UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 000-19644
YOU ON DEMAND HOLDINGS,
INC.
(Exact name of registrant as specified in its
charter)
Nevada |
20-1778374 |
(State or other jurisdiction of incorporation or
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
(Registrant's telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No
[ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of larger accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer [ ] |
Accelerated
filer
[ ] |
Non-accelerated filer [
] |
Smaller reporting company [X] |
|
|
|
|
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
Yes [
] No [X]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date:
23,948,464 shares as of August 13, 2015.
QUARTERLY REPORT ON FORM 10-Q
OF YOU ON DEMAND HOLDINGS,
INC.
FOR THE PERIOD ENDED JUNE 30, 2015
TABLE OF CONTENTS
References
Except as otherwise indicated by the context, references in
this report to (i) the Company, YOU On Demand, we, us, and our are to
the business of YOU On Demand Holdings, Inc., a Nevada corporation, and its
consolidated subsidiaries and variable interest entities; (ii) CB Cayman are
to our wholly-owned subsidiary China Broadband, Ltd., a Cayman Islands company;
(iii) YOD Hong Kong are to YOU On Demand (Asia) Limited (formerly known as
Sinotop Group Limited), a Hong Kong company wholly-owned by CB Cayman; (iv) YOD
WFOE are to YOU On Demand (Beijing) Technology Co., Ltd., a PRC company
wholly-owned by YOD Hong Kong; (v) Sinotop Beijing or Sinotop are to Beijing
Sino Top Scope Technology Co., Ltd, a PRC company controlled by YOD Hong Kong
through contractual arrangements; (vi) Zhong Hai Video are to Zhong Hai Shi
Xun Information Technology Co., Ltd., a PRC company 80% owned by Sinotop
Beijing; (vii) Hua Cheng are to Hua Cheng Hu Dong (Beijing) Film and
Television Communication Co., Ltd., a PRC company 39% owned by Sinotop Beijing
and 20% owner of Zhong Hai Video; (viii) WFOE are to our wholly-owned
subsidiary Beijing China Broadband Network Technology Co., Ltd., a PRC company,
which was sold effective March 25, 2014; (ix) Jinan Zhong Kuan are to Jinan
Zhong Kuan Dian Guang Information Technology Co. Ltd., a PRC company controlled
through contractual arrangements, which was dissolved effective March 25, 2014;
(x) SEC are to the United States Securities and Exchange Commission; (xi)
Securities Act are to Securities Act of 1933, as amended; (xii) Exchange Act
are to the Securities Exchange Act of 1934, as amended; (xiii) PRC and China
are to Peoples Republic of China; (xiv) Renminbi and RMB are to the legal
currency of China; (xv) U.S. dollar, $ and US$ are to United States
dollars; and (xvi) VIE refers to our current variable interest entity, Sinotop
Beijing.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
YOU ON DEMAND HOLDINGS, INC., ITS SUBSIDIARIES AND VARIABLE
INTEREST ENTITY
INDEX
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED
JUNE 30, 2015
4
YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entity
UNAUDITED CONSOLIDATED BALANCE SHEETS
|
|
June 30, |
|
|
December 31, |
|
|
|
2015 |
|
|
2014 |
|
ASSETS |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
$ |
6,865,510
|
|
$ |
10,812,371
|
|
Accounts
receivable, net |
|
2,680,483 |
|
|
1,091,076 |
|
Licensed content, current |
|
722,893 |
|
|
1,041,609 |
|
Prepaid expenses
|
|
556,819 |
|
|
196,474 |
|
Other current assets |
|
109,294 |
|
|
22,442 |
|
Total current assets |
|
10,934,999 |
|
|
13,163,972 |
|
Property and equipment, net |
|
248,711 |
|
|
320,671 |
|
Licensed content,
non-current |
|
26,200 |
|
|
35,648 |
|
Intangible assets, net |
|
2,315,759 |
|
|
2,320,103 |
|
Goodwill |
|
6,648,911 |
|
|
6,648,911 |
|
Long-term equity investments |
|
757,441 |
|
|
850,054 |
|
Other non-current
assets |
|
475,745 |
|
|
365,006 |
|
Total assets |
$ |
21,407,766 |
|
$ |
23,704,365 |
|
|
|
|
|
|
|
|
LIABILITIES,
CONVERTIBLE REDEEMABLE PREFERRED STOCK AND EQUITY |
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Accounts
payable (including accounts payable of consolidated variable interest
entity (VIE) without recourse to the
Company of $18,180 and $8,598 as of June 30, 2015 and December 31, 2014,
respectively) |
$ |
30,614 |
|
$ |
110,814
|
|
Deferred
revenue (including deferred revenue of VIE without recourse to the Company
of $331,177 and $13,431 as of June 30,
2015 and December 31, 2014, respectively) |
|
331,177 |
|
|
13,431 |
|
Accrued
expenses and other liabilities (including accrued expenses and other
liabilities of VIE without recourse to the
Company of $810,227 and $573,620 as of June 30, 2015 and December 31,
2014, respectively) |
|
2,916,098 |
|
|
2,046,783 |
|
Accrued license
fees (including accrued license fees of VIE without recourse to the
Company of $895,799 and $348,007 as of
June 30, 2015 and December 31, 2014, respectively) |
|
895,799 |
|
|
348,007 |
|
Convertible promissory note |
|
3,000,000 |
|
|
3,000,000 |
|
Warrant
liabilities |
|
551,001 |
|
|
585,050 |
|
Total current
liabilities |
|
7,724,689
|
|
|
6,104,085
|
|
Deferred income tax liability |
|
347,348 |
|
|
364,572 |
|
Total liabilities |
|
8,072,037 |
|
|
6,468,657 |
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible redeemable
preferred stock: |
|
|
|
|
|
|
Series A -
7,000,000 shares issued and outstanding, liquidation preference of
$3,500,000 at June 30, 2015 and December 31,
2014, respectively |
|
1,261,995 |
|
|
1,261,995 |
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
Series E
Preferred Stock - $0.001 par value; 16,500,000 shares authorized,
7,326,426 and 7,365,283 shares issued and
outstanding, liquidation preference of $12,821,246 and $12,889,245 at June
30, 2015 and December 31, 2014,
respectively |
|
7,326 |
|
|
7,365 |
|
Common stock,
$0.001 par value; 1,500,000,000 shares authorized, 23,860,369 and
23,793,702 shares issued and outstanding at
June 30, 2015 and December 31, 2014, respectively |
|
23,861 |
|
|
23,794 |
|
Additional paid-in capital |
|
96,691,120 |
|
|
96,347,272 |
|
Accumulated
deficit |
|
(82,472,176 |
) |
|
(78,356,567 |
) |
Accumulated other comprehensive loss |
|
(65,637 |
) |
|
(66,032 |
) |
Total YOU On Demand shareholders
equity |
|
14,184,494 |
|
|
17,955,832 |
|
Non-controlling interest |
|
(2,110,760 |
) |
|
(1,982,119 |
) |
Total equity |
|
12,073,734 |
|
|
15,973,713 |
|
Total liabilities,
convertible redeemable preferred stock and equity |
$ |
21,407,766 |
|
$ |
23,704,365 |
|
The accompanying notes are an integral part of these
consolidated financial statements.
5
YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entity
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
$ |
1,479,648
|
|
$ |
182,696
|
|
$ |
2,507,576
|
|
$ |
320,377
|
|
Cost of revenue |
|
829,039 |
|
|
857,179 |
|
|
1,872,038 |
|
|
1,733,117 |
|
Gross profit/(loss)
|
|
650,609 |
|
|
(674,483 |
) |
|
635,538 |
|
|
(1,412,740 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general
and administrative expense |
|
1,658,814 |
|
|
2,270,657 |
|
|
4,107,116 |
|
|
3,911,297 |
|
Professional fees |
|
151,363 |
|
|
76,231 |
|
|
440,081 |
|
|
261,715 |
|
Depreciation and
amortization |
|
95,082 |
|
|
139,590 |
|
|
184,825 |
|
|
289,550 |
|
Total operating
expense |
|
1,905,259 |
|
|
2,486,478 |
|
|
4,732,022 |
|
|
4,462,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(1,254,650 |
) |
|
(3,160,961 |
) |
|
(4,096,484 |
) |
|
(5,875,302 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other
income/(expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense,
net |
|
(30,232 |
) |
|
(28,321 |
) |
|
(58,555 |
) |
|
(2,317,059 |
) |
Change in fair value of warrant liabilities |
|
49,344 |
|
|
1,501,632 |
|
|
34,049 |
|
|
(937,386 |
) |
Change in fair
value of contingent consideration |
|
- |
|
|
589,994 |
|
|
- |
|
|
(113,132 |
) |
Loss on long-term equity investments |
|
(60,621 |
) |
|
(5,349 |
) |
|
(93,024 |
) |
|
(10,257 |
) |
Gain from disposal
of consolidated entities |
|
- |
|
|
- |
|
|
- |
|
|
727,963 |
|
Others |
|
(36,576 |
) |
|
(15,015 |
) |
|
(46,343 |
) |
|
(67,681 |
) |
Net loss before income taxes and
non-controlling interest |
|
(1,332,735 |
) |
|
(1,118,020 |
) |
|
(4,260,357 |
) |
|
(8,592,854 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
8,612 |
|
|
32,495 |
|
|
17,224 |
|
|
55,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
(1,324,123 |
) |
|
(1,085,525 |
) |
|
(4,243,133 |
) |
|
(8,537,417 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to non-controlling
interest |
|
7,303 |
|
|
292,560 |
|
|
127,524 |
|
|
527,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to YOU On Demand
shareholders |
|
(1,316,820 |
) |
|
(792,965 |
) |
|
(4,115,609 |
) |
|
(8,010,073 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and deemed dividends on preferred
stock |
|
- |
|
|
- |
|
|
- |
|
|
(16,402,161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to YOU On Demand
common shareholders |
$ |
(1,316,820 |
) |
$ |
(792,965 |
) |
$ |
(4,115,609 |
) |
$ |
(24,412,234 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
$ |
(0.06 |
) |
$ |
(0.05 |
) |
$ |
(0.17 |
) |
$ |
(1.50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
23,851,602 |
|
|
16,598,990 |
|
|
23,833,760 |
|
|
16,267,036 |
|
The accompanying notes are an integral part of these
consolidated financial statements.
6
YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entity
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
Net loss |
$ |
(1,324,123 |
) |
$ |
(1,085,525 |
) |
$ |
(4,243,133 |
) |
$ |
(8,537,417 |
) |
Other comprehensive loss, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
Sale of subsidiary and dissolution of variable interest entity |
|
- |
|
|
- |
|
|
- |
|
|
(633,984 |
) |
Foreign currency
translation adjustments |
|
(1,683 |
) |
|
(77,886 |
) |
|
(722 |
) |
|
(53,171 |
) |
Comprehensive loss |
|
(1,325,806 |
) |
|
(1,163,411 |
) |
|
(4,243,855 |
) |
|
(9,224,572 |
) |
Comprehensive loss
attributable to non-controlling interest |
|
7,196 |
|
|
274,281 |
|
|
128,641 |
|
|
515,946 |
|
Comprehensive loss
attributable to YOU On Demand shareholders |
$ |
(1,318,610 |
) |
$ |
(889,130 |
) |
$ |
(4,115,214 |
) |
$ |
(8,708,626 |
) |
The accompanying notes are an integral part of these
consolidated financial statements.
7
YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entity
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2015 |
|
|
2014 |
|
Cash flows from operating
activities: |
|
|
|
|
|
|
Net loss |
$ |
(4,243,133 |
) |
$ |
(8,537,417 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities |
|
|
|
|
|
|
Share-based compensation expense |
|
681,376 |
|
|
359,686 |
|
Provision for doubtful accounts |
|
9,087 |
|
|
- |
|
Depreciation and amortization |
|
184,825 |
|
|
289,550 |
|
Amortization of interest expense related to debt issuance
costs |
|
- |
|
|
128,879 |
|
Amortization of interest expense related to beneficial conversion
feature |
|
- |
|
|
2,126,301 |
|
Income tax benefit |
|
(17,224 |
) |
|
(55,437 |
) |
Loss
on long-term equity investments |
|
93,024 |
|
|
10,257 |
|
Loss on disposal of assets |
|
2,421 |
|
|
8,334 |
|
Change in fair value of warrant liabilities |
|
(34,049 |
) |
|
937,386 |
|
Change in fair value of contingent consideration |
|
- |
|
|
113,132 |
|
Gain
from disposal of consolidated entities |
|
- |
|
|
(727,963 |
) |
Change in
assets and liabilities, |
|
|
|
|
|
|
Accounts receivable |
|
(1,598,494 |
) |
|
141,144 |
|
Licensed content |
|
328,164 |
|
|
(215,735 |
) |
Prepaid expenses and other assets |
|
(447,411 |
) |
|
(222,816 |
) |
Accounts payable |
|
(80,200 |
) |
|
(301,697 |
) |
Accrued expenses and other liabilities |
|
375,847 |
|
|
315,680 |
|
Deferred revenue |
|
317,746 |
|
|
(33,123 |
) |
Accrued license fee |
|
547,792 |
|
|
171,606 |
|
Net cash used in operating
activities |
|
(3,880,229 |
) |
|
(5,492,233 |
) |
|
|
|
|
|
|
|
Cash flows from investing
activities: |
|
|
|
|
|
|
Acquisition of property
and equipment |
|
(30,116 |
) |
|
(56,295 |
) |
Acquisition of leasehold improvements |
|
- |
|
|
(9,492 |
) |
Investments in
intangibles and research and development |
|
(35,202 |
) |
|
(292 |
) |
Sale of
subsidiary |
|
- |
|
|
(57,549 |
) |
Net cash used in investing activities
|
|
(65,318 |
) |
|
(123,628 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
Proceeds
from sale of Series E Preferred Stock |
|
- |
|
|
16,613,949 |
|
Proceeds from the
exercise of warrants and options |
|
- |
|
|
995,607 |
|
Series D
Preferred Stock dividend payment |
|
- |
|
|
(92,054 |
) |
Convertible note interest
paid |
|
- |
|
|
(19,508 |
) |
Net cash provided by
financing activities |
|
- |
|
|
17,497,994 |
|
Effect of exchange rate changes on cash |
|
(1,314 |
) |
|
(33,614 |
) |
Net increase/(decrease) in
cash and cash equivalents |
|
(3,946,861 |
) |
|
11,848,519 |
|
|
|
|
|
|
|
|
Cash and cash equivalents
at beginning of period |
|
10,812,371 |
|
|
3,822,889
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
at end of period |
$ |
6,865,510 |
|
$ |
15,671,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
$ |
- |
|
$ |
- |
|
Cash paid for interest |
$ |
- |
|
$ |
19,508 |
|
Value of warrants issued for issuance costs
in connection with Preferred Series E Preferred Stock |
$ |
- |
|
$ |
2,166,296 |
|
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 |
|
Exchange of Series E
Preferred Stock for Common stock |
$ |
39 |
|
$ |
- |
|
Value of common stock issued from conversion
of Preferred Series C shares |
$ |
- |
|
$ |
219,754 |
|
Receivable from sale of
subsidiary |
$ |
- |
|
$ |
50,000 |
|
The accompanying notes are an integral part of these
consolidated financial statements.
8
YOU On Demand Holdings, Inc., Its
Subsidiaries and Variable Interest
Entity
UNAUDITED CONSOLIDATED
STATEMENTS OF EQUITY
For the Six
Months Ended June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
YOU On |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
Other |
|
|
Demand |
|
|
Non- |
|
|
|
|
|
|
Preferred |
|
|
Par |
|
|
Common |
|
|
Par |
|
|
Paid-in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Shareholders' |
|
|
controlling |
|
|
Total |
|
|
|
Stock |
|
|
Value |
|
|
Stock |
|
|
Value |
|
|
Capital |
|
|
Deficit |
|
|
Loss |
|
|
Equity |
|
|
Interest |
|
|
Equity |
|
Balance, January 1,
2014 |
|
- |
|
$ |
- |
|
|
15,794,762 |
|
$ |
15,794 |
|
$ |
67,417,025 |
|
$ |
(65,856,053 |
) |
$ |
(715,090 |
) |
$ |
861,676 |
|
$ |
(1,397,322 |
) |
$ |
(535,646 |
) |
Stock option compensation |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
409,687 |
|
|
- |
|
|
- |
|
|
409,687 |
|
|
- |
|
|
409,687 |
|
Common stock issued for
services |
|
- |
|
|
- |
|
|
10,309 |
|
|
10 |
|
|
29,990 |
|
|
- |
|
|
- |
|
|
30,000 |
|
|
- |
|
|
30,000 |
|
Conversion of Series C Preferred Stock into
common stock |
|
- |
|
|
- |
|
|
140,000 |
|
|
140 |
|
|
219,614 |
|
|
- |
|
|
- |
|
|
219,754 |
|
|
- |
|
|
219,754 |
|
Preferred Series D cash
dividends paid |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(92,054 |
) |
|
- |
|
|
(92,054 |
) |
|
- |
|
|
(92,054 |
) |
Preferred Series E stock issued for cash |
|
14,285,714 |
|
|
14,286 |
|
|
- |
|
|
- |
|
|
24,985,714 |
|
|
- |
|
|
- |
|
|
25,000,000 |
|
|
- |
|
|
25,000,000 |
|
Conversion of Preferred
Series D shares into common |
|
(857,143 |
) |
|
(857 |
) |
|
857,143 |
|
|
857 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Issuance costs in connection with the
issuance of Series E preferred stock |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(4,552,347 |
) |
|
- |
|
|
- |
|
|
(4,552,347 |
) |
|
- |
|
|
(4,552,347 |
) |
Valuation of warrants issued
to placement agent in connection with the issuance of Series E preferred
stock |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
2,166,296 |
|
|
- |
|
|
- |
|
|
2,166,296 |
|
|
- |
|
|
2,166,296 |
|
Beneficial conversion feature of Series E
preferred stock |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
16,388,572 |
|
|
(16,388,572 |
) |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Beneficial conversion feature
related to Convertible note modification |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
2,126,301 |
|
|
- |
|
|
- |
|
|
2,126,301 |
|
|
- |
|
|
2,126,301 |
|
Sale of subsidiary and dissolution of
variable interest entity |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(633,984 |
) |
|
(633,984 |
) |
|
- |
|
|
(633,984 |
) |
Exercise of warrants |
|
- |
|
|
- |
|
|
607,480 |
|
|
608 |
|
|
2,374,575 |
|
|
- |
|
|
- |
|
|
2,375,183 |
|
|
- |
|
|
2,375,183 |
|
Exercise of options |
|
- |
|
|
- |
|
|
526 |
|
|
1 |
|
|
1,051 |
|
|
- |
|
|
- |
|
|
1,052 |
|
|
- |
|
|
1,052 |
|
Net loss attributable to YOU
On Demand shareholders |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(8,010,073 |
) |
|
- |
|
|
(8,010,073 |
) |
|
(527,344 |
) |
|
(8,537,417 |
) |
Foreign currency translation adjustments |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(53,171 |
) |
|
(53,171 |
) |
|
11,398 |
|
|
(41,773 |
) |
Balance, June 30, 2014
|
|
13,428,571 |
|
$ |
13,429 |
|
|
17,410,220 |
|
$ |
17,410 |
|
$ |
111,566,478 |
|
$ |
(90,346,752 |
) |
$ |
(1,402,245 |
) |
$ |
19,848,320 |
|
$ |
(1,913,268 |
) |
$ |
17,935,052 |
|
The accompanying notes are an
integral part of these consolidated
financial statements.
9
YOU On Demand Holdings, Inc., Its
Subsidiaries and Variable Interest Entity
UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY
For the Six Months Ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
2015 |
|
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 |
|
Share-based compensation |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
251,356 |
|
|
- |
|
|
- |
|
|
251,356 |
|
|
- |
|
|
251,356 |
|
Common stock issued for
services |
|
- |
|
|
- |
|
|
24,999 |
|
|
25 |
|
|
92,495 |
|
|
- |
|
|
- |
|
|
92,520 |
|
|
- |
|
|
92,520 |
|
Conversion of Series E Preferred Stock
into common stock |
|
(38,857 |
) |
|
(39 |
) |
|
38,857 |
|
|
39 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Exercise of options |
|
- |
|
|
- |
|
|
2,811 |
|
|
3 |
|
|
(3 |
) |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Net loss attributable to YOU On Demand
shareholders |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(4,115,609 |
) |
|
- |
|
|
(4,115,609 |
) |
|
(127,524 |
) |
|
(4,243,133 |
) |
Foreign currency translation
adjustments |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
395 |
|
|
395 |
|
|
(1,117 |
) |
|
(722 |
) |
Balance, June 30, 2015 |
|
7,326,426 |
|
$ |
7,326 |
|
|
23,860,369 |
|
$ |
23,861 |
|
$ |
96,691,120 |
|
$ |
(82,472,176 |
) |
$ |
(65,637 |
) |
$ |
14,184,494 |
|
$ |
(2,110,760 |
) |
$ |
12,073,734 |
|
The accompanying notes are an
integral part of these consolidated
financial statements.
10
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 and video
streaming service 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.
In the opinion of management, these
financial statements reflect all adjustments, which are of a normal and
recurring nature that is necessary for a fair statement of the results for the
periods presented in accordance with U.S. Generally Accepted Accounting
Principles (U.S. GAAP) and with the instructions to Form 10-Q in Article 10 of
SEC Regulation S-X. The results of operations for the interim periods presented
are not necessarily indicative of results for the full year.
Certain information and footnote
disclosures normally included in the annual consolidated financial statements
prepared in accordance with U.S. GAAP have been condensed or omitted. These
unaudited consolidated financial statements should be read in conjunction with
the Companys audited consolidated financial statements and notes thereto
included in the Companys Annual Report on Form 10-K for the year ended December
31, 2014 filed with the Securities and Exchange Commission on March 30, 2015
(our 2014 Annual Report).
2. |
Going Concern and Managements
Plans |
For the six months ended June 30, 2015,
we incurred a net loss of approximately $4.2 million and we used cash for
operations of approximately $3.9 million. Further, we had an accumulated deficit
of approximately $82.5 million as of June 30, 2015.
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 Stock
financing (as discussed below in Note 9) in which we raised an additional $19.0
million. 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.
3. |
VIE Structure and
Arrangements |
To comply with PRC laws and regulation
that prohibit or restrict foreign ownership of companies that provide
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.
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
YOD Hong Kongs future payment obligations.
11
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 the 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.
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.
12
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 $2.7 million) as of June
30, 2015. 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 VIE, as applicable for the periods presented, affected the Companys
consolidated financial statements.
|
|
June 30, |
|
|
December 31, |
|
|
|
2015 |
|
|
2014 |
|
ASSETS |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
$ |
772,263
|
|
$ |
506,525
|
|
Accounts
receivable, net |
|
2,680,483 |
|
|
1,091,076 |
|
Licensed content, current |
|
722,893 |
|
|
1,041,609 |
|
Prepaid expenses
|
|
85,376 |
|
|
105,918 |
|
Other current assets |
|
27,076 |
|
|
12,811 |
|
Intercompany
receivables due from the Company's subsidiaries(i) |
|
169,391 |
|
|
572,192 |
|
Total current assets
|
|
4,457,482
|
|
|
3,330,131
|
|
Property and equipment,
net |
|
238,862 |
|
|
297,898 |
|
Licensed
content, non-current |
|
26,200 |
|
|
35,648 |
|
Intangible assets, net
|
|
78,615 |
|
|
5,291 |
|
Long-term
equity investments |
|
757,441 |
|
|
850,054 |
|
Other non-current assets
|
|
227,416 |
|
|
272,657 |
|
Total assets |
$ |
5,786,016 |
|
$ |
4,791,679 |
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Accounts payable |
$ |
18,180 |
|
$ |
8,598 |
|
Deferred revenue
|
|
331,177 |
|
|
13,431 |
|
Accrued expenses and other liabilities |
|
810,227 |
|
|
573,620 |
|
Accrued license
fees |
|
895,799 |
|
|
348,007 |
|
Intercompany payables due to the Company's
subsidiaries(i) |
|
11,886,135 |
|
|
11,200,536 |
|
Total current liabilities |
|
13,941,518 |
|
|
12,144,192 |
|
Total liabilities |
$ |
13,941,518 |
|
$ |
12,144,192 |
|
(i) Intercompany receivables and payables are eliminated upon
consolidation
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2015 |
|
|
2014 |
|
Net revenue |
$ |
2,507,576
|
|
$ |
320,377
|
|
Net loss |
$ |
(731,763 |
) |
$ |
(2,671,253 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2015 |
|
|
2014 |
|
Net cash provided by/(used in) operating
activities |
$ |
329,740 |
|
$ |
(2,218,904 |
) |
Net cash used in investing activities
|
$ |
(64,002 |
) |
$ |
(65,126 |
) |
Net cash provided by
financing activities |
$ |
- |
|
$ |
- |
|
13
4. |
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.
5. |
Property and Equipment |
The following is a breakdown of our
property and equipment:
|
|
June 30, |
|
|
December 31, |
|
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
|
|
Furniture and office
equipment |
$ |
951,139
|
|
$ |
959,080
|
|
Leasehold improvements |
|
190,722 |
|
|
190,722 |
|
Total property and
equipment |
|
1,141,861
|
|
|
1,149,802
|
|
Less: accumulated depreciation |
|
(893,150 |
) |
|
(829,131 |
) |
Net carrying value |
$ |
248,711 |
|
$ |
320,671 |
|
We recorded depreciation expense of
approximately $49,000 and $100,000 for the three and six months ended June 30,
2015. We recorded depreciation expense of approximately $60,000 and $126,000 for
the three and six months ended June 30, 2014.
The Company intangible assets primarily
arose from the acquisition of YOD Hong Kong.
As of June 30, 2015, the Companys
amortized intangible assets consisted of the following:
|
|
June 30, 2015 |
|
|
December 31, 2014 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net |
|
|
|
Amount |
|
|
Amortization |
|
|
Balance |
|
|
Amount |
|
|
Amortization |
|
|
Balance |
|
Charter/ Cooperation
agreements |
$ |
2,755,821
|
|
$ |
(677,476 |
) |
$ |
2,078,345
|
|
$ |
2,755,821
|
|
$ |
(608,580 |
) |
$ |
2,147,241
|
|
Software and licenses |
|
253,930 |
|
|
(224,730 |
) |
|
29,200 |
|
|
253,930 |
|
|
(215,358 |
) |
|
38,572 |
|
Website and mobile app
development |
|
437,070 |
|
|
(363,146 |
) |
|
73,924 |
|
|
356,425 |
|
|
(356,425 |
) |
|
- |
|
Total definite lived intangible
assets |
$ |
3,446,821 |
|
$ |
(1,265,352 |
) |
$ |
2,181,469 |
|
$ |
3,366,176 |
|
$ |
(1,180,363 |
) |
$ |
2,185,813 |
|
Website name |
|
134,290 |
|
|
- |
|
|
134,290 |
|
|
134,290 |
|
|
- |
|
|
134,290 |
|
Total intangible assets |
$ |
3,581,111 |
|
$ |
(1,265,352 |
) |
$ |
2,315,759 |
|
$ |
3,500,466 |
|
$ |
(1,180,363 |
) |
$ |
2,320,103 |
|
We recorded amortization expense
related to our finite lived intangible assets of approximately $46,000 and
$85,000 for the three and six months ended June 30, 2015. We recorded
amortization expense related to our finite lived intangible assets of
approximately $79,000 and $164,000 for the three and six months ended June 30,
2014.
14
The following table outlines the
amortization expense for the next five years and thereafter:
|
|
Amortization to be |
|
Years ending December 31, |
|
Recognized |
|
2015 (6 months) |
$ |
91,657 |
|
2016 |
|
181,664 |
|
2017 |
|
165,877 |
|
2018 |
|
145,715 |
|
2019 |
|
138,275 |
|
Thereafter |
|
1,458,281 |
|
Total amortization to be
recognized |
$ |
2,181,469 |
|
7. |
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
to determine if the fair value measurements are still appropriate on an annual
basis, and evaluate and adjust the unobservable inputs used in the fair value
measurements based on current market conditions and third party information.
The fair value of the warrant
liabilities at June 30, 2015 were valued using the Black-Scholes Merton method
as an estimate for the Monte Carlos Simulation method which was the method used
at the year ended December 31, 2014. The following assumptions were
incorporated:
|
|
Black Scholes |
|
|
Monte Carlo |
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2015 |
|
|
2014 |
|
Risk-free interest rate |
|
0.64% |
|
|
1.040% |
|
Expected volatility |
|
70% |
|
|
70% |
|
Expected term (years) |
|
2.17 |
|
|
2.67 |
|
Expected dividend yield |
|
0% |
|
|
0% |
|
The following tables present the fair
value hierarchy for those assets and liabilities measured at fair value on a
recurring basis at June 30, 2015 and December 31, 2014, respectively:
|
|
June 30,
2015 |
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total Fair Value |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note 10) |
$ |
- |
|
$ |
- |
|
$ |
551,001 |
|
$ |
551,001 |
|
15
|
|
December
31, 2014 |
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total Fair Value
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note 10) |
$ |
- |
|
$ |
- |
|
$ |
585,050 |
|
$ |
585,050 |
|
The table below reflects the components
effecting the change in fair value for the six months ended June 30, 2015:
|
|
Level 3
Assets and Liabilities |
|
|
|
|
|
|
For the Six Months Ended June 30,
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
January 1, |
|
|
|
|
|
Fair Value |
|
|
June 30, |
|
|
|
2015 |
|
|
Settlements |
|
|
gain |
|
|
2015 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note 10) |
$ |
585,050 $ |
|
|
- $ |
|
|
(34,049 |
) |
$ |
551,001 |
|
|
|
Quantitative
Information about Level 3 Fair Value Measurements |
|
|
|
|
|
|
For the Six Months
Ended June 30, 2015 |
|
|
|
|
|
|
Fair
Value at |
|
|
Valuation |
|
|
Unobservable |
|
|
|
|
|
|
06/30/2015 |
|
|
Techniques |
|
|
Inputs |
|
|
Input |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
$ |
551,001 |
|
|
Black-Scholes
Merton
Model |
|
|
Risk-free
rate of interest |
|
|
0.64% |
|
|
|
|
|
|
|
|
|
Expected volatility |
|
|
70% |
|
|
|
|
|
|
|
|
|
Expected term (years) |
|
|
2.17 |
|
|
|
|
|
|
|
|
|
Expected dividend yield |
|
|
0% |
|
The significant unobservable inputs
used in the fair value measurement of the Companys warrant liability 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 June 30, 2015 and December 31,
2014, approximate fair value because of the short maturity of these instruments.
8. |
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, our 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.
16
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 9), 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 9) 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.
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 to the Note 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 three and six months ended June
30, 2015, the Company recorded interest expense of $30,000 and $60,000,
respectively, related to the Note. For the three and six months ended June 30,
2014, the Company recorded interest expense of $30,000 and $2,186,000,
respectively, related to the Note.
(b) Revenue and Accounts
Receivable
In March 2015, Zhong Hai Video entered
into an agreement with C Media Limited (C Media) to provide video content
services via C Medias proprietary railway Wi-Fi service platform. For the three
and six months ended June 30, 2015, total revenue recognized amounted to nil and
$182,000, respectively. As of June 30, 2015, total accounts receivable due from
C Media amounted to $97,000.
(c) Cost of Revenue
Zhong Hai Video paid licensed content
fees of approximately $40,000 and $42,000 for the three months ended June 30,
2015 and 2014, and $80,000 and $81,000 for the six months ended June 30, 2015
and 2014, respectively, to Hua Cheng, the minority shareholder of Zhong Hai
Video.
(d) Sale of WFOE
Effective March 25, 2014, 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 for the sale of WFOE was US$50,000, which was received in the
third quarter of 2014.
9. |
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, pursuant to which we
sold to C Media 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.
17
The Series D Preferred Stock and any
dividends thereon may be converted into shares of our common stock at any time
by C Media at a conversion price of $1.75 per share. The dividends on the Series
D 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 C
Media. The redemption may be exercised in whole or in part at $1.75 dollars per
share, plus all unpaid and accrued dividends. C Media shall have the right to
vote with our stockholders in any matter. C Media 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 Company,
C Media 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.
Subsequently, the Company exchanged the
Series D Preferred Stock to Series E Preferred Stock, effective as of January
31, 2014. Previously recognized beneficial conversion feature of $183,000
related to the 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, in accordance with the terms of the Series D Preferred Stock Purchase
Agreement, the Company paid the full cumulative dividends of $92,000 upon the
exchange of the Series D Preferred Stock to Series E Preferred Stock.
(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 Preferred Stock 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, the Company
recorded debt issuance costs of approximately $370,000 that was to be amortized
over the period of the earliest possible conversion date of January 31, 2014, of
which $129,000 was recognized during the three months ended March 31, 2014. 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.
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. On December 4, 2013, C Media exercised its extension option
which extended such 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 conversion of 2,285,714 shares of Series D Preferred Stock held
by C Media, which constitute all of the issued and outstanding shares of Series
D Preferred Stock, into the Series E Preferred Stock pursuant to the Series E
Purchase Agreement. In connection with
the issuance of the Series E Preferred Stock, we recorded issuance costs of
$4,552,347 to additional paid in capital. The issuance costs included cash paid
of 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.
18
In connection with the issuance of
Series E Preferred Stock, we recorded dividends of approximately $16,402,000.
This amount is comprised of (1) recognition of a deemed dividend for a
beneficial conversion feature discount of $16,571,000, (2) reversal of a deemed
dividend for the beneficial conversion feature discount of $183,000 related to
the extinguishment of the Series D Preferred Stock and (3) cash dividends paid
of $14,000 for January 2014, which is part of the total cash dividend paid,
amounting to $92,054, in the six months ended June 30, 2014.
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 June 30, 2015 and December 31,
2014, the warrant liability was re-valued as disclosed in Note 7, and was
adjusted to its current fair value of approximately $551,000 and $585,000,
respectively, as determined by the Company, resulting in a gain of approximately
$34,000 for the six months ended June 30, 2015. There were no warrants exercised
during six months ended June 30, 2015.
As of June 30, 2015, the Company had
1,723,153 options and 2,191,487 warrants outstanding to purchase shares of our
common stock.
The Company awards common stock and
stock options to employees and directors as compensation for their services, and
accounts for its stock option awards to employees and directors pursuant to the
provisions of ASC 718, Stock Compensation. The fair value of each option
award is estimated on the date of grant using the Black-Scholes Merton valuation
model. The Company recognizes the fair value of each option as compensation
expense ratably using the straight-line attribution method over the service
period, which is generally the vesting period.
Total share-based payments expense
recorded by the Company during the three and six months ended June 30, 2015 and
2014 is as follows:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30 |
|
|
June 30 |
|
|
June 30 |
|
|
June 30 |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
Employees and directors
share-based payments |
$ |
277,000
|
|
$ |
413,000
|
|
$ |
681,000
|
|
$ |
652,000
|
|
19
(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 June 30,
2015, options available for issuance are 2,080,370 shares.
Stock option activity for the six
months ended June 30, 2015 is summarized as follows:
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregated |
|
|
|
Options |
|
|
Weighted Average
|
|
|
Contractual Life
|
|
|
Intrinsic |
|
|
|
Outstanding |
|
|
Exercise Price |
|
|
(Years) |
|
|
Value |
|
Outstanding at January 1,
2015 |
|
1,800,226 |
|
$ |
2.73 |
|
|
|
|
|
|
|
Granted |
|
- |
|
|
- |
|
|
|
|
|
|
|
Exercised |
|
(16,636 |
) |
|
1.81 |
|
|
|
|
|
|
|
Expired |
|
(24,063 |
) |
|
1.93 |
|
|
|
|
|
|
|
Forfeited |
|
(36,374 |
) |
|
1.69 |
|
|
|
|
|
|
|
Outstanding at June 30, 2015 |
|
1,723,153 |
|
$ |
2.77 |
|
|
6.12 |
|
$ |
144,771 |
|
Vested and expected to vest
as of June 30, 2015 |
|
1,723,153 |
|
|
2.77 |
|
|
6.12 |
|
|
144,771 |
|
Options exercisable at June 30, 2015 (vested)
|
|
1,660,025 |
|
$ |
2.79 |
|
|
6.06 |
|
$ |
124,515 |
|
The weighted average grant-date fair
value of options granted during the six months ended June 30, 2015 and 2014 was
nil and $2.91. The total intrinsic value of options exercised during the six
months ended June 30, 2015 and 2014 was $5,398 and $1,693.
As of June 30, 2015, approximately
$117,000 of total unrecognized compensation expense related to non-vested share
options is expected to be recognized over a weighted average period of
approximately 1.73 years. The total fair value of shares vested during the six
months ended June 30, 2015 and 2014 was approximately $251,000 and $360,000,
respectively.
(b) Warrants
In connection with the Companys
financings, the Warner Brother Agreement and the service agreements, the Company
issued warrants to investors and service providers to purchase common stock of
the Company.
As of June 30, 2015, the weighted
average exercise price of the warrants was $2.20 and the weighted average
remaining life was 2.89 years. The following table outlines the warrants
outstanding and exercisable as of June 30, 2015 and December 31, 2014:
|
|
June 30, |
|
|
December 31, |
|
|
|
|
|
|
|
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
|
|
|
Number of |
|
|
Number of |
|
|
|
|
|
|
|
|
|
Warrants |
|
|
Warrants |
|
|
Exercise |
|
|
Expiration |
|
Warrants Outstanding |
|
Outstanding |
|
|
Outstanding |
|
|
Price |
|
|
Date |
|
|
|
and Exercisable |
|
|
and Exercisable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
536,250 |
|
$ |
1.50 |
|
|
08/30/17 |
|
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 |
|
|
1,085,714 |
|
$ |
1.75 |
|
|
01/31/19 |
|
|
|
2,191,487 |
|
|
2,191,487 |
|
|
|
|
|
|
|
(i) |
The warrants are classified as derivate liabilities in
Note 10 |
20
12. |
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 applicable 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 six months ended June 30, 2015
and 2014, 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:
|
|
June 30, |
|
|
June 30, |
|
|
|
2015 |
|
|
2014 |
|
Warrants |
|
2,191,487 |
|
|
2,191,487 |
|
Options |
|
1,723,153 |
|
|
1,896,744 |
|
Series A Preferred Stock |
|
933,333 |
|
|
933,333 |
|
Series E Preferred Stock |
|
7,326,426 |
|
|
13,428,571 |
|
Convertible promissory notes
|
|
1,929,769 |
|
|
1,861,198 |
|
Total |
|
14,104,168 |
|
|
20,311,333 |
|
The Company has reserved its authorized
but unissued common stock for possible future issuance in connection with the
following:
|
|
June 30, |
|
|
June 30, |
|
|
|
2015 |
|
|
2014 |
|
Exercise of stock warrants
|
|
2,191,487 |
|
|
2,191,487 |
|
Exercise and future grants of stock options
|
|
3,983,263 |
|
|
4,023,345 |
|
Conversion of preferred stock
|
|
8,259,759 |
|
|
14,361,904 |
|
Contingent issuable shares in connection with
YOD Hong Kong acquisition |
|
- |
|
|
245,274 |
|
Issuable shares from
conversion of promissory notes payable |
|
1,929,769 |
|
|
1,861,198 |
|
Total |
|
16,364,278 |
|
|
22,683,208 |
|
As of June 30, 2015, the Company had
approximately $23.2 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 $13.2 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 2035 and year 2015 to year 2020, respectively. We
have established a 100% valuation allowance against our net deferred tax assets
due to our history of pre-tax losses and the likelihood that the deferred tax
assets will not be realizable, therefore a net deferred tax liability arises
from one jurisdiction. The valuation allowance increased approximately $0.5
million and $1.8 million during the three and six months ended June 30, 2015,
respectively.
We are not aware of any unrecorded tax
liabilities which would impact our financial position or our results of
operations.
14. |
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 June 30, 2015, the Company's potential minimum cash obligation to these
employees was approximately $876,000.
21
(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 (6 months) |
$ |
413,190
|
|
2016 |
|
700,602 |
|
2017 |
|
57,725 |
|
Total |
$ |
1,171,517 |
|
(c) Licensed Content Commitment
The Company is committed to paying
content costs through 2016 as follows:
Years ending December 31, |
|
Content Costs |
|
2015 (6 months) |
$ |
2,677,000
|
|
2016 |
|
2,791,000 |
|
Total |
$ |
5,468,000 |
|
(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.
15. |
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 is consolidated in the Companys
financial statements 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 laws 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 laws 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. Administrative and court proceedings in China may also be protracted,
resulting in substantial costs and diversion of resources and management
attention. Regulatory risk also encompasses the interpretation by the tax
authorities of current tax laws, and the Companys legal structure and scope of
operations in the PRC, which could be subject to further restrictions resulting
in limitations on the Companys ability to conduct business in the PRC.
22
(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 six months ended June 30, 2015,
three customers individually accounted for more than 10% of the Companys
revenue. Four customers individually accounted for 10% of the Companys net
accounts receivables as of June 30, 2015.
For the six months ended June 30, 2014,
three 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 June 30, 2014.
(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 six months ended June 30, 2015,
four suppliers individually accounted for more than 10% of the Companys cost of
revenues. Two suppliers individually accounted for 10% of the Companys accounts
payable and prepayment as of June 30, 2015.
For the six months ended June 30, 2014,
four 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 June 30, 2014.
(d) Concentration of Credit Risks
Financial instruments that potentially
subject the Company to significant concentration of credit risk primarily
consist of cash and cash equivalents, accounts receivable and other receivables.
As of June 30, 2015 and 2014, the Companys 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
Companys VOD content distribution partners. The risk with respect to accounts
receivable is mitigated by regular credit evaluations that the Company performs
on its distribution partners and its ongoing monitoring of outstanding balances.
(e) Foreign Currency Risks
A majority of the Companys operating
transactions are denominated in RMB and a significant portion of the Companys
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 Company 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.
16. |
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 $6,000 and $19,000 for the six months ended
June 30, 2015 and 2014, respectively.
Management evaluated subsequent events
after June 30, 2015 through the latest practicable date, and concluded that no
subsequent event has occurred that would require recognition or disclosure in
the unaudited consolidated financial statements.
23
Cautionary Note Regarding Forward Looking Statements
This Form 10-Q contains forward-looking statements that
involve risks and uncertainties. You can identify these statements by the use of
forward-looking words such as "may", "will", "expect", "anticipate", "estimate",
"believe", "continue", or other similar words. You should read statements that
contain these words carefully because they discuss our future expectations,
contain projections of our future results of operations or financial condition
or state other "forward-looking" information. We believe that it is important to
communicate our future expectations to our investors. However, these
forward-looking statements are not guarantees of future performance and actual
results may differ materially from the expectations that are expressed, implied
or forecasted in any such forward-looking statements. There may be events in the
future that we are unable to accurately predict or control, including weather
conditions and other natural disasters which may affect demand for our products,
and the productdevelopment and marketing efforts of our competitors. Examples
of these events are more fully described in the Companys 2014 Annual Report
under Part I. Item 1A. Risk Factors.
Unless required by law, the Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. However, readers should carefully
review the reports and documents the Company files from time to time with the
SEC, particularly its Quarterly Reports on Form 10-Q, Annual Report on Form 10-K
, Current Reports on Form 8-K and all amendments to those reports.
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations.
The following managements discussion and analysis should be
read in conjunction with our financial statements and the notes thereto and the
other financial information appearing elsewhere in this report. In addition to
historical information, the following discussion contains certain
forward-looking information. See 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 enhanced
premium content through our video streaming service and integrated value-added
video-on-demand (VOD) solutions business 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 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.
24
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. |
|
|
|
|
|
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
normalized operating expenses have been decreasing but we have also
incurred certain additional costs related to our financing activities,
maintaining our public company status and making staff reductions.
|
|
|
|
|
|
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.
25
Consolidated Results of Operations
Comparison of Three Months Ended June 30, 2015 and 2014
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
Amount Change |
|
|
% Change |
|
Revenue |
$ |
1,480,000
|
|
$ |
183,000
|
|
$ |
1,297,000
|
|
|
709% |
|
Cost of revenue |
|
829,000 |
|
|
857,000 |
|
|
(28,000 |
) |
|
-3% |
|
Gross profit/(loss)
|
|
651,000 |
|
|
(674,000 |
) |
|
1,325,000 |
|
|
-197% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
1,659,000 |
|
|
2,271,000 |
|
|
(612,000 |
) |
|
-27% |
|
Professional fees |
|
151,000 |
|
|
76,000 |
|
|
75,000 |
|
|
99% |
|
Depreciation and amortization |
|
95,000 |
|
|
140,000 |
|
|
(45,000 |
) |
|
-32% |
|
Total operating expense
|
|
1,905,000 |
|
|
2,487,000 |
|
|
(582,000 |
) |
|
-23% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(1,254,000 |
) |
|
(3,161,000 |
) |
|
1,907,000
|
|
|
-60% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other
income/(expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
(30,000 |
) |
|
(28,000 |
) |
|
(2,000 |
) |
|
7% |
|
Change in fair value of
warrant liabilities |
|
49,000 |
|
|
1,502,000 |
|
|
(1,453,000 |
) |
|
-97% |
|
Change in fair value of contingent
consideration |
|
- |
|
|
590,000 |
|
|
(590,000 |
) |
|
-100% |
|
Loss on investment in
unconsolidated entities |
|
(61,000 |
) |
|
(6,000 |
) |
|
(55,000 |
) |
|
917% |
|
Others |
|
(37,000 |
) |
|
(15,000 |
) |
|
(22,000 |
) |
|
147% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and
non-controlling interest |
|
(1,333,000 |
) |
|
(1,118,000 |
) |
|
(215,000 |
) |
|
19% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
9,000 |
|
|
32,000 |
|
|
(23,000 |
) |
|
-72% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
(1,324,000 |
) |
|
(1,086,000 |
) |
|
(238,000 |
) |
|
22% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to non-controlling
interests |
|
7,000 |
|
|
293,000 |
|
|
(286,000 |
) |
|
-98% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to YOU On Demand shareholders
|
|
(1,317,000 |
) |
|
(793,000 |
) |
|
(524,000 |
) |
|
66% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend and deemed dividend on preferred
stock |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to YOU On Demand
common shareholders |
$ |
(1,317,000 |
) |
$ |
(793,000 |
) |
$ |
(524,000 |
) |
|
66% |
|
26
Revenues
Revenue for the three months ended June 30, 2015 was
$1,480,000, as compared to $183,000 for the same period in 2014. The increase in
revenue of approximately $1,297,000 was attributable to the growth of our
multi-platform video streaming services.
Gross profit/ loss
Our gross profit for the three months ended June 30, 2015 was
$651,000, as compared to $674,000 gross loss during the same period in 2014. The
increase in gross profit of approximately $1,325,000 was primarily due to growth
in revenue while maintaining tight control of costs. YODs cost of revenue is
largely comprised of content licensing fees and, to a lesser extent, costs
associated with direct delivery of our content services such as content
preparation fees and government censorship clearance costs.
Selling, general and administrative expenses
Our selling, general and administrative expenses for the three
months ended June 30, 2015, decreased approximately $612,000, to $1,659,000, as
compared to $2,271,000 for the three months ended June 30, 2014.
Salaries and personnel costs are the primary components of
selling, general and administrative expenses, accounting for 50% of our selling,
general and administrative expenses for the three months ended June 30, 2015.
For the second quarter of 2015, salaries and personnel costs totaled $837,000, a
decrease of $51,000, or 6%, as compared to $888,000 for the same period of 2014.
While we added resources in the area of product development and operations,
salaries and personnel costs decreased due to our cost saving
initiatives.
The other major components of our selling, general and
administrative expenses include marketing and promoting, technology and
severance expense. For the three months ended June 30, 2015, these costs totaled
$822,000, a net decrease of $561,000, or 41%, as compared to $1,383,000 for the
same period in 2014, primarily due to resource shifts to China as part of our
long-term cost savings and operations enhancement initiatives.
Professional fees
Professional fees are generally related to public company
reporting and governance expenses as well as legal fees related to expansion of
our multi-platform video streaming services. Our costs for professional fees
increased $75,000, or 99%, to $151,000 for the three months ended June 30, 2015,
from $76,000 for the same period in 2014. The increase in professional fees was
related to our transition to a new audit firm.
Depreciation and amortization
Our depreciation and amortization expense decreased by $45,000,
or 32%, to $95,000 in the three months ended June 30, 2015, from $140,000 during
the three months ended June 30, 2014. The decrease was mainly due to full
amortization of website development and certain software in 2014.
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 gain of $49,000 and $1,502,000 for the three months ended June 30,
2015 and 2014, respectively. The changes are primarily due to fluctuation in our
closing stock price.
Change in fair value of contingent consideration
Our contingent consideration related to our acquisition of YOD
HK 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 gain of
$590,000 for the three months ended June 30, 2014.
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 gain of $728,000 from disposal
of these consolidated entities as discussed in Note 4 of our consolidated
financial statements included in this report.
27
Net loss attributable to non-controlling interest
Hua Cheng has a 20% non-controlling interest in Zhong Hai Video
and as such we allocate 20% of the operating loss of Zhong Hai Video to Hua
Cheng. During the three months ended June 30, 2015, $7,000 of our operating loss
from Zhong Hai Video was allocated to Hua Cheng. For the three months ended June
30, 2014, operating loss attributable to non-controlling interest was $293,000.
28
Comparison of Six Months Ended June 30, 2015 and 2014
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
|
June 30, 2014 |
|
|
Amount Change |
|
|
% Change |
|
Revenue |
$ |
2,508,000
|
|
$ |
320,000
|
|
$ |
2,188,000
|
|
|
684% |
|
Cost of revenue |
|
1,872,000 |
|
|
1,733,000 |
|
|
139,000 |
|
|
8% |
|
Gross profit/(loss)
|
|
636,000 |
|
|
(1,413,000 |
) |
|
2,049,000 |
|
|
-145% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
4,107,000 |
|
|
3,911,000 |
|
|
196,000 |
|
|
5% |
|
Professional fees |
|
440,000 |
|
|
262,000 |
|
|
178,000 |
|
|
68% |
|
Depreciation and amortization |
|
185,000 |
|
|
289,000 |
|
|
(104,000 |
) |
|
-36% |
|
Total operating
expense |
|
4,732,000 |
|
|
4,462,000 |
|
|
270,000 |
|
|
6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(4,096,000 |
) |
|
(5,875,000 |
) |
|
1,779,000
|
|
|
-30% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest & other
income/(expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
(59,000 |
) |
|
(2,317,000 |
) |
|
2,258,000 |
|
|
-97% |
|
Change in fair value of
warrant liabilities |
|
34,000 |
|
|
(937,000 |
) |
|
971,000 |
|
|
-104% |
|
Change in fair value of contingent
consideration |
|
- |
|
|
(113,000 |
) |
|
113,000 |
|
|
-100% |
|
Loss on investment in
unconsolidated entities |
|
(93,000 |
) |
|
(10,000 |
) |
|
(83,000 |
) |
|
830% |
|
Gain from disposal of consolidated entities
|
|
- |
|
|
728,000 |
|
|
(728,000 |
) |
|
-100% |
|
Others |
|
(46,000 |
) |
|
(68,000 |
) |
|
22,000 |
|
|
-32% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
and non-controlling interest |
|
(4,260,000 |
) |
|
(8,592,000 |
) |
|
4,332,000
|
|
|
-50% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
17,000 |
|
|
55,000 |
|
|
(38,000 |
) |
|
-69% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
(4,243,000 |
) |
|
(8,537,000 |
) |
|
4,294,000
|
|
|
-50% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to
non-controlling interests |
|
128,000 |
|
|
527,000 |
|
|
(399,000 |
) |
|
-76% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to
YOU On Demand shareholders |
|
(4,115,000 |
) |
|
(8,010,000 |
) |
|
3,895,000
|
|
|
-49% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend and deemed dividend
on preferred stock |
|
- |
|
|
(16,402,000 |
) |
|
16,402,000 |
|
|
-100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to
YOU On Demand common shareholders |
$ |
(4,115,000 |
) |
$ |
(24,412,000 |
)
|
$ |
20,297,000 |
|
|
-83% |
|
29
Revenues
Revenue for the six months ended June 30, 2015 was $2,508,000,
as compared to $320,000 for the same period in 2014. The increase in revenue of
approximately $2,188,000 was attributable to the growth of our multi-platform
video streaming services.
Gross profit/loss
Our gross profit for the six months ended June 30, 2015 was
$636,000, as compared to $1,413,000 gross loss during the same period in 2014.
The increase in gross profit of approximately $2,049,000 was primarily due to
growth in revenue while maintaining tight control of costs. YODs cost of
revenue is largely comprised of content licensing fees and, to a lesser extent,
costs associated with direct delivery of our content services such as content
preparation fees and government censorship clearance costs.
Selling, general and administrative expenses
Our selling, general and administrative expenses for the six
months ended June 30, 2015, increased approximately $196,000, to $4,107,000, as
compared to $3,911,000 for the six months ended June 30, 2014.
Salaries and personnel costs are the primary components of
selling, general and administrative expenses, accounting for 41% of our selling,
general and administrative expenses for the six months ended June 30, 2015. For
the half year of 2015, salaries and personnel costs totaled $1,692,000, a
decrease of $133,000, or 7%, as compared to $1,825,000 for the same period of
2014, due to our cost saving
initiatives.
The other major components of our selling, general and
administrative expenses include marketing and promoting, technology and
severance expense. For the six months ended June 30, 2015, these costs totaled
$2,415,000, a net increase of $329,000, or 16%, as compared to $2,086,000 for
the same period in 2014, primarily due to the increase of severance cost and
growth in our business, including development of new products and services, as
well as promotion of these services.
Professional fees
Professional fees are generally related to public company
reporting and governance expenses as well as legal fees related to expansion of
our VOD business. Our costs for professional fees increased $178,000, or 68%, to
$440,000 for the six months ended June 30, 2015, from $262,000 for the same
period in 2014. The increase in professional fees was related to our transition
to a new audit firm.
Depreciation and amortization
Our depreciation and amortization expense decreased by
$104,000, or 36%, to $185,000 in the six months ended June 30, 2015, from
$289,000 during the six months ended June 30, 2014. The decrease was mainly due
to full amortization of website development and certain software in 2014.
Interest expense, net
Our interest expense decreased by $2,258,000 to $59,000 for the
six months ended June 30, 2015, from $2,317,000 during the same period in 2014.
Interest expense incurred during 2014 was primarily related 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 8(a) 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 gain of $34,000 and a loss of $937,000 for the six months ended June
30, 2015 and 2014, respectively. The changes are primarily due to fluctuation in
our closing stock price.
Change in fair value of contingent consideration
Our contingent consideration related to our acquisition of YOD
HK 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
$113,000 for the six months ended June 30, 2014.
30
Gain 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 gain of $728,000 from disposal
of these consolidated entities as discussed in Note 4 of 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 six months ended June 30, 2015, $128,000 of our operating loss
from Zhong Hai Video was allocated to Hua Cheng. For the six months ended June
30, 2014, operating loss attributable to non-controlling interest was $527,000.
Dividends on preferred stock
For the six months ended June 30, 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.
31
Liquidity and Capital Resources
As of June 30, 2015, we had cash and cash equivalents of
approximately $6,866,000. Approximately $1,328,000 was held in our Hong Kong
entity and $5,409,000 was held in our China entities. The Company has no plans
to repatriate these funds. As of June 30, 2015, we had working capital of
approximately $3,210,000.
The following table provides a summary of our net cash flows
from operating, investing and financing activities.
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2015 |
|
|
2014 |
|
Net cash used in operating
activities |
$ |
(3,880,000 |
)
|
$ |
(5,492,000 |
)
|
Net cash used in investing activities |
|
(65,000 |
) |
|
(124,000 |
) |
Net cash provided by
financing activities |
|
- |
|
|
17,498,000 |
|
Effect of exchange rate changes on cash |
|
(1,000 |
) |
|
(34,000 |
) |
Net increase/(decrease) in
cash and cash equivalents |
|
(3,946,000 |
)
|
|
11,848,000 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at
beginning of period |
|
10,812,000 |
|
|
3,823,000 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at
end of period |
$ |
6,866,000 |
|
$ |
15,671,000 |
|
Operating Activities
Cash used in operating activities decreased for the six months
ended June 30, 2015 compared to 2014 primarily due to the expansion of our VOD
business. Although our content license payments and operational costs increased
year-over-year, the increase in our costs and expenses was partially offset by
our significant revenue growth.
Investing Activities
Cash used in investing activities for the six months ended June
30, 2015 was primarily due to additions to property and equipment of $30,000 and
intangibles and research and development of $35,000. Cash used in investing
activities for the six months ended June 30, 2014 was primarily due to (i) the
sale of subsidiary of $58,000, and (ii) additions to property and equipment and
leasehold improvement of $66,000.
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.
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 June 30, 2015 and 2014, the Company has accumulated deficits of
approximately $82 million and $90 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.
32
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.
Seasonality
Our operating results and operating cash flows historically
have not been subject to seasonal variations. This pattern may change, however,
as a result of new market opportunities or new product introductions.
Critical Accounting Policies
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.
33
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 14 to the
consolidated financial statements.
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 judgment, 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 April 2015, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update (ASU) 2015-05, Customer
Accounting for Fees Paid in Cloud Computing Arrangement, under ASC 350-40,
Intangibles Goodwill and Other Internal-Use Software. This amendment
provides guidance to customers about whether a cloud computing arrangement
includes a software license. If a cloud computing arrangement includes a
software license, then the customer should account for the software license
element of the arrangement consistent with the acquisition of other software
licenses. If a cloud computing arrangement does not include a software license,
the customer should account for the arrangement as a service contract. This
amendment is effective for annual and interim periods beginning after December
15, 2015, and early adoption is permitted. Management is currently evaluating
the impact of this amendment on our financial position, statement of operations
or cash flow.
34
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of
the Securities Exchange Act of 1934 and are not required to provide the
information under this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act) that are designed to ensure that
information that would be required to be disclosed in Exchange Act reports is
recorded, processed, summarized and reported within the time period specified in
the SECs rules and forms, and that such information is accumulated and
communicated to our management, including to our Chief Executive Officer and
Vice President of Finance, 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 Vice president of finance,
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of June 30, 2015. Based on that evaluation, our Chief
Executive Officer and Vice President of Finance concluded that as of June 30,
2015, 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 based on the following reason:
|
|
Management identified one material weakness in our
internal control over financial reporting as of December 31, 2014. The
material weakness was related to insufficiently complete and comprehensive
controls to ensure that accounting for complex and non-routine
transactions were complete. |
The Company is in the process of taking additional measures to
address the material weakness, including:
|
|
continuous formalization and implementation of internal
control over financial reporting, including formalization of policies and
procedures on entity-level controls, enhanced effectiveness of finance
department involvement during business transactions; |
|
|
performing formal assessments and documentation on
complex and non-routine transactions, including evaluation of transactions
and contractual terms under the appropriate accounting guidance, selection
of new accounting policies, updating assessments on critical accounting
judgments and estimates for new transactions; and |
|
|
investing in additional resources in the finance
department to evaluate the appropriate accounting for complex and
non-routine transactions |
We consider that the actions we are taking, as listed above,
will help remedy the material weakness referred to above, and help strengthen
our general internal controls and procedures over financial reporting. However,
the process of designing and implementing an effective financial reporting
system represents a continuous effort that requires us to anticipate and react
to changes in our business and the economic and regulatory environments and to
expend significant resources to maintain a financial reporting system that is
adequate to satisfy our reporting obligations. While we have developed a
remediation plan to address the material weakness identified in 2014, this
remediation plan or any additional plan we plan to implement may be insufficient
to address our material weakness and additional material weaknesses may be
discovered in the future. We plan to continue to address and remediate
additional control deficiencies we may identify during our evaluation process in
2015.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control for the quarter
ended June 30, 2015, which have materially affected or would likely materially
affect our internal control over financial reporting. The Company continues to
invest resources in order to upgrade internal controls.
35
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which we are
a party or to which any of our property is subject. To the best of our
knowledge, no such actions against us are contemplated or threatened.
Item 1A. Risk Factors
In addition to the other information set forth in this report,
you should carefully consider the factors discussed in Part I, "Item 1A. Risk
Factors" in our 2014 Annual Report which could materially affect our business,
financial condition or future results. The risks described in our Annual Report
on Form 10-K is not the only risks facing our Company. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition or future results.
Item 2. Unregistered Sales of Sales of Equity Securities and
Use of Proceeds
There were no unregistered sales of equity securities during
the fiscal quarter ended June 30, 2015.
Item 3. Defaults Upon Senior Securities
There were no defaults upon senior securities during the fiscal
quarter ended June 30, 2015.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
See Exhibit Index.
36
EXHIBIT INDEX
101.INS |
XBRL Instance Document |
101.SCH |
Taxonomy Extension Schema Document |
101.CAL |
Taxonomy Extension Calculation
Linkbase Document |
101.DEF |
Taxonomy Extension Definition Linkbase Document
|
101.LAB |
Taxonomy Extension Label
Linkbase Document |
101.PRE |
Taxonomy Extension Presentation Linkbase
Document |
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
YOU ON DEMAND HOLDINGS, INC
August 13, 2015 |
By: /s/ Weicheng
Liu
|
|
|
|
Name: Weicheng Liu
|
|
Title: Chief
Executive Officer |
|
(Principal Executive
Officer and an Authorized Officer) |
38
CERTIFICATIONS
I, Weicheng Liu, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of YOU
On Demand Holdings, Inc.; |
|
|
|
2. |
Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this report; |
|
|
|
3. |
Based on my knowledge, the financial statements, and
other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report; |
|
|
|
4. |
The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
|
|
a) |
Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which
this report is being prepared; |
|
|
|
|
b) |
Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles; |
|
|
|
|
c) |
Evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on
such evaluation; and |
|
|
|
|
d) |
Disclosed in this report any change in the registrants
internal control over financial reporting that occurred during the
registrants most recent fiscal quarter (the registrants fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the registrants internal
control over financial reporting; and |
|
|
|
5. |
The registrants other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrants auditors and the audit committee
of the registrants board of directors (or persons performing the
equivalent functions): |
|
|
|
|
a) |
All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrants ability to
record, process, summarize and report financial information; and |
|
|
|
|
b) |
Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial
reporting. |
Date: August 13, 2015
/s/ Weicheng Liu
Weicheng Liu
Chief Executive
Officer
(Principal Executive Officer)
CERTIFICATIONS
I, Grace He, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of YOU
On Demand Holdings, Inc.; |
|
|
|
2. |
Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this report; |
|
|
|
3. |
Based on my knowledge, the financial statements, and
other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report; |
|
|
|
4. |
The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
|
|
a) |
Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which
this report is being prepared; |
|
|
|
|
b) |
Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles; |
|
|
|
|
c) |
Evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on
such evaluation; and |
|
|
|
|
d) |
Disclosed in this report any change in the registrants
internal control over financial reporting that occurred during the
registrants most recent fiscal quarter (the registrants fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the registrants internal
control over financial reporting; and |
|
|
|
5. |
The registrants other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrants auditors and the audit committee
of the registrants board of directors (or persons performing the
equivalent functions): |
|
|
|
|
a) |
All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrants ability to
record, process, summarize and report financial information; and |
|
|
|
|
b) |
Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial
reporting. |
Date: August 13, 2015
/s/ Grace He
Grace He
Vice President of
Finance
(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, Weicheng Liu, Chief Executive
Officer of YOU ON
DEMAND HOLDINGS, INC. (the Company), DOES HEREBY CERTIFY that:
|
1. |
The Companys Quarterly Report on Form 10-Q for the
period ended June 30, 2015 (the Report), fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934;
and |
|
|
|
|
2. |
Information contained in the Report fairly presents, in
all material respects, the financial condition and results of operation of
the Company. |
IN WITNESS WHEREOF, the undersigned has executed this statement
this 13th day of August, 2015.
/s/ Weicheng Liu
Weicheng Liu
Chief Executive
Officer
(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, Grace He, Vice President of Finance of YOU ON
DEMAND HOLDINGS, INC. (the Company), DOES HEREBY CERTIFY that:
|
1. |
The Companys Quarterly Report on Form 10-Q for the
period ended June 30, 2015 (the Report), fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934;
and |
|
|
|
|
2. |
Information contained in the Report fairly presents, in
all material respects, the financial condition and results of operation of
the Company. |
IN WITNESS WHEREOF, the undersigned has executed this statement
this 13th day of August, 2015.
/s/ Grace
He
Grace He
Vice President of Finance
(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.
Seven Stars Cloud Group, Inc. (NASDAQ:SSC)
Historical Stock Chart
From Aug 2024 to Sep 2024
Seven Stars Cloud Group, Inc. (NASDAQ:SSC)
Historical Stock Chart
From Sep 2023 to Sep 2024