Securities registered or to be registered pursuant to Section 12(b) of
the Act:
Securities registered or to be registered pursuant
to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
None
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.
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer”
in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark which basis of accounting the registration
has used to prepare the financial statements included in this filing:
If “Other” has been checked in response to the previous
question, indicate by check mark which consolidated financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
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.
As of December 31, 2015, the local television
stations with which we had established our direct investment entities included: Chengdu Television Station, Shenzhen Media Group,
Jilin Television Station, Haerbin Television Station, Dalian Television Station, Henan Cable Television Network Group Co., Ltd.,
Hubei Broadcast and Television General Station, Wuxi Broadcast and Television Group, Suzhou Broadcast and Television General Station,
Changzhou Television Station, and Ningbo Broadcast and Television Group.
As of December 31, 2015, the local mobile
digital television operating companies with which we had entered into exclusive agency agreements included: Beijing Beiguang Media
Mobile Television Co., Ltd, Guangzhou Pearl River Mobile Multimedia Television Co., Ltd., Nanjing Guangdian Mobile Television
Development Co., Ltd., Chengdu China Digital Mobile Television Co., Ltd., Wuxi Guangtong Digital Mobile Television Co., Ltd.,
Ningbo China Mobile Television Development Co., Ltd., Shanxi Dazhong Mobile Television Co., Ltd., Jilin Mobile Television
Co., Ltd., Dalian Mobile Digital Television Co., Ltd., Hubei China Mobile Television Co., Ltd., Liaoning Beifang
New Media Co., Ltd., Xiamen Radio and Television Digital Media Co., Ltd., Suzhou China Mobile Television Co., Ltd.,
Changzhou China Mobile Television Company Limited, Changsha Guangdian Digital Mobile Television Co., Ltd., and Henan China
Digital Mobile Television Company Limited.
This annual report includes our audited consolidated
financial statements for the years ended December 31, 2013, 2014 and 2015 and as of December 31, 2014 and 2015.
ADSs are listed on the Nasdaq Global Market
under the symbol “VISN”. On December 12, 2012, we effected a change in our ADS to common share ratio from one
ADS representing one common share to one ADS representing 20 common shares.
PART I.
|
ITEM 1.
|
IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not Applicable.
|
ITEM 2.
|
OFFER
STATISTICS AND EXPECTED TIMETABLE
|
Not Applicable.
|
A.
|
Selected Financial Data
|
The following selected condensed consolidated
statement of operations data for the years ended December 31, 2013, 2014 and 2015 and the condensed consolidated balance
sheet data as of December 31, 2014 and 2015 have been derived from our audited consolidated financial statements, which are
included elsewhere in this annual report. The following selected condensed consolidated statement of operations data for the years
ended December 31, 2011 and 2012 and the condensed consolidated balance sheet data as of December 31, 2011, 2012 and
2013 have been derived from our audited consolidated financial statements, which are not included elsewhere in this annual report.
In December 2015, our subway business has been
presented as discontinued operations in accordance with US. GAAP in our consolidated financial statements. Our historical financial
statements are restated to present discounted operations separately.
You should read the selected condensed consolidated
financial data in conjunction with the financial statements and the related notes included elsewhere in this annual report and
“Item 5. Operating and Financial Review and Prospects.” Our consolidated financial statements are prepared and presented
in accordance with U.S. GAAP. Our historical results do not necessarily indicate our results expected for any future periods.
|
|
For
the year ended
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
(US$, except number of shares)
|
|
Condensed
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
service revenue
|
|
|
81,743,567
|
|
|
|
56,996,981
|
|
|
|
53,558,824
|
|
|
|
52,209,283
|
|
|
|
37,971,760
|
|
Advertising
equipment revenue
|
|
|
1,301,959
|
|
|
|
298,892
|
|
|
|
484,977
|
|
|
|
463,177
|
|
|
|
2,092,026
|
|
Wi-Fi
revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,400,187
|
|
Total
revenues
|
|
|
83,045,526
|
|
|
|
57,295,873
|
|
|
|
54,043,801
|
|
|
|
52,672,460
|
|
|
|
41,463,973
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
service cost
|
|
|
(53,352,999
|
)
|
|
|
(55,812,793
|
)
|
|
|
(48,335,638
|
)
|
|
|
(58,073,338
|
)
|
|
|
(39,119,233
|
)
|
Advertising
equipment cost
|
|
|
(1,494,027
|
)
|
|
|
(345,291
|
)
|
|
|
(513,095
|
)
|
|
|
(538,517
|
)
|
|
|
(1,825,994
|
)
|
Wi-Fi
cost
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,166,698
|
)
|
Total
cost of revenues
|
|
|
(54,847,026
|
)
|
|
|
(56,158,084
|
)
|
|
|
(48,848,733
|
)
|
|
|
(58,611,855
|
)
|
|
|
(46,111,925
|
)
|
Gross
profit/(loss)
|
|
|
28,198,500
|
|
|
|
1,137,789
|
|
|
|
5,195,068
|
|
|
|
(5,939,395
|
)
|
|
|
(4,647,952
|
)
|
Operating expenses(2)
|
|
|
(51,272,660
|
)
|
|
|
(239,108,878
|
)
|
|
|
(33,463,714
|
)
|
|
|
(25,
965,092)
|
|
|
|
(21,076,163
|
)
|
Government
grant
|
|
|
—
|
|
|
|
756,757
|
|
|
|
2,783,085
|
|
|
|
4,165,627
|
|
|
|
135,381
|
|
Share
of profits (losses) from equity method investees
|
|
|
183,188
|
|
|
|
135,654
|
|
|
|
(93,217
|
)
|
|
|
(57,777
|
)
|
|
|
410,467
|
|
Dividend
income
|
|
|
142,265
|
|
|
|
162,100
|
|
|
|
128,611
|
|
|
|
254,759
|
|
|
|
44,827
|
|
Gain
on settlements of consideration payable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,800,047
|
|
|
|
—
|
|
|
|
For
the year ended
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
(US$, except number of shares)
|
|
Impairment
loss on a cost method investee
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(808,304
|
)
|
Impairment
loss on investments under equity method
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(537,939
|
)
|
Other
operating income
|
|
|
175,903
|
|
|
|
—
|
|
|
|
1,307
|
|
|
|
—
|
|
|
|
—
|
|
Operating
loss
|
|
|
(22,572,804
|
)
|
|
|
(236,916,578
|
)
|
|
|
(25,448,860
|
)
|
|
|
(25,741,831
|
)
|
|
|
(26,479,683
|
)
|
Interest
income
|
|
|
1,711,101
|
|
|
|
696,270
|
|
|
|
418,673
|
|
|
|
307,007
|
|
|
|
116,894
|
|
Interest
expense
|
|
|
(4,716,577
|
)
|
|
|
(2,614,543
|
)
|
|
|
(1,425,625
|
)
|
|
|
(4,569,207
|
)
|
|
|
(5,964,443
|
)
|
Change
in fair value through profit and loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
157,518
|
|
|
|
(562,738
|
)
|
Other
income (expenses)
|
|
|
42,153
|
|
|
|
(605,958
|
)
|
|
|
(669,018
|
)
|
|
|
(587,937
|
)
|
|
|
176,790
|
|
Net
loss from continuing operations before income taxes
|
|
|
(25,536,127
|
)
|
|
|
(239,440,809
|
)
|
|
|
(27,124,830
|
)
|
|
|
(30,434,450
|
)
|
|
|
(32,713,180
|
)
|
Income
tax benefit (expense)
|
|
|
793,415
|
|
|
|
7,547,421
|
|
|
|
(373,584
|
)
|
|
|
(142,554
|
)
|
|
|
—
|
|
Net
loss from continuing operations after income tax benefit (expenses)
|
|
|
(24,742,712
|
)
|
|
|
(231,893,388
|
)
|
|
|
(27,498,414
|
)
|
|
|
(30,577,004
|
)
|
|
|
(32,713,180
|
)
|
Net
loss attributable to noncontrolling interest
|
|
|
114,962
|
|
|
|
118,724
|
|
|
|
88,489
|
|
|
|
388,732
|
|
|
|
1,923,314
|
|
Net
loss from continuing operations
|
|
|
(24,627,750
|
)
|
|
|
(231,774,664
|
)
|
|
|
(27,409,925
|
)
|
|
|
(30,188,272
|
)
|
|
|
(30,789,866
|
)
|
Net
profit (loss) from discontinued operations (3)
|
|
|
12,124,458
|
|
|
|
(14,634,528
|
)
|
|
|
3,442,055
|
|
|
|
(888,943
|
)
|
|
|
7,389,520
|
|
Net
loss attributable to VisionChina Media Inc. shareholders
|
|
|
(12,503,292
|
)
|
|
|
(246,409,192
|
)
|
|
|
(23,967,870
|
)
|
|
|
(31,077,215
|
)
|
|
|
(23,400,346
|
)
|
Net
loss per common share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.24
|
)
|
|
|
(2.29
|
)
|
|
|
(0.27
|
)
|
|
|
(0.30
|
)
|
|
|
(0.30
|
)
|
Diluted
|
|
|
(0.24
|
)
|
|
|
(2.29
|
)
|
|
|
(0.27
|
)
|
|
|
(0.30
|
)
|
|
|
(0.30
|
)
|
Net
profit/(loss) per common share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.12
|
)
|
|
|
(0.14
|
)
|
|
|
0.03
|
|
|
|
(0.01
|
)
|
|
|
0.07
|
|
Diluted
|
|
|
(0.12
|
)
|
|
|
(0.14
|
)
|
|
|
0.03
|
|
|
|
(0.01
|
)
|
|
|
0.07
|
|
Net loss per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.12
|
)
|
|
|
(2.43
|
)
|
|
|
(0.24
|
)
|
|
|
(0.31
|
)
|
|
|
(0.23
|
)
|
Diluted
|
|
|
(0.12
|
)
|
|
|
(2.43
|
)
|
|
|
(0.24
|
)
|
|
|
(0.31
|
)
|
|
|
(0.23
|
)
|
Weighted average number
of shares used in computation of net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
102,047,412
|
|
|
|
101,351,222
|
|
|
|
101,495,442
|
|
|
|
101,601,913
|
|
|
|
102,353,956
|
|
Diluted
|
|
|
102,047,412
|
|
|
|
101,351,222
|
|
|
|
101,495,442
|
|
|
|
101,601,913
|
|
|
|
102,353,956
|
|
Share-based
compensation expenses during the related periods included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
58,836
|
|
|
|
52,824
|
|
|
|
73,225
|
|
|
|
72,778
|
|
|
|
48,988
|
|
Selling and marketing expenses
|
|
|
447,767
|
|
|
|
394,719
|
|
|
|
379,246
|
|
|
|
107,404
|
|
|
|
4,761
|
|
General and administrative expenses
|
|
|
311,070
|
|
|
|
221,111
|
|
|
|
389,819
|
|
|
|
390,499
|
|
|
|
130,065
|
|
|
(1)
|
Before January 1, 2012, our advertising revenues were subject to
business tax. The PRC government implemented a value-added tax, or VAT, reform pilot
program, or the VAT Tax Reform, which replaced the business tax with VAT on selected
sectors including the advertising sector, in Shanghai effective from January 1,
2012, in Beijing effective from September 1, 2012, and in Shenzhen effective from
November 1, 2012. Commencing on August 1, 2013, the VAT Tax Reform expanded to all
regions in the PRC. With the adoption of the VAT Tax Reform, the VAT rate on our advertising
revenues applicable to the subsidiaries and consolidated variable interest entities is
6% as compared to the 5% business tax rate which was applicable prior to the reform.
|
|
(2)
|
Included in operating expenses for the years ended December 31,
2012 were non-cash impairment losses of US$178.8 million, made against the intangible
assets and goodwill relating to our acquisitions of three out of the six advertising
agency businesses in 2008 and our acquisition of Digital Media Group Company Limited,
or Digital Media Group, in 2010.
|
|
(3)
|
We have solicited for purchasers of the subway mobile TV business during 2015. As of December
31, 2015, based on the status of negotiations between us and the purchaser of the subway business, we considered that the
sale of subway business was probable and that the criteria for classification of subway business as an asset held for sale
had been met. As a result, during the year ended December 31, 2015 and as of December 31, 2015, we presented the operations
of subway business as discontinued operations and the assets as assets held for sale and liabilities to liabilities held for
sale. In February 2016, we entered into a series of definitive agreements with
Ledman Optoelectronic Co., Ltd. ("Ledman") to sell all of our equity
interests in VisionChina New Culture Media Co., Ltd. ("New Culture"), the
operating entity of our subway mobile TV advertising business. On July 22, 2016, we
and Ledman mutually agreed to submit an application for suspension of the
transaction to the China Securities Regulatory Commission ("CSRC"), due to
pending uncertainties surrounding government regulatory policies pertaining to
foreign-listed Chinese companies relisting in China's domestic stock market.
|
On August 19, 2016, we entered
into new equity transfer agreement and a profit compensation agreement to sell 49% equity interest of New Culture to Ledman for
an aggregate consideration of RMB382.2 million. Pursuant to the equity transfer agreement, the consideration comprises RMB61 million
in cash and the other RMB321.2 million in cash with restriction that such cash need to be used for purchasing the shares of Ledman
from a major shareholders of Ledman.
|
|
As
of December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
(US$, except number of shares)
|
|
Condensed
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
80,309,629
|
|
|
|
29,012,381
|
|
|
|
38,949,359
|
|
|
|
19,466,735
|
|
|
|
8,541,890
|
|
Total
assets
|
|
|
415,140,682
|
|
|
|
149,795,319
|
|
|
|
151,140,598
|
|
|
|
102,306,914
|
|
|
|
90,974,833
|
|
Total
current liabilities
|
|
|
120,961,630
|
|
|
|
108,805,722
|
|
|
|
129,630,299
|
|
|
|
61,541,478
|
|
|
|
118,842,314
|
|
Total
equity (deficit)
|
|
|
283,401,981
|
|
|
|
40,012,946
|
|
|
|
19,335,233
|
|
|
|
(10,253,238
|
)
|
|
|
(27,867,481
|
)
|
Common shares
|
|
|
10,131
|
|
|
|
10,137
|
|
|
|
10,156
|
|
|
|
10,212
|
|
|
|
10,274
|
|
Total
VisionChina Media Inc. shareholders’ equity (deficit)
|
|
|
283,184,369
|
|
|
|
39,914,058
|
|
|
|
19,324,834
|
|
|
|
(11,510,067
|
)
|
|
|
(30,929,940
|
)
|
Number
of common shares issued and outstanding
|
|
|
101,313,015
|
|
|
|
101,366,544
|
|
|
|
101,560,744
|
|
|
|
102,121,144
|
|
|
|
102,353,956
|
|
|
|
As
of December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
Selected
Operating Data(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of digital television displays in our mobile digital television advertising network:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exclusive
agency cities
|
|
|
78,955
|
|
|
|
72,489
|
|
|
|
60,915
|
|
Direct
investment cities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
78,955
|
|
|
|
72,489
|
|
|
|
60,915
|
|
Number
of digital displays in our supplemental subway advertising platform
|
|
|
32,208
|
|
|
|
18,786
|
|
|
|
27,929
|
|
|
|
For
the Year Ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
Total
hours of broadcasting
(1)
|
|
|
152,575
|
|
|
|
147,077
|
|
|
|
128,303
|
|
Average
revenue per hour
(1)(2)
(US$)
|
|
|
633
|
|
|
|
590
|
|
|
|
323
|
|
Average
advertising minutes sold per hour
|
|
|
7.43
|
|
|
|
7.94
|
|
|
|
6.71
|
|
|
(1)
|
Includes all of the cities in our network and supplemental subway
advertising platform.
|
|
(2)
|
We calculate average revenue per hour by dividing our advertising
service revenue derived from our network and supplemental subway advertising platform
by the total hours of broadcasting in the cities of our network and supplemental subway
advertising platform.
|
|
(3)
|
Operating data presented includes operating data for discontinued
operations
|
Exchange Rate Information
A number of RMB-denominated figures used in
this annual report are accompanied with U.S. dollar translations. These translations are based on the noon buying rate in The
City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York on December 31,
2015, which was RMB6.4907 to US$1.00. We make no representation that any RMB or U.S. dollar amounts could have been, or could
be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, the rates stated below, or at all. The PRC
government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into
foreign currencies and through restrictions on foreign trade.
The following table sets forth information
concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. These rates are provided solely for your
convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our
periodic reports or any other information to be provided to you. The exchange rate of RMB per U.S. dollar as set forth in the
H.10 statistical release of the Federal Reserve Board was RMB6.6778 to US$1.00 as of September 9, 2016.
|
|
Exchange
Rate (Renminbi per US Dollar) (1)
|
|
Period
|
|
Period
End
|
|
|
Average
(2)
|
|
|
Low
|
|
|
High
|
|
|
|
(RMB per US$1.00)
|
|
2011
|
|
|
6.2939
|
|
|
|
6.4475
|
|
|
|
6.2939
|
|
|
|
6.6364
|
|
2012
|
|
|
6.2301
|
|
|
|
6.2990
|
|
|
|
6.2221
|
|
|
|
6.3879
|
|
2013
|
|
|
6.0537
|
|
|
|
6.1478
|
|
|
|
6.0537
|
|
|
|
6.2438
|
|
2014
|
|
|
6.2046
|
|
|
|
6.1620
|
|
|
|
6.0402
|
|
|
|
6.2591
|
|
2015
|
|
|
6.4778
|
|
|
|
6.2827
|
|
|
|
6.1870
|
|
|
|
6.4896
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
|
|
|
6.4480
|
|
|
|
6.5027
|
|
|
|
6.4480
|
|
|
|
6.5500
|
|
April
|
|
|
6.4738
|
|
|
|
6.4754
|
|
|
|
6.4571
|
|
|
|
6.5004
|
|
|
|
Exchange
Rate (Renminbi per US Dollar) (1)
|
|
Period
|
|
Period
End
|
|
|
Average
(2)
|
|
|
Low
|
|
|
High
|
|
|
|
(RMB per US$1.00)
|
|
May
|
|
|
6.5798
|
|
|
|
6.5259
|
|
|
|
6.4738
|
|
|
|
6.5798
|
|
June
|
|
|
6.6459
|
|
|
|
6.5892
|
|
|
|
6.5590
|
|
|
|
6.6481
|
|
July
|
|
|
6.6371
|
|
|
|
6.6771
|
|
|
|
6.6371
|
|
|
|
6.7013
|
|
August
|
|
|
6.6776
|
|
|
|
6.6466
|
|
|
|
6.6239
|
|
|
|
6.6778
|
|
September (through September
9, 2016)
|
|
|
6.6778
|
|
|
|
6.6707
|
|
|
|
6.6600
|
|
|
|
6.6790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The source of the exchange rate is the H.10 statistical release
of the Federal Reserve Board.
|
|
(2)
|
Annual averages are calculated from month-end rates. Monthly averages
are calculated using the average of the daily rates during the relevant period.
|
|
B.
|
Capitalization and Indebtedness
|
Not Applicable.
|
C.
|
Reasons for the Offer and
Use of Proceeds
|
Not Applicable.
You should consider carefully all of the
information in this annual report, including the risks and uncertainties described below and our consolidated financial statements
and related notes. Any of the following risks could have a material adverse effect on our business, financial condition and results
of operations. In any such case, the market price of our ADSs could decline.
Risks Related to Our Company and Our Industry
We incurred recurring loss and experienced
negative cash flow from operations that may raise substantial doubt on our ability to continue as a going concern in
the foreseeable future.
We recorded net losses from continuing operation
of US$27.5 million, US$30.6 million and US$32.7 million for the years ended December 31, 2013, 2014 and 2015, respectively. As
of December 31, 2015, we had cash and cash equivalents of US$8.5 million with bank borrowings due within one year of US$9.2 million
and a convertible note reaching maturity within one year related to our settlement of a litigation with certain former shareholders
of Digital Media Group, or Former DMG Shareholders, in the amount of US$55.9 million. For more information on our legal disputes
with Former DMG Shareholders, see “Item 8. Financial Information—Legal and Administrative Proceedings.”
For reasons stated above, third parties may
doubt the adequacy of our sources of liquidity to fund our working capital and capital expenditure requirements and to meet our
short term debt obligations, other liabilities and commitments as they become due. Such uncertainty may create additional concerns
for our creditors, suppliers, customers and other counterparties, which may make it more difficult for us to conduct our business
and meet our debt and other obligations. Moreover, our consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty; and the adjustments to our consolidated financial statements could be substantial.
Furthermore, the uncertain sustainability of
China’s advertising industry in the current macroeconomic environment is likely to continue to adversely affect demand for
our service. In order to mitigate the above factors, we have the following plans and actions:
|
·
|
We have successfully
negotiated with China Construction Bank (Shenzhen branch) (“CCB(SZ)”) and
will continue to negotiate with other banks to obtain revolving bank facilities to ensure
the our bank borrowings can be renewed on an on-going basis. On February 22, 2016, we
entered into another RMB80.0 million (equivalent to US$12.2 million) secured revolving
credit facility granted by CCB (SZ) with interest rate in a range between 99.615% to
102.66% of the Loan Prime Rate in the PRC.
|
|
·
|
We have entered
into an equity transfer agreement and a profit compensation agreement to sell 49% equity
interest of New Culture to Ledman. Pursuant to the equity transfer agreement, Ledman
will pay RMB61 million in cash and the other RMB321.2 million in cash with restriction
that such cash need to be used for purchasing the shares of Ledman from a major shareholders
of Ledman.
|
|
·
|
We are actively
negotiating with potential buyers to dispose the remaining 51% equity interest in New
Culture.
|
|
·
|
We are actively
negotiating with the holders of convertible promissory notes to extend the payments of
the overdue amounts of $55.9 million.
|
We have taken or in process of taking a
number of initiatives to reduce costs and improve working capital management. We have been negotiating with a number of
vendors, including vendors of concession right contracts, for them to provide us with lower prices or more favorable payment
terms in order to achieve cost savings. We decided to postpone a substantial portion of its planned capital expenditures for
the next twelve months. In addition, we has implemented measures to more closely monitor the collection of receivable
balances with an aim to improving liquidity. We expect that, taking into account our plan to sell all of our equity interests
in New Culture, adequate sources of liquidity will exist to fund our working capital and capital expenditure requirements and
to meet our short term debt obligations, other liabilities and commitments as they become due. However, there can be no
assurance that we will be able to sell all of our equity interests in New Culture, or that such sales will provide adequate
sources of liquidity.
If we are not able to successfully implement the above plans
or actions, a substantial doubt on our ability to continue as a going concern for the foreseeable future may be resulted.
We have failed to comply with the terms of the US$58
million of secured convertible promissory notes issued by us to the Former DMG Shareholders, which resulted in a default under
the terms of those notes and, if such default were uncured, it could potentially result in action that may undermine control over
certain subsidiaries of our company.
Pursuant to our settlement agreement with the
Former DMG Shareholders, we issued to them US$58 million of convertible promissory notes, or the Notes. These Notes are subject
to certain terms and conditions including negative covenants that, among other things, restrict our ability to, with certain exceptions,
(i) agree to any encumbrances or undertakings with respect to the assets or revenues of our company, its subsidiaries and consolidated
variable interest entities, or VIEs, collectively the Group except for collateral for bank loans in the ordinary course of business
and on normal commercial terms, (ii) engage in dissolution or liquidation of major subsidiaries, (iii) transfer equity interest
in any subsidiaries, (iv) pay dividends or make distributions, or (v) modify our arrangement with respect to our variable interest
entities, or VIEs. We will redeem the Notes in instalments on each anniversary of the issue date from the first to the sixth anniversaries
of the issue date, in amounts of US$4 million, US$5 million, US$13.5 million, US$16.5 million, US$16 million and US$3 million,
respectively.
As of August 31, 2016, we have failed to comply
with our payment obligations under the Notes and the settlement agreement, and Former DMG Shareholders have declared a default
under the Notes. The default remains uncured by us, and the Former DMG Shareholders have certain rights with respect to replacing
members of the boards of directors of certain subsidiaries in the Group. As of the date of this report, the Former DMG Shareholders
have not exercised such rights.
In July 2016, concerning our breach of the
settlement agreement, Grand Court of Cayman Islands issued a ruling (the “Cayman Ruling”) that ordered us to pay the
Former DMG Shareholders a) approximately US$59.4 million (the "Judgment Amount"), b) interest at the rate of 9% per
annum calculated from November 16, 2010 as to US$30 million and from November 16, 2011 as to the remaining portion of the Judgment
Amount, until such Judgment Amount is paid in full and c) costs on the indemnity basis to be taxed if not agreed.
We seek to enter into a new settlement agreement
with the Former DMG Shareholders to satisfy the Cayman Ruling. The parties are currently in discussions regarding such settlement
agreement. There can be no assurance that we will be able to obtain a settlement agreement under terms favorable to us, or at
all. If the Former DMG Shareholders were able to enforce the Cayman Ruling against us, our business, financial condition and results
of operations would be materially and adversely affected.
Any conversion of the Notes would dilute the ownership
interests of our existing shareholders and holders of our ADSs.
The Former DMG Shareholders now hold the Notes
in an amount of US$58.0 million. The Notes do not contain a mandatory conversion requirement. Any Former DMG Shareholder may convert
the Notes held by it, at its election, in either of the following two scenarios: (1) Conversion Qualified Financing: Upon the
closing of any transactions in which we issue equity securities or securities convertible into equity, or Qualified Financing,
the Former DMG Shareholders shall have the right to convert the Notes at their election. The maximum amount of the Notes which
the Former DMG Shareholders may convert shall not exceed the lower of (i) outstanding principal plus interest accrued on the Notes;
and (ii) gross proceeds of the Qualified Financing. The price payable to convert the Notes shall be 80% of (i) the effective per
share price in the Qualified Financing; or (ii) the conversion price for the debt or other securities convertible into common
shares to be issued in the Qualified Financing; (2) Maturity Date Conversion: we may elect to repay at any time no later than
60 days before the corresponding maturity date. The Former DMG Shareholders shall have the option to, within the 30 days before
each maturity date, convert some or all of the Notes, into shares in us at a price which is 80% of the weighted average NASDAQ
trading price during the last 90 days before the issuance of a conversion notice in respect of said Notes. The conversion of some
or all of the Notes would dilute the ownership interests of our existing shareholders and holders of our ADSs, and could cause
the price of our ADSs to decline. In addition, any sales in the public market of the ADSs issuable upon such conversion could
adversely affect the price for our ADSs prevailing in the open market.
We have a limited operating history, which may make
it difficult for you to evaluate our business and prospects.
We began operations in April 2005. Accordingly,
we have a very limited operating history upon which you can evaluate the viability and sustainability of our business and its
acceptance by advertisers and consumers. It also is difficult to evaluate the viability of our mobile digital television- advertising
network on mass transportation systems because we do not have sufficient experience to address the risks frequently encountered
by early stage companies using new forms of advertising media and entering new and rapidly evolving markets. These circumstances
may make it difficult for you to evaluate our business and prospects. In addition, due to our limited operating history and recent
additions to our management team, some of our senior management and employees have only worked together at our company for a relatively
short period of time. As a result, it may be difficult for you to evaluate the effectiveness of our senior management and other
key employees and their ability to address future challenges to our business.
We have incurred net losses in the past and may incur
losses in the future.
We recorded net losses
of US$24.0 million, US$31.1 million and US$23.4 million for the years ended December 31, 2013, 2014 and 2015, respectively. We
pay media costs, the components of which are detailed in “Item 5. Operating and Financial Review and Prospects — A.
Operating Results — Cost of Revenues — Advertising Service Costs — Media Costs”, to our local operating
partners for operating our advertising business on buses and subways. For both continuing and discontinued operations, media costs
constitute a significant portion of our cost of revenues and accounted for approximately 69.6%, 69.9% and 69.5% of our total revenues
in the years ended December 31, 2013, 2014 and 2015, respectively. As of December 31, 2015, in respect of the exclusive agency
agreements for our bus platforms, nine were entered into with our direct investment entities and seven were entered into with
independent local operating partners. In respect of the exclusive agency agreements for our subway platforms, one agreement was
entered into with one of our direct investment entities and all other agreements were entered into with independent local operating
partners across five cities in the PRC. Our exclusive agency agreements typically have terms ranging from three
to
ten years, and do not contain any renewal provisions. Upon expiration of the exclusive agency agreements, we will discuss renewing
the agreements with our local operating partners, and the detailed terms of the new exclusive agency agreements will be negotiated
at that time. The exclusive agency agreements cannot be terminated before the expiry of their terms unless agreed by both parties,
and any party who initiates early termination of such an agreement is subject to penalty at an amount specified in the agreement.
Our media costs each year pursuant to each of these agreements is fixed and is determined upfront at the time when the agreements
were signed. We negotiate each of our exclusive agency agreements with our local operating partners on a case-by-case basis and
also determine through negotiation the amount of the media costs for each year under the agreement. All of our exclusive agency
agreements contain escalation clauses to increase the media costs at pre-determined fixed amounts each year under the agreements,
except for (i) two exclusive agency agreements that in aggregate accounted for less than 5% of our media costs and (ii) one exclusive
agency agreement that has a fixed media cost for the first six years with an annual increase in the media costs beginning in the
seventh year. However, our revenues may fluctuate significantly from period to period due to, among other factors, seasonality,
customer loyalty, competition and changes in regulations. If our revenues decrease in a given period, we may be unable to reduce
our cost of revenues as a significant portion of our cost of revenues is fixed, which could materially and adversely affect our
results of operations, and result in a net loss in that period.
If PRC regulators order one or more of our local operating
partners to stop their mobile digital television operations due to violations of applicable regulations, our business, financial
condition and results of operations would be materially and adversely affected.
On March 17, 2014, the PRC State Administration
of Press, Publication, Radio, Film and Television, or SARFT, promulgated the
Notice Concerning Regulating Development of Mobile
Digital Television
, or the March 2014 Notice. The March 2014 Notice regulates mobile digital television operations and mainly
comprises the following provisions:
|
·
|
mobile digital
television businesses shall be operated by municipal or provincial radio and television
stations, and satisfy the following requirements:
|
|
·
|
mobile digital
television operations shall comply with the overall plan and layout of mobile digital
television determined by SARFT;
|
|
·
|
mobile digital
television operations shall be conducted in cities with a relatively high level of economic
and social development, which should have no less than 2,000 buses in total, or have
a subway or light railway transportation system;
|
|
·
|
the equity fund,
equipment, worksite and professional personnel required for mobile digital television
operations shall be commensurate with the relevant business scale;
|
|
·
|
there shall be
a sound system in place for the review, broadcast and monitoring of programs on mobile
digital television;
|
|
·
|
the business operator
shall have program resources which are in compliance with relevant state regulations
and commensurate with its business scale;
|
|
·
|
the technical system
shall meet the industrial and technical standards required by the relevant state regulations;
|
|
·
|
permits to transmit
radio and television programming shall be obtained for the integrated signal transmission
platform, which platform shall be regulated by and qualified with SARFT;
|
|
·
|
mobile digital
television operations that are newly conducted after the March 2014 Notice shall obtain
approval from SARFT;
|
|
·
|
mobile digital
television operations shall comply with the Measures for Administration of Advertisement
Broadcasting by Radio and Television promulgated in 2009 by SARFT, including restrictions
on total advertising time, frequency, content and format of advertisements;
|
|
·
|
national mobile
digital television standards have been established and all mobile digital television
operations shall comply with such national standards; and
|
|
·
|
the
Notice
Concerning Experimental Mobile Digital Television
previously promulgated by SARFT,
or the March 2006 Notice, has been repealed as of March 17, 2014.
|
These regulations apply directly to our local
mobile digital television operating partners because they are in the business of operating mobile digital television networks.
SARFT and its local branches have the authority to halt the operations of any mobile digital television operator that has violated
the March 2014 Notice or other applicable laws or regulations.
SARFT or its local branches may order any of
our local operating partners to stop their operations. If any of our local operating partners is ordered to stop their mobile
digital television operations in a given city, we may not be able to continue our advertising business in that city through other
media or channels at acceptable costs, or at all. In which case, our business, financial condition and results of operations would
be materially and adversely affected.
We may be subject to, and may expend significant resources
in defending against, government actions and civil suits based on the content and services we provide through our mobile digital
television advertising network.
PRC advertising laws and regulations require
advertisers, advertising operators and advertising distributors, including businesses such as ours and those of our local operating
partners, to ensure that the content of the advertisements they prepare or distribute is fair, accurate and in full compliance
with applicable laws, rules and regulations. Violation of these laws, rules or regulations may result in penalties, including
fines, confiscation of advertising fees, orders to cease dissemination of the advertisements, and/or orders to publish an advertisement
correcting any misleading information. In circumstances involving serious violations, the PRC government may revoke a violator’s
license to operate its advertising business.
As an operator of an advertising medium, we
are obligated under PRC laws, rules and regulations to monitor the advertising content aired on our network or supplemental subway
advertising platform for compliance with applicable laws. Although the advertisements shown on our network generally have previously
been broadcast over public television networks and have been subjected to internal review and verification by these broadcasters,
we are required to review and verify these advertisements separately and independently for content compliance before displaying
these advertisements. In addition, for advertising content related to special types of products and services, such as alcohol,
cosmetics, pharmaceuticals and medical procedures, we are required to confirm that the advertisers have obtained requisite government
approvals including operating qualifications, proof of quality inspection of the advertised products, government pre-approval
of the contents of the advertisement, and filing with the local authorities. We employ, and our local direct investment entities
are required by applicable PRC laws, rules and regulations to employ, qualified advertising inspectors who are trained to review
advertising content for compliance with applicable PRC laws, rules and regulations. We endeavor to comply with such requirements,
including by requesting relevant documents from advertisers. Our reputation would be tarnished and our results of operations may
be adversely affected if advertisements shown on our mobile digital television advertising network or supplemental subway advertising
platform were provided to us by our advertising clients in violation of relevant PRC content laws and regulations, or if the supporting
documentation and government approvals provided to us by our advertising clients in connection with such advertising content were
not complete, or if the advertisements that our local operating partners have broadcasted on our network were not approved by
relevant local supervisory bodies, or if the content of any advertisement were not compliant with applicable laws and regulations.
All forms of outdoor advertisements must be
registered in advance of their dissemination with the relevant local branch of the State Administration of Industry and Commerce,
or SAIC, which regulates advertising companies. Advertising distributors are required to submit a registration application form
as well as the content of the advertisement to the local SAIC branch in order to receive an advertising registration certificate.
Applicable PRC laws and regulations are not clear as to whether advertising on public transportation systems or other out-of-home
locations are considered to be “outdoor advertising”. In practice, local SAIC branches have discretion to determine
whether such advertising constitutes outdoor advertising which would require registration with the relevant local SAIC branch.
Local SAIC branches in different regions of the PRC may reach different conclusions with respect to this issue and such conclusions
also may be subject to further revisions or amendments. All of our local operating partners are affiliates or subsidiaries of
state-owned television stations operating under SARFT, and the senior management of these state-owned television stations consists
of appointed government officials. The competent government authority grants state-owned television stations the authority to
review and approve advertisements to be broadcast. These state-owned television stations have confirmed that advertisements can
be broadcast on mobile digital television without being classified as outdoor advertising. We and each of our local operating
partners do not believe that advertising activity on public transportation constitutes “outdoor advertising” and therefore
do not believe that registration with the SAIC is necessary. None of our local operating partners or direct investment entities
has renewed or completed an outdoor advertising registration, and as of December 31, 2014, none of our local operating partners
or direct investment entities was required by the local SAIC to apply for such registration or was fined or penalized for failing
to complete such registration. Furthermore, none of our local operating partners expects the SAIC in the future to levy any fines
or sanctions related to the absence of such registration. Our local operating partners have expressed to us their willingness
to comply fully with all relevant PRC rules and regulations during our conversations with them, including registering with the
SAIC. Although no written assurances have been provided, our local operating partners have orally expressed their willingness
to register with the SAIC in the event that the SAIC or a competent government authority determines that such registrations are
required. We believe that our local operating partners will be able to apply for the appropriate registrations in the event that
the SAIC or a competent government authority determines that such registrations are required. As a precaution to cope with this
legal uncertainty, our direct investment entities in Haerbin and Zhengzhou registered with the local SAIC, but these registrations
expired in 2008. Currently, our local operating partners have advised us that they do not believe such registrations are necessary,
and none of our local operating partners plan to submit registration applications to the SAIC. If advertising on public transportation
systems or other out-of-home locations is determined by a local SAIC branch to be outdoor advertising, it will take the SAIC branch
as long as seven working days to review and approve an outdoor advertising registration after having accepted an application filed
by our local operating partner or direct investment entity. If a registration is not effected as required by the local SAIC branch,
our local operating partner or direct investment entity within the relevant jurisdiction of the local SAIC branch would be subject
to a fine of up to RMB30,000, confiscation of advertising fees received and may be ordered to stop disseminating the advertisements.
As a result, our business in that jurisdiction would be materially and adversely affected, which may have a material and adverse
effect on our overall business.
Moreover, civil claims may be filed against
us for fraud, defamation, subversion, negligence, copyright or trademark infringement or other violations due to the nature and
content of the information displayed on our advertising network. If viewers find the content displayed on our advertising network
to be offensive, bus and subway companies that display our content on their buses and subway platforms may seek to hold us responsible
for any claims by their passengers or such companies may terminate their relationships with us.
We may encounter cyber-attacks, which may have a material
and adverse effect on our business operations, financial condition and reputation.
If the security of the broadcasting network
we use to send our signals is breached despite the efforts of our local operating partners to ensure the security of the content
management system, and unauthorized images, text or audio sounds are broadcast through our advertising 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. Any such cyber-attack incidents may disrupt our services and result in significant damages and have a material and adverse
effect on our operations. In addition, we may suffer negative consequences, such as litigation, monetary liabilities, increased
cybersecurity protection costs, lost revenues and reputational damage. If viewers of our advertising do not believe our content
is reliable or secure, our business model may become less appealing to viewers in China and our advertising clients may be unwilling
to place advertisements on our advertising network.
By promulgating the March 2014 Notice, the SARFT determined
that regulations on radio and television advertising operations are applicable to advertising on mobile digital television, and
our business and prospects could be harmed by this determination.
In 2009, SARFT promulgated Measures for Administration
of Advertisement Broadcasting by Radio and Television, or the 2009 Regulation. The 2009 Regulation became effective on January
1, 2010 and is applicable to advertisement broadcasting on all radio and television stations and channels. This regulation contains
a number of restrictions, including that the total time of advertisements broadcast by a single radio or television station or
channel shall not exceed 12 minutes per broadcasting hour. On average, we sold 7.43, 7.94 and 6.71 advertising minutes per broadcasting
hour for the years ended December 31, 2013, 2014 and 2015, respectively. Pursuant to the March 2014 Notice, mobile digital television
operations must comply with the 2009 Regulation. In which case, our future revenues could be significantly impacted by any action
by SARFT to enforce the 2009 Regulation with respect to the mobile digital television industry. Even though our PRC legal counsel
has advised us that under relevant PRC laws and regulations, we are entitled to enforce our media contracts against our state-owned
local operating partners and there is no limitation on the enforceability of those media contracts, if a regulatory enforcement
action were to occur as described above, the total time of advertisements broadcast on our network would be limited. As the annual
increase of our media costs is already agreed in certain of our media contracts and such contracts do not contain any provisions
to decrease the media costs in the event that the total advertising time on the networks of our local operating partners were
to be limited, a regulatory limitation on advertising time would limit our potential revenues, while our media costs continue
to increase. Our business, advertising service revenue and operating results may thereby be materially and adversely affected.
Our failure to maintain relationships with local television
stations or local mobile digital television companies would harm our business and prospects.
Our ability to generate revenues from advertising
sales depends largely upon our ability to broadcast advertisements on large mobile digital television networks on mass transportation
systems in urban areas. This, in turn, necessitates that we develop and maintain business relationships with local television
stations, local mobile digital television companies, local governments, and mass transportation services through which we obtain
programming, broadcasting and space for our mobile digital television advertising networks. As of December 31, 2015, we provided
advertising services mainly through our network and supplemental subway advertising platform with approximately 88,844 digital
displays in 19 cities in China, among which we have entered into exclusive advertising agency arrangements in 19 cities and direct
investment arrangements in 11 cities in China. We cannot assure you that we can maintain these relationships on satisfactory terms,
or at all. Our local operating partners may unilaterally terminate our agreements prior to those agreements’ expiry if there
are events of force majeure or if we have breached the agreements. If we fail to perform our contractual obligations, we will
be in breach of our agreement and our local operating partner may unilaterally terminate our agreement. If we fail to maintain
relationships with our local operating partners, advertisers may find advertising on our network unattractive and may not purchase
advertising time from us, which would cause our revenues to decline and our business and prospects to deteriorate.
We do not completely control the operations of our
direct investment entities; any dispute with a local television station could harm our business.
We operate in 10
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cities through direct investment entities formed with local television stations. PRC law provides that the television
stations or entities controlled by them must own no less than 51% of the equity interests in any mobile digital television operating
company. We own a 49% equity interest in each of those direct investment entities, except for a direct investment entity in Shenzhen
in which we own a 25% equity interest and a direct investment entity in Wuxi in which we own a 14% equity interest. Seven out
of ten of our direct investment agreements provide that we have the right to appoint the general manager of the direct investment
entity, who will be in charge of the entity’s day-to -day operations. The right to appoint the general manager is subject
to confirmation by the direct investment entity. Our local operating partners, which include the local television stations Chengdu
Television Station, Shenzhen Media Group, Jilin Television Station, Dalian Television Station, Henan Cable Television Network
Group Co., Ltd., Hubei Broadcast and Television General Station, Wuxi Broadcast and Television Group, Suzhou Broadcast and Television
General Station, Changzhou Television Station and Ningbo Broadcast and Television Group, control broadcasting and are responsible
for compliance matters. We cannot assure you that disputes will not arise between us and our local operating partners, or that
any such dispute will be resolved in our favor. Further, our interests may differ from those of our local operating partners.
We may have to rely on court proceedings to resolve a dispute between us and one or more of our local operating partners. Any
litigation will divert our resources, may divert the attention of our senior management, and may result in a judgment against
us. If any dispute between us and one or more of our local operating partners were to arise, our business operations could be
harmed, and our financial condition and results of operations could be materially and adversely affected.
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We have
entered into direct investment arrangements in 11 cities in China. Among these 11 cities,
we operate in 10 cities through direct investment entities formed with local television
stations. In the remaining 1 city, we operate through a direct investment entity which
was not formed with the local television station.
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Any failure by us or by one or more of our local operating
partners to maintain existing relationships or to develop new relationships with local bus companies or subway companies would
harm our business and prospects.
In most of the cities where we operate, our
business relationships with local bus companies, or subway companies, or other selected operations are secured and provided by
our local operating partners or our direct investment entities. Furthermore, as of December 31, 2015, our operations on the supplemental
subway advertising platform in, Beijing, Chongqing, Nanjing and Shenzhen were secured by our agreements with the subway companies
in these four cities, respectively. However, we cannot assure you that we and our local operating partners can maintain these
relationships with the local bus companies or subway companies on satisfactory terms, or at all, or that the local bus companies
or subway companies will not terminate these relationships before their expiration. If we or our local operating partners fail
to maintain these relationships, advertisers may find advertising on our network unattractive and may not purchase advertising
time from us, which would cause our revenues to decline and our business and prospects to deteriorate.
A significant portion of the mobile digital television
networks of our direct investment entities and the digital television broadcasting infrastructure of our local operating partners
currently does not meet newly adopted PRC national standards for mobile digital television operations. We will be required to
spend significant capital and other resources to upgrade the existing digital television broadcasting infrastructure of our local
operating partners in order to meet these new national standards, which expenditures could materially and adversely affect our
business, financial condition and results of operations.
Our local operating partners have adopted three
different digital television technology standards in operating their networks. In addition, our direct investment entities have
installed digital television receivers based on the technology standards that our local operating partners have adopted. The National
Standard of Frame Structure and Channel Code and Modulation of Digital Television Ground Broadcasting Transmission System, or
the National Standard, was approved by the Standardization Administration of the PRC on August 18, 2006, and became effective
on August 1, 2007. On March 27, 2006, the SARFT promulgated the
Notice Concerning Experimental Mobile Digital Television
,
or the March 2006 Notice, which required all of our local operating partners to adopt the National Standard for their mobile digital
television operations. In addition, the SARFT issued a notice requiring some of our local operating partners and direct investment
entities to complete the adoption of the National Standard by June 30, 2010. As of August 31, 2016, the mobile digital television
network of our direct investment entities and the digital television broadcasting infrastructure of our local operating partners
in 13 cities (Chengdu China Digital Mobile Television Co., Ltd., Wuxi Guangtong Digital Mobile Television Co., Ltd., Ningbo China
Mobile Television Development Co., Ltd., Dalian Mobile Digital Television Co., Ltd., Hubei China Mobile Television Co., Ltd.,
Liaoning Beifang New Media Co., Ltd., Xiamen Radio and Television Digital Media Co., Ltd., Suzhou China Mobile Television Co.,
Ltd., Shenzhen Mobile Television Co., Ltd., Guangzhou Pearl River Mobile Multimedia Television Co., Ltd., Changsha Guangdian Digital
Mobile Television Co., Ltd., Henan Cable China Mobile Television Company Limited and Changzhou China Mobile Television Company
Limited) have been upgraded to meet the National Standard, but those in another four cities (Beijing Beiguang Media Mobile Television
Co., Ltd., Nanjing Guangdian Mobile Television Development Co., Ltd., Shanxi Dazhong Mobile Television Co., Ltd., and Jilin Mobile
Television Co., Ltd.) have not yet completed upgrades and currently do not meet the requirements of the National Standard. As
of August 31, 2016, aside from Beijing, our local operating partners in the other three of these four cities have not yet begun
the upgrade process, and we and our local operating partners estimate that the upgrade process will take no more than two years
to complete once it has begun. The actual amount of time required to complete the upgrade process in any given city depends on
a number of factors, including the size of the mobile digital television network in that city, the equipment currently used, the
resources available for the upgrade and the schedule for replacing the equipment. Our direct investment entity, Jilin Mobile Television
Co., Ltd., and our local operating partners, Beijing Beiguang Media Mobile Television Co., Ltd, Nanjing Guangdian Mobile Television
Development Co., Ltd., and Shanxi Dazhong Mobile Television Co., Ltd., will be required to spend significant capital and other
resources, including purchasing new equipment, to upgrade their digital television broadcasting infrastructures to meet the requirements
of the National Standard. These same three of our local operating partners told us the upgrade process had commenced as of April
9, 2012. Furthermore, the installation of new technology and equipment could cause disruptions to our programming, which in turn
may adversely affect our reputation and business. If our local operating partners and direct investment entities do not complete
the adoption of the National Standard in a timely manner or at all, or if such adoption requires substantial capital expenditures
or other resources, our business, financial condition and results of operations would be materially and adversely affected.
In certain cities, we may be required to obtain approvals
in order to continue including non-advertising content in our programs that are transmitted through closed circuit networks. If
we are unable to continue to include non-advertising content in our programs, our business and prospects could be adversely affected.
On December 6, 2007, the SARFT issued the
Circular
regarding Strengthening the Management of Public Audio -Video in Automobiles, Buildings and Other Public Areas
, or the SARFT
Circular. Under the SARFT Circular, the display of audio-video programs, such as television news, films and television shows,
sports, technology and entertainment, through public audio-video systems located in outdoor public places, including automobiles,
airports and bus and train stations, must be approved by the SARFT. While the SARFT Circular does not apply to audio-video transmitted
through digital broadcast technology, it does apply to audio-video transmitted through closed circuit networks. As a result, we
may be required to obtain approvals for certain of our supplemental subway advertising operations. These supplemental subway advertising
operations transmit programming through closed video networks rather than through digital broadcast technology and include operations
in Beijing (Line 4 and Daxing Line), Shenzhen (Lines 2, 4 and 5, and stations in Line 1), Nanjing (Line 2 and the southern extended
line for Line 1) and Chongqing.
We intend to obtain the required approvals
for our non-advertising content transmitted through these operations. However, relevant government authorities in China have not
yet promulgated any implementation rules on the procedure for applying for these approvals. We cannot assure you that we will
obtain such approvals as required by the SARFT Circular in a timely manner, or at all. If we do not obtain the requisite approvals,
we may be required to eliminate part or all of the non-advertising content transmitted through closed circuit networks on our
supplemental subway platforms. As a result, we may not be able to capture the attention of our target audience due to the lack
of non-advertising content, which could make our advertising network on these supplemental subway platforms less attractive, and
consequently have an adverse effect on our business and prospects.
We operate in the advertising industry, which is particularly
sensitive to changes in economic conditions and advertising trends.
Demand for advertising time on our network
and supplemental subway advertising platform, and the according amounts spent by our clients on advertising, are particularly
sensitive to changes in general economic conditions. For example, advertising expenditures typically decrease during periods of
economic downturn. Advertisers may reduce the money they spend to advertise on our network and supplemental subway advertising
platform for a number of reasons, including:
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a general decline
in economic conditions;
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a decline in
economic conditions in the particular cities where we conduct business;
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a decision to
shift advertising expenditures to other available advertising media; and
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a general decline
in advertising spending.
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A decrease in demand for advertising media
in general, and for our advertising services in particular, would materially and adversely affect our ability to generate revenues,
and have a material and adverse effect on our financial condition and results of operations.
In March 2016, China pared down its economic
growth target to a range of 6.5% to 7.0%. Growth in consumer spending in China have also slowed, which resulted in a corresponding
slowdown in advertising spending growth. If there is another deterioration in economic conditions, our revenues, net income and
results of operations could be materially adversely affected.
If advertisers or the viewing public do not accept,
or lose interest in, our mobile digital television advertising network, our revenues may be negatively affected and our business
may not expand or be successful.
The mobile digital television advertising market
in China is relatively new and its potential is uncertain. We compete for advertising revenues with many forms of more established
advertising media. Our success depends on the acceptance of our mobile digital television advertising network by advertisers and
their continuing interest in this medium as part of their advertising strategies. Our success also depends on the viewing public’s
continued receptiveness towards our mobile digital television advertising model. Advertisers may elect not to use our services
if they believe that viewers are not receptive to our network or that our network does not provide sufficient value as an effective
advertising medium. Likewise, if viewers find some element of our network, such as the audio feature of monitors, to be disruptive
or intrusive, mass transportation companies may decide not to install our digital displays, and advertisers may view our network
as a less attractive advertising medium compared to other alternatives. In these events, advertisers may reduce their spending
on our network. If a substantial number of advertisers lose interest in advertising on our network for these or other reasons,
we will be unable to generate sufficient revenues and cash flows to operate our business, and our financial condition and results
of operations would be materially and adversely affected.
The process of developing a relationship with a local
television station or its mobile digital television operating company, and then installing digital displays on mass transportation
systems can be time -consuming and requires us to commit a substantial amount of resources, from which commitment we may not be
able to recognize the benefits we had anticipated.
Our success depends largely on our ability
to establish relationships with local television stations and mass transportation companies. Before expanding into a new city,
we identify cities that have been or are planning to launch digital mobile television operations, collect data and analyze certain
development status indicators such as economic status, consumer patterns, potential market size for advertising, development of
mass transportation systems (including bus and subway) and mobile digital television networks, population and the percentage of
the population that takes public transportation in those cities. We also evaluate the commercial potential and our estimated revenue.
In some cases, we actively pursue cooperation activities with television stations or mobile television operators based on market
research, while in other cases we are contacted by those operators who have an interest in cooperating with us. The process of
establishing these relationships can be lengthy as mobile digital television is a relatively new form of media and we often need
to convince counterparties of the benefits of establishing a mobile digital television network on a given mass transportation
system. We may be required to commit substantial resources, including but not limited to the time and effort spent by our senior
management (such as our chief executive officer and chief development officer) and staff from our media development department,
research work and feasibility analyses and other expenses incurred during this process, such as travelling. Despite our best efforts,
counterparties ultimately may decide not to establish a mobile digital television network or may choose not to collaborate with
us. If counterparties do not accept a mobile digital television network as an effective medium on mass transportation vehicles,
we may not be able to grow our business or our revenues.
Once a mass transportation company has agreed
to install our mobile digital television displays on their buses or other vehicles, we must invest substantial time and resources
to install digital television displays before we receive any revenues from such efforts. Such investments typically include the
purchase and installation of digital television displays, or expenses relating to the acquisition of interests in one or more
local direct investment entities. We may experience increased distribution and operations costs during and/or after deploying
our digital television displays. We also may experience delays in generating revenue, if any, due to deployment delays or difficulties
in selling advertising time to new or current advertisers to be aired on these buses and other mass transportation vehicles. We
may not be able to generate sufficient revenues from advertising packages on these buses and other mass transportation vehicles
to offset the related costs.
Defects in local mobile digital television networks,
on which we rely to conduct our advertising operations, could result in unexpected expenses and losses of advertisers and in numbers
of potential viewers.
Our advertising operations rely on a combination
of digital television displays and the broadcasting network infrastructure of local television stations. This combined infrastructure
is complex and must meet stringent quality and reliability requirements. Due to the complexity of this infrastructure and the
impracticability of testing all possible operating scenarios prior to its implementation, certain errors or defects may not be
detectable. The existence of errors or defects in this combined infrastructure may result in a loss of, or delay in, acceptance
of our advertising services by advertisers and public viewers. In addition, mass transportation companies could cancel their arrangements
with our direct investment entities or our local operating partners if their respective networks experience sustained downtime.
Any errors or defects in the local mobile digital television networks which we use to conduct our advertising operations could
damage our reputation, result in lost revenue, divert development resources, and increase service and support costs and warranty
claims.
When our local mobile digital television advertising
networks reach saturation in the cities where we operate, we may not be able to grow our revenue base or satisfy all of our advertisers’
needs, which could hamper our ability to generate higher levels of revenues over time.
Air time allocated to programming and advertising
on our mobile digital television networks is generally specified in the agreements we have with our local operating partners.
In cities where advertisers’ demand for advertising time is high, such as Beijing, Guangzhou, Shenzhen and Nanjing, our
local mobile digital television networks may reach saturation, meaning that we cannot sell additional advertising time without
increasing the proportion of advertisements to programs. If our local networks reach saturation in any particular city, we will
be forced to request additional advertising time from our local operating partners or increase our advertising rates to increase
our revenues. However, we cannot assure you that our local operating partners will grant our requests, and advertisers may not
be willing to accept rate increases or a decrease in the amount of programming, which decrease in turn may decrease the audience’s
attentiveness to their advertisements. If we are unable to obtain longer advertising time on our network, or the rates for advertising
time in saturated cities, we may be unable to generate higher levels of revenues over time.
If we fail to attract advertisers to our network, we
would be unable to maintain or increase our advertising prices, which would negatively affect our ability to grow revenues.
The actual prices we can charge advertisers
for time on our mobile digital television network and supplemental subway advertising platform depend on the size and quality
of our networks and on advertisers’ demand for advertising time. Advertisers choose to advertise on our network in part
because of the network’s size and the desirability of the cities where we operate. If we fail to diversify advertising channels,
to maintain or increase the number of cities in our network, or to solidify our brand name and reputation as a quality provider
of advertising services, advertisers may not be willing to purchase time on our network or to pay the advertising fees we need
to generate in order to remain profitable. Any significant decrease in demand could cause us to lower the prices we charge for
advertising time on our network and could negatively affect our ability to increase revenues in the future.
We generally do not have exclusive or long-term agreements
with our advertising clients and we may lose their engagement if they are not satisfied with our services or for other reasons.
As is customary in the advertising industry
in China, we generally do not have exclusive or long -term agreements with our advertising clients. A majority of our agreements
have a term of less than one year. Accordingly, we must rely on high -quality services, industry reputation, our network size
and coverage, and favorable pricing to attract and retain advertising clients. There is no assurance, however, that we will be
able to maintain our relationships with current and/or future clients. In particular, we derive a substantial percentage of our
revenues from a small number of advertising clients. For example, our top ten advertising clients in the aggregate accounted for
33.5% of our total revenues for the year ended December 31, 2015. These and our other advertising clients may elect to terminate
their relationships with us if they are not satisfied with our services. We have lost client accounts in the past and may lose
client accounts in the future. If a substantial number of our advertising clients choose to discontinue their purchases of advertising
time from us, we would not be able to generate sufficient revenues and cash flows to operate our business, and our results of
operations and financial condition would be materially and adversely affected.
We face significant competition, and if we do not compete
successfully against new and existing competitors, we may lose our market share, and our profitability may be adversely affected.
We compete with other mobile digital television
advertising companies and other new media advertising companies in China. We compete for advertising clients primarily on the
basis of our network size and coverage, locations, prices, range of services and brand name. We also face competition from other
mobile digital television advertising network operators for access to the most desirable cities and mass transportation systems
in China. Our major competitors include other companies that operate out-of-home advertising media networks such as Focus Media
Information Technology Co., Ltd., AirMedia Group Inc., Towona Mobile Digital Co., Ltd. and Bus Online Media Co., Ltd. We also
compete for overall advertising spending with other advertising media, such as television, mass transportation posters, billboards,
newspapers, radio, magazines and the Internet. Some of our competitors operate digital television advertising networks installed
on mass transportation systems primarily playing prerecorded content saved on compact flash drives or DVDs.
Many smaller mobile digital television companies
operate in cities outside of our network pursuant to exclusive agreements, and we expect to encounter barriers-to -entry as we
attempt to expand our network into these cities. For example, in Shanghai, Shanghai Oriental Pearl Mobile Television Inc. operates
the largest mobile digital television advertising network using broadcasting technology. As a result, we face barriers-to -entry
to expand our network on the bus platform in Shanghai. In addition, we will face barriers-to -entry as we attempt to expand our
out-of-home advertising network to different media platforms, such as in -building displays or large outdoor LED displays, because
other companies have already signed exclusive placement agreements to secure the most desirable locations.
Further, we also may face competition from
new entrants into the mobile digital television advertising sector. As is customary in the advertising industry in China, we generally
do not have exclusive arrangements with our advertising clients and we do not have exclusive arrangements with the local operating
partners in a number of cities where we operate. Therefore, we cannot assure you that we will succeed in increasing or maintaining
our market share.
Increased competition could reduce our operating
margins and profitability and result in a loss of market share. Some of our existing and potential competitors may have competitive
advantages, such as significantly greater financial, marketing or other resources, and others may successfully mimic and adopt
our business model. Moreover, increased 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. We cannot assure you that we
will be able to compete successfully against new or existing competitors.
Several major cities in China have accounted, and will
continue to account, for a substantial majority of our revenues. Our business and financial condition are particularly susceptible
to general economic conditions and to the relationships we have with our local operating partners in these cities.
A substantial majority of our revenues currently
derive from our operations in China’s four major cities: Beijing, Shanghai, Guangzhou and Shenzhen. Our advertising revenue
in Beijing, Guangzhou and Shenzhen in the aggregate accounted for 62.9% of our total advertising service revenue in 2009. Following
the completion of our acquisition of Digital Media Group, we expanded our network to the subway platform in Shanghai and additional
subway lines in Beijing and Shenzhen. These four major cities in the aggregate accounted for 65.8%,72.4% and 67% of our total
advertising service revenue in 2010, 2011 and 2012, respectively, among which 15.0%,14.2%, 9.7% were from our subway platform
in Shanghai. On September 1, 2012, we terminated our exclusive advertising agency agreements with our local operating partner
in Shanghai. On September 1, 2014 we terminated our exclusive advertising agency agreements with one of our local operating partners
in Beijing, Beijing Beiguang Metro Media Co., Ltd., responsible for our networks in Beijing subway lines 1, 2, 13 and the Batong
Line. On November 1, 2014 we terminated our exclusive advertising agency agreements with one of our local operating partners in
Guangzhou, Guangzhou Metro Television Co., Ltd., responsible for our networks in the subway lines in Guangzhou. Termination of
exclusive advertising agreements with our local operating partners in respect of subways in Shanghai, Beijing and Guangzhou allows
us to optimize our cost structure by removing the obligation previously borne by us to spend fixed amounts on media costs with
certain of these local operating partners. After terminating these agreements, we changed our business model in these three major
media platforms from that of an exclusive agency contract to a non-exclusive contract so that we can continue to sell our advertising
products through these media platforms. Our advertising revenue deriving from all of the subway lines in Beijing and Guangzhou
in which we operate in the aggregate accounted for 26%, 28.0% and 20.6% of our total advertising service revenue in 2012, 2013
and 2014, respectively. In 2015, we generated 26.6% of our total advertising revenue in Beijing, Guangzhou and Shenzhen through
our exclusive advertising agency agreements. We expect in the future to generate a substantial portion of our revenues from these
three cities. If any of these cities experiences an event negatively affecting its mobile digital television advertising industry,
such as a serious economic downturn, a decline in the use of mass transportation systems, changes in government policy, a natural
disaster or changes in advertising preferences, our mobile digital television network, our supplemental subway advertising platform
and our ability to generate adequate cash flow would be materially and adversely affected. In addition, if we fail to maintain
our relationships with our remaining local operating partners in these cities (i.e. Beijing Beiguang Media Mobile Television Co.,
Ltd., Guangzhou Pearl River Mobile Multimedia Television Co., Ltd. and Shenzhen Metro Co., Ltd.), our business, financial condition
and results of operations would be materially and adversely affected.
Our quarterly operating results are difficult to predict
and may fluctuate significantly from period to period in the future.
Our quarterly operating results are difficult
to predict and may fluctuate significantly from period to period in the future based on the seasonality of consumer spending and
advertising trends in China or other factors. Factors that are likely to cause our operating results to fluctuate include:
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our ability to
maintain and increase sales to existing advertising clients, to attract new advertising
clients and to satisfy our clients’ demands;
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the frequency
of our clients’ advertisements on our network;
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the price we
charge for our advertising time or changes in our pricing strategies or in the pricing
strategies of our competitors;
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the effects of
strategic alliances, potential acquisitions and other business combinations, and our
ability to successfully and timely integrate them into our business;
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technical difficulties,
system downtime or interruptions;
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changes in government
regulations with respect to the advertising industry; and
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economic and
geopolitical conditions in China and elsewhere.
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Many of the factors mentioned above are beyond
our control, making our quarterly results difficult to predict, which could cause the trading price of our ADSs to decline below
the expectations of our investors. You should not rely on our operating results for prior periods as an indication of our future
results. If our revenues for a particular quarter are lower than expected, we may not be able to reduce our operating expenses
for that quarter by a corresponding amount, which would harm our operating results for that quarter relative to our operating
results from other quarters.
We depend substantially on the continuing efforts of
our executive officers, and our business and prospects may be severely disrupted if we lose their services.
Our future success largely depends on the continued
services of key members of our management team. In particular, our future success depends upon the continued service of Limin
Li, our co-founder, chairman, chief executive officer, and largest shareholder. We rely on his experience and knowledge of our
business operations, and in particular, his business vision, management skills and working relationships with our employees, our
other major shareholders, many of our clients and our local operating partners. We have granted share options and/or restricted
shares to executive officers to align those officers’ interests with ours. However, we face competition for personnel from
other mobile digital television advertising companies or general advertising companies and other organizations. Such competition
could cause us to offer higher compensation and other benefits in order to attract and retain these individuals, which could materially
and adversely affect our financial condition and results of operations. Furthermore, as we continue to expand our operations and
develop new products, we will need to continue to attract and retain experienced managers. We may not be able to attract or retain
the personnel we require to achieve our business objectives. Any failure on our part to do so could severely disrupt our business
and prospects. The process of hiring qualified personnel also is often lengthy. If our recruitment and retention efforts are unsuccessful
in the future, it may be more difficult for us to execute on our business strategy.
We do not maintain key-person insurance for
members of our management team. If we lose the services of any member of our senior management, we may not be able to locate suitable
or qualified replacements, and may incur additional expenses to recruit and train new personnel, which could severely disrupt
our business and prospects. In addition, if any of our executive officers were to join a competitor or were to form a competing
company, our marketing and sales efforts could be adversely affected and we may lose some of our customers. Although each of our
executive officers has entered into an employment agreement with us that contains confidentiality and non-compete provisions,
disputes may arise between our executive officers and us and we cannot assure you, in light of uncertainties associated with the
PRC legal system, that any of these provisions could be enforced in accordance with their terms.
We may not be able to recruit and retain the key personnel
we need generally, and sales and marketing personnel in particular, which could have material and adverse effects on our business,
financial condition and results of operations.
Our success depends on our ability to attract
and retain senior managers, as well as sales, marketing, engineering and other key personnel. Because of intense competition for
these employees, we may not be able to attract and retain personnel. If we are unable to retain our existing personnel, or to
attract, train, integrate or motivate additional qualified personnel, our growth may be restricted. The loss of any of our key
employees could slow our programming, distribution and sales efforts or harm the perceptions of advertisers, venue providers and
investors. Our senior executives may have to divert their attention to recruiting replacements for key personnel.
In particular, we depend on our sales and marketing
team to sell advertising time. We market our advertising services directly to advertisers, as well as to advertising agencies.
As of December 31, 2015, we had 208 dedicated sales and marketing personnel to support our sales and marketing efforts. We depend
on our sales staff to market our services to existing and potential clients and to cover a large number of clients in a wide variety
of industries. We need to further increase the size of our sales and marketing staff as our business continues to grow. If we
are unable to hire, retain, integrate or motivate our current or new marketing personnel, our sales and marketing efforts may
be materially impaired and our business, financial condition and results of operations could be materially and adversely affected.
We may be subject to intellectual property infringement
claims, which may force us to incur substantial legal expenses and could potentially result in judgments against us, which may
materially disrupt our business.
We cannot be certain that our advertising content,
entertainment content or other aspects of our business do not or will not infringe upon patents, copyrights or other intellectual
property rights held by third parties. Although we are not currently aware of any such claims, 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 or otherwise to have infringed upon others’ intellectual property rights, we may be enjoined
from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives. In addition, we may
incur substantial expenses in defending against third party infringement claims, regardless of the merits of those claims. Successful
infringement or licensing claims against us may result in substantial monetary liabilities, which may materially and adversely
disrupt our business.
If we are unable to adapt to evolving advertising trends
and preferences of advertisers and viewers, we will not be able to compete effectively.
The market for mobile digital television advertising
continuously requires us to identify new advertising trends and the technology needs of advertisers and public viewers, which
may necessitate the development of new features and enhancements for our network. The majority of our displays use LCD screens.
We currently broadcast programs and advertisements on our network through the television broadcasting network of our local operating
partners or their affiliated television stations. In the future, subject to relevant PRC laws and regulations, we may use other
technologies available in the market. We may be required to incur development and acquisition costs in order to keep pace with
new technology needs, but we may not have the financial resources necessary to fund and implement future technological innovations
or to replace obsolete technology. Furthermore, we may fail to respond in a timely fashion to changing technology needs. If we
cannot succeed in developing and introducing new features on a timely and cost-effective basis, advertisers’ demand for
our advertising time may decrease and we may not be able to compete effectively or to attract advertising clients, which would
have a material and adverse effect on our business and prospects.
We may need additional capital and we may not be able
to obtain it on acceptable terms, or at all, which could adversely affect our liquidity and financial position.
We may need additional cash resources due to
changes in the conditions of our business, acquisitions or other future developments. If readily available sources are inadequate
to satisfy our cash requirements, we may seek to sell additional equity or debt securities or to obtain a credit facility. The
sale of convertible debt securities or additional equity securities could result in dilution to our shareholders or a decrease
in the price of our ADSs. The incurrence of additional debt would result in increased debt service obligations and could result
in operating and financing covenants that would restrict our operations, liquidity, or ability to distribute dividends.
Our ability to obtain additional capital on
acceptable terms is subject to a variety of uncertainties, including:
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investors’
perception of, and demand for, securities of alternative advertising media companies;
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conditions of
the U.S. and other capital markets in which we may seek to raise funds;
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our future results
of operations, financial condition and cash flow;
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PRC governmental
regulation of foreign investment in advertising service companies in China;
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PRC governmental
regulation of the mobile digital television industry;
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economic, political
and other conditions in China; and
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PRC governmental
policies relating to foreign currency borrowings.
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We cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to
us could have a material adverse effect on our liquidity and financial condition. Without additional capital, we may not be able
to:
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upgrade our mobile
digital television advertising network;
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further develop
or enhance our services;
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acquire necessary
technologies or businesses;
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expand our operations,
including the reach of our network;
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hire, train and
retain employees;
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market our programs,
services and products; or
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respond to competitive
pressures or unanticipated capital requirements.
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Acquisition of other companies or assets of other companies
is a part of our growth strategy, and such acquisitions may expose us to significant business and financial risks, including exposure
to contingent acquisition consideration, which may adversely affect our results of operations and financial condition.
One of our strategies is to pursue acquisition
opportunities which are complementary to our business. However, we cannot assure you that we will be able to identify and secure
suitable acquisition opportunities. Our ability to consummate and integrate effectively any future acquisitions on terms that
are favorable to us may be limited by a number of factors such as the number of attractive acquisition targets, internal demands
on our resources and, to the extent necessary, our ability to obtain financing on satisfactory terms, if at all, for larger acquisitions.
Moreover, if an acquisition candidate is identified,
we may fail to enter into an acquisition or purchase agreement for such acquisition candidate on commercially reasonable terms,
or at all. The negotiation and completion of potential acquisitions, whether or not ultimately consummated, also could require
significant diversions of our time and resources and potentially may disrupt our existing business. Furthermore, we cannot assure
you that we will be able to integrate our acquisitions successfully into our operations or that the anticipated synergies of future
acquisitions will actually materialize. In addition, acquisitions could result in the incurrence of additional debt, costs and
contingent liabilities. For example, in connection with our acquisitions of six advertising agency businesses in China completed
in 2008, we were required to pay additional consideration if the acquired businesses met specified performance targets in the
years from 2008 through 2010. See “Item 5. Operating and Financial Review and Prospects — B. Liquidity and Capital
Resources — Investing Activities” for more details regarding this performance-based consideration. In addition, on
April 30, 2014, we issued the Notes to the Former DMG Shareholders to settle unpaid consideration for our acquisition of Digital
Media Group. We expect to redeem the Notes following the completion of a pre-determined repayment schedule over a period of six
years. See “Item 5. Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Investing
Activities” for more details. Future acquisitions also may expose us to potential risks, including risks associated with:
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the integration
of new operations, services and personnel;
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unforeseen or
hidden liabilities;
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diversions of
financial or other resources from our existing businesses and technologies;
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our inability
to generate sufficient revenues to recover costs and expenses of acquisitions; and
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the potential
loss of, or harm to, relationships with our employees or customers.
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Any of the above risks could significantly
disrupt our ability to manage our business, and could materially and adversely affect our business, financial condition and results
of operations.
Any failure to protect our intellectual property rights
could have a negative impact on our business.
We believe that our brand and trademarks are
critical to our success. The success of our business depends in part upon our continued ability to use our brand and trademarks
to increase awareness of, and further develop, our brand. The unauthorized reproduction of our trademarks could diminish the value
of our brand and its market acceptance, competitive advantages or goodwill.
It is difficult to monitor and prevent against
the unauthorized use of our intellectual property. The measures we take to protect our brand and trademarks may not be adequate
to prevent third parties from using them without our authorization. Furthermore, applications of laws governing intellectual property
rights in China and abroad is uncertain and evolving, and could subject us to substantial risks. If we are not able to protect
our brand and trademarks adequately, we may lose some or all of our rights to use these intellectual property assets and our business
may suffer materially. Furthermore, unauthorized use of our brand, trade names or trademarks could harm our reputation or cause
advertisers to confuse our brand with that of others. If our brand recognition decreases, we may lose advertisers and fail to
execute successfully on our expansion strategies, and our business, results of operations, financial condition and prospects could
be materially and adversely affected.
In managing our operations we rely on computer software
and hardware systems, the failure of which could adversely affect our business, financial condition and results of operations.
We depend upon computer software and hardware
systems to support our network and manage and monitor programs on the network. In addition, we rely on our computer hardware for
the storage, delivery and transmission of data on our network. Any system failure that interrupts the input, retrieval or transmission
of data could disrupt our normal operations. Any failure in our computer software or hardware systems could decrease our revenues
and harm our relationships with advertisers and consumers, which in turn could have a material and adverse effect on our business,
financial condition and results of operations.
The insurance coverage which we maintain in respect
of our operations in China is limited.
China’s insurance industry is still in
the early stages of its development. The insurance products offered by insurance companies in China are limited. We have determined
that the risks to our business of disruption or liability from continuing operations, any loss of or damage to our fixed assets,
including our equipment and office furniture, the cost of insuring for these risks, and the difficulties associated with acquiring
such insurance on commercially reasonable terms, make it impractical for us to maintain such insurance. As a result, we do not
have any business liability, disruption, litigation or property insurance coverage for our operations in China, except for insurance
on some company-owned vehicles. Any uninsured occurrence of loss or damage to fixed assets, or litigation or business disruption
may result in the incurrence of substantial costs and the diversion of resources, which could have an adverse effect on our operating
results.
We may become a passive foreign investment company,
or PFIC, which could result in adverse U.S. tax consequences to U.S. investors.
Based on our financial statements, relevant
market data, the composition of our income and valuation of our assets, including goodwill, we do not believe that we were a PFIC
for the year ended December 31, 2015 , although there can be no assurance in this regard. However, if we were to become a PFIC,
such characterization could result in adverse U.S. tax consequences to you if you are a U.S. investor. For example, if we were
to become a PFIC, our U.S. investors would become subject to increased tax liabilities under U.S. tax laws and regulations and
would become subject to burdensome reporting requirements.
If we are a PFIC for any taxable year during
which a U.S. investor holds our ADSs or common shares, unless the U.S. investor made a mark-to -market election, the U.S. investor
would be subject to special tax rules with respect to any “excess distribution” received and any gain realized from
a sale or other disposition, including a pledge, of those ADSs or common shares. Distributions received in a taxable year that
are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable years or
a U.S. investor’s holding period for the ADSs or common shares will be treated as excess distributions. Under these special
tax rules:
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the excess distribution
or gain will be allocated ratably over the U.S. investor’s holding period for the
ADSs or common shares,
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the amount allocated
to the current taxable year, and any taxable year prior to the first taxable year in
which we were a PFIC, will be treated as ordinary income, and
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the amount allocated
to each other year will be subject to tax at the highest tax rate in effect for that
year and the interest charge generally applicable to underpayments of tax will be imposed
on the resulting tax attributable to each such year.
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In addition, non-corporate U.S. investors will
not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the taxable year in which
such dividends are paid or in the preceding taxable year.
The determination of whether or not we are
a PFIC is made on an annual basis and depends on the composition of our income and assets from time to time. Specifically, we
will be classified as a PFIC for U.S. tax purposes if either: (i) 75% or more of our gross income in a taxable year is passive
income, or (ii) 50% or more of the value (determined on a quarterly average) of our assets (including cash) is attributable to
assets that produce or are held for the production of passive income (which includes cash). The calculation of the value of our
assets will be based, in part, on the then-prevailing market value of our ADSs, which is subject to change. We cannot assure you
that we will not be a PFIC for 2015 or any future taxable year. See “Item 10. Additional Information — E. Taxation
— Material United States Federal Income Tax Consequences.”
We may be, or may be joined as, a defendant in litigation
brought against our clients or our local operating partners by third parties, governmental or regulatory authorities, consumers
or competitors, which could result in judgments against us and could materially disrupt our business.
From time to time, we may be, or may be joined
as, a defendant in litigation brought against our clients or our local operating partners by third parties, governmental or regulatory
authorities, consumers or competitors. These actions could involve claims alleging, among other things, that:
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advertising claims
made with respect to our clients’ products or services are false, deceptive or
misleading;
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our clients’
products are defective or injurious and may be harmful to others;
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marketing, communications
or advertising materials created for our clients infringe on the proprietary rights of
third parties; or
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our relationships
with our local operating partners violate or interfere with the contractual relationships
or rights of third parties.
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Any such litigation could result in judgments
being issued against us that would materially and adversely affect our business operations.
Risks Related to Our Corporate Structure
If the PRC government determines that the agreements
establishing the structure for operating our China business do not comply with applicable PRC laws, rules and regulations, we
could be subject to severe penalties including being prohibited from continuing our operations in the PRC.
The PRC government requires any foreign entities
that invest in the advertising services industry to have at least two years of direct operations in the advertising industry outside
of China. We have not directly operated any advertising business outside of China and therefore, we currently do not qualify under
PRC regulations to invest in the advertising services industry. In addition, the March 2006 Notice prohibits foreign investment
in any mobile digital television company operating in China. We are a Cayman Islands corporation and a foreign legal person under
PRC law. Accordingly, our subsidiary, China Digital Technology (Shenzhen) Co., Ltd., or CDTC, which is a wholly -owned foreign
enterprise established by us on March 9, 2006, is currently ineligible to apply for the licenses required to provide advertising
services directly in China. CDTC is an intermediate holding company that consolidates the operating results generated by our consolidated
affiliated entities in a manner that complies with PRC rules and regulations. CDTC is authorized to engage in businesses such
as, but not limited to, technical development and technical consultancy services in connection with digital visual and audio equipment.
Our advertising business is currently provided pursuant to contractual arrangements with our consolidated affiliated entities
in China, which hold the requisite licenses to provide advertising services in China. One of our consolidated affiliated entities,
VisionChina Media Group Company Limited, or VisionChina Media Group, is currently owned by Limin Li and Yanqing Liang. We do not
have any equity interest in VisionChina Media Group, but we receive economic benefits from it through various contractual arrangements.
See “Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions.” In January
2010, we completed our acquisition of Digital Media Group, which operated and continues to operate its advertising business through
its consolidated affiliated entity in China, Beijing Eastlong Advertising. Beijing Eastlong Advertising is currently owned by
Qijun Men and Haifeng Wang. Digital Media Group does not have any equity interest in Beijing Eastlong Advertising, but receives
economic benefits from it and bears economic risks of it through various contractual arrangements. Our consolidated affiliated
entities and their subsidiaries directly operate our advertising network, enter into direct investment and exclusive and non-exclusive
advertising agency agreements, and sell advertising time to our clients. We have been, and expect to continue to be, dependent
on our consolidated affiliated entities and their subsidiaries to operate our advertising business.
There are substantial uncertainties regarding
the interpretation and application of current and future PRC laws, rules and regulations, including but not limited to the laws,
rules and regulations governing the validity and enforcement of our contractual arrangements with our consolidated affiliated
entities. Although we have been advised by our PRC counsel that the structure for operating our business in China (including our
corporate structure and contractual arrangements with our consolidated affiliated entities and their shareholders) complies with
all applicable PRC laws, rules and regulations, and does not violate, breach, contravene or otherwise conflict with any applicable
PRC laws, rules or regulations, we cannot assure you that the PRC regulatory authorities will not take a view that is contrary
to the above opinion of our PRC counsel and determine that our corporate structure and contractual arrangements violate PRC laws,
rules or regulations. We have been further advised by our PRC counsel that if the PRC government determines that the agreements
that establish the structure for operating our PRC advertising businesses do not comply with applicable restrictions on foreign
investment in the advertising industry or the mobile digital television industry, we may be subject to severe penalties including,
among other things, being prohibited from continuing our operations in the PRC.
If we, our consolidated affiliated entities
or any of their current or future subsidiaries, our direct investment entities, or our local operating partners are found to be
in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the permits or approvals
required to comply with existing or future PRC laws or regulations, relevant PRC regulatory authorities, including the SAIC and
the SARFT, would have broad discretion to handle and address such violations, which discretion could include taking any of the
following actions:
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revoking the
business and/or operating licenses of such entities;
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discontinuing
or restricting the conduct of any transactions among our consolidated affiliated entities,
our PRC subsidiaries and affiliated entities;
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imposing fines,
confiscating income generated by our consolidated affiliated entities or by us, or imposing
other requirements with which we, our consolidated affiliated entities, our PRC subsidiaries
or affiliated entities may not be able to comply;
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shutting down
the network of our consolidated affiliated entities; or
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requiring us,
our PRC subsidiaries or affiliated entities to restructure our ownership structure or
operations.
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The imposition of any of these penalties could
result in a material and adverse effect on our ability to conduct our business, on our financial condition and results of operations.
We rely on contractual arrangements with our consolidated
affiliated entities in China and with the holders of their equity interests in order to operate our business. These contractual
arrangements may not be as effective as owning a controlling equity interest for purposes of enabling us to control, or to derive
economic benefits from, the operations of these consolidated affiliated entities.
In the past we have relied, and in the future
we likely will continue to rely, on contractual arrangements with VisionChina Media Group, one of our consolidated affiliated
entities in China, and with its shareholders to operate our advertising business. In January 2010, we completed our acquisition
of Digital Media Group, which operated, and likely will continue to operate, its advertising business through contractual arrangements
with Beijing Eastlong Advertising and the holders of its equity interests.
These contractual arrangements may not be as
effective as owning a controlling equity interest would be for the purposes of enabling us to control, or to derive economic benefits
from, the business operations of our consolidated affiliated entities and their subsidiaries. If we had direct ownership of our
consolidated affiliated entities and their subsidiaries, we would be able to exercise our rights as a shareholder (i) to effect
changes in the board of directors of those entities, which in turn could effect changes, subject to any applicable fiduciary obligations,
at the management level of those entities, and (ii) to derive economic benefits from the operations of our consolidated affiliated
entities and their subsidiaries by causing them to declare and pay dividends. However, pursuant to our contractual arrangements
currently in force, as a legal matter, if our consolidated affiliated entities and their subsidiaries or any of the respective
holders of their equity were to fail to perform their, his or her respective obligations under these contractual arrangements,
we may have to incur substantial costs and resources to enforce such arrangements, and to rely on legal remedies available to
us under PRC law, including seeking specific performance or injunctive relief, and claiming damages. We cannot assure you that
any of the legal remedies available to us under PRC law will be effective for the purpose of enforcing these contractual arrangements.
For example, if equity holders of VisionChina Media Group were to refuse to transfer their equity interests in VisionChina Media
Group to us or to one or more persons whom we designate when we exercise the purchase option pursuant to these contractual arrangements,
we may have to take legal action to compel them to fulfill their contractual obligations, and we cannot guarantee that such legal
action would be successful in this regard.
Due to regulatory restrictions on foreign investment
in our industry in the PRC, we expect to continue to depend upon our contractual arrangements with our consolidated affiliated
entities, their subsidiaries, and holders of their equity interests in order to operate our advertising business in China. If
(i) applicable PRC authorities were to invalidate these contractual arrangements as being in violation of PRC laws, rules and
regulations, (ii) our consolidated affiliated entities or their subsidiaries were to terminate these contractual arrangements,
or (iii) our consolidated affiliated entities or their subsidiaries were to fail to perform their obligations under these contractual
arrangements, we would not be able to continue operating our business in China or to derive economic benefits from that business,
and the value of your ADSs would substantially decrease. Pursuant to the terms of each of (i) the technology and management services
agreement entered into on February 15, 2007 by and between CDTC and VisionChina Media Group, (ii) the domain name license agreement
entered into on February 15, 2007 by and between CDTC and VisionChina Media Group, (iii) the cooperation agreement entered into
on February 22, 2005 by and between Beijing Eastlong Technology and Beijing Eastlong Advertising, (iv) the supplemental agreement
entered into on April 2, 2014 by and among CDTC, Limin Li, Yanqing Liang and VisionChina Media Group, and (v) each of the respective
loan agreements, equity pledge agreement and option agreements to which each of CDTC and Beijing Eastlong Technology, respectively,
is a party, if CDTC or Beijing Eastlong Technology, as applicable, were to breach its representations or warranties or any of
the terms of the agreement, then the nondefaulting party, i.e. the relevant consolidated affiliated entity or the shareholders
thereof, as applicable, would be entitled to terminate the agreement. However, VisionChina Media Group and Beijing Eastlong Advertising
do not have any substantive kick-out rights available to them under any of the contractual arrangements. Furthermore, if we fail
to renew these contractual arrangements upon their expiration, we would not be able to continue operating our business unless
applicable PRC laws, rules and regulations were to allow us to operate advertising businesses directly in China.
In addition, through an Equity Pledge Agreement,
our consolidated entities encumber all or part of their assets with liens. See “Item 7. Major Shareholders and Related Party
Transactions — B. Related Party Transactions — Agreements that Provide Us Effective Control over VisionChina Media
Group, Beijing Eastlong Advertising and Their Respective Subsidiaries.” If our consolidated affiliated entities or all or
part of their assets become subject to liens or rights of third-party creditors, we may not be able to continue some or all of
our business activities, which could severely disrupt our business and have material and adverse effects on our financial condition
and results of operations. If one of our consolidated affiliated entities undergoes a voluntary or involuntary liquidation proceeding,
its equity holders or unrelated third-party creditors may claim rights to some or all of the assets of that consolidated affiliated
entity, thereby hindering our ability to operate our business and to derive economic benefits from that consolidated affiliated
entity and its subsidiaries. Such a hindrance could materially and adversely affect our business, our ability to generate revenues
and the market price of your ADSs.
The contractual arrangements with our consolidated
affiliated entities are governed by PRC law and provide for the resolution of disputes either through arbitration or litigation
in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in
accordance with PRC legal procedures. The PRC legal system is not as developed as that of some 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.
If we are unable to enforce these contractual arrangements, we may not be able to exercise effective control over our operating
entities, and we may be precluded from operating our business, which would have a material and adverse effect on our financial
condition and results of operations.
If VisionChina Media Group or Beijing Eastlong Advertising
fails to honor its obligations under contractual arrangements with us, our advertising business may be severely and adversely
affected.
PRC laws and regulations prohibit or restrict
foreign ownership of media content and advertising businesses. To comply with these restrictions on foreign ownership, we invest
in ventures with local television stations and provide advertising services on our out-of-home digital television networks in
the PRC through VisionChina Media Group and Beijing Eastlong Advertising, both of which are PRC legal entities. VisionChina Media
Group was established by our co-founders, and Beijing Eastlong Advertising was established by Haifeng Wang and Qijun Men. The
registered capital of VisionChina Media Group was paid in by us or CDTC through a loan extended to VisionChina Media Group’s
co-founders. CDTC has entered into certain exclusive agreements with VisionChina Media Group, which agreements obligate us to
absorb a majority of the risk of loss from VisionChina Media Group’s activities and entitle us to receive a majority of
its residual returns. In addition, we, through CDTC, have entered into certain agreements with the two individuals, including
a loan agreement described above for the amount of VisionChina Media Group’s paid-in registered capital, an option agreement
to acquire the equity interests in VisionChina Media Group at such future time as when PRC laws would permit us to hold those
equity interests, and a share pledge agreement with respect to the shares in VisionChina Media Group held by its co-founders.
Any dispute arising from these agreements is to be resolved through PRC court proceedings. Similarly, the registered capital of
Beijing Eastlong Advertising was paid in by Beijing Eastlong Technology Development Co., Ltd., or Beijing Eastlong Technology,
through loans extended to its equity holders. Beijing Eastlong Technology became our wholly owned subsidiary subsequent to our
acquisition of Digital Media Group in 2010. Beijing Eastlong Technology has entered into certain exclusive agreements with Beijing
Eastlong Advertising, which agreements obligate us to absorb a majority of the risk of loss from Beijing Eastlong Advertising’s
activities and entitle us to receive a majority of its residual returns. In addition, Beijing Eastlong Technology has entered
into certain agreements with the two individual holders of its equity, including a loan agreement described above for the amount
of paid-in registered capital of Beijing Eastlong Advertising, and an option agreement to acquire all of the equity interests
in Beijing Eastlong Advertising at such future time as when PRC laws would permit us to hold those equity interests, and a share
pledge agreement with respect to the shares in Beijing Eastlong Advertising held by Qijun Men and Haifeng Wang. Any dispute arising
from these agreements is to be resolved through PRC court proceedings. The major difference between arbitration and court proceedings
in the PRC is that PRC arbitral judgments are binding, enforceable and may not be appealed, whereas the judgment of a PRC court
may be appealed. According to the
PRC Civil Procedure Law
, each party to a dispute adjudicated by the trial of first instance
is entitled to appeal within the statutory time limit, and the relevant court shall hear all appeals once the case has been filed
in the second instance. Before appeals are heard, the trial level people’s court must serve copies of the appellate petition
on the respondent within five days of receiving said petition, and the respondent must submit its written defense within 15 days
of receiving the appellate petition. Failure by the respondent to submit a defense will not prevent the case from being tried
by the appellate people’s court. In trying a case appealed from the judgment of a lower court, the appellate people’s
court must issue its final judgment within three months after the date on which the case was filed in the second instance; in
trying a case appealed from the order of a lower court, the appellate people’s court must issue a final order within 30
days after the date on which the case was filed in the second instance. See “Item 7. Major Shareholders and Related Party
Transactions — B. Related Party Transactions” for a detailed description of these contractual arrangements.
Based on these contractual arrangements, we
believe that VisionChina Media Group and Beijing Eastlong Advertising should each be considered as a VIE, under FASB ASC 810,
Consolidation
, because investors in the equity interests of each of VisionChina Media Group and Beijing Eastlong Advertising
do not possess a controlling financial interest in these two companies; rather, we, through CDTC and Beijing Eastlong Technology,
are the primary beneficiary of VisionChina Media Group and Beijing Eastlong Advertising. We and CDTC together hold all of the
variable interests in VisionChina Media Group, and we and CDTC together have been determined to be the entities most closely associated
with VisionChina Media Group. We and Beijing Eastlong Technology together hold all of the variable interests in Beijing Eastlong
Advertising, and we and Beijing Eastlong Technology together have been determined to be the entities most closely associated with
Beijing Eastlong Advertising. Therefore, we are the primary beneficiary of both VisionChina Media Group and Beijing Eastlong Advertising.
Accordingly, we consolidate the economic benefits we receive from each of VisionChina Media Group and Beijing Eastlong Advertising
into our financial results.
These contractual arrangements enable us to
exercise effective control over VisionChina Media Group and its subsidiaries, and to receive substantially all of the economic
benefits of VisionChina Media Group and its subsidiaries for a remaining period of 17 years. If VisionChina Media Group fails
to comply with its obligations under the foregoing contractual arrangements, such breach may have a material and adverse effect
on our financial condition and results of operations. Furthermore, these contractual arrangements enable us to exercise effective
control over Beijing Eastlong Advertising and its subsidiaries, and to receive substantially all of the economic benefits of Beijing
Eastlong Advertising and its subsidiaries for a remaining period of 10.2 years
. If
Beijing Eastlong Advertising fails to comply with its obligations under the foregoing contractual arrangements, such breach may
have a material and adverse effect on our financial condition and results of operations.
The interests of our consolidated affiliated entities’
shareholders potentially may conflict with our interests.
The beneficial owners of VisionChina Media
Group also are the founders of our company and own a substantial portion of our common shares. Their interests as beneficial owners
of VisionChina Media Group and as beneficial owners of our company potentially may conflict. Beijing Eastlong Advertising’s
shareholders founded Digital Media Group. The interests of Beijing Eastlong Advertising’s shareholders potentially may conflict
with the interests of our company, particularly after we completed our acquisition of Digital Media Group in January 2010.
If and when a conflict of interests arises
as described above, we cannot assure you that any or all of these individuals will act in the best interests of our company, or
that said conflict of interests will be resolved in our favor. In addition, an individual whose interests conflict with our own
could breach, or cause a consolidated affiliated entity to breach, or refuse to renew, our existing contractual arrangements,
which would have a material and adverse effect on our ability to control that consolidated affiliated entity and to receive economic
benefits from it. If we cannot resolve any conflict of interests or dispute between us and the equity holders of one or more of
our consolidated affiliated entities, we would have to pursue our lawful rights and interests through legal proceedings, the outcome
of which would be uncertain and could disrupt our business.
The audit report included in this annual report was
prepared by auditors that are not inspected by the Public Company Accounting Oversight Board and, as such, our investors are deprived
of the benefits of such inspection.
Our independent registered public accounting
firm that issues the audit reports included in our annual reports filed with the U.S. Securities and Exchange Commission, as an
auditor of companies that are traded publicly in the United States and as a firm that is registered with the U.S. Public Company
Accounting Oversight Board (United States), or the PCAOB, is required by the laws of the United States to undergo regular inspections
by the PCAOB in order to assess its compliance with the applicable laws of the United States and professional standards.
Our operations are principally conducted in
China, a jurisdiction where the PCAOB currently is unable to inspect our auditors’ work, as such work relates to those operations,
without approval from PRC authorities. Accordingly, our auditor currently is not inspected fully by the PCAOB.
Inspections of other audit firms which 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 the quality of future audits. The inability of the PCAOB to
conduct inspections in China prevents the PCAOB from regularly evaluating the audits and quality control procedures of our auditor.
Consequently, investors may be deprived of the benefits of PCAOB inspections.
The inability of the PCAOB to conduct full
inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures
or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose
confidence in our reported financial information and procedures and the quality of our financial statements.
If additional remedial measures are imposed on the
Big Four PRC-based accounting firms, including our independent registered public accounting firm, in administrative proceedings
brought by the SEC alleging the firms’ failure to meet specific criteria set by the SEC with respect to requests for the
production of documents, we could be unable to timely file future financial statements in compliance with the requirements of
the Securities Exchange Act of 1934.
Starting in 2011 the Chinese affiliates of
the ‘‘big four’’ accounting firms (including our independent registered public accounting firm) were affected
by a conflict between U.S. and Chinese law. Specifically, for certain U.S. listed companies operating and audited in mainland
China, the SEC and the PCAOB sought to obtain from the Chinese 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 CSRC.
In late 2012 this impasse led the SEC to commence
administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes- Oxley Act of 2002 against the
Chinese accounting firms (including our independent registered public accounting firm). A first instance trial of the proceedings
in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative
law judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although
that proposed penalty 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 specified criteria, the SEC retains authority to impose a variety
of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could
include, as appropriate, an automatic six -month bar on a single firm’s performance of certain audit work, commencement
of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms.
In the event that the SEC restarts the administrative
proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult
or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined
to be not in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about
any such future proceedings against these audit firms may cause investor uncertainty regarding China -based, United States -listed
companies and the market price of our ADSs may be adversely affected.
If our independent registered public accounting
firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered
public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined
to be not in compliance with the requirements of the Exchange Act of 1934, as amended. Such a determination could ultimately lead
to the delisting of our ordinary shares from the Nasdaq Global Market or deregistration from the SEC, or both, which would substantially
reduce or effectively terminate the trading of our ADSs in the United States.
Our contractual arrangements with our consolidated
affiliated entities may be subject to scrutiny by the PRC tax authorities and may result in a finding that we owe additional taxes
or are ineligible for tax exemption, or both, which could substantially increase our taxes owed and thereby reduce our net income.
Under applicable PRC laws, rules and regulations,
arrangements and transactions among related parties may be subject to audits or challenges by the PRC tax authorities. Neither
we nor our PRC counsel are able to guarantee that the PRC tax authorities will regard any of these transactions as having been
negotiated and made at arm’s length because, based on our knowledge, the PRC tax authorities have not issued a ruling or
interpretation in respect of any transaction having a structure that is similar to ours. Relevant PRC tax authorities may determine
that our contractual relationships with our consolidated affiliate entities and their equity holders were not entered into on
an arm’s length basis. If any of the transactions between one or more of our wholly owned subsidiaries in China and a consolidated
affiliated entity, and its equity holders, including our contractual relationships with that consolidated affiliated entity, are
determined to have not been entered into on an arm’s length basis, or are found to result in a reduction in taxes that is
impermissible under PRC law, the PRC tax authorities may adjust the profits and losses of that consolidated affiliated entity
and accordingly reassess the entity’s tax liability. Such a reassessment would likely result in the entity being required
to pay a higher amount in taxes. In addition, the PRC tax authorities may impose late payment surcharges and other penalties on
that consolidated affiliated entity for underpayment of taxes. Our operating results may be materially and adversely affected
if the tax liability of one or more of our consolidated affiliated entities were to increase, or if one or more of those entities
were subjected to late payment surcharges or other penalties.
We rely principally on our subsidiaries to pay us dividends
and other distributions on equity in order 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 and adverse effect on our ability to conduct
our business.
We are a holding company with no operations
of our own. We conduct our operations in China primarily through our subsidiaries established in China. As a result, we rely principally
on dividends and other distributions on equity paid to us by our PRC subsidiaries for our cash needs, including the funds necessary
to pay dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses.
If any of our PRC operating subsidiaries incurs debt on its own behalf, the instruments governing the debt may restrict its ability
to pay dividends or make other distributions to us. In addition, PRC tax authorities may require us to adjust our taxable income
under the contractual arrangements our PRC operating subsidiaries currently have in place with our consolidated affiliated entities
in a manner that would materially and adversely affect our PRC operating subsidiaries’ ability to pay dividends and other
distributions to us. Furthermore, the payment of dividends by entities established in China generally is subject to limitations.
Relevant PRC laws, rules and regulations currently restrict payments of dividends to be made only out of accumulated profits,
if any, as determined in accordance with PRC accounting standards and regulations. Under PRC laws, rules and regulations, each
of our PRC operating subsidiaries also is required to set aside a portion of its net income each year to specific reserve funds
until such time as the aggregate amount of such reserve funds equals 50% of its respective registered capital. Our restricted
statutory reserve funds are used to make up for losses and are not allowed to be distributed as cash dividends.
To the extent that a company has not complied
with these requirements, the company shall be ordered to contribute to the statutory reserve fund and may be fined a maximum penalty
of RMB200,000. If the company has unlawfully distributed cash dividends to its shareholders out of its restricted statutory reserve
funds, shareholders may be required to return to the company those dividends so distributed. As a result of these PRC laws, rules
and regulations, our PRC operating subsidiaries are restricted in their ability to transfer a portion of their net assets to us
whether in the form of dividends, loans or advances. Any limitation on the ability of our PRC operating subsidiaries to pay dividends
to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our
businesses, pay dividends or otherwise fund and conduct our business.
Historically, our PRC wholly -owned subsidiaries,
CDTC and Beijing Eastlong Technology, did not pay dividends to us. The management of our company, its subsidiaries and consolidated
variable interest entities, or the Group, believes that the Group will be able to pay dividends to us from CDTC and Beijing Eastlong
Technology, but our management does not have any present plan for receiving dividends from our PRC operating subsidiaries, including
CDTC and Beijing Eastlong Technology. Currently we plan to retain all of our profits in our PRC subsidiaries and consolidated
affiliates, including CDTC and Beijing Eastlong Technology, and to reinvest those profits in for our future business expansion.
Risks Related to Doing Business in China
Adverse changes in political and economic policies
of the PRC government could have a material and adverse effect on China’s overall economic growth, which could reduce demand
for our products and materially and adversely affect our competitive position.
All of our business operations are conducted
in China and all of our sales are made in China. 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 economic, political and legal developments in China. The Chinese economy differs from
the economies of most developed countries in many respects, including:
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degree of government
involvement;
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rate of economic
growth;
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controls on foreign
exchange;
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access to financing;
and
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allocation of
resources.
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While the Chinese economy has experienced significant
growth over the past 30 years, growth has been uneven, both geographically and across different sectors of the economy. The PRC
government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these
measures benefit the Chinese economy overall, but also may have a negative effect on us. For example, our financial condition
and results of operations may be materially and adversely affected by government control over capital investments or changes in
tax regulations that are applicable to us.
The Chinese economy has been transitioning
from a planned economy to a more market -oriented economy. Although in recent years the PRC government has implemented measures
emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is
still owned by the PRC government. The continued control of these assets and other aspects of the national economy by the PRC
government could materially and adversely affect our business.
The PRC government also exercises significant
control over China’s economic growth by allocating resources, controlling payments of foreign- denominated obligations,
setting monetary policy and providing preferential treatment to particular industries or companies. These actions, as well as
future actions and policies of the PRC government, could materially affect our liquidity, our access to capital, and our ability
to operate our business. Accordingly, our business, financial condition, results of operations and prospects are subject, to a
significant extent, to economic, political and legal developments in China.
Uncertainties with respect to the PRC legal system
could limit the protections available to you and us.
The PRC legal system is a civil law system
based on written statutes. Unlike common law systems, prior court decisions in the PRC may be cited for reference but have limited
precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various
forms of foreign investment in China. We conduct all of our business through our subsidiary and consolidated affiliated entities
established in China. However, since many laws, rules and regulations are relatively new and the PRC legal system continues to
evolve rapidly, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws,
regulations and rules involves uncertainties, which may limit legal protections available to us. For example, we may have to resort
to administrative or court proceedings to enforce lawful rights that we have either by law or under contract. However, since PRC
administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms,
it may be more difficult than in more developed legal systems to evaluate the outcome of administrative and court proceedings
and the level of legal protection we enjoy. These uncertainties may impede our ability to enforce the contracts we have entered
into with our business partners, customers and suppliers. In addition, such uncertainties, including the inability to enforce
our contracts, could materially and adversely affect our business and operations. Furthermore, intellectual property rights and
confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, we cannot
predict the effect that future developments in the PRC legal system, including the promulgation of new laws, changes to existing
laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws, will have upon our
business. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In
addition, any litigation in China may be protracted and result in substantial costs and diversions of our resources and the attention
of our management.
You may experience difficulties effecting service of
legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws,
against us, our management or the experts named in this annual report.
We conduct substantially all of our operations
in China and substantially all of our assets are located in China. In addition, all of our senior executive officers, such as
our chief executive officer, Limin Li, our chief operating officer, Wei Liu, our chief development officer, Haijun Liu, and our
chief financial officer, Yan Wang, reside within China. As a result, it may not be possible to effect service of process within
the United States or elsewhere outside China upon us or our senior executive officers, including with respect to matters arising
under U.S. federal securities laws or applicable state securities laws. Moreover, our PRC counsel has advised us that the PRC
does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement
of legal judgments.
PRC regulation of loans to and direct investment in
PRC entities by offshore holding companies and governmental control of conversion of foreign exchange may delay or prevent us
from making loans or additional capital contributions to our PRC operating subsidiaries and affiliates, which could adversely
affect our ability to fund and expand our business.
We are an offshore holding company conducting
our operations in China through our PRC operating subsidiaries and consolidated affiliated entities. We may make loans to our
PRC subsidiaries and consolidated affiliated entities, or we may make additional capital contributions to our PRC subsidiaries.
Any loans we make to our PRC subsidiaries or consolidated affiliated entities in China are subject to PRC regulations and approvals.
For example:
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loans made by
us to foreign invested enterprises, such as our PRC subsidiaries, cannot exceed statutory
limits and must be registered with the SAFE, or its local counterparts; and
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loans made by
us to domestic PRC enterprises, such as our consolidated affiliated entities, must be
approved by relevant PRC governmental authorities and also must be registered with the
SAFE, or its local counterparts.
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We also may decide to finance our PRC operating
subsidiaries by means of capital contributions. Any such capital contribution that we make must be approved by the PRC Ministry
of Commerce, or the MOC, or its local counterpart. Because our VIEs and their subsidiaries are domestic PRC enterprises, we are
not likely to finance their activities by means of capital contributions due to government regulation of foreign investment in
domestic PRC enterprises, as well as licensing and other regulatory issues.
We cannot assure you that we will be able to
obtain these government registrations or approvals on a timely basis, if at all, with respect to future loans or capital contributions
that we may want to make to our consolidated affiliated entities or any of their subsidiaries. If we fail to receive such registrations
or approvals, our ability to fund or expand our PRC operations may be materially and adversely affected, which could adversely
and materially affect our liquidity and our ability to expand our business.
PRC regulations relating to the establishment of offshore
special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability, limit our ability
to inject capital into our consolidated PRC entities, limit the ability of our consolidated PRC entities to distribute profits
to us, or otherwise adversely affect us.
The SAFE issued a public notice in October
2005, or the SAFE notice, requiring PRC residents to register with a local SAFE branch before establishing or controlling any
company outside of China for the purpose of obtaining capital financing with assets or equities of PRC companies, referred to
in the notice as an “offshore special purpose company.” PRC residents that hold shares in offshore special purpose
companies established before November 1, 2005 were required to register with their local SAFE branch before March 31, 2006. Furthermore,
PRC residents are required to file amendments to their registrations with their local SAFE branch if their offshore special purpose
companies undergo material events involving changes in capital, such as changes in share capital, mergers and acquisitions, share
transfers or exchanges, spin-off transactions or long -term equity or debt investments. Such material events also would include
an initial public offering by the company. Since May 2007, the SAFE has issued guidance to its local branches regarding the operational
procedures for such registration, which guidance provides more specific and stringent requirements on the registration relating
to SAFE Circular 75, including the most recent
Notice of SAFE on Printing and Distributing the Implementing Rules for the Administration
of Foreign Exchange in Fund-raising and Round- trip Investment Activities of Domestic Residents Conducted via Offshore Special
Purpose Companies
, or Circular 19, which became effective on July 1, 2011. This guidance obligates onshore subsidiaries of
the offshore special purpose company to coordinate with and supervise the beneficial owners of the offshore entity who are PRC
citizens or residents to complete the SAFE registration process. If the beneficial owners fail to comply, the onshore subsidiaries
are required to report such non-compliance to the local branch of SAFE.
As of the date of this annual report, we had
been advised that both Limin Li and Yanqing Liang, each of whom is a PRC citizen and our shareholder, have registered with their
respective local SAFE branches as required by the SAFE notice. They are required to amend their registrations to reflect recent
developments of our company and our PRC subsidiary. The failure of our beneficial owners who are PRC citizens to amend their SAFE
registrations in a timely manner pursuant to the SAFE notice or the failure of future beneficial owners of our company who are
PRC residents to comply with the registration procedures set forth in the SAFE notice may subject such beneficial owners to fines
and legal sanctions and also may limit our ability to contribute additional capital to our PRC subsidiary, limit the ability of
our PRC subsidiary to distribute dividends to our company, or otherwise materially and adversely affect our business.
Failure to comply with PRC regulations regarding the
registration requirements for employee equity incentive plans may subject our PRC citizen employees or us to fines and other legal
or administrative sanctions.
Pursuant to the Measures for the Administration
of Individual Foreign Exchange promulgated by the People’s Bank of China on December 25, 2006, the Implementation Rules
of the Administrative Measures for Individual Foreign Exchange, or the Individual Foreign Exchange Rule, promulgated on January
5, 2007 by the SAFE and the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating
in Stock Incentive Plans of Overseas Publicly-Listed Companies issued by the SAFE on February 15, 2012, or the Stock Incentive
Plan Rules, which replaced the Processing Guidance on Foreign Exchange Administration of Domestic Individuals Participating in
the Employee Stock Ownership Plans or Stock Option Plans of Overseas-Listed Companies issued by the SAFE in March 2007, “domestic
individuals” (both PRC individuals and non-PRC individuals who reside in the PRC for a continuous period of not less than
one year, excluding foreign diplomatic personnel and representatives of international organizations) who are granted shares or
share options by an overseas-listed company according to its share option or stock incentive plan are required, through qualified
PRC agents which may be the PRC subsidiary of such overseas-listed company, to register with the SAFE and complete certain other
procedures related to such share option or stock incentive plan. In addition, such “domestic individuals” also must
retain an overseas entrusted institution to handle matters in connection with their exercise of stock options and their purchase
and sale of stocks. As such, our employees, who are “domestic individuals” and have been granted share options, or
PRC optionees, became subject to the Stock Incentive Plan Rules when our company became an overseas-listed company upon the completion
of our initial public offering. If we or our PRC optionees fail to comply with the Individual Foreign Exchange Rule and the Stock
Incentive Plan Rules, we and our PRC optionees may be subject to fines and other legal sanctions. We also may face regulatory
uncertainties that could restrict our ability to adopt additional option plans for our directors and employees under PRC law.
In addition, the PRC State Administration of Taxation, or the SAT, has issued certain circulars concerning employee share options.
Under these circulars, our employees working in the PRC who exercise share options will be subject to PRC individual income tax.
Our PRC subsidiaries are obligated to file documents related to employee share options with relevant tax authorities and to withhold
amounts of individual income taxes from those employees who exercise their share options. If our employees fail to pay, or we
fail to withhold, such amounts of income taxes according to relevant PRC tax laws and regulations, we may face sanctions imposed
by the tax authorities or other PRC governmental authorities. Furthermore, there are substantial uncertainties regarding the interpretation
and implementation of the Individual Foreign Exchange Rule and the Stock Incentive Plan Rules.
If any of our PRC affiliates becomes the subject of
a bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy such affiliate’s assets, which could reduce
the size of our advertising network and materially and adversely affect our business, ability to generate revenues and the market
price of our ADSs.
To comply with PRC laws, rules and regulations
relating to restrictions on foreign investment in and ownership of advertising businesses in China, we currently conduct our operations
in China through contractual arrangements with our consolidated affiliated entities and their equity holders. As part of these
arrangements, VisionChina Media Group, Beijing Eastlong Advertising and their subsidiaries hold some of the assets that are important
to the operation of our business. If any of these entities becomes bankrupt and all or part of their assets become subject to
liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially
and adversely affect our business, financial condition and results of operations. If any of our consolidated affiliated entities
or any of their subsidiaries undergoes a voluntary or involuntary liquidation proceeding, their shareholders or unrelated third-
party creditors may claim rights to some or all of their assets, thereby hindering our ability to operate our business, which
could materially and adversely affect our business, our ability to generate revenues and the market price of our ADSs.
Governmental control of currency conversion may affect
the value of your investment.
The PRC government imposes controls on the
convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive
all of our revenues in Renminbi. Under our current corporate structure, our income primarily derives from dividend payments received
from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries
to remit sufficient amounts of foreign currency to pay dividends or other payments to us, or otherwise satisfy their obligations
denominated in foreign currency. Under existing PRC foreign exchange regulations, payments of current account items, including
profit distributions and expenditures from trade related transactions, can be made in foreign currency without prior approval
from the SAFE by complying with certain procedural requirements. In addition, foreign currency received under current account
items can be retained or sold to financial institutions engaged in the business of settling or selling foreign exchange by complying
with relevant regulations. However, an approval from the SAFE or its local branch is required where Renminbi is to be converted
into foreign exchange and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign
currency. Similarly, an approval from the SAFE or its local branch is required if foreign currency received in respect of capital
account items is to be retained or sold to financial institutions engaged in the business of settling or selling foreign exchange.
In the future the PRC government also may, in its discretion, restrict access to foreign currencies for current account transactions.
If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands,
we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.
Fluctuation in the value of the Renminbi may have a
material and adverse effect on your investment.
Fluctuation in the value of the Renminbi against
the U.S. dollar is affected by, among other things, changes in the PRC’s political and economic conditions. From 1995 until
July 2005, the People’s Bank of China intervened in the foreign exchange market to maintain an exchange rate of approximately
RMB8.3 per U.S. dollar. On July 21, 2005, the PRC government changed this policy and began allowing modest appreciation of the
Renminbi against the U.S. dollar. Under the new policy, the Renminbi was permitted to fluctuate within a narrow and managed band
against a basket of certain foreign currencies. This change in policy caused the Renminbi to appreciate more than 20% against
the U.S. dollar over the following five years. As a consequence, the Renminbi has fluctuated sharply against other freely traded
currencies since July 2008. It is difficult to predict how long the PRC government’s current policy with respect to the
value of the Renminbi may continue, and when and how such policy may change in the future. The PRC government is still under significant
international pressure to liberalize its currency policy or to adopt a more flexible policy, which could result in further and
more significant appreciation in the value of the Renminbi against the U.S. dollar.
As we rely on dividends paid to us by our operating
subsidiary, any significant revaluation of the Renminbi may have a material and adverse effect on our cash flows, revenues, earnings
and financial position, and the value of, and dividends payable on, our ADSs in foreign currency terms. Significant revaluation
of the Renminbi also may have a material and adverse effect on your investment. For example, to the extent that we need to convert
U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect
on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars
for the purpose of making payments for dividends on our common shares or ADSs or for other business purposes, appreciation of
the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us for such payments.
In addition, fluctuation in the value of the Renminbi relative to the U.S. dollar would have a positive or negative effect on
our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business, financial
condition and results of operations.
Very limited hedging options are available
in China to reduce exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions to reduce
our exposure to such fluctuations. While we may decide to enter into hedging transactions in the future, the availability and
effectiveness of these hedges may be limited and we may not be able to hedge our exposure successfully, if at all. In addition,
any loss we incur related to foreign exchange depreciation may be aggravated by PRC exchange control regulations that restrict
our ability to convert Renminbi into foreign exchange.
The discontinuation of any preferential tax treatment
currently available to us and the increase in the PRC enterprise income tax could decrease our net income and materially and adversely
affect our financial condition and results of operations.
Our operating subsidiaries and consolidated
affiliates are incorporated in the PRC and are subject to applicable PRC income tax laws and regulations. The
PRC Enterprise
Income Tax Law
, or the EIT Law, became effective on January 1, 2008. The implementation of regulations under the EIT Law issued
by the PRC State Council, or the implementation regulations, also became effective January 1, 2008. Under the EIT Law and the
implementation regulations, the PRC has adopted a uniform tax rate of 25% for all enterprises (including foreign-invested enterprises)
and has revoked previous tax exemption, reduction and preferential treatments applicable to foreign-invested enterprises. However,
there is a transition period for enterprises, whether foreign-invested or domestic, that received preferential tax treatments
granted by relevant tax authorities prior to January 1, 2008. Enterprises that were subject to an enterprise income tax rate lower
than 25% prior to January 1, 2008 may continue to enjoy the lower rate and gradually transition to the new tax rate within five
years after the effective date of the EIT Law.
Before the EIT Law and its implementation regulations
became effective on January 1, 2008, CDTC and VisionChina Media Group, as enterprises located in the Shenzhen Special Economic
Zone, were allowed to enjoy a preferential tax rate of 15%, and pursuant to the EIT Law, continued to enjoy the lower rate and
gradually transitioned to the new tax rate within five years from 2008 to 2012. VisionChina Media Group’s sales branches
located in various cities in the PRC are subject to enterprise income tax at the standard rate of 25% under the EIT Law. Furthermore,
in November 2008, VisionChina Media Group was recognized as a “new and high technology enterprise strongly supported by
the state” and became entitled to a preferential tax rate of 15% for 2009 and 2010. In October 2011, VisionChina Media Group
obtained approval from governmental authorities to be recognized as a state-encouraged new and high technology enterprise from
2011 to 2016, and is entitled to a preferential tax rate of 15% during these six years, subject to an approval from the tax authority
at the end of each year. In accordance with a circular issued in December 2010, Beijing Eastlong Technology has been recognized
as a state-encouraged new and high technology enterprise starting from 2010, and this status is valid for a period of three years.
As such, the effective EIT rate for Beijing Eastlong Technology was 15% in each of the years 2010, 2011 and 2012, and was 25%
in 2013, 2014 and 2015, respectively. Furthermore, one of our operating consolidated affiliated entities in Luzhou in Sichuan
province was recognized as a “local government encouraged company” and was entitled to exemption from the enterprise
income tax for the years 2008 and 2009, and to reduced tax rates of 7.5%, 7.5%, 7.5%, and 15% for the years 2010, 2011, 2012 and
2013, respectively. The standard EIT rate of 25% was applicable to Beijing Eastlong Technology in 2014. Notwithstanding the standard
statutory tax rate of 25%, in 2011, under the direction of the relevant tax authority, one of our operating consolidated affiliated
entities, Jiangxi Huashi Media Advertising Co., Ltd., or Jiangxi Huashi, applied a deemed-profit-rate method for its annual tax
filings in 2011. Pursuant to the deemed-profit-rate method, Jiangxi Huashi’s taxable income was deemed to be 16% of its
revenues generated in 2011. Jiangxi Huashi did not produce any revenue for the year ended December 31, 2015.
We cannot assure you that our PRC operating
subsidiary and consolidated affiliated entities will enjoy preferential tax treatment in the future. Any further changes to PRC
tax laws or regulations could subject our PRC operating subsidiary and consolidated affiliated entities to increased rates of
income tax. Any increase in the effective EIT rate applicable to our operating subsidiary and consolidated affiliated entities
in the PRC would decrease our net income and materially and adversely affect our financial condition and results of operations.
Dividends we receive from our subsidiary located in
the PRC may be subject to PRC withholding tax.
The EIT Law specifies that a maximum income
tax rate of 20% may be applicable to dividends payable to non-PRC investors that are “non-resident enterprises,” to
the extent such dividends derive from sources within the PRC. The State Council of the PRC has reduced this tax rate to 10% in
the implementation regulations promulgated under the EIT Law. We are a Cayman Islands holding company and substantially all of
our income may be derived from dividends we receive from our subsidiaries located in the PRC. Thus, dividends paid to us by our
subsidiary in China may be subject to income tax at a rate of 10% if we are considered to be a “non-resident enterprise”
under the EIT Law. If we are required under the EIT Law to pay income tax on any dividends we receive from our subsidiary in China,
it will materially and adversely affect the amount of dividends, if any, we may pay to our shareholders and ADS holders.
In addition, we conduct our advertising business
through contractual arrangements with our consolidated affiliated entities, which are currently owned by individuals. If one of
our consolidated affiliated entities were to distribute dividends in the future, we would be required to pay taxes at an individual
income tax rate of 20% on behalf of our employees who hold interests in that consolidated affiliated entity. Furthermore, business
tax liability potentially may arise from the contractual arrangements with our consolidated affiliated entities. If we were unable
to receive tax free distributions of earnings from our consolidated affiliated entities and were required to pay additional taxes
on those distributions, our net income, financial condition, and results of operations would be materially and adversely affected.
We may be deemed a PRC resident enterprise under the
EIT Law and subject to PRC taxation on our worldwide income.
The EIT Law provides that enterprises established
outside China whose “de facto management bodies” are located in China are considered “resident enterprises”
and are generally subject to the uniform 25% enterprise income tax rate as to their worldwide income. Under the implementation
regulations for the EIT Law issued by the PRC State Council, “de facto management body” is defined as a body that
has material and overall management and control over the manufacturing and business operations, personnel and human resources,
finances and treasury, and acquisition and disposition of properties and other assets of an enterprise.
Circular 82 and Circular 45 issued by the SAT
in 2009 and 2011, respectively, or the SAT Notices, provide detailed guidance regarding the definition of “de facto management
bodies” and the determination and administration of offshore-incorporated PRC tax residents. Under the SAT Notices, an “offshore
- incorporated PRC tax resident” was defined as “an enterprise that is incorporated under the law of a foreign country
or territory with a PRC company or PRC corporate group as its primary controlling shareholder whose de facto management bodies
are located within the PRC.”
Our board of directors holds regular meetings
and makes most of its significant operational, investment, financing and human resources decisions outside of the PRC. In addition,
our senior management regularly spends time outside of the PRC developing and managing investor relations. As such, we believe
that our “de facto management body” is located outside the PRC, and, accordingly, we believe that it is unlikely that
we will be treated as a PRC “resident enterprise” under the EIT Law. Furthermore, we believe that we do not meet the
criteria under Circular 82, since Circular 82 only applies to offshore enterprises controlled by PRC enterprises, while none of
our major controlling shareholders is a PRC company or PRC corporate group. If we were treated as a “PRC resident enterprise”
for PRC tax purposes, we would be subject to PRC tax on our worldwide income at the uniform tax rate of 25%, and our effective
net tax rate and results of operations thereby could be materially and adversely affected. However, for the years ended December
31, 2013, 2014 and 2015, our legal entities organized outside of the PRC incurred losses. Therefore, even if our legal entities
organized outside the PRC were treated as PRC residents for purposes of the EIT Law, our management believes that such treatment
would not have any material impact on our results of operations.
Dividends payable by us to our foreign investors and
any capital gains realized on the sale of our ADSs or common shares may become subject to tax under PRC tax laws.
Under the EIT Law and implementation regulations
issued by the State Council, PRC income tax at a rate of 10% is applicable to dividends payable to investors that are “non-resident
enterprises” which do not have an establishment or place of business in the PRC, or which have such establishment or place
of business but whose relevant income is not effectively connected with the establishment or place of business, to the extent
that such dividends have their sources within the PRC. Similarly, any capital gain realized on the transfer of ADSs or shares
by such investors also is subject to PRC income tax at the 10% rate if such gain is regarded as income derived from sources within
the PRC. If we are considered a PRC “resident enterprise,” it is unclear whether dividends we pay with respect to
our common shares or ADSs, or the gain you may realize from the transfer of our common shares or ADSs, would be treated as income
derived from sources within the PRC and thereby subject to PRC tax. It is also unclear whether, if we are considered a PRC “resident
enterprise,” holders of our ordinary shares or ADSs might be able to claim the benefit of income tax treaties entered into
between China and other countries. If we are required under the EIT Law to withhold PRC income tax on dividends payable to our
non-PRC investors that are “non-resident enterprises,” or if you are required to pay PRC income tax on the transfer
of our common shares or ADSs, the value of your investment in our common shares or ADSs may be materially and adversely affected.
We face risks related to natural disasters, health
epidemics, terrorist attacks or other events in China that may affect usage of public transportation, which could have a material
and adverse effect on our business and results of operations.
Our business could be materially and adversely
affected by natural disasters, the outbreak of health epidemics, terrorist attacks or other events in China. For example, in early
2008, parts of China, in particular its southern, central and eastern regions, experienced what was reported to be the most severe
winter weather in the country in half a century, which resulted in significant and extensive damage that severely impacted public
transportation systems. In May 2008, a major earthquake struck Sichuan Province and certain other parts of China, devastating
many of the affected areas and causing tens of thousands of deaths and widespread injuries. In addition, over the last decade,
the PRC has encountered incidents of the H5N1 strain of bird flu, or avian flu, severe acute respiratory syndrome, or SARS, and,
more recently in 2009, the outbreak of influenza A, also known as H1N1, and the spread of H7N9 avian influenza virus in early
2013. In July 2008, explosive devices were detonated on several buses in Kunming in China’s Yunnan Province, which resulted
in casualties and disruptions to public transportation systems in Kunming. Any future natural disasters, health epidemics, terrorist
attacks or other events in the PRC could cause a reduction in usage of, or other severe disruptions to, public transportation
systems and could have a material and adverse effect on our business and results of operations.
The implementation of the PRC Labor Contract Law may
significantly increase our operating expenses and adversely affect our business and results of operations.
The PRC National People’s Congress enacted
the Labor Contract Law, which was promulgated on June 29, 2007 and became effective on January 1, 2008, and the amendment to the
Labor Contract Law which was promulgated on December 28, 2012 and became effective on July 1, 2013, or the Labor Contract Law
Amendment. The Labor Contract Law and the Labor Contract Law Amendment formalize workers’ rights concerning overtime hours,
pensions, layoffs, employment contracts and the role of trade unions, and specifies standards and procedures for the termination
of an employment contract. In addition, the Labor Contract Law and the Labor Contract Law Amendment require statutory severance
pay to be paid upon the termination of an employment contract in most cases, including in cases where a fixed-term employment
contract has expired. As there has been little guidance as to how the Labor Contract Law and the Labor Contract Law Amendment
will be interpreted and enforced by relevant PRC authorities, there remains substantial uncertainty as to its potential impact
on our business and results of operations. The implementation of the Labor Contract Law and the Labor Contract Law Amendment may
significantly increase our operating expenses, in particular our personnel expenses, as the continued success of our business
depends significantly on our ability to attract and retain qualified personnel. In the event that we decide to terminate some
of our employees or otherwise change our employment or labor practices, the Labor Contract Law and the Labor Contract Law Amendment
may also limit our ability to effect these changes in a manner that we believe to be most desirable or cost- effective, which
could adversely affect our business and results of operations.
Risks Related to Our Common Shares and ADSs
The market price of our ADSs may be volatile which
could result in substantial loss to you.
The market price of our ADSs is likely to be
highly volatile and subject to wide fluctuations in response to a number of factors, including:
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actual or anticipated
fluctuations in our quarterly operating results;
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regulatory developments
in China affecting us, our industry, our corporate structure or our advertisers;
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announcements
of competitive developments;
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announcements
regarding litigation or administrative proceedings involving us;
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changes in financial
estimates by securities research analysts;
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changes in the
economic performance or market valuations of companies with comparable businesses;
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additions or
departures of our executive officers;
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release or expiry
of lock-up or other transfer restrictions on our outstanding common shares or ADSs;
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sales or perceived
sales of additional common shares or ADSs; and
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conversion of
convertible notes held by the Former DMG Shareholders.
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In addition, the securities markets from time
to time have experienced significant price and volume fluctuations that are not related to the operating performance of particular
companies. For example, the securities of some China -based companies that have listed their securities in the United States have
experienced significant volatility since their initial public offerings, including, in some cases, substantial declines in the
trading prices of their securities. The trading performances of these Chinese companies’ securities after their offerings
may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently may impact the
trading performance of our ADSs, without reference to our actual operating performance. In addition, any negative news or perceptions
about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese
companies also may negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless
of whether we have engaged in any inappropriate activities.
Substantial future sales or perceived sales of our
ADSs in the public market could cause the price of our ADSs to decline.
Sales of our ADSs or common shares in the public
market, or the perception that these sales could occur, could cause the market price of our ADSs to decline. As of December 31,
2015, we had 102,741,977 common shares outstanding, including 79,250,445 common shares represented by 3,962,522 ADSs. Sales of
our common shares or ADSs held by our significant shareholders or any other shareholder, or the availability of these securities
for future sale, may have a negative effect on the market price of our ADSs. In addition, certain of our shareholders or their
transferees and assignees have the right to cause us to register the sale of their shares under the Securities Act upon the occurrence
of certain events. Registration of these shares under the Securities Act would result in these shares becoming freely tradable
without restriction under the Securities Act immediately upon their registration becoming effective. Sales of these registered
shares in the public market could cause the price of our ADSs to decline.
Our charter documents contain anti-takeover provisions
that could have a material and adverse effect on the rights of holders of our ADSs.
Our amended and restated memorandum and articles
of association include provisions that could limit the ability of others to acquire control of our company, modify our structure
or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders
of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to
obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority,
without further action by our shareholders, to issue preferred shares in one or more series and to fix the powers and rights of
these shares, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any
or all of which may be greater than the rights associated with our common shares in the form of ADS or otherwise. Preferred shares
thus could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management
more difficult. In addition, if our board of directors issues preferred shares, the market price of our common shares may decline
and the voting and other rights of the holders of our common shares may be materially and adversely affected.
We are a Cayman Islands company and, because judicial
precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, you may have less
protection of your shareholder rights than you would under U.S. law.
Our corporate affairs are governed by our amended
and restated memorandum and articles of association, the Cayman Islands Companies Law (as amended) and the common law of the Cayman
Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities
of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common
law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from
English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders
and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under
statutes or judicial precedent in some jurisdictions of the United States. In particular, securities laws of the Cayman Islands
are less developed than those of the United States. In addition, some U.S. states, such as Delaware, have bodies of corporate
law that are more fully developed and judicially interpreted than corporate law of the Cayman Islands. Furthermore, shareholders
of Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United
States. As a result, our public shareholders may have more difficulties in protecting their interests in the face of actions taken
by management, members of the board of directors or controlling shareholders than they otherwise would if they were shareholders
of a company incorporated in the United States.
Judgments obtained against us by our shareholders may
not be enforceable.
We are a Cayman Islands company and substantially
all of our assets are located outside of the United States. All of our current operations are conducted in the PRC. In addition,
most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion
of the assets of these persons are located outside the United States. As a result, it may be difficult for you to effect service
of process within the United States upon these persons. It also may be difficult for you to enforce in the U.S. judgments obtained
in U.S. courts based on civil liability provisions of U.S. federal securities laws against us or our officers and directors, most
of whom are not residents of the United States and a substantial portion of whose assets are located outside of the United States.
Moreover, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments
of United States courts against us or our directors and officers predicated upon civil liability provisions of securities laws
of the United States or any state in the United States. In addition, there is uncertainty as to whether courts of the Cayman Islands
or the PRC would be competent to hear original actions brought against us or our directors and officers predicated upon the securities
laws of the United States or any state in the United States.
Holders of ADSs have fewer rights than shareholders
and must act through the depositary to exercise their rights.
Holders of our ADSs do not have the same rights
as our shareholders and may only exercise voting rights with respect to the underlying common shares in accordance with the provisions
of the deposit agreement. Under our third amended and restated memorandum and articles of association, the minimum notice period
required to convene a general meeting is seven days. When a general meeting is convened, you may not receive sufficient notice
of a shareholders’ meeting to permit you to withdraw your common shares and allow you to cast your vote with respect to
any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out
your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights
to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can
instruct the depositary to vote your ADSs. Furthermore, the depositary and its agents will not be responsible for any failure
to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result,
you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you requested. In addition,
in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.
The depositary for our ADSs will give us a discretionary
proxy to vote our common shares underlying your ADSs if you do not vote at shareholders’ meetings, except in limited circumstances,
which could adversely affect your interests.
Under the deposit agreement for the ADSs, the
depositary will give us a discretionary proxy to vote our common shares underlying your ADSs at shareholders’ meetings if
you do not vote, unless:
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we have failed
to provide the depositary with our notice of meeting and related voting materials in
a timely fashion;
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we have instructed
the depositary that we do not wish to receive a discretionary proxy;
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we have informed
the depositary that there is substantial opposition to a matter to be voted on at the
meeting; or
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a matter to be
voted on at the meeting would have a material and adverse impact on shareholders.
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The effect of this discretionary proxy is that
you cannot prevent our common shares underlying your ADSs from being voted, absent the situations described above, and it may
make it more difficult for shareholders to influence the management of our company. Holders of our common shares are not subject
to this discretionary proxy.
You may be subject to limitations on transfers 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 appropriate
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 deems 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.
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 the rights and the securities to which they relate under the Securities Act or an exemption from the
registration requirements is available. Also, under the deposit agreement, the depositary will not make rights available to you
unless either both the rights and any related securities are registered under the Securities Act, or the distribution of them
to ADS holders is exempted 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.
Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may not be
able to participate in our rights offerings and may experience dilution in your holdings.
In addition, the depositary of our ADSs has
agreed to pay to you the cash dividends or other distributions it or the custodian receives on our common shares or other deposited
securities underlying our ADS, after having deducted its fees and expenses and any applicable taxes and government charges. You
will receive these distributions in proportion to the number of common shares your ADSs represent. However, the depositary may,
in its discretion, decide that it is impractical to make a distribution available to any holders of ADSs. For example, the depositary
may determine that it is not reasonably practicable to distribute certain property, or that the value of certain distributions
may be less than the cost of distributing them. In these cases, the depositary may decide not to distribute such property and
you will not receive such distribution.
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ITEM 4.
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INFORMATION
ON THE COMPANY
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A.
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History and Development of
the Company
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We commenced operations through China Digital
Mobile Television Co., Ltd., a limited liability company established in China on April 8, 2005. In September 2008, we changed
the name of China Digital Mobile Television Co., Ltd. to VisionChina Media Group. VisionChina Media Group is currently 70% owned
by Limin Li, our co-founder, chairman of our board of directors and our chief executive officer, and 30% owned by Yanqing Liang,
our co-founder. Both Limin Li and Yanqing Liang are PRC citizens. VisionChina Media Group and its subsidiaries hold the licenses
and permits necessary to operate our businesses and provide our advertising services in China.
Our company was incorporated as CDMTV Holding
Company in the Cayman Islands on January 27, 2006 on behalf of our co-founders, Limin Li and Yanqing Liang. On August 13, 2007,
we changed our company’s name to VisionChina Media Inc. On March 9, 2006, we established our wholly owned subsidiary, CDTC,
in Shenzhen.
On December 6, 2007, our ADSs were listed on
the Nasdaq Global Market.
We purchased all of the outstanding equity
interests in six British Virgin Islands companies from their sellers pursuant to share subscription agreements entered into in
April, May and August 2008 in connection with our acquisition of certain advertising agency businesses in China.
In August 2008, we completed a follow-on public
offering in which we sold 1,150,000 newly issued common shares, in the form of ADSs, at a price of US$16.00 per ADS and received
gross proceeds of US$17.6 million.
In October 2009, we entered into an agreement
(which was amended and restated in November 2009) to acquire Digital Media Group, which was completed in January 2010. The total
consideration of US$160 million (or US$167 million based on the fair value of the total consideration on the acquisition date
in January 2010) was payable in three installments over two years in cash and shares. In November 2009, we deposited the initial
installment of US$40 million and 8,476,013 of our common shares, registered under Vision Best Limited, our consolidated subsidiary,
into an escrow account, a portion of which was released upon completion of the acquisition and the remaining portion was to be
released in accordance with the terms of the agreement and plan relating to our acquisition of Digital Media Group. The second
installment of US$30 million was to be paid on the first anniversary of the acquisition, of which US$20 million was to be in the
form of cash and US$10 million in the form of cash or shares at the option of the eligible Former DMG Shareholders. The number
of our ordinary shares representing the share consideration of the second installment was to be equal to the quotient of US$10
million divided by the higher of (A) 125% of US$7.0788, or the Initial Conversion Price, and (B) 80% of the average of the closing
sales prices for one ADS as reported on the Nasdaq Global Market for the twenty consecutive trading days ending (and including)
two days prior to the payment date. The third installment of US$30 million was to be paid on the second anniversary of the acquisition,
of which US$20 million was to be in the form of cash and US$10 million in the form of cash or shares at the option of the eligible
Former DMG Shareholders. The number of our ordinary shares representing the share consideration of the third installment was to
be equal to the quotient of US$10 million divided by the higher of (A) 150% of the Initial Conversion Price and (B) 80% of the
average of the closing sales prices for one ADS as reported on the Nasdaq Global Market for the twenty consecutive trading days
ending (and including) one day prior to the payment date. The second and third installments totaling US$60 million remained unpaid
as of December 31, 2013 as a result of our lawsuit against the Former DMG Shareholders. On April 30, 2014, we entered into a Settlement
Arrangement with the Former DMG Shareholders. Pursuant to the Settlement Arrangement, we and the Former DMG Shareholders agreed
to discontinue pending litigation in connection with the acquisition of Digital Media Group in New York, United States and the
Cayman Islands with customary closing conditions. We agreed to settle the unpaid acquisition consideration by a combination of
an upfront payment of US$12 million in cash and the issuance of interest-bearing convertible notes of US$58 million to the Former
DMG Shareholders upon closing.
In July 2010, following a definitive agreement
entered into between our company and certain of our existing shareholders and employees dated June 25, 2010, we issued an aggregate
of 4,006,474 common shares at a subscription price of US$3.22 per share, equivalent to US$3.22 per ADS, to these existing shareholders
and employees. We received net proceeds of US$12.9 million from issuing these shares.
On December 30, 2010, in order to offer integrated
media solutions and greater media value to advertisers, we entered into a securities purchase agreement with Focus Media Holding
Limited, or Focus Media, China’s largest lifestyle community and digital out-of-home media company; Front Lead Investments
Limited, or Front Lead; and JJ Media Investment Holding Limited, or JJ Media. Pursuant to this agreement, Focus Media, Front Lead
and JJ Media purchased 15,331,305, 1,022,087 and 1,022,087, respectively, of our newly issued common shares at a price of US$3.979
per share, equivalent to US$3.979 per ADS. Upon the consummation of these transactions, Front Lead and Focus Media owned approximately
17.2% and 15%, respectively, of our outstanding common shares. In connection with these transactions, we also entered into a shareholders
agreement and a registration rights agreement with Front Lead, Focus Media and JJ Media on January 13, 2011. We received net proceeds
of US$69.0 million from these transactions.
Pursuant to the securities purchase agreement,
each of Focus Media, Front Lead and JJ Media agreed to a lock-up period of 365 days from the date on which they purchased our
newly issued common shares with respect to all transactions other than those in which a majority of our company is being acquired.
Furthermore, Focus Media and JJ Media each agreed to a standstill period ranging from two to three years from the date on which
they purchased our newly issued common shares, during which period they would not acquire or offer to acquire any additional voting
securities of our company or assist or participate in efforts by any other party to do so. These restrictions do not apply to
transactions made by Focus Media pursuant to its gross-up rights provided by the securities purchase agreement. Such gross-up
rights are valid for five years from the date of the securities purchase agreement and give Focus Media the opportunity to acquire
securities offered by us in any nonpublic offering or sale of any security that is convertible into equity in order to maintain
its proportionate interest in our company.
Under the registration rights agreement, we
will file with the SEC a shelf registration statement within 18 months of the purchase of our securities by Focus Media, Front
Lead and JJ Media. All expenses incurred in connection with a subsequent sale of registered shares which requires any further
filings are to be borne by the holders of such shares. Under the shareholders agreement, Focus Media has the right to nominate
one candidate for election to our Board so long as it owns at least 5% of our outstanding common shares. The shareholders agreement
also establishes rights of first offer between Focus Media, Front Lead and JJ Media in which existing shareholders seeking to
transfer their shares must first make an offer of such shares to other existing shareholders.
On July 14, 2015, in order to fund our working
capital and out-of-home interactive media growth initiatives, we entered into a definitive share purchase agreement with China
Special Situtations Holdings (1)(BVI) Limited, a leading investment company in the technology, media and telecommunications (TMT)
and consumer electronics sectors in China. Pursuant to the share purchase agreement, China Special Situations Holdings (1) (BVI)
Limited will purchase our newly issued Common Shares for total consideration of approximately US$9.8 million, at a purchase price
of US$12.90 per ADS, or the equivalent of approximately US$ 0.645 per Common Share. The purchase price represents a premium of
approximately 7.5% over closing price of the Company’s ADSs for the previous trading day prior to the signing date of the
share purchase agreement. Upon closing, China Special Situations Holdings (1) (BVI) Limited will hold approximately 13.0% of our
issued and outstanding share capital and will become one of our largest shareholders. As of the date of this report, the transaction
has not been consummated due to China Special Situations Holdings (1) (BVI) Limited’s failure to pay the purchase price.
The parties are currently in discussion to restructure the transaction.
Pursuant to the share purchase agreement, China
Special Situations Holdings (1) (BVI) Limited has also agreed not to sell, transfer or dispose of any Common Shares acquired in
this transaction to any third parties for a period of six months after closing of this private placement. In addition, China Special
Situations Holdings (1) (BVI) Limited will have the right to appoint one director to the Company’s board of directors after
this transaction.
Due to PRC regulatory restrictions on foreign
investments in the advertising and mobile digital television industries, we operate our advertising business in China through
VisionChina Media Group and Beijing Eastlong Advertising. While we do not have any equity interests in the operating entities
in China, our relationships with VisionChina Media Group, Beijing Eastlong Advertising and their respective equity holders are
governed by a series of contractual arrangements that allow us effectively to control and derive economic benefits from both VisionChina
Media Group and Beijing Eastlong Advertising (for the details of these contractual arrangements, please see “Item 7. Major
Shareholders and Related Party Transactions — B. Related Party Transactions —Agreements that Provide Us Effective
Control over VisionChina Media Group, Beijing Eastlong Advertising and Their Respective Subsidiaries”). Accordingly, we
treat VisionChina Media Group and Beijing Eastlong Advertising as variable interest entities and have consolidated their historical
financial results in our financial statements in accordance with U.S. GAAP. All our revenues were derived from VisionChina Media
Group for the year ended December 31, 2009. After we completed the acquisition of Digital Media Group in January 2010, Beijing
Eastlong Advertising became our consolidated variable interest entity, and substantially all of our revenues for the years ended
December 31, 2010 and 2011 were derived from VisionChina Media Group and Beijing Eastlong Advertising. Our assets and those of
our subsidiaries mainly include cash, accounts receivables, plants and equipment, intangible assets, investments in consolidated
variable interest entities and investments under cost method. The revenues generated by us and our subsidiaries, apart from revenues
earned in respect of the relevant contractual arrangements to which CDTC and Beijing Eastlong Advertising are parties, are primarily
derived from (1) sales of Passenger Information and Direction Systems, which display information about the subway trains and advertising,
to various subway companies in the PRC; (2) sales of equipment used for mobile digital television systems on mass transit systems;
and (3) advertising revenue on advertising platforms located outside of the PRC. In the fiscal years ended December 31, 2013,
2014 and 2015, we and our subsidiaries (excluding operations that are subject to involvement with the consolidated affiliated
entities) contributed in aggregate approximately 1.5%, 1.3% and 4.9%, respectively, of our total consolidated net revenues derived
from third parties and non-consolidated affiliates. As of December 31, 2013, 2014 and 2015, we and our subsidiaries accounted
for an aggregate of 20.7%, 21.3% and 26.9%, respectively, of our total assets (excluding for the purpose of this calculation assets
that are subject to involvement with the consolidated affiliated entities).
Other than the above contractual arrangements,
our company or CDTC does not have any business relationships with the equity holders of VisionChina Media Group, and our company
or Beijing Eastlong Technology does not have any business relationships with the equity holders of Beijing Eastlong Advertising.
In February 2016, our consolidated variable
interest entities VisionChina Media Group Co., Ltd. and Shenzhen HDTV Industrial Investment Co., Ltd. (collectively “VisionChina
Subsidiaries”) have entered into an equity transfer agreement and a profit compensation agreement to sell all of our subway
mobile TV advertising business to Ledman Optoelectronic Co., Ltd. (“Ledman”), a leading manufacturer and distributor
of LED products in China, for an aggregate consideration of RMB780 million (US$119 million) (the “Consideration”).
Prior to this transaction, VisionChina Subsidiaries completed a restructuring to transfer the subway mobile TV advertising business
to VisionChina New Culture Media Co., Ltd. ("New Culture"), an entity wholly owned by VisionChina Subsidiaries. Since
January 1, 2016, New Culture has been the operating entity of the subway mobile TV advertising business. Upon the closing of this
transaction, Ledman will hold 100% equity interest of New Culture.
Pursuant to the equity transfer agreement,
Ledman will pay RMB390 million in cash and the other RMB390 million in the form of 20,774,680 newly issued shares of Ledman (the
“Share Consideration”). Upon the completion of this transaction, we, through VisionChina Media Group Co., Ltd. and
Shenzhen HDTV Industrial Investment Co., Ltd., will indirectly own approximately 5.6% of Ledman. The Share Consideration will
be subject to a 36-month lock-up.
In addition, according to the profit compensation
agreement, in the event that the consolidated net profits attributable to the shareholders (excluding extraordinary items) of
New Culture in any of the fiscal years 2016, 2017 and 2018 are less than the profit target for such fiscal year - RMB60 million,
RMB80 million and RMB100 million, respectively, VisionChina Subsidiaries will compensate Ledman for the deficiency by returning
a certain amount of the Share Consideration to Ledman. In the event that the Share Consideration is not sufficient to compensate
for such deficiency, VisionChina Subsidiaries are required to pay compensation in cash. The compensation amount will be calculated
based on a pre-determined formula and subject to an aggregate cap in an amount equal to the amount of the Consideration.
In July 2016, Ledman advised us that it had
submitted to the CSRC an application for suspension of the Transaction pending uncertainties surrounding government regulatory
policies pertaining to foreign-listed Chinese companies relisting in China's domestic stock market.
In August 2016, we entered into a new equity
transfer agreement and a new profit compensation agreement (the "New Agreements") with Ledman to sell 49% equity interests
in New Culture, for an aggregate consideration of RMB382.2 million (the "New Transaction"). Concurrently with signing
of the New Agreements, VisionChina Subsidiaries and Ledman agreed to terminate the equity transfer agreement and profit compensation
agreement entered into among the parties in February 2016 for sale of all of the Company's subway mobile TV advertising business
to Ledman.
Pursuant to the new equity transfer agreement,
Ledman will pay RMB382.2 million to acquire 49% equity interests in New Culture. Upon closing of the New Transaction, Ledman will
pay an installment of RMB321.2 million in cash to VisionChina Media Group Co., Ltd, and VisionChina Media Group Co., Ltd will
be required to use the entire amount of the first installment payment to purchase shares of Ledman held by Ledman's controlling
shareholder ("Ledman Shares") through a block trade within five business days after the first installment payment. Within
10 business days (excluding time required for the block trade described above) after the closing of the New Transaction, Ledman
will pay the remaining amount of RMB61 million in cash. Upon completion of the transactions contemplated by the new equity transfer
agreement, we expect to receive cash proceeds of RMB61 million and indirectly own, through VisionChina Media Group Co. Ltd, a
certain amount of Ledman's total outstanding shares. The Ledman Shares will be subject to a lock-up until May 31, 2019 and VisionChina
Media Group may not sell or otherwise dispose of more than 75% of the Ledman Shares during the 12 months after the lock-up expires.
According to the new profit compensation agreement,
in the event that the consolidated net profits attributable to the shareholders (excluding extraordinary items) of New Culture
in any of the fiscal years 2016, 2017 and 2018 are less than the profit target for such fiscal year - RMB60 million, RMB80 million
and RMB100 million, respectively, VisionChina Media Group Co. Ltd. will compensate Ledman for the deficiency by returning a certain
amount of the Ledman Shares to Ledman. In the event that the Ledman Shares are not sufficient to compensate for such deficiency,
VisionChina Media Group Co. Ltd. will be required to pay compensation in cash. The compensation amount will be calculated based
on a pre-determined formula and subject to an aggregate cap in an amount equal to the amount of the total consideration for the
New Transaction.
We intend to sell the remaining 51% of our
equity interests in New Culture, but we have not entered into a definitive agreement as of the date of this report.
The nominee shareholders of our consolidated
affiliated entities are Limin Li, Yangqing Yang, Qijun Men and Haifeng Wang. The business relationship between us and Limin Li
and his affiliates is set forth in “Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions
— Transactions with Affiliated Companies of Limin Li”. Neither Yanqing Liang nor her affiliated companies have any
business relationship with us. Qijun Men and Haifeng Wang are individual shareholders of Beijing Eastlong Advertising. Qijun Men
and Haifeng Wang are not shareholders of VisionChina and do not have any business relationship or transactions with us.
Our principal executive offices are located
at 1/F Block No. 7, Champs Elysees, Nongyuan Road, Futian District, Shenzhen 518040, People’s Republic of China. Our telephone
number at this address is (86 755) 8293-2222 and our fax number is (86 755) 8298-1111. Our registered office in the Cayman Islands
is located at the offices of Maples Corporate Services Limited, P.O. Box 309, Ugland House, South Church Street, George Town,
Grand Cayman KY1-1104, Cayman Islands, and British West Indies. Our principal website is
www.visionchina.cn
. The information
contained on our website is not a part of this annual report.
Principal Capital Expenditures
We had capital expenditures of
US$1.5 million, US$2.2 million and US$15.3 million for the years ended December 31, 2013, 2014 and 2015, respectively. In
2013, our capital expenditures were made primarily to acquire digital television displays and related equipment for our
network. In 2014 and 2015, we made our capital expenditures primarily to purchase Wi-Fi devices and equipment related to our
public transit Wi-Fi network. The digital television displays we acquired have an estimated useful life of five years and
Wi-Fi related devices and equipment have useful lives of five years.
As of December 31, 2015, the
estimated average remaining useful life of our digital television displays is approximately 2.5 years. We believe that our
existing digital television displays and Wi-Fi devices, with cost value of US$15.6 million
as
of December 31, 2015, will not become technologically obsolete before the end of their respective useful lives. Therefore
we do not expect significant capital expenditure for replacement of digital television displays in 2016.
Our capital expenditures on
digital television displays were primarily funded by proceeds from issuance of our common shares, proceeds from bank loans
for the years ended December 31, 2013, 2014 and 2015. Our capital expenditures on Wi-Fi devices were primarily funded by
proceeds received from capital injection from minor shareholders of our subsidiary engaging in Wi-Fi business for the year
ended December 2014 and 2015.
We expect our capital expenditures in 2016
primarily to consist of purchases of Wi-Fi devices as we continue to expand
our public transit Wi-Fi network.
We believe that we will be able to fund these equipment purchases from our internal cash reserves or fund raised
from external investors and we do not anticipate that these obligations will have a material impact on our liquidity needs.
Overview
Based on our number of displays, we
believe that we operate the largest out-of-home advertising network using real-time mobile digital television broadcasts to
deliver content and advertising on mass transportation systems in China. Due to PRC regulatory restrictions on foreign
investments in the advertising and mobile digital television industries, we operate our advertising business in China through
our consolidated affiliated entities. Our relationships with our consolidated affiliated entities and their shareholders are
governed by a series of contractual arrangements that allow us effectively to control, and derive substantially all of the
economic benefits from, our consolidated affiliated entities. Our mobile digital television advertising network, or our
network, which delivers real-time content provided by the local television stations in addition to advertising,
differentiates us from other out-of-home advertising networks in China, and we believe this facilitates our future expansion
into different advertising media platforms. Our advertising network consists of digital television displays located on buses
and in subway trains and on subway platforms that receive mobile digital television broadcasts of real-time content and
advertising. We also operate various closed-circuit advertising digital displays on certain subway platforms and in subway
trains in Beijing, Chongqing, Nanjing and Shenzhen. As of December 31, 2015, our network and supplemental subway
advertising platform covered 19 cities in China and consisted of approximately 88,844 displays. In addition, we have expanded
the geographic reach of our advertising operations by purchasing advertising time on existing mobile digital television
networks in cities outside of our network to place advertisements to meet our clients’ demands.
We believe that our network delivers substantial
value to our advertising clients by reaching targeted mobile audiences in an enclosed environment conducive to capturing their
attention. We also believe that the combination of our advertising content along with real-time news and stock quotes, weather
and traffic updates, sports highlights and other programs displayed on our network makes the audience more receptive to the advertisements
on our network and ultimately helps make the advertisements more effective for our advertising clients. In addition, the real-time
broadcasting capability of our network allows us to utilize our network to disseminate public-interest messages and programs that
promote the general welfare of society and other urgent messages during emergency situations such as typhoons, earthquakes or
other events that concern public safety.
We currently place our digital displays primarily
on buses and subways. As many urban areas in China face increasing traffic congestion, many people endure a long average daily
commute time. Therefore, we believe that our network offers our clients the advantages of both traditional television and out-of-
home advertising media by capturing the attention of the audience in out-of-home locations with real-time broadcasts of programs.
We principally generate revenues by selling
advertising time during breaks in between the programs and certain infomercials on our network and supplemental subway advertising
platform. In addition, we have the ability to sell soft advertising time embedded in the programs. We charge our advertising clients
by the broadcasting time of the advertisement in each city where they want to place their advertisement. We divide our cities
into different price categories based on a variety of factors, including the number of installed displays, population, demand
and consumer purchasing power.
We also vary pricing based on the time of day
when an advertisement is broadcasted, with higher prices typically during the morning and evening commute periods.
As of December 31, 2015, we use the following
business models for our advertising operations in China:
|
·
|
Exclusive
agency model
refers to our arrangements, with terms ranging up to 11 years, in
19 cities: Beijing, Changchun, Changsha, Changzhou, Chengdu, Chongqing, Dalian, Guangzhou,
Nanjing, Ningbo, Shenyang, Shenzhen, Suzhou, Taiyuan, Tianjin, Wuhan, Wuxi, Xiamen and
Zhengzhou. We have entered into an exclusive advertising agency agreement with the partner
local mobile digital television company in 4 cities, namely Beijing, Changsha, Chengdu
and Guangzhou, that typically gives us the exclusive right to sell all of the advertising
time on our local partner’s mobile digital television network located on buses.
Our exclusive agency arrangements in Changzhou, Dalian, Suzhou, Wuxi, Xiamen, Zhengzhou,
Changchun, Ningbo, Shenyang, Taiyuan and Wuhan that give us the exclusive right to sell
a portion of the advertising time do not include sales of advertising time to local advertisers
within each respective city. For our supplemental subway advertising operations, we have
also entered into exclusive advertising agency agreements with the partner subway authority
or partner local mobile digital television company for subway trains and platforms in
Beijing, Chongqing, Nanjing and Shenzhen.
|
|
·
|
Direct
investment model
refers to our arrangements in 11cities, among which we and a
partner local television station, or its affiliate, have formed a jointly-owned mobile
digital television operating company in which we hold a noncontrolling equity interest,
as well as our arrangement in one city, among which we and a partner local subway authority,
or its affiliate, have formed a joint-owned subway television operating company in which
we hold a noncontrolling equity interest. We refer to these jointly-owned mobile digital
television operating companies as direct investment entities in this annual report. This
model gives us the opportunity to work in conjunction with the local television station
to provide programs to meet the demands of our audience and advertising clients. In the
majority of our direct investment cities, such as Changchun, Changzhou, Chengdu, Chongqing,
Dalian, Ningbo, Suzhou, Wuhan, Wuxi and Zhengzhou, we also have entered into an exclusive
agency agreement with our direct investment entities to secure the exclusive right to
sell advertising time on that network. For the cities where we have not entered into
an exclusive agency agreement, we purchase advertising time at commercial prices from
our direct investment entities and resell them to our advertising clients.
|
|
·
|
Outreach
agency model
refers to our operations in other cities where we purchase advertising
time from an existing mobile digital television company or other advertising service
providers outside of our network, either directly or through an agent at the request
of our clients. This model works in conjunction with our network arrangements to extend
the reach of our advertising operations to cover substantially all of the major advertising
markets in China. As of December 31, 2015, we had advertising time purchase agreements
with 82 companies engaged in the business of providing mobile digital television advertising
on buses and 14 companies engaged in the business of providing mobile digital television
advertising on subways.
|
Through December 31, 2015, 522 advertisers
had purchased advertising time on our mobile digital television advertising network or our supplemental subway advertising platform
either directly or through an advertising agent. As a result, our network has attracted a large number of blue-chip companies
to purchase advertising time either directly or through an agent. Our top three brand name advertisers, Ctrip, McDonald’s
and Chimelong Group accounted in aggregate for approximately 18.5% of our advertising service revenue for the year ended December
31, 2015. We believe the appeal and effectiveness of our advertising network is largely evidenced by the number of advertisers
who place repeated and multiple advertising campaigns on our network. We generated advertising service revenues of US$103.1 million,
US$102.4 million and US$74.6 million including continuing and discontinued operations for the years ended December 31, 2013, 2014
and 2015, respectively. We incurred net losses attributable to our shareholders of US$24.0 million, US$31.1 million and US$20.4
million for the years ended December 31, 2013, 2014 and 2015, respectively.
Our Advertising Network
As of June 30, 2016, our network and supplemental
subway advertising platform covered 15 cities in China. The following map and tables illustrate the geographic scope of our mobile
digital television advertising network and supplemental subway advertising platform as of June 30, 2016:
Our
Mobile Digital Television Advertising Network Cities
|
|
Exclusive
Agency
|
|
Direct
Investment
|
Beijing
Bus(1)
|
|
ü
|
|
|
Changchun(2)
|
|
ü
|
|
ü
|
Changzhou(3)
|
|
ü
|
|
ü
|
Chengdu
|
|
ü
|
|
ü
|
Dalian(4)
|
|
|
|
ü
|
Guangzhou
|
|
ü
|
|
|
Ningbo(5)
|
|
ü
|
|
ü
|
Suzhou(6)
|
|
|
|
ü
|
Taiyuan(7)
|
|
ü
|
|
|
Wuhan(8)
|
|
ü
|
|
ü
|
Wuxi(9)
|
|
ü
|
|
ü
|
Xiamen(10)
|
|
ü
|
|
|
Zhengzhou(11)
|
|
ü
|
|
ü
|
|
(1)
|
Our exclusive agency arrangement for Beijing Bus gives us the exclusive
right to sell a portion of the advertising time on Beijing’s bus mobile digital
television network to advertisers, excluding sales of advertising time to advertisers
from Beijing, from January 1, 2015.
|
|
(2)
|
Our exclusive agency arrangement in Changchun gives us the exclusive
right to sell a portion of the advertising time on Changchun’s mobile digital television
network to advertisers, excluding sales of advertising time to advertisers from Changchun,
from July 1, 2014.
|
|
(3)
|
Our exclusive agency arrangement in Changzhou gives us the exclusive
right to sell a portion of the advertising time on Changzhou’s mobile digital television
network to advertisers, excluding those from Changzhou, from March 5, 2010.
|
|
(4)
|
Our exclusive agency arrangement in Dalian gives us the exclusive
right to sell a portion of the advertising time on Dalian’s mobile digital television
network to advertisers, excluding those from Dalian, from November 1, 2012 to October
30, 2015. We terminated the exclusive agreement in Dalian on June 30, 2016.
|
|
(5)
|
Our exclusive agency arrangement in Ningbo gives us the exclusive
right to sell a portion of the advertising time on Ningbo’s mobile digital television
network, excluding sales of advertising time to advertisers from Ningbo.
|
|
(6)
|
Our exclusive agency arrangement in Suzhou gives us the exclusive
right to sell a portion of the advertising time on Suzhou’s mobile digital television
network, excluding sales of advertising time to advertisers from Suzhou.
|
|
(7)
|
Our exclusive agency arrangement in Taiyuan gives us the exclusive
right to sell a portion of the advertising time on Taiyuan’s mobile digital television
network, excluding sales of advertising time to advertisers from Taiyuan.
|
|
(8)
|
Our exclusive agency arrangement in Wuhan gives us the exclusive
right to sell a portion of the advertising time on Wuhan’s mobile digital television
network to advertisers excluding sales of advertising time to advertisers from Wuhan,
from April 1, 2014.
|
|
(9)
|
Our exclusive agency arrangement in Wuxi gives us the exclusive
right to sell a portion of the advertising time on Wuxi’s mobile digital television
network to advertisers, excluding sales of advertising time to advertisers from Wuxi.
|
|
(10)
|
Our exclusive agency agreements in Xiamen give us the exclusive
rights to sell a portion of the advertising time on Xiamen’s mobile television
network to advertisers, excluding those from Xiamen.
|
|
(11)
|
Our exclusive agency agreements in Zhengzhou give us the exclusive
rights to sell a portion of the advertising time on Zhengzhou’s mobile television
network from January 1, 2013 to December 31, 2015, excluding sales of advertising time
to advertisers from Zhengzhou.
|
Our exclusive advertising agency arrangement
for the Shanghai subway, which was acquired through our acquisition of Digital Media Group, gave us the exclusive right to sell
all of the advertising time on the mobile digital television network in 13 lines of the Shanghai subway from January 2, 2010.
We terminated the exclusive advertising agency agreement in Shanghai for 13 lines effective September 1, 2012. We terminated the
exclusive advertising agency agreement in Beijing subway for 4 lines (lines 1, 2, 3 and the Batong line) effective September 1,
2014. We terminated the exclusive advertising agency agreement for the Guangzhou subway with Guangzhou metro Television Co., Ltd.,
effective November 1, 2014.
Our
Mobile Digital Television Advertising Network Cities
|
|
Exclusive
Agency
|
|
Direct
Investment
|
Beijing
(two subway lines)(1)
|
|
ü
|
|
|
Chongqing(2)
|
|
ü
|
|
ü
|
Shenzhen
(line 4 of the Shenzhen subway)(3)
|
|
ü
|
|
|
Shenzhen
(three subway lines)(4)
|
|
ü
|
|
|
Tianjin
|
|
ü
|
|
|
Nanjing
(line 2 and southern extension of line 1)(5)
|
|
ü
|
|
|
|
(1)
|
Our exclusive agency arrangement in Beijing on our supplemental
subway advertising platform gives us the exclusive right to sell all of the advertising
time on the television platform in subway line 4 and the Daxing line of the Beijing subway.
|
|
(2)
|
Our arrangements in Chongqing give our direct investment entity
the exclusive right to sell all of the advertising time on the television platform in
Chongqing’s light rail lines 1, 2 and 3. Our direct investment entity also entered
into an exclusive arrangement with us in April 2011 which gives us the exclusive right
to sell all of the advertising time on the television platform in Chongqing’s light
rail line 2.
|
|
(3)
|
Our exclusive agency arrangement for Shenzhen line 4 gives us the
exclusive right to sell all of the advertising time on the television platform in line
4 of the Shenzhen subway.
|
|
(4)
|
In March 2011, we signed an exclusive agency arrangement with Shenzhen
subway, which gives us the exclusive right to sell all of the advertising time in subway
platforms in line 1, and in subway platforms and subway trains on lines 2 and 5 from
July 1, 2011 to June 30, 2016.
|
|
(5)
|
Our exclusive agency arrangements in Nanjing give us the exclusive
right to sell all of the advertising time on the television platform in line 2 and in
the southern extension of line 1 of the Nanjing subway for a period of ten years starting
from May 28, 2010.
|
Our mobile digital television advertising network
and supplemental subway advertising platform include digital displays installed in the mass transportation systems of 19 cities
around China as of December 31, 2015. Those digital television displays in our mobile digital television advertising network receive
real-time programs broadcast by local television stations on mobile digital television frequencies. The digital television screens
in our supplemental subway advertising platform receive programming transmitted through closed circuit digital networks. As of
December 31, 2015, our mobile digital television advertising network and supplemental subway advertising platform consisted of
approximately 88,844 digital displays.
We believe that our network bridges the gap
between traditional television advertising and other out-of-home advertising networks by combining the advantages of each medium.
Our advertising network captures the attention of the audience with real-time broadcasts of programs and also reaches the audience
in out-of-home locations such as mass transportation systems. Similar to traditional television broadcasts, our network delivers
real-time news and stock quotes, sports and other entertainment programs for some of the total broadcast time and advertising
content during short breaks between the programs.
Our advertising network and supplemental subway
advertising platform operating under the exclusive agency model in Beijing, Guangzhou and Shenzhen accounted in the aggregate
for approximately 65.6% of our advertising service revenue for the year ended December 31, 2015. We entered into exclusive agency
agreements with (1) Beijing Beiguang Media Mobile Television Co., Ltd. on October 13, 2006 for a term of ten years and seven months,
(2) Guangzhou Zhujiang Mobile Multimedia Information Co., Ltd. on July 26, 2007 for a term of eight years, (3) Shenzhen Metro
Group Company Limited on March 15, 2011 for a term of five years and (4) MTR (Shenzhen) Company Limited on April 21, 2010 for
a term of seven years.
As of December 31, 2015, according to the typical
terms of the exclusive agency agreements:
|
·
|
We typically
pay a pre-determined media cost each year to the mobile digital television company to
receive the exclusive right to place advertisements on that network.
|
|
·
|
We have the responsibility
to invest in new digital television displays and install the displays in new buses in
Beijing, Guangzhou and Nanjing.
|
For our supplemental subway advertising operations
acquired in connection with our acquisition of Digital Media Group, we are responsible for installing displays in the subway trains
and platforms in Beijing (line 4), Chongqing, and Tianjin, as well as displays in the subway trains on line 2 in Nanjing and the
southern extension of line 1, and we are responsible for upgrading displays in Nanjing. Most of these displays were installed
and upgraded prior to our acquisition of Digital Media Group.
|
·
|
We either sign
a contract directly with the local mass transportation companies, or our local partner
or our direct investment entity signs the contract with the local mass transportation
companies and assigns to us the right to install displays.
|
|
·
|
Our local partner
or our direct investment entity makes the investment to construct the broadcasting infrastructure
and arranges the necessary approvals from relevant regulatory agencies.
|
|
·
|
Our local partner
or our direct investment entity remains responsible for all of the broadcast programs
aside from advertising content, but we may provide suggestions for the purpose of maximizing
the effectiveness of our advertising network.
|
In cities where a local television station
has already created a mobile digital television company, we generally prefer to expand our cooperation by engaging in an exclusive
agency agreement. These exclusive arrangements allow our local partner to focus on the programming and operation of the mobile
digital television network without worrying about generating advertising revenues. Our pre-determined payment of the media cost
each year guarantees our local partner a steady stream of income, and our ability to place advertisements from local, national
and international clients may enhance the prestige and public perception of the local mobile digital television network. In addition,
we generally work closely with our local partner in the operation of the network and may provide suggestions regarding programming
on the network.
Our Direct Investment Cities
As of December 31, 2015, we operated our mobile
digital television advertising network under the direct investment model in nine cities: Changchun, Changzhou, Chengdu, Dalian,
Ningbo, Suzhou, Wuhan, Wuxi and Zhengzhou. We also operated our supplemental subway advertising platform under the direct investment
model in Chongqing. In these ten cities, in addition to primary installations of digital television displays on buses, subway
platforms or subway trains, we also have displays installed in buildings that receive digital television broadcasts from our mobile
digital television advertising network in Changchun, Dalian, Suzhou, Wuhan and Wuxi. Under our direct investment model, we form
an operating company together with a local television station or subway company authorized to operate the digital television network
or supplemental subway advertising platforms in that city. Due to regulatory considerations, we typically own 49% of the direct
investment entity and our partner owns the other 51%, but in Wuxi we own 14%,. Aside from the arrangements in respect of our direct
investment entities in Wuxi, the remaining nine direct investment agreements usually contain the following provisions:
|
·
|
We appoint the
general managers of most of the direct investment entities.
|
|
·
|
We train a locally
recruited sales force.
|
|
·
|
We purchase advertising
time from our direct investment entity and place advertisements for broadcasting on the
local network.
|
|
·
|
We sell assembled
digital television displays to the direct investment entity.
|
|
·
|
The local television
station obtains the necessary approvals for operating the mobile digital television station.
|
|
·
|
The local television
station provides the transmission equipment for broadcasting the advertising and programming
in that city.
|
|
·
|
The direct investment
entity enters into contracts with local mass transportation companies to install our
digital television displays in buses and other suitable locations.
|
|
·
|
The local television
station provides the news, entertainment and other programs for broadcasting on the direct
investment entity’s network, and the local television station ensures that the
programs conform to applicable PRC content laws and regulations.
|
In cities without mobile digital television
operations, we typically attempt to form an operating company together with the local television station authorized to operate
the mobile digital television network in that city. The direct investment model allows us to secure that particular city for a
long period of time because our contractual arrangements with the local television stations to form the direct investment entities
have durations ranging from 10 to 50 years. The direct investment model also allows us to be involved in the process of determining
the mixture of entertainment programs and advertising content broadcast on that network. In addition, the direct investment model
allows us to expand into new media platforms in the future using mobile digital television broadcasting technology.
We have entered into exclusive agency agreements
with our direct investment entities sell all of or a portion of the advertising time on the mobile digital television network
controlled by these direct investment entities. These exclusive agency agreements grant us the exclusive right to sell the advertising
time on the direct investment network typically for a term ranging from four years to eight years. Under these arrangements, we
realize all of the advertising revenues and pay a pre-determined media cost to the direct investment entity. Under this type of
contract, the direct investment entity effectively transfers the operational risk to us and enjoys a guaranteed stream of revenues.
We believe that the terms of these exclusive agency agreements were negotiated on an arm’s length basis. See “Item
7. — Major Shareholders and Related Party Transactions — B. Related Party Transactions — Exclusive Agency Agreements
with Our Direct Investment Entities”.
Our Outreach Agency Cities
We extend our geographic reach beyond the existing
scope of our network by purchasing advertising time on mobile digital television networks or other media either directly or through
an agent in cities outside of our network at the request of our advertising clients.
Our outreach agency model allows our advertising
operation to have a larger geographic presence and to provide the local network with advertising from national or international
clients, which may heighten the prestige and public perception of the local network. If our demand for advertising time on the
local network grows to a sufficient threshold, we may attempt to engage the local network in an exclusive agency agreement to
broaden our cooperation.
Advertising Clients, Sales and Marketing
Our Advertising Clients
The quality and broad geographic coverage
of our mobile digital television advertising network has attracted a broad base of international and domestic advertisers. In
2015, 1,205 advertisers have purchased advertising time on our mobile digital television advertising network or our
supplemental subway advertising platform either directly or through an agent. We regularly
collaborate with some of the largest global advertising agencies, or 4A agencies, to place advertisements for their clients.
We have the ability to place a client’s advertisements in one or more cities, both within and beyond our network,
according to their demands. As of December 31, 2015, we have placed advertisements in over 90 cities across China. As a
result, our network has attracted a large number of blue-chip companies to purchase advertising time either directly or
through an agent pursuant to contracts. Our top three brand name advertisers, Ctrip, McDonald’s and Chimelong Group ,
accounted in the aggregate for approximately 18.5% of our advertising service revenue for the year ended December 31, 2015.
We believe the appeal and effectiveness of our advertising network is largely evidenced by the number of advertisers who
place repeated and multiple advertising campaigns on our network.
The following table sets forth a breakdown
of our advertisers by industry for the year ended December 31, 2015:
Industry
|
|
%
of total advertising
service revenues
|
|
Food, Beverage, Restaurants, Wines
and Spirits
|
|
|
35.0
|
%
|
Tourism
|
|
|
17.4
|
%
|
IT and Internet
|
|
|
15.0
|
%
|
Household Products
|
|
|
8.9
|
%
|
Pharmaceutical and Nutritional Supplements
|
|
|
8.1
|
%
|
Fashion and Accessories
|
|
|
2.0
|
%
|
Electronics and Digital Products
|
|
|
2.5
|
%
|
Others
|
|
|
11.1
|
%
|
Sales and Marketing
As of December 31, 2015, we employed an experienced
advertising sales force of 208 employees. We also engaged consultants to assist with our marketing efforts. In addition to our
direct sales force, we also sell our advertising time through third party advertising agencies such as the 4A agencies. We provide
in-house education and training to our sales force to ensure that they provide our current and prospective clients with comprehensive
information about our services, the advantages of using our mobile digital television advertising network as a marketing channel
and relevant information regarding the advertising industry as a whole. We organize our sales force into teams to provide specialized
coverage for geographic regions. We believe that our regional coverage teams provide quality service for our advertisers and allow
our sales and marketing teams to focus on building close relationships and on staying current on regional market trends. We also
market our advertising services from time to time by placing advertisements on our own network.
We believe our advertisers derive substantial
value from our ability to provide advertising services targeted at specific segments of consumer markets. Since market research
is an important part of evaluating and demonstrating the effectiveness and value of our business to advertisers, we routinely
provide market research reports to our clients as part of our marketing efforts. We conduct market research, consumer surveys,
demographic analysis and other advertising industry research for our internal use to evaluate new and existing advertising channels.
We also purchase or commission studies containing relevant market study data from reputable third-party market research firms,
such as CTR Market Research. We typically consult such studies to assist us in evaluating the effectiveness of our network for
our advertisers. A number of these studies contain research on the numbers and socio-economic and demographic profiles of the
users of the mass transportation systems in the cities where we operate.
Starting from May 2008, we agreed with CTR
Market Research, the largest media and market research company in China, to jointly develop the first media evaluation standard
for China’s mobile digital televisions on public transportation systems. China has experienced rapid growth in the mobile
digital television market in recent years, but the industry lacks a standardized and authoritative audience measurement index
which advertisers and media owners may use to judge the efficacy and value of advertisements placed on mobile digital television
networks on public transportation systems. The creation of third-party evaluation standards will help provide common criteria
for comparing mobile digital television with traditional television, which is expected to help elevate the status of the emergent
mobile digital television industry.
Through June 2016, we, through our consolidated
affiliate Shenzhen Qianhai VisionChina Mobile Interactive Co., Ltd. ("Qianhai Mobile"), have secured exclusive concession
rights for bus Wi-Fi services in 25 cities across China, including Shanghai, Shenzhen, Guangzhou and Tianjin, covering approximately
80,000 buses. Currently, Qianhai Mobile provides free Wi-Fi Internet services on approximately 35,000 buses under the brand name
"VIFI," spanning over 12.0 million commuters and providing over 6.0 million Wi-Fi service sessions per day. We will
continue to expand our mobile internet initiative to further expand its national footprint and seek additional opportunities to
monetize Wi-Fi traffic in the near term.
Advertising Contracts
The standard advertising package includes advertising
time on our network in a particular city on either the mobile digital television advertising network or our supplemental subway
advertising platform, and our clients often combine standard advertising packages to purchase advertising time across multiple
cities. Our sales are made pursuant to written contracts with commitments ranging from one week to one year. Similar to traditional
television advertising, we primarily sell advertising time during breaks between programs and we also sell soft advertising embedded
into programs. The majority of our customers purchase the advertising time during breaks between programs and we often provide
flexible durations of time to meet the specific demands of our advertising clients. Our clients may choose to broadcast these
advertisements during specific times of the day or throughout the entire day. Our advertising rates vary depending on the time
of day, the broadcast city and the receiving platform. We divide our cities into different categories and charge rates consistent
with the advertising market in that city. We evaluate the listed price at the end of each quarter against the prevailing advertising
rates of our competitors in each city and determine any adjustments to be made based on prevailing market trends. The price we
charge for advertising time differs in each city as a function of the size of our network, the quality and mixture of the programming,
socioeconomic conditions and other prevailing market considerations.
We generally require our clients to submit
advertising content at least five days prior to the first broadcast date for compliance review. We also reserve the right to refuse
to disseminate advertisements that are not in compliance with content requirements under PRC laws and regulations.
Programming
The mobile digital television network in each
city determines its mixture of programming independently from the others. For our direct investment cities, the direct investment
entity exercises direct control over the mixture of programming and advertising, and for our exclusive agency cities, we typically
work closely with our partner network to enhance the effectiveness of the advertisements broadcasted. The mobile digital television
network broadcasts real- time news and stock quotes, sports highlights and other entertainment programs for most of the time and
we use short breaks between these programs to broadcast advertising in order to maximize the effectiveness of our advertising
network.
We provide suggestions for some of the programs
to be broadcast in our direct investment cities, and the local television station produces the remaining programs by editing the
material used for local television station broadcasts. Our ability to distribute programs produced by the local television station
in one city to other cities in our network gives us the opportunity to syndicate entertaining programs across all of our local
networks and to attract larger audiences to our network. Our real-time broadcast platform also allows local television stations
to provide real-time news and stock quotes and entertainment programs.
Relationships with Location Providers
Establishing and maintaining long-term relationships
with local mass transportation companies is critical to our business. We have entered into the following arrangements to secure
rights to install or use the displays on mass transportation systems in many cities across China.
Our Exclusive Agency Cities
In our exclusive agency cities, the local mobile
digital television company typically negotiates directly with the bus companies or other local mass transportation service providers
for a placement agreement to secure the right to install digital television displays and then exclusively assigns that right to
us. In our exclusive agency cities that are also our direct investment cities, the direct investment entity usually negotiates
directly with the bus companies or other location providers for a placement agreement to secure the right to install and operate
the digital television displays. In Guangzhou, which is an exclusive agency city, our local affiliate has entered into agreements
directly with bus companies to install and operate the mobile digital television displays. In Changzhou, which also is an exclusive
agency city, we have entered into an agreement directly with the local bus company to install and operate the mobile digital television
displays. For our supplemental subway advertising operations, we have entered into exclusive agency agreements with the local
subway authorities or their related entities.
Our Direct Investment Cities
With the exception of Changzhou, in our direct
investment cities, the direct investment entity negotiates directly with the bus companies or other location providers for a placement
agreement to secure the right to install the digital television displays.
Technology
Our digital television advertising network
uses digital television technology. This technology provides a communication method for broadcasting and receiving moving pictures
and sound by using digital signals, which provides better throughput compared to the analog signals used by analog televisions.
The digital television broadcasts use digital modulation data, which uses an algorithm to digitally compress the data. The transmission
equipment broadcasts a digital bit stream wirelessly over an analog bandpass channel to television receivers that decode the digital
signal. Our digital television displays installed on buses contain a receiver and decoder component that performs this task and
displays the broadcasted content. This technology enables the uninterrupted reception of audio visual signals while in motion,
thereby allowing the display of real-time programs on moving buses. Our supplemental subway advertising platform also uses digital
displays, and we transmit the advertisements and information from a broadcast center digitally, through a local area closed circuit
network, to the displays.
Suppliers
The primary hardware required for operating
our business comprises digital television displays, mobile digital television receivers, speakers and other related equipment
that we use in our mobile digital television advertising network. Maintaining a steady supply of our digital television displays
is important to our operations and the growth of our mobile digital television advertising network. We purchase our digital television
displays and receivers from third party manufacturers who build these components according to our specifications. We select component
suppliers based on price and quality. As there are several other qualified alternative suppliers for our equipment, our obligation
to our current suppliers is not exclusive. We have never experienced any material delay or interruption in the supply of our digital
television displays.
Competition
We compete with other advertising companies
in China including companies that operate out-of-home advertising media networks such as Focus Media Information Technology Co.,
Ltd., AirMedia Group Inc., Towona Mobile Digital Co., Ltd. and Bus Online Media Co., Ltd. We also compete with traditional television
stations for advertising spending. We compete for advertising clients primarily on the basis of network size and coverage, location,
price, the range of services that we offer and our brand name. We also compete for overall advertising spending with other companies
that offer to provide advertising through alternative media, such as the Internet, street furniture, billboards, frame and public
transport advertising companies, and with traditional advertising media, such as newspapers, magazines and radio. Some of our
competitors operate digital television advertising networks installed on mass transportation systems primarily playing prerecorded
content saved on compact flash drives or DVDs.
In the future, we also may face competition
from new entrants into the out-of-home television advertising network sector. In addition, the establishment of wholly foreign
owned advertising companies has been permitted since December 10, 2005. China’s ongoing deregulation of its advertising
market will likely expose us to greater competition with existing or new advertising companies in China, including PRC subsidiaries
of large well-established multi-national companies that may have significantly more resources than we do.
We face barriers-to-entry in the mobile digital
television advertising industry as a result of competition. Many smaller mobile digital television companies operate in cities
outside of our network pursuant to exclusive agreements, and we expect to encounter barriers-to -entry as we attempt to expand
our network into these cities. For example, in Shanghai, Shanghai Oriental Pearl Mobile Television Inc. operates one of the largest
mobile digital television advertising networks using broadcasting technology. As a result, we face barriers-to-entry to expand
our network to the bus platform in Shanghai. In addition, we will face barriers-to -entry to the extent that we expand our out-of-home
advertising network to different media platforms, such as in-building displays or large outdoor LED displays, as other companies
may have already signed exclusive placement agreements to secure the most desirable locations. These barriers-to -entry may limit
our ability to expand our network rapidly in the cities where we already operate and into new cities.
Intellectual Property
Our intellectual property consists of our brand,
trademarks and design patents related to some of the equipment we use. As of December 31, 2015, we held seven patents and copyrights
issued in the PRC.
Insurance
We only maintain insurance coverage for our
automobiles. We do not maintain any property insurance policies covering equipment and facilities for losses due to fire, earthquake,
flood or any other disaster. Consistent with customary industry practice in China, we do not maintain business interruption insurance
or key employee insurance for our executive officers. Uninsured damage to any of our equipment or buildings or a significant product
liability claim could have a material and adverse effect on our results of operations.
Regulation
This section sets forth a summary of the most
significant regulations or requirements that affect our business activities in China or our shareholders’ right to receive
dividends and other distributions from us.
Regulations on the Television Industry
Television content
According to the
Regulations on the Administration
of Radio and Television
promulgated by the State Counsel on August 11, 1997, and the
Provisions on the Administration of
Radio and Television Program Production
promulgated by the SARFT on July 19, 2004, entities engaging in the production of
television programs, such as feature programs, general programs, drama series and animations, and the trading activities and agency
services on the copyrights of such programs must first obtain preliminary approval from the SARFT or its provincial branches.
The entity must then register with the SAIC to obtain or update its business license. The television programs aired on the mobile
digital television networks on which we rely in operating our advertising network are produced by our local operating partners.
Our local operating partners are subject to regulations on television content. Since we rely on our business relationships with
our local operating partners to operate our advertising network, our business may be indirectly affected by any changes to the
regulations on television content.
Foreign investment in television operations
According to the
Regulations on the Administration
of Radio and Television promulgated by the State Council on August 11, 1997, the Detailed Procedures for the Financing of Radio,
Film and Television Conglomerates
promulgated by the SARFT on December 20, 2001, and the
Measures for the Administration
of Examination and Approval of Radio Stations and Television Stations
promulgated by the SARFT on August 18, 2004, television
stations or television channels may only be established and operated by the government. Pursuant to the
Several Decisions on
the Entry of Private Capital into the Culture Industry
, or the Decisions, issued by the State Council on April 13, 2005, and
the
Several Opinions on Foreign Investment in the Culture Sector
, or the Opinions, jointly issued by the SARFT, the Ministry
of Culture, the General Administration for Press and Publication, the National Development and Reform Commission and the Ministry
of Commerce on July 6, 2005, foreign investors are prohibited from establishing or operating television stations or transmission
networks, from broadcasting television programs, and from operating television channels. Under the Opinions and the
Circular
on the Further Strengthening of the Supervision of Radio and Television Channels
, or the Supervision Circular, promulgated
by the SARFT on August 4, 2005, foreign investors are prohibited from investing in or operating television channels.
We operate our business through our contractual
arrangements with our consolidated affiliated entities, which are PRC companies. Our consolidated affiliated entities in turn
rely on their contractual arrangements with our local operating partners to broadcast advertisements and programs. All of our
local operating partners that engage in broadcasting have obtained the licenses and approvals that are required in order to broadcast
television programs lawfully. Our PRC legal counsel has advised us that our business operations do not violate any restrictions
on foreign investment in television operations.
Foreign investments in television content
production
According to the Catalogue of Foreign Investment
Industries, amended on December 24, 2011 and effective as of January 30, 2012, foreign investors are prohibited from owning equity
interests in companies that are engaged in producing radio and television programs or drama series.
Under our contractual arrangements with our
local operating partners, our local operating partners are responsible for the production of television content. We or our direct
investment entities may provide suggestions with respect to the production or sourcing of the content and advertisements. The
content is subject to review and approval by the television stations which broadcast such content. Our consolidated PRC affiliates
engaging in advertising content production have obtained the requisite licenses and approvals issued by the local SARFT.
Mobile digital television
On March 17, 2014, the SARFT promulgated the
Notice Concerning Regulating the Development of Mobile Digital Television, or the March 2014 Notice. The March 2014 Notice regulates
mobile digital television operations and mainly comprises the following provisions:
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the mobile digital
television business shall be operated by municipal or provincial radio and television
stations, and satisfy the following requirements:
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mobile digital
television operations shall comply with the overall plan and layout of mobile digital
television determined by the SARFT;
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mobile digital
television operations shall be conducted in cities with a relatively high level of economic
and social development, having no less than 2,000 buses in total, or a subway or light
railway transportation system;
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the equity fund,
equipment, worksite and professional personnel required for the operations of mobile
digital television shall be commensurate with the relevant business scale;
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there shall be
a sound system in place for the review, broadcasting and monitoring of programs on mobile
digital television;
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the business operator
shall have program resources which are in compliance with relevant state regulations
and commensurate with its business scale;
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the technical system
shall meet the industrial and technical standards required by relevant state regulations;
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permits to transmit
radio and television programming shall be obtained for the integrated signal transmission
platform, which shall be regulated and qualified by the SARFT;
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mobile digital
television operations that are newly conducted after the March 2014 Notice shall obtain
approval from the SARFT;
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mobile digital
television operations shall comply with the Measures for the Administration of Advertisement
Broadcasting by Radio and
Television
promulgated by the SARFT, including restrictions
on total advertising time, frequency, content and format of advertisements;
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the national
digital mobile television standards have been established and all mobile digital television
operations shall comply with such national standards; and
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the
Notice
Concerning Experimental Mobile Digital Television
previously promulgated by the SARFT,
or the March 2006 Notice, has been repealed as of March 17, 2014.
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These regulations apply directly to our local
mobile digital television operating partners because they are in the business of operating mobile digital television networks.
The SARFT and its local branches have the authority to order any mobile digital television operators who have violated the March
2014 Notice or other applicable laws or regulations to stop operating their mobile digital television networks.
The SARFT or its local branches may order any
of our local operating partners to stop their operations. If any of our local operating partners is ordered to stop their mobile
digital television operations, we may not be able to continue our advertising business in the affected city through other media
or channels at acceptable costs, or at all. In which case, our business, financial condition and results of operations would be
materially and adversely affected.
The March 2014 Notice also provides that the
local SARFT branches have the authority to order any mobile digital television operators who have violated the March 2014 Notice
to rectify or stop operating their mobile digital television networks. We believe that the March 2014 Notice applies to the mobile
digital television operations of our local operating partners.
The National Standard of Frame Structure and
Channel Code and Modulation of Digital Television Ground Broadcasting Transmission System, or the National Standard, was approved
by the Standardization Administration of the PRC on August 18, 2006, and became effective on August 1, 2007. Under the March 2006
Notice, all of our local operating partners must adopt the National Standard for their mobile digital television operations. In
addition, the SARFT officially issued a notice requiring some of our local operating partners and direct investment entities to
complete the adoption of the National Standard by June 30, 2010. See “Item 3. Key Information — D. Risk Factors —
Risks Related to Doing Business in China” and “— Risks Related to Our Company and Our Industry — A significant
portion of the mobile digital television networks of our direct investment entities and the digital television broadcasting infrastructure
of our local operating partners currently does not meet newly adopted PRC national standards for mobile digital television operations.
We will be required to spend significant capital and other resources to upgrade the existing digital television broadcasting infrastructure
of our local operating partners in order to meet these new national standards, which expenditures could materially and adversely
affect our business, financial condition and results of operations.”
The SARFT issued a notice to provincial level
SARFT branches in China in July 2007 regarding mobile digital television operations. The notice contains provisions regarding:
(i) the authority of local SARFT branches to control program production and broadcasting on the mobile digital television networks;
(ii) the development of the mobile digital television business; (iii) permission for non-state-owned enterprises to form joint
ventures with the SARFT-affiliated entities to engage in advertising, marketing, program production and equipment installation
services in connection with mobile digital television operations as long as the SARFT-affiliated entities control at least 51%
of the equity interests in such joint ventures; (iv) the transition to the National Standard for mobile digital television operations;
and (v) the requirement that each local SARFT branch inspect the mobile digital television operations within its jurisdiction.
We do not own more than a 49% equity interest in any of the direct investment entities that we have jointly established with relevant
local SARFT-affiliated entities.
The SARFT issued a notice regarding strengthening
the administration of public audio/visual media on public transportation vehicles and in public buildings on December 6, 2007.
According to this notice, broadcasting programs on audio/visual media located on public transportation vehicles and in public
buildings using television, Internet or other broadcasting technology must first obtain approval from the SARFT. In addition,
programs are prohibited from being broadcast on audio/video media located in public transportation vehicles, public buildings
and other indoor and outdoor places using compact flash drives or DVD technology, as only advertisements are allowed to be shown
on media using these technologies.
Regulations on the Advertising Industry
Foreign investments in advertising
Under the Catalogue and the Administrative
Provision on Foreign Investment in the Advertising Industry, jointly promulgated by SAIC and the Ministry of Commerce on March
2, 2004, foreign investors can invest in PRC advertising companies either through wholly owned enterprises or joint ventures with
Chinese parties. Since December 10, 2005, foreign investors have been allowed to own up to 100% of the equity interests in PRC
advertising companies. However, foreign investors must have at least three years of direct operations outside of the PRC in the
advertising industry as their core business. This requirement is reduced to two years if foreign investment in the advertising
company is made in the form of a joint venture. Foreign-invested advertising companies can engage in advertising design, production,
publishing and agencies, provided that certain conditions are met and necessary approvals are obtained.
Our advertising business is currently provided
through contractual arrangements with our consolidated affiliated entities in China, which hold the licenses that are required
in order to provide advertising services in China. One of our consolidated affiliated entities, VisionChina Media Group, is currently
owned by Limin Li and Yanqing Liang. We do not have any equity interest in VisionChina Media Group, but we receive economic benefits
from it through various contractual arrangements. See “Item 7. Major Shareholders and Related Party Transactions —
B. Related Party Transactions.” In January 2010, we completed our acquisition of Digital Media Group, which operated and
continues to operate its advertising business through its consolidated affiliated entity in China, Beijing Eastlong Advertising.
Beijing Eastlong Advertising is currently owned by Qijun Men and Haifeng Wang. Digital Media Group does not have any equity interest
in Beijing Eastlong Advertising, but receives economic benefits from it and bears economic risks of it through various contractual
arrangements. Our consolidated affiliated entities and their subsidiaries directly operate our advertising network, enter into
direct investment and exclusive and non-exclusive advertising agency agreements, and sell advertising time to our clients. We
have been, and expect to continue to be, dependent on our consolidated affiliated entities and their subsidiaries to operate our
advertising business.
Advertising content
PRC laws, rules and regulations that are applicable
to advertising set forth certain content requirements for advertisements in China including, among other things, prohibitions
on false or 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. There also are specific restrictions and requirements regarding advertisements that relate to matters such
as patented products or processes, pharmaceuticals, medical instruments, agrochemicals, foodstuffs, alcohol and cosmetics. In
addition, all advertisements relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals, together
with any other advertisements which are subject to censorship by administrative authorities according to relevant laws or regulations,
must be submitted to relevant authorities for content approval prior to the advertisements being disseminated.
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 is true and in full compliance with applicable law. In providing advertising services, advertising operators and
advertising distributors must review the supporting documents provided by advertisers for advertisements and verify that the content
of the advertisements complies with applicable PRC laws, rules and regulations. Prior to distributing advertisements that are
subject to government censorship and approval, advertising distributors are obligated to verify that such censorship has been
performed and that approval has been obtained. Violation of these regulations may result in penalties, including fines, confiscation
of advertising income, orders to cease disseminating advertisements, and orders to publish an advertisement correcting the misleading
information. In circumstances involving serious violations, the SAIC or its local branches may revoke violators’ licenses
or permits to operate their advertising business. Furthermore, advertisers, advertising agencies or advertising distributors may
be subject to civil liability if they infringe on the legal rights and interests of third parties in the course of engaging in
their advertising business.
Under the
Administrative Measures on Radio
and Television Advertisement Broadcasting
issued by the SARFT on September 8, 2009, which became effective on January 1, 2010,
or the Measures, advertisements relating to certain products and services, including tobacco, certain prescription pharmaceuticals,
medical instruments, medical treatments, name analysis and fortune telling, are specifically prohibited from being disseminated.
Advertisements relating to certain other products and services, including pharmaceuticals, medical instruments, foodstuffs, cosmetics,
agrochemicals, veterinary pharmaceuticals and financial management, are subject to censorship by administrative authorities according
to relevant laws or regulations, and approval for such advertisements must be reviewed and examined prior to dissemination. In
addition, the Measures restrict and address other types of advertising, including advertisements in political news programs, advertisements
for investment consultations or franchising businesses, advertisements for lottery or gambling, and advertisements featuring medical
experts in advertisements for pharmaceuticals, medical instruments, medical treatment and health care information. The Measures
also limit the length of advertising time in each program and require radio and television broadcasting institutions to establish
management systems to operate, review and disseminate advertisements. Violation of these regulations may result in penalties,
including warnings, fines, orders to cease disseminating advertisements and orders to publish an advertisement correcting the
misleading information. In circumstances involving serious violations, the SARFT or its local branches may revoke violators’
licenses or permits to operate their radio and television businesses.
Tax
Our operating subsidiary and controlled entities
are incorporated in the PRC and are governed by the PRC income tax law, which subjects them to the PRC enterprise income tax rate
of 25%.
The PRC EIT Law became effective on January
1, 2008. Under the EIT Law and the implementation regulations under the EIT Law issued by the PRC State Council, China has adopted
a uniform tax rate of 25% for all enterprises (including foreign-invested enterprises) and revoked the previous tax exemption,
reduction and preferential treatments applicable to foreign-invested enterprises. However, there is a transition period for enterprises,
whether foreign-invested or domestic, that received preferential tax treatments granted by relevant tax authorities prior to January
1, 2008. Enterprises that were subject to an enterprise income tax rate lower than 25% prior to January 1, 2008 may continue to
enjoy the lower rate and gradually transition to the new tax rate within five years. Enterprises that were entitled to exemptions
or reductions from the standard income tax rate for a fixed term prior to January 1, 2008 may continue to enjoy such treatment
until the fixed term expires. However, if a foreign-invested enterprise had not become profitable before the end of December 2007,
a two-year exemption from the enterprise income tax was granted for the period between the time the enterprise becomes profitable
and December 31, 2009. According to the implementation regulations, during the transition period, the enterprise income tax rates
applicable to CDTC were 20%, 22%, 24%, 25%, 25% and 25% in the years 2009, 2010, 2011, 2012, 2013 and 2014, respectively. Preferential
tax treatments may continue to be granted to industries and projects that are strongly supported and encouraged by the state,
and enterprises classified as “new and high technology enterprises strongly supported by the state” are entitled to
be subject to enterprise income tax at a reduced rate of 15%. VisionChina Media Group was designated as a “new and high
technology enterprise strongly supported by the state” in November 2008 and, as a result, was subject to an enterprise income
tax rate of 15% for the years 2009 and 2010. In addition, VisionChina Media Group obtained approval from a governmental authority
in October 2011 to be recognized as a state-encouraged new and high technology enterprise and therefore was entitled to be subject
to a preferential tax rate of 15% for a three-year period from 2011 to 2013. In August 2014, VisionChina Media Group obtained
approval from a governmental authority to be recognized as a state-encouraged new and high technology enterprise and therefore
is entitled to be subject to a preferential tax rate of 15% for a three-year period from 2014 to 2016, subject to approval from
the tax authority at the end of each year. In accordance with a circular issued in December 2010, Beijing Eastlong Technology
has been recognized as a state-encouraged new and high technology enterprise starting from 2010, and this status was valid for
a period of three years. As such, the effective EIT rates for Beijing Eastlong Technology were 15%, 15%, 15%, 25%, and 25% in
the years 2010, 2011, 2012, 2013 and 2014, respectively. One of our operating consolidated affiliated entities established in
Luzhou in Sichuan province was recognized as a “local government encouraged company” and was entitled to exemption
from the enterprise income tax during 2008 and 2009, and to be subject to a reduced tax rate of 7.5% for the years ended December
31, 2010, 2011 and 2012. This operating subsidiary in Luzhou was subject to tax rates of 15% and 25% in the years 2013 and 2014,
respectively. Notwithstanding the standard statutory tax rate of 25%, in 2011, under the direction of a relevant tax authority,
one of our operating consolidated affiliated entities, Jiangxi Huashi, applied a deemed-profit-rate method to its annual tax filings
for 2011. Pursuant to the deemed-profit-rate method, taxable income for Jiangxi Huashi was deemed to be 16% of revenues. Additional
amounts of US$0.1 million and nil would otherwise have been payable if Jiangxi Huashi were not allowed to apply the deemed-profit-rate
method to its annual tax filings for the years ended December 31, 2013 and 2014, respectively.
The EIT Law also specifies that enterprises
established outside of China whose “de facto management bodies” are located in China are considered “resident
enterprises,” and are generally subject to PRC enterprise income tax at the uniform rate of 25% on their global income,
including income received from subsidiaries and consolidated affiliates. Under the implementation regulations to the EIT Law issued
by the PRC State Council, “de facto management body” is defined as a body that has material and overall management
and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition
and disposition of properties and other assets of an enterprise. If we were treated as a resident enterprise for PRC tax purposes,
we would be subject to PRC tax on our worldwide income at a rate of 25%.
Furthermore, unlike the
PRC Income Tax Law
for Enterprises with Foreign Investment and Foreign Enterprises
that was replaced by the EIT Law, which specifically exempts
withholding tax on any dividends payable to non-PRC investors of foreign-invested enterprises, the EIT Law and its implementation
regulations issued by the State Council specify that an income tax rate of 10% is normally applicable to dividends payable to
non-PRC investors where those dividends derive from sources within China, although such income tax may be exempted or reduced
by the State Council or a tax treaty between China and the jurisdiction where the non-PRC investors reside. We are a Cayman Islands
holding company and substantially all of our income may be derived from dividends we receive from our operating subsidiary and
consolidated affiliates located in China. If we declare dividends from such income, it may be deemed to be derived from sources
within China under the EIT Law and be subject to income tax under the EIT Law. If we are required under the EIT Law to pay income
tax for any dividends we receive from our subsidiary in China, the value of your investment may be materially and adversely affected.
In addition, it is unclear whether dividends paid to our non-PRC shareholders and ADS holders or any capital gains from the transfer
of our common shares or ADSs would be treated as income derived from sources within the PRC and thereby subject to PRC tax. If
we are required under the EIT Law to withhold PRC income tax on dividends payable to our non-PRC investors that are “non-resident
enterprises,” or if you are required to pay PRC income tax on the transfer of our common shares or ADSs, the value of your
investment may be materially and adversely affected.
Before January 1, 2012, our advertising revenues
were subject to business tax. The PRC government implemented a the VAT Tax Reform which replaced the business tax with VAT on
selected sectors including the advertising sector, effective in Shanghai as of January 1, 2012, effective in Beijing as of September
1, 2012, and effective in Shenzhen as of November 1, 2012. Commencing on August 1, 2013, the VAT Tax Reform became applicable
to all regions of the PRC. With the adoption of the VAT Tax Reform, the VAT rate on our advertising revenues applicable to our
subsidiaries and consolidated variable interest entities is 6% as compared to the 5% business tax rate which was applicable prior
to the reform.
In addition, we conduct our advertising business
through contractual arrangements with our consolidated affiliated entities, which are currently owned by individuals. If one of
our consolidated affiliated entities were to distribute dividends in the future, we would be required to pay taxes at an individual
income tax rate of 20% on behalf of our employees who hold interests in that consolidated affiliated entity. Furthermore, business
tax liability potentially may arise from the contractual arrangements we have with our consolidated affiliated entities. If we
were unable to receive tax-free distributions of earnings from our consolidated affiliated entities, we may need to pay additional
taxes upon such earnings distributions.
Regulations on Foreign Currency Exchange
Foreign currency exchange
Pursuant to the Foreign Currency Administration
Rules promulgated on and effective as of August 5, 2008, and various regulations issued by the SAFE and other relevant PRC governmental
authorities, the Renminbi is freely convertible only to the extent of current account items, such as trade-related receipts and
payments, interest and dividends. Foreign currency received under current account items can either be retained or sold to financial
institutions engaged in the business of settling or selling foreign exchange without prior approval from the SAFE by complying
with relevant regulations. Capital account items, such as direct equity investments, loans, repatriation of investments and investments
in stocks and bonds, require prior approval from the SAFE or its local branch before such items are converted from Renminbi into
foreign exchange, such as U.S. dollars, and remitted outside PRC. Payments for transactions that take place within the PRC must
be made in Renminbi. Foreign currency received in respect of capital account items can be retained or sold to financial institutions
engaged in the business of settling or selling foreign exchange only with prior approval from the SAFE. Foreign-invested enterprises
may retain foreign exchange in accounts with designated foreign exchange banks subject to a cap set by the SAFE or its local branch.
Foreign exchange registration of offshore
investment by PRC residents
Pursuant to SAFE’s
Notice on Relevant
Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Overseas Investment and Financing via Special
Purpose Vehicles and Round-trip Investments
, or Circular 37, issued on July 4, 2014, (i) a PRC resident, including a PRC resident
natural person or a PRC company, shall register with a local SAFE branch before contributing to or paying for any special purpose
vehicles, or SPV, with its legally owned domestic or overseas assets and interests, and (ii) when the SPV undergoes a material
event outside of China, such as a change to one or more of its PRC resident individual shareholders, or merger or acquisition,
the PRC resident shall register such change with a local SAFE branch.
Under Circular 37, failure to comply with the
registration procedures set forth above may result in penalties, including restrictions on a PRC subsidiary’s foreign exchange
activities in capital accounts and its ability to distribute dividends to the SPV.
On December 25, 2006, the People’s Bank
of China promulgated the
Measures for the Administration of Individual Foreign Exchange
, and on January 5, 2007, the SAFE
promulgated the implementation rules for those measures. Both of these regulations became effective on February 1, 2007. Pursuant
to these regulations, PRC citizens who are granted shares or share options by an overseas-listed company according to its employee
share option or share incentive plan are required, through a qualified PRC agent which may be the PRC subsidiary of such overseas-listed
company, to register with the SAFE and complete certain other procedures related to the share option or share incentive plan.
Foreign exchange income received from the sale of shares or dividends distributed by the overseas-listed company must be remitted
into a foreign currency account of such PRC citizen or be exchanged into Renminbi. Our PRC citizen employees who had been granted
share options, or PRC optionees, became subject to these regulations upon the listing of our ADSs on the Nasdaq Global Market.
If we or our PRC optionees were to fail to comply with these regulations, we or our PRC optionees could be subject to fines and
legal sanctions.
Dividend Distribution
The principal laws, rules and regulations governing
dividends paid by PRC operating subsidiaries include the
PRC Company Law
(1993), as amended in 2013, the
Wholly Foreign
Owned Enterprise Law
(1986), as amended in 2000, and the
Wholly Foreign Owned Enterprise Law Implementation Rules
(1990),
as amended in 2001. Under these laws and regulations, PRC subsidiaries, including wholly foreign owned enterprises, or WFOEs,
and domestic companies in China, may only pay dividends out of their accumulated profits, if any, determined in accordance with
PRC accounting standards and regulations. In addition, PRC subsidiaries and consolidated affiliates, including WFOEs and domestic
companies, are required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to their
statutory capital reserve fund until such time as the cumulative amount of such reserve equals 50% of such entity’s registered
capital. These reserves may not be distributed as cash dividends.
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Organizational Structure
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The following diagram illustrates our company’s
organizational structure, and the place of formation, ownership interest and affiliation of each of our principal subsidiaries
and affiliated entities as of June 30, 2016.
In December 2015, in order to avoid potential
share structure issue in future listing of our WIFI business in China’s capital market, including but not limited to the
National Equities Exchange and Quotations ("NEEQ"), we proposed to sell 47.04% equity interests in Shenzhen Qianhai VisionChina
Mobile Interactive Co., Ltd. ("Qianhai Mobile), one of our subsidiaries, to a company controlled by Mr. Limin Li, our co-founder,
chairman of our board of directors and our chief executive officer, subject to approval of our board of directors (the “Proposed
Transaction”). As we wished to enter into the Proposed Transaction before the next meeting of our board of directors, we
decided to seek our board of directors’ approval through written resolutions of the directors. We erroneously believed that
we only need a majority of our directors to execute the written resolutions in order for the resolutions to become effective. As
such, after the written resolutions intended to approve the Proposed Transaction (the “Written Resolutions”) were executed
by all but one of our directors, we erroneously believed that the Written Resolutions had become effective. Based on such
erroneous belief, we entered into an equity transfer agreement (the “Equity Transfer Agreement”) with Shenzhen Champ
Elysee Investment Co, Ltd. (“Shenzhen Champ Elysee”) in January 2016, and pursuant to the agreement, we registered
the transfer of 47.04% equity interests in ("Qianhai Mobile”) to Shenzhen Champ Elysee with the responsible local government
agency in China in the same month.
In later January 2016, we noticed that
Article 104 of our articles of association provides that, “A resolution signed by all the Directors shall be as valid and
effectual as if it had been passed at a meeting of the Directors duly called and constituted” and realized that the Written
Resolutions were never effective as they were not signed by all of our directors. Our failure to receive an effective board resolution
with respect to the Proposed Transaction had made the Equity Transfer Agreement voidable by Shenzhen Champ Elysee. Having
reached these legal conclusions, Shenzhen Champ Elysee and we agreed that the Equity Transfer Agreement should be canceled. As
such, we and Shenzhen Champ Elysee reversed all actions taken for the Proposed Transaction, including registering the transfer
of 47.04% equity interests in Qianhai Mobile back to us with the responsible local government agency in China, in March 2016.
|
D.
|
Property, Plants and Equipment
|
Our principal executive offices are located
at our headquarters comprising approximately 1,780 square meters in Shenzhen, China. We also maintain offices in other cities
across China. We lease all of our facilities and do not own any real property. We lease some of our facilities from related parties.
See “Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Transactions
with Affiliated Companies of Limin Li — Lease and Loan with Meidi Zhiye.” We believe that our leased facilities are
adequate to meet our needs for the foreseeable future, and we believe that we will be able to obtain adequate facilities, principally
through leasing of additional properties, to accommodate our future expansion plans.
The primary hardware required for operating
our business comprises digital television displays, mobile digital television receivers, speakers and other related equipment
that we use in our mobile digital television advertising network. We also purchase Wi-Fi devices and
equipment to build and operate our public transit Wi-Fi network. We purchase such devices and equipment from
third party manufacturers who build these components according to our specifications. As there are several other qualified alternative
suppliers for our equipment, our obligation to our current suppliers is not exclusive. We have never experienced any material
delay or interruption in the supply of our equipment.
|
ITEM 4A.
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UNRESOLVED
STAFF COMMENTS
|
None.
|
ITEM 5.
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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. This discussion may contain forward-looking statements based upon
current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in
these forward-looking statements as a result of various factors, including those set forth under “Item 3. Key Information
— D. Risk Factors” or in other parts of this annual report.
Overview
We believe that we operate the largest out-of-home
advertising network using real-time mobile digital television broadcasts to deliver content and advertising on mass transportation
systems in China based on the number of displays. As of December 31, 2015, our mobile digital television advertising network consists
primarily of our digital television displays installed on buses and subways. As of December 31, 2015, our mobile digital television
advertising network and supplemental subway advertising platform covered 19 cities in China and consisted of approximately 87,844
digital displays. We generate revenues by selling advertising time on our network and our supplemental subway advertising platform
and from sales of advertising equipment to our direct investment entities.
We experienced significant revenue growth,
and the size of our network grew significantly after the commercial launch of our advertising network in 2005. In 2008, we acquired
six advertising agency businesses and integrated their customer bases and strong sales teams into our operations. In January 2010,
we completed our acquisition of Digital Media Group and expanded our advertising network to include various subway lines in China,
the Shanghai bus shelter network and the Hong Kong Airport Express Line. We have expanded our operations through
three different types of arrangements that consist of our exclusive agency model, our direct investment model and our outreach
agency model.
We expect our future growth to be driven by
a number of factors and trends including:
|
·
|
overall economic
growth in China, which we expect to contribute to an increase in advertising spending
in major urban areas in China where consumer spending is concentrated;
|
|
·
|
our ability to
establish and maintain business relationships with our local operating partners, and
our and their ability to establish and maintain business relationships with mass transportation
companies;
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|
·
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our ability to
expand our network and supplemental subway advertising platform into new locations and
additional cities;
|
|
·
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our ability to
secure exclusive agency arrangements with mobile digital television companies in additional
cities to control the advertising time on those networks;
|
|
·
|
our ability to
respond to competitive pressures and to compete effectively when expanding the reach
of our network;
|
|
·
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our ability to
increase sales of advertising time and extend the total minutes available for broadcasting
of advertisements across all of our cities;
|
|
·
|
our ability to
attract more revenues from our existing clients and expand our client base through promotion
of our services;
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|
·
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our ability to
provide programs that appeal to local viewers;
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|
·
|
our ability to
enhance the technology of our network to make our advertising platform more effective
in terms of increasing audience reach and engagement; and
|
|
·
|
our ability to
acquire companies that operate advertising businesses that are complementary to our existing
operations.
|
As our advertising service revenue constitutes
a significant portion of our revenues, we focus on factors that directly affect our advertising service revenue such as (i) the
total advertising time that we have available across all of our cities, (ii) the actual price we charge for our advertising time
and (iii) the programming to advertising ratio. The actual price we charge advertising clients, which equals the official list
price minus any discounts, for time on our network is affected by, among other things, (i) the overall socioeconomic conditions
in each city, (ii) the level of demand for advertising time in each city, and (iii) the perceived effectiveness of our network
in achieving the goals of our advertising clients. The perceived effectiveness of our network directly relates to our ability
to expand the coverage of our mobile digital television advertising network and our ability to provide programs that draw the
attention of viewers. We also measure our performance using an average revenue per hour metric, which we calculate by dividing
our advertising service revenue by the total hours of broadcasting in the cities of our network and supplemental subway advertising
platform.
As we continue to expand our network, we expect
to face a number of challenges. Entering into a new market requires us to develop a contractual relationship with the local television
station or its mobile digital television affiliate, so expansion into new cities may require an extended amount of time. To the
extent we expand our network beyond mass transportation systems, we may compete directly with other companies that have already
occupied many of the most desirable locations in China’s major cities. In addition, we must react to continuing technological
innovations in our industry and changes in the regulatory environment. In connection with the required compliance with the National
Standard for mobile digital television, our direct investment entities and our local operating partners will need to upgrade digital
television displays in their networks to conform with the National Standard. Currently, we are not able to estimate accurately
the amount and timing of capital expenditures required to upgrade to the National Standard. We have implemented a number of measures
to address these anticipated challenges: (i) we had a special team of nine employees as of December 31, 2015 focusing on business
development and expansion of our network; (ii) our management maintains an active dialogue with the relevant regulatory authorities
to stay current on new developments and to ensure compliance with all current laws and regulations; and (iii) we purchase digital
television displays and other related equipment with easily upgradable components to minimize the capital expenditures required
to upgrade our network in response to technological or regulatory changes in our industry.
Through June 2016, we, through our consolidated affiliate
Shenzhen Qianhai VisionChina Mobile Interactive Co., Ltd. ("Qianhai Mobile"), have secured exclusive concession rights
for bus Wi-Fi services in 25 cities across China, including Shanghai, Shenzhen, Guangzhou and Tianjin, covering approximately
80,000 buses, which represent an increase compared to same period in the previous year.
Continuing Operations Overview.
Our continuing operations consist of the following
reporting units: (i) our advertising agency business of our digital mobile television network on buses and (ii) our public transit
Wi-Fi network:
Revenues
—
Continuing Operations
We had total revenues of US$54.0 million, US$52.7
million and US$41.5 million for the years ended December 31, 2013, 2014 and 2015, respectively. We generate revenues from sales
of advertising time on our mobile digital television advertising network and Wi-Fi portal on buses. We principally derive our
advertising service revenue from sales of advertising time between programs and certain infomercials, and we also have generated
revenues from sales of our digital television displays to our local operating partners, which sales we refer to as our advertising
equipment revenue. The following table sets forth a breakdown of our total revenues for the periods indicated.
|
|
For the Year Ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
% of total
revenues
|
|
|
US$
|
|
|
% of total
revenues
|
|
|
US$
|
|
|
% of total
revenues
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
Service Revenue
|
|
|
53,558,824
|
|
|
|
99.1
|
|
|
|
52,209,283
|
|
|
|
99.1
|
|
|
|
37,971,760
|
|
|
|
91.6
|
|
Advertising
Equipment Revenue
|
|
|
484,977
|
|
|
|
0.9
|
|
|
|
463,177
|
|
|
|
0.9
|
|
|
|
2,092,026
|
|
|
|
5.0
|
|
Wi-Fi
revenue
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
1,400,187
|
|
|
|
3.4
|
|
Total Revenues from continuing operations
|
|
|
54,043,801
|
|
|
|
100.0
|
|
|
|
52,672,460
|
|
|
|
100.0
|
|
|
|
41,463,973
|
|
|
|
100.0
|
|
Advertising Service Revenue
—
Continuing Operations
We derive the majority of our advertising service
revenue from sales of advertising time between the programs on our mobile digital television advertising network. Our advertising
service revenues accounted for 99.1%, 99.1%, and 91.6% of our total revenues for the years ended December 31, 2013, 2014 and 2015,
respectively.
Our advertising service revenue is recorded
net of any sales discounts from our official list prices that we may provide to our advertising clients. These discounts include
volume discounts and other customary incentives offered to our advertising clients, including additional broadcast time for their
advertisements if we have unused time available in a particular city and represent the difference between our official list price
and the amount we charge our advertising clients. Our advertising clients include advertisers that directly engage in advertisement
placements with us and advertising agencies retained by some advertisers to place advertisements on the advertiser’s behalf.
We expect that our advertising service revenues will continue to be the primary source of our total revenues for the foreseeable
future.
The PRC government implemented a VAT reform
pilot program which replaced the business tax with VAT on selected sectors including the advertising sector, in Shanghai effective
from January 1, 2012, in Beijing effective from September 1, 2012, and in Shenzhen effective from November 1, 2012. The VAT reform
program was effectively expanded to all PRC regions as of August 1, 2013. The VAT rate applicable to the subsidiaries and consolidated
variable interest entities of our group is 6% as compared to the 5% business tax rate which was applicable prior to the reform.
We typically sign advertising contracts with
our advertising clients that require us to place the advertisements on our network in specific cities for specified periods. We
recognize revenues as the advertisement airs over the contractual term based on the schedule agreed upon with the client.
Even though we believe that the regulation
regarding registration with the SAIC for outdoor advertisements and the regulation issued by the SARFT restricting advertising
time do not apply to us, substantially all of our revenues would be impacted if the SAIC or the SARFT determine that such regulations
apply to us and impose regulatory sanctions on us. For example, none of our local operating partners are currently registered
with the SAIC, so substantially all of our revenues could be affected if the SAIC determines that registration was necessary and
decides to take regulatory actions. While we currently sell approximately 10% of total broadcasting time each day, if the SARFT
determines that the 20% regulatory limitation on the number of advertising minutes applies to us, our business and results of
operations could be materially and adversely affected as it would limit our potential revenues, while our media costs would continue
to increase. See “Item 3. Key Information — D. Risk Factors — Risks Related to Our Company and Our Industry
— By promulgating the March 2014 Notice, the SARFT determined that regulations on radio and television advertising operations
are applicable to advertising on mobile digital television, and our business and prospects could be harmed by this determination.”
Factors that Affect Our Advertising Service Revenue
|
·
|
Advertising
Time
. The total advertising time available across all of our cities determines
our total capacity and affects our advertising service revenue. Any future expansion
of our network or non-broadcast advertising platform into new cities will increase the
total advertising time available across all of our cities and affect our advertising
service revenue. Geographic expansion of our network also allows us to attract more advertising
clients by providing greater geographic coverage and exposure.
|
Our ability to expand into new cities will affect the total
advertising time available across our network and our supplemental subway advertising platform. Our management has implemented
certain measures to facilitate our entrance into new markets. We maintain a special team of employees to focus on our network
expansion efforts. In conjunction with the members of our management, this team consults with prospective partners to develop
relationships, secure contractual agreements and assist in the deployment and maintenance of our network.
|
·
|
Actual
Price of Advertising Time
. The price that we actually charge our clients for
our advertising time directly affects our advertising service revenue. The listed prices
for advertising time on our network and supplemental subway advertising platform vary
significantly from city to city as income levels, standards of living and general economic
conditions vary significantly across different regions in China. In accordance with standard
industry practice, we offer discounts to our clients on an individual basis, so the actual
price we charge for our advertising time after taking into account any discounts will
affect our advertising service revenue.
|
|
·
|
Demand
for advertising time on our network
. The demand for our advertising time directly
affects the actual price of our advertising time and is affected by a variety of factors,
including general and economic conditions and certain special events that may cause significant
changes in the number of riders in the mass transportation systems of our network cities.
Special national and international events, such as the Olympic Games or the Asian Games,
may affect the actual prices of our advertising time. Such special events may draw more
viewers to our real-time broadcasts, making our advertising network more effective. Conversely,
any adverse events, such as an outbreak of an airborne disease or public safety concerns,
may impact usage of mass transportation systems and have an adverse effect on the actual
prices of our advertising time. Demand for our advertising services also varies according
to the time of day, with higher demand typically during morning and evening commute times.
Demand for advertising time on our network may also be impacted by corresponding demand
on other advertising outlets such as traditional television.
|
|
·
|
Number
of displays in each city
. The number of displays in each of our cities affects
the actual prices of our advertising time in that city. An increase in the number of
displays will reach a larger audience and make advertisements more effective. We expect
that the actual prices of our advertising time will increase as the number of displays
increases.
|
|
·
|
Quality
of programs
. The quality of the programs broadcast on our network and supplemental
subway advertising platform affects the actual prices of our advertising time. Programs
that attract the attention of our audience will make our advertising platform more effective.
Our ability to locate, edit and provide suitable programs that appeal to our intended
audience will affect the actual prices of our advertising time. We have undertaken steps
to increase the quality of programs broadcast on our network by providing suggestions
to the local television stations that provide the programs.
|
|
·
|
Programming
to Advertising Ratio
. The mixture of programming to advertising that gets broadcasted
on our network affects our advertising service revenue. Broadcasting an optimal mix of
advertising and programs will maximize our total revenues.
|
|
·
|
Maximizing
sales of soft advertisements
. We began sales of soft advertising in July 2007,
and our ability to maximize sales of soft advertisements such as advertisements embedded
within the programs and sponsorships of the programs on our network will allow us to
realize additional revenues from the time reserved for broadcasts of programs. Increasing
our sales of such advertisements is expected to help increase our average revenue per
hour.
|
Advertising Equipment Revenue
—
Continuing Operations
We derived a portion of our total revenues
from sales of digital television displays or passenger information and direction system, or PIDS, to certain of our local operating
partners, including our direct investment entities. We record these revenues as advertising equipment revenue. We source digital
television displays and related equipment from third-party suppliers and sell them to our direct investment entities in order
to ensure consistent quality of the equipment used in our network and to achieve cost efficiency for our local operating partners.
Our advertising equipment revenue represented 0.9%, 0.9%, and 5.0% of our total revenues for the years ended December 31, 2013,
2014 and 2015, respectively. We generally set the price of our advertising equipment at the unit procurement cost plus an additional
markup. Since sales of equipment in China require the payment of value added tax, or VAT, at a rate of 17%, we record our advertising
equipment revenue excluding the VAT payments. We expect that advertising equipment revenue in future periods will not constitute
a significant portion of our total revenues because we expect our advertising service revenue to grow faster than our advertising
equipment revenue.
We recognize advertising equipment revenue
upon delivery of the equipment when the risk of ownership has passed to our local operating partners and when we have fulfilled
all of our performance obligations under the arrangement (such as post-delivery support and training).
Factors that Affect Our Advertising Equipment Revenue
Addition of New Local Operating Partners
.
The addition of new local operating partners directly affects our advertising equipment revenue. We only sell our digital television
displays or PIDS to our local operating partners for installation in the city’s mass transportation system and other locations.
We anticipate higher sales of our digital television displays or PIDS in the earlier stages of our local operating partners’
operations during the expansion of the mobile digital television network in those cities. Accordingly, as the operations of our
local operating partners expand, we expect the sales of our digital television displays to decrease.
Network Expansion of Local Operating
Partners
. The pace of network expansion undertaken with each of our local operating partners directly affects our advertising
equipment revenue. Any expansion of the mobile digital television network or the supplemental subway advertising platforms could
generate advertising equipment revenue for us. In addition, our local operating partners, including direct investment entities,
will need to purchase new equipment from us to replace their worn or obsolete equipment.
Cost of Equipment
. Since we sell
our digital television displays or PIDS at the total costs that are incurred for the equipment (including procurement, installation
and post-delivery supporting costs) plus a fixed percentage markup, any changes to the cost of our equipment will directly affect
our advertising equipment revenue.
Cost of Revenues
—
Continuing Operations
Our cost of revenues consists of costs directly
related to the offering of our advertising services and costs related to our sales of advertising equipment. The following table
sets forth our cost of revenues, divided into its major components, by amount and percentage of our total revenues for the periods
indicated.
|
|
For
the Year Ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
%
of total
revenues
|
|
|
US$
|
|
|
%
of total
revenues
|
|
|
US$
|
|
|
%
of total
revenues
|
|
Total revenues from continuing operations
|
|
|
54,043,801
|
|
|
|
100.0
|
|
|
|
52,672,460
|
|
|
|
100.0
|
|
|
|
41,463,973
|
|
|
|
100.0
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising service costs
|
|
|
48,335,638
|
|
|
|
89.4
|
|
|
|
58,073,338
|
|
|
|
110.3
|
|
|
|
39,119,233
|
|
|
|
94.3
|
|
Advertising equipment costs
|
|
|
513,095
|
|
|
|
1.0
|
|
|
|
538,517
|
|
|
|
1.0
|
|
|
|
1,825,994
|
|
|
|
4.4
|
|
Wi-Fi costs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,166,698
|
|
|
|
12.5
|
|
Total cost of revenues
from continuing operations
|
|
|
48,848,733
|
|
|
|
90.4
|
|
|
|
58,611,855
|
|
|
|
111.3
|
|
|
|
46,111,925
|
|
|
|
111.2
|
|
Gross profit (loss) from
continuing operations
|
|
|
5,195,068
|
|
|
|
9.6
|
|
|
|
(5,939,395
|
)
|
|
|
(11.3
|
)
|
|
|
(4,647,952
|
)
|
|
|
(11.2
|
)
|
Advertising Service Costs
Our cost of revenues related to the offering
of our advertising services consists of media costs, depreciation, business taxes and surcharges, amortization of intangible assets
and other operating costs.
Media Costs
. Our media costs
represented the largest component of our cost of revenues and accounted for approximately 63.1%, 69.0%, and 80.3% of our total
revenues for the years ended December 31, 2013, 2014 and 2015, respectively. Our media costs primarily comprise:
|
·
|
payments to our
exclusive agency partner companies under our contractual arrangements to purchase advertising
time on their networks;
|
|
·
|
payments to our
direct investment entities under our contractual arrangements to purchase advertising
time; and
|
|
·
|
payments to mobile
digital television companies and other advertising service providers outside of our network,
either directly or through third- party advertising agencies, to purchase advertising
time pursuant to the requests of our advertising clients.
|
The primary factors affecting our media costs
include the number of exclusive agency cities that we have and the amount of advertising time that we purchase from our direct
investment entities and other mobile digital television companies outside of our network.
|
·
|
The number of
exclusive agency cities represents the largest factor affecting our media costs. When
we enter into an exclusive agency arrangement with a mobile digital television company,
we typically commit to a pre-determined annual media cost in exchange for the exclusive
right to place advertisements during all of the time available for advertisements on
that network. We expect the number of our exclusive agency cities to increase in future
periods as we enter into exclusive agency arrangements with our direct investment entities
and with additional mobile digital television companies in new cities. As a result, we
expect our media costs to increase in future periods.
|
|
·
|
The amount of
advertising time that we purchase from our direct investment entities and other mobile
digital television companies outside of our network also affect our media costs. For
our direct investment entities without exclusive agency agreements, we purchase advertising
time according to our needs to place advertisements on behalf of our clients. For the
mobile digital television companies and other advertising service providers outside of
our network, we purchase time at the request of our advertising clients to place advertisements
in that city.
|
Depreciation
. Depreciation for
our digital television displays accounted for 2.8%, 1.9%, and 0.9% of our total revenues for the years ended December 31, 2013,
2014 and 2015, respectively. Our depreciation expense only consists of depreciation for the displays directly owned by us but
not the displays owned by our direct investment entities. Generally, we capitalize the acquisition cost of our digital television
displays and recognize depreciation on a straight-line basis over the term of the useful lives of those display assets, which
we estimate to be five years. The primary factors affecting our depreciation include the number of digital television displays
in our network, the unit cost of each of our displays and the remaining useful life of our displays. We expect our depreciation
expense to increase in future periods as a result of expanding our network by adding more displays.
Business Taxes and Surcharges
.
Our business taxes and surcharges accounted for 1.2%, 1.4%, and 0.6% of our total revenues for years ended December 31, 2013,
2014 and 2015, respectively. Prior to January 1, 2012, the total amount of our advertising service revenues was subject to business
tax. Business taxes and surcharges generally include the 5% business tax and 3% surcharges that our PRC operating subsidiary must
pay for revenues generated from advertising services provided in China after deduction of allowable media costs. The government
implemented a VAT reform pilot program which replaced the business tax with value -added tax on selected sectors including the
advertising sector, in Shanghai effective from January 1, 2012, in Beijing effective from September 1, 2012, and in Shenzhen effective
from November 1, 2012. As of August 1, 2013, the VAT reform program had been effectively expanded to all regions of the PRC. The
VAT rate applicable to our subsidiaries and variable interest entities is 6% as compared to the 5% business tax rate which was
applicable prior to the reform. With adoption of the VAT reform program, our advertising service revenues and deductible media
costs are recorded net of VAT. From 2013 onward, business tax and surcharges only includes those surcharges levied by relevant
government authorities.
Amortization of Intangible Assets
.
In connection with our acquisition of Digital Media Group in January 2010, we recorded concession contracts acquired from Digital
Media Group as intangible assets. The cost of these intangible assets was measured as the fair value of the concession contracts,
estimated at US$90.9 million as of the acquisition date, and is amortized over its expected useful life of nine years using the
straight-line method. The amortization of such intangible assets is recorded within advertising service costs and accounted for
nil, nil, and nil of our total revenues for the years ended December 31, 2013, 2014 and 2015, respectively.
Other Operating Costs
. Our other
operating costs primarily comprise salaries and other expenses in relation to the maintenance, development and expansion of our
network and costs for producing advertising content. Other operating costs accounted for 18.4%, 38.3%, and 9.0% of our total revenues
for the years ended December 31, 2013, 2014 and 2015, respectively. Decrease in other operating costs was mainly attributable
that a non-cash non-recurring contingent penalty provision of approximately US$10.4 million resulting from the early termination
of our exclusive advertising agency agreement with Guangzhou Metro Television Co., Ltd. was recorded in 2014. There was no such
expense in 2015.
Advertising Equipment Costs
Our advertising equipment costs comprise the
amounts we pay to our third-party suppliers for the digital television displays or the related equipment for PIDS that we sell
to our local operating partners, as well as costs related to installation and post-delivery support. Our advertising equipment
costs accounted for 0.9%, 1.0%, and 4.4% of our total revenues for the years ended December 31, 2013, 2014 and 2015, respectively.
The major factors affecting our advertising equipment costs include the number of digital television displays or PIDS we sell
and the unit cost that we pay for the assembly of each piece of equipment.
Wi-Fi Costs
Our Wi-Fi costs primarily comprise concession costs we pay to
local bus companies to secure rights to install Wi-Fi devices. We also purchase mobile data package from local telecommunication
carriers to render free mobile internet services to the passengers using our public transit Wi-Fi network.
Operating Expenses
—
Continuing Operations
Our operating expenses comprise selling and
marketing expenses, general and administrative expenses, and impairment loss on intangible assets and goodwill. The following
table sets forth our operating expenses, divided into their major categories by amount and as a percentage of total revenues for
the periods indicated.
|
|
For
the Year Ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
%
of total
revenues
|
|
|
US$
|
|
|
%
of total
revenues
|
|
|
US$
|
|
|
%
of total
revenues
|
|
Total revenues from continuing operations
|
|
|
54,043,801
|
|
|
|
100.0
|
|
|
|
52,672,460
|
|
|
|
100.0
|
|
|
|
41,463,973
|
|
|
|
100.0
|
|
Gross profit/(loss) from continuing operations
|
|
|
5,195,068
|
|
|
|
9.6
|
|
|
|
(5,939,395
|
)
|
|
|
(11.3
|
)
|
|
|
(4,647,952
|
)
|
|
|
(11.2
|
)
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
|
22,235,707
|
|
|
|
41.1
|
|
|
|
12,612,949
|
|
|
|
23.9
|
|
|
|
10,660,024
|
|
|
|
25.7
|
|
General and administrative expenses
|
|
|
9,078,104
|
|
|
|
16.8
|
|
|
|
13,352,143
|
|
|
|
25.3
|
|
|
|
9,038,056
|
|
|
|
21.8
|
|
Research
and development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,378,083
|
|
|
|
3.3
|
|
Contingent
loss in connection with
litigation
|
|
|
2,149,903
|
|
|
|
4.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total operating expenses
from continuing operations
|
|
|
33,463,714
|
|
|
|
61.9
|
|
|
|
25,965,092
|
|
|
|
49.2
|
|
|
|
21,076,163
|
|
|
|
50.8
|
|
Selling and Marketing Expenses
.
Our selling and marketing expenses primarily comprise salaries and benefits for our sales staff, marketing and promotional expenses
and other costs related to supporting our sales force. Selling and marketing expenses accounted for 41.2%, 23.
9%,
and 25.7% of our total revenues for the years ended December 31, 2013, 2014 and 2015, respectively. We maintained strict cost
control measures to control our sales and marketing expenses to strengthen our operational efficiency. Our sales force serving
for our continuing operation had 131 employees as of December 31, 2015, compared to 220 employees as of December 31, 2014 and
280 employees as of December 31, 2013. We decreased the number of our sales and marketing employees as a result of focusing on
acquire advertising spending on blue chip customers.
General and Administrative Expenses
.
Our general and administrative expenses primarily comprise salaries and benefits for management, accounting and administrative
personnel, office rentals, allowance for doubtful accounts receivable, depreciation of office equipment, professional service
fees, maintenance, utilities and other office expenses. General and administrative expenses accounted for 16.8%, 25.3%, and 21.8%
of our total revenues for the years ended December 31, 2013, 2014 and 2015, respectively. Increase in general and administrative
expenses in 2014 was due primarily to the increase of provision for doubtful debts totaling US$7.7 million and additional personnel
we hired. Decrease in general and administrative expenses in 2015 was due primarily to less doubtful debt provision. We expect
that our general and administrative expenses will decrease in future periods as we continue to strengthen cost control.
Research and Development
Expenses.
Our research and development expenses primarily comprise salaries, benefits and other auxiliary expenses
for employees dedicated to technology and product development for public transit Wi-Fi network. We did not incur research and
development expenses in 2013 and 2014.
Contingent Loss in Connection with Litigation
.
We recorded contingent losses of US$2.1 million, nil, and nil in 2013, 2014 and 2015 respectively, in connection with interest
expenses related to the overdue consideration payable to the Former DMG Shareholders.
Contingent loss in 2013 was recorded based
on our then-current assessment of the probable outcome of litigation with the Former DMG Shareholders. As litigation with the
Former DMG Shareholders was settled by an agreement entered into on April 30, 2014, we do not expect to incur any further loss
in respect of this litigation in future periods.
Government Grants and Subsidies
—
Continuing Operations
We received grants totaling US$2.8 million,
US$4.2 million, and US$0.1 million in 2013, 2014 and 2015, respectively, from local governments to subsidize our (i) being qualified
as a “cultural enterprise”; (ii) costs expensed for various inventions in connection with mobile digital television
receiver devices; (iii) usage of airtime for social public services; and (iv) being qualified as an enterprise eligible for subsidies
of bank borrowing interest expenses.
In the future, we expect to receive government
grants and incentives from time to time. If we believe that any of our group entities meet relevant criteria in order to receive
government grants or incentives, we plan to take the initiative to apply for such grants or incentives. However, the receipt of
any incentive or grant is subject to review and approval by relevant government authorities.
Share of profit/(loss) of Equity Method Investees
—
Continuing Operations
Our equity investments primarily comprise our
investments in our eleven direct investment entities that we account for using the equity method as of December 31, 2015. We expect
our income from our existing equity method investees to increase as they continue to improve monetization from local advertising
agency business.
We generate advertising service revenue by
selling advertising time on our mobile digital television advertising network, which is partly provided by our equity method investees.
We also closely monitor the financial operating activities of the equity method investees. As the operations of our equity method
investees form an integral part of our operating activities, our share of undistributed earnings or losses of these entities are
classified as part of our operating profit and loss.
Share-based Compensation
Our share-based compensation expenses are recognized
in respect of share options and other stock awards granted to our employees and consultants. We allocate our share-based compensation
expenses to cost of revenues, general and administrative expenses or selling and marketing expenses, depending on the role of
the person receiving the options under our 2006 Share Incentive Plan, or the 2006 Plan. We have reserved 8,000,000 common shares
for issuance under the 2006 Plan. As of December 31, 2015, there were 1,409,060 share options and 574,567 restricted shares outstanding
to employees and consultants. Our total share-based compensation expenses accounted for 1.6%, 1.1%, and 0.4% of our total revenues
for the years ended December 31, 2013, 2014 and 2015, respectively.
Taxation
We are an exempted company incorporated in
the Cayman Islands and conduct substantially all of our business through our subsidiaries and variable interest entities in the
PRC, or our PRC entities. Our PRC entities must pay business taxes and surcharges on revenues generated from advertising services
and value added taxes on sales of our advertising equipment, and we account for the business taxes and surcharges under cost of
revenues. Our PRC entities also must pay enterprise income tax, or EIT, on their taxable income at the applicable tax rate, which
is either the uniform rate of 25% or a preferential rate for which the entity qualifies.
Before the new EIT Law and its implementation
regulations became effective on January 1, 2008, both VisionChina Media Group and CDTC, as enterprises located in the Shenzhen
Special Economic Zone, were allowed to enjoy a preferential enterprise income tax rate of 15%. In addition, since VisionChina
Media Group has been recognized as a “culture enterprise,” VisionChina Media Group received a full exemption from
the EIT from 2006 to 2008. Preferential tax treatments will continue to be granted to industries and projects that are strongly
supported and encouraged by the state, and enterprises otherwise classified as “new and high technology enterprises strongly
supported by the state” will be subject to a 15% enterprise income tax rate. VisionChina Media Group was designated as a
“new and high technology enterprise strongly supported by the state” in November 2008 and, as a result, was subject
to an enterprise income tax rate of 15% during 2009 and 2010. In October 2011, VisionChina Media Group obtained approvals from
relevant governmental authorities to be recognized as a state-encouraged new and high technology enterprise in 2011, 2012 and
2013, and obtained similar approvals in August 2014 for the years 2014, 2015 and 2016. During this six year period from 2011 to
2016, VisionChina Media Group is entitled to a preferential tax rate of 15%, subject to approval from the tax authority at the
end of each year. In accordance with a circular issued in December 2010, Beijing Eastlong Technology was recognized from 2010
as a state-encouraged new and high technology enterprise, and this status was valid for a period of three years. Accordingly,
the effective EIT rate applicable to Beijing Eastlong Technology was 15%, 15%, 25%, 25%, and 25% in the years 2011, 2012, 2013,
2014 and 2015, respectively. Furthermore, one of our operating subsidiaries in Luzhou in Sichuan province was recognized as a
“local government encouraged company” and was entitled to exemption from the enterprise income tax for the years ended
December 31, 2008 and 2009, and subject to a reduced tax rate of 7.5% for the years 2010, 2011 and 2012. This operating subsidiary
in Luzhou was subject to tax rates of 15%, 25% and 25% in the years 2013, 2014 and 2015, respectively.
Under the new EIT Law, effective as of January
1, 2008, China has adopted a uniform tax rate of 25% for all enterprises (including foreign-invested enterprises) and revoked
the current tax exemption, reduction and preferential treatments applicable to foreign-invested enterprises. However, there will
be a transition period for enterprises, whether foreign-invested or domestic, that currently are receiving preferential tax treatments
granted by relevant tax authorities. Enterprises that were subject to an enterprise income tax rate lower than 25% prior to January
1, 2008 may continue to enjoy the lower rate and gradually transition to the new tax rate within five years after the effective
date of the EIT Law. Enterprises that currently are entitled to exemptions or reductions from the standard income tax rate for
a fixed term may continue to enjoy such treatment until the fixed term expires. However, if a foreign-invested enterprise was
not profitable by the end of December 2007, a two-year exemption from enterprise income tax was granted for the period between
the time the enterprise becomes profitable and December 31, 2009. According to the implementation regulations, during the transition
period, the effective enterprise income tax rate applicable to CDTC was 18%, 20%, 22%, 24%, 25% , 25%, 25% and 25% in the years
2008, 2009, 2010, 2011, 2012, 2013, 2014 and 2015, respectively. As a result, we expect our income tax expenses to increase in
future years compared with our historical periods.
Our effective EIT tax rate was 1.4%, negative
0.5% and nil for the years ended December 31, 2013, 2014 and 2015, respectively. The difference between our effective EIT tax
rate and the uniform EIT tax rate of 25% in the PRC is attributable primarily to the following factors: (1) the effect of tax
exemptions and tax concessions granted to our subsidiaries and variable interest entities in the PRC; (2) the effect of operating
losses that could not be carried forward to offset tax liabilities in future years; (3) tax expenses arising from items that are
not deductible or not taxable for income tax purposes (for example, impairment loss on goodwill); and (4) changes in valuation
allowances against our deferred tax assets.
The EIT Law also provides that enterprises
established outside of China whose “de facto management bodies” are located in China are considered “resident
enterprises,” and generally will be subject to enterprise income tax at the uniform rate of 25% on their worldwide income,
including income received from subsidiaries and consolidated affiliates. Under the Implementation Rules of the PRC Enterprise
Income Tax Law, a “de facto management body” is defined as a body that has material and overall management and control
over manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition
of properties and other assets of an enterprise. If we were treated as a resident enterprise for PRC tax purposes, we would be
subject to PRC tax on our worldwide income at the 25% tax rate. Because substantially all of our consolidated revenues derive
from the PRC, and our company does not generate any taxable income on a standalone basis, even if our company were determined
to be a resident enterprise for PRC tax purposes, we do not expect that such determination would have a material impact on our
results of operations.
Furthermore, unlike the
Income Tax Law for
Enterprises with Foreign Investment and Foreign Enterprises
, which was replaced by the EIT Law and which specifically exempts
withholding tax on any dividends payable to non-PRC investors, the EIT Law and its implementation regulations specify that an
income tax rate of 10% is normally applicable to dividends payable to non-PRC investors where those dividends are derived from
sources within China, although such income tax may be exempted or reduced by the State Council of the PRC or pursuant to a tax
treaty between China and the jurisdictions in which our non-PRC shareholders reside. We are a Cayman Islands holding company and
substantially all of our income may be derived from dividends that we receive from our operating subsidiary and consolidated affiliates
established in China. If we declare dividends from such income, it may be deemed to be derived from sources within China under
the EIT Law, and thereby be subject to income tax under the EIT Law. If we are required under the EIT Law to pay income tax on
any dividends received from our subsidiaries in China, your investment in us may be materially and adversely affected. However,
we plan to retain and reinvest our earnings to further expand our business in the PRC. In addition, it is unclear whether dividends
paid to our non-PRC shareholders and ADS holders or any capital gains from the transfer of our common shares or ADSs would be
treated as income derived from sources within the PRC and thereby be subject to PRC tax. If we are required under the EIT Law
to withhold PRC income tax on dividends payable to our non-PRC investors that are “non-resident enterprises” or if
you are required to pay PRC income tax on the transfer of our common shares or ADSs, the value of your investment may be materially
and adversely affected.
Discontinued Operations Overview.
We did not prepare nor are required to prepare
separate financial statements for discontinued operations. To assist readers to evaluate the discontinued operations, particularly
the assets held for sale to Leman or other potential interested buyers, we have included certain operation and financial measures
of discontinued operations. Our discontinued operations consist of our mobile digital television network on our supplemental subway
advertising platform. The following table sets forth operating result of our discontinued operations for the periods indicated:
|
|
For
the Year Ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
%
of total
revenues
|
|
|
US$
|
|
|
%
of total
revenues
|
|
|
US$
|
|
|
%
of total
revenues
|
|
Advertising service revenue
|
|
|
50,697,547
|
|
|
|
100.0
|
|
|
|
51,128,541
|
|
|
|
100.0
|
|
|
|
37,519,190
|
|
|
|
100.0
|
|
Advertising service cost
|
|
|
(41,974,817
|
)
|
|
|
82.8
|
|
|
|
(44,173,428
|
)
|
|
|
86.4
|
|
|
|
(24,883,087
|
)
|
|
|
66.3
|
|
Gross profit
|
|
|
8,722,730
|
|
|
|
17.2
|
|
|
|
6,955,113
|
|
|
|
13.6
|
|
|
|
12,636,103
|
|
|
|
33.7
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
|
(5,039,274
|
)
|
|
|
9.9
|
|
|
|
(4,889,498
|
)
|
|
|
9.6
|
|
|
|
(3,871,035
|
)
|
|
|
10.3
|
|
General and administrative expenses
|
|
|
(258,269
|
)
|
|
|
0.5
|
|
|
|
(3,010,454
|
)
|
|
|
5.9
|
|
|
|
(1,394,838
|
)
|
|
|
3.7
|
|
Share
of profit from an equity method investee
|
|
|
16,805
|
|
|
|
—
|
|
|
|
55,831
|
|
|
|
0.1
|
|
|
|
18,991
|
|
|
|
0.1
|
|
Interest
income
|
|
|
63
|
|
|
|
—
|
|
|
|
65
|
|
|
|
—
|
|
|
|
299
|
|
|
|
—
|
|
Net income/(loss) from
discontinued operations
|
|
|
3,442,055
|
|
|
|
6.8
|
|
|
|
(888,943
|
)
|
|
|
(1.7
|
)
|
|
|
7,389,520
|
|
|
|
19.7
|
|
Advertising service revenue
—
Discontinued Operations
For our discontinued operations, we generate
revenues primarily from the sale of advertising time slots on our mobile digital television network on our supplemental subway
advertising platform. We derive most of our revenue from sale of the advertising time to unrelated third party advertisers. Our
advertising service revenue policies for discontinued operations are substantially consistent with those for continuing operations.
See “Business overview”
and
“—Advertising Service Revenue—Continuing Operations” above
Advertising service cost
—
Discontinued Operations
Our cost of revenues for our discontinued operations
consists of costs directly related to our advertising services on our supplemental subway advertising platform. Our cost of revenues
for discontinuing operations related to the offering of our advertising services consists of media costs paid to our local operating
partners or subway authorities; depreciation costs of the digital display and other PIDS equipment and other cost items, including
staff salaries and costs of maintenance materials.
Operating expenses
—
Discontinued Operations
General and administrative expenses for discontinued
operations consist of substantially the same items as for continuing operations. General and Administrative expenses increased
in 2014 was primarily due to an increase of provision for doubtful debt.
Selling and Marketing. Our selling and marketing
expenses for discontinued operations consist of substantially the same items as for continuing operations. The changes during
the reporting periods were approximately in proportion to the increase in revenue from discontinued operations.
Critical Accounting Policies
We prepare our consolidated financial statements
in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect: (i) the reported amounts
of our assets and liabilities; (ii) the disclosure of our contingent assets and liabilities at the end of each reporting period;
and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these estimates
based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding
the future based on available information and reasonable assumptions, which together form our basis for making judgments about
matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial
reporting process, our actual results could differ from those estimates.
We believe that any reasonable deviation from
those judgments and estimates would not have a material impact on our financial condition or results of operations. To the extent
that the estimates used differ from actual results, however, adjustments to the statement of operations and corresponding balance
sheet accounts would be necessary. These adjustments would be made in future financial statements.
When reading our financial statements, you
should consider: (i) our critical accounting policies; (ii) the judgment and other uncertainties affecting the application of
such policies; and (iii) the sensitivity of reported results to changes in conditions and assumptions. We believe the following
accounting policies involve the most significant judgment and estimates used in the preparation of our financial statements
Allowance for doubtful accounts
We evaluate the recoverability of our accounts
receivable primarily based on the ages of receivables and factors surrounding the credit risks of specific customers. We regularly
analyze our customer accounts, and when we become aware of a specific customer’s inability to meet its financial obligations
to us, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial positions,
we record a reserve for bad debts to reduce the related receivables to the amount we reasonably believe is collectible. If circumstances
related to specific customers change, our estimates of the recoverability of receivables will be further adjusted. In the event
that our accounts receivable become uncollectible, we record additional adjustments to receivables to reflect the amounts at net
realizable value. We recorded allowances for doubtful debt for continuing operation in amounts of negative US$0.1 million, US$6.0
million and US$3.0 million within general and administrative expenses in 2013, 2014 and 2015, respectively, representing negative
0.3%, 11.5% and 7.9% as a percentage of our total revenues from continuing operations in that year. As of December 31, 2013, 2014
and 2015, we had allowances for doubtful debt of US$9.5 million, US$15.5 million and US$2.5 million, respectively. Increase in
provision for doubtful debts in 2014 reflects our assessment of credit risk during the current period of slower economic growth
in China. We assess allowances for doubtful debts based on our review of aging data and credit risks of specific customers. We
had charged off account receivables of US$0.03 million, nil and US$15.2 million in 2013, 2014 and 2015, respectively, as we had
exhausted all means of collection. We believe that the balance of allowances for doubtful accounts receivable is sufficient to
reflect the recoverability of our accounts receivable. We do not expect allowances for doubtful accounts, which are charged to
our consolidated statement of operations, to increase significantly as a percentage of our total revenues in future years. We
also do not expect our allowances for doubtful accounts to have a significant impact on our liquidity or capital resources.
Contingencies
The outcomes of legal proceedings and claims
brought against our company are subject to significant uncertainty. FASB ASC 450-20-25-2,
Contingencies-Loss Contingencies-Recognition
,
requires that an estimated loss from a loss contingency such as a legal proceeding or claim should be accrued by a charge to income
if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably
estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred.
In determining whether a loss should be accrued
we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate
of the amount of loss. While we believe that we might incur losses from such legal proceedings, it is not possible to make a reasonable
estimate of the amount of loss. Changes in these factors could materially impact our financial position or our results of operations.
Our ability to continue as a going concern
When assessing our ability to continue as a
going concern, our management must make judgments and estimates about various aspects of our business, including the following:
|
·
|
plans to raise
new funds, restructure our debt, sales of remaining equity interest of our subway mobile TV business
and reorganize our capital structure;
|
|
·
|
the timing and
amount of cash flows from operating activities;
|
|
·
|
plans to reduce
and delay our expenditures;
|
|
·
|
our ability to
comply with various debt covenants; and
|
|
·
|
the present and
future regulatory, business, credit and competitive environment in which we operate.
|
These factors individually and collectively
will have a significant effect on our financial condition and results of operations and on our ability to generate sufficient
cash to repay our indebtedness as it becomes due.
Other Factors Affecting Our Results of Operations
In addition to the factors discussed above,
our reported results also are affected by fluctuations in the value of the Renminbi against the U.S. dollar. This is because our
reporting currency is the U.S. dollar, while the Renminbi is the functional currency of our subsidiary and affiliated consolidated
entities in China, which operate substantially all of our business. In 2013, the Renminbi appreciated against the U.S. dollar
by approximately 3.1%. In 2014, the Renminbi depreciated 2.5% against the U.S. dollar. In 2015, the Renminbi depreciated 4.4%
against the U.S. dollar . The PRC government is still under significant international pressure to liberalize its currency policy
or to adopt a more flexible policy, which could result in further and more significant volatility in the value of the Renminbi
against the U.S. dollar. For additional information relating to the fluctuations in the value of the Renminbi against the U.S.
dollar, see “Item 3. Key Information — A. Selected Financial Data — Exchange Rate Information,” “Item
3. Key Information — D. Risk Factors — Risks Related to Doing Business in China—Fluctuation in the value of
the Renminbi may have a material and adverse effect on your investment” and “Item 11. Quantitative and Qualitative
Disclosures About Market Risk — Foreign Exchange Risk.”
Results of Operations for Continuing Operations
The following table sets forth a summary, for
the periods indicated, of our consolidated results of operations. Our historical results presented below are not necessarily indicative
of the results that may be expected for any future period.
|
|
For
the Year Ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
(US$, except number of shares)
|
|
Condensed
Consolidated Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
service revenue
|
|
|
53,558,824
|
|
|
|
52,209,283
|
|
|
|
37,971,760
|
|
Advertising
equipment revenue
|
|
|
484,977
|
|
|
|
463,177
|
|
|
|
2,092,026
|
|
Wi-Fi
revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
1,400,187
|
|
Total
revenues
|
|
|
54,043,801
|
|
|
|
52,672,460
|
|
|
|
41,463,973
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
service costs
|
|
|
(48,335,638
|
)
|
|
|
(58,073,338
|
)
|
|
|
(39,119,233
|
)
|
Advertising
equipment costs
|
|
|
(513,095
|
)
|
|
|
(538,517
|
)
|
|
|
(1,825,994
|
)
|
Wi-Fi
cost
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,166,698
|
)
|
Total
cost of revenues
|
|
|
(48,848,733
|
)
|
|
|
(58,611,855
|
)
|
|
|
(46,111,925
|
)
|
Gross
profit /(loss)
|
|
|
5,195,068
|
|
|
|
(5,939,395
|
)
|
|
|
(4,647,952
|
)
|
Operating
expenses
|
|
|
(33,463,714
|
)
|
|
|
(25,
965,092)
|
|
|
|
(21,076,163
|
)
|
Government
grants
|
|
|
2,783,085
|
|
|
|
4,165,627
|
|
|
|
135,381
|
|
Share
of (losses)/profits from equity method investees
|
|
|
(93,217
|
)
|
|
|
(57,777
|
)
|
|
|
410,467
|
|
Dividend
income
|
|
|
128,611
|
|
|
|
254,759
|
|
|
|
44,827
|
|
Gain
on settlements of consideration payable
|
|
|
—
|
|
|
|
1,800,047
|
|
|
|
—
|
|
Impairment
loss on a cost method investee
|
|
|
—
|
|
|
|
—
|
|
|
|
(808,304
|
)
|
Impairment
loss on investments under equity method
|
|
|
—
|
|
|
|
—
|
|
|
|
(537,939
|
)
|
Other
operating income
|
|
|
1,307
|
|
|
|
—
|
|
|
|
—
|
|
Operating
losses
|
|
|
(25,448,860
|
)
|
|
|
(25,741,831
|
)
|
|
|
(26,479,683
|
)
|
Interest
income
|
|
|
418,673
|
|
|
|
307,007
|
|
|
|
116,894
|
|
Interest
expense
|
|
|
(1,425,625
|
)
|
|
|
(4,569,207
|
)
|
|
|
(5,964,443
|
)
|
Change
in fair value through profit and loss
|
|
|
—
|
|
|
|
157,518
|
|
|
|
(562,738
|
)
|
Other
(expenses)/income
|
|
|
(669,018
|
)
|
|
|
(587,937
|
)
|
|
|
176,790
|
|
Net
loss from continuing operations before income taxes
|
|
|
(27,124,830
|
)
|
|
|
(30,434,450
|
)
|
|
|
(32,713,180
|
)
|
Income
tax expense
|
|
|
(373,584
|
)
|
|
|
(142,554
|
)
|
|
|
—
|
|
Net
loss from continuing operations after income taxes
|
|
|
(27,498,414
|
)
|
|
|
(30,577,004
|
)
|
|
|
(32,713,180
|
)
|
Net
loss attributable to noncontrolling interest
|
|
|
88,489
|
|
|
|
388,732
|
|
|
|
1,923,314
|
|
Net
loss from continuing operations
|
|
|
(27,409,925
|
)
|
|
|
(30,188,272
|
)
|
|
|
(30,789,866
|
)
|
Net
profit/(loss) from discontinued operations
|
|
|
3,442,055
|
|
|
|
(888,943
|
)
|
|
|
7,389,520
|
|
Net
loss attributable to VisionChina Media Inc. shareholders
|
|
|
(23,967,870
|
)
|
|
|
(31,077,215
|
)
|
|
|
(23,400,346
|
)
|
Net
loss per common share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.27
|
)
|
|
|
(0.30
|
)
|
|
|
(0.30
|
)
|
Diluted
|
|
|
(0.27
|
)
|
|
|
(0.30
|
)
|
|
|
(0.30
|
)
|
Net
profit/(loss) per common share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.03
|
|
|
|
(0.01
|
)
|
|
|
0.07
|
|
Diluted
|
|
|
0.03
|
|
|
|
(0.01
|
)
|
|
|
0.07
|
|
Net loss per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.24
|
)
|
|
|
(0.31
|
)
|
|
|
(0.23
|
)
|
Diluted
|
|
|
(0.24
|
)
|
|
|
(0.31
|
)
|
|
|
(0.23
|
)
|
Weighted average number
of shares used in computation of net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
101,495,442
|
|
|
|
101,601,913
|
|
|
|
102,353,956
|
|
Diluted
|
|
|
101,495,442
|
|
|
|
101,601,913
|
|
|
|
102,353,956
|
|
Share-based
compensation expenses during the related periods included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
73,225
|
|
|
|
72,778
|
|
|
|
48,988
|
|
Selling
and marketing expenses
|
|
|
379,246
|
|
|
|
107,404
|
|
|
|
4,761
|
|
General
and administrative expenses
|
|
|
389,819
|
|
|
|
390,499
|
|
|
|
130,065
|
|
Comparison of Years Ended December 31, 2015 and December
31, 2014
Total Revenues from continuing operations
.
Our total revenues decreased to US$41.5 million in 2015 from US$52.7 million in 2014.
|
·
|
Our advertising
service revenue decreased to US$38.0 million in 2015 from US$52.2 million in 2014. This
decrease was due to decrease in advertising spending of small and medium size local advertisers
as a result of our strategic move to scale down operation on bus network to focus marketing
on high margin international and national advertisers in certain exclusive agencies cities.
|
|
·
|
We generated
advertising equipment revenue of US$2.1 million in 2015, compared to US$0.5 million in
2014.
|
|
·
|
We generated adverting revenues from our public transit Wi-Fi network
of US$1.4 million in 2015, compared to nil in 2014.
|
Cost of Revenues from continuing operations
.
Our cost of revenues decrease to US$39.1 million in 2015 from US$58.1 million in 2014.
|
·
|
Our media costs
decreased to US$33.3 million in 2015 from US$36.3 million in 2014. The decrease in our
media costs was due primarily to enhancement of the cost structure of our bus mobile
TV business..
|
|
·
|
Our depreciation
expenses decreased to US$1.0 million in 2015 from US$1.5 million in 2014.
|
|
·
|
Our business
tax decreased to US$0.2 million in 2015 from US$0.7 million in 2014.
|
|
·
|
Our other operating
costs related to the provision of advertising service revenue mainly comprise salaries
and expenses related to the installation and maintenance of displays in our network,
and costs of content production. These other operating costs decreased to US$3.7 million
in 2015 from US$20.2 million in 2014. This decrease in other operating costs was attributable
mainly to a non-recurring contingent penalty provision of approximately US$10.4 million
resulting from the early termination of our exclusive advertising agency agreement with
Guangzhou Metro Television Co., Ltd. recorded in 2014. There was no such item in 2015.
|
|
·
|
Our advertising
equipment costs increased to US$1.8 million in 2015 from US$0.5 million in 2014 due to
increasing sales of mobile digital television equipment in 2015.
|
|
·
|
Our
costs related to our public transit Wi-Fi business was US$5.2 million in 2015.
|
Gross Profit from continuing operations
As a result of the foregoing, our gross loss from continuing operation was US$4.6 million in 2015, compared to gross loss
US$5.9 million in 2014.
Operating Expenses from continuing operations
.
Our operating expenses decreased to US$21.1 million in 2015 from US$26.0 million in 2014.
|
·
|
Selling
and Marketing Expenses
. Selling and marketing expenses decreased to US$10.7 million
in 2015 from US$12.6 million in 2014. Our selling and marketing expenses decreased primarily
as a result of decrease in staff number of our salesforce.
|
|
·
|
General
and Administrative Expenses
. General and administrative expenses decreased to
US$9.0 million in 2015 from US$13.4 million in 2014 as a result of decrease in provision
in doubtful debts.
|
Share of Loss from Equity Method Investees
from continuing operations
We recorded share of
profits
from equity method investees of US$0.4 million in 2015, compared to share of loss of US$58 thousand in 2014.
Operating Losses from continuing operations
As a result of the foregoing, our operating losses increased to US$26.5 million in 2015 from US$25.7 million in 2014.
Interest Income from continuing operations
Our interest income decreased to US$0.1 million in 2015 from US$0.3 million in 2014.
Interest Expenses from continuing operations
Our interest expenses increased to US$6.0 million in 2015 from US$4.6 million in 2014 as a result of increase in interest
arising from the convertible notes issued to Former DMG Shareholders.
Income Taxes from continuing operations
We recognized income tax expense of nil in 2015, compared to income tax expense of US$0.1 million in 2014.
Net Loss Attributable to Noncontrolling
Interest
. Our net loss attributable to noncontrolling interest amounted to US$1.9 million in 2015, compared to net loss
attributable to noncontrolling interest of US$0.4 million in 2014.
Net Loss Attributable to VisionChina
Media Inc. Shareholders.
As a result of the foregoing, net loss attributable to our shareholders decreased to US$20.4
million in 2015 from US$23.4 million in 2014.
Comparison of Years Ended December 31, 2014 and December
31, 2013
Total Revenues from continuing operations
.
Our total revenues decreased to US$52.7 million in 2014 from US$54.0 million in 2013.
|
·
|
Our advertising
service revenue decreased to US$52.2 million in 2014 from US$53.6 million in 2013. This
slight decrease was due to a slight decrease in advertising spending by advertisers exercising
greater caution in light of slower economic growth in China during 2014.
|
|
·
|
We generated
advertising equipment revenue of US$0.5 million in 2014, compared to US$0.5 million in
2013.
|
Cost of Revenues from continuing operations
.
Our cost of revenues increased to US$58.6 million in 2014 from US$48.5 million in 2013.
|
·
|
Our media costs
increased to US$36.3 million in 2014 from US$34.1 million in 2013. The increase of our
media costs was due primarily to increase of concession cost in certain bus cities according
to the exclusive agencies agreements.
|
|
·
|
Our depreciation
expenses decreased to US$1.0 million in 2014 from US$1.5 million in 2013.
|
|
·
|
Our business
tax increased to US$0.7 million in 2014 from US$0.6 million in 2013.
|
|
·
|
Our other operating
costs related to the provision of advertising service revenue mainly comprise salaries
and expenses related to the installation and maintenance of displays in our network,
and costs of content production. These other operating costs increased to US$20.2 million
in 2014 from US$9.9 million in 2013. This increase in other operating costs was attributable
mainly to a non-recurring contingent penalty provision of approximately US$10.4 million
resulting from the early termination of our exclusive advertising agency agreement with
Guangzhou Metro Television Co., Ltd.
|
|
·
|
Our advertising
equipment costs were US$0.5 million in 2013 and remained constant at US$0.5 million in
2014.
|
Gross Profit/Loss from continuing operations
.
As a result of the foregoing, our gross loss was US$5.9 million in 2014, compared to gross profit US$5.2 million in 2013.
Operating Expenses from continuing operations
.
Our operating expenses decreased to US$26.0 million in 2014 from US$33.5 million in 2013.
|
·
|
Selling
and Marketing Expenses
. Selling and marketing expenses decreased to US$12.6 million
in 2014 from US$22.2 million in 2013. Our selling and marketing expenses decreased primarily
as a result of measures to reduce the cost of our sales and marketing activities.
|
|
·
|
General
and Administrative Expenses
. General and administrative expenses increased to
US$13.4 million in 2014 from US$9.1 million in 2013 as a result of the increased provision
for doubtful debts.
|
|
·
|
Contingent
Loss in Connection with Litigation
. We did not record any contingent loss in
connection with litigation in 2014. In 2013, we recorded a contingent loss of US$2.1
million in connection with litigation. This decrease in contingent loss was due primarily
to the settlement of litigation between us and the Former DMG Shareholders.
|
Share of Loss from Equity Method Investees
from continuing operations.
We recorded share of loss from equity method investees of US$57.8 thousand in 2014, compared
to share of loss of US$93.2 thousand in 2013.
Operating Losses from continuing
operations.
As a result of the foregoing, our operating losses increased to US$25.7 million in 2014 from US$25.4
million in 2013.
Interest Income from continuing operations.
Our interest income decreased to US$0.3 million in 2014 from US$0.4 million in 2013.
Interest Expenses from continuing operations.
Our interest expenses increased to US$4.6 million in 2014 from US$1.4 million in 2013 as a result of interest payments
to the Former DMG Shareholders.
Income Taxes from continuing operations.
We recognized income tax expense of US$0.1 million in 2014, compared to income tax expense of US$0.4 million in 2013.
Net Loss Attributable to Noncontrolling
Interest.
Our net loss attributable to noncontrolling interest amounted to US$0.4 million in 2014, compared to net loss
attributable to noncontrolling interest of US$88.5 thousand in 2013.
Net Loss Attributable to VisionChina
Media Inc. Shareholders.
As a result of the foregoing, net loss attributable to our shareholders increased to US$31.1
million in 2014 from US$24.0 million in 2013.
Results of Operations for Discontinued Operations
Comparison of Years Ended December 31, 2015 and December
31, 2014
Net Revenue for Discontinued Operations.
Our net revenue decreased to US$37.5 million in 2015 from $51.1 million in 2014. This decrease was due to decrease in
advertising spending of small and medium size local advertisers as a result of our strategic move to scale down operation on subway
network to focus marketing on high margin international and national advertisers in Beijing and Guangzhou.
Cost of Revenues for Discontinued Operations.
Our cost of revenues decrease to US$24.9 million in 2015 from US$44.2 million in 2014 as a result of substantial cut off
of media cost of certain concession contracts of our supplemental subway platform.
Gross Profit for Discontinued Operations.
As a result of the foregoing, our gross loss from continuing operation was US$12.6 million in 2015, compared to gross
loss US$7.0 million in 2014. Our gross margin was 33.7% in 2015 compared to 13.6% in 2014.
Selling and Marketing Expenses for Discontinued
Operations.
Selling and marketing expenses decreased to US$3.9 million in 2015 from US$4.9 million in 2014 as a result
of decrease in staff number of our salesforce.
General and Administrative Expenses for
Discontinued Operations.
General and administrative expenses decreased to US$1.4 million in 2015 from US$3.0 million in
2014 as a result of decrease in provision in doubtful debts.
Net Loss for Discontinued Operations.
As a result of the foregoing, net income for discontinued operations was US$7.4 million in 2015 and net loss for discontinued
operations was US$0.9 million in 2014.
Comparison of Years Ended December 31, 2014 and December
31, 2013
Net Revenue for Discontinued Operations.
Our net revenue slightly increased to US$51.1 million in 2014 from $50.7 million in 2013.
Cost of Revenues for Discontinued Operations.
Our cost of revenues increase to US$44.2 million in 2014 from US$42.0 million in 2013.
Gross Profit for Discontinued Operations.
As a result of the foregoing, our gross profit from discontinued operation was US$7.0 million in 2014, compared to gross
profit US$8.7 million in 2013. Our gross margin was 13.6% in 2014 compared to 17.2% in 2013.
Selling and Marketing Expenses for Discontinued
Operations.
Selling and marketing expenses decreased to US$4.9 million in 2014 from US$5.0 million in 2013.
General and Administrative Expenses for
Discontinued Operations.
General and administrative expenses increased to US$3.0 million in 2014 from US$0.3 million in
2013 as a result of increase in provision in doubtful debts.
Net Loss/Profit for Discontinued Operations.
As a result of the foregoing, net loss for discontinued operations was US$0.9 million in 2014 and net income for discontinued
operations was US$3.4 million in 2013.
|
B.
|
Liquidity and Capital Resources
|
Our liquidity needs include (i) net cash used
in operating activities, which cash comprises (a) cash required to fund the initial build-out and continued expansion of our network
and (b) our working capital needs, which include payment of our operating expenses and financing of our accounts receivable; (ii)
net cash used to invest in our direct investment entities; and (iii) redemption of the convertible notes issued to the Former
DMG Shareholders in April 2014 to settle the remaining consideration for our acquisition of Digital Media Group. To date, we have
financed our liquidity needs primarily through proceeds from the issuance of our preferred shares, proceeds from our public offerings,
long -term borrowings from financial institutions and cash flows from operations.
As of December 31, 2015, we had
US$8.5 million in cash and cash equivalents. Our cash primarily consists of cash on hand and cash deposited in banks
and interest-bearing savings accounts. We believe that our current cash on hand, expected cash flows from operations, available credit facilities from financial institutions and proceeds from sale of our subway mobile TV business will be
sufficient to meet our anticipated cash needs for at least the next 12 months.
As of December 31, 2013, we entered into a
RMB6.7 million Renminbi-denominated secured revolving credit facility, granted by Bank of China (Shenzhen Branch) to VisionChina
Media Group, that expired on June 24, 2014. This revolving credit facility was secured by restricted cash of US$7.5 million. The
revolving credit facility was available for general corporate working capital purposes at a fixed interest rate of 6.3%.
In January 2014, we entered into a RMB130 million
Renminbi-denominated secured revolving credit facility, granted by China Construction Bank (Shenzhen Branch) to our consolidated
variable interest entity, VisionChina Media Group, that expired on January 13, 2015. This revolving credit facility was secured
by VisionChina Media Group’s accounts receivable. This credit facility was available for general corporate working capital
purposes at variable interest rates of between 95% and 160% of the People’s Bank of China Benchmark interest rate, or the
Benchmark Rate. This credit facility contained a restrictive financial covenant which obligated VisionChina Media Group to maintain
a leverage ratio of no higher than 65%. Violation of this financial covenant could have resulted in a default under the revolving
credit facility, which would have permitted China Construction Bank (Shenzhen Branch) to terminate the facility and require immediate
repayment from us of any outstanding loans advanced under the facility.
In January 2015, we were granted a secured
revolving credit facility, or the Credit Facility, from China Construction Bank (Shenzhen branch), or the CCB, until January 26,
2016 for our variable interest entity, VisionChina Media Group. The total amount of the Credit Facility is RMB100.0 million (approximately
US$16.3 million). The Credit Facility is secured by the accounts receivable of VisionChina Media Group and the interest rate is
in a range of 99.54% to 103.46% of the loan prime rate in the PRC. As of April 30, 2015, we have fully utilized and drawn down
the Credit Facility, and the interest rate on our outstanding balance is 6.44%.
As of December 31, 2015, aggregate undistributed
earnings of our subsidiaries and variable interest entities located in the PRC that were available for distribution to us was
nil. We intend to have such undistributed earnings of our subsidiaries and variable interest entities, if any, indefinitely reinvested,
and accordingly, no provision has been made for withholding taxes on PRC dividends that otherwise would be due and payable upon
our receipt of such dividends. However, the actual amount of earnings which may be distributed to us from our subsidiaries and
VIEs in the PRC could vary in parallel with restrictions and procedures specified by relevant tax authorities and the SAFE.
We incurred net losses attributable to our
shareholders of US$24.0 million, US$31.1 million and US$20.4 million in 2013, 2014 and 2015, respectively. We intend to maintain
our current policies for collections of accounts receivable, which generally stipulates a grace period not to exceed 180 days
after the month in which the advertisement was displayed. As we expect the out-of-home advertising market in China to continue
growing, we plan to continue expanding our network in the cities where we already operate and into new cities. We currently rely
on our cash on hand and on deposit as well as cash generated from operating activities to fund our liquidity needs. However, we
may need additional cash resources in the future if our business conditions change or if we experience other developments. We
also may need additional cash resources in the future if we find and wish to pursue opportunities for investment, acquisition,
strategic cooperation or other similar actions. If we determine that our cash requirements exceed our amounts of cash on hand,
we may seek to issue debt or equity securities or to obtain additional short-term or long-term bank financing. Any issuance of
equity securities could cause dilution in our shareholders’ holdings. Any incurrence of indebtedness could increase our
debt service obligations and cause us to be subject to restrictive operating and financial covenants. It is possible that when
we need additional cash resources, financing will only be available to us in amounts or on terms that would not be acceptable
to us, or that financing will not be available at all.
|
|
For
the Year Ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
(US$)
|
|
Net
cash (used in) provided by operating activities
|
|
|
(8,994,630
|
)
|
|
|
(6,330,251
|
)
|
|
|
2,872,465
|
|
Net
cash provided (used in) by investing activities
|
|
|
790,626
|
|
|
|
(1,832,641
|
)
|
|
|
(15,253,570
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
17,061,076
|
|
|
|
(10,737,568
|
)
|
|
|
6,379,340
|
|
Effect
of changes in exchange rate
|
|
|
1,079,906
|
|
|
|
(564,346
|
)
|
|
|
(4,813,186
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
9,936,978
|
|
|
|
(19,464,806
|
)
|
|
|
(10,814,951
|
)
|
Cash
and cash equivalents, beginning of year
|
|
|
29,012,381
|
|
|
|
38,949,359
|
|
|
|
19,484,553
|
|
Less:
cash and cash equivalents in assets held for sale
|
|
|
(16,425
|
)
|
|
|
(17,818
|
)
|
|
|
(127,712
|
)
|
Cash
and cash equivalents, end of year
|
|
|
38,932,934
|
|
|
|
19,466,735
|
|
|
|
8,541,890
|
|
Operating Activities
Our net cash used in operating activities amounted
to US$9.0 million, US$6.3 million in 2013 and 2014 Our net cash provided by operating activities amounted US$2.9 million in 2015.
Investing Activities
In 2015, our net cash used in investing activities
amounted to US$15.3 million which resulted from acquisition of bus Wi-Fi devices.
Our net cash used in investing activities amounted
to US$1.8 million in 2014, which resulted from a US$12.0 million payment of upfront cash to settle litigation with the Former
DMG Shareholders and a US$2.2 million payment to acquire fixed assets offset by US$12.4 million cash received from withdrawals
of restricted cash deposited with Bank of China (Macau Branch).
Our net cash provided by our investing activities
amounted to US$0.8 million in 2013, which primarily comprised a withdrawal of restricted cash in an amount of US$2.5 million and
payment for fixed assets acquisition of US$1.5 million.
Financing Activities
In 2015, our net cash provided by financing
activities amounted to US$6.4 million, which primarily comprised US$10.2 million investment proceeds received from new investors
of Qianhai Mobile.
Our net cash used in financing activities amounted
to US$10.7 million in 2014, which primarily comprised a repayment of US$14.0 million to Bank of China (Shenzhen Branch).
Our net cash provided by financing activities
amounted to US$17.1 million in 2013, which primarily comprised net proceeds received from bank loans.
Working Capital Deficit
We incurred net losses of US$24.0 million,
US$31.1 million and US$23.4 million for the years ended December 31, 2013, 2014 and 2015, respectively. During the year ended
December 31, 2015, we had cash inflow of operations of US$2.8 million. During the year ended December 31, 2014, we experienced
negative cash flow of operations of US$6.3 million.
We have taken or in process of taking a number
of initiatives to improve our liquidity:
|
·
|
We have successfully
negotiated with CCB(SZ) and
will continue to negotiate with other banks to obtain revolving bank facilities to ensure
the our bank borrowings can be renewed on an on-going basis. On February 22, 2016, we
entered into another RMB80 million (equivalent to US$12.2 million) secured revolving
credit facility granted by CCB (SZ) with interest rate in a range between 99.615% to
102.66% of the Loan Prime Rate in the PRC.
|
|
·
|
We have entered into an equity transfer agreement and a profit compensation
agreement to sell 49% equity interest of New Culture, our operating subsidiary of
subway mobile TV business, to Ledman. Pursuant to the equity transfer agreement, Ledman
will pay
RMB61 million in
cash and the other RMB321.2 million in cash with restriction that
such cash need to be used for purchasing the shares of Ledman from a major shareholders
of Ledman.
|
|
·
|
We are actively
negotiating with potential buyers to dispose the remaining 51% equity interest in New
Culture.
|
|
·
|
We are actively
negotiating with the holders of convertible promissory notes to extend the payments of
the overdue amounts of $55.9 million.
|
|
·
|
We have taken
or in process of taking a number of initiatives to reduce costs and improve working capital
management. We have been negotiating with a number of vendors, including vendors of concession
right contracts, for them to provide us with lower prices or more favorable payment terms
in order to achieve cost savings. We decided to postpone a substantial portion of its
planned capital expenditures for the next twelve months. In addition, We has implemented
measures to more closely monitor the collection of receivable balances with an aim to
improving liquidity.
|
We expect that, taking into account our plan
to sell all of our equity interests in New Culture, adequate sources of liquidity will exist to fund our working capital and capital
expenditure requirements and to meet our short term debt obligations, other liabilities and commitments as they become due.
Holding Company Structure
As a holding company, our company may rely
on dividends and other distributions from our PRC subsidiaries to fund our liquidity needs. Current PRC laws and regulations permit
our PRC subsidiaries to pay dividends only out of their retained earnings, if any, determined in accordance with PRC accounting
standards and regulations. In addition, our PRC subsidiaries are required to set aside a certain amount of their after-tax profits
each year to fund certain reserve funds, and these reserves may not be distributed as cash dividends. See “Item 3. Key Information
— D. Risk Factors — Risks Related to our Corporate Structure — We rely principally on our subsidiaries to pay
us dividends and other distributions on equity in order 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 and adverse effect on our ability to
conduct our business.” for more information. Historically, our wholly owned subsidiaries in the PRC, CDTC and Beijing Eastlong
Technology, did not pay dividends to us. Our management will be able to pay dividends to us from CDTC and Beijing Eastlong Technology,
but our management does not have any present plan for receiving dividends from our operating subsidiaries in PRC, which subsidiaries
include CDTC and Beijing Eastlong Technology. Currently we plan to use all our retained profits in our PRC subsidiaries and consolidated
affiliates, including CDTC and Beijing Eastlong Technology, to reinvest for our future business expansion.
Each of CDTC and Beijing Eastlong Technology
has the right to receive service and royalty fees, as applicable, from VisionChina Media Group and Beijing Eastlong Advertising,
respectively, pursuant to our contractual arrangements. Under these arrangements, the earnings and cash of VisionChina Media Group
Limited and Beijing Eastlong Advertising and their subsidiaries will be used to pay such RMB-denominated fees to CTDC and Beijing
Eastlong Technology, respectively, in the manner and amount as are set forth in the relevant agreements. Historically, CTDC and
Beijing Eastlong Technology agreed to waive their rights to receive service and royalty fees from VisionChina Media Group Limited
and Beijing Eastlong Advertising because (i) we decided to retain funds in VisionChina Media Group Limited and Beijing Eastlong
Advertising for the purposes of expanding our network and acquiring media assets in China and (ii) under U.S. GAAP, VisionChina
Media Group Limited and Beijing Eastlong Advertising were in accumulated net loss positions.
Capital Expenditures
We had capital expenditures of US$1.5
million, US$2.2 million and US$15.3 million for the years ended December 31, 2013, 2014 and 2015, respectively. Our capital
expenditures were made primarily to acquire digital television displays and related equipment for our network and, we also
made capital expenditures to purchase Wi-Fi devices and equipment for our public transit Wi-Fi network. We expect our capital expenditures in 2016 primarily to consist of purchases of Wi-Fi devices as we continue
to expand our public transit Wi-Fi network. We believe that we will be able to fund these equipment purchases from our internal
cash reserves or fund raised from external investors and we do not anticipate that these obligations will have a material impact
on our liquidity needs.
In connection with required compliance with
the National Standard for mobile digital television, we may need to incur additional capital expenditures in order to upgrade
our mobile digital television receivers. As of June 30, 2016, with the exception of Beijing, our local operating partners in four
other cities have not yet begun this upgrade process. Under our exclusive advertising agency agreements, we are responsible for
a portion of such expenditures in three of these four cities: Taiyuan, Nanjing and Changchun. The total cost of upgrading this
equipment to conform with the National Standard in these three cities is expected not to exceed RMB4.0 million. However, we and
our local operating partners have not yet determined how we will allocate of these upgrade expenses. We believe that these capital
expenditures would not materially affect our liquidity. For more details on required compliance with the National Standard, please
refer to “Item 3. Key Information — D. Risk Factors — Risks Related to Our Company and Our Industry —
A significant portion of the mobile digital television networks of our direct investment entities and the digital television broadcasting
infrastructure of our local operating partners currently does not meet newly adopted PRC national standards for mobile digital
television operations. We will be required to spend significant capital and other resources to upgrade the existing digital television
broadcasting infrastructure of our local operating partners in order to meet these new national standards, which expenditures
could materially and adversely affect our business, financial condition and results of operations.”
Recently Issued Accounting Pronouncements
In April 2015, FASB issued ASU 2015-03
“Interest - Imputation of Interest” on simplifying the presentation of the debt issuance costs so as to reduce complexity.
This ASU requires that debt issuance cost related to a recognized debt liability be deducted directly from the carrying amount
of the debt liability, consistent with the debt discount, when presenting in the balance sheet. However, the recognition and measurement
for debt issuance costs is not affected by the amendments. The amendments in this ASU are effective for fiscal years beginning
after December 15, 2015 and interim periods within those fiscal years and early adoption is permitted. FASB requires that the amendments
of this update should be applied retrospectively to all prior periods presented in the financial statements. Management does not
expect the adoption of this ASU would have a material impact on our consolidated financial statements.
In May 2014, the FASB issued an accounting
standard update which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts
with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principal
of this new revenue recognition model is that an entity should recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods
or services. This update also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and
cash flows arising from an entity’s contracts with customers.
In August 2015, the FASB issued an accounting
standard update which defers the effective date of the new revenue recognition accounting guidance by one year, to annual and interim
periods beginning after December 15, 2017, and early adoption is permitted for annual and interim periods beginning after December
15, 2016. The guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of
the date of adoption. Management is currently assessing the potential impact of adopting this guidance on our consolidated financial
statements.
In November 2015, FASB issued ASU 2015-17
“Income Taxes-Balance Sheet Classification of Deferred Taxes”, which is intended to simplify the presentation of deferred
income taxes. This ASU requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement
of financial position. The guidance is effective for fiscal years beginning after December 15, 2016 including interim periods within
those fiscal years. Earlier application is permitted for all. Management is currently assessing the potential impact of adopting
this guidance on our consolidated financial statements.
In January 2016, FASB issued ASU 2016-01
“Recognition and Measurement of Financial Assets and Financial Liabilities”, which addresses certain aspects of recognition,
measurement, presentation, and disclosure of financial instruments. This ASU amends the accounting for equity investments, the
presentation of certain fair value changes for financial liabilities measured at fair value and certain disclosure requirements
associated with the fair value of financial instruments. For public business entities, the amendments in this ASU are effective
for fiscal years beginning after December 15, 2017, with early adoption permitted under certain circumstances. Management is currently
assessing the potential impact of adopting this guidance on our consolidated financial statements.
In February 2016, FASB issued ASU 2016-02
“Leases”, which outlines the recognition of right-of-use assets and lease liabilities by lessees for virtually all
leases. The guidance is effective for interim and fiscal years beginning after December 15, 2018, and early adoption is permitted
for all entities. Management is currently assessing the potential impact of adopting this guidance on our consolidated financial
statements.
In March 2016, FASB issued ASU 2016-09
“Compensation - Stock Compensation”, which is intended to simplify certain aspects of the accounting for share-based
payment award transactions. The guidance is effective for fiscal years beginning after December 15, 2016, and early adoption is
permitted for all entities. Management is currently assessing the potential impact of adopting this guidance on our consolidated
financial statements.
In March 2016, FASB issued ASU 2016-07
“Investments - Equity Method and Joint Ventures”, which is intended to simplify the equity method of accounting. The
guidance is effective for fiscal years beginning after December 15, 2016, and early adoption is permitted for all entities. Management
is currently assessing the potential impact of adopting this guidance on our consolidated financial statements.
In August 2016, FASB issued ASU 2016-15
“Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments”, which is intended to provide
specific guidance on the certain eight cash flow classification issues included in the amendments in this Update. The guidance
is effective for fiscal years beginning after December 15, 2017, and early adoption is permitted for all entities. Management is
currently assessing the potential impact of adopting this guidance on our consolidated financial statements.
In March 2016, FASB issued ASU 2016-09 “Compensation
- Stock Compensation”, which is intended to simplify certain aspects of the accounting for share-based payment award transactions.
The guidance is effective for fiscal years beginning after December 15, 2016, and early adoption is permitted for all entities.
Management is currently assessing the potential impact of adopting this guidance on the Group’s consolidated financial statements.
In March 2016, FASB issued ASU 2016-07 “Investments
- Equity Method and Joint Ventures”, which is intended to simplify the equity method of accounting. The guidance is effective
for fiscal years beginning after December 15, 2016, and early adoption is permitted for all entities. Management is currently
assessing the potential impact of adopting this guidance on the Group’s consolidated financial statements.
In August 2016, FASB issued ASU 2016-15 “Statement
of Cash Flows: Classification of Certain Cash Receipts and Cash Payments”, which is intended to provide specific guidance
on the certain eight cash flow classification issues included in the amendments in this Update. The guidance is effective for
fiscal years beginning after December 15, 2017, and early adoption is permitted for all entities. Management is currently assessing
the potential impact of adopting this guidance on the Group’s consolidated financial statements
|
C.
|
Research and Development
|
We did not make significant expenditures
on research and development activities in 2013 or 2014. We increased research and development activities and incurred
increased relevant expenditures in 2015 due to our public transit Wi-Fi initiative. We expect to continue to increase
expenditures in research and development in Wi-Fi sector.
Other than as disclosed elsewhere in this annual
report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2015 to December
31, 2015 that are reasonably likely to have a material adverse effect on our total revenues, net loss, profitability, liquidity
or capital resources, or that caused the financial information disclosed to be not necessarily indicative of future operating
results or financial conditions.
|
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. In addition, we have not entered into any derivative
contracts that are indexed to our own 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. Moreover, 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
|
The following table sets forth our contractual
obligations and commercial commitments as of December 31, 2015:
|
|
Total
|
|
|
Less
than 1
year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
than 5
years
|
|
|
|
(US$)
|
|
|
(US$)
|
|
|
(US$)
|
|
|
(US$)
|
|
|
(US$)
|
|
Long-term purchase agreements
|
|
|
62,270,000
|
|
|
|
23,660,000
|
|
|
|
22,803,000
|
|
|
|
10,388,000
|
|
|
|
5,419,000
|
|
Operating lease obligations
|
|
|
2,424,545
|
|
|
|
1,467,402
|
|
|
|
940,873
|
|
|
|
16,270
|
|
|
|
—
|
|
Short -term bank loan
|
|
|
9,243,995
|
|
|
|
9,243,995
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Convertible promissory
notes
|
|
|
58,000,000
|
|
|
|
58,000,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total contractual obligations
|
|
|
131,938,540
|
|
|
|
92,371,397
|
|
|
|
23,743,873
|
|
|
|
10,404,270
|
|
|
|
5,419,000
|
|
We have entered into several agreements under
our exclusive agency model to purchase advertising time from local mobile digital television companies typically for a period
of five to ten years. As of December 31, 2015, future minimum purchase commitments under these agreements totaled approximately
US$62.3 million.
Operating lease obligations represent leasing
arrangements relating to the lease of our office premises.
This annual report contains forward -looking
statements that relate to future events, including our future operating results and conditions, our prospects and our future financial
performance and condition, all of which are largely based on our current expectations and projections. The forward -looking statements
are contained principally in the sections entitled “Item 3. Key Information — D. Risk Factors,” “Item
4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” 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 terminology such as “may,” “will,” “expect,”
“anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,”
“is/are likely to” or other and 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, among other things, statements
relating to:
|
·
|
our growth strategies,
including our plan or intention to expand the coverage and penetration of our national
network, to maximize our average revenues per hour, to continue to pursue exclusive arrangements
with additional mobile digital television companies, to continue to explore new digital
media technologies and techniques, to expand our network to other advertising media platforms
and to pursue strategic relationships and acquisitions;
|
|
·
|
our future business
development, results of operations and financial condition;
|
|
·
|
expected changes
in our revenues and certain cost or expense items;
|
|
·
|
our ability to
manage the expansion of our operations;
|
|
·
|
changes in general
economic and business conditions in China; and
|
|
·
|
trends and competition
in the mobile digital television advertising industry.
|
The forward -looking statements made in this
annual report relate only to events or information as of the date on which the statements are made in this annual report. Except
as required by law, we undertake no obligation to update or revise publicly any forward -looking statements, whether as a result
of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of
unanticipated events. You should read this annual report completely and with the understanding that our actual future results
may be materially different from what we expect.
|
ITEM 6.
|
DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
|
|
A.
|
Directors and Senior Management
|
Directors and Executive Officers
The following table sets forth information
regarding our directors and executive officers as of June 30, 2016.
Name
|
|
Age
|
|
Position/Title
|
Limin
Li
|
|
55
|
|
Chairman
of the Board of Directors, Chief Executive Officer
|
Yan
Wang
|
|
38
|
|
Chief
Financial Officer
|
Wei
Liu
|
|
49
|
|
Chief
Operating Officer
|
Haijun
Liu
|
|
53
|
|
Chief
Development Officer
|
Arthur Wong (1)(2)(3)
|
|
56
|
|
Independent
Director
|
Jie
Chen (1)(2)(3)
|
|
36
|
|
Independent
Director
|
Xisong
Tan(1)(2)(3)
|
|
68
|
|
Independent
Director
|
Zhen
Xiong
|
|
33
|
|
Director
|
|
(1)
|
Audit committee member
|
|
(2)
|
Compensation committee member
|
|
(3)
|
Corporate governance and nominating committee member
|
Limin Li
is our co-founder and has been
chairman of our board of directors since our inception in 2005 and our chief executive officer since March 2007. Mr. Li has been
a director and chairman of Shenzhen Champs Elysees Venture Capital Management Co., Ltd., a PRC company engaging in project financing
and investment management, since 2003. He also has been a director and chairman of Shenzhen Meidi Real Estate Development Co.,
Ltd., a PRC real estate development company, since 1997. He also has been a director and chairman of Shenzhen Meiye Enterprise
Development Co., Ltd., a PRC manufacturer and distributor of electronic products, since 1992. Mr. Li received a bachelor’s
degree from Wuhan Institute of Physical Education.
Yan Wang
has been our chief financial
officer since August 2012. Mr. Wang was our senior vice president from February 2012 to August 2012, vice president of finance
from January 2011 to February 2012, and senior financial controller from December 2009 to January 2011. Mr. Wang joined us in
April 2009 as a full -time employee. Before joining VisionChina Media, Mr. Wang was an audit manager with KPMG, an independent
public registered accounting firm. From 2001 to 2009, he worked in the audit department in the Guangzhou office of KPMG for eight
years, and has led the audit engagements for SEC registrants, including both audits of U.S. GAAP financial statement and audits
of internal control over financial reporting. Mr. Wang received a bachelor’s degree of arts from Guangdong University of
Foreign Studies in 2001.
Wei Liu
has been our chief operating
officer since January 23, 2013. Ms. Liu began her career in 1993 with the Hunan Broadcasting Group, one of the top satellite TV
stations in China. She was one of the key founding members of the Hunan Traffic Radio Channel, where she held a number of positions
including chief of the advertising department, deputy director and director. Ms. Liu helped establish the Hunan Traffic Radio
Channel among China’s first-tier radio channels with revenue growth of over 50% each year during her tenure there. In 2011,
she was promoted to vice president of the Hunan Radio Station, where she produced a series of highly regarded events and was named
as one of “The Top Ten Advertising Talents of Hunan Province.”
Haijun Liu
has been our chief development
officer since July 2008. Mr. Liu was the general manager of Beijing Beiguang Media Mobile Television Advertising Co., Ltd., a
wholly -owned subsidiary of our company from October 2006 to January 2009. From August 2005 to October 2006, Mr. Liu was general
manager of Jilin Mobile Television Co., Ltd., a direct investment entity of our company. From 1996 to 2005, he was general manager
of Shenzhen Huali Electronic Co., Ltd. Mr. Liu received a bachelor’s degree and a master’s degree in electronic materials
from Xi’an Jiaotong University in 1985 and 1991, respectively.
Arthur Wong
has been a director of our
company since December 2011. He is the Chief Financial Officer of Beijing Radio Cultural Transmission Company Limited. He currently
also serves as an independent director of Daqo New Energy Corp, China Automotive Systems, Inc. and Sky Solar Holdings, both of
which are listed on the NASDAQ, and Petro-king Oilfield Services Limited and China Maple leaf Educational Systems Limited, both
of which are listed on the Hong Kong Stock Exchange. Mr. Wong served as chief financial officer for Asia New-Energy, Nobao Renewable
Energy and GreenTree Inns Hotel Management Group sequentially. From 1982 to 2008, Mr. Wong worked for Deloitte Touche Tohmatsu
in Hong Kong, San Jose and Beijing over various periods of time, most recently as a partner in the Beijing office. Mr. Wong received
a bachelor’s degree in applied economics from the University of San Francisco and a higher diploma of accountancy from Hong
Kong Polytechnic University. He is a member of the American Institute of Certified Public Accountants and the Hong Kong Institute
of Certified Public Accountants.
Jie Chen
has been a director of our
company since May 2016. Mr. Chen currently serves as deputy general manager of the Investment Banking Division in Guotai Junan
Securities Co., Ltd., a position he has held since September 2015. From November 2007 to September 2015, Mr. Chen worked at the
Shenzhen Stock Exchange serving in various roles as follows: from February 2015 to September 2015, he served as a member of the
Stock Issuance Registration System Reform Working Group; from February 2014 to February 2015 he was seconded to the China Securities
Regulatory Commission (“CSRC”) to serve in the Department of Public Offering Supervision; from February 2013 to February
2014 he worked in the Preparatory Group of Refinancing, Mergers and Acquisitions; from January 2011 to February 2013, he was seconded
to the CSRC to serve on the Public Offering Review Committee; from November 2007 to December 2010 he served in the initial public
offering department. Mr. Chen earned his doctorate degree in business management, master’s degree in agricultural economic
management and bachelor’s degree in finance from the Zhongnan University of Economics. He conducted his post doctorate research
in applied economics at the Chinese Academy of Fiscal Sciences.
Xisong Tan
has been a director of our
company since December 2007. Ms. Tan has served as a director and chairwoman of the board of directors of Hairun Ogilvy Entertainment
Distribution and Advertising Company since 2005. She also served as a consultant of our company from 2006 until 2007. From 1999
to 2005, Ms. Tan served as general manager of Hong Kong China Advertising Company and president of Hairun Advertising Company.
Prior to 1999, she was the director of the advertising department of China Central Television, or CCTV, the director of CCTV’s
advertisement and economic information center, and an assistant president of CCTV, which operates the largest television network
in China. Ms. Tan is a director of the China Advertising Association and a director of China Four-A Advertising Association. She
received a bachelor’s degree from the Party School of the Central Communist Party Commission.
Zhen Xiong
has been a director of our
company since June 2015. Mr. Xiong brings more than 10 years of experience in the Internet sector. He currently serves as the
vice general manager of the mobile application distribution business unit of the Mobile Service Business Group of Baidu. Prior
to joining Baidu, Mr. Xiong held several senior positions at Xunlei Limited (“Xunlei”), including head of product
research, regional sales general manager and general manager of its national strategy center. Prior to joining Xunlei, Mr. Xiong
was a founding member and project manager of Baidu's MP3 and video search business.
The business address for all of our executive
officers and directors is 1/F Block No. 7, Champs Elysees, Nongyuan Road, Futian District, Shenzhen 518040, the People’s
Republic of China.
|
B.
|
Compensation of Directors
and Executive Officers
|
Compensation of Directors and Executive Officers
In 2015, the aggregate cash compensation paid
to our executive officers, including all directors, was approximately US$0.3million. For options granted to officers and directors,
see “—2006 Share Incentive Plan.”
2006 Share Incentive Plan
We have adopted our 2006 share incentive plan,
or the 2006 Share Incentive Plan, to attract and retain the best available personnel, provide additional incentives to our employees,
directors and consultants, and promote the success of our business. The 2006 Share Incentive Plan provides for the grant of options,
restricted shares, and restricted share units, collectively referred to as “awards.” Our board of directors has authorized
the issuance of up to 8,000,000 common shares upon exercise of awards granted under our 2006 Share Incentive Plan.
An amendment to the 2006 share incentive plan,
or the Share Incentive Plan Amendment, was approved at our extraordinary general meeting of shareholders held on April 10, 2014
in Hong Kong. Pursuant to the Share Incentive Plan Amendment, the maximum aggregate number of shares under the 2006 share incentive
plan was increased from 8,000,000 common shares to 11,000,000 common shares.
Plan Administration
. Our board
of directors, or a committee designated by our board of directors, will administer the 2006 Share Incentive Plan. The committee
or the full board of directors, as appropriate, will determine the participants to receive awards, the type and number of awards
to be granted, and the terms and conditions of each award grant.
Award Agreements
. Awards granted
under our 2006 Share Incentive Plan are evidenced by an award agreement that sets forth the terms, conditions and limitations
of each grant, which may include the term of the award, the provisions applicable in the event that the grantee’s employment
or service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind the award.
Transfer Restrictions
. The right
of a grantee in an award granted under our 2006 Share Incentive Plan may not be transferred in any manner by the grantee other
than by will or the laws of succession and, with limited exceptions, may be exercised during the lifetime of the grantee only
by the grantee.
Acceleration upon a Change of Control
.
If a change of control of our company occurs and a grantee is terminated without cause within one year after such change of control,
our board of directors may decide to grant one year’s acceleration in vesting to such terminated grantee. There is no other
accelerated vesting in any event.
Termination and Amendment
. Unless
terminated earlier, our 2006 Share Incentive Plan will expire after ten years. Our board of directors has the authority to amend
or terminate our 2006 share incentive plan subject to shareholder approval to the extent necessary to comply with applicable laws.
Shareholders’ approval is required for any amendment to the 2006 share incentive plan that (i) increases the number of common
shares available under the 2006 Share Incentive Plan, (ii) permits our board of directors to extend the exercise period for an
option beyond ten years from the grant date, or (iii) results in a material increase in benefits or a change in eligibility requirements.
Our board of directors has only granted options
to participants in our 2006 Share Incentive Plan. As of December 31, 2015, there were 1,983,627 common shares issuable upon the
exercise of outstanding share options at a weighted average exercise price of US$4.00 per share and restricted shares, and there
were 936,120 common shares available for future issuance upon the exercise of future grants under our 2006 Share Incentive Plan.
The following table summarizes, as of December 31, 2015, the outstanding options granted to our directors and executive officers
and other individuals as a group.
Name
|
|
Ordinary shares
Underlying Outstanding
Options or Restricted
shares
|
|
|
Exercise price
Underlying Outstanding
Options or Restricted
Shares (US$/Share)
|
|
|
Grant Date
|
|
Expiration Date
|
Limin Li
|
|
|
350,000
|
|
|
|
6.545
|
|
|
August 30, 2007
|
|
August 30, 2017
|
|
|
|
100,000
|
|
|
|
0.00
|
|
|
October 16, 2013
|
|
October 15, 2023
|
Haijun Liu(1)
|
|
|
*
|
|
|
|
1.00
|
|
|
December 8, 2006
|
|
December 8, 2016
|
|
|
|
|
|
|
|
8.53
|
|
|
October 8, 2009
|
|
October 8, 2019
|
|
|
|
*
|
|
|
|
0.00
|
|
|
October 16, 2013
|
|
October 15, 2023
|
Yan Wang(2)
|
|
|
*
|
|
|
|
5.48
|
|
|
June 17, 2009
|
|
June 17, 2019
|
|
|
|
|
|
|
|
8.53
|
|
|
October 8, 2009
|
|
October 8, 2019
|
|
|
|
*
|
|
|
|
0.00
|
|
|
October 16, 2013
|
|
October 15, 2023
|
Wei Liu(3)
|
|
|
*
|
|
|
|
0.00
|
|
|
October 16, 2013
|
|
October 15, 2023
|
Arthur Wong(4)
|
|
|
*
|
|
|
|
0.00
|
|
|
December 29, 2011
|
|
December 29, 2021
|
Xisong Tan(5)
|
|
|
*
|
|
|
|
1.00
|
|
|
December 8, 2007
|
|
December 8, 2016
|
|
|
|
|
|
|
|
4.68
|
|
|
April 2, 2010
|
|
April 2, 2020
|
|
|
|
|
|
|
|
0.00
|
|
|
December 29,2011
|
|
December 29,2021
|
Other individuals as group
|
|
|
1,297,820
|
|
|
|
2.87
|
|
|
(6)
|
|
(7)
|
|
*
|
Upon exercise of all options granted, would beneficially own less
than 1% of our outstanding common shares, assuming the conversion of all of our outstanding
preferred shares.
|
|
(1)
|
A portion of the options was granted on December 8, 2006 with an
exercise price of US$1.00 and another portion was granted on October 8, 2009 with an
exercise price of US$8.53. The restricted shares were granted on October 16, 2013.
|
|
(2)
|
A portion of the options was granted on June 17, 2009 with an exercise
price of US$5.48 and another portion was granted on October 8, 2009 with an exercise
price of US$8.53. The restricted shares were granted on October 16, 2013.
|
|
(3)
|
The restricted shares were granted on October 16, 2013. (4) The
restricted shares were granted on December 29, 2011.
|
|
(5)
|
A portion of the options was granted on December 8, 2006 with an
exercise price of US$6.545 and another portion was granted on April 2, 2010 with an exercise
price of US$4.68. The restricted shares were granted on December 29, 2011 and December
6, 2013, respectively.
|
|
(6)
|
Options and restricted shares were granted to other individuals
on various dates. (7) Other individuals’ options and restricted shares expire on
various dates.
|
Committees of the Board of Directors
Audit Committee
Our audit committee currently consists of Arthur
Wong, Xisong Tan and Jie Chen. Our board of directors has determined that each of Arthur Wong, Xisong Tan and Jie Chen satisfies
the “independence” requirements of Rule 10A-3 under the Securities Exchange Act of 1934, as amended, and Rule 5605(a)(2)
of the Nasdaq Listing Rules. Mr. Wong is the chairman of our audit committee and meets the criteria of an audit committee financial
expert as set forth under the applicable rules of the SEC. Our 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 our
independent auditors and pre-approving all auditing and non-auditing services permitted
to be performed by our independent auditors;
|
|
·
|
reviewing with
our independent auditors any audit problems or difficulties and management’s response;
|
|
·
|
reviewing and
approving all proposed related-party transactions, as defined in Item 404 of Regulation
S-K under the Securities Act;
|
|
·
|
discussing the
annual audited financial statements with management and our independent auditors;
|
|
·
|
reviewing major
issues as to the adequacy of our internal controls and any special audit steps adopted
in light of material deficiencies in those internal controls;
|
|
·
|
annually reviewing
and reassessing the adequacy of our audit committee charter;
|
|
·
|
such other matters
that are specifically delegated to our audit committee by our board of directors from
time to time;
|
|
·
|
meeting separately
and periodically with management and our internal and independent auditors; and
|
|
·
|
reporting regularly
to the full board of directors.
|
Compensation Committee
Our compensation committee currently consists
of Arthur Wong, Xisong Tan and Jie Chen. Our board of directors has determined that each of Arthur Wong, Xisong Tan and Jie Chen
satisfies the “independence” requirements of Rule 5605(a)(2) of the Nasdaq Listing Rules. Ms. Tan is the chairperson
of our compensation committee. Our compensation committee assists our board of directors in reviewing and approving the compensation
structure, including all forms of compensation, relating 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
making recommendations to our board of directors with respect to the total compensation
package for our three most senior executives;
|
|
·
|
approving and
overseeing the total compensation package for our executives other than the three most
senior executives;
|
|
·
|
reviewing and
making recommendations to our board of directors 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.
|
Corporate Governance and Nominating Committee
Our corporate governance and nominating committee
currently consists of Arthur Wong, Xisong Tan and Jie Chen . Our board of directors has determined that each of Arthur Wong, Xisong
Tan and Jie Chen satisfies the “independence” requirements of Rule 5605(a)(2) of the Nasdaq Listing Rules. Ms. Tan
is the chairman of our corporate governance and nominating committee. Our corporate governance and nominating committee assists
our board of directors in selecting individuals qualified to become our directors and in determining the composition of the board
of directors and its committees. The corporate governance and nominating committee is responsible for, among other things:
|
·
|
selecting and
recommending to the board of directors nominees for election or re -election to the board,
or for appointment to fill any vacancy;
|
|
·
|
reviewing annually
with the board of directors the current composition of the board with respect to characteristics
such as independence, age, skills, experience and availability of service to us;
|
|
·
|
selecting and
recommending to the board of directors the names of directors to serve as members of
the audit committee and the compensation committee, as well as the corporate governance
and nominating committee itself;
|
|
·
|
periodically
advising the board of directors on significant developments in the law and practice of
corporate governance as well as our compliance with applicable laws and regulations,
and making recommendations to the board on all matters of corporate governance and on
any remedial action to be taken; and
|
|
·
|
monitoring compliance
with our code of business conduct and ethics, including reviewing the adequacy and effectiveness
of our procedures to ensure proper compliance.
|
Duties of Directors
Under Cayman Islands law, our directors have
a fiduciary duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise
the skills they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances.
In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association,
as amended and restated from time to time. Our company would have the right to seek damages if a director were to breach a duty
owed to the company.
The functions and powers of our board of directors
include, among others:
|
·
|
convening shareholders’
annual general meetings and reporting the board’s work to shareholders at such
meetings;
|
|
·
|
issuing authorized
but unissued shares and redeeming or purchasing outstanding shares of our company (subject
to the Companies Law);
|
|
·
|
declaring dividends
and other distributions;
|
|
·
|
appointing officers
and determining the term of office of officers;
|
|
·
|
exercising the
borrowing powers of our company and mortgaging the property of our company; and
|
|
·
|
approving the
transfer of shares of our company, including the registration of such shares in our share
register.
|
Terms of Directors and Executive Officers
Our officers are elected by and serve at the
discretion of the board of directors. Our directors are not subject to a term of office and hold office until such time as they
are removed from office by special resolution or the unanimous written resolution of all shareholders. A director will be removed
from office automatically if, among other things, the director (i) becomes bankrupt or makes any arrangement or composition with
his creditors; or (ii) dies or is found by our company to be or becomes of unsound mind.
Employment Agreements
We have entered into employment agreements
with each of our senior executive officers. We may terminate a senior executive officer’s employment for cause, at any time,
without notice or remuneration, for certain acts of the officer, including, but not limited to, a conviction or plea of guilty
to a felony, willful misconduct to our detriment or a failure to perform agreed duties. A senior executive officer may terminate
his or her employment at any time without penalty if there is a material reduction in his or her authority, duties or responsibilities
or if there is a material breach by us, provided that we are allowed to correct or cure within 30 days upon receipt of his or
her written notice of intent to terminate on such basis. Furthermore, either we or an executive officer may terminate employment
at any time without cause upon advance written notice to the other party. Each senior executive officer is entitled to certain
benefits upon termination, including a severance payment equal to three months’ salary, if he or she resigns for certain
specified good reasons or if we terminate his or her employment due to his or her incapacitation. We will indemnify an executive
officer for his or her losses based on or related to his or her acts and decisions made in the course of performing his or her
duties within the scope of his or her employment.
Each senior executive officer has agreed to
hold in strict confidence any trade secrets or technical secrets of our company. Each officer also has agreed to comply with all
material applicable laws and regulations related to his or her responsibilities in respect of our company as well as all material
written corporate and business policies and procedures of our company.
As of December 31, 2013, 2014, and 2015, we
had 642, 523, and 443 full-time employees, respectively. As of December 31, 2015, we had 87 employees in management and administration,
208 in sales and marketing, 87 in network maintenance and development and 61 in research and development.
None of our employees is represented by a labor
union or other collective bargaining agreements. Since our establishment, we have never experienced a strike or other disruption
of employment. We believe that we have good relationships with our employees.
The remuneration packages for our employees
include salary, bonus, stock options, other cash benefits and benefits in -kind. In accordance with applicable PRC regulations,
we participate in a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a personal injury insurance
plan and a housing reserve fund. Our total contributions for such employee benefits required by applicable PRC regulations amounted
to US$1.7 million, US$1.5 million and US$2.0 million for the years ended December 31, 2013, 2014 and 2015, respectively.
The following table sets forth information
with respect to the beneficial ownership of our common shares as of August 31, 2016 by:
|
·
|
each of our directors
and executive officers; and
|
|
·
|
each person known
to us to own beneficially more than 5.0% of our common shares.
|
|
|
Shares
Beneficially Owned(1)(2)
|
|
|
|
Number
|
|
|
%
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
Limin Li(3)(5)
|
|
|
18,180,967
|
|
|
|
17.5
|
|
Yan Wang
|
|
|
*
|
|
|
|
*
|
|
Haijun Liu
|
|
|
*
|
|
|
|
*
|
|
Zhen Xiong
|
|
|
*
|
|
|
|
*
|
|
Arthur Wong
|
|
|
*
|
|
|
|
*
|
|
Xisong Tan
|
|
|
*
|
|
|
|
*
|
|
Jie Chen
|
|
|
*
|
|
|
|
*
|
|
All directors and executive officers
as a group(4)
|
|
|
18,613,447
|
|
|
|
17.6
|
|
Principal Shareholders:
|
|
|
|
|
|
|
|
|
Front Lead Investments Limited (5)
|
|
|
18,180,967
|
|
|
|
17.5
|
|
Focus Media Holding Limited (6)
|
|
|
15,331,305
|
|
|
|
14.8
|
|
|
*
|
Upon exercise of all options granted, would own beneficially less
than 1.0% of our outstanding common shares.
|
|
(1)
|
Beneficial ownership is determined in accordance with Rule 13d-3
of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended,
and includes voting or investment power with respect to the securities.
|
|
(2)
|
The calculations assume there are 102,121,144 common shares issued
and outstanding as of April 28, 2015. 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 of this date of this annual report
on Form 20-F, including through the exercise of any option, warrant 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.
|
|
(3)
|
Includes 17,780,967 common shares owned by Front Lead Investments
Limited, a British Virgin Islands company, and 400,000 common shares issuable upon the
exercise of options granted to Front Lead Investments Limited that are exercisable within
60 days of this date of this annual report on Form 20-F.
|
|
(4)
|
Includes common shares held by all of our directors and executive
officers as a group and common shares issuable upon the exercise of all of the options
that are exercisable within 60 days of this date of this annual report on Form 20-F held
by all of our directors and executive officers.
|
|
(5)
|
Malte International Holdings Limited is the sole shareholder and
sole director of Front Lead Investments Limited. The Li Liu Family Trust, an irrevocable
trust, is the sole shareholder of Malte International Holders Limited. HSBC International
Trustee Limited is the trustee of the Li Liu Family Trust with Limin Li as the settlor.
Certain family members of Limin Li are beneficiaries of the Li Liu Family Trust. The
business address of HSBC International Trustee Limited is Strathvale House, 2nd Floor,
North Church Street, George Town, Grand Cayman, Cayman Islands and the business address
of Mr. Li is c/o VisionChina Media Inc., 1/F Block No. 7, Champs Elysees, Nongyuan Road,
Futian District, Shenzhen 518040, China.
|
|
(6)
|
Includes 15,331,305 common shares held by Focus Media Holding Limited,
a limited liability company incorporated in the Cayman Islands whose American Depositary
Receipts were traded on the Nasdaq Global Market under the symbol “FMCN”.
In May 2013, Focus Media Holding Limited went private and was delisted from the Nasdaq
Global Market. The mailing address of Focus Media Holding Limited is Unit No. 1, 20th
Floor, The Centrium, 60 Wyndham Street, Central, Hong Kong.
|
None of our existing shareholders has voting
rights that differ from the voting rights of other shareholders. We are not aware of any arrangement that may, at a subsequent
date, result in a change of control of our company. For information regarding our common shares and ADSs held or beneficially
owned by persons in the United States, see “Item 9. The Offering and Listing — A. Offering and Listing Details”
in this annual report.
|
ITEM 7.
|
MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
Please refer to “Item 6. Directors, Senior
Management and Employees — E. Share Ownership.”
|
B.
|
Related Party Transactions
|
We adopted an audit committee charter, which
requires that the audit committee review all related party transactions on an ongoing basis and all such transactions be approved
by the committee. Set forth below is a description of all of our related party transactions for the years ended December 31, 2013,
2014 and 2015.
Transactions with Our Direct Investment Entities
Agreements to Purchase Advertising Time from and Sell
Advertising Equipment to Our Direct Investment Entities
Under our arrangements with our local operating
partners, we are responsible for the procurement of equipment for some of our direct investment entities and other local operating
partners, such as digital displays and digital television receivers. We sell the advertising equipment to these local operating
partners (including our direct investment entities) at negotiated prices and record the sales of advertising equipment as advertising
equipment revenue on our financial statements. We had advertising equipment revenue of US$0.5 million, US$0.5 million and US$2.1
million for the years ended December 31, 2013, 2014 and 2015, respectively, of which US$1.1 million, US$0.3 million and US$0.3
million represents the sales of advertising equipment to our direct investment entities in each of these three years.
We also purchase advertising placement services
from our direct investment entities at negotiated prices. For the years ended December 31, 2013, 2014 and 2015, we paid amounts
of US$0.6 million, US$33 thousand and US$77 thousand, respectively, to our direct investment entities for advertising placement
services.
Exclusive Agency Agreements with Our Direct Investment
Entities
We entered into an exclusive agency agreement
with Shenzhen Mobile Television Co., Ltd., or Shenzhen Mobile, in December 2006. This exclusive agency agreement granted us the
exclusive right to sell advertising time on the mobile digital television network in Shenzhen buses for a term from January 1,
2007 to July 31, 2011. Under the agreement, we paid a pre-determined media cost each year to Shenzhen Mobile. We were responsible
for installing additional digital television displays on the buses of the Shenzhen public transportation companies that have entered
into agreements with Shenzhen Mobile. The cost in connection with such installation was deductible from the rental fees payable
by us. We had an exclusive agency agreement with Shenzhen Mobile through our acquisition of Digital Media Group in January 2010.
This exclusive agency agreement in Shenzhen for subway trains on line 1 gave us the exclusive right to sell all of the advertising
time on the mobile digital television network in line 1 of the Shenzhen subway from January 2, 2010 to December 31, 2012. We terminated
our exclusive agency agreement with Shenzhen Mobile with effect from September 1, 2011.
We entered into an exclusive agency agreement
with Chengdu China Digital Mobile Television Co., Ltd., or Chengdu VisionChina Media Group, in July 2007. This exclusive agency
agreement grants us the exclusive right to sell advertising time on the mobile digital television network in Chengdu for a term
from January 1, 2008 to December 31, 2015. Under the agreement, we pay a pre-determined media cost each year to Chengdu VisionChina
Media Group. Chengdu VisionChina Media Group is responsible for installing additional digital television displays on the buses
of the Chengdu public transportation companies that have entered into agreements with Chengdu VisionChina Media Group. The terms
of this exclusive agency agreement have been negotiated on an arm’s length basis.
We entered into exclusive agency agreements
with Wuxi Guangtong Digital Mobile Television Co., Ltd., or Wuxi Guangtong, in September 2007. These agreements granted us the
exclusive right to sell a portion of the advertising time on the mobile digital television network in Wuxi to advertisers that
are not from Wuxi for a term from October 1, 2007 to December 31, 2013. Under these agreements, we paid a pre-determined media
cost each year to Wuxi Guangtong. Wuxi Guangtong was responsible for installing additional digital television displays on the
buses of the Wuxi public transportation companies that had entered into agreements with Wuxi Guangtong. The terms of this exclusive
agency agreement were negotiated on an arm’s length basis. In January 2014, we renewed our exclusive agency agreement with
Wuxi Guangtong. The renewed agreement grants us the right to sell advertising time on our network in Wuxi to advertisers that
are not from Wuxi for a term from January 1, 2014 to January 1, 2016.
We entered into an exclusive agency agreement
with Ningbo China Digital Mobile Television Co., Ltd., or Ningbo VisionChina Media Group, in November 2007. This exclusive agency
agreement granted us the exclusive right to sell advertising time on the mobile digital television network in Ningbo for a term
from January 1, 2008 to December 31, 2012. Under the agreement, we paid a pre-determined media cost each year to Ningbo VisionChina
Media Group. Ningbo VisionChina Media Group was responsible for installing additional digital television displays on the buses
of the Ningbo public transportation companies that had entered into agreements with Ningbo VisionChina Media Group. The terms
of this exclusive agency agreement were negotiated on an arm’s length basis. In January 2013, we renewed our exclusive agency
agreement with Ningbo VisionChina Media Group. The renewed agreement grants us the right to sell advertising time on our network
in Ningbo to advertisers that are not from Ningbo for a term from January 1, 2013 to November 15, 2016.
We entered into an exclusive agency agreement
with Jilin Mobile Television Co., Ltd., or Jilin Mobile, in March 2008. This exclusive agency agreement granted us the exclusive
right to sell advertising time on the mobile digital television network in Changchun for a term from July 1, 2008 to June 30,
2014. Under the agreement, we paid a pre-determined media cost each year to Jilin Mobile. Jilin Mobile was responsible for installing
additional digital television displays on the buses of the Changchun public transportation companies that had entered into agreements
with Jilin Mobile. The terms of this exclusive agency agreement were negotiated on an arm’s length basis. In July 2014,
we renewed our exclusive agency agreement with Jilin Mobile. The renewed agreement grants us the right to sell advertising time
on our network in Changchun to advertisers that are not from Changchun for a term from July 1, 2014 to February 28, 2020.
We entered into an exclusive agency agreement
with Hubei China Digital Mobile Television Co., Ltd., or Hubei VisionChina Media Group, in March 2008. This exclusive agency agreement
granted us the exclusive right to sell advertising time on the mobile digital television network in Wuhan for a term from April
1, 2008 to March 31, 2014. Under the agreement, we paid a pre-determined media cost each year to Hubei VisionChina Media Group.
Hubei VisionChina Media Group was responsible for installing additional digital television displays on the buses of the Wuhan
public transportation companies that had entered into agreements with Hubei VisionChina Media Group. In March 2014, we renewed
our exclusive agency agreement with Hubei VisionChina Media Group for a term from April 1, 2014 to December 31, 2018. The renewed
agreement grants us the right to sell a portion of the advertising time on our network in Wuhan to advertisers that are not from
Wuhan. The terms of this exclusive agency agreement have been negotiated on an arm’s length basis. In April 2014, we renewed
our exclusive agency agreement with Hubei VisionChina Media Group. The renewed agreement grants us the right to sell advertising
time on our network in Wuhan to advertisers that are not from Wuhan for a term from April 1, 2014 to December 31, 2018.
We entered into an exclusive agency agreement
with Dalian China Digital Mobile Television Co., Ltd., or Dalian VisionChina Media Group, in March 2008. This exclusive agency
agreement granted us the exclusive right to sell advertising time on the mobile digital television network in Dalian for a term
from April 1, 2008 to March 31, 2014. Under the agreement, we paid a pre-determined media cost each year to Dalian VisionChina
Media Group. Dalian VisionChina Media Group was responsible for installing additional digital television displays on the buses
of the Dalian public transportation companies that had entered into agreements with Dalian VisionChina Media Group. The terms
of this exclusive agency agreement were negotiated on an arm’s length basis. In November 2012, we renewed our exclusive
agency agreement with Dalian VisionChina Media Group. The renewed agreement grants us the right to sell advertising time on our
network in Dalian to advertisers that are not from Dalian for a term from November 1, 2012 to November 1, 2015.
We entered into an exclusive agency agreement
with Suzhou China Digital Mobile Television Co., Ltd., or Suzhou VisionChina Media Group, in September 2009. This exclusive agency
agreement granted us the exclusive right to sell a portion of the advertising time on the mobile digital television network in
Suzhou to advertisers that are not from Suzhou for a term from October 1, 2009 to December 31, 2013. Under the agreement, we paid
a pre- determined media cost each year to Suzhou VisionChina Media Group. Suzhou VisionChina Media Group was responsible for installing
additional digital television displays on the buses of the Suzhou public transportation companies that had entered into agreements
with Suzhou VisionChina Media Group. The terms of this exclusive agency agreement were negotiated on an arm’s length basis.
In December 2013, we renewed our exclusive agency agreement with Suzhou VisionChina Media Group. The renewed agreement grants
us the right to sell advertising time on our network in Suzhou to advertisers that are not from Suzhou for a term from January
1, 2014 to December 31, 2015.
We entered into an exclusive agency agreement
with Changzhou China Digital Mobile Television Co., Ltd., or Changzhou VisionChina Media Group, in March 2010. This exclusive
agency agreement grants us the exclusive right to sell a portion of the advertising time on the mobile digital television network
in Changzhou to advertisers that are not from Changzhou for a term from January 1, 2010 to March 18, 2017. Under the agreement,
we pay a pre-determined media cost each year to Changzhou VisionChina Media Group. Changzhou VisionChina Media Group is responsible
for installing additional digital television displays on the buses of the Changzhou public transportation companies that have
entered into agreements with Changzhou VisionChina Media Group. The terms of this exclusive agency agreement were negotiated on
an arm’s length basis.
We entered into an exclusive agency agreement
with Henan China Digital Mobile Television Company Limited and Henan VisionChina Media Group, in January 2013. This exclusive
agency agreement grants us the exclusive right to sell a portion of the advertising time on the mobile digital television network
in Zhengzhou City, the capital of Henan Province, to advertisers that are not from Zhengzhou for a term from January 1, 2013 to
December 31, 2015. Under the agreement, we pay a pre-determined media cost each year to Henan China Digital Mobile Television
Company Limited. Henan VisionChina Media Group is responsible for installing additional digital television displays on the buses
of the Zhengzhou public transportation companies that have entered into agreements with Henan VisionChina Media Group. The terms
of this exclusive agency agreement were negotiated on an arm’s length basis.
We entered into an exclusive agency agreement
with Chongqing Jielong Light Rail Advertising Co., Ltd., or Chongqing VisionChina Media Group, in April 2011. This exclusive agency
agreement grants us the exclusive right to sell advertising time on the television network in line 2 of the Chongqing Light Rail
for a term from January 1, 2011 to December 31, 2015. Under the agreement, we pay a pre-determined media cost each year to Chongqing
VisionChina Media Group. The terms of this exclusive agency agreement were negotiated on an arm’s length basis.
Transactions with Affiliated Companies of Limin Li
Lease and Loan with Meidi Zhiye
We rented office space from Shenzhen Meidi
Zhiye Development Co., Ltd., a former equity holder of VisionChina Media Group, or Meidi Zhiye, for the office space of our headquarters
and VisionChina Media Group. The terms of the lease were negotiated on an arm’s length basis. Limin Li, our founder and
chairman of our board of directors, owns more than 10% of Meidi Ziye’s equity interest and is the chairman of Meidi Zhiye.
The rental expenses totaled US$0.3 million, US$0.4 million and US$0.4 million in 2013, 2014 and 2015, respectively.
Transactions with Champs Elysees
In 2013, 2014, and 2015, VisionChina Media
Group paid office decoration charges of US$4,446, US$377,079, and US$473,332, respectively, to Champs Elysees Renovations Co.,
Ltd., or Champs Elysees Renovations. In 2013, 2014, and 2015, VisionChina Media Group also paid property management fees and utility
expenses of US$53,355, US$59,973, and US$$56,925, respectively, to Champs Elysees Management Co., Ltd. Limin Li’s wife is
the chairwoman of Champs Elysees Renovations.
Transactions Related to Our Corporate Structure
Under applicable PRC laws, rules and regulations,
to invest in the advertising industry, foreign investors must have at least two years of direct operations in the advertising
industry as their core businesses outside of the PRC. We are a Cayman Islands corporation and a foreign legal person under PRC
laws and we have not directly operated any advertising business outside China. Therefore, we do not qualify under PRC regulations
to own directly equity interests in advertising services providers. Accordingly, our subsidiaries, CDTC and Beijing Eastlong Technology
are ineligible to apply for the licenses required to provide advertising services in China. Our advertising business inside the
PRC is operated through our contractual arrangements with VisionChina Media Group and Beijing Eastlong Advertising. CDTC and VisionChina
Media Group entered into a series of agreements on March 30, 2006, including a technology and management services agreement, a
domain name license agreement, a loan agreement, a proxy letter, an option agreement and an equity pledge agreement. CDTC and
VisionChina Media Group entered into a series of new agreements on February 15, 2007, which replaced the agreements entered into
on March 30, 2006, as are described in the preceding sentence. Beijing Eastlong Technology and Beijing Eastlong Advertising entered
into a series of agreements, including a business cooperation agreement, loan agreements, option agreements and equity pledge
agreements. These contractual arrangements enable us to exercise effective control over VisionChina Media Group, Beijing Eastlong
Advertising, and their respective subsidiaries, and to receive substantially all of the economic benefits of these entities in
consideration for the services provided by our subsidiary in China. We intend to continue our business operations in China upon
the expiration of these contractual arrangements by renewing them or entering into new contractual arrangements if then-current
PRC laws, rules and regulations still do not allow us directly to operate advertising businesses in China. We believe that, under
these contractual arrangements, we have sufficient control over VisionChina Media Group, Beijing Eastlong Advertising, and their
respective equity holders to renew or enter into new contractual arrangements prior to the expiration of the current arrangements
on terms that would enable us to continue to operate our business in China after the expiration of the current arrangements.
Agreements that Transfer Economic Benefits to Us
Technology and Management Services Agreement
.
Pursuant to the technology and management services agreement entered into on February 15, 2007 by and between CDTC and VisionChina
Media Group, CDTC provides technology consulting and management services related to the business operations of VisionChina Media
Group. As consideration for such services, VisionChina Media Group has agreed to pay the service fees specified by CDTC in the
payment notices it provides to VisionChina Media Group from time to time. The payment notices shall enclose charge lists, setting
forth the services provided, the hours spent in performing the services, and the applicable service charge rates. The charge rates,
which are annexed to the agreement, may be adjusted pursuant to a supplemental agreement entered into by the parties. If VisionChina
Media Group objects to the service fees set forth in a payment notice, both parties shall mutually agree upon the service fees
to be paid by VisionChina Media Group. In addition, VisionChina Media Group shall reimburse CDTC for out-of-pocket expenses incurred
in connection with providing the services. The service fee shall be calculated using a rate as mutually agreed by CDTC and VisionChina
Media Group multiplied by average numbers of LCD screens put into use in the digital mobile television advertising network operated
by VisionChina Media Group during each of the calendar year. The term of this agreement is 25 years, which may be terminated at
any time or extended by CDTC in its discretion. In the event of a default under this agreement, the non-defaulting party can terminate
this agreement.
Domain Name License Agreement
.
Pursuant to the domain name license agreement entered into on February 15, 2007 by and between CDTC and VisionChina Media Group,
CDTC grants VisionChina Media Group the exclusive right to use its domain names, www.cdmtv.tv and www.cdmg.cn, in exchange for
a royalty fee equal to 0.2% of the gross annual revenues of VisionChina Media Group. The parties may mutually agree to adjust
the royalty fee within the first ten working days of any year during the term of the agreement. The agreement has a term of 25
years, which may be terminated at any time or extended by CDTC in its discretion. In the event of a default under this agreement,
the non-defaulting party can terminate this agreement.
Business Cooperation Agreement
.
Pursuant to the business cooperation agreement entered into on February 22, 2005 by and between Beijing Eastlong Technology and
Beijing Eastlong Advertising, Beijing Eastlong Advertising shall operate an out-of-home advertising platform and sell advertisements
or value - added -services on that platform, which it may do by setting up joint ventures with third parties or by other feasible
means. The cooperation method by which Beijing Eastlong Technology and Beijing Eastlong Advertising engage in business projects
shall vary, with Beijing Eastlong Technology either providing technology and consulting services to Beijing Eastlong Advertising,
Beijing Eastlong Advertising subletting work to Beijing Eastlong Technology, or Beijing Eastlong Technology and Beijing Eastlong
Advertising jointly engaging in projects, depending on PRC legal and regulatory requirements, including qualification or licensing
requirements, and the requirements of third-party project owners. Under each cooperation method, Beijing Eastlong Technology and
Beijing Eastlong Advertising shall receive 90% and 10%, respectively, of the project profits, and each shall be reimbursed, as
applicable, for its out-of-pocket expenses. Beijing Eastlong Technology shall be the exclusive and sole cooperating partner of
Beijing Eastlong Advertising, and Beijing Eastlong Advertising shall not engage in any business other than that which it conducts
in cooperation with Beijing Eastlong Technology without Beijing Eastlong Technology’s prior written consent. The term of
this agreement commences on February 22, 2005 and remains effective in perpetuity unless and until such time as the agreement
is terminated or Beijing Eastlong Technology ceases to exist. This agreement can be terminated (i) by both parties’ mutual
consent, (ii) if either party is declared legally bankrupt and the other party requests that the agreement be terminated, or (iii)
if Beijing Eastlong Technology is unable to provide any services to Beijing Eastlong Advertising for more than three years due
to force majeure.
Agreements that Provide Us Effective Control over VisionChina
Media Group, Beijing Eastlong Advertising and Their Respective Subsidiaries
Loan Agreement
. CDTC entered
into a loan agreement with Limin Li and Yanqing Liang on February 15, 2007 that allows us to capitalize our PRC operating affiliates
in VisionChina Group and which facilitates the establishment of our current corporate structure in VisionChina Group. CDTC made
an interest-free loan of RMB50 million to the equity holders of VisionChina Media Group. The loan can only be repaid with proceeds
from the transfer of the equity interests in VisionChina Media Group by its equity holders to CDTC or to another person designated
by CDTC pursuant to the Option Agreement as discussed below. In the event of a default under this agreement, the non-defaulting
party can terminate this agreement.
Beijing Eastlong Technology entered into a
series of loan agreements, and amendments thereto, with Qijun Men and Haifeng Wang in February 2005, March 2007 and May 2008,
which allowed Beijing Eastlong Advertising to capitalize its PRC operating affiliates and facilitated the establishment of our
current corporate structure. Beijing Eastlong Technology made an interest-free loan of RMB20 million to the equity holders of
Beijing Eastlong Advertising. This loan can only be repaid with proceeds from the transfer of the equity interests in Beijing
Eastlong Advertising by the equity holders to Beijing Eastlong Technology or to another person designated by Beijing Eastlong
Technology. In the event of a default under this agreement, the non-defaulting party can terminate this agreement.
Proxy Letter
. Limin Li and Yanqing
Liang signed certain proxy letters on February 15, 2007, pursuant to which Limin Li and Yanqing Liang granted an employee of CDTC,
who is a PRC citizen, the right to exercise all of their voting rights as equity holders of VisionChina Media Group as provided
under its articles of association. Such grant must be approved by CDTC and the grantee must be an employee of CDTC. If the grantee
ceases to be an employee of CDTC, then the grantors will revoke the proxy and grant a similar proxy to a then-current employee
of CDTC designated by CDTC. The proxy letters will remain effective until February 15, 2032.
Option Agreement
. CDTC entered
into an option agreement with Limin Li and Yanqing Liang on February 15, 2007, pursuant to which CDTC has an exclusive option
to purchase, or to designate another qualified person to purchase, to the extent permitted by the laws and foreign investment
policies of the PRC, part or all of the equity interests in VisionChina Media Group owned by Limin Li and Yanqing Liang. The purchase
price for the entire equity interest shall be the greater of (i) RMB50 million and (ii) the minimum price permitted by applicable
PRC law and agreed upon by the parties. The option agreement will remain in effect until such time as all of the equity interests
contemplated by the agreement have been transferred thereunder. In the event of a default under this agreement, the non-defaulting
party can terminate this agreement.
Beijing Eastlong Technology entered into a
series of option agreements, and amendments thereto, with Qijun Men and Haifeng Wang in February 2005, March 2007 and May 2008,
pursuant to which Beijing Eastlong Technology has an exclusive option to purchase, or to designate another qualified person to
purchase, to the extent permitted by the laws and foreign investment policies of the PRC, all of the equity interests in Beijing
Eastlong Advertising owned by Qijun Men and Haifeng Wang. The purchase price for the entire equity interest shall be RMB20 million.
The option agreement will remain in effect until such time as all of the equity interests contemplated by the agreement have been
transferred thereunder.
Equity Pledge Agreement
. Pursuant
to an equity pledge agreement entered into on February 15, 2007, Limin Li and Yanqing Liang have pledged their equity interests
in VisionChina Media Group to CDTC to secure their obligations under the loan agreement, and VisionChina Media Group’s obligations
under the technology and management services agreement and domain name license agreement, each as described above. In addition,
shareholders of VisionChina Media Group agree not to transfer, sell, pledge, dispose of or create any encumbrance on any equity
interests in VisionChina Media Group that would affect the pledgees’ interests. The equity pledge agreement will expire
when the shareholders fully perform their obligations under the agreements described above.
The
PRC Property Rights Law
entered
into effect on October 1, 2007 and governs equity pledges made after that date. Our PRC legal counsel has advised us that the
PRC Property Rights Law
does not stipulate whether, or require that, an equity pledge made prior to October 1, 2007 must
be registered with the SAIC. Our equity pledge agreement was entered into on February 15, 2007, at which time equity pledges were
governed by then-applicable provisions of the
PRC Company Law
and the
PRC Guarantee Law
. According to these two
PRC laws and regulations, an equity pledge of a limited liability company does not need to be registered with the SAIC or its
local branches, and an equity pledge agreement becomes effective soon after the equity pledge is recorded or filed with the relevant
company’s Register of Shareholders. Therefore, we believe that our equity pledge agreement is effective and enforceable
even though we did not register it with the SAIC or a local SAIC branch. As of December 31, 2014, we, CDTC and VisionChina Media
Group had not been required by any PRC governmental authority to register our equity pledge agreement with the SAIC, nor were
we, CDTC or VisionChina Media Group subject to any penalties or fines for having failed to complete such registration. Based on
the foregoing, we believe that we are not obligated under the
PRC Property Rights Law
to register our equity pledge agreement
with the SAIC, and that the equity pledge agreement is enforceable in courts of law in the PRC.
|
C.
|
Interests of Experts and
Counsel
|
Not Applicable.
|
ITEM 8.
|
FINANCIAL
INFORMATION
|
|
A.
|
Consolidated Statements and
Other Financial Information
|
We have appended consolidated financial statements
filed as part of this annual report.
Legal and Administrative Proceedings
|
(i)
|
Litigation with the Former DMG Shareholders
|
Our company and its wholly owned subsidiary,
Vision Best Limited, filed a summons with notice in the Supreme Court of New York County, or the New York Court on December 27,
2010 against the Former DMG Shareholders. The summons with notice alleged that the Former DMG Shareholders (i) engaged in an unlawful
scheme to induce us, through false, deceptive, and misleading statements concerning Digital Media Group’s financial condition
and performance, to pay a grossly inflated price to purchase Digital Media Group in 2010, and (ii) received, or are scheduled
to receive, ill-gotten gains from this unlawful scheme. The summons with notice further alleged that we are owed indemnification
from an escrow fund, established at the time of the purchase, as a result of breaches of representations and warranties contained
in the merger agreement pursuant to which we acquired Digital Media Group, or the Merger Agreement. The claims summarized in the
summons with notice were set forth in a more detailed complaint we filed on February 2, 2011.
On February 25, 2011, Gobi Partners, Inc.,
Gobi Fund, Inc., Gobi Fund II, L.P., Oak Investment Partners XII, L.P., and Thomas Gai Tei Tsao, or the Former DMG Shareholders,
filed a countersuit against us in the New York Court. The complaint in that lawsuit alleges that we breached certain agreements
related to the Digital Media Group acquisition by (i) declining to make certain installment payments that the Former DMG Shareholders
claim they were entitled to receive and (ii) declining to take steps to facilitate the transfer of shares of our stock that the
Former DMG Shareholders claim to be entitled to receive in connection with the acquisition of Digital Media Group. The Former
DMG Shareholders also sought specific enforcement of the contracts at issue, compensatory damages in an amount to be determined
at trial, and permanent and preliminary injunctive relief compelling us to comply with the parties’ agreement. We denied
the material allegations of the complaint by the Former DMG Shareholders and asserted a counterclaim for breach of contract arising
from the destruction of Digital Media Group’s electronic data prior to such data being delivered to us.
Also on February 25, 2011, the Former DMG Shareholders
filed motions against us for various relief. They sought to dismiss most of the claims in our complaint as well as our counterclaim
based on destruction of Digital Media Group’s electronic data. They also sought (i) an order of attachment against us in
the amount of US$30 million plus interest, on account of a post-closing payment of that amount which the Former DMG Shareholders
alleged to be due, and (ii) an order directing us to transfer assets into the United States to secure a prospective judgment.
The Former DMG Shareholders also filed a motion for a preliminary injunction to compel us to remove the restrictive legend on
the ordinary shares received by the Former DMG Shareholders in connection with the acquisition of Digital Media Group, and to
provide consents or authorizations to convert those shares into freely tradable American Depository Shares.
On November 3, 2011 the New York Court decided
the pending motions in the above lawsuits. The Court granted the Former DMG Shareholders’ motion to dismiss our fraud, unjust
enrichment and declaratory judgment claims, as well as our breach of contract claim based on the destruction of Digital Media
Group’s electronic data. The Court denied the Former DMG Shareholders’ motion to dismiss our indemnification claim
for not less than US$2,785,633, but granted their motion to attach our assets in the amount of US$30.0 million plus interest,
as security in the event that the Former DMG Shareholders were successful in their monetary claims against us. The ruling also
required the Former DMG Shareholders to file a US$500,000 undertaking in the event that the Court were ultimately to determine
that they were not entitled to the attachment. Finally, the New York Court denied the Former DMG Shareholders’ request to
compel us to release the restrictions on the stock certificates which they had received, noting that any injury they may have
suffered as a result of the alleged failure to release those restrictions would be compensable in monetary damages.
On November 11, 2011 we filed an appeal from
the Court’s orders.
On November 21, 2011 the Former DMG Shareholders
filed a motion for partial summary judgment in the New York Court, seeking a judgment against us of US$60.0 million plus interest
for failure to make US$60.0 million in post-closing payments claimed to be due for the acquisition of Digital Media Group. They
also filed a motion to confirm the order of attachment previously entered in the amount of US$30 million plus interest.
On August 13, 2012, the New York State Supreme
Court entered an order, or the August 13 Order, directing us and Vision Best Limited, on or before August 21, 2012 to (a) transfer
US$60.0 million in assets readily convertible into U.S. currency into New York State, to be held in the custody of the New York
City Sheriff’s Office, (b) deposit US$60.0 million into an escrow account controlled by the Sheriff, or (c) make other arrangements
satisfactory to the Former DMG Shareholders in the litigation for security with respect to the final judgment in that amount.
We and Vision Best Limited took prompt steps to comply with the August 13 Order and arranged for the delivery to the Sheriff of
more than US$3.2 million in cash denominated in or convertible to U.S. dollars that were held by or for us or our subsidiaries
outside the PRC. With respect to funds in Renminbi held within the PRC, any transfer to the Sheriff in New York requires approval
of the relevant authority of the PRC government, the SAFE. Accordingly, on August 20, 2012, we applied to the SAFE to approve
our transfer of the balance required under the August 13 Order (an amount equivalent to approximately US$56.8 million). SAFE,
however, denied our application on August 20, 2012.
Concurrently as we were taking steps to comply
with the August 13 Order to the furthest extent possible, we also appealed from the August 13 Order. We sought a stay of enforcement
of the August 13 Order, but that request was denied, first by a single judge of the appellate court on August 17, 2012 and then
by a full panel of that court on October 2, 2012. We have perfected the appeal from the August 13 Order.
On October 21, 2012, the Former DMG Shareholders
filed a contempt motion in the New York Court against us and Vision Best for failure to transfer US$60.0 million into New York
State by August 21, 2012 as directed in the August 13 Order.
On January 7, 2013, the New York Court issued
an order of civil contempt against us for having failed to comply fully with an August 13, 2012 turnover order requiring us to
post security in connection with prejudgment orders of attachment totaling US$60 million. The turnover order required us to pay
that amount to the New York City Sheriff or enter into an escrow agreement with respect to the funds in the PRC or such an alternative
security arrangement as would be acceptable to the plaintiffs. Although we arranged to transfer to the Sheriff most of the assets
of our subsidiaries located outside the PRC (almost US$4.5 million), we advised the judge that we were not able to transfer additional
assets held by our PRC subsidiaries due to restrictions imposed by the SAFE.
On February 19, 2013 the New York Court entered
a modified order, or the February 14 Order, adding to the August 13 Order’s terms an alternative provision that we may deposit
in escrow, with Jun He Law Offices as escrow agent, an amount of Chinese currency equivalent to US$60.0 million less the amount
of approximately US$4.5 million then on deposit with the New York City Sheriff’s Office, to be held in escrow until a final
judgment in respect of this action or a settlement between the parties had resolved the action. However, Jun He Law Offices informed
the New York Court that they were not willing to serve as escrow agent, and we had been advised that any escrow of Renminbi-denominated
funds to be held in China pursuant to an agreement contemplating the possibility of those funds’ ultimate transfer outside
of China would require approval from SAFE. The contempt sanction was a fine of US$250 plus payment of the fees of the plaintiffs’
attorneys which had been incurred on the contempt application. Those attorneys’ fees were estimated to be US$282,000, and
that amount was fully accrued as of December 31, 2012 and included in accrued expenses and other current liabilities (however,
as explained below, the amount actually awarded in addition to the US$250 fine was US$185,892.31 in plaintiffs’ attorneys’
fees, for a total of US$186,142.31). We filed a notice of appeal from that Contempt Order on March 15, 2013.
On May 16, 2013, the New York Court ordered
us to pay the Former DMG Shareholders US$250 a fine of US$250 plus plaintiffs’ costs and reasonable attorneys’ fees
in the amount of US$185,892.31 within fifteen days.
On June 11, 2013, the Appellate Division, First
Department of the Supreme Court of the State of New York entered a Decision and Order, or the Appellate Division Ruling, determining
appeals and cross-appeals from rulings by the New York Court. The Appellate Division Ruling (a) affirmed the New York Court’s
order of November 3, 2011 granting the Former DMG Shareholders’ motions to dismiss our claims and counter-claims for fraud,
unjust enrichment and declaratory judgment, (b) reversed that part of the New York Court’s order of June 15, 2012 denying
the Former DMG Shareholders’ motion for partial summary judgment on the defense we had asserted to their claims for breach
of contract, including the defense based on allegations of intentional destruction of certain electronic data that was to be conveyed
as part of the sale of Digital Media Group’s assets, and (c) affirmed the New York Court’s denial of the Former DMG
Shareholders’ motion to dismiss the breach of contract and indemnity claims we had asserted, seeking an amount not less
than US$2,785,633, based on alleged inaccuracies in the representations and warranties contained in the Merger Agreement.
With respect to the orders entered by the New
York Court regarding the attachment of our assets, the Appellate Division Ruling (d) reversed the New York Court’s order
entered on November 4, 2011, granting the Former DMG Shareholders’ motion for pre-judgment attachment of our assets, (e)
reversed the New York Court’s order entered on June 15, 2012, granting the Former DMG Shareholders’ motion to confirm
the two ex parte orders of attachment they previously obtained in the aggregate amount of US$60 million, or the Attachment Orders,
and (f) reversed the New York Court’s order entered on August 13, 2012, granting the Former DMG Shareholders’ motion
to compel us to transfer US$60 million into New York State pursuant to the Attachment Orders.
Neither we nor the Former DMG Shareholders
sought leave to appeal the Appellate Division Ruling, which therefore became final. On July 15, 2013, the New York Court entered
an order requested by the Former DMG Shareholders granting summary judgment on two of their causes of action in the amount of
US$60 million plus interest and certain costs and permitting execution of such judgment. On July 26, 2013, the Clerk of the New
York Court entered judgment in favor of the Former DMG Shareholders pursuant to the July 15, 2013 order, directing that they shall
recover from us the sum of US$71,800,047 and have execution thereof, or the New York Judgment.
On July 29, 2013, proceedings were begun in
the Cayman Islands against us for the enforcement of the New York Judgment entered on July 26, 2013, or the Cayman Islands Proceedings
and we received a Writ of Summons.
On August 22, 2013, the Former DMG Shareholders
sought an order from the New York Court directing the Sheriff to pay to them the amount awarded on the contempt motion. On September
10, 2013, the New York Court entered an order directing the Sheriff to pay the Former DMG Shareholders the amount awarded on their
contempt motion, and on September 25, 2013, the Sheriff disbursed funds to the Former DMG Shareholders in the amount of US$186,142.
On October 21, 2013, we appeared before the
New York Court and put a stipulation on the record, approved by the New York Court, agreeing to a continuation of the temporary
stay entered by the New York Court on July 29, 2013, prohibiting the Sheriff from disbursing any additional funds held by him
in escrow until the Former DMG Shareholders had served us with notice of their application for such disbursement of said funds.
At that same court appearance, we voluntarily withdrew without prejudice our application to enforce the Appellate Division Ruling
and to compel the return of remaining funds held by the Sheriff.
On February 14, 2014, we stipulated to the
withdrawal of all appeals in that action pending before the Appellate Division. The stipulation was transmitted to the New York
Court on February 19, 2014.
As of December 31, 2013, the Sheriff held US$4.5
million, pursuant to the August 13 Order, in an interest-bearing account. The amount includes the principal sum transferred by
us and accrued interest. Such amount is included in the restricted cash on our consolidated balance sheets as of December 31,
2012 and 2013.
As a result of the above litigation, penalty
interest on the overdue payables of US$2.1 million and nil and nil were recognized during the years ended December 31, 2013, 2014
and 2015, respectively.
As of December 31, 2013, consideration payable
of US$75.8 million (including US$11.8 million accrued penalty interest on the overdue consideration payable) had been recorded
by us as management’s best estimate of the consideration required to settle the litigation with the Former DMG Shareholders.
On April 30, 2014, we entered into the settlement
arrangement, subscription agreement and note instrument, or collectively, the Settlement Arrangement, with the Former DMG Shareholders
to settle this litigation.
On July 25, 2014, we and the Former DMG Shareholders
jointly announced the closing of the settlement agreement of all litigation actions arising from VisionChina Media’s November
16, 2009 acquisition of Digital Media Group Company Limited from the Selling Shareholders. As of April 28, 2015, all claims in
these pending lawsuits had been dismissed and all closing conditions of the settlement agreement have been met.
As of August 31, 2016, we have failed to comply
with our payment obligations under the Notes and the settlement agreement, and Former DMG Shareholders have declared a default
under the Notes. The default remains uncured by us, and the Former DMG Shareholders have certain rights with respect to replacing
members of the boards of directors of certain subsidiaries in the Group. As of the date of this report, the Former DMG Shareholders
have not exercised such rights.
In July 2016, concerning our breach of the
settlement agreement, Grand Court of Cayman Islands issued a ruling (the “Cayman Ruling”) that ordered us to pay the
Former DMG Shareholders a) approximately $59.4 million (the "Judgment Amount"), b) interest at the rate of 9% per annum
calculated from November 16, 2010 as to $30 million and from November 16, 2011 as to the remaining portion of the Judgment Amount,
until such Judgment Amount is paid in full and c) costs on the indemnity basis to be taxed if not agreed.
We seek to enter into a new settlement agreement
with the Former DMG Shareholders to satisfy the Cayman Ruling. The parties are currently in discussions regarding such settlement
agreement. There can be no assurance that we will be able to obtain a settlement agreement under terms favorable to us, or at
all.
The litigation of Yi Zhao v. Dina Liu, VisionChina
Media Inc., was filed on October 26, 2012, but service of the complaint allegedly had not been made on us until at least August
26, 2013, by delivery to our headquarters in the PRC. The litigation arises out of the dissolution of the marriage between Yi
Zhao and Dina Liu Dan, our former Chief Financial Officer. The primary claims are made against Dina Liu Dan, who was claimed to
have exercised certain stock options in respect of our stock (through a company she allegedly controls, Barrie Holdings) without
sharing the proceeds with her former husband, Yi Zhao. The single claim lodged against us is for aiding and abetting fraud by
Dina Liu Dan, with damages alleged to be approximately US$5,000,000. The underlying fraud claim against Dina Liu Dan, however,
has been dismissed for lack of personal jurisdiction, although a dismissal motion by Barrie Holdings was denied. We filed a motion
to dismiss the single claim on December 24, 2013, which was denied by decision and order dated February 28, 2014. On March 11,
2014, Yi Zhao moved for entry of a default judgment against us, on the basis of our purported failure to answer or move to dismiss
the complaint within the period permitted by law. On April 14, 2014, the motion of Yi Zhao for a default judgment against us was
denied. As of the date of this report, although it is theoretically possible that losses may be incurred, given the uncertainty
of the case, our management believes that it is unlikely that we would incur losses in relation to the law suit by recognizing
a contingent loss under FASB ASC 450-20-25-2. Therefore, as of December 31, 2014, no provision had been made for such losses.
As of the date of this report, this litigation is still pending. There have been no further proceedings in the Zhao Action in
either the trial or appellate courts as of April 25, 2015.
On October 23, 2014, a supplier, Guangzhou
Metro Television Co., Ltd., or Guangzhou Metro, initiated proceedings against us for breach of contract. Guangzhou Metro asserts
that it has sustained damages comprising US$7,693,289 for exclusive media costs, US$2,396,041 for overdue fines, and US$32,168
for electricity charges. On the same day, we also filed a motion against Guangzhou Metro for breach of contract, asserting damages
sustained in a total amount of US$5,959,111, and demanding the release of a concession rights deposit in an amount of US$885,884
together with interest. On November 7, 2014, Guangzhou Metro asserted further claims against us and demanded that penalties in
an amount of US$5,251,772 be assessed against us due to the early termination of our exclusive agency agreement with Guangzhou
Metro.
On October 23, 2015, a supplier, Guangzhou
Communication Information Construction Investment and Operation Co. Ltd. ("Guangzhou Communication") initiated
proceedings against us for breach of contracts. Guangzhou Communication asserts that its total losses are RMB10,421,306
relating to media cost, maintenance and installation fee and RMB480,000 relating to interest charges, respectively. On May 6,
2016, a ruling was issued by Shenzhen Futian District Renmin Court requiring (1) the cooperation agreements signed by us with
Guangzhou Communication are terminated and become ineffective immediately; (2) we are required to pay RMB10,213,218
(equivalent to $1.57 million) and interest. Accruals of US$1.4 million for this litigation and cooperation agreements with
Guangzhou Communication were recorded as of December 31, 2015.
Other than as disclosed above, we currently
are not a party to any other material legal or administrative proceedings, and we are not aware of any material legal or administrative
proceedings threatened against us. We may from time to time become a party to various legal or administrative proceedings arising
in the ordinary course of our business.
Dividend Policy
Since our incorporation, we have never declared
or paid any dividends and we have no present plan to declare or pay any dividends in the near future on our common shares or ADSs.
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 complete discretion as to whether to distribute dividends. Even if our board of directors decides to
pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus,
general financial condition, contractual restrictions and other factors that our board of directors may deem relevant.
We have not experienced any other significant
changes since the date of our audited consolidated financial statements included in this annual report.
|
ITEM 9.
|
THE
OFFER AND LISTING
|
|
A.
|
Offering and Listing Details
|
Our ADSs, each representing one of our common
shares, have been listed on the Nasdaq Global Market since December 6, 2007 under the symbol “VISN.” On December 12,
2012, we effected a change in our ADS to common share ratio from one ADS representing one common share to one ADS representing
20 common shares. For ease of comparison, our ADS trading prices on the Nasdaq Global Market before December 12, 2012 have been
retroactively adjusted to reflect this ratio change. The table below shows, for the periods indicated, the high and low market
prices for our ADSs. The closing price for our ADSs on the Nasdaq Global Market on September 16, 2016 was US$6.83 per ADS.
|
|
Market
Price Per ADS
|
|
|
|
High
|
|
|
Low
|
|
Yearly:
|
|
|
|
|
|
|
|
|
2011
|
|
|
99.8
|
|
|
|
21.6
|
|
2012
|
|
|
37.20
|
|
|
|
3.00
|
|
2013
|
|
|
31.63
|
|
|
|
1.77
|
|
2014
|
|
|
36.71
|
|
|
|
8.55
|
|
2015
|
|
|
19.87
|
|
|
|
7.34
|
|
Quarterly:
|
|
|
|
|
|
|
|
|
First quarter 2014
|
|
|
36.71
|
|
|
|
15.00
|
|
Second quarter 2014
|
|
|
32.00
|
|
|
|
16.60
|
|
|
|
Market
Price Per ADS
|
|
|
|
High
|
|
|
Low
|
|
Third quarter
2014
|
|
|
19.23
|
|
|
|
11.25
|
|
Fourth quarter 2014
|
|
|
12.10
|
|
|
|
8.55
|
|
First quarter 2015
|
|
|
17.43
|
|
|
|
8.53
|
|
Second quarter 2015
|
|
|
19.87
|
|
|
|
11.02
|
|
Third quarter 2015
|
|
|
14.00
|
|
|
|
7.34
|
|
Fourth quarter 2015
|
|
|
11.78
|
|
|
|
7.70
|
|
First quarter 2016
|
|
|
11.29
|
|
|
|
8.05
|
|
Second quarter 2016
|
|
|
10.29
|
|
|
|
6.66
|
|
Monthly:
|
|
|
|
|
|
|
|
|
April 2016
|
|
|
10.29
|
|
|
|
8.73
|
|
May 2016
|
|
|
9.41
|
|
|
|
7.52
|
|
June 2016
|
|
|
8.45
|
|
|
|
6.66
|
|
July 2016
|
|
|
7.49
|
|
|
|
5.49
|
|
August 2016
|
|
|
9.45
|
|
|
|
4.88
|
|
September 2016 (through September 16, 2016)
|
|
|
6.86
|
|
|
|
5.06
|
|
As of June 30, 2016, a total of 3,962,522 ADSs
were outstanding. As of June 30, 2016, a total of 79,250,440 common shares were registered in the name of a nominee of The Bank
of New York Mellon, the depositary for the ADSs. We have no further information as to common shares or ADSs held, or beneficially
owned, by U.S. persons.
Not Applicable.
Our ADSs, each representing 20 of our common
shares, have been listed on the Nasdaq Global Market since December 6, 2007 under the symbol “VISN.”
Not Applicable.
Not Applicable.
Not Applicable.
|
ITEM 10.
|
ADDITIONAL
INFORMATION
|
Not Applicable.
|
B.
|
Memorandum and Articles of
Association
|
We incorporate by reference into this annual
report the description of our amended and restated memorandum of association contained in our F-1 registration statement (File
No. 333-147275), as amended, initially filed with the SEC on November 29, 2007. Our shareholders adopted our amended and restated
memorandum and articles of association by Special Resolution passed on November 8, 2007 and effective upon completion of our initial
public offering of common shares represented by our ADSs.
We have not entered into any material contracts
other than in the ordinary course of business and other than those described in “Item 4. Information on the Company”
or elsewhere in this annual report.
Foreign Currency Exchange
Foreign currency exchange regulation in China
is primarily governed by the following rules:
|
·
|
Foreign Currency
Administration Rules (1996), as amended, or the Exchange Rules; and
|
|
·
|
Administration
Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration
Rules.
|
Under the Exchange Rules, the Renminbi is convertible
for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange
transactions. However, conversion of Renminbi for capital account items, such as direct investments, loans, security investments
and repatriation of investments, is still subject to the approval of the SAFE.
Under the Administration Rules, foreign-invested
enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business
after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from the
SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals
by the Ministry of Commerce, the SAFE and the National Development and Reform Commission.
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. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except
for stamp duties which may be applicable on instruments executed in, or brought within, the jurisdiction of the Cayman Islands.
The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by us. There are no
exchange control regulations or currency restrictions in the Cayman Islands.
Material United States Federal Income Tax Consequences
The following summary describes the material
United States federal income tax consequences of the ownership of our common shares and ADSs as of the date hereof. The discussion
is applicable to United States Holders (as defined below) who hold our common shares or ADSs as capital assets. As used herein,
the term “United States Holder” means a beneficial owner of a common share or ADS that is for United States federal
income tax purposes:
|
·
|
an individual
citizen or resident of the United States;
|
|
·
|
a corporation
(or other entity treated as a corporation for United States federal income tax purposes)
created or organized in or under the laws of the United States, any state thereof or
the District of Columbia;
|
|
·
|
an estate the
income of which is subject to United States federal income taxation regardless of its
source; or
|
|
·
|
a trust if it
(1) is subject to the primary supervision of a court within the United States and one
or more United States persons have the authority to control all substantial decisions
of the trust or (2) has a valid election in effect under applicable United States Treasury
regulations to be treated as a United States person.
|
This summary does not represent a detailed
description of the United States federal income tax consequences applicable to you if you are subject to special treatment under
the United States federal income tax laws, including if you are:
|
·
|
a dealer in securities
or currencies;
|
|
·
|
a financial institution;
|
|
·
|
a regulated investment
company;
|
|
·
|
a real estate
investment trust;
|
|
·
|
a tax-exempt
organization;
|
|
·
|
a person holding
our common shares or ADSs as part of a hedging, integrated or conversion transaction,
a constructive sale or a straddle;
|
|
·
|
a trader in securities
that has elected the mark-to -market method of accounting for your securities;
|
|
·
|
a person liable
for alternative minimum tax;
|
|
·
|
a person who
owns or is deemed to own 10% or more of our voting stock;
|
|
·
|
a partnership
or other pass-through entity for United States federal income tax purposes; or
|
|
·
|
a United States
Holder whose “functional currency” is not the United States dollar.
|
The discussion below is based upon the provisions
of the Internal Revenue Code of 1986, as amended, or the Code, and regulations, rulings and judicial decisions thereunder as of
the date hereof, and such authorities may be replaced, revoked or modified so as to result in United States federal income tax
consequences different from those discussed below. In addition, this summary is based, in part, upon representations made by the
depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance with
their terms.
If a partnership holds our common shares or
ADSs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership.
If you are a partner of a partnership holding our common shares or ADSs, you should consult your tax advisors.
This summary does not contain a detailed description
of all the United States federal income tax consequences to you in light of your particular circumstances and does not address
the Medicare tax on net investment income, or the effects of any state, local or non-United States tax laws.
You should consult
your own tax advisors concerning the United States federal income tax consequences to you of owning or disposing of our ordinary
shares or ADSs in light of your particular situation as well as any consequences arising under the laws of any other taxing jurisdiction
.
ADSs
If you hold ADSs, for United States federal
income tax purposes, you generally will be treated as the owner of the underlying common shares that are represented by such ADSs.
Accordingly, deposits or withdrawals of common shares for ADSs will not be subject to United States federal income tax.
Taxation of Dividends
Subject to the discussion under “—Passive
Foreign Investment Company” below, the gross amount of distributions on the ADSs or common shares (including any amounts
withheld to reflect PRC withholding taxes) will be taxable as dividends, to the extent paid out of our current or accumulated
earnings and profits, as determined under United States federal income tax principles. Such income (including withheld taxes)
will be includable in your gross income as ordinary income on the day actually or constructively received by you, in the case
of the common shares, or by the depositary, in the case of ADSs. Such dividends will not be eligible for the dividends received
deduction allowed to corporations under the Code.
With respect to non-corporate United States
Holders, certain dividends received from a qualified foreign corporation may be subject to reduced rates of taxation. A foreign
corporation is treated as a qualified foreign corporation with respect to dividends received from that corporation on shares (or
ADSs backed by such shares) that are readily tradable on an established securities market in the United States. United States
Treasury Department guidance indicates that our ADSs (which are listed on the Nasdaq Global Market), but not our common shares,
are readily tradable on an established securities market in the United States. Thus, we believe that dividends we pay on our common
shares that are represented by ADSs, but not on our common shares that are not so represented, currently meet the conditions required
for the reduced tax rates. There can be no assurance that our ADSs will be continue to be readily tradable on an established securities
market in later years (or that our common shares will be readily tradable on an established securities market in any given year).
A qualified foreign corporation also includes a foreign corporation that is eligible for the benefits of certain income tax treaties
with the United States. In the event that we are deemed to be a Chinese (or PRC) “resident enterprise” under the PRC
tax law, we may be eligible for the benefits of the income tax treaty between the United States and the PRC, and if we are eligible
for such benefits, dividends we pay on our common shares, regardless of whether such shares are represented by ADSs, would be
subject to the reduced rates of taxation. Non-corporate United States Holders that do not meet a minimum holding period requirement
during which they are not protected from the risk of loss or that elect to treat the dividend income as “investment income”
pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a
qualified foreign corporation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated
to make related payments with respect to positions in substantially similar or related property. This disallowance applies even
if the minimum holding period has been met. You should consult your own tax advisors regarding the application of these rules
to your particular circumstances.
Non-corporate United States Holders will not
be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the taxable year in which such
dividends are paid or in the preceding taxable year.
The amount of any dividend paid in Renminbi
will equal the United States dollar value of the Renminbi received calculated by reference to the exchange rate in effect on the
date the dividend is actually or constructively received by you, in the case of the common shares, or by the depositary, in the
case of ADSs, regardless of whether the Renminbi are actually converted into United States dollars. If the Renminbi received as
a dividend are converted into United States dollars on the date they are received, you generally will not be required to recognize
foreign currency gain or loss in respect of the dividend income. If the Renminbi received as a dividend are not converted into
United States dollars on the date of receipt, you will have a basis in the Renminbi equal to their United States dollar value
on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the Renminbi will be treated
as United States source ordinary income or loss for foreign tax credit limitation purposes.
In the event that we are deemed to be a Chinese
(or PRC) “resident enterprise” under the PRC tax law, you may be subject to PRC withholding taxes on dividends paid
to you with respect to the ADSs or common shares. In that case, however, you may be able to obtain a reduced rate of PRC withholding
taxes under the treaty between the United States and the PRC if certain requirements are met. In addition, subject to certain
conditions and limitations, PRC withholding taxes on dividends, if any, may be treated as foreign taxes eligible for credit or
deduction against your United States federal income tax liability. The election to receive a credit or deduction must be made
annually, and applies to all foreign taxes for the applicable tax year. The limitation on foreign taxes eligible for credit is
calculated separately with respect to specific classes of income. For purposes of calculating the foreign tax credit, dividends
paid on the ADSs or common shares will be treated as foreign-source income and will generally constitute passive category income.
Furthermore, in certain circumstances, if you have held the ADSs or common shares for less than a specified minimum period during
which you are not protected from risk of loss, or are obligated to make payments related to the dividends, you will not be allowed
a foreign tax credit for any PRC withholding taxes imposed on dividends paid on the ADSs or common shares. The rules governing
the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit
given your particular circumstances.
To the extent that the amount of any distribution
exceeds our current and accumulated earnings and profits for a taxable year, as determined under United States federal income
tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis
of the ADSs or common shares (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by you
on a subsequent disposition of the ADSs or common shares), and the balance in excess of adjusted basis will be taxed as capital
gain recognized on a sale or exchange. However, we do not expect to keep earnings and profits in accordance with United States
federal income tax principles. Therefore, you should expect that a distribution will generally be treated as a dividend (as discussed
above).
Passive Foreign Investment Company
Based on our financial statements, relevant
market data, and the composition of our income and valuation of our assets, including goodwill, we do not believe that we were
a PFIC for 2014, although there can be no assurance in this regard. In general, we will be a PFIC for any taxable year in which:
|
·
|
at least 75%
of our gross income is passive income, or
|
|
·
|
at least 50%
of the value (determined based on a quarterly average) of our assets is attributable
to assets that produce or are held for the production of passive income.
|
For this purpose, passive income generally
includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or
business and not derived from a related person). If we own at least 25% (by value) of the stock of another corporation, we will
be treated, for purposes of the PFIC tests, as owning our proportionate share of the other corporation’s assets and receiving
our proportionate share of the other corporation’s income.
The determination of whether we are a PFIC
is made annually. Accordingly, it is possible that we may become a PFIC in the current or any future taxable year due to changes
in our asset or income composition. Because we have valued our goodwill based on the market value of our equity, a decrease in
the price of our ADSs may also result in our becoming a PFIC. This particular risk may have been heightened due to the recent
volatility in the price of our ADSs. Moreover, there exist substantial uncertainties regarding the application of the Code and
regulations thereunder with respect to the determination of the character of certain classes of assets. Although we believe we
have reasonably applied the Code and regulations thereunder, there can be no assurance that the Internal Revenue Service will
follow the same application. In addition, there exist substantial uncertainties regarding the application, interpretation and
enforcement of relevant current and future PRC laws and regulations and their potential effect on our corporate structure and
contractual arrangements with certain of our consolidated affiliated PRC entities. Further, even if the uncertainties as to PRC
laws and regulations did not exist, there are also substantial uncertainties as to the treatment of our corporate structure and
ownership of these consolidated affiliated PRC entities for United States federal income tax purposes. If it is determined that
we do not own the stock of the consolidated affiliated PRC entities for U.S. federal income tax purposes, we would likely be treated
as a PFIC for 2014 and any taxable year thereafter. If we are a PFIC for any taxable year during which you hold our ADSs or common
shares, you will be subject to special tax rules discussed below.
If we are a PFIC for any taxable year during
which you hold our ADSs or common shares, you will be subject to special tax rules with respect to any “excess distribution”
received and any gain realized from a sale or other disposition, including a pledge, of ADSs or common shares. Distributions received
in a taxable year that are greater than 125% of the average annual distributions received during the shorter of the three preceding
taxable years or your holding period for the ADSs or common shares will be treated as excess distributions. Under these special
tax rules:
|
·
|
the excess distribution
or gain will be allocated ratably over your holding period for the ADSs or common shares,
|
|
·
|
the amount allocated
to the current taxable year, and any taxable year prior to the first taxable year in
which we were a PFIC, will be treated as ordinary income, and
|
|
·
|
the amount allocated
to each other year will be subject to tax at the highest tax rate in effect for that
year and the interest charge generally applicable to underpayments of tax will be imposed
on the resulting tax attributable to each such year.
|
In addition, non-corporate United States Holders
will not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the taxable year in which
such dividends are paid or in the preceding taxable year. You will be required to file Internal Revenue Service Form 8621 if you
hold our ADSs or common shares in any year in which we are classified as a PFIC.
If we are a PFIC for any taxable year during
which you hold our ADSs or common shares and any of our non-United States subsidiaries is also a PFIC, a United States Holder
would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application
of these rules. You are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.
In certain circumstances, in lieu of being
subject to the excess distribution rules discussed above, you may make an election to include gain on the stock of a PFIC as ordinary
income under a mark-to -market method, provided that such stock is regularly traded on a qualified exchange. Under this method,
any difference between the stock’s fair market value and its adjusted basis at the end of the year is accounted for by either
an inclusion in income or a deduction from income, as described below. Under current law, the mark-to -market election may be
available to holders of ADSs because the ADSs are listed on the Nasdaq Global Market, which constitutes a qualified exchange,
although there can be no assurance that the ADSs will be “regularly traded” for purposes of the mark-to -market election.
It should be noted that only the ADSs, and not the common shares, are listed on the Nasdaq Global Market. Consequently, if you
are a holder of common shares that are not represented by ADSs, you generally will not be eligible to make a mark-to -market election
if we are or were to become a PFIC. If you make an effective mark-to -market election, you will include in each year as ordinary
income the excess of the fair market value of your ADSs at the end of the year over your adjusted tax basis in the ADSs. You will
be entitled to deduct as an ordinary loss in each such year the excess of your adjusted tax basis in the ADSs over their fair
market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the
mark-to -market election. If you make an effective market -to -market election, any gain you recognize upon the sale or other
disposition of your ADSs will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent
of the net amount previously included in income as a result of the mark-to -market election.
Your adjusted tax basis in the ADSs will be
increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to -market rules.
If you make a mark-to -market election it will be effective for the taxable year for which the election is made and all subsequent
taxable years unless the ADSs are no longer regularly traded on a qualified exchange or the Internal Revenue Service consents
to the revocation of the election. You are urged to consult your tax advisor about the availability of the mark-to -market election,
and whether making the election would be advisable in your particular circumstances.
Alternatively, a U.S. investor in a PFIC generally
can mitigate the consequences of the rules described above by electing to treat the PFIC as a “qualified electing fund”
under Section 1295 of the Code. However, this option is not available to you because we do not intend to comply with the requirements
necessary to permit you to make this election. You are urged to consult your tax advisors concerning the United States federal
income tax consequences of holding ADSs or common shares if we are considered a PFIC in any taxable year.
Taxation of Capital Gains
For United States federal income tax purposes,
you will recognize taxable gain or loss on any sale or exchange of ADSs or common shares in an amount equal to the difference
between the amount realized for the ADSs or common shares and your tax basis in the ADSs or common shares. Subject to the discussion
under “—Passive Foreign Investment Company” above, such gain or loss will generally be capital gain or loss.
Capital gains of non-corporate holders (including individuals) derived with respect to capital assets held for more than one year
are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss recognized
by you will generally be treated as United States source gain or loss for foreign tax credit limitation purposes. However, in
the event that we are deemed to be a PRC resident enterprise under the PRC tax law and gain from the disposition of the ADSs or
common shares is subject to tax in the PRC, if you are eligible for the benefits of the treaty between the United States and the
PRC, you may elect to treat such gain as PRC source. If you are not eligible for the benefits of the Treaty or you fail to make
the election to treat any gains as PRC source, then you may not be able to use the foreign tax credit arising from any PRC tax
imposed on the disposition of our ADSs or common share unless such credit can be applied (subject to applicable limitations) against
tax due on other income treated as derived from foreign sources. You are urged to consult your tax advisors regarding the tax
consequences if PRC tax is imposed on gain on a disposition of our ADSs or common shares, including the availability of the foreign
tax credit under your particular circumstances.
Information Reporting and Backup Withholding
In general, information reporting will apply
to dividends in respect of our ADSs or common shares and the proceeds from the sale, exchange or redemption of our ADSs or common
shares that are paid to you within the United States (and in certain cases, outside the United States), unless you are an exempt
recipient. A backup withholding tax may apply to such payments if you fail to provide a taxpayer identification number or certification
of other exempt status or fail to report in full dividend and interest income.
Any amounts withheld under the backup withholding
rules will be allowed as a refund or a credit against your United States federal income tax liability provided the required information
is furnished to the Internal Revenue Service in a timely manner.
|
F.
|
Dividends and Paying Agents
|
Not Applicable.
Not Applicable.
We have filed this annual report, including
exhibits, with the SEC. As allowed by the SEC, in Item 19 of this annual report, we incorporate by reference certain information
we filed with the SEC. This means that we can disclose important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is considered to be part of this annual report.
You may read and copy this annual report, including
the exhibits incorporated by reference in this annual report, at the SEC’s Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549 and at the SEC’s regional offices in New York, New York and Chicago, Illinois. You also can request
copies of this annual report, including the exhibits incorporated by reference in this annual report, upon payment of a duplicating
fee, by writing information on the operation of the SEC’s Public Reference Room.
The SEC also maintains a website at www.sec.gov
that contains reports, proxy statements and other information regarding registrants that file electronically with the SEC. Our
annual report and some of the other information submitted by us to the SEC may be accessed through this web site.
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.
Our financial statements have been prepared
in accordance with U.S. GAAP.
We will furnish our shareholders with annual
reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity
with U.S. GAAP.
|
I.
|
Subsidiary Information
|
For a listing of our subsidiaries, see “Item
4. Information on the Company — C. Organizational Structure”
|
ITEM 11.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Foreign Exchange Risk
Substantially all of our revenues, costs and
expenses are denominated in Renminbi. Although the conversion of the Renminbi is highly regulated in China, the value of the Renminbi
against the value of the U.S. dollar or any other currency nonetheless may fluctuate and be affected by, among other things, changes
in China’s political and economic conditions. Under the currency policy in effect in China today, the value of the Renminbi
is permitted to fluctuate within a narrow band against a basket of certain foreign currencies. China is currently under significant
international pressure to liberalize this government currency policy, and if such liberalization were to occur, the value of the
Renminbi could appreciate or depreciate against the U.S. dollar.
We use the U.S. dollar as the reporting currency
for our financial statements. Our company’s functional currency is the U.S. dollar and the functional currency of our PRC
subsidiaries is the Renminbi. All of our subsidiary’s transactions in currencies other than the Renminbi during the year
are recorded at the exchange rates prevailing on the relevant dates of such transactions. Monetary assets and liabilities of our
subsidiary existing at the balance sheet date denominated in currencies other than the Renminbi are re -measured at the exchange
rates prevailing on such date. Exchange differences are recorded in our consolidated statements of operations. Fluctuations in
exchange rates also may affect our consolidated financial statements and operations. For example, to the extent that we need to
convert U.S. dollars received in our public offering in August 2008 into Renminbi for our operations, appreciation of the Renminbi
against the U.S. dollar would have an adverse effect on the amount of Renminbi that we receive from the conversion. Conversely,
if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our common shares or ADSs
or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S.
dollar amounts available to us. Except for certain cash balances, majority of our transactions are denominated in Renminbi. Considering
the amount of our cash and cash equivalents balance as of December 31, 2015, a 1.0% change in the exchange rates between the Renminbi
and the U.S. dollar will result in an increase or decrease of US$0.1 million for our total amount of cash balance, with a corresponding
increase or decrease in accumulated comprehensive income as of December 31, 2015.
We do not believe that we currently have any
significant direct foreign exchange risk and have not used any derivative financial instruments to hedge our exposure to foreign
exchange risk.
Interest Rate Risk
Our risk exposure to changes in interest rates
relates primarily to the interest income generated by cash deposited in interest-bearing savings accounts and interest expenses
arising from bank borrowings.
In June 2012, China Digital Technology (Shenzhen)
Co., Ltd, our wholly owned subsidiary, obtained a RMB57 million Renminbi-denominated secured revolving credit facility which expired
on June 24, 2013 granted by Bank of China (Shenzhen Branch). This secured credit facility was secured by restricted cash of US$10.0
million. This secured credit facility was available for general corporate working capital purposes at an interest rate of the
Benchmark Rate. As of December 31, 2015, there were no outstanding borrowings under this credit facility.
In January 2013, we obtained a RMB150.0
million Renminbi-denominated secured revolving credit facility, or the Existing Credit Facility, granted by China
Construction Bank (Shenzhen Branch), or CCB Shenzhen, for our variable interest entity, VisionChina Media Group, which
facility expired on January 13, 2014. This revolving credit facility was secured by VisionChina Media Group’s accounts
receivable. This credit facility was available for general corporate working capital purposes at an interest rate of 160% of
the Benchmark Rate. This credit facility contained a restrictive financial covenant that required VisionChina Media Group to
maintain a leverage ratio of no higher than 65%. Violation of this financial covenant could have resulted in a default under
the revolving credit facility, which would have permitted CCB Shenzhen to terminate the revolving credit facility and require
immediate repayment from us of any outstanding loans advanced. In January 2014, CCB Shenzhen granted a new credit facility to
replace the Existing Credit Facility, which expired on January 9, 2015. The total amount of the credit facility was RMB130.0
million. As of December 31, 2015, there were no outstanding borrowings under this credit facility.
In January 2015, we were granted a secured
revolving credit facility, or the Credit Facility, from China Construction Bank (Shenzhen branch), or the CCB, until January 26,
2016 for our variable interest entity, VisionChina Media Group. The total amount of the Credit Facility is RMB100.0 million (approximately
US$16.3 million). The Credit Facility is secured by the accounts receivable of VisionChina Media Group and the interest rate is
in a range of 99.54% to 103.46% of the loan prime rate in the PRC. As of December 31, 2015, there were no outstanding borrowings
against this credit facility.
On April 30, 2014, we issued US$58 million
of convertible promissory notes, or the Notes, to the Former DMG Shareholders. We will redeem the Notes in instalments on each
anniversary of the issue date from the first to the sixth anniversaries of the issue date, in amounts of US$4 million, US$5 million,
US$13.5 million, US$16.5 million, US$16 million and US$3 million, respectively. Interest accrues on the Notes at a rate equal
to our company’s actual weighted average borrowing rate per annum. Our company’s weighted average borrowing rate as
of December 31, 2015 was 6.772%.
On February 22, 2016, we entered into another
RMB80 million (equivalent to US$12.2 million) secured revolving credit facility granted by CCB (SZ) with interest rate in a range
between 99.615% to 102.66% of the Loan Prime Rate in the PRC. As of August 31, 2015, we have fully utilized and drawn down the
credit facility, and the interest rate on our outstanding balance is 5.44%.
Our management monitors the banks’ prime
rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources
of funds. Historically, we have not been exposed to material risks due to changes in interest rates; however, our future interest
income may decrease, and interest expenses on our borrowings may increase, due to changes in market interest rates. We have not
used, and do not expect to use in the future, any derivative financial instruments to hedge our exposure to interest rate risk.
Inflation
In recent years, China has not experienced
significant inflation, and thus inflation has not had a material impact on our results of operations. According to the National
Bureau of Statistics of China, the change in the Consumer Price Index in China was 2.6%, 2.0% and 1.4% in 2013, 2014 and
2015, respectively.
|
ITEM 12.
|
DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
|
Not Applicable
Not Applicable
Not Applicable
|
D.
|
American Depositary Shares
|
Depositary Fees
Under the terms of the deposit agreement for
our ADSs, an ADS holder may have to pay the following service fees to the depositary:
Service
|
|
Fees
|
Issuance
of ADSs
|
|
Up
to US$0.05 per ADS issued
|
Cancellation
of ADSs
|
|
Up
to US$0.05 per ADS cancelled
|
Distribution
of cash dividends or other cash distributions
|
|
Up
to US$0.02 per ADS held
|
Distribution
of ADSs pursuant to stock dividends, free stock distributions or exercises of rights
|
|
Up
to US$0.05 per ADS held
|
Distribution
of securities other than ADSs or rights to purchase additional ADSs
|
|
Up
to US$0.05 per ADS held
|
Depositary Charges
In addition, an ADS holder will be responsible
for the following charges:
|
·
|
taxes and other
governmental charges;
|
|
·
|
such registration
fees as may from time to time be in effect for the registration of common shares or other
deposited securities on the share register and applicable to transfers of common shares
or other deposited securities to or from the name of the custodian, the depositary or
any nominees upon the making of deposits and withdrawals, respectively;
|
|
·
|
such cable, telex
and facsimile transmission and delivery expenses as are expressly provided in the deposit
agreement to be at the expense of ADS holders and beneficial owners of ADSs;
|
|
·
|
the expenses
and charges incurred by the depositary in the conversion of foreign currency; and
|
|
·
|
the fees and
expenses incurred by the depositary, the custodian or any nominee in connection with
the servicing or delivery of deposited securities.
|
Depositary fees payable upon the issuance and
cancellation of ADSs are typically paid to the depositary by the brokers (on behalf of their clients) receiving the newly-issued
ADSs from the depositary and by the brokers (on behalf of their clients) delivering the ADSs to the depositary for cancellation.
The brokers in turn charge these transaction fees to their clients.
Depositary fees payable in connection with
distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary to the holders
of record of ADSs as of the applicable ADS record date. The depositary fees payable for cash distributions are generally deducted
from the cash being distributed. In the case of distributions other than cash (i.e. stock dividends, rights offerings), the depositary
charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in
the name of the investor (whether certificated or un-certificated in direct registration), the depositary sends invoices to the
applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts via the central clearing and
settlement system, The Depository Trust Company, or DTC, the depositary generally collects its fees through the systems provided
by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their
DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’
accounts the amount of the fees paid to the depositary.
In the event of refusal to pay the depositary
fees, the depositary may, under the terms of the deposit agreement, refuse the requested service until payment is received or
may set off the amount of the depositary fees from any distribution to be made to the ADS holder.
The fees and charges ADS holders may be required
to pay may vary over time and may be changed by us and by the depositary. ADS holders will receive prior notice of such changes.
Payments by Depositary
In 2015, we did not receive any payments from
The Bank of New York Mellon, the depositary bank for our ADR program.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES
|
|
|
VisionChina Media Inc. (the “Company”)
was incorporated under the laws of the Cayman Islands on January 27, 2006. The Company,
its subsidiaries and variable interest entities (“VIEs”) (collectively, the
“Group”) sell advertising time on its out-of-home digital television networks
and provide passenger information and direction system (“PIDS”) in the People’s
Republic of China (the “PRC”). The Group also provides Wi-Fi Internet
services on buses under the brand name “VIFI” in various cities in the PRC.
With on-bus Wi-Fi services, commuters are able to access content provided by the
VIFI platform, including news, music, video and App downloading, as well as web browsing
and communication capabilities via social media platforms. The Group’s principal
geographic market is in the PRC.
|
|
|
The Company holds its interest in the
operating subsidiaries and investees through two holding companies, (i) China Digital
Technology Consulting Co., Ltd. (“CDTC”), which is a wholly owned company
established in the PRC on March 9, 2006, and (ii) Digital Media Group Company Limited
(“DMG”) which was acquired by the Company in January 2010 and is incorporated
under the laws of the British Virgin Islands on May 13, 2003. The Company does not conduct
any substantive operations of its own, but conducts its primary business operations through
CDTC’s VIE, VisionChina Media Group Limited (“VisionChina Media Group”)
and VisionChina Media Group’s subsidiaries and investees. VisionChina Media Group
was established under the laws of the PRC on April 8, 2005. DMG does not conduct any
substantive operations of its own, but conducts its primary business through its wholly-owned
subsidiaries, DMG (HK) Co., Limited (“DMG HK”), Beijing Eastlong Technology
Development Co., Ltd. (“Eastlong Technology”), Eastlong Technology’s
VIE, Beijing Eastlong Advertising Co., Ltd. (“Eastlong Advertising”), and
Eastlong Advertising’s subsidiaries and equity investees.
|
|
|
The VIEs contractual arrangements
|
|
|
Chinese laws and regulations prohibit
or restrict foreign ownership of media content and advertising business. To comply with
these foreign ownership restrictions, the Group invests in ventures with local television
stations and provides advertising services on its out-of-home digital television networks
in the PRC through VisionChina Media Group and Eastlong Advertising, which are PRC legal
entities established by co-founders of the Company and DMG, respectively.
|
|
|
Applicable PRC laws and regulations prohibit
foreign investment in and ownership of mobile advertising agencies. As a Cayman Islands
corporation, the Company is deemed a foreign legal person under PRC laws.
|
|
|
To provide the Company with effective
control over the two VIEs, namely VisionChina Media Group and Eastlong Advertising, and
the ability to receive substantially all of the economic benefits of the VIEs and their
subsidiaries, a series of contractual arrangements were entered amongst:
|
|
·
|
CDTC,
VisionChina Media Group and direct equity holders of VisionChina Media Group; and
|
|
·
|
Eastlong
Technology, Eastlong Advertising and direct equity holders of Eastlong Advertising.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES
- continued
|
|
|
Agreements that transfer economic benefits
to CDTC and Eastlong Technology:
|
|
|
Technology and management services
agreement
|
|
|
Pursuant to the technology and management
service agreement entered into on February 15, 2007 between CDTC and VisionChina Media
Group, CDTC provides technology consulting and management services related to the business
operations of VisionChina Media Group. As consideration for such services, VisionChina
Media Group has agreed to pay the service fees specified by CDTC in the payment notices
it provides to VisionChina Media Group from time to time. The payment notices shall enclose
charge lists, setting forth the services provided, the hours spent in performing the
services, and the applicable service charge rates. The charge rates, which are annexed
to the agreement, may be adjusted pursuant to a supplemental agreement entered into by
the parties. If VisionChina Media Group objects to the service fees set forth in a payment
notice, both parties shall mutually agree upon the service fees to be paid by the VisionChina
Media Group. In addition, VisionChina Media Group shall reimburse the Wholly Foreign
Owned Enterprise (“WFOE”) for out-of-pocket expenses incurred in connection
with providing the services by CDTC. The service fee shall be calculated using a rate
as mutually agreed by CDTC and VisionChina Media Group multiplied by average numbers
of screens put into use in the digital mobile television advertising network operated
by VisionChina Media Group during each of the calendar year. The term of this agreement
is 25 years, which may be terminated at any time or extended by CDTC at its discretion.
In the event of a default under this agreement, the non-defaulting party can terminate
this agreement.
|
|
|
Domain Name License Agreement
|
|
|
Pursuant to the domain name license agreement
entered into on February 15, 2007 between CDTC and VisionChina Media Group, CDTC grants
VisionChina Media Group the exclusive right to use its domain names, in exchange for
a royalty fee equal to 0.2% of the gross annual revenues of VisionChina Media Group.
The parties may mutually agree to adjust the royalty fee within the first ten working
days of any year during the term of the agreement. The agreement has a term of 25 years,
which may be terminated at any time or extended by CDTC at its discretion. In the event
of a default under this agreement, the non-defaulting party can terminate this agreement.
|
|
|
Business Cooperation Agreement
|
|
|
Pursuant to the business cooperation agreement
entered into on February 22, 2005 between Eastlong Technology and Eastlong Advertising,
Eastlong Advertising shall operate an out-of-home advertising platform and selling advertisements
or value added services on that platform, which it may do by setting up joint ventures
with third parties or by other feasible means. The cooperation method by which Eastlong
Technology and Eastlong Advertising engage in business projects shall vary, with Eastlong
Technology either providing technology and consulting services to Eastlong Advertising,
Eastlong Advertising subletting work to Eastlong Technology, or Eastlong Technology and
Eastlong Advertising jointly engaging in projects, depending on PRC legal and regulatory
requirements, including qualification or licensing requirements, and the requirements
of third-party project owners. Under each cooperation method, Eastlong Technology and
Eastlong Advertising shall receive 90% and 10%, respectively, of the project profits
and each shall be reimbursed, as applicable, for its out-of-pocket expenses. Eastlong
Technology shall be the exclusive and sole cooperating partner of Eastlong Advertising,
and Eastlong Advertising shall not engage in any business other than that it conducts
in cooperation with Eastlong Technology without Eastlong Technology’s prior written
consent. The term of this agreement commences on February 22, 2005 and remains in effect
unless Eastlong Technology ceases to exist. This agreement can be terminated if (i) by
mutual agreement by both parties (ii) if either party is declared legally bankrupt and
the other party requests termination of the agreement or (iii) Eastlong Technology is
unable to provide any services to Eastlong Advertising for more than three consecutive
years due to force majeure.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES
- continued
|
|
|
Agreements that transfer economic benefits
to CDTC and Eastlong Technology:
- continued
|
|
|
CDTC and Eastlong Technology historically
agreed to waive the obligation of the respective VIEs to pay their service and royalty
fees because (i) the Group determined to retain funds in the respective VIEs for network
expansion and media asset acquisition in China and (ii) each of the VIEs was still in
accumulated net loss position in accordance with the accounting principles generally
accepted in the United States of America (“US GAAP”). The WFOE and VIEs mutually
agreed on the terms of the fee waivers and such fee waivers have been approved by the
respective board of directors of CDTC and VisionChina Media Group.
|
|
|
The service agreements (namely, the technology
and management services agreement, the domain name license agreement and the business
cooperation agreement) are renewable by CDTC or Eastlong Technology, as applicable, at
its discretion. The technology and management services agreement and the domain name
license agreement require mutual consent for any adjustments to the fee under the respective
agreements. Given the structure of the Company and its control over the VIEs as explained
below, the mutual consent requirement is non-substantive and the Company effectively
maintains the ability to determine the amount and timing of fees charged of the service
agreements so that substantially all of the profits of the VIEs can be transferred to
CDTC or Eastlong Technology. The above service agreements can convey substantially all
of the economic benefits of the VIEs to CDTC and Eastlong Technology because CDTC and
Eastlong Technology can unilaterally determine the amount and timing of the fees charged.
|
|
|
The Company has the power to direct the
activities of VIEs that most significantly impact VIEs’ economic performance, such
as (1) determining pricing for advertising services, (2) hiring and conducting performance
evaluations of employees, (3) managing sales activities, (4) conducting marketing activities,
(5) establishing the policy for payment of cash from the VIEs to the WFOEs, including
determination of the amount of the fees to be paid under the agreements between the VIEs
and the WFOEs, and (6) determining whether to expand or terminate advertising platforms.
As further described below, Mr. Limin Li and Ms. Yanqing Liang, the direct equity holders
of VisionChina Media Group, has each signed an irrevocable proxy letter pursuant to which
he/she has granted CDTC the right to exercise all of his/her voting rights as an equity
holder of VisionChina Media Group. The proxy letters provide the Company with the ability
to control and exercise the voting and governance rights that the equity holders of VisionChina
Media Group would otherwise possess through their equity ownership interests in VisionChina
Media Group. In addition, as further described below, the option agreements also provide
the Company with the ability to control and exercise the voting and governance rights
of the equity holders of VisionChina Media Group and Eastlong Advertising by having CDTC
and Eastlong Technology exercise their substantive kick out rights to replace the equity
holders of these consolidated affiliated entities. The terms of the option agreements
are currently exercisable and legally enforceable under current PRC laws and regulations.
A simple majority vote of the Company’s board of directors is required to pass
a resolution to exercise the Company’s kick-out rights under the option agreements,
and no consent of the VIEs’ equity holders is required. The board of directors
of the Company comprises five directors, including Mr. Limin Li and Ms. Yanqing Liang,
and therefore Mr. Limin Li and Ms. Yanqing Liang do not have veto power over such majority
vote. The Company’s right under the option agreements gives the Company the power
to control the equity holders of the VIEs and thus the power to direct the activities
that most significantly impact the VIEs’ economic performance.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES
- continued
|
|
|
Agreements that provide Company effective
control over VisionChina Media Group and Eastlong Advertising:
|
|
|
CDTC entered into a loan agreement and
amendments thereto with Mr. Limin Li and Ms. Yanqing Liang, direct equity holders of
VisionChina Media Group, on March 30, 2006 and February 15, 2007, which allows
the Company to capitalize the PRC operating affiliates in VisionChina Media Group and
facilitates the establishment of the current corporate structure in VisionChina Media
Group. CDTC made an interest-free loan of RMB50 million to the direct equity holders
of VisionChina Media Group. The loan can be repaid only with the proceeds from the transfer
of equity interest in VisionChina Media Group owned by the direct equity holders to CDTC
or to another person designated by CDTC pursuant to the Option Agreement as discussed
below. In the event of a default under this agreement, the non-defaulting party can terminate
this agreement.
|
|
|
Eastlong Technology entered into a series
of loan agreements and amendments thereto with Mr. Qijun Men and Mr. Haifeng Wang, direct
equity holders of Eastlong Advertising, in February 2005, March 2007 and May 2008,
respectively, which allowed Eastlong Technology to capitalize its PRC operating affiliates
and facilitates the establishment of the corporate structure. Eastlong Technology made
an interest-free loan of RMB20 million to the direct equity holders of Eastlong
Advertising. This loan can only be repaid by transferring the equity interest in Eastlong
Advertising owned by the direct equity holders to Eastlong Technology or to another person
designated by Eastlong Technology. In the event of a default under this agreement, the
non-defaulting party can terminate this agreement.
|
|
|
Mr. Limin Li and Ms. Yanqing Liang, direct
equity holders of VisionChina Media Group, signed certain proxy letters on February 15,
2007, pursuant to which Mr. Limin Li and Ms. Yanqing Liang have granted an employee of
CDTC, who is a PRC citizen, the right to exercise all their voting rights as equity holders
of VisionChina Media Group as provided under its articles of association, including the
right to appoint and elect board members and senior management members of VisionChina
Media Group. Such grant must be approved by CDTC and the grantee must be an employee
of CDTC. If the grantee ceases to be an employee of CDTC, then the grantors will revoke
the proxy and grant a similar proxy to a then-current employee of CDTC designated by
CDTC. The proxy letters will remain effective until February 15, 2032.
|
|
|
CDTC, Mr. Limin Li and Ms. Yanqing Liang
entered into an option agreement on February 15, 2007, pursuant to which CDTC has
an exclusive option to purchase, or to designate another qualified person to purchase,
to the extent permitted by PRC law and foreign investment policies, part or all of the
equity interests in VisionChina Media Group owned by Mr. Limin Li and Ms. Yanqing Liang.
The purchase price for the entire equity interest shall be the greater of (i) RMB50 million
and (ii) the minimum price permitted by applicable PRC law and agreed upon by the
parties. The option agreement remains in effect until the completion of the transfer
of all the equity interests in accordance with the option agreement. In the event of
a default under this agreement, the non-defaulting party can terminate this agreement.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES
- continued
|
|
|
Agreements that provide Company effective
control over VisionChina Media Group and Eastlong Advertising:
- continued
|
|
|
Option Agreements
- continued
|
|
|
Eastlong Technology, Mr. Qijun Men and
Mr. Haifeng Wang entered into a series of option agreements and amendments thereto in
February 2005, March 2007 and May 2008, respectively, pursuant to which
Eastlong Technology has an exclusive option to purchase, or to designate another qualified
person to purchase, to the extent permitted by the PRC law and foreign investment policies,
all of the equity interests in Eastlong Advertising owned by Mr. Qijun Men and Mr. Haifeng
Wang. The purchase price for the entire equity interest shall be RMB20 million. The option
agreement remains in effect until the completion of the transfer of all the equity interests
in accordance with the option agreements.
|
The above contractual arrangements
allow the Group to have (1) the power to direct the activities of VisionChina Media Group, Eastlong Advertising and their subsidiaries
that most significantly affect their economic performance and (2) the obligation to absorb losses of, or the right to receive
benefits from VisionChina Media Group, Eastlong Advertising and their subsidiaries. Accordingly, the Group treats VisionChina
Media Group and Eastlong Advertising as VIEs. Because the Group is the primary beneficiary of VisionChina Media Group and Eastlong
Advertising, the Group has effective control on and consolidated the financial results of VisionChina Media Group and Eastlong
Advertising and their subsidiaries.
Risks in relation to the
VIEs structure
|
|
The Group believes that the VIEs arrangements
are in compliance with PRC law and are legally enforceable. The equity holders of VisionChina
Media Group are also shareholders of the Group and therefore have no current interest
in seeking to act contrary to the contractual arrangements. However, there are certain
risks related to the VIE arrangements, which include but are not limited to the following:
|
|
·
|
If
the ownership structure and contractual arrangements are found to be in violation of
any existing or future PRC laws or regulations, the Group could be subject to severe
penalties;
|
|
·
|
The
Group relies on contractual arrangements with the VIEs and their equity holders for substantially
all of its PRC operations, which may not be as effective as direct ownership in providing
operational control; and
|
|
·
|
The
Group may have to incur significant cost to enforce, or may not be able to effectively
enforce, the contractual arrangements with the VIEs and their equity holders in the event
of a breach or non-compliance by the VIEs or their equity holders.
|
|
|
In particular, if the Company’s
ownership structure and contractual arrangements were found to be in violation of PRC
laws or regulations, the PRC government could:
|
|
·
|
Revoke
the business and operating licenses of the Company’s PRC subsidiaries, the VIEs
and the VIEs’ subsidiaries;
|
|
·
|
Discontinue
or restrict the operations of any related-party transactions among the Company’s
PRC subsidiaries, the VIEs and the VIEs’ subsidiaries;
|
|
·
|
Impose
fines, confiscate the income of the VIEs or the VIEs’ subsidiaries, or impose other
requirements with which the Company’s PRC subsidiaries, the VIEs or the VIEs’
subsidiaries may not be able to comply;
|
|
·
|
Shut
down the network of the VIEs and the VIEs’ subsidiaries; or
|
|
·
|
Require
the Company or the Company’s PRC subsidiaries, the VIEs and the VIEs’ subsidiaries
to restructure their ownership structure or operations.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES
- continued
|
|
|
Risks in relation to the VIEs structure
- continued
|
|
|
The Company’s ability to conduct
its advertising business may be negatively affected if the PRC government were to carry
out any of the aforementioned action, or if the VIEs or their equity holders breach or
do not comply with the contractual arrangements. As a result, the Company may not be
able to consolidate the VIEs and the VIEs’ subsidiaries in its consolidated financial
statements as it may lose the ability to exert effective control over the VIEs and the
VIEs’ subsidiaries, and it may lose the ability to receive economic benefits from
the VIEs and the VIEs’ subsidiaries.
|
|
|
Mr. Limin Li and Ms. Yanqing Liang are
the shareholders of VisionChina Media Group and they are also beneficial owners of the
Company. The interests of Mr. Limin Li and Ms. Yanqing Liang as the beneficial owners
of VisionChina Media Group may differ from the interests of the Company as a whole, since
Mr. Limin Li and Ms. Yanqing Liang are also beneficial shareholders of the Company. The
Company cannot assure that when conflicts of interest arise, Mr. Limin Li and Ms. Yanqing
Liang 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 Mr. Limin Li and Ms. Yanqing
Liang may encounter in their capacity as beneficial owners and directors of VisionChina
Media Group, on the one hand, and as a beneficial owner and director of the Company,
on the other hand. Mr. Limin Li and Ms. Yanqing Liang signed irrevocable proxy letters,
pursuant to which Mr. Limin Li and Ms. Yanqing Liang have granted CDTC the right to exercise
all their voting rights as equity holders of VisionChina Media Group. The Company believes
Mr. Limin Li and Ms. Yanqing Liang will not act contrary to any of the contractual arrangements,
and the exclusive option agreement provides the Company with a mechanism to remove Mr.
Limin Li and Ms. Yanqing Liang as beneficial shareholders of VisionChina Media Group
should they act to the detriment of the Company. The Company relies on Mr. Limin Li,
as a director and executive officer of the Company, and Ms. Yanqing Liang, as a director
of the Company, to fulfill their fiduciary duties and abide by laws of the PRC and Cayman
Islands and act in the best interest of the Company. If the Company cannot resolve any
conflicts of interest or disputes between the Company and Mr. Limin Li and Ms. Yanqing
Liang, the Company would have to rely on legal proceedings, which could result in disruption
of its business, and there is substantial uncertainty as to the outcome of any such legal
proceedings.
|
|
|
The Company has two VIEs, VisionChina
Media Group and Eastlong Advertising, which it has consolidated under the authoritative
literature because it is the primary beneficiary of these VIEs. Since the Company, through
its subsidiaries, has (1) the power to direct the activities of the VIEs that most significantly
affect the VIEs’ economic performance and (2) the right to receive benefits from
the VIEs, the Company has continued to consolidate the VIEs upon the adoption of the
new guidance, which, other than for additional disclosures, has no accounting impact
on the Company’s consolidated financial statements.
|
|
|
The VIEs contributed an aggregate of 96.7%,
100% and 95.1% of the Group’s consolidated net revenues derived from third parties
and non-consolidated affiliates for the years ended December 31, 2013, 2014 and 2015,
respectively. The Group’s operations not conducted through contractual arrangements
with the VIEs primarily consist of (1) sales of PIDS to various subway companies in the
PRC, (2) sales of equipment used for mobile digital television on mass transit systems,
and (3) advertising revenue on advertising platforms located outside of the PRC. In the
fiscal years ended December 31, 2013, 2014 and 2015, the Company and its subsidiaries
(excluding operations that are subject to involvement with the consolidated affiliated
entities) contributed in aggregate approximately 3.3%, 0% and 4.9%, respectively, of
the Group’s total consolidated net revenues derived from third parties and non-consolidated
affiliates. As of December 31, 2014 and 2015, the VIEs accounted for an aggregate of
66.4% and 73.1%, respectively, of the Group’s consolidated total assets. As of
December 31, 2014 and 2015, the Company and its subsidiaries accounted for an aggregate
of 33.7% and 26.9%, respectively, of the Company’s total assets (excluding for
the purpose of this calculation assets that are subject to involvement with the consolidated
affiliated entities).
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES
- continued
|
Risks in relation
to the VIEs structure
- continued
|
|
The financial information of the Company’s VIEs and VIEs’
subsidiaries as of December 31, 2014 and 2015 and for the years ended December 31, 2013,
2014 and 2015 is as follows:
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
67,788,321
|
|
|
$
|
66,465,586
|
|
Total liabilities
|
|
|
42,026,064
|
|
|
|
46,137,892
|
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
52,233,496
|
|
|
$
|
52,672,460
|
|
|
$
|
39,422,818
|
|
Net loss
|
|
|
(4,193,263
|
)
|
|
|
(25,288,462
|
)
|
|
|
(22,973,856
|
)
|
Net cash (used in) provided by operating activities
|
|
|
(16,445,774
|
)
|
|
|
12,040,459
|
|
|
|
(6,022,571
|
)
|
Net cash provided by (used in) investing activities
|
|
|
4,216,520
|
|
|
|
487,309
|
|
|
|
(7,111,932
|
)
|
Net cash provided by financing
activities
|
|
|
19,638,649
|
|
|
|
5,701,719
|
|
|
|
2,247,792
|
|
|
|
The Group’s consolidated assets
do not include any collateral for VisionChina Media Group’s and Eastlong Advertising’s
obligations.
|
|
|
There was no pledge or collateral of the
assets in Eastlong Advertising as of December 31, 2014 and 2015. Account receivable of
$17.2 million and $13.8 million in VisionChina Media Group are pledged to secure the
CCB Facilities granted by CCB (SZ) (as defined and detailed in Note 11) as at December
31, 2014 and 2015, respectively. Creditors of VisionChina Media Group have no recourse
to the general credit of CDTC or the Company, which is the primary beneficiary of VisionChina
Media Group. Creditors of Eastlong Advertising have no recourse to the general credit
of Eastlong Technology or the Company, which is primary beneficiary of Eastlong Advertising.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES
- continued
|
|
|
As of December 31, 2015, subsidiaries
and variable interest entities include the following entities:
|
|
|
|
|
Date of
|
|
Place of
|
|
|
|
|
|
Date of
|
|
establishment/
|
|
establishment/
|
|
Percentage of
|
|
Companies
|
|
acquisition
|
|
incorporation
|
|
incorporation
|
|
ownership
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiaries of the Company
|
|
|
|
|
|
|
|
|
|
|
CDTC
|
|
N/A
|
|
March 9, 2006
|
|
PRC
|
|
|
100
|
%
|
Vision Best Limited
|
|
N/A
|
|
September 23, 2009
|
|
British Virgin Islands (“BVI”)
|
|
|
100
|
%
|
Whole Genius Limited
|
|
N/A
|
|
May 16, 2008
|
|
HK
|
|
|
100
|
%
|
DMG
|
|
January 2, 2010
|
|
May 15, 2003
|
|
BVI
|
|
|
100
|
%
|
DMG HK
|
|
January 2, 2010
|
|
October 10, 2003
|
|
HK
|
|
|
100
|
%
|
Eastlong Technology
|
|
January 2, 2010
|
|
December 10, 2001
|
|
PRC
|
|
|
100
|
%
|
Shenzhen Huachangshi Digital Technology Co., Ltd. (“Huachangshi”)
|
|
N/A
|
|
November 27, 2008
|
|
PRC
|
|
|
100
|
%
|
Shenzhen Huadingshi Digital Technology Co., Ltd.
|
|
N/A
|
|
December 20, 2010
|
|
PRC
|
|
|
100
|
%
|
Dienzhi Advertising (Shanghai) Co., Ltd
|
|
January 2, 2010
|
|
March 19, 2009
|
|
PRC
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
VIE of CDTC
|
|
|
|
|
|
|
|
|
|
|
VisionChina Media Group
|
|
N/A
|
|
April 8, 2005
|
|
PRC
|
|
|
note (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiaries of VisionChina
Media Group
|
|
|
|
|
|
|
|
|
|
|
Shenzhen HDTV Industry Investment Co., Ltd. (“Shenzhen
HDTV”)
|
|
February 17, 2006
|
|
June 16, 2004
|
|
PRC
|
|
|
100
|
%
|
Beijing Beiguang Media Mobile Television Advertising
Co., Ltd.
|
|
N/A
|
|
December 18, 2006
|
|
PRC
|
|
|
100
|
%
|
Luzhou Huashi Digital Technology Co., Ltd. (“Luzhou
Huashi”)
|
|
N/A
|
|
November 21, 2009
|
|
PRC
|
|
|
100
|
%
|
Nanjing Hua Dingshi Communication Technology Co., Ltd.
|
|
N/A
|
|
July 16, 2007
|
|
PRC
|
|
|
100
|
%
|
Shenzhen Hua Meishi Advertising Co., Ltd.
|
|
N/A
|
|
June 29, 2007
|
|
PRC
|
|
|
100
|
%
|
VisionChina New Culture Media Co., Ltd. (“New
Culture”)
|
|
N/A
|
|
September 3, 2007
|
|
PRC
|
|
|
100
|
%
|
Guangzhou Jiaojian Multimedia Information Technology
Co., Ltd. (“Guangzhou Jiaojian”)
|
|
N/A
|
|
October 8, 2007
|
|
PRC
|
|
|
50
|
%
|
Jiangxi Huashi Media Advertising Co., Ltd. (“Jiangxi
Huashi”)
|
|
N/A
|
|
June 17, 2011
|
|
PRC
|
|
|
100
|
%
|
Shenzhen Qianhai VisionChina
|
|
N/A
|
|
March 26, 2014
|
|
PRC
|
|
|
69
|
%
|
Mobile Interactive Co., Ltd. (“Shenzhen Qianhai”)
|
|
|
|
|
|
|
|
|
note (c)
|
|
|
|
|
|
|
|
|
|
|
|
|
VIE of Eastlong Technology
|
|
|
|
|
|
|
|
|
|
|
Eastlong Advertising
|
|
January 2, 2010
|
|
March 30, 2004
|
|
PRC
|
|
|
note (b)
|
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES
- continued
|
|
|
|
|
Date of
|
|
Place of
|
|
|
|
|
|
Date of
|
|
establishment/
|
|
establishment/
|
|
Percentage of
|
|
Companies
|
|
acquisition
|
|
incorporation
|
|
incorporation
|
|
ownership
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiaries of Eastlong Advertising
|
|
|
|
|
|
|
|
|
|
|
Nanjing Metro Operation Information Service
Co., Ltd.
|
|
January 2, 2010
|
|
September 13, 2006
|
|
PRC
|
|
|
100
|
%
|
Shenzhen Metro Operation Information Service Co., Ltd.
(“DMG Shenzhen”)
|
|
January 2, 2010
|
|
August 10, 2005
|
|
PRC
|
|
|
100
|
%
|
Tianjin Metro Operation Information Service Co., Ltd.
|
|
January 2, 2010
|
|
September 22, 2005
|
|
PRC
|
|
|
100
|
%
|
Dienzhi Advertising (Beijing) Co., Ltd.
|
|
January 2, 2010
|
|
June 17, 2009
|
|
PRC
|
|
|
100
|
%
|
|
(a)
|
Through a series of contractual
arrangements, VisionChina Media Group became a VIE of CDTC.
|
|
(b)
|
Through a series of contractual
arrangements, Eastlong Advertising became a VIE of Eastlong Technology.
|
|
(c)
|
On May 31, 2015, Baidu Inc. and
additional top-tier private equity investors (collectively “new investors”),
independent third parties, entered into an agreement with the Group to inject approximately
$11.5 million (equivalent to RMB 69,225,000) in Shenzhen Qianhai. The proceeds of $10.2
million (equivalent to RMB62,302,500) were received on June 5, 2015. After the capital
injection by new investors, the percentage of ownership held by the Group in Shenzhen
Qianhai was decreased from 80% to 69% during the year ended December 31, 2015. The capital
injection did not result in change of control of Shenzhen Qianhai.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES
- continued
|
|
|
As of December 31, 2015, the Group’s equity method investees
include the following entities:
|
|
|
Date of
|
|
Date of
|
|
Place of
|
|
Percentage of
|
|
Investee companies
|
|
acquisition
|
|
establishment
|
|
establishment
|
|
ownership
|
|
|
|
|
|
|
|
|
|
|
|
Chengdu Mobile Digital Television Company
Limited (“Chengdu Mobile”)
|
|
N/A
|
|
April 29, 2005
|
|
PRC
|
|
|
49
|
%
|
Chongqing Light Rail Information Services Co., Ltd.
(“DMG Chongqing”)
|
|
January 2, 2011
|
|
December 30, 2004
|
|
PRC
|
|
|
46.75
|
%
|
Haerbin China Mobile Television Company limited (“Haerbin
Mobile”)
|
|
N/A
|
|
November 10, 2005
|
|
PRC
|
|
|
49
|
%
|
Jilin Mobile Television Company Limited (“Jilin
Mobile”)
|
|
N/A
|
|
November 8, 2005
|
|
PRC
|
|
|
49
|
%
|
Dalian Mobile Digital Television Company Limited (“Dalian
Mobile”)
|
|
N/A
|
|
February 20, 2006
|
|
PRC
|
|
|
49
|
%
|
Henan China Digital Mobile Television Company Limited
(“Henan Mobile”)
|
|
N/A
|
|
July 4, 2006
|
|
PRC
|
|
|
49
|
%
|
Hubei China Digital Television Company Limited (“Hubei
Mobile”)
|
|
N/A
|
|
July 26, 2006
|
|
PRC
|
|
|
49
|
%
|
Suzhou China Digital Mobile Television Company Limited
(“Suzhou Mobile”)
|
|
N/A
|
|
February 17, 2007
|
|
PRC
|
|
|
49
|
%
|
Changzhou China Digital Mobile Television Company Limited
(“Changzhou Mobile”)
|
|
N/A
|
|
March 19, 2007
|
|
PRC
|
|
|
49
|
%
|
Ningbo China Digital Mobile Television Company Limited
(“Ningbo Mobile”)
|
|
N/A
|
|
April 5, 2007
|
|
PRC
|
|
|
49
|
%
|
Zhongguanguoji Metro TV (Beijing) Co., Ltd. (“Zhongguanguoji”)
|
|
January 2, 2010
|
|
December 22, 2005
|
|
PRC
|
|
|
49
|
%
|
China (Shenzhen) National New Media & Advertising
Industrial Park (“Shenzhen Media”)
|
|
N/A
|
|
September 9, 2013
|
|
PRC
|
|
|
49
|
%
|
|
|
Apart from Zhongguanguoji, Shenzhen Media
and DMG Chongqing, the Group’s equity method investees have been separately formed
with nine separate parties for the purpose of engaging in provision of digital mobile
television advertising services in the PRC. VisionChina Media Group contributed cash
and another investor contributed advertising broadcasting rights to the equity method
investees for 49% and 51% equity interests, respectively.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
|
(a)
|
Basis of presentation
|
|
|
The consolidated financial statements
of the Group have been prepared in accordance with the US GAAP.
|
During the
year ended December 31, 2015, the directors of the Company approved the plan to dispose the subway mobile TV advertising business
of the Group (“Subway Advertising Business”). As of December 31, 2015, Subway Advertising Business is available for
immediate sale in its present condition and being actively marketed for sale. There is an active program to locate a buyer. The
directors considered that the sale of Subway Advertising Business is probable within one year. Therefore, Subway Advertising Business
is classified as held for sale and accounted as discontinued operation during the year ended and as of December 31, 2015.
The consolidated statements of
income (loss) and comprehensive income (loss) for the year ended 2013 and 2014 and corresponding notes previously reported have
been revised to conform to the current presentation accordingly.
|
(b)
|
Principles of consolidation
|
|
|
The consolidated financial statements
include the financial statements of the Company, its subsidiaries and VIEs for which
the Company is the primary beneficiary. All inter-company transactions and balances have
been eliminated on consolidation.
|
|
|
The accompanying consolidated financial
statements have been prepared assuming that we will continue as a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in the normal
course of business. The realization of assets and the satisfaction of liabilities in
the normal course of business are dependent on, among other things, the Group’s
ability to generate cash flows from operations, and the Group’s ability to arrange
adequate financing arrangements to support its working capital requirements.
|
|
|
The following factors raise substantial
doubt about our ability to continue as a going concern for the foreseeable future.
|
|
·
|
For
the year ended December 31, 2013, 2014 and 2015, the Group incurred net loss of $23,967,870,
$31,077,215 and $23,400,346, respectively.
|
|
·
|
As
of December 31, 2015, the Group’s net current assets exceeded its current liabilities
by $58,210,118.
|
|
·
|
As
of December 31, 2015, the Group had cash and cash equivalents of $8,541,890 with bank
borrowings due within one year of $9,243,995 and overdue convertible promissory notes
of $55,889,559 as detailed in Note 17 to the consolidated financial statements.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
- continued
|
|
(c)
|
Going
concern
- continued
|
|
|
These factors are mitigated by the
following plans and actions:
|
|
·
|
The
Group has successfully negotiated with China Construction Bank (Shenzhen branch) (“CCB(SZ)”)
and will continue to negotiate with other banks to obtain revolving bank facilities to
ensure the Group’s bank borrowings can be renewed on an on-going basis. On February
22, 2016, the Group has entered into another RMB80 million (equivalent to $12.2 million)
secured revolving credit facility granted by CCB(SZ) with interest rate in a range between
99.615% to 102.66% of the Loan Prime Rate in the PRC.
|
|
·
|
VisionChina
Media Group and Shenzhen HDTV (collectively “VisionChina Subsidiaries” or
the “Sellers”), have entered into an equity transfer agreement and a profit
compensation agreement to sell 49% equity interest in Subway Advertising Business to
Ledman Optoelectronic Co., Ltd. (“Ledman”) for an aggregate consideration
of RMB382.2 million (equivalent to $58.3 million). Pursuant to the equity transfer agreement,
Ledman will pay RMB61 million in cash and the other RMB321.2 million in cash with restriction
that such cash need to be used for purchasing the shares of Ledman from a major shareholders
of Ledman. Please refer to Note 3 for further details on this transaction.
|
|
·
|
The
Group is actively negotiating with potential buyers to dispose the remaining 51% equity
interest in Subway Advertising Business.
|
|
·
|
The
Group is actively negotiating with the holders of convertible promissory notes to extend
the payments of the overdue amounts of $55,889,559.
|
|
·
|
The
Group has taken or in process of taking a number of initiatives to reduce costs and improve
working capital management. The Group has been negotiating with a number of vendors,
including vendors of concession right contracts, for them to provide the Group with lower
prices or more favorable payment terms in order to achieve cost savings. The Group has
decided to postpone a substantial portion of its planned capital expenditures for the
next twelve months. In addition, the Group has implemented measures to more closely monitor
the collection of receivable balances with an aim to improving liquidity.
|
|
|
Based on the above factors, the directors
are of the opinion that adequate sources of liquidity will exist to fund the Group’s
working capital and capital expenditure requirements, and to settle the overdue convertible
promissory notes, and to meet other short term debt obligations, other liabilities and
commitments as they become due.
|
As a result,
the accompanying consolidated financial statements have been prepared assuming the Group will continue as a going concern. The
accompanying consolidated financial statements do not reflect any adjustments relating to the recoverability and reclassification
of assets and liabilities as that might be necessary if the Group is unable to continue as a going concern.
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
- continued
|
|
(d)
|
Noncontrolling
interest
|
|
|
Noncontrolling interest have been
reported as a component of equity in the consolidated balance sheets and consolidated
statements of changes of equity and comprehensive income for all periods presented
.
|
|
(e)
|
Significant risks and uncertainties
|
|
|
The Group participates in a young
and 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: advances and trends in new technologies or industry standards;
competition; changes in key suppliers; changes in certain strategic relationships; regulatory
or other PRC related factors such as PRC tax rules and etc.; risks associated with the
Group’s ability to attract and retain employees necessary to support its growth;
risks related to VIEs structure as detailed in Note 1; and general risks associated with
the advertising industry.
|
|
(f)
|
Cash and cash equivalents
|
|
|
Cash and cash equivalents consist
of cash on hand and highly liquid investments which are unrestricted as to withdrawal
or use, and which have maturities of three months or less when purchased.
|
|
|
Restricted cash represents the cash
subsidies received from the PRC government by the operating subsidiaries of the Company
for which the use of cash subsidies are restricted and the bank deposits placed in escrow
accounts as the performance security for certain concession agreements and PIDS agreements
which are restricted from withdrawal. Restricted cash received from the PRC government
is contractually restricted and is classified as current asset and expected to be utilized
within one year. Restricted cash related to bank deposits in escrow accounts as the performance
security for certain concession agreements and PIDS agreements are classified as current
or non-current assets depending on whether or not such agreements are expected to be
completed within one year.
|
|
|
Accounts receivable primarily represent
amounts due from customers, which are recorded at the invoiced amount or at an amount
in accordance with the contractual terms agreed with the advertising customers, and do
not bear interest. The Group reviews its accounts receivable on a periodic basis and
records allowances when there is a doubt as to the collectability of the balance. In
evaluating the collectability of the accounts receivable balances, the Group considers
various factors, including the age of the balance, customer specific facts and economic
conditions. Accounts receivable balances are charged off against the allowance after
all means of collection have been exhausted and the potential for recovery is considered
remote. The Group does not have any off-balance-sheet credit exposure related to its
customers.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
- continued
|
|
(i)
|
Intangible Assets, net
|
|
|
Intangible assets, which consist of
trademark and patents are carried at cost less accumulated amortization. Amortization
is calculated using the straight-line method over their respective expected useful lives
as follows:
|
|
Estimated useful
life
|
|
|
Trademark
|
10 years
|
Patents
|
10 years
|
|
|
Fixed assets are carried at cost less
accumulated depreciation and amortization. Assembly in progress is not depreciated until
it is ready for its intended use.
|
|
|
Depreciation and amortization is computed
on a straight-line basis over the following estimated useful lives, after taking into
account the residual values:
|
|
Estimated useful life
|
Media display equipment
|
5 years
|
Wi-Fi equipment
|
5 years
|
Computers and office equipment
|
5 years
|
Motor vehicles
|
5 years
|
Leasehold improvements
|
lesser of lease terms or the estimated
useful lives of the assets
|
|
(k)
|
Investments under equity method
|
|
|
The investments for which the Group
has the ability to exercise significant influence are accounted for under the equity
method. Under the equity method, original investments are recorded at cost and adjusted
by the Group’s share of undistributed earnings or losses of these entities, by
the amortization of intangible assets recognized upon purchase price allocation and by
dividend distributions or subsequent investments. All unrecognized inter-company profits
and losses have been eliminated under the equity method.
|
|
|
The Group generates a portion of its
revenues from sales of advertising time on mobile television networks which are owned
by its equity method investees. Because the operations of the Group’s investees
under equity method form an integral part to the Group’s operating activities,
the Group’s share of undistributed earnings or losses of these entities is classified
as part of the Group’s operating profit (loss).
|
|
|
When the estimated amount to be realized
from the investments falls below its carrying value, an impairment charge is recognized
in the consolidated statements of operations when the decline in value is considered
other than temporary.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
- continued
|
The Group considers assets
to be held for sale when all of the following criteria are met: i) a commitment to a plan to sell an entity or a group of components
of an entity was made and exercised; ii) the entity or a group of components of an entity is available for immediate sale in its
present condition; iii) an active program to locate a buyer or buyers and other actions required to complete the plan to sell
the entity to be sold have been initiated; iv) sale of the entity or a group of components of an entity is probable and the Group
expects the completed sale will occur within one year; v) the entity or a group of components of an entity is actively being marketed
for sale at a price that is reasonable given its current market value; and vi) actions required to complete the plan indicate
that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Upon designation as
assets held for sale, the Group records Disposal Group (as defined in Note 3) at the lower of its carrying value or its estimated
fair value, less estimated costs to sell, and the Group ceases depreciation.
|
|
The Group’s investments in non-marketable
equity securities for which the Group does not have the ability to exercise significant
influence or control are accounted for using the cost method. Dividends and other distributions
of earnings from investees, if any, are recognized in the consolidated statements of
operations when declared. The Group periodically evaluates the carrying value of investments
accounted for under the cost method of accounting and any impairment is included in the
consolidated statements of operations.
|
|
(n)
|
Impairment of long-lived assets
|
|
|
The Group reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may no longer be recoverable. When these events occur, the Group measures
impairment by comparing the carrying value of the long-lived assets to the estimated
undiscounted future cash flows expected to result from the use of the assets and their
eventual disposition. If the sum of the expected undiscounted cash flow is less than
the carrying amount of the assets, the Group recognizes an impairment loss based on the
fair value of the assets. The Group recorded impairment charges of $537,939 and $808,304
against investments under equity method and a cost method investee in the consolidated
statements of operations during the year ended December 31, 2015, respectively as detailed
in Note 8 and Note 9, respectively. No impairment charge is recognized for long-lived
assets during the year end December 31, 2013 and 2014.
|
|
(o)
|
Convertible promissory notes
|
|
|
The Company determines the appropriate
accounting treatment of its convertible promissory notes in accordance with the terms
in relation to the conversion feature, call and put option, beneficial conversion feature
and settlement feature. After considering the impact of such features, the Company may
account for such instrument as a liability in its entirety, or separate the instrument
into debt, derivative and equity components.
|
|
|
Convertible promissory notes are classified
as a current liability if their maturity is or will be within one year from the balance
sheet date.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
- continued
|
|
|
The outcomes of legal proceedings
and claims brought against the Company are subject to significant uncertainty. An estimated
loss from a loss contingency such as a legal proceeding or claim is accrued if it is
probable that a liability has been incurred and the amount of the loss can be reasonably
estimated. In determining whether a loss should be accrued the Company evaluates, among
other factors, the degree of probability of an unfavourable outcome and the ability to
make a reasonable estimate of the amount of loss.
|
|
(1)
|
Time-based advertising services and
advertising services on VIFI platform
|
|
|
The Group recognizes revenues as the
advertisements are aired over the contractual term based on the schedules agreed with
the customers. Payments received in advance of services provided are recorded as customer
deposits.
|
|
|
Revenue is deferred until persuasive
evidence of an arrangement exists, delivery has occurred provided that there are no significant
post delivery obligations to the customers, the sales price is fixed or determinable,
and collection is reasonably assured.
|
|
|
The Group engages in barter transactions
which are generally recorded at fair value. The revenues contributed by barter transactions
accounted for 2%, 0.9% and 1.7% of the Group’s total revenues for the years ended
December 31, 2013, 2014 and 2015, respectively, of which 0.7%, 0.3% and 1.6% were related
to discontinued operations for the years ended December 31, 2013, 2014 and 2015, respectively.
|
|
(3)
|
Sales of advertising equipment
|
|
|
Sales of advertising equipment comprises
sales of media display equipment and PIDS.
|
|
|
Revenues from sales of media display
equipment, which are from related parties, are recognized upon delivery, at which time
all of the following four criteria are met: (i) pervasive evidence that an arrangement
exists; (ii) delivery of the productions and/or services has occurred and risks and rewards
of ownership have passed to the customer; (iii) the selling price is both fixed and determinable,
and (iv) collection of the resulting receivable is reasonable assured.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
- continued
|
|
(q)
|
Revenue recognition
-
continued
|
|
(3)
|
Sales of advertising equipment
-
continued
|
|
|
The Group entered into certain arrangements
for sales of PIDS where it is obligated to deliver multiple products and/or services
(multiple elements), including the equipment necessary for the operation of PIDS, free
post-delivery support and training. The Group is unable to establish vendor-specific
objective evidence or third party evidence of fair value for any of the elements in the
arrangement because they are not sold separately, nor is the Group able to establish
the estimated selling prices for each components in the arrangements for sales of PIDS.
Recognition of revenue from the sales of PIDS is deferred until the earlier of the point
at which such sufficient vendor-specific objective evidence does exist or all elements
of the arrangement have been delivered.
|
|
|
Advertising equipment revenues are recorded
net of value-added tax incurred, which amounted to $484,977, $463,177 and $2,092,026
for the years ended December 31, 2013, 2014 and 2015, respectively.
|
|
|
Cost of revenues comprises advertising service cost and advertising
equipment cost.
|
|
|
Advertising service cost consists
primarily of media costs payable under concession contracts, depreciation, business taxes
and surcharges and other operating costs. Media costs are expensed as incurred.
|
|
|
The amount of business taxes and surcharges
included in advertising services cost totaling $1,209,283, $1,301,940 and $855,227 for
the years ended December 31, 2013, 2014 and 2015, respectively, of which $594,481, $589,096
and $625,558 were related to discontinued operations for the years ended December 31,
2013, 2014 and 2015, respectively.
|
|
|
Advertising equipment represents the
cost incurred for sales of media display equipment and PIDS, including purchase cost
of digital television displays and equipment necessary for the operation of PIDS, and
post-delivery training and supporting cost for PIDS. Cost of sales of PIDS is deferred
until the corresponding revenue is recognized in the consolidated statements of operations.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
- continued
|
|
(s)
|
Research and development
|
|
|
Research and development costs are
expensed as incurred. Research and development expenses consist primarily of salaries
and related expenses, traffic charges, consultant fees, as well as costs related to other
overhead expenses such as depreciation, facilities and utilities.
|
|
|
Leases in which substantially all
the rewards and risks of ownership of assets remain with the leasing group are accounted
for as operating leases. Payments made under operating leases are charged to the consolidated
statement of operations on a straight-line basis over the lease periods.
|
|
(u)
|
Foreign currency translation
|
|
|
The functional and reporting currency
of the Group is the United States dollars (“US dollars”). Monetary assets
and liabilities denominated in currencies other than the US dollars are translated into
the US dollars at the rates of exchange at the balance sheet date. Transactions in currencies
other than the US dollars during the year are converted into the US dollars at the applicable
rates of exchange prevailing on the respective dates of the transactions. Transaction
gains and losses are recognized in the consolidated statements of operations.
|
|
|
The financial records of the Company’s
subsidiaries and VIEs are maintained in their respective local currencies, the Renminbi
(“RMB”) or Hong Kong Dollar (“HKD”), which are also their respective
functional currencies. Assets and liabilities are translated at the exchange rates at
the balance sheet date; equity accounts are translated at historical exchange rates;
revenues, expenses and gains and losses are translated using the average rates for the
period. Translation adjustments are reported as cumulative translation adjustments and
are recorded within accumulated other comprehensive income in the consolidated statements
of changes of equity and comprehensive income (loss).
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
- continued
|
|
|
Basic net loss per share is computed
by dividing net loss attributable to VisionChina Media Inc. shareholders by the weighted
average number of common shares outstanding during the year. Diluted net loss per share
reflects the potential dilution that could occur if securities or other contracts to
issue common shares were exercised or converted into common shares. The Company’s
dilutive securities consist of convertible promissory notes, outstanding share options
and restricted shares. Convertible promissory notes and certain common share equivalents
(e.g. share options and restricted shares) are excluded from calculation of diluted loss
per share as their effect is anti-dilutive. The Company had outstanding share options
amounted to 1,418,420, 1,409,060 and 1,409,060 as of December 31, 2013, 2014 and 2015,
respectively. As of December 31, 2013, 2014 and 2015, the Company had outstanding restricted
shares of 1,104,400, 1,195,400 and 574,567, respectively.
|
|
|
The following table sets forth the
computation of basic and diluted net loss per share.
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing
operations
|
|
$
|
(27,409,925
|
)
|
|
$
|
(30,188,272
|
)
|
|
$
|
(30,789,866
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued
operations
|
|
$
|
3,442,055
|
|
|
$
|
(888,943
|
)
|
|
$
|
7,389,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Vision
China Media Inc. shareholders
|
|
$
|
(23,967,870
|
)
|
|
$
|
(31,077,215
|
)
|
|
$
|
(23,400,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-basic
|
|
|
101,495,442
|
|
|
|
101,601,913
|
|
|
|
102,353,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding-diluted
|
|
|
101,495,442
|
|
|
|
101,601,913
|
|
|
|
102,353,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share from continuing operations
|
|
$
|
(0.27
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.30
|
)
|
Basic net income (loss) per share from discontinued
operations
|
|
$
|
0.03
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share from continuing operations
|
|
$
|
(0.27
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.30
|
)
|
Diluted net income (loss) per
share from discontinued operations
|
|
$
|
0.03
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.07
|
|
|
|
During the years ended December 31, 2013, 2014 and
2015, the Company had convertible promissory notes, restricted shares and share
options of which would potentially dilute earnings per share in the future, but
which were excluded from the computation of diluted earnings per share as their effect
would have been antidilutive, such restricted shares and share options consist of 2,522,820, 2,604,460 and 1,983,627,
respectively.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
- continued
|
|
|
Deferred tax assets and liabilities
are determined based on the difference between the financial reporting and tax bases
of assets and liabilities, and operating loss and tax credit carry forwards using enacted
tax rates that will be in effect for the period in which the differences are expected
to reverse. The Group records a valuation allowance against the amount of deferred tax
assets that it determines is not more likely than not of being realized. The effect on
deferred taxes of a change in tax rates is recognized in income in the period that includes
the enactment date.
|
|
|
The Company recognizes the effect
of income tax positions only if those positions are more likely than not of being sustained.
Recognized income tax positions are measured at the largest amount that is greater than
50% likely of being realized. Changes in recognition or measurement are reflected in
the period in which the change in judgment occurs. The Company records interest related
to unrecognized tax benefits and penalties, if any, within income tax (expense) benefits.
|
|
(x)
|
Accounting for Derivative Instruments
|
|
|
The Company does not use derivative
instruments to hedge exposures to cash flow, market or foreign currency.
|
|
|
The Company reviews the terms of convertible
debt and equity instruments to determine whether there are derivative instruments, including
an embedded conversion option that is required to be bifurcated and accounted for separately
as a derivative financial instrument. Derivative instruments are initially recorded at
fair value and are then revalued at each reporting date with changes in the fair value
reported as non-operating income or expense.
|
|
(y)
|
Share-based compensation
|
|
|
Share-based payments to employees
are measured based on the fair values of share options and restricted shares on the respective
grant dates and recognized as compensation expense over the requisite service periods
with a corresponding credit to additional paid-in capital. For share options and restricted
shares granted with performance condition that do not affect the exercise price or factors
other than vesting or exercisability, compensation expense is accrued if it is probable
that the performance condition will be achieved, and compensation expense is not accrued
if it is not probable that the performance condition will be achieved.
|
|
|
Share awards issued to non-employees
are measured at fair value at the earlier of the commitment date or the date the services
is completed and recognized over the period the service is provided or as goods is received.
|
|
|
The Group uses the Black-Scholes option
pricing model to measure the value of options granted to non-employees and employees
at each measurement date.
|
|
(z)
|
Comprehensive income (loss)
|
|
|
Comprehensive income (loss) includes
net income (loss) and foreign currency translation adjustments. The Group presents the
components of net income (loss), the components of other comprehensive income (loss)
and total comprehensive income (loss) in two separate but consecutive statements.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
- continued
|
|
|
The preparation of consolidated financial
statements in conformity with US GAAP requires management to make estimates and assumptions
that affect reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements, and the reported
amounts of revenues and expenses during the reporting period. Significant accounting
estimates reflected in the Group’s consolidated financial statements include allowance
for doubtful debts. These estimates are often based on complex judgments and assumptions
that management believes to be reasonable but are inherently uncertain and unpredictable.
Actual results could differ from those estimates.
|
|
|
Government grants represent cash subsidies
received from the PRC government by the operating subsidiaries or VIEs of the Company.
Government grants are recognized after the grants have been received and all of the conditions
specified in the grant have been met, and are classified as operating or non-operating
profit based on the nature of the government grants.
|
|
|
The Company received government incentive
of $2,783,085, $4,165,627 and $135,381 from the local government for its business operations
for the years ended December 31, 2013, 2014 and 2015, respectively. This incentive has
been classified as operating profit because it was related to the Company’s business
operations.
|
|
|
Advertising costs are expensed as
incurred. Advertising costs amounted to $4,142,101, $190,697 and $259,086 for years ended
December 31, 2013, 2014 and 2015, respectively, of which nil, $6,280 and $9,366 were
related to discontinued operations for the years ended December 31, 2013, 2014 and 2015,
respectively, and were included in selling and marketing expenses.
|
|
(ad)
|
Concentration
of Risks
|
|
|
Concentration of Credit Risk
|
|
|
Financial instruments that potentially
subject the Company to significant concentration of credit risk primarily consist of
cash and cash equivalents, restricted cash and accounts receivable. As of December 31,
2013, 2014 and 2015, substantially all of the Group’s cash and cash equivalents
and restricted cash were managed by financial institutions with high credit ratings and
quality. Accounts receivable are typically unsecured and are derived from revenues earned
from customers in the PRC. The risk with respect to accounts receivables is mitigated
by credit evaluations performed on the customers and ongoing monitoring of outstanding
balances. The Group maintains and records an allowance for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments. The allowance
for doubtful accounts is based on a review of aging data and specifically identified
accounts. Accounts receivable are charged against the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote. There is no
individual customers with balances over 10% of the accounts receivable as of December
31, 2013 and 2015 one customer accounted for 13% of the accounts receivable as of
December 31, 2014.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- continued
|
|
(ad)
|
Concentration
of Risks
- continued
|
|
|
Current vulnerability due to certain other concentrations
|
|
|
Substantially all of the Group’s
businesses are transacted in RMB. Since the RMB is not a fully convertible currency,
all foreign exchange transactions involving the RMB must take place either through the
People’s Bank of China or other institutions authorized to buy and sell foreign
exchange. The exchange rates adopted for the foreign exchange transactions are the rates
of exchange quoted by the People’s Bank of China. Approval of foreign currency
payments by the People’s Bank of China or other institutions requires submitting
a payment application form together with supplier invoices, shipping documents and signed
contracts.
|
|
(ae)
|
Fair value
of financial instruments
|
|
|
Fair value is the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When determining the fair value
measurements for assets and liabilities required or permitted to be recorded at fair
value, the Group considers the principal or most advantageous market in which it would
transact and it considers assumptions that market participants would use when pricing
the asset or liability.
|
|
|
A fair value hierarchy is established
that requires the Company to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or liabilities (Level
1 measurements) and the lowest priority to measurements involving significant unobservable
inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
|
|
·
|
Level
1 applies to assets or liabilities for which there are quoted prices in active markets
for identical assets or liabilities.
|
|
·
|
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
asset 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 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.
|
|
|
The level in the fair value hierarchy
within which a fair value measurement in its entirety falls is based on the lowest level
input that is significant to the fair value measurement in its entirety.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- continued
|
|
(ae)
|
Fair value
of financial instruments
- continued
|
|
|
Measured at fair value on a recurring
basis
|
The carrying
amounts of financial instruments, which consist of cash and cash equivalents, restricted cash, accounts receivable, amounts due
from related parties, other current assets, short-term bank loans, derivative instrument, accounts payable, amounts due to related
parties and other current liabilities approximate their fair values due to the short term nature of these instruments.
The Group’s
financial assets and liabilities or nonfinancial assets and liabilities that were required to be measured at fair value on a recurring
basis as at December 31, 2014 and 2015 included derivative instrument - embedded conversion option. Derivative instrument - embedded
conversion option carried at fair value and the fair value of these embedded conversion option approximated the amounts the Group
would pay if these contracts were settled at the respective valuation dates. Fair value is estimated based on valuation model
that involved the probabilities of Qualified Financing (as defined in Note 17) and other market-based observable inputs such as
interest rate yields. Since significant unobservable inputs are used in the valuation model, the derivative instrument - embedded
conversion option represented a level 3 measurement in the fair value hierarchy. The significant unobservable input used was the
probabilities of Qualified Financing. Significant increase (decrease) in the probability would result in a significantly higher
(lower) fair value.
|
|
The following table shows the fair
value of the Company’s financial assets and liabilities measured at recurring basis
as of December 31, 2014 and 2015:
|
|
|
December
31, 2014
|
|
|
December
31, 2015
|
|
|
|
Fair
value measurements at the reporting date using
|
|
|
Fair
value measurements at the reporting date using
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
active markets
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
active markets
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
instruments
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
|
instruments
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
Total
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
instrument - embedded conversion option
|
|
|
-
|
|
|
|
-
|
|
|
$
|
3,398,642
|
|
|
$
|
3,398,642
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
3,961,380
|
|
|
$
|
3,961,380
|
|
|
|
Movement in derivative instrument
- embedded conversion option
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
Balance at beginning of the year
|
|
$
|
-
|
|
|
$
|
3,398,642
|
|
Issuance of embedded conversion option
|
|
|
3,556,160
|
|
|
|
-
|
|
Total gains or losses for the year (included in earning)
|
|
|
(157,518
|
)
|
|
|
562,738
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
$
|
3,398,642
|
|
|
$
|
3,961,380
|
|
There is
no transfer into or out of Level 3 during the years ended December 31, 2014 and 2015.
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- continued
|
|
(ae)
|
Fair value
of financial instruments
- continued
|
|
|
Measured at fair value on a non-recurring
basis
|
|
|
The Group measures certain assets,
including the intangible assets, cost method investments and equity method investments,
at fair value on a nonrecurring basis when they are deemed to be impaired. The estimated
fair value of the intangible assets at the time of impairment tests was estimated by
applying unobservable inputs to the discounted cash flow valuation methodology that are
significant to the measurement of the fair value of these assets (Level 3).
|
The fair
values of the cost method investments and equity method investments are determined based on valuation techniques using the best
information available, and may include management judgments, future performance projections, etc. An impairment charge to these
investments is recorded when the cost of the investment exceeds its fair value and this condition is determined to be other-than-temporary
by applying unobservable inputs such as forecasted financial performance, discount rate, etc. to the discounted cash flow valuation
methodology that are significant to the measurement of the fair value of these assets (Level 3).
|
(af)
|
Accounting
pronouncements recently adopted
|
|
|
In April 2014, the FASB has issued
an Accounting Standard Update (“ASU”) 2014-08 “Reporting Discontinued
Operations and Disclosures of Disposals of Components of an Entity”, which amends
the definition of a discontinued operation to include a disposal of a component or group
of components that is disposed of or is classified as held for sale and represents a
strategic shift that has (or will have) a major effect on an entity’s operations
and financial results. This ASU also expands disclosure requirements of discontinued
operation. The Group adopted this pronouncement effective from January 1, 2015, which
did not have a significant effect on the Group’s consolidated financial statements.
|
|
(ag)
|
Recently issued
accounting standards
not yet adopted
|
In May 2014,
the FASB issued an accounting standard update which outlines a single comprehensive model for entities to use in accounting for
revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific
guidance. The core principal of this new revenue recognition model is that an entity should recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled
in exchange for those goods or services. This update also requires enhanced disclosures regarding the nature, amount, timing,
and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.
In April 2015, FASB issued ASU
2015-03 “Interest - Imputation of Interest” on simplifying the presentation of the debt issuance costs so as to reduce
complexity. This ASU requires that debt issuance cost related to a recognized debt liability be deducted directly from the carrying
amount of the debt liability, consistent with the debt discount, when presenting in the balance sheet. However, the recognition
and measurement for debt issuance costs is not affected by the amendments. The amendments in this ASU are effective for fiscal
years beginning after December 15, 2015 and interim periods within those fiscal years and early adoption is permitted. FASB requires
that the amendments of this update should be applied retrospectively to all prior periods presented in the financial statements.
Management does not expect the adoption of this ASU would have a material impact on the Group’s consolidated financial statements.
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- continued
|
|
(ag)
|
Recently issued
accounting standards
not yet adopted - continued
|
|
|
In August 2015, the FASB issued an
accounting standard update which defers the effective date of the new revenue recognition
accounting guidance by one year, to annual and interim periods beginning after December
15, 2017, and early adoption is permitted for annual and interim periods beginning after
December 15, 2016. The guidance can be applied either retrospectively to each period
presented or as a cumulative-effect adjustment as of the date of adoption. Management
is currently assessing the potential impact of adopting this guidance on the Group’s
consolidated financial statements.
|
In November
2015, FASB issued ASU 2015-17 “Income Taxes-Balance Sheet Classification of Deferred Taxes”, which is intended to
simplify the presentation of deferred income taxes. This ASU requires that deferred tax liabilities and assets be classified as
noncurrent in a classified statement of financial position. The guidance is effective for fiscal years beginning after December
15, 2016 including interim periods within those fiscal years. Earlier application is permitted for all. Management is currently
assessing the potential impact of adopting this guidance on the Group’s consolidated financial statements.
In January
2016, FASB issued ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities”, which addresses
certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This ASU amends the accounting
for equity investments, the presentation of certain fair value changes for financial liabilities measured at fair value and certain
disclosure requirements associated with the fair value of financial instruments. For public business entities, the amendments
in this ASU are effective for fiscal years beginning after December 15, 2017, with early adoption permitted under certain circumstances.
Management is currently assessing the potential impact of adopting this guidance on the Group’s consolidated financial statements.
|
|
In February 2016, FASB issued ASU
2016-02 “Leases”, which outlines the recognition of right-of-use assets and
lease liabilities by lessees for virtually all leases. The guidance is effective for
interim and fiscal years beginning after December 15, 2018, and early adoption is permitted
for all entities. Management is currently assessing the potential impact of adopting
this guidance on the Group’s consolidated financial statements.
|
In March
2016, FASB issued ASU 2016-09 “Compensation - Stock Compensation”, which is intended to simplify certain aspects of
the accounting for share-based payment award transactions. The guidance is effective for fiscal years beginning after December
15, 2016, and early adoption is permitted for all entities. Management is currently assessing the potential impact of adopting
this guidance on the Group’s consolidated financial statements.
In March
2016, FASB issued ASU 2016-07 “Investments - Equity Method and Joint Ventures”, which is intended to simplify the
equity method of accounting. The guidance is effective for fiscal years beginning after December 15, 2016, and early adoption
is permitted for all entities. Management is currently assessing the potential impact of adopting this guidance on the Group’s
consolidated financial statements.
In
August 2016, FASB issued ASU 2016-15 “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments”,
which is intended to provide specific guidance on the certain
eight cash flow classification issues included in the amendments
in this Update.
The guidance is effective for fiscal years beginning after December 15, 2017, and
early adoption is permitted for all entities. Management is currently assessing the potential impact of adopting this guidance
on the Group’s consolidated financial statements.
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
3.
|
DISCONTINUED OPERATION
|
As refer
in Note 2(a), during the year ended December 31, 2015, the directors of the Company approved the plan to dispose the Subway Advertising
Business of the Group. As of December 31, 2015, Subway Advertising Business is available for immediate sale in its present condition
and being actively marketed for sale. There is an active program to locate a buyer. The directors considered that the sale of
Subway Advertising Business is probable within one year. Therefore, Subway Advertising Business is classified as held for sale
and accounted as discontinued operation during the year ended and as of December 31, 2015.
Subsequently on February 15,
2016, the Group announced the Sellers have entered into an equity transfer agreement and a profit compensation agreement to sell
all of Subway Advertising Business (“Disposal Group”) to a third party, Ledman, for an aggregate consideration of
RMB780 million (approximate to $119 million) (the “February 2016 Agreement”).
|
|
On August 19, 2016, the February 2016
Agreement was cancelled and the Sellers have entered into another equity transfer agreement
and a profit compensation agreement (the “Transaction”) to sell 49% equity
interest in the Disposal Group to Ledman for an aggregate consideration of RMB382.2 million
(equivalent to $58.3 million) (the “Consideration”).
|
|
|
Pursuant to the equity transfer
agreement, the Consideration comprises RMB61 million in cash and the other RMB321.2 million
in cash with restriction that such cash need to be used for purchasing the shares of
Ledman from a major shareholders of Ledman.
|
|
|
According to the profit compensation
agreement, in the event that the consolidated net profits attributable to the shareholders
(excluding extraordinary items) of New Culture in any of the fiscal years 2016, 2017
and 2018 (collectively, the “Covered Period”) are less than the profit target
for such fiscal year - RMB60 million, RMB80 million and RMB100 million, respectively
(the “Profit Targets”), VisionChina Subsidiaries will compensate Ledman for
the deficiency by returning a certain amount of the Ledman Shares to Ledman. In the event
that the Ledman Shares are not sufficient to compensate for such deficiency, VisionChina
Media Group will be required to pay compensation in cash. The compensation amount will
be calculated based on a pre-determined formula and subject to an aggregate cap in an
amount equal to the amount of the Consideration.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
3.
|
DISCONTINUED OPERATION
- continued
|
|
|
The consummation of the Transaction remains
subject to the requisite internal approvals of the relevant parties. There is no assurance
that these approvals will be obtained within the expected time frame, or at all.
|
|
|
Assets and liabilities of the Disposal
Group are classified as held for sale as of December 31, 2014 and 2015 and are comprised
of the following:
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,818
|
|
|
$
|
127,712
|
|
Accounts receivable, net of allowance for doubtful
accounts of $1,690,317 and $512,517 as of December 2014 and 2015, respectively
|
|
|
18,940,000
|
|
|
|
11,540,775
|
|
Amount due from a related party (Note)
|
|
|
308,276
|
|
|
|
250,677
|
|
Prepaid expenses and other current assets
|
|
|
2,286,387
|
|
|
|
3,353,056
|
|
Fixed assets, net
|
|
|
2,077,022
|
|
|
|
1,188,040
|
|
Investment under equity method
|
|
|
153,660
|
|
|
|
164,618
|
|
|
|
|
|
|
|
|
|
|
Total assets
of the disposal group classified as held for sale in the Consolidated Balance Sheets
|
|
$
|
23,783,163
|
|
|
$
|
16,624,878
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,509,420
|
|
|
$
|
855,909
|
|
Accrued expenses and other current
liabilities
|
|
|
1,019,516
|
|
|
|
1,283,619
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
of the disposal group classified as held for sale in the Consolidated Balance Sheets
|
|
$
|
3,528,936
|
|
|
$
|
2,139,528
|
|
Note: The amount due from a related party is non-interest
bearing and repayable on demand.
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
3.
|
DISCONTINUED OPERATION
- continued
|
|
|
The following table presents the amounts
of the major line items that are included in discontinued operations, net of income tax
that are presented on the Consolidated Statements of Operations.
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Advertising service revenue to third-parties
|
|
$
|
49,558,469
|
|
|
$
|
50,197,097
|
|
|
$
|
36,627,419
|
|
Advertising equipment revenue to related parties
|
|
|
1,139,078
|
|
|
|
931,444
|
|
|
|
891,771
|
|
Advertising service cost to third-parties
|
|
|
(41,974,817
|
)
|
|
|
(44,173,428
|
)
|
|
|
(24,883,087
|
)
|
Selling and marketing expenses
|
|
|
(5,039,274
|
)
|
|
|
(4,889,498
|
)
|
|
|
(3,871,035
|
)
|
General and administrative expenses
|
|
|
(258,269
|
)
|
|
|
(3,010,454
|
)
|
|
|
(1,394,838
|
)
|
Share of profits from equity method investee
|
|
|
16,805
|
|
|
|
55,831
|
|
|
|
18,991
|
|
Interest income
|
|
|
63
|
|
|
|
65
|
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations before income
taxes
|
|
|
3,442,055
|
|
|
|
(888,943
|
)
|
|
|
7,389,520
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net
of income tax
|
|
$
|
3,442,055
|
|
|
$
|
(888,943
|
)
|
|
$
|
7,389,520
|
|
|
|
Summarized cash flow information
for discontinued operations are as follows:
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
6,155,890
|
|
|
$
|
1,838,411
|
|
|
$
|
(2,315,406
|
)
|
Net cash used in investing activities
|
|
|
(5,653,461
|
)
|
|
|
(333,839
|
)
|
|
|
(252,121
|
)
|
Net cash from financing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The Company has solicited
for purchasers during 2015. As of December 31, 2015, based on the status of negotiations between the Company and the purchaser
of the subway business, the directors of the Company considered that the sale of subway business was probable and that the criteria
for classification of subway business as an Asset Held for Sale had been met. As a result, during the year ended December 31,
2015 and as of December 31, 2015, the Group presented the operations of subway business to discontinued operations and the assets
to Assets Held for Sale and liabilities to Liabilities Held for Sale.
These assets held for sale
primarily consisted of property and equipment and trade receivables and were recorded at the lower of the assets’ carrying
amount or their fair value less estimated costs to sell. The Group derives fair value estimates from definitive sales agreements,
appraisals, established market values of comparable assets, or internal estimates of future net cash flows. Fair value estimates
can change by material amounts in subsequent periods. Many factors and assumptions can impact fair value estimates, including
the future financial results of discontinued operations and how they are operated by the Group until they are divested, changes
in advertising industry trends and regulations until the business is disposed.
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
33,466,215
|
|
|
$
|
16,485,674
|
|
Less: Allowance for doubtful accounts
|
|
|
(15,479,534
|
)
|
|
|
(2,465,977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,986,681
|
|
|
$
|
14,019,697
|
|
|
|
Movements in allowance for doubtful accounts
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
Balance at beginning of the year
|
|
$
|
9,510,186
|
|
|
$
|
15,479,534
|
|
Foreign exchange adjustment
|
|
|
(37,459
|
)
|
|
|
(839,955
|
)
|
Allowance for doubtful accounts
|
|
|
6,006,807
|
|
|
|
2,993,675
|
|
Amounts written off as uncollectible
|
|
|
-
|
|
|
|
(15,167,277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,479,534
|
|
|
$
|
2,465,977
|
|
|
|
Accounts receivable of $17.2 million and
$13.8 million are pledged to secure the CCB Facilities granted by CCB (SZ) (as defined
and detailed in Note 11) as at December 31, 2014 and 2015, respectively.
|
|
|
As at December 31, 2014 and 2015, the
Group had billed accounts receivable of $26,962,525 and $8,298,616, respectively, and
unbilled accounts receivable of $6,503,690 and $8,187,058, respectively. Unbilled accounts
receivable represent amounts earned under advertising contracts in progress but not billable
at December 31, 2014 and 2015. These amounts become billable according to contract term.
The Group anticipates that substantially all of such unbilled amounts will be billed
and collected within twelve months of the balance sheet date.
|
|
5.
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
|
|
Prepaid expenses and other current assets
consist of the following:
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
Advances to suppliers
|
|
$
|
7,045,046
|
|
|
$
|
2,900,450
|
|
Prepaid expenses
|
|
|
5,344,346
|
|
|
|
8,933,296
|
|
Barter goods
|
|
|
1,977,228
|
|
|
|
1,859,095
|
|
Other current assets
|
|
|
3,503,898
|
|
|
|
2,548,055
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,870,518
|
|
|
$
|
16,240,896
|
|
|
|
Advances to suppliers mainly represent
prepayment for media costs.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
|
Fixed assets consist of the following:
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
Media display equipment
|
|
$
|
11,733,704
|
|
|
$
|
15,642,153
|
|
Wi-Fi equipment
|
|
|
164,077
|
|
|
|
6,530,020
|
|
Computers and office equipment
|
|
|
3,636,351
|
|
|
|
4,704,191
|
|
Motor vehicles
|
|
|
659,494
|
|
|
|
596,989
|
|
Leasehold improvements
|
|
|
2,314,882
|
|
|
|
2,870,695
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
18,508,508
|
|
|
|
30,344,048
|
|
Less: accumulated depreciation and amortization
|
|
|
(14,114,608
|
)
|
|
|
(13,524,510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,393,900
|
|
|
$
|
16,819,538
|
|
|
|
Depreciation expense was $4,112,181, $3,288,751
and $1,864,250 for the years ended December 31, 2013, 2014 and 2015, respectively, of
which $2,064,681, $1,817,788 and $869,825 were related to discontinued operations for
the years ended December 31, 2013, 2014 and 2015, respectively.
|
|
|
Included in media display equipment and
Wi-Fi equipment are assembly in progress of $1,282,686 and $6,778,562 as of December
31, 2014 and 2015, respectively. These assets are expected to be placed in service in
the following year.
|
|
7.
|
INTANGIBLE ASSETS, NET
|
|
|
As of December 31, 2014 and 2015, the
Group had the following amounts related to the intangible assets:
|
|
|
|
|
December 31, 2014
|
|
|
December 31, 2015
|
|
|
|
Weighted
average
|
|
|
|
|
Accumulated
|
|
|
Impairment
|
|
|
Net Carrying
|
|
|
|
|
|
Accumulated
|
|
|
Impairment
|
|
|
Net Carrying
|
|
|
|
economic life
|
|
Cost
|
|
|
amortization
|
|
|
loss
|
|
|
values
|
|
|
Cost
|
|
|
amortization
|
|
|
loss
|
|
|
values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
10 years
|
|
|
280,974
|
|
|
|
(138,507
|
)
|
|
|
-
|
|
|
|
142,467
|
|
|
|
268,393
|
|
|
|
(155,611
|
)
|
|
|
-
|
|
|
|
112,782
|
|
Trademark
|
|
10 years
|
|
|
328,619
|
|
|
|
(111,391
|
)
|
|
|
-
|
|
|
|
217,228
|
|
|
|
310,787
|
|
|
|
(135,756
|
)
|
|
|
-
|
|
|
|
175,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
609,593
|
|
|
$
|
(249,898
|
)
|
|
$
|
-
|
|
|
$
|
359,695
|
|
|
$
|
579,180
|
|
|
$
|
(291,367
|
)
|
|
$
|
-
|
|
|
$
|
287,813
|
|
|
|
The Company estimates the fair value of
the intangible assets through internal analysis, which utilizes income approach through
the application of discounted cash flow method. The valuation technique is based on a
number of estimates and assumptions, including the projected future cash inflow from
the intangible assets, appropriate discount rates and long-term growth rates.
|
No impairment loss on intangible
assets was recorded during the years ended December 31, 2013, 2014 and 2015.
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
7.
|
INTANGIBLE ASSETS, NET
- continued
|
|
|
The Group recorded amortization expense as follows:
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
$
|
51,316
|
|
|
$
|
57,687
|
|
|
$
|
57,807
|
|
|
8.
|
INVESTMENTS UNDER EQUITY METHOD
|
|
|
The Group had, in total, twelve equity
method investees which are engaged in provision of digital mobile television advertising
services in the PRC as of December 31, 2014 and 2015, respectively. The Group has accounted
for these investments using the equity method of accounting. There is nil, nil and $537,939
impairment loss recognised on the investments under equity method for the year ended
December 31, 2013, 2014 and 2015, respectively. No impairment loss recognised on the
investments under equity method is related to discontinued operations for the years ended
December 31, 2013, 2014 and 2015, respectively.
|
|
|
The combined results of operations and
financial position of these investments are summarized below:
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
Condensed statement of
operations information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
12,436,311
|
|
|
$
|
17,260,168
|
|
|
$
|
14,237,107
|
|
Net income
|
|
|
226,421
|
|
|
|
118,987
|
|
|
|
1,082,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group’s equity in net income
of investees
|
|
$
|
110,362
|
|
|
$
|
55,524
|
|
|
$
|
529,642
|
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
Condensed balance sheet information:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
15,227,141
|
|
|
$
|
16,482,244
|
|
Non-current assets
|
|
|
3,209,706
|
|
|
|
2,173,274
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
18,436,847
|
|
|
|
18,655,518
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
5,832,265
|
|
|
|
5,716,659
|
|
Non-current liabilities
|
|
|
392,352
|
|
|
|
394,703
|
|
Equity
|
|
|
12,212,230
|
|
|
|
12,544,156
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
|
18,436,847
|
|
|
|
18,655,518
|
|
|
|
|
|
|
|
|
|
|
Group’s share of net assets
|
|
$
|
5,983,993
|
|
|
$
|
6,146,636
|
|
|
|
As of December 31, 2014 and 2015, the
carrying value of the Group’s investments under the equity method was $7,431,629
and $6,874,627, respectively. The difference between the carrying value of the Group’s
investments under the equity method and the Group’s share in its investees’
net assets was attributable to the elimination of unrealised profits on the sales of
certain media display equipment to its investees; and the adjustment attributable to
intangible assets, which represent the broadcasting rights contributed by the investors,
identified on formation and its related amortization (see Note 2(ae)).
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
|
In 2006, the Group acquired a 25% equity
interest in Shenzhen Mobile Television Company Limited (“Shenzhen Mobile”),
through VisionChina Media Group’s subsidiary, Shenzhen HDTV. Shenzhen Mobile was
established in the PRC and engages in the provision of digital mobile television advertising
services in the PRC. Although the Group has 25% voting power in board meetings of Shenzhen
Mobile, the Group cannot exercise significant influence over Shenzhen Mobile’s
operating and financial activities because the remaining 75% voting power is dominated
by a sole controlling shareholder of Shenzhen Mobile and only that sole controlling shareholder
can appoint key management personnel in Shenzhen Mobile. The Group accounts for this
investment using the cost method of accounting. During the years ended December 31, 2013,
2014 and 2015, the Group received dividend income from Shenzhen Mobile of nil, $210,466
and nil, respectively. $648,427 impairment loss on investment cost was recognised during
the year ended December 31, 2015 (see Note 2(n)).
|
|
|
In 2006, the Group acquired a 14% equity
interest in Wuxi Guangtong Digital Mobile Television Company Limited (“Guangtong
Mobile”). During the year ended December 31, 2009, all equity holders of Guangtong
Mobile made an additional capital injection and in order to retain the same percentage
of ownership, the Company also made an additional capital injection of $389,048. Guangtong
Mobile was established in the PRC and engages in the provision of digital mobile television
advertising business in the PRC. As the Group has 14% voting power in board meetings
of Guangtong Mobile, the Group accounts for this investment using the cost method of
accounting. During the year ended December 31, 2013, 2014 and 2015, the Group received
dividend income from Guangdong Mobile of $128,611, $44,293 and $44,827, respectively.
|
|
|
In 2011, the Group acquired a 20% equity
interest in Shenzhen Eastlong Huatong Technology Development Company Limited (“Eastlong
Huatong”) at a consideration of $157,423. Eastlong Huatong was established in the
PRC and engages in development of multimedia interactive information system for subway
in PRC. As the Group does not have any voting power in board meetings of Eastlong Huatong,
the Group cannot exercise significant influence over Eastlong Huatong’s operating
and financial activities. The Group accounts for this investment using the cost method
of accounting. $159,877 impairment loss on investment cost was recognised during the
year ended December 31, 2015.
|
|
10.
|
LONG-TERM PREPAYMENTS AND DEPOSITS
|
|
|
Long term prepayments and deposits consist
of the following:
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
Prepayments for acquisition of fixed assets
|
|
$
|
1,484,843
|
|
|
$
|
542,647
|
|
Other deposits
|
|
|
2,000,350
|
|
|
|
2,848,375
|
|
Other long-term prepayments
|
|
|
615,373
|
|
|
|
484,163
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,100,566
|
|
|
$
|
3,875,185
|
|
|
|
Other deposits mainly represent deposits
for concession contracts.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
11.
|
BANK LOANS AND FACILITIES
|
|
|
The Group has entered into $21.3 million
(approximate to RMB130 million), RMB denominated secured revolving credit facility granted
by CCB(SZ) to VisionChina Media Group, expired on January 9, 2015 (the “CCB Facility”).
The CCB Facility is secured by accounts receivable of VisionChina Media Group. The CCB
Facility is available for general corporate working capital purposes at an interest rate
in a range between 95% to 160% of the Benchmark Rate. The CCB Facility contains restrictive
financial covenant of maintaining a leverage ratio of 65% by VisionChina Media Group.
Violation of such covenant could result in a default under the CCB Facility, which would
permit the CCB(SZ) to terminate the CCB Facility available to the Group and require immediate
repayment from the Group of any outstanding loans advanced under the CCB Facility. The
Group is in compliance with such financial covenant as of December 31, 2014. As of December
31, 2014, there were borrowings of $13.8 million. The amount of $7.5 million of the CCB
Facility was unutilised. As of December 31, 2015, there were no such borrowings.
|
|
|
In January 2015, the Group has entered
into another $16.3 million (approximate to RMB100 million), RMB denominated secured revolving
credit facility granted by CCB(SZ) to VisionChina Media Group, scheduled to expire on
January 26, 2016 (the “2015 CCB Facility”). The 2015 CCB Facility is secured
by accounts receivable of VisionChina Media Group. The 2015 CCB Facility is available
for general corporate working capital purposes at an interest rate in a range between
99.54% to 103.46% of the Loan Prime Rate in the PRC. The 2015 CCB Facility contains restrictive
financial covenant of maintaining a leverage ratio of 65% by VisionChina Media Group.
It is cancelable by CCB(SZ) if there is any material adverse change or failure to maintain
satisfactory operations of VisionChina Media Group. Violation of such covenant could
result in a default under the 2015 CCB Facility, which would permit the CCB(SZ) to terminate
the 2015 CCB Facility available to the Group and require immediate repayment from the
Group of any outstanding loans advanced under the 2015 CCB Facility. The Group is in
compliance with such financial covenant as of December 31, 2015. As of December 31, 2015,
the 2015 CCB Facility was fully utilised and there were borrowings of $9.2 million.
|
|
|
The Group’s bank loans consist of
the following:
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
CCB Facility
|
|
|
|
|
|
|
|
|
- Interest rate in a range between 95%
to 160% of Benchmark Rate, denominated in RMB
|
|
$
|
13,847,031
|
|
|
$
|
-
|
|
2015 CCB Facility
|
|
|
|
|
|
|
|
|
- Interest rate in a range between
99.54% to 103.46% of the Loan Prime Rate in the PRC, denominated in RMB
|
|
|
-
|
|
|
|
9,243,995
|
|
|
|
|
|
|
|
|
|
|
Total bank loans
|
|
|
13,847,031
|
|
|
|
9,243,995
|
|
|
|
|
|
|
|
|
|
|
Less: Amount due within one year
shown under current liabilities
|
|
|
13,847,031
|
|
|
|
9,243,995
|
|
|
|
|
|
|
|
|
|
|
Amount due after one year shown
under non-current liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
12.
|
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
|
|
Accrued expenses and other current liabilities consist of the following:
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
Accrued payroll and welfare
|
|
$
|
3,121,361
|
|
|
$
|
2,476,248
|
|
Customer deposits
|
|
|
4,877,924
|
|
|
|
1,362,770
|
|
Accrued penalty for the early termination of exclusive
agency agreement (Note 18(d))
|
|
|
10,386,179
|
|
|
|
9,822,602
|
|
Accrued expenses
|
|
|
8,177,991
|
|
|
|
8,578,908
|
|
Other current liabilities
|
|
|
4,565,222
|
|
|
|
10,618,219
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,128,677
|
|
|
$
|
32,858,747
|
|
|
|
There were 102,121,144 common shares issued
and outstanding as of December 31, 2014 after the issuance of 560,400 common shares as
a result of the issuance of 560,400 restricted shares (see Note 15).
|
|
|
There were 102,741,977 common shares issued
and outstanding as of December 31, 2015 after the issuance of 620,833 common shares as
a result of the issuance of 620,833 restricted shares (see Note 15).
|
|
|
The Company is a tax exempted company
incorporated in the Cayman Islands and conducts substantially all of its business through
its PRC subsidiaries, CDTC and Eastlong Technology, and their VIEs, VisionChina Media
Group and Eastlong Advertising.
|
|
|
The Company which was incorporated in
the Cayman Islands and its subsidiaries incorporated in Cayman Islands and BVI are all
not subject to income tax under the current laws of the Cayman Islands and BVI. In addition,
payments of dividends by the Company to its shareholders, are not subject to Cayman Islands
or BVI withholding tax.
|
|
|
The Company’s subsidiaries established
in HK are subject to HK profits tax on all profits (excluding profits arising from the
sale of capital assets, dividend income and interest income) arising in or derived from
HK from its trade, profession or business. The normal applicable profits tax rate is
16.5%.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
14.
|
INCOME TAXES
- continued
|
|
|
On January 1, 2008, the new enterprise
income tax (“EIT”) law in the PRC (the “New EIT Laws”) took effect.
It applies a uniform tax rate of 25% for all enterprises (including foreign-invested
enterprises) and revoked the current tax exemption, reduction and preferential treatments
applicable to foreign-invested enterprises. However, there is a transition period for
enterprises, whether foreign-invested or domestic, that were receiving preferential tax
treatments granted by relevant tax authorities at the time when New EIT Law took effect.
Enterprises that were subject to an EIT rate lower than 25% prior to January 1, 2008
may continue to enjoy the lower rate and gradually transition to the new tax rate over
the five year period after the effective date of the New EIT Law. According to the implementation
regulations, during the transition period the EIT rate for CDTC, Shenzhen HDTV and DMG
Shenzhen is 20%, 22% and 24% in the years 2009, 2010 and 2011, respectively. The EIT
rate is 25% in the year of 2012, 2013, 2014 and 2015.
|
|
|
In accordance with a circular issued in
November 2008, VisionChina Media Group has been recognized as a state-encouraged high-new
technology enterprise since 2008, and the status is valid for a period of three years
and was therefore entitled to a preferential tax rate of 15% in 2008, 2009 and 2010.
In October 2011 and September 2014, VisionChina Media Group obtained the approval to
continue being recognized as a state encouraged high-new technology enterprise for three
consecutive years respectively, and is entitled to a preferential tax rate of 15% in
these six years. The tax rate is 15% in the year of 2015.
|
|
|
In accordance with a circular issued in
January 2013, Shenzhen Qianhai is entitled to a reduced tax rate of 15% starting from
2013, and is valid for a period of eight years from 2013 to 2020.
|
|
|
In accordance with a circular issued in
December 2010, Eastlong Technology has been recognized as a state-encouraged high-new
technology enterprise starting from 2010, and the status is valid for a period of three
years. Eastlong Technology is thus entitled to a preferential tax rate of 15% in 2010,
2011 and 2012. The EIT rate for Eastlong Technology is 25% in the year of 2013, 2014
and 2015.
|
|
|
Luzhou Huashi was established in Sichuan.
It is recognized as a “Local government encouraged company” and is entitled
to a reduced tax rate of 7.5% for the years ended December 31, 2010, 2011 and 2012, and
a reduced tax rate of 15% for the year ended December 31, 2013. The tax rate is 25% for
the year of 2014 and 2015.
|
|
|
Notwithstanding the applicable statutory
tax rates noted above, in 2013, 2014 and 2015, under the direction of the relevant in-charge
tax authority, Jiangxi Huashi applied a deemed-profit-rate method for its annual tax
filings in 2013, 2014 and 2015. Pursuant to the deemed-profit-rate method, taxable income
for Jiangxi Huashi was deemed at 16% of revenues. An additional amount of $140,000, nil
and nil would otherwise have been payable if deemed-profit-rate method is not allowed
for the year ended December 31, 2013, 2014 and 2015, respectively.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
14.
|
INCOME TAXES
- continued
|
|
|
In March 2015, under the direction of
the relevant in-charge tax authority, Guangzhou Jiaojian applied a deemed-profit-rate
method for its annual tax filings in 2015. Pursuant to the deemed-profit-rate method,
taxable income for Guangzhou Jiaojian was deemed at 12% of revenues. An additional amount
of $164,919, $138,750 and nil would otherwise have been payable if deemed-profit-rate
method is not allowed for the year ended December 31, 2013, 2014 and 2015, respectively.
|
|
|
The Company and its other subsidiaries
in the PRC have minimal operations and the Group has minimal operations in jurisdictions
other than the PRC.
|
|
|
The current and deferred components of
the income tax expenses (benefits) appearing in the consolidated statements of operations
are as follows:
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Current tax
|
|
$
|
70,426
|
|
|
$
|
(9,283
|
)
|
|
$
|
-
|
|
Deferred tax
|
|
|
303,158
|
|
|
|
151,837
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
373,584
|
|
|
$
|
142,554
|
|
|
$
|
-
|
|
|
|
The principal components of the Group’s deferred income tax
assets and liabilities are as follows:
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carrying forward
|
|
$
|
18,481,333
|
|
|
$
|
17,625,830
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
18,481,333
|
|
|
|
17,625,830
|
|
Valuation allowance on deferred tax assets
|
|
|
(18,481,333
|
)
|
|
|
(17,625,830
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (non-current)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Movement of valuation allowance:
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
At the beginning of the year
|
|
$
|
18,238,463
|
|
|
$
|
17,777,605
|
|
|
$
|
18,481,333
|
|
Tax loss expired
|
|
|
(1,732,828
|
)
|
|
|
(3,039,002
|
)
|
|
|
(2,501,714
|
)
|
Liquidation of subsidiaries
|
|
|
(303,557
|
)
|
|
|
(324,524
|
)
|
|
|
-
|
|
Exchange realignment
|
|
|
541,242
|
|
|
|
(66,707
|
)
|
|
|
(929,898
|
)
|
Change in tax rate
|
|
|
920,005
|
|
|
|
37,653
|
|
|
|
95,238
|
|
Change for the year
|
|
|
114,280
|
|
|
|
4,096,308
|
|
|
|
2,480,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At the end of the year
|
|
$
|
17,777,605
|
|
|
$
|
18,481,333
|
|
|
$
|
17,625,830
|
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
14.
|
INCOME TAXES
- continued
|
|
|
A valuation allowance has been provided
on the deferred tax assets because the Group believes that it is not more likely than
not that the assets will be utilized. As of December 31, 2014 and 2015, a valuation allowance
was provided for the deferred tax assets relating to the future benefit of net operating
loss carry forward as the management determined that the utilization of those net operating
loss carry forward is not more likely than not. If events occur in the future that allow
the Group to realize more of its deferred tax assets than the presently recorded amount,
an adjustment to the valuation allowance will be made when those events occur.
|
|
|
As of December 31, 2015, the Group had
net operating loss carry forward of approximately $1,949,882, $39,449,965, $10,620,102,
$9,339,940 and $12,699,558 that will expire in the years ending December 31, 2016, 2017,
2018, 2019 and 2020, respectively.
|
|
|
A reconciliation of the income tax benefits
to the amount computed by applying the current tax rate to loss before income taxes in
the statements of operations is as follows:
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
Expected taxation at PRC EIT statutory
rate of 25%
|
|
$
|
(5,920,694
|
)
|
|
$
|
(7,830,848
|
)
|
|
$
|
(6,330,915
|
)
|
Effect of different tax rates
|
|
|
1,069,008
|
|
|
|
(731,720
|
)
|
|
|
1,503,740
|
|
Effect of loss that cannot be carried forward
|
|
|
1,305,869
|
|
|
|
754,828
|
|
|
|
109,710
|
|
Tax expense arising from items which are not deductible
or not taxable for tax purpose:
|
|
|
|
|
|
|
|
|
|
|
|
|
- non-deductible entertainment expenses
|
|
|
584,296
|
|
|
|
305,119
|
|
|
|
240,274
|
|
- others, net
|
|
|
3,906,086
|
|
|
|
1,245,086
|
|
|
|
814,053
|
|
Effect of tax exemption and tax concessions
|
|
|
(685,261
|
)
|
|
|
2,303,781
|
|
|
|
1,182,267
|
|
Change in valuation allowance
|
|
|
114,280
|
|
|
|
4,096,308
|
|
|
|
2,480,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expenses
|
|
$
|
373,584
|
|
|
$
|
142,554
|
|
|
$
|
-
|
|
|
|
The amount of $685,261 would otherwise
have been payable without tax exemptions and tax concessions for the years ended December
31, 2013. In addition, $0.007 would have been deducted from the basic net loss per share
for the years ended December 31, 2013.
|
|
|
Uncertainties exist with respect to how
the PRC’s current income tax law applies to the Company’s overall operations,
and more specifically, with regard to tax residency status. The New EIT Law includes
a provision specifying that legal entities organized outside of the PRC will be considered
residents for PRC income tax purposes if their place of effective management or control
is within PRC. The Implementation Rules to the New Law provide that non-resident legal
entities will be considered PRC residents if substantial and overall management and control
over the manufacturing and business operations, personnel, accounting, properties, etc.
occurs within the PRC. Due to the present uncertainties resulting from the limited PRC
tax guidance on this issue, it is unclear that the legal entities organized outside of
PRC should be treated as residents for New EIT Law purposes. Because substantially all
of the Company’s revenues on a consolidated basis are generated in the PRC, and
the Company’s legal entities organized outside of the PRC does not generate any
taxable income on a standalone basis, even if one or more of the Company’s legal
entities organized outside of the PRC were characterized as PRC tax residents, the Company
does not expect any significant adverse impact on the Company’s consolidated results
of operations.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
14.
|
INCOME TAXES
- continued
|
|
|
As of December 31, 2015, the Company’s
subsidiaries and VIEs in the PRC had no aggregate undistributed earnings that are available
for distribution to the Company. Any aggregate undistributed earnings are considered
to be indefinitely reinvested under FASB ASC 740, and accordingly, no provision has been
made for the PRC dividend withholding taxes that would be payable upon the distribution
of those amounts to the Company. However, the actual amount of earnings distributable
to the Company from its subsidiaries and VIEs in the PRC could vary as a result of the
restrictions and procedures governed by the relevant tax authorities and the State Administration
of Foreign Exchange. In an announcement formally made on February 22, 2008, the PRC authorities
clarified that the distributions made out of undistributed earnings that arose prior
to January 1, 2008 would not give rise to withholding tax.
|
|
|
The Group has made its assessment of the
level of tax authority for each tax position (including the potential application of
interest and penalties) based on the technical merits in each case, and has measured
the unrecognized tax benefits associated with the tax positions. Based on this evaluation,
the Group has concluded that there are no significant uncertain tax positions requiring
recognition in its consolidated financial statements. The Group does not anticipate any
significant increases or decreases to its liability for unrecognized tax benefits within
the next twelve months. The Group classifies interest and/or penalties related to income
tax matters in income tax benefit (expense). As of December 31, 2015, there is no
interest or penalties related to uncertain tax positions. The years 2010 to 2015 remain
subject to examination by the PRC tax authorities.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
|
On December 8, 2006, the Group adopted
the 2006 share incentive plan (the “Plan”) which allows the Group to offer
a variety of incentive awards to consultants and employees. The Group reserved 7,000,000
ordinary shares in 2006 and 2007 for issuance under the Plan. In December 2008, the total
number of share issuable under the Plan was increased to 8,000,000 shares.
|
|
|
In 2013, 2014 and 2015, the Group granted
1,036,500, 700,000 and nil, respectively, restricted shares to employees. No share options
were granted in 2013, 2014 and 2015.
|
|
|
The contractual term of the share options
granted is generally ten years. The majority of the share options granted vest 25% after
the first year of service and ratably over the remaining 36-month period, and certain
of the share options vest contingent upon meeting performance criteria set by the Company
over a performance period ranging from 9 months to 48 months from the respective grant
dates. For the share options that would vest based on performance conditions, the performance
criteria are linked to the employees’ job performance, and at the end of the performance
period, the Company determines at its sole discretion whether each employee has met all
performance criteria for the vesting of the share options. The performance criteria do
not affect the exercise price or factors other than vesting or exercisability.
|
|
|
No share options are granted to employees
during the years ended December 31, 2013, 2014 and 2015.
|
|
|
A summary of share options under the Plan
during the years ended December 31, 2013, 2014 and 2015 is presented below:
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Number
|
|
|
Weighted-
|
|
|
average
|
|
|
Weighted-
|
|
|
|
of
|
|
|
average
|
|
|
remaining
|
|
|
average
|
|
|
|
shares
|
|
|
exercise
price
|
|
|
contractual
life
|
|
|
fair
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of January 1, 2013
|
|
|
1,488,696
|
|
|
$
|
4.22
|
|
|
|
5.28
|
|
|
$
|
1.46
|
|
Forfeited
|
|
|
(70,276
|
)
|
|
|
5.10
|
|
|
|
|
|
|
|
2.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of December 31, 2013
|
|
|
1,418,420
|
|
|
$
|
4.01
|
|
|
|
4.20
|
|
|
$
|
1.33
|
|
Forfeited
|
|
|
(9,360
|
)
|
|
|
11.13
|
|
|
|
|
|
|
|
6.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of December 31, 2014
|
|
|
1,409,060
|
|
|
$
|
4.00
|
|
|
|
3.20
|
|
|
$
|
1.32
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of December 31, 2015
|
|
|
1,409,060
|
|
|
$
|
4.00
|
|
|
|
2.20
|
|
|
$
|
1.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
as of December 31, 2015
|
|
|
1,409,060
|
|
|
$
|
4.00
|
|
|
|
2.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
or expected to vest as of December 31, 2015
|
|
|
1,409,060
|
|
|
$
|
4.00
|
|
|
|
2.20
|
|
|
|
|
|
|
|
The Company received proceeds of nil,
nil and nil from exercise of share options by the employee during the years ended December
31, 2013, 2014 and 2015, respectively.
|
|
|
The aggregate intrinsic value of options
outstanding, options exercisable and options vested or expected to vest as of December
31, 2015 was $nil, $nil, and $nil, respectively.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
15.
|
SHARE INCENTIVE PLAN
- continued
|
|
|
A summary of restricted shares under the Plan during the years ended
December 31, 2013, 2014 and 2015 is presented below:
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
average
|
|
|
|
shares
|
|
|
fair value
|
|
|
|
|
|
|
|
|
Outstanding as of January 1, 2013
|
|
|
443,351
|
|
|
$
|
2.96
|
|
Granted
|
|
|
1,036,500
|
|
|
|
0.59
|
|
Forfeited
|
|
|
(181,251
|
)
|
|
|
0.78
|
|
Vested
|
|
|
(194,200
|
)
|
|
|
0.81
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2013
|
|
|
1,104,400
|
|
|
$
|
1.07
|
|
Granted
|
|
|
700,000
|
|
|
|
0.53
|
|
Forfeited
|
|
|
(48,600
|
)
|
|
|
0.42
|
|
Vested
|
|
|
(560,400
|
)
|
|
|
0.59
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2014
|
|
|
1,195,400
|
|
|
$
|
0.75
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(620,833
|
)
|
|
|
0.5
3
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2015
|
|
|
574,567
|
|
|
$
|
0.62
|
|
|
|
The fair value of restricted shares was
determined to be the market value of the common shares on the date of grant.
|
|
|
Restricted shares are granted subject
to certain restrictions. The majority of the restricted shares generally vest 25% after
the first year of service and rateably over the remaining 36-month period, and certain
of the restricted shares vest based on certain performance conditions.
|
|
|
The total share-based compensation expense
in relation to options and restricted shares recognized in the statements of operations
for the years ended December 31, 2013, 2014 and 2015 was $842,290, $570,861 and $183,814,
respectively.
|
|
|
As of December 31, 2015, total unrecognized
share-based compensation expenses related to non-vested share options and non-vested
restricted shares granted under the Plan amounted to $86,090. Such unrecognized expenses
are expected to be recognized over 1.5 years.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
16.
|
PRC CONTRIBUTION PLAN
|
|
|
The Group’s full time employees
in the PRC participate in a government-mandated multiemployer defined contribution plan
pursuant to which certain medical care unemployment insurance, employee housing fund
and other welfare benefits are provided to employees. The PRC labour regulations require
the Group to accrue for these benefits based on certain percentages of the employees’
salaries. The total contributions for such employee benefits for the years ended December
31, 2013, 2014 and 2015 were $1,665,975, $1,510,645 and $1,982,144, respectively, of
which $1,013,181, $918,715 and $1,214,841 were related to discontinued operations for
the years ended December 31, 2013, 2014 and 2015, respectively.
|
|
17.
|
CONVERTIBLE
PROMISSORY NOTES AND DERIVATIVE INSTRUMENT
|
|
|
On April 30, 2014, the Company issued
a $58 million of convertible promissory notes (“Notes”) to the Former DMG
Shareholders as part of the Settlement Agreement (as defined in Note 18(c)) (“Noteholders”).
The Notes will be redeemed by the Company in instalments on each anniversary of the issue
date from the first to the sixth anniversaries of the issue date, at the amount of $4
million, $5 million, $13.5 million, $16.5 million, $16million and $3 million, respectively.
Interest on the Notes is accrued at a rate of the actual weighted average borrowing rate
of the Company per annum. The weighted average borrowing rate of the Group as of December
31, 2014 and 2015 is 6.670% and 6.935%, respectively. The Notes are convertible at the
elections of the holders of the Notes in certain scenarios.
|
|
|
The Notes do not contain a mandatory conversion
requirement. The Notes held by a holder are optionally convertible at the election of
such Noteholders in either of the following two scenarios:
|
|
|
Conversion Qualified Financing
|
|
|
Upon the closing of any transactions in
which the Company issues equity securities or securities convertible into equity (“Qualified
Financing”), the Noteholders shall optionally convert the Notes, at the election
of the holders of the Notes.
|
|
|
The maximum amount of the Notes the Noteholders
may convert shall not exceed the lower of (i) outstanding principal plus accrued interest
under the Notes; and (ii) gross proceeds in the Qualified Financing. Conversion price
shall be 80% of (i) the effective per share price in the Qualified Financing; or (ii)
conversion price for the debt or other securities convertible into common shares to be
issued in the Qualified Financing.
|
|
|
The Company may elect to repay at any
time no later than the 60 days before the corresponding maturity dates. The Noteholders
shall have the option to, within the 30 days period before each maturity date, convert
the Notes in whole or in part, into shares of the Company at a price which is 80% of
weighted average 90-day NASDAQ trading price (before the conversion notice).
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
17.
|
CONVERTIBLE
PROMISSORY NOTES AND DERIVATIVE INSTRUMENT
- continued
|
|
|
The Notes contains negative covenants
that, among other things, restricts the Company’s ability to, with certain exceptions,
(i) encumbrances on undertakings, assets or revenues of the Group Company except for
collateral for bank loans in ordinary course of business and on normal commercial terms,
(ii) dissolution or liquidation of major subsidiaries, (iii) transfer of equity interest
in any subsidiaries, (iv) pay dividends or make distributions, or (v) change on the VIEs
arrangement.
|
|
|
The embedded conversion option is not
clearly and closely related to its debt host and meets the definition of a derivative.
The embedded derivative does not qualify for the scope exception for certain contracts
involving an issuer’s own equity. It is therefore separately account for and initially
record at fair value with changes in fair value recorded in earnings.
|
|
|
The movements of the liability component
and derivative component of the Notes for the years are set out below:
|
|
|
Liability
|
|
|
Derivative
|
|
|
|
|
|
|
component
|
|
|
component
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2014
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Notes issued on April 30, 2014
|
|
|
54,443,840
|
|
|
|
3,556,160
|
|
|
|
58,000,000
|
|
Change in fair value
|
|
|
-
|
|
|
|
(157,518
|
)
|
|
|
(157,518
|
)
|
Interest charge during the year
|
|
|
574,834
|
|
|
|
-
|
|
|
|
574,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2014 and January 1, 2015
|
|
$
|
55,018,674
|
|
|
$
|
3,398,642
|
|
|
$
|
58,417,316
|
|
Change in fair value
|
|
|
-
|
|
|
|
562,738
|
|
|
|
562,738
|
|
Interest charge during the year
|
|
|
870,885
|
|
|
|
-
|
|
|
|
870,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015
|
|
$
|
55,889,559
|
|
|
$
|
3,961,380
|
|
|
$
|
59,850,939
|
|
|
|
Liability component of the Notes is analyzed
for reporting purposes as:
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
4,000,000
|
|
|
$
|
55,889,559
|
|
Non-current liabilities
|
|
|
51,018,674
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,018,674
|
|
|
$
|
55,889,559
|
|
The Company has failed to
redeem the first instalment of the Notes at the amount of $4 million on April 30, 2015 and the Notes become due immediately according
to the terms of the Notes. Full balance of the Notes of $55,889,559 is therefore classified as current liabilities as of December
31, 2015. Default interest on the Notes of $193,223 is recognised for the year ended December 31, 2015. On July 22, 2016, there
was a ruling by the Grand Court of Cayman Islands, concerning the Company’s breach in the terms of the agreement in relation
to the Notes issued (see Note 18(c)). The Company is currently negotiating with the Note Holders for the supplementary agreement
regarding the extension of payment terms.
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
17.
|
CONVERTIBLE
PROMISSORY NOTES AND DERIVATIVE INSTRUMENT
- continued
|
Negative covenants
- continued
|
|
The change in the fair value of the derivative
liability between December 31, 2014 and December 31, 2015, includes an increase to the
derivative liability of $562,738 which was recognized through earnings in the consolidated
statement of operations. The Company will continue to revalue the derivative liability
on each subsequent balance sheet date until the securities to which the derivative instrument
relates to are exercised or expired.
|
|
|
The estimated fair values of the derivative
liability were computed as of the issuance date and as of December 31, 2014 and 2015
using a valuation model based on interest rate of 6.67%. In addition, as of the valuation
dates management assessed the probabilities of Qualified Financing assumptions in the
valuation models.
|
|
18.
|
COMMITMENTS AND CONTINGENCY
|
|
|
The Group has entered into certain
leasing arrangements relating to the lease of the Group’s office premises. Rental
expense under operating leases for the years ended 2013, 2014 and 2015 was $1,349,017,
$1,713,263 and $1,753,380, respectively.
|
|
|
As of December 31, 2015, the Group
was obligated under certain operating leases, relating to the rental of office premises,
requiring minimum rental payments as follows:
|
Year ending December 31,
|
|
|
|
|
2016
|
|
$
|
1,467,402
|
|
2017
|
|
|
638,059
|
|
2018
|
|
|
302,814
|
|
2019
|
|
|
12,849
|
|
2020
|
|
|
3,421
|
|
2021 and thereafter
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
2,424,545
|
|
|
|
The Group has entered into several
agreements to pay media costs for periods of 5 to 10 years. As of December 31, 2015,
future minimum purchase commitments under these agreements totaled approximately $62,270,000,
which will be payable as follow:
|
Year ending December 31,
|
|
|
|
|
2016
|
|
$
|
23,660,000
|
|
2017
|
|
|
13,959,000
|
|
2018
|
|
|
8,844,000
|
|
2019
|
|
|
6,351,000
|
|
2020
|
|
|
4,037,000
|
|
2021 and thereafter
|
|
|
5,419,000
|
|
|
|
|
|
|
|
|
$
|
62,270,000
|
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
18.
|
COMMITMENTS
AND CONTINGENCY
- continued
|
|
(c)
|
Litigation with former shareholders
of DMG
|
The Company filed a summons with
notice in the Supreme Court of the State of New York, which is the trial court in New York (the “New York Court”)
on December 27, 2010, against the selling shareholders and former management of DMG. The summons with notice alleged that the
selling shareholders of DMG (i) engaged in an unlawful scheme to induce the Group, through false, deceptive, and misleading statements
concerning DMG’s financial condition and performance, to pay a grossly inflated price to purchase DMG in 2010, and (ii)
received, or are scheduled to receive, ill-gotten gains from this unlawful scheme. The summons with notice further alleged that
the Group is owed indemnification from an escrow fund, established at the time of the purchase, as a result of breaches of representations
and warranties contained in the merger agreement pursuant to which the Company acquired DMG (the “Merger Agreement”).
|
|
On February 25, 2011, Gobi Partners,
Inc., Gobi Fund, Inc., Gobi Fund II, L.P., Oak Investment Partners XII, L.P., and Thomas
Gai Tei Tsao (collectively, the “Former DMG Shareholders”) filed a countersuit
in the New York Court against the Company. The complaint in that lawsuit alleges that
the Company breached certain agreements related to the DMG Acquisition by (i) declining
to make certain instalment payments that the Former DMG Shareholders claim they were
entitled to receive and (ii) declining to take steps to facilitate the transfer of Company
stock that the Former DMG Shareholders claim to be entitled to receive in connection
with the DMG Acquisition. The Former DMG Shareholders also seek specific enforcement
of the contracts at issue, compensatory damages in an amount to be determined at trial,
and permanent and preliminary injunctive relief compelling the Company to comply with
the parties’ agreement. On the same date, the Former DMG Shareholders filed motions
against the Group for various relief.
|
On August
13, 2012 the New York Court entered an order (the “August 13 Order”) directing the Group, on or before August 21,
2012 (a) to transfer $60 million in assets readily convertible into U.S. currency into New York State, to be held in the custody
of the New York City Sheriff’s Office, (b) to deposit $60 million into an escrow account controlled by the Sheriff, or (c)
to make other arrangements satisfactory to the plaintiffs in the litigation for security with respect to the final judgment plaintiffs
seek in that amount. The Group took prompt steps to comply with the August 13 Order and have arranged for the delivery to the
Sheriff of more than $3.2 million in cash denominated in or convertible to U.S. dollars that were held by or for the Group outside
the PRC and such transferred amount was recorded as restricted cash as of December 31, 2012. With respect to funds held within
the PRC in RMB, any transfer to the Sheriff in New York requires approval of the relevant authority of the PRC government, the
State Administration on Foreign Exchange (“S.A.F.E.”). Accordingly, on August 20, 2012 the Company applied to the
S.A.F.E. for such approval, for the transfer of the balance required under the August 13 Order (an amount equivalent to approximately
$56.8 million). S.A.F.E., however, denied the application. At the same time as taking steps to comply with the August 13 order
to the extent possible, the Company has appealed from that order. It sought a stay of enforcement of the August 13 Order, but
that request was denied, first by a single judge of the appellate court on August 17, 2012 and then by a full panel of that court
on October 2, 2012. The August 13 order is reversed by New York Court on June 11, 2013.
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
18.
|
COMMITMENTS
AND CONTINGENCY
- continued
|
|
(c)
|
Litigation with former shareholders
of DMG – continued
|
On January
7, 2013, the New York State Supreme Court issued an order of civil contempt against the Group that it had failed to comply fully
with the August 13 Order requiring the Group to post security in connection with prejudgment orders of attachment totalling $60
million.
On June 11,
2013, the Appellate Division, First Department of the Supreme Court of the State of New York entered a Decision and Order (the
“Appellate Division Ruling”), determining appeals and cross-appeals from rulings by the New York Court. Neither the
Group nor the Former DMG Shareholders sought leave to appeal the Appellate Division Ruling, which therefore became final.
|
|
On July 29, 2013, proceedings were
begun in the Cayman Islands against the Group for the enforcement of the New York Judgment
entered on July 26, 2013 (the “Cayman Islands Proceeding”) and the Group
has received a Writ of Summons. As a result of the above litigation, penalty interest
on the overdue payable of $3,375,000, $5,993,145 and $2,149,903 were recognised during
the years ended December 31, 2011, 2012 and 2013, respectively.
|
As of December
31, 2013, consideration payable of $75,800,047 (including $11,800,047 accrued penalty interest on the overdue consideration payable)
was recorded by the Company and it is the management’s best estimate of the consideration required to settle the litigation
with the Former DMG Shareholders.
On February
14, 2014, the Company stipulated to the withdrawal of all appeals in that action pending before the Appellate Division. The stipulation
was transmitted to the New York Court on February 19, 2014.
On April
30, 2014, the Company entered into settlement agreement, subscription agreement and note instrument (“Settlement Arrangement”)
with the Former DMG Shareholders to settle this litigation. Under the terms of the Settlement Agreement, the Company agrees pay
to the Former DMG Shareholders an aggregate amount of $70 million, including $12 million in cash and $58 million in six-year term
Notes issued by the Company (See Note 17 for details), in addition to certain other consideration to satisfy the New York Judgment
of $71,800,047. A gain of $1,800,047 is recognised in the statement of operations during the year ended December 31, 2014 in relation
to the overprovision for the consideration payable and litigation. All claims in these pending lawsuits have been dismissed and
all closing conditions of the settlement agreement have been met.
On July 22, 2016, ruling by
the Grand Court of Cayman Islands, concerning the Company’s breach in the terms of the Settlement Agreement dated April
30, 2014 requiring the Company to pay the Former DMG Shareholders $59,367,371 including interest at the rate of 9% per annum calculated
from November 16, 2010 as to $30 million and from November 16, 2011 as to the remaining $29,267,371 until payment is made in full
and to pay the Former DMG Shareholders costs on the indemnity basis to be taxed if not agreed.
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
18.
|
COMMITMENTS
AND CONTINGENCY
- continued
|
|
|
The litigation of Yi Zhao v. Dina
Liu, Visionchina Media Inc. was filed on October 26, 2012, but service of the complaint
is not alleged to have been made on the Company until at least August 26, 2013, by delivery
to the Company’s headquarters in the People’s Republic of China. The litigation
arises out of the dissolution of the marriage between Yi Zhao and Dina Liu Dan, a former
Chief Financial Officer of the Company. The primary claims are asserted against Dina
Liu Dan, who is alleged to have exercised certain stock options for the Company’s
stock (through a company she allegedly controls, Barrie Holdings) without sharing the
proceeds with her former husband, Yi Zhao. The single claim asserted against the Company
is for aiding and abetting fraud by Dina Liu Dan, with damages alleged to be approximately
$5,000,000. The underlying fraud claim against Dina Liu Dan, however, has been dismissed
for lack of personal jurisdiction, although a dismissal motion by Barrie Holdings was
denied. The Company filed a motion to dismiss the single claim on December 24, 2013,
which was denied by decision and order dated February 28, 2014. On March 11, 2014, Yi
Zhao moved for entry of a default judgment against the Company, on the basis of the Company’s
purported failure to answer or move to dismiss the complaint within the period permitted
by law. On April 14, 2014, the motion of Yi Zhao for a default judgment against the Company
was denied. On August 5, 2014, the Zhao Action was dismissed based on the Plaintiff’s
counsel’s failure to appear at a scheduled status conference on September 18, 2014.
On October 3, 2014, the trial court stayed all the proceedings. The stay will be lifted
only if the Chinese court denies Mr. Zhao’s claims against Ms. Liu and then only
upon his submission of written evidence supporting his right to proceed with his action
in New York. This stay does not apply to proceedings in the appellate court. Management
estimates that potential loss that could result from this litigation as of date of this
report merely reasonably possible but not probable in accordance to ASC 450, due to uncertainty
and therefore no provision was made for such amount as of December 31, 2014 and 2015.
There have been no further proceedings in the Zhao Action in either the trial or appellate
courts as the date of this report.
|
|
|
On October 23, 2014, a supplier, Guangzhou
Metro Television Media Co., Ltd. (“Guangzhou Metro”) initiated proceedings
against the subsidiary of the Company, VisionChina Media Group, for breach of contract.
Guangzhou Metro asserts that its total losses are representing $7,693,289 exclusive media
cost, $2,396,041 overdue fines, and $32,168 electricity charges. On the same day, VisionChina
Media Group also filed a motion against Guangzhou Metro without fulfilling the contract
terms, for a total claim of $5,959,111 damages, and urged to release the $885,884 concession
right deposit together with the respective interest. On November 7, 2014, Guangzhou Metro
further claimed for the penalty of $5,251,772 due to the early termination of the Guangzhou
Metro exclusive agency agreement. Management estimates that potential loss that could
result from this litigation as of date of this report is probable in according to ASC
450. An accrued penalty for the early termination of $10,386,179 and $9,822,602 was recorded
as of December 31, 2014 and 2015, respectively, based on management’s best estimation.
|
On
October 23, 2015, a supplier, Guangzhou Communication Information Construction Investment and Operation Co. Ltd.
("Guangzhou Communication") initiated proceedings against the subsidiary of the Company, VisionChina Media Group,
for breach of contracts. Guangzhou Communication asserts that its total losses are RMB10,421,306 relating to media cost,
maintenance and installation fee and RMB480,000 relating to interest charges, respectively. On May 6, 2016, a ruling was
issued by Shenzhen Futian District Renmin Court requiring (1) the cooperation agreements signed by VisionChina Media Group
with Guangzhou Communication are terminated and become ineffective immediately; (2) VisionChina Media Group is required to
pay RMB10,213,218 (equivalent to $1.57 million) and interest. Accruals of $1.4 million for this cooperation
agreements with Guangzhou Communication were recorded as of December 31, 2015.
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
18.
|
COMMITMENTS
AND CONTINGENCY
- continued
|
|
|
The National Standard of Frame Structure
and Channel Code and Modulation of Digital Television Ground Broadcasting. Transmission
System (the “National Standard”), was approved by the Standardization Administration
of the PRC on August 18, 2006, and became effective on August 1, 2007. On March 27, 2006,
the PRC State Administration of Radio, Film and Television (“SARFT”) promulgated
the Notice Concerning Experimental Mobile Digital Television (the “March Notice”),
which required all of the Group’s local operating partners must adopt the National
Standard for their mobile digital television operations and the SARFT has officially
issued a notice to require some of the Group’s local operating partners and direct
equity investment entities to complete the adoption of the National Standard by June
30, 2010. As of December 31, 2014 and 2015, the mobile digital television network of
the Group’s direct equity investment entities and the digital television broadcasting
infrastructure of the Group’s local operating partners in 11 cities have been converted
to the National Standard, but those in another 6 cities have not yet completed the conversion
and do not meet the requirements of the National Standard. The Group’s direct equity
investment entities and local operating partners may be required to spend significant
capital and other resources, including on new equipment, to convert their digital television
broadcasting infrastructure to the National Standard. Under some of the Group’s
exclusive advertising agency agreements, the Group may be responsible for a portion of
such expenditures in 3 of the 6 cities that have not yet completed the conversion. The
total cost of converting the equipment to the 3 cities is not expected to exceed $0.5
million. However, the Group and its local operating partners in these 3 cities have not
yet determined the allocation of such capital expenditures, and there is no reliable
basis for management to accurately estimate the amount and timing of capital expenditures
required for these local operating partners, therefore, no accrual for such liability
has been made in the consolidated financial statements.
|
|
19.
|
SEGMENT AND GEOGRAPHIC INFORMATION
|
|
|
The Group operates and manages its business
as a single segment. The Group’s chief operating decision maker has been identified
as the Chief Executive Officer, who reviews the consolidated results when making decisions
about allocating resources and assessing performance of the Group.
|
|
|
The Group operates in the PRC and all
of the Group’s identifiable assets are located in the PRC.
|
|
|
Although the Group operates in multiple
cities in the PRC which include Beijing, Shanghai, Guangzhou, Shenzhen, Nanjing and other
cities, it believes it operates in one segment as the Group provides services to customers
irrespective of their locations. Accordingly all relevant information about the Group’s
operations can be found in the consolidated financial statements.
|
|
|
There is no individual customer with advertising
service revenue over 10% of the advertising service revenue for the years ended December
31, 2013, 2014 and 2015.
|
|
|
There is no individual customer with balances
over 10% of the accounts receivable as of December 31, 2013 and 2015, and one customer accounted
for 13% and 10% of the accounts receivable as of December 31, 2014.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
20.
|
RELATED PARTY TRANSACTIONS
|
|
(a)
|
Details of amounts due from related
parties as of December 31, 2014 and 2015 are as follows:
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
Hubei Mobile
|
|
$
|
200,605
|
|
|
$
|
208,976
|
|
Jilin Mobile
|
|
|
187,373
|
|
|
|
-
|
|
Ningbo Mobile
|
|
|
321,708
|
|
|
|
316,500
|
|
Shenzhen Mobile
|
|
|
211,323
|
|
|
|
246,076
|
|
Shenzhen Media
|
|
|
15,156
|
|
|
|
47,371
|
|
Director and management of the Company
|
|
|
815,648
|
|
|
|
866,014
|
|
Shenzhen Deshan Yinshi Co., Ltd. (“Shenzhen Deshan”)
|
|
|
407,266
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,159,079
|
|
|
$
|
1,684,937
|
|
|
|
The amounts due from related parties
are non-interest bearing and repayable on demand.
|
|
(b)
|
Details of amounts due to related
parties as of December 31, 2014 and 2015 are as follows:
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
Changzhou Mobile
|
|
$
|
2,610
|
|
|
$
|
8,292
|
|
Suzhou Mobile
|
|
|
63,941
|
|
|
|
80,885
|
|
Eastlong Huatong
|
|
|
56,119
|
|
|
|
842
|
|
Shenzhen Champs Elysees Renovations Co., Ltd. (“Champs
Elysees”)
|
|
|
3,807
|
|
|
|
126,652
|
|
Shenzhen Meidi Zhiye Development Co., Ltd. (“Zhiye”)
|
|
|
219,094
|
|
|
|
241,869
|
|
Shenzhen Meiye Qiye Development Co., Ltd. (“Qiye”)
|
|
|
1,029
|
|
|
|
974
|
|
Shenzhen Champs Elysees Investment Co., Ltd. (“Champs
Elysees Investment”)
|
|
|
-
|
|
|
|
770,333
|
|
Guangtong Mobile
|
|
|
115,093
|
|
|
|
66,788
|
|
Zhongguanguoji
|
|
|
715,797
|
|
|
|
676,956
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,177,490
|
|
|
$
|
1,973,591
|
|
|
|
The amounts due to related parties
are non-interest bearing and repayable on demand.
|
|
|
Zhiye, Qiye and Shenzhen Deshan are
companies in which the Chief Executive Officer of the Company holds a beneficial interest
and Champs Elysees and Champs Elysees Investment are companies in which the Chief Executive
Officer’s wife holds a beneficial interest.
|
|
|
The amounts due from (to) related
parties mainly arise from trading transactions with related parties (such as receipt
of services rendered to related parties) and payments of expenses on behalf of the related
parties.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
20.
|
RELATED
PARTY TRANSACTIONS
-
continued
|
|
(c)
|
Advertising service rendered and
equipment sold to related parties
|
|
|
The Group provided advertising service
and sold digital equipment at negotiated price to related parties for a total amount
of $1,103,495, $1,023,720 and $383,157 for the years ended December 31, 2013, 2014
and 2015, respectively. Details are as follows:
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Hubei Mobile
|
|
$
|
1,102
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Jilin Mobile
|
|
|
226
|
|
|
|
-
|
|
|
|
-
|
|
Ningbo Mobile
|
|
|
296,040
|
|
|
|
254,931
|
|
|
|
188,409
|
|
Suzhou Mobile
|
|
|
-
|
|
|
|
-
|
|
|
|
194,748
|
|
Shenzhen Deshan Yinshi Co., Ltd.
(“Shenzhen Deshan”)
|
|
|
806,127
|
|
|
|
768,789
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,103,495
|
|
|
$
|
1,023,720
|
|
|
$
|
383,157
|
|
|
|
Shenzhen Deshan is a company in which
the Chief Executive Officer of the Company holds a beneficial interest.
|
|
|
The Group has purchased digital equipment
at negotiated price from related parties of $648,935, $33,179 and $76,929 for the years
ended December 31, 2013, 2014 and 2015, respectively.
|
|
(d)
|
Services rendered by related parties
|
The Group has received broadcasting
service and other services from related parties at negotiated prices for a total amount of $8,393,864, $6,971,581 and $6,554,986
for the years ended December 31, 2013, 2014 and 2015, respectively, of which $387,798, $640,246 and $668,845 were related to discontinued
operations for the years ended December 31, 2013, 2014 and 2015, respectively. Details are as follows:
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Chengdu Mobile
|
|
$
|
1,859,950
|
|
|
$
|
1,689,243
|
|
|
$
|
1,820,935
|
|
Dalian Mobile
|
|
|
770,964
|
|
|
|
831,172
|
|
|
|
825,048
|
|
Eastlong Huatong
|
|
|
300,791
|
|
|
|
334,035
|
|
|
|
-
|
|
Guangtong Mobile
|
|
|
1,323,535
|
|
|
|
-
|
|
|
|
2,276
|
|
Henan Mobile
|
|
|
556,960
|
|
|
|
597,393
|
|
|
|
619,972
|
|
Hubei Mobile
|
|
|
1,303,298
|
|
|
|
948,592
|
|
|
|
815,627
|
|
Jilin Mobile
|
|
|
602,118
|
|
|
|
52,213
|
|
|
|
-
|
|
Ningbo Mobile
|
|
|
761,977
|
|
|
|
813,908
|
|
|
|
852,501
|
|
Suzhou Mobile
|
|
|
526,473
|
|
|
|
921,405
|
|
|
|
845,187
|
|
Shenzhen Media
|
|
|
-
|
|
|
|
143,374
|
|
|
|
98,859
|
|
Changzhou Mobile
|
|
|
-
|
|
|
|
-
|
|
|
|
5,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,006,066
|
|
|
$
|
6,331,335
|
|
|
$
|
5,886,141
|
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
20.
|
RELATED
PARTY TRANSACTIONS
-
continued
|
|
|
During the years ended December 31,
2013, 2014 and 2015, the Group rented office space from Zhiye. The rate for rent was
determined based on negotiated prices. The rental expense for the years ended December
31, 2013, 2014 and 2015 was $340,556, $361,417 and $399,167, respectively, of which $164,009,
$185,064 and $18,076 were related to discontinued operations for the years ended December
31, 2013, 2014 and 2015, respectively.
|
|
|
For the years ended December 31, 2013,
2014 and 2015, the Group paid office decoration charges of $4,446, $377,079 and $473,332
respectively, to Champs Elysees. During the years ended December 31, 2013, 2014 and 2015,
the Group also paid property management fees and utility expenses of $53,355, $59,973
and $56,925, respectively, of which $25,695, $30,709 and $25,681 were related to discontinued
operations for the years ended December 31, 2013, 2014 and 2015, respectively, to Champs
Elysees Management.
|
|
|
Champs Elysees Management is a company
in which the Chief Executive Officer’s wife holds a beneficial interest.
|
|
|
In December 2015, VisionChina Media
Group borrowed approximately $4,600,000 (equivalent to RMB30,000,000) from Zhiye for
a period of 4 days with a total interest expense approximate to $10,000 (equivalent to
RMB60,000), which were fully repaid before the year ended December 31, 2015.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
|
In accordance with the Regulations on
Enterprises with Foreign Investment of China and the articles of association of the Company’s
subsidiaries, the Company’s subsidiaries, being foreign invested enterprises established
in China, are required to provide certain statutory reserve funds, namely general reserve
fund, enterprise expansion fund and staff welfare and bonus funds, all of which are appropriated
from net profit as reported in their PRC statutory accounts. The Company’s subsidiaries
are required to allocate at least 10% of their after-tax profits to the general reserve
fund until such fund has reached 50% of their respective registered capital. Appropriations
to the enterprise expansion fund and staff welfare and bonus fund are at the discretion
of the board of directors of the Company’s subsidiaries.
|
|
|
In accordance with the PRC Company Laws,
the Company’s VIEs and their subsidiaries must make appropriations from their after-tax
profits as reported in their PRC statutory accounts to non-distributable reserve funds,
namely statutory surplus fund, statutory public welfare fund and discretionary surplus
fund. The Company’s VIEs and their subsidiaries are required to allocate at least
10% of their after-tax profits to the statutory surplus fund until such fund has reached
50% of their respective registered capital. Appropriations to the statutory public welfare
fund and discretionary surplus fund are at the discretion of the Company’s VIEs
and their subsidiaries.
|
|
|
The general reserve fund and statutory
surplus fund are restricted to set-off against losses, expansion of production and operation
and increasing registered capital of the respective company. The staff welfare and bonus
fund and statutory public welfare fund are restricted to capital expenditures for the
collective welfare of employees. These reserves are not allowed to be transferred to
the Company in terms of cash dividends or loans or advances, nor can they be distributed
except under liquidation.
|
|
|
There were no appropriations to reserves
by the Company other than the Company’s VIEs and certain of the VIEs’ subsidiaries
in the PRC during any of the periods presented. During the years ended December 31,
2013, 2014 and 2015, approximately nil, nil and nil was appropriated from retained earnings
to the statutory surplus fund, respectively, which are included in the accumulated deficit
of the Group.
|
VISIONCHINA MEDIA INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
22.
|
RESTRICTED NET ASSETS
|
|
|
Under PRC laws and regulations, there
are certain restrictions on the Company’s PRC subsidiaries and VIEs with respect
to transferring certain of their net assets and reserves to the Company either in the
form of dividends, loans, or advances. Amounts restricted include restricted cash, paid
up capital and statutory reserves of the Company’s PRC subsidiaries and VIEs, totaling
approximately $161.4 million and $168.1 million as of December 31, 2014 and 2015, respectively.
|
|
|
In February 2016, the Group has entered
into $12.3 million (approximate to RMB80 million), RMB denominated secured revolving
credit facility granted by CCB(SZ) to VisionChina Media Group, scheduled to expire on
February 21, 2017 (the “2016 CCB Facility”). The CCB Facility is secured
by accounts receivable of VisionChina Media Group. The 2016 CCB Facility is available
for general corporate working capital purposes at an interest rate in a range between
99.615% to 102.66% of the Loan Prime Rate in the PRC. The 2016 CCB Facility contains
restrictive financial covenant of maintaining a leverage ratio of 65% by VisionChina
Media Group. It is cancelable by CCB(SZ) if there is any material adverse change or failure
to maintain satisfactory operations of VisionChina Media Group. Violation of such covenant
could result in a default under the 2016 CCB Facility, which would permit the CCB(SZ)
to terminate the 2016 CCB Facility available to the Group and require immediate repayment
from the Group of any outstanding loans advanced under the 2016 CCB Facility.
|
|
|
On February 1, 2016, VisionChina Media
Group has borrowed approximately $5.4 million (equivalent to RMB35,000,000) from a related
party, Zhiye, for one month at an interest of 10% per annum and the borrowing was fully
repaid on March 1, 2016.
|
In
June 2016, CCB International (Shenzhen) Investment Co., Ltd. ("CCB International"), an independent third party,
entered into a definitive Equity Subscription Agreement with the Group to inject approximately RMB150 million (equivalent to
$22.6 million) in Shenzhen Qianhai. The proceeds were fully received on June 24, 2016. After the capital injection by CCB
International, the percentage of ownership held by the Group in Shenzhen Qianhai was decreased from 69% to 62.8%. The capital
injection did not result in change of control of Shenzhen Qianhai.
VISIONCHINA MEDIA INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT -
SCHEDULE I
|
BALANCE SHEETS
|
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,873
|
|
|
$
|
690,095
|
|
Amounts due from subsidiaries
|
|
|
40,992,888
|
|
|
|
24,366,566
|
|
Prepaid expenses and other current
assets
|
|
|
39,387
|
|
|
|
11,677
|
|
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
$
|
41,040,148
|
|
|
$
|
25,068,338
|
|
|
|
|
|
|
|
|
|
|
Non-current Assets:
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
$
|
4,644
|
|
|
$
|
4,644
|
|
Intangible assets, net
|
|
|
6,806
|
|
|
|
5,422
|
|
Investments in subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total non-current
assets
|
|
$
|
11,450
|
|
|
$
|
10,066
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
41,051,598
|
|
|
$
|
25,078,404
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Amounts due to subsidiaries
|
|
$
|
50,638,106
|
|
|
$
|
52,153,400
|
|
Accrued expenses and other current
liabilities
|
|
|
1,923,559
|
|
|
|
3,854,944
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
52,561,665
|
|
|
$
|
56,008,344
|
|
|
|
|
|
|
|
|
|
|
Equity (deficit)
|
|
|
|
|
|
|
|
|
Common shares ($0.0001 par value; 200,000,000 shares authorized; 102,121,144
and 102,741,977 shares issued and outstanding as of December 31, 2014 and 2015, respectively)
|
|
$
|
10,212
|
|
|
$
|
10,274
|
|
Additional paid-in capital
|
|
|
344,083,552
|
|
|
|
350,769,364
|
|
Accumulated deficit
|
|
|
(395,183,492
|
)
|
|
|
(418,583,838
|
)
|
Accumulated other comprehensive
income
|
|
|
39,579,661
|
|
|
|
36,874,260
|
|
|
|
|
|
|
|
|
|
|
Total VisionChina
Media Inc. shareholders’ deficit
|
|
$
|
(11,510,067
|
)
|
|
$
|
(30,929,940
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
AND EQUITY
|
|
$
|
41,051,598
|
|
|
$
|
25,078,404
|
|
VISIONCHINA MEDIA INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT -
SCHEDULE I
|
STATEMENTS OF OPERATIONS
|
(Amounts in U.S. Dollars (“US$”),
except number of shares)
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
(4,927,611
|
)
|
|
$
|
(2,729,494
|
)
|
|
$
|
(1,962,854
|
)
|
Equity in loss of subsidiaries and variable interest
entities
|
|
|
(1,284
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
Impairment losses recognised on
amounts due from subsidiaries
|
|
|
(19,118,382
|
)
|
|
|
(40,144,181
|
)
|
|
|
(21,437,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(24,047,277
|
)
|
|
|
(42,873,676
|
)
|
|
|
(23,400,389
|
)
|
Other income
|
|
|
-
|
|
|
|
11,800,000
|
|
|
|
-
|
|
Interest income
|
|
|
79,407
|
|
|
|
-
|
|
|
|
43
|
|
Interest expense
|
|
|
-
|
|
|
|
(3,539
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(23,967,870
|
)
|
|
$
|
(31,077,215
|
)
|
|
$
|
(23,400,346
|
)
|
VISIONCHINA MEDIA INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT -
SCHEDULE I
|
STATEMENT OF COMPREHENSIVE INCOME
|
(Amounts in U.S. Dollars (“US$”),
except number of shares)
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(23,967,870
|
)
|
|
$
|
(31,077,215
|
)
|
|
$
|
(23,400,346
|
)
|
Other comprehensive income (loss) net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cumulative foreign currency translation
adjustments
|
|
|
2,536,356
|
|
|
|
(328,367
|
)
|
|
|
(2,705,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
$
|
(21,431,514
|
)
|
|
$
|
(31,405,582
|
)
|
|
$
|
(26,105,747
|
)
|
VISIONCHINA MEDIA
INC.
CONDENSED FINANCIAL INFORMATION
OF REGISTRANT - SCHEDULE I
|
statements of CHANGES OF shareholders’
equity AND COMPREHENSIVE INCOME (LOSS)
|
(Amounts in U.S. Dollars (“$”),
except number of shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
Total
|
|
|
|
Common shares
|
|
|
paid-in
|
|
|
Accumulated
|
|
|
comprehensive
|
|
|
shareholders’
|
|
|
|
Number
|
|
|
Amount
|
|
|
capital
|
|
|
deficit
|
|
|
income
|
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
January 1, 2013
|
|
|
101,366,544
|
|
|
$
|
10,137
|
|
|
$
|
342,670,656
|
|
|
$
|
(340,138,407
|
)
|
|
$
|
37,371,672
|
|
|
$
|
39,914,058
|
|
Restricted shares
|
|
|
194,200
|
|
|
|
19
|
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
842,290
|
|
|
|
-
|
|
|
|
-
|
|
|
|
842,290
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,536,356
|
|
|
|
2,536,356
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(23,967,870
|
)
|
|
|
-
|
|
|
|
(23,967,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2013
|
|
|
101,560,744
|
|
|
$
|
10,156
|
|
|
$
|
343,512,927
|
|
|
$
|
(364,106,277
|
)
|
|
$
|
39,908,028
|
|
|
$
|
19,324,834
|
|
Restricted shares
|
|
|
560,400
|
|
|
|
56
|
|
|
|
(56
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
570,681
|
|
|
|
-
|
|
|
|
-
|
|
|
|
570,681
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(328,367
|
)
|
|
|
(328,367
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(31,077,215
|
)
|
|
|
-
|
|
|
|
(31,077,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2014
|
|
|
102,121,144
|
|
|
$
|
10,212
|
|
|
$
|
344,083,552
|
|
|
$
|
(395,183,492
|
)
|
|
$
|
39,579,661
|
|
|
$
|
(11,510,067
|
)
|
Restricted shares
|
|
|
620,833
|
|
|
|
62
|
|
|
|
(62
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
183,814
|
|
|
|
-
|
|
|
|
-
|
|
|
|
183,814
|
|
Changes
in ownership interests in a subsidiary without change of control
|
|
|
-
|
|
|
|
-
|
|
|
|
6,502,060
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,502,060
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,705,401
|
)
|
|
|
(2,705,401
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(23,400,346
|
)
|
|
|
-
|
|
|
|
(23,400,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2015
|
|
|
102,741,977
|
|
|
$
|
10,274
|
|
|
$
|
350,769,364
|
|
|
$
|
(418,583,838
|
)
|
|
$
|
36,874,260
|
|
|
$
|
(30,929,940
|
)
|
VISIONCHINA MEDIA INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT -
SCHEDULE I
|
STATEMENTS OF CASH FLOWS
|
(Amounts in U.S. Dollars (“US$”),
except number of shares)
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
Cash flows used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(23,967,870
|
)
|
|
$
|
(31,077,215
|
)
|
|
$
|
(23,400,346
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
19,163
|
|
|
|
5,761
|
|
|
|
1,384
|
|
Equity in loss of subsidiaries and variable interest entities
|
|
|
1,284
|
|
|
|
1
|
|
|
|
-
|
|
Impairment losses recognised on amounts due from subsidiaries
|
|
|
19,118,382
|
|
|
|
40,144,181
|
|
|
|
21,437,535
|
|
Share-based compensation
|
|
|
842,290
|
|
|
|
570,681
|
|
|
|
183,814
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
125,292
|
|
|
|
63,856
|
|
|
|
27,710
|
|
Amounts due from subsidiaries
|
|
|
(327,047
|
)
|
|
|
(10,529,497
|
)
|
|
|
500,740
|
|
Accrued expenses and other current liabilities
|
|
|
2,596,939
|
|
|
|
(11,104,209
|
)
|
|
|
1,931,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(1,591,567
|
)
|
|
|
(11,926,441
|
)
|
|
|
682,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
1,592,050
|
|
|
|
11,933,535
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
1,592,050
|
|
|
|
11,933,535
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
483
|
|
|
|
7,094
|
|
|
|
682,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the beginning of the year
|
|
|
296
|
|
|
|
779
|
|
|
|
7,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year
|
|
$
|
779
|
|
|
$
|
7,873
|
|
|
$
|
690,095
|
|
VISIONCHINA MEDIA INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT -
SCHEDULE I
|
(Amounts in U.S. Dollars (“US$”))
|
Schedule 1 has been provided pursuant
to the requirements of Rules 12-04(a) and 4-08(e)(3) of SEC Regulation S-X, which require condensed financial information as to
financial position, changes in financial position and results of operations of a parent company as of the same dates and for the
same periods for which audited consolidated financial statements have been presented when the restricted net assets of consolidated
and unconsolidated subsidiaries together exceed 25 percent of consolidated net assets as of the end of the most recently completed
fiscal year. As of December 31, 2014 and 2015, approximately $157.3 million and $148.8 million of the registered capital and reserves
are not available for distribution, respectively, and as such, the condensed financial information of VisionChina Media Inc. has
been presented for the years ended December 31, 2013, 2014 and 2015.
Basis of Presentation
For the purposes of the presentation of
the parent company only financial information, the Company records its investment in subsidiaries under the equity method of accounting
as prescribed in FASB ASC 323 “Investments in Equity Method and Joint Ventures”. Such investment is presented on the
balance sheet as “Investment in subsidiaries and variable interest entities” and 100% of the subsidiaries’ profit
or loss as “Equity in loss of subsidiaries and variable interest entities” on the statements of operations.