UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30,
2014
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number:000-19644
YOU ON DEMAND HOLDINGS,
INC.
(Exact name of registrant as specified in its
charter)
Nevada |
20-1778374 |
(State or other jurisdiction of incorporation or |
(I.R.S. Employer Identification No.) |
organization) |
|
27 Union Square West, Suite 502
New York, New
York 10003
(Address of principal executive offices)
212-206-1216
(Registrant's telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes
[X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of larger accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer |
[ ] |
Accelerated filer |
[ ] |
Non-accelerated filer |
[ ]
|
Smaller reporting company
|
[X]
|
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
Yes [
] No [X]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date:
23,734,859 shares as of November 13, 2014.
QUARTERLY REPORT ON FORM 10-Q
OF YOU ON DEMAND
HOLDINGS, INC.
FOR THE PERIOD ENDED SEPTEMBER 30, 2014
TABLE OF CONTENTS
References
Except as otherwise indicated by the context, references in
this report to (i) the Company, YOU On Demand, we, us, and our are to
the business of YOU On Demand Holdings, Inc., a Nevada corporation, and its
consolidated subsidiaries and variable interest entities; (ii) CB Cayman are
to our wholly-owned subsidiary China Broadband, Ltd., a Cayman Islands company;
(iii) Sinotop Hong Kong are to YOU On Demand (Asia) Limited (formerly known as
Sinotop Group Limited), a Hong Kong company wholly-owned by CB Cayman; (iv) YOD
WFOE are to YOU On Demand (Beijing) Technology Co., Ltd., a PRC company
wholly-owned by Sinotop Hong Kong; (v) Sinotop Beijing or Sinotop are to
Beijing Sino Top Scope Technology Co., Ltd, a PRC company controlled by Sinotop
Hong Kong through contractual arrangements; (vi) Zhong Hai Video are to Zhong
Hai Shi Xun Information Technology Co., Ltd., a PRC company 80% owned by Sinotop
Beijing; (vii) Hua Cheng are to Hua Cheng Hu Dong (Beijing) Film and
Television Communication Co., Ltd., a PRC company 39% owned by Sinotop Beijing
and 20% owner of Zhong Hai Video; (viii) WFOE are to our wholly-owned
subsidiary Beijing China Broadband Network Technology Co., Ltd., a PRC company,
which was sold effective March 25, 2014; (ix) Jinan Zhong Kuan are to Jinan
Zhong Kuan Dian Guang Information Technology Co. Ltd., a PRC company controlled
through contractual arrangements, which was dissolved effective March 25, 2014;
(x) Jinan Broadband are to our 51% owned subsidiary Jinan Guangdian Jia He
Broadband Co. Ltd, a PRC company, which was sold effective July 31, 2013; (xi)
Jinan Parent are to Jinan Guangdian Jia He Digital Television Co., Ltd., a PRC
Company; (xii) SEC are to the United States Securities and Exchange
Commission; (xiii) Securities Act are to Securities Act of 1933, as amended;
(xiv) Exchange Act are to the Securities Exchange Act of 1934, as amended;
(xv) PRC and China are to Peoples Republic of China; (xvi) Renminbi and
RMB are to the legal currency of China; (xvii) U.S. dollar, $ and US$
are to United States dollars; and (xviii) VIEs refers to either our current
variable interest entity (Sinotop Beijing), to our deconsolidated variable
interest entity (Jinan Zhong Kuan) or to our discontinued variable interest
entity (Jinan Broadband).
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
YOU ON DEMAND HOLDINGS, INC., ITS SUBSIDIARIES AND VARIABLE
INTEREST ENTITY
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2014
YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entity
UNAUDITED CONSOLIDATED BALANCE SHEETS
|
|
September 30, |
|
|
December 31, |
|
|
|
2014 |
|
|
2013 |
|
ASSETS |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
$ |
13,045,215
|
|
$ |
3,822,889
|
|
Accounts
receivable, net |
|
636,684 |
|
|
175,211 |
|
Licensed content, current |
|
1,000,928 |
|
|
428,322 |
|
Prepaid expenses
|
|
292,708 |
|
|
330,013 |
|
Debt issuance costs, net |
|
- |
|
|
128,879 |
|
Other current
assets |
|
9,066 |
|
|
48,928 |
|
Total current assets
|
|
14,984,601 |
|
|
4,934,242 |
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
376,330 |
|
|
499,858 |
|
Licensed content, non-current |
|
145,801 |
|
|
162,646 |
|
Intangible assets, net |
|
2,386,419 |
|
|
2,621,527 |
|
Goodwill |
|
6,105,478 |
|
|
6,105,478 |
|
Investment in unconsolidated
entities |
|
861,194 |
|
|
673,567 |
|
Other non-current assets |
|
367,409 |
|
|
- |
|
Total assets |
$ |
25,227,232 |
|
$ |
14,997,318 |
|
|
|
|
|
|
|
|
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND EQUITY |
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Accounts payable
|
$ |
173,613 |
|
$ |
656,545 |
|
Deferred revenue |
|
142,144 |
|
|
68,969 |
|
Accrued expenses
and other liabilities |
|
1,745,126 |
|
|
1,075,944 |
|
Deferred license
fees |
|
1,205,427 |
|
|
1,200,764 |
|
Contingent purchase price consideration liability |
|
- |
|
|
578,744 |
|
Convertible promissory note |
|
3,000,000 |
|
|
3,000,000 |
|
Warrant
liabilities |
|
619,660 |
|
|
1,344,440 |
|
Total current
liabilities |
|
6,885,970 |
|
|
7,925,406 |
|
|
|
|
|
|
|
|
Deferred income tax liability
|
|
41,560 |
|
|
125,809 |
|
Convertible promissory note |
|
- |
|
|
2,000,000 |
|
Total liabilities |
|
6,927,530 |
|
|
10,051,215 |
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible redeemable
preferred stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A - 7,000,000 shares issued and outstanding, liquidation
preference of $3,500,000 at
September 30, 2014 and
December 31, 2013, respectively |
|
1,261,995 |
|
|
1,261,995 |
|
Series C - 0 and 87,500 shares issued and
outstanding, liquidation
preference of $0 and $350,000 at September 30, 2014
and
December 31, 2013,
respectively |
|
- |
|
|
219,754 |
|
Series D 4% - 0 and 2,285,714
shares issued and
outstanding,
liquidation
preference of $0 and $4,000,000 at
September
30, 2014 and
December 31, 2013, respectively |
|
- |
|
|
4,000,000 |
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
Series E Preferred
Stock, $0.001 par value; 16,500,000
shares authorized, 7,559,998
and 0 shares issued and
outstanding, liquidation
preference of $13,230,000 and $0 at September
30, 2014 and December 31,
2013, respectively |
|
7,560 |
|
|
- |
|
|
|
|
|
|
|
|
Common stock, $0.001
par value; 1,500,000,000 shares
authorized, 23,598,430 and
15,794,762 shares issued at September 30, 2014
and December 31, 2013,
respectively |
|
23,598 |
|
|
15,794 |
|
Additional paid-in capital |
|
112,764,950 |
|
|
67,417,025 |
|
Accumulated
deficit |
|
(92,293,390 |
) |
|
(65,856,053 |
) |
Accumulated other comprehensive loss |
|
(1,381,701 |
) |
|
(715,090 |
) |
Total YOU On Demand
equity |
|
19,121,017 |
|
|
861,676 |
|
Non-controlling interest |
|
(2,083,310 |
)
|
|
(1,397,322 |
)
|
|
|
|
|
|
|
|
Total equity |
|
17,037,707 |
|
|
(535,646 |
) |
|
|
|
|
|
|
|
Total liabilities,
convertible redeemable preferred stock and equity |
$ |
25,227,232 |
|
$ |
14,997,318 |
|
See notes to unaudited consolidated financial statements.
5
YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entity
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
$ |
644,891 |
|
$ |
95,295 |
|
$ |
965,268 |
|
$ |
146,852 |
|
Cost of revenue |
|
873,025 |
|
|
712,327 |
|
|
2,606,142 |
|
|
2,350,931 |
|
Gross loss |
|
(228,134 |
) |
|
(617,032 |
) |
|
(1,640,874 |
) |
|
(2,204,079 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense |
|
1,861,053 |
|
|
1,726,967 |
|
|
5,772,350 |
|
|
5,856,484 |
|
Professional fees |
|
114,271 |
|
|
78,379 |
|
|
375,986 |
|
|
474,114 |
|
Depreciation and amortization |
|
124,936 |
|
|
154,719 |
|
|
414,486 |
|
|
620,946 |
|
Impairments of long-lived
assets |
|
- |
|
|
- |
|
|
- |
|
|
311,249 |
|
Total operating expense |
|
2,100,260 |
|
|
1,960,065 |
|
|
6,562,822 |
|
|
7,262,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
(2,328,394 |
) |
|
(2,577,097 |
) |
|
(8,203,696 |
) |
|
(9,466,872 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest & other income/(expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net |
|
(29,151 |
) |
|
(29,818 |
) |
|
(2,346,210 |
) |
|
(88,882 |
) |
Change in fair value of
warrant liabilities |
|
281,537 |
|
|
(6,840 |
) |
|
(655,849 |
) |
|
(37,130 |
) |
Change
in fair value of contingent consideration |
|
(47,634 |
) |
|
(15,649 |
) |
|
(160,766 |
) |
|
(99,343 |
) |
Gain/(loss) on
investment in unconsolidated entities |
|
(6,389 |
) |
|
8,592 |
|
|
(16,646 |
) |
|
7,873 |
|
Gain on
sale of subsidiary |
|
- |
|
|
- |
|
|
755,426 |
|
|
- |
|
Loss on dissolution of
a variable interest entity |
|
- |
|
|
- |
|
|
(27,463 |
) |
|
- |
|
Others |
|
(14,783 |
) |
|
(11,827 |
) |
|
(82,464 |
) |
|
58,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
before income tax
and non-controlling interest |
|
(2,144,814 |
) |
|
(2,632,639 |
) |
|
(10,737,668 |
) |
|
(9,625,585 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
28,812 |
|
|
21,168 |
|
|
84,249 |
|
|
82,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
(2,116,002 |
) |
|
(2,611,471 |
) |
|
(10,653,419 |
) |
|
(9,543,456 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations |
|
- |
|
|
5,589,872 |
|
|
- |
|
|
5,255,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) |
|
(2,116,002 |
) |
|
2,978,401 |
|
|
(10,653,419 |
) |
|
(4,287,982 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to non-controlling
interest |
|
169,364 |
|
|
193,512 |
|
|
696,708 |
|
|
834,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) attributable to YOU
On Demand shareholders |
|
(1,946,638 |
) |
|
3,171,913 |
|
|
(9,956,711 |
) |
|
(3,453,297 |
) |
Dividend on preferred stock |
|
- |
|
|
(1,029,829 |
) |
|
(16,402,161 |
) |
|
(1,029,829 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
attributable to YOU on Demand common shareholders |
$ |
(1,946,638 |
) |
$ |
2,142,084 |
|
$ |
(26,358,872 |
) |
$ |
(4,483,126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per
share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations |
$ |
(0.09 |
)
|
$ |
(0.22 |
)
|
$ |
(1.45 |
)
|
$ |
(0.65 |
)
|
Income from discontinued
operations |
|
- |
|
|
0.36 |
|
|
- |
|
|
0.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
income/(loss) per share |
$ |
(0.09 |
) |
$ |
0.14 |
|
$ |
(1.45 |
) |
$ |
(0.30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
22,012,166 |
|
|
15,553,097 |
|
|
18,203,124 |
|
|
15,034,841 |
|
See notes to unaudited consolidated financial statements.
6
YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entity
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
LOSS
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
Net income/(loss) |
$ |
(2,116,002 |
) |
$ |
2,978,401 |
|
$ |
(10,653,419 |
) |
$ |
(4,287,982 |
) |
Other comprehensive
income/(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of subsidiary and dissolution of
variable interest entity |
|
- |
|
|
- |
|
|
(633,984 |
) |
|
- |
|
Foreign currency
translation adjustments |
|
31,264 |
|
|
(1,424,011 |
) |
|
(21,907 |
) |
|
(1,341,217 |
) |
Unrealized gain/(loss) on available for
sale securities |
|
- |
|
|
343 |
|
|
- |
|
|
(515 |
) |
Comprehensive loss
attributable to
non-controlling interest |
|
170,042 |
|
|
200,353 |
|
|
685,988 |
|
|
821,583 |
|
Comprehensive income/(loss)
attributable to YOU On Demand shareholders |
$ |
(1,914,696 |
) |
$ |
1,755,086 |
|
$ |
(10,623,322 |
) |
$ |
(4,808,131 |
) |
See notes to unaudited consolidated financial statements.
7
YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entity
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2014 |
|
|
2013 |
|
Cash flows from operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
$ |
(10,653,419 |
) |
$ |
(4,287,982 |
) |
Adjustments to reconcile net
loss to net cash used in operating activities |
|
|
|
|
|
|
Share-based compensation expense |
|
1,133,335 |
|
|
728,917 |
|
Depreciation and
amortization |
|
414,486 |
|
|
1,463,900 |
|
Amortization of licensed content |
|
63,903 |
|
|
112,743 |
|
Amortization of interest expense related to debt issuance costs |
|
128,879 |
|
|
- |
|
Amortization of
interest expense related to beneficial conversion feature |
|
2,126,301 |
|
|
- |
|
Deferred income
tax |
|
(84,249 |
) |
|
(82,129 |
) |
Loss/(gain) on investment in unconsolidated entities |
|
16,646 |
|
|
(7,873 |
) |
Loss on disposal of assets |
|
8,334 |
|
|
- |
|
Change in fair
value of warrant liabilities |
|
655,849 |
|
|
37,130 |
|
Change
in fair value of contingent purchase price consideration liability |
|
160,766 |
|
|
99,343 |
|
Gain on sale of Jinan Broadband |
|
- |
|
|
(5,616,269 |
) |
Impairment
of long-lived assets |
|
- |
|
|
311,249 |
|
Gain on sale of subsidiary, net of cash |
|
(755,426 |
) |
|
- |
|
Loss on
dissolution of variable interest entity |
|
27,463 |
|
|
- |
|
Change in
assets and liabilities: |
|
|
|
|
|
|
Accounts receivable |
|
(461,473 |
) |
|
(111,371 |
) |
Inventory |
|
- |
|
|
(65,367 |
) |
Licensed content |
|
(619,665 |
) |
|
650,939 |
|
Prepaid expenses
and other assets |
|
(97,399 |
) |
|
278,543 |
|
Accounts payable |
|
(482,932 |
) |
|
594,940 |
|
Accrued expenses and other liabilities |
|
349,169 |
|
|
(12,546 |
) |
Deferred revenue |
|
73,175 |
|
|
119,483 |
|
Deferred license
fee |
|
4,663 |
|
|
(2,795 |
) |
Other current liabilities |
|
- |
|
|
95,938 |
|
Others |
|
1,372 |
|
|
(742 |
) |
Net cash used in operating activities |
|
(7,990,222 |
) |
|
(5,693,949 |
) |
|
|
|
|
|
|
|
Cash flows from investing
activities: |
|
|
|
|
|
|
Acquisition of property and
equipment |
|
(58,869 |
) |
|
(424,689 |
) |
Acquisition of
leasehold improvements |
|
(9,492 |
) |
|
- |
|
Investments in intangibles |
|
(292 |
) |
|
(22,662 |
) |
Investment in
unconsolidated entities |
|
(208,760 |
) |
|
- |
|
Sale of subsidiary |
|
(7,549 |
) |
|
(190,760 |
) |
Net cash used in investing
activities |
|
(284,962 |
) |
|
(638,111 |
) |
|
|
|
|
|
|
|
Cash flows from financing
activities: |
|
|
|
|
|
|
Proceeds from sale of Series D
Preferred Stock |
|
- |
|
|
4,000,000 |
|
Proceeds from
sale of Series E Preferred Stock |
|
19,000,000 |
|
|
- |
|
Proceeds from the exercise of
warrants and options |
|
995,607 |
|
|
- |
|
Series D
Preferred Stock dividend payment |
|
(92,054 |
) |
|
- |
|
Costs associated with
financing and share issuance |
|
(2,386,051 |
) |
|
(849,046 |
) |
Net cash provided by
financing activities |
|
17,517,502 |
|
|
3,150,954 |
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
(19,992 |
) |
|
14,553 |
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash and cash
equivalents |
|
9,222,326
|
|
|
(3,166,553 |
) |
|
|
|
|
|
|
|
Total cash and cash equivalents at
beginning of period |
|
3,822,889 |
|
|
4,381,043 |
|
Less cash and cash equivalents of discontinued operations
at beginning of period |
|
- |
|
|
1,103,152 |
|
Cash and cash equivalents of continuing
operations at beginning of period |
|
3,822,889
|
|
|
3,277,891
|
|
|
|
|
|
|
|
|
Cash and cash equivalents of continuing
operations at end of period |
$ |
13,045,215 |
|
$ |
1,214,490 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of warrants issued for issuance cost
in connection with Series D Preferred Stock |
|
- |
|
$ |
247,995
|
|
Value of warrants issued for issuance costs
in connection with Series E Preferred Stock |
$ |
2,166,296
|
|
$ |
- |
|
Conversion of convertible promissory note
for Series E Preferred Stock |
$ |
2,000,000
|
|
$ |
- |
|
Conversion of Series D Preferred Stock for
Series E Preferred Stock |
$ |
4,000,000
|
|
$ |
- |
|
Value of common stock issued from
conversion of Series C Preferred Stock |
$ |
219,754
|
|
$ |
408,114
|
|
Value of common stock issued from
conversion of Series B Preferred Stock |
$ |
- |
|
$ |
3,223,575
|
|
Values of shares and options issued for
Sinotop contingent consideration earn-out |
|
739,265 |
|
$ |
410,475
|
|
See notes to unaudited consolidated financial statements.
8
YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entity
UNAUDITED CONSOLIDATED STATEMENT OF EQUITY
For the Nine Months Ended September 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
YOU on |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
Other |
|
|
Demand |
|
|
Non- |
|
|
|
|
|
|
Preferred |
|
|
Par |
|
|
Common |
|
|
Par |
|
|
Paid-in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Shareholders' |
|
|
controlling |
|
|
Total |
|
|
|
Stock
|
|
|
Value
|
|
|
Stock
|
|
|
Value
|
|
|
Capital |
|
|
Deficit |
|
|
Loss
|
|
|
Equity |
|
|
Interest |
|
|
Equity |
|
Balance, January 1, 2014 |
|
- |
|
$ |
-
|
|
|
15,794,762
|
|
$ |
15,794 |
|
$ |
67,417,025
|
|
$ |
(65,856,053 |
) |
$ |
(715,090 |
) |
$ |
861,676
|
|
$ |
(1,397,322 |
) |
$ |
(535,646 |
) |
Share-based compensation |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
718,969 |
|
|
- |
|
|
- |
|
|
718,969 |
|
|
- |
|
|
718,969 |
|
Common stock issued for services |
|
- |
|
|
- |
|
|
73,600 |
|
|
74 |
|
|
179,926 |
|
|
- |
|
|
- |
|
|
180,000 |
|
|
- |
|
|
180,000 |
|
Common stock and options issued for Sinotop acquisition
earn-out |
|
- |
|
|
- |
|
|
245,274 |
|
|
245 |
|
|
739,265 |
|
|
- |
|
|
- |
|
|
739,510 |
|
|
- |
|
|
739,510 |
|
Conversion of Series C Preferred Stock into
common stock |
|
- |
|
|
- |
|
|
140,000 |
|
|
140 |
|
|
219,614 |
|
|
- |
|
|
- |
|
|
219,754 |
|
|
- |
|
|
219,754 |
|
Series D Preferred Stock cash dividends |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(92,054 |
) |
|
- |
|
|
(92,054 |
) |
|
- |
|
|
(92,054 |
)
|
Series E Preferred Stock issued |
|
14,285,714 |
|
|
14,286 |
|
|
- |
|
|
- |
|
|
24,985,714 |
|
|
- |
|
|
- |
|
|
25,000,000 |
|
|
- |
|
|
25,000,000 |
|
Conversion of Series E Preferred Stock into common stock
|
|
(6,725,716 |
) |
|
(6,726 |
) |
|
6,725,716 |
|
|
6,726 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Issuance costs in connection with the
issuance of Series E Preferred Stock |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(4,552,347 |
) |
|
- |
|
|
- |
|
|
(4,552,347 |
) |
|
- |
|
|
(4,552,347 |
) |
Valuation of warrants issued to placement agent in
connection with the issuance of Series E Preferred Stock |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
2,166,296 |
|
|
- |
|
|
- |
|
|
2,166,296 |
|
|
- |
|
|
2,166,296 |
|
Beneficial conversion feature of Series E
Preferred Stock |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
16,388,572 |
|
|
(16,388,572 |
) |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Beneficial conversion feature related to convertible note
modification |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
2,126,301 |
|
|
- |
|
|
- |
|
|
2,126,301 |
|
|
- |
|
|
2,126,301 |
|
Sale of subsidiary and dissolution of
variable interest entity |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(633,984 |
) |
|
(633,984 |
) |
|
- |
|
|
(633,984 |
) |
Exercise of warrants |
|
- |
|
|
- |
|
|
607,480 |
|
|
607 |
|
|
2,374,575 |
|
|
- |
|
|
- |
|
|
2,375,182 |
|
|
- |
|
|
2,375,182 |
|
Exercise of options |
|
- |
|
|
- |
|
|
11,598 |
|
|
12 |
|
|
1,040 |
|
|
- |
|
|
- |
|
|
1,052 |
|
|
- |
|
|
1,052 |
|
Net loss attributable to YOU On Demand shareholders |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(9,956,711 |
) |
|
- |
|
|
(9,956,711 |
) |
|
(696,708 |
) |
|
(10,653,419 |
)
|
Foreign currency translation adjustments
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(32,627 |
) |
|
(32,627 |
) |
|
10,720 |
|
|
(21,907 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30,
2014 |
|
7,559,998 |
|
$ |
7,560 |
|
|
23,598,430 |
|
$ |
23,598 |
|
$ |
112,764,950 |
|
$ |
(92,293,390 |
) |
|
(1,381,701 |
) |
$ |
19,121,017 |
|
$ |
(2,083,310 |
) |
$ |
17,037,707 |
|
See notes to unaudited consolidated financial statements.
9
YOU ON DEMAND HOLDINGS, INC., ITS SUBSIDIARIES AND VARIABLE
INTEREST ENTITY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. |
Organization and Principal Activities |
|
|
|
YOU On Demand Holdings, Inc., is a Nevada corporation
that primarily operates in China through our subsidiaries and variable
interest entities (VIEs). The Company, its subsidiaries and its VIEs are
collectively referred to as YOU on Demand (YOU On Demand, we, us, or
the Company). |
|
|
|
YOU on Demand is principally engaged in providing video
on demand (VOD) content through a comprehensive end-to-end secure
delivery system. Our services are offered across multiple platforms,
including digital cable television, IPTV (Internet Protocol Television),
mobile and over-the-top (OTT) devices. |
|
|
|
Prior to July 31, 2013, the Company held 51% interest in
Jinan Guangdian Jia He Broadband Co. ltd. (Jinan Broadband), a cable
broadband business based in Jinan City, China. Effective July 31, 2013,
the Company sold its 51% interest in Jinan Broadband. |
|
|
|
In the opinion of management, these financial statements
reflect all adjustments, which are of a normal and recurring nature that
is necessary for a fair statement of the results for the periods presented
in accordance with U.S. Generally Accepted Accounting Principles (U.S.
GAAP) and with the instructions to Form 10-Q in Article 10 of SEC
Regulation S-X. The results of operations for the interim periods
presented are not necessarily indicative of results for the full
year. |
|
|
|
Certain information and footnote disclosures normally
included in the annual consolidated financial statements prepared in
accordance with U.S. GAAP have been condensed or omitted. These unaudited
consolidated financial statements should be read in conjunction with the
Companys audited consolidated financial statements and notes thereto
included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2013 filed with the Securities and Exchange Commission on
March 31, 2014 (our 2013 Annual Report). |
|
|
|
Reclassifications |
|
|
|
In presenting the Companys unaudited consolidated
statement of operations for the three and nine months ended September 30,
2013, we recorded approximately $69,000 and $298,000 of business related
expenses as professional fees. In presenting the Companys unaudited
consolidated statement of operations for the three and nine months ended
September 30, 2014, we reclassified such business related expenses from
professional fees to selling, general and administrative expense to
more properly reflect fees paid for recurring operating expenses in the
ordinary course of business. The prior year information has been
reclassified to be comparable with our current year presentation. This
reclassification has no effect on previously reported net loss. |
|
|
2. |
Going Concern and Managements Plans |
|
|
|
For the nine months ended September 30, 2014, we incurred
a net loss from continuing operations of approximately $10.7 million and
we used cash for operations of approximately $8.0 million. Further, we had
an accumulated deficit of approximately $92.3 million as of September 30,
2014. |
|
|
|
The Company must continue to rely on debt and equity to
pay for ongoing operating expenses in order to execute its business plan.
On July 5, 2013 we completed a Series D Preferred Stock financing in which
we raised $4.0 million and closed on a Bridge Loan on November 4, 2013 for
$2.0 million. On January 31, 2014, we completed a Series E Preferred Stock
financing in which we raised an additional $19.0 million. See Note 11 for
additional information. |
|
|
|
In addition, we believe we have access to additional
funding through various methods, including utilization of our $50 million
shelf registration, of which $47.3 million is remaining, as well as other
means of financing such as debt or private investment. However, financing
may not be available to the Company on terms acceptable to us or at all or
such resources may not be received in a timely manner. Further we may need
approval to seek additional financing from the shareholders from the
August 2012 private financing in the event we do a public
financing. |
|
|
|
These conditions raise substantial doubt about the
Companys ability to continue as a going concern. The unaudited
consolidated financial statements have been prepared assuming that the
Company will continue as a going concern and, accordingly, do not include
any adjustments that might result from the outcome of this
uncertainty. |
10
3. |
WFOE and Jinan Zhong Kuan |
|
|
|
On March 25, 2014, we sold WFOE, our wholly-owned
subsidiary, to Linkstar Gloal Investment Limited. On the same date, we
dissolved Jinan Zhong Kuan, the VIE of WFOE. Both WFOE and Jinan Zhong
Kuan were investment holding companies and were sold or dissolved when we
determined that they were no longer required for our organizational
structure. Total consideration for the sale of WFOE was US$50,000, which
we received in the third quarter of 2014. In accordance with ASC
810-10-40, Deconsolidation of a Subsidiary, we removed the net
assets associated with WFOE and Jinan Zhong Kuan on March 25, 2014 when we
ceased to have controlling financial interest in these entities. |
|
|
|
In connection with the sale of WFOE, we recognized a gain
of $755,426, of which $661,332 represented the release of foreign currency
translation gain which was previously recognized in other comprehensive
income. In connection with the dissolution of Jinan Zhong Kuan, we
recognized a loss of $27,463, of which $27,348 represented the release of
foreign currency translation loss which was previously recognized in other
comprehensive income. |
|
|
4. |
VIE Structure and Arrangements |
|
|
|
Sinotop Beijing |
|
|
|
Management Services Agreement |
|
|
|
Pursuant to a Management Services Agreement, dated March
9, 2010, between Sinotop Beijing and Sinotop Hong Kong (the Management
Services Agreement), Sinotop Hong Kong has the exclusive right to provide
to Sinotop Beijing management, financial and other services related to the
operation of Sinotop Beijings business, and Sinotop Beijing is required
to take all commercially reasonable efforts to permit and facilitate the
provision of the services by Sinotop Hong Kong. As compensation for
providing the services, Sinotop Hong Kong is entitled to receive a fee
from Sinotop Beijing, upon demand, equal to 100% of the annual Net Profits
of Sinotop Beijing during the term of the Management Services Agreement
(Sinotop Hong Kong may request ad hoc quarterly payments of the
aggregate fee, which payments will be credited against Sinotop Hong Kongs
future payment obligations). |
|
|
|
The Management Services Agreement also provides Sinotop
Hong Kong or its designee with a right of first refusal to acquire all or
any portion of the equity of Sinotop Beijing upon any proposal by the sole
shareholder of Sinotop Beijing to transfer such equity. In addition, at
the sole discretion of Sinotop Hong Kong, Sinotop Beijing may be obligated
to transfer to Sinotop Hong Kong or its designee any part or all of the
business, personnel, assets and operations of Sinotop Beijing which may be
lawfully conducted, employed, owned or operated by Sinotop Hong Kong,
including: |
|
|
|
(a) business opportunities presented to, or available to
Sinotop Beijing may be pursued and contracted for in the name of Sinotop
Hong Kong rather than Sinotop Beijing, and at its discretion Sinotop Hong
Kong may employ the resources of Sinotop Beijing to secure such
opportunities; |
|
|
|
(b) any tangible or intangible property of Sinotop
Beijing, any contractual rights, any personnel, and any other items or
things of value held by Sinotop Beijing may be transferred to Sinotop Hong
Kong at book value; |
|
|
|
(c) real property, personal or intangible property,
personnel, services, equipment, supplies and any other items useful for
the conduct of the business may be obtained by Sinotop Hong Kong by
acquisition, lease, license or otherwise, and made available to Sinotop
Beijing on terms to be determined by agreement between Sinotop Hong Kong
and Sinotop Beijing; |
|
|
|
(d) contracts entered into in the name of Sinotop Beijing
may be transferred to Sinotop Hong Kong, or the work under such contracts
may be subcontracted, in whole or in part, to Sinotop Hong Kong, on terms
to be determined by agreement between Sinotop Hong Kong and Sinotop
Beijing; and |
|
|
|
(e) any changes to, or any expansion or contraction of,
the business may be carried out in the exercise of the sole discretion of
Sinotop Hong Kong, and in the name of and at the expense of, Sinotop Hong
Kong; provided, however, that none of the foregoing may cause or
have the effect of terminating (without being substantially replaced under
the name of Sinotop Hong Kong) or adversely affecting any license, permit
or regulatory status of Sinotop Beijing. |
11
The term of the Management Services
Agreement is 20 years, and may not be terminated by Sinotop Beijing except with
the consent of, or a material breach by, Sinotop Hong Kong.
Equity Pledge Agreement
Pursuant to an Equity Pledge Agreement
among Sinotop Hong Kong, Sinotop Beijing and the sole shareholder of Sinotop
Beijing (the Shareholder), dated March 9, 2010, the Shareholder pledged all of
its equity interest in Sinotop Beijing to Sinotop Hong Kong as security for the
performance of the obligations of Sinotop Beijing to make all of the required
management fee payments pursuant to the Management Services Agreement. The term
of the Equity Pledge Agreement expires two years from Sinotop Beijings
satisfaction of all obligations under the Management Services Agreement.
Option Agreement
Pursuant to an Option Agreement among
Sinotop Hong Kong, Sinotop Beijing and the sole shareholder of Sinotop Beijing
(the Shareholder), dated March 9, 2010, and entered into in connection with
the Management Services Agreement, the Shareholder granted an exclusive option
to Sinotop Hong Kong or its designee to purchase, at any time and from time to
time, to the extent permitted under PRC law, all or any portion of the
Shareholders equity in Sinotop Beijing. The aggregate purchase price of the
option is equal to the paid-in registered capital of the Shareholder. The term
of the agreement is until all of the equity interest in Sinotop Beijing held by
the Shareholder is transferred to Sinotop Hong Kong or its designee, or until
the maximum period allowed by law has run, and may not be terminated by any
party to the agreement without the consent of the other parties.
Voting Rights Proxy Agreement
Pursuant to a Voting Rights Proxy
Agreement among Sinotop Hong Kong, Sinotop Beijing and the sole shareholder of
Sinotop Beijing (the Shareholder ), dated March 9, 2010, the Shareholder
granted to Sinotop Hong Kong an irrevocable proxy, for the maximum period of
time permitted by law, all of its voting rights as a shareholder of Sinotop
Beijing. The Shareholder may not transfer any of its equity interest in Sinotop
Beijing to any party other than Sinotop Hong Kong. The Voting Rights Proxy
Agreement may not be terminated except upon the written consent of all parties,
or unilaterally by Sinotop Hong Kong upon 30 days notice.
Jinan Broadband
Effective July 31, 2013, we have
deconsolidated Jinan Broadband due to the disposition of all of our ownership.
The corporate structure for our broadband business consisted of:
|
• |
a Cooperation Agreement, dated December 26, 2006, between
CB Cayman and Jinan Parent (the December 2006 Cooperation Agreement ); |
|
• |
a Cooperation Agreement dated January 2007, between Jinan
Broadband and Networks Center (the January 2007 Cooperation Agreement
); and |
|
• |
two Exclusive Service Agreements, dated December 2006 and
March 2007, between Jinan Broadband, Jinan Parent and Networks Center. |
Pursuant to the December 2006
Cooperation Agreement, CB Cayman and Jinan Parent set up a joint venture, Jinan
Broadband. CB Cayman contributed in cash and owned a 51% controlling interest,
and Jinan Parent contributed the assets in exchange of 49% ownership in Jinan
broadband. Jinan Broadband is a corporate joint venture with a term of 20 years.
Jinan Broadband was considered as a VIE based on ASC 810-10-25-38 due to the
fact that CB Cayman had a controlling financial interest in Jinan Broadband and
therefore deemed to be the primary beneficiary based on the terms stipulated in
the December 2006 Cooperation Agreement as described below:
|
• |
CB Cayman appointed 3 directors
and Jinan Parent appointed 2 directors; |
|
• |
The general manager and financial
manager were appointed by CB Cayman; and |
|
• |
CB Cayman was entitled to receive
51% of net profit/loss of Jinan Broadband. |
Pursuant to the January 2007
Cooperation Agreement, Networks Center, the PRC governmental agency which
controls Jinan Parent, affirmed the arrangement set forth in the December 2006
Cooperation Agreement which provided that all of the pre-tax revenues of Jinan
Broadband would be assigned to our WFOE for 20 years.
12
5. |
Investment in unconsolidated
entities |
During the second quarter of 2014,
Shandong Lushi Media Co., Ltd (Shandong Media), a PRC company 30% owned by
Sinotop Beijing, initiated the process to increase their registered capital from
RMB5,044,200 to RMB9,330,000. The purpose of the financing activity was to allow
Shandong Media to develop a multi-media platform to expand its current business
into the Internet space. In August 2014, the Company invested cash of
RMB1,285,800 (approximately $209,000) into Shandong Media to maintain our 30%
equity ownership.
6. |
Property and Equipment |
|
|
|
The following is a breakdown of our property and
equipment: |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
Furniture and office
equipment |
$ |
982,063 |
|
$ |
965,568 |
|
|
Leasehold improvements |
|
192,309 |
|
|
184,129 |
|
|
Total property and equipment
|
|
1,174,372 |
|
|
1,149,697 |
|
|
Less: accumulated depreciation |
|
(798,042 |
) |
|
(649,839 |
) |
|
Net carrying value |
$ |
376,330 |
|
$ |
499,858 |
|
|
We recorded depreciation expense of approximately $55,000
and $181,000 for the three and nine months ended September 30, 2014,
respectively. We recorded depreciation expense of approximately $70,000
and $207,000 for the three and nine months ended September 30, 2013,
respectively. |
|
|
7. |
Intangible Assets |
|
|
|
The Company has intangible assets primarily relating to
the acquisition of Sinotop Hong Kong. The Company amortizes its intangible
assets that have finite lives and tests its indefinite-lived intangible
assets, other than goodwill, for impairment at least annually, or whenever
events or changes in circumstances indicate that the asset may be
impaired. |
|
|
|
As of September 30, 2014, the Companys amortized
intangible assets consisted of the following: |
|
|
|
September 30, 2014 |
|
|
December 31, 2013 |
|
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net |
|
|
|
|
Amount |
|
|
Amortization |
|
|
Balance |
|
|
Amount |
|
|
Amortization |
|
|
Balance |
|
|
Charter /
Cooperation agreements |
$ |
2,755,821 |
|
$ |
(574,133 |
) |
$ |
2,181,688 |
|
$ |
2,755,821 |
|
$ |
(470,789 |
) |
$ |
2,285,032 |
|
|
Non-compete agreement |
|
- |
|
|
- |
|
|
- |
|
|
3,637,512 |
|
|
(3,637,512 |
) |
|
- |
|
|
Software and
licenses |
|
275,901 |
|
|
(235,408 |
) |
|
40,493 |
|
|
282,399 |
|
|
(200,833 |
) |
|
81,566 |
|
|
Website development |
|
359,284 |
|
|
(329,336 |
) |
|
29,948 |
|
|
361,919 |
|
|
(241,280 |
) |
|
120,639 |
|
|
Total
indefinite lived intangible assets |
$ |
3,391,006 |
|
$ |
(1,138,877 |
) |
$ |
2,252,129 |
|
$ |
7,037,651 |
|
$ |
(4,550,414 |
) |
$ |
2,487,237 |
|
During the nine months ended September
30, 2014, our acquired intangible asset was comprised of software, which was
recognized over the weighted-average amortization period of 5.0 years.
We recorded amortization expense
related to our finite lived intangible assets of approximately $70,000 and
$234,000 for the three and nine months ended September 30, 2014, respectively,
and $85,000 and $414,000, for the three and nine months ended September 30,
2013, respectively.
13
The following table outlines the
amortization expense for the next five years and thereafter:
|
|
|
Amortization |
|
|
|
|
to be |
|
|
Years Ending December 31, |
|
Recognized |
|
|
2014 (3 months) |
$ |
69,081 |
|
|
2015 |
|
156,529 |
|
|
2016 |
|
154,655 |
|
|
2017 |
|
137,997 |
|
|
2018 |
|
137,791 |
|
|
2019 |
|
137,791 |
|
|
Thereafter |
|
1,458,285 |
|
|
Total amortization to be recognized
|
$ |
2,252,129 |
|
8. |
Fair Value Measurements |
|
|
|
Accounting standards require the categorization of
financial assets and liabilities, based on the inputs to the valuation
technique, into a three-level fair value hierarchy. The various levels of
the fair value hierarchy are described as
follows: |
|
Level 1 Financial assets and liabilities whose values
are based on unadjusted quoted market prices for identical assets and
liabilities in an active market that we have the ability to access.
|
|
Level 2 Financial assets and liabilities whose values
are based on quoted prices in markets that are not active or model inputs
that are observable for substantially the full term of the asset or
liability. |
|
Level 3 Financial assets and liabilities whose values
are based on prices or valuation techniques that require inputs that are
both unobservable and significant to the overall fair value measurement.
|
Accounting standards require the use of
observable market data, when available, in making fair value measurements. When
inputs used to measure fair value fall within different levels of the hierarchy,
the level within which the fair value measurement is categorized is based on the
lowest level input that is significant to the fair value measurement.
Annually we review the valuation
techniques used and determine if the fair value measurements are still
appropriate and evaluate and adjust the unobservable inputs used in the fair
value measurements based on current market conditions and third party
information.
The fair value of the warrant
liabilities at September 30, 2014 were valued using the Black-Scholes Merton
method as an estimate for the Monte Carlo Simulation method which was the method
used at year end, December 31, 2013. The following assumptions were
incorporated:
|
|
|
Black Scholes |
|
|
Monte Carlo |
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
|
2014
|
|
|
2013
|
|
|
Risk-free interest rate |
|
1.07% |
|
|
1.186% |
|
|
Expected volatility |
|
70% |
|
|
70% |
|
|
Expected term (years) |
|
2.92 |
|
|
3.67 |
|
|
Expected dividend yield |
|
0% |
|
|
0% |
|
Our contingent consideration liability
was settled on July 1, 2014 (see Note 9). The fair value of the option portion
of our contingent consideration liability at December 31, 2013 was valued using
the Black-Scholes Merton model which incorporated the following assumptions:
|
|
|
September 30, |
|
|
December 31, |
|
|
|
|
2014
|
|
|
2013
|
|
|
Risk-free interest rate |
|
- |
|
|
1.27% |
|
|
Expected volatility |
|
- |
|
|
70% |
|
|
Expected term (years) |
|
- |
|
|
4.0 |
|
|
Expected dividend yield |
|
- |
|
|
0% |
|
14
The following tables present the fair
value hierarchy for those assets and liabilities measured at fair value on a
recurring basis at September 30, 2014 and December 31, 2013, respectively:
|
|
|
|
|
|
September 30, 2014 |
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total Fair Value |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note 12) |
$ |
- |
|
$ |
- |
|
$ |
619,660 |
|
$ |
619,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013 |
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurements |
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total Fair Value |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
$ |
1,371 |
|
$ |
- |
|
$ |
- |
|
$ |
1,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note 12) |
$ |
- |
|
$ |
- |
|
$ |
1,344,440 |
|
$ |
1,344,440 |
|
|
Contingent purchase price consideration
(see Note 9) |
$ |
- |
|
$ |
- |
|
$ |
578,744 |
|
$ |
578,744 |
|
The table below reflects the components
effecting the change in fair value for the nine months ended September 30, 2014:
|
|
|
Level 3 Assets and Liabilities |
|
|
|
|
For the Nine Months Ended September 30, 2014 |
|
|
|
|
January 1, |
|
|
Settlements |
|
|
Change in |
|
|
September 30, |
|
|
|
|
2014 |
|
|
|
|
|
fair value |
|
|
2014 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note 12) |
$ |
1,344,440 |
|
$ |
(1,380,629 |
) |
$ |
655,849 |
|
$ |
619,660 |
|
|
Contingent purchase price consideration
(see Note 9) |
$ |
578,744 |
|
$ |
(739,510 |
) |
$ |
160,766 |
|
$ |
- |
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value
Measurements |
|
|
|
For the Nine Months Ended September 30, 2014 |
|
|
|
Fair Value at |
|
Valuation |
Unobservable |
|
|
|
|
9/30/2014 |
|
Techniques |
Inputs |
Input |
|
|
|
|
|
|
|
|
|
Warrant
liabilities |
$ |
619,660 |
|
Black-Scholes
Merton Model |
Risk-free rate of
interest |
1.07% |
|
|
|
|
|
|
Expected volatility |
70% |
|
|
|
|
|
|
Expected term
(years) |
2.92 |
|
|
|
|
|
|
Expected dividend yield |
0% |
The significant unobservable inputs
used in the fair value measurement of the Companys warrant liability and
contingent consideration includes the risk free interest rate, expected
volatility, expected term and expected dividend yield. Significant increases or
decreases in any of those inputs in isolation would result in a significantly
different fair value measurement.
15
9. |
Sinotop Contingent Consideration |
|
|
|
In connection with the acquisition of Sinotop Hong Kong
on July 30, 2010, if specified performance milestones are achieved,
Weicheng Liu (Mr. Liu or the Seller) will be entitled to earn up to
(i) an additional 403,820 shares of common stock of the Company, (ii)
three-year warrants to purchase 571,275 shares of the Companys common
stock, and (iii) a four-year option to purchase 80,000 shares of the
Companys common stock (collectively, the securities referred to in
clauses (i), (ii) and (iii) are referred to herein as the Earn-Out
Securities). The milestones are as follows: Sinotop Hong Kong will ensure
that (i) at the end of the first earn-out year (July 1, 2012), at least 3
million homes will have access to the Companys VOD services, (ii) at the
end of the second earn-out year (July 1, 2013), at least 11 million homes
will have access to the Companys VOD services, and (iii) at the end of
the third earn-out year (July 1, 2014), at least 30 million homes will
have access to the Companys VOD services. The shares, warrants, and
options are earned at a rate of one third for each milestone
achieved. |
|
|
|
Subsequent to the acquisition of Sinotop, the Company
underwent a warrant exchange that converted the three- year warrants to be
potentially earned under clause (ii) above to 332,002 shares of common
stock. As such, the Earn-Out Securities subject to the achievement of the
specified performance milestones were 735,822 shares of common stock and a
four-year option to purchase 80,000 shares of common stock. |
|
|
|
The Company recorded a contingent consideration
obligation related to the Earn-Out Securities at the time of acquisition
which totaled $2,750,966, representing the fair value of the estimated
payment of the full earn-out. The contingent consideration was classified
as a liability because the Earn-Out Securities did not meet the fixed-
for-fixed criteria under ASC 815-40-15 for equity classification, since
the achievement of the milestones is not solely based on the operations of
the Company. Further ASC 815-40-15 required us to re- measure the
contingent consideration obligation at the end of every reporting period
with the change in value reported in the consolidated statements of
operations. Accordingly, we reported a fair value loss of $47,634 and
$160,766 for the three and nine months ended September 30, 2014,
respectively. We reported a loss of $15,649 and $99,343 for the three and
nine months ended September 30, 2013, respectively. |
|
|
|
As of the end of the second earn-out year (July 1, 2013),
the second milestone was achieved with over 11 million homes having access
to our VOD services. As such, we issued in total 490,548 shares of our
common stock and 53,334 options to Mr. Liu for achieving the first two
year milestones. As of the end of the third earn-out year (July 1, 2014),
the third milestone was achieved with over 30 million homes having access
to our VOD services. As such, we issued 245,274 shares of our common stock
and 26,666 options to Mr. Liu for achieving the third year milestone on
July 1, 2014. |
|
|
10. |
Related Party Transactions |
|
|
|
$3.0 Million Convertible Note |
|
|
|
On May 10, 2012, our Executive Chairman and Principal
Executive Officer, Mr. Shane McMahon, made a loan to the Company in the
amount of $3,000,000. In consideration for the loan, the Company issued a
convertible note to Mr. McMahon in the aggregate principal amount of
$3,000,000 (the Note). Upon issuance, the conversion price of
$4.00 for the Note was equal to the price per share paid for securities by
investors in the most recent financing (as of the date of conversion) of
equity or equity-linked securities of the Company. Thereafter, on May 21,
2012, at the Companys request, the Company and Mr. McMahon entered into
Amendment No. 1 to the Note, pursuant to which the price per share at
which the Note, or any convertible securities into which the Note is
converted, may be converted into shares of the Companys common stock,
shall not be less than $4.75, which amount represents the closing bid
price of the Companys common stock on the trading day immediately prior
to the date of the Note in accordance with the rules and regulations of
The Nasdaq Stock Market, Inc. |
|
|
|
On April 12, 2013, the majority shareholders of the
Company approved an amendment to the Note, as amended on May 21, 2012, to
remove the $4.75 floor to the conversion price of the Note and such
approval and such amendment was effective following the expiration of the
20-day period mandated by Rule 14c-2. |
|
|
|
Effective May 10, 2013, the Company and Mr. McMahon
entered into Amendment No. 3 to the Note pursuant to which (i) the Note
will mature on November 10, 2013, and (ii) the net proceeds of any
financing of equity or equity-linked securities of the Company occurring
on or before such date will be used to repay the Note until the full
amount of the Note, and all accrued interest on the Note is
repaid. |
|
|
|
In connection with the Series D Amendment (as discussed
below in Note 11), on November 4, 2013, the Company and Mr. McMahon
entered into a waiver, pursuant to which (i) Mr. McMahon waived the
Companys obligation to repay the Note on November 10, 2013, (ii) the
Company and Mr. McMahon agreed that the principal and all interest on the
Note shall become due and payable on the earlier of (a) the closing of the
Series E Financing, or (b) if there is no Series E Financing, the date
when the Bridge Note (as discussed below in Note 11) is repaid in full or
converted into shares of Series D Preferred Stock, and (iii) Mr. McMahon
waived the Companys obligation to repay the Note with the proceeds
received from the issuance of the Bridge Note. |
16
|
Effective on January 31, 2014, the Company and Mr.
McMahon entered into Amendment No. 4 to the Note pursuant to which the
Note will be, at Mr. McMahons option, payable on demand or convertible on
demand into shares of Series E Preferred Stock of the Company (the Series
E Preferred Stock) at a conversion price of $1.75, until December 31,
2014. As a result, the Company recognized a beneficial conversion feature
discount calculated as the difference between the Series E Preferred Stock
at its intrinsic value, which was the fair value of the common stock at
the commitment date for the Series E Preferred Stock investment and the
effective conversion price. As such, we recognized a beneficial conversion
feature of approximately $2,126,000 which was reflected as interest
expense since the note was convertible at the issuance date. |
|
|
|
Short-term Loans |
|
|
|
On June 10, 2013, Shane McMahon made a short-term loan in
the amount of $40,000 to the Company which was repaid in full on July 11,
2013. |
|
|
|
On June 26, 2013, at the Companys request, Shane McMahon
made a loan to the Company in the amount of $150,000 in order for the
Company to make certain payments, pending consummation of the Series D
investment transaction described in Note 11. In consideration for the
loan, the Company issued a Promissory Note to Mr. McMahon in the aggregate
principal amount of $150,000 (the June 2013 Note). The June 2013 Note
was to mature on the earlier of the Series D investment transaction, or,
if that transaction was not consummated, six months from the date of
issuance. On July 11, 2013, the Company repaid all amounts owed to Mr.
McMahon under the June 2013 Note. |
|
|
|
Video On Demand Business |
|
|
|
Cost of Revenue |
|
|
|
Zhong Hai Video paid licensed content fees of
approximately $41,000 and $41,000 for the three months ended September 30,
2014 and 2013, and $122,000 and $121,000 for the nine months ended
September 30, 2014 and 2013, respectively, to Hua Cheng Hu Dong (Beijing)
Film and Television Communication Co., Ltd., the minority shareholder of
Zhong Hai Video. |
|
|
11. |
Series D and Series E Preferred Stock Financing and
Convertible Note |
|
|
|
Series D Preferred Stock |
|
|
|
On July 5, 2013, we entered into a Series D Preferred
Stock Purchase Agreement (the Series D Purchase Agreement) with C Media
Limited (the Investor or C Media), pursuant to which we sold to the
Investor 2,285,714 shares of Series D 4% Convertible Redeemable Preferred
Stock of the Company (the Series D Preferred Stock) for $1.75 per share,
or a total purchase price of $4,000,000. |
|
|
|
The Series D Preferred Stock and any dividends thereon
could be converted into shares of our common stock at any time by the
Investor at a conversion price of $1.75 per share. The dividends on the
Series D Preferred Stock were payable, at our option, in cash, if
permissible, or in additional shares of common stock. In the event the
Series E Preferred Stock financing transaction (discussed below) was not
consummated on or prior to October 31, 2013, the Series D Preferred Stock
would become immediately redeemable at the option of the Investor. The
redemption would be exercised in whole or in part at $1.75 dollars per
share, plus all unpaid and accrued dividends. The Investor would have the
right to vote with our stockholders in any matter. The Investor would be
entitled to one vote per common stock on an as-converted basis, based on
the conversion price of $1.75 per share. Upon any liquidation, dissolution
or winding-up of the Company, the Investor would be entitled to receive an
amount equal to the then-outstanding Series D Preferred Stock at $1.75 per
share, plus any accrued and unpaid dividends, prior to and in preference
of holders of common stock or Series A, B or C preferred
stock. |
17
The Series D Preferred Stock when
issued was a hybrid instrument comprised of a (i) a preferred stock and (ii) an
option to convert the preferred stock into shares of our common stock (the
Conversion Option). The Conversion Option derived its value based on the
underlying fair value of the shares of our common stock as did the Series D
Preferred Stock, and therefore it was clearly and closely related to the
underlying preferred stock. Since the Series D Preferred Stock could have been
ultimately redeemed at the option of the holder, the carrying value of the
shares, net of unamortized discount and accumulated dividends, was classified as
temporary equity.
The Company paid issuance costs of
approximately $849,000 in cash and issued warrants to the placement agent to
purchase 228,571 shares of our common stock at $1.75 per share. The fair value
of the warrants was calculated using the Black-Scholes Merton model with the
following assumptions: expected life of 5 years, expected dividend rate of 0%,
volatility of 70% and an interest rate of 1.60% . The exercise price of the
warrants was $1.75. The warrants were valued at $247,995 at the date of
issuance. The Series D Preferred Stock was recorded net of issuance costs of
$1,097,041 at the issuance date, as a charge to additional paid-in capital, due
to our deficit in retained earnings during the period ended December 31, 2013.
The Company recognized a beneficial
conversion feature discount on the Series D Preferred Stock at its intrinsic
value, which was the fair value of the common stock at the commitment date for
the Series D Preferred Stock investment, less the effective conversion price. As
such, the Company recognized approximately $183,000 of beneficial conversion
feature as a deemed dividend and increase in Series D Preferred Stock on the
date of issuance since these shares were convertible at the issuance date.
Subsequently, the Company converted the Series D Preferred Stock to Series E
Preferred Stock which was binding and legally enforceable by both parties on
January 31, 2014 which established a new commitment date pursuant to ASC
470-20. As such the previously recognized beneficial conversion feature of
$183,000 related to our Series D Preferred Stock was reversed and the Company
recognized $2,651,429 of beneficial conversion feature as a deemed dividend
related to the exchange of Series D Preferred Stock to Series E Preferred Stock.
Further, the Company was obligated to pay cumulative dividends of 4% per annum.
In the first quarter of 2014, we paid in full the total cumulative dividends due
of $92,054.
$2.0 Million Convertible Note
On November 4, 2013, the Company issued
a convertible note to C Media in $2,000,000 principal amount (the Bridge
Note). The Bridge Note had an annual interest rate of 4% and a maturity date of
January 5, 2015. Upon the closing of a financing pursuant to the terms of the
Series D Purchase Agreement by and between the Company and C Media, dated as of
July 5, 2013, as amended as of November 4, 2013 (as discussed below) in which C
Media would invest funds in the Company in exchange for shares of the Series E
Preferred Stock, the principal amount and all unpaid interest of the Bridge Note
would be automatically converted into shares of Series E Preferred Stock at a
conversion price equal to the per share purchase price paid for the Series E
Preferred Stock by C Media. If the Bridge Note was not converted into shares of
Series E Preferred Stock within 30 days following the issuance of the Bridge
Note (or, in the event that all of the conditions to the Series E Financing
contained in the Series E Purchase Agreement (defined below) would have been
satisfied except the condition set forth in Section 6.1(i)(ii) of the Series E
Purchase Agreement, then, at C Medias option, by January 31, 2014 (the
Optional Extension Date)), the principal amount and all accrued and unpaid
interest under the Bridge Note would, at C Medias option, be converted into
shares of the Companys Series D Preferred Stock at a conversion price of $1.75
per share. In connection with the issuance of the Bridge Note, we recorded debt
issuance costs of $370,008 to current assets to be amortized over the period of
the earliest possible conversion date which was January 31, 2014. As such we
recorded interest expense of $128,879 and $241,129 during 2014 and 2013,
respectively. The issuance costs included cash paid of $241,936 and the issuance
of warrants to the placement agent to purchase 114,285 shares of common stock at
$1.75 per share. The fair value of the warrants was calculated using the
Black-Scholes model with the following assumptions: expected life of 5 years,
expected dividend rate of 0%, volatility of 70% and an interest rate of 1.36% .
The exercise price of the warrants was $1.75. The warrants were valued at
$128,072 at the date of issuance.
Amendment to Series D Stock Purchase
Agreement
On November 4, 2013, in connection with
the issuance of the Bridge Note, the Company and C Media entered into Amendment
No. 1 to the Series D Purchase Agreement (the Series D Amendment). Pursuant to
the original Series D Purchase Agreement, dated July 5, 2013, the Company and C
Media agreed, among other things, that each party would act in good faith and
with fair dealing to finalize an agreement for the purchase and sale of shares
of Series E Preferred Stock pursuant to the terms of a Series E Purchase
Agreement on or before October 31, 2013. Pursuant to the Series D Amendment, the
parties agreed that each party would act in good faith and with fair dealing to
finalize the Series E Purchase Agreement on or before the 30th day
following the issuance of the Bridge Note.
Also in connection with the Series D
Amendment, C Media executed a waiver and consent with the Company as of October
31, 2013 agreeing, among other things, to waive its right to redeem its Series D
Preferred Stock as of October 31, 2013 until the 30th day following
the issuance of the Bridge Note or the Optional Extension Date.
On December 4, 2013, C Media exercised
its Optional Extension Option which extended the date to January 31, 2014.
18
|
Series E Preferred Stock |
|
|
|
On January 31, 2014, the Company entered into a Series E
Preferred Stock Purchase Agreement (the Series E Purchase Agreement)
with C Media and certain other purchasers (collectively, the Investors),
pursuant to which the Company issued to the Investors an aggregate of
14,285,714 shares of Series E Preferred Stock of the Company for $1.75 per
share, or a total purchase price of $25.0 million. Among the 14,285,714
shares of Series E Preferred Stock issued to the Investors, (i) 1,142,857
shares were issued upon the conversion of the Bridge Note issued to C
Media in principal amount of $2,000,000, (ii) 10,857,143 shares were
issued for an aggregate purchase price of $19 million, and (iii) 2,285,714
shares were issued upon the conversion of 2,285,714 shares of Series D
Preferred Stock held by C Media, which constitute all of the issued and
outstanding shares of Series D Preferred Stock, into the Series E
Preferred Stock pursuant to the Series E Purchase Agreement. In connection
with the issuance of the Series E Preferred Stock, we recorded issuance
costs of $4,552,347 to additional paid in capital. The issuance costs
included cash paid of $2,386,051 and the issuance of warrants to the
placement agent to purchase 1,085,714 shares of common stock at $1.75 per
share. The fair value of the warrants was calculated using the
Black-Scholes model with the following assumptions: expected life of 5
years, expected dividend rate of 0%, volatility of 70% and an interest
rate of 1.49%. The exercise price of the warrants was $1.75. The warrants
were valued at $2,166,296 at the date of issuance. |
|
|
|
In connection with the Series E financing, a total
beneficial conversion feature of $16,571,429 was recognized in Additional
Paid-in Capital. |
|
|
12. |
Warrant Liabilities |
|
|
|
In connection with our August 30, 2012 private financing,
we issued 977,063 warrants to investors and the broker. In accordance with
FASB ASC 815-40-15-5, Determining Whether an Instrument (or Embedded
Feature) is Indexed to an Entitys Own Stock, the warrants have been
characterized as derivative liabilities to be re- measured at the end of
every reporting period with the change in value reported in the
consolidated statement of operations. On August 30, 2012, such warrants
were valued at $1,525,000 utilizing a valuation model and were initially
recorded as a liability. The warrants are revalued each quarter based on
the Monte Carlo valuation, however, as of September 30, 2014, we utilize
the Black-Scholes Merton model as an estimate of the Monte Carlo
valuation. |
|
|
|
As of September 30, 2014 and December 31, 2013, the
warrant liability was re-valued as disclosed in Note 8, Fair Value
Measurement, and was adjusted to its current fair value of approximately
$620,000 and $1,344,000 as determined by the Company, resulting in a loss
of approximately $656,000 for the nine months ended September 30, 2014.
During the nine months ended September 30, 2014, 440,813 warrants were
exercised at an exercise price $1.50 for gross proceeds received of
$661,220. |
|
|
13. |
Net Loss Per Common Share |
|
|
|
Basic net loss per common share attributable to YOU On
Demand shareholders is calculated by dividing the net loss attributable to
YOU On Demand shareholders by the weighted average number of outstanding
common shares during the period. Diluted net loss per share equals basic
net loss per share because the effect of securities convertible into
common shares is anti-dilutive. |
|
|
|
In January 2013, the remainder of our Series B Preferred
Stock (7,866,800 shares) was converted to 1,048,907 common stock. During
2013 and 2014, all of our Series C Preferred Stock (250,000 shares) was
converted to 400,000 common stock. As of September 30, 2014, total of
6,725,716 shares of our Series E Preferred Stock was converted into common
stock on a 1:1 basis. |
|
|
|
For the nine months ended September 30, 2014 and 2013,
the number of securities convertible into common stock not included in
diluted EPS because the effect would have been anti-dilutive consists of
the following: |
19
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
2014
|
|
|
2013
|
|
|
Warrants |
|
2,191,487 |
|
|
1,598,968 |
|
|
Options |
|
1,821,142 |
|
|
1,606,501 |
|
|
Series A Preferred Stock |
|
933,333 |
|
|
933,333 |
|
|
Series C Preferred Stock |
|
- |
|
|
140,000 |
|
|
Series D 4% Preferred Stock |
|
- |
|
|
2,308,551 |
|
|
Series E Preferred Stock |
|
7,559,998 |
|
|
- |
|
|
Convertible promissory note |
|
1,878,481 |
|
|
1,896,612 |
|
|
Total |
|
14,384,441 |
|
|
8,483,965 |
|
The Company has reserved its authorized
but unissued common stock for possible future issuance in connection with the
following:
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
2014
|
|
|
2013
|
|
|
Exercise of stock warrants |
|
2,191,487 |
|
|
1,598,968 |
|
|
Exercise and future grants of stock options |
|
3,985,605 |
|
|
4,025,319 |
|
|
Conversion of preferred stock |
|
8,493,331 |
|
|
3,381,884 |
|
|
Contingent issuable shares in connection with Sinotop
acquisition |
|
- |
|
|
245,274 |
|
|
Issuable shares from conversion of
promissory notes payable |
|
1,878,481 |
|
|
1,896,612 |
|
|
Total |
|
16,548,904 |
|
|
11,148,057 |
|
14. |
Share-Based Payments |
|
|
|
As of September 30, 2014, the Company has 1,821,142
options and 2,191,487 warrants outstanding to purchase shares of our
common stock. |
|
|
|
The following table provides the details of the
approximate total share based payments expense during the three months and
nine months ended September 30, 2014 and 2013: |
|
|
|
Three
Months Ended |
|
|
Nine
Months Ended |
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
|
|
Employees and directors share-based
payments |
$ |
912,000 |
|
$ |
112,000 |
|
$ |
1,133,000 |
|
$ |
401,000 |
|
(a) |
|
Cost of stock option price reduction |
|
- |
|
|
- |
|
|
- |
|
|
55,000 |
|
|
|
Stock issued for services |
|
- |
|
|
57,000 |
|
|
- |
|
|
442,000 |
|
|
|
Stock warrants issued for services |
|
- |
|
|
21,000 |
|
|
- |
|
|
109,000 |
|
|
|
|
$ |
912,000 |
|
$ |
190,000 |
|
$ |
1,133,000 |
|
$ |
1,007,000 |
|
|
(a) |
The Company awards common stock and stock options to
employee and directors as compensation for their services, and accounts
for its stock option awards to employees and directors pursuant to the
provisions of ASC 718, Stock Compensation. The fair value of each
option award is estimated on the date of grant using the Black-Scholes
Merton valuation model. The Company recognizes the fair value of each
option as compensation expense ratably using the straight-line attribution
method over the service period, which is generally the vesting
period. |
Stock Options
Effective as of December 3, 2010, our
Board of Directors approved the YOU On Demand Holdings, Inc. 2010 Stock
Incentive Plan (the Plan) pursuant to which options or other similar
securities may be granted. The maximum aggregate number of shares of our common
stock that may be issued under the Plan is 4,000,000 shares. As of September 30,
2014, options available for issuance is 1,821,142 shares.
Stock option activity for the nine
months ended September 30, 2014 is summarized as follows:
|
|
|
Options |
|
|
Weighted Average |
|
|
Intrinsic |
|
|
|
|
Outstanding |
|
|
Exercise Price |
|
|
Value |
|
|
Outstanding at January 1, 2014 |
|
1,878,835 |
|
$ |
2.64 |
|
|
|
|
|
Granted |
|
62,999 |
|
|
3.18 |
|
|
|
|
|
Exercised |
|
(11,598) |
|
|
1.94 |
|
|
|
|
|
Expired |
|
(44,208) |
|
|
1.95 |
|
|
|
|
|
Forfeited |
|
(64,886) |
|
|
1.77 |
|
|
|
|
|
Outstanding at September 30, 2014 |
|
1,821,142 |
|
$ |
2.72 |
|
$ |
198,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2014 (vested) |
|
1,522,209 |
|
$ |
2.87 |
|
$ |
86,015 |
|
20
In the first quarter of 2014, the
Company granted 22,435 options to board members for services provided in 2013.
The weighted average grant-date fair value of options granted was $2.91. The
total intrinsic value of options exercised during the nine months ended
September 30, 2014 was $8,553. There were no options granted or exercised for
the same period in 2013.
The following table summarizes
information concerning outstanding and exercisable options as of September 30,
2014:
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
|
Range of |
|
Number |
|
|
Contractual Life |
|
|
Weighted Average |
|
|
Number |
|
|
Weighted Average |
|
|
Exercise Prices
|
|
Outstanding |
|
|
(Years) |
|
|
Exercise Price |
|
|
Exercisable |
|
|
Exercise Price |
|
|
$1 - $2 |
|
324,500 |
|
|
9.01 |
|
$ |
1.65 |
|
|
81,126 |
|
$ |
1.65 |
|
|
$2 - $3 |
|
561,976 |
|
|
6.58 |
|
|
2.05 |
|
|
531,417 |
|
|
2.05 |
|
|
$3 - $5 |
|
933,333 |
|
|
5.98 |
|
|
3.39 |
|
|
908,333 |
|
|
3.36 |
|
|
$74 - $75 |
|
1,333
|
|
|
3.45
|
|
|
75.00
|
|
|
1,333
|
|
|
75.00
|
|
|
|
|
1,821,142 |
|
|
6.70 |
|
$ |
2.72 |
|
|
1,522,209 |
|
$ |
2.87 |
|
The following table summarizes the
status of options which contain vesting provisions:
|
|
|
|
|
Weighted |
|
|
|
Number |
|
|
Average |
|
|
|
of |
|
|
Grant Date |
|
|
|
Options |
|
|
Fair
Value |
|
Non-vested at January 1, 2014
|
|
582,337 |
|
$ |
1.52 |
|
Granted |
|
62,999 |
|
|
2.94 |
|
Vested |
|
(274,568 |
) |
|
1.98 |
|
Forfeited |
|
(64,886 |
) |
|
1.19 |
|
Non-vested at September 30,
2014 |
|
305,882 |
|
$ |
1.46 |
|
As of September 30, 2014, the Company
had total unrecognized compensation expense related to options granted of
approximately $446,000 which will be recognized over a remaining service period
of 2.62 years.
Warrants
In connection with the Companys
financings, the Warner Brother Agreement and service agreements, the Company
issued warrants to investors and service providers to purchase common stock of
the Company.
As of September 30, 2014, the weighted
average exercise price of the warrants was $2.20 and the weighted average
remaining life was 3.64 years. The following table outlines the warrants
outstanding and exercisable as of September 30, 2014 and December 31, 2013:
21
|
|
|
September 30, |
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Exercise |
|
|
Expiration |
|
|
Warrants Outstanding |
|
Warrants Outstanding |
|
|
Price |
|
|
Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 Warner Brothers Warrants |
|
200,000 |
|
|
200,000 |
|
$ |
6.60 |
|
|
05/11/16 |
|
|
2011 Service Agreement Warrants |
|
26,667 |
|
|
26,667 |
|
$ |
7.20 |
|
|
06/15/16 |
|
|
2012 August Financing Warrants |
|
536,250 |
|
|
977,063 |
|
$ |
1.50 |
|
|
08/30/17 |
|
|
2013 Service Agreement Warrants |
|
- |
|
|
166,667 |
|
$ |
2.00 |
|
|
02/26/18 |
|
|
2013 Broker Warrants (Series D Financing)
|
|
228,571 |
|
|
228,571 |
|
$ |
1.75 |
|
|
07/05/18 |
|
|
2013 Broker Warrants (Convertible Note) |
|
114,285 |
|
|
114,285 |
|
$ |
1.75 |
|
|
11/04/18 |
|
|
2014 Broker Warrants (Series E Financing)
|
|
1,085,714 |
|
|
- |
|
$ |
1.75 |
|
|
01/31/19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,191,487 |
|
|
1,713,253 |
|
|
|
|
|
|
|
15. |
Income Taxes |
|
|
|
As of September 30, 2014, the Company had approximately
$24.6 million of the U.S domestic cumulative tax loss carryforwards (which
excludes the NOL carryforwards of approximately $1.7 million because of
the uncertainty of the position being sustained) and approximately $15.0
million of the foreign cumulative tax loss carryforwards which may be
available to reduce future income tax liabilities in certain
jurisdictions. These U.S. and foreign tax loss carryforwards will expire
beginning year 2027 through 2034 and year 2015 to year 2019, respectively.
We have established a 100% valuation allowance against our net deferred
tax assets due to our history of pre-tax losses and the likelihood that
the deferred tax assets will not be realizable. Further, a net deferred
tax liability arises from one jurisdiction. The valuation allowance
increased approximately $0.5 million and $3.0 million during the three and
nine months ended September 30, 2014, respectively. |
|
|
|
We are not aware of any unrecorded tax liabilities which
would impact our financial positions of our results of
operations. |
22
16. |
Commitments and Contingencies |
|
|
|
Severance Commitment |
|
|
|
The Company has employment agreements with certain
employees that provide severance payments upon termination of employment
under certain circumstances, as defined in the applicable agreements. As
of September 30, 2014, the Company's potential minimum cash obligation to
these employees was approximately $1,812,000. |
|
|
|
Operating Lease Commitment |
|
|
|
The Company is committed to paying leased property costs
related to our offices in New York and China through 2017 as
follows: |
|
|
Leased |
|
|
|
Property |
|
Years Ending
December 31, |
|
Costs |
|
2014 (3 months) |
$ |
253,000 |
|
2015 |
|
822,000 |
|
2016 |
|
698,000 |
|
2017 |
|
58,000 |
|
Thereafter |
|
- |
|
Total |
$ |
1,831,000 |
|
Licensed Content Commitment
The Company is committed to paying
content costs through 2016 as follows:
|
|
Content |
|
Years Ending
December 31, |
|
Costs |
|
2014 (3 months) |
$ |
413,000 |
|
2015 |
|
2,857,000 |
|
2016 |
|
2,655,000 |
|
Thereafter |
|
- |
|
Total |
$ |
5,925,000 |
|
|
From time to time, we may become involved in various
lawsuits and legal proceedings which arise in the ordinary course of
business. However, litigation is subject to inherent uncertainties, and an
adverse result in these or other matters may arise from time to time that
may harm our business. We are currently not aware of any such legal
proceedings or claims that we believe will have a material adverse effect
on our business, financial condition or operating results. |
|
|
17. |
Subsequent Events |
|
|
|
Management evaluated subsequent events after September
30, 2014 through the latest practicable date, and concluded that no
subsequent event has occurred that would require recognition or disclosure
in the unaudited consolidated financial
statements. |
23
Cautionary Note Regarding Forward Looking Statements
This Form 10-Q contains forward-looking statements that
involve risks and uncertainties. You can identify these statements by the use of
forward-looking words such as "may", "will", "expect", "anticipate", "estimate",
"believe", "continue", or other similar words. You should read statements that
contain these words carefully because they discuss our future expectations,
contain projections of our future results of operations or financial condition
or state other "forward-looking" information. We believe that it is important to
communicate our future expectations to our investors. However, these
forward-looking statements are not guarantees of future performance and actual
results may differ materially from the expectations that are expressed, implied
or forecasted in any such forward-looking statements. There may be events in the
future that we are unable to accurately predict or control, including weather
conditions and other natural disasters which may affect demand for our products,
and the productdevelopment and marketing efforts of our competitors. Examples
of these events are more fully described in the Companys 2013 Annual Report
under Part I. Item 1A. Risk Factors.
Unless required by law, the Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. However, readers should carefully
review the reports and documents the Company files from time to time with the
SEC, particularly its Quarterly Reports on Form 10-Q, Annual Report on Form 10-K
, Current Reports on Form 8-K and all amendments to those reports.
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations.
The following managements discussion and analysis should be
read in conjunction with our financial statements and the notes thereto and the
other financial information appearing elsewhere in this report. In addition to
historical information, the following discussion contains certain
forward-looking information. See Cautionary Note Regarding Forward Looking
Statements above for certain information concerning those forward looking
statements.
Overview
We are a multi-platform media company that principally operates
in China through our subsidiaries and VIE. We provide integrated value-added
service solutions business for the delivery of video on demand (VOD) and
enhanced premium content to digital cable providers, IPTV (Internet Protocol
Television) providers, Over-the-Top (OTT) providers and mobile manufacturers.
On July 30, 2010, we acquired Sinotop Hong Kong through our
subsidiary, CB Cayman. Through a series of contractual arrangements, Sinotop
Hong Kong controls Sinotop Beijing, a corporation established in the Peoples
Republic of China (PRC) which is the 80% owner of Zhong Hai Video, our primary
operating company.
Our Discontinued Broadband Business
Prior to July 31, 2013, through Jinan Broadband, we provided to
our customers cable and wireless broadband services, principally internet
services, Internet Protocol Point wholesale services, related network equipment
rental and sales, and fiber network construction and maintenance. Jinan
Broadband, was 49% owned by Jinan Parent and 51% owned by our wholly owned
subsidiary, WFOE. Effective July 31, 2013, we sold our 51% interest in Jinan
Broadband to Shandong Broadcast Network Limited. Jinan Broadband is accounted
for as discontinued operations in the unaudited consolidated financial
statements included in this quarterly report on Form 10-Q.
Principal Factors Affecting Our Financial Performance
Our operating results are primarily affected by the following
factors:
|
• |
Our ability to adapt our product and service
offerings to meet consumer demands. Our expansion prospect is
dependent on continued development of our product and services. The
content distribution industry in China is highly competitive and dominated
by large Internet companies that have more resources than us. The growth
of our business will depend on whether we can develop new services and
products that can offer higher quality contents, technological innovation
and unique user experience. |
|
|
|
|
• |
Our ability to expand our subscriber base.
Our business is affected by the overall size of our user base, which in
turn is determined by, among other factors, (i) user experience of our
service and products, (ii) our relationship with distribution platforms,
such as digital cable and IPTV providers and mobile product manufacturers,
(iii) expansion of our business to include increased service offering and
(iv) the expansion of our subscribers beyond smartphones to mobile tablets
and other Internet-enabled mobile devices. |
|
|
|
|
• |
Our ability to achieve revenue growth and meet
internal or external expectations of future performance. In the
past year, we have shifted our focus to our core VOD business and our
business model is still evolving. Our financial performance is affected
by, among other things, our ability to come to favorable business terms
with our distribution partners, manage and procure contents in a
cost-effective manner and manage our operating expenses. Overall, our
operating expenses have been decreasing but we have also incurred certain
additional costs related our financing activities and maintaining our
public company status. |
24
|
• |
Changes in Chinas economic, political or social
policies or conditions could have a significant impact on our
business and operations. We operate in China and derive all
of our revenues from sales to customers in China. Accordingly, our
business, financial condition and results of operation is significantly
influenced by the political, social and economic policies and conditions
in China. While the Chinese economy has experienced significant growth
over the past decade, growth has been uneven, both geographically and
among various sectors of the economy. In addition, the Chinese government
continues to play a significant role in regulating telecommunication and
Internet industry development by imposing certain laws and regulations
concerning Internet access and distribution of video content and other
information over traditional and new media platforms. Some of the laws and
regulations are also relatively new and involving and their interpretation
and enforcement involve significant uncertainty. |
Taxation
United States
YOU On Demand Holdings, Inc. is subject to United States tax at
a tax rate of 34%. No provision for income taxes in the United States has been
made as YOU On Demand Holdings, Inc. had no income taxable in the United States
since inception.
Cayman Islands
CB Cayman was incorporated in the Cayman Islands. Under the
current law of the Cayman Islands, CB Cayman is not subject to income or capital
gains tax. In addition, dividend payments are not subject to withholding tax in
the Cayman Islands.
Hong Kong
Our subsidiary, Sinotop Hong Kong, was incorporated in Hong
Kong and under the current laws of Hong Kong, is subject to Profits Tax of 16.5%
. No provision for Hong Kong Profits Tax has been made as Sinotop Hong Kong has
no taxable income.
The Peoples Republic of China
Under the Enterprise Income Tax Law, our Chinese subsidiaries
and VIEs are subject to an earned income tax of 25.0% .
Our future effective income tax rate depends on various
factors, such as tax legislation, the geographic composition of our pre-tax
income and non-tax deductible expenses incurred. Our management carefully
monitors these legal developments to determine if there will be any change in
the statutory income tax rate.
25
Consolidated Results of Operations
Comparison of Three Months Ended September 30, 2014 and 2013
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
Amount |
|
|
% |
|
|
|
2014 |
|
|
2013 |
|
|
Change |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
$ |
645,000 |
|
$ |
95,000 |
|
$ |
550,000 |
|
|
579% |
|
Cost of revenue |
|
873,000 |
|
|
712,000 |
|
|
161,000 |
|
|
23% |
|
Gross loss |
|
(228,000 |
) |
|
(617,000 |
) |
|
389,000 |
|
|
-63% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses |
|
1,861,000 |
|
|
1,727,000 |
|
|
134,000 |
|
|
8% |
|
Professional fees |
|
114,000 |
|
|
78,000 |
|
|
36,000 |
|
|
46% |
|
Depreciation and amortization |
|
125,000 |
|
|
155,000 |
|
|
(30,000 |
) |
|
-19% |
|
Total operating expense |
|
2,100,000 |
|
|
1,960,000 |
|
|
140,000 |
|
|
7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
(2,328,000 |
) |
|
(2,577,000 |
) |
|
249,000 |
|
|
-10% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income/(expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
(29,000 |
) |
|
(29,000 |
) |
|
- |
|
|
- |
|
Change in fair value of warrant liabilities |
|
282,000 |
|
|
(7,000 |
) |
|
289,000 |
|
|
-4,219% |
|
Change in fair value of
contingent consideration |
|
(48,000 |
) |
|
(16,000 |
) |
|
(32,000 |
) |
|
200% |
|
Gain/(loss) on investment in unconsolidated
entities |
|
(6,000 |
) |
|
9,000 |
|
|
(15,000 |
) |
|
-167% |
|
Others |
|
(16,000 |
) |
|
(12,000 |
) |
|
(4,000 |
) |
|
33% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income tax and non-controlling interest |
|
(2,145,000 |
) |
|
(2,632,000
|
) |
|
487,000 |
|
|
-19% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
29,000 |
|
|
21,000 |
|
|
8,000 |
|
|
38% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
(2,116,000 |
) |
|
(2,611,000 |
) |
|
495,000 |
|
|
-19% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations |
|
- |
|
|
5,590,000 |
|
|
(5,590,000 |
) |
|
-100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) |
|
(2,116,000 |
) |
|
2,979,000 |
|
|
(5,095,000 |
) |
|
-171% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to non-controlling
interest |
|
169,000 |
|
|
193,000 |
|
|
(24,000 |
) |
|
-12% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) attributable to
YOU On Demand shareholders |
|
(1,947,000 |
) |
|
3,172,000 |
|
|
(5,119,000 |
) |
|
-161% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred stock |
|
- |
|
|
(1,030,000 |
) |
|
1,030,000 |
|
|
-100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) attributable to
YOU on Demand common shareholders |
$ |
(1,947,000 |
) |
$ |
2,142,000 |
|
$ |
(4,089,000 |
) |
|
-191% |
|
26
Revenue
Revenue for the three months ended September 30, 2014, totaled
$645,000, as compared to $95,000 for 2013. The increase in revenue of
approximately $550,000 was attributable to the growth of our VOD business.
Gross Loss
Our gross loss for the three months ended September 30, 2014
was $228,000, as compared to $617,000 during the same period in 2013. The
decrease in gross loss of approximately $389,000, or 63%, was mainly due to
increased revenue related to our VOD business. Our cost of revenue is primarily
comprised of content licensing fees. Our content license agreements with
production companies incorporate minimum guaranteed payment levels. As our
operations are just evolving, revenues from operations do not yet meet the
threshold at which they exceed those costs.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the three
months ended September 30, 2014, increased approximately $134,000 to $1,861,000,
as compared to $1,727,000 for the three months ended September 30, 2013.
Salaries and personnel costs are the primary components of
selling, general and administrative expenses. For the three months ended
September 30, 2014 salaries and personnel costs accounted for 47% of our
selling, general and administrative expenses. For the three months ended
September 30, 2014, salaries and personnel costs totaled $866,000, a decrease of
$6,000, as compared to $872,000 for the same period of 2013 due to staff
reductions made as part of our cost savings initiatives.
The other major components of our selling, general and
administrative expenses include technology, marketing, business development,
rent expenses and regulatory expenses. For the three months ended September 30,
2014, these costs totaled $770,000, a net increase of $497,000, or 182%, as
compared to $273,000 for the same period in 2013, due primarily to increases in
the compensation paid to our board members and increased costs in technology and
rent expense.
Professional Fees
Professional fees are generally related to public company
reporting and governance expenses as well as legal fees related to expansion of
our VOD business. Our costs for professional fees increased $36,000, or 46%, to
$114,000 for the three months ended September 30, 2014, from $78,000 during
2013. The increase in professional fees was primarily due to legal fees incurred
during the expansion in our VOD business. This increase was partially offset by
the decrease in accounting service fees due to timing in accounting services
related to our transition to a new audit firm.
Depreciation and Amortization
Our depreciation and amortization expense decreased $30,000, or
19%, to $125,000 in the three months ended September 30, 2014, from $155,000
during 2013. The decrease was primarily due to full amortization of certain
software in the beginning of 2014 and write-off of certain office equipment in
year end of 2013.
Change in Fair Value of Warrant Liabilities
Certain of our warrants are characterized as derivative
liabilities to be re-measured at the end of every reporting period with the
change in value reported in the statement of operations and, accordingly, we
reported a gain of $282,000 and a loss of $7,000 for the three months ended
September 30, 2014 and 2013, respectively. The changes are primarily due to
fluctuations in our closing stock price.
Change in Fair Value of Contingent Consideration
Our contingent consideration related to our acquisition of
Sinotop Hong Kong is classified as a liability because the Earn-Out Securities
do not meet the fixed-for-fixed criteria under ASC 815-40-15 since the
contingency was not solely based on the Companys operations. Further, ASC
815-40-15 requires us to re-measure at the end of every reporting period with
the change in value reported in the statement of operations and, accordingly, we
reported a loss of $48,000 and $16,000 for the three months ended September 30,
2014 and 2013, respectively. The changes are primarily due to fluctuations in
our closing stock price. The earn-out provisions were fully met on July 1, 2014
and the contingency was thereby resolved on that date.
Discontinued Operations
Effective July 31, 2013, we sold our 51% interest in Jinan
Broadband to Shandong Broadcast Network Limited in order to focus on our core
VOD business and help with cash flow needs. As such, Jinan Broadband is
accounted for as discontinued operations in our unaudited consolidated financial
statements included in this report.
Net Loss Attributable to Non-controlling Interest
Hua Cheng has a 20% non-controlling interest in Zhong Hai Video
and as such we allocate 20% of the operating loss of Zhong Hai Video to Hua
Cheng. During the three months ended September 30, 2014, $169,000 of our
operating loss from Zhong Hai Video was allocated to Hua Cheng, as compared to
$193,000 during the same period of 2013.
27
Comparison of Nine Months Ended September 30, 2014 and 2013
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
Amount |
|
|
% |
|
|
|
2014 |
|
|
2013 |
|
|
Change |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
$ |
965,000 |
|
$ |
147,000 |
|
$ |
818,000 |
|
|
556% |
|
Cost of revenue |
|
2,606,000 |
|
|
2,351,000 |
|
|
255,000 |
|
|
11% |
|
Gross loss |
|
(1,641,000 |
) |
|
(2,204,000 |
) |
|
563,000 |
|
|
-26% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense |
|
5,772,000 |
|
|
5,857,000 |
|
|
(85,000 |
) |
|
-1% |
|
Professional fees |
|
376,000 |
|
|
474,000 |
|
|
(98,000 |
) |
|
-21% |
|
Depreciation and amortization |
|
415,000 |
|
|
621,000 |
|
|
(206,000 |
) |
|
-33% |
|
Impairments |
|
- |
|
|
311,000 |
|
|
(311,000 |
) |
|
-100% |
|
Total operating expense |
|
6,563,000 |
|
|
7,263,000 |
|
|
(700,000 |
) |
|
-10% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
(8,204,000 |
) |
|
(9,467,000 |
) |
|
1,263,000 |
|
|
-13% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest & other income/(expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
(2,346,000 |
) |
|
(89,000 |
) |
|
(2,257,000 |
) |
|
2,536% |
|
Change in fair value of warrant liabilities |
|
(656,000 |
) |
|
(37,000 |
) |
|
(619,000 |
) |
|
1,673% |
|
Change in fair value of
contingent consideration |
|
(161,000 |
) |
|
(99,000 |
) |
|
(62,000 |
) |
|
63% |
|
Loss on investment in unconsolidated entities |
|
(17,000 |
) |
|
8,000 |
|
|
(25,000 |
) |
|
-313% |
|
Gain on sale of subsidiary |
|
755,000 |
|
|
- |
|
|
755,000 |
|
|
- |
|
Loss on dissolution of a variable interest
entity |
|
(27,000 |
) |
|
- |
|
|
(27,000 |
) |
|
- |
|
Others |
|
(82,000 |
) |
|
59,000 |
|
|
(141,000 |
) |
|
-239% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income tax and non-controlling interest |
|
(10,738,000 |
) |
|
(9,625,000 |
) |
|
(1,113,000 |
) |
|
12% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
84,000 |
|
|
82,000 |
|
|
2,000 |
|
|
2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing
operations |
|
(10,
654,000 |
) |
|
(9,543,000 |
) |
|
(1,111,000 |
) |
|
12% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations |
|
- |
|
|
5,255,000 |
|
|
(5,255,000 |
) |
|
-100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
(10,654,000 |
) |
|
(4,288,000 |
) |
|
(6,366,000 |
) |
|
148% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to non-controlling
interest |
|
697,000 |
|
|
835,000 |
|
|
(138,000 |
) |
|
-17% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to YOU On
Demand shareholders |
|
(9,957,000 |
) |
|
(3,453,000 |
) |
|
(6,504,000 |
) |
|
188% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred stock |
|
(16,402,000 |
) |
|
(1,030,000 |
) |
|
(15,372,000 |
) |
|
1,492% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to YOU on
Demand common shareholders |
$ |
(26,359,000 |
) |
$ |
(4,483,000 |
) |
$ |
(21,876,000 |
) |
|
488% |
|
28
Revenue
Revenue for the nine months ended September 30, 2014, totaled
$965,000, as compared to $147,000 for the same period in 2013. The increase in
revenue of approximately $818,000 was attributable to the growth of our VOD
business.
Gross Loss
Our gross loss for the nine months ended September 30, 2014 was
$1,641,000, as compared to $2,204,000 during the same period in 2013. The
decrease in gross loss of approximately $563,000, or 26%, was mainly due to
increased revenue related to our VOD business. Our cost of revenue is primarily
comprised of content licensing fees. Our content license agreements with
production companies incorporate minimum guaranteed payment levels. As our
operations are just evolving, revenues from operations do not yet meet the
threshold at which they exceed those costs.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the nine
months ended September 30, 2014, decreased approximately $85,000, to $5,772,000,
as compared to $5,857,000 for the nine months ended September 30, 2013.
Salaries and personnel costs are the primary components of
selling, general and administrative expenses. For the nine months ended
September 30, 2014 salaries and personnel costs accounted for 46% of our
selling, general and administrative expenses. For the nine months ended
September 30, 2014, salaries and personnel costs totaled $2,690,000, a decrease
of $310,000, or 10%, as compared to $3,000,000 for the same period of 2013 due
to staff reductions made as part of our cost savings initiatives.
The other major components of our selling, general and
administrative expenses include technology, marketing, business development,
rent expenses and regulatory expenses. For the nine months ended September 30,
2014, these costs totaled $2,322,000, a net increase of $1,084,000, or 88%, as
compared to $1,238,000 in 2013, due primarily to increases in the compensation
paid to our board members and increased costs in technology and rent expense.
Professional Fees
Professional fees are generally related to public company
reporting and governance expenses as well as legal fees related to expansion of
our VOD business. Our costs for professional fees decreased $98,000, or 21%, to
$376,000 for the nine months ended September 30, 2014, from $474,000 during
2013. The decrease in professional fees was due to reductions in both consulting
fees and timing in accounting services related to our transition to a new audit
firm.
Depreciation and Amortization
Our depreciation and amortization expense decreased $206,000,
or 33%, to $415,000 in the nine months ended September 30, 2014, from $621,000
during 2013.The decrease was mainly due to full amortization of non-compete
agreement as of January 31, 2013, and, to a lesser extent, write-off of certain
office equipment.
Interest Expense, Net
Our interest expense increased $2,257,000 to $2,346,000 for the
nine months ended September 30, 2014, from $89,000 during 2013, primarily due to
(1) the amortization of debt issuance costs related to the issuance of the $2.0
million convertible note and (2) the recognition of the beneficial conversion
feature of $2,126,000 related to the modification of the $3.0 million
convertible note as discussed in Note 11 of the unaudited consolidated financial
statements included in this report.
Change in Fair Value of Warrant Liabilities
Certain of our warrants are characterized as derivative
liabilities to be re-measured at the end of every reporting period with the
change in value reported in the statement of operations and, accordingly, we
reported a loss of $656,000 and $37,000 for the nine months ended September 30,
2014 and 2013, respectively. The changes are primarily due to increases in our
closing stock price.
Change in Fair Value of Contingent Consideration
Our contingent consideration related to our acquisition of
Sinotop Hong Kong is classified as a liability because the Earn-Out Securities
do not meet the fixed-for-fixed criteria under ASC 815-40-15 since the
contingency was not solely based on the Companys operations. Further, ASC
815-40-15 requires us to re-measure at the end of every reporting period with
the change in value reported in the statement of operations and, accordingly, we
reported a loss of $161,000 and $99,000 for the nine months ended September 30,
2014 and 2013, respectively. The changes are primarily due to increases in our
closing stock price. The earn-out milestones were all achieved on July 1, 2014
and the contingency was thereby resolved on that date.
Gain on Sale of Subsidiary and Loss of a VIE
Effective March 25, 2014, we deconsolidated our ownership in
WFOE and Jinan Zhong Kuan. As such, we recorded a gain of $755,000 on the sale
of WFOE and a loss of $27,000 on dissolution of Jinan Zhong Kuan as discussed in
Note 3 of our unaudited consolidated financial statements included in this
report.
Discontinued Operations
Effective July 31, 2013, we sold our 51% interest in Jinan
Broadband to Shandong Broadcast Network Limited in order to focus on our core
VOD business and help with cash flow needs. As such, Jinan Broadband is
accounted for as discontinued operations in our unaudited consolidated financial statements included in
this report.
29
Net Loss Attributable to Non-controlling Interest
Hua Cheng has a 20% non-controlling interest in Zhong Hai Video
and as such we allocate 20% of the operating loss of Zhong Hai Video to Hua
Cheng. During the nine months ended September 30, 2014, $697,000 of our
operating loss from Zhong Hai Video was allocated to Hua Cheng, as compared to
$835,000 during the same period of 2013.
Dividends on Preferred Stock
For the nine months ended September 30, 2014, in connection
with the issuance of Series E Preferred Stock, we recorded dividends of
approximately $16,402,000. This amount is comprised of (1) recognition of a
deemed dividend for a beneficial conversion feature discount of $16,571,000, (2)
reversal of a deemed dividend for the beneficial conversion feature discount of
$183,000 related to the extinguishment of the Series D Preferred Stock and (3)
cash dividends paid of $14,000 for January 2014, which is part of the total cash
dividend paid, amounting to $92,054, in the nine months ended September 30,
2014.
Liquidity and Capital Resources
As of September 30, 2014, we had cash and cash equivalents of
approximately $13,045,000. Approximately $3,873,000 was held in our Hong Kong
entity and $8,212,000 was held in our China entities. The Company has no plans
to repatriate these funds. As of September 30, 2014, we had working capital of
approximately $8,099,000.
The following table provides a summary of our net cash flows
from operating, investing, and financing activities.
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2014 |
|
|
2013 |
|
Net cash used in operating activities |
$ |
(7,990,000 |
) |
$ |
(5,694,000 |
) |
Net cash used in investing activities |
|
(285,000 |
) |
|
(638,000 |
) |
Net cash provided by financing activities |
|
17,517,000 |
|
|
3,151,000 |
|
Effect of exchange rate changes on cash |
|
(20,000 |
) |
|
14,000 |
|
Net increase/(decrease) in cash
and cash equivalents |
|
9,222,000 |
|
|
(3,167,000 |
) |
|
|
|
|
|
|
|
Total cash and cash equivalents at
beginning of period |
|
3,823,000 |
|
|
4,381,000 |
|
Less cash and cash equivalents of discontinued operations
at beginning of period |
|
- |
|
|
1,103,000 |
|
Cash and cash equivalents of
continuing operations at beginning of period |
|
3,823,000 |
|
|
3,278,000 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents at end of
period |
$ |
13,045,000 |
|
$ |
1,214,000 |
|
Operating Activities
Cash used in operating activities increased for the nine months
ended September 30, 2014 compared to 2013 primarily due to increased content
license payments and increased operational costs arising from our transition
into our VOD business. Our content license agreements with production companies
incorporate minimum guarantee payments, most of which increase year-over-year.
Investing Activities
Cash used in investing activities for the nine months ended
September 30, 2014 was primarily used for investment in Shandong Lushi Media
Co., Ltd (Shandong Media), a PRC company 30% owned by Sinotop Beijing, and, to
a lesser extent, the acquisition of property and equipment. In August 2014, we
invested US$209,000 (approximately RMB1.29 million) in Shandong Media to
maintain our 30% equity ownership. Cash used in investing activities for the
nine months ended September 30, 2013 was used for the acquisition of property
and equipment and investments in intangibles.
30
Financing Activities
The Company must continue to rely on debt and equity to pay for
ongoing operating expenses in order to execute its business plan.
In January 2014, we received investment net proceeds of
approximately $16,614,000 from the sale of the Series E Preferred Stock and we
received approximately $996,000 from the exercise of warrants and options from
certain investors and employees.
In addition, we believe we have the ability to raise funds by
various methods including utilization of our $50 million shelf registration of
which $47.3 million is remaining as well as other means of financing such as
debt or private investment. However, financing may not be available to the
Company on terms acceptable to us or at all or such resources will be received
in a timely manner. Further we may need approval to seek additional financing
from the shareholders from the August 2012 private financing in the event we do
a public financing.
The fact that we have incurred significant continuing losses
and continue to rely on debt and equity financings to fund our operations to
date, could raise substantial doubt about our ability to continue as a going
concern. As of September 30, 2014, the Company has an accumulated operating loss
of approximately $92.3 million. The unaudited consolidated financial statements
included in this report have been prepared assuming that the Company will
continue as a going concern and, accordingly, do not include any adjustments
that might result from the outcome of this uncertainty.
Effects of Inflation
Inflation and changing prices could have an effect on our
business and we expect that inflation or changing prices could materially affect
our business in the foreseeable future. Our management will closely monitor the
price change and make efforts to maintain effective cost control in operations.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity or capital expenditures or capital resources that is
material to an investor in our securities.
Seasonality
Our operating results and operating cash flows historically
have not been subject to seasonal variations. This pattern may change, however,
as a result of new market opportunities or new product introductions.
Critical Accounting Policies and Significant Judgments and
Estimates
The discussion and analysis of our financial condition and
results of operation are based upon our unaudited consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. Note 2 to the consolidated
financial statements in our 2013 Annual Report includes a summary of our most
significant accounting policies.
The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of assets and
liabilities. On an ongoing basis, we evaluate our estimates and judgments,
including those related to revenue recognition, inventories, income taxes,
interest expenses, deemed dividend, stock-based compensation and contingent
liabilities. Management bases its estimates on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. Periodically, we review our critical accounting
estimates with the Audit Committee of our Board of Directors.
31
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of
the Securities Exchange Act of 1934 and are not required to provide the
information under this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act) that are designed to ensure that
information that would be required to be disclosed in Exchange Act reports is
recorded, processed, summarized and reported within the time period specified in
the SECs rules and forms, and that such information is accumulated and
communicated to our management, including to our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
As required by Rule 13a-15 under the Exchange Act, our
management, including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of September 30, 2014. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that as of
September 30, 2014 and as of the date that the evaluation of the effectiveness
of our disclosure controls and procedures was completed, our disclosure controls
and procedures were not effective to satisfy the objectives for which they are
intended.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control. The Company
continues to invest resources in order to upgrade internal controls.
32
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which we are
a party or to which any of our property is subject. To the best of our
knowledge, no such actions against us are contemplated or threatened.
Item 1A. Risk Factors
In addition to the other information set forth in this report,
you should carefully consider the factors discussed in Part I, "Item 1A. Risk
Factors" in our 2013 Annual Report which could materially affect our business,
financial condition or future results. The risks described in our Annual Report
on Form 10-K are not the only risks facing our Company. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition or future results.
Item 2. Unregistered Sales of Sales of Equity Securities and
Use of Proceeds
There were no unregistered sales of equity securities during
the fiscal quarter ended September 30, 2014.
Item 3. Defaults Upon Senior Securities
There were no defaults upon senior securities during the fiscal
quarter ended September 30, 2014.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
See Exhibit Index.
33
EXHIBIT INDEX
34
SIGNATURES
In accordance with the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized on September 14, 2014.
|
YOU ON DEMAND HOLDINGS, INC |
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By: |
/s/
Marc Urbach |
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Name: Marc Urbach |
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Title: President and Chief Financial Officer
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(Principal Accounting Officer, Principal |
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Financial Officer and an Authorized Officer)
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35
EXHIBIT 31.1
CERTIFICATIONS
I, Shane McMahon, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of YOU
On Demand Holdings, Inc.; |
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|
2. |
Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this report; |
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|
3. |
Based on my knowledge, the financial statements, and
other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report; |
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4. |
The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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|
a) |
Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which
this report is being prepared; |
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b) |
Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles; |
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c) |
Evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on
such evaluation; and |
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d) |
Disclosed in this report any change in the registrants
internal control over financial reporting that occurred during the
registrants most recent fiscal quarter (the registrants fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the registrants internal
control over financial reporting; and |
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5. |
The registrants other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrants auditors and the audit committee
of the registrants board of directors (or persons performing the
equivalent functions): |
|
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|
|
a) |
All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrants ability to
record, process, summarize and report financial information; and |
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b) |
Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial
reporting. |
Date: November 13, 2014
Shane
McMahon
Shane McMahon
Chairman
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATIONS
I, Marc Urbach, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of YOU
On Demand Holdings, Inc.; |
|
|
|
2. |
Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this report; |
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|
|
3. |
Based on my knowledge, the financial statements, and
other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report; |
|
|
|
4. |
The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
|
|
a) |
Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which
this report is being prepared; |
|
|
|
|
b) |
Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles; |
|
|
|
|
c) |
Evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on
such evaluation; and |
|
|
|
|
d) |
Disclosed in this report any change in the registrants
internal control over financial reporting that occurred during the
registrants most recent fiscal quarter (the registrants fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the registrants internal
control over financial reporting; and |
|
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|
5. |
The registrants other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrants auditors and the audit committee
of the registrants board of directors (or persons performing the
equivalent functions): |
|
|
|
|
a) |
All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrants ability to
record, process, summarize and report financial information; and |
|
|
|
|
b) |
Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial
reporting. |
Date: November 13, 2014
Marc
Urbach
Marc Urbach
President and Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY
ACT OF 2002
The undersigned, Shane McMahon, Chairman of YOU ON DEMAND
HOLDINGS, INC. (the Company), DOES HEREBY CERTIFY that:
1. The Companys Quarterly
Report on Form 10-Q for the period ended September 30, 2014 (the Report),
fully complies with the requirements of Section 13(a) of the Securities Exchange
Act of 1934; and
2. Information
contained in the Report fairly presents, in all material respects, the financial
condition and results of operation of the Company.
IN WITNESS WHEREOF, the undersigned has executed this statement
this 13th day of November, 2014.
Shane
McMahon
Shane McMahon
Chairman
(Principal Executive Officer)
A signed original of this written statement required by Section
906 has been provided to YOU On Demand Holdings, Inc. and will be retained by
YOU On Demand Holdings, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
The forgoing certification is being furnished to the Securities
and Exchange Commission pursuant to § 18 U.S.C. Section 1350. It is not being
filed for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, and is not to be incorporated by reference into any filing of the
Company, whether made before or after the date hereof, regardless of any general
incorporation language in such filing.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY
ACT OF 2002
The undersigned, Marc Urbach, President and Chief Financial
Officer of YOU ON DEMAND HOLDINGS, INC. (the Company), DOES HEREBY CERTIFY
that:
1. The Companys
Quarterly Report on Form 10-Q for the period ended September 30, 2014 (the
Report), fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
2. Information
contained in the Report fairly presents, in all material respects, the financial
condition and results of operation of the Company.
IN WITNESS WHEREOF, the undersigned has executed this statement
this 13th day of November, 2014.
Marc
Urbach
Marc Urbach
President and Chief Financial Officer
(Principal
Financial and Accounting Officer)
A signed original of this written statement required by Section
906 has been provided to YOU On Demand Holdings, Inc. and will be retained by
YOU On Demand Holdings, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
The forgoing certification is being furnished to the Securities
and Exchange Commission pursuant to § 18 U.S.C. Section 1350. It is not being
filed for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, and is not to be incorporated by reference into any filing of the
Company, whether made before or after the date hereof, regardless of any general
incorporation language in such filing.
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