UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 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 No. 001-35561
YOU ON DEMAND
HOLDINGS, INC.
(Exact name of registrant as specified
in its charter)
Nevada |
20-1778374 |
(State or other jurisdiction of incorporation or
organization) |
(I.R.S. Employer Identification No.) |
375 Greenwich Street, Suite 516
New York, New
York 10013
(Address of principal executive offices)
(212) 206-1216
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Name of each exchange on which registered |
Common Stock, par value $0.001 per share
|
Nasdaq Capital Market
|
Securities registered pursuant to Section 12(g) of the Exchange
Act: None.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [
] No [ X ]
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [ X ]
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 if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
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 large 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 ] |
(Do not check if a smaller reporting company) |
|
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Act).
Yes [ ]
No [ X ]
As of June 30, 2014 (the last business day of the registrants
most recently completed second fiscal quarter), the market value of the shares
of the registrants common stock held by non-affiliates (based upon the closing
price of shares as reported by Nasdaq) was approximately $34,641,212. Shares of
the registrants common stock held by each executive officer and director and
each by each person who owns 10% or more of the outstanding common stock have
excluded from the calculation in that such persons may be deemed to be
affiliates of the registrant. This determination affiliate status is not
necessarily a conclusive determination for other purposes.
There were a total of 23,832,559 shares of the registrants
common stock outstanding as of March 25, 2015.
DOCUMENTS INCORPORATED BY REFERENCE
None.
YOU ON DEMAND HOLDINGS, INC.
Annual Report on
FORM 10-K
For the Fiscal Year Ended December 31, 2014
TABLE OF CONTENTS
3
Special Note Regarding Forward Looking Statements
In addition to historical information, this report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. We use words such as believe, expect, anticipate, project,
target, plan, optimistic, intend, aim, will or similar expressions
which are intended to identify forward-looking statements. Such statements
include, among others, those concerning market and industry segment growth and
demand and acceptance of our new and existing products or services; any
projections of sales, earnings, revenue, margins or other financial items; any
statements regarding the plans, strategies and objectives of management for
future operations; any statements regarding future economic conditions or
performance; uncertainties related to conducting business in China; and all
assumptions, expectations, predictions, intentions or beliefs about future
events. You are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, including,
and without limitation, those identified in Item 1A, Risk Factors included
herein, as well as assumptions, which, if they were to ever materialize or prove
incorrect, could cause the results of the Company to differ materially from
those expressed or implied by such forward-looking statements.
Although we believe the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
level of activity, performance, or achievements. Moreover, neither we nor any
other person assumes responsibility for the accuracy or completeness of any of
these forward-looking statements. You should not rely upon forward-looking
statements as predictions of future events. The forward-looking statements
included herein are made as of the date of this report. We undertake no
obligation to update any of these forward-looking statements, whether written or
oral, that may be made, from time to time, after the date of this report to
conform our prior statements to actual results or revised expectations.
Use of Terms
Except as otherwise indicated by the context, references in
this report to we, us, our, our Company, the Company, or YOU On
Demand are to the combined business of YOU On Demand Holdings, Inc., a Nevada
corporation, and its consolidated subsidiaries and variable interest entities.
In addition, unless the context otherwise requires and for the
purposes of this report only:
- CB Cayman refers to our wholly-owned subsidiary China Broadband, Ltd., a
Cayman Islands company;
- Exchange Act refers to the Securities Exchange Act of 1934, as amended;
- Hong Kong refers to the Hong Kong Special Administrative Region of the
Peoples Republic of China;
- Hua Cheng refers 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;
- Jinan Broadband refers to our former subsidiary, Jinan Guangdian Jia He
Broadband Co., Ltd., a PRC company (effective July 31, 2013, the Company sold
its 51% interest in Jinan Broadband);
- Jinan Parent refers to Jinan Guangdian Jia He Digital Television Co.,
Ltd., a PRC company;
- Jinan Zhong Kuan refers to Jinan Zhong Kuan Dian Guang Information
Technology Co., Ltd., a PRC company which we control through contractual
arrangements (as of March 25, 2014, this company has been dissolved);
- Modern Movie refers to Modern Movie & TV Biweekly Press, a PRC
company;
- Networks Center refers to the shareholder of Jinan Parent, Jinan Radio
& Television Network, which had been dissolved and merged into Shandong
Broadcast Network Limited;
- PRC, China, and Chinese, refer to the Peoples Republic of China;
- Renminbi and RMB refer to the legal currency of China;
- SAPPRFT refers to the State Administration of Press, Publication, Radio,
Film & Television, an executive branch under the State Council of the
Peoples Republic of China;
- SEC refers to the United States Securities and Exchange Commission;
- Securities Act refers to the Securities Act of 1933, as amended;
- Shandong Broadcast refers to Shandong Broadcast & TV Weekly Press, a
PRC company;
- Shandong Media refers to our previously owned 50% joint venture, Shandong
Lushi Media Co., Ltd., a PRC company; effective July 1, 2012, Shandong Media
became a 30% owned company by Sinotop Beijing;
- Shandong Newspaper Entities refers to Shandong Broadcast and Modern
Movie;
- Sinotop Beijing refers to Beijing Sino Top Scope Technology Co., Ltd., a
PRC company controlled by YOD WFOE through contractual arrangements;
- U.S. dollars, dollars, USD, US$, and $ refer to the legal
currency of the United States;
4
- VIEs refers to our current, deconsolidated or discontinued variable
interest entities, including Jinan Broadband, Jinan Zhong Kuan and Sinotop
Beijing;
- VOD refers to video on demand, which includes near video on demand
(NVOD), subscription video on demand (SVOD), and transactional video on
demand (TVOD);
- WFOE refers to our wholly-owned subsidiary Beijing China Broadband
Network Technology Co., Ltd., a PRC company which was sold during the quarter
ended March 31, 2014;
- YOD Hong Kong refers to YOU On Demand (Asia) Limited, formerly Sinotop
Group Limited, a Hong Kong company wholly- owned by CB Cayman;
- YOD WFOE refers to YOU On Demand (Beijing) Technology Co., Ltd., a PRC
company wholly-owned by YOD Hong Kong; and
- Zhong Hai Video refers to Zhong Hai Shi Xun Information Technology Co.,
Ltd., a PRC company 80% owned by Sinotop Beijing.
In this report we are relying on and we refer to information
and statistics regarding the media industry in China that we have obtained from
various public sources. Any such information is publicly available for free and
has not been specifically prepared for us for use or incorporation in this
report or otherwise.
5
PART I
Overview
YOU On Demand Holdings, Inc. is a corporation formed in the
State of Nevada on October 19, 2004.
We operate in the Chinese media industry and provide integrated
value-added service solutions for the delivery of video on demand (VOD) and
enhanced premium content to digital cable providers, Internet Protocol
Television (IPTV) providers, Over-the-Top (OTT) streaming providers, mobile
manufacturers and operators, as well as direct customers.
On July 30, 2010, we acquired YOD Hong Kong, formerly Sinotop
Group Limited, through our subsidiary CB Cayman. Through a series of contractual
arrangements, YOD Hong Kong and its subsidiary, YOD WFOE, controls Beijing Sino
Top Scope Technology Co., Ltd. (Sinotop Beijing), a corporation established in
the Peoples Republic of China (PRC). Sinotop Beijing is the
80% owner of Zhong Hai Shi Xun Information Technology Co., Ltd. (Zhong Hai Video), though which we provide: 1) integrated value-added business-to-business
(B2B) service solutions for the delivery of VOD and enhanced premium content
for digital cable; 2) integrated value-added business-to-business-to-customer
(B2B2C) service solutions for the delivery of VOD and enhanced premium content
for IPTV and OTT providers and; 3) direct to user, or B2C, mobile video service
apps. As a result of the contractual arrangements with Sinotop Beijing, we have
the right to control management decisions and direct the economic activities
that most significantly impact Sinotop Beijing and Zhong Hai Video, and,
accordingly, under generally accepted accounting principles in the United States
(U.S. GAAP), we consolidate these operating entities in our consolidated
financial statements.
Our OTT, Mobile App, IPTV and Digital Cable VOD Businesses
YOU On Demand is a leading multi-platform entertainment company
delivering premium content, including leading Hollywood and China-produced movie
titles as well as childrens programming, to customers mobile and TV screens
across China via Subscription Video On Demand (SVOD) and Transactional Video
On Demand (TVOD) services. The Companys current distribution partners include
digital cable operators, IPTV operators, OTT streaming operators and mobile
smartphone manufacturers and operators. Our subscribers can watch our content
anytime, anywhere and have full DVD-like control as they can play, pause and
resume watching, all without commercial and advertising interruptions. Our core
revenues are being generated from both minimum guarantee payments and revenue sharing arrangements with our
distribution partners as well as subscription or transactional fees from our
subscribers.
In the second quarter of 2014, we launched the independent YOU
On Demand mobile app via popular app stores and online channels in China such as
Android Mobile Market, 91 Mobile Assistant, 360 Mobile Assistant, and Taobao
Mobile Store. We see this service app as the cornerstone of our multi-screen
video entertainment platform. With continuous adoption of 4G and smartphones, we
envision a day when a YOU On Demand subscribers can toggle back and forth
between their smartphone device and their HDTV screen in the home.
We have distribution agreements with several OTT, IPTV and
mobile distributors, manufacturers and operators. In 2014, the YOU Cinema movie
subscription service made its commercial debut on the Xiaomi OTT set-top box as
part of YOU On Demands previously announced distribution deal with China
Network Television's (CNTV) subsidiary, Future TV Co. Ltd. (the official
online division of Chinese national public broadcaster China Central Television
[CCTV]). Other distribution partners of ours include: Huawei, a leading global
information and communications technology solutions provider and in the top 5 of
largest global smartphone manufacturers; Dr. Peng Telecom and Media Group, Ltd
and its OTT box, the Domy Box; Southern Media Corporations 3GTV mobile video
platform which currently serves 6 million subscribers through China Mobile,
China Unicom and China Telecom in Guangdong, a province which has the largest
mobile service and movie box office in China
Specifically for digital cable, through the acquisition of YOD
Hong Kong and its VIE, Sinotop Beijing, YOU On Demand has an exclusive 20-year
joint venture (approximately 16 years remaining) with CCTV-6's China Home Cinema
(CHC), making us the first national Video On Demand (VOD) platform in China.
We operate under a national government license obtained by CHC to serve as their
exclusive agent in the PRC for operating and marketing TVOD, SVOD, Near Video On
Demand (NVOD) and related Value-Added Services (VAS).
YOU On Demand has and continues to license increasing amounts
of entertainment and educational content that enables our subscribers to enjoy
premium and diverse entertainment directly on their mobile and TV screens. We
have content agreements with Disney Media Distribution, Paramount Pictures,
Twentieth Century Fox Television Distribution, NBC Universal, Miramax Films,
Lionsgate, Screen Media Ventures, Gravitas Ventures, among other independent
studios.
In December 2014, YOU On Demand launched our childrens
entertainment and educational offering, YOU Kids, with content from Sesame
Street Workshop, Nelvana Enterprises, HiT Entertainment Ltd. YOU Kids, initially
launched with Nanjing Cable and will be expanding to other cable and IPTV
networks in select regions in 2015 and beyond. Our strategy is to offer original
English programming, with select voice-over programs, due to the lack of English
programming made available for pre-school children in the Chinese market.
6
Our Unconsolidated Equity Investment
We hold 30% ownership interest in Shandong Media, our
print-based media business, and account for our investment in Shandong Media
under the equity method The business of Shandong Media includes a television
programming guide publication, the distribution of periodicals, the publication
of advertising, the organization of public relations events, the provision of
information related services, copyright transactions, the production of audio
and video products, and the provision of audio value added communication
services. In addition to being the exclusive provincial television programming
guide publishing group in the Shandong province, Shandong Media has a combined
subscription basis of approximately 225,000 subscribers.
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, which was 49% owned by Jinan Parent and 51% owned by our wholly owned
subsidiary WFOE, operated in accordance with a cooperation agreement and an
exclusive service agreement. Jinan Broadband operated out of its base in
Shandong where it had an exclusive cable broadband deployment partnership and
exclusive service agreement with Networks Center, the only cable TV operator in
Jinan. Pursuant to the exclusive service agreement, Jinan Broadband, Jinan
Parent and Networks Center cooperated and provided each other with technical
services related to their respective broadband, cable and internet content-based
businesses. Effective July 31, 2013, we sold our 51% interest in Jinan Broadband
to Shandong Broadcast Network Limited. Jinan Broadband is reported as
discontinued operations in the consolidated financial statements included in
this annual report on Form 10-K.
7
Corporate Structure
The following chart depicts our corporate structure as of March
30, 2015:
Note: Zhang Yan, the sole shareholder of Sinotop Beijing, and a
party to certain VIE arrangements between YOD Hong Kong and Sinotop Beijing, is
the wife of Weicheng Liu, our Chief Executive Officer.
---------------
1. |
Sinotop Beijing VIE Agreements, including with Zhang Yan,
the sole shareholder of Sinotop Beijing. |
|
(i) |
Management Services Agreement between Sinotop Beijing and
YOD Hong Kong, dated as of March 9, 2010. |
|
|
|
|
(ii) |
Option Agreement among YOD Hong Kong, Sinotop Beijing and
the sole shareholder of Sinotop Beijing (Zhang Yan), dated March 9,
2010. |
|
|
|
|
(iii) |
Termination, Assignment and Assumption Agreement, dated
June 4, 2012, by and among YOD Hong Kong, YOD WFOE, Sinotop Beijing and
Zhang Yan, as the sole shareholder of Sinotop Beijing. |
|
|
|
|
(iv) |
Equity Pledge Agreement, dated June 4, 2012, by and among
Sinotop Beijing, YOD WFOE and Zhang Yan, as the sole shareholder of
Sinotop Beijing. Pursuant to the Pledge Agreement, the Pledge Agreement
was registered with the competent office of the PRC SAIC in Beijing
shortly after the Pledge Agreement was executed. |
|
|
|
|
(v) |
Voting Rights Proxy Agreement, dated June 4, 2012, by and
among Sinotop Beijing, YOD WFOE and Zhang Yan, as the sole shareholder of
Sinotop Beijing. |
|
|
|
|
(vi) |
Power of Attorney, dated June 4, 2012 executed by Zhang
Yan as the sole shareholder of Sinotop
Beijing. |
2. |
Cooperation Agreement, by and among, Sinotop Beijing, Hua
Cheng Hu Dong (Beijing) Film and Television Communication Co., Ltd. (Hua
Cheng) and Zhong Hai Shi Xun Information Technology Co., Ltd. (Zhong Hai
Video), dated September 30, 2010. The controlling party of Hua Cheng is
Hua Cheng Film and Television Digital Programs Co. Ltd. (Hua Cheng
Digital). Hua Cheng Digital is not related to us or our
principles. |
8
VIE Structure and Arrangements
On July 30, 2010, we acquired YOD Hong Kong through CB Cayman.
Through a series of contractual arrangements, we control Sinotop Beijing.
Sinotop Beijing, a corporation established in the PRC, is the 80% owner of Zhong Hai Video, which was established to provide integrated
value-added service solutions for the delivery of VOD, PPV and enhanced premium
content for digital cable, IPTV and OTT providers, mobile manufacturers and
operators, as well as direct customers.
In March 2010, YOD Hong Kong entered into a management services
agreement with Sinotop Beijing pursuant to which Sinotop Beijing pays consulting
and service fees, equal to 100% of net profits of Sinotop Beijing, to
YOD Hong Kong for various management, technical, consulting and other services
in connection with its business. Payment of the fees under the management
services agreement is secured through an equity pledge agreement, dated June 4,
2012, by and among Sinotop Beijing, YOD WFOE and the sole shareholder of Sinotop
Beijing, pursuant to which the sole shareholder of Sinotop Beijing pledged all
equity interests in Sinotop Beijing to YOD WFOE. In addition, on June 4, 2012,
YOD WFOE entered into a voting rights agreement with Sinotop Beijing and the
sole shareholder of Sinotop Beijing, whereby YOD WFOE was entrusted with all of
the voting rights of the sole shareholder of Sinotop Beijing. Through these
contractual arrangements, we acquired control over and rights to 100% of the
economic benefit of Sinotop Beijing. Accordingly, Sinotop Beijing is considered
a VIE and, therefore, is consolidated in our financial statements.
Our Industry
Mobile
China's smartphone market is now the world's largest. According
to the International Data Corporation (IDC), 107.5 million smartphones were
shipped to China in the fourth quarter of 2014, representing a 2%
Quarter-on-Quarter growth. This is in accumulation to the 420.7 million
smartphones being shipped to China in 2014 alone. In addition, Chinas three
mobile telecom carriers have created a new company, China Tower, which will take
over ownership of the three firms telecom infrastructure while ambitiously
planning to build 1 million new towers in the next two years. The coming
physical improvements to the network are meant to accommodate the expansion of
4G mobile services.
OTT & IPTV
China plans to invest 2 trillion yuan ($323 billion) to improve
its broadband infrastructure by 2020 with the aim of taking the nearly entire
population online, according to the Ministry of Information and Industry on the
governments official website www.gov.cn. The government is trying to improve
fixed-line and wireless connectivity throughout China, where only 45 percent of
the population have Internet access. China's broadband strategy will ensure that
the number of 3G and LTE users will increase to 1.2 billion by 2020, four times
of the current figure.
Cable
Until 2005, there were over 3,000 independent cable operators
in the PRC. While the State Administration of Press, Publication, Radio, Film
and Television (SAPPRFT), an executive branch under the State Council of the
PRC, has advocated for national consolidation of the countrys sprawling cable
networks, the consolidation has primarily occurred at the provincial level. The
30 provinces are highly variable in their consolidation efforts and processes.
To expedite consolidation, SAPPRFT announced in 2010 that it would permit and
encourage state-owned cable operators to expand and consolidate through mergers
and acquisitions. We believe that as consolidation proceeds it will smooth the
way to two-way digitization through common technical standards.
We believe that SAPPRFT and its broadcasters are currently
focusing on increasing subscription revenues by converting Chinese television
viewers from analog service to digital (pay TV) service. The digitalization
efforts include providing upgraded digital set-top-boxes free of charge that
will provide the bandwidth to deliver pay channels and services beyond the basic
tier as part of a digital television service bundling initiative.
Our Competition
The market for video entertainment is subject to continuous
change and aggressive competition. Our primary competitors include
Internet-based movie content providers and the DVD market, both of which include
those that provide legal and pirated (illegal) content. Specifically, our
primary competitors include companies that operate online video websites in
China where we compete with these entities for customers and users. Some of
these competitors include iQiyi.com, Youku, Tencent and Sohu. As far as digital
cable distribution, although we can provide no assurances that other companies
will not enter the market of providing such services, we believe that we will
have a competitive advantage over any new market entrant because of our
exclusive joint venture partnership with CCTV-6s pay channel, CHC, and first to
market advantage. We also have some indirect competition from the pirated DVD
market.
9
Intellectual Property
We are not a party to any royalty agreements, labor contracts
or franchise agreements. We own the trademark YOU On Demand and (优点互动),
which are both registered in the PRC.
Our Employees
As of December 31, 2014, we had a total of 47 full-time
employees including four located in the United States. The following table sets
forth the number of our employees by function at December 31, 2014.
Function |
|
Number of Employees |
Sales and Marketing |
|
7 |
Service Operations |
|
9 |
Research and Development |
|
5 |
Content Production |
|
10 |
Financial |
|
10 |
Administrative |
|
6 |
TOTAL |
|
47 |
Our employees are not represented by a labor organization or
covered by a collective bargaining agreement. We have not experienced any work
stoppages.
We are required under PRC law to make contributions to employee
benefit plans at specified percentages of after-tax profit. In addition, we are
required by the PRC law to cover employees in China with various types of social
insurance. We believe that we are in compliance with the relevant PRC laws.
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.
Regulation
General Regulation of Businesses
Our PRC-based operating subsidiaries and VIEs are regulated by
the national and local laws of the PRC. The radio and television broadcasting
industries are highly regulated in China. Local broadcasters including national,
provincial and municipal radio and television broadcasters are 100% state-owned
assets. SAPPRFT regulates the radio and television broadcasting industry in
China. In China, the radio and television broadcasting industries are designed
to serve the needs of government programming first, and to make profits second.
The SAPPRFT interest group controls broadcasting assets and broadcasting content
in China.
The Ministry of Industry and Information Technology (MIIT)
plays a similar role to SAPPRFT in the telecom industry in China. Chinas
telecom industry is much more deregulated than the broadcasting industry. While
Chinas telecom industry has substantial financial backing, SAPPRFT, and its
regulator, the Propaganda Ministry under Chinas Communist Party Central
Committee, never relinquished ultimate regulatory control over content and
broadcasting control.
The major internet regulatory barrier for cable operators to
migrate into multiple-system operators and to be able to offer telecom services
is the license barrier. Few independent cable operators in China are able to
acquire full and proper broadband connection licenses from MIIT. The licenses,
while awarded by MIIT, are given on very-fragmented regional market levels. With
cable operators holding the last mile to access end users, SAPPRFT cable
operators pose a competitive threat to local telecom carriers. While internet
connection licenses are deregulated to even the local private sector, MIIT still
tries to utilize the license as a barrier to entry from cable operators that
fall under the SAPPRFT interest group.
We are required to obtain government approval from the Ministry
of Commerce of the Peoples Republic of China (MOFCOM), and other government
agencies in China for transactions such as our acquisition or disposition of
business entities in China. Additionally, foreign ownership of business and
assets in China is not permitted without specific government approval. For this
reason, Sinotop Beijing was acquired through our acquisition of YOD Hong Kong,
which controls Sinotop Beijing through a series of contractual agreements with
YOD Hong Kong and YOD WFOE. We use voting control agreements
among the parties so as to obtain equitable and legal ownership or control of our
subsidiaries and VIEs.
10
Licenses and Permits
Video on Demand
Zhong Hai Video holds the following licenses:
Description |
|
License/Permit |
Cable Television &
Operations Permit |
|
Beijing No. 1413 |
Internet Content Provider |
|
Beijing No. 140351 |
Shandong Media
Shandong Media holds the following licenses:
Description |
|
License/Permit |
PRC Newspaper
Publication License for Shandong Broadcast & TV Weekly |
|
National Unified
Publication CN 37-0014 |
PRC Magazine Publication License for
View Weekly |
|
Ruqichu Nor:1384 |
PRC Magazine Publication
License for Modern Movie & TV Biweekly |
|
Ruqichu No:1318 |
Advertising License for Shandong Broadcast
& TV Weekly |
|
3700004000093 |
Advertising License for View
Weekly |
|
3700004000186 |
Advertising License for Modern Movie & TV
Biweekly |
|
3700004000124 |
Taxation
On March 16, 2007, the National Peoples Congress of China
passed the EIT Law, and on November 28, 2007, the State Council of China passed
its implementing rules which took effect on January 1, 2008. The EIT Law and its
implementing rules impose a unified earned income tax (EIT) rate of 25.0% on
all domestic-invested enterprises and foreign invested enterprises (FIEs)
unless they qualify under certain limited exceptions. In addition, under the EIT
Law, an enterprise established outside of China with de facto management
bodies within China is considered a resident enterprise and will normally be
subject to an EIT of 25% on its global income. The implementing rules define the
term de facto management bodies as an establishment that exercises, in
substance, overall management and control over the production, business,
personnel, accounting, etc., of a Chinese enterprise. If the PRC tax
authorities subsequently determine that we should be classified as a resident
enterprise, then our organizations global income will be subject to PRC income
tax of 25%. For detailed discussion of PRC tax issues related to resident
enterprise status, see Risk Factors Risks Related to Doing Business in China
Under the New Enterprise Income Tax Law, we may be classified as a resident
enterprise of China. Such classification will likely result in unfavorable tax
consequences to us and our non-PRC shareholders.
Foreign Currency Exchange
All of our sales revenue and significant expenses are
denominated in RMB. Under the PRC foreign currency exchange regulations
applicable to us, RMB is convertible for current account items, including the
distribution of dividends, interest payments, trade and service-related foreign
exchange transactions. Currently, our PRC operating entities may purchase
foreign currencies for settlement of current account transactions, including
payments of dividends to us, without the approval of the PRC State
Administration of Foreign Exchange (SAFE), by complying with certain
procedural requirements. Conversion of RMB for capital account items, such as
direct investment, loan, security investment and repatriation of investment,
however, is still subject to the approval of SAFE. In particular, if our PRC
operating entities borrow foreign currency through loans from us or other
foreign lenders, these loans must be registered with SAFE, and if we finance the
subsidiaries by means of additional capital contributions, these capital
contributions must be approved by certain government authorities, including the
MOFCOM, or their respective local branches. These limitations could affect our
PRC operating entities ability to obtain foreign exchange through debt or
equity financing.
11
Dividend Distributions
All of our revenues are earned by our PRC entities. However,
PRC regulations restrict the ability of our PRC entities to make dividends and
other payments to their offshore parent company. PRC legal restrictions permit
payments of dividends by our PRC entities only out of their accumulated
after-tax profits, if any, determined in accordance with PRC accounting
standards and regulations. Each of our PRC subsidiaries is also required under
PRC laws and regulations to allocate at least 10% of our annual after-tax
profits determined in accordance with PRC GAAP to a statutory general reserve
fund until the amounts in such fund reaches 50% of its registered capital. These
reserves are not distributable as cash dividends. Our PRC subsidiaries have the
discretion to allocate a portion of their after-tax profits to staff welfare and
bonus funds, which may not be distributed to equity owners except in the event
of liquidation.
In addition, under the new EIT law, the Notice of the State
Administration of Taxation on Negotiated Reduction of Dividends and Interest
Rates (Notice 112), which was issued on January 29, 2008, and the Notice of
the State Administration of Taxation Regarding Interpretation and Recognition of
Beneficial Owners under Tax Treaties (Notice 601), which became effective on
October 27, 2009, dividends from our PRC operating subsidiaries paid to us
through our entities will be subject to a withholding tax at a rate of 10%.
Furthermore, the ultimate tax rate will be determined by treaty between the PRC
and the tax residence of the holder of the PRC subsidiary. Dividends declared
and paid from before January 1, 2008 on distributable profits are grandfathered
under the EIT Law and are not subject to withholding tax.
The Company intends on reinvesting profits, if any, and does
not intend on making cash distributions of dividends in the near future.
12
The business, financial condition and operating results of
the Company may be affected by a number of factors, whether currently known or
unknown, including but not limited to those described below. Any one or more of
such factors could directly or indirectly cause the Companys actual results of
operations and financial condition to vary materially from past or anticipated
future results of operations and financial condition. Any of these factors, in
whole or in part, could materially and adversely affect the Companys business,
financial condition, results of operations and stock price. The following
information should be read in conjunction with Part II, Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations and
the consolidated financial statements and related notes in Part II, Item 8,
Financial Statements and Supplementary Data of this Annual Report.
RISKS RELATED TO OUR BUSINESS
Substantial doubt about our ability to continue as a
going concern.
As discussed in Note 3 to
the consolidated financial statements included in this report, the Company has
incurred significant losses during 2014 and 2013 and has relied on debt and
equity financings to fund our operations. These conditions raise substantial
doubt about our ability to continue as a going concern. Managements plans
regarding these matters are also described in Note 3. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. If we are in fact unable to continue as a going concern, our
shareholders may lose their entire investment in our company.
Expansion of our business may put added pressure on our
management and operational infrastructure, impeding our ability to meet any
potential increased demand for our services and possibly hurting our future
operating results.
Our business plan is to significantly grow our operations to
meet anticipated growth in demand for the services that we offer, and by the
introduction of new goods or services. Growth in our businesses may place a
significant strain on our personnel, management, financial systems and other
resources. The evolution of our business also presents numerous risks and
challenges, including:
- our ability to successfully and rapidly expand sales to potential new
distributors in response to potentially increasing demand;
- the costs associated with such growth, which are difficult to quantify,
but could be significant; and
- rapid technological change.
To accommodate any such growth and compete effectively, we may
need to obtain additional funding to improve information systems, procedures and
controls and expand, train, motivate and manage our employees, and such funding
may not be available in sufficient quantities, if at all. If we are not able to
manage these activities and implement these strategies successfully to expand to
meet any increased demand, our operating results could suffer.
In order to comply with PRC regulatory requirements, we
operate our businesses through companies with which we have contractual
relationships. By virtue of these contractual relationships, we control the
economic interests and have the power to direct the activities of these
entities, and are therefore determined to be the primary beneficiary of these
entities, but we do not have any equity ownership interest in these entities. If the PRC
government determines that our contractual agreements with these entities are
not in compliance with applicable regulations, our business in the PRC could be
materially adversely affected.
We do not have direct or indirect equity ownership of our VIEs,
which collectively operate all our businesses in China, but instead have entered
into contractual arrangements with each of our VIEs and their individual legal
shareholder(s) pursuant to which we received an economic interest in, and have the
power to direct the activities of each of the VIEs, in a manner substantially
similar to a controlling equity interest. Although we believe that our business
operations are in compliance with the current laws in China, we cannot be sure
that the PRC government would view our operating arrangements to be in
compliance with PRC regulations that may be adopted in the future. If we are
determined not to be in compliance, the PRC government could levy fines, revoke
our business and operating licenses, require us to restrict or discontinue our
operations, restrict our right to collect revenues, require us to restructure
our business, corporate structure or operations, impose additional conditions or
requirements with which we may not be able to comply, impose restrictions on our
business operations or on our customers, or take other regulatory or enforcement
actions against us that could be harmful to our business. As a result, our
business in the PRC could be materially adversely affected.
13
We rely on contractual arrangements with our VIEs for our
operations, which may not be as effective for providing control over these
entities as direct ownership.
Our operations and financial results are dependent on our VIEs
in which we have no equity ownership interest and must rely on contractual
arrangements to control and operate the businesses of each of our VIEs. These
contractual arrangements may not be as effective for providing control over the
VIEs as direct ownership. For example, one of the VIEs may be unwilling or
unable to perform its contractual obligations under our commercial agreements.
Consequently, we may not be able to conduct our operations in the manner
currently planned. In addition, any of the VIEs may seek to renew their
agreements on terms that are disadvantageous to us. Although we have entered
into a series of agreements that provide us with the ability to control
the VIEs, we may not succeed in enforcing our rights under them insofar as our
contractual rights and legal remedies under PRC law are inadequate. In addition,
if we are unable to renew these agreements on favorable terms when these
agreements expire or to enter into similar agreements with other parties, our
business may not be able to operate or expand, and our operating expenses may
significantly increase.
Our arrangements with our VIEs and their respective
shareholders may be subject to a transfer pricing adjustment by the PRC tax
authorities which could have an adverse effect on our income and expenses.
We could face material and adverse tax consequences if the PRC
tax authorities determine that our contracts with our VIEs and their respective
shareholders were not entered into based on arms length negotiations. Although
our contractual arrangements are similar to those of other companies conducting
similar operations in China, if the PRC tax authorities determine that these
contracts were not entered into on an arms length basis, they may adjust our
income and expenses for PRC tax purposes in the form of a transfer pricing
adjustment. Such an adjustment may require that we pay additional PRC taxes plus
applicable penalties and interest, if any.
The success of our business is dependent on our ability
to retain our existing key employees and to add and retain senior officers to
our management.
We depend on the services of our key employees, in particular,
Mr. Shane McMahon, our Chairman, Mr. Xuesong Song, our Executive Chairman, and
Mr. Weicheng Liu, our Chief Executive Officer. Our success will largely depend
on our ability to retain these key employees and to attract and retain qualified
senior and middle level managers to our management team. We have recruited
executives and management in China to assist in our ability to manage the
business and to recruit and oversee employees. While we believe we offer
compensation packages that are consistent with market practice, we cannot be
certain that we will be able to hire and retain sufficient personnel to support
our business. In addition, severe capital constraints have limited our ability
to attract specialized personnel. Moreover, our budget limitations will restrict
our ability to hire qualified personnel. The loss of any of our key employees
would significantly harm our business. We do not maintain key person life
insurance on any of our employees.
We may be unable to compete successfully against new
entrants and established film and media industry competitors.
The Chinese market for film and media content and services is
intensely competitive and rapidly changing. Barriers to entry may be relatively
minimal, and current and new competitors may be able to provide film and media
content at a lower cost. Although the Chinese government continues to improve
its efforts to enforce intellectual property protection, pirated film and media
content continues to be prevalent in China, which may reduce our potential
profits. In addition, other companies offer competitive products or services
including Chinese language content. Furthermore, as many of our existing
competitors, as well as a number of potential competitors, have longer operating
histories in the entertainment, film, media or Internet service markets, greater
name and brand recognition, better relationships with key players, larger
customer bases and libraries and significantly greater financial, technical and
marketing resources than we have, we cannot assure you that we will be able to
compete successfully against our current or future competitors. Any increased
competition could reduce our subscribers, make it difficult for us to attract
and retain subscribers, reduce or eliminate our market share, lower our profit
margins and reduce our revenues.
Our VOD business depends on third parties to provide the
programming that we offer to subscribers in China, and if we are unable to
secure access to this programming, we may be unable to attract subscribers.
Our VOD business depends on third parties to provide us with
programming content which we would distribute to our distributors and subscribers in China. We
continue to negotiate with various entertainment studios and other right holders
to secure access to additional programming content. However, we may not be able
to obtain access to additional programming content on favorable terms or at all.
If we are unable to successfully negotiate agreements for access to more high
quality programming content, we may not be able to attract many subscribers for
our service and our operating results would be negatively affected.
14
If we are unable to attract many subscribers for our VOD
services, or are unable to successfully negotiate additional agreements with
distribution partners in China to deliver our programming content, our financial
performance will be adversely affected.
At present, there is a limited market for VOD services in
China, and there is no guarantee that a market will develop or that we will be
able to attract subscribers to purchase our services. In addition, we rely on
cable television, IPTV and OTT providers to deliver our programming content to
subscribers and we may not be able to negotiate additional agreements to deliver
our programming content on favorable terms, or at all. If we are unable to
attract many subscribers or successfully negotiate additional delivery
agreements with distribution partners, including cable television, IPTV and OTT
providers, our financial performance will be adversely affected.
We derived a substantial portion of our revenue from
several major customers. If we lose any of these customers, or if the volume of
business with these distribution partners decline, our revenues may be
significantly affected.
Revenue from two of our distribution partners accounted for
over 53% of our revenues for the year ended December 31, 2014, and the same
two distribution partners accounted for over 69% of our accounts receivable as
of December 31, 2014. Due to our reliance on a limited number of distribution
partners, any of the following events may cause a material decline in our
revenue and have a material adverse effect on our results of operations:
- reductions, delays or cessation of purchases from one or more significant
distribution partner;
- loss of one or more distribution partner and our inability to find new
distribution partners that can generate the same volume of business; and
- failure of any distribution partner to make timely payment of our products
and services.
We cannot be certain whether these relationships will continue
to develop or if these distribution partners will continue to generate
significant revenue for us in the future.
Our independent registered accounting firm has identified
a material weakness in our internal control over financial reporting. If we fail
to maintain an effective system of internal control over financial reporting,
our ability to accurately and timely report our financial results or prevent
fraud may be adversely affected, and investor confidence and market price of our
shares may be adversely impacted.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002
(SOX 404), the SEC adopted rules requiring public companies to include a
report of management on the companys internal controls over financial reporting
in their annual reports on Form 10-K. Under current law, we became subject to
these requirements beginning with our annual report for the fiscal year ended
December 31, 2007. Our internal control over financial reporting and our
disclosure controls and procedures have been ineffective, and failure to improve
them could lead to future errors in our financial statements that could require
a restatement or untimely filings, which could cause investors to lose
confidence in our reported financial information, and a decline in our stock
price.
In connection with the preparation and audit of our 2014
financial statements and notes, we were informed by our auditor, KPMG Huazhen
(Special General Partnership), or KPMG, of certain deficiencies in our internal controls over financial reporting that KPMG considered to be a material
weakness. The material weakness is related to accounting for non-routine
transactions, see Item 9.A Controls and Procedures Management Annual Report
on Internal Control Over Financial Reporting. We have devoted significant
resources to upgrading our internal controls, including retaining key accounting
personnel with sufficient U.S. GAAP accounting and SEC reporting knowledge,
implementing internal Sarbanes Oxley procedures and upgrading our internal
control-related processes.
Due to the above referenced deficiencies and weaknesses in our
disclosure controls and procedures and internal control over financial
reporting, we may be unable to comply with the SOX 404 internal controls
requirements. As a result of any deficiencies and weaknesses, we may experience
difficulty in collecting financial data and preparing financial statements,
books of account and corporate records, and instituting business practices that
meet international standards, failure of which may prevent us from accurately
reporting our financial results or detecting and preventing fraud.
15
RISKS RELATED TO DOING BUSINESS IN CHINA
U.S. financial regulatory and law enforcement agencies,
including without limitation the U.S. Securities and Exchange Commission, U.S.
Department of Justice and U.S. national securities exchanges, have limited
ability, and in fact may have no ability, to conduct investigations within the
Peoples Republic of China concerning the Company, our PRC-based officers,
directors, market research services or other professional services or experts.
Most of our assets and substantially all of our current
operations are conducted in the PRC, and some of our officers, directors and
other professional service providers are nationals and residents of China. U.S.
financial regulatory and law enforcement agencies, including without limitation
the U.S. Securities and Exchange Commission (the SEC), U.S. Department of
Justice and U.S. national securities exchanges, have limited ability, and in
fact may have no ability, to conduct investigations within the PRC concerning
the Company, and China may have limited or no agreements in place to facilitate
cooperation with the SECs Division of Enforcement for investigations within its
jurisdiction. In addition, our auditors, KPMG, are based in China, and work
papers regarding the Company may be maintained in China, where the Public Company
Accounting Oversight Board (PCAOB) is currently unable to conduct inspections
without the approval of the Chinese authorities. Any limitations on the ability
of U.S. financial regulatory and law enforcement agencies, including the PCAOB,
to access books, records and testimony, to conduct onsite investigation of
operations, to exercise subpoena power and to take other investigative actions,
including those stemming from investor tips, complaints and referrals, may
deprive investors of the benefits and protections of these agencies, and
investors may lose confidence in, or be skeptical as to the quality of, the
Companys disclosures in filings with the SEC, reported financial information
and procedures and the quality of our financial statements, or the Companys
compliance with the rules and regulations of such agencies.
Adverse changes in political, economic and other policies
of the Chinese government could have a material adverse effect on the overall
economic growth of China, which could materially and adversely affect the growth
of our business and our competitive position.
Our business operations are conducted in China. Accordingly,
our business, financial condition, results of operations and prospects are
affected significantly by economic, political and legal developments in China.
The Chinese economy differs from the economies of most developed countries in
many respects, including:
- the degree of government involvement;
- the level of development;
- the growth rate;
- the control of foreign exchange;
- the allocation of resources;
- an evolving regulatory system; and
- a lack of sufficient transparency in the regulatory process.
While the Chinese economy has experienced significant growth in
the past 30 years, growth has been uneven, both geographically and across
various sectors of the economy. The Chinese economy has also experienced certain
adverse effects due to the global financial crisis. In addition, the growth rate
of Chinas gross domestic product has slowed in recent years to 7.7% in 2013 and
7.4% in 2014, according to the National Bureau of Statistics of China. The
Chinese government has implemented various measures to encourage economic growth
and guide the allocation of resources. Some of these measures benefit the
overall Chinese economy, but may also have a negative effect on us. For example,
our financial condition and results of operations may be adversely affected by
government control over capital investments or changes in tax regulations that
are applicable to us.
The Chinese economy has been transitioning from a planned
economy to a more market-oriented economy. Although in recent years the Chinese
government has implemented measures emphasizing the utilization of market forces
for economic reform, the reduction of state ownership of productive assets and
the establishment of sound corporate governance in business enterprises, a
substantial portion of the productive assets in China is still owned by the
Chinese government. The continued control of these assets and other aspects of
the national economy by the Chinese government could materially and adversely
affect our business. The Chinese government also exercises significant control
over Chinese economic growth through the allocation of resources, controlling
payment of foreign currency-denominated obligations, setting monetary policy and
providing preferential treatment to particular industries or companies.
Any adverse change in the economic conditions or government
policies in China could have a material adverse effect on overall economic
growth, which in turn could lead to a reduction in demand for our products and
consequently have a material adverse effect on our businesses.
16
Uncertainties with respect to the PRC legal system could
limit the legal protections available to you and to us, which could cause material
adverse effects to our business operations.
We conduct substantially all of our business through our
subsidiaries and VIEs in the PRC. Our subsidiaries and VIEs are generally
subject to laws and regulations applicable to foreign investments in China and,
in particular, laws applicable to foreign invested entities established in the
PRC (FIEs). The PRC legal system is based on written statutes, and prior court
decisions may be cited for reference but have limited precedential value. Since
1979, a series of new PRC laws and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. For
example, on January 19, 2015, MOFCOM published a draft of the PRC law on Foreign
Investment (Draft for Comment), of the Draft Foreign Investment Law, which was
open for public comments until February 17, 2015. At the same time, MOFCOM
published an accompanying explanatory note of the Draft Foreign Investment Law,
or the Explanatory Note, which contains important information about the Draft
Foreign Investment Law, including its drafting philosophy and principles, main
content, plans to transition to the new legal regime and treatment of business
in China controlled by FIEs, primarily
through contractual arrangements. The Draft Foreign Investment Law is intended
to replace the current foreign investment legal regime consisting of three laws:
the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign
Cooperative Joint Venture Enterprise Law and the Wholly Foreign-Invested
Enterprise Law, as well as detailed implementing rules. The Draft Foreign
Investment Law proposes significant changes to the PRC foreign investment legal
regime and may have a material impact on Chinese companies listed or to be
listed overseas. The proposed Draft Foreign Investment Law is to regulate FIEs
the same way as PRC domestic entities, except for those FIEs that operate in
industries deemed to be either restricted or prohibited in a Negative
List. As the Negative List has yet to be published, it is unclear whether it
will differ from the current list of industries subject to restrictions or
prohibitions on foreign investment. The Draft Foreign Investment Law also
provides that only FIEs operating in industries on the Negative List will
require entry clearance and other approvals that are not required of PRC
domestic entities. As a result of the entry clearance and approvals, certain
FIEs operating in industries on the Negative List may not be able to continue
to conduct their operations through contractual arrangements.
Since the PRC legal system continues to evolve rapidly, the interpretations of
many laws, regulations, and rules are not always uniform, and enforcement of
these laws, regulations, and rules involve uncertainties, which may limit legal
protections available to you and to us. In addition, any litigation in China may
be protracted and result in substantial costs and diversion of resources and
managements attention. In addition, some of our executive officers and
directors are residents of China and not of the United States, and substantially
all the assets of these persons are located outside the United States. As a
result, it could be difficult for investors to affect service of process in the
United States or to enforce a judgment obtained in the United States against our
Chinese operations and entities.
You may have difficulty enforcing judgments against us.
Most of our assets are located outside of the United States and
most of our current operations are conducted in the PRC. In addition, some of
our directors and officers are nationals and residents of countries other than
the United States. A substantial portion of the assets of these persons is
located outside the United States. As a result, it may be difficult for you to
effect service of process within the United States upon these persons. It may
also be difficult for you to enforce in U.S. courts judgments on the civil
liability provisions of the U.S. federal securities laws against us and our
officers and directors, that are not residents in the United States and the
substantial majority of whose assets are located outside of the United States.
In addition, there is uncertainty as to whether the courts of the PRC would
recognize or enforce judgments of U.S. courts. Recognition and enforcement of
foreign judgments are provided for under the PRC Civil Procedures Law. Courts in
China may recognize and enforce foreign judgments in accordance with the
requirements of the PRC Civil Procedures Law based on treaties between China and
the country where the judgment is made or on reciprocity between jurisdictions.
China does not have any treaties or other arrangements that provide for the
reciprocal recognition and enforcement of foreign judgments with the United
States. In addition, according to the PRC Civil Procedures Law, courts in the
PRC will not enforce a foreign judgment against us or our directors and officers
if they decide that the judgment violates basic principles of PRC law or
national sovereignty, security, or the public interest. So it is uncertain
whether a PRC court would enforce a judgment rendered against us by a court in
the United States.
The PRC government exerts substantial influence over the
manner in which we must conduct our business activities.
The PRC government has exercised and continues to exercise
substantial control over virtually every sector of the Chinese economy through
regulation and state ownership. Our ability to operate in China may be harmed by
changes in its laws and regulations, including those relating to taxation,
import and export tariffs, environmental regulations, land use rights, property,
and other matters. We believe that our operations in China are in material
compliance with all applicable legal and regulatory requirements. However, the
central or local governments of the jurisdictions in which we operate may impose
new, stricter regulations or interpretations of existing regulations that would
require additional expenditures and efforts on our part to ensure our compliance
with such regulations or interpretations.
Accordingly, government actions in the future, including any
decision not to continue to support recent economic reforms and to return to a
more centrally planned economy or regional or local variations in the
implementation of economic policies, could have a significant effect on economic
conditions in China or particular regions thereof and could require us to divest
ourselves of any interest we then hold in Chinese properties or joint ventures.
The enforcement of the PRC labor contract law may
materially increase our costs and decrease our net income.
China adopted a new Labor Contract Law, effective on January 1,
2008, issued its implementation rules and regulations, effective on September
18, 2008, and amended the Labor Contract Law, effective on July 1, 2013. The
Labor Contract Law and related rules and regulations impose more stringent
requirements on employers with regard to, among other things, minimum wages,
severance payment and non-fixed-term employment contracts, time limits for
probation periods, as well as the duration and the times that an employee can be
placed on a fixed-term employment contract. Due to the limited period of
effectiveness of the Labor Contract Law, its implementation rules and
regulations and its amendment, and the lack of clarity with respect to its
implementation and the potential penalties and fines, it is uncertain how it
will impact our current employment policies and practices. In particular,
compliance with the Labor Contract Law and its implementation rules and
regulations may increase our operating expenses. In the event that we decide to
terminate some of our employees or otherwise change our employment or labor
practices, the Labor Contract Law and its implementation rules and regulations
may also limit our ability to effect those changes in a manner that we believe
to be cost-effective or desirable, and could result in a material decrease in
our profitability.
17
Future inflation in China may inhibit our ability to
conduct business in China.
In recent years, the Chinese economy has experienced periods of
rapid expansion and highly fluctuating rates of inflation. These factors have
led to the adoption by the Chinese government, from time to time, of various
corrective measures designed to restrict the availability of credit or regulate
growth and contain inflation. In 2010 and 2011, for example, the Chinese economy
experienced high inflation and to curb the accelerating inflation, the Peoples
Bank of China (PBOC), China central bank, raised benchmark interest rates
three times in 2011. High inflation may in the future cause the Chinese
government to impose controls on credit and/or prices, or to take other action,
which could inhibit economic activity in China, and thereby harm the market for
our products and services and our company.
Restrictions on currency exchange may limit our ability
to receive and use our sales effectively.
At present, all of our sales will be settled in RMB, and any
future restrictions on currency exchanges may limit our ability to use revenue
generated in RMB to fund any future business activities outside China or to make
dividend or other payments in U.S. dollars. Although the Chinese government
introduced regulations in 1996 to allow greater convertibility of the RMB for
current account transactions, significant restrictions still remain, including
primarily the restriction that FIEs may only buy, sell or remit foreign
currencies after providing valid commercial documents, at those banks in China
authorized to conduct foreign exchange business. In addition, conversion of RMB
for capital account items, including direct investment and loans, is subject to
governmental approval in China, and companies are required to open and maintain
separate foreign exchange accounts for capital account items. We cannot be
certain that the Chinese regulatory authorities will not impose more stringent
restrictions on the convertibility of the RMB.
Fluctuations in exchange rates could adversely affect our
business and the value of our securities.
The value of our common stock will be indirectly affected by
the foreign exchange rate between the U.S. dollar and RMB and between those
currencies and other currencies in which our sales may be denominated.
Appreciation or depreciation in the value of the RMB relative to the U.S. dollar
would affect our financial results reported in U.S. dollar terms without giving
effect to any underlying change in our business or results of operations.
Fluctuations in the exchange rate will also affect the relative value of any
dividend we issue that will be exchanged into U.S. dollars, as well as earnings
from, and the value of, any U.S. dollar-denominated investments we make in the
future.
Since July 2005, the RMB has no longer been pegged to the U.S.
dollar. Although the Peoples Bank of China regularly intervenes in the foreign
exchange market to prevent significant short-term fluctuations in the exchange
rate, the RMB may appreciate or depreciate significantly in value against the
U.S. dollar in the medium to long term. Moreover, it is possible that in the
future PRC authorities may lift restrictions on fluctuations in the RMB exchange
rate and lessen intervention in the foreign exchange market.
Very limited hedging transactions are available in China to
reduce our exposure to exchange rate fluctuations. To date, we have not entered
into any hedging transactions. While we may enter into hedging transactions in
the future, the availability and effectiveness of these transactions may be
limited, and we may not be able to successfully hedge our exposure at all. In
addition, our foreign currency exchange losses may be magnified by PRC exchange
control regulations that restrict our ability to convert RMB into foreign
currencies.
Restrictions under PRC law on our PRC subsidiaries
ability to make dividends and other distributions could materially and adversely
affect our ability to grow, make investments or acquisitions that could benefit
our business, pay dividends to you, and otherwise fund and conduct our business.
At present, all of our sales are earned by our PRC operating
entities. However, PRC regulations restrict the ability of our PRC
subsidiaries to make dividends and other payments to their offshore parent
companies. PRC legal restrictions permit payments of dividends by our PRC
subsidiaries only out of their accumulated after-tax profits, if any, determined
in accordance with PRC accounting standards and regulations. Our PRC
subsidiaries are also required under PRC laws and regulations to allocate at
least 10% of their annual after-tax profits determined in accordance with PRC
GAAP to a statutory general reserve fund until the amounts in said fund reaches
50% of their registered capital. Allocations to these statutory reserve funds
can only be used for specific purposes and are not transferable to us in the
form of loans, advances, or cash dividends. Any limitations on the ability of
our PRC subsidiaries to transfer funds to us could materially and adversely
limit our ability to grow, make investments or acquisitions that could be
beneficial to our business, pay dividends and otherwise fund and conduct our
business.
18
Failure to comply with PRC regulations relating to the
establishment of offshore special purpose companies by PRC residents may subject
our PRC resident shareholders to personal liability, limit our ability to
acquire PRC companies or to inject capital into our PRC subsidiaries, limit our
PRC subsidiaries ability to distribute profits to us or otherwise materially
adversely affect us.
SAFE has promulgated several regulations, including the Notice
Concerning Foreign Exchange Controls on Domestic Residents Financing and
Roundtrip Investment Through Offshore Special Purpose Vehicles (Circular 75),
effective on November 1, 2005, and the Circular on Issues Concerning Foreign
Exchange Administration Over the Overseas Investment and Financing and Roundtrip
Investment by Domestic Residents Via Special Purpose Vehicles (Circular 37),
effective on July 4, 2014, which replaced Circular 75. Under Circular 37, PRC
residents must register with local branches of SAFE in connection with their
direct establishment or indirect control of an offshore entity for the purpose
of holding domestic or offshore assets or interests, referred to as a special
purpose vehicle in Circular 37. In addition, amendments to the registration
must be made in the event of any material change, such as an increase or
decrease in share capital contributed by the individual PRC resident
shareholder, share transfer or exchange, merger, division or other material
event. Failure to comply with the specified registration procedures may result
in restrictions being imposed on the foreign exchange activities of the relevant
PRC entity, including the payment of dividends and other distributions to its
offshore parent, as well as restrictions on capital inflows from the offshore
entity to the PRC entity. Further, failure to comply with the SAFE registration
requirements may result in penalties under PRC law for evasion of foreign
exchange regulations.
We have asked our shareholders who are PRC residents as defined
in Circular 37 and related rules to register with the relevant branch of SAFE,
as currently required, in connection with their equity interests in us and our
acquisitions of equity interests in our PRC subsidiaries. However, we cannot
provide any assurances that they can obtain the above SAFE registrations
required by Circular 37 and related rules. Moreover, because Circular 37 is
newly issued, there is uncertainty over how Circular 37 and related rules will
be interpreted and implemented and how or whether SAFE will apply it to us, and
we cannot predict how it will affect our business operations or future
strategies. For example, our present and prospective PRC subsidiaries ability
to conduct foreign exchange activities, such as the remittance of dividends and
foreign currency-denominated borrowings, may be subject to compliance with
Circular 37 and related rules by our PRC resident beneficial holders. In
addition, such PRC residents may not always be able to complete the necessary
registration procedures required by Circular 37 and related rules. We have
little control over either our present or prospective direct or indirect
shareholders or the outcome of such registration procedures.
We may be unable to complete a business combination
transaction efficiently or on favorable terms due to complicated merger and
acquisition regulations which became effective on September 8, 2006.
On August 8, 2006, six PRC regulatory agencies, including the
China Securities Regulatory Commission, promulgated the Regulation on Mergers
and Acquisitions of Domestic Companies by Foreign Investors, which became
effective on September 8, 2006 and was amended in 2009. This regulation, among
other things, governs the approval process by which a PRC company may
participate in an acquisition of assets or equity interests. Depending on the
structure of the transaction, the regulation will require the PRC parties to
make a series of applications and supplemental applications to the government
agencies. In some instances, the application process may require the
presentation of economic data concerning a transaction, including appraisals of
the target business and evaluations of the acquirer, which are designed to allow
the government to assess the transaction. Government approvals will have
expiration dates by which a transaction must be completed and reported to the
government agencies. Compliance with the regulation is likely to be more time
consuming and expensive than in the past and the government can now exert more
control over the combination of two businesses. Accordingly, due to the
regulation, our ability to engage in business combination transactions has
become significantly more complicated, time consuming and expensive, and we may
not be able to negotiate a transaction that is acceptable to our shareholders or
sufficiently protect their interests in a transaction.
The regulation allows PRC government agencies to assess the
economic terms of a business combination transaction. Parties to a business
combination transaction may have to submit to MOFCOM and other relevant
government agencies an appraisal report, an evaluation report and the
acquisition agreement, all of which form part of the application for approval,
depending on the structure of the transaction. The regulation also prohibits a
transaction at an acquisition price obviously lower than the appraised value of
the PRC business or assets, and in certain transaction structures, may require
that consideration be paid within defined periods, generally not in excess of a
year. The regulation also limits our ability to negotiate various terms of the
acquisition, including aspects of the initial consideration, contingent
consideration, holdback provisions, indemnification provisions and provisions
relating to the assumption and allocation of assets and liabilities. Transaction
structures involving trusts, nominees and similar entities are prohibited.
Therefore, such regulation may impede our ability to negotiate and complete a
business combination transaction on financial terms that satisfy our investors
and protect our shareholders economic interests.
19
Our existing contractual arrangements with Sinotop
Beijing and its shareholders may be subject to national security review by
MOFCOM, and the failure to receive the national security review could have a
material adverse effect on our business and operating results.
In August 2011, MOFCOM promulgated the Rules of Ministry of
Commerce on Implementation of Security Review System of Merger and Acquisition
of Domestic Enterprises by Foreign Investors (the Security Review Rules) to
implement the Notice of the General Office of the State Council on Establishing
the Security Review System for Merger and Acquisition of Domestic Enterprises by
Foreign Investors promulgated on February 3, 2011 (Circular 6). The Security
Review Rules became effective on September 1, 2011. Under the Security Review
Rules, a national security review is required for certain mergers and
acquisitions by foreign investors raising concerns regarding national defense
and security. Foreign investors are prohibited from circumventing the national
security review requirements by structuring transactions through proxies,
trusts, indirect investments, leases, loans, control through contractual
arrangements or offshore transactions. The application and interpretation of the
Security Review Rules remain unclear. Based on our understanding of the Security
Review Rules, we do not need to submit our existing contractual arrangements
with Sinotop Beijing and its shareholders to the MOFCOM for national security
review because, among other reasons, (i) we gained de facto control over Sinotop
Beijing in 2010 prior to the effectiveness of Circular 6 and the Security Review
Rules; and (ii) there are currently no explicit provisions or official
interpretations indicating that our current businesses fall within the scope of
national security review. Although we have no plan to submit our existing
contractual arrangements with Sinotop Beijing and its shareholders to MOFCOM for
national security review, the relevant PRC government agencies, such as MOFCOM,
may reach a different conclusion. If MOFCOM or another PRC regulatory agency
subsequently determines that we need to submit our existing contractual
arrangements with Sinotop Beijing and its shareholders for national security
review by interpretation, clarification or amendment of the Security Review
Rules or by any new rules, regulations or directives promulgated, we may face
sanctions by MOFCOM or another PRC regulatory agency. These sanctions may
include revoking the business or operating licenses of our PRC entities,
discontinuing or restricting our operations in China, confiscating our income or
the income of Sinotop Beijing, and taking other regulatory or enforcement
actions, such as levying fines, that could be harmful to our business. Any of
these sanctions could cause significant disruption to our business operations.
The Security Review Rules may make it more difficult for
us to make future acquisitions or dispositions of our business operations or
assets in China.
The Security Review Rules, effective as of September 1, 2011,
provide that when deciding whether a specific merger or acquisition of a
domestic enterprise by foreign investors is subject to the national security
review by MOFCOM, the principle of substance-over-form should be applied.
Foreign investors are prohibited from circumventing the national security review
requirement by structuring transactions through proxies, trusts, indirect
investments, leases, loans, control through contractual arrangements or offshore
transactions. If the business of any target company that we plan to acquire
falls within the scope of national security review, we may not be able to
successfully acquire such company by equity or asset acquisition, capital
increase or even through any contractual arrangement.
Under the Enterprise Income Tax Law, we may be classified
as a resident enterprise of China. Such classification will likely result in
unfavorable tax consequences to us and our non-PRC shareholders.
On March 16, 2007, the National Peoples Congress of China
passed a new Enterprise Income Tax Law (the EIT Law), and on November 28,
2007, the State Council of China passed its implementing rules, which took
effect on January 1, 2008. Under the EIT Law, an enterprise established outside
of China with de facto management bodies within China is considered a
resident enterprise, meaning that it can be treated in a manner similar to a
Chinese enterprise for enterprise income tax purposes. The implementing rules of
the EIT Law define de facto management as substantial and overall management
and control over the production and operations, personnel, accounting, and
properties of the enterprise.
On April 22, 2009, the State Administration of Taxation issued
the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment
Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to
Criteria of de facto Management Bodies (the Notice), further interpreting the
application of the EIT Law and its implementation non-Chinese enterprise or
group controlled offshore entities. Pursuant to the Notice, an enterprise
incorporated in an offshore jurisdiction and controlled by a Chinese enterprise
or group will be classified as a non-domestically incorporated resident
enterprise if (i) its senior management in charge of daily operations reside or
perform their duties mainly in China; (ii) its financial or personnel decisions
are made or approved by bodies or persons in China; (iii) its substantial assets
and properties, accounting books, corporate chops, board and shareholder minutes
are kept in China; and (iv) at least half of its directors with voting rights or
senior management often reside in China. A resident enterprise would be subject
to an enterprise income tax rate of 25% on its worldwide income and must pay a
withholding tax at a rate of 10% when paying dividends to its non-PRC
shareholders. However, it remains unclear as to whether the Notice is applicable
to an offshore enterprise incorporated by a Chinese natural person. Detailed
measures on the imposition of tax from non-domestically incorporated resident
enterprises are not readily available. Therefore, it is unclear how tax
authorities will determine tax residency based on the facts of each case.
20
We may be deemed to be a resident enterprise by Chinese tax
authorities. If the PRC tax authorities determine that we are a resident
enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC
tax consequences could follow. First, we may be subject to the enterprise income
tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise
income tax reporting obligations. In our case, this would mean that income such
as interest on financing proceeds and non-China source income would be subject
to PRC enterprise income tax at a rate of 25%. Second, although under the EIT
Law and its implementing rules dividends paid to us from our PRC subsidiaries
would qualify as tax-exempt income, we cannot guarantee that such dividends
will not be subject to a 10% withholding tax, as the PRC foreign exchange
control authorities, which enforce the withholding tax, have not yet issued
guidance with respect to the processing of outbound remittances to entities that
are treated as resident enterprises for PRC enterprise income tax purposes.
Finally, it is possible that future guidance issued with respect to the new
resident enterprise classification could result in a situation in which a 10%
withholding tax is imposed on dividends we pay to our non-PRC shareholders and
with respect to gains derived by our non-PRC shareholders from transferring our
shares.
If we were treated as a resident enterprise by PRC tax
authorities, we would be subject to taxation in both the United States and
China, and our PRC tax may not be creditable against our U.S. tax.
Heightened scrutiny of acquisition transactions by PRC
tax authorities may have a negative impact on our business operations or the
value of your investment in us.
Pursuant to the Notice on Strengthening Administration of
Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises (SAT
Circular 698), effective on January 1, 2008, and the Announcement on Several
Issues Related to Enterprise Income Tax for Indirect Asset Transfer by Non-PRC
Resident Enterprises (SAT Announcement 7), effective on February 3, 2015,
issued by the SAT, if a non-resident enterprise transfers the equity interests
of or similar rights or interests in overseas companies which directly or
indirectly own PRC taxable assets through an arrangement without a reasonable
commercial purpose resulting in the avoidance of PRC corporate income taxes,
such a transaction may be re-characterized and treated as a direct transfer of
PRC taxable assets subject to PRC corporate income tax. SAT Announcement 7
specifies certain factors that should be considered in determining whether an
indirect transfer has a reasonable commercial purpose. However, as SAT
Announcement 7 is newly issued, there is uncertainty as to its application and
the interpretation of the term reasonable commercial purpose. In addition,
under SAT Announcement 7, the entity which has the obligation to pay the
consideration for the transfer to the transferring shareholders has the
obligation to withhold any PRC corporate income tax that is due. If the
transferring shareholders do not pay corporate income tax that is due for a
transfer and the entity which has the obligation to pay the consideration does
not withhold the tax due, the PRC tax authorities may impose a penalty on the
entity that so fails to withhold, which may be relieved or exempted from the
withholding obligation and any resulting penalty under certain circumstances if
it reports such transfer to the PRC tax authorities.
As SAT Circular 698 and SAT Announcement 7 are relatively new
and there is uncertainty over their application, we and our non-PRC resident
investors may be subject to being taxed under Circular 698 and SAT Announcement
7 and may be required to expend valuable resources to comply with Circular 698
and SAT Announcement 7 or to establish that we or our non-PRC resident investors
should not be taxed under Circular 698 and SAT Announcement 7, which could have
a material adverse effect on our financial condition and results of operations.
Regulations relating to the online transmission of
foreign films may adversely affect our business.
On September 2, 2014, the SAPPRFT issued a Notice on Further
Strengthening the Administration of Online Foreign Audiovisual Content (the
September 2014 SAPPRFT Notice), which requires that operators of audiovisual
websites obtain from the SAPPRFT a Film Public Screening Permit for all foreign
films before they are transmitted via the Internet in China. The September 2014
SAPPRFT Notice further stipulates that before any foreign films for transmission
exclusively via the Internet are purchased after the promulgation of the
September 2014 SAPPRFT Notice, operators of audiovisual websites must declare
their annual purchasing plans with the SAPPRFT before the end of the year
preceding the year of the intended broadcast and obtain the SAPPRFTs approval.
The September 2014 SAPPRFT Notice also states that the number of foreign-sourced
content to be purchased by an operator and transmitted via its website in a
single year may not exceed 30% of the total amount of the domestic content
purchased and transmitted by the same website in the previous year.
We rely heavily on foreign films to attract users and while the
application and interpretation of the September 2014 SAPPRFT Notice is
uncertain, the promulgation of the September 2014 SAPPRFT Notice could have an
adverse impact on our business. Any requirement of a minimum ratio of domestic
content to foreign-sourced content in the September 2014 SAPPRFT Notice may
require us to purchase more domestic content. In addition, as competing
operators in China will also be required to maintain such a minimum ratio, the
September 2014 SAPPRFT Notice may have the effect of driving up the price for
Chinese films, which could cause our content costs to increase.
21
We may be subject to fines and legal sanctions if we or
our employees who are PRC citizens fail to comply with PRC regulations relating
to employee share options.
Under the Administration Measures on Individual Foreign
Exchange Control issued by the PBOC and the related Implementation Rules issued
by the SAFE, all foreign exchange transactions involving an employee share
incentive plan, share option plan or similar plan participated in by PRC
citizens may be conducted only with the approval of the SAFE. Under the Notice
of Issues Related to the Foreign Exchange Administration for Domestic
Individuals Participating in Stock Incentive Plan of Overseas Listed Company
(Offshore Share Incentives Rule), issued by the SAFE on February 15, 2012, PRC
citizens who are granted share options, restricted share units or restricted
shares by an overseas publicly listed company are required to register with the
SAFE or its authorized branch and comply with a series of other requirements.
The Offshore Share Incentives Rule also provides procedures for registration of
incentive plans, the opening and use of special accounts for the purpose of
participation in incentive plans, and the remittance of funds for exercising
options and gains realized from such exercises and sales of such options or the
underlying shares, both outside and inside the PRC. We, and any of our PRC
employees or members of our board of directors who have been granted share
options, restricted share units or restricted shares, are subject to the
Administration Measures on Individual Foreign Exchange Control, the related
Implementation Rules, and the Offshore Share Incentives Rule. If we, or any of
our PRC employees or members of our board of directors who receive or hold
options, restricted share units or restricted shares in us or any of our
subsidiaries, fail to comply with these registration and other procedural
requirements, we may be subject to fines and other legal or administrative
sanctions.
We may be exposed to liabilities under the Foreign
Corrupt Practices Act and Chinese anti-corruption laws, and any determination
that we violated these laws could have a material adverse effect on our
business.
We are subject to the Foreign Corrupt Practice Act (FCPA) and
other laws that prohibit improper payments or offers of payments to foreign
governments and their officials and political parties by U.S. persons and
issuers as defined by the statute, for the purpose of obtaining or retaining
business. We have operations and agreements with third parties, and make most of
our sales in China. The PRC also strictly prohibits bribery of government
officials. Our activities in China create the risk of unauthorized payments or
offers of payments by the employees, consultants, sales agents, or distributors
of our Company, which may not always be subject to our control. It is our policy
to implement safeguards to discourage these practices by our employees. However,
our existing safeguards and any future improvements may prove to be less than
effective, and the employees, consultants, sales agents, or distributors of our
company may engage in conduct for which we might be held responsible. Violations
of the FCPA or Chinese anti-corruption laws may result in severe criminal or
civil sanctions, and we may be subject to other liabilities, which could
negatively affect our business, operating results and financial condition. In
addition, the U.S. government may seek to hold our Company liable for successor
liability FCPA violations committed by companies in which we invest or that we
acquire.
If we become directly subject to the recent scrutiny,
criticism and negative publicity involving U.S.-listed Chinese companies, we may
have to expend significant resources to investigate and resolve the matter which
could harm our business operations, stock price and reputation and could result
in a loss of your investment in our stock, especially if such matter cannot be
addressed and resolved favorably.
Recently, U.S. public companies that have substantially all of
their operations in China, particularly companies like ours which have completed
so-called reverse merger transactions, have been the subject of intense
scrutiny, criticism and negative publicity by investors, financial commentators
and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and
negative publicity has centered around financial and accounting irregularities
and mistakes, a lack of effective internal controls over financial accounting,
inadequate corporate governance policies or a lack of adherence thereto and, in
many cases, allegations of fraud. As a result of the scrutiny, criticism and
negative publicity, the publicly traded stock of many U.S. listed Chinese
companies has sharply decreased in value and, in some cases, has become
virtually worthless. Many of these companies are now subject to shareholder
lawsuits and SEC enforcement actions and are conducting internal and external
investigations into the allegations. It is not clear what effect this
sector-wide scrutiny, criticism and negative publicity will have on our company,
our business and our stock price. If we become the subject of any unfavorable
allegations, whether such allegations are proven to be true or not, we will have
to expend significant resources to investigate such allegations and/or defend
our company. This situation will be costly and time consuming and distract our
management from growing our company.
The disclosures in our reports and other filings with the
SEC and our other public announcements are not subject to the scrutiny of any
regulatory bodies in the PRC. Accordingly, our public disclosure should be
reviewed in light of the fact that no governmental agency that is located in
China, where substantially all of our operations and business are located, has
conducted any due diligence on our operations or reviewed or cleared any of our
disclosure.
We are regulated by the SEC and our reports and other filings
with the SEC are subject to SEC review in accordance with the rules and
regulations promulgated by the SEC under the Securities Act and the Exchange
Act. Unlike public reporting companies whose operations are located primarily in
the United States, however, substantially all of our operations are located in
China. Since substantially all of our operations and business takes place in
China, it may be more difficult for the staff of the SEC to overcome the
geographic and cultural obstacles that are present when reviewing our
disclosure. These same obstacles are not present for similar companies whose
operations or business take place entirely or primarily in the United States.
Furthermore, our SEC reports and other disclosure and public announcements are
not subject to the review or scrutiny of any PRC regulatory authority. For
example, the disclosure in our SEC reports and other filings are not subject to
the review of the China Securities Regulatory Commission (CSRC), a PRC
regulator that is tasked with oversight of the capital markets in China.
Accordingly, you should review our SEC reports, filings and our other public
announcements with the understanding that no local regulator has done any due
diligence on our company and with the understanding that none of our SEC
reports, other filings or any of our other public announcements has been
reviewed or otherwise been scrutinized by any local regulator.
22
If additional remedial measures are imposed on the Big
Four PRC-based accounting firms, including our independent registered public
accounting firm, in administrative proceedings brought by the SEC alleging the
firms failure to meet specific criteria set by the SEC, we could be unable to
timely file future financial statements in compliance with the requirements of
the Securities Exchange Act of 1934.
On January 22, 2014, Judge Cameron Elliot, an SEC administrative law judge, issued an initial decision suspending the PRC member firms of the “Big Four” accounting firms, including our independent registered public accounting firm, from, among other things, practicing before the SEC for six months. In February 2014, the initial decision was appealed. While under appeal and in February 2015, the PRC member firms of “Big Four” accounting firms reached a settlement with the SEC. As part of the settlement, each of the PRC member firms of “Big Four” accounting firms agreed to settlement terms that include a censure; undertakings to make a payment to the SEC; procedures and undertakings as to future requests for documents by the US SEC; and possible additional proceedings and remedies should those undertakings not be adhered to.
If the settlement terms are not adhered to, Chinese member firms of the “Big Four” accounting firms, including our independent registered public accounting firm, may be suspended from practicing before the SEC which could in turn delay the timely filing of our financial statements with the SEC. In addition, it could be difficult for us to timely identify and engage another qualified independent auditor to replace KPMG
Huazhen (SGP).
A
determination that we have not timely filed financial statements in compliance
with SEC requirements could ultimately lead to the delisting of our common stock
from Nasdaq or the termination of the registration of our common stock under the
Securities Exchange Act of 1934, or both, which would substantially reduce or
effectively terminate the trading of our common stock in the United States.
RISKS RELATED TO THE MARKET FOR OUR STOCK
The market price of our common stock is volatile, leading
to the possibility of its value being depressed at a time when you may want to
sell your holdings.
The market price of our common stock is volatile, and this
volatility may continue. Numerous factors, many of which are beyond our control,
may cause the market price of our common stock to fluctuate significantly. In
addition to market and industry factors, the price and trading volume for our
common stock may be highly volatile for specific business reasons. Factors such
as variations in our revenues, earnings and cash flow, announcements of new
investments, cooperation arrangements or acquisitions, and fluctuations in
market prices for our products could cause the market price for our shares to
change substantially.
Securities class action litigation is often instituted against
companies following periods of volatility in their stock price. This type of
litigation could result in substantial costs to us and divert our managements
attention and resources.
Moreover, the trading market for our common stock will be
influenced by research or reports that industry or securities analysts publish
about us or our business. If one or more analysts who cover us downgrade our
common stock, the market price for our common stock would likely decline. If one
or more of these analysts cease coverage of us or fail to regularly publish
reports on us, we could lose visibility in the financial markets, which, in
turn, could cause the market price for our common stock or trading volume to
decline.
Furthermore, securities markets may from time to time
experience significant price and volume fluctuations for reasons unrelated to
operating performance of particular companies. These market fluctuations may
adversely affect the price of our common stock and other interests in our
company at a time when you want to sell your interest in us.
Although publicly traded, the trading market in our
common stock has been substantially less liquid than the average trading market
for a stock quoted on the Nasdaq Stock Market and this low trading volume may
adversely affect the price of our common stock.
Our common stock trades on the Nasdaq Capital Market. The
trading volume of our common stock has been comparatively low compared to other
companies listed on Nasdaq. Limited trading volume will subject our shares of
common stock to greater price volatility and may make it difficult for you to
sell your shares of common stock at a price that is attractive to you.
23
Provisions in our articles of incorporation and bylaws or
Nevada law might discourage, delay or prevent a change of control of us or
changes in our management and, therefore, depress the trading price of the
common stock.
Our articles of incorporation authorize our Board of Directors
to issue up to 50,000,000 shares of preferred stock. The preferred stock may be
issued in one or more series, the terms of which may be determined at the time
of issuance by the Board of Directors without further action by the
shareholders. These terms may include preferences as to dividends and
liquidation, conversion rights, redemption rights and sinking fund provisions.
The issuance of any preferred stock could diminish the rights of holders of our
common stock, and therefore could reduce the value of such common stock. In
addition, specific rights granted to future holders of preferred stock could be
used to restrict our ability to merge with, or sell assets to, a third party.
The ability of our Board of Directors to issue preferred stock could make it
more difficult, delay, discourage, prevent or make it more costly to acquire or
effect a change-in-control, which in turn could prevent our shareholders from
recognizing a gain in the event that a favorable offer is extended and could
materially and negatively affect the market price of our common stock.
Certain of our shareholders hold a significant percentage
of our outstanding voting securities.
As of March 25, 2015, C Media Limited is the beneficial owner
of approximately 34.1% of our outstanding voting securities, Mr. Shane McMahon,
our Chairman, is the beneficial owner of approximately 11.7% of our outstanding
voting securities, and Mr. Weicheng Liu, our Chief Executive Officer, is the
beneficial owner of approximately 7.8% of our outstanding voting securities (as
calculated in accordance with Rule 13d-3(d)(1) of the Exchange Act). As a
result, each possesses significant influence over the election of our directors
and the authorization of any proposed significant corporate transactions. Their
respective ownership and control may also have the effect of delaying or
preventing a future change in control, impeding a merger, consolidation,
takeover or other business combination or discourage a potential acquirer from
making a tender offer.
We do not intend to pay dividends for the foreseeable
future.
For the foreseeable future, we intend to retain any earnings to
finance the development and expansion of our business, and we do not anticipate
paying any cash dividends on our common stock. Accordingly, investors must be
prepared to rely on sales of their common stock after price appreciation to earn
an investment return, which may never occur. Investors seeking cash dividends
should not purchase our common stock. Any determination to pay dividends in the
future will be made at the discretion of our Board of Directors and will depend
on our results of operations, financial condition, contractual restrictions,
restrictions imposed by applicable law and other factors our Board deems
relevant.
24
ITEM 1B. |
UNRESOLVED STAFF COMMENTS. |
Not Applicable.
Our principal executive offices are located at 375 Greenwich
Street, Suite 516, New York, New York 10013. We paid $136,900 for rent in 2014.
The principal address of YOD WFOE and Zhong Hai Video is Office
Park, Tower A, Suite 2603 2607, 10 Jintong West Road, Chaoyang District,
Beijing 100020, China. We paid approximately $593,000 for rent in 2014.
We believe that all our properties have been adequately
maintained, are generally in good condition, and are suitable and adequate for
our business.
ITEM 3. |
LEGAL PROCEEDINGS. |
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.
ITEM 4. |
MINE SAFETY DISCLOSURES |
Not applicable.
25
PART II
ITEM 5. |
MARKET FOR REGISTRANTS COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES. |
Market Information
Our common stock is quoted on the Nasdaq Capital Market under
the symbol YOD. Trading of our common stock is sometimes limited and sporadic.
The following table sets forth, for the periods indicated, the high and low
closing prices of our common stock.
|
|
Closing Bid Prices
(1) |
|
|
|
High |
|
|
Low |
|
Year Ended December 31, 2014 |
|
|
|
|
|
|
1st Quarter |
$ |
6.61 |
|
$ |
2.25 |
|
2nd Quarter |
$ |
4.37 |
|
$ |
2.00 |
|
3rd Quarter |
$ |
3.09 |
|
$ |
1.77 |
|
4th Quarter |
$ |
3.11 |
|
$ |
1.61 |
|
|
|
|
|
|
|
|
Year Ended December 31, 2013 |
|
|
|
|
|
|
1st Quarter |
$ |
1.84 |
|
$ |
0.91 |
|
2nd Quarter |
$ |
2.21 |
|
$ |
1.71 |
|
3rd Quarter |
$ |
2.09 |
|
$ |
1.75 |
|
4th Quarter |
$ |
3.20 |
|
$ |
2.69 |
|
------------
(1)
The above table sets forth the range of high and low closing bid prices per
share of our common stock as reported by Nasdaq for the periods indicated, and
adjusted for the reverse stock split that occurred on February 9, 2012.
26
Approximate Number of Holders of Our Common Stock
As of March 25, 2015, there were approximately 328 holders of
record of our common stock. This number excludes the shares of our common stock
beneficially owned by shareholders holding stock in securities trading accounts
through DTC, or under nominee security position listings.
Dividend Policy
We have never declared or paid a cash dividend. Any future
decisions regarding dividends will be made by our Board of Directors. We
currently intend to retain and use any future earnings for the development and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Our Board of Directors has complete discretion on whether to
pay dividends, subject to the approval of our shareholders. Even if our Board of
Directors decides to pay dividends, the form, frequency and amount will depend
upon our future operations and earnings, capital requirements and surplus,
general financial condition, contractual restrictions and other factors that the
Board of Directors may deem relevant. In addition, our ability to declare and
pay dividends is dependent on our ability to declare dividends and profits in
our PRC subsidiaries. PRC rules greatly restrict and limit the ability of our
subsidiaries to declare dividends to us which, in addition to restricting our
cash flow, limits our ability to pay dividends to our shareholders.
Securities Authorized for Issuance Under Equity Compensation
Plans
See Item 12 Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters Securities Authorized
for Issuance Under Equity Compensation Plans.
Recent Sales of Unregistered Securities
We did not sell any equity securities during the fiscal year
ended December 31, 2014 that were not previously disclosed in a quarterly report
on Form 10-Q or a current report on Form 8-K that was filed during the 2014
fiscal year.
Purchases of Equity Securities
No repurchases of our common stock were made in 2014.
ITEM 6. |
SELECTED FINANCIAL DATA. |
Not Applicable.
27
ITEM 7. |
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 Special Note Regarding Forward Looking
Statements above for certain information concerning those forward-looking
statements.
Overview
YOU On Demand Holdings, Inc. is a corporation formed in the
State of Nevada on October 19, 2004.
We operate in the Chinese media industry and provide integrated
value-added service solutions business for the delivery of video-on-demand
(VOD) and enhanced premium content to digital cable providers, Internet
Protocol Television (IPTV) providers, Over-the-Top (OTT) streaming
providers, mobile manufacturers and operators, as well as direct customers.
On July 30, 2010, we acquired YOD Hong Kong, formerly Sinotop
Group Limited, through our subsidiary China CB Cayman. Through a series of
contractual arrangements, YOD Hong Kong and its subsidiary, YOD WFOE, controls
Beijing Sino Top Scope Technology Co., Ltd. (Sinotop Beijing), a corporation
established in the Peoples Republic of China (PRC). Sinotop
Beijing is the 80% owner of Zhong Hai Shi Xun Information Technology Co., Ltd. (Zhong Hai
Video), though which we provide: 1) integrated value-added
business-to-business (B2B) service solutions for the delivery of VOD and
enhanced premium content for digital cable; 2) integrated value-added
business-to-business-to-customer (B2B2C) service solutions for the delivery of
VOD and enhanced premium content for IPTV and OTT providers and; 3) a direct to
user, or B2C, mobile video service app. As a result of the contractual
arrangements with Sinotop Beijing, we have the right to control management
decisions and direct the economic activities that most significantly impact
Sinotop Beijing and Zhong Hai Video, and accordingly, under generally accepted
accounting principles in the United States (U.S. GAAP), we consolidate these
operating entities in our consolidated financial statements.
Our Unconsolidated Equity Investment
Shandong Media operates a publishing business,
which includes the distribution of periodicals, the publication of advertising,
the organization of public relations events, the provision of information
related services, copyright transactions, the production of audio and video
products, and the provision of audio value added communication services. We hold
30% ownership interest in Shandong Media and account for our investment using
the equity method.
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, which was 49% owned by Jinan Parent and 51% owned by our wholly-owned
subsidiary, WFOE, operated in accordance with a cooperation agreement and an
exclusive service agreement. 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 consolidated financial
statements included in this annual report on Form 10-K.
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 offerings and (iv) the expansion of our subscribers
beyond smartphones to mobile tablets and other Internet-enabled mobile
devices.
28
-
Our ability to achieve revenue growth and meet internal or external
expectations of future performance. In the latter half of 2013, we
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 to our financing
activities and maintaining our public company status.
-
Changes in Chinas economic, political or social policies or
conditions. 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. 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 laws of the Cayman Islands, it 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, YOD 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 YOD 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.
29
Consolidated Results of Operations
Comparison of Years Ended December 31, 2014 and 2013
|
|
Year Ended |
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
|
Amount Change |
|
|
% Change |
|
Revenue |
$ |
1,963,000 |
|
$ |
309,000 |
|
$ |
1,654,000 |
|
|
535% |
|
Cost of revenue |
|
2,756,000 |
|
|
3,126,000 |
|
|
(370,000 |
) |
|
-12% |
|
Gross loss |
|
(793,000 |
) |
|
(2,817,000 |
) |
|
2,024,000 |
|
|
-72% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
7,459,000 |
|
|
7,609,000 |
|
|
(150,000 |
) |
|
-2% |
|
Professional fees |
|
654,000 |
|
|
706,000 |
|
|
(52,000 |
) |
|
-7% |
|
Depreciation and amortization |
|
537,000 |
|
|
774,000 |
|
|
(237,000 |
) |
|
-31% |
|
Impairments of long-lived assets |
|
- |
|
|
311,000 |
|
|
(311,000 |
) |
|
-100% |
|
Total operating expense |
|
8,650,000 |
|
|
9,400,000 |
|
|
(750,000 |
) |
|
-8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
(9,443,000 |
) |
|
(12,217,000 |
) |
|
2,774,000 |
|
|
-23% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest & other income/(expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
(2,374,000 |
) |
|
(371,000 |
) |
|
(2,003,000 |
) |
|
540% |
|
Change in fair value of warrant liabilities |
|
(621,000 |
) |
|
(466,000 |
) |
|
(155,000 |
) |
|
33% |
|
Change in fair value of contingent
consideration |
|
(161,000 |
) |
|
(252,000 |
) |
|
91,000 |
|
|
-36% |
|
Loss on investment in unconsolidated entities |
|
(21,000 |
) |
|
(3,000 |
) |
|
(18,000 |
) |
|
600% |
|
Loss from disposal of consolidated entities |
|
(623,000 |
) |
|
- |
|
|
(623,000 |
) |
|
- |
|
Others |
|
(86,000 |
) |
|
56,000 |
|
|
(142,000 |
) |
|
-254% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes and non-controlling interests |
|
(13,329,000 |
) |
|
(13,253,000 |
) |
|
(76,000 |
) |
|
1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
305,000 |
|
|
111,000 |
|
|
194,000 |
|
|
175% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
(13,024,000 |
) |
|
(13,142,000 |
) |
|
118,000 |
|
|
-1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations |
|
- |
|
|
5,255,000 |
|
|
(5,255,000 |
) |
|
-100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
(13,024,000 |
) |
|
(7,887,000 |
) |
|
(5,137,000 |
) |
|
65% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to non-controlling interests |
|
616,000 |
|
|
1,055,000 |
|
|
(439,000 |
) |
|
-42% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to YOU On Demand shareholders |
|
(12,408,000 |
) |
|
(6,832,000 |
) |
|
(5,576,000 |
) |
|
82% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend and deemed dividend on preferred stock |
|
(16,402,000 |
) |
|
(1,358,000 |
) |
|
(15,044,000 |
) |
|
1108% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to YOU on Demand common shareholders |
$ |
(28,810,000 |
) |
$ |
(8,190,000 |
) |
$ |
(20,620,000 |
) |
|
252% |
|
30
Revenues
Revenue for the year ended December 31, 2014 was $1,963,000, as
compared to $309,000 for 2013. The increase is revenue of approximately
$1,654,000 was attributable to the growth of our VOD business.
Gross loss
Our gross loss for the year ended December 31, 2014 was
$793,000, as compared to $2,817,000 during 2013. The decrease in gross loss of
approximately $2,024,000, or 72%, was mainly due to (1) the increased revenue
related to our VOD business and (2) a 12% decrease in amortization of content
costs due to shifts in our content strategy. 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 year
ended December 31, 2014, decreased approximately $150,000, to $7,459,000, as
compared to $7,609,000 for the year ended December 31, 2013.
Salaries and personnel costs are the primary components of
selling, general and administrative expenses. For the year ended December 31,
2014 salaries and personnel costs accounted for 45% of our selling, general and
administrative expenses. For the year ended December 31, 2014, salaries and
personnel costs totaled $3,370,000, a decrease of $816,000, or 19%, as compared
to $4,186,000 for 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 year ended December 31, 2014,
these costs totaled $3,007,000, a net increase of $1,347,000, or 81%, as
compared to $1,660,000 in 2013, due primarily to increases in the compensation
paid to our board members, increase in technology and product development
related expenses, as well as rising office rent expenses.
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 $52,000, or 7%, to
$654,000 for the year ended December 31, 2014, from $706,000 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 $237,000,
or 31%, to $537,000 in the year ended December 31, 2014, from $774,000 during
2013.The decrease was mainly due to write-off of certain office equipment in
2013, and, to a lesser extent, full amortization of certain software in the
beginning of 2014.
Interest expense, net
Our interest expense increased $2,003,000 to $2,374,000 for the
year ended December 31, 2014, from $371,000 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 13 of the consolidated financial
statements included in this report.
Change in fair value of warrant liabilities
Certain of our warrants are recognized as derivative
liabilities and re-measured at the end of every reporting period and upon
settlement, with the
change in value reported in the statement of operations. We
reported a loss of $621,000 and $466,000 for the years ended December 31, 2014
and 2013, respectively. The changes are primarily due to fluctuation in our
closing stock price.
31
Change in fair value of contingent consideration
Our contingent consideration related to our acquisition of YOD
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 $252,000 for the years ended December 31, 2014 and 2013,
respectively. The changes are primarily due to fluctuation 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.
Loss from disposal of consolidated entities
Effective March 25, 2014, we deconsolidated our ownership in
WFOE and Jinan Zhong Kuan as these entities were investment holding companies, and we determined that they were no longer required for our organizational structure on a going forward basis. We recorded a loss of $623,000 from disposal
of these consolidated entities as discussed in Note 6 of our 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
reported as discontinued operations in our 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 year ended December 31, 2014, $616,000 of our operating loss
from Zhong Hai Video was allocated to Hua Cheng. For the year ended December 31, 2013, operating loss attributable to non-controlling interest was $1,055,000, of which $878,000 was allocated to Hua Cheng.
Dividends on preferred stock
For the year ended December 31, 2014, in connection with the
issuance of Series E Preferred Stock, we recorded dividends of approximately
$16,402,000, which was primarily comprised of the recognition of a deemed dividend
for a beneficial conversion feature discount of $16,571,000.
Liquidity and Capital Resources
As of December 31, 2014, we had cash and cash equivalents of
approximately $10,812,000. Approximately $3,125,000 was held in our Hong Kong
entity and $7,087,000 was held in our China entities. The Company has no plans
to repatriate these funds. As of December 31, 2014, we had working capital of
approximately $7,060,000. As discussed in Note 3 to the consolidated
financial statements included in this report, the Company has incurred
significant losses during 2014 and 2013, and has relied on debt and equity
financings to fund our operations. These conditions raise substantial doubt
about our ability to continue as a going concern. Managements plans regarding
these matters are also described in Note 3 to the consolidated financial
statements.
The following table provides a summary of our net cash flows
from operating, investing, and financing activities.
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2014 |
|
|
2013 |
|
Net cash used in operating activities |
$ |
(10,174,000 |
) |
$ |
(8,761,000 |
) |
Net cash provided by/(used in) investing activities |
|
(287,000 |
) |
|
3,275,000 |
|
Net cash provided by financing activities |
|
17,517,000 |
|
|
4,909,000 |
|
Effect of exchange rate changes on cash |
|
(67,000 |
) |
|
19,000 |
|
Net increase/(decrease) in cash and cash equivalents |
|
6,989,000 |
|
|
(558,000 |
) |
|
|
|
|
|
|
|
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 |
|
10,812,000 |
|
|
3,823,000 |
|
Less cash and cash equivalents of discontinued operations
at end of period |
|
- |
|
|
- |
|
Cash and cash equivalents of continuing
operations at end of period |
$ |
10,812,000 |
|
$ |
3,823,000 |
|
32
Operating Activities
Cash used in operating activities increased for the year ended
December 31, 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.
In addition, in line with our revenue growth, our accounts receivable also
increased.
Investing Activities
Cash used in investing activities for the year ended December
31, 2014 was primarily used for investment in Shandong Media. In August 2014, we
invested US$209,000 (approximately RMB1.29 million) in Shandong Media to
maintain our 30% equity ownership. Cash provided by investing activities for the
year ended December 31, 2013 was primarily from the sale of Jinan Broadband of
$3,729,000, which was partially offset by $431,000 from the purchase of property
and equipment.
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. For 2013, the Company received net proceeds of
approximately $4,900,000 from the sale of our equity securities (Convertible
Preferred Shares D) and Convertible note.
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 December 31, 2014 and 2013, the Company has accumulated deficits
of approximately $78.4 million and $65.9 million, respectively. The 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 have had 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.
Contractual Obligations
As of December 31, 2014, we have the following contractual
obligations:
|
|
|
|
|
|
|
|
Payments due by Period |
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
More than |
|
Contractual
Obligations |
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
3-5 years |
|
|
5 years |
|
Content costs |
$ |
3,848,000 |
|
$ |
2,143,000 |
|
$ |
1,705,000 |
|
$ |
- |
|
$ |
- |
|
Property leases |
|
1,568,000 |
|
|
817,000 |
|
|
751,000 |
|
|
- |
|
|
- |
|
Promissory convertible note |
|
3,318,000 |
|
|
3,318,000 |
|
|
- |
|
|
- |
|
|
- |
|
Total |
$ |
8,734,000 |
|
$ |
6,278,000 |
|
$ |
2,456,000 |
|
$ |
- |
|
$ |
- |
|
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.
33
Critical Accounting Policies
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires our
management to make assumptions, estimates, and judgments that affect the amounts
reported, including the notes thereto, and related disclosures of commitments
and contingencies, if any. We have identified certain accounting policies that
are significant to the preparation of our financial statements. These accounting
policies are important for an understanding of our financial condition and
results of operations. Critical accounting policies are those that are most
important to the portrayal of our financial condition and results of operations
and require managements difficult, subjective, or complex judgment, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain and may change in subsequent periods. Certain accounting
estimates are particularly sensitive because of their significance to financial
statements and because of the possibility that future events affecting the
estimate may differ significantly from managements current judgments. We
believe the following critical accounting policies involve the most significant
estimates and judgments used in the preparation of our financial statements.
Variable Interest Entities
We account for entities qualifying as variable interest
entities (VIEs) in accordance with Financial Accounting Standards Boards (FASB)
Accounting Standards Codification (ASC) Topic 810, Consolidation. For our
consolidated VIEs, management has made evaluations of the relationships between
our VIEs and the economic benefit flow of contractual arrangement with VIEs. In
connection with such evaluation, management also took into account the fact
that, as a result of such contractual arrangements, we control the legal
shareholders voting interests and have power of attorney in the VIEs, and
therefore we are able to direct all business activities of the VIEs. As a result
of such evaluation, management concluded that we are the primary beneficiary of
our consolidated VIEs.
We have consulted our PRC legal counsel in assessing our
ability to control our PRC VIEs. Any changes in PRC laws and regulations that
affect our ability to control our PRC VIEs may preclude us from consolidating
these companies in the future.
Revenue Recognition
When persuasive evidence of an arrangement exists, the sales
price is fixed or determinable and collectability is reasonably assured, we
recognize revenue as services are performed. For certain contracts that involve
sub-licensing content within the specified license period, revenue is recognized
in accordance with ASC Subtopic 926-605, Entertainment-Films-Revenue
Recognition, whereby revenue is recognized upon delivery of films when the
arrangement includes a nonrefundable minimum guarantee, delivery is complete and
we have no substantive future obligations to provide future additional services. Payments received from customers
for the performance of future services are recognized as deferred revenue, and
subsequently recognized as revenue in the period that the service obligations
are completed.
In accordance with ASC 605-25, Revenue Recognition
Multiple Element Arrangements, contracts with multiple element deliverables
are separated into individual units for accounting purposes when the unit
determined to have standalone value to the customer and performance of service
is considered probable. Since the contract price is for all deliverables, we
allocated the arrangement consideration to all deliverables at the inception of
the arrangement based on their relative selling price. We use (a)
vendor-specific objective evidence of selling price, if it exists, or, (b) the
managements best estimate of the selling price for that deliverable to
determine the relative selling price of each individual unit.
The recognition of revenue involves certain judgments and
changes in our assumptions, judgments or estimations may have a material impact
on the amount and timing of our revenue recognition.
Licensed Content
We obtain content through content license agreements and revenue sharing agreements with studios and distributors. When the license fee is known or reasonably determinable for a specified title in the content license agreements, we recognize the greater of: (i) revenue sharing costs incurred through the end of the reporting period, or (ii) the proportionate value of total minimum license fees over the term of each license agreement. Prepaid license fees are classified as an asset on our consolidated balance sheets as licensed content and accrued license fees payable to licensors are classified as a liability on our consolidated balance sheets. When the license fee is not known or reasonably determinable for a specific title, the title is not recognized in licensed content asset or liability in accordance with the relevant guidance. Commitments for license agreements that do not meet the criteria for recognition in licensed content are included in Note 18 to the consolidated financial statements.
34
Intangible Assets and Goodwill
We account for intangible assets and goodwill, in accordance
with ASC 350, Intangibles- Goodwill and Other. ASC 350 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be evaluated for impairment at least annually. ASC 350
also requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives and reviewed for impairment
whenever events indicate the carrying amount may not be recoverable. In
accordance with ASC 350, goodwill is allocated to reporting units, which are
either the operating segment or one reporting level below the operating segment.
On an annual basis, we review goodwill for impairment by first assessing
qualitative factors to determine whether the existence of events or
circumstances makes it more-likely-than-not that the fair value of a reporting
unit is less than its carrying amount. If we determine that it is
more-likely-than-not that the fair value of a reporting unit is less than its
carrying amount, goodwill is further tested for impairment by comparing the
carrying value to the estimated fair value of its reporting units, determined
using externally quoted prices (if available) or a discounted cash flow model
and, when deemed necessary, a market approach.
Application of goodwill impairment tests requires significant
management judgement, including the identification of reporting units, assigning
assets, liabilities and goodwill to reporting units and determination of fair
value of each reporting unit. Judgment applied when performing the qualitative
analysis includes consideration of macroeconomic, industry and market
conditions, overall financial performance of the reporting unit, composition,
personnel or strategy changes affecting the reporting unit and recoverability of
asset groups within a reporting unit. Judgments applied when performing the quantitative
analysis includes estimating future cash flows, determining appropriate
discount rates and making other assumptions. Changes in these judgments, estimates and
assumptions could materially affect the determination of fair value for each
reporting unit.
Foreign Currency Translation.
An entitys functional currency is the currency of the primary
economic environment in which it operates, normally that is the currency of the
environment in which the entity primarily generates and expends cash.
Managements judgment is essential to determine the functional currency by
assessing various indicators, such as cash flows, sales price and market,
expenses, financing and inter-company transactions and arrangements. The
functional currency of YOU On Demand Holdings, Inc., CB Cayman and YOD Hong Kong
is the U.S. dollar. The functional currency of YOD WFOE, Sinotop Beijing and
Zhong Hai Video is the RMB.
Assets and liabilities of our subsidiaries and VIEs whose
functional currencies are not the U.S. dollar are translated into U.S. dollars,
our reporting currency, at the exchange rate in effect at the balance sheet
date, and revenues and expenses are translated at the average exchange rates in
effect during the reporting period. Foreign currency translation adjustments are
not included in determining net income for the period but are accumulated in a
separate component of equity in our consolidated balance sheets.
Foreign currency transactions denominated in currencies other
than the functional currency are translated into the functional currency using
the exchange rates prevailing at the dates of the transactions. Monetary assets
and liabilities denominated in foreign currencies at the balance sheet date are
re-measured at the applicable rates of exchange in effect at that date. Gains
and losses resulting from foreign currency re-measurement are included in the
consolidated statements of comprehensive loss.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) 2014-09, creating a new Topic 606,
Revenue from Contracts with Customers, to supersede the revenue
recognition under current Topic 605, Revenue Recognition, and most
industry-specific guidance. The core principle of the new guidance is that an
entity should recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those good or services. For public
entities, the amendment becomes effective for annual or interim reporting
periods beginning after December 15, 2016. Early adoption is not permitted.
Management is currently evaluating the impact on its consolidated financial
statement of adopting this guidance.
In June 2014, the FASB issued ASU 2014-12, Accounting for
Share-Based Payments When the Terms of an Award Provide that a Performance
Target Could Be Achieved after the Requisite Service Period, under ASC 718,
Compensation Stock Compensation. The amendment applies to all reporting
entities that grant their employee share-based payments under which the terms of
the award provides a performance target that affects vesting and could be
achieved after the requisite service period. The amendment is effective for
annual and interim periods beginning after December 15, 2015, and early adoption
is permitted. The Company does not anticipate that the amendment will have a
significant impact on our financial position, statement of operations or cash
flow.
35
ITEM 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK. |
Not Applicable.
ITEM 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA. |
The full text of our consolidated financial statements
as of December 31, 2014 and 2013 begins on page F-1 of this annual report.
ITEM 9. |
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. |
One June 25, 2014, the Company dismissed UHY LLP (UHY) as our
independent registered accounting firm and engaged KPMG Huazhen (Special General
Partnership) (KPMG) as our independent registered accounting firm. UHY audited
our financial statements for our fiscal year ended December 31, 2013 and 2012.
The dismissal of UHY was approved by our Board of Directors. UHY did not resign
or decline to stand for re-election.
UHY has served as our independent registered accounting firm
since August 2007. Neither the report dated March 31, 2014 on our consolidated
balance sheet as of December 31, 2013 and 2012 and the related consolidated
statements of operations, comprehensive loss, changes in stockholders equity,
and cash flows for the years then ended, contained an adverse opinion or
disclaimer of opinion, nor were such reports qualified or modified as to
uncertainty, audit scope, or accounting principles, except that both reports
contain an explanatory paragraph regarding the going concern assumption.
During the Companys fiscal years ended December 31, 2013 and
2012, and through June 25, 2014, there have been (i) no disagreements with UHY
on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not resolved to UHYs
satisfaction, would have caused them to make reference to the subject matter in
connection with their report on the Companys financial statements for such
years, and (ii) there were no reportable events, as defined in Item 304(a)(1)(v)
of Regulation S-K, except that for the fiscal years ended December 31, 2013 and
2012, the Companys Board of Directors discussed with UHY the existence of a
material weakness in the Companys internal control over financial reporting, as
more fully described in the Companys Annual Reports on Form 10-K for the years
ended December 31, 2013 and December 31, 2012, filed on March 31, 2014 and April
8, 2013, respectively, with the Securities and Exchange Commission.
On June 25, 2014 the Board of Directors of the Company
authorized the engagement of KPMG as the Companys independent registered public
accounting firm effective July 1, 2014. During the Companys fiscal years ended
December 31, 2013 and 2012 and through the subsequent interim period prior to
retaining KPMG, the Company did not consult with KPMG regarding any of the
matters or events set forth in item 304(a)(2)(i) and (ii) of Regulation S-K.
ITEM 9A. |
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 December 31, 2014. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that as of
December 31, 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.
36
Managements Annual Report on Internal Control Over
Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act. The Exchange Act defines internal control
over financial reporting as a process designed by, or under the supervision of,
our principal executive and principal financial officers and effected by our
Board of Directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America and includes those
policies and procedures that:
- Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of the
Company;
- Provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that our
receipts and expenditures are being made only in accordance with
authorizations of our management and Directors;
- Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on our financial statements.
All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal controls
over financial reporting as of December 31, 2014. In making this assessment,
management used the framework set forth in the report entitled Internal Control
- Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission, or COSO. The COSO framework summarizes
each of the components of a companys internal control system, including (i) the
control environment, (ii) risk assessment, (iii) control activities, (iv)
information and communication, and (v) monitoring.
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of our annual or interim
financial statements will not be prevented or detected on a timely basis. A
significant deficiency is a deficiency, or a combination of deficiencies, in
internal control over financial reporting that is less severe than a material
weakness, yet important enough to merit attention by those responsible for
oversight of our financial reporting.
Our internal control over financial reporting was not effective
as a result of the following identified material weakness:
-
As of December 31, 2014, the Company’s controls were not sufficiently complete and comprehensive to ensure that our accounting for complex and non-routine transactions were complete and accurate. Specifically, there was inadequate analysis and review of the documentation and calculations supporting the Company’s accounting for foreign currency translation adjustments upon deconsolidation of
certain entities, deferred tax accounting on business combination, and modification of share-based compensation. Although the amount related to the misstatements was immaterial and corrected in the Company’s consolidated financial statements, the absence of sufficient controls create a reasonable possibility that a material misstatement in the Company’s interim or annual financial statements would not be prevented or detected in a timely manner.
This annual report does not include an attestation report of
our registered public accounting firm regarding internal control over financial
reporting. Managements report was not subject to attestation by our independent
registered public accounting firm pursuant to the SEC rules that permit the
Company to provide only managements report in this annual report.
Changes in Internal Control Over Financial Reporting
There were no changes in the Companys internal controls over
financial reporting that occurred during the fourth quarter of fiscal year 2014
that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting. The Company continues
to invest resources in order to upgrade internal controls.
37
ITEM 9B. |
OTHER INFORMATION. |
Resignation of President and Chief Financial Officer
On March 30, 2015, Marc Urbach and the Company entered into a
retention and separation agreement (the Urbach Separation Agreement), pursuant
to which Mr. Urbach will resign as President and Chief Financial Officer of the
Company, and from all other positions he holds with respect to the Company, and
each of its parents, subsidiaries, affiliates and any of their employee benefit
or pension plans, effective March 31, 2015 (the Termination Date).
Pursuant to the terms of the Urbach Separation Agreement, Mr.
Urbach and the Company have entered into a consulting agreement (the Urbach
Consulting Agreement), pursuant to which Mr. Urbach will provide general
business and consulting services to the Company following his resignation to
assist in the transitional needs and activities of the Company for a period of
six (6) months (the Consulting Term). As consideration for his consulting
services to the Company during the Consulting Term, the Company has agreed to
pay Mr. Urbach $9,583.50 per month plus 50,000 shares of restricted stock over
the course of the Consulting Term (with 8,333 shares of restricted stock to be
issued to Mr. Urbach each month of the Consulting Term except for the sixth
month when he will be issued 8,335 shares of restricted stock).
Pursuant to the terms of the Urbach Separation Agreement, and
subject to his execution of a general release within 45 days of the Termination
Date, in connection with his resignation, Mr. Urbach will receive a severance
payment equal to his base salary then in effect ($345,000) for a period of 18
months from the Termination Date, plus an additional payment equal to four weeks
base salary on account of vacation time earned but not taken by Mr. Urbach,
payable in a lump sum within the later of 10 days after the Termination Date or
the date of his delivery of the general release to the Company. Mr. Urbach will
also be entitled to receive, at his election, either (i) continued benefits
under the Companys group health and life insurance plans in which he
participated prior to the Termination Date for a period of 12 months from the
Termination Date or (ii) a lump sum equal to $47,586.12 (representing 80% of the
cost to the Company of such coverage), payable to him within 10 days of his
delivering his election to the Company. Mr. Urbach will also be entitled to
receive all unpaid expenses, earned but unpaid bonuses and earned but unpaid
benefits from the Company and its employee benefit plans on or before the
Termination Date. In addition, pursuant to the terms of the Urbach Separation
Agreement, all outstanding unvested options, warrants or restricted stock
previously granted to Mr. Urbach will become fully vested on the Termination
Date and, with respect to options and warrants, will thereafter be exercisable
for the full term of the option or warrant.
The foregoing description of the Urbach Separation Agreement
and the Urbach Consulting Agreement are qualified in their entirety by reference
to the Urbach Separation Agreement and the Urbach Consulting Agreement, copies
of which are filed herewith as Exhibits 10.26 and 10.27, respectively, and
are incorporated herein by reference.
Amendment to Bylaws
On March 26, 2015, the Board approved an amendment to Section
6.8 of the Companys Second Amended and Restated Bylaws to delete certain
language indicating that the Chairman will be a principal executive of the
Corporation.
The preceding is qualified in its entirety by reference to
Amendment No. 1 to the Second Amended and Restated Bylaws, which became
effective on March 26, 2015, and is attached hereto as Exhibit 3.3 and
incorporated herein by reference.
38
PART III
ITEM 10. |
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE. |
Directors and Executive Officers
The following sets forth the name and position of each of our
current executive officers and directors.
NAME |
|
AGE |
|
POSITION |
Xuesong Song |
|
46 |
|
Executive Chairman and
Director |
Shane McMahon |
|
45 |
|
Chairman |
Weicheng Liu |
|
57 |
|
Chief Executive Officer and
Director |
Marc Urbach |
|
42 |
|
President and Chief Financial Officer |
James Cassano |
|
67 |
|
Director |
Clifford Higgerson |
|
75 |
|
Director |
Jin Shi |
|
45 |
|
Director |
Arthur Wong |
|
55 |
|
Director |
Xuesong Song. Mr. Song was appointed as our Executive
Chairman on January 31, 2014 and as a member of our Board of Directors on July
5, 2013. Mr. Song currently serves as the chairman of the board of directors and
chief executive officer of C Media Limited and the chairman of the board of
directors and chief financial officer of China Growth Equity Investment Ltd.,
positions he has held since the companys inception in January 2010. From May
2006 through January 2009, Mr. Song served as the chairman of ChinaGrowth North
Acquisition Corporation, a special purpose acquisition company, which acquired
UIB Group Limited in January 2009, the second largest insurance brokerage firm
in China. Following the acquisition, Mr. Song served as a director of UIB Group
Limited from January 2009 through May 2010. From May 2006 through January 2009,
Mr. Song also served as the executive vice president of business development and
a director of the board of ChinaGrowth South Acquisition Corporation, a special
purpose acquisition company, which acquired Olympia Media Holdings Ltd. in
January 2009, the largest privately owned newspaper aggregator and operator in
China. Mr. Song has been a principal of Chum Capital Group Limited since August
2001, a merchant banking firm that invests in growth Chinese companies and
advises them in financings, mergers and acquisitions and restructurings, and the
chief executive officer of Beijing Chum Investment Co., Ltd. since December
2001. From April 2005 to May 2010, Mr. Song served as the chairman and chief
executive officer of Shanghai Jinqiaotong Enterprise Developments Corporation
Ltd., a direct investment company. Mr. Song has also served as a director of
Mobile Vision Communication Ltd. since July 2004. Mr. Song received his M.B.A.
from Oklahoma City/Tianjin Program and an Associates Degree in electrical
engineering from Civil Aviation University of China.
Shane McMahon. Mr. McMahon has served as our Chairman
since July 30, 2010. Prior to joining us, from 2000 to December 31, 2009, Mr.
McMahon served in various executive level positions with World Wrestling
Entertainment, Inc. (NYSE: WWE). Mr. McMahon has significant marketing and
promotion experience and has been instrumental in exploiting pay-per-view and
video on demand programming on a global basis. Mr. McMahon also sits on the
Boards of Directors of International Sports Management (USA) Inc., a Delaware
corporation, and Global Power of Literacy, a New York not-for-profit
corporation.
Weicheng Liu. Mr. Liu was appointed as our Chief
Executive Officer on July 5, 2013 and has served as a member of our Board of
Directors since July 30, 2010. Prior to joining us, Mr. Liu founded Sinotop
Beijing and served as its sole officer and director until his resignation on
July 30, 2010. Mr. Liu is currently a non-executive director of Codent Networks
(Shanghai) Co. Ltd., a mobile software company in China founded by Mr. Liu, and
has served in that position since 2011, prior to which he served as the Chairman
and Chief Executive Officer since 2003. Overall, Mr. Liu has almost twenty years
of experience in the telecommunications and network technology industries. Mr.
Liu received a degree in engineering physics from Tsinghua University and a
Ph.D. from the University of Waterloo.
Marc Urbach. Mr. Urbach has over fifteen years of
accounting, finance, and operations experience in both large and small
companies. He was the Executive Vice President and Chief Financial Officer of
Profile Home Inc., a privately held importer and distributor of home furnishings
from September 2004 until February 2008. He additionally served on the Board and
was part owner of Tri-state Trading LLC, a related import company during that
same time period. Mr. Urbach was a Director of Finance at Mercer Inc., a Marsh
& McLennan Company from 2002 to 2004. He was a Finance Manager at Small
World Media from 2000 until 2002 and held a similar position at The Walt Disney
Company from 1998 to 2000. He started his career at Arthur Andersen LLP as a
senior auditor from 1995 to 1998. Mr. Urbach received his Bachelor of Science in
Accounting from Babson College in 1995.
James S. Cassano. Mr. Cassano was appointed as director
of the Company effective as of January 11, 2008. Mr. Cassano is currently a
Partner & Chief Financial Officer of CoActive Health Solutions, LLC, a
worldwide contract research organization, supporting the pharmaceutical and
biotechnology industries. Mr. Cassano has served as executive vice president,
chief financial officer, secretary and director of Jaguar Acquisition
Corporation, a Delaware corporation (OTCBB: JGAC), a blank check company, since
its formation in June 2005. Mr. Cassano has served as a managing director of
Katalyst LLC, a company which provides certain administrative services to Jaguar
Acquisition Corporation, since January 2005. In June 1998, Mr. Cassano founded
New Forum Publishers, an electronic publisher of educational material for
secondary schools, and served as its chairman of the Board and chief executive
officer until it was sold to Apex Learning, Inc., a company controlled by
Warburg Pincus, in August 2003. He remained with Apex until November 2003 in
transition as vice president business development and served as a consultant to
the company through February 2004. In June 1995, Mr. Cassano co-founded
Advantix, Inc., a high volume electronic ticketing software and transaction
services company which handled event related client and customer payments, that
was re-named Tickets.com and went public through an IPO in 1999. From March 1987
to June 1995, Mr. Cassano served as senior vice president and chief financial
officer of the Hill Group, Inc., a privately-held engineering and consulting
organization, and from February 1986 to March 1987, Mr. Cassano served as vice
president of investments and acquisitions for Safeguard Scientifics, Inc., a
public venture development company. From May 1973 to February 1986, Mr. Cassano
served as partner and director of strategic management services (Europe) for the
strategic management group of Hay Associates. Mr. Cassano received a B.S. in
Aeronautics and Astronautics from Purdue University and an M.B.A. from Wharton
Graduate School at the University of Pennsylvania. Mr. Cassanos extensive
executive experience, as noted above, along with his educational background, led
us to the conclusion that he should serve as a director of our Company, in light
of our business and structure.
39
Clifford Higgerson. Mr. Higgerson was appointed as
director of the Company on January 31, 2014. Mr. Higgerson has more than 40
years of experience in research, consulting, planning and venture investing
primarily in the telecommunications industry, with an emphasis on carrier
systems and equipment. In 2006, he became a partner with Walden International, a
global venture capital firm focused on four key industry sectors:
communications, electronics/digital consumer software and IT services, and
semiconductors. Mr. Higgerson was a founding partner of ComVentures from 1986 to
2005, and has been a general partner with Vanguard Venture Partners since 1991.
He currently serves as a member of the board of directors of Aviat Networks,
Inc., Kotura Inc., Xtera Communications Inc., Ygnition Networks, Inc., Ormet
Circuits, Inc., Thrupoint, Inc. and Geronimo Windpower. He served as a member of
the Stratex board of directors from March 2006 to January 2007 and served on the
Compensation and Strategic Business Development Committees. He previously served
as a member of the board of directors of Hatteras Networks Inc. and World of
Good. Mr. Higgerson holds an MBA from the University of California at Berkeley,
and a BS from the University of Illinois.
Jin Shi. Mr. Shi was appointed as director of the
Company on January 31, 2014. Mr. Shi has been a managing partner of Chum Capital
Group Limited since 2007, a merchant banking firm that invests in Chinese growth
companies and advises them on financings, mergers and acquisitions and
restructurings. He is also the independent director of Pingtan Marine Enterprise
Limited (Pingtan Marine), one of the largest deep-sea fishing companies in
China. From 2011 through 2013, Mr. Shi served as the chief executive officer and
a director on the board of China Growth Equity Investment Limited, which
acquired Pingtan Marine in February 2013. From 2010 through 2011, he served as
the vice-chairman and a director of the board of China Growth Equity Investment
Limited. From 2006 through 2009, Mr. Shi served as the chief executive officer
and a director of the board of ChinaGrowth North Acquisition Corporation, which
acquired UIB Group Limited in January 2009, the second largest insurance
brokerage firm in China. From 2006 through 2009, Mr. Shi also served as the
chief financial officer and a director of the board of ChinaGrowth South
Acquisition Corporation, which acquired Olympia Media Holdings Ltd. in January
2009, the largest privately-owned newspaper aggregator and operator in China.
Mr. Shi has also been the chairman of Shanghai RayChem Industries Co., Ltd., a
research & development based active pharmaceutical ingredient producer,
since he founded the company in 2005. Mr. Shi is also the president of
PharmaSource Inc., a company he founded in 1997. Mr. Shi received an EMBA from
Guanghua School of Management, Peking University and a BS degree in Chemical
Engineering from Tianjin University.
Arthur Wong. Mr. Wong was appointed as director of the
Company on January 31, 2014. Mr. Wong is CFO of Beijing Radio Cultural
Transmission Company Limited (Beijing Radio). Prior to joining Beijing Radio,
Mr. Wong served as CFO of Shanghai GreenTree Inns Hotel Management Group,
Shanghai Nobao Renewable Energy and Henan Asia New-Energy. From 1982 to 2008,
Mr. Wong spent 26 years at Deloitte, including in Hong Kong, San Jose and
Beijing holding several positions including TMT (Technology, Media, Telecom)
leader for northern China, national media sector leader and audit leader for
northern China. In addition to his role at Beijing Radio, Mr. Wong serves as a
board member and chairperson of the audit committee of the following companies:
VisionChina Media Inc. (NASDAQ: VISN), China Automotive Systems, Inc. (NASDAQ:
CAAS), Daqo New Energy Corp. (NYSE: DQ) Sky Solar Holdings, Ltc. (NASDAQ:SKYS),
China Maple Leaf Education Systems Limited (HKSE: 1317) and Petro-king Oilfield
Services Limited (SEHK: 2178). Mr. Wong is a member of the American Institute of
Certified Public Accountants, the Hong Kong Institute of Certified Public
Accountants and the Chartered Association of Certified Accountants. Mr. Wong
holds a Bachelor of Science in Applied Economics from University of San
Francisco and a Higher Diploma of Accountancy from The Hong Kong Polytechnic
University.
There are no agreements or understandings between any of our
executive officers or directors and any other persons to resign at the request
of another such other person and to act on behalf of or at the direction of any
such other person.
Directors are elected for one year term and until their
successors are duly elected and qualified.
40
Corporate Governance
Our current corporate governance practices and policies are
designed to promote shareholder value and we are committed to the highest
standards of corporate ethics and diligent compliance with financial accounting
and reporting rules. Our Board provides independent leadership in the exercise
of its responsibilities. Our management oversees a system of internal controls
and compliance with corporate policies and applicable laws and regulations, and
our employees operate in a climate of responsibility, candor and integrity.
Corporate Governance Guidelines
We and our Board are committed to high standards of corporate
governance as an important component in building and maintaining shareholder
value. To this end, we regularly review our corporate governance policies and
practices to ensure that they are consistent with the high standards of other
companies. We also closely monitor guidance issued or proposed by the SEC and
the provisions of the Sarbanes-Oxley Act, as well as the emerging best practices
of other companies. The current corporate governance guidelines are available on
the Companys website http://corporate.yod.com. Printed copies of our corporate
governance guidelines may be obtained, without charge, by contacting our
Corporate Secretary at Office Park, Tower A, Suite 2603, 10 Jintong West Road,
Chaoyang District, Beijing 100020, China.
The Board and Committees of the Board
The Company is governed by the Board that currently consists of
seven members: Xuesong Song, Shane McMahon, Weicheng Liu, James Cassano,
Clifford Higgerson, Jin Shi and Arthur Wong. The Board has established three
Committees: the Audit Committee, the Compensation Committee and the Nominating
and Governance Committee. Each of the Audit Committee, Compensation Committee
and Nominating and Governance Committee are comprised entirely of independent
directors. From time to time, the Board may establish other committees. The
Board has adopted a written charter for each of the Committees which are
available on the Companys website http://corporate.yod.com. Printed copies of
these charters may be obtained, without charge, by contacting our Corporate
Secretary at Office Park, Tower A, Suite 2603, 10 Jintong West Road, Chaoyang
District, Beijing 100020, China.
Governance Structure
Our Board of Directors is responsible for corporate governance
in compliance with reporting laws and for representing the interests of our
shareholders. As of February 2014, the Board was composed of seven members, four
of whom are considered independent, non-executive directors. Details on Board
membership, oversight and activity are reported below.
We encourage our shareholders to learn more about our Companys
governance practices at our website, http://corporate.yod.com.
The Boards Role in Risk Oversight
The Board oversees that the assets of the Company are properly
safeguarded, that the appropriate financial and other controls are maintained,
and that the Companys business is conducted wisely and in compliance with
applicable laws and regulations and proper governance. Included in these
responsibilities is the Board of Directors oversight of the various risks
facing the Company. In this regard, the Board seeks to understand and oversee
critical business risks. The Board does not view risk in isolation. Risks are
considered in virtually every business decision and as part of the Companys
business strategy. The Board recognizes that it is neither possible nor prudent
to eliminate all risk. Indeed, purposeful and appropriate risk-taking is
essential for the Company to be competitive on a global basis and to achieve its
objectives.
While the Board oversees risk management, Company management is
charged with managing risk. The Company has robust internal processes and a
strong internal control environment to identify and manage risks and to
communicate with the Board. The Board and the Audit Committee monitor and
evaluate the effectiveness of the internal controls and the risk management
program at least annually. Management communicates routinely with the Board,
Board committees and individual directors on the significant risks identified
and how they are being managed. Directors are free to, and indeed often do,
communicate directly with senior management.
The Board implements its risk oversight function both as a
whole and through Committees. Much of the work is delegated to various
Committees, which meet regularly and report back to the full Board. All
Committees play significant roles in carrying out the risk oversight function.
In particular:
- The Audit Committee oversees risks related to the Companys financial
statements, the financial reporting process, accounting and legal matters. The
Audit Committee members meet separately with representatives of the
independent auditing firm.
- The Compensation Committee evaluates the risks and rewards associated with
the Companys compensation philosophy and programs. The Compensation Committee
reviews and approves compensation programs with features that mitigate risk
without diminishing the incentive nature of the compensation. Management
discusses with the Compensation Committee the procedures that have been put in
place to identify and mitigate potential risks in compensation.
41
Independent Directors
In considering and making decisions as to the independence of
each of the directors of the Company, the Board considered transactions and
relationships between the Company (and its subsidiaries) and each director (and
each member of such directors immediate family and any entity with which the
director or family member has an affiliation such that the director or family
member may have a material direct or indirect interest in a transaction or
relationship with such entity). The Board has determined that James Cassano,
Clifford Higgerson, Jin Shi and Arthur Wong are independent as defined in
applicable SEC and NASDAQ rules and regulations, and that each constitutes an
Independent Director as defined in NASDAQ Listing Rule 5605.
Audit Committee
Our Audit Committee consists of James Cassano, Clifford
Higgerson and Arthur Wong with Mr. Wong acting as Chair. The Audit Committee
oversees our accounting and financial reporting processes and the audits of the
financial statements of our company. Mr. Cassano and Mr. Wong serve as our Audit
Committee financial experts as that term is defined by the applicable SEC rules.
The Audit Committee is responsible for, among other things:
- selecting our independent auditors and pre-approving all auditing and
non-auditing services permitted to be performed by our independent auditors;
- reviewing with our independent auditors any audit problems or difficulties
and managements response;
- reviewing and approving all proposed related-party transactions, as
defined in Item 404 of Regulation S-K under the Securities Act of 1933, as
amended;
- discussing the annual audited financial statements with management and our
independent auditors;
- reviewing major issues as to the adequacy of our internal controls and any
special audit steps adopted in light of significant internal control
deficiencies;
- annually reviewing and reassessing the adequacy of our Audit Committee
charter;
- overseeing the work of our independent auditor, including resolution of
disagreements between management and the independent auditor regarding
financial reporting;
- reporting regularly to and reviewing with the full Board any issues that
arise with respect to the quality or integrity of the Companys financial
statements, the performance and independence of the independent auditors and
any other matters that the Audit Committee deems appropriate or is requested
to review for the benefit of the Board.
The Audit Committee may engage independent counsel and such
other advisors it deems necessary to carry out its responsibilities and powers,
and, if such counsel or other advisors are engaged, shall determine the
compensation or fees payable to such counsel or other advisors. The Audit
Committee may form and delegate authority to subcommittees consisting of one or
more of its members as the Audit Committee deems appropriate to carry out its
responsibilities and exercise its powers.
Compensation Committee
Our Compensation Committee consists of Jin Shi, Clifford
Higgerson and James Cassano with Mr. Shi acting as Chair. Our Compensation
Committee assists the Board in reviewing and approving the compensation
structure of our directors and executive officers, including all forms of
compensation to be provided to our directors and executive officers. The
Compensation Committee is responsible for, among other things:
- reviewing and approving corporate goals and objectives relevant to the
compensation of our chief executive officer, evaluating the performance of our
chief executive officer in light of those goals and objectives, and setting
the compensation level of our chief executive officer based on this
evaluation;
- reviewing and making recommendations to the Board with regard to the
compensation of other executive officers;
- reviewing and making recommendations to the Board with respect to the
compensation of our directors; and
- reviewing and making recommendations to the Board regarding all
incentive-based compensation plans and equity-based plans.
The Compensation Committee has sole authority to retain and
terminate any consulting firm or other outside advisor to assist the committee
in the evaluation of director, chief executive officer or senior executive
compensation and other compensation-related matters, including sole authority to
approve the firms' fees and other retention terms. The Compensation Committee
may also form and delegate authority to subcommittees consisting of one or more
members of the Compensation Committee.
42
Governance and Nominating Committee
Our Governance and Nominating Committee consists of Clifford
Higgerson, Arthur Wong and Jin Shi with Mr. Higgerson acting as Chair. The
Governance and Nominating Committee assists the Board of Directors in
identifying individuals qualified to become our directors and in determining the
composition of the Board and its committees. The Governance and Nominating
Committee is responsible for, among other things:
- identifying and recommending to the Board nominees for election or
re-election to the Board, or for appointment to fill any vacancy;
- selecting directors for appointment to committees of the Board; and
- overseeing annual evaluation of the Board and its committees for the prior
fiscal year
The Governance and Nominating Committee has sole authority to
retain and terminate retain and terminate any search firm that is to be used by
the Company to assist in identifying director candidates, including sole
authority to approve the firms' fees and other retention terms. The Governance
and Nominating Committee may also form and delegate authority to subcommittees
consisting of one or more members of the Governance and Nominating Committee.
Director Qualifications
Directors are responsible for overseeing the Companys business
consistent with their fiduciary duty to shareholders. This significant
responsibility requires highly-skilled individuals with various qualities,
attributes and professional experience. The Board believes that there are
general requirements for service on the Companys Board of Directors that are
applicable to all directors and that there are other skills and experience that
should be represented on the Board as a whole but not necessarily by each
director. The Board and the Governance and Nominating Committee of the Board
consider the qualifications of directors and director candidates individually
and in the broader context of the Boards overall composition and the Companys
current and future needs.
Qualifications for All Directors
In its assessment of each potential director candidate,
including those recommended by shareholders, the Governance and Nominating
Committee considers the nominees judgment, integrity, experience, independence,
understanding of the Companys business or other related industries and such
other factors the Governance and Nominating Committee determines are pertinent
in light of the current needs of the Board. The Governance and Nominating
Committee also takes into account the ability of a director to devote the time
and effort necessary to fulfill his or her responsibilities to the Company.
The Board and the Governance and Nominating Committee require
that each director be a recognized person of high integrity with a proven record
of success in his or her field. Each director must demonstrate innovative
thinking, familiarity with and respect for corporate governance requirements and
practices, an appreciation of multiple cultures and a commitment to
sustainability and to dealing responsibly with social issues. In addition to the
qualifications required of all directors, the Board assesses intangible
qualities including the individuals ability to ask difficult questions and,
simultaneously, to work collegially.
The Board does not have a specific diversity policy, but
considers diversity of race, ethnicity, gender, age, cultural background and
professional experiences in evaluating candidates for Board membership.
Diversity is important because a variety of points of view contribute to a more
effective decision-making process.
Qualifications, Attributes, Skills and Experience to be
Represented on the Board as a Whole
The Board has identified particular qualifications, attributes,
skills and experience that are important to be represented on the Board as a
whole, in light of the Companys current needs and business priorities. The
Companys services are performed in areas of future growth located outside of
the United States. Accordingly, the Board believes that international experience
or specific knowledge of key geographic growth areas and diversity of
professional experiences should be represented on the Board. In addition, the
Companys business is multifaceted and involves complex financial transactions.
Therefore, the Board believes that the Board should include some directors with
a high level of financial literacy and some directors who possess relevant
business experience as a Chief Executive Officer or President. Our business
involves complex technologies in a highly specialized industry. Therefore, the
Board believes that extensive knowledge of the Companys business and industry
should be represented on the Board.
43
Summary of Qualifications of Current Directors
Set forth below is a narrative disclosure that summarizes some
of the specific qualifications, attributes, skills and experiences of our
directors. For more detailed information, please refer to the biographical
information for each director set forth above.
Xuesong Song. Mr. Song has significant senior executive
experience including roles as Chairman and Chief Executive Officers of various
companies and provides the Board with financial and strategic planning
expertise. In light of our business and structure, Mr. Songs extensive
executive experience led us to the conclusion that he should serve as a director
of our Company.
Shane McMahon. Mr. McMahon has significant marketing and
promotion experience and has been instrumental in exploiting pay-per-view
programming on a global basis. In light of our business and structure, Mr.
McMahons extensive executive and industry experience led us to the conclusion
that he should serve as a director of our Company.
Weicheng Liu. Mr. Liu has almost twenty years of
experience in the telecommunications and network technology industries, and has
significant experience serving in senior executive positions, including chief
executive officer. In light of our business and structure, Mr. Lius extensive
industry and management experience led us to the conclusion that he should serve
as a director of our Company.
James Cassano. Mr. Cassano has significant senior
management experience, including service as chief executive officer, executive
vice president, chief financial officer, secretary and director, and is
considered an "audit committee financial expert" under SEC rules, based on his
lengthy experience as a certified public accountant practicing public
accounting. In light of our business and structure, Mr. Cassanos extensive
executive experience and his educational background led us to the conclusion
that he should serve as a director of our Company.
Clifford Higgerson. Mr. Higgerson has more than 40 years
of experience in research, consulting, planning and venture investing primarily
in the telecommunications industry. He also serves as a member of the board of
directors of many companies. In light of our business and structure, Mr.
Higgersons extensive industry and directorship experience and his educational
background led us to the conclusion that he should serve as a director of our
Company.
Jin Shi. Mr. Shi provides our Board with significant
executive-level leadership expertise as well as extensive experience as
directors of various companies. In light of our business and structure, Mr.
Shis business experience and education background led us to the conclusion that
he should serve as a director of our Company.
Arthur Wong. Mr. Wong has an in-depth understanding of
the preparation and analysis of financial statements, and is considered an
"audit committee financial expert" under SEC rules, based on his lengthy
experience as a certified public accountant practicing public accounting. In
light of our business and structure, Mr. Wongs extensive accounting and
financial knowledge is an invaluable asset to the Board in its oversight of the
integrity of our financial statements, the financial reporting process and our
system of internal controls, which led us to the conclusion that he should serve
as a director of our Company.
Family Relationships
There are no family relationships among our directors and
officers.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or
executive officers has, during the past ten years:
- been convicted in a criminal proceeding or been subject to a pending
criminal proceeding (excluding traffic violations and other minor offences);
- had any bankruptcy petition filed by or against the business or property
of the person, or of any partnership, corporation or business association of
which he was a general partner or executive officer, either at the time of the
bankruptcy filing or within two years prior to that time;
- been subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction or federal or
state authority, permanently or temporarily enjoining, barring, suspending or
otherwise limiting, his involvement in any type of business, securities,
futures, commodities, investment, banking, savings and loan, or insurance
activities, or to be associated with persons engaged in any such activity;
- been found by a court of competent jurisdiction in a civil action or by
the Securities and Exchange Commission or the Commodity Futures Trading
Commission to have violated a federal or state securities or commodities law,
and the judgment has not been reversed, suspended, or vacated;
- been the subject of, or a party to, any federal or state judicial or
administrative order, judgment, decree, or finding, not subsequently reversed,
suspended or vacated (not including any settlement of a civil proceeding among
private litigants), relating to an alleged violation of any federal or state
securities or commodities law or regulation, any law or regulation respecting
financial institutions or insurance companies including, but not limited to, a
temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order,
or removal or prohibition order, or any law or regulation prohibiting mail or
wire fraud or fraud in connection with any business entity; or
44
- been the subject of, or a party to, any sanction or order, not
subsequently reversed, suspended or vacated, of any self-regulatory
organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C.
78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the
Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange,
association, entity or organization that has disciplinary authority over its
members or persons associated with a member.
Except as set forth in our discussion below in Item 13
Certain Relationships and Related Transactions, and Director Independence
Transactions with Related Persons, none of our directors, director nominees or
executive officers has been involved in any transactions with us or any of our
directors, executive officers, affiliates or associates which are required to be
disclosed pursuant to the rules and regulations of the SEC.
Section 16(A) Beneficial Ownership Reporting Compliance
Under U.S. securities laws, Directors, certain executive
officers and persons holding more than 10% of our common stock must report their
initial ownership of the common stock, and any changes in that ownership, to the
SEC. The SEC has designated specific due dates for these reports. Based solely
on our review of copies of such reports filed with the SEC by and written
representations of our Directors and executive offers, we believe that our
Directors and executive offers filed the required reports on time during 2014,
except as follows: both Mr. Xuesong Song and C Media Limited were late in filing
a Form 3 after they became a reporting person pursuant to Section 16(A) of the
Exchange Act.
Code of Ethics
Our board of directors adopted a code of business conduct and
ethics that applies to our directors, officers, employees and advisors, which
became effective in January 2015. We have posted a copy of our code of business
conduct and ethics on our website at corporate.yod.com
ITEM 11. |
EXCECUTIVE COMPENSATION
|
Summary Compensation Table (2014 and 2013)
The following table sets forth information concerning all cash
and non-cash compensation awarded to, earned by or paid to the named persons
(our named executive officers) for services rendered in all capacities during
the noted periods.
|
|
|
|
|
Cash |
|
|
Option |
|
|
|
|
|
|
|
|
|
Compensation |
|
|
Awards
(2) |
|
|
Total |
|
Name and Principal Position |
|
Year |
|
|
($) |
|
|
($) |
|
|
($) |
|
Shane McMahon |
|
2014 |
|
|
300,000 |
|
|
- |
|
|
300,000 |
|
Chairman |
|
2013 |
|
|
255,000 |
(1) |
|
- |
|
|
255,000 |
(1) |
Weicheng Liu |
|
2014 |
|
|
362,486 |
|
|
- |
|
|
362,486 |
|
Chief Executive Officer |
|
2013 |
|
|
276,476 |
|
|
- |
|
|
276,476 |
|
Marc Urbach |
|
2014 |
|
|
230,000 |
|
|
- |
|
|
230,000 |
|
President and Chief Financial Officer |
|
2013 |
|
|
229,900 |
|
|
214,795 |
|
|
444,695 |
|
---------------
(1) |
As of October 1, 2012, in an effort to conserve the Companys
working capital, Mr. McMahon elected to cease collecting salary until such
time as the Company has sufficient revenues from operations. The remaining
$63,750 due from 2012 and $255,000 due from 2013 will be paid in 2015 to Mr.
McMahon pursuant to his employment agreement dated January 31, 2014. |
(2) |
The assumptions for the valuation of the option awards are included in Note 15
of our consolidated financial statements included in this report. |
45
Employment Agreements
On January 31, 2014, we entered into an employment agreement
with our Chairman, Shane McMahon. The agreement is for a term of two years,
which will automatically be extended for additional one year terms unless
terminated earlier. Mr. McMahon is also eligible to receive a bonus at the sole
discretion of our Board of Directors, and is entitled to participate in all of
the benefit plans of the Company. In the event that Mr. McMahon is terminated
without cause, he would be entitled to eighteen months of severance pay if
within the initial two years of the term and twelve months if after the initial
two years of the term. The agreement also contains customary restrictive
covenants regarding non-competition relating to the pay-per-view business in the
PRC, non-solicitation of employees and customers and confidentiality.
On January 31, 2014, we entered into an employment agreement
with our Chief Executive Officer, Weicheng Liu. The agreement is for a term of
one year, which will automatically be extended for additional one year terms
unless terminated earlier by either party. Mr. Liu is also eligible to receive a
bonus at the sole discretion of the Board of Directors of the Company, and is
entitled to participate in all of the benefit plans of the Company. In the event
Mr. Liu is terminated without cause, he would be entitled to eighteen months of
severance pay if within the initial two years of the term and twelve months if
after the initial two years of the term. The Liu Agreement also contains
customary restrictive covenants regarding non-competition relating to the
pay-per-view business in the PRC, non-solicitation of employees and customers
and confidentiality.
On January 31, 2014, we entered into an employment agreement
with our President and CFO, Marc Urbach. The agreement is for a term of one
year, which will automatically be extended for additional one year terms unless
terminated earlier. Mr. Urbach is also eligible to receive a bonus at the sole
discretion of our Board of Directors, and is entitled to participate in all of
the benefit plans of the Company. In the event that Mr. Urbach is terminated
without cause, he would be entitled to eighteen months of severance pay if
within the initial two years of the term and twelve months if after the initial
two years of the term. The agreement also contains customary restrictive
covenants regarding non-competition relating to the pay-per-view business in the
PRC, non-solicitation of employees and customers and confidentiality. Mr. Urbach
does not receive any compensation for service as member of the Companys Board
of Directors.
We have not provided retirement benefits (other than a state
pension scheme in which all of our employees in China participate) or change of
control benefits to our named executive officers.
Outstanding Equity Awards at Fiscal Year-End (2014)
The following table sets forth the equity awards outstanding at
December 31, 2014.
|
|
Option Awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Number of |
|
|
Equity incentive
|
|
|
|
|
|
|
securities |
|
|
securities |
|
|
plan awards: |
|
|
|
|
|
|
underlying |
|
|
underlying |
|
|
Number of
Securities |
|
|
|
|
|
|
unexercised |
|
|
unexercised |
|
|
underlying
unexercised |
|
|
Option |
|
|
|
options (#) |
|
|
options (#) |
|
|
unearned options
|
|
|
exercise price
|
|
Name |
|
exercisable |
|
|
unexercisable |
|
|
(#) |
|
|
($) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shane McMahon |
|
158,333 |
|
|
8,333 |
|
|
- |
|
|
2.00 |
|
|
|
533,333 |
|
|
- |
|
|
- |
|
|
3.00 |
|
|
|
30,000 |
|
|
10,000 |
|
|
- |
|
|
4.50 |
|
Weicheng Liu |
|
320,000 |
|
|
- |
|
|
- |
|
|
3.75 |
|
|
|
30,000 |
|
|
10,000 |
|
|
- |
|
|
4.50 |
|
Marc Urbach |
|
53,125 |
|
|
116,875 |
|
|
- |
|
|
1.65 |
|
|
|
286,667 |
|
|
6,667 |
|
|
- |
|
|
2.00 |
|
|
|
1,333 |
|
|
- |
|
|
- |
|
|
75.00 |
|
James Cassano |
|
13,333 |
|
|
- |
|
|
- |
|
|
2.00 |
|
|
|
8,974 |
|
|
- |
|
|
- |
|
|
2.91 |
|
46
Compensation of Directors (2014)
The following table sets forth certain information concerning
the compensation paid to our directors for services rendered to us during the
fiscal year ended December 31, 2014. Mr. McMahon and Mr. Liu were not
compensated for their service as director in 2014.
|
|
Fees Earned or
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid in Cash |
|
|
Stock Awards |
|
|
Option Awards |
|
|
Total |
|
Name |
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
Xuesong Song |
$ |
- |
|
$ |
275,000
|
|
$ |
- |
|
$ |
275,000
|
|
Arthur Wong |
$ |
50,000 |
|
$ |
- |
|
$ |
21,272 |
|
$ |
71,272 |
|
Clifford Higgerson |
$ |
16,667 |
|
$ |
50,000 |
|
$ |
- |
|
$ |
66,667 |
|
James Cassano |
$ |
16,667 |
|
$ |
50,000 |
|
$ |
- |
|
$ |
66,667 |
|
Jin Shi |
$ |
16,667 |
|
$ |
50,000 |
|
$ |
- |
|
$ |
66,667 |
|
ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
|
Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth information regarding beneficial
ownership of our common stock as of March 25, 2015 (i) by each person who is
known by us to beneficially own more than 5% of our common stock; (ii) by each
of our named executive officers and directors; and (iii) by all of our executive
officers and directors as a group. Unless otherwise specified, the address of
each of the persons set forth below is in care of YOU On Demand Holdings,
Inc., 375 Greenwich Street, Suite 516, New York, New York 10013.
|
|
Shares Beneficially Owned(1) |
|
|
|
|
|
|
|
|
Combined |
|
|
|
|
|
|
|
|
Common
Stock, |
Name and |
|
|
|
Series A
Preferred |
Series E
Preferred |
Series A
and |
Address of |
|
Common
Stock(2) |
Stock(3) |
Stock(4) |
and Series
E((5) |
Beneficial |
Office, If |
|
% of |
|
% of |
|
% of |
|
|
Owner |
Any |
Shares |
Class |
Shares |
Class |
Shares |
Class |
Votes(2)(3)(4) |
Percentage |
|
|
|
|
|
|
|
|
|
|
Directors and Officers |
|
|
|
|
|
|
|
|
|
Xuesong Song |
Executive Chairman and Director |
0 |
* |
7,000,000(7) |
100% |
5,923,807(7) |
80.9% |
12,754,671 |
34.1% |
Shane McMahon |
Chairman |
3,052,996(6) |
12.4% |
0 |
* |
2,856,151(6) |
30.9% |
4,702,588 |
11.7% |
Weicheng Liu |
CEO
and Director |
2,950,125(8) |
12.2% |
0 |
* |
0 |
* |
2,950,125 |
7.8% |
Marc Urbach |
President and CFO |
360,311(9) |
1.5% |
0 |
* |
0 |
* |
360,311 |
1.0% |
James Cassano |
Director |
53,404(10) |
* |
0 |
* |
0 |
* |
53,404 |
* |
Clifford Higgerson |
Director |
21,097 |
* |
0 |
* |
0 |
* |
21,097 |
* |
Jin Shi |
Director |
21,097 |
* |
0 |
* |
0 |
* |
21,097 |
* |
Arthur Wong |
Director |
13,898(11) |
* |
0 |
* |
0 |
* |
13,898 |
* |
All officers
and directors as a group (8 persons named above) |
|
6,472,928 |
25.6% |
7,000,000 |
100% |
8,779,958 |
94.9% |
20,877,191 |
51.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% Securities Holders |
C Media Limited
CN11 Legend Town, No. 1 Ba Li Zhuang Dong Li
Chaoyang District, Beijing 100025 China |
|
0 |
* |
7,000,000(7) |
100% |
5,923,807(7) |
80.9% |
12,754,671 |
34.1% |
* Less than 1%.
---------------
47
(1) |
Beneficial Ownership is determined in accordance with the
rules of the SEC and generally includes voting or investment power with
respect to securities. Each of the beneficial owners listed above has
direct ownership of and sole voting power and investment power with
respect to our securities. For each beneficial owner above, any options
exercisable within 60 days have been included in the
denominator. |
|
|
(2) |
A total of 23,832,559 shares of our Common Stock are
considered to be outstanding pursuant to SEC Rule 13d-3(d)(1) as of March
25, 2015. |
|
|
(3) |
Based on 7,000,000 shares of Series A Preferred Stock
issued and outstanding as of March 25, 2015, with the holders thereof
being entitled to cast ten (10) votes for every share of Common Stock that
is issuable upon conversion of a share of Series A Preferred Stock (each
share of Series A Preferred Stock is convertible into 0.1333333 shares of
Common Stock), or a total of 9,333,330 votes. |
|
|
(4) |
Based on 7,326,428 shares of Series E Preferred Stock
issued and outstanding as of March 25, 2015. Each share of Series E
Preferred Stock is initially convertible into one share of Common Stock,
subject to certain adjustment. The holders of Series E Preferred Stock are
entitled to vote on all matters submitted to a vote of the Companys
stockholders and entitled to the number of votes equal to the lesser of
(i) the number of whole shares of Common Stock into which such shares of
Series E Preferred Stock are convertible at the record date for the
determination of stockholders entitled to vote on such matters, and (ii)
the number of whole shares of Common Stock issuable based on the
conversion price of $3.03, the closing trading price of the Companys
Common Stock as of the end of the trading day immediately preceding the
closing date of the financing contemplated by certain Series E Preferred
Stock Purchase Agreement by and among the Company, C Media Limited and
certain other purchasers, dated January 31, 2014. |
|
|
(5) |
Represents total voting power with respect to all shares
of our Common Stock, Series A Preferred Stock and Series E Preferred
Stock. |
|
|
(6) |
Includes (i) 2,324,600 shares of Common Stock, (ii)
533,333 shares of Common Stock underlying options exercisable within 60
days at $3.00 per share, (iii) 33,671 shares of Common Stock underlying
options exercisable within 60 days at $4.50 per share; and (iv) 161,392
shares of Common Stock underlying options exercisable within 60 days at
$2.00 per share. In addition, Mr. McMahons Series E Preferred Shares
includes 933,333 shares of Series E Preferred Stock and 1,922,818 shares
of Series E Preferred Stock, issuable within 60 days, upon conversion of a
promissory note which is convertible at any time between January 31, 2014
and December 31, 2016, at a price of $1.75 per share at the option of Mr.
McMahon. |
|
|
(7) |
Includes 7,000,000 shares of Series A Preferred Stock and
5,923,807 shares of Series E Preferred Stock directly owned by C Media
Limited of which Mr. Song is the Chairman and Chief Executive
Officer. |
|
|
(8) |
Includes 320,000 shares underlying options exercisable
within 60 days at $3.75 per share and 33,671 shares underlying options
exercisable within 60 days at $4.50 per share. |
|
|
(9) |
Includes 1,333 shares underlying options exercisable
within 60 days at $75.00 per share, 289,115 shares underlying options
exercisable within 60 days at $2.00 per share, and 69,863 shares
underlying options exercisable within 60 days at $1.65 per
share. |
|
|
(10) |
Includes 13,333 shares underlying options exercisable
within 60 days at $2.00 per share and 8,974 shares underlying options
exercisable within 60 days at $2.91 per share. |
|
|
(11) |
Includes 13,898 shares underlying options exercisable
within 60 days at $2.37 per share. |
Changes in Control
There are no arrangements known to us, including any pledge by
any person of our securities, the operation of which may at a subsequent date
result in a change in control of the Company.
48
Securities Authorized for Issuance Under Equity Compensation
Plans
The following table includes the information as of December 31,
2014 for each category of our equity compensation plan:
|
|
|
Number of securities
remaining |
|
Number of securities
to |
Weighted-average
|
available for future
issuance |
|
be issued upon
exercise |
exercise price of
|
under equity
compensation |
|
of outstanding
options |
outstanding
options |
plans (excluding
securities |
Plan category |
and rights (a) |
and rights (b) |
reflected in column (a)) (c) |
Equity compensation plans
approved by security holders(1) |
1,996,703 |
$2.62 |
2,003,297 |
Equity compensation plans not approved by
security holders |
- |
- |
- |
Total |
1,996,703 |
|
2,003,297 |
---------------
(1) |
On December 3, 2010, our Board of Directors approved the YOU On
Demand Holdings, Inc. 2010 Equity Incentive Plan, or the Plan, pursuant to
which incentive stock options, non-statutory stock options, restricted stock,
restricted stock units, stock appreciation rights, performance units and
performance shares may be granted to employees, directors and consultants of
the Company and its subsidiaries. The maximum aggregate number of shares of
our common stock that may be issued under the Plan is 4,000,000 shares. The
Plan was also approved by our majority shareholders on December 3, 2010. |
ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTION, AND DIRECTOR INDEPENDENCE. |
Transactions with Related Persons
The following includes a summary of transactions since the
beginning of the 2013 fiscal year, or any currently proposed transaction, in
which we were or are to be a participant and the amount involved exceeded or
exceeds the lesser of $120,000 or one percent of the average of our total assets
at year-end for the last two completed years, and in which any related person
had or will have a direct or indirect material interest (other than compensation
described under Item 11 Executive Compensation. We believe the terms
obtained or consideration that we paid or received, as applicable, in connection
with the transactions described below were comparable to terms available or the
amounts that would be paid or received, as applicable, in arms-length
transactions.
On May 10, 2012, at the Companys request, our Chairman and
Chief Executive Officer, 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 with
interest rate at 4% annually. Effective on January 31, 2014, the Company and Mr.
McMahon entered into an amendment to the McMahon Note pursuant to which the
McMahon Note will be, at Mr. McMahons option, payable on demand or convertible
on demand into shares of Series E Preferred Stock at a conversion price of
$1.75, until December 31, 2014. On December 30, 2014, the Company and Mr.
McMahon entered into an amendment pursuant to which the McMahon Note will be, at
Mr. McMahons option, payable on demand or convertible on demand into shares of
Series E Preferred Stock at a conversion price of $1.75, until December 31,
2016.
Except as set forth in our discussion above, none of our
Directors, director nominees or executive officers has been involved in any
transactions with us or any of our Directors, executive officers, affiliates or
associates which are required to be disclosed pursuant to the rules and
regulations of the SEC. For details, see Item 10 Directors, Executive Officers
and Corporate Governance.
Promoters and Certain Control Persons
We did not have any promoters at any time during the past five
fiscal years.
49
ITEM 14. |
PRINCIPAL ACCOUNTING FEES AND SERVICES.
|
Independent Auditors Fees
The following is a summary of the fees billed to the Company by
its principal accountants for professional services rendered for the years ended
December 31, 2014 and 2013:
|
|
Year Ended December 31, |
|
|
|
2014 |
|
|
2013 |
|
Audit Fees |
$ |
313,033
|
|
$ |
336,504
|
|
Audit-Related Fees |
|
39,611 |
|
|
60,272 |
|
Tax Fees |
|
- |
|
|
- |
|
All Other Fees |
|
- |
|
|
- |
|
TOTAL |
$ |
352,644 |
|
$ |
396,776 |
|
* Audit Fees consisted of the aggregate fees billed for
professional services rendered for the audit of our annual financial statements
and the reviews of the financial statements included in our Forms 10-Q and for
any other services that were normally provided in connection with our statutory
and regulatory filings or engagements.
Audit Related Fees consisted of the aggregate fees billed for
professional services rendered for assurance and related services that were
reasonably related to the performance of the audit or review of our financial
statements and were not otherwise included in Audit Fees.
Tax Fees consisted of the aggregate fees billed for
professional services rendered for tax compliance, tax advice and tax planning.
Included in such Tax Fees were fees for preparation of our tax returns and
consultancy and advice on other tax planning matters.
All Other Fees consisted of the aggregate fees billed for
products and services provided and not otherwise included in Audit Fees, Audit
Related Fees or Tax Fees.
Pre-Approval Policies and Procedures
Under the Sarbanes-Oxley Act of 2002, all audit and non-audit
services performed by our auditors must be approved in advance by our Board of
Directors to assure that such services do not impair the auditors independence
from us. In accordance with its policies and procedures, our Board of Directors
pre-approved the audit service performed by KPMG Huazhen (Special General
Partnership) for our consolidated financial statements as of and for the year
ended December 31, 2014, and the audit and non-audit services performed by UHY
LLP for our consolidated financial statements as of and for the year ended
December 31, 2013.
50
PART IV
ITEM 15. |
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
|
Financial Statements and Schedules
The financial statements are set forth under Item 8 of this
annual report on Form 10-K. Financial statement schedules have been omitted
since they are either not required, not applicable, or the information is
otherwise included.
Exhibit List
The list of exhibits in the Exhibit Index to this Report is
incorporated herein by reference.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereto duly authorized.
Date: March 30, 2015
|
YOU ON DEMAND HOLDINGS, INC. |
|
|
By: |
/s/
Shane McMahon |
|
Shane McMahon |
|
Chairman |
|
|
|
|
By: |
/s/
Marc Urbach |
|
Marc Urbach |
|
President and Chief Financial
Officer |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Shane McMahon and Marc Urbach,
jointly and severally, as his attorney-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Annual Report on Form 10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature
|
|
Title |
|
Date |
/s/ Xuesong Song
|
|
|
|
March 30, 2015 |
Xuesong Song |
|
Executive Chairman and Director |
|
|
|
|
|
|
|
/s/ Shane McMahon
|
|
|
|
March 30, 2015 |
Shane McMahon |
|
Chairman and Director |
|
|
|
|
(Principle Executive Officer) |
|
|
|
|
|
|
|
/s/ Weicheng Liu
|
|
|
|
March 30, 2015 |
Weicheng Liu |
|
Chief Executive Officer and Director |
|
|
|
|
|
|
|
/s/ Marc Urbach
|
|
|
|
March 30, 2015 |
Marc Urbach |
|
President and Chief Financial Officer |
|
|
|
|
(Principle Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/ James Cassano
|
|
|
|
March 30, 2015 |
James Cassano |
|
Director |
|
|
|
|
|
|
|
/s/ Clifford
Higgerson |
|
|
|
March 30, 2015 |
Clifford Higgerson |
|
Director |
|
|
|
|
|
|
|
/s/ Jin Shi |
|
|
|
March 30, 2015 |
Jin Shi |
|
Director |
|
|
|
|
|
|
|
/s/ Arthur Wong
|
|
|
|
March 30, 2015 |
Arthur Wong |
|
Director |
|
|
52
YOU ON DEMAND HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
YOU On Demand
Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of
YOU On Demand Holdings, Inc. and subsidiaries as of December 31, 2014, and the
related consolidated statements of operations, comprehensive loss, equity, and
cash flows for the year ended December 31, 2014. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of YOU
On Demand Holdings, Inc. and subsidiaries as of December 31, 2014, and the
results of their operations and their cash flows for the year then ended in
conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in note 3 to the consolidated financial statements, the Company
incurred net losses from continuing operations and had a significant accumulated
deficit that raise substantial doubt about its ability to continue as a going
concern. Managements plans in regard to these matters are also described in
note 3. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ KPMG Huazhen (SGP)
Beijing, China
March 30, 2015
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
YOU On Demand
Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of
YOU On Demand Holdings, Inc. and its Subsidiaries (the Company) as of December
31, 2013, and the related consolidated statements of operations, comprehensive
loss, stockholders equity, and cash flows for the year ended December 31, 2013.
The Company management is responsible for these consolidated financial
statements. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of YOU
On Demand Holdings, Inc. and its Subsidiaries as of December 31, 2013, and the
results of their operations and their cash flows for the year ended December 31,
2013 in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern. As discussed in
Note 3 to the consolidated financial statements, the Company has incurred
significant losses during 2013 and has relied on debt and equity financings to
fund their operations. These conditions raise substantial doubt about the
Company ability to continue as a going concern. Managements plans regarding
these matters are also described in Note 3. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ UHY LLP
March 31, 2014
New York, New York
F-2
YOU On Demand Holdings, Inc. and Its Subsidiaries
CONSOLIDATED BALANCE SHEET
|
|
2014 |
|
|
2013 |
|
ASSETS |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
$ |
10,812,371
|
|
$ |
3,822,889
|
|
Accounts
receivable, net |
|
1,091,076 |
|
|
175,211 |
|
Licensed content, current |
|
1,041,609 |
|
|
428,322 |
|
Prepaid expenses
|
|
196,474 |
|
|
330,013 |
|
Debt issuance costs, net |
|
- |
|
|
128,879 |
|
Other current
assets |
|
22,442 |
|
|
48,928 |
|
Total current assets
|
|
13,163,972
|
|
|
4,934,242
|
|
Property and equipment, net |
|
320,671 |
|
|
499,858 |
|
Licensed content, non-current
|
|
35,648 |
|
|
162,646 |
|
Intangible assets, net |
|
2,320,103 |
|
|
2,621,527 |
|
Goodwill |
|
6,648,911 |
|
|
6,105,478 |
|
Long-term equity investments |
|
850,054 |
|
|
673,567 |
|
Other non-current assets |
|
365,006 |
|
|
- |
|
Total assets |
$ |
23,704,365 |
|
$ |
14,997,318 |
|
|
|
|
|
|
|
|
LIABILITIES, CONVERTIBLE REDEEMABLE
PREFERRED STOCK AND EQUITY |
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Accounts payable (including accounts payable of consolidated variable
interest entities (VIEs) without resource to the Company of $8,598 and
$3,043, respectively as of December 31, 2014 and 2013) |
$ |
110,814 |
|
$ |
656,545 |
|
Deferred revenue (including deferred revenue of VIEs without resource to
the Company of $13,431 and $68,969, respectively as of December 31, 2014 and
2013) |
|
13,431 |
|
|
68,969 |
|
Accrued expenses and other liabilities (including accrued expenses and
other liabilities of VIEs without resource to the Company of $573,620 and
$25,018, respectively as of December 31, 2014 and 2013) |
|
2,046,783 |
|
|
1,075,944 |
|
Accrued license fees (including accrued license fees of VIEs without
resource to the Company of $348,007 and $1,200,764, respectively as of
December 31, 2014 and 2013) |
|
348,007 |
|
|
1,200,764 |
|
Contingent
purchase price consideration liability |
|
- |
|
|
578,744 |
|
Convertible promissory note |
|
3,000,000 |
|
|
3,000,000 |
|
Warrant
liabilities |
|
585,050 |
|
|
1,344,440 |
|
Total current liabilities
|
|
6,104,085
|
|
|
7,925,406
|
|
Deferred income tax liability |
|
364,572 |
|
|
125,809 |
|
Convertible promissory note
|
|
- |
|
|
2,000,000 |
|
Total liabilities |
|
6,468,657 |
|
|
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 December 31, 2014 and 2013, respectively |
|
1,261,995 |
|
|
1,261,995 |
|
Series C
- Nil and 87,500 shares issued and outstanding, liquidation
preference
of nil and $350,000 at December 31, 2014 and 2013, respectively |
|
- |
|
|
219,754 |
|
Series D 4% - Nil and
2,285,714 shares issued and outstanding, liquidation
preference
of nil and $4,000,000 at December 31, 2014 and 2013, respectively |
|
- |
|
|
4,000,000 |
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
Series E Preferred Stock - $0.001 par
value; 16,500,000 shares authorized, 7,365,283
and nil shares issued and outstanding, liquidation preference of $12,889,250
and
nil at December 31, 2014 and December 31,
2013, respectively |
|
7,365 |
|
|
- |
|
Common stock, $0.001
par value; 1,500,000,000 shares authorized, 23,793,702 and
15,794,762 shares issued and outstanding at December 31, 2014 and 2013,
respectively
|
|
23,794 |
|
|
15,794 |
|
Additional paid-in
capital |
|
96,347,272 |
|
|
67,417,025 |
|
Accumulated deficit |
|
(78,356,567 |
) |
|
(65,856,053 |
) |
Accumulated other
comprehensive loss |
|
(66,032 |
) |
|
(715,090 |
) |
Total YOU On Demand shareholder's equity
|
|
17,955,832
|
|
|
861,676
|
|
Non-controlling interests |
|
(1,982,119 |
) |
|
(1,397,322 |
) |
Total equity/(deficit) |
|
15,973,713
|
|
|
(535,646 |
) |
Total liabilities, convertible redeemable
preferred stock and equity |
$ |
23,704,365 |
|
$ |
14,997,318 |
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
YOU On Demand Holdings, Inc. and Its Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
|
|
Revenue |
$ |
1,962,622
|
|
$ |
308,695
|
|
Cost of revenue |
|
2,756,363 |
|
|
3,126,089 |
|
Gross loss |
|
(793,741 |
) |
|
(2,817,394 |
) |
|
|
|
|
|
|
|
Operating expense: |
|
|
|
|
|
|
Selling, general
and administrative expense |
|
7,459,192 |
|
|
7,608,742 |
|
Professional fees |
|
653,646 |
|
|
705,692 |
|
Depreciation and
amortization |
|
536,689 |
|
|
774,480 |
|
Impairments of long-lived assets |
|
- |
|
|
311,249 |
|
Total operating expense |
|
8,649,527 |
|
|
9,400,163 |
|
|
|
|
|
|
|
|
Loss from operations |
|
(9,443,268 |
) |
|
(12,217,557 |
) |
|
|
|
|
|
|
|
Interest and other income/(expense) |
|
|
|
|
|
|
Interest expense, net |
|
(2,374,368 |
)
|
|
(370,752 |
)
|
Change in fair
value of warrant liabilities |
|
(621,239 |
) |
|
(466,060 |
) |
Change in fair value of contingent consideration |
|
(160,766 |
)
|
|
(251,963 |
)
|
Loss on long-term
equity investments |
|
(20,717 |
) |
|
(2,741 |
) |
Loss from disposal of consolidated entities |
|
(622,939 |
)
|
|
- |
|
Others |
|
(85,516 |
) |
|
55,831 |
|
Net loss from continuing
operations before income taxes and non-controlling interest |
|
(13,328,813 |
) |
|
(13,253,242 |
) |
|
|
|
|
|
|
|
Income tax benefit |
|
304,670 |
|
|
111,266 |
|
|
|
|
|
|
|
|
Net loss from continuing
operations |
|
(13,024,143 |
)
|
|
(13,141,976 |
)
|
|
|
|
|
|
|
|
Net income from discontinued
operations |
|
- |
|
|
5,255,474 |
|
|
|
|
|
|
|
|
Net loss |
|
(13,024,143 |
) |
|
(7,886,502 |
) |
|
|
|
|
|
|
|
Net loss attributable to
non-controlling interests |
|
615,683 |
|
|
1,054,970 |
|
|
|
|
|
|
|
|
Net loss attributable to YOU
On Demand shareholders |
|
(12,408,460 |
)
|
|
(6,831,532 |
)
|
|
|
|
|
|
|
|
Dividends and deemed
dividends on preferred
stock |
|
(16,402,161 |
)
|
|
(1,358,364 |
)
|
|
|
|
|
|
|
|
Net loss attributable to
YOU On Demand common shareholders |
$ |
(28,810,621 |
) |
$ |
(8,189,896 |
) |
|
|
|
|
|
|
|
Basic and diluted loss per
share: |
|
|
|
|
|
|
Loss from
continuing operations |
$ |
(1.47 |
) |
$ |
(0.89 |
) |
Income from discontinued operations |
|
- |
|
|
0.35 |
|
Basic
and diluted loss per share |
$ |
(1.47 |
) |
$ |
(0.54 |
) |
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
Basic and diluted |
|
19,600,510 |
|
|
15,226,216 |
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
YOU On Demand Holdings, Inc. and Its Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
|
2014 |
|
|
2013 |
|
Net loss |
$ |
(13,024,143 |
) |
$ |
(7,886,502 |
) |
Other comprehensive income/(loss), net of tax |
|
|
|
|
|
|
Foreign currency translation adjustments |
|
(36,974 |
) |
|
141,378 |
|
Comprehensive loss |
|
(13,061,117 |
) |
|
(7,745,124 |
) |
Comprehensive loss
attributable to non-controlling interest |
|
584,797 |
|
|
1,047,359 |
|
Comprehensive loss
attributable to YOU On Demand shareholders |
$ |
(12,476,320 |
) |
$ |
(6,697,765 |
) |
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
YOU On Demand Holdings, Inc. and
Its Subsidiaries
CONSOLIDATED STATEMENTS
OF EQUITY
For the Years Ended December
31, 2014 and 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
YOU on |
|
|
|
|
|
|
|
|
|
Series E |
|
|
Series E |
|
|
|
|
|
|
|
|
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,
2013 |
|
- |
|
$ |
-
|
|
$ |
13,742,394 |
|
$ |
13,742 |
|
$ |
62,388,502
|
|
$ |
(58,841,664 |
) |
$ |
604,632 |
|
$ |
4,165,212 |
|
$ |
53,046 |
|
$ |
4,218,258 |
|
Warrants issued for service |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
108,840 |
|
|
- |
|
|
- |
|
|
108,840 |
|
|
- |
|
|
108,840 |
|
Common shares issued for
service |
|
- |
|
|
- |
|
|
60,501 |
|
|
61 |
|
|
163,694 |
|
|
- |
|
|
- |
|
|
163,755 |
|
|
- |
|
|
163,755 |
|
Common shares issued for clawback reset
provision |
|
- |
|
|
- |
|
|
436,238 |
|
|
436 |
|
|
658,283 |
|
|
- |
|
|
- |
|
|
658,719 |
|
|
- |
|
|
658,719 |
|
Common shares and options
issued for YOD Hong Kong acquisition earn-out |
|
- |
|
|
- |
|
|
245,274 |
|
|
245 |
|
|
410,230 |
|
|
- |
|
|
- |
|
|
410,475 |
|
|
- |
|
|
410,475 |
|
Share-based compensation expense |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
595,214 |
|
|
- |
|
|
- |
|
|
595,214 |
|
|
- |
|
|
595,214 |
|
Conversion of Series B and C
Preferred Stock into common stock |
|
- |
|
|
- |
|
|
1,308,907 |
|
|
1,309 |
|
|
3,630,380 |
|
|
- |
|
|
- |
|
|
3,631,689 |
|
|
- |
|
|
3,631,689 |
|
Accretion from Series D Preferred Stock |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(1,097,041 |
) |
|
- |
|
|
- |
|
|
(1,097,041 |
) |
|
- |
|
|
(1,097,041 |
) |
Warrants issued to placement
agent in connection with Series D Preferred Stock issuance |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
247,995 |
|
|
- |
|
|
- |
|
|
247,995 |
|
|
- |
|
|
247,995 |
|
Warrants issued to placement agent in
connection with convertible note issuance |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
128,072 |
|
|
- |
|
|
- |
|
|
128,072 |
|
|
- |
|
|
128,072 |
|
Beneficial conversion feature
of Series D Preferred Stock |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
182,857 |
|
|
(182,857 |
) |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Sale of Jinan Broadband |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(1,461,100 |
) |
|
(1,461,100 |
) |
|
(403,009 |
) |
|
(1,864,109 |
) |
Exercise of options |
|
- |
|
|
- |
|
|
1,448 |
|
|
1 |
|
|
(1 |
) |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Net loss attributable to YOU On Demand
shareholders |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(6,831,532 |
) |
|
- |
|
|
(6,831,532 |
) |
|
(1,054,970 |
) |
|
(7,886,502 |
) |
Foreign currency translation
adjustments |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
142,236 |
|
|
142,236 |
|
|
7,611 |
|
|
149,847 |
|
Unrealized losses on marketable securities
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(858 |
) |
|
(858 |
) |
|
- |
|
|
(858 |
) |
Balance, December 31,
2013 |
|
- |
|
$ |
- |
|
|
15,794,762 |
|
$ |
15,794 |
|
$ |
67,417,025 |
|
$ |
(65,856,053 |
) |
$ |
(715,090 |
) |
$ |
861,676 |
|
$ |
(1,397,322 |
) |
$ |
(535,646 |
) |
Share-based compensation |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
727,363 |
|
|
- |
|
|
- |
|
|
727,363 |
|
|
- |
|
|
727,363 |
|
Common stock issued for
services |
|
- |
|
|
- |
|
|
73,600 |
|
|
74 |
|
|
142,426 |
|
|
- |
|
|
- |
|
|
142,500 |
|
|
- |
|
|
142,500 |
|
Common stock and options issued for YOD Hong
Kong acquisition earn-out |
|
- |
|
|
- |
|
|
245,275 |
|
|
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
issuance |
|
14,285,714 |
|
|
14,286 |
|
|
- |
|
|
- |
|
|
24,985,714 |
|
|
- |
|
|
- |
|
|
25,000,000 |
|
|
- |
|
|
25,000,000 |
|
Conversion of Series E Preferred Stock into
common stock |
|
(6,920,431 |
) |
|
(6,921 |
) |
|
6,920,431 |
|
|
6,921 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Issuance costs in connection
with the issuance of Series E Preferred Stock |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(4,552,347 |
) |
|
- |
|
|
- |
|
|
(4,552,347 |
) |
|
- |
|
|
(4,552,347 |
) |
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 related to
convertible note modification |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
2,126,301 |
|
|
- |
|
|
- |
|
|
2,126,301 |
|
|
- |
|
|
2,126,301 |
|
Disposal of consolidated
entities |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
716,918 |
|
|
716,918 |
|
|
- |
|
|
716,918 |
|
Exercise of warrants |
|
- |
|
|
- |
|
|
607,480 |
|
|
608 |
|
|
2,374,575 |
|
|
- |
|
|
- |
|
|
2,375,183 |
|
|
- |
|
|
2,375,183 |
|
Exercise of options |
|
- |
|
|
- |
|
|
12,154 |
|
|
12 |
|
|
1,040 |
|
|
- |
|
|
- |
|
|
1,052 |
|
|
- |
|
|
1,052 |
|
Net loss attributable to YOU On Demand
shareholders |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(12,408,460 |
) |
|
- |
|
|
(12,408,460 |
) |
|
(615,683 |
) |
|
(13,024,143 |
) |
Foreign currency translation
adjustments |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(67,860 |
) |
|
(67,860 |
) |
|
30,886 |
|
|
(36,974 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2014 |
|
7,365,283 |
|
$ |
7,365 |
|
|
23,793,702 |
|
$ |
23,794 |
|
$ |
96,347,272 |
|
$ |
(78,356,567 |
) |
$ |
(66,032 |
) |
$ |
17,955,832 |
|
$ |
(1,982,119 |
) |
$ |
15,973,713 |
|
The accompanying notes are an
integral part of these consolidated
financial statements.
F-6
YOU On Demand Holdings, Inc. and Its Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
2014 |
|
|
2013 |
|
Cash flows from operating
activities: |
|
|
|
|
|
|
Net loss |
$ |
(13,024,143 |
) |
$ |
(7,886,502 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities |
|
|
|
|
|
|
Share-based compensation expense |
|
1,339,863 |
|
|
1,146,000 |
|
Depreciation and amortization |
|
536,689 |
|
|
1,616,966 |
|
Amortization of interest expense related to debt
issuance costs |
|
128,879 |
|
|
241,129 |
|
Amortization of interest expense related to beneficial conversion
feature |
|
2,126,301 |
|
|
- |
|
Income tax benefit |
|
(304,670 |
) |
|
(111,266 |
) |
Loss on long-term equity investments |
|
20,717 |
|
|
2,741 |
|
Loss on disposal of assets |
|
49,118 |
|
|
8,144 |
|
Change in fair value of warrant liabilities |
|
621,239 |
|
|
466,060 |
|
Change in fair value of contingent consideration |
|
160,766 |
|
|
251,963 |
|
Loss from disposal of consolidated entities |
|
622,939 |
|
|
(5,616,269 |
) |
Impairment of long-lived assets |
|
- |
|
|
311,249 |
|
Change in assets and
liabilities, |
|
|
|
|
|
|
Accounts receivable |
|
(915,865 |
) |
|
(174,032 |
) |
Inventory |
|
- |
|
|
(65,367 |
) |
Licensed content |
|
(504,990 |
) |
|
1,270,837 |
|
Prepaid expenses and other assets |
|
(79,072 |
) |
|
(92,724 |
) |
Accounts payable |
|
(545,731 |
) |
|
(324,034 |
) |
Accrued expenses and other liabilities |
|
502,184 |
|
|
(40,309 |
) |
Deferred revenue |
|
(55,538 |
) |
|
188,308 |
|
Accrued license fees |
|
(852,757 |
) |
|
45,946 |
|
Net cash used in operating
activities |
|
(10,174,071 |
) |
|
(8,761,160 |
) |
|
|
|
|
|
|
|
Cash flows from investing
activities: |
|
|
|
|
|
|
Acquisition of property
and equipment |
|
(67,297 |
) |
|
(430,775 |
) |
Investments in intangibles |
|
(3,361 |
) |
|
(22,662 |
) |
Cash paid for long-term
equity investment |
|
(208,760 |
) |
|
- |
|
Sale of
subsidiary |
|
(7,549 |
) |
|
3,728,759 |
|
Net cash (used in)/provided by investing activities |
|
(286,967 |
) |
|
3,275,322 |
|
|
|
|
|
|
|
|
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 |
) |
|
- |
|
Proceeds
from issuance of convertible note |
|
- |
|
|
2,000,000 |
|
Costs associated with
financings and share issuances |
|
(2,386,051 |
) |
|
(1,090,982 |
) |
Net cash provided by
financing activities |
|
17,517,502 |
|
|
4,909,018 |
|
Effect of exchange rate changes on cash |
|
(66,982 |
) |
|
18,666 |
|
Net increase/(decrease) in
cash and cash equivalents |
|
6,989,482 |
|
|
(558,154 |
) |
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
Total cash and cash
equivalents at end of period |
|
10,812,371 |
|
|
3,822,889 |
|
Less cash and cash equivalents of
discontinued operations at end of period |
|
- |
|
|
- |
|
Cash and cash equivalents
of continuing operations at end of period |
$ |
10,812,371 |
|
$ |
3,822,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
Cash paid for income taxes |
|
- |
|
|
- |
|
Cash paid for interest |
|
- |
|
|
1,033 |
|
Value of warrants issued for
issuance costs in connection with Preferred Series D shares |
$ |
- |
|
$ |
247,995 |
|
Value of warrants issued for issuance costs
in connection with Preferred Series E shares |
$ |
2,166,296 |
|
$ |
- |
|
Value of warrants issued for
issuance costs in connection with the Convertible Note |
$ |
- |
|
$ |
128,072 |
|
Conversion of convertible promissory note for
Series E Preferred Stock |
$ |
2,000,000 |
|
$ |
- |
|
Exchange of Series D
Preferred Stock for Series E Preferred Stock |
$ |
4,000,000 |
|
$ |
- |
|
Value of common stock issued from conversion
of Preferred Series B shares |
$ |
- |
|
$ |
3,223,575 |
|
Issuance of common stock issued
from conversion of Preferred Series C shares |
$ |
219,754 |
|
$ |
408,114 |
|
Issuance of shares and options issued for YOD
Hong Kong contingent consideration earn-out |
$ |
739,510 |
|
$ |
410,475 |
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
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 and delivery of 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. |
2. |
Summary of Significant Accounting
Policies |
(a) Principles of Consolidation
The consolidated financial
statements include the accounts of YOU On Demand and (a) YOU On Demands
wholly-owned subsidiary China Broadband, Ltd., ("CB Cayman"), (b) the
wholly-owned subsidiary of CB Cayman: YOU On Demand (Asia) Limited (YOD Hong
Kong, formerly Sinotop Group Limited), (c) YOD Hong Kongs PRC subsidiary: YOU
On Demand (Beijing) Technology Co., Ltd. (YOD WFOE), (d) YOD WFOEs variable
interest entity: Beijing Sino Top Scope Technology Co., Ltd.(Sinotop Beijing)
and (e) Sinotop Beijings subsidiary Zhong Hai Shi Xun Information Technology
Co., Ltd. (Zhong Hai Video). All material intercompany transactions and
balances are eliminated upon consolidation.
Effective July 31, 2013, the Company
sold its 51% interest in Jinan Broadband and as such, the operating results of
Jinan Broadband was reported as discontinued operations in our consolidated
statements of operations for the year ended December 31, 2013. Unless otherwise
indicated, all disclosures and amounts in the Notes to the Consolidated
Financial Statements relate to the Companys continuing operations.
(b) Basis of Presentation
The Company prepares and presents its
consolidated financial statements in accordance with accounting principles
generally accepted in the United States (U.S. GAAP).
Reclassifications
Certain amounts in the prior period
presented have been reclassified to conform to the current period consolidated
financial statement presentation. These reclassifications have no effect on
previously reported consolidated net
income or cash flows.
(c) Long-term Equity Investments
Investments in entities where the
Company can exercise significant influence, but not control, is classified as a
long-term equity investment and accounted for using the equity method. Under the
equity method, the investment is initially recorded at cost and adjusted for the
Companys share of undistributed earnings or losses of the investee. Investment
losses are recognized until the investment is fully written down as the Company
does not guarantee the investees obligations nor it is committed to provide
additional funding.
Management regularly evaluates the
carrying value of its long-term equity investments based on performance and the
financial position of the investee, as well as other evidence of market value.
Such evaluation includes, but is not limited to, reviewing the investees cash
position, recent financings, projected and historical financial performance,
cash flow forecasts and financing needs. An impairment charge is recorded when
the carrying amount of the investment exceeds its fair value and the impairment
is determined to be other-than-temporary.
As of and for the year ended December
31, 2014 and 2013, the Companys long-term equity investments are comprised of
the Companys investment in Shandong Lushi Media Co., Ltd. (Shandong Media)
and Hua Cheng Hu Dong (Beijing) Film and Television Communication Co., Ltd.
(Hua Cheng), which are 30% and 39%, respectively, owned by Sinotop Beijing.
F-8
(d) Use of Estimates
The preparation of consolidated
financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, as well as the related disclosure of
contingent assets and liabilities, at the date of the consolidated financial
statements and during the reporting period. Actual results could differ from
those estimates.
The most significant estimates relate
to the useful lives of property and equipment and intangible assets subject to
amortization, property and equipment, goodwill and intangible asset impairment
assessments, allowance for doubtful accounts, fair value of financial
instruments, share-based payments, contingent purchase consideration and warrant
liabilities, and valuation allowance of deferred tax assets. These estimates may
be adjusted as more current information becomes available, and any adjustment
made could be significant.
(e) Foreign Currency Translation
The Company uses the United States
dollar (US$ or USD) as its reporting currency. The functional currency of
YOU On Demand Holdings, Inc., CB Cayman and YOD Hong Kong is the USD while the
functional currency of Sinotop Beijing, Zhonghai Video and YOD WFOE is Renminbi
(RMB). In the consolidated financial statements, the financial information of
the entities which uses RMB as their functional currency has been translated
into USD. Assets and liabilities are translated at the exchange rates on the
balance sheet date, equity amounts are translated at the historical exchange
rates, and revenues, expenses, gains and losses are translated using the average
rate for the period. Translation adjustments arising from these are reported as
foreign currency translation adjustments and are shown as a component of other
comprehensive loss in the statement of comprehensive loss.
Foreign currency transactions
denominated in currencies other than functional currency are translated into the
functional currency using the exchange rates prevailing on the date of the
transaction. Monetary assets and liabilities denominated in foreign currencies
at the balance sheet date are re-measured at the applicable rates of exchange in
effect at that date. Foreign exchange gains and losses resulting from the
settlement of such transactions and from re-measurement at year end are
recognized in foreign currency exchange gain/(loss) in the consolidated
statement of operations.
(f) Cash and Cash
Equivalents
Cash and cash equivalents consist of
cash on hand and highly liquid investment securities with original maturities as of the date
of purchase of three months or less. The Company deposits its cash balances with
a limited number of banks.
(g) Accounts Receivable
Accounts receivable are recognized at
invoiced amounts, less an allowance for uncollectible accounts, if any.
The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
Company reviews the collectability of its receivables on an ongoing basis. After
all attempts to collect a receivable have failed, the receivable is written off
against the allowance.
(h) Property and Equipment
Property and equipment are stated at
cost less accumulated depreciation. Expenditures for major renewals and
improvements, which extend the original estimated economic useful lives of
applicable assets, are capitalized. Expenditures for normal repairs and
maintenance are charged to expense as incurred. The costs and related
accumulated depreciation of assets sold or retired are removed from the accounts
and any gain or loss thereon is recognized in our statement of operations.
Depreciation is provided for on a straight-line basis over the estimated useful
lives of the respective assets.
F-9
(i) Licensed Content
The Company obtains content through
content license agreements and revenue sharing agreements with studios and
distributors. When the license fee is known or reasonably determinable for a
specified title in the content license agreements, we recognize the greater of:
(i) revenue sharing costs incurred through the end of the reporting period, or
(ii) the proportionate value of total minimum license fees over the term of each
license agreement. Prepaid license fees are classified as an asset on the
consolidated balance sheets as licensed content and accrued license fees
payable to licensors are classified as a liability on the consolidated balance
sheets. When the license fee is not known or reasonably determinable for a
specific title, the title is not recognized in licensed content asset or
liability in accordance with the relevant guidance. Commitments for license
agreements that do not meet the criteria for recognition in licensed content are
included in Note 18 to the consolidated financial statements.
(j) Intangible Assets
Intangible assets are stated at
acquisition fair value or cost, less accumulated amortization. The Company
amortizes its intangible assets with definite lives over their estimated useful
lives and reviews these assets for impairment when an indicator for potential
impairment exists. The Company is currently amortizing its intangible assets
with definite lives over periods generally ranging between 5 to 20 years. The
estimated useful lives are 20 years for the charter/cooperation agreements and 5
years for software licenses.
(k) Website Development Costs
Website development costs are stated at
acquisition fair value or cost less accumulated amortization. The Company
capitalizes website development costs associated with graphics design and
development of the website application and infrastructure. Costs related to
planning, content input, and website operations are expensed as incurred. The
Company amortizes website development costs over three years.
(l) Goodwill
In accordance with Financial Accounting
Standards Boards (FASB) Accounting Standards Codification (ASC) 350-20,
Goodwill, the Company performs impairment test for its goodwill annually as of
December 31, or more frequently, if indicators of potential impairment exist, to
determine if the carrying value of goodwill is impaired. The Company reviews
goodwill for impairment based on its identified reporting units, which are
defined as reportable segments or groupings of businesses one level below the
reportable segment level. In September 2011, the FASB issued amended guidance on
testing goodwill for impairment. The guidance provides entities with an option
to perform a qualitative assessment to determine whether further quantitative
impairment testing is necessary, or to proceed directly to performing the first step of the goodwill impairment test.
Under the qualitative assessment, the
Company would first assess qualitative factors to determine if it is
more-likely-than-not the fair value of the reporting unit is less than its
carrying value of the reporting units assets and liabilities (including
goodwill). If management determines that it is more-likely-than-not that the
fair value of the reporting unit is less than its carrying value, or if
management is unable to reach a conclusion based on qualitative assessments, then the first and second steps of the goodwill impairment is performed.
Under the quantitative assessment, if
the two-step goodwill impairment test is required, the fair value of the
reporting unit is first compared with its carrying amount (including goodwill).
If the fair value of the reporting unit is less than its carrying amount, an
indication of goodwill impairment exists for the reporting unit and the Company
must perform step two of the impairment test (measurement). Under step two, an
impairment loss is recognized for any excess of the carrying amount of the
reporting units goodwill over the implied fair value of that goodwill. The
implied fair value of goodwill is determined by allocating the fair value of the
reporting unit in a manner similar to a purchase price allocation and the
residual fair value after this allocation is the implied fair value of the
reporting unit goodwill. If the fair value of the reporting unit exceeds its
carrying amount, step two does not need to be performed.
For the purpose of goodwill impairment
testing, the Company is considered as a reporting unit. Based on the annual
goodwill impairment test performed in the fourth quarter of 2014 and 2013,
management concluded that the fair value of the reporting unit exceeded its
carrying value. No impairment loss was recognized for the periods presented.
F-10
(m) Impairment of Long-Lived
Assets
Long-lived assets, including property,
equipment and intangible assets, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to the estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized for the amount by which
the carrying amount of the asset exceeds the fair value of the asset. Impairment loss recognized for the year ended December 31, 2014 and 2013 amounted to nil and $311,000, respectively.
Assets to be disposed of are separately
presented in the balance sheet and reported at the lower of the carrying amount
or fair value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposed group classified as held for sale are presented
separately in the appropriate asset and liability sections of the balance sheet.
(n) Warrant Liabilities
We account for derivative instruments
and embedded derivative instruments in accordance with ASC 815, Accounting for
Derivative Instruments and Hedging Activities, as amended. The amended standard
requires an entity to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure these instruments at fair
value. Fair value is estimated using the Monte Carlo simulation method.
We also follow ASC 815-40 Accounting for Derivative Financial Instruments Indexed to and Potentially
Settled in a Companys Own Stock, which requires freestanding contracts that
are settled in a companys own stock, including common stock warrants, to be
designated as an equity instrument, asset or a liability. Under these provisions
a contract classified as an asset or a liability must be carried at fair value,
with any changes in fair value recorded in the results of operations. A contract
classified as an equity instrument must be included in equity, with no fair value
adjustments required. The asset/liability derivatives are valued on an annual
basis using the Monte Carlo simulation method. Significant assumptions used in
the valuation included exercise dates, fair value for our common stock,
volatility of our common stock and a risk-free interest rate. Gains or losses on
warrants are included in Changes in fair value of warrant liabilities in our
consolidated statement of operations.
(o) Advertising & Marketing
Expenses
The Company expenses advertising and
marketing costs as incurred, which are included in selling expense. Advertising
and marketing costs were approximately $359,000 and $533,000 for the years ended
December 31, 2014 and 2013, respectively.
(p) Income Taxes
The Company accounts for income taxes
in accordance with the asset and liability method. Deferred taxes are recognized
for the future tax consequences attributable to temporary differences between
the carrying amounts of assets and liabilities for financial statement purposes
and income tax purposes using enacted rates expected to be in effect when such
amounts are realized or settled. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date. A
tax valuation allowance is established, as needed to reduce net deferred tax
assets to the amount expected to be realized. The Company also follows
ASC 740-10 for accounting for uncertainty in income taxes.
The accounting for an uncertain tax position is a
two-step process. The first step is to determine whether it is
more-likely-than-not that a tax position will be sustained upon examination,
including the resolution of any related appeals or litigation based on the
technical merits of that position. The second step is to measure a tax position
that meets the more-likely-than-not threshold to determine the amount of benefit
to be recognized in the financial statements. A tax position is measured at the
largest amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement.
Tax positions that previously failed to
meet the more-likely-than-not recognition threshold should be recognized in the
first subsequent period in which the threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not criteria should be
de-recognized in the first subsequent financial reporting period in which the
threshold is no longer met.
The Company recognizes accrued interest
and penalties related to unrecognized tax benefits in the provision for income
taxes in our consolidated statements of operation.
F-11
(q) Revenue Recognition
Revenue is recorded as services are
provided. The Company generally recognizes all revenues in the period in which
the service is rendered, provided that persuasive evidence of an arrangement
exists, the sales price is fixed or determinable, and collection is reasonably
assured. For certain contracts that involve sub-licensing content within the
specified license period, revenue is recognized in accordance with ASC Subtopic
926-605, Entertainment-Films Revenue Recognition. That is, if the arrangement
includes a nonrefundable minimum guarantee, all contents have been delivered in
accordance with the terms of the arrangement and there are no substantive future
obligations from the Company, then revenue is recognized upon delivery. The Company records deferred revenue for payments received from
customers for the performance of future services and recognize the associated
revenue in the period that the services are performed.
In accordance with ASC 605-25, Revenue
Recognition Multiple Element Arrangements, contracts with multiple
element deliverables are separated into individual units for accounting purposes
when the unit determined to have standalone value to the customer and
performance of service is considered probable. Since the contract price is for
all deliverables, the Company allocates the arrangement consideration to all
deliverables at the inception of the arrangement on the basis of their relative
selling price. Revenue related to each unit is recognized when the Companys
obligations under the contract have been satisfied and all revenue recognition
criteria are met.
(r) Net Loss Per Share
Attributable to YOU On Demand Shareholders
Basic and Diluted net loss per share
attributable to YOU On Demand shareholders have been computed by dividing the
net loss by the weighted average number of common shares outstanding. The
assumed exercise of dilutive warrants, less the number of treasury shares
assumed to be purchased from the proceeds of such exercises using the average
market price of the Companys common stock during each respective period, have
been excluded from the calculation of diluted net loss per share for all periods
presented as their effect would be anti-dilutive.
(s) Share-Based Payment
The Company awards share options and
other equity-based instruments to its employees, directors and consultants
(collectively share-based payments). Compensation cost related to such awards
is measured based on the fair value of the instrument on the grant date and
recognizes the cost over the period the employee is required to provide service
in exchange for the award, which generally is the vesting period. The amount of
cost recognized is adjusted to reflect the expected forfeiture prior to vesting.
When no future services are required to be performed by the employee in exchange
for an award of equity instruments, and if such award does not contain a
performance or market condition, the cost of the award is expensed on the grant
date. The Company recognizes compensation cost for an award with only service
conditions that has a graded vesting schedule on a straight-line basis over the
requisite service period for the entire award, provided that the cumulative
amount of compensation cost recognized at any date at least equals the portion
of the grant-date value of such award that is vested at that date.
The Company also awards stocks and
warrants for service to consultants for service and accounts for these awards
under ASC 505-50, Equity Equity-Based Payments to Non-Employees. Under the
applicable guidance, fair value of the awards is assessed upon measurement date
and recognized as cost or expenses when the services are provided. If the
related services are completed upon issuance date, measurement date is
determined to be the date the awards are issued.
(t) Reportable Segment
The Company has one operating business segment, video content and media, in which the chief operating decision maker reviews the operating results of the segment to determine the allocation of resources and the measuring of performance.
(u) Recent Accounting
Pronouncements
In May 2014, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09,
creating a new Topic 606, Revenue from Contracts with Customers, to supersede
the revenue recognition under current Topic 605, Revenue Recognition, and most
industry-specific guidance. The core principle of the new guidance is that an
entity should recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those good or services. The
guidance also specifies the accounting for some costs to obtain or fulfill a
contract with a customer, as well as disclosure requirements for qualitative and
quantitative information that should be included in financial statements. For
public entities, the amendment becomes effective for annual or interim reporting
periods beginning after December 15, 2016. Early adoption is not permitted. The
Company is currently evaluating the impact on its consolidated financial
statement of adopting this guidance.
F-12
In June 2014, the FASB issued ASU
2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide
that a Performance Target Could Be Achieved after the Requisite Service Period
under ASC 718, Compensation Stock Compensation. The amendment applies to all
reporting entities that grant their employee share-based payments under which
the terms of the award provides a performance target that affects vesting and
could be achieved after the requisite service period. Under the amended
guidance, compensation cost shall be recognized in the period in which it
becomes probable that the performance target will be achieved and should
represent the compensation cost attributable to the period(s) for which the
requisite service has already been rendered. If the performance target becomes
probable of being achieved before the end of the requite service period, the
remaining unrecognized compensation cost for which requisite service has not yet
been rendered shall be recognized prospectively over the remaining requisite
service period. The total amount of compensation cost recognized during and
after the requisite service period should reflect the number of awards that are
expected to vest and should be adjust to reflect those awards that ultimately
vest. The amendment is effective for annual and interim periods beginning after
December 15, 2015, and early adoption is permitted. The Company does not
anticipate that the amendment will have a significant impact on our financial
position, statement of operations or cash flow.
3. |
Going Concern and Managements
Plans |
For the year ended December 31, 2014 and 2013, we incurred net
losses from continuing operations of approximately $13.0 million and $13.1
million, respectively, and we used cash for operations of approximately $10.2
million and $8.8 million, respectively. Further, we had significant accumulated
deficits of approximately $78.4 million and $65.9 million as of December 31,
2014 and 2013, respectively, due to recurring losses since our inception.
The Company must continue to rely on
debt and equity to pay for ongoing operating expenses in order to execute its
business plan. On January 31, 2014, we completed a Series E Preferred Share
financing in which we raised an additional $19.0 million. See Note 13 for
additional information. We also 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 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
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.
4. |
VIE Structure and
Arrangements |
To comply with PRC laws and regulation
that prohibit or restrict foreign ownership of companies that provides
value-added telecommunication services, the Company provides its services
through Sinotop Beijing and its subsidiary, Zhonghai Video, which holds the
licenses and approvals to provide digital distribution and Internet content
services in the PRC. The Company has obtained substantial ability to control
Sinotop Beijing and Zhonghai Video through a series of contractual agreements
entered into among YOD WFOE, YOD Hong Kong, Sinotop Beijing and the legal
shareholder of Sinotop Beijing.
F-13
Management Services Agreement
Pursuant to a Management Services
Agreement, as of March 9, 2010, between Sinotop Beijing and YOD Hong Kong (the
Management Services Agreement), YOD 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 YOD Hong Kong. As compensation for providing the services,
YOD 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. YOD Hong Kong may also 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 YOD 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 YOD Hong Kong, Sinotop Beijing is obligated to
transfer to YOD 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 YOD Hong Kong, including:
(a) business opportunities presented
to, or available to Sinotop Beijing may be pursued and contracted for in the
name of YOD Hong Kong rather than Sinotop Beijing, and at its discretion, YOD
Hong Kong may employ the resources of Sinotop Beijing to secure such
opportunities;
(b) any tangible or intangible property
of Sinotop Bejing, any contractual rights, any personnel, and any other items or
things of value held by Sinotop Beijing may be transferred to YOD 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 YOD Hong Kong by
acquisition, lease, license or otherwise, and made available to Sinotop Beijing
on terms to be determined by agreement between YOD Hong Kong and Sinotop
Beijing;
(d) contracts entered into in the name
of Sinotop Beijing may be transferred to YOD Hong Kong, or the work under such
contracts may be subcontracted, in whole or in part, to YOD Hong Kong, on terms
to be determined by agreement between YOD 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 YOD Hong Kong, and in the name of and at the expense of, YOD 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 YOD Hong
Kong) or adversely affecting any license, permit or regulatory status of Sinotop
Beijing.
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, YOD Hong Kong.
Equity Pledge Agreement
Pursuant to an Equity Pledge Agreement
among YOD Hong Kong, Sinotop Beijing and the sole shareholder of Sinotop Beijing
(the Shareholder), dated March 9, 2010, the Shareholder pledged all of its
equity interests in Sinotop Beijing (the Collateral) to YOD 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
YOD Hong Kong, Sinotop Beijing and Shareholder, dated March 9, 2010, and entered
into in connection with the Management Services Agreement, the Shareholder
granted an exclusive option to YOD 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 registered paid-in 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 YOD 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.
F-14
Voting Rights Proxy Agreement
Pursuant to a Voting Rights Proxy
Agreement among YOD Hong Kong, Sinotop Beijing and the Shareholder, dated March
9, 2010, the Shareholder granted to YOD 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 YOD Hong Kong. The
Voting Rights Proxy Agreement may not be terminated except upon the written
consent of all parties, or unilaterally by YOD Hong Kong upon 30 days notice.
On June 4, 2012, YOD Hong Kong assigned
all rights under the above agreement to YOD WFOE, its wholly-owned subsidiary.
Accordingly, YOD WFOE may exercise the above agreements in place of YOD Hong
Kong.
Under the above contractual agreements,
YOD WFOE has the power to direct the activities of the Sinotop Beijing, and can
have the assets transferred freely out of Sinotop Beijing without any
restrictions. Therefore, YOD WFOE considers that there is no asset of Sinotop
Beijing or Zhonghai Video that can be used only to settle obligations of Sinotop
Beijing or Zhonghai Video, except for the registered capital of these two
entities amounting to RMB17.0 million (approximately $2.6 million) as of
December 31, 2014. As Sinotop Beijing and Zhonghai Video are incorporated as
limited liability companies under PRC Company Law, creditors of these two
entities do not have recourse to the general credit of other entities of the
Company.
Financial Information
The following financial information of
our VIEs, as applicable for the periods presented, affected the Company's
consolidated financial statements.
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
2014 |
|
|
2013 |
|
|
ASSETS |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
506,525
|
|
$ |
3,074,107
|
|
|
Accounts
receivable, net |
|
1,091,076 |
|
|
166,374 |
|
|
Licensed content, current |
|
1,041,609 |
|
|
277,997 |
|
|
Prepaid expenses
|
|
105,918 |
|
|
251,203 |
|
|
Other current assets |
|
12,811 |
|
|
1,458 |
|
|
Intercompany
receivables due from the Company's subsidiaries (i) |
|
572,192 |
|
|
783,988 |
|
|
Total current assets
|
|
3,330,131
|
|
|
4,555,127
|
|
|
Property and equipment, net |
|
297,898 |
|
|
410,642 |
|
|
Licensed content, non-current
|
|
35,648 |
|
|
12,319 |
|
|
Intangible assets, net |
|
5,291 |
|
|
9,538 |
|
|
Long-term equity investments
|
|
850,054 |
|
|
673,567 |
|
|
Other non-current assets |
|
272,657 |
|
|
- |
|
|
Total assets |
$ |
4,791,679 |
|
$ |
5,661,193 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payable |
$ |
8,598 |
|
$ |
$3,043 |
|
|
Deferred revenue
|
|
13,431 |
|
|
68,969 |
|
|
Accrued expenses and other liabilities |
|
573,620 |
|
|
25,018 |
|
|
Accrued license
fees |
|
348,007 |
|
|
1,200,764 |
|
|
Intercompany payables due to the Company's subsidiaries (i) |
|
11,200,536 |
|
|
8,636,434 |
|
|
Total current liabilities |
|
12,144,192 |
|
|
9,934,228 |
|
|
Total liabilities |
$ |
12,144,192 |
|
$ |
9,934,228 |
|
(i) Intercompany receivables and payables are eliminated upon consolidation.
F-15
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
2014 |
|
|
2013 |
|
|
Net revenue |
$ |
1,962,622
|
|
$ |
308,695
|
|
|
Net loss |
$ |
(3,173,010 |
) |
$ |
(4,529,372 |
)
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
2014 |
|
|
2013 |
|
|
Net cash used in operating
activities |
$ |
(2,284,452 |
) |
$ |
(1,233,993 |
) |
|
Net cash provided by/(used in) investing
activities |
$ |
(278,469 |
) |
$ |
3,672,829 |
|
|
Net cash provided by
financing activities |
$ |
- |
|
$ |
561,356 |
|
5. |
Discontinued Operations |
In order to focus on our core VOD
business and help with cash flow needs, the Company sold its 51% ownership of
Jinan Broadband to Shandong Broadcast Networks Limited. Total consideration for
the sale was RMB29,000,000, and the sale became finalized on July 31, 2013. The
Company received an initial payment of RMB5,000,000 (approximately $811,000) in
the third quarter of 2013 and the final payment of RMB 24,000,000 (approximately
$3,920,000) in the fourth quarter of 2013.
Jinan Broadband met the criteria for
being reported as a discontinued operation for the year ended December 31, 2013. We do not have any
continuing involvement with Jinan Broadband. The related gain on the sale was
reported in discontinued operations during the year ended December 31, 2013.
The following table summarizes the
results from discontinued operations:
|
|
|
December 31, |
|
|
|
|
2013 |
|
|
|
|
(7 months) |
|
|
Revenue |
$ |
3,095,148
|
|
|
|
|
|
|
|
Net loss before income taxes
and non-controlling interest |
|
(360,795 |
)
|
|
Income tax benefit |
|
- |
|
|
Net loss from discontinued
operations |
|
(360,795 |
)
|
|
Plus: Net loss attributable to
non-controlling interest |
|
176,790 |
|
|
Net loss attributable to YOU
On Demand shareholders |
$ |
(184,005 |
)
|
6. |
Sales of WFOE and Dissolution of Jinan Zhong
Kuan |
On March 25, 2014, we sold Beijing
China Broadband Network Technology Co., Ltd. (WFOE), our wholly-owned
subsidiary, to Linkstar Global Investment Limited. On the same date, we
dissolved Jinan Zhong Kuan Dian Guang Information Technology Co., Ltd. (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 derecognized 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.
F-16
7. |
Long-Term Equity
Investment |
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 ($208,760) into Shandong Media to maintain our 30% equity
ownership.
8. |
Property and Equipment |
The following is a breakdown of our
property and equipment:
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
Furniture and office
equipment |
$ |
959,080
|
|
$ |
965,568
|
|
|
Leasehold improvements |
|
190,722 |
|
|
184,129 |
|
|
Total property and
equipment |
|
1,149,802
|
|
|
1,149,697
|
|
|
Less: accumulated depreciation |
|
(829,131 |
) |
|
(649,839 |
) |
|
Net carrying value |
$ |
320,671 |
|
$ |
499,858 |
|
We recorded depreciation expense of
approximately $233,000 and $275,000, which is included in our operating expense for the
years ended December 31, 2014 and 2013, respectively.
The Company intangible assets primarily
arose from the acquisition of YOD Hong Kong.
As of December 31, 2014 and 2013, the Companys
amortized intangible assets consisted of the following:
|
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net |
|
|
|
|
Amount |
|
|
Amortization |
|
|
Balance |
|
|
Amount |
|
|
Amortization |
|
|
Balance |
|
|
Charter/ Cooperation
agreements |
$ |
2,755,821
|
|
$ |
(608,580
|
)
|
$ |
2,147,241
|
|
$ |
2,755,821
|
|
$ |
(470,789 |
)
|
$ |
2,285,032
|
|
|
Non-compete agreement |
|
- |
|
|
- |
|
|
- |
|
|
3,637,512 |
|
|
(3,637,512 |
) |
|
- |
|
|
Software and licenses |
|
253,930 |
|
|
(215,358 |
)
|
|
38,572 |
|
|
282,399 |
|
|
(200,833 |
)
|
|
81,566 |
|
|
Website development |
|
356,425 |
|
|
(356,425 |
) |
|
- |
|
|
361,919 |
|
|
(241,280 |
) |
|
120,639 |
|
|
Total finite lived
intangible assets |
$ |
3,366,176 |
|
$ |
(1,180,363 |
) |
$ |
2,185,813 |
|
$ |
7,037,651 |
|
$ |
(4,550,414 |
) |
$ |
2,487,237 |
|
|
Website name |
|
134,290 |
|
|
- |
|
|
134,290 |
|
|
134,290 |
|
|
- |
|
|
134,290 |
|
|
Total intangible assets |
$ |
3,500,466 |
|
$ |
(1,180,363 |
) |
$ |
2,320,103 |
|
$ |
7,171,941 |
|
$ |
(4,550,414 |
) |
$ |
2,621,527 |
|
During the year ended December 31,
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 $304,000 and
$499,000 during the year ended December 31, 2014 and 2013, respectively.
F-17
The following table outlines the
amortization expense for the next five years and thereafter:
|
|
|
Amortization to be |
|
|
Years ending December 31, |
|
Recognized |
|
|
2015 |
$ |
156,454
|
|
|
2016 |
|
154,589 |
|
|
2017 |
|
138,881 |
|
|
2018 |
|
138,881 |
|
|
2019 |
|
138,722 |
|
|
Thereafter |
|
1,458,286 |
|
|
Total amortization to be
recognized |
$ |
2,185,813 |
|
10. |
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.
We review the valuation techniques used
annually to determine if the fair value measurements are still appropriate, and
to 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 December 31, 2014 and 2013 were valued using the Monte Carlo
Simulation method which incorporated the following assumptions:
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
2014 |
|
|
2013 |
|
|
Risk-free interest rate |
|
1.040% |
|
|
1.186% |
|
|
Expected volatility |
|
70% |
|
|
70% |
|
|
Expected term (years) |
|
2.67 |
|
|
3.67 |
|
|
Expected dividend yield |
|
0% |
|
|
0% |
|
Our contingent consideration liability
was settled on July 1, 2014 (see Note 11). 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:
|
|
|
December 31, |
|
|
|
|
2013 |
|
|
Risk-free interest rate |
|
1.27% |
|
|
Expected volatility |
|
70% |
|
|
Expected term (years) |
|
4.0 |
|
|
Expected dividend yield |
|
0% |
|
F-18
The following tables present the fair
value hierarchy for those assets and liabilities measured at fair value on a
recurring basis at December 31, 2014 and December 31, 2013, respectively:
|
|
|
December
31, 2014 |
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total Fair Value |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note14) |
$ |
- $ |
|
|
- $ |
|
|
585,050 |
|
$ |
585,050 |
|
|
|
|
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
Note14) |
$ |
- |
|
$ |
- |
|
$ |
1,344,440
|
|
$ |
1,344,440
|
|
|
Contingent purchase price consideration (see
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11) |
$ |
- |
|
$ |
- |
|
$ |
578,744
|
|
$ |
578,744
|
|
The table below reflects the components
effecting the change in fair value for the year ended December 31, 2014 and
2013, respectively:
|
|
|
Level 3
Assets and Liabilities |
|
|
|
|
|
|
|
For the Year Ended December 31,
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
|
January 1, |
|
|
|
|
|
Fair Value |
|
|
December 31, |
|
|
|
|
2014 |
|
|
Settlements |
|
|
loss |
|
|
2014 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note14) |
$ |
1,344,440 |
|
$ |
(1,380,629 |
) |
$ |
621,239 |
|
$ |
585,050 |
|
|
Contingent purchase price
consideration (see Note 11) |
$ |
578,744
|
|
$ |
(739,510 |
) |
$ |
160,766
|
|
$ |
- |
|
|
|
|
Level 3
Assets and Liabilities |
|
|
|
|
|
|
|
For the Year Ended December 31,
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
|
January 1, |
|
|
|
|
|
Fair Value |
|
|
December 31, |
|
|
|
|
2013 |
|
|
Settlements |
|
|
loss |
|
|
2013 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note14) |
$ |
878,380 |
|
$ |
- |
|
$ |
466,060 |
|
$ |
1,344,440 |
|
|
Contingent purchase price
consideration (see Note 11) |
$ |
737,256 |
|
$ |
(410,475 |
) |
$ |
251,963 |
|
$ |
578,744 |
|
F-19
The table below reflects the components
effecting the change in fair value for the year ended December 31, 2014 and
2013, respectively:
|
|
|
Quantitative Information about Level
3 Fair Value Measurements |
|
|
|
|
|
|
|
For the Year Ended December 31,
2014 |
|
|
|
|
|
|
|
Fair Value at |
|
|
Valuation |
|
|
Unobservable |
|
|
|
|
|
|
|
12/31/2014 |
|
|
Techniques |
|
|
Inputs |
|
|
Input |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
liabilities |
$ |
585,050
|
|
|
Monte Carlo
Simulation Model |
|
|
Risk-free rate
of interest |
|
|
1.040% |
|
|
|
|
|
|
|
|
|
|
Expected volatility |
|
|
70% |
|
|
|
|
|
|
|
|
|
|
Expected term
(years) |
|
|
2.67 |
|
|
|
|
|
|
|
|
|
|
Expected dividend yield |
|
|
0% |
|
|
|
|
Quantitative Information about Level
3 Fair Value Measurements |
|
|
|
|
|
|
|
For the Year Ended December 31,
2013 |
|
|
|
|
|
|
|
Fair Value at |
|
|
Valuation |
|
|
Unobservable |
|
|
|
|
|
|
|
12/31/2013 |
|
|
Techniques |
|
|
Inputs |
|
|
Input |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
liabilities |
$ |
1,344,440
|
|
|
Monte Carlo
Simulation Model |
|
|
Risk-free rate
of interest |
|
|
1.186% |
|
|
|
|
|
|
|
|
|
|
Expected volatility |
|
|
70% |
|
|
|
|
|
|
|
|
|
|
Expected term
(years) |
|
|
3.67 |
|
|
|
|
|
|
|
|
|
|
Expected dividend yield |
|
|
0% |
|
|
Contingent
consideration |
$ |
578,744
|
|
|
Black-Scholes
Merton Model |
|
|
Risk-free rate
of interest |
|
|
1.270% |
|
|
|
|
|
|
|
|
|
|
Expected volatility |
|
|
70% |
|
|
|
|
|
|
|
|
|
|
Expected term
(years) |
|
|
4.00 |
|
|
|
|
|
|
|
|
|
|
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.
The carrying amount of cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses and other
payables and convertible promissory note as of December 31, 2014 and 2013,
approximate fair value because of the short maturity of these instruments.
11. |
YOD Hong Kong Contingent
Consideration |
In connection with the acquisition of
YOD 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 which was equal to 5% of the total number of 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: YOD 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.
F-20
Subsequent to the acquisition of YOD
Hong Kong, 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 requires 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 an expense of approximately $161,000 and $252,000, for the years ended
December 31, 2014 and 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.
12. |
Related Party Transactions |
(a)
$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 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 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 13), 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 13) 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.
F-21
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 and additional
paid-in capital since the note was payable upon demand.
Effective December 30, 2014, the
Company and Mr. McMahon entered into Amendment No. 5 pursuant to which the
maturity date of the Note was extended to December 31, 2016. The Note remains
payable on demand or convertible on demand into shares of Series E Preferred
Stock at a conversion price of $1.75 at Mr. McMahons option.
For the year ended December 31, 2014
and 2013, the Company recorded interest expense of $2,444,000 and $120,000 related
to the Note.
(b) 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 13. 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.
(c) Cost of Revenue
Zhong Hai Video paid licensed content
fees of approximately $163,000 and $161,000 for the years ended December 31,
2014 and 2013, respectively, to Hua Cheng, the minority shareholder of Zhong Hai
Video.
(d) Sale of WFOE
Effective March 25, 2014, Beijing China
Broadband Network Technology Co., Ltd. (WFOE), our wholly-owned subsidiary,
was sold to Linkstar Global Investment Limited, whose sole shareholder is a family
member of one of our management personnel. Total consideration received from the
sale of WFOE amounted to $50,000 (see Note 6).
13. |
Series D and Series E Preferred Stock Financing and
Convertible Note |
(a) Series D Preferred Stock
On July 5, 2013, we entered into a
Series D Preferred Stock 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 Preferred Stock and any dividends
thereon may 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
Preferred Stock are 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 is not consummated on or prior to October 31, 2013, the
Series D Preferred Stock shall become immediately redeemable at the option of
the Investor. The redemption may be exercised in whole or in part at $1.75
dollars per share, plus all unpaid and accrued dividends. The Investor shall
have the right to vote with our stockholders in any matter. The Investor shall
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 Corporation, the Investor shall 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.
F-22
The 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 derives its value based on the underlying fair
value of the shares of our common stock as does the Preferred Stock, and
therefore is clearly and closely related to the underlying preferred stock.
Since the Preferred Stock may ultimately be redeemed at the option of the
holder, the carrying value of the shares, net of unamortized discount and
accumulated dividends, has been 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 model with the following
assumptions: expected term 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 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 at the issuance date. Subsequently, the Company exchanged the Series D
Preferred Stock to Series E Preferred Stock, which was binding and legally
enforceable by both parties on January 31, 2014. As such, the previously recognized beneficial conversion
feature of $183,000 related to our Series D Preferred Stock was reversed and the
Company recognized approximately $2,651,000 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 on the Series D Preferred Stock. In the first quarter of 2014, we paid in full the
total cumulative dividends due of $92,000.
(b) $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 approximately $370,000 that is to be amortized over
the period of the earliest possible conversion date which was January 31, 2014.
As such we recorded interest expense of approximately $129,000 and $241,000
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 term 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.
(c) 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.
F-23
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 by January 31, 2014.
On December 4, 2013, C Media exercised
its extension option which extended the date to January 31, 2014.
(d) 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 exchange 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 approximately $2,386,000 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 term 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, the Company recognized a beneficial conversion feature discount on
the Series E Preferred Stock at its intrinsic value, which was the fair value of
the common stock at commitment date for the Series E Preferred Stock investment,
less the effective conversion price. As such, the Company recognized a total
beneficial conversion feature of approximately $16,402,000 as deemed dividend on preferred stock.
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
accounted 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 at each year end based on the Monte Carlo valuation.
As of December 31, 2014 and 2013, the
warrant liability was re-valued as disclosed in Note 10, and was adjusted to its
current fair value of approximately $585,000 and $1,344,000 as determined by the
Company, resulting in a loss of approximately $621,000 for the year ended
December 31, 2014. During year ended December 31, 2014, 440,813 warrants were
exercised at an exercise price $1.50 for gross proceeds received of
approximately $661,000.
As of December 31, 2014, the Company
has 1,800,226 options and 2,191,487 warrants outstanding to purchase shares of
our common stock.
F-24
The following table provides the
details of the approximate total share based payments expense during the years
ended December 31, 2014 and 2013:
|
|
|
December 31, |
|
|
December,31 |
|
|
|
|
|
2014 |
|
|
2013 |
|
|
|
Employees and directors
share-based payments |
$ |
1,340,000
|
|
$ |
540,000
|
|
(i) |
|
Cost of stock option price reduction |
|
- |
|
|
55,000 |
|
(ii) |
|
Stock issued for services |
|
- |
|
|
442,000 |
|
(iii) |
|
Stock warrants issued for services |
|
- |
|
|
109,000 |
|
(iv) |
|
|
$ |
1,340,000 |
|
$ |
1,146,000 |
|
|
-------
(i) 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, Compensation 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.
(ii) The Compensation Committee of the
Board of Directors (acting as Administrator) reduced the exercise price of
701,167 outstanding stock options granted under the Companys 2010 Equity
Incentive Plan to $2.00. The Plan permits the Administrator to reduce the
exercise price of any award granted under the Plan if the fair market value of
the award has declined since the date of grant. All other terms of these
options, including, without limitation, the exercise date, vesting schedule and
the number of shares to which each option pertains, remain unchanged. The
exercise prices of stock options for all employees were adjusted except that the
exercise price of stock options held by the Companys Chairman, Shane McMahon,
and the Companys CEO, Weicheng Liu. As a
result of the exercise price modification, the Company recognized additional
compensation expense of $55,000 for the stock options held by 30 employees for
the year ended December 31, 2013.
(iii) During 2013, 60,501 shares were
issued to certain consultants for services provided to us. We recorded the cost of
common shares at the closing price on the issue date which is the date the
service is completed. We expensed to consulting
and marketing services $442,000 during the year ended December 31, 2013. No
shares were issued for services in 2014.
(iv) In 2013, we issued 166,677
warrants to consultants for services and 6,667 warrants vested during 2013. The fair value of the
warrants was estimated on the date of grant using the Black-Scholes Merton
valuation model. We expensed to marketing $109,000 during the year ended
December 31, 2013. No warrants were issued for services in 2014.
(a)
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 December 31,
2014, options available for issuance are 2,003,297 shares.
F-25
Stock option activity for the year
ended December 31, 2014 is summarized as follows:
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregated |
|
|
|
|
Options |
|
|
Weighted Average |
|
|
Contractual Life |
|
|
Intrinsic |
|
|
|
|
Outstanding |
|
|
Exercise Price |
|
|
(Years) |
|
|
Value |
|
|
Outstanding at January 1,
2014 |
|
1,878,835 |
|
$ |
2.64 |
|
|
|
|
|
|
|
|
Granted |
|
62,999 |
|
|
3.15 |
|
|
|
|
|
|
|
|
Exercised |
|
(46,727 |
) |
|
1.94 |
|
|
|
|
|
|
|
|
Expired |
|
(12,862 |
) |
|
1.89 |
|
|
|
|
|
|
|
|
Forfeited |
|
(82,019 |
) |
|
1.75 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014 |
|
1,800,226 |
|
$ |
2.73 |
|
|
6.68 |
|
$ |
156,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to be vested as of December 31, 2014 |
|
1,800,226 |
|
$ |
2.73 |
|
|
6.68 |
|
$ |
156,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
December 31, 2014 (vested) |
|
1,544,752 |
|
$ |
2.86 |
|
|
6.38 |
|
$ |
69,743 |
|
The weighted average grant-date fair
value of options granted during the years ended December 31, 2014, and 2013, was
$1.70 and $1.26. The total intrinsic value of options exercised during the years
ended December 31, 2014, and 2013, was $27,820 and $1,636.
As of December 31, 2014, approximately
$422,000 of total unrecognized compensation expense related to non-vested share
options is expected to be recognized over a weighted average period of
approximately 2.34 years. The total fair value of shares vested during the years
ended December 31, 2014 and 2013 was approximately $619,000 and $540,000,
respectively.
The following table summarizes the
assumptions used to estimate the fair values of the share options granted in the
years presented:
|
|
|
December,31 |
|
|
December,31 |
|
|
|
|
2014 |
|
|
2013 |
|
|
Exercise multiple |
|
2.52~2.91 |
|
|
1.65 |
|
|
Expected term |
|
10 years |
|
|
10 years |
|
|
Expected volatility |
|
70% |
|
|
70% |
|
|
Expected dividend yield |
|
0% |
|
|
0% |
|
|
Risk free interest rate |
|
1.43%~2.66% |
|
|
2.66% |
|
|
Fair value |
|
1.33~2.23 |
|
|
1.26 |
|
(b) 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 December 31, 2014, the weighted
average exercise price was $2.20 and the weighted average remaining life was
3.39 years. The following table outlines the warrants outstanding and
exercisable as of December 31, 2014 and December 31, 2013:
|
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
Warrants |
|
|
Exercise |
|
|
Expiration |
|
|
Warrants Outstanding |
|
Outstanding |
|
|
Outstanding |
|
|
Price |
|
|
Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 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 (i) |
|
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 |
|
|
|
|
|
|
|
(i) The warrants are calssified as derivative liabilities as disclosed in Note 14.
F-26
16. |
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.
For the years ended December 31, 2014
and 2013, the number of securities convertible into common shares not included
in diluted loss per common share because the effect would have been
anti-dilutive consists of the following:
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
2014 |
|
|
2013 |
|
|
Warrants |
|
2,191,487 |
|
|
1,713,253 |
|
|
Options |
|
1,800,226 |
|
|
1,878,835 |
|
|
Series A Preferred Stock |
|
933,333 |
|
|
933,333 |
|
|
Series C Preferred Stock |
|
- |
|
|
140,000 |
|
|
Series D 4% Preferred Stock
|
|
- |
|
|
2,320,434 |
|
|
Series E Preferred Stock |
|
7,365,283 |
|
|
- |
|
|
Convertible promissory notes
|
|
1,895,765 |
|
|
2,977,315 |
|
|
Total |
|
14,186,094 |
|
|
9,963,170 |
|
The Company has reserved its authorized
but unissued common stock for possible future issuance in connection with the
following:
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
2014 |
|
|
2013 |
|
|
Exercise of stock warrants
|
|
2,191,487 |
|
|
1,713,253 |
|
|
Exercise and future grants of stock options
|
|
3,986,074 |
|
|
4,023,871 |
|
|
Conversion of preferred stock
|
|
8,298,616 |
|
|
3,393,767 |
|
|
Contingent issuable shares in connection with
YOD Hong Kong acquisition |
|
- |
|
|
245,274 |
|
|
Issuable shares from
conversion of promissory notes payable |
|
1,895,765 |
|
|
2,977,315 |
|
|
Total |
|
16,371,942 |
|
|
12,353,480 |
|
(a) Corporate Income Tax (CIT)
YOD was incorporated in Nevada and is
subject to U.S. federal and state income tax.
CB Cayman was incorporated in Cayman
Islands as an exempted company and is not subject to income tax under the
current laws of Cayman Islands.
YOD Hong Kong was incorporated in HK as
a holding company. The statutory income tax rate in HK is 16.5% .
All of the Companys income is
generated in the PRC. WFOE, YOD WFOE, Sinotop Beijing, Zhong Hai Video, Jinan
Zhong Kuan are PRC entities. The income tax provision of these entities is
calculated at the applicable tax rates on the taxable income for the periods
based on existing legislation, interpretations and practices in the PRC.
In accordance with the Corporate Income
Tax Law of the PRC (CIT Law), effective beginning on January 1, 2008,
enterprises established under the laws of foreign countries or regions and whose
place of effective management is located within the PRC territory are
considered PRC resident enterprises and subject to the PRC income tax at the
rate of 25% on worldwide income. The definition of place of effective
management refers to an establishment that exercises, in substance, and among
other items, overall management and control over the production and business,
personnel, accounting, and properties of an enterprise. If the Companys non-PRC
incorporated entities are deemed PRC tax residents, such entities would be
subject to PRC tax under the CIT Law. Since our non-PRC entities have
accumulated loss, the application of this tax rule will not result in any PRC
tax liability, if our non-PRC incorporated entities are deemed PRC tax residents.
F-27
The CIT Law imposes a 10% withholding
income tax, subject to reduction based on tax treaty where applicable, for
dividends distributed by a foreign invested enterprise to its immediate holding
company outside China. Under the PRC-HK tax treaty, the withholding tax on
dividends is 5% provided that a HK holding company qualifies as a HK tax
resident as defined in the tax treaty. No provision was made for the withholding
income tax liability as the Companys foreign subsidiaries were in accumulated
loss.
Loss before tax and the provision for income tax benefit
consists of the following components:
|
|
|
2014 |
|
|
2013 |
|
|
Loss before tax |
$ |
(13,328,813 |
) |
$ |
(13,253,242 |
)
|
|
Deferred tax benefit of net operating loss |
|
|
|
|
|
|
|
United States |
$ |
- |
|
$ |
- |
|
|
PRC/Hong Kong |
|
(304,670 |
) |
|
(68,523 |
) |
|
|
|
(304,670 |
) |
|
(68,523 |
) |
|
Deferred tax benefit other than benefit of net operating loss |
|
|
|
|
|
|
|
United States |
|
- |
|
|
- |
|
|
PRC/Hong Kong |
|
- |
|
|
(42,743 |
) |
|
|
|
|
|
|
|
|
|
Total income tax benefit |
$ |
(304,670 |
) |
$ |
(111,266 |
)
|
A reconciliation of the expected income
tax derived by the application of the 34.0% U.S. corporate income tax rate to the
Company's loss before income tax benefit is as follows:
|
|
2014 |
|
|
2013 |
|
U. S. statutory income tax rate |
|
34.0% |
|
|
34.0% |
|
Non-deductible expenses |
|
-2.5% |
|
|
-1.6% |
|
Non-deductible interest expenses |
|
-6.1% |
|
|
- |
|
Non-taxable change in warrant liabilities |
|
-1.6% |
|
|
-1.2% |
|
Non-taxable (gain)/loss on contingent
consideration |
|
-0.4% |
|
|
-0.6% |
|
Forfeiture of capital loss |
|
-3.2% |
|
|
- |
|
Increase in valuation allowance |
|
-18.5% |
|
|
-22.5% |
|
Rate-differential on foreign income invested indefinitely |
|
- |
|
|
-5.0% |
|
Others |
|
0.5% |
|
|
-2.1% |
|
Effective income tax rate |
|
2.3% |
|
|
0.8% |
|
F-28
Deferred income taxes are recognized
for future tax consequences attributable to temporary differences between the
carrying amounts of assets and liabilities for financial statement purposes and
income tax purposes using enacted rates expected to be in effect when such
amounts are realized or settled. Significant components of the Companys
deferred tax assets and liabilities at December 31, 2014 and 2013 are as
follows:
|
|
2014 |
|
|
2013 |
|
U.S. NOL |
|
9,563,551 |
|
|
6,809,115 |
|
Foreign NOL |
|
2,790,913 |
|
|
2,495,773 |
|
Accrued payroll and expense |
|
479,116 |
|
|
1,334,949 |
|
Nonqualified options |
|
829,354 |
|
|
306,559 |
|
Marketable securities |
|
131,691 |
|
|
100,795 |
|
Capital loss carryover |
|
72,660 |
|
|
482,898 |
|
Others |
|
92,675 |
|
|
54,333 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
13,959,960 |
|
|
11,584,422 |
|
|
|
|
|
|
|
|
Less: valuation allowance |
|
(13,783,420 |
) |
|
(11,319,919 |
) |
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
Deferred rent |
|
(4,301 |
) |
|
(522 |
) |
Basis in equity method investee |
|
|
|
|
(12,760 |
) |
Intangible assets |
|
(536,811 |
) |
|
(377,030 |
) |
Total deferred tax liabilities |
|
(541,112 |
) |
|
(390,312 |
) |
|
|
|
|
|
|
|
Net deferred tax liability |
|
(364,572 |
) |
|
(125,809 |
) |
As of December 31, 2014, the Company
had approximately $21.7 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 $11.2 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 2028 through 2034 and year 2015 to year 2019, respectively. The
non-recognition of the tax benefits, while reducing the net operating loss
carryovers, gives rise to a capital loss carryover of approximately $165,000. Utilization of
net operating losses may be subject to an annual limitation due to ownership
change limitations provided in the Internal Revenue Code and similar state and
foreign provisions. This annual limitation may result in the expiration of net
operating losses before utilization.
Realization of the Companys net
deferred tax assets is dependent upon the Companys ability to generate future
taxable income in appropriate tax jurisdictions to obtain benefit from the
reversal of temporary differences and net operating loss carryforwards. The
valuation allowance increased approximately $2.5 million and $0.6 million ($3.0
million, less the removal of $2.4 million from discontinued operations) during
the years ended December 31, 2014 and 2013, respectively. The increase was
primarily related to increases in net operating loss carryovers, which the
Company does not expect to realize.
F-29
(b) Uncertain Tax Positions
Accounting guidance for recognizing and
measuring uncertain tax positions prescribes a threshold condition that a tax
position must meet for any of the benefit of uncertain tax position to be
recognized in the financial statements. The following is a reconciliation of the
beginning and ending amounts of unrecognized tax benefits for the years ended
December 31, 2014 and 2013:
|
|
2014 |
|
|
2013 |
|
Balance, beginning of year |
$ |
(1,718,974 |
) |
$ |
(1,718,974 |
) |
Increase from prior year's tax positions |
|
- |
|
|
- |
|
Reduction resulting from the lapse of the
statute of limitations |
|
- |
|
|
- |
|
Balance, end of year |
$ |
(1,718,974 |
) |
$ |
(1,718,974 |
) |
As of December 31, 2014 and 2013, the
Company did not accrue any material interest and penalties.
The Company's United States income tax
returns are subject to examination by the Internal Revenue Service for at least
2010 and later years. Due to the uncertainty regarding the filing of tax returns
for years before 2007, it is possible that the Company is subject to examination
by the IRS for earlier years. All of the Chinese tax returns for the Chinese
operating companies are subject to examination by the Chinese tax authorities
for all periods from the companies' inceptions in 2007 through 2014 as
applicable.
18. |
Contingencies and
Commitments |
(a) 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 December 31, 2014, the Company's potential minimum cash obligation to
these employees was approximately $1,806,000.
(b) 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 |
|
|
2015 |
$ |
816,641
|
|
|
2016 |
|
693,344 |
|
|
2017 |
|
57,725 |
|
|
Total |
$ |
1,567,709 |
|
(c) Licensed Content Commitment
The Company is committed to paying
content costs through 2016 as follows:
|
Years ending December 31, |
|
Content Costs |
|
|
2015 |
$ |
2,143,000
|
|
|
2016 |
|
1,705,000 |
|
|
Total |
$ |
3,848,000 |
|
F-30
(d) Lawsuits and Legal
Proceedings
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.
19. |
Concentration, Credit and Other
Risks |
(a) PRC Regulations
The PRC market in which the Company
operates poses certain macro-economic and regulatory risks and uncertainties.
These uncertainties extend to the ability of the Company to conduct wireless
telecommunication services through contractual arrangements in the PRC since the
industry remains highly regulated. The Company conducts all of its operations in
China through its Zhonghai Video, which the Group consolidates as a result of a
series of contractual arrangements enacted among YOD WFOE, Sinotop Beijing as
the parent company of Zhonghai Video and the legal shareholder of Sinotop
Beijing. The Company believes that these contractual arrangements are in
compliance with PRC law and are legally enforceable. If Sinotop Beijing or its
legal shareholder fails to perform the obligations under the contractual
arrangements or any dispute relating to these contracts remains unresolved, YOD
WFOE or YOD HK can enforce its rights under the VIE contracts through the
operations of PRC law and courts. However, uncertainties in the PRC legal system
could limit the Companys ability to enforce these contractual arrangements. In
particular, the interpretation and enforcement of these laws, rules and
regulations involve uncertainties. If YOD WFOE had direct ownership of Sinotop
Beijing, it would be able to exercise its rights as a shareholder to effect
changes in the board of directors of Sinotop Beijing, which in turn could effect
changes at the management level, subject to any applicable fiduciary
obligations. However, under the current contractual arrangements, the Company
relies on Sinotop Beijing and its legal shareholder to perform their contractual
obligations to exercise effective control.
In addition, the telecommunications,
information and media industries remain highly regulated. Restrictions are
currently in place and are unclear with respect to which segments of these
industries foreign owned entities, like YOD WFOE, may operate. The PRC
government may issue from time to time new laws or new interpretations on
existing laws to regulate areas such as telecommunications, information and
media, some of which are not published on a timely basis or may have retroactive
effect. For example, there is substantial uncertainty regarding the Draft
Foreign Investment Law, including, among others, what the actual content of the
law will be as well as the adoption and effective date of the final form of the
law. Administrative and court proceedings in China may also be protracted,
resulting in substantial costs and diversion of resources and management
attention. While such uncertainty exists, the Group cannot assure that the new
laws, when it is adopted and becomes effective, and potential related
administrative proceedings will not have a material and adverse effect on the
Company's ability to control the affiliated entities through the contractual
arrangements. Regulatory risk also encompasses the interpretation by the tax
authorities of current tax laws, and the Groups legal structure and scope of
operations in the PRC, which could be subject to further restrictions resulting
in limitations on the Groups ability to conduct business in the PRC.
(b) Major Customers
The Company relies on agreements with
distribution partners, including digital cable operators, IPTV operators, OTT
streaming operators and mobile smartphone manufacturers and operators, during
the course of its business. A distribution partner that individually generates
more than 10% of the Companys revenue is considered a major customer.
For the year ended December 31, 2014,
two customers individually accounted for more than 10% of the Companys revenue.
Three customers individually accounted for 10% of the Companys net accounts
receivables as of December 31, 2014.
For the year ended December 31, 2013, three customers individually accounted for more than 10% of the Company’s revenue. Three customers individually accounted for 10% of the Company’s net accounts receivables as of December 31, 2013.
(c) Major Suppliers
The Company relies on agreements with
studio content partners to acquire video contents. A content partner that
accounts for more than 10% of the Companys cost of revenues is considered a
major supplier.
For the year ended December 31, 2014,
three suppliers individually accounted for more than 10% of the Companys cost
of revenues. Two suppliers individually accounted for 10% of the Companys
accounts payable as of December 31, 2014.
For the year ended December 31, 2013, four suppliers individually accounted for more than 10% of the Company’s cost of revenues. One supplier individually accounted for 10% of the Company’s accounts payable as of December 31, 2013.
F-31
(d) Concentration of Credit Risks
Financial instruments that potentially
subject the Group to significant concentration of credit risk primarily consist
of cash and cash equivalents, accounts receivable and other receivables. As of
December 31, 2014 and 2013, the Groups cash and cash equivalents were held by
financial institutions located in the PRC, Hong Kong and the United States that
management believes are of high-credit ratings and quality. Accounts receivable
are typically unsecured and are mainly derived from revenues from the Groups
VOD content distribution partners. The risk with respect to accounts receivable
is mitigated by regular credit evaluations that the Group performs on its
distribution partners and its ongoing monitoring of outstanding balances.
(e) Foreign Currency Risks
A majority of the Groups operating
transactions are denominated in RMB and a significant portion of the Groups
assets and liabilities is denominated in RMB. RMB is not freely convertible into
foreign currencies. The value of the RMB is subject to changes in the central
government policies and to international economic and political developments. In
the PRC, certain foreign exchange transactions are required by laws to be
transacted only by authorized financial institutions at exchange rates set by
the Peoples Bank of China (PBOC). Remittances in currencies other than RMB by
the Group in China must be processed through PBOC or other China foreign
exchange regulatory bodies which require certain supporting documentation in
order to complete the remittance.
20. |
Defined Contribution Plan |
During 2011, the Company began
sponsoring a 401(k) defined contribution plan ("401(k) Plan") that provides for
a 100% employer matching contribution of the first 3% and a 50% employer
matching contribution of each additional percent contributed by an employee up
to 5% of each employees pay. Employees become fully vested in employer matching
contributions after six months of employment. Company 401(k) matching
contributions were approximately $31,000 and $45,000 for the years ended
December 31, 2014 and 2013, respectively.
On March 30, 2015, Marc Urbach and the
Company entered into a retention and separation agreement, pursuant to which Mr.
Urbach resigned as President and Chief Financial Officer of the Company, and
from all other positions he holds with respect to the Company effective March
31, 2015. On the same date, Mr. Urbach and the Company entered into a consulting
agreement for a period of six months commencing from March 31, 2015. Under these agreements, Mr. Urbach shall
be entitled to receive a lump sum payment of his severance payment, all unpaid
expenses, earned but unpaid bonuses and benefits from the Company and its
employee benefit plans, in addition to a fixed consulting fee on a monthly basis
from April 1 to September 30, 2015. All outstanding unvested options, warrants
or restricted stock previously granted to Mr. Urbach also became fully vested on
March 31, 2015.
F-32
EXHIBIT INDEX
Exhibit |
|
No.
|
Description |
|
|
3.1 |
Articles of Incorporation of the Company, as amended to date
[incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K (File
No. 001-35561) filed on March 30,
2012]. |
3.2 |
Second
Amended and Restated Bylaws, adopted on January 31, 2014 [incorporated by
reference to Exhibit 3.1 to the Company's Current Report on Form 8-K (File
No. 001-35561) filed on February 6,
2014]. |
3.3 |
Amendment No. 1 to the Second Amended and Restated Bylaws,
adopted on March 26, 2015. |
3.4 |
Certificate of Designation of Series A Preferred Stock
[incorporated by reference to Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q (File No. 001-35561) filed on
August 23, 2010]. |
3.5 |
Certificate of Designation of Series C Preferred Stock
[incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K (File
No. 001-35561) filed on August 31, 2012]. |
3.6 |
Certificate of Designation of Series D 4%
Convertible Preferred Stock [incorporated by reference to Exhibit 4.1 to the Company's Current Report
on Form 8-K (File No. 001-35561) filed on July 11,
2013]. |
3.7 |
Certificate of Designation of Series E Convertible Preferred
Stock [incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K (File
No. 001-35561) filed on February 6,
2014]. |
4.1 |
Form
of Warrant issued pursuant to the Securities Purchase Agreement dated May
20, 2010 [incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q (File No.
001-35561) filed August 23, 2010]. |
4.2 |
Form
of Warrant issued on July 30, 2010 to Shane McMahon [incorporated by
reference to Exhibit 4.2 to
the Company's Quarterly Report on Form 10-Q (File No. 001-35561) filed
August 23, 2010]. |
4.3 |
Form
of Warrant issued on July 30, 2010 to Steven Oliveira [incorporated by
reference to Exhibit 4.3 to
the Company's Quarterly Report on Form 10-Q (File No. 001-35561) filed
August 23, 2010]. |
4.4 |
Form
of Warrant issued pursuant to the Securities Purchase Agreement dated
August 30, 2012 [incorporated by reference to exhibit 4.1 to the Company's
Current Report on Form 8-K (File No. 001-35561) filed on August 31, 2012]. |
10.1 |
Management Services Agreement, dated March 9, 2010, by and
between Sinotop Beijing and Sinotop Hong Kong [incorporated by reference to Exhibit 10.1
to the Company's Annual Report on
Form 10-K (File No. 001-35561) filed on March 31, 2014]. |
10.2 |
Option
Agreement, dated March 9, 2010, by and among Sinotop Hong Kong, Sinotop
Beijing, and Zhang
Yan (the sole shareholder of Sinotop Beijing) [incorporated by reference
to Exhibit 10.2 to the
Company's Annual Report on Form 10-K (File No. 001-35561) filed on March
31, 2014]. |
10.3 |
Termination, Assignment and Assignment Agreement, dated June
4, 2012, by and among Sinotop Hong
Kong, YOD WFOE, Sinotop Beijing and Zhang Yan [incorporated by reference
to Exhibit 10.3
to the Company's Annual Report on Form 10-K (File No. 001-35561) filed on
March 31, 2014]. |
10.4 |
Equity
Pledge Agreement, dated June 4, 2012, by and among YOD WFOE, Sinotop
Beijing and Zhang
Yan [incorporated by reference to Exhibit 10.4 to the Company's Annual
Report on Form 10-K
(File No. 001-35561) filed on March 31, 2014]. |
10.5 |
Voting
Rights Proxy Agreement, dated June 4, 2013, by and among YOD WFOE, Sinotop
Beijing and
Zhang Yan [incorporated by reference to Exhibit 10.5 to the Company's
Annual Report on Form
10-K (File No. 001-35561) filed on March 31, 2014]. |
10.6 |
Employment Agreement, dated January 31, 2014 between the
Company and Shane McMahon [incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K (File No.
001-35561) filed on February 6, 2014]. |
10.7 |
Employment Agreement, dated January 31, 2014 between the
Company and Weicheng Liu [incorporated by reference to Exhibit 10.3 to the Company's
Current Report on Form 8-K (File No. 001-35561) filed on February 6, 2014]. |
10.8 |
Employment Agreement, dated January 31, 2014 between the
Company and Marc Urbach [incorporated by reference to Exhibit 10.4 to the Company's
Current Report on Form 8-K (File No.
001-35561) filed on February 6, 2014]. |
10.9 |
Employment Agreement, dated January 31, 2014 between the
Company and Xuesong Song [incorporated by reference to Exhibit 10.5 to the Company's
Current Report on Form 8-K (File No.
001-35561) filed on February 6, 2014]. |
10.10 |
Form
of Securities Purchase Agreement, dated August 30, 2012, by and among the
Company, the Investors and Chardan Capital Management [incorporated by
reference to exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-35561)
filed on August 31, 2012]. |
10.11 |
Form
of Registration Rights Agreement, dated August 30, 2012, by and between
the Company and the
Investors [incorporated by reference to exhibit 10.2 to the Company's
Current Report on Form 8-K
(File No. 001-35561) filed on August 31, 2012]. |
10.12 |
Convertible Promissory Note in $3,000,000 principal amount
issued to Shane McMahon [incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q (File No.
001-35561) filed on May 15, 2012]. |
10.13 |
Amendment No. 1 to Convertible Promissory Note in $3,000,000
principal amount issued to Shane McMahon [incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K
(File No. 001-35561) filed on May 21, 2012]. |
10.14 |
Amendment No. 2 to Convertible Promissory Note in $3,000,000
principal amount issued to Shane McMahon [incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K
(File No. 001-35561) filed on October 23, 2012]. |
10.15 |
Amendment No. 3 to Convertible Promissory Note in $3,000,000
principal amount issued to Shane McMahon [incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q
(File No. 001-35561) filed on May 15, 2013]. |
10.16 |
Amendment No. 4 to Convertible Promissory Note in $3,000,000
principal amount issued to Shane McMahon [incorporated by reference to Exhibit 10.6 to the
Company's Current Report on Form 8-K
(File No. 001-35561) filed on February 6, 2014]. |
10.17 |
Amendment No. 5 to Convertible Promissory Note in $3,000,000
principal amount issued to Shane McMahon [incorporated by reference to the Company's Current
Report on Form 8-K (File No. 001-35561) filed on January 2, 2015]. |
10.8 |
Series
D Preferred Stock Purchase Agreement, dated as of July 5, 2013, between
the Company and C
Media Limited [incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form
8-K (File No. 001-35561) filed on July 11, 2013]. |
10.19 |
English Translation of Equity Transfer Agreement, dated May
20, 2013, between Beijing China Broadband Network Technology Co., Ltd. and Shandong Broadcast
Network [incorporated by reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K (File No. 001-35561) filed
on August 6, 2013]. |
10.20 |
English Translation of Letter Agreement, dated July 23, 2013,
between Beijing China Broadband Network Technology Co., Ltd. and Shandong Broadcast Network
[incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (File
No. 001-35561) filed on August 6, 2013]. |
10.21 |
English Translation of Letter Agreement, dated
July 31, 2013, between Beijing China Broadband Network Technology Co., Ltd. and Shandong
Broadcast Network [incorporated by reference to Exhibit 10.3 to the Company's Current Report on
Form 8-K (File No. 001-35561) filed on August 6,
2013]. |
10.22 |
Convertible Promissory Note in $2,000,000 principal amount
issued to C Media Limited, dated November 4, 2013 [incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K (File No. 001-35561) filed on November
8, 2013]. |
10.23 |
Amendment No. 1 to Series D Preferred Stock
Purchase Agreement, dated November 4, 2013, between the Company and C Media Limited
[incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 001-35561)
filed on November 8, 2013]. |
10.24 |
Waiver, dated November 4, 2013, between Shane McMahon and the
Company [incorporated by reference to Exhibit 10.4 to the Company's Current Report on
Form 8-K (File No. 001-35561) filed on November 8, 2013]. |
10.25 |
Form of Series E Preferred Stock Purchase
Agreement, dated as of January 31, 2014, between the Company and certain investors [incorporated by
reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K (File No. 001-35561) filed on February 6, 2014]. |
* Filed herewith
** Furnished herewith
AMENDMENT NO. 1 TO
THE SECOND AMENDED AND RESTATED
BYLAWS
(the "Bylaws")
OF
YOU ON DEMAND HOLDINGS,
INC.
(the "Corporation")
Effective March 26, 2015
The Bylaws of the Corporation shall be amended as follows:
Section 6.8 of the Bylaws shall be deleted in its entirety and
replaced with the following:
"Section 6.8 Chairman. The Chairman
shall be an officer of the Corporation and shall provide advice to, and guide
and assist the Corporation's Chief Executive Officer and have such other duties
as may from time to time be assigned to him or her by the Board of Directors.
The Chairman, shall, in the absence of the Executive Chairman, preside at
meetings of the Board of Directors and stockholders of the Corporation."
* * * * *
Adopted by resolution of the Board of Directors, the 26th day
of March, 2015.
|
/s/ Grace He |
|
Grace He, Secretary
|
RETENTION AND SEPARATION AGREEMENT
Agreement made as of this 30 day
of March, 2015 between YOU ON DEMAND HOLDINGS, INC., a Nevada Corporation (the
Company) and MARC URBACH, an individual residing at 79 Greenhill Road,
Springfield, New Jersey, 07081 (Executive) (the Retention and Separation
Agreement).
BACKGROUND
The Company and Executive entered
into an Employment Agreement dated January 31, 2014 (the Employment Agreement)
pursuant to which Executive has served as President and Chief Financial Officer
of the Company. The Company now wishes to terminate the Employment Agreement as
of March 31, 2015 on the terms set forth herein, without Executive invoking any
right to resign with good reason, while retaining the services of Executive
thereafter as a Consultant pursuant to the terms of a consulting agreement (the
Consulting Agreement) to be entered into simultaneously with the execution of
this Retention and Separation Agreement.
NOW, THEREFORE, in consideration
of the foregoing and the mutual covenants herein contained and for good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
1. Termination
of Executives Employment. The Company hereby terminates Executives
employment without cause, in accordance with Section 4.4 of the Employment
Agreement, effective March 31, 2015, (the Termination Date). Provided that the
Company complies in full with the terms of this Retention and Separation
Agreement, Executive hereby waives further notice of such Termination, and
waives any right he may have to invoke his right to terminate his employment
with good reason based on any actions of the Company prior to this date, and
based on the transactions contemplated hereby.
2.
Resignation as Officer, Director, and Plan Fiduciary. To the extent that,
as of the Termination Date Executive has not previously resigned from any
position as an officer, director, trustee, plan administrator or fiduciary with
respect to the Company, and each of its parents, subsidiaries, affiliates, and
any of their employee benefit or pension plans, Executive shall be deemed to
have resigned all such positions as of the Termination Date without further
action on the part of Executive or the Company.
3. Severance.
3.1 Except
as they are modified herein, the Company acknowledges its obligation to pay to
Executive the Severance Payments and benefits provided in Sections 5.1.1.
(i)(A), (ii), (iii), (iv) and (v) of the Employment Agreement.
3.2 The
terms of Section 5.1.2 of the Employment Agreement shall apply to all
outstanding unvested options, warrants or restricted stock, and all vested
options and warrants granted to Executive.
3.3 The
eighteen (18) month severance payment shall be paid to Executive in a lump sum
within the later of ten (10) days after the Termination Date, or the date of the
delivery of Executives General Release to the Company pursuant to paragraph 4
below.
3.4 At
Executives option, Executive may elect not to participate in the Companys
health insurance plan, and shall be paid in lieu thereof the sum of $47,586.12,
representing 80% of the cost to the Company of such coverage, which shall be
paid to him in a lump sum within ten (10) days of his delivering his election to
the Company.
3.5 At
the time of payment of the Severance Payment Executive shall be paid an
additional payment equal to four (4) weeks base salary on account of vacation
time earned but not taken by Executive.
3.6 Executive
shall not be required to mitigate the Severance Payments by seeking other
employment or otherwise rendering services for compensation and such payments
shall not be reduced or abated by reason of any compensation (in whatever form)
earned by Executive on account of any other employment or rendering of services,
without regard to when such compensation is paid.
3.7 In
the event that Executives employment is terminated for any reason other than
for cause prior to March 31, 2015, the date of such earlier termination shall be
the Termination Date and all amounts payable hereunder and all other terms and
conditions of this Retention and Separation Agreement shall be due and/or shall
apply as of that date.
4. Releases.
Within forty-five (45) days of the Termination Date, Executive shall sign and
deliver to the Company a General Release in the form attached hereto as Exhibit
A. At the time of this delivery of the General Release to the Company, the
Company shall deliver to the Executive its duly executed General Release in the
form attached hereto as Exhibit B. In the event of Executives death prior to
payment of the Severance Payments, the payments shall be made to Executives
Estate upon delivery of a release executed by the Estate, and the Company shall
deliver its release to the Estate.
5.
Insurance. For a period of seven (7) years from the Termination Date, the
Company shall maintain in effect directors and officers insurance in an amount
not less than the amount maintained as of the present date, which shall cover
Executive with respect to his conduct, actions or omissions as an officer,
director, manager, employee or agent of the Company (or any parent, subsidiary,
affiliate or benefit plan of the Company or any of the foregoing).
6. Survival
of Obligations. The provisions of this Retention and Separation Agreement
and the provisions of the Employment Agreement which by their terms or substance
contemplate continuing effect shall survive the termination of such
Agreements.
7. Consulting
Agreement. Simultaneous with the execution of this Retention and Separation
Agreement, Executive and the Company shall execute and deliver to the other the
Consulting Agreement, in the form attached hereto as Exhibit C.
- 2 -
8. Confidentiality.
8.1 This
Retention and Separation Agreement and the Exhibits hereto are confidential and
the Parties shall not disclose any information regarding their terms, except
that Executive may disclose them to Executives immediate family and any tax,
legal or other counsel that he has consulted regarding the meaning or effect
hereof or as required by law. Executive will instruct each of the foregoing not
to disclose the same to anyone. The Company agrees to disclose any such
information only to any tax, legal or other counsel of the Company or as
required by law.
8.2 Any
non-disclosure provision in this Retention and Separation Agreement does not
prohibit or restrict either Party from responding to any inquiry about this
Retention and Separation Agreement or its underlying facts and circumstances by
the Securities and Exchange Commission (SEC), the Financial Industry Regulatory
Authority (FINRA), or any other self-regulatory organization or governmental
entity.
9. Interpretation;
Merger.
9.1 Whenever
possible, each provision of this Retention and Separation Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision is held to be invalid, illegal or unenforceable in any
respect under any applicable law or rule in any jurisdiction, such invalidity,
illegality or unenforceability shall not affect any other provision or any other
jurisdiction, but this Retention and Separation Agreement shall be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision had never been contained herein.
9.2 This
Retention and Separation Agreement (and the Employment Agreement to the extent
preserved herein) constitutes the complete and entire agreement and
understanding among the parties, and supersedes any and all prior or
contemporaneous agreements, commitments, understandings or arrangements, whether
written or oral, between or among any of the parties, in each case concerning
the subject matter hereof.
10.
Public Announcements. The text of all statements or releases given to the
employees or business associates of the Company or issued to the press regarding
this agreement or the termination of Executives employment shall be mutually
agreed to by Executive and the Company.
11. Governing
Law. This Retention and Separation Agreement shall be governed by and
construed in accordance with the internal law of the State of New York without
application of its principles of conflict of laws.
12. Exclusive
Jurisdiction and Venue. Any action involving a dispute arising out of or
relating to this Retention and Separation Agreement or the Exhibits hereto,
their performance, interpretation or effect shall be brought in the federal or
state courts located in the County of New York, which shall have exclusive
jurisdiction thereof. The parties hereby submit to the personal jurisdiction of
such Courts and waive any objection based on improper or inconvenient forum, and
any right to seek dismissal or transfer on such basis.
- 3 -
13.
Amendment; Assignment; Binding Effect; Counterparts and Signature. The
terms of this Retention and Separation Agreement may be amended only by a
writing signed by all Parties. This Retention and Separation Agreement may be
assigned by the Company only in connection with a sale or transfer of all or
substantially all of its assets and business. The Retention and Separation
Agreement shall be binding upon and inure to the benefit of the parties, their
heirs, executors, personal representatives, successors and permitted assigns.
This Retention and Separation Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement. This Retention and Separation
Agreement, to the extent signed and delivered by means of a facsimile machine or
other electronic transmission (including .pdf files), shall be treated in all
manner and respects and for all purposes as an original agreement or instrument
and shall be considered to have the same binding legal effect as if it were the
original signed version thereof delivered in person.
IN WITNESS WHEREOF, the parties
have each executed this Agreement as of the date first set forth above.
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YOU ON DEMAND HOLDINGS, INC |
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By: /s/ WEICHENG LIU |
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Name: Weicheng Liu |
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Title: Chief Executive Officer |
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/s/ MARC URBACH |
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MARC URBACH |
- 4 -
CONSULTING AGREEMENT
This Consulting Agreement (this
Agreement), dated as of March 31, 2015, is entered into by and between
You On Demand Holdings, Inc. (the Company) and Marc Urbach
(Consultant). (The Company and Consultant are referenced collectively
herein as the Parties; each of the Parties is referred to individually
as a Party).
RECITALS
WHEREAS, Consultant is currently
employed by the Company as President and Chief Financial Officer; and WHEREAS,
Consultants employment with the Company will terminate as of the date of this
Agreement, and the Company desires to engage Consultant to provide transition
services for the Company in accordance with the provisions of this Agreement;
and Consultant desires and is willing to accept engagement with the Company on
the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration
of the foregoing recitals, the mutual covenants and conditions herein, and other
good and valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the Parties hereby agree as follows:
AGREEMENTS
1. Consulting Services; Term.
1.1 Company desires to engage
Consultant as an independent contractor providing services to the Company, and
Consultant desires to accept such engagement, upon the terms and conditions in
this Agreement.
1.2 The term of this Agreement
(the Term) shall begin as of March 31, 2015, and end on the relevant
date described in Section 3, unless extended by mutual agreement of the
Parties.
1.3 During the Term, Consultant
shall perform the transition services set forth in Exhibit A to this
Agreement. In performing such services, Consultant shall report to the Chief
Executive Officer (CEO) of Company.
1.4 Consultant shall be generally
responsible for maintaining, at Consultants own expense, a place of work, any
necessary equipment and supplies, and appropriate communications facilities.
1.5 During and after the Term,
Consultant will not: (a) negotiate or enter into any oral or written contract,
agreement, or arrangement on behalf of or in the name of the Company, sign any
checks on behalf of or authorize any payments by the Company, or otherwise bind
the Company, without the express prior written consent of the CEO of Company;
(b) knowingly engage in any conduct, or cause the Company to engage in any
conduct, that would result in the Companys breach or violation of any
agreement, law, ordinance, or regulation; or (c) describe or represent
Consultant, or hold Consultant out, as an employee of the Company.
2. Fees and Expenses.
Payment of the Fees shall be made in the amount and at the time set forth in
Exhibit A. If the Consultant incurs any reimbursable expenses, Consultant shall
be reimbursed promptly upon providing supporting documentation provided that expenses
were approved by the Company in accordance with the Companys employee expense
reimbursement policies and incurred by Consultant on behalf of the Company.
3. Termination of Agreement.
3.1 The Term and this Agreement
shall begin on the date hereof and shall terminate 6 months from the date hereof
(the Termination Date).
3.2 Upon the Termination Date,
Consultant shall be entitled only to (a) the portion of Consultants fee that
was earned before the Termination Date; and (b) reimbursement of expenses
incurred by Consultant before the Termination Date that are reimbursable under
Section 2 (the Accrued Compensation).
4. Independent Contractor; No Employee
Benefits.
4.1 In performing services for
the Company under this Agreement, Consultant shall act as an independent
contractor with respect to the Company and not as its employee. As an
independent contractor, Consultant shall accept any directions issued by the
Company pertaining to the goals to be attained and the results to be achieved by
Consultant, but shall be solely responsible for the manner in which Consultants
services shall be performed. During the Term, Consultant may perform work on
behalf of persons and entities other than the Company, so long as: (a)
Consultant devotes sufficient time to performance of services under this
Agreement as shall be reasonably necessary for Consultant to effectively and
efficiently perform those services; (b) Consultant does not violate any part of
this Agreement or any obligations Consultant may otherwise have or any
restrictive covenants with the Company or an affiliate of the Company; and (c)
Consultant does not engage in any conduct that creates an actual or apparent
conflict of interest with Consultants obligations to the Company under this
Agreement.
4.2 Consultant agrees and
acknowledges that: (a) except as otherwise provided in an agreement between
Consultant and the Company, at no point during or after the Term shall
Consultant be eligible to participate in any of the Companys employee benefit
plans, fringe benefit programs, group insurance arrangements, or other similar
plans or programs maintained by Company for the benefit of its employees, and
shall never claim that Consultant is eligible for or entitled to any benefits
under any such plan, arrangement, or program based on services performed under
this Agreement; (b) the Company shall not provide Consultant with any statutory
benefit available to employees, including but not limited to workers
compensation, disability insurance, Social Security, or unemployment
compensation coverage with respect to services performed during the Term; and
(c) the Company shall not make any tax or other withholdings from any payment it
makes to Consultant or any contributions to any federal or state agency with
respect to such payments on behalf of Consultant, but shall report the payments
made to Consultant hereunder on an IRS Form 1099. Consultant agrees never to
claim, during or after the Term, that Consultant was or is an employee of the
Company at any point during the Term.
5. Legal Requirements and
Insurance.
5.1 Consultant represents and
warrants to the Company that Consultant has fulfilled all legal obligations
necessary for Consultant to perform the services and tasks described in
Exhibit A of this Agreement and to otherwise comply with Consultants
obligations hereunder.
5.2 Consultant shall comply at
Consultants own expense with all applicable provisions of workers compensation
laws, Social Security law, federal, state, and local income tax laws, and all
other applicable laws and regulations relating to terms and
conditions required to be fulfilled by independent contractors.
- 2 -
5.3 The Parties acknowledge that
the Company intends to deduct the fees it pays to Consultant for services under
this Agreement (the Consulting Fees) as an ordinary and necessary
business expense for income tax purposes. Consultant agrees and represents that,
except as otherwise required in writing by the Internal Revenue Service, (a)
Consultant will treat the Consulting Fees as ordinary income for income tax
purposes, pay all taxes due on Consultants receipt of the Consulting Fees
including, but not limited to, income taxes and self-employment taxes
(Consultants Taxes); and (b) if Consultant reports the receipt of the
Consulting Fees as other than ordinary income and/or fails to pay Consultants
Taxes, Consultant will indemnify and hold harmless the Company from the employee
share of any and all taxes, penalties, interest, costs and expenses actually
incurred, and reasonable attorneys fees and accounting fees, assessed against
or incurred by the Company as a result thereof.
5.4 If required by law or
regulation, Consultant will obtain, maintain, and pay for any insurance coverage
(including, without limitation, workers compensation or professional liability
insurance coverage) needed for Consultant to conduct its business and perform
services under this Agreement. Upon request of the Company, Consultant will
promptly provide the Company with a copy of the current insurance policy for any
such coverage.
5.5 The obligations of the
Company with respect to providing indemnification and/or insurance coverage
contained in section 8.9 of the Employment Agreement and section 5 of the
Separation Agreement shall apply with respect to all services rendered by
Consultant to the Company, and the Company shall take all steps necessary to
provide such indemnification and/or insurance coverage to Consultant hereunder.
5.6 Consultant shall indemnify
and defend the Company, and hold it harmless, from and against any and all
claims, losses, damages and expenses (including reasonable attorneys fees and
costs) arising, directly or indirectly, from intentional misconduct or gross
negligence, in the performance of services under this Agreement, provided that
there shall be no duty to indemnify or defend with respect to actions or
omissions by you made in the good faith belief they were in the best interest of
the company.
6. Restrictive Covenants.
6.1 Restrictive Covenants.
Consultant and the Company agree that the Company would suffer irreparable harm
and incur substantial damage if Consultant were to enter into Competition (as
defined herein) with the Company. Therefore, in order for the Company to protect
its legitimate business interests, Consultant agrees as follows:
(a)
Without the prior written consent of the Company, Consultant shall not, during
the Term, for any reason, directly or indirectly, invest or engage in any
business that is Competitive (as defined herein) with the business of the
Company or accept employment or render services to a Competitor (as defined
herein) of the Company as a director, officer, agent, employee or consultant or
solicit or attempt to solicit or accept business that is Competitive with the
business of the Company, except that Consultant may own up to five percent (5%)
of any outstanding class of securities of any company registered under Section
12 of the Securities Exchange Act of 1934, as amended.
(b)
Nothing contained herein shall relieve Consultant of his obligations pursuant to
sections 6.1.1, 6.1.2. , 6.1.3, 6.1.4 and 6.1.6 of the Employment Agreement.
- 3 -
6.2 Works for Hire.
Consultant acknowledges and agrees that all services performed for the Company
during the Term are provided on a work for hire basis (as that term is used in
the United States Copyright Act), and that Consultant has no right, claim or
title, and expressly disavows any such right, claim, or title, to any such work.
If, for any reason, the foregoing is ineffective to confirm the absolute,
irrevocable and unconditional ownership by, or rights of, the Company in any
materials created by Consultant in connection with such services, or if it
should ever be determined that any of such materials are not a
work-made-for-hire exclusively owned and authored by the Company, Consultant
hereby absolutely, irrevocably and unconditionally assigns (or, to the extent
such assignment is or may be prohibited or limited by any applicable law, hereby
absolutely, irrevocably and unconditionally licenses, royalty-free) exclusively
to the Company all of such materials, throughout the universe in perpetuity,
without condition, exclusion, limitation or reservation.
6.3 Return of Property. In
the event of the termination of Consultants engagement for any reason,
Consultant shall deliver to the Company: (i) all of the property of each of the
Company and its affiliates received at any time by Consultant (to the extent not
previously returned to the Company) and (ii) all the documents and data of any
nature and in whatever medium of each of the Company and its affiliates received
at any time by Consultant (to the extent not previously returned to the
Company), and Consultant shall not take any such property, documents or data or
any reproduction thereof, or any documents containing or pertaining to any
Confidential Information; provided, however, the foregoing shall not limit any
rights or obligations with respect to any such property, documents, data or
reproductions thereof that Consultant may have as a shareholder, creditor,
consultant and/or director of the Company.
7. Non-Disparagement. Except
as otherwise required by law, Consultant and Company each agrees that he and it
respectively will not make any false, negative or disparaging comments about,
and that he and it will refrain from directly or indirectly making any comments
or engaging in publicity or any other action or activity which reflects
adversely upon, the other (and with respect to the Company, its employees,
agents or representatives). This Non-Disparagement provision applies to comments
made verbally, in writing, electronically or by any other means, including, but
not limited to blogs, postings, message boards, texts, video or audio files and
all other forms of communication. The Company will direct its executive officers
to comply with the foregoing.
8. Legal Representation.
Consultant acknowledges that he was advised to consult with, and has had
ample opportunity to receive the advice of, independent legal counsel before
executing this Agreement, and that the Company advised Consultant to do so and
that Consultant has fully exercised that opportunity to the extent he desired.
Consultant acknowledges that he had ample opportunity to consider this Agreement
and to receive an explanation from such legal counsel of the legal nature,
effect, ramifications, and consequences of this Agreement. Consultant warrants
that he has carefully read this Agreement, that he understands completely its
contents, that he understands the significance, nature, effect, and consequences
of signing it, and that he has agreed to and signed this Agreement knowingly and
voluntarily of his own free will, act, and deed, and for full and sufficient
consideration.
9. Due Execution; Binding Obligation.
The Company represents and warrants that it has taken all necessary
action required to authorize, execute, deliver and perform this Agreement and
that when signed and delivered to Consultant, it is a valid legal and binding
obligation of the Company.
10. Miscellaneous.
10.1 Notices. Any notice
provided for in this Agreement must be in writing and must be either personally
delivered, mailed by first class mail postage prepaid and return receipt
requested) or sent by reputable overnight courier service (charges prepaid), or
faxed, to the recipient at the address below indicated:
- 4 -
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To Company: |
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You On Demand Holdings, Inc. |
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Office Park, Tower A Suite 2603 |
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10 Jintong West Road, |
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Chaoyang District, Beijing |
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100020 |
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Peoples Republic of China |
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To Consultant: |
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Marc Urbach |
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79 Greenhill Road |
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Springfield, New Jersey 07091
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or such other address or to the attention of such other person
as the recipient Party shall have specified by prior written notice to the
sending Party. Any notice under this Agreement shall be deemed to have been
given when personally delivered, one business day after sent by reputable
overnight courier service, five days after deposit in the U.S. mail or at such
time as it is transmitted via facsimile, with receipt confirmed.
10.2 Severability. It is
the Parties intend that the provisions of this Agreement be read and
interpreted with every reasonable inference given to its enforceability.
However, it is also the Parties intent that if any term, provision or condition
of the Agreement is held to be invalid, void or unenforceable, the remainder of
the provisions thereof shall remain in full force and effect and shall in no way
be affected, impaired or invalidated.
10.3 Complete Agreement.
This Agreement and those documents expressly referred to herein embody the
complete agreement and understanding among the Parties and supersede and preempt
any prior understandings, agreements or representations by or among the Parties,
written or oral, which may have been related to the subject matter hereof in any
way.
10.4 Counterparts. This
Agreement may be executed in separate counterparts, each of which is deemed to
be an original and all of which taken together constitute one and the same
agreement. This Agreement, to the extent signed and delivered by means of a
facsimile machine or other electronic transmission (including .pdf files), shall
be treated in all manner and respects and for all purposes as an original
agreement or instrument and shall be considered to have the same binding legal
effect as if it were the original signed version thereof delivered in
person.
10.5 Amendment and Waiver.
This Agreement may not be orally canceled, changed, modified or amended, and no
cancellation, change, modification or amendment shall be effective or binding,
unless in writing and signed by both (a) the Company; and (b) Consultant.
10.6 Business Days. If any
time period for giving notice or taking action hereunder expires on a day which
is a Saturday, Sunday or legal holiday in the state in which the Companys chief
employment office is located, the time period shall be automatically extended to
the business day immediately following such Saturday, Sunday or holiday.
- 5 -
10.7 Assignment. This
Agreement shall be binding upon and inure to the benefit of the Company and
Consultant and each of their successors and assigns, as applicable. If the
Company shall merge or consolidate with or into, or transfer substantially all
of its assets, including goodwill, to another corporation or other form of
business organization, this Agreement shall be binding on, and run to the
benefit of, the successor of the Company resulting from such merger,
consolidation, or transfer. Consultant shall not assign, pledge, or encumber his
interest in this Agreement, or any part thereof, without the prior written
consent of the Company, and any such attempt to assign, pledge or encumber any
interest in this Agreement shall be null and void and shall have no effect
whatsoever.
10.8 Governing Law;
Jurisdiction and Venue; No Jury Trials. This Agreement shall be governed by
and construed in accordance with the laws of New York (without regard to
principles of conflicts of law), and each of the Parties hereto submits to the
exclusive jurisdiction of any state or federal court sitting in the County of
New York, in any action or proceeding arising out of, or relating to, this
Agreement, agrees that all claims in respect of the action or proceeding may be
heard and determined in any such court and agrees not to bring any action or
proceeding arising out of, or relating to, this Agreement in any other court.
Each of the Parties hereto waives any defense of inconvenient forum to the
maintenance of any action or proceeding so brought and waives any bond, surety
or other security that might be required of any other party with respect
thereto. Each Party agrees that a final judgment in any action or proceeding so
brought may be enforced by suit on the judgment or in any other manner provided
by law. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES THE RIGHT TO TRIAL BY JURY
WITH RESPECT TO ANY ACTION RELATING TO OR ARISING OUT OF OR IN CONNECTION WITH
THIS AGREEMENT.
11. Knowing and Voluntary
Agreement. Consultant has carefully read all parts of this
Agreement and fully understands their meaning. Consultant understands that this
Agreement is legally binding, and affirms that Consultant is entering into it
voluntarily. Consultant acknowledges having had an adequate opportunity to
review this Agreement with an attorney of Consultants choice, and having done
so to the full extent Consultant believes necessary and appropriate.
- 6 -
IN WITNESS WHEREOF, the Parties
hereto have executed this Consulting Agreement as of the date first written
above.
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YOU ON DEMAND HOLDINGS, INC. |
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By: |
/s/ WEICHENG LIU |
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Name: |
Weicheng Liu |
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Title: |
Chief Executive Officer |
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CONSULTANT |
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/s/ MARC URBACH |
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Name: |
Marc Urbach |
- 7 -
EXHIBIT A
to CONSULTING
AGREEMENT
Description of Basic Consulting Services
1. Basic Services. Consultant shall
provide for the Company the following consulting services, in accordance with
the terms and conditions of this Agreement:
a. Help to participate in the
Companys finance function ensuring a smooth transition to the Companys finance
team, including but not limited to:
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involved in the review of the 2015 annual and quarterly budgets;
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review of the Companys financial and operating metrics based on current
and future business goals;
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involved in discussions and oversight of the companys liabilities,
including review of legal contracts, discussion of statutory and tax
obligations, contingencies, leases, insurance, etc.;
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provide insight on improvements to the companys corporate governance and
internal control policies, implementations and metrics.
b. Assist in the companys internal and external reporting
process by providing insight, comments and reminders on the following reporting
matters
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all required SEC reporting and document filings
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internal communication with Audit Committee and Finance Oversight Committee
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external communication with auditors, financial consultants, legal
counsels, SEC and other relevant parties.
c. Continued support to the Companys investor relations team,
including assisting in investor communication and outreach
2. Fees. Consultant will
earn fees during the Term at a monthly rate of $19,167, to be paid 50% in cash
and 50,000 restricted shares of stock of the Company. Consulting fees shall be
paid on or prior to the first day of each calendar month, as follows: $9,583.50
in cash and 8,333 shares of stock except for the sixth month when the stock
portion of the payment shall be 8,335 shares.
3. Manner of Providing Services.
The consulting services shall be provided at times reasonably convenient
to Consultant and shall customarily be provided by telephone or email.
Consultant shall not be required to travel outside of the New York metropolitan
area without his consent and in such case at the Companys sole expense.
International travel shall be business or first class for air travel and luxury
for hotel accommodations.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-183689 and 333-193786) of YOU On Demand Holdings, Inc. and its Subsidiaries (the “Company”) of our report dated March 31, 2014, relating to the Company’s consolidated financial statements as of December 31, 2013 and 2012 and for each of the two years then ended, which appears in this annual report on Form 10-K.
/s/ UHY LLP
New York, New York
March 30, 2015
Consent of Independent Registered Public Accounting Firm
The Board of Directors
YOU On Demand Holdings, Inc.:
We consent to the incorporation by reference in registration
statements (No. 333-183689 and 333-193786) on Form S-3/A of YOU On Demand
Holdings, Inc. of our report dated March 30, 2015, with respect to the
consolidated balance sheet of YOU On Demand Holdings, Inc. as of December 31,
2014, and the related consolidated statements of operations, comprehensive loss,
equity and cash flows for the year ended December 31, 2014, which report appears
in the December 31, 2014 annual report on Form 10-K of YOU On Demand Holdings,
Inc..
Our report dated March 30, 2015 contains an explanatory
paragraph that states that YOU On Demand Holdings, Inc. incurred net losses from
continuing operations and had a significant accumulated deficit that raise
substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ KPMG Huazhen (SGP)
Beijing, China
March 30,
2015
CERTIFICATIONS
I, Shane McMahon, certify that:
1. |
I have reviewed this annual report on Form 10-K 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 |
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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6. |
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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. |
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Date: March 30, 2015 |
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/s/
SHANE MCMAHON |
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Shane McMahon |
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Chairman |
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(Principal Executive Officer)
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CERTIFICATIONS
I, Marc Urbach, certify that:
1. |
I have reviewed this annual report on Form 10-K 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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|
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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 |
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): |
|
|
|
6. |
|
|
|
|
|
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: March 30, 2015 |
|
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|
|
/s/ MARC URBACH |
|
Marc Urbach |
|
|
|
President and Chief Financial Officer |
|
(Principal Financial and Accounting
Officer) |
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 Annual Report on Form 10-K for the fiscal
year ended December 31, 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 30th day of March, 2015.
|
/s/
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.
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 Annual Report on Form 10-K for the fiscal
year ended December 31, 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 30th day of March, 2015.
|
/s/ 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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