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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Global Market | LSE:GMC | London | Ordinary Share | KYG3927E1145 | ORD USD0.0002 (DI) |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 50.00 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From May 2019 to May 2024
TIDMGMC
RNS Number : 1943I
Global Market Group Ltd
28 May 2014
Global Market Group Limited
("Global Market" or the "Group")
Global Market Group announces Financial Results
for year to 31 December 2013
Global Market Group Limited (AIM: GMC), a leading manufacturer-to-business ("M2B") e-commerce service provider that connects high-quality manufacturers in China with buyers from all over the world announces today its financial results for the year to 31 December 2013.
Financial and Operational Highlights
Group Revenue: US$25.71 million (-34.3%)
Gross Margin 84.7% (-2.2%)
Non-GAAP Net Loss: US$8.9 million (-293%) (including around $3.8 investment in Free GMC Scheme and $4.2 investment in M2C China)
Non-GAAP Diluted Loss per Share: US$cents 9.1 (-290%)
ARPU during the year shifted upwards to RMB61,328 (+35%)
Cash position at 31 December 2013 US$17.5 million (30 June 2013: US$16.2 million)
Paying Subscribers as at 31 December 2013: 5,391(-0.3%)
New Package Services Customers signed up in the 12 months ended 31 December 2013: 2,165 (-50.3%)
Online Product Offerings (M2B) as at 31 December 2013: 3.2 million (+287%)
Year End Registered Buyers: 1.18 million (+13.7%)
Google PageRank upgraded to 7 (2012: 6)
Soft launch of M2C website www.feifei.com in November 2013
Share Buyback of 4,503,000 shares completed on 28 January 2014
Strategic Investment by Guangzhou Daily into FeiFei on 27 March 2014
Commenting on the results, Mr. David Ling, Chairman and Chief Executive Officer, said:
"The second half of 2013 carried solid underlying indications that the changes being put in place have already positioned the Company well to overcome the wider economic challenges. These encouraging early indications of successful repositioning emerge from the second half figures and have continued beyond the year end into the current period, and I remain confident we are on course to meet our objectives of steady growth and return to profitability by the end of 2015."
The financial information in this announcement is derived from the Company's audited financial statements for the year ended 31 December 2013, a copy of which is available on the Company's website: www.globalmarket.com.
For further information, please visit www.globalmarket.com or contact:
Global Market Group Limited
David Ling, Chairman and CEO
Weiquan (Cheandy) Hu, CFO Tel: +86 (20) 8600 2299
Grant Thornton UK LLP
Philip Secrett/ Maureen Tai/ Melanie Frean Tel: +44 (0)20 7383 5100
Westhouse Securities Limited
Richard Baty/ Hugo Rubinstein Tel: +44 (0)20 7601 6100
Allan Piper/ Jiang LeiFirst City Public Relations: +852 2854 2666
Simon Hudson Tavistock Communications: +44 (0) 20 7920 3150
CHAIRMAN'S STATEMENT
Overview
As Global Market forewarned in earlier announcements to shareholders, the year ended 31 December 2013 proved to be a period of continued challenges as the Company moved forward with two key strategic initiatives designed to deliver stepped growth, strengthen its market position and drive a return to profitability in 2015. In the September 2013 interim statement we disclosed disappointing trading results for the first six months of the year, but foresaw scope for longer term optimism once the Company begins to realise the benefits of continuing investment in those two initiatives, the Free GMC Scheme, and FeiFei, previously known as M2C China.
In line with our expectation of a two-year strategic adjustment period running until the end of 2014, our year-end 2013 results were superficially uninspiring, and progress was, moreover, slowed by the prolonged dip in global demand for manufactured goods and resultant reluctance of our manufacturing client base to invest in marketing. At the same time, however, the second half of 2013 carried solid underlying indications that the changes being put in place have already positioned the Company well to overcome the wider economic challenges. These encouraging early indications of successful repositioning emerge from the second half figures and have continued beyond the year end into the current period, and I remain confident we are on course to meet our objectives of steady growth and return to profitability by the end of 2015.
Global Market's core M2B (manufacturer-to-business) operation provides the online M2B portal www.globalmarket.com to link high-quality manufacturers in China with buyers from all over the world. The lower rate of China's export growth has unsurprisingly triggered a loss of confidence and profitability for a number of Chinese manufacturers who as a result have become less willing to invest in their own expansion. This had a knock-on effect for Global Market's performance during 2013.
It was in response to that macro-economic backdrop that Global Market over the course of the year implemented its two key strategic adjustments. These aim separately to restore revenue growth in the core M2B business (the Free GMC Scheme) while separately leveraging the customer base established by the core business to create a direct retail portal that meets the booming demand of China's huge consumer base (FeiFei). As mentioned above, these two initiatives are both now well underway, with promising early results.
The Company is now also actively developing a new "small order transaction" service offering to consolidate small buyer orders so that they can be accepted by manufacturers with minimum order quantity (MOQ) requirements. This new service will help the Chinese manufacturers to expand their sales channels with lower costs, while worldwide small buyers, such as retail sellers on eBay.com or Amazon.com who traditionally source products through local importers, or wholesale distributers, can, now deal directly with high quality Chinese manufacturers and benefit from better prices, better product quality, better service commitment and consolidated international logistics solutions. It will create a new revenue stream for the Company through commissions based on the final value of the transaction.
Operational review
The core M2B operation and the Free GMC Scheme
Global Market announced in November 2012 that it was launching the Free GMC Scheme with the long term objective of first attracting new manufacturers to its online M2B portal www.globalmarket.com, and then converting them into paying subscribers. The first goal in delivering this plan was to complete the vetting of 30,000 targeted manufacturers through the scheme by the end of 2013. That objective has been achieved, with 30,089 manufacturers vetted by the year-end, marking an important step towards achieving critical mass in the online market place. At the same time, the Company shifted more of its marketing efforts into persuading paying subscribers into switching to its Upgraded Package services, with the objective of increasing long-term Average Revenue Per Subscriber (ARPU).
Against that backdrop of investment in long term change, the shifts in the number of our paying subscribers and the service options they chose led to a 34% revenue drop for 2013 to US$25.71 million (2012: US$39.1 million) and a net loss of US$8.9 million (2012: net income of US$4.6 million). This mainly reflected a heavy drop in the number of paying subscribers signed up during the year. These reached only 2,165, against 4,356 signed up during 2012, a reflection of the global economic pressures described above. Yet because of the constantly-changing mix of customers on one and two year contracts, that resulted only in a very slight year-on-year fall in the total number of customers under contract at the year end - down 17 to 5,391, from 5,408 at the end of 2012.
Alongside the slowdown in new customer signings, deferred revenues also impacted the income statement. These are revenues that are due to the Company from clients who signed contracts during the financial year but which are not fully recognised until the end of contract periods of 12 months, 24 months or more. Not included in the 2013 figures, these deferred revenues will be recognized in future financial statements. They increased 52% to US$16.0 million by the year-end, providing a solid underpinning for revenues during the current year. The increase in deferred revenues is a reflection of the timing of new contracts, contract length and the increase in ARPU through the sale of higher value subscriptions.
On a cash basis, the increase in activity and cash generation from our core M2B business during the second half was 30% above the figure for the first six months, reaching close to US$18.5 million. This is because, while the Company suffered the small overall reduction in its paying subscriber base, ARPU increased significantly from those customers that subscribed to Upgraded Package services. The Global Market sales team worked with promising results during the year to sign up more of its paying customers for Upgraded Package services, which generate higher ARPU. While Basic Package customers pay RMB39,800 per year (approx. US$6,528), Upgraded Package subscribers mainly pay RMB98,000 (approx. US$16,073) for an enhanced range of services. At the end of 2012 only 18% of subscribers had signed up for Upgraded Package membership, but that number had risen to 47% by the end of 2013. Measured over the final quarter alone, moreover, cash generation resulting from this shift came close to matching that of the same quarter in 2012, before the impact of the economic downturn struck.
Our sales and marketing teams also worked successfully during the year to achieve the Company's main objective of vetting 30,000 manufacturers by the year-end for membership of www.globalmarket.com, with the longer-term objective of, first, increasing transactional activity between manufacturers and buyers, and then creating increased incentives for manufacturers to convert to full paying membership by offering more value added services. With the first target comfortably achieved, Global Market will not seek to add more manufacturers within the Free GMC Scheme in the current year but is instead focusing on increasing the transactional activities between the Free GMC manufacturers and buyers, developing the new "small order transaction" service, while also using its sales force to drive conversions to the paying service and demonstrate the value of the premium services.
During the first quarter of this year, ARPU increased to over RMB73,000, compared to around RMB52,000 during the first quarter of 2013. Deferred revenue as at the end of the first quarter increased 58% year-on-year.
In the meantime, the early success in capturing manufacturers for Free GMC means that www.globalmarket.com is now established as one of China's largest online marketplaces for high quality manufacturers, with more than 3.2 million products on offer by the end of 2013, an increase of 287% over the year-end 2012, and a further increase to around 4 million achieved by the end of March 2014. At the same time, the number of international buyers registered to use the portal for free had risen to 1.18 million by the year end, and has since risen further to 1.22 million. During the year the portal www.globalmarket.com also achieved Google PageRank 7, achieved by only two Chinese B2B companies , positioning it as one of the most popular websites in the B2B/M2B sectors.
FeiFei (Previously known as M2C China)
Following a soft launch of Global Market's retail portal, www.feifei.com, during November 2013, FeiFei has continued to develop steadily in line with the strategy set by the Company of using its existing manufacturer customer base to meet the growing demand of China's emerging online retail market. The FeiFei retail portal was established as a natural extension of Global Market's core M2B business using resources already developed for www.globalmarket.com. Still undergoing the marketing and operating trials initiated at the time of the soft launch last November, FeiFei for the time being remains focused on selling household goods, including such items as home appliances, kitchenware, furniture, home decoration products, home textiles and personal care products. In addition to capturing sales in China's huge retail market, FeiFei also provides a medium through which to attract new manufacturing customers to the Group's M2B business.
The Company invested around $4.2 million into FeiFei during 2013, including around US$2.3 million on sales and marketing expenses, US$1.0 million on general and administration expenses, and US$0.9 million on fulfillment expenses.
Global Market also built up a dedicated FeiFei team which now numbers over 140 sales and support staff to manage the supply chain, product quality testing, platform development, promotional marketing, and after-sales services. The business model is structured so that manufacturers bear all of the costs occurred ahead of sales to consumers, including wholesale product shipping and warehouse storage, while FeiFei takes responsibility for vetting manufacturers, product listing and quality testing, marketing, and product shipping. FeiFei charges a service commission based on the retail selling price. A key marketing incentive to buyers is FeiFei's triple guarantee covering the quality of GMC manufacturers, safety of products, and commitment of after-sales service.
An early indication of FeiFei's long-term potential arrived after the year end, when the Company announced in March 2014 that it had attracted a strategic investment of RMB40 million in cash and RMB40 million in advertising resources from a Chinese media group, Guangzhou Daily Group, in exchange for an initial 10.5% interest in FeiFei's holding company, Guangzhou Longfei Software Technology Co., up to that point a wholly-owned subsidiary of Global Market. Current marketing activity and online consumer sales are for the time being mainly focused on Global Market's home province of Guangdong, the largest online single consumer market in China.
During the first four months of 2014, Global Market continued with work to test the supply chain, assess product quality, further development of the online platform www.feifei.com, and optimise after-sales services. Peak day orders have risen to more than 6,000, and Global Market is now targetting an official launch for FeiFei during the second half of 2014.
Financial review
Revenues for the year ended 31 December 2013 fell by 34.3% to US$25.71 million (2012: US$39.11 million), reflecting the global economic strains and shifting customer patterns discussed above. The Non-GAAP net loss of US$8.85 million arose after accounting for an investment of around US$4.2 million in FeiFei and $3.8 million in the Free GMC Scheme.
Gross margins of 84.7% were achieved for the period compared to 86.9% in 2012.
Sales and marketing expenses (excluding share-based compensation expenses of US$0.33 million) decreased by 3.7% to US$22.89 million (2012: US$23.77 million). On one hand, heavy investment in the two key strategic initiatives, FeiFei and Free GMC Scheme, resulted in the increase of sales and marketing expenses. On the other hand, the decline of sales salaries helped minimise the impact of the Company's investment in the two initiatives.
General and administrative expenses (excluding share-based compensation expenses of US$0.39 million) increased by 31.3% to US$7.76 million during the year (2012: US$5.91 million), largely attributable to the investment in FeiFei, which represented nearly 58.5% of the total increase. A further 17% of the increase arose from investment in the optimisation of online connection speeds and the planned introduction of an online Office Assistance System, which rose to around US$534,000 (2012: US$220,000). Moreover, the addition of fixed assets and intangible assets in 2013, including an office purchased in Suzhou and an office building built in Guangzhou, resulted in the increase of depreciation and amortiszation expenses which represented 16.5% of the total increase in general and administrative expenses.
The Company completed a share buyback of an aggregate 4,503,000 ordinary shares of the Company from NIFSMBC-V2006S1 and NIFSMBC-V2006S3, two pre-IPO shareholders at an average price of 29.1 pence per share on 28 January 2014.
Further to the share buyback the remaining pre-IPO shareholders including Jafco Asia Technology Fund IV, Huitung Investments (BVI) Limited, Shanghai International Shanghai Growth Investment Limited, Beprecise Investments Limited, Ultra View Investments Limited, Future World International Limited, World Target Limited, and Global Marketing Group Holding Limited reached agreement on an Orderly Market Agreement with the Company which was entered into on 31 March 2014 and sets out a broad agreement whereby these shareholders have committed through to 31 January 2015 not to dispose of their shares except by means of block trade.
Outlook
There is inevitable short-term impact on the financial results of the Company during the two-year strategic adjustment period. The Company has made progress by vetting 30,000 manufacturers, achieving Google PageRank 7 and increasing ARPU.
As Chinese manufacturers continue to face the challenge of the slowdown of China's export growth and the global economy more generally, www.globalmarket.com has around 4 million product offerings online, we are looking to offer manufacturers an additional service to deal with small order transactions.
The Board is confident that the Group is now well positioned to overcome the challenges and to seize the new opportunities in both M2B and M2C business in the current year.
We would like to thank all of our investors, customers, partners and employees for your on-going commitment, support and trust.
David Ling
Chairman and CEO
May 2014
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GLOBAL MARKET GROUP LIMITED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. Dollars ("US$") except for number
of shares and per share data)
As of As of
December December
Notes 31, 2013 31, 2012
------ ---------- ----------
US$ US$
ASSETS
Current assets:
Cash and cash equivalents 17,519 22,480
Inventory 188 -
Accounts receivable (net of allowance
of nil and nil for December 31,
2012 and 2013, respectively) 3 362 1,828
Prepayments and other current
assets 4 4,743 4,516
Deferred tax assets, current - 181
---------- ----------
Total current assets 22,812 29,005
---------- ----------
Non-current assets:
Property and equipment, net 5 4,415 1,027
Goodwill 6 6,510 6,512
Other intangible assets, net 6 4,408 1,692
Deferred tax assets, non-current - 31
Deposit for land use right - 794
Other non-current assets 7 3,663 2,775
---------- ----------
Total non-current assets 18,996 12,831
---------- ----------
TOTAL ASSETS 41,808 41,836
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
GLOBAL MARKET GROUP LIMITED
CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in thousands of U.S. Dollars ("US$") except for number
of shares and per share data)
As of As of
December December
Notes 31, 2013 31, 2012
------ ---------- ----------
US$ US$
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable 398 -
Deferred revenue 16,018 10,487
Accrued expenses and other liabilities
(including accrued expenses and
other current liabilities of the
variable interest entity without
recourse to Global Market Group
Limited of US$20 and US$18 as
of December 31, 2012 and 2013,
respectively) 8 7,307 4,683
Income tax payable 28 3
---------- ----------
Total current liabilities 23,751 15,173
---------- ----------
Non-current liabilities:
Deferred tax liabilities, non-current 98 112
Unrecognized tax benefits 2 30
---------- ----------
Total non-current liabilities 100 142
---------- ----------
Total liabilities 23,851 15,315
---------- ----------
Commitments and contingencies
Shareholders' Equity:
Ordinary shares (par value of
US$0.0002 per share; 250,000,000
and 250,000,000 shares authorized
as of December 31, 2012 and 2013,
respectively; 97,774,935 and 97,824,935
shares issued and outstanding
as at December 31, 2012 and 2013,
respectively.) 10 20 20
Additional paid-in capital 44,593 43,813
Accumulated deficit (26,714) (17,166)
Accumulated other comprehensive
income (loss) 10 58 (146)
---------- ----------
Total shareholders' equity 17,957 26,521
---------- ----------
Total liabilities and shareholders'
equity 41,808 41,836
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
GLOBAL MARKET GROUP LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands of U.S. Dollars ("US$") except for number
of shares and per share data)
For the years ended
December 31,
-------------------------
Notes 2013 2012
------ ------------ -----------
US$ US$
Revenues 13 25,709 39,112
Cost of revenues (3,930) (5,137)
------------ -----------
Gross profit 21,779 33,975
Operating expenses:
Fulfillment (931) -
Selling and marketing expenses (22,893) (25,241)
General and administrative expenses (7,759) (7,085)
Write-off of initial public offering
expenses - (707)
------------ -----------
Operating income (loss) (9,804) 942
------------ -----------
Other income 21 25
Foreign exchange gain (loss) 64 (8)
Changes in fair value of derivative
financial liabilities 15 65 70
Interest income 303 184
------------ -----------
(Loss) Income before income tax (9,351) 1,213
Income tax (expense) benefit (197) 10
------------ -----------
Net (loss) income (9,548) 1,223
Less:
Cumulative dividends of Series
A contingently redeemable convertible
preferred shares 9 - (157)
Cumulative dividends of Series
B contingently redeemable convertible
preferred shares 9 - (785)
------------ -----------
Net (loss) income attributable
to Global Market Group Limited's
ordinary shareholders (9,548) 281
============ ===========
Other comprehensive income, net
of tax
Foreign currency translation
adjustment 204 30
------------ -----------
Other comprehensive income, net
of tax 204 30
------------ -----------
Comprehensive (loss) income attributable
to Global Market Group Limited's
ordinary shareholders (9,344) 311
============ ===========
Earnings per share:
Basic 14 (0.10) Nil
Diluted 14 (0.10) Nil
Weighted average number of ordinary
shares in computing:
Basic 14 97,801,236 75,462,284
Diluted 14 97,801,236 76,078,720
The accompanying notes are an integral part of the consolidated
financial statements.
GLOBAL MARKET GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of U.S. Dollars ("US$") except for number
of shares and per share data)
For the years ended
December 31,
2013 2012
--------- -----------
US$ US$
Cash flows from operating activities
Net (loss) income (9,548) 1,223
Adjustments to reconcile income from
continuing operations to net cash
generated from operating activities:
Share-based payment 696 2,695
Depreciation of property and equipment 421 313
Amortization of other intangible assets 491 223
Allowance for doubtful accounts - 611
Loss on disposal of property and equipment 14 1
Write-off of initial public offering
expense - 707
Deferred income tax benefit (expense) 200 (155)
Unrealized foreign exchange loss 204 30
Changes in operating assets and liabilities:
Increase in inventory (188) -
(Decrease) increase in accounts receivable 1,466 (1,439)
Increase in prepayments and other
current assets (226) (1,096)
(Increase) decrease in other non-current
assets 7 (42)
Increase in accounts payable 398 -
Increase (decrease) in deferred revenue 5,531 (375)
Increase in income tax payable 24 131
Increase in accrued expenses and other
current liabilities 2,708 814
(Decrease) increase in unrecognized
tax benefits (28) 30
--------- -----------
Net cash generated from operating
activities 2,170 3,671
--------- -----------
Cash flows from investing activities
Acquisition of property and equipment (3,048) (648)
Proceeds from disposal of property
and equipment - 1
Acquisition of intangible assets (3,183) (1,266)
Increase in loans to employees (895) (626)
--------- -----------
Net cash used in investing activities (7,126) (2,539)
--------- -----------
The accompanying notes are an integral part of the consolidated
financial statements.
GLOBAL MARKET GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Amounts in thousands of U.S. Dollars ("US$") except for number
of shares and per share data)
For the years ended
December 31,
----------------------
2013 2012
---------- ----------
US$ US$
Cash flows from financing activities
Payment of initial public offering
expenses - (3,086)
Proceeds from initial public offering - 15,021
---------- ----------
Net cash generated from financing
activities - 11,935
---------- ----------
Exchange rate effect on cash and cash
equivalent (5) (21)
---------- ----------
Net (decrease) increase in cash and
cash equivalents (4,961) 13,046
Cash and cash equivalents, beginning
of the period 22,480 9,434
---------- ----------
Cash and cash equivalents, end of
the period 17,519 22,480
========== ==========
Supplemental schedule of cash flows
information:
Income tax paid - -
Non-cash activities:
Conversion of contingently redeemable
convertible preferred shares into
ordinary shares - 28,620
The accompanying notes are an integral part of the consolidated
financial statements.
GLOBAL MARKET GROUP LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands of U.S. Dollars ("US$") except for number of
shares and per share data)
Total Global Market Group Limited's Equity
------------- ---------------------------------------------------------------------------------
Number Additional Accumulated
of ordinary Ordinary paid-in Accumulated other comprehensive Total shareholders'
shares shares capital deficit income (loss) equity
------------- --------- ----------- ------------- -------------------- --------------------
Balance as of
January 1, 2012 50,000,000 10 148 (17,447) (176) (17,465)
Net income - - - 1,223 - 1,223
Other comprehensive
income - - - - 30 30
Cumulative dividend
of Series A
contingently
redeemable
convertible
preferred shares - - - (157) - (157)
Cumulative dividend
of Series B
contingently
redeemable
convertible
preferred shares - - - (785) - (785)
Share-based
compensation - - 2,592 - - 2,592
Conversion of
contingently
redeemable
convertible
preferred shares
into ordinary
shares 40,315,380 8 28,612 - - 28,620
Issuance of
ordinary shares 7,459,555 2 12,461 - - 12,463
------------- --------- ----------- ------------- -------------------- --------------------
Balance as of
December 31,
2012 97,774,935 20 43,813 (17,166) (146) 26,521
============= ========= =========== ============= ==================== ====================
Net loss - - - (9,548) - (9,548)
Other comprehensive
income - - - - 204 204
Share-based
compensation - - 748 - - 748
Issuance of
ordinary shares 50,000 - 32 - - 32
------------- --------- ----------- ------------- -------------------- --------------------
Balance as of
December 31,
2013 97,824,935 20 44,593 (26,714) 58 17,957
============= ========= =========== ============= ==================== ====================
The accompanying notes are an integral part of the consolidated financial
statements.
GLOBAL MARKET GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. Dollars ("US$") and in thousands of Renminbi ("RMB") except for number of shares and per share data)
1. ORGANIZATION AND BASIS OF PRESENTATION
The Company was incorporated under the laws of the Cayman Islands on May 13, 2002. The accompanying consolidated financial statements include the financial statements of the Company, its controlled subsidiaries and VIE (hereinafter subsidiaries and VIE are collectively referred to as "subsidiaries" unless stated otherwise). The Company and its subsidiaries are collectively referred to as the "Group". The Group is principally engaged in provision of manufacturer-to-business ("M2B") e-commerce services and manufacturer-to-consumer ("M2C") e-commerce services. The Company does not conduct any substantive operations on its own but instead conducts its business operations through its subsidiaries and VIE.
Global Market Group (Guangzhou) Co., Ltd ("Global Market Guangzhou"), a PRC entity wholly owned by the Company entered into a series of contractual arrangements ("VIE Arrangements") with Guangzhou Shen Long Computer Technology Co. Ltd ("Guangzhou Shen Long"), a PRC entity wholly owned by Mr. Weijia Pan and Mr. Weinian Pan (the "Pan Brothers") whose principal business is the provision of internet content services, whereby Global Market Guangzhou obtained effective control over the Guangzhou Shen Long through its ability to exercise all the rights of Guangzhou Shen Long, the rights to absorb substantially all of the economic residual benefits and the obligation to fund all of the expected losses of the Guangzhou Shen Long. In accordance with Accounting Standards Codification ("ASC") topic 810 ("ASC 810"), "Consolidation", the Company, through Global Market Guangzhou, consolidates the operating results of Guangzhou Shen Long. The reason the Group entered into these VIE Arrangements is due to the fact that PRC Laws and regulations (i) prohibit direct foreign control in certain industries such as internet services in which the Group operates and (ii) restrict an offshore company controlled or established by a PRC enterprise or natural person to acquire its PRC affiliates. As a result, in an effort to ensure that the Group is not violating such PRC Laws or regulations, it structured its legal organization using the aforementioned VIE arrangements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and use of estimation
The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions reflected in the Group's financial statements include, but are not limited to, revenue recognition, allowance for doubtful accounts, useful lives of property and equipment, impairment of property and equipment, intangible assets and goodwill, realization of deferred tax assets, share-based compensation, Series A and B contingently redeemable convertible preferred shares, and consolidation of variable interest entity. Actual results could materially differ from those estimates.
Foreign Currency
In accordance with ASC 830-10, "Foreign Currency Matters: Overall", the functional currencies of the Company, Feifei International Ltd., and Feifei Group Ltd., are determined to be the United States dollars ("US$"), The functional currency of Global Market Asia is determined to be Hong Kong dollars ("HK$"); and the functional currency of the Company's PRC subsidiaries is the Chinese Renminbi ("RMB"). The Company uses the US$ as its reporting currency. The financial statements of foreign subsidiaries are translated to U.S. dollars at the end-of-period exchange rates for assets and liabilities and an average exchange rate for each period for revenues and expenses. The resulting translation gains (losses) are recorded in accumulated other comprehensive income (loss) as a component of shareholders' equity.
Transactions denominated in foreign currencies are remeasured into the functional currency at the exchange rates prevailing on the transaction dates. Foreign currency denominated financial assets and liabilities are remeasured at the balance sheet date exchange rate. Exchange gains and losses are included in the consolidated statements of comprehensive income.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are carried at net realizable value. An allowance for doubtful accounts are recorded when collection is no longer probable. In evaluating the collectability of receivable balances, the Group considers factors such as customer circumstances or age of the receivable. Accounts receivable are written off after all collection efforts have ceased. Collateral is not typically required, nor is interest charged on accounts receivables.
Inventories
Inventories, consisting of products available for sale, are accounted for using the first-in first-out method, and are valued at the lower of cost or market. This valuation requires the Company to make judgments, based on currently available information, about the likely method of disposition, such as through sales to individual customers, returns to product vendors, or liquidations, and expected recoverable values of each disposition category.
Revenue Recognition
Revenue is derived from M2B e-commerce services and M2C e-commerce services. Revenue for each type of service is recognized in accordance with ASC 605-10, "Revenue Recognition: Overall" when the following four criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the service has been rendered; (iii) the fees are fixed or determinable; (iv) collectability is reasonably assured.
M2B e-commerce services
The Group provides M2B e-commerce services to connect manufacturers in China with international buyers through its online marketplaces. M2B e-commerce services consist principally of global manufacturer certificate ("GMC") service, listing services, matching services, storefront services, catalog services and exhibition services.
The GMC service is based on a proprietary evaluation process wherein a customer is awarded a certificate to indicate that it has successfully met the evaluation criteria. The Group engages an external third party with expertise in quality testing and certification to execute the evaluation procedures which typically require less than 1 month to complete.
Listing services involve the production and maintenance of customer product or service offering information in databases ("Customer Database") that are interfaced to the Group's online website to enable users to search for products, services and other information provided by the Group's customers. The listing services typically have a term of 1 or 2 years.
Matching services utilizes the information contained in the Customer Database to identify suppliers whose product or service offerings matches the sourcing requests obtained from potential buyers. Once there is a match, the Group provides a notification to both parties with their respective contact information and/or facilitates contact between the parties. The Group does not guarantee any business will arise from its matching results. The matching services typically have a term of 1 or 2 years.
Storefront services utilize the information contained in the Customer Database to develop virtual storefronts on the Group's online website. These storefronts enable potential buyers to obtain information concerning the customer. The storefront services typically have a term of 1 or 2 years.
Catalog services involve the production and distribution of monthly or bi-monthly product/service catalog that lists the offerings of its customers. The catalog services typically have a term of 1 or 2 years.
Exhibition services involve displaying products and distributing a customer's marketing material of its products or services at trade fairs. The exhibition services typically have a term of 1 or 2 years.
The Group enters into M2B service arrangements with its customers that contain multiple service deliverables because each of the services in the arrangement is explicitly referred to as an obligation of the Group, requires distinct actions by the Group and the inclusion or exclusion of each service in the contract are expected to cause the service consideration to vary. The Group adopted Accounting Standards Update ("ASU") No. 2009-13 ("ASU 2009-13"), "Multiple-Deliverable Revenue Arrangements" in assessing its multiple element arrangements for all periods presented. GMC service was provided on a standalone basis to a significant number of its customers and as a result, the Group recognized GMC service as a separate deliverable in multiple element arrangements that are entered into. The Group will continue to monitor whether standalone value of GMC service is established such that GMC services in the multiple arrangements may be recognized as a separate deliverable. The total arrangement consideration is allocated to each unit of accounting based on its relative selling price which is determined based on the Group's best estimate of the selling price for that deliverable because neither vendor-specific evidence nor third-party evidence of selling price exists. In determining its best estimate of selling price for each deliverable, the Group considered its overall pricing model and objectives, as well as market or competitive conditions that may impact the price at which the Group would transact if the deliverable were sold regularly on a standalone basis. The Group will monitor the conditions that affect its determination of selling price for each deliverable and will reassess such estimates periodically.
Written contracts are signed by the Group and customer to document the agreed terms of each M2B service arrangement. Side arrangements or subsequent changes are not made to signed contracts. M2B arrangements have service terms of 1 or 2 years for all services to be performed except the GMC service which is a provision of a certificate to the customer to indicate that such customer has undergone an evaluation process to certify certain criteria have been met. The Group does not monitor whether the customer continues to meet the criteria once the GMC certificate is issued and cannot revoke the issued GMC certificate for any reason, including if the GMC certificate holder does not meet the criteria subsequent to the issuance of the GMC certificate. The arrangement fee is fixed and not subject to variable or contingent provisions or general rights to refund. The Group performs credit assessments on its customers prior to selling on credit to ensure collectability is reasonably assured. In accordance with ASC 605-10, revenue is recognized for each separate unit of accounting upon satisfying the four criteria for revenue recognition stated above. For listing services, catalog services and exhibition services which are separate units of accounting, revenue is recognized ratably over the service period, generally over a term of 1 or 2 years, assuming the other criteria for revenue recognition have been met. For GMC service which is sold by the Group on a standalone basis, revenue is recognized upon the delivery of the GMC certificate for the compliance of GMC standards or when the customer is informed of its failure to comply with the GMC standards. For those deliverables that are combined with the last delivered element in an arrangement, the allocated amount to the combined unit is recognized as revenue over the service period in which the last delivered element is performed, generally over a term of 1 or 2 years, assuming the other criteria for revenue recognition have been met.
M2C e-commerce services
The Group provides M2C e-commerce service to sell general merchandise sourced from manufacturers and distributors in China and to operate the feifei.com marketplace program, under which third-party merchants sell general merchandise on the Company's website.
Customers place their order for products online fixing the related selling price and shipping charge. Payment for the purchased product is made before delivery. Revenue, net of discounts and return allowances, are recorded when title passes to customers upon delivery. Return allowances, which reduce product revenue, are estimated based on historical experience. Shipping charges to customers are included in product revenue and totaled US$6 for the year ended December 31, 2013.
In accordance with ASC 605, Revenue Recognition, the Company records product sales and related costs on a gross basis as it is the primary obligor in a transaction.
Cost of Revenues
Cost of revenue for M2B e-commerce service comprises direct costs incurred for the provision of services and an allocation of indirect overhead costs. Cost of revenue for M2C e-commerce service represents the purchase price of consumer products sold by the Company.
The Group is subject to business taxes and surcharges levied on services provided in China. In accordance with ASC 605-45, "Revenue Recognition - Principal Agent Considerations", all such business taxes and surcharges are presented as cost of revenues on the consolidated statements of comprehensive income. Business taxes, value-added taxes and surcharges for the years ended December 31, 2012 and 2013 are approximately US$2,081 and US$1,426, respectively.
Commission Costs
The Group's sales personnel are entitled to commission calculated based on a percentage of total service fees earned. The commission is paid to the sales employees after the service fees are collected from the customers. Since the commissions incurred are considered direct and incremental to securing service revenue agreements, they are capitalized and deferred in accordance with ASC 605-20-25, "Revenue - Services - Recognition". Commissions are charged to selling and marketing expenses in proportion to the revenue recognized. Commission expenses were approximately US$6,932 and US$3,130 for the years ended December 31, 2012 and 2013, respectively.
Fulfillment
Fulfillment costs represent packaging material costs and those costs incurred in outbound shipping, operating and staffing the Group's fulfillment and customer service centers, including costs attributable to buying, receiving, inspecting and warehousing inventories; picking, packaging and preparing customer orders for shipment; processing payment and related transaction costs and responding to inquiries from customers. Fulfillment costs also contain third party transaction fees, such as credit card processing and debit card processing fees. Shipping cost amounted to nil and US$136 for the years ended December 31, 2012 and 2013, respectively.
Share-based compensation
Share options granted to employees are accounted for under ASC 718, "Share-Based Payment". In accordance with ASC 718, the Company determines whether a share option or restricted share unit ("RSU") should be classified and accounted for as a liability award or an equity award. All grants of share options or RSUs to employees classified as equity awards are recognized in the financial statements based on their grant date fair values. Compensation cost for an award with a performance condition shall be accrued only if it is probable that the performance condition will be achieved. Compensation cost related to performance options that only vest on consummation of liquidity events such as initial public offerings and change in control events is recognized when liquidity event is consummated. The Company recognizes compensation expenses using the accelerated method for share options granted and the straight-line method for RSUs granted.
ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates. Forfeiture rate is estimated based on historical and future expectation of employee turnover rate and are adjusted to reflect future change in circumstances and facts, if any. Share-based compensation expense is recorded net of estimated forfeitures such that expense was recorded only for those share-based awards that are expected to vest. To the extent the Company revises this estimate in the future, the share-based payments could be materially impacted in the period of revision, as well as in following periods.
The Company records share-based compensation expense for awards granted to non-employees in exchange for services at fair value in accordance with the provisions of ASC 505-50, "Equity based payment to non-employees". For the awards granted to non-employees, the Company will record compensation expenses equal to the fair value of the share options at the measurement date, which is determined to be the earlier of the performance commitment date or the service completion date. Upon the performance completion, the awards will subject to the requirements of ASC 815 and be reclassified from equity to liability if it meets the definition of derivative. Accordingly, the fair value of the awards will be measured at each reporting date with changes in fair value recognized as compensation expenses until the awards are exercised or expired.
3. ACCOUNTS RECEIVABLE
As at As at
December December
31, 2013 31, 2012
---------- ----------
US$ US$
Accounts receivable 362 1,828
Less: Allowance for doubtful accounts - -
---------- ----------
Accounts receivable, net 362 1,828
========== ==========
Movement in allowance for doubtful accounts:
2013 2012
------ ------
US$ US$
Balance at beginning of the year - -
Additional provision charged to
expenses - 596
Write-offs - (596)
------ ------
Balance at end of the year - -
====== ======
4. PREPAYMENTS AND OTHER CURRENT ASSETS
As at As at
December December
31, 2013 31, 2012
---------- ----------
US$ US$
Prepaid expenses 2,184 2,877
Deposits for office leases 240 188
Capitalized commission costs 1,507 924
Advance to supplier 99 -
Others 713 527
---------- ----------
Total 4,743 4,516
========== ==========
5. PROPERTY AND EQUIPMENT, NET
As at As at
December December
31, 2013 31, 2012
---------- ----------
US$ US$
Electronic and office equipment 3,546 1,402
Leasehold improvement 724 605
Construction in progress 1,443 -
---------- ----------
Property and equipment, cost 5,713 2,007
Less: Accumulated depreciation (1,298) (980)
---------- ----------
Property and equipment, net 4,415 1,027
========== ==========
Depreciation expenses amounted to approximately US$313 and US$421 for years ended December 31, 2012 and 2013, respectively.
6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
The changes in carrying amount of goodwill for the years ended December 31, 2012 and 2013 are as follows:
US$
Balance as at December 31, 2012 6,512
Foreign currency translation adjustment (2)
------
Balance as at December 31, 2013 6,510
======
Other intangible assets consist of the following:
As at As at
December December
31, 2013 31, 2012
---------- ----------
US$ US$
Computer software 2,216 692
Website 640 272
Acquired customers relationships 613 613
Capitalized software development costs 2,268 947
Less: Accumulated amortization (1,329) (832)
---------- ----------
Total 4,408 1,692
========== ==========
Amortization expense amounting to approximately US$180 and US$474 for the years ended December 31, 2012 and 2013, respectively, were recorded in general and administrative expenses on the consolidated statements of comprehensive income. Amortization expense amounting to approximately US$43 and US$17 for the years ended December 31, 2012and 2013, respectively, were recorded in cost of revenues on the consolidated statements of comprehensive income.
The estimated annual amortization expense of intangible assets for each of the following five fiscal years are as follows:
US$
------
2014 937
2015 868
2016 864
2017 840
2018 641
------
Total 4,150
======
7. OTHER NON-CURRENT ASSETS
As at As at
December December
31, 2013 31, 2012
US$ US$
Deposits 163 170
Loans to employees 3,500 2,605
---------- ----------
Total 3,663 2,775
========== ==========
The Group granted interest-free loans to high performing senior managers, managers and sales representatives to purchase cars. The loans granted to senior managers and managers would be settled when they exercised share options, while the loans granted to sales representatives would be repaid through monthly salary deduction over the next 15 months. The cars purchased by the employees are pledged to the Group as collateral for the loans.
8. ACCRUED EXPENSES AND OTHER LIABILITIES
As at As at
December December
31, 2013 31, 2012
---------- ----------
US$ US$
Salary and welfare payable 3,642 2,501
Accrued operating expenses 3,092 1,586
Professional fees 115 164
Other taxes payable 414 269
Others 44 163
---------- ----------
Total 7,307 4,683
========== ==========
9. CONTINGENTLY REDEEMABLE CONVERTIBLE PREFERRED SHARES
Upon the completion of the Company's admission to trading on the AIM Market of the London Stock Exchange in June 2012 (the "Admission"), each Series A and Series B Preferred Shares was automatically converted into one ordinary share. As a result, 40,315,380 ordinary shares were issued. The balance of Series A and Series B Preferred Shares as of December 31, 2012 and 2013 was US$ nil and US$ nil.
The movement of carrying value of the Preferred Shares is as follows:
Series Series
A B Total
US$ US$ US$
Balance as at January 1, 2012 5,699 21,979 27,678
Cumulative dividends 157 785 942
Dividends paid (5,856) (22,764) (28,620)
-------- --------- ---------
Balance as at December 31, 2012 - - -
======== ========= =========
10. SHAREHOLDERS' EQUITY
Ordinary shares
On September 26, 2013, the Company issued 50,000 ordinary shares of US$0.0002 each to the Company's Independent Non-Executive Director in accordance with his letter of appointment dated June 6, 2012.
The Company did not pay or declare any dividends on ordinary shares for the years ended December 31, 2012 and 2013.
Accumulated other comprehensive loss
Changes in accumulated other comprehensive loss by component, net of tax, for the years ended December 31, 2012 and 2013 are as follows:
Foreign currency
translation Total
US$ US$
Balance as at January 1, 2012 (176) (176)
Other comprehensive income 30 30
----------------- --------
Balance as at December 31, 2012 (146) (146)
Other comprehensive income 204 204
----------------- --------
Balance as at December 31, 2013 58 58
================= ========
11. INCOME TAXES
Cayman Islands
Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gains.
British Virgin Islands
Under the current laws of the British Virgin Islands, the Company is not subject to tax on income or capital gains.
Hong Kong
For the years ended 31 December 2012 and 2013, profits tax in Hong Kong was generally assessed at the rate of 16.5% on the taxable income arising in or derived from Hong Kong. Upon payments of dividends by Hong Kong companies to their shareholders, there was no Hong Kong dividend withholding tax.
China
Effective from January 1, 2008, the PRC's statutory income tax rate in 2012 and 2013 is 25%. The Company's PRC subsidiaries are subject to income tax at 25% except for the following:
Suzhou Long Mei is qualified as a "Software and Integrated Circuit Enterprise" and was granted a full exemption of income tax for two years and a 50% reduction in income tax for the succeeding three years ("2+3 tax holiday") starting from its first profit-making year. Suzhou Long Mei started its 2+3 tax holidays in 2010. As a result, Suzhou Long is subject to income tax at 12.5% from 2012 to 2014.
Shenzhen Long Mei is qualified as a "Software and Integrated Circuit Enterprise" and was granted a full exemption of income tax for two years and a 50% reduction in income tax for the succeeding three years ("2+3 tax holiday") starting from its first profit-making year. Shenzhen Long Mei started its 2+3 tax holidays in 2008. As a result, Shenzhen Long Mei was subject to income tax at 12.5% and 25% for 2012 and 2013.
Guangzhou Longtian was qualified as a "Software Enterprise" and was granted a 2+3 tax holiday starting from its first profit-making year in 2012. As such, Guangzhou Longtian is income tax exempted for 2012 and 2013 and is subject to income tax at 12.5% from 2014 to 2016.
Further, pursuant to the prevailing income tax law and its relevant regulations, qualified research and development ("R&D") expenses are subject to an additional 50% super deduction. Moreover, dividends paid by PRC tax residents to non-PRC tax residents shareholders, for earnings derived since January 1, 2008 are subject to a 10% PRC dividend withholding tax, unless tax treaty reliefs are available.
Corporate Income Tax
Income (loss) from continuing operations before income taxes consists of:
For the years ended
December 31,
----------------------
2013 2012
------------ --------
US$ US$
British Virgin Islands (38) -
Cayman Island (224) (295)
Hong Kong (178) (674)
PRC (8,911) 2,182
------------ --------
Total (9,351) 1,213
============ ========
The current and deferred components of the income tax benefit appearing in the consolidated statements of comprehensive income are as follows:
For the years ended
December 31,
----------------------
2013 2012
---------- ----------
US$ US$
Current tax benefit (expense) 3 (145)
Deferred tax (expense) benefit (200) 155
---------- ----------
Income tax (expense) benefit (197) 10
========== ==========
The reconciliation of income tax expense computed by applying the PRC statutory income tax rate to income before income tax and the actual income tax benefit is presented below.
For the years ended
December 31,
----------------------
2013 2012
---------- ----------
US$ US$
Income before income tax (9,351) 1,213
Income tax expenses computed at
the PRC statutory tax rate of 25% 2,338 (303)
Effect of different tax rates in
different jurisdictions (78) (118)
Effect of tax holidays (68) 239
Non-deductible expenses
Share-based compensation (165) (660)
Others (95) (100)
Research and development super
deduction - 231
Income not subject to tax 29 2
Effect of different tax rates in
differed tax items - 228
Changes in valuation allowance (2,106) 473
Unrecognized tax benefits - (14)
Investment basis difference in
PRC Domestic Entities 4 11
Other (56) 21
---------- ----------
Actual income tax benefit (197) 10
========== ==========
The aggregate amount and per share effect of tax holidays or preferential tax rate are as follows:
For the years ended
December 31,
----------------------
2013 2012
---------- ----------
US$ US$
The aggregate amount (68) 239
========== ==========
The aggregate effect on basic
and diluted earnings per share:
Basic and diluted Nil Nil
========== ==========
Deferred Tax
The Group's significant components of deferred tax assets and liabilities are as follows:
As at As at
December December
31, 2013 31, 2012
---------- ----------
US$ US$
Deferred tax assets, current
portion:
Accrued expense 702 360
Excessive advertising expense
deductible in the future 147 -
Deferred income of government
grant -
Bad debt provision 126 122
Less: Valuation allowance (975) (301)
---------- ----------
Total - 181
========== ==========
Deferred tax assets, non-current
portion:
Capitalized software development
cost 18 15
Intangible assets and property
and equipment 62 17
Net operating loss 1,756 403
Less: Valuation allowance (1,836) (404)
---------- ----------
Total - 31
========== ==========
Deferred tax liabilities, non-current
portion:
Customer relationships 8 22
Intangible assets and property
and equipment 67 62
Investment basis in PRC Domestic
Entities 23 28
---------- ----------
Total 98 112
========== ==========
In assessing the realizability of deferred tax assets, the Company has considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company records a valuation allowance to reduce deferred tax assets to a net amount that management believes is more-likely-than-not realizable based on the weight of all available evidence.
As of December 31, 2013, the Company had net operating losses of approximately US$8,161 from various subsidiaries, which can be carried forward to offset future net profit for income tax purposes. The net operating loss carryforward as at December 31, 2013 will expire in years 2014 to 2018 if not utilized.
Unrecognized Tax Benefits
For the years ended December 31, 2012 and 2013, the Company recorded unrecognized tax benefits of approximately US$30 and US$2, respectively, which is mainly related to non-deductible expenses. The management does not expect the amount of unrecognized tax benefits will change significantly in the next 12 months. US$2 if ultimately recognized will impact the effective tax rate.
The unrecognized tax benefits are analyzed as follows:
As at December 31
--------------------
2013 2012
--------- ---------
US$ US$
Balance-beginning 30 14
Addition related to tax positions
in current year - 16
Settlement for tax positions of
prior years (27) -
Foreign currency adjustment (1) -
--------- ---------
Balance-ending 2 30
========= =========
During the years ended December 31, 2012 and 2013, the Company did not recognize any interest and penalties related to unrecognized tax benefits. There was no accrued interest and penalties related to unrecognized tax benefits as of December 31, 2012 and 2013.
The Company's PRC subsidiaries' tax years 2008 through 2013 remain open to examination by the PRC tax authorities and the Company's Hong Kong subsidiary's tax years 2004 through 2012 remain open to examination by the Hong Kong Inland Revenue Department.
12. SHARE-BASED PAYMENTS
Options granted to Consultants
(a) Granted by a shareholder
On July 11, 2008, Mr. Weijia Pan, a principal shareholder of the Company, entered into an stock option agreement with the consultant, Hanson Westhouse Limited ("Hanson Westhouse"), under which, Hanson Westhouse paid Great British Pound ("GBP" or "GBP") 1 to Mr. Weijia Pan in exchange for a fully vested options to purchase from Mr. Weijia Pan 489,845 ordinary shares with an exercise price of US$0.6533 per share. These options are exercisable at any time during the period of two years commencing from the date of the completion of the Company's listing of its ordinary shares on a stock exchange in the United States or in Hong Kong.
As of December 31, 2013, the options granted by Mr. Weijia Pan to Hanson Westhouse to purchase an aggregate of 489,845 shares with exercise prices of US$0.6533 per share were still outstanding which will expire two years after the completion of an initial public offering in the United States or in Hong Kong. As of December 31, 2013, the aggregate intrinsic value of options granted to Hanson Westhouse was nil.
(b) Granted by the Company
On June 18, 2012, the Company granted 86,000 stock options to two external consultants at an exercise price of GBP1.3 per share with a contractual life of ten years. These options will vest upon the Admission and continuous service of the grantees for a period of 1 to 4 years after the Admission.
On June 18, 2012, the Company granted 140,000 stock options to two external consultants at an exercise price of GBP1.3 per share with a contractual life of ten years. Pursuant to the share option agreements, 30%, 40% and 30% of these options will vest and become exercisable upon the first, second and third anniversary of the Admission, respectively.
The following table summarized the consultant share options granted by the Company for the years ended December 31, 2013 and 2013:
Weighted Weighted
Average Average
per Share Remaining Aggregated
Number Exercise Contractual Intrinsic
Granted by the Company of option Price Term Value
US$ (Years) US$'000
Outstanding, January 1,
2013 226,000 2.04 9.47
==========
Granted - -
Forfeited -
Exercised -
----------
Outstanding, December 31,
2013 226,000 2.04 8.47 -
==========
Vested and expected to
vest at December 31, 2013 226,000 2.04 8.47 -
==========
Exercisable at December
31, 2013 -
==========
As of December 31, 2013, the Company has options outstanding granted to consultants to purchase an aggregate of 226,000 shares with exercise prices of GBP1.3 per share which will expire in 8.47 years. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the estimated fair value of the underlying stock at each reporting date, for those awards that have an exercise price below the fair value of the Company's ordinary shares. As of December 31, 2013, the aggregate intrinsic value of options granted to consultant on June 18, 2012 was nil. The total grant date fair value of the options granted to consultants during the year ended December 31, 2013 was US$253.
The 140,000 stock options granted to two external consultants were subject to the requirements of ASC 815 and was reclassified from equity to liability as it meets the definition of derivative on performance completion date.
The Company calculated the estimated fair value of the above noted options using the binomial option pricing model with the following assumptions:
December
June 18, 31,
2012 December
2012 31, 2013
--------- --------- ----------
Expected share option life 10 9.47 8.47
Estimated forfeiture rate - - -
Fair value of ordinary shares 2.04 1.35 0.14
Suboptimal exercise factor 2 2 2
Risk-free interest rates 1.66% 1.83% 2.62%
Expected volatility 60.29% 59.79% 55.70%
Expected dividend yield - - -
The volatility assumption was estimated based on the price volatility of ordinary shares of comparable companies. The sub optimal early exercise factor was estimated based on the vesting and contractual terms of the awards and management's expectation of exercise behavior of the grantees. The risk free rate was based on the US Treasury Bonds and other market information at the measurement dates. The fair value of the ordinary shares, at the option grant dates, was determined with assistance from an independent valuation firm. The fair values of stock options were US$2.04, US$1.35 and US$0.52 per share on June 18, 2012, December 31, 2012 and 2013, respectively.
Employee options
In order to attract and retain the best available personnel, provide additional incentives to employees and directors and promote the success of the Company's business, the Company adopted a 2010 equity incentive plan in 2009 (the "2010 Plan"). Under the 2010 Plan, the Company may grant options to its employees and directors to purchase an aggregate of no more than 5,000,000 ordinary shares of the Company, subject to different vesting requirements. The 2010 Plan was approved by the Board of Directors and shareholders of the Company on July 23, 2009.
The 2010 Plan will be administered by the Compensation Committee as set forth in the Option Plans (the "Plan Administrator"). The officers of the Company have been authorized and directed by the Plan Administrator to execute Option Agreements with those persons selected by the Plan Administrator and issue ordinary shares of the Company upon exercise of any options so granted pursuant to the terms of an Option Agreement.
All options granted under the 2010 Plans have a term of ten years from the option grant date. During year ended December 31, 2010, the Company granted 4,242,127 options to employees and non-employee directors of the Company at exercise prices ranging from US$0.65 to US$1.8. The options vest upon the successful completion of the Company initial public offering in any jurisdiction and continuous employment of the grantees with the Company for a period of 3 to 4 years after the completion of the offering. The options have been accounted for as equity awards and measured at their grant date fair values.
On June 18, 2012, the Company granted 50,000 stock options to an independent director at an exercise price of GBP1.3 per share with a contractual life of ten years. These options will vest upon the Admission and continuous service of the grantees for a period of 1 to 2 years after the Admission. The options have been accounted for as equity awards and measured at their grant date fair values.
On July 18, 2013, the Company granted 1,788,080 stock options to employees of the Company at an exercise price of GBP1.3 per share with a contractual life of ten years. These options will vest upon the continuous service of the grantees for a period of 3 to 4 years after the grant date. The options have been accounted for as equity awards and measured at their grant date fair values.
(a) Options Granted to Employees
The following table summarized the Company's employee share option activity under the Option Plans for the years ended December 31, 2013:
Weighted Weighted
Average Average
per Share Remaining Aggregated
Number Exercise Contractual Intrinsic
Granted by the Company of option(*) Price Term Value
US$ (Years) US$'000
Outstanding, January 1,
2013 3,188,282 1.31 7.51 130
=============
Granted 1,788,080 1.98
Forfeited (93,925) (1.54)
Exercised -
-------------
Outstanding, December 31,
2013* 4,882,437 1.55 7.54 -
=============
Vested and expected to
vest at December 31, 2013* 4,882,437 1.55 7.54 -
=============
Exercisable at December
31, 2013 -
=============
*Options to purchase 331,311 and 318,159 shares granted to the Group's former employees in the logistics and M2C businesses before their disposal on September 9, 2010 were outstanding as of December 31, 2012 and 2013, respectively. Since the change in the status of these individuals from employees to non-employees of the Group arose from the disposal of the Group's logistics and M2C businesses through a spin-off transaction with its shareholders, no compensation expense will recognize in the future because these individuals will not be performing any services for the Group.
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the estimated fair value of the underlying stock at each reporting date, for those awards that have an exercise price below the estimated fair value of the Company's shares.
The Company calculated the estimated fair value of the options on the respective measurement dates using the binomial option pricing model with the following assumptions:
July 18, 2013
--------------
Suboptimal exercise factor 2
Risk-free interest rates 2.29%
Expected volatility 59.96%
Expected dividend yield -
Weight average expected life 9.47
Estimated forfeiture rate -
Fair value of ordinary shares 1.98
The total grant date fair value of the options granted to employees during the year ended December 31, 2013 was US$337.
As of December 31, 2013, there was US$1,024 of unrecognized share-based compensation cost related to options granted to employee by the Company, which are expected to be recognized over a weighted-average vesting period of 2.12 years. To the extent the actual forfeiture rate is different from the Company's estimate, actual share-based compensation related to these awards may be different from the expectation.
(b) Founder's Options
On April 29, 2010, Mr. Weijia Pan, a principal shareholder of the Company, entered into stock option agreements ("Option Agreements") with selected employees (the "Grantees") to purchase ordinary shares in the Company held by him at a fixed exercise ranging between US$0.005 to US$0.3 per share.
On September 8, 2010, Mr. Weijia Pan entered into stock option agreements with selected employees to purchase ordinary shares in the Company held by him at a fixed exercise price of US$1.75 per share.
The options granted by Mr. Weijia Pan vest upon the successful completion of the Company's initial public offering in any jurisdiction and continuous employment of the grantee with the Company for a period of 3 years after the completion of the offering. The awards were granted on April 29, 2010 and September 8, 2010, respectively, and have been accounted for as equity awards of the Company since the options were granted by a principal shareholder for service provided to the Company. The options are measured at the grant date fair value and a corresponding credit will be recorded in additional paid-in capital when vested.
The following table summarized the employee share options granted by the principal shareholder:
Weighted
Weighted-Average Average
per Share Remaining Aggregated
Number of Exercise Contractual Intrinsic
Granted by Principal shareholder option(*) Price Term Value
US$ (Years) US$'000
Outstanding, January 1,
2013 1,997,449 0.24 7.35 2,214
==========
Granted -
Forfeited (27,700) 0.24
Exercised
----------
Outstanding, December
31, 2013 * 1,969,749 0.24 6.35 545
==========
Vested and expected to
vest at December 31, 2013
* 1,969,749 0.24 6.35 545
==========
Exercisable at December
31, 2013 - - -
==========
* Options to purchase 220,500 and 220,500 shares granted to the Group's former employees in the logistics and M2C businesses before their disposal on September 9, 2010 were outstanding as of December 31, 2012 and 2013, respectively. Since the change in the status of these individuals from employees to non-employees of the Group arose from the disposal of the Group's logistics and M2C businesses through a spin-off transaction with its shareholders, no compensation expense will recognize in the future because these individuals will not be performing any services for the Group.
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the estimated fair value of the underlying stock at each reporting date, for those awards that have an exercise price below the estimated fair value of the Company's shares.
The Company calculated the estimated fair value of the options on the respective measurement dates using the binomial option pricing model with the following assumptions:
April 29,
September
2010 8, 2010
----------------- -----------------
Suboptimal exercise factor
-middle and high management level 2 2
Suboptimal exercise factor
-employee level 1.5 1.5
Risk-free interest rates 3.81% 2.70%
Expected volatility 64.55% 73.57%
Expected dividend yield - -
Weighted average fair value of share option
presented to give retroactive effect of
share division 0.75 1.35
As of December 31, 2013, there was US$266 of unrecognized share-based compensation cost related to options granted to employee by the Founder, which are expected to be recognized over a weighted-average vesting period of 1.72 years. To the extent the actual forfeiture rate is different from the Company's estimate, actual share-based compensation related to these awards may be different from the expectation.
(c) Modification of employee options
On April 23, 2013, the Company modified the vesting date of 1,761,255 options and 519,688 options granted to employees from June 22, 2013 and July 22, 2013 to June 22, 2014 and July 22, 2014, respectively. Since the vesting condition was probable of achievement both before and after the modification, the modification of the vesting condition attached to the options was treated as a Type I probable-to-probable modification in accordance with ASC 718 on April 23, 2013. The incremental compensation cost of US$21 associated with the modification was recognized for the year ended December 31, 2013.
(d) Restricted share units
Pursuant to letter of appointment of independent non-executive director, the Company issued to an independent director 15,385 fully vested RSUs at nil subscription price on the Admission. In addition, on the first anniversary of the Admission, the Company will grant a number of fully vested RSUs with an aggregate fair value equivalent to GBP20,000 calculated based on the closing price per share on the last trading day before June 22, 2013, provided his appointment as an independent director of the Company has not been terminated or expired at the time of grant. On September 26, 2013, the Company issued 50,000 vested RSUs with par value US$0.0002 each to the independent director.
The RSUs are classified as liability awards which are measured based on the settlement date fair value. As of December 31, 2013, the RSUs granted to employee by the Company are all vested.
(e) Compensation cost
Total compensation cost relating to options and RUSs granted to employees and directors recognized for the years ended December 31, 2012 and 2013 are as follows:
The years ended
December 31,
------------------
2013 2012
-------- --------
US$ US$
Cost of revenues 42 122
Selling and marketing expenses 329 1,469
General and administrative expenses 390 1,005
-------- --------
Total 761 2,596
======== ========
13. SEGMENT REPORTING
In accordance with ASC 280-10 "Segment Reporting: Overall", the Group's chief operating decision maker ("CODM") has been identified as the Chief Executive Officer, who reviews consolidated results of the Group when making decisions about allocating resources and assessing performance of the Group. The chief operating decision maker uses income (loss) from continuing operations to evaluate the performance of each reportable segment. Accordingly, for the year ended December 31, 2013, the Group operated and managed its business as M2B e-commerce segment and M2C e-commerce segment. For the year ended December 31, 2012, the Group operated and managed its business as a single reportable segment, namely M2B e-commerce segment and therefore, additional segment information has not been presented.
Business disclosures:
Prior to June 25, 2013, the Group operated and managed its business as a single reportable segment, namely M2B e-commerce segment. On June 25, 2013, the M2C China e-commerce services segment was set up. As of and for the year ended December 31, 2013, the Group consisted of two segments.
The accounting policies used in its segment reporting are the same as those used in the preparation of the Group's consolidated financial statements. The Company does not allocate any assets to its M2B e-commerce segment and M2C China e-commerce services segment as management does not use this information to measure the performance of the reportable segments.
The Group's segment information as of and for year ended December 31, 2013 is as follows:
M2B M2C China Unallocated Total
--------- ---------- ------------ ---------
US$ US$ US$ US$
Revenues 24,916 793 - 25,709
Cost of revenues (3,329) (601) - (3,930)
Fulfillment - (931) - (931)
Selling and marketing
expenses (20,509) (2,384) - (22,893)
General and administrative
expenses (6,314) (1,082) (363) (7,759)
Other income 21 - - 21
Foreign exchange loss
(gain) 59 - 5 64
Changes in fair value
of derivative financial
liabilities 65 - - 65
Interest income 302 1 - 303
Income tax benefit (197) - - (197)
Net (loss) income (4,986) (4,204) (358) (9,548)
Total assets 36,919 4,803 86 41,808
Total liabilities 22,278 1,435 138 23,851
Capital expenditure 5,876 1,148 - 7,024
Depreciation and amortization
expense 823 89 - 920
Geographic disclosures:
The Group primarily generates its M2B revenues from customers in Mainland China and Hong Kong in the PRC. All of the Group's long-lived assets are located in Mainland China and Hong Kong. Revenues from customers based on their geographical location for the year ended December 31, 2012 and 2013 are as follows:
For the years ended
December 31,
----------------------
2013 2012
---------- ----------
US$ US$
Mainland China 20,605 33,412
Hong Kong 5,104 5,700
---------- ----------
Total 25,709 39,112
========== ==========
14. EARNINGS PER SHARE
Basic and diluted earnings per share for each of the periods presented are calculated as follows:
For the years ended
December 31,
-------------------------------
2013 2012
--------------- --------------
US$ US$
(Amounts in thousands except
for the number of shares
and per share data)
Numerator:
Net income (loss) (9,548) 1,223
Less: Cumulative dividends of Series
A and Series B Preferred Shares - (942)
--------------- --------------
Net income attributable to ordinary
shareholders used in calculating
net income per ordinary share -
basic and diluted (9,548) 281
=============== ==============
Denominator:
Weighted average number of ordinary
shares outstanding used in calculating
basic earnings per share: 97,801,236 75,462,284
Dilutive option - 616,436
Weighted average number of ordinary
shares outstanding used in calculating
diluted earnings per share: 97,801,236 76,078,720
Basic and diluted earnings per share:
Basic earnings per share (0.10) Nil
=============== ==============
Diluted earnings per share (0.10) Nil
=============== ==============
Upon the Admission on June 22, 2012, each Series A and Series B Preferred Share of a nominal or par value of US$0.0002 of the Company were automatically converted into ordinary shares. Thus, there was no outstanding participating security as of December 31, 2012 and 2013 and two-class method was not applied to calculate the basic earnings per share for the years ended December 31, 2012 and 2013.
Preferred Shares with conversion rights to convert up to 40,315,380 ordinary shares were outstanding during the years ended December 31, 2012, but were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.
15. FAIR VALUE MEASUREMENT
The Group applies ASC 820 "Fair Value Measurements and Disclosures" in measuring fair value. ASC 820-10 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
ASC 820-10 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
Level 2 - Include other inputs that are directly or indirectly observable in the marketplace. Level 3 - Unobservable inputs which are supported by little or no market activity.
ASC 820-10 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.
In accordance with ASC 820-10, the Group measures the fair value of the derivative financial liabilities using a market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities.
Liabilities measured at fair value on a recurring basis as of December 31, 2012 are summarized below:
Quoted Prices
in Active
Markets for Significant
Identical Other Observable Unobservable
Assets (Level Inputs (Level Inputs (Level
1) 2) 3)
US$ US$ US$
Share-based compensation
liability - - 85
============== ================= ==============
Liabilities measured at fair value on a recurring basis as of December 31, 2013 are summarized below:
Quoted Prices
in Active
Markets for Significant
Identical Other Observable Unobservable
Assets (Level Inputs (Level Inputs (Level
1) 2) 3)
US$ US$ US$
Share-based compensation
liability - - 20
============== ================= ==============
The following table presents a reconciliation of share-based compensation liability measured at fair value on a recurring basis using significant unobservable inputs for the year ended December 31, 2013:
Share-based
compensation
liability
--------------
US$
Balance as of December 31, 2012 85
Addition -
Unrealized gains (65)
--------------
Balance as of December 31, 2013 20
==============
Unrealized gains of US$65 for the year ended December 31, 2013 were recorded in "changes in fair value of derivative financial liabilities" in the consolidated statements of comprehensive income.
No assets and liabilities were measured at fair value on a non-recurring basis as of December 31, 2012 and 2013.
16. SUBSEQUENT EVENT
In accordance with ASC topic 855 ("ASC 855"), Subsequent Events, the Group evaluated subsequent events through May 27, 2014, which was the date that the consolidated financial statements were issued.
On January 28, 2014, the Company announces that, pursuant to the share buyback authority granted by shareholders at its Extraordinary General Meeting on July 30, 2012, the Company has purchased in aggregate 4,503,000 ordinary shares of the Company from NIFSMBC-V2006S1 Investment Limited Partnership and NIFSMBC-V2006S3 Investment Limited Partnership (together, the "Vendors") at an average price of GBP0.291 per share. These shares will be held as treasury shares. As a result of this buyback, the Vendors no longer have any interest in the Company's ordinary shares.
On March 26, 2014, the Company entered into an agreement with Guangzhou Daily Newspaper Business Co., Limited ("Guangzhou Daily"), under which Guangzhou Daily will acquire 10.5% of the equity interest of Guangzhou Long Fei Software Technology Co., Ltd. ("Guangzhou Long Fei"), one of the subsidiary of the Company, for a cash consideration of RMB40 million (approximately US$6.5 million). This 10.5% equity interest of Guangzhou Long Fei is redeemable upon the option of Guangzhou Daily if Guangzhou Long Fei could not achieve a success listing in any stock exchange before December 31, 2021, at a redemption price equal to the original issue price per share increased at the rate of ten percent (10%) per annum, compounded annually, starting from the issuance date until the redemption date, plus all accrued but unpaid dividends thereon up to the redemption date.
The following information does not form part of the Company's audited financial statements.
NON-GAAP FINANCIAL DATA
The Company defines adjusted financial data, a non-GAAP financial measure, as financial data excluding write-off of aborted U.S. initial public offering expenses, share-based compensation expenses and changes in fair value of derivative financial liabilities. The Company reviews adjusted financial data together with financial data to obtain a better understanding of the operating performance. The Company presents this non-GAAP financial measure to provide useful information to investors and other interested persons because by having access to such information they will have the same data which the Company uses to assess the operating performance, and because such information allows them to understand and evaluate the consolidated results of operations in the same manner as the management and to make period over period comparison of the financial results. However, the use of adjusted net income has material limitations as an analytical tool. One of the limitations of using non-GAAP adjusted net income is that it does not include all items that impact the net income for the period. In addition, because adjusted net income may not be calculated in the same manner by all companies, it may not be comparable to other similar titled measures used by other companies. In light of the foregoing limitations, you should not consider adjusted net income in isolation from or as an
alternative to net income prepared in accordance with U.S. GAAP. The Company encourages investors and other interested persons to review our financial information in its entirety and not rely on a single financial measure.
(a) Non-GAAP Operating income and Non-GAAP Net income
Year ended
December 31
------------------------------------
2013 2012
------------------ ----------------
US$ US$
Operating income (9,804) 942
Add back:
Write-off of aborted U.S. initial
public offering expenses - 707
Share-based compensation expenses 761 2,765
Non-GAAP operating income (9,043) 4,414
================== ================
Net income (9,548) 1,223
Add back:
Write-off of aborted U.S. initial
public offering expenses - 707
Share-based compensation expenses 761 2,765
Changes in fair value of derivative
financial liabilities (65) (70)
Non-GAAP net income (8,852) 4,625
================== ================
(b) Non-GAAP basic and diluted earnings per share
Year ended
December 31
--------------------------------------------
2013 2012
--------------------- ---------------------
US$ US$
Non-GAAP net income (8,852) 4,625
Less: Cumulative dividends of Series
A and Series B Preferred Shares - (942)
--------------------- ---------------------
Non-GAAP undistributed earnings (8,852) 3,683
Non-GAAP undistributed earnings
allocated to participating preferred
shares - -
--------------------- ---------------------
Non-GAAP net income attributable
to ordinary shareholders used in
calculating net income per ordinary
share - basic and diluted (8,852) 3,683
===================== =====================
Weighted average number of ordinary
shares in computing:
Earnings per share - basic 97,801,236 75,462,284
Earnings per share - diluted 97,801,236 76,078,720
Non-GAAP Earnings per share:
Non-GAAP Earnings per share - basic (0.09) 0.05
===================== =====================
Non-GAAP Earnings per share - diluted (0.09) 0.05
===================== =====================
TOTAL SHARE-BASED COMPENSATION EXPENSES
Total share-based compensation expenses relating to options and RUSs granted to employees, directors and external consultant recognized for the years ended December 31, 2013 and 2012 are as follows:
The years ended
December 31,
------------------
2013 2012
-------- --------
US$ US$
Cost of revenues 43 122
Selling and marketing expenses 329 1,469
General and administrative
expenses 389 1,174
-------- --------
Total 761 2,765
======== ========
Global Market Group Limited ("the Company") recognizes share-based compensation cost ratably for each vesting tranche from the service inception date to the end of the requisite service period. However, as the share options granted by the Company and Mr. Weijia (David Ling) Pan are subject to a performance vesting condition of the Company's initial public offering, no compensation cost has been recognized until after the completion of the admission of the Company's shares to the AIM Market ("Admission") in June 2012.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR EADSPALPLEEF
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