UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 20-F
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended December 31, 2018
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)
15/F, Sky Plaza
No. 46 Dongzhimenwai Street
Dongcheng District, Beijing 100027
The People’s Republic of China
(Address of principal executive offices)
Xin Li
Chief Financial Officer
AirMedia Group Inc.
15/F, Sky Plaza
No. 46 Dongzhimenwai Street
Dongcheng District, Beijing 10027
The People’s Republic of China
Phone:+86 10 8460 8181
Email: lixin@ihangmei.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Ordinary shares, par value $0.001 per share*
American Depositary Shares, each representing
ten ordinary shares
Name of each exchange on which registered
The Nasdaq Stock Market LLC
(The Nasdaq Capital Market)
* Not for trading, but only in connection with the listing on the Nasdaq Global Market of American depositary shares, each representing ten 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:
As of December 31, 2018, 125,664,777 ordinary shares, par value $0.001 per share, were outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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 ☒
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ☒
No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒
No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☐
Non-Accelerated Filer ☒
Accelerated Filer ☐
Emerging growth company ☐
If an emerging growth company that prepare its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to
use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange
Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting
Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒
International Financial Reporting Standards as issued by the International Accounting Standards Board ☐
Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐ Item 17
☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐
No ☒
(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
PART I
PART II
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.
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
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 16A.
ITEM 16B.
ITEM 16C.
ITEM 16D.
ITEM 16E.
ITEM 16F.
ITEM 16G.
ITEM 16H.
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
PART III
ITEM 17.
ITEM 18.
ITEM 19.
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
EXHIBITS
i
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3
3
3
32
45
45
63
73
76
78
79
87
88
89
89
89
90
91
91
92
92
92
92
93
93
93
93
94
94
Except as otherwise indicated by the context, in this annual report:
INTRODUCTION
·
·
·
·
·
·
·
“ADS” refers to our American depositary shares, each of which represents ten 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 $0.001 per share;
“RMB” or “Renminbi” refers to the legal currency of China;
“U.S. dollars”, “$”, “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.
Our financial statements are expressed in U.S. dollars, which is our reporting currency. Certain Renminbi figures in this annual report are translated into U.S.
dollars solely for the reader’s convenience. Unless otherwise noted, all convenience translations from Renminbi to U.S. dollars in this annual report were
made at a rate of RMB6.8755 to $1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 31, 2018. We
make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be,
at any particular rate, at the rate stated above, or at all.
FORWARD-LOOKING INFORMATION
This annual report on Form 20-F contains statements of a forward-looking nature. These statements are made under the “safe harbor provisions” of the U.S.
Private Securities Litigation Reform Act of 1995.
You can identify these forward-looking statements by words or phrases such as “may”, “will”, “expect”, “anticipate”, “aim”, “estimate”, “intend”, “plan”,
“believe”, “likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about
future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These
forward-looking statements include but are not limited to:
·
·
·
·
our growth strategies;
our future business development, results of operations and financial condition, including the products and services combining in-flight connectivity
and entertainment;
competition in the advertising industry and in particular, the travel advertising industry in China;
the expected growth in consumer spending, average income levels and advertising spending levels;
·
·
the growth of the air, train and long-haul bus 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.
2
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, 2016, 2017 and 2018 and the consolidated balance sheet data as of December 31, 2017 and 2018 have been derived from our audited
consolidated financial statements, which are included in this annual report. The selected consolidated statements of operations data for the years ended
December 31, 2014 and 2015 and the selected consolidated balance sheet data as of December 31, 2014, 2015 and 2016, except for the impact of
retrospective adjustments for the deconsolidation of our media business in airports (excluding digital TV screens in airports and TV-attached digital frames)
and all billboard and LED media business outside of airports (excluding gas station media network and digital TV screens on airplanes), all of which have
been classified as discontinued operations, have been derived from our financial statements for the relevant periods, which are not included in this annual
report. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP.
These selected consolidated financial data below should be read in conjunction with, and are qualified in their entirety by reference to, our consolidated
financial statements and related notes included elsewhere in this annual report and “Item 5. Operating and Financial Review and Prospects” below. Our
historical results do not necessarily indicate results expected for any future periods.
$
Consolidated Statements of Operations Data:
Revenues:
Air Travel Media Network
Gas Station Media Network
Other Media
Total revenues
Business tax and other sales tax
Net revenues
Cost of revenues
Gross loss
Operating expenses:
Selling and marketing
General and administrative
Impairment of fixed assets, prepaid equipment cost and
intangible assets
Total operating expenses
Loss from operations
Interest income (expense)
(Loss)/gain and impairment on long-term investments
Other income, net
Loss before income taxes
Income tax (benefits) / expenses
Net loss from continuing operations
Net income from discontinued operations, net of tax
Net (loss) income
Less: Net loss attributable to noncontrolling interests
-Continuing operations
-Discontinued operations
Net (loss) income attributable to AirMedia Group
Inc.’s shareholders
-Continuing operations
-Discontinued operations
Weighted average shares outstanding used in
computing net (loss) income per ordinary share
-basic
Continuing operations
Discontinued operations
-diluted
Continuing operations
2014
Years Ended December 31,
2016
(In thousands of U.S. Dollars, except share, per share and per ADS data)
2017
2015
59,200 $
11,164
5,583
75,947
(1,254)
74,693
(96,608)
(21,915)
(12,916)
(20,620)
—
(33,536)
(55,451)
1,058
(212)
979
(53,626)
(1,512)
(52,114)
20,288
(31,826)
(6,131)
(6,808)
677
(25,695)
(45,306)
19,611
38,917 $
9,840
2,109
50,866
(633)
50,233
(89,577)
(39,344)
(9,611)
(27,102)
—
(36,713)
(76,057)
472
2,352
1,383
(71,850)
6,421
(78,271)
221,183
142,912
(6,735)
(7,620)
885
149,647
(70,651)
220,298
12,178 $
4,009
410
16,597
(84)
16,513
(49,042)
(32,529)
(12,056)
(44,401)
(826)
(57,283)
(89,812)
843
(33)
4,243
(84,759)
4,483
(89,242)
—
(89,242)
(23,617)
(23,617)
—
(65,625)
(65,625)
—
18,702
4,093
1,533
24,328
(569)
23,759
(58,967)
(35,208)
(12,747)
(63,507)
(67,342)
(143,596)
(178,804)
2,645
(2,603)
214
(178,548)
633
(179,181)
—
(179,181)
(22,705)
(22,705)
—
(156,476)
(156,476)
—
2018
22,212
413
2,151
24,776
(230)
24,546
(32,630)
(8,084)
(7,492)
(32,612)
(564)
(40,668)
(48,752)
(106)
(52,337)
7,926
(93,269)
150
(93,419)
—
(93,419)
(3,322)
(3,322)
—
(90,097)
(90,097)
—
119,304,773
119,304,773
121,740,194
121,740,194
125,277,056
—
125,629,779
—
125,653,175
—
119,304,773
121,740,194
125,277,056
125,629,779
125,653,175
Discontinued operations
Net (loss) income attributable to AirMedia Group
Inc.’s shareholders per ordinary share—basic
Continuing operations
Discontinued operations
Net (loss) income attributable to AirMedia Group
Inc.’s shareholders per ordinary share—diluted
$
Continuing operations
Discontinued operations
Net (loss) income attributable to AirMedia Group
Inc.’s shareholders per ADS—basic(1)
Continuing operations
Discontinued operations
Net (loss) income attributable to AirMedia Group
Inc.’s shareholders per ADS—diluted(1)
Continuing operations
Discontinued operations
$
$
119,924,927
129,372,158
—
—
—
$
(0.38) $
0.16
(0.58) $
1.81
(0.52) $
—
(0.38) $
0.16
(0.58) $
1.70
(0.52) $
—
(1.25)
—
(1.25)
—
(3.80) $
1.60
(5.80) $
18.1
(5.24) $
—
(12.46)
—
(3.80) $
1.60
(5.80) $
17.0
(5.24) $
—
(12.46)
—
(0.72)
—
(0.72)
—
(7.17)
—
(7.17)
—
(1) Each ADS represents ten ordinary shares effective on April 11, 2019, and per ADS information has been retrospectively restated for all periods
presented.
3
The following table presents a summary of our consolidated balance sheet data as of December 31, 2014, 2015, 2016, 2017 and 2018:
2014
2015
As of December 31,
2016
(In thousands of U.S. Dollars)
2017
2018
Balance Sheet Data:
Cash and cash equivalents
Total assets
Total liabilities
Total AirMedia Group Inc.’s shareholders’ equity
Noncontrolling interests
Total equity
B.
Capitalization and Indebtedness
Not applicable.
C.
Reasons for the Offer and Use of Proceeds
Not applicable.
$
$
60,117 $
395,597
126,725
248,736
20,136
268,872 $
86,960 $
531,601
133,968
386,568
11,065
397,633 $
117,547 $
381,190
114,593
268,737
(2,140)
266,597 $
15,355 $
225,002
101,323
147,649
(23,970)
123,679 $
15,536
129,816
115,417
51,399
(37,000)
14,399
4
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.
In an effort to realign our business:
1. We divested most of our airport travel advertising business in 2015;
2. We terminated our advertising service at long-haul buses, gas stations completely and scaled down our on-train Wi-Fi business significantly in 2018;
3. We consolidated our efforts in providing in-flight contents of entertainment, advertising and digital multimedia in China; and,
4. We strengthened our efforts in launching and operating our in-flight connectivity business.
We have incurred net losses in recent years and in spite of our efforts to transition into our new business, we may continue to incur loss in the future. With
respect to our advertising service at gas station and our on-train Wi-Fi business, we no longer pay concession fees. With respect to providing contents on
flights, we have paid, and expect to continue to pay concession fees to secure time intervals to play advertising contents. With respect to our in-flight
connectivity business, we have incurred, and expect to continue to incur, substantial expenses in the form of acquisition of concession rights, initial system
development and installation investments and ongoing system operation and maintenance costs. In the event of any significant technology development, we
may need to incur further system development expenses. Those fees constitute a significant part of our cost of revenues and most of our concession fees are
fixed under the concession rights contracts with an escalation clause. These fees payments are usually due in advance. However, our revenues may fluctuate
significantly from period to period for various reasons. For instance, when new concession rights contracts are signed for a period, additional concession fees
are incurred immediately, but it may take some time for us to generate revenues from these concession rights contracts because it takes time to find
advertisers for the time slots and locations made available under these new contracts. Similarly, we need to purchase the bandwidth before we sell our Wi-Fi
services to users and we need to maintain our system regardless of the level of revenue. If we are not able to attract enough advertisers and customers, or at
all, our revenue will decrease and we may continue to incur losses given most of our costs and expenses are fixed.
We have a limited operating history, which may make it difficult for you to evaluate our business and prospects.
Although we began our business operations in August 2005, we started to explore our in-flight connectivity business in 2015, and operated our in-flight
content business in 2015 as well after divested our airport travel advertising business. As a result of our business realignment, our advertising service at long-
haul buses and gas stations were terminated and on-train Wi-Fi business were scaled down significantly in 2018. Our limited operating history may not
provide a meaningful basis for you to evaluate our business, financial performance and prospects. It is also difficult to evaluate the viability of our business
model because we do not have sufficient experience to address the risks that we may encounter as we conduct our businesses. Certain members of our senior
management team, especially those who joined us only recently due to our new Wi-Fi business, have worked together for only a relatively short period of
time and it may be difficult for us to evaluate their effectiveness, on an individual or collective basis, and their ability to address future challenges to our
business. Because of our limited operating history, we may not be able to:
5
· manage our relationships with relevant parties to retain existing concession rights and obtain new concession rights on commercially advantageous
terms or at all;
·
·
retain existing and acquire new advertisers and third party content providers;
secure a sufficient number of low-cost hardware for our business from our suppliers;
· manage our operations;
·
·
·
successfully launch new business and operate our existing business;
respond to competitive market conditions;
respond to changes in the PRC regulatory regime;
· maintain adequate control of our costs and expenses; or
·
attract, train, motivate and retain qualified personnel.
If advertisers or the viewing public do not accept, or lose interest in, our air travel advertising network, we may be unable to generate sufficient cash
flow from our operating activities and our business and results of operations could be materially and adversely affected.
Our success in our air travel advertising business depends on the acceptance of our advertising network by advertisers and their interest in it as a part of their
advertising strategies. In this annual report, the term “advertisers” refer to the ultimate brand-owners whose brands and products are being publicized by our
advertisements, including both advertisers that purchase advertisements directly from us and advertisers that do so through third-party advertising agencies.
Our advertisers may elect not to use our services if they believe that consumers are not receptive to our media network or that our network is not a sufficiently
effective advertising medium. If consumers find our network to be disruptive or intrusive, airplane companies may refuse to allow us to place our programs
on airplanes, and our advertisers may reduce spending on our network.
If we are not able to adequately track air traveler responses to our programs, in particular track the demographics of air travelers most receptive to air travel
advertising, we will not be able to provide sufficient feedback and data to existing and potential advertisers to help us generate demand and determine pricing.
Without improved market research, advertisers may reduce their use of air travel advertising and instead turn to more traditional forms of advertising that
have more established and proven methods of tracking the effectiveness of advertisements.
Demand for our advertising services and the resulting advertising spending by our advertisers may fluctuate from time to time, and our advertisers may
reduce the money they spend to advertise on our network for any number of reasons. If a substantial number of our advertisers lose interest in advertising on
our media network for these or other reasons or become unwilling to purchase advertising time slots or locations on our network, we will be unable to
generate sufficient revenues and cash flow to operate our business, and our business and results of operations could be materially and adversely affected.
If we do not succeed in launching our in-flight business, our future results of operations and growth prospects may be materially and adversely
affected.
Driven by innovation, we gradually reinvented ourselves and shaped our core competence in providing in-flight solutions to connectivity, entertainment and
digital multimedia in China. We began to explore the in-flight business in 2018 and are still in the investment and development stage. We collaborated with
partners to deliver in-flight connectivity solutions. In addition to our active endeavors in in-flight connectivity, we maintain a wide range of in-flight
entertainment and advertising contents. We may face unexpected new risks as we continue to launch this new business. As a result, we cannot assure you that
we will be able to generate enough, or any, revenue from this business. If we fail to do so, our considerable amounts of investment on system development,
will materially and adversely affect our business and financial results.
6
In our new business, we may face new competition. If we cannot successfully address the foregoing new challenges and compete effectively, we may not be
able to develop a sufficiently large advertiser base, recover costs incurred for developing and marketing our new business, and eventually achieve profitability
from these businesses, and, consequently, our future results of operations and growth prospects may be materially and adversely affected.
We may be adversely affected by a significant or prolonged economic downturn in the level of consumer spending in the industries and markets
served by our customers.
Our business depends on demand for our advertising services from our customers, which is affected by the level of business activity and economic condition
of our customers and is in turn affected by the level of consumer spending in the markets our customers serve. Therefore, our businesses and earnings are
affected by general business and economic conditions in China as well as abroad.
Advertising revenues from advertisers in the automobile industry accounted for a significant portion of our revenues. Any significant or prolonged slowdown
or decline of this industry or the economy of China, countries with close economic ties with China or the overall global economy will affect consumers’
disposable income and consumer spending in these industries, and lead to a decrease in demand for our services. Furthermore, the campaign launched by the
Chinese government to curb waste by officials may also lead to decrease in demand for products of our key customers and in turn adversely affect demand for
our services.
We derive a significant portion of our revenues from the provision of air travel advertising services. A contraction in the air travel advertising
industry in China may materially and adversely affect our business and results of operations.
Approximately 89.7% of our revenues from continuing operations in 2018 was generated from the provision of air travel advertising services through the
display of advertisements on digital TV screens on airplanes. We expect digital TV screens on airplanes to contribute substantially all of our air travel
network revenue and a majority of all our revenue in the foreseeable future. If we cannot successfully generate revenues from our Wi-Fi business, this
situation will continue into the foreseeable future. A contraction in air travel advertising industry in China could therefore have a material adverse effect on
our business and results of operations.
If we are unable to carry out our operations as specified in existing concession rights contracts, retain or renew existing concession rights contracts
or to obtain new concession rights contracts on commercially advantageous terms, we may be unable to maintain or expand our network coverage
and our costs may increase significantly in the future.
Our ability to carry out almost all of our business depends on the availability of the necessary concession rights. However, we cannot assure you that we will
be able to carry out our operations as specified in our concession rights contracts, and any failure to perform may affect the availability of our concession
rights and materially and negatively affect our business.
We may also be unable to retain or renew concession rights contracts when they expire. Most of our concession rights contracts have no automatic renewal
provisions. We cannot assure you that we will be able to renew any or all of our concession contracts when they expire. In particular, failure to renew our Wi-
Fi concession right contracts will render it hard or impossible for us to recoup our investment in related system development and installation. We enter into
on-train Wi-Fi concession rights contracts with railway administrative bureaus, which are governmental agencies, and their renewal decisions may be
influenced by their supervising authorities and the changes in policies or regulations in relevant areas. We enter into in-flight Wi-Fi contracts with private
companies operating those vehicles or the relevant advertising companies or agencies operated or hired by the relevant airline companies, and those
companies are usually price sensitive and may choose not to renew our concession rights but instead enter into contracts with other players who can offer
more competitive pricing. Furthermore, even if we manage to renew a concession right contract, the terms of the new contract may not be commercially
favorable to us. The concession fees that we incur under our concession rights contracts comprise a significant portion of our cost of revenues, which may
further increase upon renewals. If we cannot pass increased concession costs onto our customers, our earnings and our results of operations could be
materially and adversely affected. In addition, many of our concession rights contracts contain provisions granting us certain exclusive concession rights. We
cannot assure you that we will be able to retain these exclusivity provisions when we renew these contracts. If we were to lose exclusivity, our advertisers
may decide to advertise with our competitors or otherwise reduce their spending on our network and we may lose market share.
7
We cannot assure you that our concession rights contracts will not be unilaterally terminated during their terms, whether with or without justification. In
addition, many of our concession rights contracts were entered into with the advertising companies operated by or advertising agencies hired by airline
companies, and not with the airline companies directly. Although these advertising companies and agents have generally represented to us in writing that they
have the rights to operate advertising media on airplanes and all of them have performed their contractual obligations, we cannot assure you that airline
companies will not challenge or revoke the contractual concession rights granted to us by their advertising companies or agents; if such challenges or
revocations occur, our revenues and results of operations could be materially and adversely affected.
If we fail to properly perform our existing concession rights contracts, retain existing concession rights contracts or obtain new concession rights contracts on
commercially advantageous terms, we may be unable to maintain or expand our network coverage and our costs may increase significantly in the future.
A significant portion of our revenues has been derived from a limited number of airline companies in China. If any of these airline companies
experiences a material business or flight disruption or if there are changes in our arrangements with these airline companies, we may incur
substantial losses of revenues.
We derived a significant portion of our revenues from operations in 2018 from seven airline companies in China. As of the date of this annual report, we have
concession rights contracts to place our programs on China Southern Airline and China Eastern Airline, respectively, which in the aggregate contributed more
than a majority of our revenue from digital TV screens on airplanes in 2018. A material business or flight disruption of any of those airline companies could
negatively affect our advertising media on airplanes operated by those companies.
We expect our advertising platform with these abovementioned airline companies to continue to contribute a significant portion of our revenues in the
foreseeable future. If any such companies experiences a material business or flight disruption, we would likely lose a substantial amount of revenues.
We depend on third-party program producers to provide the non-advertising content that we include in our programs. Failure to obtain high-quality
content on commercially reasonable terms could materially reduce the attractiveness of our network, harm our reputation and materially and
adversely affect our business and results of operations.
The programs on the majority of our digital TV screens include both advertising and non-advertising content. Third-party content providers and various other
television stations and television production companies have contracts with us to provide the majority of the non-advertising content played over our network,
particularly on our digital TV screens on airplanes. There is no assurance that we will be able to renew these contracts, enter into substitute contracts to obtain
similar contents or obtain non-advertising content on satisfactory terms, or at all. To make our programs more attractive, we must continue to secure contracts
with third-party content providers. If we fail to obtain a sufficient amount of high-quality content on a cost-effective basis, advertisers may find advertising on
our network unattractive and may not wish to purchase advertising time slots or locations on our network, which would materially and adversely affect our
business and results of operations.
8
When our current advertising network of digital TV screens and LED screens becomes saturated on the airlines where we operate, we may be unable
to offer additional time slots or locations to satisfy all of our advertisers’ needs, which could hamper our ability to generate higher levels of revenues
and profitability over time.
When our network of digital TV screens and LED screens becomes saturated in any particular airline where we operate, we may be unable to offer additional
advertising time slots or locations to satisfy all of our advertisers’ needs. We would need to increase our advertising rates for advertising in such airlines or
other locations to increase our revenues. However, advertisers may be unwilling to accept rate increases, which could hamper our ability to generate higher
levels of revenues over time. In particular, the utilization rates of our advertising time slots and locations on the three largest airlines in China are higher than
those on other airlines, and saturation or oversaturation of digital TV screens on these airlines could have a material adverse effect on our growth prospects.
Our advertising agencies could engage in activities that are harmful to our reputation in the industry and to our business.
We engage third-party advertising agencies to help source advertisers from time to time. These third-party advertising agencies assist us in identifying
advertisers and introduce advertisers to us. In return, we pay fees to these advertising agencies if they generate advertising revenues for us. Fees that we pay
to these third-party agencies are calculated based on a pre-set percentage of revenues generated from the advertisers introduced to us by the third-party
agencies and are paid when payments are received from the advertisers. Our contractual arrangements with these advertising agencies do not provide us with
control or oversight over their everyday business activities, and one or more of these agencies may engage in activities that violate PRC laws and regulations
governing the advertising industry and related non-advertising content, or other laws and regulations. If the advertising agencies we use violate PRC
advertising or other laws or regulations, it could harm our reputation in the industry and have detrimental effects on our business operations.
Because we rely on third-party advertising agencies to help obtain advertisers, if we fail to maintain stable business relations with key third-party
agencies or to attract additional agencies on competitive terms, our business and results of operations could be materially and adversely affected.
We engage third-party advertising agencies to help obtain advertisers from time to time. We do not have long-term or exclusive agreements with these
advertising agencies, including our key third-party advertising agencies, and cannot assure you that we will continue to maintain stable business relations with
them. Furthermore, the fees we pay to these third-party advertising agencies constitute a significant portion of our cost of revenues. If we fail to retain key
third-party advertising agencies or to attract additional advertising agencies, we may not be able to retain existing advertisers or attract new advertisers or
advertising agencies, or the fees we pay them may have to significantly increase. If any of the above happens, our business and results of operations could be
materially and adversely affected.
A limited number of advertisers have historically accounted for a significant portion of our revenues and this dependence may reoccur in the future,
which would make us more vulnerable to the loss of major advertisers or delays in payments from these advertisers.
A limited number of advertisers historically accounted for a significant portion of our revenues, for the years ended December 31, 2016, 2017 and 2018, nil, 1
and 2 individual customer accounted for over 10% of total revenue, respectively.
If we fail to sell our services to one or more of our major advertisers in any particular period, or if a major advertiser purchases fewer of our services, fails to
purchase additional advertising time on our network, or cancels some or all of its purchase orders with us, our revenues could decline and our operating
results could be adversely affected. The dependence on a small number of advertisers could leave us more vulnerable to payment delays from these
advertisers. We are required under some of our concession rights contracts to make prepayments and although we do receive some prepayments from
advertisers, there is typically a lag between the time of our prepayment of concession fees and the time that we receive payments from our advertisers. As our
business expands and revenues grow, we have experienced and may continue to experience an increase in our accounts receivable. If any of our major
advertisers are significantly delinquent with its payments, our liquidity and financial conditions may be materially and adversely affected.
9
We face significant competition in the advertising industry in China, and if we do not compete successfully against new and existing competitors, we
may lose our market share, and our profits may be reduced.
We face significant competition in the advertising industry in China. We compete for advertisers primarily on the basis of price, program quality, the range of
services offered and brand recognition. We primarily compete for advertising dollars spent in the air travel advertising industry. We may also face competition
from new competitors as we enter into new markets.
Significant competition could reduce our operating margins and profitability and lead to a loss of market share. Some of our existing and potential
competitors may have competitive advantages such as significantly greater brand recognition, a longer history in the out-of-home advertising industry and
financial, marketing or other resources, and may be able to mimic and adopt our business model. In addition, several of our competitors have significantly
larger advertising networks than we do, which gives them an ability to reach a larger number of overall potential consumers and which may make them less
susceptible than we are to downturns in particular advertising sectors, such as air travel. Moreover, significant competition will provide advertisers with a
wider range of media and advertising service alternatives, which could lead to lower prices and decreased revenues, gross margins and profits focus. We
cannot assure you that we will be able to successfully compete against new or existing competitors, and failure to compete may reduce for existing market
share and profits.
Our results of operations are largely subject to fluctuations in the demand for air travel. A decrease in the demand for air travel may make it difficult
for us to sell our advertising time slots and locations.
To a large extent, our results of operations are linked to the demand for air travel, which fluctuates greatly from period to period, and is subject to seasonality
due to holiday travel and weather conditions. Other factors that may affect our results include:
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Downturns in the economy. Business travel is one of the primary drivers of the air travel industry and it tends to increase in times of economic
growth and decrease in times of economic slowdown. A decrease in air passengers in China could lead to lower advertiser spending on our air travel
advertising network.
Plane crashes or other accidents. An aircraft crash or other accident, such as those in 2014 involving certain Asian-based airlines, could create a
public perception that air travel is not safe or reliable, which could result in air travelers being reluctant to fly. Significant aircraft delays due to
capacity constraints, weather conditions or mechanical problems could also reduce demand for air travel, especially for shorter domestic flights.
If the demand for air travel within our network decreases for any of these or other reasons, advertisers may be reluctant to advertise on our network and we
may be unable to sell our advertising time slots or locations or charge premium prices.
Past and future acquisitions may have an adverse effect on our ability to manage our business.
We have acquired and may continue to acquire businesses, technologies, services or products which are complementary to our core air travel advertising
network business in the future. Past and future acquisitions may expose us to potential risks, including risks associated with:
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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.
10
Any of these potential risks could have a material and adverse effect on our ability to manage our business, our revenues and net income.
We may need to raise additional debt or sell additional equity securities to make future acquisitions. The raising of additional debt funding by us, if required,
would increase debt service obligations and may lead to additional operating and financing covenants, or liens on our assets, that would restrict our
operations. The sale of additional equity securities could cause additional dilution to our shareholders.
Our acquisition strategy also depends on our ability to obtain necessary government approvals. See “– Risks Related to Doing Business in China – The M&A
Rule sets forth complex procedures for acquisitions conducted by foreign investors which could make it more difficult to pursue growth through
acquisitions.”
Our quarterly and annual operating results are difficult to predict and have fluctuated and may continue to fluctuate significantly from period to
period.
Our quarterly and annual operating results are difficult to predict and have fluctuated and may continue to fluctuate significantly from period to
period based on the performance of our new business, the seasonality of air travel, consumer spending and corresponding advertising trends in China. Air
travel, and advertising spending in China generally tend to increase during major national holidays in October and tend to decrease during the first quarter of
each year. Air travel and advertising spending in China is also affected by certain special events and related government measures. As a result, and also due
to the unpredictable performance of our new business, you may not be able to rely on period-to-period comparisons of our operating results as an indication
of our future performance. Other factors that may cause our operating results to fluctuate include a deterioration of economic conditions in China and
potential changes to the regulation of the advertising industry in China. If our revenues for a particular quarter are lower than we expect, we may be unable to
reduce our operating costs and expenses for that quarter by a corresponding amount, and it would harm our operating results for that quarter relative to our
operating results for other quarters.
Our business depends substantially on the continuing efforts of our senior executives and other key employees, and our business may be severely
disrupted if we lose their services.
Our future success heavily depends upon the continued services of our senior executives and other key employees. We rely on their industry expertise, their
experience in business operations and sales and marketing, and their working relationships with our advertisers, airlines, and relevant government authorities.
If one or more of our senior executives and other key employees were unable or unwilling to continue in their present positions, we might not be able to
replace them easily or at all. If any of our senior executives and other key employees joins a competitor or forms a competing company, we may lose
advertisers, suppliers, key professionals and staff members. Each of our executive officers and other key employees has entered into an employment
agreement with us which contains non-competition provisions. However, if any dispute arises between any of our executive officers and other key employees
and us, we cannot assure you the extent to which any of these agreements could be enforced in China, where most of these executive officers and other key
employees reside, in light of the uncertainties with China’s legal system. See “—Risks Related to Doing Business in China—Uncertainties with respect to the
PRC legal system could limit the legal protections available to us or result in substantial costs and the diversion of resources and management attention.”
Failure to maintain an effective system of internal control over financial reporting and effective disclosure controls and procedures could have a
material and adverse effect on the trading price of our ADSs.
We are subject to reporting obligations under the U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the
Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on such company’s internal control over financial
reporting in its annual report, which must also contain management’s assessment of the effectiveness of the company’s internal control over financial
reporting. SEC rules also require every public company to include a management report containing management’s assessment of the effectiveness of such
company’s disclosure controls and procedures in its annual report.
11
We have identified material weaknesses in our internal control over financial reporting, if we fail to develop or maintain an effective system of internal
controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders could lose confidence in
our financial reporting, which would harm our business and the trading price of our securities. In connection with the audit of our consolidated financial
statements for the years ended December 31, 2018 and 2017, our management concluded that the Company had material weaknesses in its internal controls.
Our management has concluded that we had not maintained effective internal control over financial reporting and disclosure controls and procedures as of
December 31, 2018. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
After identifying the material weakness regarding lack of internal controls over related party borrowings resulting in interest free loans lent to director for
personal purpose for the year ended December 31, 2017, we have collected all the borrowings from directors and have standardized and improved the
borrowing processes according to the requirements of internal control. The material weaknesses as of December 31, 2018 were related to a) the weak
operating effectiveness and lack of monitoring of controls over financial reporting due to inadequate resources or resources with insufficient experience or
training in our financial reporting team, internal control team, administration team and human resource team, and b) lack of internal controls over risk
assessments related to third party borrowings resulting in material losses from loans to third parties. See “Item 15. Controls and Procedures.” Any failure to
achieve and maintain effective internal control over financial reporting could negatively affect the reliability of our financial information and reduce
investors’ confidence in our reported financial information, which in turn could result in lawsuits being filed against us by our shareholders, otherwise harm
our reputation or negatively impact the trading price of our ADSs. Furthermore, we have incurred and anticipate that we will continue to incur considerable
costs and use significant management time and other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act and other requirements of
the Sarbanes-Oxley Act.
We may need additional capital which, if obtained, could result in dilution or significant debt service obligations. We may not be able to obtain
additional capital on commercially reasonable terms, which could adversely affect our liquidity and financial position.
We may require additional cash resources due to changed business conditions or other future developments, especially given our investment in our new Wi-Fi
business. If our current resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit
facility. The sale of convertible debt securities or additional equity securities could result in additional dilution to our shareholders. The incurrence of
indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations and
liquidity.
In addition, our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:
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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.
Compliance with PRC laws and regulations may be difficult and could be costly, and failure to comply could subject us to government sanctions.
As an advertising service provider, we are obligated under PRC laws and regulations to monitor the advertising content shown on our network for compliance
with applicable law. Violation of these laws or regulations may result in penalties, including fines, confiscation of advertising fees, orders to cease
dissemination of the offending advertisements and orders to publish advertisements correcting the misleading information. In case of serious violations, the
PRC authorities may revoke our license for advertising business operations. In general, the advertisements shown on our network have previously been
broadcast over public television networks and have been subjected to internal review and verification by such networks, but we are still required to
independently review and verify these advertisements for content compliance before displaying them. In addition, if a special government review is required
for certain product advertisements before they are shown to the public, we are required to confirm that such review has been performed and approval
obtained. For advertising content related to certain types of products and services, such as food products, alcohol, cosmetics, pharmaceuticals and medical
procedures, we are required to confirm that the advertisers have obtained requisite government approvals, including review of operating qualifications, proof
of quality inspection of the advertised products, government pre-approval of the contents of the advertisement and filing with local authorities.
12
We endeavor to comply with such requirements through means such as requesting relevant documents from the advertisers. However, we cannot assure you
that each advertisement that an advertiser provides to us and which we include in our network programs is in full compliance with all relevant PRC
advertising laws and regulations or that such supporting documentation and government approvals provided to us are complete. Although we employ
qualified advertising inspectors who are trained to review advertising content for compliance with relevant PRC laws and regulations, the content standards in
the PRC are less certain and less clear than those in more developed countries such as the United States and we cannot assure you that we will always be able
to properly review all advertising content to comply with the PRC standards imposed on us with certainty.
In addition, although we use our best efforts to comply with all relevant laws and regulations and to obtain all necessary certificates, registrations and
approvals for our business, due to the complexity of local laws and regulations across China governing outdoor media advertising platforms, there can be no
assurance that we will be able to obtain or maintain all necessary approvals. For example, our Wi-Fi business might be regarded as value-added
telecommunication service. To provide this type of services, we are required to obtain the relevant telecommunication license from the communication
authorities. As a result, we cannot assure you that we will be able to obtain the necessary license soon, if at all, to provide Wi-Fi service. Any delay or failure
in obtaining such approvals or licenses could materially and adversely affect our results of operations.
We may be subject to, and may expend significant resources in defending against government actions and civil suits based on the content we provide through
our advertising network.
Because of the nature and content of the information displayed on our network, civil claims may be filed against us for fraud, defamation, subversion,
negligence, copyright or trademark infringement or other violations. Offensive and objectionable content and legal standards for defamation and fraud in
China are less defined than in other more developed countries and we may not be able to properly screen out unlawful content. If consumers find the content
displayed on our network to be offensive, the relevant airlines, gas stations, railway bureaus and long-haul bus companies may seek to hold us responsible for
any consumer claims or may terminate their relationships with us.
In addition, if the security of our content management system is breached and unauthorized images, text or audio sounds are displayed on our network,
viewers or the PRC government may find these images, text or audio sounds to be offensive, which may subject us to civil liability or government censure
despite our efforts to ensure the security of our content management system. Any such event may also damage our reputation. If our advertising viewers do
not believe our content is reliable or accurate, our business model may become less appealing to viewers in China and our advertisers may be less willing to
place advertisements on our network.
We may be subject to intellectual property infringement claims, which may force us to incur substantial legal expenses and, if determined adversely
against us, may materially and adversely affect our business.
Our commercial success depends to a large extent on our ability to operate without infringing the intellectual property rights of third parties. We cannot assure
you that our displays or other aspects of our business do not or will not infringe patents, copyrights or other intellectual property rights held by third parties.
We may become subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business.
If we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property, incur licensing fees or be
forced to develop alternatives. In addition, we may incur substantial expenses and diversion of management time in defending against these third-party
infringement claims, regardless of their merit. Successful infringement or licensing claims against us may result in substantial monetary liabilities, which may
materially and adversely affect our business.
13
We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.
Our business could be materially and adversely affected by natural disasters or the outbreak of health epidemic. Any such occurrences could cause severe
disruption to our daily operations, and may even require a temporary closure of our facilities. In August 2014, a strong earthquake hit part of Yunnan province
in south, and resulted in significant casualties and property damage. While we did not suffer any loss or experience any significant increase in cost resulting
from these earthquakes, if a similar disaster were to occur in the future affecting Beijing or another city where we have major operations in China, our
operations could be materially and adversely affected due to loss of personnel and damages to property. In addition, any outbreak of avian flu, severe acute
respiratory syndrome (SARS), influenza A (H1N1), H7N9, Ebola, or other adverse public health epidemic in China may have a material and adverse effect on
our business operations. These occurrences could require the temporary closure of our offices or prevent our staff from traveling to our customers’ offices to
provide services. Such closures could severely disrupt our business operations and adversely affect our results of operations. These occurrences could reduce
air and train traveling in China and adversely affect the results of operations of our related business.
RISKS RELATED TO OUR CORPORATE STRUCTURE
If the PRC government finds that the agreements that establish the structure for operating our China business do not comply with PRC governmental
restrictions on foreign investment in the advertising industry and in the operating of non-advertising content, our business could be materially and
adversely affected.
Substantially all of our operations are conducted through contractual arrangements with our consolidated VIEs in China: AirMedia Online Network
Technology Group Co., Ltd. (previously known as AirMedia Online Network Technology Co., Ltd.) or AM Online, Beijing Linghang Shengshi Advertising
Co., Ltd. (Formerly Beijing AirMedia Shengshi Advertising Co., Ltd.), or Linghang Shengshi (Formerly “AirMedia Shengshi”), Beijing Wangfan Jiaming
Advertising Co.,Ltd. (Formerly Beijing AirMedia Jiaming Advertising Co., Ltd.), or Jiaming Advertising, Beijing Yuehang Digital Media Advertising Co.,
Ltd., or Beijing Yuehang (Formerly “AM Yuehang”) and Guangzhou Meizheng Online Network Technology Co., Ltd. (formerly known as Guangzhou
Meizheng Advertising Co., Ltd.), or Guangzhou Meizheng. As the Foreign-invested Advertising Enterprise Management Regulations, or the Foreign-invested
Advertising Regulations, which became effective on October 1, 2008 and has been abolished on June 29, 2015, it currently permit 100% foreign ownership of
companies that provide advertising services, subject to approval by relevant PRC government authorities. In addition, the Special Administrative Measures
for Access of Foreign Investment (Negative List) (2018 Edition), which became effective on July 28, 2018, stated that television program production and
operation companies fall into the category of a prohibited foreign investment industry. We believe that these regulations apply to our business and are
therefore carrying out the portions of our business that involve the production of non-advertising content through our VIEs. Our wholly owned Hong Kong
subsidiary Air Net (China) Limited (Formerly AirMedia (China) Limited) , or AN China (Formerly “AM China”), the 100% shareholder of our three wholly
foreign owned subsidiaries in China, has been operating an advertising business in Hong Kong since 2008, and thus it is allowed to directly invest in
advertising business in China. In December 2014, we transferred 100% equity interest in Shenzhen Yuehang Information Technology Co., Ltd. (Formerly
Shenzhen AirMedia Information Technology Co., Ltd.), or Shenzhen Yuehang (Formerly “Shenzhen AM”), to AN China to provide advertising services in
China directly. In July 2015, Shenzhen Yuehang obtained the approval to include advertising in its scope of business. We therefore intent to gradually shift
our advertising business to Shenzhen Yuehang to gradually reduce our reliance on the current VIE structure in terms of our advertising business. Our
advertising business is currently primarily provided through our contractual arrangements with certain of our consolidated VIEs in China. These entities
directly operate our air advertising network, enter into concession rights contracts related to our air advertising network and sell advertising time slots and
locations to our advertisers. In addition, under current PRC regulations, a foreign entity is prohibited from owning more than 50% of any PRC entity that
provides value-added telecommunication services, and Wi-Fi services might be regarded as value-added telecommunication business. As a result, we enter
into concession rights contracts related to our Wi-Fi business via AM Online, which is expected to directly operate this business. We have contractual
arrangements with these VIEs pursuant to which we, through Yuehang Chuangyi Technology (Beijing) Co., Ltd. (Formerly AirMedia Technology (Beijing)
Co., Ltd.), or Chuangyi Technology (“Formerly “AM Technology”), provide technical support and consulting services and other services to these entities. We
also have agreements with our VIEs and each of their individual shareholders (except Yi Zhang) that provide us with the substantial ability to control these
entities. For a description of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure” and “Item 7. Major
Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements.”
14
In January 2016, we, through the nominee shareholders of the respective VIEs, transferred 3.5% equity interest in each of AM Online, Linghang Shengshi
and Jiaming Advertising to Yi Zhang. Yi Zhang is an unrelated third party minority shareholder of those VIEs and did not enter into the same VIE
arrangements with us as did the other nominee shareholders. In December 31, 2018, Yi Zhang has withdrawn all the 3.5% equity interest, we therefore can
exert the same level of control over the 3.5% interests of the VIEs owned by Yi Zhang.
Some of our VIE arrangements with Linghang Shengshi and Jiaming Advertising may expire on June 13, 2027 if any party thereto sends a no-extension
notice to the other at least twenty (20) days in advance. Although we believe we can renew those agreements with the VIEs and their shareholders at that
time, if we fail to do so, our control over such VIEs might be adversely affected.
In the opinion of Commerce & Finance Law Offices, our PRC counsel, except as described in this annual report, the VIE arrangements between Chuangyi
Technology and our consolidated VIEs, as described in this annual report, do not violate PRC law and are valid, binding and legally enforceable. However,
uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements and if the shareholders of the VIEs were to reduce their
interest in us, their interests may diverge from ours and that may potentially increase the risk that they would seek to act contrary to the contractual terms, for
example by influencing the VIEs not to pay the service fees when required to do so.
Our ability to control the VIEs also depends on the power of attorney Chuangyi Technology has to vote on all matters requiring shareholder approval in the
VIEs. As noted above, we believe this power of attorney is legally enforceable but may not be as effective as direct equity ownership.
In addition, if the PRC government were to find that the VIE arrangements do not comply with PRC governmental restrictions on foreign investment in the
advertising industry and in the operating of non-advertising content, or if the legal structure and contractual arrangements were found to be in violation of any
other existing PRC laws and regulations, the PRC government could:
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revoke the business and operating licenses of the our PRC subsidiaries and affiliates;
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, Chuangyi Technology, or
the VIEs, the imposition of any of these penalties may result in a material and adverse effect on our ability to conduct the our business. In addition, if the
imposition of any of these penalties causes us to lose the power to direct the activities of the VIEs (and VIEs’ subsidiaries) that most significantly impact the
VIEs (and VIEs’ subsidiaries) economic performance or the right to receive substantially all of the benefits from the VIEs (and VIEs’ subsidiaries), we would
no longer be able to consolidate the VIEs (and VIEs’ subsidiaries).
In December 2018, the National People’s Congress of the PRC, or the NPC, released another draft of foreign investment law, or the Foreign Investment Law,
for soliciting public comments. On March 15, 2019, the Foreign Investment Law was enacted by the NPC and will become effective on January 1, 2020.
Although the Foreign Investment Law does not explicitly define the contractual arrangements with VIEs as a form of foreign investment, it contains an
ambiguous clause that covers other form stipulated in laws, administrative regulations or other methods prescribed by the State Council within its definition
of foreign investment. Therefore, uncertainties still exist about whether our contractual arrangements with VIEs will be deemed to violate the market access
requirements for foreign investment under the PRC laws. Additionally, if the State Council or laws, administrative regulations require further actions
regarding the existing contractual arrangements with VIEs, we may not complete such actions in a timely manner, or at all, which may materially and
adversely affect our business operation and financial condition.
15
Because some of the shareholders of our VIEs in China are our directors and officers, their fiduciary duties to us may conflict with their respective
roles in the VIEs, and their interest may not be aligned with the interests of our unaffiliated public security holders. If any of the shareholders of our
VIEs fails to act in the best interests of our company or our shareholders, our business and results of operations may be materially and adversely
affected.
Certain of our directors and officers are shareholders in the VIEs, AM Online, Linghang Shengshi, Jiaming Advertising, and Beijing Yuehang. Mr. Herman
Man Guo, our chairman and chief executive officer, in addition to holding 15.3% in our company, also directly and indirectly holds approximately 77.2% of
AM Online, 83.6% of Linghang Shengshi and 1.00% of Jiaming Advertising. Mr. Qing Xu, our director and executive president, in addition to holding 1.3%
of our company, also directly and indirectly holds approximately 14.5% of AM Online, 12.50% of Linghang Shengshi and 0.21% of Jiaming Advertising. In
addition, Mr. Guo and Mr. Xu are each a director of Jiaming Advertising, Linghang Shengshi and AirMedia Group Co., Ltd. (“AM Advertising”), Mr. Guo is
the legal representative of each of Linghang Shengshi and Jiaming Advertising. For these directors and officers, their fiduciary duties toward our company
under Cayman Islands law—to act honestly, in good faith and with a view to our best interests—may conflict with their roles in the VIEs, as what is in the
best interest of the VIEs may not be in the best interests of our company or the unaffiliated public shareholders of our company.
Currently, we do not have agreements in place that solely target to resolve conflicts of interest arising between our company and the VIEs and their
operations. In addition, we have not appointed a separate fiduciary—one without potential conflicts of interest—to serve as the fiduciary of the public
unaffiliated security holders of our company. Although our independent directors or disinterested officers may take measures to prevent the parties with dual
roles from making decisions that may favor themselves as shareholders of the VIEs, we cannot assure you that these measures would be effective in all
instances. If the parties with dual roles do find ways to make and carry out decisions on our behalf that are detrimental to our interest, our business and results
of operations may be materially and adversely affected.
Certain provisions in the contractual agreements between Chuangyi Technology and our VIEs do impose limits on the rights of the shareholders of the VIEs.
For example, each of the individual shareholders of the VIEs (except Yi Zhang) has signed an irrevocable power of attorney authorizing the person designated
by Chuangyi Technology to exercise its rights as shareholder, including the voting rights, the right to enter into legal documents and the right to transfer its
equity interest in the VIEs. However, we cannot assure you that when conflicts of interest arise that each of our VIEs and its respective shareholders will act
completely in our interests or that conflicts of interests will be resolved in our favor, or that the above contractual provisions would be sufficient protection for
us in the event that shareholders of the VIEs fail to perform under their contracts with Chuangyi Technology. In any such event, we would have to rely on
legal remedies under PRC law, which may not be effective. See “—We rely on contractual arrangements with our consolidated variable interest entities and
their shareholders for a substantial portion of our China operations, which may not be as effective as direct ownership in providing operational control” and
“Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements.”
We rely on contractual arrangements with our consolidated variable interest entities and their shareholders for a substantial portion of our China
operations, which may not be as effective as direct ownership in providing operational control.
We rely on contractual arrangements with AM Online, Linghang Shengshi, Jiaming Advertising and Beijing Yuehang to operate our Wi-Fi and air advertising
business. For a description of these arrangements, see “Item 4. Information on the Company—C. Organizational Structure” and “Item 7. Major Shareholders
and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements.” These contractual arrangements may not be as effective as
direct ownership in providing control over our VIEs. Under these contractual arrangements, if our VIEs or their shareholders fail to perform their respective
obligations, we may have to incur substantial costs and resources to enforce such arrangements and rely on legal remedies under PRC law, including seeking
specific performance or injunctive relief and claiming damages, and we may not be successful.
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Many of these contractual arrangements are governed by PRC law and provide for disputes to be resolved through arbitration or litigation in the PRC. The
legal environment in the PRC is not as developed as in other jurisdictions such as the United States. As a result, uncertainties in the PRC legal system could
limit our ability to enforce these contractual arrangements, which may make it difficult to exert effective control over our VIEs, and our ability to conduct our
business may be negatively affected.
We have not registered the pledge of equity interest by certain shareholder of our consolidated affiliated entities with the relevant authority, and we
may not be able to enforce the equity pledge against any third parties who acquire the equity interests in good faith in the relevant consolidated
affiliated entities before the pledge is registered.
Except for Yi Zhang, who acquired 3.5% minority equity interest in each of AM Online, Linghang Shengshi and Jiaming Advertising in January 2016, the
individual shareholders of our VIEs, each a consolidated affiliated entity of ours, have pledged all of their equity interests, including the right to receive
declared dividends, in the relevant VIEs to Chuangyi Technology, our wholly-owned subsidiary. An equity pledge agreement becomes effective among the
parties upon execution, but according to the PRC Property Rights Law, an equity pledge is not perfected as a security property right unless it is registered with
the relevant local administration for industry and commerce. We have not yet registered the share pledges by shareholders of AM Online, Linghang Shengshi
and Jiaming Advertising. As the registration of these pledges has not yet been completed so far, the pledges, as property rights, have not yet become effective
under the PRC Property Rights Law. Before the registration procedures are completed, we cannot assure you that the effectiveness of these pledges will be
recognized by PRC courts if disputes arise with respect to certain pledged equity interests or that Chuangyi Technology’s interests as pledgee will prevail over
those of third parties. Chuangyi Technology may not be able to successfully enforce these pledges against any third parties who have acquired property right
interests in good faith in the equity interests in AM Online, Linghang Shengshi and Jiaming Advertising. As a result, if AM Online, Linghang Shengshi or
Jiaming Advertising breaches their respective obligations under the various agreements described above, and there are third parties who have acquired equity
interests in good faith, Chuangyi Technology would need to resort to legal proceedings to enforce its contractual rights under the equity pledge agreements, or
the underlying agreements secured by the pledges. We do not have agreements that pledge the assets of the VIEs and their respective subsidiaries for the
benefit of us or our wholly owned subsidiaries.
Contractual arrangements we have entered into among our subsidiaries and variable interest entities may be subject to scrutiny by the PRC tax
authorities and a finding that we owe additional taxes could substantially increase our taxes owed and reduce our net income and the value of your
investment.
Under PRC law, arrangements and transactions among related parties may be audited or challenged by the PRC tax authorities. If any transactions we have
entered into among Chuangyi Technology and our VIEs are found not to be on an arm’s length basis, or to result in an unreasonable reduction in tax under
PRC law, the PRC tax authorities have the authority to disallow our tax savings, adjust the profits and losses of our respective PRC entities and assess late
payment interest and penalties. A finding by the PRC tax authorities that we are ineligible for the tax savings we achieved would substantially increase our
taxes owed and reduce our net income and the value of your investment.
We may rely principally on dividends and other distributions on equity paid by our wholly-owned operating subsidiaries to fund any cash and
financing requirements we may have, and any limitation on the ability of our operating subsidiaries to pay dividends to us could have a material
adverse effect on our ability to conduct our business.
We are a holding company, and we may rely principally on dividends and other distributions on equity paid by Chuangyi Technology, Shenzhen Yuehang and
Xi’an Shengshi Dinghong Information Technology Co., Ltd. (Formerly Xi’an AirMedia Chuangyi Technology Co., Ltd.), or Xi’an Shengshi for our cash
requirements, including the funds necessary to service any debt we may incur. If Chuangyi Technology, Shenzhen Yuehang or Xi’an Shengshi incurs debt on
its own behalf in the future, the instruments governing the debt may restrict the ability of these entities to pay dividends or make other distributions to us. In
addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements Chuangyi Technology currently has in place
with our VIEs in a manner that would materially and adversely affect Chuangyi Technology’s ability to pay dividends and other distributions to us.
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Furthermore, relevant PRC laws and regulations permit payments of dividends by Chuangyi Technology, Shenzhen Yuehang and Xi’an Shengshi only out of
their accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC laws and regulations, Chuangyi
Technology, Shenzhen Yuehang and Xi’an Shengshi are also required to set aside at least 10% of after-tax income based on PRC accounting standards each
year to their general reserves until the accumulative amount of such reserves reaches 50% of their respective registered capital.
The registered capital of Chuangyi Technology, Shenzhen Yuehang and Xi’an Shengshi is $45.0 million, $96.4 million (approximately RMB700 million) and
$50.0 million, respectively. Xi’an Shengshi has made the applicable annual appropriations required under PRC law. Chuangyi Technology and Shenzhen
Yuehang are not currently required to fund any statutory surplus reserve because Chuangyi Technology incurred loss this year and Shenzhen Yuehang still has
accumulated losses. Any direct or indirect limitation on the ability of our PRC subsidiaries to distribute dividends and other distributions to us could
materially and adversely limit our ability to make investments or acquisitions at the holding company level, pay dividends or otherwise fund and conduct our
business.
Although none of Chuangyi Technology, Shenzhen Yuehang or Xi’an Shengshi has any present plan to pay any cash dividends to us in the foreseeable future,
any limitation on the ability of Chuangyi Technology, Shenzhen Yuehang or Xi’an Shengshi to pay dividends or make other distributions to us could
materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, or otherwise fund and conduct
our business.
RISKS RELATED TO DOING BUSINESS IN CHINA
Adverse changes in the political and economic policies of the PRC government could have a material adverse effect on the overall economic growth
of China, which could reduce the demand for our services and have a material adverse effect on our competitive position.
Substantially all of our assets are located in China and substantially all of our revenues are derived from our operations in China. Accordingly, our business,
financial condition, results of operations and prospects are affected significantly by China’s economic, political and legal developments. The Chinese
economy differs from the economies of most developed countries in many respects, including the level of government involvement and the level and growth
rate of economic development.
While the Chinese economy has experienced significant growth in the past decades, growth has been uneven both geographically and among various sectors
of the economy, and the rate of growth has been slowing. The PRC government has implemented various measures to encourage economic growth and guide
the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may also have a negative effect on us. We cannot predict
the future direction of political or economic reforms or the effects such measures may have on our business, financial position or results of operations. Any
adverse change in the political or economic conditions in China, including changes in the policies of the PRC government or in laws and regulations in China,
could have a material adverse effect on the overall economic growth of China and the industries in which we operate. Such developments could have a
material adverse effect on our business, lead to a reduction in demand for our services and materially and adversely affect our competitive position.
Uncertainties with respect to the PRC legal system could limit the legal protections available to us or result in substantial costs and the diversion of
resources and management attention.
We conduct our business primarily through Beijing Yuehang Digital and AM Online, which are subject to PRC laws and regulations applicable to foreign
investment in China and, in particular, laws applicable to wholly-foreign owned companies. The PRC legal system is based on written statutes. Prior court
decisions may be cited for reference but have limited precedential value. PRC legislation and regulations afford significant protections to various forms of
foreign investments in China, but since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations
of many laws, regulations and rules are not always uniform and the enforcement of these laws, regulations and rules involve uncertainties, which may limit
the legal protections available to us. In addition, any litigation in China may be protracted and result in substantial costs and the diversion of resources and
management attention.
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Fluctuations in the value of the Renminbi may have a material adverse effect on your investment.
The value of the RMB against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign
exchange policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of the RMB to the U.S. dollar,
and the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted
and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the RMB has fluctuated against the U.S. dollar,
at times significantly and unpredictably. Since October 1, 2016, Renminbi has joined the International Monetary Fund (IMF)’s basket of currencies that make
up the Special Drawing Right (SDR), along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, Renminbi
has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. With the development of the foreign exchange
market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes
to the exchange rate system and there is no guarantee that Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the
future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in
the future.
The reporting and functional currency of our Cayman Islands parent company is the U.S. dollar. However, substantially all of the revenues and expenses of
our consolidated operating subsidiaries and affiliate entities are denominated in Renminbi. Substantially all of our sales contracts are denominated in
Renminbi and substantially all of our costs and expenses are denominated in Renminbi. Any significant appreciation or depreciation of the RMB may
materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. To the
extent that we need to convert U.S. dollars into Renminbi for our operations, depreciation of the Renminbi against the U.S. dollar would have an adverse
effect on the Renminbi amount we receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of
dividend distribution or for other business purposes, depreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar
amount available to us. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue which will be exchanged into U.S. dollars
and earnings from and the value of any U.S. dollar-denominated investments we make in the future.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the
availability and effectiveness of these hedges may be limited so that we may not be able to successfully hedge our exposure at all. In addition, our currency
exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency. As a result,
fluctuations in exchange rates may have a material adverse effect on your investment.
Restrictions on currency exchange may limit our ability to receive and use our revenues or financing effectively.
Substantially all of our revenues and expenses are denominated in Renminbi. We may need to convert a portion of our revenues into other currencies to meet
our foreign currency obligations, including, among others, payments of dividends declared, if any, in respect of our ordinary shares or ADSs. Under China’s
existing foreign exchange regulations, Chuangyi Technology, Shenzhen Yuehang and Xi’an Shengshi are able to pay dividends in foreign currencies, without
prior approval from the State Administration of Foreign Exchange, or the SAFE, by complying with certain procedural requirements. However, we cannot
assure you that the PRC government will not take measures in the future to restrict access to foreign currencies for current account transactions.
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Foreign exchange transactions by our subsidiaries and VIEs in China under capital accounts continue to be subject to significant foreign exchange controls
and require the approval of, or registration with, PRC governmental authorities. In particular, if we or other foreign lenders make foreign currency loans to
our subsidiaries or VIEs in China, these loans must be registered with the SAFE, and if we finance them by means of additional capital contributions, these
capital contributions must be approved by or registered with certain government authorities including the SAFE, the Ministry of Commerce or their local
counterparts. These limitations could affect the ability of our subsidiaries in China to exchange the foreign currencies obtained through debt or equity
financing, and could affect our business and financial condition.
On August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment
and Settlement of Foreign Currency Capital of Foreign Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise
of foreign currency registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular 142 provides that the RMB capital
converted from foreign currency registered capital of a foreign-invested enterprise may only be used within the purpose within the business scope approved
by the applicable government authority and unless otherwise provided by law, such RMB capital may not be used for equity investments within the PRC. In
addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-invested
company. The use of such RMB capital may not be altered without SAFE approval, and such RMB capital may not in any case be used to repay RMB loans if
the proceeds of such loans have not been used. Violations of SAFE Circular 142 could result in severe monetary or other penalties. On November 9, 2011,
SAFE promulgated the Circular of the State Administration of Foreign Exchange on Issues Relating to Further Clarification and Regulation of Certain Capital
Account Items under Foreign Exchange Control (“Circular 45”) to further strengthen and clarify its existing regulations on foreign exchange control under
SAFE Circular 142. Circular 45 expressly prohibits foreign invested entities, including wholly foreign owned enterprises such as Chuangyi Technology, from
converting registered capital in foreign exchange into RMB for the purpose of equity investment, granting certain loans, repayment of inter-company loans,
and repayment of bank loans which have been transferred to a third party. Further, Circular 45 generally prohibits a foreign invested entity from converting
registered capital in foreign exchange into RMB for the payment of various types of cash deposits. If our VIEs require financial support from us or our wholly
foreign-owned enterprises in the future and we find it necessary to use foreign currency-denominated capital to provide such financial support, our ability to
fund the VIEs’ operations will be subject to statutory limits and restrictions, including those described above.
Circular 45 was abolished by SAFE on March 19, 2015 according to a Circular on Promulgating the Abolishment and Invalidation of 50 Foreign Exchange-
related Regulatory Documents. On March 30, 2015, SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign
Exchange Capital Settlement of Foreign-invested Enterprises, or SAFE Circular 19, which took effect on June 1, 2015 and replaced SAFE Circular 142. On
June 9, 2016, the SAFE promulgated the Circular of the State Administration of Foreign Exchange on Reforming and Regulating Policies on the Control over
Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, which revised some provisions of SAFE Circular 19. SAFE Circular 19 and SAFE
Circular 16 allow foreign-invested enterprises to settle 100% of their foreign exchange capitals on a discretionary basis and allows ordinary foreign-invested
enterprises to make domestic equity investments by capital transfer in the original currencies, or with the amount obtained from foreign exchange settlement,
subject to complying with certain requirements. According to SAFE Circular 19 and SAFE Circular 16, the RMB funds obtained by foreign-invested
enterprises from the discretionary settlement of foreign exchange capitals shall be managed under the accounts pending for foreign exchange settlement
payment, and foreign-invested enterprise shall not use its capital and the RMB funds obtained from foreign exchange settlement for the purposes within the
following negative list: for expenditure beyond its business scope or expenditure prohibited by laws and regulations, for investments in securities or other
investments than banks’ principal-secured products, for the granting of loans to non-affiliated enterprises, except where it is expressly permitted in the
business license, or for construction or expenses related to the purchase of real estate not for self-use, unless it is a foreign-invested real estate enterprise.
Nevertheless, it is still not clear whether foreign-invested enterprises like our PRC subsidiaries are allowed to extend intercompany loans to our VIEs.
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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.
Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule, sets forth complex procedures and requirements
that could make merger and acquisition activities by foreign investors more time-consuming and complex. Part of our growth strategy includes acquiring
complementary businesses or assets. Complying with the requirements of the M&A Rule to complete such transactions could be time-consuming, and any
required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit the completion of such transactions, which
could affect our ability to expand our business or maintain our market share. In addition, if any of our acquisitions were subject to the M&A Rule and were
found not to be in compliance with the requirements of the M&A Rule in the future, relevant PRC regulatory agencies may impose fines and penalties on our
operations in the PRC, limit our operating privileges in the PRC, or take other actions that could materially and adversely affect our business and results of
operations.
Changes in laws and regulations governing air travel advertising or otherwise affecting our business in China may result in substantial costs and
diversion of resources and may materially and adversely affect our business and results of operations.
There are no existing PRC laws or regulations that specifically define or regulate air travel advertising. Changes in existing laws and regulations or the
implementation of new laws and regulations governing the content of air travel advertising and our business licenses or otherwise affecting our business in
China may result in substantial costs and diversion of resources and may materially and adversely affect our business prospects and results of operations.
The enforcement of the Labor Contract Law and other labor-related regulations in China may adversely affect our business and our results of
operations.
The Labor Contract Law, which came into effect January 1, 2008 and was amended on July 1, 2013, established more restrictions and increased costs for
employers to dismiss employees under certain circumstances, including specific provisions relating to fixed-term employment contracts, non-fixed-term
employment contracts, task-based employment, part-time employment, probation, consultation with the labor union and employee representative’s council,
employment without a contract, dismissal of employees, compensation upon termination and for overtime work, and collective bargaining. Under the Labor
Contract Law, unless otherwise provided by law, an employer is obligated to sign a labor contract with a non-fixed term with an employee, if the employer
continues to hire the employee after the expiration of two consecutive fixed-term labor contracts, or if the employee has worked for the employer for 10
consecutive years. Severance pay is required if a labor contract expires and is not renewed because of the employer’s refusal to renew or seeking to renew
with less favorable terms. In addition, under the Regulations on Paid Annual Leave for Employees, which became effective on January 1, 2008, employees
who have served more than one year for an employer are entitled to a paid vacation for five to 15 days, depending on the employee’s number of years of
employment. Employees who waive such vacation at the request of employers are entitled to compensation that equals to three times their regular daily salary
for each waived vacation day. As a result of these new labor protection measures, our labor costs are expected to increase, which may adversely affect our
business and our results of operations. It is also possible that the PRC government may enact additional labor-related legislations in the future, which would
further increase our labor costs and affect our operations.
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We have limited insurance coverage in China, and any business disruption or litigation we experience may result in our incurring substantial costs
and the diversion of resources.
Insurance companies in China offer limited business insurance products and do not, to our knowledge, offer business liability insurance. While business
disruption insurance is available to a limited extent in China, we have determined that the risks of disruption, cost of such insurance and the difficulties
associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. As a result, except for our
liability insurance for directors and officers, we do not have any business liability, disruption or litigation insurance coverage for our operations in China. Any
business disruption or litigation may result in our incurring substantial costs and the diversion of resources.
We may have claims and lawsuits against us that may result in material adverse outcomes.
We have been and will be possibly subject to a variety of claims and lawsuits. See “Item 8. Financial Information—A. Consolidated Statements and Other
Financial Information—Legal Proceedings.” This litigation and other claims that may be made against us from time to time are subject to inherent
uncertainties. Adverse outcomes in one or more of those claims may result in significant monetary damages or injunctive relief that could adversely affect our
ability to conduct our business. A material adverse impact on our financial statements also could occur for the period in which the effect of an unfavorable
final outcome becomes probable and reasonably estimable.
If one or more of our PRC subsidiaries fails to maintain or obtain qualifications to receive PRC preferential tax treatments, we will be required to
pay more taxes, which may have a material adverse effect on our result of operations.
The EIT Law (revised in 2017), which became effective on February 24, 2017, imposes a uniform income tax rate of 25% on most domestic enterprises and
foreign investment enterprises. Under this law, entities that qualify as “high and new technology enterprises strongly supported by the state,” or HNTE, are
entitled to the preferential EIT rate of 15%. A company’s status as a HNTE is valid for three years, after which the company must re-apply for such
qualification in order to continue to enjoy the preferential EIT rate. In addition, according to relevant guidelines, “new software enterprises” can enjoy an
income tax exemption for two years beginning with their first profitable year and a 50% tax reduction to a rate of 12.5% for the subsequent three years.
In September 2011, one of our PRC subsidiaries, Chuangyi Technology received the HNTE certificate, and, Chuangyi Technology successfully renewed its
HNTE status and obtained the renewed certificate issued by the competent governmental authority successively in October 2014 and December 2017. As a
result, Chuangyi Technology was subject to an EIT rate of 15% from 2014 to 2017, and is subject to an EIT rate of 25% from 2018.
Xi’an AirMedia Chuangyi Technology Co., Ltd., one of our PRC subsidiaries, or Xi’an Shengshi, received the HNTE certificate jointly issued by the
competent governmental authorities in Shanxi Province in September 2014. As such, Xi’an Shengshi enjoyed a preferential income tax rate of 15% from
2014 to 2016. Xi’an Shengshi is subject to EIT at a rate of 25% from 2017 afterwards.
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Shenzhen AirMedia Information Technology Co., Ltd., one of our PRC subsidiaries, or Shenzhen Yuehang is subject to EIT at a rate of 25% from 2013
afterwards.
We cannot assure you that our PRC subsidiaries will be able to maintain or obtain qualifications to receive the above preferential tax treatments; we will be
required to pay more taxes if they fail to become or continue to be eligible to receive PRC tax benefits, which may materially and adversely affect our
business and results of operations.
Dividends payable to us by our wholly-owned operating subsidiaries may be subject to PRC withholding taxes, or we may be subject to PRC taxation
on our worldwide income, and dividends distributed to our investors may be subject to more PRC withholding taxes under PRC tax law.
Under the EIT Law and related regulations, dividends payable by a foreign-invested enterprise in China to its foreign investors who are non-resident
enterprises are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a
different withholding arrangement. The British Virgin Islands, or BVI, where Broad Cosmos Enterprises Ltd., or Broad Cosmos, our wholly-owned
subsidiary, is incorporated, does not have such a tax treaty with AN China, the 100% shareholder of Chuangyi Technology, Shenzhen Yuehang and Xi’an
Shengshi, is incorporated in Hong Kong. According to the Mainland and Hong Kong Special Administrative Region Arrangement on Avoiding Double
Taxation or Evasion of Taxation on Income between China and Hong Kong and the relevant rules, dividends paid by a foreign-invested enterprise in China to
its direct holding company in Hong Kong will be subject to withholding tax at a rate of 5% (if the foreign investor owns directly at least 25% of the shares of
the foreign-invested enterprise). However, under recently implemented PRC regulations, now our Hong Kong subsidiary must obtain approval from the
competent local branch of the State Administration of Taxation in accordance with the double-taxation agreement among the PRC and Hong Kong in order to
enjoy the 5% preferential withholding tax rate. In February 2009, the State Administration of Taxation issued Notice No. 81. According to Notice No. 81, in
order to enjoy the preferential treatment on dividend withholding tax rates, an enterprise must be the “beneficial owner” of the relevant dividend income, and
no enterprise is entitled to enjoy preferential treatment pursuant to any tax treaties if such enterprise qualifies for such preferential tax rates through any
transaction or arrangement, the major purpose of which is to obtain such preferential tax treatment. The tax authority in charge has the right to make
adjustments to the applicable tax rates, if it determines that any taxpayer has enjoyed preferential treatment under tax treaties as a result of such transaction or
arrangement. In October 2009, the State Administration of Taxation issued another notice on this matter, or Notice No. 601, to provide guidance on the
criteria to determine whether an enterprise qualifies as the “beneficial owner” of the PRC sourced income for the purpose of obtaining preferential treatment
under tax treaties. Pursuant to Notice No. 601, the PRC tax authorities will review and grant tax preferential treatment on a case-by-case basis and adopt the
“substance over form” principle in the review. Notice 601 specifies that a beneficial owner should generally carry out substantial business activities and own
and have control over the income, the assets or other rights generating the income. Therefore, an agent or a conduit company will not be regarded as a
beneficial owner of such income. Since the two notices were issued, it has remained unclear how the PRC tax authorities will implement them in practice and
to what extent they will affect the dividend withholding tax rates for dividends distributed by our subsidiaries in China to our Hong Kong subsidiary. If the
relevant tax authority determines that our Hong Kong subsidiary is a conduit company and does not qualify as the “beneficial owner” of the dividend income
it receives from our PRC subsidiaries, the higher 10% withholding tax rate may apply to such dividends. On February 3, 2018, SAT issued Announcement of
the State Administration of Taxation on Issues concerning “Beneficial Owners” in Tax Treaties, or Circular 9, which became effective on April 1, 2018 and
superseded Notice No. 601. In comparison with Notice No. 601, Circular 9 enlarging and further explaining the scope of beneficial owner, supplementing the
applicants deemed as beneficial owners who obtain proceeds from China as direct or indirect 100% shareholder, increasing the certainty of identifying
beneficial owner.
24
Under the EIT Law and EIT Implementation Rules, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is
considered a PRC resident enterprise and is subject to the EIT at the rate of 25% on its worldwide income. The EIT Implementation Rules define the term “de
facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations,
personnel, accounting, properties, etc. of an enterprise.” The SAT issued the Notice Regarding the Determination of Chinese-Controlled Overseas
Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or SAT Circular 82, on April 22, 2009. SAT
Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled overseas-incorporated
enterprise is located in China.
In addition, the SAT issued a bulletin on July 27, 2011 to provide more guidance on the implementation of SAT Circular 82 with an effective date to be
September 1, 2011. The bulletin made clarification in the areas of resident status determination, post-determination administration, as well as competent tax
authorities. It also specifies that when provided with a copy of the Chinese tax resident determination certificate from a resident Chinese controlled offshore
incorporated enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced dividends, interest, royalties, etc. to the Chinese
controlled offshore incorporated enterprise. Although both SAT Circular 82 and the bulletin only apply to offshore enterprises controlled by PRC enterprises,
not to those that, like our company, are controlled by PRC individuals, the determination criteria set forth in SAT Circular 82 and administration clarification
made in the bulletin may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax residency
status of offshore enterprises and the administration measures that should be implemented, regardless of whether they are controlled by PRC enterprises or
PRC individuals.
After consulting with our PRC counsel, we do not believe that our holding company and other overseas subsidiaries should be deemed PRC resident
enterprises as, among other things, certain of our company’s key assets and records, including register of members, board resolutions and shareholder
resolutions, are located and maintained outside of the PRC, and we also hold our board and board committee meetings outside of the PRC from time to time.
However, we have been advised by our PRC counsel, Commerce & Finance Law Offices, that because there remains uncertainty regarding the interpretation
and implementation of the EIT Law and EIT Implementation Rules, it is uncertain whether we will be deemed a PRC resident enterprise. If the PRC
authorities were to subsequently determine, or any further regulations provide, that we should be treated as a PRC resident enterprise, we would be subject to
a 25% EIT on our global income. To the extent our holding company earns income outside of China, a 25% EIT on our global income may increase our tax
burden and could adversely affect our financial condition and results of operations.
If we are regarded as a PRC resident enterprise, dividends distributed from our PRC subsidiaries to us could be exempt from the PRC dividend withholding
tax, since such income is exempt under the EIT Law and the EIT Implementation Rules to the extent such dividends are deemed “dividends among qualified
PRC resident enterprises.” If we are considered a resident enterprise for enterprise income tax purposes, dividends we pay with respect to our ADSs or
ordinary shares may be considered income derived from sources within the PRC and subject to PRC withholding tax of 10%. In addition, non-PRC
shareholders may be subject to PRC tax on gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is treated as sourced
from within the PRC. It is unclear whether our non-PRC shareholders would be able to claim the benefits of any tax treaties between their tax residence and
the PRC in the event that we are considered as a PRC resident enterprise.
With the 10% PRC dividend withholding tax, we will incur an incremental PRC tax cost when we distribute our PRC profits to our ultimate shareholders if
we are deemed not to be a PRC resident enterprise. On the other hand, if we are determined to be a PRC resident enterprise under the EIT Law and receive
income other than dividends, our profitability and cash flow would be adversely impacted due to our worldwide income being taxed in China under the EIT
Law.
Moreover, under the EIT Law, foreign ADS holders may be subject to a 10% withholding tax upon dividends payable by us and gains realized on the sale or
other disposition of ADSs or ordinary shares, if we are classified as a PRC resident enterprise and such income is deemed to be sourced from within the PRC.
Although we are incorporated in the Cayman Islands, it is unclear whether the dividends payable by us or the gains our foreign ADS holders may realize on
disposition will be regarded as income from sources within the PRC if we are classified as a PRC resident enterprise. Any such tax on our dividend payments
will reduce the returns of your investment.
25
Scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.
In connection with the PRC Enterprise Income Tax Law, or the EIT Law, the Ministry of Finance and the State Administration of Taxation jointly issued, on
April 30, 2009, the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59. On December 10,
2009, the State Administration of Taxation issued the Notice on Strengthening the Management on Enterprise Income Tax for Non-resident Enterprises
Equity Transfer, or Circular 698. Both Circular 59 and Circular 698 became effective retroactively on January 1, 2008. By promulgating and implementing
these circulars, the PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of equity interests in a PRC resident enterprise by a
non-resident enterprise. However, SAT issued Announcement of the State Administration of Taxation on Matters concerning Withholding of Income Tax of
Non-resident Enterprises at Source, or Circular 37, which became effective on December 1, 2017 and superseded Circular 698. In comparison with Circular
698, Circular 37 releases the obligations of withholding agent, taxpayer by adopting straightforward procedures and simple calculation concerning
withholding income tax of non-resident enterprises at source.
On February 3, 2015, the SAT issued the Announcement on Several Issues concerning the Enterprise Income Tax on Indirect Transfers of Properties by Non-
Resident Enterprises, or Public Notice 7, to supersede tax rules in relation to the Indirect Transfer of Shares under the original SAT Circular 698. Public
Notice 7 covers transactions involving not only Indirect Transfer of Shares as set forth under SAT Circular 698 but also transactions involving an overseas
company’s indirect transfer of other property or assets (such as real properties) located in China (collectively, ‘‘PRC Taxable Properties’’) through transfer of
shares of an offshore intermediary company. Pursuant to Public Notice 7, in the event that non-residential enterprises indirectly transfer PRC Taxable
Properties without reasonable commercial purposes in order to evade PRC enterprise income tax, such indirect transfer will be deemed as direct transfer of
PRC Taxable Properties and, therefore, be subject to PRC enterprise income tax. In addition, Public Notice 7 provides clearer criteria on how to assess
reasonable commercial purposes and allows for safe harbor scenarios applicable to internal group restructurings. Under Public Notice 7, subject to certain
exceptions such as internal group restructurings and purchase and sale of shares of the same publicly-listed oversea enterprise in a public securities market, an
indirect transfer of PRC Taxable Properties shall be directly deemed as having no reasonable commercial purposes if the following circumstances are
satisfied: (i) more than 75% of the value of overseas enterprises’ shares directly or indirectly comes from PRC Taxable Properties; (ii) at any time within one
year before the indirect transfer of PRC Taxable Properties, more than 90% the total amount of overseas enterprises’ assets (excluding cash) are directly or
indirectly constituted by their investment within the PRC, or within one year before the indirect transfer of PRC Taxable Properties, more than 90% of the
overseas enterprises’ income directly or indirectly derive from the PRC; (iii) the overseas enterprises and their controlling enterprises, which directly or
indirectly hold PRC Taxable Properties, cannot justify the economic substance of the corporate structure; and (iv) overseas tax payment regarding indirect
transfer of PRC Taxable Properties is lower than PRC tax payment regarding direct transfer of PRC Taxable Properties. Public Notice 7 also brings
uncertainties to the offshore transferor and transferee of the indirect transfer of PRC Taxable Properties as they have to make self-assessment on whether the
transaction should be subject to PRC tax and to file or withhold the PRC tax accordingly. As a result, where non-resident investors were involved in our
private equity financing or share transfer of our company between two or more offshore parties, if such transactions were determined by the tax authorities to
lack reasonable commercial purpose, we and our non-resident investors may become at risk of being taxed under Circular 37 and Public Notice 7 and may be
required to expend valuable resources to comply with Circular 37 and Public Notice 7 or to establish that we should not be taxed under Circular 37 and Public
Notice 7, which may have an adverse effect on our financial condition and results of operations.
The PRC tax authorities have the discretion under Public Notice 7 to make adjustments to the taxable capital gains based on the difference between the fair
value of the equity interests transferred and the cost of investment. We may pursue acquisitions in the future that may involve complex corporate structures. If
we are considered a non-resident enterprise under the PRC Enterprise Income Tax Law and if the PRC tax authorities make adjustments to the taxable income
of the transactions under SAT Circular 59, Circular 37 or Public Notice 7, our income tax costs associated with such potential acquisitions will be increased,
which may have an adverse effect on our financial condition and results of operations. Although Circular 37 requires less scrutiny on withholding income tax
of non-resident enterprises at source, we cannot assure you that the PRC government will not take harsh measures in the future with respect to tax related
regulations over acquisition transactions.
26
If we become directly subject to the scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend
significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in a
loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
Occasionally, U.S. public companies that have substantially all of their operations in China, particularly companies which have completed so-called reverse
merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies,
such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities and mistakes, a lack of
effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations
of fraud. For example, in December 2012, the SEC initiated administrative proceedings against the China affiliates of the Big Four public accounting firms
for allegedly refusing to produce audit work papers and other documents related to certain China-based companies under investigation by the SEC for
potential accounting fraud against U.S. investors. Although the firms reached a settlement with the SEC and although we were not and are not subject to any
ongoing SEC investigations, many U.S. listed Chinese companies are now subject to, or may become subject to, shareholder lawsuits and SEC enforcement
actions and are conducting internal and external investigations into the allegations. As a result of this proceeding and the scrutiny, criticism and negative
publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless.
It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our Company, our business and our stock price. If we become
the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate
such allegations and/or defend our company. This situation will be costly and time consuming and distract our management from growing our company.
Our prior audit reports are prepared by auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, you are
deprived of the benefits of such inspection.
Deloitte Touche Tohmatsu Certified Public Accountants LLP (Deloitte), which acted as our independent registered public accounting firm until March 3,
2017, issued audit reports included in our prior annual reports filed with the United States Securities and Exchange Commission. Auditors of companies that
are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or the PCAOB, are
required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and
professional standards. Because Deloitte is located in the Peoples’ Republic of China, a jurisdiction where the PCAOB is currently unable to conduct
inspections without the approval of the Chinese authorities, they are not currently inspected by the PCAOB. On December 7, 2018, the SEC and the PCAOB
issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies
with significant operations in China. The joint statement reflects a heightened interest in an issue that has vexed U.S. regulators in recent years. However, it
remains unclear what further actions the SEC and PCAOB will take to address the problem.
Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control
procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the
PCAOB from regularly evaluating Deloitte’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB
inspections.
The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of Deloitte’s audit procedures or
quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported
financial information and procedures and the quality of our financial statements issued by Deloitte.
27
If additional remedial measures are imposed on the “Big Four” PRC-based accounting firms, including Deloitte, our previous independent
registered public accounting firm, in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by the
SEC, with respect to requests for the production of documents, investors’ confidence in our reported financial information and the price of our ADSs
could be adversely affected.
Starting in 2011, the Chinese affiliates of the “big four” accounting firms, including Deloitte, our previous independent registered public accounting firm,
were affected by a conflict between the United States’ and Chinese laws. Specifically, for certain U.S. listed companies operating and audited in mainland
China, the SEC and the PCAOB sought to obtain from these Chinese accounting firms access to their audit work papers and related documents. The firms
were, however, advised and directed that under China law they could not respond directly to the U.S. regulators on those requests, and that requests by foreign
regulators for access to such papers in China had to be channeled through the China Securities Regulatory Commission, or the CSRC.
In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley
Act of 2002 against the Chinese accounting firms, including Deloitte. A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative
court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms including a temporary suspension of
their right to practice before the SEC, although such proposed penalties did not take effect pending review by the Commissioners of the SEC. On February 6,
2015, before a review by the Commissioner had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future
requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are
required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they
fail to meet the specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms, depending on the nature of the
failure. Under the terms of the settlement, the underlying proceeding against the four PRC-based accounting firms was deemed dismissed with prejudice at
the end of four years starting from the settlement date, which was February 6, 2019. We cannot predict if the SEC will further challenge the four PRC-based
accounting firms’ compliance with U.S. law in connection with U.S. regulatory requests for audit work papers or if the results of such a challenge would
result in the SEC imposing penalties such as suspensions.
In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC
operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being
determined to not be in compliance with the requirements of the Exchange Act and possible delisting. Moreover, any negative news about any such future
proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our
ADSs may be adversely affected.
RISKS RELATED TO THE MARKET FOR OUR ADSs
If the buyers of our equity interest in AM Advertising exercise their respective revocation rights and require us to repurchase the equity interest sold
or if we need to compensate the buyers as earnout, our business and financial results may experience material adverse effect.
In June 2015, we entered into an equity interest transfer agreement with Beijing Longde Wenchuang Investment Fund Management Co., Ltd. to sell 75%
equity interest of AM Advertising for RMB2.1 billion in cash. In November 2015, Beijing Longde Wenchuang Investment Fund Management Co., Ltd.
assigned and transferred its rights and obligations under the equity interest transfer agreement relating to 46.43% equity interest of AM Advertising to Beijing
Cultural Center Construction and Development Fund (Limited Partnership). We have completed the equity interest transfer and have received the payments
for the transfer. However, under that equity interest transfer agreement, the buyers may require us to repurchase the 75% equity interest upon the occurrence
of certain events. In addition, the agreement’s earnout provisions will continue to apply until all profit targets have been achieved. See “Item 4. Information
on the Company—A. History and Development of the Company.” On March 28, 2018, August 23, 2018 and November 2018, we entered into a memorandum
of understanding (MoU) and its supplemental agreement respectively, with, among others, Beijing Longde Wenchuang Investment Fund Management Co.,
Ltd and Beijing Cultural Center Construction and Development Fund (Limited Partnership), under which, among other things, Linghang Shengshi, Mr. Guo
and Mr. Xu have agreed to pay or make available to AM Advertising on or prior to May 30, 2018 and further extended to September 30, 2018 and December
31, 2018 an aggregate of RMB304,553,900 to hedge the following amounts (i) the RMB152,000,000 profits attributable to Linghang Shengshi, Mr. Guo and
Mr. Xu for the first nine months of 2015, based on a third-party pro forma audit report on the Target Business; (ii) the loan of RMB88,000,000 in principal
balance and RMB7,840,000 in interests; and (iii) the payment of RMB56,713,900 in cash after the sale of the 20.32% equity interests in AM Advertising,
which consisted of 20.18% equity interests hold by the Company and 0.14% equity interests hold by Mr. Man Guo and Mr. Qing Xu on behalf of the
Company, and following the completion of the foregoing arrangements, our obligations with respect to the profit target for 2015, the earnout provision for the
first nine months of 2015 and the loans between AM Advertising and Linghang Shengshi shall be deem completed. We are negotiating for further extension
of deadline for payment under the MoU and its supplemental agreement. We cannot assure you that the buyers will not bring up any claim with respect to the
above arrangements and if there is any dispute or legal proceedings initiated, our business and financial position may be adversely affected.
28
In November 2018, Linghang Shengshi, Mr. Guo and Mr. Xu entered into an equity transfer agreement with Jiangsu Hongzhou Investment Co., Ltd., an
independent third party to sell all the remaining 20.32% equity interest of AM Advertising for an initial transfer price of RMB580 million in cash. We have
completed the equity interest transfer and have received the installment payment of RMB 200 million for the transfer pursuant to this equity transfer
agreement. However, under this equity transfer agreement, the buyer may require sellers to repurchase the 20.32% equity interest upon the occurrence of
certain events.
The trading price of our ADSs has been and may continue to be volatile.
The trading price of our ADSs has been and may continue to be subject to wide fluctuations. During the year of 2018, the trading prices of our ADSs on the
Nasdaq Global Select Market and Nasdaq Capital Market ranged from $0.9 to $7.5 per ADS, and the last reported trading price on April 29, 2019 was $1.83
per ADS. Effective on April 11, 2019, we adjusted the ratio of our ADSs to ordinary shares from one ADS representing two ordinary shares to one ADS
representing ten ordinary shares. The aforementioned trading prices have not been adjusted for the ADS ratio change. The price of our ADSs may fluctuate in
response to a number of events and factors including, changes in the economic performance or market valuations of other advertising companies, conditions
in the air travel advertising industry and the sales or perceived potential sales of additional ordinary shares or ADSs.
In addition, the securities market has from time to time experienced significant price and volume fluctuations unrelated to the operating performance of
particular companies. These market fluctuations may also have a material adverse effect on the market price of our ADSs.
Additional sales of our ordinary shares in the public market, or the perception that these sales could occur, could also cause the market price of our ADSs to
decline.
We have been named as a defendant or respondent in legal proceedings that could have a material adverse impact on our business, financial
condition, results of operation, cash flows and reputation.
We will have to defend against the legal proceedings described in “Item 8. Financial Information—A. Consolidated Statements and Other Financial
Information—Legal Proceedings,” including any appeals of such legal proceedings should our initial defense be unsuccessful. We are currently unable to
estimate the possible loss or possible range of loss, if any, associated with the resolution of these legal proceedings. In the event that our initial defense of
these legal proceedings is unsuccessful, there can be no assurance that we will prevail in any appeal. Any adverse outcome of these cases, including any
plaintiff’s or claimant’s appeal of a judgment in these legal proceedings, could have a material adverse effect on our business, financial condition, results of
operation, cash flows and reputation. In addition, there can be no assurance that our insurance carriers will cover all or part of the defense costs, or any
liabilities that may arise from these matters. The legal proceeding process may utilize a significant portion of our cash resources and divert management’s
attention from the day-to-day operations of our company, all of which could harm our business. We also may be subject to claims for indemnification related
to these matters, and we cannot predict the impact that indemnification claims may have on our business or financial results.
29
You may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your
right to vote.
Except as described in this annual report and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares
evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting
rights attaching to the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that
you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.
Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings and you may not receive cash
dividends if it is impractical to make them available to you.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in
the United States unless we register both the rights and the securities to which the rights relate under the U.S. Securities Act of 1933, as amended, or the
Securities Act, or an exemption from the registration requirements is available. Under the deposit agreement, the depositary bank will not make rights
available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt
from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to
endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the
Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.
The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other
deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs
represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs.
For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions
may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it
deems expedient in connection with the performance of its duties.
In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or
at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any
provision of the deposit agreement, or for any other reason.
You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited, because
we are incorporated under Cayman Islands law, conduct substantially all of our operations in China and most of our directors and officers reside
outside the United States.
We are incorporated in the Cayman Islands, and conduct substantially all of our operations in China through our subsidiaries and VIEs. Most of our directors
and officers reside outside the United States and a substantial portion of their assets are located outside of the United States. As a result, it may be difficult for
you to effect service of process within the United States and bring an action against us or against these individuals in a U.S. court if you believe that your
rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands
and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. There is no statutory recognition in
the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances recognize and enforce
a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.
30
Our corporate affairs are governed by our amended and restated memorandum and articles of association, as amended and restated from time to time, and by
the Companies Law (2018 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against us and our directors,
actions by minority shareholders and the fiduciary duties of our directors are to a large extent governed by the common law of the Cayman Islands. The rights
of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or
judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States and provides
significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in U.S.
federal courts.
As a result, our public shareholders may have more difficulty in protecting their interests through actions against us, our management, our directors or our
controlling shareholders than shareholders of a corporation incorporated in a jurisdiction in the United States.
Our memorandum and articles of association contain anti-takeover provisions that could adversely affect the rights of holders of our ordinary shares
and ADSs.
We have included certain provisions in our memorandum and articles of association that could limit the ability of others to acquire control of our company
and deprive our shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties from seeking to
obtain control of our company in a tender offer or similar transactions. The following provisions in our articles may have the effect of delaying or preventing
a change of control of our company:
·
·
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, 2019, our principal
shareholder, Mr. Herman Man Guo, along with his wife, Ms. Dan Shao, beneficially owned approximately 34.7% 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.
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We believe we were a passive foreign investment company for our taxable year ended December 31, 2018, which could subject United States investors
in the ADSs or ordinary shares to significant adverse United States income tax consequences.
Based on the market price of our ADSs and composition of our assets (in particular the retention of a substantial amount of cash), we believe that we were a
“passive foreign investment company,” or “PFIC,” for U.S. federal income tax purposes for our taxable year ended December 31, 2018, and we will likely be
a PFIC for our current taxable year ending December 31, 2019 unless the market price of our ADSs increases and/or we invest a substantial amount of cash
and other passive assets we hold in assets that produce or are held for the production of non-passive income. A non-U.S. corporation will be considered a
PFIC for any taxable year if either (1) 75% or more of its gross income for such year consists of certain types of “passive” income or (2) 50% or more of the
average quarterly value of its assets (as generally determined on the basis of fair market value) during such year produce or are held for the production of
passive income.
If we were to be classified as a PFIC in any taxable year, a U.S. Holder (as defined in Item 10. Additional Information—E. —Taxation—United States
Federal Income Taxation) may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the ADSs or
ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent such gain or distribution is treated as an “excess distribution”
under the U.S. federal income tax rules. Furthermore, a U.S. Holder will generally be treated as holding an equity interest in a PFIC in the first taxable year of
the U.S. Holder’s holding period in which we become a PFIC and subsequent taxable years even if, we, in fact, cease to be a PFIC in subsequent taxable
years. Accordingly, a U.S. Holder of our ADSs or ordinary shares is urged to consult its tax advisor concerning the U.S. federal income tax consequences of
an investment in our ADSs or ordinary shares, including the possibility of making a “mark-to-market” election. For more information, see “Item 10.
Additional Information – E. Taxation – United States Federal Income Taxation.
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 Linghang Shengshi, a consolidated variable interest entity of our principal
subsidiary, Chuangyi Technology. Later, we established additional PRC consolidated VIEs to conduct our operations in China. Substantially all of our current
operations are conducted through contractual arrangements with these VIEs.
On November 7, 2007, we listed our ADSs on the Nasdaq Global Market under the symbol “AMCN”. We and certain of our then shareholders completed the
initial public offering of 17,250,000 ADSs, representing 34,500,000 of our ordinary shares, on November 13, 2007. Our ADSs were subsequently transferred
to the Nasdaq Global Select Market. Our ADSs, each representing ten of our ordinary shares effective on April 11, 2019, has been transferred to The Nasdaq
Capital Market in November 2018.
During 2014 and 2015, we dissolved certain non-operating holding entities, including Glorious Star Investment Limited, Dominant City Ltd. and Easy Shop
Limited.
In 2015, we sold all equity interest of Jinsheng Advertising, the operating entity of our TV-attached digital frames business. In connection with such equity
interest transfer, we have transferred all relevant assets, liabilities and managerial duties related to the TV-attached digital frames operated by Jinsheng
Advertising with net carrying value of $1.1 million. In 2015, we also divested our digital TV screens in airports and did not renew the relevant concession
right contracts as they expired. As a result, we ceased our operation of the business line of digital TV screens in airports.
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In June 2015, we entered into an equity interest transfer agreement with Beijing Longde Wenchuang Investment Fund Management Co., Ltd. to sell 75%
equity interest of AM Advertising, for a consideration of RMB2.1 billion in cash. In November 2015, Beijing Longde Wenchuang Investment Fund
Management Co., Ltd. assigned and transferred its rights and obligations under the equity interest transfer agreement relating to 46.43% equity interest of AM
Advertising to Beijing Cultural Center Construction and Development Fund (Limited Partnership). As part of the transaction, we effected an internal business
reorganization and transferred all our media business in airports (excluding digital TV screens in airports and TV-attached digital frames) and all billboard
and LED media business outside of airports (excluding gas station media network and digital TV screens on airplanes) to AM Advertising to form the target
business to be sold (the “Disposed Business”) and transferred our other business out of AM Advertising. To effectuate the sale, we removed the VIE structure
with respect to AM Advertising. The change in the equity ownership of AM Advertising was registered with the local branch of the State Administration for
Industry and Commerce, or the SAIC (which has merged into the State Administration for Market Regulation, or the SAMR, in March 2018), in December
2015. We have ceased to consolidate the results of AM Advertising after the sale. The buyers may require the Company to repurchase the equity interest of
AM Advertising upon the occurrence of any of the following events:
·
·
·
the audited net profit (before or after adjustment for non-recurring gains and losses, whichever is less) in relation to the Target Business is less than
RMB150 million in 2015;
eighty per cent of the concession right contracts (as calculated based on the contract subject amount) with respect to the Target Business in the area
of the Beijing Capital Airport effective as of the date of the equity interest transfer agreement which were entered into by AirMedia Advertising,
AirMedia and any of its subsidiaries and/or VIE companies (as set forth in detail in Schedule 6 hereto) are not renewed with AirMedia Advertising
as a party to the contract upon the expiration of the respective contracts; and
the internal restructuring as required under the equity interest transfer agreement has not been fully completed by June 30, 2016.
In addition, the agreement’s earnout provisions will continue to apply until all profit targets are achieved. In the event the adjusted net profit of AM
Advertising after the provided restructuring in 2015, 2016 and 2017 is less than the profit target provided for in the agreement, we, as a shareholder of AM
Advertising, will be obligated to compensate the buyers for the deficiency by nil-consideration equity interest transfers or other means of compensation. On
March 28, 2018, August 23, 2018 and November 2018, we entered into a memorandum of understanding (MoU) and its supplemental agreement respectively,
with, among others, Beijing Longde Wenchuang Investment Fund Management Co., Ltd and Beijing Cultural Center Construction and Development Fund
(Limited Partnership), under which, among other things, Linghang Shengshi, Mr. Guo and Mr. Xu have agreed to pay or make available to AM Advertising
on or prior to May 30, 2018 and further extended to September 30, 2018 and December 31, 2018 an aggregate of RMB304,553,900 to hedge the following
amounts (i) the RMB152,000,000 profits attributable to Linghang Shengshi, Mr. Guo and Mr. Xu for the first nine months of 2015, based on a third-party pro
forma audit report on the Target Business; (ii) the loan of RMB88,000,000 in principal balance and RMB7,840,000 in interests; and (iii) the payment of
RMB56,713,900 in cash after the sale of the 20.32% equity interests in AM Advertising, which consisted of 20.18% equity interests hold by the Company
and 0.14% equity interests hold by Mr. Man Guo and Mr. Qing Xu on behalf of the Company, and following the completion of the foregoing arrangements,
our obligations with respect to the profit target for 2015, the earnout provision for the first nine months of 2015 and the loans between AM Advertising and
Linghang Shengshi shall be deem completed. As the primary rights and obligations of the MoU have been fulfilled including the transfer all its media
business in airports (excluding digital TV screens in airports and TV-attached digital frames) and all billboard and LED media business outside of airports
(excluding gas station media network and digital TV screens on airplanes) to AM Advertising, and transfer of the trademark to AM advertising, and the
Company did not received any notice of cancellation of the MoU from Beijing Longde Wenchuang Investment Fund Management Co., Ltd and Beijing
Cultural Center Construction and Development Fund (Limited Partnership), the Company believes the MoU is legally valid. The Company will make
payment according to the MoU once the application for tax refund of AM Advertising finishes as agreed in the MoU. And once the tax refund finishes, the net
settlement amount may be reduced pursuant to the MoU.
In April 2015, we established AM Online, a variable interest entity of us, to operate the new Wi-Fi business.
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In June 2015, Mr. Herman Man Guo submitted to the board of directors of the Company a preliminary nonbinding proposal letter (the “Proposal Letter”) to
acquire the Company in a going private transaction for $3.00 in cash per Share (or $6.00 in cash per ADS) other than any ordinary shares or ADSs
beneficially held by Mr. Guo, his affiliates or other management shareholders who may choose to roll over their Shares in connection with the proposed
acquisition (the “Proposal”). The board of directors of the Company formed a special committee comprised of three independent and disinterested directors,
Messrs. Conor Chia-hung Yang, Shichong Shan and Songzuo Xiang, to negotiate the Proposal with the buyer group. On September 28, 2015, the Company
entered into a definitive agreement and plan of merger (the “Merger Agreement”) with AirMedia Holdings Ltd. (“Parent”) and AirMedia Merger Company
Limited, a wholly owned subsidiary of Parent, pursuant to which Parent will acquire the Company for $3.00 per Share (or $6.00 per ADS). Under the terms
of the Merger Agreement, either the Company or Parent could terminate the Merger Agreement if the merger contemplated by the Merger Agreement has not
been completed by the date of June 28, 2016. In 2016 and 2017, the parties entered into various amendments to the Merger Agreement to extend this
termination date and amend other terms of the Merger Agreement. The Merger Agreement was terminated on December 27, 2017 in view that the going
private transaction would not be completed by December 31, 2017.
In January 2017, we, through AM Online, established Unicom AirNet (Beijing) Network Co., Ltd., or Unicom AirNet, jointly with Unicom Broadband
Online Co., Ltd., a wholly owned subsidiary of China Unicom, and Chengdu Haite Kairong Aeronautical Technology Co., Ltd., a wholly owned subsidiary of
a listed company providing aeronautical technical services. Pursuant to a capital contribution agreement entered into by the relevant parties, AM Online
invested an aggregate of RMB117.9 million in Unicom AirNet. AM Online currently holds 39% of equity interests in Unicom AirNet, and can designate three
directors to its seven-member board. We and the other two shareholders of Unicom AirNet intend to build global network for aeronautical communication
and provide in-flight Internet and other value-added services through this newly established company. We believe that our respective expertise and advantages
in telecommunication and aeronautical technology can be fully utilized under this joint venture.
In November 2018, Linghang Shengshi, Mr. Guo and Mr. Xu entered into an equity transfer agreement with Jiangsu Hongzhou Investment Co., Ltd., an
independent third party to sell 20.32% equity interest of AM Advertising for an initial transfer price of RMB 580 million in cash. We have completed the
equity interest transfer and have received the installment payment of RMB 150 million for the year ended December 31, 2018 and RMB 50 million in January
2019 for the transfer pursuant to this equity transfer agreement. However, under this equity transfer agreement, the buyer may require sellers to repurchase the
20.32% equity interest upon the occurrence of certain events, we do not expect to repurchase the 20.32% equity interest as of the date of this annual report,
and we have accrued impairment of RMB 332 million for the 20.32% equity investment as of December 31, 2018.
We are realigning our business by focusing our crucial resources on the further development of the in-flight connectivity business. In conjunction with this
realignment, we proposed to convene an extraordinary general meeting on May 20, 2019 to change our name from "AirMedia Group Inc." to "AirNet
Technology Inc.".
Our principal executive offices are located at 15/F, Sky Plaza, No. 46 Dongzhimenwai Street, Dongcheng District, Beijing 100027, People’s Republic of
China. Our telephone number at this address is +86-10-8438-6868 and our fax number is +86-10-8460-8658. Our registered office in the Cayman Islands is at
the offices of Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.
See “Item 5. Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Capital Expenditures” for a discussion of our capital
expenditures.
B.
Business Overview
General
Driven by innovation, we gradually reinvented ourselves and shaped our core competence in providing in-flight solutions to connectivity, entertainment and
digital multimedia in China. Collaborating with our partners, we provide Chinese airlines with seamless and immersive Internet connections through a
network of satellites and land-based beacons, furnish airline travelers with interactive entertainment and coverage of breaking news, and provide corporate
clients with advertisements tailored to the changing perceptions of the travelers.
Collaborating with China Unicom, we are licensed to provide in-flight connectivity over the Internet. Furthermore, backed by Honeywell’s next-generation
JetWave TM satellite communications hardware, we are able to provide airline travelers with a seamless and immersive Internet connection delivering the
same experience as it would’ve been otherwise on the ground. Moreover, our strategic partnership with China Eastern Airlines Media Co., Ltd. enables us to
deliver multimedia contents to travelers on airplanes operated by China Eastern Airlines through a mobile app.
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In addition to our active endeavors in in-flight connectivity, we maintain a wide range of in-flight entertainment and advertising contents. As of March 31,
2019, we have access to in-flight entertainment and advertising contents including exclusive in-flight copyrights to over 80% of movies currently shown in
domestic theaters, more than 800 archived films, and thousands of hours of multimedia programs of entertainment nature covering a variety of topics such as
sports, comedies, local attractions, reality shows, commentaries, documentaries. As of March 31, 2019, we were engaged to provide copyrighted
entertainment contents to more than 30 airlines. Furthermore, we are engaged by hundreds of corporate clients to provide advertising contents across different
in-flight entertainment systems. Built upon our experiences, we are capable of developing entertainment contents independently and producing advertising
contents tailored to the needs of corporate clients.
Our entertainment contents usually show as individual programs lasting from approximately 45 minutes to 120 minutes of which approximately 3 minutes to
15 minutes are divided into slots sold to advertisers to show advertising contents of their choice. Our contents are usually showed on digital TV screens that
are highly visible to travelers or on mobile devices brought by travelers. We usually offer advertising time slots to the advertisers at a fix duration, time and
frequency of displaying advertisements. Payments of certain offering are subject to the receipt of monitoring reports verified by the advertisers. We generally
require a screening of the advertising contents at least 10 working days for digital media or 14 working days for conventional media before the contents are to
be aired. We reserve the right to refuse providing the service shall the advertising content fail to meet the requirements under PRC laws and regulations.
Our products and services combine in-flight connectivity and entertainment. To further grow our business, we are committed to take full advantage of our
partnership with China Unicom and Honeywell to improve travelers’ experience when they connect to the Internet en route of their travel. Meanwhile, we are
devoted to maintaining a versatile collection of entertainment contents covering a variety of aspects of lifestyles attracting traveling consumers. We are also
satisfying the advertising needs of corporate clients through our influence on travelling consumers.
Advertisers, Sales and Marketing
Our Advertisers
Our advertisers purchase advertising time slots and locations on our advertising network either directly from us or through advertising agencies. Many
advertisers negotiate the terms of the advertising purchase agreements directly with us, however we also rely on advertising agencies for a significant portion
of our sales.
We have a broad base of international and domestic advertisers in various industries. In each of 2016, 2017 and 2018, advisors from one industry, which is
automobiles, accounted for more than 10% of our total revenues from continuing operations. Nil, 1 and 2 of our customers accounted for more than 10% of
our total revenues for 2016, 2017 and 2018, respectively.
Sales and Marketing
We rely on our experienced sales team to assist advertisers in structuring advertising campaigns by analyzing advertisers’ target audiences and the form and
contents of the advertisement they may be interested in, as well as consumer products and services. We conduct market research, consumer surveys,
demographic analysis and other advertising industry research for internal use to help our advertisers to create effective advertisements. We also use third-party
market research firms from time to time to obtain the relevant market study data, and at the same time hire such research firms to evaluate the effects of our
advertising, so as to evaluate the effectiveness of our network for our advertisers and to illustrate to our advertisers our ability to reach targeted demographic
groups effectively.
Our experienced advertising sales team is organized by region and city with a presence in many cities in China. We provide in-house education and training to
our sales force to ensure they provide our current and prospective advertisers with comprehensive information about our services, the advantages of using our
advertising network as a marketing channel, and relevant information regarding the advertising industry. Our performance-linked compensation structure and
career-oriented training are key drivers that motivate our sales employees.
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We actively attend various public relation events to promote our brand image and the value of air travel digital advertising. We market our advertising
services by displaying our name and logo on all of our digital TV screens on airplanes and gas station LED screens and by placing advertisements on third-
party media from time to time, including China Central Television. We also engage third-party advertising agencies to help source advertisers.
Pricing
The listing prices of our air travel advertising services depend on the passenger flow of each airline, the needs of each airline, the number of time slots and
display locations purchased, the cost of the relevant media assets, our costs for the relevant concession rights, and competition. Going forward, we intend to
review our listing prices periodically and make adjustments as necessary in light of market conditions.
Prices for advertisements on our network are fixed under our sales contracts with advertisers or advertising agencies, typically at a discount to our listing
prices.
Programming
Our digital TV screens on network airplanes play programs ranging from 45 minutes to 120 minutes once per flight. We compile each cycle from
advertisements of 5-, 15- or 30-seconds in length provided by advertisers to us and from non-advertising content generated by our VIEs in China or provided
by third-party content providers. We generally create a programming list on a weekly and monthly basis for programs played on airplanes, respectively. We
create this list by first fixing the schedule for advertising content according to the respective sales contracts with our advertisers to guarantee the agreed
duration, time and frequency of advertisements for each advertiser, then adding the non-advertising content to achieve an optimal blend of advertising and
non-advertising content.
Substantially all of the advertisements on our network are provided by our advertisers. All of the advertising content displayed on our advertising network is
reviewed by us to ensure compliance with PRC laws and regulations. See “—Regulation—Regulation of Advertising Services—Advertising Content.” We
update advertising content for our programs played on digital TV screens on airplanes on a monthly basis. A majority of the non-advertising content played
on our network is provided by third-party content providers such as Dragon TV, the Travel Channel and various satellite and cable television stations and
television production companies. In January 2014, we entered into a strategic partnership with China Radio International Oriental Network (Beijing) Co., Ltd,
which manages the internet TV business of China International Broadcasting Network, to operate the CIBN-AirMedia channel to broadcast network TV
programs to air travelers in China.
Our programming team edits, compiles and records into digital format for all of our network programs according to the programming list. Each programming
list and pre-recorded program is carefully reviewed to ensure the accuracy of the order, duration and frequency as well as the appropriateness of the
programming content.
Display Equipment Supplies and Maintenance
The primary hardware required for the operation of our air travel advertising network are the digital TV screens that we use in our media network. The
majority of our digital TV screens consist of plasma display panels and LCDs. Maintaining a steady supply of our display equipment is important to our
operations and the growth of our network. Our TV screen suppliers typically provide us with one-year warranties. Our service team cleans, maintains and
monitors our digital TV screens on airplanes regularly.
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For our traditional media platforms in airports, the primary hardware was already established when we purchased the traditional media from airports, and we
do not incur significant maintenance costs in relation to these platforms.
For our gas stations media network, the primary hardware consists of basic display equipment that we install and maintain. In 2016 and 2017, 45 and 66
suppliers, respectively, together supplied a majority of our gas station display equipment. In early 2018, the management assessed the operational
underperformance of our Wi-Fi services on trains, long-haul buses and gas station media service, which indicated that the underperformance could be
ascribed to i) the wide spread of 4G technology and affordable data plans; and ii) the depleting marketing budget of some of our advertisers. In order to
prevent further losses while seizing the opportunities from other components such as air travel media service, we gradually ceased our operations of Wi-Fi
service on long-haul buses and our gas station media services, and scaled down operations in providing Wi-Fi services on trains.
Customer Service
Our customer service team is responsible for contacting third-party research firms to compile evaluation reports based on selective sampling of the status of
advertising on our network and providing advertisers with monthly monitoring reports once the relevant advertising campaign is launched on our network. At
the same time, we also provide our advertisers with monthly reports prepared by third parties that verify the proper functioning of our displays and the proper
dissemination of the advertisement when required by our advertisers; such reports are done through online survey to analyze the effectiveness of and public
reaction to the advertisements. In addition, our network airlines, as well as trains are also actively involved in the monitoring process.
Competition
We compete primarily with several different groups of competitors in the air travel advertising market:
·
·
in-house advertising companies of airlines that may operate their own advertising networks; and
traditional advertising media, such as newspapers, television, magazines and radio.
We compete for advertisers primarily on the basis of location, price, program quality, range of services offered and brand recognition. See “Item 3. Key
Information—D. Risk Factors — Risks Related to Our Business — We face significant competition in the PRC advertising industry, and if we do not compete
successfully against new and existing competitors, we may lose our market share, and our profits may be reduced.”
Intellectual Property
To protect our brand and other intellectual property, we rely on a combination of trademark and trade secret laws as well as confidentiality agreements with
our employees, sales agents, contractors and others. As of March 31, 2019, we have registered 23 major trademarks and one patent in China, including “(cid:0)(cid:0)”,
“(cid:0)(cid:0)” and “(cid:0)(cid:0)”. We cannot be certain that our efforts to protect our intellectual property rights will be adequate or that third parties will not infringe or
misappropriate these rights.
Regulation
We operate our business in China under a legal regime consisting of the State Council, which is the highest authority of the executive branch of the National
People’s Congress, and several ministries and agencies under its authority including the SAMR.
China’s Advertising Law was promulgated in 1994, and was revised in 2015 and further revised in 2018. In addition, the State Council, SAIC (which has
merged into the SAMR in March 2018) and other ministries and agencies have issued regulations that regulate our business, all of which are discussed below.
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Limitations on Foreign Ownership in the Advertising Industry
The Foreign Investment Industrial Guidance Catalogue, and relevant provisions provide that foreign investment projects are divided into four categories:
encouraged, permitted, restricted and prohibited. The foreign investment projects that are encouraged, restricted and prohibited shall be listed in the Foreign
Investment Industrial Guidance Catalogue. The foreign investment projects that do not fall into the categories of encouraged, restricted or prohibited projects
are considered permitted foreign investment projects and are not listed in the Foreign Investment Industrial Guidance Catalogue. Applicable regulations and
approval requirements vary based on the different categories. Investments in the PRC by foreign investors through wholly foreign-owned enterprises must be
in compliance with the applicable regulations, and such foreign investors must obtain governmental approvals as required by these regulations. Since the
advertising industry is not listed in the Foreign Investment Industrial Guidance Catalogue, it falls into the permitted foreign investment category.
Since December 10, 2005, foreign investors have been permitted to directly own a 100% interest in advertising companies in China. PRC laws and
regulations do not permit the transfer of any approvals, licenses or permits, including business licenses containing a scope of business that permits engaging
in the advertising industry. In the event we are permitted to acquire the equity interests of our VIEs under the rules allowing for complete foreign ownership,
our VIEs would continue to hold the required advertising licenses consistent with current regulatory requirements.
Currently, our advertising business is mainly conducted through contractual arrangements with our consolidated VIEs in China, including AM Online,
Linghang Shengshi, Jiaming Advertising, Guangzhou Meizheng and Beijing Yuehang.
Our VIEs are the major companies through which we provide advertising services in China. Our subsidiary, Chuangyi Technology, has entered into a series of
contractual arrangements with our PRC operating affiliates and their respective subsidiaries and shareholders under which:
·
·
·
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 could be transferred to us; and
we have an exclusive option to purchase all of the equity interests in our PRC operating affiliates (except for those owned by Yi Zhang) in each case
when and to the extent permitted by PRC law.
See “Item 4. Information on the Company—C. Organizational Structure” and “Item 7. Major Shareholders and Related Party Transactions—B. Related Party
Transactions—Contractual Arrangements.”
In the opinion of Commerce & Finance Law Offices, our PRC legal counsel: except as described in this annual report, the respective ownership structures of
Chuangyi Technology and our consolidated VIEs do not violate existing PRC laws and regulations, and the contractual arrangements among Chuangyi
Technology and our consolidated VIEs, in each case governed by PRC law, are valid, binding and enforceable.
We have been advised by our PRC legal counsel, however, that there are some uncertainties regarding the interpretation and application of current and future
PRC laws and regulations. Accordingly, there can be no assurance that the PRC regulatory authorities, in particular the SAMR (which regulates advertising
companies), will not in the future take a view that is contrary to the opinion of our PRC legal counsel. We have been further advised by our PRC counsel that
if the PRC government determines that the agreements establishing the structure for operating our PRC advertising business do not comply with PRC
government restrictions on foreign investment in the advertising industry, we could be subject to certain penalties. See “Item 3. Key Information—D. Risk
Factors—Risks Related to Our Corporate Structure—If the PRC government finds that the agreements that establish the structure for operating our China
business do not comply with PRC governmental restrictions on foreign investment in the advertising industry and in the operating of non-advertising content,
our business could be materially and adversely affected.”
Regulation on Foreign Investment
On March 15, 2019, the Foreign Investment Law was enacted by the National People’s Congress and it will become effective on January 1, 2020. Upon its
enactment, it will replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the
Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and
ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line
with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments.
Unlike its first draft which was published in 2015, the approved Foreign Investment Law does not explicitly define the contractual arrangements with VIEs as
a form of foreign investment. It contains an ambiguous clause that covers other form stipulated in laws, administrative regulations or other methods
prescribed by the State Council within its definition of foreign investment. Therefore, uncertainties still exist about whether the contractual arrangements with
VIEs will be deemed to violate the market access requirements for foreign investment under the PRC laws.
Moreover, the Foreign Investment Law establishes a foreign investment information reporting system. Foreign investors or foreign-funded enterprises shall
submit the investment information to competent authorities through the enterprise registration system and the enterprise credit information publicity system.
The contents and scope of foreign investment information to be reported shall be determined by the principle of necessity. Where foreign-investors or foreign-
invested enterprises are found to be non-compliant with these information reporting obligations, competent commerce authority shall ask for corrections with
a specified period; if such corrections are not made in time, a penalty of not less than RMB100,000 yet not more than RMB500,000 shall be imposed. Other
than reporting foreign investment information, the Foreign Investment Law also establishes a security examination mechanism for foreign investment and
conducts security review of foreign investment that affects or may affect national security. The decision made upon the security examination in accordance
with the law shall be final.
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Regulation of Advertising Services
Business License for Advertising Companies
Under applicable regulations governing advertising businesses in China, companies that engage in advertising activities must obtain from the SAMR or its
local branches a business license which specifically includes within its scope the operation of an advertising business. Companies conducting advertising
activities without such a license may be subject to penalties, including fines, confiscation of advertising income and orders to cease advertising operations.
The business license of an advertising company is valid for the duration of its existence, unless the license is suspended or revoked due to a violation of any
relevant law or regulation. We do not expect to encounter any difficulties in maintaining our business licenses. Each of our VIEs has obtained such a business
license from the local branches of the SAMR as required by existing PRC regulations.
Each of Beijing Yuehang Digital and AM Online has valid business license as of the date of this annual report. The business scope of these two entities as set
forth in their business licenses include the development of electronic, computer and media-related technologies and products and do not include advertising,
due to certain restrictions on foreign ownership of advertising enterprises under PRC law.
Advertising Content
PRC advertising laws and regulations set forth certain content requirements for advertisements in China, which include prohibitions on, among other things,
misleading content, superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement
of the public interest. Advertisements for anesthetic, psychotropic, toxic or radioactive drugs are prohibited. The dissemination of tobacco advertisements via
media is also prohibited as well as the display of tobacco advertisements in public areas. There are also specific restrictions and requirements regarding
advertisements that relate to matters such as patented products or processes, pharmaceuticals, medical instruments, agrochemicals, foodstuff, alcohol and
cosmetics. In addition, all advertisements relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals advertised through
any media, together with any other advertisements subject to censorship by administrative authorities under relevant laws and administrative regulations, must
be submitted to the relevant administrative authorities for content approval prior to dissemination. We do not believe that advertisements containing content
subject to restriction or censorship comprise a material portion of the advertisements displayed on our network.
Advertisers, advertising operators and advertising distributors are required by PRC advertising laws and regulations to ensure that the content of the
advertisements they prepare or distribute are true and in full compliance with applicable law. In providing advertising services, advertising operators and
advertising distributors must review the prescribed supporting documents provided by advertisers for advertisements and verify that the content of the
advertisements comply with applicable PRC laws and regulations. In addition, prior to distributing advertisements for certain items which are subject to
government censorship and approval, advertising distributors are obligated to ensure that such censorship has been performed and approval has been
obtained. Violation of these regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the
advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the SAMR or its
local branches may revoke violators’ licenses or permits for advertising business operations. Furthermore, advertisers, advertising operators or advertising
distributors may be subject to civil liability if they infringe the legal rights and interests of third parties in the course of their advertising business.
Outdoor Advertising
The PRC Advertising Law stipulates that the exhibition and display of outdoor advertisements must not:
·
·
·
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;
39
·
·
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, according to a relevant SARFT circular, displaying audio-video programs such as television news, films and television shows, sports, technology
and entertainment through public audio-video systems located in automobiles, buildings, airports, bus or train stations, shops, banks and hospitals and other
outdoor public systems must be approved by the SARFT. The relevant authority in China has not promulgated any implementation rules on the procedure of
applying for the requisite approval pursuant to the SARFT circular.
Regulations on Foreign Exchange
The principal regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules, which became effective in 1996, and
was further amended in 2008. Under these Rules, RMB is freely convertible for current account items, such as trade and service-related foreign exchange
transactions, but not for capital account items, such as direct investment, loan or investment in securities outside China unless the prior approval of, and/or
registration with, SAFE or its local counterparts (as the case may be) is obtained.
On March 30, 2015, SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of
Foreign-invested Enterprises, or SAFE Circular 19, which will took effect on June 1, 2015. On June 9, 2016, the SAFE promulgated the Circular of the State
Administration of Foreign Exchange on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE
Circular 16, which revised some provisions of SAFE Circular 19. SAFE Circular 19 and SAFE Circular 16 allows foreign-invested enterprises to settle 100%
of their foreign exchange capitals on a discretionary basis and allows ordinary foreign-invested enterprises to make domestic equity investments by capital
transfer in the original currencies, or with the amount obtained from foreign exchange settlement, subject to complying with certain requirements. According
to SAFE Circular 19 and SAFE Circular 16, the RMB funds obtained by foreign-invested enterprises from the discretionary settlement of foreign exchange
capitals shall be managed under the accounts pending for foreign exchange settlement payment, and foreign-invested enterprise shall not use its capital and
the RMB funds obtained from foreign exchange settlement for the purposes within the following negative list: for expenditure beyond its business scope or
expenditure prohibited by laws and regulations, for investments in securities or other investments than banks’ principal-secured products,, for the granting of
loans to non-affiliated enterprises, except where it is expressly permitted in the business license, or for construction or expenses related to the purchase of real
estate not for self-use, unless it is a foreign-invested real estate enterprise. Moreover, on January 26, 2017, SAFE promulgated Circular of the State
Administration of Foreign Exchange on Further Advancing the Reform of Foreign Exchange Administration and Improving Examination of Authenticity and
Compliance, or Circular 3. The Circular 3 states several control measures with respect to the outbound remittance of any profit from domestic entities to
offshore entities, including (i) under the principle of genuine transaction, banks should review board resolutions, the original version of tax filing records and
audited financial statements before wiring the foreign exchange profit distribution of a foreign-invested enterprise exceeding $50,000; and (ii) domestic
entities should hold income to make up previous years’ losses before remitting the profits to offshore entities. Meanwhile, verification on the genuineness and
compliance of foreign direct investments in domestic entities has also been tightened in accordance with Circular 3,
Pursuant to SAFE Circular 19, SAFE Circular 16 and SAFE Circular 3, foreign invested enterprises in China may convert part or all of the amount of the
foreign currency in its capital account, special account for foreign debt or special account for overseas listing into RMB at any time after going through
capitals review process with bank and supplement necessary supporting documents upon bank’s request for verification on genuineness and compliance.
Nevertheless, it is still not clear whether foreign-invested enterprises like our PRC subsidiaries are allowed to extend intercompany loans to our VIEs.
Regulations on Dividend Distribution
Under applicable PRC regulations, wholly foreign-owned companies in the PRC may pay dividends only out of their accumulated profits as determined in
accordance with PRC accounting standards and regulations. Additionally, these wholly foreign-owned companies are required to set aside at least 10% of
their respective accumulated profits each year, if any, to fund certain reserve funds until their cumulative total reserve funds have reached 50% of the
companies’ registered capitals. At the discretion of these wholly foreign-owned companies, they may allocate a portion of their after-tax profits based on PRC
accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends except in
the event of liquidation and cannot be used for working capital purposes.
40
In addition, under the EIT Law and its implementing rules, dividends generated after January 1, 2008 and payable by a FIE in China to its foreign investors
who are non-resident enterprises will be subject to a 10% withholding tax unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with
China that provides for a different withholding arrangement. BVI, where Broad Cosmos, our wholly owned subsidiary, is incorporated, does not have such a
tax treaty with China. AN China, the 100% shareholder of Chuangyi Technology, Shenzhen Yuehang and Xi’an Shengshi, is incorporated in Hong Kong.
According to the Mainland and Hong Kong Special Administrative Region Arrangement on Avoiding Double Taxation or Evasion of Taxation on Income
agreed between China and Hong Kong in August 2006, dividends paid by a foreign-invested enterprise in China to its direct holding company in Hong Kong
will be subject to withholding tax at a rate of 5% (if the foreign investor owns directly at least 25% of the shares of the foreign-invested enterprise). In
October 2015, the State Administration of Taxation released the Administrative Measures for Non-Residents Enjoying Tax Treaty Benefits (Trial
Implementation), which took effect on November 1, 2015. Under these measures, our Hong Kong subsidiary needs to obtain approval from the competent
local branch of the State Administration of Taxation in order to enjoy the preferential withholding tax rate of 5% in accordance with the Double Taxation
Arrangement. In February 2009, the State Administration of Taxation issued Notice No. 81. According to Notice No. 81, in order to enjoy the preferential
treatment on dividend withholding tax rates, an enterprise must be the “beneficial owner” of the relevant dividend income, and no enterprise is entitled to
enjoy preferential treatment pursuant to any tax treaties if such enterprise qualifies for such preferential tax rates through any transaction or arrangement, the
major purpose of which is to obtain such preferential tax treatment. The tax authority in charge has the right to make adjustments to the applicable tax rates, if
it determines that any taxpayer has enjoyed preferential treatment under tax treaties as a result of such transaction or arrangement. In October 2009, the State
Administration of Taxation issued another notice on this matter, or Notice No. 601, to provide guidance on the criteria to determine whether an enterprise
qualifies as the “beneficial owner” of the PRC sourced income for the purpose of obtaining preferential treatment under tax treaties. Pursuant to Notice No.
601, the PRC tax authorities will review and grant tax preferential treatment on a case-by-case basis and adopt the “substance over form” principle in the
review. Notice 601 specifies that a beneficial owner should generally carry out substantial business activities and own and have control over the income, the
assets or other rights generating the income. Therefore, an agent or a conduit company will not be regarded as a beneficial owner of such income. On
February 3, 2018, SAT issued Announcement of the State Administration of Taxation on Issues concerning “Beneficial Owners” in Tax Treaties, or Circular
9, which became effective on April 1, 2018 and superseded Notice No. 601. In comparison with Notice No. 601, Circular 9 enlarging and further explaining
the scope of beneficial owner, supplementing the applicants deemed as beneficial owners who obtain proceeds from China as direct or indirect 100%
shareholder, increasing the certainty of identifying beneficial owner. Since the two notices were issued, it has remained unclear how the PRC tax authorities
will implement them in practice and to what extent they will affect the dividend withholding tax rates for dividends distributed by our subsidiaries in China to
our Hong Kong subsidiary. If the relevant tax authority determines that our Hong Kong subsidiary is a conduit company and does not qualify as the
“beneficial owner” of the dividend income it receives from our PRC subsidiaries, the higher 10% withholding tax rate may apply to such dividends.
The EIT Law provides, however, that dividends distributed between qualified resident enterprises are exempted from the withholding tax. According to the
Implementation Regulations of the EIT Law, the qualified dividend and profit distribution from equity investment between resident enterprises shall refer to
investment income derived by a resident enterprise from its direct investment in other resident enterprises, except the investment income from circulating
stocks issued publicly by resident enterprises and traded on stock exchanges where the holding period is less than 12 months. As the term “resident
enterprises” needs further clarification and interpretation, we cannot assure you that the dividends distributed by Chuangyi Technology, Shenzhen Yuehang
and Xi’an Shengshi to their direct shareholders would be regarded as dividends distributed between qualified resident enterprises and be exempted from the
withholding tax.
41
Under the EIT Law and related regulations, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a
PRC resident enterprise and is subject to the EIT at the rate of 25% on its worldwide income. The related regulations define the term “de facto management
bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel,
accounting, properties, etc. of an enterprise.” The SAT issued the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated
Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or SAT Circular 82, on April 22, 2009, which was amended in
2013 and 2017 respectively. SAT Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-
controlled overseas-incorporated enterprise is located in China. In addition, the SAT issued a bulletin on July 27, 2011 to provide more guidance on the
implementation of SAT Circular 82 with an effective date to be September 1, 2011. The bulletin provided clarification in the areas of resident status
determination, post-determination administration, as well as competent tax authorities. It also specifies that when provided with a copy of a Chinese tax
resident determination certificate from a resident Chinese controlled offshore incorporated enterprise, the payer should not withhold 10% income tax when
paying the Chinese-sourced dividends, interest, royalties, etc. to the Chinese controlled offshore incorporated enterprise. Although both SAT Circular 82 and
the bulletin only apply to offshore enterprises controlled by PRC enterprises, not to those that, like our company, are controlled by PRC individuals, the
determination criteria set forth in SAT Circular 82 and administration clarification made in the bulletin may reflect the SAT’s general position on how the “de
facto management body” test should be applied in determining the tax residency status of offshore enterprises and the administration measures that should be
implemented, regardless of whether they are controlled by PRC enterprises or PRC individuals.
Moreover, under the EIT Law, if we are classified as a PRC resident enterprise and such income is deemed to be sourced from within the PRC, foreign ADS
holders may be subject to a 10% withholding tax upon dividends payable by us and gains realized on the sale or other disposition of ADSs or ordinary shares.
See “Item 3. Key Information — D. Risk Factors — Risks Related to our Business — Dividends payable to us by our wholly-owned operating subsidiaries
may be subject to PRC withholding taxes, or we may be subject to PRC taxation on our worldwide income, and dividends distributed to our investors may be
subject to more PRC withholding taxes under the PRC tax law.”
SAFE Regulations on Offshore Investment by PRC Residents and Employee Stock Options
In October 2005, the SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Return Investment Activities
of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular 7, which became effective as of November 1, 2005. SAFE
Circular 7 suspends the implementation of two prior regulations promulgated in January and April of 2005 by the SAFE. On July 4, 2014, SAFE issued the
SAFE’s Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Outbound Investment and Financing and
Inbound Investment via Special Purpose Vehicles, or SAFE Circular 37, which has superseded SAFE Circular 75. Under SAFE Circular 75, SAFE Circular
37 and other relevant foreign exchange regulations, PRC residents who make, or have previously made, prior to the implementation of these foreign exchange
regulations, direct or indirect investments in offshore companies will be required to register those investments. In addition, any PRC resident who is a direct
or indirect shareholder of an offshore company is also required to file or update the registration with the local branch of SAFE, with respect to that offshore
company for any material change involving its round-trip investment, capital variation, such as an increase or decrease in capital, transfer or swap of shares,
merger, division, long-term equity or debt investment or the creation of any security interest. If any PRC shareholder fails to make the required registration or
update the previously filed registration, the PRC subsidiary of that offshore parent company may be prohibited from distributing their profits and the proceeds
from any reduction in capital, share transfer or liquidation to their offshore parent company, and the offshore parent company may also be prohibited from
injecting additional capital into its PRC subsidiary. Moreover, failure to comply with the various foreign exchange registration requirements described above
could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
42
In December 2006, the People’s Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, or the PBOC
Regulation, setting forth the respective requirements for foreign exchange transactions by PRC individuals under either the current account or the capital
account. In January 2007, the SAFE issued implementing rules for the PBOC Regulation, which, among other things, specified approval requirements for
certain capital account transactions such as a PRC citizen’s participation in the employee stock ownership plans or stock option plans of an overseas publicly-
listed company. On February 15, 2012, the SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Administration for Domestic
Individuals Participating in an Employee Share Incentive Plan of an Overseas-Listed Company (which replaced the old Circular 78, “Application Procedure
of Foreign Exchange Administration for Domestic Individuals Participating in an Employee Stock Holding Plan or Stock Option Plan of an Overseas-Listed
Company” promulgated on March 28, 2007), or the New Share Incentive Rule. Under the New Share Incentive Rule, PRC citizens who participate in a share
incentive plan of an overseas publicly listed company are required to register with SAFE and complete certain other procedures. All such participants need to
retain a PRC agent through a PRC subsidiary to register with SAFE and handle foreign exchange matters such as opening accounts and transferring and
settlement of the relevant proceeds. The New Share Incentive Rule further requires that an offshore agent should also be designated to handle matters in
connection with the exercise or sale of share options and proceeds transferring for the share incentive plan participants.
We and our PRC employees who have been granted stock options are subject to the New Share Incentive Rule. We are in the process of completing the
required registration and the procedures for the New Share Incentive Rule under PRC laws, but the application documents are subject to the review and
approval of the SAFE, and we can make no assurance as to when the registration and procedures will be completed. If we or our PRC employees fail to
comply with the New Share Incentive Rule, we and/or our PRC employees may face sanctions imposed by the foreign exchange authority or any other PRC
government authorities.
In addition, the State Administration of Taxation has issued a few circulars concerning employee stock options. Under these circulars, our employees working
in China who exercise stock options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to
employee stock options with relevant tax authorities and withhold individual income taxes of those employees who exercise their stock options. If our
employees fail to pay and we fail to withhold their income taxes, we may face sanctions imposed by tax authorities or any other PRC government authorities.
Seasonality
Our operating results and operating cash flows historically have been subject to seasonal variations. This pattern may change, however, as a result of new
market opportunities or new product introductions.
43
C. Organizational Structure
The following diagram illustrates our principal subsidiaries, VIEs and VIEs’ subsidiaries as of March 31, 2019:
Notes:
(1) Several of our principal subsidiaries, VIEs and VIEs’ subsidiaries as of March 31, 2019 have changed their names compared to as of December 31, 2017.
Following is for the details.
Air Net International Limited (Formerly AirMedia International Limited (“Air Net International”)
Air Net (China) Limited (Formerly AirMedia (China) Limited) (“AN China”)
Yuehang Chuangyi Technology (Beijing) Co., Ltd. (Formerly AirMedia Technology (Beijing) Co., Ltd.) Shenzhen Yuehang Information Technology Co.,
Ltd. (Formerly Shenzhen AirMedia Information Technology Co., Ltd.)
Xi’an Shengshi Dinghong Information Technology Co., Ltd. (Formerly Xi’an AirMedia Chuangyi Technology Co., Ltd.)
Beijing Linghang Shengshi Advertising Co., Ltd. (Formerly Beijing AirMedia Shengshi Advertising Co., Ltd.)
Beijing Wangfan Jiaming Advertising Co.,Ltd. (Formerly Beijing AirMedia Jiaming Advertising Co., Ltd.)
AirMedia Online Network Technology Group Co., Ltd. (Formerly AirMedia Online Network Technology Co., Ltd.)
Beijing Airnet Pictures Co., Ltd. (Formerly Beijing AirMedia Film & TV Culture Co., Ltd.)
Beijing Zhihe Xianglong Advertising Co., Ltd. (Formerly Flying Dragon Media Advertising Co., Ltd.)
Wenzhou Yuehang Advertising Co., Ltd. (Wenzhou AirMedia Advertising Co., Ltd.)
Beijing Yuehang Tianyi Electronic Information Technology Co., Ltd.(Formerly Beijing AirMedia Tianyi Information Technology Co., Ltd.)
Wangfan Linghang Mobile Network Technology Co., Ltd. (Formerly AirMedia Mobile Network Technology Co., Ltd.)
Beijing Wangfan Jiaming Pictures Co., Ltd. (Formerly Beijing AirMedia Jiaming Film & TV Culture Co., Ltd.)
(2) AirMedia Online Network Group Technology Co., Ltd. is 77.2%, 14.5%, 4.8% and 3.5% owned by Herman Man Guo, Qing Xu, Tao Hong and Yi
Zhang, respectively. Yi Zhang divested all the 3.5% equity interest in AirMedia Online Network Group Technology Co., Ltd in 2018. However, the
registration of such alternation is in progress in the local administration for industry and commerce as of the date of this annual report.
(3) On December 15, 2016, AM Online and an individual signed concurrently an equity transfer agreement and an entrusted equity holding agreement,
pursuant to which AM Online transferred 100% equity interests in Beijing Yuehang Digital Media Advertising Co., Ltd., or Beijing Yuehang, to the
individual and entrusted the individual to act as the nominee shareholder of the foregoing equity interests. The entrusted equity holding agreement
terminates upon the earlier of (i) two years from the date of the entrusted equity holding agreement or (ii) the transfer of all entrusted equity by AM
Online to AM Online itself or a third party designated by AM Online. AM Online as the actual investor in Beijing Yuehang continues to hold actual
shareholder rights and receive benefits from the investment in Beijing Yuehang.
44
(4) Beijing AirMedia Jiaming Advertising Co., Ltd. is 1.0%, 0.2% and 98.8% owned by Herman Man Guo, Qing Xu and Beijing Linghang Shengshi
Advertising Co., Ltd., respectively.
(5) Beijing Linghang Shengshi Advertising Co., Ltd. is 83.6%, 12.5%, 3.8% and 0.1% owned by Herman Man Guo, Qing Xu , Yi Zhang and Xiao Ya Zhang,
respectively. Yi Zhang Yi divested all the 3.8% equity interest in Beijing Linghang Shengshi Advertising Co., Ltd in 2018. However, the registration of
such alternation is in progress in the local administration for industry and commerce as of the date of this annual report.
Substantially all of our operations are conducted through contractual arrangements with our consolidated VIEs in China, Linghang Shengshi, Jiaming
Advertising, Beijing Yuehang, Guangzhou Meizheng and AM Online. We do not have any equity interests in our VIEs, but instead enjoy the economic
benefits derived from them through a series of contractual arrangements. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party
Transactions—Contractual Arrangements” for a description of these arrangements.
D.
Property, Plants and Equipment
Our headquarters are located in Beijing, China, where we lease approximately 5,026 square meters of office space. Our branch offices lease approximately
3,671 square meters of office space in seven other locations.
In addition, we own approximately 2,109 square meters of office space in China. In September 2014 and April 2015, we entered into the agreements to
purchase an office space of approximately 2,109 square meters in Beijing for a total consideration of RMB65 million ($9.4 million).
ITEM 4A.
UNRESOLVED STAFF COMMENTS
None.
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial
statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements. Our actual
results may differ materially from those anticipated in these forward-looking statements because of various factors, including those set forth under “Item 3.
Key Information—D. Risk Factors” or in other parts of this annual report on Form 20-F. See “Forward-looking Information.”
A.
Operating Results
Important Factors Affecting the Results of Operations of Our Air Travel Advertising, Gas Station Media Business and Trains, Buses and Airline Wi-
Fi Business
In early 2018, the management assessed the operational underperformance of our Wi-Fi services on long-haul buses and gas station media service, which
indicated that the underperformance could be ascribed to i) the wide spread of 4G technology and affordable data plans; and ii) the depleting marketing
budget of some of our advertisers. In order to prevent further losses while seizing the opportunities from other components such as air travel media service,
we gradually ceased our operations of Wi-Fi service on long-haul buses and our gas station media services, and scaled down operations in providing Wi-Fi
services on trains.
The operating results of our air travel advertising, gas station advertising business and trains, and buses are substantially affected by the following factors and
trends.
Demand for Our Advertising Time Slots and Locations
The demand for our advertising time slots and locations for each of the last three fiscal years was directly related to our customers’ available advertising
budgets and the attractiveness of our network to our customers. Our network’s attractiveness is largely affected by the coverage of our network, which in turn
depends on the number of intended audience that our network has the ability to reach. In terms of our air travel advertising network, the number of intended
audience we can reach is largely affected by the number of air travelers in China in generally and the scale of our network. The demand for air travel is in turn
affected by general economic conditions, the affordability of air travel in China and certain special events that may attract air travelers into and within China.
Our customers’ advertising spending was also particularly sensitive to changes in general economic conditions. In terms of our gas station media, we
gradually ceased the operations in early 2018. The demand for our time slots and locations on airline Wi-Fi systems is related to the amount of our
customers’ advertising spending budget and the attractiveness of our Wi-Fi system as a platform for their advertisements. The amount of available advertising
budget is largely affected by the general economic conditions in China. The attractiveness of our Wi-Fi system as an advertising platform depends on whether
our Wi-Fi system has the ability to reach the advertisers’ intended audience, which will in turn be affected by factors including the number and types of
travelers who will use our Wi-Fi systems and whether advertisements on our Wi-Fi systems can effectively attract the attention of such travelers.
45
Number of Our Advertising Time Slots and Locations Available for Sale
The number of time slots available for our digital TV screens on airplanes during the period presented is calculated by multiplying the time slots per month
for a given airline by the number of months during the period presented when we had operations on such airline and then calculating the sum of all the time
slots for each of our network airlines. The number of locations available for sale for our light boxes and billboards in gas stations is defined as the number of
light boxes and billboards we operated in Sinopec gas stations.
By increasing the number of airlines in our network, we can increase the number of advertising time slots and locations that we have available to sell. In
addition, the length of our advertising cycle for our digital TV screens can potentially be extended to longer durations depending on demand on airline.
However, advertisers may be unwilling to accept placement of their advertisements on a longer time cycle which decreases the frequencies of their
advertisements displayed each day.
The results of our Wi-Fi business can be affected by the number of advertisement time slots and spaces available for sale on our Wi-Fi systems. They are
determined by the number of airplanes within our Wi-Fi service network and the number of advertisement time slots and spaces available on the system for
each airplane. By increasing the number of airplanes within our network, we can increase the number of advertising time slots and locations that we have
available to sell. In addition, we may also increase the total number of advertisement time slots and spaces by increasing the frequency of the advertisements
and designating more space on our Wi-Fi system’s interface for advertising.
Pricing
The average selling price for our advertising time slots is generally calculated by dividing our advertising revenues from these time slots by the number of 30-
second equivalent advertising time slots for digital TV screens on airplanes sold during that period. The average selling price for our gas station media is
calculated by dividing the revenues derived from all the locations sold by the number of locations sold during the period presented. The primary factors that
affect the effective price we charge advertisers for time slots and locations on our network and our utilization rate include the attractiveness of our network to
advertisers, which depends on the number of displays and locations, the number and scale of airplanes in our network, the level of demand for time slots and
locations, and the perceived effectiveness by advertisers of their advertising campaigns placed on our network. We may increase the selling prices of our
advertising time slots and locations from time to time depending on the demand for our advertising time slots, spaces and locations.
A significant percentage of the programs played on our digital TV screens on airplanes included non-advertising content such as TV programs or public
service announcements. We did not directly generate revenues from non-advertising content, but we obtained such content from third party content providers.
We believe that the combination of non-advertising content with advertising content makes people more receptive to our programs, which in turn makes the
advertising content more effective for our advertisers. We believe this in turn allows us to charge a higher price for each advertising time slot. We closely
track the program blend and advertiser demand to optimize our ability to generate revenues for each program cycle.
The results of our Wi-Fi business are also affected by the level of pricing for our services.
46
Utilization Rate
The utilization rate of our advertising time slots is the total time slots sold as a percentage of total time slots available during the relevant period. In order to
provide meaningful comparisons of the utilization rate of our advertising time slots, we generally normalize our time slots into 30-second units for digital TV
screens on airplanes, which we can then compare across network airlines and periods to chart the normalized utilization rate of our network by airlines over
time. The utilization rate of our gas stations media is the total number of locations sold as a percentage of the total number of locations available during the
relevant period. Our overall utilization rate was primarily affected by the demand for our advertising time slots and locations and our ability to increase the
sales of our advertising time slots and locations. We plan to strengthen our sales efforts in these cities by building local sales teams to increase our direct sales
of advertising time slots and locations in these cities and ultimately improve our utilization rate.
Network Coverage and Concession Fees
The demand for our advertising time slots and locations and the effective price we charged advertisers for time slots and locations on our network depended
on the attractiveness and effectiveness of our network as viewed by our advertisers which, in turn, related to the breadth of our network coverage, including
significant coverage on major airlines that advertisers wish to reach. As a result, it has been, and will continue to be, important for us to secure and retain
concession rights contracts to place our programs on major airlines and to increase the number of programs we place on those airlines. In addition, it is
important for us to secure and maintain the coverage of our gas station network. It is also important to our results of operations of our Wi-Fi business that we
secure and retain these concession rights contracts on commercially advantageous terms.
Concession fees constituted a significant portion of our cost of revenues. Concession fees tend to increase over time, and a significant increase in concession
fees will increase our cost while our revenues may not increase proportionately, or at all. It will therefore be important to our results of operations that we
secure and retain these concession rights contracts on commercially advantageous terms.
Revenues
We mainly generate revenues from the sale of advertising time slots and locations on our advertising network.
(All amounts are in thousands of U.S. dollars, except percentages)
2016
2017
2018
Fiscal Years Ended December 31,
Air Travel Media Network
Gas station Media Network
Other Media
Total revenues
Business tax and other sales tax
Net revenues
Amount
$
% of
Total
Revenues
Amount
% of
Total
Revenues
Amount
% of
Total
Revenues
73.4% $
24.2%
2.4%
100.0%
(0.5)%
99.5% $
18,702
4,093
1,533
24,328
(569)
23,759
76.9%
16.8%
6.3%
100.0%
(2.3)%
97.7%
22,212
413
2,151
24,776
(230)
24,546
89.7%
1.6%
8.7%
100.0%
(0.9)%
99.1%
12,178
4,009
410
16,597
(84)
16,513
$
Revenues from Air Travel Media Network and Other Media
Our air travel media network revenues from operations in 2016, 2017 and 2018 consisted of revenues from digital frames in airports in the form of TV-
attached digital frames, digital TV screens in airports, digital TV screens on airplanes, traditional media in airports and other revenues in air travel.
47
Revenues from our air travel media network accounted for 73.4%, 76.9% and 89.7% of our total revenues for the years ended December 31, 2016, 2017, and
2018 respectively. Our network consisted of six, seven and seven airlines as of December 31, 2016, 2017 and 2018.
Revenues from other media were primarily revenues from our trains Wi-Fi advertising promotion, public account promotion, long-haul Wi-Fi advertising. In
early 2018, we gradually ceased our operations of Wi-Fi service on long-halt buses, and scaled down operations in providing Wi-Fi services on trains.
The most significant factors that directly or indirectly affect our revenues from digital TV screens on airplanes and other revenues in air travel include the
following:
·
·
·
·
·
our ability to retain existing advertisers and attract new advertisers;
our ability to retain existing concession rights to operate digital TV screens on airplanes and to add additional airlines to our network;
our ability to continue providing effective advertising solutions that enable advertisers to reach their target audiences;
the demand in general for air travel advertising; and
the state of the PRC and global economy.
Revenues from Gas Station Media Network
We started our gas station media network in 2009, when we gained concession rights to develop and operate an outdoor advertising network in Sinopec gas
stations throughout China. Revenues from our gas station media network, consisting of outdoor advertising platforms such as LED screens, billboards and
light boxes at Sinopec gas stations in China, accounted for 24.2%, 16.8% and 1.6% of our total revenues for the years ended December 31, 2016, 2017 and
2018, respectively. In early 2018, the management assessed the operational underperformance of our gas station media service, which indicated that the
underperformance could be ascribed to i) the wide spread of 4G technology and affordable data plans; and ii) the depleting marketing budget of some of our
advertisers. In order to prevent further losses while seizing the opportunities from other components such as air travel media service, we gradually ceased our
operations of our gas station media services.
Business Tax, Value-added Tax (“VAT”) and Other Sales Related Tax
Our PRC subsidiaries are subject to value-added tax at a rate of 6% on revenues from advertising services and paid after deducting input VAT on purchases.
The net VAT balance between input VAT and output VAT is reflected in the account under input VAT receivable or other taxes payable. In July 2012, the
Ministry of Finance and the State Administration of Taxation jointly issued a circular regarding the pilot collection of VAT in lieu of business tax in certain
areas and industries in the PRC, including Beijing, Jiangsu, Anhui, Fujian, Guangdong, Tianjin, Zhejiang, and Hubei between September and December
2012. Also a circular issued in May 2013 provided that such VAT pilot program is rolled out nationwide since August 2013. Since then, certain of our
subsidiaries and VIEs became subject to VAT at the rates of 6% or 3%, on certain service revenues which were previously subject to business tax. Our gross
revenue is presented net of the VAT.
Our net revenue is presented net of such business tax and other sale related taxes. Pursuant to the Circular on Comprehensively Promoting the Pilot Program
of Replacing Business Tax with Value Added Tax promulgated by the Ministry of Finance of China and the State Administration of Taxation of China on
March 23, 2016, which took effect on May 1, 2016, the Chinese government will levy VAT in lieu of business tax on a trial basis across China, and the tax
rate for taxpayers who are service providers, such as us, is 6%.
48
Cost of Revenues
During the periods covered by this report, our cost of revenues consisted primarily of concession fees, agency fees and advertisement publishing fees, and
other costs, including equipment depreciation costs, operating costs and non-advertising content costs. The following table sets forth the major components of
our cost of revenues, both in absolute amounts and as percentages of net revenues for the periods indicated.
Fiscal Years Ended December 31,
(All amounts are in thousands of U.S. Dollars, except percentages)
2017
2018
2016
Net revenues
Cost of revenues
Concession fees
Agency fees and advertisement publishing fees
Others
Total cost of revenues
Concession Fees
Amount
$
16,513
%
Amount
%
Amount
%
100.0% $
23,759
100.0% $
24,546
100.0%
(23,470)
(4,388)
(21,184)
(49,042)
(142.1)%
(26.6)%
(128.3)%
(297.0)% $
(28,559)
(4,675)
(25,733)
(58,967)
(120.2)%
(19.7)%
(108.3)%
(248.2)% $
(20,976)
(4,879)
(6,775)
(32,630)
(85.5)%
(19.9)%
(27.6)%
(133.0)%
$
We incur concession fees to airlines for placing our programs on their digital TV screens and to gas stations for operating our media displays such as light
boxes, billboards and LEDs and to train administration authorities for Wi-Fi system installation and operation rights. These fees constitute a significant
portion of our cost of revenues. Most of the concession fees paid to airlines were fixed under the relevant concession rights contracts with escalation clauses,
which required fixed fee increases over each year of the relevant contract, and payments were usually due three or six months in advance.
We began to incur concession fees related to our Wi-Fi business from 2013. We recorded these concession fees in the amount of $5.3 million, $9.5 million
and $5.1 million in 2016, 2017 and 2018, respectively. The concession fee related to Wi-Fi business decreased significantly in 2018 mainly due to we
gradually ceased our operations of Wi-Fi service on long-haul buses and scaled down operations in providing Wi-Fi services on trains in 2018.
The rest of our concession fees consisted of those related to our non-Wi-Fi business and slightly increased from $18.2 million in 2016 and to $19.1 million in
2017 and decreased to $15.9 million in 2018, the decreased in 2018 was mainly due to we ceased our gas station business in 2018.
Agency Fees and Advertisement Publishing Fees
From 2016 to 2018, we engaged third-party advertising agencies to help source advertisers from time to time or to help advertise publishing. These third-party
advertising agencies assisted us in identifying and introducing advertisers to us or help us to publish advertisement. In return, we paid fees to these third-
party agencies if they generated advertising revenues or published advertisement for us. Fees that we paid to these third-party agencies were calculated based
on a pre-set percentage of revenues generated from the advertisers by the third-party agencies and were paid when payments were received from the
advertisers. We recorded these agency fees and advertisement publishing fees as cost of revenues ratably over the period in which the related advertisements
were displayed.
Others
Our other cost of revenues includes the following:
·
Equipment Depreciation. Generally, we capitalized the cost of our digital TV screens, light boxes, LED screens and billboards in the gas station
media network and related Wi-Fi equipment and PAD on high-speed trains and recognized depreciation costs on a straight-line basis over the term of
their useful lives, which we estimate to be five years. The primary factors affecting our depreciation costs were the number of digital TV screens,
LED screens in gas stations and Wi-Fi equipment and the unit cost and impairment for those equipment, as well as the remaining useful life of the
equipment. However, the depreciation costs decreased significantly in 2018 due to the impairment on equipment in 2017.
49
·
·
Equipment Maintenance Cost. Our maintenance cost consisted of salaries for our network maintenance staff, travel expenses in relation to on-site
visits and monitoring and costs for materials and maintenance in connection with the upkeep of our media network. The primary factor affecting our
equipment maintenance cost was the size of our network maintenance staff.
Non-advertising Content Cost. The programs on the majority of our digital TV screens combine advertising content with non-advertising content,
such as comedy clips, movie and TV series. Our standard programs in airports currently include 40 minutes of non-advertising content during each
hour of programming and are shown for approximately 16 hours per day. Our in-flight programs typically range from approximately 45 to 120
minutes per flight, approximately 40 to 45 minutes of which consist of non-advertising content. The majority of the non-advertising content
broadcast on our network was provided by third-party content providers such as various local television stations and television production
companies. We pay a fixed price for some content. The non-advertising content cost was $0.8 million for the year ended December 31, 2018.
As we gradually ceased our operation of Wi-Fi service on long-haul buses and our gas station media services, scaled down operations in Wi-Fi service on
trains in 2018, our other cost of revenues decreased in 2018 significantly compared to the same for year 2017.
Operating Expenses
During the periods covered by this report, our operating expenses consisted of general and administrative expenses and selling and marketing expenses. The
following table sets forth the two components of our operating expenses, and as a percentage of net revenues for the periods indicated.
Net revenues
Operating expenses
General and administrative expenses
Selling and marketing expenses
Impairment of fixed assets, prepaid equipment cost
2016
Amount
$
16,513
Fiscal Years Ended December 31,
2017
2018
%
Amount
%
Amount
%
100.0% $
23,759
100.0% $
24,546
100.0%
(44,401)
(12,056)
(268.9)%
(73.0)%
(63,507)
(12,747)
(267.3)%
(53.7)%
(32,612)
(7,492)
(132.9)%
(30.5)%
(2.3)%
(165.7)%
and intangible assets
Total operating expenses
(826)
(57,283)
$
(5.0)%
(346.9)% $
(67,342)
(143,596)
(283.4)%
(604.4)% $
(564)
(40,668)
50
General and Administrative Expenses
Our general and administrative expenses consisted primarily of office and utility expenses, salaries and benefits for general management, finance and
administrative personnel, allowance for doubtful accounts, depreciation of office equipment, public relations related expenses and other administration related
expenses.
Selling and Marketing Expenses
Our selling and marketing expenses consisted primarily of salaries and benefits for our sales and marketing personnel, office and utility expenses related to
our selling and marketing activities, travel expenses incurred by our sales personnel, expenses for the promotion, advertisement, and other sales and
marketing related expenses.
Impairment of fixed assets, prepaid equipment cost and intangible assets
In the second half of 2017, the management was alerted of the trend of recording operational losses continued in providing Wi-Fi
services on trains and long-haul buses and media services on gas station. Meanwhile the management noticed that the willingness
to spend on marketing expenses targeting travelers by trains, buses and gas station was projected strong and growing. Given the
projected potential with exclusivity to provide such services, the management concluded that operations in both business
components should continue and be reviewed in the first quarter of 2018. Upon the scheduled review in the first quarter of 2018, a
flag was risen when the operational loss was widened and the willingness to spend on marketing was depleting and diminishing.
Immediately, the management halted operations in providing Wi-Fi services on long-haul buses and media services in gas station,
scaled down operations in providing Wi-Fi services on trains, and commissioned a comprehensive review on the sustainability of
both business components. Upon completion of the review, the management exercised prudently to record impairments in both
business components in 2017. In addition, we accrued a fully impairment loss for the leasehold improvement and the construction
in progress equipment of Tianjin VR store for the year ended December 31, 2018 because Tianjin VR store did not go into
operation.
Taxation
Cayman Islands. We are an exempted company incorporated in the Cayman Islands. The Cayman Islands currently levies no taxes on Islands or corporations
based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty.
British Virgin Islands. We are exempted from income tax in the British Virgin Islands on our foreign-derived income. There are no withholding taxes in the
British Virgin Islands.
Hong Kong. Our Hong Kong subsidiary, Air Media (China) Ltd, did not have any assessable profits arising in or derived from Hong Kong for the years ended
December 31, 2016, 2017 and 2018, and accordingly no provision for Hong Kong Profits Tax was made in these years. According to Tax (Amendment) (No.
3) Ordinance 2018 published by Hong Kong government, form April 1, 2018, under the two-tiered profits tax rates regime, the profits tax rate for the first $2
million of assessable profits will be lowered to 8.25% (half of the rate specified in Schedule 8 to the Inland Revenue Ordinance (IRO)) for corporations and
7.5% (half of the standard rate) for unincorporated businesses (mostly partnerships and sole proprietorships). Assessable profits above $2 million will
continue to be subject to the rate of 16.5% for corporations and standard rate of 15% for unincorporated businesses. AN China is qualified to elect the tax rate
of 8.25% as it has no assessable profit in 2018.
PRC. Effective as of January 1, 2008, the EIT Law applies a uniform EIT rate of 25% to all domestic enterprises and foreign-invested enterprises and defines
new tax incentives for qualified entities. Under the EIT Law, entities that qualify as HNTE are entitled to the preferential income tax rate of 15%. A
company’s status as a HNTE is valid for three years, after which the company must re-apply for such qualification in order to continue to enjoy the
preferential income tax rate.
Chuangyi Technology was recognized as a HNTE and maintained the status that would allow for a reduced 15% tax rate under EIT Law from year 2016 to
2017. Hence, Chuangyi Technology was subject to an EIT rate of 15%, 15% and 25% in 2016, 2017, and 2018, respectively.
51
Xi’an Shengshi received the HNTE certificate jointly issued by the competent governmental authorities in Shaanxi Province in September 2014. As such,
Xi’an Shengshi was subject to a preferential income tax rate of 15% from 2014 to 2016, Xi’an Shengshi is subject to EIT at a rate of 25% from 2017
afterwards.
Shenzhen Yuehang is subject to EIT at a rate of 25% from 2013 afterwards.
Wangfan Linghang qualified for the HNTE at the end of 2017 and entitled to an EIT rate of 15% for the years 2017, 2018 and 2019.
Beijing Yuehang Tianyi qualified for the HNTE in 2018 and entitled to an EIT rate of 15% for the years 2018, 2019 and 2020.
Furthermore, under the EIT Law, a “resident enterprise,” which includes an enterprise established outside of China with “de facto management bodies”
located in China, is subject to PRC income tax. The SAT issued the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated
Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, i.e. SAT Circular 82, on April 22, 2009. SAT Circular 82
provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled overseas-incorporated enterprise is located
in China.
In addition, the SAT issued a bulletin on July 27, 2011 to provide more guidance on the implementation of SAT Circular 82 with an effective date of
September 1, 2011. The bulletin made clarification in the areas of resident status determination, post-determination administration, as well as competent tax
authorities. It also specifies that when provided with a copy of the Chinese tax resident determination certificate from a resident Chinese controlled offshore
incorporated enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced dividends, interest, royalties, etc. to the Chinese
controlled offshore incorporated enterprise. Although both SAT Circular 82 and the bulletin only apply to offshore enterprises controlled by PRC enterprises,
not to those that, like our company, are controlled by PRC individuals, the determination criteria set forth in SAT Circular 82 and administration clarification
made in the bulletin may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax residency
status of offshore enterprises and the administration measures should be implemented, regardless of whether they are controlled by PRC enterprises or PRC
individuals.
We do not believe we and our subsidiaries established outside of the PRC are PRC resident enterprises. However, if the PRC tax authorities subsequently
determine that we and our subsidiaries established outside of China should be deemed as a resident enterprise, we and our subsidiaries established outside of
China will be subject to PRC income tax at a rate of 25%. In addition, under the EIT law, dividends generated after January 1, 2008 and payable by a foreign-
invested enterprise in China to its foreign investors who are non-resident enterprises are subject to 10% withholding tax, unless any such foreign investor’s
jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. The BVI, where Broad Cosmos, our wholly
owned subsidiary and the 100% shareholder of Shenzhen Yuehang, is incorporated, does not have such a tax treaty with China. Air Media (China) Ltd, the
100% shareholder of Chuangyi Technology Shenzhen Yuehang and Xi’an Shengshi, is incorporated in Hong Kong. According to the Mainland and Hong
Kong Special Administrative Region Arrangement on Avoiding Double Taxation or Evasion of Taxation on Income agreed between China and Hong Kong in
August 2006, dividends paid by a foreign-invested enterprise in China to its direct holding company in Hong Kong will be subject to withholding tax at a rate
of 5% (if the foreign investor owns directly at least 25% of the shares of the foreign-invested enterprise). However, if the Hong Kong company is not
considered to be the beneficial owner of dividends paid to it by its PRC subsidiaries under a tax notice promulgated on October 27, 2009 and the bulletin
No.30 of 2012, such dividends would be subject to withholding tax at a rate of 10%. See “Item 3. Key Information — D. Risk Factors — Risks Related to our
Business — Dividends payable to us by our wholly-owned operating subsidiaries may be subject to PRC withholding taxes, or we may be subject to PRC
taxation on our worldwide income, and dividends distributed to our investors may be subject to more PRC withholding taxes under the PRC tax law.”
Critical Accounting Policies
We prepare our financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect our reporting of, among
other things, assets and liabilities, contingent assets and liabilities and revenues and expenses. We continually evaluate these estimates and assumptions based
on the most recently available information, our own historical experiences and other factors that we believe to be relevant under the circumstances. Since our
financial reporting process inherently relies on the use of estimates and assumptions, our actual results could differ from our expectations. This is especially
true with some accounting policies that require higher degrees of judgment than others in their application. We consider the policies discussed below to be
critical to an understanding of our audited consolidated financial statements because they involve the greatest reliance on our management’s judgment.
52
Revenue Recognition
On January 1, 2018, the Company adopted ASC Topic 606, “Revenue from Contracts with Customers”, applying the modified retrospective method. The
adoption did not result in a material adjustment to the accumulated deficit as of January 1, 2018.
In accordance with ASC Topic 606, revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an
amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. In determining when and how much
revenue is recognized from contracts with customers, the Company performs the following five-step analysis: (1) identify the contract(s) with a customer; (2)
identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the
contract; (5) recognize revenue when (or as) the entity satisfies a performance obligation.
The Company’s contracts with customers do not include multiple performance obligations, significant financing component and any variable consideration.
The Company is a principal as it controls the specified good or service before that good or service is transferred to a customer. The Company is primarily
responsible for fulfilling the promise to provide the specified good or service, has inventory risk before the specified good or service has been transferred to a
customer and has discretion in establishing the price for the specified good or service.
Generally, the Company recognizes revenue under ASC Topic 606 for each type of its performance obligation either over time (generally, the transfer of a
service) or at a point in time (generally, the transfer of content) as follows:
The Company's revenues are derived from selling advertising time slots on the Company's advertising networks. For the years ended December 31, 2016,
2017 and 2018, the advertising revenues were generated from air travel media network including TV-attached digital frames in airports, digital TV screens in
airports, digital TV screens on airlines, gas station media network and other media network such as on-train and on long-haul bus Wi-Fi.
Revenue by service categories:
Revenues from operations:
Air Travel Media Network
Gas Station Media Network
Other Media
2016
For the years ended December 31,
2017
(In thousands of U.S. Dollars)
2018
$
$
12,178 $
4,009
410
16,597 $
18,702 $
4,093
1,533
24,328 $
22,212
413
2,151
24,776
Air Travel Media Network: Through air travel media network, revenues were generated from digital frames in airports in the form of TV-attached digital
frames, digital TV screens in airports, digital TV screens on airplanes. There are also other revenues in air travel mainly include revenues from the display of
media contents in air travel. For the advertising business, the Company typically signs standard contracts with its advertising clients, who require the
Company to run the advertiser's advertisements on the Company's network in airports, airlines for a period of time which is the only performance obligation
for a fixed price agreed in the contracts without variable considerations. The Company recognizes advertising revenues ratably over the service period for
which the advertisements are displayed, so long as collection remains probable.
Gas Station Media Network: Through gas station media network, the Company sells advertising time slots through digital TV screens in gas stations which is
the only performance obligation included in the contracts. The Company signs fixed fee contracts with the end customers or agencies for a specified period.
The revenue is recognized on a straight-line basis over the specified period. This business is ceased in 2018 and no continuing revenue will be generated from
gas station in following years.
Other Media: Through other media network such as on-train and on long-haul bus Wi-Fi, the Company provides Wechat public account promotion through
Wi-Fi network and advertising and promotion articles publishing on both self-owned and third parties’ public accounts. Wechat public account is an
application account applied by individual, business or enterprise on the Wechat Public Platform through which communication and interaction with specific
groups of words, pictures, voice and video can be achieved. For the public account promotion business, the passengers in the trains could connect to Wi-Fi for
free via the Company's Wi-Fi equipment after registered as a member to that public account as a follower in WeChat. The Company charges a fix rate per new
member and collects service fee from the client who owns the public accounts. The Company typically signs standard contracts with its clients, who require
the Company to promote their public accounts which is the only performance obligation defined in the contracts, and recognizes public account promotion
revenue by the quantities of members over the performance period multiplied by unit price defined in the contract. For the advertising and promotion articles
publishing business, the Company has developed a public accounts pool which have already accumulated hundreds of and thousands of registered users (there
are both self-owned and third parties’ public accounts). The Company typically signs standard contracts with its clients, who require the Company to publish
advertising articles on the public accounts to take advantage of the existing users and recognizes advertising revenues by numbers of articles published on
public accounts and the unit price that defined in the contract which differs on the basis of user numbers of selected public accounts.
Deferred Revenue
Prepayments from customers for advertising service are deferred when corresponding performance obligation is not satisfied and recognized as revenue when
the advertising services are rendered. The balance of deferred revenue as of December 31, 2018 is $2.0 million, the majority of which is $1.1 million for the
unsatisfied performance obligation with two customers with contracts amount of $5.7 million.
Nonmonetary exchanges
The Company occasionally exchanges advertising time slots and locations with other entities for assets or services, such as
equipment and other assets. The amount of assets and revenue recognized is based on the fair value of the advertising provided or
the fair value of the transferred assets, whichever is more readily determinable. There were no revenue recognized for nonmonetary
transactions were for the years ended December 31, 2016, 2017 and 2018. No direct costs are attributable to the revenues.
Concession Fees
The Company enters concession right agreements with vendors such as airlines, railway bureaus and petroleum companies, under which The Company
obtains the right to use the spaces or equipment of the vendors to display the advertisements.
Fees under concession right agreements are usually due every three, six or twelve months. Payments made are recorded as current assets and current liabilities
according to the respective payment terms. Most of the concession fees with airlines and railway bureaus are fixed with escalation, which means a fixed
increase over each year of the agreements. The total concession fee under the concession right agreements with airlines is charged to the consolidated
statements of operations on a straight-line basis over the agreement periods, which is generally between three to five years.
The fee structure of the concession right agreement with the petroleum companies is based on the actual number of developed gas stations and associated
standard annual concession fee for each developed gas station. Each gas station has its specific lease term starting from the time when it is actually put into
operation. The calculation of rental payments is based on how many months the gas stations are actually put into operation during the year and the standard
annual concession fee determined based on the location of the gas station. The amount of annual concession fee to-be-paid is determined by an actual incurred
concession fee or a fixed minimum payment, if any, based on negotiation with the petroleum company.
In 2018, we ceased our long-haul buses Wi-Fi service operations and gas station media services, and scaled down operations in providing Wi-Fi services on
trains. The concession fees due to the petroleum companies will be settled by providing equipment and future free service. Other prepaid concession fees
made to railway bureaus are returned or to be returned in the future.
53
Agency Fees and Advertisement Publishing Fees
The Company pays fees to advertising agencies for identifying and introducing advertisers to us and assisting in advertisement publishing based on a certain
percentage of revenues made through the advertisement agencies upon receipt of payment from advertisers. The agency fees and advertisement publishing
fees are charged to cost of revenues in the consolidated statements of operations ratably over the period in which the advertisement is displayed. Prepaid and
accrued agency fees and advertisement publishing fees are recorded as current assets and current liabilities according to relative timing of payments made and
advertising service provided.
Allowance for Doubtful Accounts
The Company conducts credit evaluations of clients and generally does not require collateral or other security from clients. The
Company establishes an allowance for doubtful accounts based upon estimates, historical experience and other factors surrounding
the credit risk of specific clients and utilizes both specific identification and a general reserve to calculate allowance for doubtful
accounts. The amount of receivables ultimately not collected by the Company has generally been consistent with expectations and
the allowance established for doubtful accounts. If the frequency and amount of customer defaults change due to the clients'
financial condition or general economic conditions, the allowance for uncollectible accounts may require adjustment. As a result,
the Company continuously monitors outstanding receivables and adjusts allowances for accounts where collection may be in doubt.
Impairment of long-lived assets
Long-lived assets held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such
assets may not be fully recoverable. It is possible that these assets could become impaired as a result of technology, economy or other industry changes. If
circumstances require a long-lived asset or asset group to be tested for possible impairment, we first compare undiscounted cash flows expected to be
generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted
cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation
techniques, including discounted cash flow models, relief from royalty income approach, quoted market values and third-party independent appraisals, as
considered necessary.
We make various assumptions and estimates regarding estimated future cash flows and other factors in determining the fair values of the respective assets.
The assumptions and estimates used to determine future values and remaining useful lives of long-lived assets are complex and subjective. They can be
affected by various factors, including external factors such as industry and economic trends, and internal factors such as our business strategy and its forecasts
for specific market expansion
Income Taxes
Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial
statements, net operating loss carry forwards and credits, by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Current income taxes are provided for in accordance with the laws and regulations applicable to us as enacted by the relevant tax authorities.
54
The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than not to be sustained
upon audit by the relevant tax authorities. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
Additionally, the Company classifies the interest and penalties, if any, as a component of the income tax expense. According to the PRC Tax Administration
and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the
withholding agent. The statute of limitations is extended to five years under special circumstances, where the underpayment of taxes is more than RMB 100.
In the case of transfer pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. According to Hong Kong
Inland Revenue Department, the statute of limitation is six years if any company chargeable with tax has not been assessed or has been assessed at less than
the proper amount, the statute of limitation is extended to 10 years if the underpayment of taxes is due to fraud or willful evasion. In 2018, the Company
incurred penalties of $4.3 million related to underpayment or delayed payment for income tax expense of previous years. The tax penalty of $2,664 is charged
for one-year delay of income tax payment of 2015 rising from the gain on transferring 75% equity of AM Advertising and the tax penalty of $1,660 is
charged for the unpaid income tax expense of 2016 for the deduction of bad debt allowance from taxable income before tax without chasing up for debt and
filing a special declaration of loss in asset. As of December 31, 2018, all the penalties have been paid off. For the transferring 20.32% equity of AM
Advertising of which the industrial and commercial registration procedure was completed in December 2018, the Company has filed this equity transaction in
the first quarter tax return filling in early 2019. For the deduction of bad allowance, the inspection method has been changed from filing a declaration to
reporting the loss by taxpayer. Hence, the Company did not have any material outstanding interest or penalties associated with tax positions nor did the
Company have any significant unrecognized tax positions will materially change over the next 12 months. The Company is not currently under examination
by an income tax authority, nor has been notified that an examination is contemplated.
Our Results of Operations
The following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our
consolidated financial statements, including the related notes that appear elsewhere in this annual report. We do not believe our historical consolidated results
of operations are indicative of our results of operations you may expect for any future period.
55
2016
Years Ended December 31,
2017
(In thousands of U.S. Dollars, except
share, per share and per ADS data)
2018
Consolidated Statements of Operations Data:
Revenues:
Air Travel Media Network
Gas Station Media Network
Other Media
Total revenues
Business tax and other sales tax
Net revenues
Cost of revenues
Gross loss
Operating expenses:
Selling and marketing
General and administrative
Impairment of fixed assets, prepaid equipment cost and intangible assets
Total operating expenses
Loss from operations
Interest income (expense), net
Loss from and impairment on long-term investments
Other income, net
Loss from operations before income taxes
Income tax expenses
Net loss
Less: Net loss attributable to noncontrolling interests
Net loss attributable to AirMedia Group Inc.’s shareholders
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
12,178
4,009
410
16,597
(84)
16,513
(49,042)
(32,529)
(12,056)
(44,401)
(826)
(57,283)
(89,812)
843
(33)
4,243
(84,759)
(4,483)
(89,242)
(23,617)
(65,625) $
18,702
4,093
1,533
24,328
(569)
23,759
(58,967)
(35,208)
(12,747)
(63,507)
(67,342)
(143,596)
(178,804)
2,645
(2,603)
214
(178,548)
(633)
(179,181)
(22,705)
(156,476) $
22,212
413
2,151
24,776
(230)
24,546
(32,630)
(8,084)
(7,492)
(32,612)
(564)
(40,668)
(48,752)
(106)
(52,337)
7,926
(93,269)
(150)
(93,419)
(3,322)
(90,097)
$
Net Revenues. Our net revenues increased by 3.3% to $24.5 million in 2018 from $23.8 million in 2017. The increase was primarily due to the increase in
revenues from air travel media network, which was offset by the decrease in gas station media network.
Revenues from air travel media network: Revenues from air travel media network increased by 18.8% from $18.7 million in 2017 to $22.2 million in 2018.
Among our revenues from air travel media network, revenues from digital TV screens on airplanes were $15.3 million and $20.9 million in 2017 and 2018,
respectively. The increase in revenues from digital TV screens on airplanes mainly resulted from a strong advertising market and an increase in advertisers’
demand for digital TV screens.
Revenues from the gas station media network: Revenues from the gas station media network decreased by 89.9% from $4.1 million in 2017 to $0.4 million in
2018 because we gradually ceased our gas station media services in 2018.
Revenues from other media: Revenues from other media were primarily revenues from our trains Wi-Fi advertising promotion and public account promotion.
Revenues from other media increased by 40.3% year-over-year to $2.2 million in 2018 from $1.5 million in 2017, primarily due to an increase of $0.34
million in revenues from trains Wi-Fi advertising promotion.
Cost of Revenues. Our cost of revenues decreased by 44.7% to $32.6 million in 2018 from $59.0 million in 2017. Our cost of revenues as a percentage of our
net revenues decreased to 133.0% in 2018 from 248.2% in 2017. This decrease was mainly due to the significant decrease in our depreciation costs and
concession fee costs. Depreciation costs, as one of the major component in our cost of revenue, decreased significantly by 99.6% to $44 thousand in 2018
from $10.1 million in 2017, resulting from the impairment of equipment recorded in 2017. Concession fees decreased by 26.6% to $21.0 million in 2018 from
$28.6 million in 2017. Concession fees as a percentage of net revenues decreased to 85.5% in 2018 from 120.2% in 2017. The concession fees of long-haul
buses, gas station and trains decreased significantly because we ceased operation of Wi-Fi service on long-haul buses and our gas station media services, and
scaled down operations in providing Wi-Fi services on trains. The concession fees of airline increased by $0.6 million due to the development of airline
business with concession cost increase by $6 million, which is offset by the concession cost reduction due to the refund received from one Airline company of
$5.4 million.
Operating Expenses. Our operating expenses decreased by 71.7% to $40.7 million in 2018 from $143.6 million in 2017.
56
·
·
·
Selling and Marketing Expenses. Our selling and marketing expenses decreased by 41.2% to $7.5 million in 2018 from $12.7 million in 2017. Our
selling and marketing expenses mainly consisted of $5.0 million and $8.4 million staff expenses for the year ended December 31, 2018 and 2017,
respectively. The selling expense decreased significantly primarily due to the decrease of staff numbers, because we ceased operations of Wi-Fi
service on long-haul buses and our gas station media services, and scaled down operations in providing Wi-Fi services on trains in early 2018.
General and Administrative Expenses. Our general and administrative expenses decreased by 48.6% to $32.6 million in 2018 from $63.5 million in
2017. This decrease was mainly due to the significant decrease in our bad debt expenses and staff expenses. Our bad debt expenses decreased to
$11.9 million in 2018 from $37.3 million in 2017. The staff expenses decreased to $11.3 million in 2018 from $12.5 million in 2017, because we
ceased our operations of Wi-Fi service on long-haul buses and gas station media services, and scaled down operations in providing Wi-Fi services on
trains in early 2018. The professional service fee decreased to $2.0 million in 2018 from $6.2 million in 2017 primarily due to (1) a $1.8 million
financing costs paid in 2017; and (2) the decrease of business consulting fee in 2018.
Impairment of fixed assets, prepaid equipment cost and intangible assets. Our impairment of fixed assets, prepaid equipment cost and intangible
assets decreased by 99.2% to $0.6 million in 2018 from $67.3 million in 2017, primarily resulting from the impairment due to the unexpected
operational underperformance from Wi-Fi services on trains, long-haul buses and gas station media service in 2017 of $66.8 million.
Loss from Operations. We recorded a loss from operations of $48.8 million in 2018, as compared to a loss from operations of $178.8 million in 2017 as a
cumulative result of the above factors.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Net Revenues. Our net revenues increased by 43.9% to $23.8 million in 2017 from $16.5 million in 2016. The increase was primarily due to the increase in
revenues from air travel media network.
Revenues from air travel media network: Revenues from air travel media network increased by 53.6% from $12.2 million in 2016 to $18.7 million in 2017.
Among our revenues from air travel media network, revenues from digital TV screens on airplanes were $10.3 million and $15.3 million in 2016 and 2017,
respectively. The increase in revenues from digital TV screens on airplanes mainly resulted from a strong advertising market and an increase in advertisers’
demand for digital TV screens.
Revenues from the gas station media network: Revenues from the gas station media network increased by 2.1% from $4.0 million in 2016 to $4.1 million in
2017 due to a stable advertising market.
Revenues from other media: Revenues from other media were primarily revenues from our trains and buses Wi-Fi network and film distribution business.
Revenues from other media increased by 273.9% year-over-year to $1.5 million in 2017 from $0.4 million in 2016, primarily due to an increase of $0.6
million and $0.4 million in advertising market through trains and buses Wi-Fi network, respectively.
Cost of Revenues. Our cost of revenues increased by 20.2% to $59.0 million in 2017 from $49.0 million in 2016. Our cost of revenues as a percentage of our
net revenues decreased to 248.2% in 2017 from 297% in 2016. This increase was mainly due to the significant increase in our revenues. Concession fees, as
one of the major component in our cost of revenue, increased by 21.7% to $28.6 million in 2017 from $23.5 million in 2016. Concession fees as a percentage
of net revenues decreased to 120.2% in 2017 from 142.1% in 2016. We continued to pay much of the related concession fees in 2017 due to our obligations
under the concession rights. As of the date of this annual report, concession rights contracts in connection with the business that we no longer operate have
either expired or been transferred to third parties. We expect to incur concession fee costs associated only with the business lines of digital TV screens on
airplanes, gas station media and our Wi-Fi business.
Operating Expenses. Our operating expenses increased by 150.7% to $143.6 million in 2017 from $57.3 million in 2016. Our total operating expenses in
2016 included share-based compensation expenses of $0.8 million while our total operating expenses in 2017 included share-based compensation expenses of
$0.3 million.
·
·
Selling and Marketing Expenses. Our selling and marketing expenses increased by 5.7% to $12.7 million in 2017 from $12.1 million in 2016. For
2017, our selling and marketing expenses mainly consisted of $8.4 million staff expenses.
General and Administrative Expenses. Our general and administrative expenses increased by 43.0% to $63.5 million (including $0.3 million of
share-based compensation expenses) in 2017 from $44.4 million (including $0.8 million of share-based compensation expenses) in 2016, primarily
due to approximately $37.2 million in bad debt expenses incurred in 2017. During 2016, we incurred bad debt expenses of $12.7 million.
57
·
Impairment of fixed assets, prepaid equipment cost and intangible assets. Our impairment of fixed assets, prepaid equipment cost and intangible
assets increased by 8,052.8% to $67.3 million in 2017 from $0.8 million in 2016, primarily due to the unexpected operational underperformance
from Wi-Fi services on trains, long-haul buses and gas station media service in 2017.
Loss from Operations. We recorded a loss from operations of $178.8 million in 2017, as compared to a loss from operations of $89.8 million in 2016 as a
cumulative result of the above factors.
Share-based Compensation
2012 Share incentive plan
On November 30, 2012, the Board of Directors adopted 2012 Share Incentive Plan (the “2012 Option Plan”), which allows the Company to grant options to
its employees and directors to purchase up to 6,000,000 ordinary shares of the Company subject to vesting requirement.
On November 1 and November 30, 2012, the Company granted 20,000 options to a consultant under the 2007 Option Plan and 60,000 options under the 2012
Option Plan to purchase the Company’s ordinary shares at an exercise price of $1.11 per share. 20,000 share options were vested immediately and one-third
of the 60,000 share options vested on February 1, May 1 and August 1, 2013, respectively.
On June 1 and August 1, 2014, the Company granted 2,376,620 options and 140,000 options to its employees under the 2012 Option Plan to purchase the
Company’s ordinary shares at an exercise price of $1.025 and $1.045 per share, respectively. One twelfth of these options will vest each quarter through June
1, 2017 and August 1, 2017, respectively. The expiration date will be 5 years from the grant dates.
On October 13, 2014, an employee terminated his employment with the Company but continued to provide service as a nonemployee consultant. 50,000
options granted to him on August 1, 2014 were not modified in connection with the change in status, but future service is still necessary to earn the award.
The compensation cost was measured as if the options were newly granted at the date of the change of status. The incremental share-based compensation
expense for the year ended December 31, 2014 was not material. On October 31, 2015, the consultant service contract terminated. Of the 50,000 options
granted to him, 20,830 were vested through the service period end and the expiration date of the vested options was modified from August 1, 2019 to January
31, 2016. The rest 29,170 unvested options were cancelled at the service period end.
58
On May 12, 2015, the Company granted 660,000 options its employees under the 2012 Option Plan to purchase the Company’s ordinary shares at an exercise
price of $1.675 per share. One twelfth of these options will vest each quarter through May 12, 2018. The expiration date will be 5 years from the grant date.
On June 15, 2015, an employee terminated his employment with the Company but continued to provide service as a nonemployee consultant. 200,000 options
granted to him on June 1, 2014 were not modified in connection with the change in status, but future service is still necessary to earn the award. The
compensation cost was measured as if the options were newly granted at the date of the change of status. The incremental share-based compensation expense
for the year ended December 31, 2015 was not material.
On October 31, 2015, an employee terminated his employment with the Company but continued to provide service as a nonemployee consultant. 100,000
options granted to him on May 12, 2015 were not modified in connection with the change in status, but future service is still necessary to earn the award. The
compensation cost was measured as if the options were newly granted at the date of the change of status. The incremental share-based compensation expense
for the year ended December 31, 2015 was not material.
On December 31, 2015, two consultants resigned. Of the 200,000 options granted to one of them on May 12, 2015, 3,332 were vested through the date of
resignation. The expiration date of the vested options was modified from May 12, 2020 to May 31, 2016. For the rest 166,668 unvested options, one twelfth
of the total granted options will still vest on February 12, 2016 following the original vesting schedule and the rest 150,002 options were cancelled on the date
of resignation. The fair value of the stock options, which was $1.12 per share as of the modification date, was estimated using the Black-Scholes model. The
incremental compensation cost of the modified award was immaterial for the year ended December 31, 2015. Of the 100,000 options granted to the other
consultant on May 12, 2015, 16,664 were vested through the date of resignation. The expiration date of the vested options was modified from May 12, 2020
to January 31, 2016, and the 83,336 unvested options were cancelled on the date of resignation.
On March 10, 2016, the Board of Directors approved to extend the expiration dates of the 685,000 options from various original expiration dates in March
and April 2016 to December 31, 2016. Modified awards are viewed as an exchange of the original award for a new award. The fair value of the stock options
of $1.67 as of the modification dates was estimated using the Black-Scholes model. The incremental share-based compensation expense for the year ended
December 31, 2016 was not material.
On July 10, 2016, Board of Directors approved to extend the expiration dates of the 2,139,918 options from original expiration date of July 11, 2016 to
December 31, 2016. Modified awards are viewed as an exchange of the original award for a new award. The fair value of the stock options of $0.38 as of the
modification date was estimated using the Black-Scholes model. The incremental share-based compensation expense of $79,000 was recognized for the year
ended December 31, 2016.
For the year ended December 31, 2016, four employees terminated their employment relationships with us, but continued to provide service as nonemployee
consultant. Their options were not modified in connection with the change in status, but future service is still necessary to earn the award. The compensation
cost was measured as if the options were newly granted at the date of the change of status. The incremental share-based compensation expense of $0.2 million
was recognized for the year ended December 31, 2016.
The fair value of each option granted was estimated on the date of grant/modification using the Black-Scholes option pricing model.
We recorded share-based compensation of $0.8 million, $0.3 million and $0.1 million for the years ended December 31, 2016, 2017 and 2018, respectively.
59
Inflation
Historically inflation has not had a significant effect on our business. According to the National Bureau of Statistics of China, the year-over-year percent
changes in the consumer price index for December 2016, 2017 and 2018 was increase of 2.1%, 1.8%, and 1.9%, respectively.
Although it has not materially impacted our results of operations in 2018, we can provide no assurance that we will not be affected in the future by potentially
higher rates of inflation in China. For example, certain operating costs and expenses, such as employee compensation and office operating expenses, may
increase as a result of higher inflation. Additionally, because a substantial portion of our assets consists of cash and cash equivalent, high inflation could
significantly reduce the value and purchasing power of these assets. We are not able to hedge our exposure to higher inflation in China.
Recently Issued Accounting Pronouncements
See Item. 17 of Part III, “Financial Statements—Note 2—Summary of significant accounting policies—Recent issued accounting standard.”
B.
Liquidity and Capital Resources
To date, we have financed our operations primarily through internally generated cash, the sale of preferred shares in private placements and the proceeds we
received from our initial public offering.
The Company incurred losses from operations of $178.8 million and $48.8 million for the years ended December 31, 2017 and 2018. As of December 31,
2018, the Company had shareholders’ deficit of $262.4 million. The Company had negative cash flows from operating activities for the years ended
December 31, 2017 and 2018 of $58.6 million and $19.8 million, respectively. These conditions raise substantial doubt about the Company’s ability to
continue as a going concern.
The Company intends to meet the cash requirements for the next 12 months from the issuance date of this report through a combination of bank loan,
financing by way of private placements, friends, family and business associates and management financial support. The Company will focus on the following
activities:
·
·
·
The Company plans to strengthen the air Wi-Fi business to drive its revenues and bring in cash from operation;
The Company is focusing on improving operation efficiency and cost reduction to standardize operations, enhance internal controls, and create
synergy of the Company’s resources;
The Company has also acquired the financial support letter from Mr. Man Guo and Mr. Qing Xu, who have expressed the willingness and intention
to provide the necessary financial support to the Company, so as to enable the Company to meet its liabilities as and when it falls due and to carry on
its business without a significant curtailment of operations for the next 12 months from the issuance date of this report.
As a result, management prepared the consolidated financial statements assuming the Company will continue as a going concern. As described above, the
Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its
operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these
matters are also described above. However, there is no assurance that the measures above can be achieved as planned. The consolidated financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
We generally deposit our excess cash in interest bearing bank accounts. Although we consolidate the results of our VIEs in our consolidated financial
statements, we can only receive cash payments from them pursuant to our contractual arrangements with them and their shareholders. See “Item 4.
Information on the Company — C. Organizational Structure.” Our principal uses of cash primarily include capital expenditures, contractual concession fees,
business acquisitions, share repurchases, and other investments and, to a lesser extent, salaries and benefits for our employees and other operating expenses.
We expect that these will remain our principal uses of cash in the foreseeable future. We may also use additional cash to fund strategic acquisitions.
60
Cash Flow
The following table shows our cash flows with respect to operating activities, investing activities and financing activities for the years ended December 31,
2016, 2017 and 2018:
Net cash used in operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Effect of exchange rate changes
Net increase/(decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at the beginning of the year
Cash, cash equivalents and restricted cash at the end of the year
Operating Activities
Years Ended December 31,
2017
2016
2018
(103,610)
130,582
11,130
(7,515)
30,587
86,960
117,547
(58,570)
(47,166)
874
5,787
(99,075)
117,547
18,472
(19,774)
20,096
(1,695)
(1,560)
(2,933)
18,472
15,539
Net cash used in operating activities was $19.8 million for the year ended December 31, 2018. Net cash used in operating activities was primarily attributable
to (1) a net loss of $93.4 million adjusted by non-cash loss and impairment on long-term investment of $52.3 million and bad debt expenses of $11.9 million,
and (2) a decrease in accrued expenses and other current liabilities of $3.7 million, partially offset by (1) an increase in accounts payable of $7.8 million, and
(2) a decrease in prepaid concession fees of $5.1 million.
Net cash used in operating activities was $58.6 million for the year ended December 31, 2017. Net cash used in operating activities was primarily attributable
to (1) a net loss of $179.2 million adjusted by non-cash loss and impairment of property and equipment, prepaid equipment cost and intangible assets of $67.3
million, bad debt expenses of $37.3 million and depreciation and amortization of $12.0 million, and (2) a decrease of other non-current assets of $1.3 million.
Net cash used in operating activities was $103.6 million for the year ended December 31, 2016. Net cash used in operating activities was primarily
attributable to (1) a net loss of $89.2 million adjusted by non-cash bad debt expenses of $12.7 million and depreciation and amortization of $13.0 million, (2)
a decrease in income tax payable of $27.4 million and (3) a decrease due to related parties of $15.0 million.
Investing Activities
Net cash provided by investing activities for the year ended December 31, 2018 amounted to $20.1 million. The amount of net cash provided by investing
activities was principally attributable to the disposal of long-term investment of $22.6 million, partially offset by the purchase of property and equipment of
$3.6 million.
Net cash used in investing activities for the year ended December 31, 2017 amounted to $47.2 million. The amount of net cash provided by investing
activities was principally attributable to (1) loan to third parties of $22.6 million, (2) purchase of long term investment of $17.4 million and (3) purchase of
property and equipment of $7.2 million.
Net cash provided by investing activities for the year ended December 31, 2016 amounted to $130.6 million. The amount of net cash provided by investing
activities was principally attributable to receipt of consideration receivable of $196 million as a result of disposition of our 75% equity interest in AM
Advertising in 2015, partially offset by (1) purchase of property and equipment of $21.6 million, (2) purchase of equity in subsidiary of $32.8 million and (3)
increase of loan to third parties by $17.1 million.
61
Capital Expenditures
Our capital expenditures were made primarily to purchase equipment for our network, including network construction for our gas station media network and
our Wi-Fi business.
Our capital expenditures were $21.6 million in 2016, $7.2 million in 2017, and $3.6 million in 2018, respectively.
Financing Activities
Net cash used in financing activities amounted to $1.7 million for the year ended December 31, 2018, consisting of capital withdraw by non-controlling
shareholder of $10.9 million, which was offset by cash received from short-term loans of $6.3 million and cash received from long-term loans of $2.9 million.
Net cash provided by financing activities amounted to $0.9 million for the year ended December 31, 2017, consisting of capital contribution from non-
controlling interest holders of $0.9 million.
Net cash provided by financing activities amounted to $11.1 million for the year ended December 31, 2016, consisting of capital contribution from non-
controlling interest of $9.8 million and proceeds received from stock option exercise of $1.3 million.
Intra-Company Transfers
Transfers of cash between our PRC operating subsidiaries and our non-PRC entities are regulated by certain PRC laws. For a description of these laws and the
effect that they may have on our ability to meet cash obligations, please refer to “Item 3. Key Information — D. Risk Factors — Risks Related to our
Business — Dividends payable to us by our wholly-owned operating subsidiaries may be subject to PRC withholding taxes, or we may be subject to PRC
taxation on our worldwide income, and dividends distributed to our investors may be subject to more PRC withholding taxes under PRC tax law,” “Item 3.
Key Information — D. Risk Factors — Risks Related to our Corporate Structure — We may rely principally on dividends and other distributions on equity
paid by our wholly-owned operating subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our operating
subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business,” “Item 3. Key Information — D. Risk Factors
— Risks Related to Doing Business in China — Restrictions on currency exchange may limit our ability to receive and use our revenues or financing
effectively,” “Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China — PRC regulations relating to the establishment of
offshore special purpose companies by PRC residents and registration requirements for employee stock ownership plans or share option plans may subject our
PRC resident beneficial owners or the plan participants to personal liability, limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries’
ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us,” “Item 4. Information on the Company — A.
History and Development of the Company — B. Business Overview — Regulation — Regulations on Dividend Distribution,” and “Item 4. Information on
the Company — A. History and Development of the Company — B. Business Overview — Regulation — SAFE Regulations on Offshore Investment by
PRC Residents and Employee Stock Options”. None of these regulations have had a material effect on our ability to meet our cash obligations.
62
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 2021 and are renewable upon
negotiation. In addition, the contract terms of our concession rights contracts are usually three to five years. Most of these concession rights expire through
2020 and are renewable upon negotiation. The following table sets forth our contractual obligations and commercial commitments as of December 31, 2018:
Payments Due by Period
Operating lease agreements
Concession rights contracts
Total
G.
Safe Harbor
Total
$
$
2,339 $
24,946
27,285 $
Less than 1
year
1-3 years
(in thousands of U.S. Dollars)
1,085 $
13,227
14,312 $
1,254 $
11,719
12,973 $
3-5 years
More than 5
years
- $
-
- $
-
-
-
See the section headed “Forward-Looking Information”.
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
Directors and Senior Management
The following table sets forth certain information regarding our directors and executive officers as of March 31, 2019. Mr. Richard Peidong Wu resigned as
our Chief Financial Officer effective in December 2018 for personal reasons, and Mr. Herman Man Guo was appointed to serve as the interim Chief Financial
Officer until February 28, 2019. Mr. Xin Li was appointed as our Chief Financial Officer effective in March 1, 2019. The resignation of Mr. Richard Peidong
Wu was not due to any disagreement with the management and the board of directors.
63
NAME
Herman Man Guo
Xin Li
Qing Xu
Conor Chiahung Yang
Shichong Shan
Dong Wen
Songzuo Xiang
Hua Zhuo
Hong Zhou
Peng Zhou
Rong Guo
Juntao Zhen
AGE
55
42
58
56
88
53
54
49
46
39
50
44
Chairman, Chief Executive Officer and Director
Chief Financial Officer
Director and Executive President
POSITION
Independent Director
Independent Director
Independent Director
Independent Director
Independent Director
Chief Operating Officer
Vice President
Vice President
Vice President
Mr. Herman Man Guo is our founder and has served as the chairman of our board of directors and our chief executive officer since our inception. Mr. Guo
served as our interim Chief Financial Officer in December 2018 to February 2019. He was the general manager of Beijing Sunshine Media Co., Ltd. from
1997 to 2004. From 1991 to 1996, Mr. Guo served as the deputy general manager of Beijing Trade & Technology Development Company. Prior to that, he
worked in China Civil Aviation Development Service Company from 1988 to 1990. Mr. Guo received his bachelor’s degree in applied mathematics from
People’s Liberation Army Information Engineering University in China in 1983 and an Executive MBA degree from Peking University in China in 2011.
Mr. Xin Li has served as our Chief Financial Officer since March 2019. Mr. Li Xin has extensive experience in the management of companies and connections
in the investment sector. Prior to joining us, Mr. Li was an assistant to president and the CFO of Grass Green Group, where he led several investment and
M&A projects, both domestically and internationally. Before joining Grass Green Group, Mr. Li was a managing director of CICFH Fund Management Co.,
Ltd. (the “CICFH”) and concurrently served as CFO of the fund’s portfolio company in 2016 and 2017. Prior to joining CICFH, Mr. Li held senior
professional positions in several large investment institutions. Mr. Li received a MBA degree from Duke University in 2006 and a bachelor's degree in
international finance and accounting from Tsinghua University in 1999.
Mr. Qing Xu has served as our director since our inception and as our executive president since June 2010. From October 2005 to our inception, Mr. Xu
served as a director of certain of our pre-existing affiliated entities. From 2003 to 2005, Mr. Xu served as a vice president of Zhongyuan Guoxin Investment
Guarantee Co., Ltd. Prior to that, he served as a department director of China Haohua Group Co., Ltd. from 1997 to 2003 and as a department manager of
Beijing Trade & Technology Development Company from 1991 to 1997. Mr. Xu was a secretary at the PRC State Council Secretary Bureau from 1984 to
1991. Mr. Xu received his associate’s degree in business and economics management from Beijing Normal University in 1996.
Mr. Conor Chiahung Yang has served as our independent director since March 2013. Mr. Yang is the president and cofounder of Black Fish Group.
Previously, Mr. Yang was the chief financial officer of Tuniu Corporation from January 2013 to November 2017. Mr. Yang was the chief financial officer of
E-Commerce China Dangdang Inc. from March 2010 to July 2012 and the chief financial officer of our company, from March 2007 to March 2010. Mr. Yang
was the chief executive officer of Rock Mobile Corporation from 2004 to February 2007. From 1999 to 2004, Mr. Yang served as the chief financial officer of
the Asia Pacific region for CellStar Asia Corporation. Mr. Yang was an executive director of Goldman Sachs (Asia) L.L.C. from 1997 to 1999. Prior to that,
Mr. Yang was a vice president of Lehman Brothers Asia Limited from 1994 to 1996 and an associate at Morgan Stanley Asia Limited from 1992 to 1994. Mr.
Yang currently serves as an independent director of China Online Education Group. Mr. Yang received his MBA degree from University of California, Los
Angeles in 1992 and his bachelor’s degree from Fu Jen University in Taiwan in 1985. .
Mr. Shichong Shan has served as our independent director since July 2007. Mr. Shan has retired since 1996. Before he retired, Mr. Shan had held a number of
senior executive positions in various government agencies and other organizations in the aviation industry in China, including the General Administration of
Civil Aviation of China. Mr. Shan graduated from Shanghai Lixin University of Commerce and attended the college program at the Eastern China Military
and Politics Institute.
64
Mr. Dong Wen has served as our independent director since July 2015. Mr. Wen has been the general manager of the home furnishing business division of
Leju Holdings Limited (NYSE: LEJU) since 2011. Prior to that, he worked for four years as the chief executive officer of Lianlian Technology Group, which
is the largest channel management vendor for authorized third-party prepayment for China Mobile subscribers according to that company. From 2002 to 2007,
Mr. Wen worked as a senior vice president of B&Q China.
Dr. Songzuo Xiang has served as our independent director since November 2008. He currently serves on the board of China Digital TV Co. Ltd., an NYSE-
listed company providing conditional access systems to China’s digital television market. From March 2009 to October 2009 and from July 2000 to July
2009, Dr. Xiang served as chief executive officer and director, respectively, of Ku6 Media Co., Ltd., a Nasdaq-listed company. He previously served as the
Deputy Director of the Fund Planning Department at the People’s Bank of China Shenzhen Branch and was an investment manager at Shenzhen Resources &
Property Development Group. He was a visiting scholar at Columbia University from May 1999 to July 2000 and at Cambridge University from October
1998 to May 1999. Dr. Xiang received his bachelor’s degree in engineering in Huazhong University of Science and Technology in 1986, his master’s degree
in international affairs from Columbia University in 1999, his master’s degree in management science in 1993 and his Ph.D. degree in economics in 1993
from Renmin University in China.
Mr. Hua Zhuo. Mr. Zhuo has served as our independent director since July 2015. He has worked as the chairman and president of Zhongyuan Guoxin Credit
Financing Guarantee Co., Ltd. since 2003. Prior to that, he worked as the general manager at several other companies. Mr. Zhuo received his MBA degree
from Peking University.
Mr. Hong Zhou has served as our Chief Operating Officer since May 2018. Previously, Mr. Zhou served as the head of a large-scale production and scientific
consortium of China Aerospace Science and Technology Group. Prior to that, Mr. Zhou served as deputy chief engineer and senior project director of
enterprise development department under aviation airborne communication division of China Satcom Group. Mr. Zhou received a Doctor of Engineering
degree from the school of aeronautical science and engineering, Beihang Universtiy.
Mr. Peng Zhou has served as our vice president in charge of marketing and public relationship since January 2016. Mr. Peng Zhou has had an intimate
knowledge in marketing and strategic planning for online products. Previously, Mr. Zhou served as the senior vice president of Tianji.com from January 2015
to November 2015. From January 2012 to December 2014, Mr. Zhou was the senior director of industry analysis in the marketing consultant department of
Baidu.com. From August 2007 to August 2011, Mr. Zhou served as the marketing director of baicheng.com. Prior to that, Mr. Zhou worked in elong.com and
Sohu.com. Mr. Zhou received his bachelor’s degree from Tianjin University of Commerce.
Ms. Rong Guo has served as our vice president in charge of In-train Wi-Fi business since early 2015. Prior joining us, Ms. Guo has accumulated an abundant
management experience on the online media industry. Ms. Guo served as the as the vice general manager of Baiyun International Airport Advertising Co.,
Ltd. and the account director of Shanghai Shengshi Great Wall Advertising Co., Ltd.
Mr. Juntao Zhen has served as our vice president and the general manager of Wi-Fi business since 2017. Prior joining us, Mr. Zhen served as the as the chief
architect and chief architect team leader of NOKIA Beijing research and development center, he was responsible for the system architecture of mobile
communication equipment, software and hardware technology development and team management in NOKIA Beijing research and development center.
No family relationship exists between any of our directors and executive officers. There are no arrangements or understandings with major shareholders,
customers, suppliers or others pursuant to which any person referred to above was selected as a director or member of senior management.
Employment Agreements
We have entered into employment agreements with Herman Man Guo and Xin Li. Our employment agreements with Mr. Guo has an unfixed duration as
required by the PRC Employment Law. Mr. Guo may terminate the respective agreement with a one-month prior notice while we will only be able to
terminate such agreement in limited circumstances, such as for cause. Our employment agreement with Mr. Xin Li has a fixed duration until February, 2022
and can be terminated by either us or Mr. Xin Li with a one-month prior notice over the term of the duration. We have also entered into employment
agreements with our other executive officers. Each of the contract terms was a period of two or three years. We may terminate the employment for cause, at
any time, without notice or remuneration, for certain acts of the employee, including but not limited to a conviction or plea of guilty to certain crimes,
negligence or dishonesty to our detriment and failure to perform the agreed-to duties after a reasonable opportunity to cure the failure. Furthermore, either we
or an executive officer may terminate the employment at any time without cause upon advance written notice to the other party. These agreements do not
provide for any special termination benefits, nor do we have other arrangements with these executive officers for special termination benefits.
65
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 2018, the aggregate cash compensation to our executive officers was approximately $0.5 million and the aggregate cash compensation to our non-executive
directors was approximately $0.2 million. Our PRC subsidiaries and consolidated VIEs are required by law to make contributions equal to certain percentages
of each employee’s salary for his or her pension insurance, medical insurance, housing fund, unemployment and other statutory benefits. Other than the
above-mentioned pension insurance mandated by applicable PRC law, we have not set aside or accrued any amount to provide pension, retirement or other
similar benefits to our executive officers and directors. No executive officer is entitled to any severance benefits upon termination of his or her employment
with our company except as required under applicable PRC law.
Share Options
In July 2007, we adopted the 2007 Option Plan to attract and retain the best available personnel, provide additional incentives to employees, directors and
consultants, and promote the success of our business. In December 2009, we amended the 2007 Option Plan by increasing the maximum aggregate number of
shares issuable under the plan from 12,000,000 to 17,000,000. In March 2011, our board of directors authorized the issuance of 2,000,000 ordinary shares
under the 2011 Option Plan with the same aim as the 2007 Option Plan. In 2012, our board of directors adopted the 2012 Option Plan, under which we are
authorized to grant restricted shares or options and other awards for a total issuance of up to 6,000,000 ordinary shares. As of December 31, 2018, options to
purchase 5,857,755 of our ordinary shares were 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, 2018, the outstanding options granted to our executive officers, directors and
to other individuals as a group under our 2007 Option Plan, as amended, 2011 Option Plan and 2012 Option Plan.
66
Name
Herman Man Guo
Richard Peidong Wu
Xin Li
Qing Xu
Conor Chia-hung Yang
Conor Chia-hung Yang
Conor Chia-hung Yang
Shichong Shan
Dong Wen
Songzuo Xiang
Hua Zhuo
Peng Zhou
Rong Guo
Juntao Zhen
Other individuals as a group
Other individuals as a group
Other individuals as a group
Other individuals as a group
Ordinary
Shares
Underlying
Options
1,000,000
1,276,620
—
*
*
*
*
*
—
*
—
—
—
—
600,000
200,000
180,000
40,000
Exercise
Price
($/Share)(1)
1.15
1.025
N/A
1.15
1.15
1.15
1.15
1.15
N/A
1.15
N/A
N/A
N/A
N/A
1.15
1.025
1.675
1.045
Date of Grant
July 2, 2007
June 1, 2014
N/A
March 22, 2011
July 2, 2007
November 29, 2007
July 10, 2009
July 20, 2007
N/A
July 10, 2009
N/A
N/A
N/A
N/A
March 22, 2011
June 1, 2014
May 12, 2015
August 1, 2014
Expiration Date
December 31, 2019
December 31, 2019
N/A
March 23, 2021
December 31, 2019
December 31, 2019
December 31, 2019
December 31, 2019
N/A
December 31, 2019
N/A
N/A
N/A
N/A
March 22, 2021
June 1, 2019
May 12, 2020
August 1, 2019
* Aggregate beneficial ownership of our company by such officer or director is less than 1% of our total outstanding ordinary shares.
(1) On August 23, 2011, in order to provide better incentive to our employees, our board of directors approved an adjustment to the exercise price of a
portion of the stock options previously granted to certain optionees on July 2, 2007, July 20, 2007, November 29, 2007, July 10, 2009 and March 22,
2011. The exercise price for the adjusted portion of the options is $1.15 per ordinary share and the exercise price for the unadjusted portion will remain
the same at $1.57 per ordinary share.
The following paragraphs summarize the terms of our 2007 Option Plan, as amended, 2011 Option Plan and 2012 Option Plan:
Plan Administration. Our board of directors, or a committee designated by our board or directors, will administer the plans. The committee or the full board
of directors, as appropriate, will determine the provisions and terms and conditions of each option grant.
Award Agreements. Options and stock purchase rights granted under our plans are evidenced by a stock option agreement or a stock purchase right agreement,
as applicable, that sets forth the terms, conditions and limitations for each grant. In addition, the stock option agreement and the stock purchase right
agreement also provide that securities granted are subject to a 180-day lock-up period following the effective date of a registration statement filed by us under
the Securities Act, if so requested by us or any representative of the underwriters in connection with any registration of the offering of any of our securities.
67
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 seven directors. A director is not required to hold any shares in our company by way of qualification. A director
may vote with respect to any contract, proposed contract or arrangement in which he is materially interested. A director may exercise all the powers of our
company to borrow money, mortgage its undertaking, property and uncalled capital, and issue debentures or other securities whenever money is borrowed or
as security for any obligation of our company or of any third party. The remuneration to be paid to the directors is determined by the board of directors. There
is no age limit requirement for directors.
Board Committees
We have established three committees under the board of directors: an audit committee, a compensation committee, and a compliance committee. We
currently do not plan to establish a nominating committee. The independent directors of our company will select and recommend to the board for nomination
by the board such candidates as the independent directors, in the exercise of their judgment, have found to be well qualified and willing and available to serve
as our directors prior to each annual meeting of our shareholders at which our directors are to be elected or reelected. In addition, our board of directors has
resolved that director nominations be approved by a majority of the board as well as a majority of the independent directors of the board. A majority of our
board of directors are independent directors. We have adopted a charter for each of the board committees. Each committee’s members and responsibilities are
described below.
68
Audit Committee. Our audit committee consists of Messrs. Songzuo Xiang, Shichong Shan and Conor Chia-hung Yang. Mr. Yang is the chairperson. Our
board of directors has determined that all members of our audit committee satisfy the “independence” requirements of Rule 10A-3 under the Securities
Exchange Act of 1934, as amended, or the Exchange Act, and the rules and regulations of the Nasdaq Stock Market LLC. We have determined that each of
Songzuo Xiang and Conor Chia-hung Yang qualifies as an “audit committee financial expert.” The audit committee oversees our accounting and financial
reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:
·
·
·
·
·
·
·
selecting the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors;
reviewing with the independent auditors any audit problems or difficulties and management’s response;
reviewing and approving all proposed related-party transactions on an ongoing basis;
discussing the annual audited financial statements with management and the independent auditors;
reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies;
annually reviewing and reassessing the adequacy of our audit committee charter;
other matters specifically delegated to our audit committee by our board of directors from time to time;
· meeting separately and periodically with management and the independent auditors; and
·
reporting regularly to the full board of directors.
Compensation Committee. Our compensation committee consists of Messrs. Hua Zhuo, Conor Chia-hung Yang and Shichong Shan. Conor Chia-hung Yang is
the chairperson. Our board of directors has determined that Messrs. Hua Zhuo, Conor Chia-hung Yang and Shichong Shan satisfy the “independence”
requirements of the rules and regulations of the Nasdaq Stock Market LLC. Our compensation committee assists the board in reviewing and approving the
compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers. Our
chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee is
responsible for, among other things:
·
·
·
reviewing and recommending to the board with respect to the total compensation package for our executive officers;
reviewing and making recommendations to the board with respect to the compensation of our directors; and
reviewing periodically and approving any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses,
employee pension and welfare benefit plans.
Compliance Committee. Our compliance committee consists of Messrs. Qing Xu, Songzuo Xiang and Hua Zhuo. Mr. Xu is the chairperson. Our compliance
committee assists the board in overseeing the Company’s compliance with the laws and regulations applicable to the Company’s business, and compliance
with the Company’s code of business conduct and ethics and related policies by employees, officers, directors and other agents and associates of the
Company. The compliance committee is responsible for, among other things:
·
·
establishing and revising project and purchase control policies;
establishing and revising administration and business supervision policies;
69
·
·
accepting, investigating, and settling any comments, complaints, and reports from employees;
investigating and settling any matters delegated from the board of directors; and
· monitoring the status of implementation of company policies.
Duties of Directors
Under Cayman Islands law, our directors owe fiduciary duties to our company, including a duty to act honestly, and a duty to act in what they consider in
good faith to be in our best interests. Our directors must also exercise their powers only for a proper purpose. Our directors also owe to our company a duty to
act with skills they actually possess and exercise such care and diligence that a reasonably prudent person would exercise in comparable circumstances. It was
previously considered that a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person
of his knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill
and care and these authorities are likely to be followed in the Cayman Islands. In fulfilling their duty of care to our company, our directors must ensure
compliance with our amended and restated memorandum and articles of association, as amended and restated from time to time, and the rights vested
thereunder in the holders of the shares. Our directors owe their fiduciary duties to our company and not to our company’s individual shareholders, and it is our
company which has the right to seek damages if a duty owed by our directors is breached. In limited exceptional circumstances, a shareholder may have the
right to seek damages in our name if a duty owed by our directors is breached.
Terms of Directors and Officers
All directors hold office until the expiration of their terms and until their successors have been elected and qualified. A director may be removed from office
before the expiry of his term by a special resolution passed by the shareholders. The directors shall be subject to retirement by rotation. Any director shall
serve a term of office which shall expire on the 31st day of July which is not less than one year nor more than two years after the date of his appointment.
Upon the expiry of each director’s term of office, he shall automatically retire and cease to be a director, but shall be eligible for re-election by the board of
directors. Any director who is so re-elected shall serve an additional term which shall expire on the 31st day of July of the year which is two years after such
re-election. There shall be no limit on the number of times which a director may be re-elected or the number of additional terms which any such director may
serve. Every director is subject to retirement in accordance with our articles of association at least once every two years. Our articles of association also
provide that the office of a director shall be vacated in a limited number of circumstances, namely if the director: (a) becomes bankrupt or makes any
arrangement or composition with his creditors; (b) is found to be or becomes of unsound mind; (c) resigns his office by notice in writing to our Company; or
(d) without special leave of absence from the board of directors, is absent from meetings of the board of directors for six consecutive months and the board of
directors resolves that his office be vacated. Officers are elected by and serve at the discretion of our board of directors.
In addition, our service agreements with our directors do not provide benefits upon termination of their services.
D. Employees
We had 1,052, 845 and 315 employees as of December 31, 2016, 2017, and 2018 respectively. The following table sets forth the number of our employees by
area of business as of December 31, 2016, 2017 and 2018, respectively:
Sales and Marketing Department
Quality Control and Technology Department
Programming Department
Resources Development Department
General Administrative and Accounting
Total
2016
As of December 31,
2017
Number of
Employees % of Total
Number of
Employees % of Total
387
317
124
15
209
1,052
36.8
30.1
11.8
1.4
19.9
100.0
242
253
129
13
208
845
28.6
29.9
15.4
1.5
24.6
100.0
2018
Number of
Employees % of Total
18.7
27.0
26.7
0.6
27.0
100.0
59
85
84
2
85
315
70
The following table sets forth the breakdown of employees by geographic location as of December 31, 2018:
City
Beijing
Guangzhou
Shenyang
Others
Total
Number of
Employees
% of Total
218
31
45
21
315
69.2
9.8
14.3
6.7
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, 2019, by:
·
·
each of our directors and executive officers; and
each principal shareholder, or person known to us to own beneficially more than 5.0% of our ordinary shares.
The calculations in the shareholder table below are based on 125,664,777 ordinary shares outstanding as of March 31, 2019 (excluding 2,032,278 ordinary
shares and ordinary shares represented by ADSs reserved for settlement upon exercise of our incentive share awards). Beneficial ownership is determined in
accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of
that person, we have included shares that the person has the right to acquire within 60 days after March 31, 2019, the most recent practicable date, including
through the exercise of any option, or other right or the conversion of any other security. These shares, however, are not included in the computation of the
percentage ownership of any other person.
71
Directors and Executive Officers:
Herman Man Guo(1)
Xin Li
Qing Xu(2)
Conor Chiahung Yang(3)
Shichong Shan
Dong Wen
Songzuo Xiang
Hua Zhuo
Hong Zhou
Peng Zhou
Rong Guo
Juntao Zhen
All directors and executive officers
Principal Shareholders:
Dan Shao (4)
Wealthy Environment Limited(5)
Bison Capital Media Limited (6)
Shares Beneficially Owned
%
Number
20,510,980
—
1,950,000
1,348,913
*
—
*
—
*
*
—
—
24,018,226
20,584,214
17,505,980
12,000,000
16.2
—
1.5
1.1
*
—
*
—
*
*
—
—
18.8
16.1
13.7
9.4
* Aggregate beneficial ownership of our company by such director or officer is less than 1% of our total outstanding ordinary shares.
** The business address of our directors and executive officers is 15/F, Sky Plaza, No. 46 Dongzhimenwai Street, Dongcheng District, Beijing 100027, The
People’s Republic of China.
(1) Includes (i) 16,105,980 ordinary shares held by Wealthy Environment Limited, a BVI company wholly owned by Mr. Herman Man Guo, (ii) 1,400,000
ordinary shares represented by American Depositary Shares held by Wealthy Environment Limited, (iii) 2,000,000 ordinary shares represented by
American Depositary Shares held by Mr. Herman Man Guo, and (iv) 1,005,000 ordinary shares issuable upon exercise of options held by Mr. Guo that
are exercisable within 60 days.
(2) Includes (i) 1,000,000 ordinary shares held by Mambo Fiesta Limited, a BVI company wholly owned by Mr. Qing Xu, (ii) 600,000 ordinary shares
represented by American Depositary Shares held by Mr. Qing Xu, and (iii) 350,000 ordinary shares issuable upon exercise of options held by Mr. Xu that
are exercisable within 60 days.
(3) Includes (i) 965,942 ordinary shares represented by American Depositary Shares, and (ii) 382,971 ordinary shares issuable upon exercise of options held
by Mr. Conor Chiahung Yang that are exercisable within 60 days.
(4) Includes (i) 20,000,000 ordinary shares held by Global Earning Pacific Limited and (ii) 584,214 ordinary shares represented by ADSs that Ms. Dan Shao
purchased in one or more open-market transactions. Global Earning Pacific Limited, a company incorporated in BVI, is wholly owned and controlled by
Ms. Dan Shao, Mr. Herman Man Guo’s wife. The registered address of Global Earning Pacific Limited is OMC Chambers, Wickham Cay 1, Road Town
Tortola, BVI.
(5) Includes (i) 16,105,980 ordinary shares held by Wealthy Environment Limited, and (ii) 1,400,000 ordinary shares represented by American Depositary
Shares held by Wealthy Environment Limited. Wealthy Environment Limited, a company incorporated in BVI, is wholly owned and controlled by
Herman Man Guo. The registered address of Wealthy Environment Limited is P.O. Box 173, Kingston Chambers, Road Town Tortola, BVI.
(6) The address of Bison Capital Media Limited is c/o Bison Capital Holding Company Limited, 609-610, 21st Century Tower, 40 Liangmaqiao Road,
Chaoyang District, Beijing, People’s Republic of China, 100016. Bison Capital Media Limited, a Cayman Islands company, is wholly-owned by Bison
Capital Holding Company Limited, a Cayman Islands company, which is in turn wholly owned by Ms. Fengyun Jiang, a citizen of Hong Kong Special
Administrative Region. Ms. Jiang is the sole director of both Bison Capital Media Limited and Bison Capital Holding Company Limited. Ms. Jiang
possesses the power to direct the voting and disposition of the shares owned by Bison Capital Media Limited and may be deemed to have beneficial
ownership of such shares.
72
Other than as otherwise disclosed in this report, we are not directly or indirectly owned or controlled by another corporation, by any foreign government or by
any other natural or legal person severally or jointly. None of our major shareholders have different voting rights from other shareholders. We are not aware of
any arrangement that may, at a subsequent date, result in a change of control of our company.
As of March 31, 2019, 127,697,055 of our ordinary shares were issued and outstanding, of which 2,032,278 ordinary shares are issued to our depositary bank
reserved for future exercise of vested options. To our knowledge, we had only one record shareholder in the United States, JPMorgan Chase Bank, N. A.,
which is the depositary of our ADS program and held approximately 71% of our total outstanding ordinary shares as of March 31, 2019. The number of
beneficial owners of our ADSs in the United States is likely to be much larger than the number of record holders of our ordinary shares in the United States.
For the options granted to our directors, officers and employees, please refer to “— B. Compensation — Share Options.”
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major Shareholders
Please refer to “Item 6. Directors, Senior Management and Employees — E. Share Ownership.”
B.
Related Party Transactions
Contractual Arrangements
Our consolidated VIEs, Beijing Yuehang, and Linghang Shengshi, together with their subsidiaries, directly operate our air travel advertising network, enter
into related concession rights contracts and sell advertising time slots and advertising locations to our advertisers. Our consolidated VIE, AM Online, along
with its subsidiaries, enters into concession rights contracts in relation to our Wi-Fi business and is directly operate this business and enter into related
business contracts. We have been and expect to continue to be dependent on our VIEs to operate our advertising business and Wi-Fi business. Chuangyi
Technology has entered into contractual arrangements with our VIEs, pursuant to which Chuangyi Technology provides exclusive technology support and
service and technology development services in exchange for payments from them. In addition, Chuangyi Technology has entered into agreements with our
VIEs and each of their individual shareholders (except Yi Zhang), which provide Chuangyi Technology with the substantial ability to control our VIEs. These
agreements are summarized in the following paragraphs.
73
·
·
·
Technology support and service agreements: Chuangyi Technology provides exclusive technology support and consulting services to our VIEs and
in return, the VIEs are required to pay Chuangyi Technology service fees. Except for AM Online, the VIEs pay to Chuangyi Technology annual
service fees in the amount that guarantee that the VIEs can achieve, after deducting such service fees payable to Chuangyi Technology, a net cost-
plus rate of no less than 0.5% in the case of Linghang Shengshi and Jiaming Advertising, or 1.0% in the case of Beijing Yuehang. It is at Chuangyi
Technology’s sole discretion that the rate and amount of service fees ultimately charged the VIEs under these agreements are determined. The “net
cost-plus rate” refers to the operating profit as a percentage of total costs and expenses of a certain entity. The technology support and service fees
for each given year payable by AM Online to Chuangyi Technology under AM Online’s technology support and service agreement shall be
determined by AM Online and Chuangyi Technology at the first month of such year taking into account several factors. Those factors include the
credential of the team of Chuangyi Technology that provides services to AM Online, the number of service hours, the nature and value of the
services provided by Chuangyi Technology, the extent to which Chuangyi Technology provides patent or other license to AM Online in its provision
of technology support and service and the correlation between AM Online’s results of operations and the technology support and service provided by
Chuangyi Technology. In the event Chuangyi Technology finds it necessary to make subsequent adjustment to the amount of fees, AM Online shall
negotiate in good faith with Chuangyi Technology to determine the new fee. The technology support and service agreements are effective for ten
years and such term is automatically renewed upon their expiration unless either party to an agreement informs the other party of its intention not to
extend at least twenty days prior to the expiration of these agreements.
Technology development agreements: Our VIEs exclusively engage Chuangyi Technology to provide technology development services. Chuangyi
Technology owns the intellectual property rights developed in the performance of these agreements. Except for AM Online, the VIEs pay to
Chuangyi Technology annual service fees in the amount that guarantee that the VIEs can achieve, after deducting such service fees payable to
Chuangyi Technology, a net cost-plus rate of no less than 0.5% in the case of Linghang Shengshi and Jiaming Advertising, which final rate should be
determined by Chuangyi Technology. It is at Chuangyi Technology’s sole discretion the rate and amount of fees ultimately charged the VIEs under
these agreements are determined. The “net cost-plus rate” refers to the operating profit as a percentage of total costs and expenses of a certain entity.
The technology development fees for each given year payable by AM Online to Chuangyi Technology under AM Online’s technology development
agreement shall be determined by AM Online and Chuangyi Technology at the first month of such year taking into account several factors. Those
factors include the credential of the team of Chuangyi Technology that provides services to AM Online, the number of service hours, the nature and
value of the services provided by Chuangyi Technology, the extent to which Chuangyi Technology provides patent or other license to AM Online in
its provision of technology development service and the correlation between AM Online’s results of operations and the technology development
service provided by Chuangyi Technology. In the event Chuangyi Technology finds it necessary to make subsequent adjustment to the amount of
fees, AM Online shall negotiate in good faith with Chuangyi Technology to determine the new fee. The technology development agreements are
effective for ten years and such term is automatically renewed upon their expiration unless either party informs the other party of its intention not to
extend at least twenty days prior to the expiration of these agreements.
Exclusive technology consultation and service agreement: AM online exclusively engages Chuangyi Technology to provide consultation services
in relation to management, training, marketing and promotion. AM Online agrees to pay to Chuangyi Technology the amount of annual service fees
as determined by Chuangyi Technology. In the event Chuangyi Technology finds it necessary to make subsequent adjustment to the amount of fees,
AM Online shall negotiate in good faith with Chuangyi Technology to determine the new fees. The exclusive technology consultation and service
agreement remains effective for ten years and such term may be reviewed by Chuangyi Technology’s written confirmation prior to the expiration of
the agreement term.
74
·
·
·
Call option agreements: Under the call option agreements between Chuangyi Technology and the individual shareholders (except Yi Zhang) of
Linghang Shengshi, Beijing Yuehang and Jiaming Advertising, the shareholders of those VIEs irrevocably granted Chuangyi Technology or its
designated third party an exclusive option to purchase from the VIEs’ shareholders, to the extent permitted under PRC law, all the equity interests in
the VIEs, as the case may be, for the minimum amount of consideration permitted by the applicable law without any other conditions. Under the call
option agreements between Chuangyi Technology and the shareholders of AM Online, the shareholders of AM Online (except Yi Zhang) irrevocably
granted Chuangyi Technology or its designated third party an exclusive option to purchase from the shareholders of AM Online, to the extent
permitted under PRC law, all the equity interests in AM Online, as the case may be. To the extent the applicable PRC law does not require the
valuation of the subject equity interests and does not otherwise restrict the purchase price for such equity interests, such purchase price shall equal
the amount of actual payment made by the respective shareholders of AM Online with respect to the equity interests whether in the form or share
capital injection or secondary purchase price. If and where the applicable PRC law requires the valuation of the subject equity interests or otherwise
has restrictions on the purchase price for such equity interests, such purchase price shall equal the minimum amount of consideration permitted by
the applicable law. In addition, under these agreements (except for the call option agreements between Chuangyi Technology and the shareholders of
AM Online), Chuangyi Technology has undertaken to act as guarantor of VIEs in all operations-related contracts, agreements and transactions and
commit to provide loans to support the business development needs of VIEs or if the VIEs suffer operating difficulties, provided that the relevant
VIE’s shareholders satisfy the terms and conditions in the call option agreements. Under PRC laws, to provide an effective guarantee, a guarantor
needs to execute a specific written agreement with the beneficiary of the guarantee. As Chuangyi Technology has not entered into any written
guarantee agreements with any third party beneficiaries to guarantee the VIEs’ performance obligations to these third parties, none of these third
parties can demand performance from Chuangyi Technology as a guarantor of the VIEs’ performance obligations. The absence of a written
guarantee agreement, however, does not affect our conclusion that we are the primary beneficiary of the VIEs and in turn should consolidate the
financials of the VIEs. The term of each call option agreement is ten years and such terms can be renewed upon expiration at Chuangyi Technology’s
sole discretion. In January 2016, shareholders of AM Online, Linghang Shengshi and Jiaming Advertising (except Yi Zhang) entered into a
supplement agreement to provide that, without respect to the changes in equity interest percentages of those shareholders in the respective VIEs, the
relevant provisions of the respective call option agreements shall continue to apply.
Equity pledge agreements: Under the equity pledge agreements between Chuangyi Technology and the individual shareholders of our VIEs other
than AM Online, the individual shareholders of those VIEs (except Yi Zhang) pledged all of their equity interests, including the right to receive
declared dividends, in those VIEs to Chuangyi Technology to guarantee those VIEs’ performance of their obligations under the technology support
and service agreement and the technology development agreement. Under the equity pledge agreements between Chuangyi Technology and the
shareholders of AM Online, the shareholders of AM Online (except Yi Zhang) pledged all of their equity interests, including the right to receive
declared dividends, in AM Online to Chuangyi Technology to guarantee the performance by AM Online of its obligations under its call option
agreement and its exclusive technology consultation and service agreement. If the VIEs fail to perform its obligations set forth in the applicable
agreements, Chuangyi Technology shall be entitled to exercise all the remedies and powers set forth in the provisions of the applicable equity pledge
agreements. Those agreements remain effective for as long as the technology support and service agreements and technology development
agreement are effective, or, in the case of AM Online, until two years after the term of the obligations under the call option agreement and exclusive
technology consultation and service agreement. Pursuant to the PRC Property Rights Law, an equity pledge is not perfected as a security property
right unless it is registered with the competent local administration for industry and commerce. We have not yet registered the share pledges by
shareholders of AM Online, Linghang Shengshi and Jiaming Advertising. In January 2016, shareholders of AM Online, Linghang Shengshi and
Jiaming Advertising (except Yi Zhang) entered into a supplement agreement to provide that, without respect to the changes in equity interest
percentages of those shareholders in the respective VIEs, the relevant provisions of the respective equity pledge agreements shall continue to apply.
Authorization letters: Each individual shareholder of the VIEs (except Yi Zhang) has executed an authorization letter to authorize persons appointed
by Chuangyi Technology to exercise certain of its rights, including voting rights, the rights to enter into legal documents and the rights to transfer
any or all of its equity interest in the VIEs. The authorization letters by the shareholders of our VIEs will remain effective during the operating
periods of the respective VIEs and for so long as the respective parties remain shareholders of the VIEs unless terminated earlier by Chuangyi
Technology or unless the call option agreement with respect to VIEs is terminated prior to its expiration.
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Through the above contractual arrangements, Chuangyi Technology has obtained the voting interest in the VIEs of all their shareholders (except Yi Zhang),
has the right to receive substantially all dividends declared and paid by the VIEs and may receive substantially all of the net income of the VIEs through the
technical support and service fees as determined by Chuangyi Technology at its sole discretion. Accordingly, we have consolidated the VIEs because we
believe, through the contractual arrangements, (1) Chuangyi Technology could direct the activities of the VIEs that most significantly affect its economic
performance and (2) Chuangyi Technology could receive substantially all of the benefits that could be potentially significant to the VIEs. Other than the
contractual arrangements described above, because the management and certain employees of Chuangyi Technology also serve in the VIEs as management or
employees, certain operating costs paid by Chuangyi Technology, such as payroll costs and office rental, were re-charged to the VIEs.
Chuangyi Technology also entered into loan agreements with each shareholder of AM Online (except Yi Zhang), pursuant to which Chuangyi Technology
agrees to make loans in an aggregate amount of RMB50 million to the shareholders of AM Online solely for the incorporation and capitalization of AM
Online. The loan is interest free and the term of the loan is ten years and shall be automatically renewed on an annual basis unless Chuangyi Technology
objects. Chuangyi Technology can require the shareholders to repay all or a portion of the loan before the maturity date with a 15 days prior written notice.
Under such circumstances, Chuangyi Technology is entitled to, or designate a third party to, buy all or a portion of the shareholders’ equity interests in AM
Online on a pro rata basis based on the amount of the repaid principal of the loan. As of the date of this annual report, no loan had been made and the capital
of AM Online subscribed by shareholders other than Yi Zhang was not injected.
Amounts due from related parties
As of December 31, 2017, we had $1.0 million due from Mr. Qing Xu, representing an advance to him on a short term basis for personal purpose needs, we
also have $0.5 million and $0.7 million due from AirMedia Holding Ltd. and AirMedia Merger Company Ltd., representing an advance to them on a short
term basis for operation purpose. All the balance has been collected in May 2018, there was no gain or loss upon settlement.
As of December 31, 2018, we had $16 thousand due from Mambo Fiesta Limited., an entity controlled by Mr. Qing Xu, representing an interest free advance
to it on a short term basis for operation purpose. We also have $1 thousand due from Shanghai Qingxuan Co., Ltd., an entity controlled by Mr. Herman Man
Guo, representing an interest free advance to it on a short term basis for operation purpose. In addition, we have $1 thousand due from Global Earning Pacific
Ltd., an entity controlled by Ms. Dan Shao, who is our principal shareholder, representing an interest free advance to it on a short term basis for operation
purpose.
Share Options
See “Item 6. Directors, Senior Management and Employees — B. Compensation — Share Options.”
C.
Interests of Experts and Counsel
Not applicable.
ITEM 8.
FINANCIAL INFORMATION
A.
Consolidated Statements and Other Financial Information
Financial Statements
We have appended consolidated financial statements filed as part of this annual report. See “Item 18. Financial Statements”.
76
Legal Proceedings
We may become subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time.
A majority of the digital frames and digital TV screens in the Company's network include programs that consist of both advertising content and non-
advertising content. On December 6, 2007, the State Administration of Radio, Film or Television, or the SARFT, a governmental authority in the PRC, issued
the Circular regarding Strengthening the Management of Public Audio-Video in Automobiles, Buildings and Other Public Areas, or the SARFT Circular.
According to the SARFT Circular, displaying audio-video programs such as television news, films and television shows, sports, technology and entertainment
through public audio-video systems located in automobiles, buildings, airports, bus or train stations, shops, banks and hospitals and other outdoor public
systems must be approved by the SARFT. The Company intends to obtain the requisite approval of the SARFT for the Company's non-advertising content,
but the Company cannot assure that the Company will obtain such approval in compliance with this new SARFT Circular, or at all. In January 2014, the
Company entered into a strategic alliance with China Radio International Oriental Network (Beijing) Co., Ltd ("CRION"), which manages the internet TV
business of China International Broadcasting Network, to operate the CIBN-AirMedia channel for broadcast network TV programs to air travelers in China.
According to the terms of the cooperation arrangement with CRION, during the cooperation period from March 28, 2014 to March 27, 2024, CRION shall
obtain and, from time to time, be responsible for obtaining any approval, license and consent regarding the regulation of broadcasting and television from
relevant authorities.
There is no assurance that CRION will be able to obtain or maintain the requisite approval or the Company will be able to renew the contract with CRION
when they expire. If the requisite approval is not obtained, the Company will be required to eliminate non-advertising content from the programs included in
the Company's digital frames and digital TV screens and advertisers may find the Company's network less attractive and be unwilling to purchase advertising
time slots on the Company's network. As of December 31, 2018, the Company did not record a provision for this matter as management believes the
possibility of adverse outcome of the matter is remote and any liability it may incur would not have a material adverse effect on its consolidated financial
statements. However, it is not possible for the Company to predict the ultimate outcome and the possible range of the potential impact of failure to obtain such
disclosed registrations and approvals primarily due to the lack of relevant data and information in the market in this industry in the past.
Linghang Shengshi had served a legal letter, dated June 29, 2016 (the “Legal Letter”), on Longde Wenchuang to challenge the proposed transfers by Longde
Wenchuang of their equity interests in AM Advertising to Shanghai Golden Bridge InfoTech Co., Ltd. (stock code: 603918), a PRC company with its shares
listed on the Shanghai Stock Exchange (“Golden Bridge”). As of the date of the Legal Letter, Linghang Shengshi held 24.84% of the equity interests in AM
Advertising. Longde Wenchuang and Culture Center held 28.57% and 46.43%, respectively, of the equity interests in AM Advertising. On June 14, 2016,
Longde Wenchuang entered into an equity interest transfer agreement with Golden Bridge to transfer 75% equity interests in AM Advertising to Golden
Bridge in consideration for shares in Golden Bridge (the “Transfer”). Neither of Longde Wenchuang sought consent from Linghang Shengshi with respect to
the Transfer in accordance with the provisions of the Company Law of the People’s Republic of China (the “Company Law”). In the Legal Letter, Linghang
Shengshi challenges the validity of the Transfer on the ground that it violated the statutory right of first refusal of Linghang Shengshi under the Company
Law. Subsequent to the Company’s legal letter, Golden Bridge ceased acquisition of 75% equity interest of AM Advertising from Longde Wenchuang and
Culture Center. Longde Wenchuang and Culture Center further dismissed the Company’s representative from Co-CEO position of AM Advertising.
On September 2, 2016, the Company received notice (the “September 2, 2016 Notice”) from the China International Economic and Trade Arbitration
Commission (the “CIETAC”) that the Company, Chuangyi Technology, Linghang Shengshi and Mr. Herman Man Guo (collectively, the “Respondents”) were
named as respondents by the Culture Center in an arbitration proceeding submitted by the Culture Center to the CIETAC in connection with the sale by the
Company of 75% equity interests in AM Advertising to Culture Center and Longde Wenchuang in June 2015. Culture Center seeks specific performance by
the Respondents of certain obligations under the transaction documents, which include, among other things, (i) the pledge by Linghang Shengshi and Mr. Guo
of their respective equity interests in AM Advertising to Culture Center as security for their obligations under the transaction documents, (ii) the use of best
efforts by the Respondents to cooperate with the Culture Center and Longde Wenchuang to procure the listing of AM Advertising in China and (iii) the
performance by the Company and Mr. Guo of their respective non-compete obligations to refrain from holding, operating, or otherwise participating in any
business that is the same or substantially the same as that of AM Advertising. The Company believes the arbitration request is without merit and intends to
defend the actions vigorously. However, no assurances can be provided that the Company will prevail in this arbitration proceeding. In response to the
September 2, 2016 Notice, the Company filed a notice against Culture Center to CIETAC for their breach of contract.
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As a result of the above disputes, the Company is no longer able to exercise significant influence in operating and strategic decision of AM Advertising and
cannot access to AM Advertising’s financial information. Accordingly, the Company accounted its investment in AM Advertising using cost method as of
December 31, 2016, 2017 and 2018. AM Advertising and its subsidiaries are no longer related parties to the Company. As of December 31, 2016, the
Company treated the provision for earnout commitment of $23.5 million as contingent liability and did not record any additional provision for this matter as
management believes the possibility of adverse outcome of the matter is remote and any liability it may incur would not have a material adverse effect on its
consolidated financial statements.
On March 28, 2018, August 23, 2018 and November 2018, a MoU and its supplemental agreements respectively, with, among others, Longde Wenchuang and
Beijing Cultural Center Construction and Development Fund (Limited Partnership), under which, among other things, Linghang Shengshi and Mr. Guo have
agreed to pay or make available to AM Advertising on or prior to May 30, 2018 and further extended to September 30, 2018 and December 31, 2018 an
aggregate of RMB304.6 million which was to be discounted by the following amounts (i) the RMB152 million profits attributable to Linghang Shengshi, Mr.
Guo and Mr. Xu for the first nine months of 2015, based on a third-party pro forma audit report on AM Advertising; (ii) the loan of RMB88.0 million in
principal balance and RMB7.8 million in interests; and (iii) the payment of RMB56.7 million in cash after the sale of the 20.32% equity interests in AM
Advertising, which consisted of 20.18% equity interests hold by the Company and 0.14% equity interests hold by Mr. Man Guo and Mr. Qing Xu on behalf of
the Company, and following the completion of the foregoing arrangements, our obligations with respect to the profit target for 2015, the earnout provision for
the first nine months of 2015 and the loans between AM Advertising and Linghang Shengshi shall be deem completed. According to the aforesaid MoU, after
Linghang Shengshi, Mr. Guo and Mr. Xu transfer all the equity interest of AM Advertising, they will cease to be shareholders of AM Advertising and will not
be able to continuously assume the obligations in connection with the profit commitment and earn out provision as a matter of fact.
As of December 31, 2018, the sale of the 20.32% equity interests in AM Advertising has been completed, while the cash payment of RMB56.7 million to
Longde Wenchuang and Beijing Cultural Center Construction and Development Fund (Limited Partnership) has not been paid yet by the Company. Upon the
effectiveness of MoU, the Company wrote off the contingency of provision for earnout provision, and recorded an actual payable of earnout provision in the
amount of RMB152.6 million, after the deduction loan of RMB88.0 million in principal balance and RMB7.8 million in interests.
On September 29, 2018, SINOPEC Shanghai Oil Products Company (the “SINOPEC Shanghai”) brought before the district court of Huangpu, Shanghai a
legal action against GreatView Media and AM Advertising. As plaintiff, SINOPEC Shanghai plead to the court a) to dissolve the advertising service
agreement and supplementary agreement signed between SINOPEC Shanghai and GreatView Media; b) to support its claim to an overdue concession fee of
RMB 24.4 million over the period starting from September 2009 to February 2018, which may be subject to change, payable by GreatView Media; c) to
support its claim to an overdue electricity bill of RMB 2.9 million over the period starting from September 2009 to February 2018, which may be subject to
change, payable by GreatView Media; d) to support its claim holding AM Advertising liable to both the overdue concession fee and electricity bill; and e) to
support its claim that the legal fees shall be borne by the defendants. As of December 31, 2018, the Company did not record a provision for this matter as the
management believes the possibility of adverse outcome of the matter is remote and the liability it may incur would not have a material adverse effect on its
consolidated financial statements. In February 2019, RMB 27.3 million has been paid to the court by Linghang Shengshi on behalf of GreatView Media as
security of this matter, which will be returned to the Company after the case closes if the Company wins the case. As of the date of this annual report, the
Company is not able to predict the ultimate outcome and the possible range of the potential impact of failure primarily due to the legal action has just
proceeded with the first court appearance and an exchange of evidence between the plaintiff and the defendants.
For risks and uncertainties relating to the pending cases against us, please see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—
We have been named as a defendant or respondent in legal proceedings that could have a material adverse impact on our business, financial condition, results
of operation, cash flows and reputation.”
We are not currently a party to, nor are we aware of, any other legal proceeding, investigation or claim which, in the opinion of our management, is likely to
have a material adverse effect on our business, financial condition or results of operations.
Dividend Policy
We have never declared or paid any dividends, nor do we have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future.
We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
Our board of directors has discretion in deciding whether to distribute dividends, subject to certain restrictions under Cayman Islands law, namely that our
company may only pay dividends out of profits or share premium account, and provided always that in no circumstances may a dividend be paid if this would
result in our company being unable to pay its debts due in the ordinary course of business. In addition, our shareholders may by ordinary resolution declare a
dividend, but no dividend may exceed the amount recommended by our directors. Even if our board of directors decides to pay dividends, the timing, amount
and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus,
the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by
our board of directors.
If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement,
including the fees and expenses payable thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
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.
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C.
Markets
Our ADSs, each representing ten of our ordinary shares, were listed on the Nasdaq Global Market on November 7, 2007 and were subsequently transferred to
the Nasdaq Global Select Market. Our ADSs, each representing ten of our ordinary shares, has been transferred to The Nasdaq Capital Market in November
2018. Effective on April 11, 2019, we adjusted the ratio of our ADSs to ordinary shares from one ADS representing two ordinary shares to one ADS
representing ten ordinary shares.
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
(2018 Revision) of the Cayman Islands, or the Companies Law, insofar as they relate to the material terms of our ordinary shares. This summary is not
complete, and you should read our amended and restated memorandum and articles of association, which has been filed as Exhibit 99.3 to our Form 6-K (File
No. 001-33765) filed with the SEC on December 10, 2009, and the amendment thereto, which has been filed as Exhibit 99.2 to our Form 6-K (File No. 001-
33765) filed with the SEC on June 27, 2013. We subsequently amended our memorandum and articles of association by shareholders’ resolutions passed on
July 18, 2013, the results of which have been filed as Exhibit 99.1 to our Form 6-K (File No. 001-33765) filed with the SEC on July 23, 2013.
Registered Office and Objects
Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman,
KY1-1104, Cayman Islands, or at such other place as our board of directors may from time to time decide. The objects for which our company is established
are unrestricted and we have full power and authority to carry out any object not prohibited by the Companies Law, as amended from time to time, or any
other law of the Cayman Islands.
Board of Directors
See “Item 6. Directors, Senior Management and Employees — A. Directors and Senior Management.”
Ordinary Shares
General
Our authorized share capital is US$1,000,000 consisting of 900,000,000 ordinary shares with a nominal or par value of US$0.001 each, and 100,000,000
preferred shares with a nominal or par value of US$0.001 each. All of our issued and outstanding ordinary shares are fully paid and non-assessable. Our
ordinary shares are issued in registered form, and are issued when registered in our register of members. Our shareholders who are non-residents of the
Cayman Islands may freely hold and vote their ordinary shares. Under our amended and restated memorandum and articles of association, our company may
not issue bearer shares.
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Dividend Rights
The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors. In addition, our shareholders may by ordinary
resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Under Cayman Islands law, our company may declare
and pay a dividend only out of funds legally available therefor, namely out of either profit or our share premium account, provided that in no circumstances
may we pay a dividend if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business.
Voting Rights
Each ordinary share is entitled to one vote on all matters upon which the ordinary shares are entitled to vote. Voting at any meeting of shareholders is by show
of hands unless a poll is demanded. A poll may be demanded by one or more shareholders holding together at least ten percent of the shares given a right to
vote at the meeting, present in person or by proxy.
A quorum required for a meeting of shareholders consists of shareholders holding not less than an aggregate of one-third of all voting share capital of the
Company in issue present in person or by proxy and entitled to vote. Shareholders’ meetings may be held annually and may be convened by our board of
directors on its own initiative or upon a request to the directors by shareholders holding in aggregate at least one-third of our voting share capital. Advance
notice of at least fourteen days is required for the convening of our annual general meeting and other shareholders meetings.
An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of the votes attaching to the shares cast in a general
meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes attaching to the ordinary shares cast in a general
meeting. A special resolution is required for important matters such as a change of name. Holders of the ordinary shares may effect certain changes by
ordinary resolution, including increasing the amount of our authorized share capital, consolidating or dividing all or any of our share capital into shares of
larger amount than our existing shares, and canceling any shares that are authorized but unissued. Both an ordinary resolution and a special resolution may
also be passed by a unanimous written resolution signed by all the shareholders of our company, as permitted by the Companies Law and our amended and
restated memorandum and articles of association.
Appointment and Removal of Directors
Our board of directors may, by the affirmative vote of a simple majority of the directors present and voting at a board meeting, appoint any person as a
director, to fill a casual vacancy on the board or as an addition to the existing board. Directors may be removed by special resolution of our shareholders.
Transfer of Shares
Subject to the restrictions of our articles of association, as applicable, any of our shareholders may transfer all or any of his or her shares by an instrument of
transfer in writing and executed by or on behalf of the transferor, accompanied by the certificates of such shares and such other evidence as the Directors may
reasonably require to show the right of the shareholder to make the transfer.
Redemption, Repurchase and Surrender of Shares
We may issue shares on terms that such shares are subject to redemption, at our option or at the option of the holders, on such terms and in such manner as
may be determined by our board of directors. Our company may also repurchase any of our shares provided that the manner and terms of such purchase have
been approved by ordinary resolution of our shareholders, or are otherwise authorized by our amended and restated memorandum and articles of association.
Under the Companies Law, the redemption or repurchase of any share may be paid out of our company’s profits or out of the proceeds of a fresh issue of
shares made for the purpose of such redemption or repurchase, or out of capital (including share premium account and capital redemption reserve) if the
company can, immediately following such payment, pay its debts as they fall due in the ordinary course of business. In addition, under the Companies Law no
such share may be redeemed or repurchased (a) unless it is fully paid up, (b) if such redemption or repurchase would result in there being no shares
outstanding, or (c) if the company has commenced liquidation. In addition, our company may accept the surrender of any fully paid share for no
consideration.
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Liquidation
On a winding up of our company, the liquidator may, with the sanction of an ordinary resolution of our shareholders, divide amongst the shareholders
in species or in kind the whole or any part of the assets of our company, and may for that purpose value any assets and determine how the division shall be
carried out as between our shareholders or different classes of shareholders.
Calls on Shares and Forfeiture of Shares
Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their shares in a notice served to such shareholders at
least fourteen calendar days prior to the specified time and place of payment. Shares that have been called upon and remain unpaid on the specified time are
subject to forfeiture.
Variations of Rights of Shares
If at any time, our share capital is divided into different classes of shares, all or any of the special rights attached to any class of shares may be varied either
with the written consent of the holders of a majority of the issued shares of that class, or with the sanction of a special resolution passed at a separate general
meeting of the holders of shares of that class. The rights conferred upon the holders of the shares of any class issued with preferred or other rights will not,
unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking
pari passu with such existing class of shares.
Inspection of Books and Records
Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate
records. However, we will provide our shareholders with annual audited financial statements.
Changes in Capital
Our shareholders may from time to time by ordinary resolution:
·
·
·
·
increase our share capital by such sum, to be divided into shares of such classes and amount, as the resolution shall prescribe;
consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares;
sub-divide our existing shares, or any of them into shares of a smaller amount, provided that in the subdivision the proportion between the amount
paid and the amount, if any, unpaid on each reduced share shall be the same as it was in case of the share from which the reduced share is derived; or
cancel any shares that, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the amount
of our share capital by the amount of the shares so cancelled.
Our shareholders may, by special resolution and subject to confirmation by the Grand Court of the Cayman Islands on an application by our company for an
order confirming such reduction, reduce our share capital and any capital redemption reserve in any manner authorized by law.
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Issuance of Additional Shares
Our amended and restated memorandum and articles of association authorizes our board of directors to issue additional ordinary shares from time to time as
our board of directors shall determine, to the extent there are available authorized but unissued shares.
Our amended and restated memorandum and articles of association authorizes our board of directors to establish from time to time one or more series of
convertible redeemable preferred shares and to determine, with respect to any series of convertible redeemable preferred shares, the terms and rights of that
series, including:
·
·
·
·
designation of the series;
the number of shares of the series;
the dividend rights, conversion rights and voting rights; and
the rights and terms of redemption and liquidation preferences.
The issuance of convertible redeemable preferred shares may be used as an anti-takeover device without further action on the part of the shareholders.
Issuance of these shares may dilute the voting power of holders of ordinary shares.
Anti-Takeover Provisions
Some provisions of our amended and restated memorandum and articles of association may discourage, delay or prevent a change of control of our company
or management that shareholders may consider favorable, including provisions that:
·
·
authorize our board of directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and
restrictions of such preferred shares without any further vote or action by our shareholders; and
limit the ability of shareholders to requisition and convene general meetings of shareholders.
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our amended and restated memorandum
and articles of association for a proper purpose and for what they believe in good faith to be in the best interests of our company.
See “— H. Documents on Display.”
C.
Material Contracts
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.
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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, or after execution, brought to or
produced before a court in the Cayman Islands.
The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our company. There are no exchange control
regulations or currency restrictions in the Cayman Islands. Payments of dividends and capital in respect of the ordinary shares will not be subject to taxation
in the Cayman Islands and no withholding will be required on the payment of a dividend or capital to any holder of the ordinary shares, nor will gains derived
from the disposal of the ordinary shares be subject to Cayman Islands income or corporation tax.
PRC Taxation
Under the EIT Law and its implementation rules, foreign corporate shareholders and corporate ADSs holders may be subject to a 10% income tax upon the
dividends payable by us or on any gains they realize from the transfer of our shares or ADSs, if we are classified as a PRC resident enterprise and such
income is regarded as income from “sources within the PRC.” Given the fact that whether we would be regarded as “resident enterprise” is not clear, it is
uncertain whether foreign corporate shareholders and corporate ADSs holders may be subject to a 10% income tax upon the dividends payable by us or on
any gains they realize from the transfer of our shares or ADSs. If we are required under the PRC tax law to withhold PRC income tax on our dividends
payable to our non-PRC corporate shareholders and ADS holders or if any gains of the transfer of their shares or ADSs are subject to PRC tax, such holders’
investment in our ADSs or ordinary shares may be materially and adversely affected.
United States Federal Income Taxation
The following is a summary of U.S. federal income tax considerations generally applicable to the ownership and disposition of our ADSs or ordinary shares
by a U.S. Holder (as defined below) that holds our ADSs or ordinary shares as “capital assets” (generally, property held for investment) under the U.S.
Internal Revenue Code of 1986, as amended, or the Code, but it does not purport to be a complete analysis of all potential tax consequences and
considerations. This summary is based upon existing U.S. federal income tax law as of the date hereof, which is subject to differing interpretations or change,
possibly with retroactive effect. This summary does not discuss all aspects of U.S. federal income taxation that may be important to particular holders in light
of their individual circumstances, including holders subject to special tax rules (for example, banks or other financial institutions, insurance companies,
regulated investment companies, real estate investment trusts, cooperatives, pension plans, broker-dealers, partnerships and their partners, and tax-exempt
organizations (including private foundations)), holders who are not U.S. Holders, holders who own (directly, indirectly or constructively) 10% or more of our
stock (by vote or value), holders who acquire their ADSs or ordinary shares pursuant to any employee share option or otherwise as compensation, holders that
hold their ADSs or ordinary shares as part of a straddle, hedge, conversion, constructive sale or other integrated transaction for U.S. federal income tax
purposes, investor required to accelerate the recognition of any item of gross income with respect to our ADSs or ordinary shares as a result of such income
being recognized on an applicable financial statement, traders in securities that have elected the mark-to-market method of accounting for their securities or
holders that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those
summarized below. In addition, this summary does not discuss any alternative minimum tax, state, local, non-U.S. tax or non-income tax (such as the United
States federal gift and estate tax) considerations or the Medicare tax. Each U.S. Holder is urged to consult with its tax advisor regarding the U.S. federal, state,
local, and non-U.S. income and other tax considerations relating to the ownership and disposition of our ADSs or ordinary shares.
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General
For purposes of this summary, a “U.S. Holder” is a beneficial owner of our ADSs or ordinary shares that is, for U.S. federal income tax purposes, (i) an
individual who is a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes)
created in, or organized under the law of, the United States or any state thereof or the District of Columbia, (iii) an estate the income of which is includible in
gross income for U.S. federal income tax purposes regardless of its source, or (iv) a trust (A) the administration of which is subject to the primary supervision
of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (B) that has
otherwise elected to be treated as a United States person.
If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of our ADSs or ordinary shares, the tax
treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships holding our
ADSs or ordinary shares and partners in such partnerships are urged to consult their tax advisors regarding their ownership and disposition of our ADSs or
ordinary shares.
It is generally expected that a U.S. Holder of ADSs should be treated as the beneficial owner, for United States federal income tax purposes, of the underlying
shares represented by the ADSs. The remainder of this discussion assumes that a holder of ADSs will be treated in this manner. Accordingly, deposits or
withdrawals of ordinary shares for ADSs will not be subject to United States federal income tax.
Passive Foreign Investment Company Considerations
Based on the market price of our ADSs and the composition of our assets (in particular, the retention of a large amount of cash), we believe that we were a
PFIC, for United States federal income tax purposes, for the taxable year ended December 31, 2018, and we will very likely be classified as a PFIC for our
current taxable year ending December 31, 2019 unless the market price of our ADSs increases and/or we invest a substantial amount of the cash and other
passive assets we hold in assets that produce or are held for the production of non-passive income. In general, we will be classified as a PFIC for any taxable
year if either (i) 75 percent or more of our gross income for such year is passive income or (ii) 50 percent or more of the average quarterly value of our assets
(as generally determined on the basis of fair market value) produce or are held for the production of passive income. For this purpose, cash and assets readily
convertible into cash are generally classified as passive and goodwill and other unbooked intangibles associated with active business activities may generally
be classified as non-passive. We will be treated as owning a proportionate share of the assets and earning a proportionate share of the income of any other
corporation in which we own, directly or indirectly, 25 percent or more (by value) of the stock. Although the law in this regard is unclear, we treat the VIEs
(and their subsidiaries) as being owned by us for U.S. federal income tax purposes, not only because we exercise effective control over the operations of such
entities but also because we are entitled to substantially all of the economic benefits associated with such entities, and, as a result, we consolidate such
entity’s’ operating results in our consolidated financial statements. Because there are uncertainties in the application of the relevant rules and PFIC status is a
fact-intensive determination made on an annual basis, no assurance can be given with respect to our PFIC status for any taxable year.
If we are classified as a PFIC for any year during which a U.S. Holder holds ADSs or ordinary shares, a U.S. Holder will generally, as discussed below under
“—Passive Foreign Investment Company Rules,” be treated as holding an equity interest in a PFIC in the first taxable year of the U.S. Holder’s holding
period in which we are or become a PFIC and subsequent taxable years (“PFIC-Tainted Shares”) even if, we in fact, cease to be a PFIC in subsequent taxable
years.
Passive Foreign Investment Company Rules
As mentioned above, we believe that we were a PFIC for the taxable year ended December 31, 2018, and we will very likely be classified as a PFIC for our
current taxable year ending December 31, 2019. If we are classified as a PFIC for any taxable year during which a U.S. Holder holds ADSs or ordinary
shares, and unless a mark-to-market election (as described below) is made, a U.S. Holder will generally be subject to special tax rules that have a penalizing
effect, regardless of whether we remain a PFIC, on (i) any excess distribution that we make (which generally means any distribution received in a taxable year
that is greater than 125 percent of the average annual distributions received in the three preceding taxable years or such U.S. Holder’s holding period for the
ADSs or ordinary shares, if shorter), and (ii) any gain realized on the sale or other disposition, including a pledge, of our ADSs or ordinary shares. Under the
PFIC rules:
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·
·
·
·
such excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period for the ADSs or ordinary shares;
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 Capital Market, which is a qualified exchange or other market for these purposes. We anticipate that the ADSs
will be considered regularly traded for so long as they continue to be listed, but no assurance may be given in this regard. If a U.S. Holder makes this election,
such holder will generally (i) include in gross income for each taxable year the excess, if any, of the fair market value of the ADSs at the end of the taxable
year over the adjusted tax basis of the ADSs and (ii) deduct as an ordinary loss the excess, if any, of the adjusted tax basis of the ADSs over the fair market
value of the ADSs at the end of the taxable year, but only to the extent of the amount previously included in income as a result of the mark-to-market election.
The adjusted tax basis in the ADSs would be adjusted to reflect any income or loss resulting from the mark-to-market election. If a mark-to-market election is
made in respect of a corporation classified as a PFIC and such corporation ceases to be classified as a PFIC, a U.S. Holder will generally not be required to
take into account the gain or loss described above during any period that such corporation is not classified as a PFIC. If a mark-to-market election is made,
any gain recognized upon the sale or other disposition of ADSs will be treated as ordinary income and any loss will be treated as ordinary loss, but such loss
will only be treated as ordinary to the extent of the net amount previously included in income as a result of the mark-to-market election. In the case of a U.S.
Holder who has held ADSs during any taxable year in which we are classified as PFIC and continues to hold such ADSs (or any portion thereof), and who is
considering making a mark-to-market election, special tax rules may apply relating to purging the PFIC taint of such ADSs. If a U.S. Holder makes a mark-
to-market election, the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions, except that the reduced tax rate
applicable to qualified dividend income (as discussed below in “ –Dividends”) would not apply.
Because a mark-to-market election cannot be made for any lower-tier PFICs that we may own, a U.S. Holder may continue to be subject to the PFIC rules
with respect to such U.S. Holder’s indirect interest in any investment held by us that is treated as an equity interest in a PFIC for United States federal income
tax purposes.
We do not intend to provide the U.S. Holders with the information necessary to permit U.S. Holders to make qualified electing fund elections, which, if
available, would result in tax treatment different from (and generally less adverse than) the general tax treatment for PFICs described above.
If a U.S. Holder owns our ADSs or ordinary shares during any taxable year that we are a PFIC, the holder must generally file an annual IRS Form 8621. Each
U.S. Holder is urged to consult its tax advisor concerning the United States federal income tax consequences of holding and disposing ADSs or ordinary
shares if we are or become a PFIC, including the possibility of making a mark-to-market election, the “deemed sale” and “deemed dividend” elections.
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Dividends
Subject to the PFIC rules discussed above, any cash distributions (including the amount of any taxes withheld) paid on our ADSs or ordinary shares out of our
current or accumulated earnings and profits, as determined under U.S. federal income tax principles, will generally be includible in the gross income of a U.S.
Holder as dividend income on the day actually or constructively received by the U.S. Holder, in the case of ordinary shares, or by the depositary, in the case
of ADSs. Because we do not intend to determine our earnings and profits on the basis of U.S. federal income tax principles, any distribution paid will
generally be reported as a “dividend” for U.S. federal income tax purposes. A non-corporate recipient of dividend income generally will be subject to tax on
dividend income from a “qualified foreign corporation” at a reduced U.S. federal tax rate rather than the marginal tax rates generally applicable to ordinary
income provided that certain holding period requirements are met.
A non-United States corporation (other than a corporation that is classified as a PFIC for the taxable year in which the dividend is paid or the preceding
taxable year) generally will be considered to be a qualified foreign corporation with respect to any dividend it pays on stock (or ADSs in respect of such
stock) which is readily tradable on an established securities market in the United States or, in the event that the company is deemed to be a PRC resident
under the PRC Enterprise Income Tax Law, the company is eligible for the benefits of the United States-PRC treaty.
Dividends received on the ADSs or ordinary shares are not expected to be eligible for the dividends received deduction allowed to corporations.
Although the ADSs are currently tradable on the Nasdaq Capital Market, which is an established securities market in the United States, and thus we anticipate
they will be considered readily tradable on an established securities market in the United States for purposes of the reduced tax rate, no assurance may be
given in this regard. Furthermore, as mentioned above, we believe that we were a PFIC for the taxable year ended December 31, 2018, and we will very likely
be classified as a PFIC for our current taxable year ending December 31, 2019. Each U.S. Holder is advised to consult its tax advisor regarding the rate of tax
that will apply to such holder with respect to, dividend distributions, if any, received from us.
Dividends paid on our ADSs or ordinary shares generally will be treated as income from foreign sources for United States foreign tax credit purposes and
generally will constitute passive category income. A U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in
respect of any foreign withholding taxes imposed on dividends received on our ADSs or ordinary shares. A U.S. Holder who does not elect to claim a foreign
tax credit for foreign tax withheld, may instead claim a deduction, for U.S. federal income tax purposes, in respect of such withholdings, but only for a year in
which such holder elects to do so for all creditable foreign income taxes. The rules governing the foreign tax credit are complex. Each U.S. Holder is advised
to consult its tax advisor regarding the availability of the foreign tax credit under their particular circumstances.
Sale or Other Disposition of ADSs or Ordinary Shares
Subject to the PFIC rules discussed above, a U.S. Holder generally will recognize capital gain or loss upon the sale or other disposition of ADSs or ordinary
shares in an amount equal to the difference between the amount realized upon the disposition and the holder’s adjusted tax basis in such ADSs or ordinary
shares. Any capital gain or loss will be long-term if the ADSs or ordinary shares have been held for more than one year and will generally be United States
source gain or loss for United States foreign tax credit purposes. The deductibility of a capital loss is subject to limitations. Each U.S. Holder is advised to
consult with its tax advisor regarding the tax consequences if a foreign withholding tax is imposed on a disposition of our ADSs or ordinary shares, including
the availability of the foreign tax credit under their particular circumstances.
F.
Dividends and Paying Agents
Not applicable.
G.
Statement by Expert
Not applicable.
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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 $0.1
million in our interest income for the year ended December 31, 2018.
Foreign Exchange Risk
Our financial statements are expressed in U.S. dollars, which is our reporting and functional currency. However, substantially all of the revenues and expenses
of our consolidated operating subsidiaries and affiliate entities are denominated in RMB. Substantially all of our sales contracts are denominated in RMB and
substantially all of our costs and expenses are denominated in RMB. We have not had any material foreign exchange gains or losses. Although in general, our
exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the foreign exchange rate between U.S.
dollars and RMB because the value of the business of our operating subsidiaries and VIEs is effectively denominated in RMB, while the ADSs are traded in
U.S. dollars.
The conversion of RMB into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The PRC government allowed the
RMB to appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted
and the exchange rate between RMB and the U.S. dollar remained within a narrow band. As a consequence, the RMB fluctuated significantly during that
period against other freely traded currencies, in tandem with the U.S. dollar. Since June 2010, the PRC government has allowed the RMB to appreciate slowly
against the U.S. dollar again. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB
and the U.S. dollar in the future. We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk.
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To the extent that we need to convert our U.S. dollar-denominated assets into RMB for our operations, appreciation of the RMB against the U.S. dollar would
have an adverse effect on RMB amount we receive from the conversion. A hypothetical 10% decrease in the exchange rate of the U.S. dollar against RMB
would have resulted in a decrease of $0.2 million in the value of our U.S. dollar-denominated financial assets at December 31, 2018. 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.
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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
Taxes and other governmental charges the depositary or the custodian have to
pay on any ADS or share underlying an ADS, for example, stock transfer
taxes, stamp duty or withholding taxes
As necessary
Any charges incurred by the depositary or its agents for servicing the
deposited securities
As necessary
Fees and Other Payments Made by the Depositary to Us
The depositary has agreed to reimburse us annually for our expenses incurred in connection with investor relationship programs and any other program
related to our ADS facility and the travel expense of our key personnel in connection with such programs. The depositary has also agreed to provide
additional payments to us based on the applicable performance indicators relating to our ADS facility. There are limits on the amount of expenses for which
the depositary will reimburse us, but the amount of reimbursement available to us is not necessarily tied to the amount of fees the depositary collects from
investors. We recognize the reimbursable amounts in other income on our consolidated statements of operations on a straight-line basis over the contract term
with the depositary. For the year ended December 31, 2018, we received nil from the depositary as reimbursement for our expenses incurred.
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, 2018, the net proceeds from our initial public offering have been used up as follows:
·
·
approximately $122.4 million for the purchase of digital displays and other equipment and the construction of gas station media platforms;
approximately $24.8 million for share repurchases; and
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·
·
approximately $10.1 million for the purchase of long-term investments.
approximately $29.7 million for business acquisition and the purchase of intangible assets.
ITEM 15.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by
Rule 13a-15(b) under the Exchange Act.
Based upon that evaluation, our management, with the participation of our chief executive officer and chief financial officer, has concluded that, due to the
material weakness described below, as of December 31, 2018, our disclosure controls and procedures were not effective in ensuring that the information
required to be disclosed by us in the reports that we file and furnish under the Exchange Act was recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in the reports that we file or submit under the
Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with generally accepted accounting
principles in the United States of America (“U.S. GAAP”). Internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally
accepted accounting principles, and that a company’s receipts and expenditures are being made only in accordance with authorizations of a company’s
management and directors and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of a
company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules promulgated by the Securities and Exchange Commission, our management,
including our chief executive officer and chief financial officer, assessed the effectiveness of internal control over financial reporting as of December 31, 2018
using the criteria set forth in the report “Internal Control — Integrated Framework (2013)” published by the Committee of Sponsoring Organizations of the
Treadway Commission (known as COSO).
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
The following material weakness in internal control over financial reporting has been identified as of December 31, 2018. The material weaknesses as of
December 31, 2018 were related to a) the weak operating effectiveness and lack of monitoring of controls over financial reporting due to inadequate resources
or resources with insufficient experience or training in our financial reporting team, internal control team, administration team and human resource team, and
b) lack of internal controls over risk assessments related to third party borrowings resulting in material losses from loans to third parties.
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Because of the material weakness described above, our management has concluded that we had not maintain effective internal control over financial reporting
as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
Internal Control over Financial Reporting
This annual report does not include an attestation report of our company’s registered public accounting firm as we are a non-accelerated filer as defined in
Rule 12b-2 of the Exchange Act.
Changes in Internal Control over Financial Reporting
In preparing our consolidated financial statements, we identified a material weakness in our internal control over financial reporting as of December 31, 2018.
As defined in standards established by the PCAOB, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected
on a timely basis.
The material weakness identified was related to a) the weak operating effectiveness and lack of monitoring of controls over financial reporting due to
inadequate resources or resources with insufficient experience or training in our financial reporting team, internal control team, administration team and
human resource team, and b) lack of internal controls over risk assessments related to third party borrowings resulting in material losses from loans to third
parties.
To remediate our identified material weakness, significant deficiency and other control deficiencies in connection with preparation of our consolidated
financial statements, we plan to adopt several measures to improve our internal control over financial reporting. For example, during the reporting period, we
obtained support from an external consultant firm with experienced staff to assist us in the preparation of the financial statements for the year ended
December 31, 2018. The consultant firm is well-known in China and many staff hold the AICPA license with a solid understanding of U.S. GAAP. In order to
meet the requirements of internal audit, we outsourced this function department to a professional consulting company with related industry experience and it
delivered the work on time.
Other than as described above, no changes in our internal controls over financial reporting occurred during the period covered by this annual report that have
materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that each of Songzuo Xiang and Conor Chia-hung Yang, members of our audit committee, is an audit committee
financial expert. Each of Songzuo Xiang and Conor Chia-hung Yang is an independent director as defined by the rules and regulations of the Nasdaq Stock
Market LLC and under Rule 10A-3 under the Exchange Act.
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.
91
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Marcum Bernstein
& Pinchuk LLP, our current principal external auditors, for the periods indicated. We did not pay any other fees to our auditors during the periods indicated
below.
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
TOTAL
Fiscal Year Ended December 31,
2017
2018
$
$
670,153 $
—
—
—
670,153 $
754,129
—
—
—
754,129
“Audit Fees” consisted of the aggregate fees billed for professional services rendered for the audit of our annual financial statements or quarterly review
services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.
“Audit Related Fees” consisted of the aggregate fees billed for professional services rendered for assurance and related services that were reasonably related
to the performance of the audit or review of our regulatory filings and were not otherwise included in Audit Fees.
“Tax Fees” consisted of the aggregate fees billed for professional services rendered for tax compliance, tax advice and tax planning. Included in such Tax
Fees were fees for preparation of our tax returns and consultancy and advice on other tax planning matters.
“All Other Fees” consisted of the aggregate fees billed for products and services provided and not otherwise included in Audit Fees, Audit Related Fees or
Tax Fees.
The policy of our audit committee is to pre-approve all audit and non-audit services provided by our external auditors, including audit services, audit-related
services, tax services and other services as described above, other than those for de minimus services which are approved by the audit committee prior to the
completion of the audit.
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
We have not asked for, nor have we been granted, an exemption from the applicable listing standards for our audit committee.
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
We announced on March 28, 2018 and further updated on September 28, 2018 that Mr. Herman Man Guo intended to purchase AirMedia’s ordinary shares in
the form of ADSs with an aggregate value of up to $5 million. As of the date of this annual report, Mr. Herman Man Guo acquired, an aggregate of 344,984
ADSs, representing 3,449,844 ordinary shares of us.
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Effective from March 3, 2017, we engaged Marcum Bernstein & Pinchuk LLP as our independent registered public accounting firm. We also dismissed
Deloitte on the same date. The decision was not made due to any disagreements with Deloitte. The change of our independent registered public accounting
firm was approved by the audit committee of our board on March 3, 2017.
Other than an adverse opinion on our internal control over financial reporting due to a material weakness for the fiscal year ended December 31, 2015,
Deloitte’s audit reports on our consolidated financial statements as of December 31, 2015 and 2014 and for each of the years ended December 31, 2015, 2014
and 2013 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting
principles.
92
During each of the years ended December 31, 2015, 2014 and 2013 and the subsequent interim period through March 3, 2017, there were (i) no disagreements
between us and Deloitte on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, any of which, if
not resolved to Deloitte’s satisfaction, would have caused Deloitte to make reference thereto in their reports, and (ii) no “reportable events” requiring
disclosure pursuant to Item 16F(a)(1)(v) of the instructions to Form 20-F in connection with our annual report on Form 20-F.
We provided Deloitte with a copy of the disclosures under this Item 16F and requested from Deloitte a letter addressed to the Securities and Exchange
Commission indicating whether it agrees with such disclosures. A copy of Deloitte’s letter dated April 30, 2019 is attached as Exhibit 16.1.
During each of the years ended December 31, 2015, 2014 and 2013 and the subsequent interim period through March 3, 2017, neither we nor anyone on
behalf of us has consulted with Marcum Bernstein & Pinchuk LLP regarding (i) the application of accounting principles to a specific transaction, either
completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, and neither a written report nor oral
advice was provided to us that Marcum Bernstein & Pinchuk LLP concluded was an important factor considered by us in reaching a decision as to any
accounting, auditing, or financial reporting issue, (ii) any matter that was the subject of a disagreement pursuant to Item 16F(a)(1)(iv) of the instructions to
Form 20-F, or (iii) any reportable event pursuant to Item 16F(a)(1)(v) of the instructions to Form 20-F.
ITEM 16G.
CORPORATE GOVERNANCE
The Nasdaq Stock Market rules require each issuer to hold an annual meeting of shareholders no later than one year after the end of the issuer’s fiscal year
end. They also require each issuer to seek shareholder approval for any establishment of or material amendment to the issuer’s equity compensation plans,
including any amendment effecting a repricing of outstanding options or increasing the amount of shares authorized under such plans. However, the rules
permit foreign private issuers like us to follow “home country practice” in certain corporate governance matters.
Maples and Calder (Hong Kong) LLP, our Cayman Islands counsel, has provided a letter to the Nasdaq Stock Market certifying that under Cayman Islands
law, we are not required to hold annual shareholder meetings. We held annual meetings in 2013. No annual meeting was held in 2014, 2015, 2016, 2017 and
2018. We may hold additional annual shareholder meetings in the future if there are significant issues that require shareholder approval.
Maples and Calder (Hong Kong) LLP has also provided letters to the Nasdaq Stock Market certifying that under Cayman Islands law, we are not required to
seek shareholder approval for the establishment of or any material amendments to our equity compensation plans. In 2008, we followed home country
practice with respect to our 2007 Option Plan by amending it to permit repricings of options without seeking shareholder approval. In 2011, we followed
home country practice with respect to our 2011 Option Plan by establishing it without seeking shareholder approval.
We have relied on and intend to continue to rely on the above home country practices under Cayman Islands law. Other than the above, we have followed and
intend to continue to follow the applicable corporate governance standards under the rules and regulations of the Nasdaq Stock Market.
ITEM 16H.
MINE SAFETY DISCLOSURE
Not applicable.
ITEM 17.
FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
PART III
93
ITEM 18.
FINANCIAL STATEMENTS
The full text of our audited consolidated financial statements begins on page F-2 of this annual report.
ITEM 19.
EXHIBITS
Exhibit
No.
Description
1.1
1.2
2.1
2.2
2.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
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 Amended and Restated Deposit Agreement among the Company, the depositary and holder of the American Depositary
Receipts (incorporated by reference to Exhibit 99-a to Post-effective Amendment No. 1 to the Registration Statement on Form F-6 (File
No. 333- 146908), filed with the SEC on March 29, 2019)
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)
2011 Share Incentive Plan (incorporated by reference to Exhibit 4.49 to Annual Report on Form 20-F filed on April 30, 2012)
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)
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.
(now known as Beijing Linghang Shengshi Advertising Co., Ltd.) and AirTV United Media & Culture Co., Ltd. (incorporated by
reference to Exhibit 10.9 to Registration Statement on Form F-1 (File No. 333-146825), as amended, initially filed on October 19,
2007)
94
Exhibit
No.
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
Description
English Translation of Amended Power of Attorneys dated November 28, 2008 from each of the shareholders of Beijing Shengshi
Lianhe Advertising Co., Ltd. (now known as Beijing Linghang Shengshi Advertising Co., Ltd.) (incorporated by reference to Exhibit
4.11 to Annual Report on Form 20-F filed on April 28, 2009)
English Translation of Amended and Restated Technology Development Agreement dated June 14, 2007 between AirMedia
Technology (Beijing) Co., Ltd. and Beijing Shengshi Lianhe Advertising Co., Ltd. (now known as Beijing Linghang Shengshi
Advertising Co., Ltd.) (incorporated by reference to Exhibit 10.12 to Registration Statement on Form F-1 (File No. 333- 146825), as
amended, initially filed on October 19, 2007)
English Translation of Supplementary Agreement dated November 30, 2007 to the Amended and Restated Technology Development
Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing Shengshi Lianhe Advertising Co., Ltd.
(now known as Beijing Linghang Shengshi Advertising Co., Ltd.) (incorporated by reference to Exhibit 10.1 to Annual Report on Form
20-F filed on April 30, 2008)
English Translation of Amended and Restated Technology Support and Service Agreement dated June 14, 2007 between AirMedia
Technology (Beijing) Co., Ltd. and Beijing Shengshi Lianhe Advertising Co., Ltd. (now known as Beijing Linghang Shengshi
Advertising Co., Ltd.) (incorporated by reference to Exhibit 10.13 to Registration Statement on Form F-1 (File No. 333- 146825), as
amended, initially filed on October 19, 2007)
English Translation of Supplementary Agreement dated November 30, 2007 to the Amended and Restated Technology Support and
Service Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing Shengshi Lianhe Advertising
Co., Ltd. (now known as Beijing Linghang Shengshi Advertising Co., Ltd.) (incorporated by reference to Exhibit 10.2 to Annual
Report on Form 20-F filed on April 30, 2008)
English Translation of Amended and Restated Equity Pledge Agreement dated June 14, 2007 among AirMedia Technology (Beijing)
Co., Ltd., Beijing Shengshi Lianhe Advertising Co., Ltd. (now known as Beijing Linghang Shengshi Advertising Co., Ltd.) and the
shareholders of Beijing Shengshi Lianhe Advertising Co., Ltd. (incorporated by reference to Exhibit 10.14 to Registration Statement on
Form F-1 (File No. 333-146825), as amended, initially filed on October 19, 2007)
English Translation of Supplementary Agreement dated November 28, 2008 to the Amended and Restated Equity Pledge Agreement
dated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing Shengshi Lianhe Advertising Co., Ltd. (now known as
Beijing Linghang Shengshi Advertising Co., Ltd.) and the shareholders of Beijing Shengshi Lianhe Advertising Co., Ltd. (incorporated
by reference to Exhibit 4.17 to Annual Report on Form 20-F filed on April 28, 2009)
English Translation of Amended and Restated Call Option Agreement dated June 14, 2007 among AirMedia Technology (Beijing) Co.,
Ltd., Beijing Shengshi Lianhe Advertising Co., Ltd. (now known as Beijing Linghang Shengshi Advertising Co., Ltd.) and the
shareholders of Beijing Shengshi Lianhe Advertising Co., Ltd. (incorporated by reference to Exhibit 10.15 to Registration Statement on
Form F-1 (File No. 333-146825), as amended, initially filed on October 19, 2007)
95
Exhibit
No.
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
Description
English Translation of Supplementary Agreement dated November 28, 2008 to the Amended and Restated Call Option Agreement
dated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing Shengshi Lianhe Advertising Co., Ltd. (now known as
Beijing Linghang Shengshi Advertising Co., Ltd.) and the shareholders of Beijing Shengshi Lianhe Advertising Co., Ltd. (incorporated
by reference to Exhibit 4.19 to Annual Report on Form 20-F filed on April 28, 2009)
English Translation of Amended Power of Attorneys dated November 28, 2008 from the shareholders of Beijing AirMedia UC
Advertising Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd. ) (incorporated by reference to Exhibit 4.32 to
Annual Report on Form 20-F filed on April 28, 2009)
English Translation of Technology Development Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd.
and Beijing AirMedia UC Advertising Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd. ) (incorporated by
reference to Exhibit 10.22 to Registration Statement on Form F-1 (File No. 333-146825), as amended, initially filed on October 19,
2007)
English Translation of Supplementary Agreement dated November 30, 2007 to the Amended and Restated Technology Development
Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing AirMedia UC Advertising Co., Ltd.
(now known as Beijing AirMedia Jiaming Advertising Co., Ltd. ) (incorporated by reference to Exhibit 10.5 to Annual Report on Form
20-F filed on April 30, 2008)
English Translation of Technology Support and Service Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co.,
Ltd. and Beijing AirMedia UC Advertising Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd. ) (incorporated by
reference to Exhibit 10.23 to Registration Statement on Form F-1 (File No. 333- 146825), as amended, initially filed on October 19,
2007)
English Translation of Supplementary Agreement dated November 30, 2007 to the Amended and Restated Technology Support and
Service Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing AirMedia UC Advertising Co.,
Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd. ) (incorporated by reference to Exhibit 10.6 to Annual Report on
Form 20-F filed on April 30, 2008)
English Translation of Equity Pledge Agreement dated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing
AirMedia UC Advertising Co., Ltd. and the shareholders of Beijing AirMedia UC Advertising Co., Ltd. (now known as Beijing
AirMedia Jiaming Advertising Co., Ltd. ) (incorporated by reference to Exhibit 10.24 to Registration Statement on Form F-1 (File No.
333-146825), as amended, initially filed on October 19, 2007)
English Translation of Supplementary Agreement dated November 28, 2008 to the Equity Pledge Agreement dated June 14, 2007
among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia UC Advertising Co., Ltd. and the shareholders of Beijing AirMedia
UC Advertising Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd. ) (incorporated by reference to Exhibit 4.38
to Annual Report on Form 20-F filed on April 28, 2009)
96
Exhibit
No.
4.24
4.25
4.26
4.27
4.28
4.29
4.30
4.31
4.32
4.33
Description
English Translation of Call Option Agreement dated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia
UC Advertising Co., Ltd. and the shareholders of Beijing AirMedia UC Advertising Co., Ltd. (now known as Beijing AirMedia
Jiaming Advertising Co., Ltd.) (incorporated by reference to Exhibit 10.25 to Registration Statement on Form F-1 (File No. 333-
146825), as amended, initially filed on October 19, 2007)
English Translation of Supplementary Agreement dated November 28, 2008 to the Call Option Agreement dated June 14, 2007 among
AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia UC Advertising Co., Ltd. and the shareholders of Beijing AirMedia UC
Advertising Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd. ) (incorporated by reference to Exhibit 4.40 to
Annual Report on Form 20-F filed on April 28, 2009)
English Translation of Supplementary Agreement No. 2 to Call Option Agreement dated May 27, 2010 among AirMedia Technology
(Beijing) Co., Ltd., Beijing AirMedia UC Advertising Co., Ltd. and the shareholders of Beijing AirMedia UC Advertising Co., Ltd.
(now known as Beijing AirMedia Jiaming Advertising Co., Ltd.) (incorporated by reference to Exhibit 4.45 to Annual Report on Form
20-F filed on May 28, 2010)
English Translation of Supplementary Agreement dated October 31, 2008 among AirMedia Technology (Beijing) Co., Ltd. and the
shareholders of Beijing AirMedia UC Advertising Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd.),
supplementing the original Loan Agreement dated January 1, 2007 (incorporated by reference to Exhibit 4.41 to Annual Report on
Form 20-F filed on April 28, 2009)
English Translation of Supplementary Agreement No. 2 to the Equity Pledge Agreement dated May 27, 2010 among AirMedia
Technology (Beijing) Co., Ltd., Beijing AirMedia UC Advertising Co., Ltd. and the shareholders of Beijing AirMedia UC Advertising
Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd. ) (incorporated by reference to Exhibit 4.46 to Annual Report
on Form 20-F filed on May 28, 2010)
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)
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)
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)
97
Exhibit
No.
4.34
4.35
4.36
4.37
4.38
4.39
4.40
4.41
4.42
4.43
4.44
Description
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)
English summary of Investment Agreement, dated May 12, 2013, by and among Elec-Tech International Co., Ltd., Beijing AirMedia
UC Advertising Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd. ) and Beijing Zhongshi Aoyou Advertising
Co., Ltd. (incorporated by reference to Exhibit 4.50 to Annual Report on Form 20-F filed on April 25, 2014)
English summary of Cooperation Agreement for the Establishment of Advertising Company, dated May 2013, by and between Beijing
Shengshi Lianhe Advertising Co., Ltd. (now known as Beijing Linghang Shengshi Advertising Co., Ltd.), and Guangzhou Daozheng
Advertising Co., Ltd. (incorporated by reference to Exhibit 4.51 to Annual Report on Form 20-F filed on April 25, 2014)
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)
Agreement and Plan of Merger, dated as of September 29, 2015, by and among the Registrant, AirMedia Holdings Ltd. and AirMedia
Merger Company Limited (incorporated herein by reference to Exhibit 99.2 of our current report on Form 6-K filed with the
Commission on September 30, 2015).
English translation of Equity Interest Transfer Agreement in respect of AirMedia Group Co., Ltd., dated June 15, 2015, by and among
AirMedia Group Inc., AirMedia Technology (Beijing) Co., Ltd, Beijing Linghang Shengshi Advertising Co., Ltd., Man Guo and
Beijing Longde Wenchuang Investment Fund Management Company. (incorporated by reference to Exhibit 4.39 to Annual Report on
Form 20-F filed on May 16, 2016)
English translation of Supplement Agreement of Equity Transfer, dated November 30, 2015, by and among AirMedia Group Inc.,
AirMedia Technology (Beijing) Co., Ltd, Beijing Linghang Shengshi Advertising Co., Ltd., Man Guo and Beijing Longde Wenchuang
Investment Fund Management Company. (incorporated by reference to Exhibit 4.40 to Annual Report on Form 20-F filed on May 16,
2016)
English translation of Exclusive Technology Consulting and Service Agreement, dated June 5, 2015, by and between AirMedia
Technology (Beijing) Co., Ltd. and AirMedia Online Network Technology Co., Ltd. (incorporated by reference to Exhibit 4.41 to
Annual Report on Form 20-F filed on May 16, 2016)
English translation of Technology Development Agreement, dated June 5, 2015, by and between AirMedia Technology (Beijing) Co.,
Ltd. and AirMedia Online Network Technology Co., Ltd. (incorporated by reference to Exhibit 4.42 to Annual Report on Form 20-F
filed on May 16, 2016)
English translation of Technology Support and Service Agreement, dated June 5, 2015, by and between AirMedia Technology (Beijing)
Co., Ltd. and AirMedia Online Network Technology Co., Ltd. (incorporated by reference to Exhibit 4.43 to Annual Report on Form 20-
F filed on May 16, 2016)
English translation of Loan Agreements, dated June 5, 2015, by and between AirMedia Technology (Beijing) Co., Ltd. and each
shareholder of AirMedia Online Network Technology Co., Ltd. (except Yi Zhang) (incorporated by reference to Exhibit 4.44 to Annual
Report on Form 20-F filed on May 16, 2016)
98
Exhibit
No.
4.45
4.46
4.47
4.48
4.49
4.50
4.51
4.52
4.53
Description
English translation of Exclusive Call Option Agreement, dated June 5, 2015, by and between AirMedia Technology (Beijing) Co., Ltd.,
AirMedia Online Network Technology Co., Ltd. and each shareholder of AirMedia Online Network Technology Co., Ltd. (except Yi
Zhang) (incorporated by reference to Exhibit 4.45 to Annual Report on Form 20-F filed on May 16, 2016)
English translation of Power of Attorney, dated June 5, 2015, by each shareholder of AirMedia Online Network Technology Co., Ltd.
(except Yi Zhang) (incorporated by reference to Exhibit 4.46 to Annual Report on Form 20-F filed on May 16, 2016)
English translation of Equity Pledge Agreements, dated June 5, 2015, by and among AirMedia Technology (Beijing) Co., Ltd.,
AirMedia Online Network Technology Co., Ltd. and each shareholder of AirMedia Online Network Technology Co., Ltd. (except Yi
Zhang) (incorporated by reference to Exhibit 4.47 to Annual Report on Form 20-F filed on May 16, 2016)
English translation of Supplement Agreement in respect of the Related Agreement Arrangement of Beijing Linghang Shengshi
Advertising Co., Ltd., dated January 21, 2016, by and among AirMedia Technology (Beijing) Co., Ltd., Man Guo and Qing Xu
(incorporated by reference to Exhibit 4.48 to Annual Report on Form 20-F filed on May 16, 2016)
English translation of Supplement Agreement in respect of the Related Agreement Arrangement of Beijing AirMedia Jiaming
Advertising Co., Ltd., dated January 21, 2016, by and among AirMedia Technology (Beijing) Co., Ltd., Man Guo and Qing Xu
(incorporated by reference to Exhibit 4.49 to Annual Report on Form 20-F filed on May 16, 2016)
English translation of Supplement Agreement in respect of the Related Agreement Arrangement of AirMedia Online Network
Technology Co., Ltd., dated March 15, 2016, by and among AirMedia Technology (Beijing) Co., Ltd., Man Guo, Qing Xu and Tao
Hong (incorporated by reference to Exhibit 4.50 to Annual Report on Form 20-F filed on May 16, 2016)
English translation of Capital Contribution Agreement for the Establishment of Unicom AirNet (Beijing) Network Co. Ltd. by and
among AirMedia Online Network Technology Co., Ltd., Unicom Boardband Online Co., Ltd. and Chengdu Haite Kairong Aeronautical
Technology Co., Ltd. (incorporated by reference to Exhibit 4.51 to Annual Report on Form 20-F filed on June 28, 2017)
English translation of Memorandum on Subsequent Performance of AirMedia Group Co., Ltd. Equity Transfer Agreement and
Supplementary Agreement, dated March 28, 2018, by and among AirMedia Group Inc., AirMedia Technology (Beijing) Co., Ltd.,
Beijing Linghang Shengshi Advertising Co., Ltd., Mr. Herman Man Guo, Mr. Qing Xu, Beijing Longde Wenchuang Investment Fund
Management Co., Ltd., Beijing Cultural Center Construction and Development Fund (Limited Partnership) and AirMedia Group Co.,
Ltd. (incorporated by reference to Exhibit 99.1 to Form 6-K (File No. 001-33765) filed on March 29, 2018)
English translation of Supplementary Agreement for the Memorandum Regarding Continued Implementation of the Agreement on
Equity Transfer of AirMedia Group Co., Ltd. and its Supplementary Agreement, dated August 23, 2018, by and among AirMedia
Group Inc., Hangmei United Media Technology (Beijing) Co., Ltd., Beijing Hangmei Shengshi Advertising Co., Ltd., Mr. Herman Man
Guo, Mr. Qing Xu, Beijing Longde Wenchuang Investment Fund Management Co., Ltd., Beijing Cultural Center Development Fund
(Limited Partnership) and AirMedia Group Co., Ltd. (incorporated by reference to Exhibit 4.53 to Annual Report on Form 20-F filed
on October 17, 2018)
99
Exhibit
No.
4.54
4.55*
8.1*
11.1
12.1*
12.2*
13.1**
13.2**
15.1*
15.2*
15.3*
16.1*
Description
English translation of equity transfer agreement in respect of Airmedia Group Co., Ltd., dated November 5, 2018, by and among
Beijing Linghang Shengshi Advertising Co.,Ltd., Guo Man, Xu Qing, and Jiangsu Hongzhou Investment Co., Ltd. (incorporated by
reference to Exhibit 99.2 to Form 6-K (File No. 001-33765) filed on November 7, 2018)
English translation of Supplementary Agreement for the Memorandum Regarding Continued Implementation of the Agreement on
Equity Transfer of AirMedia Group Co., Ltd. and its Supplementary Agreement, dated November 2018, by and among AirMedia Group
Inc., Hangmei United Media Technology (Beijing) Co., Ltd., Beijing Hangmei Shengshi Advertising Co., Ltd., Mr. Herman Man Guo,
Mr. Qing Xu, Beijing Longde Wenchuang Investment Fund Management Co., Ltd., Beijing Cultural Center Development Fund
(Limited Partnership) and AirMedia Group Co., Ltd.
List of the Registrant’s subsidiaries
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)
Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certifications by Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certifications by Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Consent of Marcum Bernstein & Pinchuk LLP
Consent of Commerce & Finance Law Offices
Consent of Maples and Calder (Hong Kong) LLP
Letter from Deloitte Touche Tohmatsu Certified Public Accountants LLP to the Securities and Exchange Commission
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
*
Filed herewith
** Furnished with this annual report on Form 20-F
100
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
Date: April 30, 2019
AIRMEDIA GROUP INC.
SIGNATURE
/s/ Herman Man Guo
Herman Man Guo
Chairman and Chief Executive Officer
101
AIRMEDIA GROUP INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2017 AND 2018
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
PAGE(S)
F-1
F-2
F-4
F-5
F-6
F-7
F-8~F-58
F-59~F-64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
AirMedia Group Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AirMedia Group Inc. (the “Company”) as of December 31, 2018 and 2017, the related
consolidated statements of operations, comprehensive loss, changes in equity and cash flows for each of the three years in the period ended December 31,
2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully
described in Note 2(b), the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet
its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2(b). The consolidated financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Marcum Bernstein & Pinchuk LLP
Marcum Bernstein & Pinchuk LLP
We have served as the Company’s auditor since 2017.
New York, New York
April 30, 2019
F-1
AIRMEDIA GROUP INC.
CONSOLIDATED BALANCE SHEETS
(In U.S. dollars in thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Prepaid concession fees
Other current assets, net
Amount due from related parties
Total current assets
Property and equipment, net
Prepaid equipment costs
Long-term investments
Long-term deposits
Other non-current assets
TOTAL ASSETS
Liabilities
Current liabilities:
Short-term loan
Accounts payable
Accrued expenses and other current liabilities
Deferred revenue
Consideration received from buyer
Payable of earnout commitment
Income tax payable
Total current liabilities
Non-current liabilities:
Long-term loan
Other non-current liabilities
Provision for earnout commitment
Total liabilities
F-2
$
$
$
As of December 31,
2017
2018
15,355 $
3,117
10,980
7,064
59,825
2,251
98,592
15,442
290
102,434
6,039
2,205
225,002 $
- $
48,545
12,236
1,337
-
-
13,677
75,795
-
398
25,130
101,323
15,536
3
7,938
1,813
41,057
18
66,365
13,466
2,364
46,271
1,350
-
129,816
6,109
39,304
9,758
1,995
21,817
22,188
11,483
112,654
2,763
-
-
115,417
AIRMEDIA GROUP INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
(I n U.S. dollars in thousands, except share and per share data)
Equity
Ordinary shares ($0.001 par value; 900,000,000 shares authorized in 2017 and 2018; 127,662,057 shares and
127,697,055 shares issued as of December 31, 2017 and 2018, respectively; 125,629,779 shares and 125,664,777
shares outstanding as of December 31, 2017 and 2018, respectively)
Additional paid-in capital
Treasury stock (2,032,278 and 2,032,278 shares as of December 31, 2017 and 2018, respectively)
Accumulated deficits
Accumulated other comprehensive income
Total AirMedia Group Inc.'s shareholders' equity
Non-controlling interests
Total equity
TOTAL LIABILITIES AND EQUITY
As of December 31,
2017
2018
128
286,739
(2,351)
(172,318)
35,451
147,649
(23,970)
123,679
128
284,726
(2,351)
(262,415)
31,311
51,399
(37,000)
14,399
$
225,002 $
129,816
The accompanying notes are an integral part of these consolidated financial statements.
F-3
AIRMEDIA GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In U.S. dollars in thousands, except share and per share data)
For the years ended December 31,
2017
2016
2018
Revenues
Business tax and other sales tax
Net revenues
Less: Cost of revenues
Gross loss
Operating expenses:
Selling and marketing
General and administrative
Impairment of fixed assets, prepaid equipment cost and intangible assets
Total operating expenses
Loss from operations
Other income (expenses):
Interest income (expense), net
Loss from and impairment on long-term investments
Other income, net
Total other income (expense)
Loss before income tax
Income tax expense
Net loss
Less: Net loss attributable to non-controlling interests
Net loss attributable to AirMedia Group Inc.'s shareholders
Net loss per ordinary share
Basic and diluted
Net loss per ADS
Basic and diluted.
$
$
$
$
16,597 $
(84)
16,513
49,042
(32,529)
12,056
44,401
826
57,283
24,328 $
(569)
23,759
58,967
(35,208)
12,747
63,507
67,342
143,596
24,776
(230)
24,546
32,630
(8,084)
7,492
32,612
564
40,668
(89,812)
(178,804)
(48,752)
843
(33)
4,243
5,053
(84,759)
4,483
(89,242)
(23,617)
(65,625) $
2,645
(2,603)
214
256
(178,548)
633
(179,181)
(22,705)
(156,476) $
(106)
(52,337)
7,926
(44,517)
(93,269)
150
(93,419)
(3,322)
(90,097)
(0.52) $
(1.25) $
(0.72)
(5.24) $
(12.46) $
(7.17)
Weighted average shares used in calculating net loss per ordinary share
Basic and diluted
Weighted average ADS used in calculating net loss per ADS
Basic and diluted
125,277,056
125,629,779
125,653,175
12,527,706
12,562,978
12,565,318
The accompanying notes are an integral part of these consolidated financial statements.
F-4
AIRMEDIA GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In U.S. dollars in thousands)
For the years ended December 31,
2017
2016
2018
Net loss
Other comprehensive loss, net of tax of nil:
Foreign currency translation adjustment
Comprehensive loss
Less: comprehensive loss attributable to non-controlling interests
$
(89,242) $
(179,181) $
(93,419)
(24,140)
35,716
(2,974)
(113,382)
(24,537)
(143,465)
(22,732)
(96,393)
(2,156)
Comprehensive loss attributable to AirMedia Group Inc.'s shareholders
$
(88,845) $
(120,733) $
(94,237)
The accompanying notes are an integral part of these consolidated financial statements.
F-5
AIRMEDIA GROUP INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In U.S. dollars in thousands, except share and per share data)
Ordinary shares
Shares
Amount
Additional
paid-in
capital
Treasury
stock
Accumulated
deficits
Accumulated
other
comprehensive
income (loss)
Total
AirMedia Group
Inc.'s
shareholders'
equity
Non-
controlling
interests
Total
Equity
Balance as of January 1, 2016
Stock option exercised
Share-based compensation
Foreign currency translation adjustment
Net loss
Acquisition of equity interests from non-controlling
shareholders
Capital contribution from non-controlling interests
Balance as of December 31, 2016
Share-based compensation
Capital contribution from non-controlling interests
Acquisition of equity interests from non-controlling
shareholders
Disposal of Hainan Jinhui
Foreign currency translation adjustment
Net loss
Balance as of December 31, 2017
Share issued to Ascent Investor Relations LLC
Share-based compensation
Capital withdraw from non-controlling interests
Subscription receivables from NCI
Foreign currency translation adjustment
Net loss
Acquisition of additional equity interest in a
subsidiary from the non-controlling interest
Balance as of December 31, 2018
124,395,645
1,234,134
-
-
-
128
-
-
-
-
317,414
-
773
-
-
(3,778)
1,427
-
-
-
49,876
(93)
-
-
(65,625)
-
-
-
-
(34,570)
3,477
-
-
-
-
125,629,779
-
-
128
-
-
287,094
343
716
(2,351)
-
-
-
-
-
-
-
-
-
-
(1,414)
-
-
-
-
-
-
-
(15,842)
-
-
-
-
-
(156,476)
22,928
-
-
(23,220)
-
-
-
(292)
-
-
-
-
35,743
-
125,629,779 $
34,998
-
-
-
128 $ 286,739 $ (2,351) $
18
0.03
45
(1,131)
-
-
(172,318) $
35,451 $
-
-
-
-
-
-
-
-
-
(90,097)
(4,140)
-
125,664,777 $
(945)
128 $ 284,726 $ (2,351) $
(262,415) $
31,311 $
386,568
1,334
773
(23,220)
(65,625)
11,065 397,633
1,334
773
(24,140)
(89,242)
-
-
(920)
(23,617)
(34,570)
3,477
3,614
7,718
(30,956)
11,195
268,737
343
716
(2,140) 266,597
343
1,863
-
1,147
(1,414)
-
35,743
(156,476)
-
(245)
(27)
(1,414)
(245)
35,716
(22,705) (179,181)
147,649 $
18
45
(1,131)
(4,140)
(90,097)
(23,970) $ 123,679
18
45
(10,186)
(1,969)
(2,974)
(93,419)
(9,055)
(1,969)
1,166
(3,322)
(945)
51,399 $
150
(37,000) $
(795)
14,399
The accompanying notes are an integral part of these consolidated financial statements.
F-6
AIRMEDIA GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. dollars in thousands)
For the years ended December 31,
2017
2016
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
$
(89,242) $
(179,181) $
(93,419)
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debt provisions
Depreciation and amortization
Impairment of fixed assets, prepaid equipment cost and intangible assets
Share-based compensation
Loss and impairment on long-term investments
Loss on disposal of property and equipment
Impairment loss on inventory
Gain on fair value change of earn-out provision
Other income on concession payable waived
Write off of long-term deposit not refundable
Deferred tax valuation allowance
Changes in assets and liabilities
Accounts 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
Income tax payable
Other noncurrent liabilities
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment
Consideration receivable
Net amount received upon settlement of short-term investment
Acquisition of equity interests from non-controlling shareholders
Proceeds from disposal of equity investment
Loan to third parties
Collection of loan to third parties
Purchase of long-term investment
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from short-term loan
Cash received from long-term loan
Capital contribution from non-controlling interest
Capital withdraw by non-controlling shareholder
Proceeds from options exercised
Net cash provided by financing activities
12,697
12,971
826
773
33
22
-
-
-
-
4,328
(3,250)
(3,043)
(5,369)
(1,962)
(781)
1,813
6,730
2,030
517
(15,023)
(27,377)
(303)
(103,610)
(21,558)
195,915
3,617
(32,838)
3,014
(17,249)
156
(475)
130,582
-
-
9,796
-
1,334
11,130
37,255
12,048
67,342
343
2,603
417
-
-
-
-
-
(1,874)
1,656
(821)
789
1,304
(1,310)
4,491
(920)
(525)
-
(1,712)
(475)
(58,570)
(7,170)
-
-
(1,414)
1,502
(29,825)
7,190
(17,449)
(47,166)
-
-
874
-
-
874
11,912
1,560
564
45
52,337
-
657
(1,653)
(12,318)
359
-
1,361
5,056
4,541
4,171
1,210
934
7,751
(3,693)
757
-
(1,515)
(391)
(19,774)
(3,616)
-
-
(302)
22,640
-
1,374
-
20,096
6,339
2,868
-
(10,902)
-
(1,695)
Effect of exchange rate changes
(7,515)
5,787
(1,560)
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, at beginning of year
Cash, cash equivalents and restricted cash, at end of year
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income tax paid
Interests paid
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
30,587
86,960
117,547 $
(99,075)
117,547
18,472 $
27,712 $
- $
1,601 $
- $
541 $
169 $
(2,933)
18,472
15,539
1,665
2,443
-
- $
3,569 $
103
$
$
$
$
$
Payable of acquisition of non-controlling interests
Receivable of capital contribution from non-controlling interest
Payable of capital withdraw from non-controlling interest
$
$
$
1,882 $
1,399 $
- $
- $
989 $
- $
524
-
758
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the
total of the same such amounts shown in the consolidated statements of cash flows:
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash
2016
As of December 31,
2017
2018
$
$
117,547 $
-
117,547 $
15,355 $
3,117
18,472 $
15,536
3
15,539
The accompanying notes are an integral part of these consolidated financial statements.
F-7
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES
Introduction of the Group
AirMedia Group Inc. ("AirMedia" or the "Company") was incorporated in the Cayman Islands on April 12, 2007.
AirMedia, its subsidiaries, its variable interest entities ("VIEs") and VIEs' subsidiaries (collectively the "Group") operate its out-of-home advertising
network, primarily air travel advertising network, in the People's Republic of China (the "PRC").
The Group provides advertising time slots in the form of TV-attached digital frames, digital TV screens in airports, digital TV screens on airplanes,
and media contents display in air travel. Collaborating with our partners, AirMedia serves airline travelers with interactive entertainment and a
coverage of breaking news, and furnishes corporate clients with advertisements tailored to the perceptions of the travelers.
The Group started gas station media network and explored the on train and long-haul bus Wi-Fi business in 2009 and 2015, respectively. The Group
obtained concession rights to develop and operate an outdoor advertising network in Sinopec gas stations throughout China to play advertisements
on outdoor advertising platforms such as LED screens, billboards and light boxes at Sinopec gas stations and several concession rights from railway
administration bureaus, long-haul bus operators in China to install and operate our Wi-Fi systems to provide Wi-Fi connections to passengers to
improve travelers’ experience. In view of the underperformance of recent years ascribed to the wide spread of affordable 4G or 5G technology, to
achieve the resources realignment for the focused development of the in-flight media and connectivity business, the Group ceased our operations of
Wi-Fi service on long-haul buses and our gas station media services, and scaled down operations in providing Wi-Fi services on trains in 2018.
These disposals do not represent a strategic shift on our advertising business which have no major effect on the Group’s results of operations
respectively. Accordingly, assets and liabilities, revenues and expenses, and cash flows related to the disposed entities is not required to be
reclassified in the accompanying consolidated financial statements as discontinued operations for all periods presented.
F-8
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES – continued
Introduction of the Group - continued
As of issuance date of this report, details of the Company's subsidiaries, VIEs and VIEs' subsidiaries are as follows:
Name
Intermediate Holding Company:
Date of
incorporation/
acquisition
Place of
incorporation
Percentage
of legal
ownership
Broad Cosmos Enterprises Ltd. (“Broad Cosmos”)
June 26, 2006
British Virgin Islands ("BVI")
Air Net International Limited (Formerly AirMedia International Limited) ("Air Net
International")
Air Net (China) Limited (Fomerly AirMedia (China) Limited) ("AN China")
July 14, 2007
August 5, 2005
BVI
Hong Kong
Subsidiaries:
Yuehang Chuangyi Technology (Beijing) Co., Ltd. (Formerly AirMedia Technology
(Beijing) Co., Ltd.) ("Chuangyi Technology")
September 19, 2005
Shenzhen Yuehang Information Technology Co., Ltd. (Formerly Shenzhen AirMedia
Information Technology Co., Ltd.) ("Shenzhen Yuehang")
June 6, 2006
Xi'an Shengshi Dinghong Information Technology Co., Ltd. (Formerly Xi'an AirMedia
Chuangyi Technology Co., Ltd.) ("Xi'an Shengshi")
December 31, 2007
VIEs:
Beijing Linghang Shengshi Advertising Co., Ltd. (Formerly Beijing AirMedia Shengshi
Advertising Co., Ltd.) ("Linghang Shengshi ")
Wangfan Tianxia Network Technology Co., Ltd.(“Iwanfan”)
Beijing Yuehang Digital Media Advertising Co., Ltd. ("Beijing Yuehang")
AirMedia Online Network Technology Group Co., Ltd. (Formerly AirMedia Online
Network Technology Co., Ltd.) ("AM Online")
August 7, 2005
May 6, 2016
January 16, 2008
April 30, 2015
the PRC
the PRC
the PRC
the PRC
the PRC
the PRC
the PRC
100%
100%
100%
100%
100%
100%
N/A
N/A
N/A
N/A
F-9
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES – continued
Introduction of the Group - continued
Name
VIEs' subsidiaries:
Date of
incorporation/
acquisition
Place of
incorporation
Percentage
of legal
ownership
Beijing Airnet Pictures Co., Ltd. (Formerly Beijing AirMedia Film & TV Culture Co., Ltd.)
("Airnet Pictures")
Beijing Zhihe Xianglong Advertising Co., Ltd. (Formerly Flying Dragon Media
Advertising Co., Ltd.) ("Flying Dragon")
Wenzhou Yuehang Advertising Co., Ltd. (Formerly Wenzhou AirMedia Advertising Co.,
Ltd.) ("Wenzhou Yuehang")
Beijing Dongding Gongyi Advertising Co., Ltd. ("Dongding")
Beijing GreatView Media Advertising Co., Ltd. (Formerly Beijing Weimei Shengjing
Media Advertising Co., Ltd.) ("GreatView Media")
Guangzhou Meizheng Online Network Technology Co., Ltd. (Formerly Guangzhou
Meizheng Advertising Co., Ltd.) ("Guangzhou Meizheng")
September 13, 2007
August 1, 2008
October 17, 2008
February 1, 2010
April 28, 2011
May 17, 2013
Beijing Yuehang Tianyi Electronic Information Technology Co., Ltd. (Formerly Beijing
AirMedia Tianyi Information Technology Co., Ltd.) ("Yuehang Tianyi")
September 25, 2013
Wangfan Linghang Mobile Network Technology Co., Ltd. (Formerly AirMedia Mobile
Network Technology Co., Ltd. ("Linghang")
Guangzhou Meizheng Information Technology Co., Ltd. ("Guangzhou Tech")
AirMedia Henglong Mobile Network Technology Co., Ltd. ("AMHL Mobile")
April 23, 2015
June 18, 2015
April 27, 2015
Beijing Wangfan Jiaming Pictures Co., Ltd. (Formerly Beijing AirMedia Jiaming Film &
TV Culture Co., Ltd.) ("Wangfan Jiaming")
December 31, 2015
Meizheng Network Information Technology Co., Ltd. (“Meizheng Network”)
August 8, 2016
Beijing Wangfan Jiaming Advertising Co.,Ltd. (Formerly Beijing AirMedia Jiaming
Advertising Co., Ltd.) ("Jiaming Advertising")
January 1, 2007
Shandong Airmedia Cheweishi Network Technology Co., Ltd. (Formerly Shandong
Airmedia Car Safety Technology Co.,Ltd.) (“Shangdong Cheweishi”)
Dingsheng Ruizhi (Beiing) Investment Consulting Co., Ltd. (“Dingsheng Ruizhi”)
Wangfan Tongda Culture Development (Beijing) Co., Ltd. (“Tongda Culture”)
Yuehang Zhongying E-commerce Co., Ltd. (“Zhongying”)
Beijing Airport United Culture Media Co., Ltd. (“Airport United”)
July 21, 2016
May 25, 2016
May 11, 2018
May 17, 2018
June 19, 2018
F-10
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
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
N/A
N/A
N/A
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES – continued
The VIE arrangements
Chinese regulations currently limit foreign ownership of companies that provide advertising services, including out-of-home television advertising
services. Since December 30, 2005, foreign investors have been permitted to own directly 100% interest in PRC advertising companies if the foreign
investor has at least three years of direct operations of advertising business outside of the PRC.
One of the Company's subsidiary, AN China, the 100% shareholder of Chuangyi Technology, Shenzhen Yuehang, and Xi’an Shengshi, has been
engaged in the advertising business in Hong Kong since September 2008.
The Group conducts substantially all of its activities through VIEs, i.e. Linghang Shengshi, Beijing Yuehang and AM Online, and the VIEs'
subsidiaries. The VIEs have entered into the following series of agreements with Chuangyi Technology:
·
Technology support and service agreement: Chuangyi Technology provides exclusive technology support and consulting services to
the VIEs and in return, the VIEs are required to pay Chuangyi Technology service fees. The VIEs pay to Chuangyi Technology annual
service fees in the amount that guarantee that the VIEs can achieve, after deducting such service fees payable to Chuangyi Technology,
a net cost-plus rate of no less than 0.5% in the case of Linghang Shengshi, and Jiaming Advertising, or 1.0% in the case of Beijing
Yuehang, which final rate should be determined by Chuangyi Technology. The "net cost-plus rate" refers to the operating profit as a
percentage of total costs and expenses of a certain entity. The technology support and service fees for each given year payable by AM
Online to Chuangyi Technology under AM Online’s technology support and service agreement shall be determined by AM Online and
Chuangyi Technology at the first month of such year taking into account several factors. Those factors include the credential of the
team of Chuangyi Technology that provides services to AM Online, the number of service hours, the nature and value of the services
provided by Chuangyi Technology, the extent to which Chuangyi Technology provides patent or other license to AM Online in its
provision of technology support and service and the correlation between AM Online’s results of operations and the technology support
and service provided by Chuangyi Technology. In the event Chuangyi Technology finds it necessary to make subsequent adjustment to
the amount of fees, AM Online shall negotiate in good faith with Chuangyi Technology to determine the new fee. The technology
support and service agreements are effective for ten years and such term is automatically renewed upon its expiry unless either party
informs the other party of its intention of no extension at least twenty days prior to the expiration of the agreements.
F-11
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES – continued
The VIE arrangements - continued
·
·
Technology development agreement: VIEs exclusively engaged Chuangyi Technology to provide technology development services.
Chuangyi Technology owns the intellectual property rights developed in the performance of these agreements. Except for AM Online,
the VIEs pay to Chuangyi Technology annual service fees in the amount that guarantee that the VIEs can achieve, after deducting such
service fees payable to Chuangyi Technology, a net cost-plus rate of no less than 0.5% in the case of Linghang Shengshi, and Jiaming
Advertising, which final rate should be determined by Chuangyi Technology. It is at Chuangyi Technology's sole discretion that the rate
and amount of fees ultimately charged the VIEs under these agreements are determined. The "net cost-plus rate" refers to the operating
profit as a percentage of total costs and expenses of a certain entity. The technology development fees for each given year payable by
AM Online to Chuangyi Technology under AM Online’s technology development agreement shall be determined by AM Online and
Chuangyi Technology at the first month of such year taking into account several factors. Those factors include the credential of the
team of Chuangyi Technology that provides services to AM Online, the number of service hours, the nature and value of the services
provided by Chuangyi Technology, the extent to which Chuangyi Technology provides patent or other license to AM Online in its
provision of technology development service and the correlation between AM Online’s results of operations and the technology
development service provided by Chuangyi Technology. In the event Chuangyi Technology finds it necessary to make subsequent
adjustment to the amount of fees, AM Online shall negotiate in good faith with Chuangyi Technology to determine the new fee. The
technology development agreements are effective for ten years and such terms is automatically renewed upon its expiry unless either
party informs the other party of its intention of no extension at least twenty days prior to the expiration of the agreements.
Exclusive Technology Consultation and Service Agreement: AM online exclusively engages Chuangyi Technology to provide
consultation services in relation to management, training, marketing and promotion. AM Online agrees to pay to Chuangyi Technology
the amount of annual service fees as determined by Chuangyi Technology. In the event Chuangyi Technology finds it necessary to
make subsequent adjustment to the amount of fees, AM Online shall negotiate in good faith with Chuangyi Technology to determine
the new fees. The exclusive technology consultation and service agreement remains effective for ten years and such term may be
reviewed by Chuangyi Technology’s written confirmation prior to the expiration of the agreement term.
F-12
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES – continued
The VIE arrangements - continued
·
Call option agreement : Under the call option agreements between Chuangyi Technology and the shareholders of Linghang Shengshi,
Beijing Yuehang and Jiaming Advertising, the shareholders of those VIEs irrevocably granted Chuangyi Technology or its designated
third party an exclusive option to purchase from the VIEs' shareholders, to the extent permitted under PRC law, all the equity interests
in the VIEs, as the case may be, for the minimum amount of consideration permitted by the applicable law without any other
conditions. Under the call option agreements between Chuangyi Technology and the shareholders of AM Online, the shareholders of
AM Online irrevocably granted Chuangyi Technology or its designated third party an exclusive option to purchase from the
shareholders of AM Online, to the extent permitted under PRC law, all the equity interests in AM Online, as the case may be. To the
extent the applicable PRC law does not require the valuation of the subject equity interests and does not otherwise restrict the purchase
price for such equity interests, such purchase price shall equal the amount of actual payment made by the respective shareholders of
AM Online with respect to the equity interests whether in the form or share capital injection or secondary purchase price. If and where
the applicable PRC law requires the valuation of the subject equity interests or otherwise has restrictions on the purchase price for such
equity interests, such purchase price shall equal the minimum amount of consideration permitted by the applicable law. In addition,
under these agreements (except for the call option agreements between Chuangyi Technology and the shareholders of AM Online),
Chuangyi Technology has undertaken to act as guarantor of VIEs in all operations-related contracts, agreements and transactions and
commit to provide loans to support the business development needs of VIEs or if the VIEs suffer operating difficulties, provided that
the relevant VIE's shareholders satisfy the terms and conditions in the call option agreements. Under PRC laws, to provide an effective
guarantee, a guarantor needs to execute a specific written agreement with the beneficiary of the guarantee. As Chuangyi Technology
has not entered into any written guarantee agreements with any third party beneficiaries to guarantee the VIEs' performance
obligations to these third parties, none of these third parties can demand performance from Chuangyi Technology as a guarantor of the
VIEs' performance obligations. The absence of a written guarantee agreement, however, does not affect our conclusion that the Group
is the primary beneficiary of the VIEs and in turn should consolidate the financials of the VIEs. The term of each call option agreement
is ten years and such terms can be renewed upon expiration at Chuangyi Technology's sole discretion.
F-13
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES – continued
The VIE arrangements - continued
·
·
Equity pledge agreement: Under the equity pledge agreements between Chuangyi Technology and the shareholders of our VIEs other
than AM Online, the shareholders of those VIEs pledged all of their equity interests, including the right to receive declared dividends,
in those VIEs to Chuangyi Technology to guarantee those VIEs' performance of their obligations under the technology support and
service agreement and the technology development agreement. Under the equity pledge agreements between Chuangyi Technology and
the shareholders of AM Online, the shareholders of AM Online pledged all of their equity interests, including the right to receive
declared dividends, in AM Online to Chuangyi Technology to guarantee the performance by AM Online of its obligations under its call
option agreement and its exclusive technology consultation and service agreement. If the VIEs fail to perform their obligations set forth
in the applicable agreements, Chuangyi Technology shall be entitled to exercise all the remedies and powers set forth in the provisions
of the applicable equity pledge agreements. Those agreements remain effective for as long as the technology support and service
agreements and technology development agreement are effective, or, in the case of AM Online, until two years after the term of the
obligations under the call option agreement and exclusive technology consultation and service agreement.
Authorization letter: Each shareholder of the VIEs has executed an authorization letter to authorize Chuangyi Technology to exercise
certain of its rights, including voting rights, the rights to enter into legal documents and the rights to transfer any or all of its equity
interest in the VIEs. The authorization letters by the shareholders of our VIEs other than AM Online will remain effective during the
operating periods of the respective VIEs. Such authorization is effective for ten years and such term is renewed upon its expiry at
Chuangyi Technology's sole discretion. The authorization letters by the shareholders of AM Online will remain effective for as long as
the respective parties remain shareholders of AM Online unless terminated earlier by Chuangyi Technology or the call option
agreement with respect to AM Online is terminated prior to its expiration.
Through the above contractual arrangements, Chuangyi Technology has obtained 100% of shareholders' voting interest in the VIEs, has the right to
receive all dividends declared and paid by the VIEs and may receive substantially all of the net income of the VIEs through the technical support and
service fees as determined by Chuangyi Technology at its sole discretion. Accordingly, the Group has consolidated the VIEs because the Group
believes, through the contractual arrangements, (1) Chuangyi Technology could direct the activities of the VIEs that most significantly affect its
economic performance and (2) Chuangyi Technology could receive substantially all of the benefits that could be potentially significant to the VIEs.
Other than the contractual arrangements described above, because the management and certain employees of Chuangyi Technology also serve in the
VIEs as management or employees, certain operating costs paid by Chuangyi Technology, such as payroll costs and office rental, were re-charged to
the VIEs.
F-14
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES – continued
The VIE arrangements - continued
Chuangyi Technology also entered into loan agreements with each shareholder of AM Online, pursuant to which Chuangyi Technology permits to
make loans in an aggregate amount of RMB 40,000 to the shareholders of AM Online solely for the incorporation and capitalization of AM Online.
The loan is interest free and the term of the loan is ten years and shall be automatically renewed on an annual basis unless Chuangyi Technology
objects. Chuangyi Technology can require the shareholders to repay all or a portion of the loan before the maturity date with a 15 days prior written
notice. Under such circumstances, Chuangyi Technology is entitled to, or designate a third party to, buy all or a portion of the shareholders' equity
interests in AM Online on a pro rata basis based on the amount of the repaid principal of the loan.
F-15
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES – continued
Risks in relation to the VIE structure
The Group believes that the VIE arrangements are in compliance with PRC law and are legally enforceable. The shareholders of the VIEs are also
shareholders of the Group and therefore have no current interest in seeking to act contrary to the contractual arrangements. However, uncertainties in
the PRC legal system could limit the Group's ability to enforce these contractual arrangements and if the shareholders of the VIEs were to reduce
their interest in the Group, their interests may diverge from that of the Group and that may potentially increase the risk that they would seek to act
contrary to the contractual terms, for example by influencing the VIEs not to pay the service fees when required to do so.
The Group's ability to control the VIEs also depends on the authorization letters that Chuangyi Technology has to vote on all matters requiring
shareholder approval in the VIEs. As noted above, the Group believes the rights granted by the authorization letters is legally enforceable but may
not be as effective as direct equity ownership.
In addition, if the legal structure and contractual arrangements were found to be in violation of any existing PRC laws and regulations, the PRC
government could:
·
·
·
·
revoke the business and operating licenses of the Group's PRC subsidiaries and affiliates;
discontinue or restricting the Group's PRC subsidiaries' and affiliates' operations;
impose conditions or requirements with which the Group or its PRC subsidiaries and affiliates may not be able to comply; or
require the Group or its PRC subsidiaries and affiliates to restructure the relevant ownership structure or operations;
The imposition of any of these penalties may result in a material and adverse effect on the Group's ability to conduct the Group's business. In
addition, if the imposition of any of these penalties causes the Group to lose the rights to direct the activities of the VIEs and its subsidiaries or the
right to receive their economic benefits, the Group would no longer be able to consolidate the VIEs. The Group does not believe that any penalties
imposed or actions taken by the PRC Government would result in the liquidation of the Group, Chuangyi Technology, or the VIEs.
F-16
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES – continued
Risks in relation to the VIE structure - continued
Certain shareholders of VIEs are also beneficial owners or directors of the Company. In addition, certain beneficial owners and directors of the
Company are also directors or officers of VIEs. Their interests as beneficial owners of VIEs may differ from the interests of the Company as a
whole. The Company cannot be certain that if conflicts of interest arise, these parties will act in the best interests of the Company or that conflicts of
interests will be resolved in the Company's favor. Currently, the Company does not have existing arrangements to address potential conflicts of
interest these parties may encounter in their capacity as beneficial owners of VIEs, on the one hand, and as beneficial owners of the Company, on the
other hand. The Company believes the shareholders of VIEs will not act contrary to any of the contractual arrangements and the exclusive purchase
right contract provides the Company with a mechanism to remove them as shareholders of VIEs should they act to the detriment of the Company. If
any conflict of interest or dispute between the Company and the shareholders of VIEs arises and the Company is unable to resolve it, the Company
would have to rely on legal proceedings in the PRC. Such legal proceedings could result in disruption of its business; moreover, there is substantial
uncertainty as to the ultimate outcome of any such legal proceedings.
The following financial statement information for AirMedia's VIEs were included in the accompanying consolidated financial statements, presented
net of intercompany eliminations, as of and for the years ended December 31:
Total current assets
Total non-current assets
Total assets
Total current liabilities
Total non-current liabilities
Total liabilities
As of December 31,
2017
2018
$
73,362 $
122,489
53,573
60,375
195,851
113,948
63,302
25,528
99,895
2,763
$
88,830 $
102,658
Net revenues
Net loss
$
16,311 $
(81,659)
23,759 $
(173,516)
24,546
(86,344)
F-17
For the years ended December 31,
2017
2016
2018
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
Risks in relation to the VIE structure - continued
The VIEs contributed an aggregate of 98.8%, 100.0% and 100.0% of the consolidated net revenues for the years ended December 31, 2016, 2017
and 2018, respectively. As of December 31, 2017 and 2018, the VIEs accounted for an aggregate of 85.6% and 87.8%, respectively, of the
consolidated total assets, and 85.6% and 88.9%, respectively, of the consolidated total liabilities.
There are no consolidated VIEs' assets that are collateral for the VIEs' obligations and can only be used to settle the VIEs' obligations. There are no
creditors (or beneficial interest holders) of the VIEs that have recourse to the general credit of the Company or any of its consolidated subsidiaries.
There are no terms in any arrangements, considering both explicit arrangements and implicit variable interests, which require the Company or its
subsidiaries to provide financial support to the VIEs. However, if the VIEs ever need financial support, the Company or its subsidiaries may, at its
option and subject to statutory limits and restrictions, provide financial support to its VIEs through loans to the shareholder of the VIEs or
entrustment loans to the VIEs.
On December 23, 2018, the State Council submitted the draft version of the Foreign Investment Law to the Standing Committee of the National
People’s Congress, which was promulgated by the National People’s Congress on its official site on December 26, 2018 for public consultation until
February 24, 2019. On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which On December 23, 2018, the
PRC State Council submitted the draft version of the Foreign Investment Law to the Standing Committee of the National People’s Congress, which
was promulgated by the National People’s Congress on its official site on December 26, 2018 for public consultation until February 24, 2019. On
March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which will come into effect on January 1, 2020 and replace
the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign
Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary
regulations.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis of presentation
The consolidated financial statements of the Group have been prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP").
(b)
Going concern
The Group incurred operating losses and had negative operating cash flows and may continue to generate negative cash flows as the Group
implements its business plan for 2019. There can be no assurance that the continuing efforts to execute the business plan will be successful
and that the Group will be able to continue as a going concern.
The Group incurred losses from operations of $178,804 and $48,752 for the years ended December 31, 2017 and 2018. As of December 31,
2018, the Group had accumulated deficit of $262,415. The Group had negative cash flows from operating activities for the years ended
December 31, 2017 and 2018, the net cash used in operating activities was $58,570 and $19,774 for the years ended December 31, 2017
and 2018. These conditions raise substantial doubt about the Group’s ability to continue as a going concern.
The Group intends to meet the cash requirements for the next 12 months from the issuance date of this report through a combination of
bank loan, financing by way of private placements, friends, family and business associates and management financial support. The Group
will focus on the following activities:
1. The Company plans to strengthen the air Wi-Fi business to drive its revenues and bring in cash from operation;
2. The Company is focusing on improving operation efficiency and cost reduction to standardize operations, enhance internal controls, and
create synergy of the Company’s resources;
3. The Company has also acquired the financial support letter from Mr. Man Guo and Mr. Qing Xu, who have expressed the willingness and
intention to provide the necessary financial support to the Company, so as to enable the Company to meet its liabilities as and when it falls
due and to carry on its business without a significant curtailment of operations for the next 12 months from the issuance date of this report.
As a result, management prepared the consolidated financial statements assuming the Company will continue as a going concern. As
described above, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional
funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described above. However, there is no assurance that the measures
above can be achieved as planned. The consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
F-18
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(c)
Basis of consolidation
The consolidated financial statements include the financial statements of the Company, its subsidiaries, its VIEs and its VIEs' subsidiaries.
All inter-company transactions and balances have been eliminated upon consolidation.
(d)
Discontinued operations
A disposal of a component of an entity or a group of components of an entity shall be reported in discontinued operations if the disposal
represents a strategic shift that has (or will have) a major effect on an entity’s operations. Classification as a discontinued operation occurs
upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. Where an operation is classified as
discontinued, a single amount is presented on the face of the consolidated statements of operations. The amount of total current assets, total
non-current assets, total current liabilities and total non-current liabilities are presented separately on the consolidated balance sheets. In
2018, the group ceased gas station media business and on long-haul bus Wi-Fi business, and scaled down the on-train Wi-Fi business. As
these three businesses individually or in aggregate have no major effect on the Group’s financial positions, operation and financial result,
the cease of these businesses does not qualify as discontinued operations.
(e)
Use of estimates
The preparation of financial statements in conformity with US GAAP requires to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period and accompanying notes, including allowance for doubtful accounts, the
useful lives of property and equipment and intangible assets, impairment of long-term investments, impairment of long-lived assets, share-
based compensation and valuation allowance for deferred tax assets. Actual results could differ from those estimates.
(f)
Significant risks and uncertainties
The Group participates in a dynamic industry and believes that changes in any of the following areas could have a material adverse effect
on the Group's future financial position, results of operations, or cash flows: net losses in the past and futures; failure in launching new
business; a significant or prolonged economic downturn; contraction in the air travel advertising industry in China; competition from other
competitors; regulatory or other PRC related factors; fluctuations in the demand for air travel; past and future acquisitions; failure to
maintain an effective system of internal control over financial reporting and effective disclosure controls and procedures; risks associated
with the Group's ability to attract and retain employees necessary to support its growth; risks associated with the Group's growth strategies;
and general risks associated with the industry.
F-19
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(g)
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 under current market conditions. When determining the fair value measurements for assets and
liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it
would transact and it considers assumptions that market participants would use when pricing the asset or liability.
Authoritative literature provides a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of
input that is significant to the fair value measurement as follows:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the
asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in
markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs
are observable or can be derived principally from, or corroborated by, observable market data.
Level 3
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the
measurement of the fair value of the assets or liabilities.
F-20
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(h)
Fair value of financial instruments
The Group's financial instruments include cash, accounts receivable, amount due from related parties, accounts payable and amount due to
shareholders. The Group did not have any other financial assets and liabilities or nonfinancial assets and liabilities that are measured at fair
value on recurring basis as of December 31, 2017 and 2018.
The Group's financial assets and liabilities measured at fair value on a non-recurring basis include equity investment and long-lived asset
based on level 2 or 3 inputs.
(i)
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and highly liquid deposits which are unrestricted as to withdrawal or use, and which have
original maturities of three months or less when purchased.
(j)
Restricted cash
Restricted cash relates to amount required by the bank as frozen accounts by Court mainly due to the litigation as disclosed in Note 23.
F-21
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(k)
Property and equipment , net
Property and equipment are carried at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the
following estimated useful lives:
Digital display network equipment
Gas station display network equipment
Wi-Fi
Furniture and fixture
Computer and office equipment
Vehicle
Software
Buildings
Leasehold improvement
5 years
5 years
5 years
5years
3-5 years
5 years
5 years
40 years
Shorter of the term of the lease
or the estimated useful lives of the assets
Costs of repairs and maintenance are expensed as incurred and asset improvements that extend the useful life are capitalized. The gain or
loss on disposal of property and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets
and is recognized in the consolidated income statement. When property and equipment are retired or otherwise disposed of the cost and
accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the
respective period.
(l)
Impairment of long-lived assets
Long-lived assets held and used by the Group are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying value of such assets may not be fully recoverable. It is possible that these assets could become impaired as a result of technology,
economy or other industry changes. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the
Group first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying
value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent
that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow
models, relief from royalty income approach, quoted market values and third-party independent appraisals, as considered necessary.
The Group makes various assumptions and estimates regarding estimated future cash flows and other factors in determining the fair values
of the respective assets. The assumptions and estimates used to determine future values and remaining useful lives of long-lived assets are
complex and subjective. They can be affected by various factors, including external factors such as industry and economic trends, and
internal factors such as the Group’s business strategy and its forecasts for specific market expansion.
F-22
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued
(m)
Long-term investments
Equity method investments
Investee companies over which the Group has the ability to exercise significant influence, but does not have a controlling interest are
accounted for using the equity method. Significant influence is generally considered to exist when the Group has an ownership interest in
the voting stock of the investee between 20% and 50%, and other factors, such as representation on the investee's Board of Directors, voting
rights and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate.
Cost method investments
For investments in an investee over which the Group does not have significant influence, the Group carries the investment at cost and
recognizes income as any dividends declared from distribution of investee's earnings. The Group reviews the cost method investments for
impairment whenever events or changes in circumstances indicate that the carrying value may no longer be recoverable. An impairment
loss is recognized in earnings equal to the difference between the investment's carrying amount and its fair value at the balance sheet date of
the reporting period for which the assessment is made. All equity investments, except those accounted for under the equity method of
accounting or those resulting in the consolidation of the investee, be accounted for at fair value with all fair value changes recognized in
income. For equity investments that do not have readily determinable fair values the Group measures the equity investment at cost minus
impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar
investment of the Group.
Impairment for long-term investments
The Group assesses its long-term investments for other-than-temporary impairment by considering factors including, but not limited to,
current economic and market conditions, operating performance of the companies, including current earnings trends and undiscounted cash
flows, and other company-specific information. The fair value determination, particularly for investments in privately-held companies,
requires significant judgment to determine appropriate estimates and assumptions. Changes in these estimates and assumptions could affect
the calculation of the fair value of the investments and determination of whether any identified impairment is other-than-temporary. Other-
than-temporary impairment loss is recognized in the consolidated statements of comprehensive income equal to the excess of the
investment’s carrying value over its fair value at the balance sheet date of the reporting period for which the assessment is made. The fair
value would then become the new cost basis of such investment.
F-23
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(n)
Revenue recognition
On January 1, 2018, the Group adopted ASC Topic 606, “Revenue from Contracts with Customers”, applying the modified retrospective
method. The adoption did not result in a material adjustment to the accumulated deficit as of January 1, 2018.
In accordance with ASC Topic 606, revenues are recognized when control of the promised goods or services is transferred to the Group’s
customers, in an amount that reflects the consideration the Group expects to be entitled to in exchange for those goods or services. In
determining when and how much revenue is recognized from contracts with customers, the Group performs the following five-step
analysis: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction
price; (4) allocate the transaction price to the performance obligations in the contract; (5) recognize revenue when (or as) the entity satisfies
a performance obligation.
The Group’s contract with customers do not include multiple performance obligations, significant financing component and any variable
consideration.
The Group is a principal as it controls the specified good or service before that good or service is transferred to a customer. The Group is
primarily responsible for fulfilling the promise to provide the specified good or service, has inventory risk before the specified good or
service has been transferred to a customer and has discretion in establishing the price for the specified good or service.
Generally, the Group recognizes revenue under ASC Topic 606 for each type of its performance obligation either over time (generally, the
transfer of a service) or at a point in time (generally, the transfer of content) as follows:
The Group's revenues are derived from selling advertising time slots on the Group's advertising networks. For the years ended December
31, 2016, 2017 and 2018, the advertising revenues were generated from air travel media network including TV-attached digital frames in
airports, digital TV screens in airports, digital TV screens on airlines, gas station media network and other media network such as on-train
and on long-haul bus Wi-Fi.
Revenue by service categories
Revenues from operations:
Air Travel Media Network
Gas Station Media Network
Other Media
For the years ended December 31,
2017
2016
2018
$
$
12,178 $
4,009
410
16,597 $
18,702 $
4,093
1,533
24,328 $
22,212
413
2,151
24,776
Air Travel Media Network: Through air travel media network, revenues were generated from digital frames in airports in the form of TV-
attached digital frames, digital TV screens in airports, digital TV screens on airplanes. There are also other revenues in air travel mainly
include revenues from the display of media contents in air travel. For the advertising business, the Group typically signs standard contracts
with its advertising clients, who require the Group to run the advertiser's advertisements on the Group's network in airports, airlines for a
period of time which is the only performance obligation for a fixed price agreed in the contracts without variable considerations. The Group
recognizes advertising revenues ratably over the service period for which the advertisements are displayed, so long as collection remains
probable. For the program display business, the Group typically signs standard contracts with the customer who has the copyright of movies
or TV programs and requires the Group to play the program on the Group's digital TV screens on airlines for a period of time which is the
only performance obligation for a fixed price agreed in the contract. The Group recognizes program display revenues ratably over the
performance period for which the program is played, so long as collection remains probable.
Gas Station Media Network: Through gas station media network, the Group sells advertising time slots through digital TV screens in gas
stations which is the only performance obligation included in the contracts. The Group signs fixed fee contracts with the end customers or
agencies for a specified period. The revenue is recognized on a straight-line basis over the specified period. This business is ceased in 2018
and no revenue will be generated from gas station in following years.
Other Media: Through other media network such as on-train and on long-haul bus Wi-Fi, the Group provides Wechat public account
promotion through Wi-Fi network and advertising and promotion articles publishing on both self-owned and third parties’ public accounts.
Wechat public account is an application account applied by individual, business or enterprise on the Wechat Public Platform through which
communication and interaction with specific groups of words, pictures, voice and video can be achieved. For the public account promotion
business, the passengers in the trains could connect to Wi-Fi for free via the Group's Wi-Fi equipment after registered as a member to that
public account as a follower in WeChat. The Group charges a fix rate per new member and collects service fee from the client who owns the
public accounts. The Group typically signs standard contracts with its clients, who require the Group to promote their public accounts
which is the only performance obligation defined in the contracts, and recognizes public account promotion revenue by the quantities of
members over the performance period multiplied by unit price defined in the contract. For the advertising and promotion articles publishing
business, the group has developed a public accounts pool which have already accumulated hundreds and thousands of registered users
(there are both self-owned and third parties’ public accounts). The Group typically signs standard contracts with its clients, who require the
Group to publish advertising articles on the public accounts to take advantage of the existing users and recognizes advertising revenues by
numbers of articles published on public accounts and the unit price that defined in the contract which differs on the basis of user numbers of
selected public accounts.
Deferred revenue
Prepayments from customers for advertising service are deferred when corresponding performance obligation is not satisfied and
recognized as revenue when the advertising services are rendered. The balance of deferred revenue as of December 31, 2018 is $1,995, the
majority of which is $1,139 for the unsatisfied performance obligation with two customers with contracts amount of $5,672.
Nonmonetary exchanges
The Group occasionally exchanges advertising time slots and locations with other entities for assets or services, such as equipment and
other assets. The amount of assets and revenue recognized is based on the fair value of the advertising provided or the fair value of the
transferred assets, whichever is more readily determinable. There were no revenue recognized for nonmonetary transactions for the years
ended December 31, 2016, 2017 and 2018. No direct costs are attributable to the revenues.
F-24
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(o)
Value Added Tax ("VAT")
The Company's PRC subsidiaries are subject to value-added taxes at a rate of 6% on revenues from advertising services and paid after
deducting input VAT on purchases. The net VAT balance between input VAT and output VAT is reflected in the account as input VAT
receivable or other taxes payable.
In July 2012, the Ministry of Finance and the State Administration of Taxation jointly issued a circular regarding the pilot collection of VAT
in lieu of business tax in certain areas and industries in the PRC, including Beijing, Jiangsu, Anhui, Fujian, Guangdong, Tianjin, Zhejiang,
and Hubei between September and December 2012. Also a circular issued in May 2013 provided that such VAT pilot program is rolled out
nationwide since August 2013. Since then, certain subsidiaries and VIEs became subject to VAT at the rates of 6% or 3%, on certain service
revenues which were previously subject to business tax. The Company’s gross revenue is presented net of VAT.
F-25
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(p)
Concession fees
The Group enters concession right agreements with vendors such as airlines, railway bureaus and petroleum companies, under which the
Group obtains the right to use the spaces or equipment of the vendors to display the advertisements.
Fees under concession right agreements are usually due every three, six or twelve months. Payments made are recorded as current assets
and current liabilities according to the respective payment terms. Most of the concession fees with airlines and railway bureaus are fixed
with escalation, which means a fixed increase over each year of the agreements. The total concession fee under the concession right
agreements with airlines is charged to the consolidated statements of operations on a straight-line basis over the agreement periods, which is
generally between three to five years.
The fee structure of the concession right agreement with the petroleum companies is based on the actual number of developed gas stations
and associated standard annual concession fee for each developed gas station. Each gas station has its specific lease term starting from the
time when it is actually put into operation. The calculation of rental payments is based on how many months the gas stations are actually put
into operation during the year and the standard annual concession fee determined based on the location of the gas station. The amount of
annual concession fee to-be-paid is determined by an actual incurred concession fee or a fixed minimum payment, if any, based on
negotiation with the petroleum company.
In 2018, the Group ceased our long-haul buses Wi-Fi service operations and gas station media services, and scaled down operations in
providing Wi-Fi services on trains. The concession fees due to the petroleum companies will be settled by providing equipment and future
free service. Other prepaid concession fees made to railway bureaus are returned or to be returned in the future.
(q)
Agency fees and Advertisement Publishing Fees
The Group pays fees to advertising agencies for identifying and introducing advertisers to the Group and assisting in advertisement
publishing based on a certain percentage of revenues made through the advertisement agencies upon receipt of payment from advertisers.
The agency fees and advertisement publishing fees are charged to cost of revenues in the consolidated statements of operations ratably over
the period in which the advertisement is displayed. Prepaid and accrued agency fees and advertisement publishing fees are recorded as
current assets and current liabilities according to relative timing of payments made and advertising service provided.
F-26
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(r)
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.
(s)
Advertising costs
The Group expenses advertising costs as incurred. Total advertising expenses were $720, $1,209 and $623 for the years ended December
31, 2016, 2017 and 2018, respectively, and have been included as part of selling and marketing expenses.
(t)
Foreign currency translation
The functional and reporting currency of the Company and the Company's subsidiaries domiciled in BVI and Hong Kong are the United
States dollar ("U.S. dollar"). The financial records of the Company's other subsidiaries, VIEs and VIEs' subsidiaries located in the PRC are
maintained in their local currency, the Renminbi ("RMB"), which are the functional currency of these entities.
Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at the
rates of exchange ruling at the balance sheet date. Transactions in currencies other than the functional currency during the year are
converted into functional currency at the applicable rates of exchange prevailing when the transactions occurred. Transaction gains and
losses are recognized in the statements of operations.
The Group's entities with functional currency of RMB translate their operating results and financial position into the U.S. dollar, the
Company's reporting currency. Assets and liabilities are translated using the exchange rates in effect on the balance sheet date. Revenues,
expenses, gains and losses are translated using the average rate for the year. Retained earnings and equity are translated using the historical
rate. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of other
comprehensive income.
F-27
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(u)
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
expense. According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes
is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years under
special circumstances, where the underpayment of taxes is more than RMB 100. In the case of transfer pricing issues, the statute of
limitation is ten years. There is no statute of limitation in the case of tax evasion. According to Hong Kong Inland Revenue Department, the
statute of limitation is six years if any company chargeable with tax has not been assessed or has been assessed at less than the proper
amount, the statute of limitation is extended to 10 years if the underpayment of taxes is due to fraud or willful evasion. In 2018, the Group
incurred penalties of $4,324 related to underpayment or delayed payment for income tax expense of previous years. The tax penalty of
$2,664 is charged for one-year delay of income tax payment of 2015 rising from the gain on transferring 75% equity of AM Advertising and
the tax penalty of $1,660 is charged for the unpaid income tax expense of 2016 for the deduction of bad debt allowance from taxable
income before tax without chasing up for debt and filing a special declaration of loss in asset. As of December 31, 2018, all the penalties
have been paid off. For the transferring 20.32% equity of AM Advertising of which the industrial and commercial registration procedure
was completed in December 2018, the Group has filed this equity transaction in the first quarter tax return filling in early 2019. For the
deduction of bad allowance, the inspection method has been changed from filing a declaration to reporting the loss by taxpayer. Hence, the
Group did not have any material outstanding interest or penalties associated with tax positions nor did the Group have any significant
unrecognized uncertain tax positions. The Group does not expect that its assessment regarding unrecognized tax positions will materially
change over the next 12 months. The Group is not currently under examination by an income tax authority, nor has been notified that an
examination is contemplated.
(v)
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 on the measurement date as of
each reporting date, with a corresponding impact reflected in additional paid-in capital.
F-28
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(w)
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, 2016, 2017 and 2018 in the consolidated statements of comprehensive loss.
(x)
Allowance of doubtful accounts
The Group conducts credit evaluations of clients and generally does not require collateral or other security from clients. The Group
establishes an allowance for doubtful accounts based upon estimates, historical experience and other factors surrounding the credit risk of
specific clients and utilizes both specific identification and a general reserve to calculate allowance for doubtful accounts. The amounts of
receivables ultimately not collected by the Group have generally been consistent with expectations and the allowance established for
doubtful accounts. If the frequency and amount of customer defaults change due to the clients' financial condition or general economic
conditions, the allowance for uncollectible accounts may require adjustment. As a result, the Group continuously monitors outstanding
receivables and adjusts allowances for accounts where collection may be in doubt.
(y)
Concentration of credit risk
Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and accounts receivable.
The Group places their cash with financial institutions with high-credit rating and quality in China. There are two customers accounting for
10% or more of total revenue as of December 31, 2018, and there is one customer accounting for 10% of total revenue as of December 31,
2017. There is a customer accounting for 10% or more of total accounts receivables as of December 31, 2018, and there is no customer
accounting for 10% or more of total accounts receivables as of December 31, 2017.
(z)
Net loss per share
Basic net loss per share are computed by dividing net loss attributable to holders of ordinary shares by the weighted average number of
ordinary shares outstanding during the year. Diluted net loss reflects the potential dilution that could occur if securities or other contracts to
issue ordinary shares were exercised or converted into ordinary shares. Potential common shares in the diluted net loss per share
computation are excluded in periods of losses, as their effect would be anti-dilutive.
(aa)
Government subsidies
The Group primarily receives tax refund and development supporting bonus from tax bureau and local government without any condition or
restriction. The government subsidies are recorded in other income on the consolidated statements of operations in the period in which the
amounts of such subsidies are received without future performance requirement. The recognized government subsidies as other income are
$86, nil and $10 for the years ended December 31, 2016, 2017 and 2018, respectively.
F-29
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(bb)
Recent issued accounting standards
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases
with the main difference being that operating leases are to be recorded in the statement of financial position as right-of-use assets and lease
liabilities, initially measured at the present value of the lease payments. For operating leases with a term of 12 months or less, a lessee is
permitted to make an accounting policy election not to recognize lease assets and liabilities. For public business entities, the guidance is
effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the
guidance is permitted. In transition, entities are required to recognize and measure leases at the beginning of the earliest period presented
using a modified retrospective approach. In July 2018, the FASB issued ASU No. 2018-10 and No. 2018-11, Leases (ASC 842). ASU 2018-
10 provides narrow amendments that clarify how to apply certain aspects of the guidance in ASU 2016-02. ASU 2018-11 provides entities
with an option of an additional transition method, by allowing entities to initially apply the new leases standard at the adoption date and
recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. It also provides lessors an
option to not separate lease and non-lease components when certain criteria are met. In December 2018, the FASB issued ASU No. 2018-
20, Leases (Topic 842), Narrow-Scope Improvements for Lessors, which clarifies the accounting by lessors for taxes collected from lessees,
certain lessor costs either paid by lessees directly to third parties or paid by the lessor and reimbursed by the lessee, and variable payments
received by lessors for contracts with lease and non-lease components. In March 2019, the FASB issued ASU 2019-01, Codification
Improvements, which clarifies certain aspects of the new lease standard. The Group adopted the amendments in these ASUs on January 1,
2019 using the additional modified retrospective transition method provided by ASU No. 2018-11. The adoption did not result in a material
adjustment to the Group’s accumulated deficit as of January 1, 2019. Based on the Group’s current office space lease agreements as of
December 31, 2018, the remaining balances of the right-of-use asset and related lease payment liability are $2,772 and $2,766, respectively,
under modified retrospective approach review.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses”, which will require the measurement of all
expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and
supportable forecasts. In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial
Instruments-Credit Losses”, which among other things, clarifies that receivables arising from operating leases are not within the scope of
Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842,
Leases. For public entities, the amendments in these ASU are effective for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years. The Group is currently evaluating this statement and its impact on its results of operations or
financial position.
In February 2018, the FASB issued ASU 2018-02, Income Statement Reporting Comprehensive Income (Topic 220). The amendments in
this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting
from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act
and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the
reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in
tax laws or rates be included in income from continuing operations is not affected. The amendments in this Update also require certain
disclosures about stranded tax effects. Public business entities should apply the amendments in ASU 2018-02 for fiscal years beginning
after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted,
including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet
been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance.
The Group has completed the assessment of the adoption of this guidance on its consolidated financial statements, the adoption of this
guidance will not have a material impact on its consolidated financial statements.
F-30
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(bb)
Recent issued accounting standards - continued
In February 2018, the FASB issued guidance to address the income tax accounting treatment of the tax effects within other comprehensive
income due to the enactment of the Tax Cuts and Jobs Act (the “Tax Act”). This guidance allows entities to elect to reclassify the tax effects
of the change in the income tax rates from other comprehensive income to retained earnings. The guidance is effective for periods
beginning after December 15, 2018 although early adoption is permitted. In March 2018, the FASB issued ASU No. 2018-05, Income Tax
(Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This update adds SEC paragraphs
pursuant to the SEC Staff Accounting Bulletin No. 118, which expresses the view of the staff regarding application of Topic 740, Income
Taxes, in the reporting period that includes December 22, 2017 - the date on which the Tax Act was signed into law. The Group has
completed the assessment of the adoption of this guidance on its consolidated financial statements, the adoption of this guidance will not
have a material impact on its consolidated financial statements.
In June, 2018, the FASB issued ASU No. 2018-07 to provide guidance to reduce cost and complexity and to improve financial reporting for
share-based payments issued to nonemployees (for example, service providers, external legal counsel, suppliers, etc.). The amendments in
this ASU are effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal
year. The Group has completed the assessment of the adoption of this guidance on its consolidated financial statements, the adoption of this
guidance will not have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement”. The amendments in this ASU eliminate, add and modify certain disclosure
requirements for fair value measurements. The amendments in this ASU, among other things, require public companies to disclose the
range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The amendments in this
ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and
entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. The Group
does not expect the adoption of these amendments to have a material impact on our consolidated financial position and results of operations.
In October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for
Variable Interest Entities. ASU 2018-17 expands the accounting alternative that allows private companies the election not to apply the
variable interest entity guidance to qualifying common control leasing arrangements. ASU 2018-17 broadens the scope of the private
company alternative to include all common control arrangements that meet specific criteria (not just leasing arrangements). ASU 2018-17
also eliminates the requirement that entities consider indirect interests held through related parties under common control in their entirety
when assessing whether a decision-making fee is a variable interest. Instead, the reporting entity will consider such indirect interests on a
proportionate basis. The amendments are effective for public business entities for fiscal years ending after December 15, 2019. Early
adoption is permitted. The Group is currently assessing the timing and impact of adopting the updated provisions to its consolidated
financial statements.
Recently issued ASUs by the FASB, except for the ones mentioned above, and are not expected to have a significant impact on the Group’s
consolidated results of operations or financial position.
F-31
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
3.
SEGMENT INFORMATION AND REVENUE ANALYSIS
The Group is mainly engaged in selling advertising time slots on their network, primarily air travel advertising network, gas station media network,
throughout PRC.
The Group chief operating decision maker has been identified as the Chief Executive Officer, who reviews consolidated results when making
decisions about allocating resources and assessing performance of the Group; hence, the Group has only one operating segment.
Geographic information
The Group primarily operates in the PRC and substantially all of the Group's long-lived assets are located in the PRC.
F-32
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
4.
ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of the following:
Accounts receivable, gross
Less: Allowance for doubtful accounts
Accounts receivable, net
Movement of allowance for doubtful accounts is as follows:
As of December 31,
2017
2018
$
$
15,571 $
(4,591)
10,980 $
13,424
(5,486)
7,938
January 1, 2016
Addition
Write off
Exchange rate adjustment
December 31, 2016
Addition
Write off
Exchange rate adjustment
December 31, 2017
Addition
Write off
Exchange rate adjustment
December 31, 2018
Allowance for doubtful accounts
1,727
$
2,248
-
(160)
3,815
1,403
(883)
256
4,591
1,184
-
(289)
5,486
$
F-33
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
5.
OTHER CURRENT ASSETS, NET
Other current assets, net, consist of the following:
Gross
2017
Allowance
Net
Gross
2018
Allowance
Net
As of December 31,
$
Input VAT receivable
Prepaid selling and marketing fees
Short-term deposits
Prepaid income tax
Prepaid individual income tax and other
employee advances
Loans to third parties (i)
Receivable from third party (ii)
Receivable from non-controlling interest holders
Receivable from AM Advertising and its
subsidiaries (iii)
Other prepaid expenses
Others
20,670 $
1,708
129
273
435
41,733
4,317
3,170
26,160
7,346
1,166
- $
-
-
-
-
(40,748)
(257)
-
(3,734)
(2,543)
-
20,670 $
1,708
129
273
435
985
4,060
3,170
22,426
4,803
1,166
17,540 $
308
711
264
224
38,242
4,463
1,178
22,726
6,753
726
- $
-
-
-
-
(38,061)
(1,242)
-
(8,787)
(3,988)
-
17,540
308
711
264
224
181
3,221
1,178
13,939
2,765
726
Total
(i)
(ii)
(iii)
$
107,107 $
(47,282) $
59,825 $
93,135 $
(52,078) $
41,057
These third parties provide outdoor advertising services to their customers. Loans to third parties are in order to secure them to provide
advertising services at prime locations to the Group. For the years ended December 31, 2017 and 2018, the Group entered into various loan
agreements with third parties with aggregated amount of $41,733 and $38,242, respectively with the terms of one year. The interest rates
were from 4.35% to 5% without any assets pledged for the years ended December 31, 2017 and 2018, respectively. As of December 31,
2017, the management conducted a review on the outstanding loans, and the review discovered that market conditions under which the third
parties competed deteriorated unexpectedly in 2017, which imposed adverse constraints on their ability to repay the loans. As of December
31, 2017 and 2018, the bad debt allowance for loan to third parties amounted to $40,748 and $38,061, respectively.
Receivable from third party mainly represented the concession fee deposits of Guangzhou Meizheng for the down-scaled operations in
providing Wi-Fi services on trains that is expected to be refunded within one year. As of December 31, 2017 and 2018, the management
conducted a review on the outstanding balance and recorded bad debt provision on other current assets for which the collectability is
assessed to be remote. As of December 31, 2017 and 2018, the bad debt allowance was $257 and $1,242, respectively.
Receivable from AM Advertising and its subsidiaries balance amounted to $26,160 and $22,726 as of December 31, 2017 and 2018,
respectively. As of December 31, 2017 and 2018, $3,734 and $8,787 of bad debt allowance were made for the receivable balance,
respectively. The net balance $13,939 as of December 31, 2018 represents the loan due form AM advertising to support its operations of
RMB88,000 in principal balance and RMB7,840 in interests.
On March 28, 2018, August 23, 2018 and November 2018, the Group entered into a MoU of transaction of 75% equity transfer of AM
Advertising in 2015 and its supplemental agreements with Longde Wenchuang and Beijing Cultural Center Construction and Development
Fund (Limited Partnership), Beijing Linghang Shengshi Advertising Co., Ltd. (“Linghang Shengshi”) and Mr. Guo have agreed to pay or
make available to AM Advertising on or prior to May 30, 2018 and further extended to September 30, 2018 and December 31, 2018 an
aggregate of RMB304,554 which was to be discounted by the following amounts (i) the RMB152,000 profits attributable to Linghang
Shengshi for the first nine months of 2015; (ii) the loan of RMB88,000 in principal balance and RMB7,840 in interests; and (iii) the
payment of RMB56,714 in cash. When the MoU is settled in future, the net balance of receivable from AM Advertising and its subsidiaries
will be cleared off.
F-34
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
6.
PREPAID CONCESSION FEES
The Group enters concession right agreements with vendors such as airlines, railway bureaus and petroleum companies, under which the Group
obtains the right to use the spaces or equipment of the vendors to display the advertisements. The balance of prepaid concession fees for the years
ended December 31, 2017 and 2018 are $7,064 and $1,813, respectively. The decline of prepayment is due to amortization and the refund of the
prepaid concession fee during the year ended December 31, 2018. In addition, the scale down of on-train Wi-Fi business leads to recollections and
reduced prepayment made during the year and the balances expected to be collected in 2019 are reclassified to other current assets.
7.
ACQUIRED INTANGIBLE ASSETS, NET
Acquired intangible assets, net, consist of the following:
2017
2018
As of December 31,
Gross
carrying Accumulated Accumulated carrying carrying Accumulated Accumulated carrying
impairment amount
amount amortization
impairment amount amount amortization
Gross
Net
Net
Audio-vision programming and broadcasting qualification $
Customer relationships
Contract backlog
Concession agreements
Non-compete agreements
213 $
735
1,536
10,404
182
(37) $
(735)
(1,536)
(8,529)
(172)
(176) $
-
-
(1,875)
(10)
- $
-
-
-
-
218 $
751
1,570
10,632
185
(38) $
(751)
(1,570)
(8,716)
(175)
(180) $
-
-
(1,916)
(10)
$
13,070 $
(11,009) $
(2,061)
- $
13,356 $
(11,250) $
(2,106)
-
-
-
-
-
-
The amortization expense for the years ended December 31, 2016, 2017 and 2018 were $510, $501 and nil, respectively. Due to the continuing losses
and significant reduced revenue, the Group recognized an impairment loss of $1,228 for the year ended December 31, 2017, all the intangible assets
are fully impaired as of December 31, 2017.
F-35
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
8.
PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consist of the following:
Digital display network equipment
Wi-Fi and network equipment
Gas station display network equipment
Software
Office property
Computer and office equipment
Vehicle
Leasehold improvement
Furniture and fixture
Total original costs
Less: impairment
Less: accumulated depreciation
Construction in progress
Less: impairment on construction in process
Total property and equipment, net
$
As of December 31,
2017
2018
6,548 $
36,431
43,079
9,764
11,506
3,264
817
2,262
994
114,665
(51,702)
(47,521)
514
(514)
6,183
34,476
39,523
9,241
10,888
3,058
773
2,783
1,086
108,011
(48,885)
(45,660)
569
(569)
$
15,442 $
13,466
Depreciation expense recorded for the years ended December 31, 2016, 2017 and 2018 were $12,461, $11,547 and $1,560 respectively. Impairment
loss recorded for the years ended December 31, 2016, 2017 and 2018 were $826, $49,468 and $564 respectively.
9.
PREPAID EQUIPMENT COST
For the year ended December 31, 2017, the Group recognized an impairment loss of $16,646 for the LED screens purchased from Elec-Tech
International Co., Ltd. or its subsidiaries as the ordered equipment was out of dated, and the prepaid equipment cost balance of $290 mainly
represented the prepayment made for the leasehold improvement. For the year ended December 31, 2018, the prepaid equipment cost balance
represents prepayment for airline Wi-Fi equipment of $2,364.
F-36
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
10.
LONG-TERM INVESTMENTS
(a)
Equity method investments
The Group had the following equity method investments, other-than-temporary impairment of $1,993 and $2,408 were recognized as of
December 31, 2017 and 2018, respectively:
Name of company
Equity method investments
As of December 31,
2017
2018
Percentage of
Percentage of
ownership
Amount
ownership
Amount
%
%
Beijing Eastern Media Corporation Ltd. (“BEMC “) (1)
49 $
1,618
49 $
1,769
Beijing Hezhong Chuangjin Investment Co., Ltd. ("Hezhong
Chuangjin") (2)
Lanmeihangbiao Tiandi Internet Investment Management
(Beijing) Co., Ltd. ("LMHB") (3)
Beijing Yuyue Film Culture Co., Ltd (“Yuyue Film”) (4)
15
1,993
15
1,886
40
25
223
362
40
25
179
343
Unicom AirNet (Beijing) Network Co., Ltd. ("Unicom AirNet")
(5)
39
17,422
39
15,413
Less: impairment on equity method investments:
Hezhong Chuangjin (2)
LMHB (3)
Yuyue Film (4)
(1,993)
-
-
(1,886)
(179)
(343)
Equity method investments, net
$
19,625
$
17,182
(1)
(2)
(3)
(4)
In March 2008, the Group entered into a definitive agreement with China Eastern Media Corporation, Ltd., a subsidiary of China
Eastern Group and China Eastern Airlines Corporation Limited operating the media resources of China Eastern Group, to establish
a joint venture, BEMC. BEMC was incorporated on March 18, 2008 in the PRC with China Eastern Media Corporation and the
Group holding 51% and 49% equity interest, respectively. BEMC obtained concession rights of certain media resources from
China Eastern Group, including the digital TV screens on airplanes of China Eastern Airlines, and paid concession fees to its
shareholders as consideration. The investment was accounted for using the equity method of accounting as the Group has the
ability to exercise significant influence to the operation of BEMC. $198, $57 and $247 gain on investment were picked up for the
years ended December 31, 2016, 2017 and 2018, respectively.
In May 2015, the Group, together with several other third party companies established Hezhong Chuangjin, which mainly focuses
on internet financing. The investment was accounted for using the equity method of accounting as the Group has the ability to
exercise significant influence to the operation of Hezhong Chuangjin. $59, $78 and nil loss on investment were picked up for the
years ended December 31, 2016, 2017 and 2018, respectively. The operation has been ceased from December 2017, the investment
has been provided full impairment of $1,993 and $1,886 as of December 31, 2017 and 2018, respectively, with foreign currency
translation adjustment.
In September 2015, AM Online entered into an agreement with BlueFocus wireless Internet (Beijing) Investment Management
Co., Ltd. and two individual investors to establish a joint venture, LMHB. LMHB is mainly engaged in investment management of
Wi-Fi platform marketing and other mobile internet industries. The investment was accounted for using the equity method of
accounting as the Group has the ability to exercise significant influence to the operation of LMHB. $175, $48 and $33 loss on
investment were picked up for the years ended December 31, 2016, 2017 and 2018, respectively. The investment has been
provided full impairment loss of $185 for the year ended December 31, 2018.
In June 2016, AM Film entered into an agreement with two individual investors to establish a joint venture, Yuyue Film. Yuyue
Film is mainly engaged in investment management of film investment and marketing. The investment was accounted for using the
equity method of accounting as the Group has the ability to exercise significant influence to the operation of Yuyue Film. Nil, $95
and nil loss on investment were pick up for the years ended December 31, 2016, 2017 and 2018, respectively. The investment has
been provided full impairment loss of $355 for the year ended December 31, 2018.
(5)
On February 22, 2017, AM Online established Unicom AirNet, jointly with Unicom Broadband Online Co., Ltd. and Chengdu
Haite Kairong Aeronautical Technology Co., Ltd., a wholly owned subsidiary of a listed company providing aeronautical technical
services. Pursuant to a capital contribution agreement entered into by the relevant parties, AM Online invested RMB117,900 in
Unicom AirNet. After this transaction, AM Online currently holds 39% of equity interests in Unicom AirNet. The investment was
accounted for using the equity method of accounting as the Group has the ability to exercise significant influence to the operation
of Unicom AirNet. $661 and $1,114 loss on investment was picked up for the years ended December 31, 2017 and 2018,
respectively.
F-37
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
10.
LONG-TERM INVESTMENTS - continued
(b)
Cost method investments
The Group had the following cost method investments, other-than-temporary impairment of nil and $49,273 was recognized as of
December 31, 2017 and 2018, respectively:
Name of company
Zhangshangtong Air Service (Beijing) Co., Ltd.
("Zhangshangtong") (1)
As of December 31,
2017
2018
Percentage of
Percentage of
ownership
Amount
ownership
Amount
%
%
20 $
415
20 $
392
Beijing Zhongjiao Huineng Information Technology Co., Ltd
(“Zhongjiao Huineng”) (2)
13
577
13
546
AM Advertising (3)
20
81,817
20
77,424
Less: impairment on cost method investments
Zhangshangtong (1)
Zhongjiao Huineng (2)
AM Advertising (3)
-
-
-
(392)
(546)
(48,335)
Cost method investment, net
$
82,809
$
29,089
(1) In June 2010, the Group acquired 20% equity interest in Zhangshangtong Air Service (Beijing) Co., Ltd. ("Zhangshangtong"), a
company established in the PRC that is mainly engaged in air tickets agency services. In 2018, impairment loss of $407 has been
recorded for this investment considering the carrying value is not recoverable.
(2) In January 2016, the Group acquired 13.3% equity interest in Zhongjiao Huineng, a company established in the PRC that is mainly
engaged in providing WIFI and GPS service to logistic industry. In 2018, impairment loss of $567 has been recorded for this
investment considering the carrying value is not recoverable.
(3) The investment in AM Advertising was accounted for using the cost method of accounting, as the Group does not have the ability to
exercise significant influence to the operation from 2016. In December 2018, the Group transferred the 20.32% equity interests in AM
Advertising but did not derecognized this long-term investment considering the existence of continuing involvement and more than
trivial benefit owned by the Group. Meanwhile the Group determined the fair value of this investment in AM Advertising according to
the transaction price, which became the new basis of the investment. Hence, the investment impairment loss of nil and $50,159 in AM
Advertising has been recorded for the years ended December 31, 2017 and 2018, respectively.
F-38
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
11.
OTHER NON-CURRENT ASSETS
Other non-current assets consist of the following:
Investment in film and TV series (i)
Leasehold improvement fees (ii)
Less: Impairment on the investment in films and TV series
Total other non-current assets, net
As of December 31,
2017
2018
$
$
1,407 $
798
-
2,205 $
1,407
-
(1,407)
-
(i)
(ii)
The Group enters into agreements with other investors to invest together on certain films and TV series, which are produced by other third
parties, and shares profit of the invested films and TV series based on its percentage of the total investment for films or TV series. The
investment has been provided full impairment of $1,407 for the year ended December 31, 2018 as the investment is not expected to be
recoverable.
The balance of leasehold improvement fee was $798 as of December 31, 2017, which has been amortized into expense for the year ended
December 31, 2018.
F-39
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
12.
LONG-TERM DEPOSITS
Long-term deposits consist of the following:
Concession fee deposits
Office rental deposits
Total long-term deposits
As of December 31,
2017
2018
$
$
5,516 $
523
920
430
6,039 $
1,350
Concession fee deposits normally have terms of three to five years and are refundable at the end of the concession terms. Office rental deposits
normally have terms of one to three years and are refundable at the end of the lease term. As the Group ceased the gas station media and on-bus Wi-
Fi business and scaled down on-train Wi-Fi business, most of concession fee deposit has been refunded, reclassified into other current assets or
impaired according to assessment of recoverability.
The long-term deposits are not within the scope of the ASC 310-10-25 regarding interests on receivables, because they are intended to provide
security for the counterparty to the concession rights or office rental agreements. Therefore, the deposits are recorded at cost.
F-40
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
13.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the follows:
Accrued payroll and welfare
Other tax payable
Accrued staff disbursement
Deposit payable
Accrued professional fees
Other current liabilities (i)
Payable to AM Advertising and its subsidiaries (ii)
As of December 31,
2017
2018
$
2,249 $
1,314
1,460
613
166
868
5,566
$
12,236 $
1,719
350
1,214
247
172
2,500
3,556
9,758
(i)
The other current liabilities represent other payable to third parties of $1,265 and payable to capital withdraw of non-controlling
shareholders of $1,235.
(ii)
The amounts due to AM Advertising and its subsidiaries mainly represent the operation borrowings payable.
F-41
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
14.
INCOME TAXES
AirMedia is a tax-exempted company incorporated in the Cayman Islands.
Broad Cosmos is tax-exempted company incorporated in the British Virgin Islands.
AN China did not have any assessable profits arising in or derived from Hong Kong for the years ended December 31, 2016, 2017 and 2018, and
accordingly no provision for Hong Kong Profits Tax was made in these years. According to Tax (Amendment) (No. 3) Ordinance 2018 published by
Hong Kong government, form April 1, 2018, under the two-tiered profits tax rates regime, the profits tax rate for the first $2 million of assessable
profits will be lowered to 8.25% (half of the rate specified in Schedule 8 to the Inland Revenue Ordinance (IRO)) for corporations and 7.5% (half of
the standard rate) for unincorporated businesses (mostly partnerships and sole proprietorships). Assessable profits above $2 million will continue to
be subject to the rate of 16.5% for corporations and standard rate of 15% for unincorporated businesses. AN China is qualified to elect the tax rate of
8.25% as it has no assessable profit in 2018.
The Group's subsidiaries in the PRC are all subject to PRC Enterprise Income Tax ("EIT") on the taxable income in accordance with the relevant
PRC income tax laws and regulations. The EIT rate for the Group's operating in PRC was 25% with the following exceptions.
Chuangyi Technology qualified for the High and New-Tech Enterprise ("HNTE") and maintained the status that would allow for a reduced 15% tax
rate under EIT Law from year 2006 to 2017. Hence, Chuangyi Technology was subject to an EIT rate of 15%, 15% and 25% in 2016, 2017, and
2018, respectively.
Xi’an Shengshi qualified as a "Software Enterprise" in August 2008 by Technology Information Bureau of Shaanxi province, and therefore is
entitled to a two-year exemption from the EIT commencing from its first profitable year and a 50% deduction of 25% EIT rate for the succeeding
three years, with approval by the relevant tax authorities. As Xi’an Shengshi first made profit in 2009, it was exempted from EIT in 2009 and 2010,
and enjoyed the preferential income tax rate of 12.5% from 2011 to 2013. In 2014, Xi’an Shengshi qualified as HNTE and entitled to an EIT rate of
15% for the years 2014, 2015 and 2016, and Xi’an AM is subject to EIT at a rate of 25% from 2017 afterwards.
Wangfan Linghang qualified for the HNTE at the end of 2017 and entitled to an EIT rate of 15% for the years 2017, 2018 and 2019.
Beijing Yuehang Tianyi qualified for the HNTE in 2018 and entitled to an EIT rate of 15% for the years 2018, 2019 and 2020.
F-42
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
14.
INCOME TAXES - continued
Income tax expenses are as follows:
Income tax expenses:
Current
Deferred
For the years ended December 31,
2017
2016
2018
$
$
50 $
4,433
4,483 $
633 $
-
663 $
150
150
The principal components of the Group's deferred income tax assets and liabilities are as follows:
Deferred tax assets:
Allowance for doubtful accounts
Amortization of intangible assets
Net operating loss carry forwards
Excess marketing and advertising expense (15%)
Share transfer gain according to Tax Law
Unrealized exchange gains
Total deferred tax assets
Valuation allowance
Total deferred tax assets, net
F-43
As of December 31,
2017
2018
$
12,270 $
1,163
51,769
-
-
-
65,202
14,173
232
69,835
12
(1,934)
(378)
81,940
(65,202)
(81,940)
$
- $
-
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
14.
INCOME TAXES - continued
The valuation allowance provided as of December 31, 2016, 2017 and 2018 relates to the deferred tax assets generated by the Group’s VIEs. The
Group periodically evaluates the likelihood of the realization of deferred tax assets, and reduces the carrying amount of the deferred tax assets by a
valuation allowance to the extent it believes that either it is more likely than not that the deferred tax assets for these entities will not be realized as it
does not expect to generate sufficient taxable income in future, or the amount involved is not significant. The Group's subsidiaries in the PRC had
total net operating loss carry forwards approximately of $302,480 as of December 31, 2018. The net operating loss carry forwards for the PRC
subsidiaries will expire on various dates through year 2023.
Reconciliation between the provision for income taxes computed by applying the PRC EIT rate of 25% to income before income taxes and the actual
provision of income taxes is as follows:
For the years ended December 31,
2017
2018
2016
Net loss before provision for income taxes
PRC statutory tax rate
Income tax at statutory tax rate
Expenses not deductible for tax purpose
$
(84,759)
$
25%
(21,190)
(178,548)
$
25%
(44,637)
(93,269)
25%
(23,317)
Entertainment expenses exceeded the tax limit
Tax effect of impairment loss on property and equipment and intangible assets
Tax effect of other permanent differences
Changes in valuation allowance
Effect of preferential tax rates granted to PRC entities
Effect of income tax rate difference in other jurisdictions
158
-
1,688
22,200
642
984
91
12,539
2,482
28,815
670
673
132
302
4,900
16,738
689
706
Income tax expenses
Effective tax rates
$
4,482
$
633
$
150
(5.3)%
(0.4)%
(0.2)%
A valuation allowance was provided against deferred tax assets in entities where it was determined, it was more likely than not that the benefits of
the deferred tax assets will not be realized. The Group had deferred tax assets which consisted of tax loss carry-forwards, accruals and reserves
which can be carried forward to offset future taxable income. Management determined it is more likely that deferred tax assets could not be utilized,
so a valuation allowance was provided as of December 31, 2017 and 2018. The net valuation allowance increased by $22,200, $28,815 and $16,738
during the years ended December 31, 2016, 2017 and 2018, respectively.
F-44
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
14.
INCOME TAXES - continued
The Group incurred penalties of nil, nil and $4,324 related to underpayment or delayed payment for income tax expense for the years ended
December 31, 2016, 2017 and 2018. The tax penalty of $2,664 is charged for one-year delay of income tax payment of 2015 rising from the gain on
transferring 75% equity of AM Advertising and the tax penalty of $1,660 is charged for the unpaid income tax expense of 2016 for the deduction of
bad debt allowance from taxable income before tax without chasing up for debt and filing a special declaration of loss in asset. As of December 31,
2018, all the penalties have been paid off. For the transferring 20.32% equity of AM Advertising of which the industrial and commercial registration
procedure was completed in December 2018, the Group has filed this equity transaction in the first quarter tax return filling in early 2019. For the
deduction of bad allowance, the inspection method has been changed from filing a declaration to reporting the loss by taxpayer. Hence, the Group
did not identify significant unrecognized tax benefits for the years ended December 31, 2016, 2017 and 2018.
Since the commencement of operations in August 2005, only Chuangyi Technology and Shenzhen Yuehang have been subjected to a tax
examination by the relevant PRC tax authorities. The Group's subsidiaries, VIEs and VIEs' subsidiaries remain subject to tax examinations at the tax
authority's discretion. The Group is not currently under examination by any income taxing authority, nor has it been notified of an impending
examination.
Uncertainties exist with respect to how the current income tax law in the PRC applies to the Group's overall operations, and more specifically, with
regard to tax residency status. New EIT Law includes a provision specifying that legal entities organized outside of China will be considered
residents for Chinese income tax purposes if the place of effective management or control is within China. The Implementation Rules to the new EIT
Law provide that non-resident legal entities will be considered China residents if substantial and overall management and control over the
manufacturing and business operations, personnel, accounting, properties, etc., occurs within China. Additional guidance is expected to be released
by the Chinese government in the near future that may clarify how to apply this standard to tax payers. Despite the present uncertainties resulting
from the limited PRC tax guidance on the issue, the Group does not believe that its legal entities organized outside of China should be treated as
residents for new EIT Law purposes. If the PRC tax authorities subsequently determine that the Company and its subsidiaries registered outside the
PRC should be deemed resident enterprises, the Company and its subsidiaries registered outside the PRC will be subject to the PRC income tax at a
rate of 25%.
However, the Company's subsidiaries located in the PRC were in a loss position and had accumulated deficit as of December 2018, and the tax basis
for the investment was greater than the carrying value of this investment. A deferred tax asset should be recognized for this temporary difference
only if it is apparent that the temporary difference will reverse in the foreseeable future. Absent of evidence of a reversal in the foreseeable future, no
deferred tax asset for such temporary difference was recorded. The Company did not record any tax on any of the undistributed earnings because the
relevant subsidiaries do not intend to declare dividends and the Company intends to permanently reinvest it within the PRC. Additionally, deferred
tax liability was recorded for taxable temporary differences attributable to the undistributed earnings of VIEs because the Company believes the
undistributed earnings can be distributed in a manner that would be subject to income tax.
Aggregate undistributed earnings of the Company's subsidiaries located in the PRC that are available for distribution to the Company are considered
to be indefinitely reinvested and accordingly, no provision has been made for the Chinese dividend withholding taxes that would be payable upon the
distribution of those amounts to the Company. The Chinese tax authorities have also clarified that distributions made out of pre-January 1, 2008
retained earnings will not be subject to the withholding tax.
F-45
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
15.
NET LOSS PER SHARE
The calculation of the net loss per share is as follows:
For the years ended December 31,
2017
2016
2018
Numerator:
Net loss attributable to AirMedia Group Inc.'s ordinary shareholders
$
(65,625) $
(156,476) $
(90,070)
Denominator:
Weighted average ordinary shares outstanding used in computing net loss per ordinary
share
Basic and diluted
Weighted average shares used in calculating loss per ADS
Basic and diluted
Net loss per ordinary share
Basic and diluted
Net loss per ADS (i)
Basic and diluted
125,277,056
125,629,779
125,653,175
12,527,706
12,562,978
12,565,318
$
$
(0.52) $
(1.25) $
(0.72)
(5.24) $
(12.46) $
(7.17)
(i)
On March 29, 2019, Airmedia Group Inc., JPMorgan Chase Bank, as depositary, and all holders from time to time of American Depositary
Shares entered into Amended and Restated Deposit Agreement to combine original 5 ADSs to 1 ADSs. After the agreement is executed, 1
ADS amounted to $0.01 par value represents 10 ordinary shares amounted to 0.001 per share par value. The Group presents net loss
attributable to AirMedia Group Inc.'s ordinary shareholders per ADS by retrospectively adjusting to all periods presented.
F-46
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
16.
SHARE BASED PAYMENTS
2012 Share incentive plan
On November 30, 2012, the Board of Directors adopted 2012 Share Incentive Plan (the "2012 Option Plan"), which allows the Group to grant
options to its employees and directors to purchase up to 6,000,000 ordinary shares of the Company subject to vesting requirement.
On June 1 and August 1, 2014, the Group granted 2,376,620 options and 140,000 options to its employees under the 2012 Option Plan to purchase
the Company’s ordinary shares at an exercise price of $1.025 and $1.045 per share, respectively. One twelfth of these options will vest each quarter
through June 1, 2017 and August 1, 2017, respectively. The expiration date will be 5 years from the grant dates.
On October 13, 2014, an employee terminated his employment with the Group but continued to provide service as a nonemployee consultant. 50,000
options granted to him on August 1, 2014 were not modified in connection with the change in status, but future service is still necessary to earn the
award. The compensation cost was measured as if the options were newly granted at the date of the change of status. The incremental share-based
compensation expense for the year ended December 31, 2014 was not material. On October 31, 2015, the consultant service contract terminated. Of
the 50,000 options granted to him, 20,830 were vested through the service period end and the expiration date of the vested options was modified
from August 1, 2019 to January 31, 2016. The rest 29,170 unvested options were cancelled at the service period end.
F-47
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
16.
SHARE BASED PAYMENTS - continued
2012 Share incentive plan - continued
On May 12, 2015, the Group granted 660,000 options its employees under the 2012 Option Plan to purchase the Company’s ordinary shares at an
exercise price of $1.675 per share. One twelfth of these options will vest each quarter through May 12, 2018. The expiration date will be 5 years
from the grant date.
On June 15, 2015, an employee terminated his employment with the Group but continued to provide service as a nonemployee consultant. 200,000
options granted to him on June 1, 2014 were not modified in connection with the change in status, but future service is still necessary to earn the
award. The compensation cost was measured as if the options were newly granted at the date of the change of status. The incremental share-based
compensation expense for the year ended December 31, 2015 was not material.
On October 31, 2015, an employee terminated his employment with the Group but continued to provide service as a nonemployee consultant.
100,000 options granted to him on May 12, 2015 were not modified in connection with the change in status, but future service is still necessary to
earn the award. The compensation cost was measured as if the options were newly granted at the date of the change of status. The incremental share-
based compensation expense for the year ended December 31, 2015 was not material.
On December 31, 2015, two consultants resigned. Of the 200,000 options granted to one of them on May 12, 2015, 3,332 were vested through her
date of resignation. The expiration date of the vested options was modified from May 12, 2020 to May 31, 2016. For the rest 166,668 unvested
options, one twelfth of the total granted options will still vest on February 12, 2016 following the original vesting schedule and the rest 150,002
options were cancelled on the date of resignation. The fair value of the stock options, which was $1.12 per share as of the modification date, was
estimated using the Black-Scholes model. The incremental compensation cost of the modified award was immaterial for the year ended December
31, 2015. Of the 100,000 options granted to the other consultant on May 12, 2015, 16,664 were vested through her date of resignation. The
expiration date of the vested options was modified from May 12, 2020 to January 31, 2016, and the 83,336 unvested options were cancelled on the
date of resignation.
On March 10, 2016, Board of Directors approved to extend the expiration dates of the 685,000 options from various original expiration dates in
March and April 2016 to December 31, 2016. Modified awards are viewed as an exchange of the original award for a new award. The fair value of
the stock options of $1.67 as of the modification dates, was estimated using the Black-Scholes model. The incremental share-based compensation
expense for the year ended December 31, 2016 was not material.
On July 10, 2016, Board of Directors approved to extend the expiration dates of the 2,139,918 options from original expiration date of July 11, 2016
to December 31, 2016. Modified awards are viewed as an exchange of the original award for a new award. The fair value of the stock options of
$0.38 as of the modification dates, was estimated using the Black-Scholes model. The incremental share-based compensation expense of $79 was
recognized for the year ended December 31, 2016.
For the year ended December 31, 2016, four employees terminated their employments with the Group, but continued to provide service as
nonemployee consultant. The options were not modified in connection with the change in status, but future service is still necessary to earn the
award. The compensation cost was measured as if the options were newly granted at the date of the change of status. The incremental share-based
compensation expense of $179 was recognized for the year ended December 31, 2016.
F-48
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
16.
SHARE BASED PAYMENTS - continued
The following summary of stock option activities under the 2007, 2011 and 2012 Share incentive plans as of December 31, 2018, reflective of all
modifications is presented below:
Outstanding Options
Weighted
average
exercise
price
Number of
options
per option
5,868,528 $
-
(2,500)
1.15 $
-
-
5,857,755 $
1.15 $
5,857,755
1.15
Outstanding as of January 1, 2018
Exercised
Forfeited or expired
Outstanding as of December 31, 2018
Options vested and expected to vest as of
December 31, 2018
Weighted
average
grant-date
fair value
Weighted
average
remaining
contractual
terms
Aggregate
intrinsic
value
1.05
-
-
1.05
1.05
0.75 $
-
-
- $
-
- $
-
-
-
-
-
-
Options exercisable as of December 31, 2018
5,857,755 $
1.15 $
1.05
The total intrinsic value of options exercised during the years ended December 31, 2016, 2017 and 2018 were $1,928, nil and nil respectively. The
Group recorded share-based compensation of $773, $343 and $45 for the years ended December 31, 2016, 2017 and 2018, respectively. There was
$45 and nil of total unrecognized compensation expense related to unvested share options granted as of December 31, 2017 and 2018, respectively.
The expense is expected to be recognized over a weighted-average period 0.75 and 0 years on a straight-line basis as of December 31, 2017 and
2018, respectively.
F-49
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
16.
SHARE BASED PAYMENTS – continued
(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-50
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
17.
FAIR VALUE MEASUREMENT
Measured on recurring basis
The Group measured its financial assets and liabilities, including cash and cash equivalents, accounts receivable, amounts due from related parties,
prepaid equipment costs, accounts payable and amounts to from related parties on a recurring basis as of December 31, 2017 and 2018.
Cash and cash equivalents and restricted cash are classified within Level 1 of the fair value hierarchy because they are valued based on the quoted
market price in an active market. The carrying amounts of accounts receivable, amounts due from related parties, prepaid equipment cost and
accounts payable approximate their fair values due to their short-term maturity.
Measured on non-recurring basis
The Group measured intangible assets and property and equipment at fair value on a nonrecurring basis. The fair value was determined using models
with significant unobservable inputs (Level 3 inputs). This was based on a number of key assumptions, including, but not limited to, undiscounted
future cash flows and the annual net revenue projections based on the projected levels of advertising activities during the forecast periods, all of
which were classified as Level 3 in the fair value hierarchy. As a result, the Group recorded $826, $67,342 and $564 impairment charged for the
years ended December 31, 2016, 2017 and 2018, respectively.
The Group measured its long-term investment in AM Advertising at fair value on a nonrecurring basis as result of the disposal transaction. The fair
value was determined using the market approach (AM Advertising’s recent capital transaction announced to the public) with unobservable inputs to
the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities (Level 2 inputs). The impairment
recorded was nil, nil and $48,335 as of December 31, 2016, 2017 and 2018, respectively.
F-51
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
18.
SHARE REPURCHASE PLAN
On March 21, 2011, the Board of Directors authorized the Company to repurchase up to $20,000 of its own outstanding ADSs within two years from
March 21, 2011. On September 26, 2012, the Board of Directors approved to increase the amount of the share repurchase program to $40,000 of its
own outstanding ADS and to extend the termination date of the share repurchase program to March 20, 2014.
Up to December 31, 2018, the Company had repurchased an aggregate of 1,306,486 ADSs from the open market for a total consideration of $17,400,
of which 438,137 ADSs had been cancelled and 868,349 ADSs were recorded as treasury stock. As of December 31, 2017 and 2018, accumulated
665,121 and 665,121 ADS of treasury stock have been reissued. On April 11, 2019, upon the execution of Amended and Restated Deposit
Agreement which was agreed by Airmedia Group Inc. and JPMorgan Chase Bank, as depositary, 5 original ADSs is combined to 1 new ADS. The
Group presents the number of ADSs by retrospectively adjusting to all periods presented. There were no repurchase or cancel of ADSs during the
year ended December 31, 2018
19.
MAINLAND CHINA CONTRIBUTION PLAN
Full time employees of the Group in the PRC participate in a government-mandated multiemployer defined contribution plan pursuant to which
certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. PRC
labor regulations require the Group to accrue for these benefits based on certain percentages of the employees' income. The total contribution for
such employee benefits were $4,029, $3,256 and $3,434 for the years ended December 31, 2016, 2017 and 2018, respectively.
20.
STATUTORY RESERVES
As stipulated by the relevant law and regulations in the PRC, the Group's subsidiaries, VIEs and VIEs' subsidiaries in the PRC are required to
maintain non-distributable statutory surplus reserve. Appropriations to the statutory surplus reserve are required to be made at not less than 10% of
profit after taxes as reported in the subsidiaries' statutory financial statements prepared under the PRC GAAP. Once appropriated, these amounts are
not available for future distribution to owners or shareholders. Once the general reserve is accumulated to 50% of the subsidiaries' registered capital,
the subsidiaries can choose not to provide more reserves. The statutory reserve may be applied against prior year losses, if any, and may be used for
general business expansion and production and increase in registered capital of the subsidiaries. The Group allocated no statutory reserves during the
years ended December 31, 2016, 2017 and 2018. The statutory reserves cannot be transferred to the Company in the form of loans or advances and
are not distributable as cash dividends except in the event of liquidation.
F-52
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
21.
RESTRICTED NET ASSETS
Relevant PRC laws and regulations restrict the WFOEs, VIEs and VIEs' subsidiaries from transferring a portion of their net assets, equivalent to the
balance of their paid-in-capital, additional paid-in-capital and statutory reserves to the Group in the form of loans, advances or cash dividends.
Relevant PRC statutory laws and regulations restrict the payments of dividends by the Group's PRC subsidiaries and VIEs and VIEs' subsidiaries
from their respective retained earnings, if any, as determined in accordance with PRC accounting standards and regulations.
As of December 31, 2017, the balance of restricted net assets was $376,835, of which $159,565 was attributed to the paid-in-capital, additional paid-
in-capital and statutory reserves of the VIEs and VIEs' subsidiaries, and $217,270 was attributed to the paid in capital, additional paid-in-capital and
statutory reserves of WFOE. As of December 31, 2018, the balance of restricted net assets was $351,978, of which $146,375 was attributed to the
paid-in-capital, additional paid-in-capital and statutory reserves of the VIEs and VIEs' subsidiaries, and $205,603 was attributed to the paid in
capital, additional paid-in-capital and statutory reserves of WFOE. Under applicable PRC laws, loans from PRC companies to their offshore
affiliated entities require governmental approval, and advances by PRC companies to their offshore affiliated entities must be supported by bona fide
business transactions.
22.
COMMITMENTS
(a)
Operating leases
The Group has entered into operating lease agreements principally for its office spaces in the PRC. These leases expire through 2021 and
are renewable upon negotiation. Rental expenses under operating leases for the years ended December 31, 2016, 2017 and 2018 were
$1,988, $2,854 and $2,076 respectively.
Future minimum rental lease payments under non-cancellable operating leases agreements were as follows:
Year ended December 31,
2019
2020
2021
2022
F-53
$
$
1,085
854
400
-
2,339
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
(b)
Concession fees
The Group has entered into concession right agreements with vendors, such airlines, trains and petroleum companies. The contract terms of
such concession rights are usually three to five years. The concession rights expire through 2022 and are renewable upon negotiation.
Concession fees charged into statements of operations for the years ended December 31, 2016, 2017 and 2018 were $23,470, $28,559 and
$20,976 respectively.
Future minimum concession fee payments under non-cancellable concession right agreements were as follows:
Year ended December 31,
2019
2020
2021
2022
F-54
$
13,227
11,436
283
-
$
24,946
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
23.
CONTINGENT LIABILITIES
(a)
Approval for non-advertising content
A majority of the digital frames and digital TV screens in the Group's network include programs that consist of both advertising content and
non-advertising content. On December 6, 2007, the State Administration of Radio, Film or Television, or the SARFT, a governmental
authority in the PRC, issued the Circular regarding Strengthening the Management of Public Audio-Video in Automobiles, Buildings and
Other Public Areas, or the SARFT Circular. According to the SARFT Circular, displaying audio-video programs such as television news,
films and television shows, sports, technology and entertainment through public audio-video systems located in automobiles, buildings,
airports, bus or train stations, shops, banks and hospitals and other outdoor public systems must be approved by the SARFT. The Group
intends to obtain the requisite approval of the SARFT for the Group's non-advertising content, but the Group cannot assure that the Group
will obtain such approval in compliance with this new SARFT Circular, or at all. In January 2014, the Group entered into a strategic
alliance with China Radio International Oriental Network (Beijing) Co., Ltd ("CRION"), which manages the internet TV business of China
International Broadcasting Network, to operate the CIBN-AirMedia channel for broadcast network TV programs to air travelers in China.
According to the terms of the cooperation arrangement with CRION, during the cooperation period from March 28, 2014 to March 27,
2024, CRION shall obtain and, from time to time, be responsible for obtaining any approval, license and consent regarding the regulation of
broadcasting and television from relevant authorities.
There is no assurance that CRION will be able to obtain or maintain the requisite approval or the Group will be able to renew the contract
with CRION when they expire. If the requisite approval is not obtained, the Group will be required to eliminate non-advertising content
from the programs included in the Group's digital frames and digital TV screens and advertisers may find the Group's network less
attractive and be unwilling to purchase advertising time slots on the Group's network. As of December 31, 2018, the Group did not record a
provision for this matter as management believes the possibility of adverse outcome of the matter is remote and any liability it may incur
would not have a material adverse effect on its consolidated financial statements. However, it is not possible for the Group to predict the
ultimate outcome and the possible range of the potential impact of failure to obtain such disclosed registrations and approvals primarily due
to the lack of relevant data and information in the market in this industry in the past.
F-55
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
23.
CONTINGENT LIABILITIES - continued
(b)
AM Advertising Dispute
Linghang Shengshi had served a legal letter, dated June 29, 2016 (the “Legal Letter”), on Longde Wenchuang to challenge the proposed
transfers by Longde Wenchuang of their equity interests in AM Advertising to Shanghai Golden Bridge InfoTech Co., Ltd. (stock code:
603918), a PRC company with its shares listed on the Shanghai Stock Exchange (“Golden Bridge”). As of the date of the Legal Letter,
Linghang Shengshi held 24.84% of the equity interests in AM Advertising. Longde Wenchuang and Culture Center held 28.57% and
46.43%, respectively, of the equity interests in AM Advertising. On June 14, 2016, Longde Wenchuang entered into an equity interest
transfer agreement with Golden Bridge to transfer 75% equity interests in AM Advertising to Golden Bridge in consideration for shares in
Golden Bridge (the “Transfer”). Neither of Longde Wenchuang sought consent from Linghang Shengshi with respect to the Transfer in
accordance with the provisions of the Company Law of the People’s Republic of China (the “Company Law”). In the Legal Letter,
Linghang Shengshi challenges the validity of the Transfer on the ground that it violated the statutory right of first refusal of Linghang
Shengshi under the Company Law. Subsequent to the Group’s legal letter, Golden Bridge ceased acquisition of 75% equity interest of AM
Advertising from Longde Wenchuang and Culture Center. Longde Wenchuang and Culture Center further dismissed the Group’s
representative from Co-CEO position of AM Advertising.
On September 2, 2016, the Group received notice (the “September 2, 2016 Notice”) from the China International Economic and Trade
Arbitration Commission (the “CIETAC”) that the Company, Chuangyi Technology, Linghang Shengshi and Mr. Herman Man Guo
(collectively, the “Respondents”) were named as respondents by the Culture Center in an arbitration proceeding submitted by the Culture
Center to the CIETAC in connection with the sale by the Group of 75% equity interests in AM Advertising to Culture Center and Longde
Wenchuang in June 2015. Culture Center seeks specific performance by the Respondents of certain obligations under the transaction
documents, which include, among other things, (i) the pledge by Linghang Shengshi and Mr. Guo of their respective equity interests in AM
Advertising to Culture Center as security for their obligations under the transaction documents, (ii) the use of best efforts by the
Respondents to cooperate with the Culture Center and Longde Wenchuang to procure the listing of AM Advertising in China and (iii) the
performance by the Group and Mr. Guo of their respective non-compete obligations to refrain from holding, operating, or otherwise
participating in any business that is the same or substantially the same as that of AM Advertising. The Group believes the arbitration request
is without merit and intends to defend the actions vigorously. However, no assurances can be provided that the Group will prevail in this
arbitration proceeding. In response to the September 2, 2016 Notice, the Group filed a notice against Culture Center to CIETAC for their
breach of contract.
As a result of the above disputes, the Group is no longer able to exercise significant influence in operating and strategic decision of AM
Advertising and cannot access to AM Advertising’s financial information. Accordingly, the Group accounted its investment in AM
Advertising using cost method (see Note 10) as of December 31, 2016, 2017 and 2018. AM Advertising and its subsidiaries are no longer
related parties to the Group. As of December 31, 2016, the Group treated the provision for earnout commitment of $23,549 as contingent
liability and did not record any additional provision for this matter as management believes the possibility of adverse outcome of the matter
is remote and any liability it may incur would not have a material adverse effect on its consolidated financial statements. On March 28,
2018, August 23, 2018 and November 2018, a MoU and its supplemental agreements respectively, with, among others, Longde Wenchuang
and Beijing Cultural Center Construction and Development Fund (Limited Partnership), under which, among other things, Linghang
Shengshi and Mr. Guo have agreed to pay or make available to AM Advertising on or prior to May 30, 2018 and further extended to
September 30, 2018 and December 31, 2018 an aggregate of RMB304,554 which was to be discounted by the following amounts (i) the
RMB152,000 profits attributable to Linghang Shengshi, Mr. Guo and Mr. Xu for the first nine months of 2015, based on a third-party pro
forma audit report on AM Advertising; (ii) the loan of RMB88,000 in principal balance and RMB7,840 in interests; and (iii) the payment of
RMB56,714 in cash after the sale of the 20.32% equity interests in AM Advertising, which consisted of 20.18% equity interests hold by the
Group and 0.14% equity interests hold by Mr. Man Guo and Mr. Qing Xu on behalf of the Group, and following the completion of the
foregoing arrangements, our obligations with respect to the profit target for 2015, the earnout provision for the first nine months of 2015
and the loans between AM Advertising and Linghang Shengshi shall be deem completed. According to the aforesaid MoU, after Linghang
Shengshi, Mr. Guo and Mr. Xu transfer all the equity interest of AM Advertising, they will cease to be shareholders of AM Advertising and
will not be able to continuously assume the obligations in connection with the profit commitment and earn out provision as a matter of fact.
As of December 31, 2018, the sale of the 20.32% equity interests in AM Advertising has been completed, while the cash payment of
RMB56,714 to Longde Wenchuang and Beijing Cultural Center Construction and Development Fund (Limited Partnership) has not been
paid yet by the Group. Upon the effectiveness of MoU, the Group wrote off the contingency of provision for earnout provision, and
recorded an actual payable of earnout provision in the amount of RMB152,554, after the deduction loan of RMB88,000 in principal balance
and RMB7,840 in interests.
(c)
GreatView Media Dispute
On September 29, 2018, SINOPEC Shanghai Oil Products Company (the “SINOPEC Shanghai”) brought before the district court of
Huangpu, Shanghai a legal action against GreatView Media and AM Advertising. As plaintiff, SINOPEC Shanghai plead to the court a) to
dissolve the advertising service agreement and supplementary agreement signed between SINOPEC Shanghai and GreatView Media; b) to
support its claim to an overdue concession fee of RMB 24,351 over the period starting from September 2009 to February 2018, which may
be subject to change, payable by GreatView Media; c) to support its claim to an overdue electricity bill of RMB 2,947 over the period
starting from September 2009 to February 2018, which may be subject to change, payable by GreatView Media; d) to support its claim
holding AM Advertising liable to both the overdue concession fee and electricity bill; and e) to support its claim that the legal fees shall be
borne by the defendants. As of December 31, 2018, The Group did not record a provision for this matter as the management believes the
possibility of adverse outcome of the matter is remote and the liability it may incur would not have a material adverse effect on its
consolidated financial statements. In February 2019, RMB 27,298 has been paid to the court by Linghang Shengshi on behalf of GreatView
Media as security of this matter, which will be returned to the Group after the case closes if the Group wins the case. As of the date of this
annual report, the Group is not able to predict the ultimate outcome and the possible range of the potential impact of failure primarily due to
the legal action has just proceeded with the first court appearance and an exchange of evidence between the plaintiff and the defendants.
F-56
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
24.
RELATED PARTY TRANSACTIONS
(a)
Details of outstanding balances with the Group's related parties as of December 31, 2017 and 2018 were as follows:
Amount due from related parties:
Name of related parties
Relationship
As of December 31,
2017
2018
Mambo Fiesta Limited. (1)
Shanghai Qingxuan Co.,Ltd. (1)
Global Earning Pacific Ltd. (1)
Mr. Qing Xu (2)
Mrs. Guo Rong (1)
Mrs. Li Hong (1)
Wealthy Environment Limited. (1)
AirMedia Holding Ltd. (1)
AirMedia Merger Company Ltd. (1)
$
Entity controlled by Mr. Xu Qing
Entity controlled by Mr. Guo
Shareholder of the Company
Shareholder of the Company
Vice president of the Company
Vice president of the Company
Shareholder of the Company
Entity controlled by Mr. Guo
Entity controlled by Mr. Guo
- $
-
5
968
14
5
54
540
665
$
2,251 $
16
1
1
-
-
-
-
-
-
18
(1)
(2)
The amounts represent interest free advances to the related parties in a short-term basis for operation purpose.
The amounts due from Mr. Qing Xu represents interest free advances to the related party for personal purpose, which violated
Sarbanes-Oxley Act section 402 due to the lack of internal control in term of related party borrowings, however, all the balance has
been collected in May 2018, there was no gain or loss upon settlement.
(b)
Details of transactions with the Group's related parties for the years ended December 31, 2017 and 2018 were as follows:
Transactions
Sales to Unicome AirNet.
Purchase from Beijing Eastern Airlines Media Co.,Ltd.
F-57
For the year ended December 31,
2017
2018
$
$
- $
- $
78
157
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018
(In U.S. dollars in thousands, except share and per share data)
25.
SUBSEQUENT EVENTS
On April 2, 2018, the Group sent a notification to Sinopec Sales Co., Ltd. ("Sinopec”) to terminate the cooperation on gas station media business in
advance as the Group decided to terminate the gas station advertising business, in which Sinopec confirmed the termination for concession right
since April 1, 2018.
On March 22, 2019, two parties signed the settlement agreement and agreed that 1) the Group use all the gas station media network equipment to
deduct the payables due to Sinopec except Shanghai and Henan branch. The Group's payable to Sinopec is RMB 41,450 (including RMB 35,232 for
rental, RMB 4,435 for utilities, and RMB 1,783 for interest penalty) in total and the evaluated fair value of the gas station media network equipment
is RMB 27,606; 2) the Group shall settle remaining RMB 13,844 by providing free advertising services to Sinopec in the future as settlement.
On March 29, 2019, Airmedia Group Inc. and JPMorgan Chase Bank, as depositary, and all holders from time to time of American Depositary
Shares entered into Amended and Restated Deposit Agreement to combine 5 original ADSs to 1 new ADS which is effective on April 11, 2019.
After the agreement is executed, 1 ADS amounted to $0.01 par value represents 10 ordinary shares amounted to 0.001 par value per share.
The Group announced on March 28, 2018 and further updated on September 28, 2018 that Mr. Herman Man Guo intended to purchase AirMedia’s
ordinary shares in the form of ADSs with an aggregate value of up to $5,000 As of the date of this annual report, Mr. Herman Man Guo acquired, an
aggregate of 344,984 ADSs, representing 3,449,844 ordinary shares of the Company.
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 and per share data)
Assets
Current assets
Cash and cash equivalents
Amount due from subsidiaries
Other current assets
Total current assets
TOTAL ASSETS
Liabilities
Current liabilities
Accrued expenses and other current liabilities
Total liabilities
Equity
Ordinary Shares ($0.001 par value; 900,000,000 shares authorized in 2017 and 2018; 127,662,057 shares and
127,697,055 shares issued as of December 31, 2017 and 2018; 125,629,779 shares and 125,664,777 shares
outstanding as of December 31, 2017 and 2018, respectively)
Additional paid-in capital
Treasury stock (2,032,278 and 2,032,278 shares as of December 31, 2017 and 2018, respectively)
Accumulated deficits
Accumulated other comprehensive income
Total equity
TOTAL LIABILITIES AND EQUITY
F-59
As of December 31,
2017
2018
$
89 $
145,850
1,919
5
51,226
1,895
147,858
53,126
$
147,858 $
53,126
$
209 $
209
1,727
1,727
128
286,739
(2,351)
(172,318)
35,451
128
284,726
(2,351)
(262,415)
31,311
147,649
51,399
$
147,858 $
53,126
AIRMEDIA GROUP INC.
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS OF OPERATIONS
(In U.S. dollars in thousands)
For the years ended December 31,
2017
2016
2018
Operating expenses
Selling and marketing
General and administrative
Total operating expenses
Other income (loss), net
Investment loss in subsidiaries
$
(8) $
(2,356)
(2,364)
548
(63,809)
- $
(468)
(468)
(5)
(156,003)
-
(1,786)
(1,786)
468
(88,779)
Net loss attributable to holders of ordinary shares
$
(65,625) $
(156,476) $
(90,097)
F-60
AIRMEDIA GROUP INC.
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS OF COMPREHENSIVE LOSS
(In U.S. dollars in thousands)
For the years ended December 31,
2017
2016
2018
Net loss
Other comprehensive loss, net of tax:
$
(65,625) $
(156,476) $
(90,097)
Change in cumulative foreign currency translation adjustment
(23,220)
35,743
(4,140)
Comprehensive loss attributable to Parent Company
$
(88,845) $
(120,733) $
(94,237)
F-61
AIRMEDIA GROUP INC.
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS OF CHANGES IN EQUITY
(In U.S. dollars in thousands, except share and per share data)
Balance as of January 1, 2016
124,395,645
$
128
317,414
(3,778)
49,876
22,928
386,568
Ordinary shares
Shares
Amount
Additional
paid-in
capital
Treasury
stock
(Accumulated
deficits)
retained
earnings
Accumulated
other
comprehensive
Income (loss)
Total
equity
Stock option exercised
Share-based compensation
Foreign currency translation adjustment
Net (loss)
Acquisition of equity interests from non-controlling shareholders
Capital contribution from non-controlling interests
Balance as of December 31, 2016
Share-based compensation
Foreign currency translation adjustment
Net loss
Acquisition of equity interests from non-controlling interests
Capital contribution from non-controlling interests
Balance as of December 31, 2017
Share issued to Ascent Investor Relations LLC
Share-based compensation
Foreign currency translation adjustment
Net loss
Capital withdraw from non-controlling
Acquisition of additional equity interest in the Flying Dragon from non-
controlling interest
Balance as of December 31, 2018
1,234,134
-
-
-
-
-
125,629,779
-
-
-
-
-
125,629,779
$
$
-
-
-
-
-
-
128
-
-
-
-
-
128
-
773
-
-
(34,570)
3,477
$ 287,094
$
343
-
-
(1,414)
716
$ 286,739
$
1,427
-
-
-
-
-
(2,351) $
-
-
-
-
-
(2,351) $
(93)
-
-
(65,625)
-
-
(15,842) $
-
-
(156,476)
-
-
(172,318) $
(23,220)
-
-
1,334
773
(23,220)
(65,625)
(34,570)
3,477
(292) $ 268,737
-
-
-
-
35,743
-
-
-
35,451
343
35,743
(156,476)
(1,414)
716
$ 147,649
34,998
0.03
-
-
-
-
18
45
-
-
(1,131)
(945)
-
-
-
(90,097)
(4,140)
-
125,664,777
$
128
$ 284,726
$
(2,351) $
(262,415) $
31,311
$
18
45
(4,140)
(90,097)
(1,131)
(945)
51,399
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
Accrued expenses and other current liabilities
Amount due from subsidiaries
Net cash used in operating activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercises of stock options
Net cash provided by financing activities
Net decrease in cash
Cash, at beginning of year
Cash, at end of year
F-63
For the years ended December 31,
2018
2017
2016
$
(65,625) $ (156,476) $
156,003
63,809
343
773
(90,097)
88,779
45
(2,456)
(47)
2,019
1,907
3
(1,830)
24
1,518
(353)
(1,527)
(50)
(84)
1,334
1,334
(193)
332
-
-
(50)
139
$
139 $
89 $
-
-
(84)
89
5
AIRMEDIA GROUP INC.
NOTES TO ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
(In U.S. dollars in thousands)
Notes:
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.
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
Exhibit 4.55
Supplementary Agreement for the Memorandum Regarding Continued Implementation of the Agreement on Equity Transfer of AirMedia Group
Co., Ltd. and Its Supplementary Agreement
The Supplementary Agreement was signed by the following parties in Beijing, China on November 2018.
1. AirMedia Group Inc. (hereinafter referred to as “AirMedia”), a company duly incorporated and validly existing under the laws of Cayman and listed at
NASDAQ, the United States, with the Nasdaq code of AMCN.
2. Hangmei United Media Technology (Beijing) Co., Ltd. (hereinafter referred to as “Hangmei Technology” and now renamed as Yuehang Chuangyi Media
Technology (Beijing) Co., Ltd.), a limited liability company duly incorporated and validly existing under the laws of China with the unified social credit code
of 911100007795059762, address of Room 3088, Building 1, Yard 2, Hengfu Middle Street, Science City, Fengtai District, Beijing, and legal representative
of Herman Man Guo.
3. Beijing Hangmei Shengshi Advertising Co., Ltd. (hereinafter referred to as “Hangmei Shengshi” and now renamed as Beijing Linghang Shengshi
Advertising Co., Ltd.), a limited liability company duly incorporated and validly existing under the laws of China with the unified social credit code of
91110102801743998D, address of Room 1-0363, 1F, Building 22, Xuanwumen East Street, Xuanwu District, Beijing, and legal representative of Herman
Man Guo.
4. Herman Man Guo, a Chinese citizen with the ID number of 11010219630504 1171 and address of Room 1-3, 5F, Door 2, Building 3, Beipingli, Capital
International Airport Area, Chaoyang District, Beijing, post code: 100621.
5. Qing Xu, a Chinese citizen with the ID number of 11010119610220531 and address of Room 204, Building 5, Xibahe Xili, Chaoyang District, Beijing.
6. Beijing Longde Wenchuang Investment Fund Management Co., Ltd. (hereinafter referred to as “Longde Wenchuang”), a limited liability company duly
incorporated and validly existing under the laws of China with the unified social credit code of 91110101098266260N, address of Room 11116, Building 37,
No. 11 Hepingli East Street, Dongcheng District, Beijing, and legal representative of Xing Hongwang.
7. Beijing Cultural Center Development Fund (limited partnership) (hereinafter referred to as “Cultural Center Fund”), a limited partnership company duly
incorporated and validly existing under the laws of China with the unified social credit code of 91110000355272910P and registered address of Room 801-19,
Building 52, No. 2 Jingyuan North Street, Beijing Economic-Technological Development Area, Beijing, and executive partner of Beijing Cultural Center
Development Fund Management Co., Ltd.
8. AirMedia Group Co., Ltd. (hereinafter referred to as “AirMedia Group”), a limited liability company duly incorporated and validly existing under the laws
of China with the unified social credit code of 91110000783246583E, address of Room 1901, Yanxiang Hotel, 2A Jiangtai Road, Chaoyang District, Beijing,
and legal representative of Ji Lianqiang.
WHEREAS, the above-mentioned parties signed the Memorandum Regarding Continued Implementation of the Agreement on Equity Transfer of AirMedia
Group Co., Ltd. and Its Supplementary Agreement (hereinafter referred to as the “Memorandum”) in Beijing, China, on March 28, 2018. After friendly
negotiation, the parties have supplemented the following provisions for the specific implementation of the Memorandum:
1. It is mutually agreed that the deadline to settlements stipulated in Article 1 of the memorandum effected on March 28, 2018, which says “May 30, 2018” is
to be extended to December 31, 2018.
2. Clause 3 under Article 1 of the Memorandum stating that “Hangmei Shengshi, Herman Man Guo and Qing Xu shall make up the remaining balance of
RMB56.7139 million after receiving the first equity transfer payment for the sale of 20.32% of the equity no later than May 30, 2018, and AirMedia,
Hangmei Technology, Herman Man Guo and Qing Xu shall bear unlimited joint liability” is modified into “Hangmei Shengshi, Herman Man Guo and Qing
Xu shall make up the remaining balance of RMB56.7139 million after receiving the first equity transfer payment for the sale of 20.32% of the equity no later
than December 31, 2018, and AirMedia, Hangmei Technology, Herman Man Guo and Qing Xu shall bear unlimited joint liability”.
3. Except for the above clause, other matters stipulated in the Memorandum shall still be implemented in accordance with the original clauses.
4. This Supplemental Agreement is made in eight copies, with each party holding one copy. It has legal effect together with the Memorandum. It shall take
effect after it is signed and sealed by each party.
(There is no text below, but signature signed.)
(This page is only for the signature of the Supplementary Agreement for the Memorandum Regarding Continued Implementation of the Agreement on Equity
Transfer of AirMedia Group Co., Ltd. and Its Supplementary Agreement)
AirMedia Group Inc.
/seal/ AirMedia Group Inc.
Yuehang Chuangyi Media Technology (Beijing) Co., Ltd.
/seal/ Yuehang Chuangyi Media Technology (Beijing) Co., Ltd.
Legal representative or authorized representative (signature):
/s/ Herman Man Guo
Beijing Linghang Shengshi Advertising Co., Ltd. (seal):
/seal/Beijing Linghang Shengshi Advertising Co., Ltd.
Legal representative or authorized representative (signature):
/s/ Herman Man Guo
Herman Man Guo (signature):
/s/ Herman Man Guo
Qing Xu (signature):
/s/ Qing Xu
(This page is only for the signature of the Supplementary Agreement for the Memorandum Regarding Continued Implementation of the Agreement on Equity
Transfer of AirMedia Group Co., Ltd. and Its Supplementary Agreement)
Beijing Longde Wenchuang Investment Fund Management Co., Ltd. (seal):
/seal/Beijing Longde Wenchuang Investment Fund
Management Co., Ltd.
Legal representative or authorized representative (signature):
/s/ authorized representative
Beijing Cultural Center Development Fund (Limited Partnership) (seal):
/seal/ Beijing Cultural Center Development Fund (Limited
Partnership)
Legal representative or authorized representative (signature):
/s/ authorized representative
AirMedia Group Co., Ltd. (seal)
/seal/ AirMedia Group Co., Ltd.
Legal representative or authorized representative (signature):
/s/ authorized representative
List of the Registrant’s Significant Subsidiaries
Exhibit 8.1
Wholly-Owned Subsidiaries
1
2
3
4
5
6
Broad Cosmos Enterprises Ltd.
Air Net International Limited
Air Net (China) Limited
Yuehang Chuangyi Technology (Beijing) Co., Ltd.
Shenzhen Yuehang Information Technology Co., Ltd.
Xi'an Shengshi Dinghong Information Technology Co., Ltd.
Affiliated Entities Consolidated in the Registrant's Financial Statements
Beijing Dongding Gongyi Advertising Co., Ltd.
Beijing GreatView Media Advertising Co., Ltd.
Guangzhou Meizheng Online Network Technology Co., Ltd.
Beijing Yuehang Tianyi Electronic Information Technology Co., Ltd.
Beijing Linghang Shengshi Advertising Co., Ltd.
Wangfan Tianxia Network Technology Co., Ltd.
Beijing Yuehang Digital Media Advertising Co., Ltd.
AirMedia Online Network Technology Group Co., Ltd.
Beijing Airnet Pictures Co., Ltd.
Beijing Zhihe Xianglong Advertising Co., Ltd.
7
8
9
10
11
12
13 Wenzhou Yuehang Advertising Co., Ltd.
14
15
16
17
18 Wangfan Linghang Mobile Network Technology Co., Ltd.
19
20
21
22 Meizheng Network Information Technology Co., Ltd.
Beijing Wangfan Jiaming Advertising Co.,Ltd.
23
Shandong Airmedia Cheweishi Network Technology Co., Ltd.
24
25
Dingsheng Ruizhi (Beiing) Investment Consulting Co., Ltd.
26 Wangfan Tongda Culture Development (Beijing) Co., Ltd.
27
28
Guangzhou Meizheng Information Technology Co., Ltd.
AirMedia Henglong Mobile Network Technology Co., Ltd.
Beijing Wangfan Jiaming Pictures Co., Ltd.
Yuehang Zhongying E-commerce Co., Ltd.
Beijing Airport United Culture Media Co., Ltd.
Place of Incorporation
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
PRC
PRC
PRC
Exhibit 12.1
Certification by the Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Herman Man Guo, certify that:
1. I have reviewed this annual report on Form 20-F of AirMedia Group Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make 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 30, 2019
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, Xin Li, 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 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 30, 2019
By:
/s/ Xin Li
Name: Xin Li
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, 2018 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) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: April 30, 2019
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, 2018 as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Xin Li, 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) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: April 30, 2019
By:
/s/ Xin Li
Name: Xin Li
Title: Chief Financial Officer
Exhibit 15.1
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the incorporation by reference in this Registration Statement of AirMedia Group Inc. on Form S-8 file No.333-148352, No.333-164219,
No.333-183448 and No. 333-187442 and on Form F-3 file No.333-161067 of our report which includes an explanatory paragraph as to the Company’s ability
to continue as a going concern dated April 30, 2019, with respect to our audits of the consolidated financial statements of AirMedia Group Inc. as of
December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016 appearing in the Annual Report on Form 20-F of AirMedia Group
Inc. for the year ended December 31, 2018.
/s/ Marcum Bernstein & Pinchuk LLP
Marcum Bernstein & Pinchuk LLP
New York, New York
April 30, 2019
NEW YORK OFFICE • 7 Penn Plaza • Suite 830 • New York, New York • 10001
Phone 646.442.4845 • Fax 646.349.5200 • www.marcumbp.com
(cid:0) (cid:0) (cid:0) (cid:0) (cid:0) (cid:0) (cid:0)
Commerce & Finance Law Offices
6F NCI Tower, A12 Jianguomenwai Avenue,
Chaoyang District, Beijing, PRC; Postcode: 100022
Tel:(8610) 65693399 Fax: (8610) 65693838
Website: www.tongshang.com
Exhibit 15.2
April 30, 2019
AirMedia Group Inc.
15/F, Sky Plaza
No.46 Dongzhimenwai Street
Dongcheng District, Beijing 100027
The People’s Republic of China
Dear Sir/Madam:
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, 2018 (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.
Yours faithfully,
/s/ Commerce & Finance Law Offices
Commerce & Finance Law Offices
Exhibit 15.3
Our ref
MPT/629535-000001/13595511v1
AirMedia Group Inc.
15/F, Sky Plaza
No. 46 Dongzhimenwai Street
Dongcheng District
Beijing, 100027
People's Republic of China
30 April 2019
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 2018 (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 (Hong Kong) LLP
Maples and Calder (Hong Kong) LLP
Exhibit 16.1
April 30, 2019
Securities and Exchange Commission
100 F Street, N.E.
Washington, DC20549
Dear Commissioners:
We have read Item 16F of Form 20-F of AirMedia Group Inc. (the "Company") for the year ended December 31, 2018, which the Company expects to file on
or about April 30, 2019, and have the following comments:
1. We agree with the statements made in the second and third sentences of paragraph 1, paragraphs 2 and 3, and the first sentence of paragraph 4 of
ltem 16F for which we have a basis on which to comment on, and we agree with, the disclosures.
2. We have no basis on which to agree or disagree with the statements made in the first and fourth sentences of paragraph 1, the second sentence in
paragraph 4 and entire paragraph 5 of Item 16F.
Very truly yours,
/s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP
Deloitte Touche Tohmatsu Certified Public Accountants LLP
Beijing, the People's Republic of China