[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act.
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.
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).
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Act).
As of June 30, 2015 (the last business day of the registrants
most recently completed second fiscal quarter), the market value of the shares
of the registrants common stock held by non-affiliates (based upon the closing
price of shares as reported by Nasdaq) was approximately $39,052,670. Shares of
the registrants common stock held by each executive officer and director and
each by each person who owns 10% or more of the outstanding common stock have
excluded from the calculation in that such persons may be deemed to be
affiliates of the registrant. This determination affiliate status is not
necessarily a conclusive determination for other purposes.
There were a total of 28,861,342 shares of the registrants
common stock outstanding as of March 28, 2016.
In addition to historical information, this report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. We use words such as believe, expect, anticipate, project,
target, plan, optimistic, intend, aim, will or similar expressions
which are intended to identify forward-looking statements. Such statements
include, among others, those concerning market and industry segment growth and
demand and acceptance of our new and existing products or services; any
projections of sales, earnings, revenue, margins or other financial items; any
statements regarding the plans, strategies and objectives of management for
future operations; any statements regarding future economic conditions or
performance; uncertainties related to conducting business in China; and all
assumptions, expectations, predictions, intentions or beliefs about future
events. You are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, including,
and without limitation, those identified in Item 1A, Risk Factors included
herein, as well as assumptions, which, if they were to ever materialize or prove
incorrect, could cause the results of the Company to differ materially from
those expressed or implied by such forward-looking statements.
Although we believe the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
level of activity, performance, or achievements. Moreover, neither we nor any
other person assumes responsibility for the accuracy or completeness of any of
these forward-looking statements. You should not rely upon forward-looking
statements as predictions of future events. The forward-looking statements
included herein are made as of the date of this report. We undertake no
obligation to update any of these forward-looking statements, whether written or
oral, that may be made, from time to time, after the date of this report to
conform our prior statements to actual results or revised expectations.
Except as otherwise indicated by the context, references in
this report to we, us, our, our Company, the Company, or YOU On
Demand are to the business of YOU On Demand Holdings, Inc., a Nevada
corporation, and its consolidated subsidiaries and variable interest entities.
In addition, unless the context otherwise requires and for the
purposes of this report only:
In this report we are relying on and we refer to information
and statistics regarding the media industry in China that we have obtained from
various public sources. Any such information is publicly available for free and
has not been specifically prepared for us for use or incorporation in this
report or otherwise.
PART I
Overview
YOU On Demand is a premium content Video On Demand (VOD)
service provider with primary operations in the Peoples Republic of China. YOU
On Demand Holdings, Inc. was incorporated in the State of Nevada on October 19,
2004.
YOU On Demand, through its subsidiaries and variable interest
entity, provides premium content and integrated value-added service solutions
for the delivery of VOD and paid video programming to digital cable providers,
Internet Protocol Television (IPTV) providers, Over-the-Top (OTT) streaming
providers, mobile manufacturers and operators, as well as direct customers. By
leveraging and optimizing its existing operations, we have positioned ourselves
to evolve into a mobile-driven, new media platform for both enterprises and
consumers.
We launched our VOD service through acquisition of YOD Hong
Kong, formerly Sinotop Group Limited, in July 30, 2010. Through a series of
contractual arrangements, YOD WFOE, the subsidiary of YOD Hong Kong, controls
Sinotop Beijing, a corporation established in the PRC. Sinotop Beijing is the
80% owner of Zhong Hai Video, the entity though which we provide: 1) integrated
value-added business-to-business (B2B) service solutions for the delivery of
VOD and enhanced premium content for digital cable; 2) integrated value-added
business-to-business-to-customer (B2B2C) service solutions for the delivery of
VOD and enhanced premium content for IPTV and OTT providers and; 3) direct to
user, or B2C, mobile video service apps. As a result of the contractual
arrangements with Sinotop Beijing, we have the right to control management
decisions and direct the economic activities that most significantly impact
Sinotop Beijing and Zhong Hai Video, and, accordingly, under generally accepted
accounting principles in the United States (U.S. GAAP), we consolidate these
operating entities in our consolidated financial statements.
Our OTT, Mobile App, IPTV and Digital Cable VOD Businesses
YOU On Demand is a leading multi-platform entertainment company
delivering premium content, including leading Hollywood and China-produced movie
titles as well as childrens programming, to customers mobile and TV screens
across China via Subscription Video On Demand (SVOD) and Transactional Video
On Demand (TVOD) paid content services. The Companys current distribution
partners include digital cable operators, IPTV operators, OTT streaming
operators and mobile smartphone manufacturers and operators. Our subscribers can
watch our content anytime, anywhere and have full DVD-like control as they can
play, pause and resume watching, all without commercial and advertising
interruptions. Our core revenues are being generated from both minimum guarantee
payments and revenue sharing arrangements with our distribution partners as well
as subscription or transactional fees from our subscribers.
We have distribution agreements with several OTT, IPTV and
mobile distributors, manufacturers and operators. In 2015, the YOU Cinema movie
subscription service made its commercial debut on the Xiaomi OTT set-top box as
part of YOU On Demands previously announced distribution deal with China
Network Television's (CNTV) subsidiary, Future TV Co. Ltd. (the official
online division of Chinese national public broadcaster China Central Television
[CCTV]). Other distribution partners of ours include: Huawei, a leading global
information and communications technology solutions provider and one of the
largest global smartphone manufacturers; Dr. Peng Telecom and Media Group, Ltd
and its OTT box, the Domy Box; Southern Media Corporations 3GTV mobile video
platform which currently serves 6 million subscribers through China Mobile,
China Unicom and China Telecom in Guangdong, a province which has the largest
mobile service and movie box office in China
Specifically, for digital cable, through the acquisition of YOD
Hong Kong and its VIE, Sinotop Beijing, YOU On Demand has an exclusive 20-year
joint venture (approximately 15 years remaining) with CCTV-6's China Home Cinema
(CHC), making us the first national VOD platform in China. We operate under a
national government license obtained by CHC to serve as their exclusive agent in
the PRC for operating and marketing TVOD, SVOD, Near Video On Demand (NVOD)
and related Value-Added Services (VAS).
YOU On Demand has and continues to license increasing amounts
of entertainment and educational content that enables our subscribers to enjoy
premium and diverse entertainment directly on their mobile and TV screens. We
have content agreements with Disney Media Distribution, Paramount Pictures,
Twentieth Century Fox Television Distribution, NBC Universal, Miramax Films,
Lionsgate, Screen Media Ventures, among other independent studios.
6
Recent Developments
In November 2015, we entered into a series of agreements with
Beijing Sun Seven Stars Culture Development Limited (SSS), a PRC company, and
its affiliate Tianjin Enternet Network Technology Limited (Tianjin Enternet),
which were later amended and restated in December 2015. Under the agreements
with SSS, among other things, (i) SSS purchased 4,545,454 shares of our common
stock for $2.20 per share, or total purchase price of $10.0 million, (ii) we
issued a two-year warrant to SSS to acquire an additional 1,818,182 shares of
our common stock at an exercise price of $2.75 per share, and (iii) we were
granted a non-exclusive, royalty-free content distribution right for certain
assets valued at approximately $29.1 million, in exchange for a promissory note
that is convertible into 9,208,860 shares of common stock. The promissory note
has a stated principal amount of $17.7 million, bears interest at the rate of
0.56% per annum and matures May 21, 2016. In the event of default, the
promissory note will become immediately due and payable. As of December 31,
2015, no shares, warrants or promissory note was issued by the Company as the
transaction was subject to certain closing conditions. On March 28, 2016, we
completed this transaction with SSS.
Until receipt of necessary shareholder approvals for the
transactions contemplated by these agreements, SSSs warrant may not be
exercised and the promissory note may not be converted, to the extent that such
conversion would result in SSS and its affiliates beneficially owning more than
19.99% of our outstanding shares of common stock. Once the necessary shareholder
approval is received, the unpaid principal and interest on the promissory note
will automatically convert into shares of common stock. If shareholder approval
is obtained, SSS and its affiliates will own 33.7% of our outstanding shares of
common stock, after taking into account the warrants and conversion of
promissory note.
In addition, we purchased the equity interest in a newly formed
subsidiary of Tianjin Enternet, Tianjin Sevenstarsflix Network Technology
Limited (SSF), that will offer a branded pay content service delivered to
consumers ubiquitously through all its platform partners, will track and share
consumer payments and other behavior data, will operate a customer management
and data-based service and will develop mobile social TV-based customer
management portals. In exchange for the sale of the equity interest in SSF and
subject to certain conditions and performance thresholds, Tianjin Enternet will
receive shares of our common stock over three years, with the exact amount based
on an earn-out provision, such amounts not to exceed 5.0 million shares of
common stock for each of 2016, 2017 and 2018. The issuance of such earn out
shares is subject to certain shareholder approvals. In the event we do not
obtain such approvals before applicable target thresholds have been met, we will
not issue shares of common stock to Tianjin Enternet, but will instead issue a
promissory note to Tianjin Enternet, with a principal amount equal to the
quotient obtained by multiplying 5.0 million by our applicable stock price as
defined in the promissory note. As of December 31, 2015, the transfer of SSF to
the Company was still subject to certain closing conditions.
In the event that the entire amount of earn out shares are
received by Tianjin Enternet, SSS and its affiliates will then own approximately
49.9% of our outstanding shares of common stock, after taking into account the
warrants and conversion of promissory note.
For a more detailed description of the agreements with SSS and
its affiliates, see our Current Reports on Form 8-K filed on November 24 and
December 24, 2015, respectively, as well as Notes to Consolidated Financial
Statements included in this Annual Report.
Corporate Structure
The following chart depicts our corporate structure as of March
30, 2016:
7
Note: Bing Wu, holder of 95% equity ownership in Sinotop
Beijing and a party to certain VIE arrangements between YOD WFOE and Sinotop
Beijing, is the brother of Bruno Zheng Wu, our Chairman. Yun Zhu, holder of 5%
equity ownership in Sinotop Beijing and a party to certain VIE arrangements
between YOD WFOE and Sinotop Beijing, is the Vice President of SSS, a
significant
shareholder as described under the Recent Development section above.
1.
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Sinotop Beijing VIE Agreements, including with Bing Wu
and Yun Zhu, the nominee shareholders of Sinotop Beijing (together, the
Nominee Shareholders).
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(i)
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Management Services Agreement between Sinotop Beijing and
YOD Hong Kong, dated as of March 9, 2010.
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|
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(ii)
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Call Option Agreement among YOD WFOE, Sinotop Beijing,
Bing Wu and Yun Zhu, dated as of January 25, 2016.
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(iii)
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Equity Pledge Agreement among YOD WFOE, Sinotop Beijing,
Bing Wu and Yun Zhu, dated as of January 25, 2016.
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(iv)
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Power of Attorney agreements among YOD WFOE, Sinotop
Beijing and Bing Wu and YOD WFOE, Sinotop Beijing and Yun Zhu, both dated
as of January 25, 2016
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(iv)
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Technical Services Agreement among YOD WFOE and Sinotop
Beijing, dated as of January 25, 2016.
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2.
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Cooperation Agreement, by and among, Sinotop Beijing, Hua
Cheng Hu Dong (Beijing) Film and Television Communication Co., Ltd. (Hua
Cheng) and Zhong Hai Shi Xun Information Technology Co., Ltd. (Zhong Hai
Video), dated September 30, 2010. The controlling party of Hua Cheng is Hua Cheng Film and
Television Digital Programs Co. Ltd. (Hua Cheng Digital). Hua Cheng Digital is
not related to us or our principles.
|
8
VIE Structure and Arrangements
On July 30, 2010, we acquired YOD Hong Kong through CB Cayman.
Through a series of contractual arrangements, we control Sinotop Beijing.
Sinotop Beijing, a corporation established in the PRC, is the 80% owner of Zhong
Hai Video, which was established to provide integrated value-added service
solutions for the delivery of VOD, PPV and enhanced premium content for digital
cable, IPTV and OTT providers, mobile manufacturers and operators, as well as
direct customers.
In March 2010, YOD Hong Kong entered into a management services
agreement with Sinotop Beijing pursuant to which Sinotop Beijing pays consulting
and service fees, equal to 100% of net profits of Sinotop Beijing, to YOD Hong
Kong for various management, technical, consulting and other services in
connection with its business. Payment of the fees under the management services
agreement is secured through an equity pledge agreement, dated June 4, 2012, by
and among Sinotop Beijing, YOD WFOE and the sole shareholder of Sinotop Beijing,
pursuant to which the sole shareholder of Sinotop Beijing pledged all equity
interests in Sinotop Beijing to YOD WFOE. In addition, on June 4, 2012, YOD WFOE
entered into a voting rights agreement with Sinotop Beijing and the sole
shareholder of Sinotop Beijing, whereby YOD WFOE was entrusted with all of the
voting rights of the sole shareholder of Sinotop Beijing. Through these
contractual arrangements, we acquired control over and rights to 100% of the
economic benefit of Sinotop Beijing. Accordingly, Sinotop Beijing is considered
a VIE and, therefore, is consolidated in our financial statements.
On January 22, 2016, the Company entered into a Termination
Agreement (the Termination Agreement) with Sinotop Beijing and Zhang Yan to
terminate certain contractual arrangements, including the Option Agreement,
dated March 9, 2010, among YOD HK, Sinotop Beijing and Zhang Yan, the sole
shareholder of Sinotop Beijing, the Termination, Assignment and Assumption
Agreement among YOD HK, YOD WFOE, Sinotop Beijing and Zhang Yan dated June 4,
2012, Voting Rights Proxy Agreement among YOD HK, YOD WFOE, Sinotop Beijing and
Zhang Yan dated June 4, 2012, Equity Pledge Agreement among YOD HK, YOD WFOE,
Sinotop Beijing and Zhang Yan dated June 4, 2012 and Power of Attorney Agreement
among YOD HK, YOD WFOE, Sinotop Beijing and Zhang Yan dated June 4, 2012
(collectively, the Old Sinotop VIE Agreements). On January 25, 2016,
Zhang Yan entered into an Equity Transfer Agreement with Bing Wu and Yun Zhu,
whereby Zhang Yan transferred 100% of her equity ownership in Sinotop Beijing to
Bing Wu and Yun Zhu. The equity transfer application was accepted by the State
Administration of Industry and Commerce (SAIC) on March 30, 2016 and became
effective upon acceptance. Upon the conclusion of the transfer arrangement, Bing
Wu and Yun Zhu will hold 95% and 5%, respectively, of equity ownership in
Sinotop Beijing.
On the same day, the Company entered into the following
contractual arrangements with Bing Wu and Yun Zhu (collectively, the New
Sinotop VIE Agreements), also effective on March 30, 2016 when the above mentioned transfer
arrangements were approved by the SAIC:
-
Call Option Agreement among YOD WFOE, Sinotop
Beijing, Bing Wu and Yun Zhu, dated as of January 25, 2016.
-
Equity Pledge Agreement among YOD WFOE, Sinotop
Beijing, Bing Wu and Yun Zhu, dated as of January 25, 2016.
-
Power of Attorney agreements among YOD WFOE,
Sinotop Beijing and Bing Wu and YOD WFOE, Sinotop Beijing and Yun Zhu,
both dated as of January 25, 2016.
-
Technical Service Agreement among YOD WFOE and
Sinotop Beijing, dated as of January 25, 2016.
-
Spousal Consent by the spouse of Bing Wu and Yun
Zhu, respectively, both dated January 25, 2016.
-
Letter of Indemnification among YOD WFOE and Bing
Wu and YOD WFOE and Yun Zhu, both dated as of January 25, 2016.
The terms of the New Sinotop VIE Agreements are detailed as
follows:
Equity Pledge Agreement
Pursuant to the Equity Pledge Agreement among YOD WFOE, Sinotop
Beijing, Bing Wu and Yun Zhu, the Nomineee Shareholders, dated January 25, 2016,
the Nominee Shareholders pledged all of their equity interests in Sinotop
Beijing (the Collateral) to YOD WFOE as security for the performance of the
obligations of Sinotop Beijing to make all the required technical service fee
payments pursuant to the Technical Services Agreement and for performance of the
Nominee Shareholders obligation under the Call Option Agreement. The terms of
the Equity Pledge Agreement expire upon satisfaction of all obligations under
the Technical Services Agreement and Call Option Agreement.
Call Option Agreement
Pursuant to the Call Option Agreement among YOD WFOE, Sinotop
Beijing and the Nominee Shareholders, dated January 25, 2016, and entered into
in connection with the Technical Services Agreement, the Nominee Shareholders
granted an exclusive option to YOD WFOE, 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 Nominee Shareholders equity in Sinotop Beijing. The
exercise price of the option shall be determined by YOD WFOE at its sole
discretion, subject to any restrictions imposed by PRC law. The term of the agreement is until all of the equity interest in Sinotop Beijing held by the Nominee Shareholders are transferred to YOD WFOE, or its designee and may not be terminated by
any part to the agreement without consent of the other parties.
9
Power of Attorney
Pursuant to the Power of Attorney agreements among YOD WFOE,
Sinotop Beijing and each of the respective Nominee Shareholders, dated January
25, 2016, each of the Nominee Shareholders granted YOD WFOE the irrevocable
right, for the maximum period permitted by law, all of its voting rights as
shareholders of Sinotop Beijing. The Nominee Shareholders may not transfer any
of its equity interest in Sinotop Beijing to any party other than YOD WFOE. The
Power of Attorney agreements may not be terminated except until all of the
equity in Sinotop Beijing has been transferred to YOD WFOE or its designee.
Technical Service Agreement
Pursuant to the Technical Service Agreement, dated January 25,
2016, between YOD WFOE and Sinotop Beijing, YOD WFOE has the exclusive right to
provide technical service, marketing and management consulting service,
financial support service and human resource support services to Sinotop
Beijing, and Sinotop Beijing is required to take all commercially reasonable
efforts to permit and facilitate the provision of the services by YOD WFOE. As
compensation for providing the services, YOD WFOE is entitled to receive service fees
from Sinotop Beijing equivalent to YOD WFOEs cost plus 30% of such costs. YOD
WFOE and Sinotop Beijing agree to periodically review the service fee and make
adjustments as deemed appropriate. The term of
the Technical Services Agreement is perpetual, and may only be terminated upon
written consent of both parties.
Spousal Consent
Pursuant to the Spousal Consent, dated January 25, 2016, undersigned by the
respective spouse of Nominee Shareholders (collectively, the Spouses), the
Spouses unconditionally and irrevocably agreed to the execution of the Equity
Pledge Agreement, Call Option Agreement and Power of Attorney agreement. The
Spouses agreed to not make any assertions in connection with the equity interest
of Sinotop Beijing and to waived consent on further amendment or termination of
the Equity Pledge Agreement, Call Option Agreement and Power of Attorney
agreement. The Spouses further pledge to execute all necessary documents and
take all necessary actions to ensure appropriate performance under these
agreements upon YOD WFOEs request. In the event the Spouses obtain any equity
interests of Sinotop Beijing which are held by the Nominee Shareholders, the
Spouses agreed to be bound by the New Sinotop VIE Agreements, including the
Technical Services Agreement, and comply with the obligations thereunder,
including sign a series of written documents in substantially the same format
and content as the New Sinotop VIE Agreements.
Letter of Indemnification
Pursuant to the Letter of Indemnification among YOD WFOE and Bing Wu and YOD
WFOE and Yun Zhu, both dated as of January 25, 2016, YOD WFOE agreed to
indemnify Nominee Shareholders against any personal, tax or other liabilities
incurred in connection with their role in equity transfer to the greatest extent
permitted under PRC law. YOD WFOE further waived and released Nominee
Shareholders from any claims arising from, or related to, their role as the
legal shareholder of Sinotop Beijing, provided that their actions as a nominee
shareholder are taken in good faith and are not opposed to YOD WFOEs best
interests. Conversely, the Nominee Shareholders will not be entitled to
dividends or other benefits generated therefrom, or receive any compensation in
connection with this arrangement. The Letter of Indemnification will remain
valid until either Nominee Shareholders or YOD WFOE terminates the agreement by
giving the other party hereto sixty (60) days prior written notice.
In addition, the Management Service Agreement between Sinotop
Beijing and YOD Hong Kong, dated as of March 9, 2010 continued to remain in
effect, the key terms of which is as follows:
Management Services Agreement
Pursuant to a Management Services Agreement, as of March 9,
2010, between Sinotop Beijing and YOD Hong Kong (the Management Services
Agreement), YOD Hong Kong has the exclusive right to provide to Sinotop Beijing
management, financial and other services related to the operation of Sinotop
Beijings business, and Sinotop Beijing is required to take all commercially
reasonable efforts to permit and facilitate the provision of the services by YOD
Hong Kong. As compensation for providing the services, YOD Hong Kong is entitled
to receive a fee from Sinotop Beijing, upon demand, equal to 100% of the annual
net profits of Sinotop Beijing during the term of the Management Services
Agreement. YOD Hong Kong may also request ad hoc quarterly payments of the
aggregate fee, which payments will be credited against Sinotop Hong Kongs
future payment obligations.
The Management Services Agreement also provides YOD Hong Kong,
or its designee, with a right of first refusal to acquire all or any portion of
the equity of Sinotop Beijing upon any proposal by the sole shareholder of
Sinotop Beijing to transfer such equity. In addition, at the sole discretion of
YOD Hong Kong, Sinotop Beijing is obligated to transfer to YOD Hong Kong, or its
designee, any part or all of the business, personnel, assets and operations of
Sinotop Beijing which may be lawfully conducted, employed, owned or operated by
YOD Hong Kong, including:
(a) business opportunities presented to, or available to Sinotop Beijing may be
pursued and contracted for in the name of YOD Hong Kong rather than Sinotop
Beijing, and at its discretion, YOD Hong Kong may employ the resources of
Sinotop Beijing to secure such opportunities;
(b) any tangible or intangible property of Sinotop Bejing, any contractual
rights, any personnel, and any other items or things of value held by Sinotop
Beijing may be transferred to YOD Hong Kong at book value;
(c) real property, personal or intangible property, personnel,
services, equipment, supplies and any other items useful for the conduct of the
business may be obtained by YOD Hong Kong by acquisition, lease, license or
otherwise, and made available to Sinotop Beijing on terms to be determined by
agreement between YOD Hong Kong and Sinotop Beijing;
(d) contracts entered into in the name of Sinotop Beijing may be transferred to
YOD Hong Kong, or the work under such contracts may be subcontracted, in whole
or in part, to YOD Hong Kong, on terms to be determined by agreement between YOD
Hong Kong and Sinotop Beijing; and
(e) any changes to, or any expansion or contraction of, the business may be
carried out in the exercise of the sole discretion of YOD Hong Kong, and in the
name of and at the expense of, YOD Hong Kong; provided, however, that none of
the foregoing may cause or have the effect of terminating (without being
substantially replaced under the name of YOD Hong Kong) or adversely affecting
any license, permit or regulatory status of Sinotop Beijing.
The term of the Management Services Agreement is 20 years, and may not be
terminated by Sinotop Beijing, except with the consent of, or a material breach
by, YOD Hong Kong.
Although the New Sinotop VIE Agreements resulted in a change to
the legal shareholders of Sinotop Beijing, it does not change YOD WFOEs ability
to control Sinotop Beijing or YOD WFOEs rights to the economic benefits of
Sinotop Beijing. YOD WFOE was the primary beneficiary of Sinotop Beijing prior
to the signing of the New Sinotop VIE Agreements and remained as the
primary beneficiary of Sinotop Beijing after the signing of the New Sinotop VIE
Agreements.
The foregoing description of the New Sinotop VIE Agreements is
not purported to be complete and is qualified in its entirety by reference to
the complete text of such agreements attached to this Annual Report as Exhibits
10.33 through 10.39.
Our Unconsolidated Equity Investment
We hold 30% ownership interest in Shandong Media, our
print-based media business, and account for our investment in Shandong Media
under the equity method. The business of Shandong Media includes a television
programming guide publication, the distribution of periodicals, the publication
of advertising, the organization of public relations events, the provision of
information related services, copyright transactions, the production of audio
and video products, and the provision of audio value added communication
services.
Our Industry
Mobile
China's smartphone market is now the world's largest. According
to the International Data Corporation (IDC), 107.5 million smartphones were
shipped to China in the fourth quarter of 2014, representing a 2%
Quarter-on-Quarter growth. This is in accumulation to the 420.7 million
smartphones being shipped to China in 2014 alone. In addition, Chinas three
mobile telecom carriers have created a new company, China Tower, which will take
over ownership of the three firms telecom infrastructure while ambitiously
planning to build 1 million new towers in the next two years. The coming
physical improvements to the network are meant to accommodate the expansion of
4G mobile services.
OTT & IPTV
China plans to invest 2 trillion yuan ($323 billion) to improve
its broadband infrastructure by 2020 with the aim of taking the nearly entire
population online, according to the Ministry of Information and Industry on the
governments official website www.gov.cn. The government is trying to improve
fixed-line and wireless connectivity throughout China, where only 45 percent of
the population have Internet access. China's broadband strategy will ensure that
the number of 3G and LTE users will increase to 1.2 billion by 2020, four times
of the current figure.
Cable
Until 2005, there were over 3,000 independent cable operators
in the PRC. While the State Administration of Press, Publication, Radio, Film
and Television (SAPPRFT), an executive branch under the State Council of the
PRC, has advocated for national consolidation of the countrys sprawling cable
networks, the consolidation has primarily occurred at the provincial level. The
30 provinces are highly variable in their consolidation efforts and processes.
To expedite consolidation, SAPPRFT announced in 2010 that it would permit and
encourage state-owned cable operators to expand and consolidate through mergers
and acquisitions. We believe that as consolidation proceeds it will smooth the
way to two-way digitization through common technical standards.
We believe that SAPPRFT and its broadcasters are currently
focusing on increasing subscription revenues by converting Chinese television viewers from analog service to digital (pay TV)
service. The digitalization efforts include providing upgraded digital
set-top-boxes free of charge that will provide the bandwidth to deliver pay
channels and services beyond the basic tier as part of a digital television
service bundling initiative.
10
Our Competition
The market for video entertainment is subject to continuous
change and aggressive competition. Our primary competitors include
Internet-based content providers and the DVD market, both of which include those
that provide legal and pirated (illegal) content. Specifically, our primary
competitors include companies that operate online video websites in China where
we compete with these entities for customers and users. Some of these
competitors include iQiyi.com, Youku, Tencent and Sohu. As far as digital cable
distribution, although we can provide no assurances that other companies will
not enter the market of providing such services, we believe that we will have a
competitive advantage over any new market entrant because of our exclusive joint
venture partnership with CCTV-6s pay channel, CHC, and first to market
advantage. We also have some indirect competition from the pirated DVD market.
Intellectual Property
We are not a party to any royalty agreements, labor contracts
or franchise agreements. We own the trademark YOU On Demand and (
优点互动
)
which are both registered in the PRC.
The duration of our trademarks is ten years and trademarks are generally subject
to an indefinite number of renewals upon appropriate application.
Our Employees
As of December 31, 2015, we had a total of 51 full-time
employees including one located in the United States. The following table sets
forth the number of our employees by function at December 31, 2015.
Function
|
|
Number of Employees
|
Business Development
|
|
6
|
Service Operations
|
|
9
|
Technology
|
|
11
|
Content Production
|
|
10
|
Financial and Legal
|
|
8
|
Human Resource
|
|
2
|
Administrative
|
|
5
|
TOTAL
|
|
51
|
Our employees are not represented by a labor organization or
covered by a collective bargaining agreement. We have not experienced any work
stoppages.
We are required under PRC law to make contributions to employee
benefit plans at specified percentages of after-tax profit. In addition, we are
required by the PRC law to cover employees in China with various types of social
insurance. We believe that we are in compliance with the relevant PRC laws.
Seasonality
Our operating results and operating cash flows historically
have not been subject to seasonal variations. This pattern may change, however,
as a result of new market opportunities or new product introductions.
Regulation
General Regulation of Businesses
Our PRC-based operating subsidiaries and VIE is regulated by
the national and local laws of the PRC. The radio and television broadcasting
industries are highly regulated in China. Local broadcasters including national,
provincial and municipal radio and television broadcasters are 100% state-owned
assets. SAPPRFT regulates the radio and television broadcasting industry in
China. In China, the radio and television broadcasting industries are designed
to serve the needs of government programming first, and to make profits second.
The SAPPRFT and the upper level government bodies controls broadcasting assets and broadcasting content
in China.
The Ministry of Industry and Information Technology (MIIT)
plays a similar role to SAPPRFT in the telecom industry in China. Chinas
telecom industry is comparatively more deregulated than the broadcasting industry. While
Chinas telecom industry has substantial financial backing, SAPPRFT, and its
regulator, the Propaganda Ministry under Chinas Communist Party Central
Committee, never relinquished ultimate regulatory control over content and
broadcasting control.
11
The major internet regulatory barrier for cable operators to
migrate into multiple-system operators and to be able to offer telecom services
is the license barrier. Few independent cable operators in China are able to
acquire full and proper broadband connection licenses from MIIT. The licenses,
while awarded by MIIT, are given on very-fragmented regional market levels. With
cable operators holding the last mile to access end users, cable
operators are believed to pose a competitive threat to local telecom carriers. While internet
connection licenses are deregulated to even the local private sector, MIIT still
tries to utilize the relevant licenses as a barrier to entry from cable operators that
fall under the administration of SAPPRFT.
We are required to obtain government approval from the Ministry
of Commerce of the Peoples Republic of China (MOFCOM), and other government
agencies in China for transactions such as our acquisition or disposition of
business entities in China. Additionally, foreign ownership of business and
assets in China is not permitted without specific government approval. For this
reason, Sinotop Beijing was acquired through our acquisition of YOD Hong Kong,
which controls Sinotop Beijing through a series of contractual agreements with
YOD Hong Kong and YOD WFOE. We use voting control agreements among the parties
so as to obtain equitable and legal ownership or control of our subsidiaries and
VIE.
Licenses and Permits
Video on Demand
Zhong Hai Video holds the following licenses:
Description
|
|
License/Permit
|
Cable Television & Operations
Permit
|
|
Beijing
No. 1413
|
Internet Content Provider
|
|
Beijing No. 140351
|
Shandong Media
Shandong Media holds the following licenses:
Description
|
|
License/Permit
|
PRC Newspaper Publication License for
Shandong Broadcast & TV Weekly
|
|
National Unified
Publication CN 37-0014
|
PRC Magazine Publication License for View Weekly
|
|
Ruqichu No:1384
|
PRC Magazine Publication License for Modern
Movie & TV Biweekly
|
|
Ruqichu No:1318
|
Advertising License for Shandong Broadcast & TV Weekly
|
|
3700004000093
|
Advertising License for View Weekly
|
|
3700004000186
|
Advertising License for Modern Movie & TV Biweekly
|
|
3700004000124
|
Taxation
On March 16, 2007, the National Peoples Congress of China
passed the EIT Law, and on November 28, 2007, the State Council of China passed
its implementing rules which took effect on January 1, 2008. The EIT Law and its
implementing rules impose a unified earned income tax (EIT) rate of 25.0% on
all domestic-invested enterprises and foreign invested enterprises (FIEs)
unless they qualify under certain limited exceptions. In addition, under the EIT
Law, an enterprise established outside of China with de facto management
bodies within China is considered a resident enterprise and will normally be
subject to an EIT of 25% on its global income. The implementing rules define the
term de facto management bodies as an establishment that exercises, in
substance, overall management and control over the production, business,
personnel, accounting, etc., of a Chinese enterprise. If the PRC tax
authorities subsequently determine that we should be classified as a resident
enterprise, then our organizations global income will be subject to PRC income
tax of 25%. For detailed discussion of PRC tax issues related to resident
enterprise status, see Risk Factors Risks Related to Doing Business in China
Under the New Enterprise Income Tax Law, we may be classified as a resident
enterprise of China. Such classification will likely result in unfavorable tax
consequences to us and our non-PRC shareholders.
Foreign Currency Exchange
All of our sales revenue and significant expenses are
denominated in RMB. Under the PRC foreign currency exchange regulations
applicable to us, RMB is convertible for current account items, including the
distribution of dividends, interest payments, trade and service-related foreign
exchange transactions. Currently, our PRC operating entities may purchase
foreign currencies for settlement of current account transactions, including
payments of dividends to us, without the approval of the PRC State
Administration of Foreign Exchange (SAFE), by complying with certain
procedural requirements. Conversion of RMB for capital account items, such as
direct investment, loan, security investment and repatriation of investment,
however, is still subject to the approval of SAFE. In particular, if our PRC operating entities borrow foreign currency through
loans from us or other foreign lenders, these loans must be registered with
SAFE, and if we finance the subsidiaries by means of additional capital
contributions, these capital contributions must be approved by certain
government authorities, including the MOFCOM, or their respective local
branches. These limitations could affect our PRC operating entities ability to
obtain foreign exchange through debt or equity financing.
12
Dividend Distributions
All of our revenues are earned by our PRC entities. However,
PRC regulations restrict the ability of our PRC entities to make dividends and
other payments to their offshore parent company. PRC legal restrictions permit
payments of dividends by our PRC entities only out of their accumulated
after-tax profits, if any, determined in accordance with PRC accounting
standards and regulations. Each of our PRC subsidiaries is also required under
PRC laws and regulations to allocate at least 10% of our annual after-tax
profits determined in accordance with PRC GAAP to a statutory general reserve
fund until the amounts in such fund reaches 50% of its registered capital. These
reserves are not distributable as cash dividends. Our PRC subsidiaries have the
discretion to allocate a portion of their after-tax profits to staff welfare and
bonus funds, which may not be distributed to equity owners except in the event
of liquidation.
In addition, under the new EIT law, the Notice of the State
Administration of Taxation on Negotiated Reduction of Dividends and Interest
Rates (Notice 112), which was issued on January 29, 2008, and the Notice of
the State Administration of Taxation Regarding Interpretation and Recognition of
Beneficial Owners under Tax Treaties (Notice 601), which became effective on
October 27, 2009, dividends from our PRC operating subsidiaries paid to us
through our entities will be subject to a withholding tax at a rate of 10%.
Furthermore, the ultimate tax rate will be determined by treaty between the PRC
and the tax residence of the holder of the PRC subsidiary. Dividends declared
and paid from before January 1, 2008 on distributable profits are grandfathered
under the EIT Law and are not subject to withholding tax.
The Company intends on reinvesting profits, if any, and does
not intend on making cash distributions of dividends in the near future.
13
The business, financial condition and operating results of
the Company may be affected by a number of factors, whether currently known or
unknown, including but not limited to those described below. Any one or more of
such factors could directly or indirectly cause the Companys actual results of
operations and financial condition to vary materially from past or anticipated
future results of operations and financial condition. Any of these factors, in
whole or in part, could materially and adversely affect the Companys business,
financial condition, results of operations and stock price. The following
information should be read in conjunction with Part II, Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations and
the consolidated financial statements and related notes in Part II, Item 8,
Financial Statements and Supplementary Data of this Annual Report.
RISKS RELATED TO OUR BUSINESS
Substantial doubt about our ability to continue as a
going concern.
As discussed in Note 3 to the consolidated financial statements
included in this report, the Company has incurred significant losses during 2015
and 2014 and has relied on debt and equity financings to fund our operations.
These conditions raise substantial doubt about our ability to continue as a
going concern. Managements plans regarding these matters are also described in
Note 3. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty. If we are in fact unable
to continue as a going concern, our shareholders may lose their entire
investment in our company.
Our operating results are likely to fluctuate
significantly and may differ from market expectations.
Our annual and quarterly operating results have varied
significantly in the past, and may vary significantly in the future, due to a
number of factors which could have an adverse impact on our business. Our
revenue may fluctuate as our channel partners make changes to their business
model and we rely on third-party payment platforms to produce billing based on
payment collection from end-users across all platforms. In recent years, video
content costs escalated sharply in the industry which affected our ability to
procure new content at the same cost as prior years. In addition, we incurred
substantial technology and marketing costs related to operating our
direct-to-consumer channels and developing our YOU Kids brand.
Expansion of our business may put added pressure on our
management and operational infrastructure, impeding our ability to meet any
potential increased demand for our services and possibly hurting our future
operating results.
Our business plan is to significantly grow our operations to
meet anticipated growth in demand for the services that we offer, and by the
introduction of new goods or services. Growth in our businesses may place a
significant strain on our personnel, management, financial systems and other
resources. The evolution of our business also presents numerous risks and
challenges, including:
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our ability to successfully and rapidly expand
sales to potential new distributors in response to potentially increasing
demand;
|
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the costs associated with such growth, which
are difficult to quantify, but could be significant; and
|
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rapid technological change.
|
To accommodate any such growth and compete effectively, we may
need to obtain additional funding to improve information systems, procedures and
controls and expand, train, motivate and manage our employees, and such funding
may not be available in sufficient quantities, if at all. If we are not able to
manage these activities and implement these strategies successfully to expand to
meet any increased demand, our operating results could suffer.
In order to comply with PRC regulatory requirements, we
operate our businesses through companies with which we have contractual
relationships. By virtue of these contractual relationships, we control the
economic interests and have the power to direct the activities of these
entities, and are therefore determined to be the primary beneficiary of these
entities, but we do not have any equity ownership interest in these entities. If
the PRC government determines that our contractual agreements with these
entities are not in compliance with applicable regulations, our business in the
PRC could be materially adversely affected.
We do not have direct or indirect equity ownership of our VIE,
which collectively operate all our businesses in China, but instead have entered
into contractual arrangements with our VIE and each of its individual legal
shareholder(s) pursuant to which we received an economic interest in, and have
the power to direct the activities of the VIE, in a manner substantially similar
to a controlling equity interest. Although we believe that our business
operations are in compliance with the current laws in China, we cannot be sure
that the PRC government would view our operating arrangements to be in
compliance with PRC regulations that may be adopted in the future. If we are
determined not to be in compliance, the PRC government could levy fines, revoke
our business and operating licenses, require us to restrict or discontinue our
operations, restrict our right to collect revenues, require us to restructure
our business, corporate structure or operations, impose additional conditions or
requirements with which we may not be able to comply, impose restrictions on our
business operations or on our customers, or take other regulatory or enforcement
actions against us that could be harmful to our business. As a result, our business in the PRC
could be materially adversely affected.
14
We rely on contractual arrangements with our VIE for our
operations, which may not be as effective for providing control over these
entities as direct ownership.
Our operations and financial results are dependent on our VIE
in which we have no equity ownership interest and must rely on contractual
arrangements to control and operate the businesses of our VIE. These contractual
arrangements may not be as effective for providing control over the VIE as
direct ownership. For example, the VIE may be unwilling or unable to perform its
contractual obligations under our commercial agreements. Consequently, we may
not be able to conduct our operations in the manner currently planned. In
addition, the VIE may seek to renew their agreements on terms that are
disadvantageous to us. Although we have entered into a series of agreements that
provide us with the ability to control the VIE, we may not succeed in enforcing
our rights under them insofar as our contractual rights and legal remedies under
PRC law are inadequate. In addition, if we are unable to renew these agreements
on favorable terms when these agreements expire or to enter into similar
agreements with other parties, our business may not be able to operate or
expand, and our operating expenses may significantly increase.
Our arrangements with our VIE and its respective
shareholders may be subject to a transfer pricing adjustment by the PRC tax
authorities which could have an adverse effect on our income and expenses.
We could face material and adverse tax consequences if the PRC
tax authorities determine that our contracts with our VIE and their respective
shareholders were not entered into based on arms length negotiations. Although
our contractual arrangements are similar to those of other companies conducting
similar operations in China, if the PRC tax authorities determine that these
contracts were not entered into on an arms length basis, they may adjust our
income and expenses for PRC tax purposes in the form of a transfer pricing
adjustment. Such an adjustment may require that we pay additional PRC taxes plus
applicable penalties and interest, if any.
If we do not obtain shareholder approval of certain
potential common stock issuances to Beijing Sun Seven Stars Culture Development
Limited, or SSS, a promissory note held by SSS will be due, and we may not have
the resources to repay such note.
Under the rules of the NASDAQ Capital Market, we generally may
not issue more than 19.99% of our outstanding shares unless we obtain
shareholder approval. On December 21, 2015, we entered into an Amended and
Restated Securities Purchase Agreement (the Amended and Restated Securities
Purchase Agreement) with SSS, pursuant to which we agreed to issue 4,545,454 shares
of our common stock for $2.20 per share, or a total purchase price of $10.0
million to SSS. In addition, we agreed to issue two-year warrants to acquire an
additional 1,818,182 shares of common stock at an exercise price of $2.75 per
share (the SSS Warrant) to SSS. On the same day, we also entered into a Content
License Agreement with SSS (the Content License Agreement) under which SSS
granted us a non-exclusive, royalty-free content distribution right for certain
assets valued at approximately $29.1 million, in exchange for a promissory note
(the SSS Note) that is convertible into 9,208,860 shares of our common stock
(the IP Shares). The SSS Note has a stated principal amount of $17.7 million,
bears interest at the rate of 0.56% per annum and matures May 21, 2016. In the
event of default, the SSS Note will become immediately due and payable. As of
December 31, 2015, no shares, warrants or promissory note was issued by the
Company as the transaction was subject to certain closing conditions. On March
28, 2016, we closed the transaction with SSS.
Under the terms of the respective agreements, until receipt of
necessary shareholder approvals, the SSS Warrant may not be exercised and the
SSS Note is not convertible into the IP Shares to the extent that such exercise
and/or conversion would result in SSS and its affiliates beneficially owning
more than 19.99% of our outstanding common stock. Once the necessary shareholder
approval is received, the unpaid principal and interest on the SSS Note will
automatically convert into the IP Shares.
Although we will put this proposal to our shareholders for
their approval, no assurances can be given that we will obtain such shareholder
approval. If we fail to obtain such shareholder approval by May 21, 2016 (unless
such maturity date for the SSS Note is extended), SSS may require us to satisfy
all of our obligations under the SSS Note, including the payment in full of all
principal and interest, and may pursue other legal or equitable remedies against
us. Our ability to make such cash payments will depend on available cash
resources at that time, and there can be no assurance that we will have the cash
necessary to make such payments. Early payment of the SSS Note could therefore
have a significantly adverse effect on our liquidity and financial condition
The success of our business is dependent on our ability
to retain our existing key employees and to add and retain senior officers to
our management.
We depend on the services of our key employees, in particular,
Mr. Bruno Wu, our Chairman, Mr. Shane McMahon, our Vice Chairman, and Mr.
Mingcheng Tao, our Chief Executive Officer. Our success will largely depend on
our ability to retain these key employees and to attract and retain qualified
senior and middle level managers to our management team. We have recruited
executives and management in China to assist in our ability to manage the
business and to recruit and oversee employees. While we believe we offer
compensation packages that are consistent with market practice, we cannot be
certain that we will be able to hire and retain sufficient personnel to support our business. In addition,
severe capital constraints have limited our ability to attract specialized
personnel. Moreover, our budget limitations will restrict our ability to hire
qualified personnel. The loss of any of our key employees would significantly
harm our business. We do not maintain key person life insurance on any of our
employees.
15
We may be unable to compete successfully against new
entrants and established film and media industry competitors
.
The Chinese market for film and media content and services is
intensely competitive and rapidly changing. Barriers to entry may be relatively
minimal, and current and new competitors may be able to provide film and media
content at a lower cost. Although the Chinese government continues to improve
its efforts to enforce intellectual property protection, pirated film and media
content continues to be prevalent in China, which may reduce our potential
profits. In addition, other companies offer competitive products or services
including Chinese language content. Furthermore, as many of our existing
competitors, as well as a number of potential competitors, have longer operating
histories in the entertainment, film, media or Internet service markets, greater
name and brand recognition, better relationships with key players, larger
customer bases and libraries and significantly greater financial, technical and
marketing resources than we have, we cannot assure you that we will be able to
compete successfully against our current or future competitors. Any increased
competition could reduce our subscribers, make it difficult for us to attract
and retain subscribers, reduce or eliminate our market share, lower our profit
margins and reduce our revenues.
We depend on third parties to provide video content for
our VOD services, and if we are unable to secure access to these contents, we
may be unable to attract and retain subscribers.
We depend on third parties to provide us with programming
content which we would distribute through our channel partners to our
subscribers in China. We continue to negotiate with various entertainment
studios and other right holders to secure access to additional programming
content in order to make our service more attractive to subscribers. However, we
may not be able to obtain access to additional programming content on favorable
terms, or at all. In addition, video content costs have increased sharply in the
Chinese Internet market and we may not be able to purchase the same volume of
content once our existing content contracts expires. If we are unable to
successfully negotiate agreements for access to high quality programming
content, we may not be able to attract and retain subscribers or distribution
partners for our service, and our operating results would be negatively
affected.
If we are unable to attract many subscribers for our VOD
services, or are unable to successfully renew agreements or negotiate additional
agreements with distribution partners in China to deliver our programming
content, our financial performance will be adversely affected.
At present, there is a limited market for VOD services in
China, and there is no guarantee that a market will develop or that we will be
able to attract subscribers to purchase our services. In addition, we rely on
cable television, IPTV and OTT providers to deliver our programming content to
subscribers and we may not be able to renew agreements or negotiate additional
agreements to deliver our programming content on favorable terms, or at all. If
we are unable to attract many subscribers or successfully negotiate additional
delivery agreements with distribution partners, including cable television, IPTV
and OTT providers, our financial performance will be adversely affected.
Videos and other types of content displayed on Internet
platforms may be found objectionable by PRC regulatory authorities, which may
result in penalties and other administrative actions against us.
The PRC government has adopted regulations governing Internet
access and the distribution of videos over the Internet. Although we have
adopted internal procedures to obtain the appropriate PRC censorship and
regulatory approval for contents licensed to us, new regulations and
implementation guidance may require us to limit or eliminate the dissemination
of certain content through Internet channels. Moreover, the costs of compliance
with these regulations may continue to increase as we procure more content to
support our business growth. In addition, we may also face litigation or
administrative action for defamation, negligence, or other purported injuries
resulting from content programming operated by us. Such litigation and
administrative actions, with or without merit, may be expensive and
time-consuming and may result in significant diversion of resources and
management attention from our business operations. Furthermore, such litigation
or administrative actions may adversely affect our brand image and reputation.
We derived a substantial portion of our revenue from
several major customers. If we lose any of these customers, or if the volume of
business with these distribution partners decline, our revenues may be
significantly affected.
Revenue from three of our distribution partners accounted for
over 41% of our revenues for the year ended December 31, 2015 and revenue from
two of our distribution partners accounted for over 53% of our revenues for the
year ended December 31, 2014. Due to our reliance on a limited number of
distribution partners, any of the following events may cause a material decline
in our revenue and have a material adverse effect on our results of operations:
|
.
|
reductions, delays or cessation of purchases
from one or more significant distribution partner;
|
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.
|
loss of one or more distribution partner and
our inability to find new distribution partners that can generate the same
volume of business; and
|
16
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.
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failure of any distribution partner to make
timely payment of our products and services.
|
We cannot be certain whether these relationships will continue
to develop or if these distribution partners will continue to generate
significant revenue for us in the future.
If we fail to maintain an effective system of internal
control over financial reporting, our ability to accurately and timely report
our financial results or prevent fraud may be adversely affected, and investor
confidence and market price of our shares may be adversely impacted.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002
(SOX 404), the SEC adopted rules requiring public companies to include a
report of management on the companys internal controls over financial reporting
in their annual reports on Form 10-K. Under current law, we became subject to
these requirements beginning with our annual report for the fiscal year ended
December 31, 2007. Our internal control over financial reporting and our
disclosure controls and procedures have been ineffective, and failure to improve
them could lead to future errors in our financial statements that could require
a restatement or untimely filings, which could cause investors to lose
confidence in our reported financial information, and a decline in our stock
price.
In connection with our assessment in 2014, management
identified certain
deficiencies in our internal controls over financial reporting that management
concluded to be a material weakness. The material weakness is related to
accounting for non-routine transactions, see Item 9A. Controls and Procedures
Management Annual Report on Internal Control Over Financial Reporting.
We have devoted significant resources to address the material
weakness, including retaining key accounting personnel with sufficient U.S. GAAP
accounting and SEC reporting knowledge, implementing internal Sarbanes Oxley
procedures and upgrading our internal control-related processes. As of December
31, 2015, our management has concluded that our internal control over financial
reporting is effective after remediation. See Item 9A. Controls and Procedures
Management Annual Report on Internal Control Over Financial Reporting.
However, if we fail to maintain effective internal control over
financial reporting in the future, our management may not be able to conclude
that we have effective internal control over financial reporting at a reasonable
assurance level. This could in turn result in the loss of investor confidence in
the reliability of our financial statements and negatively impact the trading
price of our shares.
RISKS RELATED TO DOING BUSINESS IN CHINA
U.S. financial regulatory and law enforcement agencies,
including without limitation the U.S. Securities and Exchange Commission, U.S.
Department of Justice and U.S. national securities exchanges, have limited
ability, and in fact may have no ability, to conduct investigations within the
Peoples Republic of China concerning the Company, our PRC-based officers,
directors, market research services or other professional services or experts.
Most of our assets and substantially all of our current
operations are conducted in the PRC, and some of our officers, directors and
other professional service providers are nationals and residents of China. U.S.
financial regulatory and law enforcement agencies, including without limitation
the U.S. Securities and Exchange Commission (the SEC), U.S. Department of
Justice and U.S. national securities exchanges, have limited ability, and in
fact may have no ability, to conduct investigations within the PRC concerning
the Company, and China may have limited or no agreements in place to facilitate
cooperation with the SECs Division of Enforcement for investigations within its
jurisdiction. In addition, our independent registered public accounting firm,
are based in China, and work papers regarding the Company may be maintained in
China, where the Public Company Accounting Oversight Board (PCAOB) is
currently unable to conduct inspections without the approval of the Chinese
authorities. Any limitations on the ability of U.S. financial regulatory and law
enforcement agencies, including the PCAOB, to access books, records and
testimony, to conduct onsite investigation of operations, to exercise subpoena
power and to take other investigative actions, including those stemming from
investor tips, complaints and referrals, may deprive investors of the benefits
and protections of these agencies, and investors may lose confidence in, or be
skeptical as to the quality of, the Companys disclosures in filings with the
SEC, reported financial information and procedures and the quality of our
financial statements, or the Companys compliance with the rules and regulations
of such agencies.
Adverse changes in political, economic and other policies
of the Chinese government could have a material adverse effect on the overall
economic growth of China, which could materially and adversely affect the growth
of our business and our competitive position.
Our business operations are conducted in China. Accordingly,
our business, financial condition, results of operations and prospects are
affected significantly by economic, political and legal developments in China.
The Chinese economy differs from the economies of most developed countries in many respects, including:
17
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the degree of government involvement;
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the level of development;
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the growth rate;
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the control of foreign exchange;
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the allocation of resources;
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an evolving and rapidly changing regulatory system; and
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a lack of sufficient transparency in the
regulatory process.
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While the Chinese economy has experienced significant growth in
the past 30 years, growth has been uneven, both geographically and across
various sectors of the economy. The Chinese economy has also experienced certain
adverse effects due to the global financial crisis. In addition, the growth rate
of Chinas gross domestic product has slowed in recent years to 7.4% in 2014 and
6.9% in 2015, according to the National Bureau of Statistics of China. The
Chinese government has implemented various measures to encourage economic growth
and guide the allocation of resources. Some of these measures benefit the
overall Chinese economy, but may also have a negative effect on us. For example,
our financial condition and results of operations may be adversely affected by
government control over capital investments, foreign currency exchange
restrictions or changes in tax regulations that
are applicable to us.
The Chinese economy has been transitioning from a planned
economy to a more market-oriented economy. Although in recent years the Chinese
government has implemented measures emphasizing the utilization of market forces
for economic reform, the reduction of state ownership of productive assets and
the establishment of sound corporate governance in business enterprises, a
substantial portion of the productive assets in China is still owned by the
Chinese government. The continued control of these assets and other aspects of
the national economy by the Chinese government could materially and adversely
affect our business. The Chinese government also exercises significant control
over Chinese economic growth through the allocation of resources, controlling
payment of foreign currency-denominated obligations, setting monetary policy and
providing preferential treatment to particular industries or companies.
Any adverse change in the economic conditions or government
policies in China could have a material adverse effect on overall economic
growth, which in turn could lead to a reduction in demand for our products and
consequently have a material adverse effect on our businesses.
Uncertainties with respect to the PRC legal system could
limit the legal protections available to you and to us, which could cause
material adverse effects to our business operations.
We conduct substantially all of our business through our
subsidiaries and VIE in the PRC. Our subsidiaries and VIE are generally subject
to laws and regulations applicable to foreign investments in China and, in
particular, laws applicable to foreign invested entities established in the PRC
(FIEs). The PRC legal system is based on written statutes, and prior court
decisions may be cited for reference but have limited precedential value. Since
1979, a series of new PRC laws and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. For
example, on January 19, 2015, MOFCOM published a draft of the PRC law on Foreign
Investment (Draft for Comment), of the Draft Foreign Investment Law, which was
open for public comments until February 17, 2015. At the same time, MOFCOM
published an accompanying explanatory note of the Draft Foreign Investment Law,
or the Explanatory Note, which contains important information about the Draft
Foreign Investment Law, including its drafting philosophy and principles, main
content, plans to transition to the new legal regime and treatment of business
in China controlled by FIEs, primarily through contractual arrangements such as
VIE arrangements. The Draft Foreign Investment Law is intended to replace the
current foreign investment legal regime consisting of three laws: the
Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative
Joint Venture Enterprise Law and the Wholly Foreign-Invested Enterprise Law, as
well as detailed implementing rules. The Draft Foreign Investment Law proposes
significant changes to the PRC foreign investment legal regime and may have a
material impact on Chinese companies listed or to be listed overseas. The
proposed Draft Foreign Investment Law is to regulate FIEs the same way as PRC
domestic entities, except for those FIEs that operate in industries deemed to be
either restricted or prohibited in a Negative List. As the Negative List
has yet to be published, it is unclear whether it will differ from the current
list of industries subject to restrictions or prohibitions on foreign
investment. The Draft Foreign Investment Law also provides that only FIEs
operating in industries on the Negative List will require entry clearance and
other approvals that are not required of PRC domestic entities. As a result of
the entry clearance and approvals, certain FIEs operating in industries on the
Negative List may not be able to continue to conduct their operations through
contractual arrangements. Moreover, it is uncertain whether the online VOD
business and value-added telecommunications industries, in which our VIEs
operate, will be subject to the foreign investment restrictions or prohibitions
set forth in the negative list to be issued.
The Draft Foreign Investment Law has not taken a position on
what actions will be taken with respect to the existing VIE structures, while it
is soliciting comments from the public on this point by illustrating several
possible options. Under these varied options, a company that has a VIE structure
and conducts the business on the negative list at the time of enactment of the
new Foreign Investment Law has either the option or obligation to disclose
its corporate structure to the authorities, while the authorities may either
permit the company to continue to maintain the VIE structure (if the company is
deemed ultimately controlled by PRC nationals), or require the company to
dispose of its businesses and/or VIE structure based on circumstantial
considerations. The Draft Foreign Investment Law also provides that only FIEs
operating in industries on the Negative List will require entry clearance and
other approvals that are not required of PRC domestic entities. As a result of
such entry clearance and approvals or certain restructuring of our corporate
structure and operations, to be completed by companies with existing VIE
structure like us, we face substantial uncertainties as to whether these actions
can be timely completed, or at all, and our business and financial condition may
be materially and adversely affected.
18
Although the overall effect of legislation over the past three
decades has significantly enhanced the protections afforded to various forms of
foreign investment in China, China has not developed a fully integrated legal
system. And recently enacted laws, rules and regulations may not sufficiently
cover all aspects of economic activities in China or may be subject to
significant degree of interpretation by PRC regulatory agencies and courts.
Since the PRC legal system continues to evolve rapidly, the interpretations of
many laws, regulations, and rules are not always uniform, and enforcement of
these laws, regulations, and rules involve uncertainties, which may limit legal
protections available to you and to us. In addition, the PRC legal system is
based in part on government policies and internal rules, some of which are not
published on a timely basis or at all, and which may have a retroactive effect.
As a result, we may not be aware of our violation of these policies and rules
until after the occurrence of the violation.
In addition, any litigation in China may be protracted and
result in substantial costs and diversion of resources and managements
attention. In addition, some of our executive officers and directors are
residents of China and not of the United States, and substantially all the
assets of these persons are located outside the United States. As a result, it
could be difficult for investors to affect service of process in the United
States or to enforce a judgment obtained in the United States against our
Chinese operations and entities.
We depend upon contractual arrangements with our VIE for
the success of our business and these arrangements may not be as effective in
providing operational control as direct ownership of these businesses and may be
difficult to enforce.
Our operations are primarily conducted in the PRC, where the
PRC government restricts or prohibits foreign-owned enterprises from owning
Internet content, telecommunication, and certain other operations in the PRC.
Accordingly, we depend on our VIE, in which we have no direct ownership
interest, to provide those services through contractual agreements among the
parties and to hold some of our assets. These arrangements may not be as
effective in providing control over our operations through direct ownership of
these businesses. Due to our VIE structure, we have to rely on contractual
rights to effect control and management of our VIE, which exposes us to the risk
of potential breach of contract by the VIE or its shareholders. A failure by our
VIE or its shareholders to perform their obligations under our contractual
arrangements with them could have an adverse effect on our business and
financial condition. Furthermore, if the shareholders of our VIE were involved
in proceedings that had an adverse impact on their shareholder interests in such
VIE or on our ability to enforce relevant contracts related to the VIE
structure, our business would be adversely affected.
As all of these contractual arrangements are governed by PRC
law and provide for the resolution of disputes through either arbitration or
litigation in the PRC, they would be interpreted in accordance with PRC law and
any disputes would be resolved in accordance with PRC legal procedures. We would
have to rely for enforcement on legal remedies under PRC law, including specific
performance, injunctive relief or damages, which might not be effective. As
these PRC governmental authorities have wide discretion in granting such
approvals, we could fail to obtain such approval. In addition, our VIE contracts
might not be enforceable in China if PRC governmental authorities, courts or
arbitral tribunals took the view that such contracts contravened PRC law or were
otherwise not enforceable for public policy reasons. In the event we were unable
to enforce these contractual arrangements, we would not be able to exert
effective control over our VIE, and our ability to conduct our business, and our
financial condition and results of operations, would be severely adversely
affected.
You may have difficulty enforcing judgments against us.
Most of our assets are located outside of the United States and
most of our current operations are conducted in the PRC. In addition, some of
our directors and officers are nationals and residents of countries other than
the United States. A substantial portion of the assets of these persons is
located outside the United States. As a result, it may be difficult for you to
effect service of process within the United States upon these persons. It may
also be difficult for you to enforce in U.S. courts judgments on the civil
liability provisions of the U.S. federal securities laws against us and our
officers and directors, that are not residents in the United States and the
substantial majority of whose assets are located outside of the United States.
In addition, there is uncertainty as to whether the courts of the PRC would
recognize or enforce judgments of U.S. courts. Recognition and enforcement of
foreign judgments are provided for under the PRC Civil Procedures Law. Courts in
China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on
treaties between China and the country where the judgment is made or on
reciprocity between jurisdictions. China does not have any treaties or other
arrangements that provide for the reciprocal recognition and enforcement of
foreign judgments with the United States. In addition, according to the PRC
Civil Procedures Law, courts in the PRC will not enforce a foreign judgment
against us or our directors and officers if they decide that the judgment
violates basic principles of PRC law or national sovereignty, security, or the
public interest. So it is uncertain whether a PRC court would enforce a judgment
rendered against us by a court in the United States.
19
The PRC government exerts substantial influence over the
manner in which we must conduct our business activities.
The PRC government has exercised and continues to exercise
substantial control over virtually every sector of the Chinese economy through
regulation and state ownership. Our ability to operate in China may be harmed by
changes in its laws and regulations, including those relating to taxation,
import and export tariffs, environmental regulations, land use rights, property,
and other matters. We believe that our operations in China are in material
compliance with all applicable legal and regulatory requirements. However, the
central or local governments of the jurisdictions in which we operate may impose
new, stricter regulations or interpretations of existing regulations that would
require additional expenditures and efforts on our part to ensure our compliance
with such regulations or interpretations.
Accordingly, government actions in the future, including any
decision not to continue to support recent economic reforms and to return to a
more centrally planned economy or regional or local variations in the
implementation of economic policies, could have a significant effect on economic
conditions in China or particular regions thereof and could require us to divest
ourselves of any interest we then hold in Chinese properties or joint ventures.
Activities of Internet content providers are or will be
subject to additional PRC regulations, which have not yet been put into effect,
could substantially affect our business activities and financial performance.
The Ministry of Industry and Information Technology (MIIT)
has stated that the activities of Internet content providers are subject to
regulation by various PRC government authorities, depending on the specific
activities conducted by the Internet content provider. Various government
authorities have stated publicly that they are in the process of preparing new
laws and regulations that will govern these activities. The areas of regulation
currently include online advertising, online news reporting, online publishing,
provision of online or mobile music, online securities trading, the provision of
industry-specific (e.g., drug-related) information over the Internet and foreign
investment in value-added telecommunication services. Other aspects of media
transferred through Internet mediums may be subject to additional regulations in
the future. We cannot assure you that the PRC regulatory authorities will not
issue new laws or regulations that will adversely impact our business activities
and financial performance.
The enforcement of the PRC labor contract law may
materially increase our costs and decrease our net income.
China adopted a new Labor Contract Law, effective on January 1,
2008, issued its implementation rules and regulations, effective on September
18, 2008, and amended the Labor Contract Law, effective on July 1, 2013. The
Labor Contract Law and related rules and regulations impose more stringent
requirements on employers with regard to, among other things, minimum wages,
severance payment and non-fixed-term employment contracts, time limits for
probation periods, as well as the duration and the times that an employee can be
placed on a fixed-term employment contract. Due to the limited period of
effectiveness of the Labor Contract Law, its implementation rules and
regulations and its amendment, and the lack of clarity with respect to its
implementation and the potential penalties and fines, it is uncertain how it
will impact our current employment policies and practices. In particular,
compliance with the Labor Contract Law and its implementation rules and
regulations may increase our operating expenses. In the event that we decide to
terminate some of our employees or otherwise change our employment or labor
practices, the Labor Contract Law and its implementation rules and regulations
may also limit our ability to effect those changes in a manner that we believe
to be cost-effective or desirable, and could result in a material decrease in
our profitability.
Future inflation in China may inhibit our ability to
conduct business in China.
In recent years, the Chinese economy has experienced periods of
rapid expansion, significant stock market volatility and highly fluctuating rates of inflation. These factors have
led to the adoption by the Chinese government, from time to time, of various
corrective measures designed to restrict the availability of credit or regulate
growth and contain inflation. In 2010 and 2011, for example, the Chinese economy
experienced high inflation and to curb the accelerating inflation, the Peoples
Bank of China (PBOC), China central bank, raised benchmark interest rates
three times in 2011. High inflation may in the future cause the Chinese
government to impose controls on credit and/or prices, or to take other action,
which could inhibit economic activity in China, and thereby harm the market for
our products and services and our company.
20
Restrictions on currency exchange may limit our ability
to receive and use our sales effectively.
At present, all of our sales will be settled in RMB, and any
future restrictions on currency exchanges may limit our ability to use revenue
generated in RMB to fund any future business activities outside China or to make
dividend or other payments in U.S. dollars. Although the Chinese government
introduced regulations in 1996 to allow greater convertibility of the RMB for
current account transactions, significant restrictions still remain, including
primarily the restriction that FIEs may only buy, sell or remit foreign
currencies after providing valid commercial documents, at those banks in China
authorized to conduct foreign exchange business. In addition, foreign exchange
transactions under the capital account remain subject to limitations and require
approvals from, or registration with, SAFE and other relevant PRC governmental
authorities and companies are required to open and maintain separate foreign
exchange accounts for capital account items. This could affect our ability to
obtain foreign currency through debt or equity financing for our subsidiaries
and the variable interest entities. Recent volatility in the RMB foreign
exchange rate as well as capital flight out of China may lead to further foreign
exchange restrictions and policies or practices which adversely affect our
operations and ability to convert RMB. We cannot be certain that the Chinese
regulatory authorities will not impose more stringent restrictions on the
convertibility of the RMB.
Fluctuations in exchange rates could adversely affect our
business and the value of our securities.
The value of our common stock will be indirectly affected by
the foreign exchange rate between the U.S. dollar and RMB and between those
currencies and other currencies in which our sales may be denominated.
Appreciation or depreciation in the value of the RMB relative to the U.S. dollar
would affect our financial results reported in U.S. dollar terms without giving
effect to any underlying change in our business or results of operations.
Fluctuations in the exchange rate will also affect the relative value of any
dividend we issue that will be exchanged into U.S. dollars, as well as earnings
from, and the value of, any U.S. dollar-denominated investments we make in the
future.
Since July 2005, the RMB has no longer been pegged to the U.S.
dollar. Although the Peoples Bank of China regularly intervenes in the foreign
exchange market to prevent significant short-term fluctuations in the exchange
rate, the RMB may appreciate or depreciate significantly in value against the
U.S. dollar in the medium to long term. Moreover, it is possible that in the
future PRC authorities may lift restrictions on fluctuations in the RMB exchange
rate and lessen intervention in the foreign exchange market.
Very limited hedging transactions are available in China to
reduce our exposure to exchange rate fluctuations. To date, we have not entered
into any hedging transactions. While we may enter into hedging transactions in
the future, the availability and effectiveness of these transactions may be
limited, and we may not be able to successfully hedge our exposure at all. In
addition, our foreign currency exchange losses may be magnified by PRC exchange
control regulations that restrict our ability to convert RMB into foreign
currencies.
Restrictions under PRC law on our PRC subsidiaries
ability to make dividends and other distributions could materially and adversely
affect our ability to grow, make investments or acquisitions that could benefit
our business, pay dividends to you, and otherwise fund and conduct our business.
At present, all of our sales are earned by our PRC operating
entities. However, PRC regulations restrict the ability of our PRC subsidiaries
to make dividends and other payments to their offshore parent companies. PRC
legal restrictions permit payments of dividends by our PRC subsidiaries only out
of their accumulated after-tax profits, if any, determined in accordance with
PRC accounting standards and regulations. Our PRC subsidiaries are also required
under PRC laws and regulations to allocate at least 10% of their annual
after-tax profits determined in accordance with PRC GAAP to a statutory general
reserve fund until the amounts in said fund reaches 50% of their registered
capital. Allocations to these statutory reserve funds can only be used for
specific purposes and are not transferable to us in the form of loans, advances,
or cash dividends. Any limitations on the ability of our PRC subsidiaries to
transfer funds to us could materially and adversely limit our ability to grow,
make investments or acquisitions that could be beneficial to our business, pay
dividends and otherwise fund and conduct our business.
Failure to comply with PRC regulations relating to the
establishment of offshore special purpose companies by PRC residents may subject
our PRC resident shareholders to personal liability, limit our ability to
acquire PRC companies or to inject capital into our PRC subsidiaries, limit our
PRC subsidiaries ability to distribute profits to us or otherwise materially
adversely affect us.
SAFE has promulgated several regulations, including the Notice
Concerning Foreign Exchange Controls on Domestic Residents Financing and
Roundtrip Investment Through Offshore Special Purpose Vehicles (Circular 75),
effective on November 1, 2005, and the Circular on Issues Concerning Foreign
Exchange Administration Over the Overseas Investment and Financing and Roundtrip
Investment by Domestic Residents Via Special Purpose Vehicles (Circular 37),
effective on July 4, 2015, which replaced Circular 75. Under Circular 37, PRC
residents must register with local branches of SAFE in connection with their
direct establishment or indirect control of an offshore entity for the purpose
of holding domestic or offshore assets or interests, referred to as a special
purpose vehicle in Circular 37. In addition, amendments to the registration
must be made in the event of any material change, such as an increase or
decrease in share capital contributed by the individual PRC resident
shareholder, share transfer or exchange, merger, division or other material
event. Failure to comply with the specified registration procedures may result
in restrictions being imposed on the foreign exchange activities of the relevant
PRC entity, including the payment of dividends and other distributions to its
offshore parent, as well as restrictions on capital inflows from the offshore
entity to the PRC entity. Further, failure to comply with the SAFE registration requirements may result in penalties under PRC law
for evasion of foreign exchange regulations.
21
We have asked our shareholders who are PRC residents as defined
in Circular 37 and related rules to register with the relevant branch of SAFE,
as currently required, in connection with their equity interests in us and our
acquisitions of equity interests in our PRC subsidiaries. However, we cannot
provide any assurances that they can obtain the above SAFE registrations
required by Circular 37 and related rules. Moreover, because Circular 37 is
newly issued, there is uncertainty over how Circular 37 and related rules will
be interpreted and implemented and how or whether SAFE will apply it to us, and
we cannot predict how it will affect our business operations or future
strategies. For example, our present and prospective PRC subsidiaries ability
to conduct foreign exchange activities, such as the remittance of dividends and
foreign currency-denominated borrowings, may be subject to compliance with
Circular 37 and related rules by our PRC resident beneficial holders. In
addition, such PRC residents may not always be able to complete the necessary
registration procedures required by Circular 37 and related rules. We have
little control over either our present or prospective direct or indirect
shareholders or the outcome of such registration procedures.
We may be unable to complete a business combination
transaction efficiently or on favorable terms due to complicated merger and
acquisition regulations which became effective on September 8, 2006.
On August 8, 2006, six PRC regulatory agencies, including the
China Securities Regulatory Commission, promulgated the Regulation on Mergers
and Acquisitions of Domestic Companies by Foreign Investors, which became
effective on September 8, 2006 and was amended in June 2009. This regulation, among
other things, governs the approval process by which a PRC company may
participate in an acquisition of assets or equity interests. Depending on the
structure of the transaction, the regulation will require the PRC parties to
make a series of applications and supplemental applications to the government
agencies. In some instances, the application process may require the
presentation of economic data concerning a transaction, including appraisals of
the target business and evaluations of the acquirer, which are designed to allow
the government to assess the transaction. Government approvals will have
expiration dates by which a transaction must be completed and reported to the
government agencies. Compliance with the regulation is likely to be more time
consuming and expensive than in the past and the government can now exert more
control over the combination of two businesses. Accordingly, due to the
regulation, our ability to engage in business combination transactions has
become significantly more complicated, time consuming and expensive, and we may
not be able to negotiate a transaction that is acceptable to our shareholders or
sufficiently protect their interests in a transaction.
The regulation allows PRC government agencies to assess the
economic terms of a business combination transaction. Parties to a business
combination transaction may have to submit to MOFCOM and other relevant
government agencies an appraisal report, an evaluation report and the
acquisition agreement, all of which form part of the application for approval,
depending on the structure of the transaction. The regulation also prohibits a
transaction at an acquisition price obviously lower than the appraised value of
the PRC business or assets, and in certain transaction structures, may require
that consideration be paid within defined periods, generally not in excess of a
year. The regulation also limits our ability to negotiate various terms of the
acquisition, including aspects of the initial consideration, contingent
consideration, holdback provisions, indemnification provisions and provisions
relating to the assumption and allocation of assets and liabilities. Transaction
structures involving trusts, nominees and similar entities are prohibited.
Therefore, such regulation may impede our ability to negotiate and complete a
business combination transaction on financial terms that satisfy our investors
and protect our shareholders economic interests.
Our existing contractual arrangements with Sinotop
Beijing and its shareholders may be subject to national security review by
MOFCOM, and the failure to receive the national security review could have a
material adverse effect on our business and operating results.
In August 2011, MOFCOM promulgated the Rules of Ministry of
Commerce on Implementation of Security Review System of Merger and Acquisition
of Domestic Enterprises by Foreign Investors (the Security Review Rules) to
implement the Notice of the General Office of the State Council on Establishing
the Security Review System for Merger and Acquisition of Domestic Enterprises by
Foreign Investors promulgated on February 3, 2011 (Circular 6). The Security
Review Rules became effective on September 1, 2011. Under the Security Review
Rules, a national security review is required for certain mergers and
acquisitions by foreign investors raising concerns regarding national defense
and security. Foreign investors are prohibited from circumventing the national
security review requirements by structuring transactions through proxies,
trusts, indirect investments, leases, loans, control through contractual
arrangements or offshore transactions. The application and interpretation of the
Security Review Rules remain unclear. Based on our understanding of the Security
Review Rules, we do not need to submit our existing contractual arrangements
with Sinotop Beijing and its shareholders to the MOFCOM for national security
review because, among other reasons, (i) we gained de facto control over Sinotop
Beijing in 2010 prior to the effectiveness of Circular 6 and the Security Review
Rules; and (ii) there are currently no explicit provisions or official
interpretations indicating that our current businesses fall within the scope of
national security review. Although we have no plan to submit our existing
contractual arrangements with Sinotop Beijing and its shareholders to MOFCOM for
national security review, the relevant PRC government agencies, such as MOFCOM,
may reach a different conclusion. If MOFCOM or another PRC regulatory agency
subsequently determines that we need to submit our existing contractual
arrangements with Sinotop Beijing and its shareholders for national security
review by interpretation, clarification or amendment of the Security Review
Rules or by any new rules, regulations or directives promulgated, we may face
sanctions by MOFCOM or another PRC regulatory agency. These sanctions may
include revoking the business or operating licenses of our PRC entities,
discontinuing or restricting our operations in China, confiscating our income or
the income of Sinotop Beijing, and taking other regulatory or enforcement
actions, such as levying fines, that could be harmful to our business. Any of
these sanctions could cause significant disruption to our business operations.
22
The Security Review Rules may make it more difficult for
us to make future acquisitions or dispositions of our business operations or
assets in China.
The Security Review Rules, effective as of September 1, 2011,
provide that when deciding whether a specific merger or acquisition of a
domestic enterprise by foreign investors is subject to the national security
review by MOFCOM, the principle of substance-over-form should be applied.
Foreign investors are prohibited from circumventing the national security review
requirement by structuring transactions through proxies, trusts, indirect
investments, leases, loans, control through contractual arrangements or offshore
transactions. If the business of any target company that we plan to acquire
falls within the scope of national security review, we may not be able to
successfully acquire such company by equity or asset acquisition, capital
increase or even through any contractual arrangement.
Under the Enterprise Income Tax Law, we may be classified
as a resident enterprise of China. Such classification will likely result in
that dividends payable to our foreign investor and gains on sale of our common
stock by our foreign investors may become subject to PRC taxation.
On March 16, 2007, the National Peoples Congress of China
passed a new Enterprise Income Tax Law (the EIT Law), and on November 28,
2007, the State Council of China passed its implementing rules, which took
effect on January 1, 2008. Under the EIT Law, an enterprise established outside
of China with de facto management bodies within China is considered a
resident enterprise, meaning that it can be treated in a manner similar to a
Chinese enterprise for enterprise income tax purposes. The implementing rules of
the EIT Law define de facto management as substantial and overall management
and control over the production and operations, personnel, accounting, and
properties of the enterprise.
On April 22, 2009, the State Administration of Taxation issued
the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment
Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to
Criteria of de facto Management Bodies (the Notice), further interpreting the
application of the EIT Law and its implementation non-Chinese enterprise or
group controlled offshore entities. Pursuant to the Notice, an enterprise
incorporated in an offshore jurisdiction and controlled by a Chinese enterprise
or group will be classified as a non-domestically incorporated resident
enterprise if (i) its senior management in charge of daily operations reside or
perform their duties mainly in China; (ii) its financial or personnel decisions
are made or approved by bodies or persons in China; (iii) its substantial assets
and properties, accounting books, corporate chops, board and shareholder minutes
are kept in China; and (iv) at least half of its directors with voting rights or
senior management often reside in China. A resident enterprise would be subject
to an enterprise income tax rate of 25% on its worldwide income and must pay a
withholding tax at a rate of 10% when paying dividends to its non-PRC
shareholders that do not have an establishment or place of business in the PRC
or which have such establishment or place of business but the dividends are not
effectively connected with such establishment or place of business, to the
extent such dividends are derived from sources within the PRC. Similarly, any
gains realized on the transfer of our shares by such investors is also subject
to PRC tax at a current rate of 10%, subject to any reduction or exemption set
forth in relevant tax treaties, if such gain is regarded as income derived from
sources within the PRC. However, it remains unclear as to whether the Notice is
applicable to an offshore enterprise incorporated by a Chinese natural person.
Detailed measures on the imposition of tax from non-domestically incorporated
resident enterprises are not readily available. Therefore, it is unclear how tax
authorities will determine tax residency based on the facts of each case.
We may be deemed to be a resident enterprise by Chinese tax
authorities. If the PRC tax authorities determine that we are a resident
enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC
tax consequences could follow. First, we may be subject to the enterprise income
tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise
income tax reporting obligations. In our case, this would mean that income such
as interest on financing proceeds and non-China source income would be subject
to PRC enterprise income tax at a rate of 25%. Second, although under the EIT
Law and its implementing rules dividends paid to us from our PRC subsidiaries
would qualify as tax-exempt income, we cannot guarantee that such dividends
will not be subject to a 10% withholding tax, as the PRC foreign exchange
control authorities, which enforce the withholding tax, have not yet issued
guidance with respect to the processing of outbound remittances to entities that
are treated as resident enterprises for PRC enterprise income tax purposes.
Finally, it is possible that future guidance issued with respect to the new
resident enterprise classification could result in a situation in which a 10%
withholding tax is imposed on dividends we pay to our non-PRC shareholders and
with respect to gains derived by our non-PRC shareholders from
transferring our shares.
23
If we were treated as a resident enterprise by PRC tax
authorities, we would be subject to taxation in both the United States and
China, and our PRC tax may not be creditable against our U.S. tax.
Heightened scrutiny of acquisition transactions by PRC
tax authorities may have a negative impact on our business operations or the
value of your investment in us.
Pursuant to the Notice on Strengthening Administration of
Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises (SAT
Circular 698), effective on January 1, 2008, and the Announcement on Several
Issues Related to Enterprise Income Tax for Indirect Asset Transfer by Non-PRC
Resident Enterprises (SAT Announcement 7), effective on February 3, 2015,
issued by the SAT, if a non-resident enterprise transfers the equity interests
of or similar rights or interests in overseas companies which directly or
indirectly own PRC taxable assets through an arrangement without a reasonable
commercial purpose resulting in the avoidance of PRC corporate income taxes,
such a transaction may be re-characterized and treated as a direct transfer of
PRC taxable assets subject to PRC corporate income tax. SAT Announcement 7
specifies certain factors that should be considered in determining whether an
indirect transfer has a reasonable commercial purpose. However, as SAT
Announcement 7 is newly issued, there is uncertainty as to its application and
the interpretation of the term reasonable commercial purpose. In addition,
under SAT Announcement 7, the entity which has the obligation to pay the
consideration for the transfer to the transferring shareholders has the
obligation to withhold any PRC corporate income tax that is due. If the
transferring shareholders do not pay corporate income tax that is due for a
transfer and the entity which has the obligation to pay the consideration does
not withhold the tax due, the PRC tax authorities may impose a penalty on the
entity that so fails to withhold, which may be relieved or exempted from the
withholding obligation and any resulting penalty under certain circumstances if
it reports such transfer to the PRC tax authorities.
As SAT Circular 698 and SAT Announcement 7 are relatively new
and there is uncertainty over their application, we and our non-PRC resident
investors may be subject to being taxed under Circular 698 and SAT Announcement
7 and may be required to expend valuable resources to comply with Circular 698
and SAT Announcement 7 or to establish that we or our non-PRC resident investors
should not be taxed under Circular 698 and SAT Announcement 7, which could have
a material adverse effect on our financial condition and results of operations.
Regulations relating to the online transmission of
foreign films may adversely affect our business.
On September 2, 2014, the SAPPRFT issued a Notice on Further
Strengthening the Administration of Online Foreign Audiovisual Content (the
September 2014 SAPPRFT Notice), which requires that operators of audiovisual
websites obtain from the SAPPRFT a Film Public Screening Permit for all foreign
films before they are transmitted via the Internet in China. The September 2014
SAPPRFT Notice further stipulates that before any foreign films for transmission
exclusively via the Internet are purchased after the promulgation of the
September 2014 SAPPRFT Notice, operators of audiovisual websites must declare
their annual purchasing plans with the SAPPRFT before the end of the year
preceding the year of the intended broadcast and obtain the SAPPRFTs approval.
The September 2014 SAPPRFT Notice also states that the number of foreign-sourced
content to be purchased by an operator and transmitted via its website in a
single year may not exceed 30% of the total amount of the domestic content
purchased and transmitted by the same website in the previous year.
We rely heavily on foreign films to attract users and while the
application and interpretation of the September 2014 SAPPRFT Notice is
uncertain, the promulgation of the September 2014 SAPPRFT Notice could have an
adverse impact on our business. Any requirement of a minimum ratio of domestic
content to foreign-sourced content in the September 2014 SAPPRFT Notice may
require us to purchase more domestic content. In addition, as competing
operators in China will also be required to maintain such a minimum ratio, the
September 2014 SAPPRFT Notice may have the effect of driving up the price for
Chinese films, which could cause our content costs to increase.
We may be subject to fines and legal sanctions if we or
our employees who are PRC citizens fail to comply with PRC regulations relating
to employee share options.
Under the Administration Measures on Individual Foreign
Exchange Control issued by the PBOC and the related Implementation Rules issued
by the SAFE, all foreign exchange transactions involving an employee share
incentive plan, share option plan or similar plan participated in by PRC
citizens may be conducted only with the approval of the SAFE. Under the Notice
of Issues Related to the Foreign Exchange Administration for Domestic
Individuals Participating in Stock Incentive Plan of Overseas Listed Company
(Offshore Share Incentives Rule), issued by the SAFE on February 15, 2012, PRC
citizens who are granted share options, restricted share units or restricted
shares by an overseas publicly listed company are required to register with the
SAFE or its authorized branch and comply with a series of other requirements.
The Offshore Share Incentives Rule also provides procedures for registration of
incentive plans, the opening and use of special accounts for the purpose of
participation in incentive plans, and the remittance of funds for exercising options and gains realized from such exercises
and sales of such options or the underlying shares, both outside and inside the
PRC. We, and any of our PRC employees or members of our board of directors who
have been granted share options, restricted share units or restricted shares,
are subject to the Administration Measures on Individual Foreign Exchange
Control, the related Implementation Rules, and the Offshore Share Incentives
Rule. If we, or any of our PRC employees or members of our board of directors
who receive or hold options, restricted share units or restricted shares in us
or any of our subsidiaries, fail to comply with these registration and other
procedural requirements, we may be subject to fines and other legal or
administrative sanctions.
24
We may be exposed to liabilities under the Foreign
Corrupt Practices Act and Chinese anti-corruption laws, and any determination
that we violated these laws could have a material adverse effect on our
business.
We are subject to the Foreign Corrupt Practice Act (FCPA) and
other laws that prohibit improper payments or offers of payments to foreign
governments and their officials and political parties by U.S. persons and
issuers as defined by the statute, for the purpose of obtaining or retaining
business. We have operations and agreements with third parties, and make most of
our sales in China. The PRC also strictly prohibits bribery of government
officials. Our activities in China create the risk of unauthorized payments or
offers of payments by the employees, consultants, sales agents, or distributors
of our Company, which may not always be subject to our control. It is our policy
to implement safeguards to discourage these practices by our employees. However,
our existing safeguards and any future improvements may prove to be less than
effective, and the employees, consultants, sales agents, or distributors of our
company may engage in conduct for which we might be held responsible. Violations
of the FCPA or Chinese anti-corruption laws may result in severe criminal or
civil sanctions, and we may be subject to other liabilities, which could
negatively affect our business, operating results and financial condition. In
addition, the U.S. government may seek to hold our Company liable for successor
liability FCPA violations committed by companies in which we invest or that we
acquire.
If we become directly subject to the recent scrutiny,
criticism and negative publicity involving U.S.-listed Chinese companies, we may
have to expend significant resources to investigate and resolve the matter which
could harm our business operations, stock price and reputation and could result
in a loss of your investment in our stock, especially if such matter cannot be
addressed and resolved favorably.
Over the past several years, U.S. public companies that have substantially all of
their operations in China, particularly companies like ours which have completed
so-called reverse merger transactions, have been the subject of intense
scrutiny, criticism and negative publicity by investors, financial commentators
and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and
negative publicity has centered around financial and accounting irregularities
and mistakes, a lack of effective internal controls over financial accounting,
inadequate corporate governance policies or a lack of adherence thereto and, in
many cases, allegations of fraud. As a result of the scrutiny, criticism and
negative publicity, the publicly traded stock of many U.S. listed Chinese
companies has sharply decreased in value and, in some cases, has become
virtually worthless. Many of these companies are now subject to shareholder
lawsuits and SEC enforcement actions and are conducting internal and external
investigations into the allegations. It is not clear what effect this
sector-wide scrutiny, criticism and negative publicity will have on our company,
our business and our stock price. If we become the subject of any unfavorable
allegations, whether such allegations are proven to be true or not, we will have
to expend significant resources to investigate such allegations and/or defend
our company. This situation will be costly and time consuming and distract our
management from growing our company.
The disclosures in our reports and other filings with the
SEC and our other public announcements are not subject to the scrutiny of any
regulatory bodies in the PRC. Accordingly, our public disclosure should be
reviewed in light of the fact that no governmental agency that is located in
China, where substantially all of our operations and business are located, has
conducted any due diligence on our operations or reviewed or cleared any of our
disclosure.
We are regulated by the SEC and our reports and other filings
with the SEC are subject to SEC review in accordance with the rules and
regulations promulgated by the SEC under the Securities Act and the Exchange
Act. Unlike public reporting companies whose operations are located primarily in
the United States, however, substantially all of our operations are located in
China. Since substantially all of our operations and business takes place in
China, it may be more difficult for the staff of the SEC to overcome the
geographic and cultural obstacles that are present when reviewing our
disclosure. These same obstacles are not present for similar companies whose
operations or business take place entirely or primarily in the United States.
Furthermore, our SEC reports and other disclosure and public announcements are
not subject to the review or scrutiny of any PRC regulatory authority. For
example, the disclosure in our SEC reports and other filings are not subject to
the review of the China Securities Regulatory Commission (CSRC), a PRC
regulator that is tasked with oversight of the capital markets in China.
Accordingly, you should review our SEC reports, filings and our other public
announcements with the understanding that no local regulator has done any due
diligence on our company and with the understanding that none of our SEC
reports, other filings or any of our other public announcements has been
reviewed or otherwise been scrutinized by any local regulator.
25
If additional remedial measures are imposed on the Big
Four PRC-based accounting firms, including our independent registered public
accounting firm, in administrative proceedings brought by the SEC alleging the
firms failure to meet specific criteria set by the SEC, we could be unable to
timely file future financial statements in compliance with the requirements of
the Securities Exchange Act of 1934.
On January 22, 2014, Judge Cameron Elliot, an SEC
administrative law judge, issued an initial decision suspending the PRC member
firms of the Big Four accounting firms, including our independent registered
public accounting firm, from, among other things, practicing before the SEC for
six months. In February 2014, the initial decision was appealed. While under
appeal and in February 2014, the PRC member firms of Big Four accounting firms
reached a settlement with the SEC. As part of the settlement, each of the PRC
member firms of Big Four accounting firms agreed to settlement terms that
include a censure; undertakings to make a payment to the SEC; procedures and
undertakings as to future requests for documents by the US SEC; and possible
additional proceedings and remedies should those undertakings not be adhered
to.
If the settlement terms are not adhered to, Chinese member
firms of the Big Four accounting firms, including our independent registered
public accounting firm, may be suspended from practicing before the SEC which
could in turn delay the timely filing of our financial statements with the SEC.
In addition, it could be difficult for us to timely identify and engage another
qualified independent auditor to replace our independent registered public
accounting firm.
A determination that we have not timely filed financial
statements in compliance with SEC requirements could ultimately lead to the
delisting of our common stock from Nasdaq or the termination of the registration
of our common stock under the Securities Exchange Act of 1934, or both, which
would substantially reduce or effectively terminate the trading of our common
stock in the United States.
RISKS RELATED TO THE MARKET FOR OUR STOCK
The market price of our common stock is volatile, leading
to the possibility of its value being depressed at a time when you may want to
sell your holdings.
The market price of our common stock is volatile, and this
volatility may continue. Numerous factors, many of which are beyond our control,
may cause the market price of our common stock to fluctuate significantly. In
addition to market and industry factors, the price and trading volume for our
common stock may be highly volatile for specific business reasons. Factors such
as variations in our revenues, earnings and cash flow, announcements of new
investments, cooperation arrangements or acquisitions, and fluctuations in
market prices for our products could cause the market price for our shares to
change substantially.
Securities class action litigation is often instituted against
companies following periods of volatility in their stock price. This type of
litigation could result in substantial costs to us and divert our managements
attention and resources.
Moreover, the trading market for our common stock will be
influenced by research or reports that industry or securities analysts publish
about us or our business. If one or more analysts who cover us downgrade our
common stock, the market price for our common stock would likely decline. If one
or more of these analysts cease coverage of us or fail to regularly publish
reports on us, we could lose visibility in the financial markets, which, in
turn, could cause the market price for our common stock or trading volume to
decline.
Furthermore, securities markets may from time to time
experience significant price and volume fluctuations for reasons unrelated to
operating performance of particular companies. These market fluctuations may
adversely affect the price of our common stock and other interests in our
company at a time when you want to sell your interest in us.
Although publicly traded, the trading market in our
common stock has been substantially less liquid than the average trading market
for a stock quoted on the Nasdaq Stock Market and this low trading volume may
adversely affect the price of our common stock.
Our common stock trades on the Nasdaq Capital Market. The
trading volume of our common stock has been comparatively low compared to other
companies listed on Nasdaq. Limited trading volume will subject our shares of
common stock to greater price volatility and may make it difficult for you to
sell your shares of common stock at a price that is attractive to you.
Provisions in our articles of incorporation and bylaws or
Nevada law might discourage, delay or prevent a change of control of us or
changes in our management and, therefore, depress the trading price of the
common stock.
Our articles of incorporation authorize our Board of Directors
to issue up to 50,000,000 shares of preferred stock. The preferred stock may be
issued in one or more series, the terms of which may be determined at the time
of issuance by the Board of Directors without further action by the
shareholders. These terms may include preferences as to dividends and
liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any
preferred stock could diminish the rights of holders of our common stock, and
therefore could reduce the value of such common stock. In addition, specific
rights granted to future holders of preferred stock could be used to restrict
our ability to merge with, or sell assets to, a third party. The ability of our
Board of Directors to issue preferred stock could make it more difficult, delay,
discourage, prevent or make it more costly to acquire or effect a
change-in-control, which in turn could prevent our shareholders from recognizing
a gain in the event that a favorable offer is extended and could materially and
negatively affect the market price of our common stock.
26
Certain of our shareholders hold a significant percentage
of our outstanding voting securities.
As of March 28, 2016, our director Mr. Xuesong Song and C Media
Limited (of which Mr. Song is the Chairman and Chief Executive Officer) are the
beneficial owners of approximately 30.7% of our outstanding voting securities,
SSS is the beneficial owner of approximately 13.8% of our outstanding voting
securities, Mr. Shane McMahon, our Vice Chairman, is the beneficial owner of
approximately 10.5% of our outstanding voting securities, and Mr. Weicheng Liu,
our former Chief Executive Officer, is the beneficial owner of approximately
6.9% of our outstanding voting securities (as calculated in accordance with Rule
13d-3(d)(1) of the Exchange Act). As a result, each possesses significant
influence over the election of our directors and the authorization of any
proposed significant corporate transactions. Their respective ownership and
control may also have the effect of delaying or preventing a future change in
control, impeding a merger, consolidation, takeover or other business
combination or discourage a potential acquirer from making a tender offer.
We do not intend to pay dividends for the foreseeable
future.
For the foreseeable future, we intend to retain any earnings to
finance the development and expansion of our business, and we do not anticipate
paying any cash dividends on our common stock. Accordingly, investors must be
prepared to rely on sales of their common stock after price appreciation to earn
an investment return, which may never occur. Investors seeking cash dividends
should not purchase our common stock. Any determination to pay dividends in the
future will be made at the discretion of our Board of Directors and will depend
on our results of operations, financial condition, contractual restrictions,
restrictions imposed by applicable law and other factors our Board deems
relevant.
27
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS.
|
Not Applicable.
Our principal executive office in New York is located at 375
Greenwich Street, Suite 516, New York, New York 10013. We paid $136,000 for rent
in 2015.
The principal address of YOD WFOE and Zhong Hai Video is Office
Park, Tower A, Suite 2603 2607, 10 Jintong West Road, Chaoyang District,
Beijing 100020, China. We paid approximately $596,000 for rent in 2015.
We believe that all our properties have been adequately
maintained, are generally in good condition, and are suitable and adequate for
our business.
ITEM 3.
|
LEGAL PROCEEDINGS.
|
From time to time, we may become involved in various lawsuits
and legal proceedings which arise in the ordinary course of business. However,
litigation is subject to inherent uncertainties, and an adverse result in these
or other matters may arise from time to time that may harm our business. We are
currently not aware of any such legal proceedings or claims that we believe will
have a material adverse effect on our business, financial condition or operating
results.
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
Not applicable.
28
PART III
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
|
Directors and Executive Officers
The following sets forth the name and position of each of our
current executive officers and directors.
NAME
|
|
AGE
|
|
POSITION
|
Bruno Wu
|
|
49
|
|
Chairman
|
Shane McMahon
|
|
46
|
|
Vice Chairman
|
Mingcheng Tao
|
|
56
|
|
Chief Executive Officer and
Director
|
Grace He
|
|
31
|
|
Vice President of Finance
|
James Cassano
|
|
68
|
|
Director
|
Jerry Fan
|
|
50
|
|
Director
|
Jin Shi
|
|
46
|
|
Director
|
Arthur Wong
|
|
56
|
|
Director
|
Polly Wang
|
|
50
|
|
Director
|
Xuesong Song
|
|
47
|
|
Director
|
Bruno Wu.
Mr. Wu has served as our Chairman since
January 12, 2016. Mr. Wu is the founder, co-chairman and CEO of Sun
Seven Stars Media Group Limited, a private media and investment company in
China, since 2007. Its predecessor is Sun Media Group Holdings Limited, which
was established by Mr. Wu and his spouse in 1999. Mr. Wu served as chairman of
Sun Media Group from 1999 to 2007 and was former director of Shanda Group, a
private investment group, from 2006 to 2009 and as former co-chairman of Sina
Corporation (NASDAQ: SINA), a Chinese media and Internet services company, from
2001 to 2002. Additionally, Mr. Wu served as the chief operating officer for
ATV, a free-to-air television broadcaster in Hong Kong, from 1998 to 1999. Mr.
Wu serves as a director of Seven Star Works Co Ltd (KOSDAQ:121800) and served as
a director of Semir Garment Co. Ltd (SHE:00256) between 2008 and 2012. Mr. Wu
received a Ph.D. from the School of International Relations and Public Affairs
at Fudan University in 2001 and prior to that received an M.A. in International
Relations from Washington University, a B.A. in Business Management from
Culver-Stockton College of Missouri and a diploma in Superior Studies in French
Literature from the School of French Language and Literature at the University
of Savoie in Chambery, France.
Shane McMahon.
Mr. McMahon was appointed Vice Chairman
as of January 12, 2016 and was previously our Chairman from July 2010 to January
2016. Prior to joining us, from 2000 to December 31, 2009, Mr. McMahon served in
various executive level positions with World Wrestling Entertainment, Inc.
(NYSE: WWE). Mr. McMahon has significant marketing and promotion experience and
has been instrumental in exploiting pay-per-view and video on demand programming
on a global basis. Mr. McMahon also sits on the Boards of Directors of
International Sports Management (USA) Inc., a Delaware corporation, and Global
Power of Literacy, a New York not-for-profit corporation.
Mingcheng Tao.
Mr. Tao was appointed as Chief Executive
Officer and a director on January 22, 2016. Prior to joining the Company, from
August 2011 to April 2015, Mr. Tao served as the Chief Executive Officer and
Director of BesTV Network Television Technology Development Co., Ltd.
(SHA:600637), a publicly-listed new media company in China, providing Internet
protocol television, over-the-top television, mobile television and Internet
video services in China. From October 2010 to July 2011, Mr. Tao served as the
President of Shanghai Interactive Television Co., Ltd. and Vice President of
Shanghai Television Broadcasting Group Co., Ltd. where he had direct executive
management duties in the areas of content acquisition, content production,
technology and other services. In 2014, he was nominated for the CNBC Asia
Business Leaders Award. Mr. Tao holds a BS from Shanghai Jiao Tong University in
electrical engineering and an Executive MBA from Fudan University.
Grace He.
Ms. He, our Vice President of Finance, was
appointed as our principle financial and accounting officer effective April 1,
2015. Ms. He joined the Company in October 2013 and previously served as our
Director of Finance. Ms. He has an international finance background and over ten
years of experience in accounting, finance and project management, including
eight years in China. Ms. Hes areas of expertise include cross border capital
market transactions, U.S. GAAP accounting and SEC regulations and merger and
acquisitions. Prior to joining YOU On Demand, Ms. He was a Manager at
PricewaterhouseCoopers Zhong Tian (Special General Partnership) from 2010 until
she joined YOU On Demand. Ms. He has a double BA in Accounting and International
Economics from University of Hong Kong and The George Washington University,
respectively.
James S. Cassano.
Mr. Cassano was appointed as director
of the Company effective as of January 11, 2008. Mr. Cassano is currently a
Partner & Chief Financial Officer of CoActive Health Solutions, LLC, a
worldwide contract research organization, supporting the pharmaceutical and
biotechnology industries. Mr. Cassano has served as executive vice president,
chief financial officer, secretary and director of Jaguar Acquisition Corporation, a Delaware
corporation (OTCBB: JGAC), a blank check company, since its formation in June
2005. Mr. Cassano has served as a managing director of Katalyst LLC, a company
which provides certain administrative services to Jaguar Acquisition
Corporation, since January 2005. In June 1998, Mr. Cassano founded New Forum
Publishers, an electronic publisher of educational material for secondary
schools, and served as its chairman of the Board and chief executive officer
until it was sold to Apex Learning, Inc., a company controlled by Warburg
Pincus, in August 2003. He remained with Apex until November 2003 in transition
as vice president business development and served as a consultant to the company
through February 2004. In June 1995, Mr. Cassano co-founded Advantix, Inc., a
high volume electronic ticketing software and transaction services company which
handled event related client and customer payments, that was re-named
Tickets.com and went public through an IPO in 1999. From March 1987 to June
1995, Mr. Cassano served as senior vice president and chief financial officer of
the Hill Group, Inc., a privately-held engineering and consulting organization,
and from February 1986 to March 1987, Mr. Cassano served as vice president of
investments and acquisitions for Safeguard Scientifics, Inc., a public venture
development company. From May 1973 to February 1986, Mr. Cassano served as
partner and director of strategic management services (Europe) for the strategic
management group of Hay Associates. Mr. Cassano received a B.S. in Aeronautics
and Astronautics from Purdue University and an M.B.A. from Wharton Graduate
School at the University of Pennsylvania. Mr. Cassanos extensive executive
experience, as noted above, along with his educational background, led us to the
conclusion that he should serve as a director of our Company, in light of our
business and structure.
41
Jerry Fan.
Mr. Fan was appointed as director of the
Company on January 12, 2016. Mr. Fan has served as Managing Director and Country
Manager for the Greater China region at Analog Devices, Inc. (NASDAQ: ADI), a
global semiconductor company since November, 2012. Prior to ADI, Mr. Fan
worked for Cisco Systems, Inc. (NASDAQ: CSCO) for 15 years between 1997 and 2012 in a number of senior
management roles, including Sales Managing Director for Cisco China, Sale
Director for Cisco Australia and Senior Manager for Operations and Strategy for
the Cisco Service Provider business based in Hong Kong. Mr. Fan started his
career in 1998 working at Fudan University as a faculty member in both teaching
and research roles. He graduated from Fudan University with a Computer Science
Bachelor degree and an Executive MBA degree from CEIBS (China European
International Business School) in 1999.
Jin Shi.
Mr. Shi was appointed as director of the
Company in February 2014. Mr. Shi has been a managing partner of Chum Capital
Group Limited since 2007, a merchant banking firm that invests in Chinese growth
companies and advises them on financings, mergers and acquisitions and
restructurings. From 2011 through 2014, Mr. Shi served as the chief executive
officer and a director on the board of China Growth Equity Investment Limited,
which acquired Pingtan Marine Enterprise Limited in February 2013. From 2010
through 2011, he served as the vice-chairman and a director of the board of
China Growth Equity Investment Limited. From 2006 through 2009, Mr. Shi served
as the chief executive officer and a director of the board of ChinaGrowth North
Acquisition Corporation, which acquired UIB Group Limited in January 2009, the
second largest insurance brokerage firm in China. From 2006 through 2009, Mr.
Shi also served as the chief financial officer and a director of the board of
ChinaGrowth South Acquisition Corporation, which acquired Olympia Media Holdings
Ltd. in January 2009, the largest privately-owned newspaper aggregator and
operator in China. Mr. Shi has also been the chairman of Shanghai RayChem
Industries Co., Ltd., a research & development based active pharmaceutical
ingredient producer, since he founded the company in 2005. Mr. Shi is also the
president of PharmaSource Inc., a company he founded in 1997. Mr. Shi received
an EMBA from Guanghua School of Management, Peking University and a BS degree in
Chemical Engineering from Tianjin University.
Arthur Wong.
Mr. Wong was appointed as director of the
Company on January 31, 2015. Mr. Wong is CFO of Beijing Radio Cultural
Transmission Company Limited (Beijing Radio). Prior to joining Beijing Radio,
Mr. Wong served as CFO of Shanghai GreenTree Inns Hotel Management Group,
Shanghai Nobao Renewable Energy and Henan Asia New-Energy. From 1982 to 2008,
Mr. Wong spent 26 years at Deloitte, including in Hong Kong, San Jose and
Beijing holding several positions including TMT (Technology, Media, Telecom)
leader for northern China, national media sector leader and audit leader for
northern China. In addition to his role at Beijing Radio, Mr. Wong serves as a
board member and chairperson of the audit committee of the following companies:
VisionChina Media Inc. (NASDAQ:VISN), China Automotive Systems, Inc. (NASDAQ:CAAS), Daqo New Energy Corp. (NYSE: DQ) Sky Solar Holdings, Ltd. (NASDAQ:SKYS),
China Maple Leaf Education Systems Limited (HKSE:1317), Petro-king Oilfield
Services Limited (SEHK:2178). Mr. Wong serves as a board member and chairperson
of the compensation committee of Xueda Education Group (NYSE:XUE). Mr. Wong is a
member of the American Institute of Certified Public Accountants, the Hong Kong
Institute of Certified Public Accountants and the Chartered Association of
Certified Accountants. Mr. Wong holds a Bachelor of Science in Applied Economics
from University of San Francisco and a Higher Diploma of Accountancy from The
Hong Kong Polytechnic University.
Polly Wang.
Ms. Wang was appointed as director of the
Company on January 22, 2016. Ms. Wang currently serves as Chief Operating
Officer at Sun Seven Stars Media Group, a private media and investment company
in China, since May 2014. Prior to that, she was
Greater China VP at Cisco Systems, Inc. (NASDAQ:CSCO), responsible for operations and business development
in the Cable, Media and Entertainment business segments. Ms. Wang held various
positions with Cisco between August 1996 and October 2013. Ms. Wang has more than
25 years of experience in the Telecom and Media industry, where she has held
various key positions in several multinational corporations, including IBM and
Cisco. Ms. Wang graduated from National Chiao Tung University and Taiwan
University with a Masters degree in Computer Engineering.
42
Xuesong Song.
Mr. Song was appointed as our Executive
Chairman in February 2014 and as a member of our Board of Directors on July 5,
2014. Mr. Song currently serves as the chairman of the board of directors and
chief executive officer of C Media Limited and the chairman of the board of
directors and chief financial officer of China Growth Equity Investment Ltd.,
positions he has held since the companys inception in January 2010. From May
2006 through January 2009, Mr. Song served as the chairman of ChinaGrowth North
Acquisition Corporation, a special purpose acquisition company, which acquired
UIB Group Limited in January 2009, the second largest insurance brokerage firm
in China. Following the acquisition, Mr. Song served as a director of UIB Group
Limited from January 2009 through May 2010. From May 2006 through January 2009,
Mr. Song also served as the executive vice president of business development and
a director of the board of ChinaGrowth South Acquisition Corporation, a special
purpose acquisition company, which acquired Olympia Media Holdings Ltd. in
January 2009, the largest privately owned newspaper aggregator and operator in
China. Mr. Song has been a principal of Chum Capital Group Limited since August
2001, a merchant banking firm that invests in growth Chinese companies and
advises them in financings, mergers & acquisitions and restructurings, and
chief executive officer of Beijing Chum Investment Co., Ltd. since December
2001. From April 2005 to May 2010, Mr. Song served as the chairman and chief
executive officer of Shanghai Jinqiaotong Enterprise Developments Corporation
Ltd., a direct investment company. Mr. Song has also served as a director of
Mobile Vision Communication Ltd. since July 2004. Mr. Song received his M.B.A.
from Oklahoma City/Tianjin Program and an Associates Degree in electrical
engineering from Civil Aviation University of China.
There are no agreements or understandings between any of our
executive officers or directors and any other persons to resign at the request
of another such other person and to act on behalf of or at the direction of any
such other person.
Directors are elected for one-year term and until their
successors are duly elected and qualified.
Corporate Governance
Our current corporate governance practices and policies are
designed to promote shareholder value and we are committed to the highest
standards of corporate ethics and diligent compliance with financial accounting
and reporting rules. Our Board provides independent leadership in the exercise
of its responsibilities. Our management oversees a system of internal controls
and compliance with corporate policies and applicable laws and regulations, and
our employees operate in a climate of responsibility, candor and integrity.
Corporate Governance Guidelines
We and our Board are committed to high standards of corporate
governance as an important component in building and maintaining shareholder
value. To this end, we regularly review our corporate governance policies and
practices to ensure that they are consistent with the high standards of other
companies. We also closely monitor guidance issued or proposed by the SEC and
the provisions of the Sarbanes-Oxley Act, as well as the emerging best practices
of other companies. The current corporate governance guidelines are available on
the Companys website http://corporate.yod.com. Printed copies of our corporate
governance guidelines may be obtained, without charge, by contacting our
Corporate Secretary at Office Park, Tower A, Suite 2603, 10 Jintong West Road,
Chaoyang District, Beijing 100020, China.
The Board and Committees of the Board
The Company is governed by the Board that currently consists of
nine members: Bruno Wu, Shane McMahon, Mingcheng Tao, Arthur Wong, James
Cassano, Jerry Fan, Jin Shi, Polly Wang and Xuesong Song. The Board has
established three Committees: the Audit Committee, the Compensation Committee
and the Nominating and Governance Committee. Each of the Audit Committee,
Compensation Committee and Nominating and Governance Committee are comprised
entirely of independent directors. From time to time, the Board may establish
other committees. The Board has adopted a written charter for each of the
Committees which are available on the Companys website
http://corporate.yod.com. Printed copies of these charters may be obtained,
without charge, by contacting our Corporate Secretary at Office Park, Tower A,
Suite 2603, 10 Jintong West Road, Chaoyang District, Beijing 100020, China.
Governance Structure
Our Board of Directors is responsible for corporate governance
in compliance with reporting laws and for representing the interests of our
shareholders. As of February 2016, the Board was composed of nine members, five
of whom are considered independent, non-executive directors. Details on Board
membership, oversight and activity are reported below.
We encourage our shareholders to learn more about our Companys
governance practices at our website, http://corporate.yod.com.
43
The Boards Role in Risk Oversight
The Board oversees that the assets of the Company are properly
safeguarded, that the appropriate financial and other controls are maintained,
and that the Companys business is conducted wisely and in compliance with
applicable laws and regulations and proper governance. Included in these
responsibilities is the Board of Directors oversight of the various risks
facing the Company. In this regard, the Board seeks to understand and oversee
critical business risks. The Board does not view risk in isolation. Risks are
considered in virtually every business decision and as part of the Companys
business strategy. The Board recognizes that it is neither possible nor prudent
to eliminate all risk. Indeed, purposeful and appropriate risk-taking is
essential for the Company to be competitive on a global basis and to achieve its
objectives.
While the Board oversees risk management, Company management is
charged with managing risk. The Company has robust internal processes and a
strong internal control environment to identify and manage risks and to
communicate with the Board. The Board and the Audit Committee monitor and
evaluate the effectiveness of the internal controls and the risk management
program at least annually. Management communicates routinely with the Board,
Board committees and individual directors on the significant risks identified
and how they are being managed. Directors are free to, and indeed often do,
communicate directly with senior management.
The Board implements its risk oversight function both as a
whole and through Committees. Much of the work is delegated to various
Committees, which meet regularly and report back to the full Board. All
Committees play significant roles in carrying out the risk oversight function.
In particular:
|
.
|
The Audit Committee oversees risks related to the
Companys financial statements, the financial reporting process,
accounting and legal matters. The Audit Committee members meet separately
with representatives of the independent auditing firm.
|
|
.
|
The Compensation Committee evaluates the risks and
rewards associated with the Companys compensation philosophy and
programs. The Compensation Committee reviews and approves compensation
programs with features that mitigate risk without diminishing the
incentive nature of the compensation. Management discusses with the
Compensation Committee the procedures that have been put in place to
identify and mitigate potential risks in compensation.
|
Independent Directors
In considering and making decisions as to the independence of
each of the directors of the Company, the Board considered transactions and
relationships between the Company (and its subsidiaries) and each director (and
each member of such directors immediate family and any entity with which the
director or family member has an affiliation such that the director or family
member may have a material direct or indirect interest in a transaction or
relationship with such entity). The Board has determined that Arthur Wong, James
Cassano, Jerry Fan, Jin Shi and Polly Wang are independent as defined in
applicable SEC and NASDAQ rules and regulations, and that each constitutes an
Independent Director as defined in NASDAQ Listing Rule 5605.
Audit Committee
Our Audit Committee consists of James Cassano, Jerry Fan and
Arthur Wong with Mr. Wong acting as Chair. The Audit Committee oversees our
accounting and financial reporting processes and the audits of the financial
statements of our company. Mr. Cassano and Mr. Wong serve as our Audit Committee
financial experts as that term is defined by the applicable SEC rules. The Audit
Committee is responsible for, among other things:
|
.
|
selecting our independent auditors and pre-approving all
auditing and non-auditing services permitted to be performed by our
independent auditors;
|
|
.
|
reviewing with our independent auditors any audit
problems or difficulties and managements response;
|
|
.
|
reviewing and approving all proposed related-party
transactions, as defined in Item 404 of Regulation S-K under the
Securities Act of 1933, as amended;
|
|
.
|
discussing the annual audited financial statements with
management and our independent auditors;
|
|
.
|
reviewing major issues as to the adequacy of our internal
controls and any special audit steps adopted in light of significant
internal control deficiencies;
|
|
.
|
annually reviewing and reassessing the adequacy of our
Audit Committee charter;
|
|
.
|
overseeing the work of our independent auditor, including
resolution of disagreements between management and the independent auditor
regarding financial reporting;
|
|
.
|
reporting regularly to and reviewing with the full Board
any issues that arise with respect to the quality or integrity of the
Companys financial statements, the performance and independence of the
independent auditors and any other matters that the Audit Committee deems
appropriate or is requested to review for the benefit of the Board.
|
44
The Audit Committee may engage independent counsel and such
other advisors it deems necessary to carry out its responsibilities and powers,
and, if such counsel or other advisors are engaged, shall determine the
compensation or fees payable to such counsel or other advisors. The Audit
Committee may form and delegate authority to subcommittees consisting of one or
more of its members as the Audit Committee deems appropriate to carry out its
responsibilities and exercise its powers.
Compensation Committee
Our Compensation Committee consists of Jin Shi and James
Cassano with Mr. Shi acting as Chair. Our Compensation Committee assists the
Board in reviewing and approving the compensation structure of our directors and
executive officers, including all forms of compensation to be provided to our
directors and executive officers. The Compensation Committee is responsible for,
among other things:
|
.
|
reviewing and approving corporate goals and objectives
relevant to the compensation of our chief executive officer, evaluating
the performance of our chief executive officer in light of those goals and
objectives, and setting the compensation level of our chief executive
officer based on this evaluation;
|
|
.
|
reviewing and making recommendations to the Board with
regard to the compensation of other executive officers;
|
|
.
|
reviewing and making recommendations to the Board with
respect to the compensation of our directors; and
|
|
.
|
reviewing and making recommendations to the Board
regarding all incentive-based compensation plans and equity-based plans.
|
The Compensation Committee has sole authority to retain and
terminate any consulting firm or other outside advisor to assist the committee
in the evaluation of director, chief executive officer or senior executive
compensation and other compensation-related matters, including sole authority to
approve the firms' fees and other retention terms. The Compensation Committee
may also form and delegate authority to subcommittees consisting of one or more
members of the Compensation Committee.
Governance and Nominating Committee
Our Governance and Nominating Committee consists of Arthur Wong
and Jin Shi with Mr. Shi acting as Chair. The Governance and Nominating
Committee assists the Board of Directors in identifying individuals qualified to
become our directors and in determining the composition of the Board and its
committees. The Governance and Nominating Committee is responsible for, among
other things:
|
.
|
identifying and recommending to the Board nominees for
election or re-election to the Board, or for appointment to fill any
vacancy;
|
|
.
|
selecting directors for appointment to committees of the
Board; and
|
|
.
|
overseeing annual evaluation of the Board and its
committees for the prior fiscal year
|
The Governance and Nominating Committee has sole authority to
retain and terminate retain and terminate any search firm that is to be used by
the Company to assist in identifying director candidates, including sole
authority to approve the firms' fees and other retention terms. The Governance
and Nominating Committee may also form and delegate authority to subcommittees
consisting of one or more members of the Governance and Nominating Committee.
Director Qualifications
Directors are responsible for overseeing the Companys business
consistent with their fiduciary duty to shareholders. This significant
responsibility requires highly-skilled individuals with various qualities,
attributes and professional experience. The Board believes that there are
general requirements for service on the Companys Board of Directors that are
applicable to all directors and that there are other skills and experience that
should be represented on the Board as a whole but not necessarily by each
director. The Board and the Governance and Nominating Committee of the Board
consider the qualifications of directors and director candidates individually
and in the broader context of the Boards overall composition and the Companys
current and future needs.
Qualifications for All Directors
In its assessment of each potential director candidate,
including those recommended by shareholders, the Governance and Nominating
Committee considers the nominees judgment, integrity, experience, independence,
understanding of the Companys business or other related industries and such
other factors the Governance and Nominating Committee determines are pertinent
in light of the current needs of the Board. The Governance and Nominating
Committee also takes into account the ability of a director to devote the time
and effort necessary to fulfill his or her responsibilities to the Company.
The Board and the Governance and Nominating Committee require
that each director be a recognized person of high integrity with a proven record
of success in his or her field. Each director must demonstrate innovative
thinking, familiarity with and respect for corporate governance requirements and
practices, an appreciation of multiple cultures and a commitment to
sustainability and to dealing responsibly with social issues. In addition to the
qualifications required of all directors, the Board assesses intangible
qualities including the individuals ability to ask difficult questions and,
simultaneously, to work collegially.
45
The Board does not have a specific diversity policy, but
considers diversity of race, ethnicity, gender, age, cultural background and
professional experiences in evaluating candidates for Board membership.
Diversity is important because a variety of points of view contribute to a more
effective decision-making process.
Qualifications, Attributes, Skills and Experience to be
Represented on the Board as a Whole
The Board has identified particular qualifications, attributes,
skills and experience that are important to be represented on the Board as a
whole, in light of the Companys current needs and business priorities. The
Companys services are performed in areas of future growth located outside of
the United States. Accordingly, the Board believes that international experience
or specific knowledge of key geographic growth areas and diversity of
professional experiences should be represented on the Board. In addition, the
Companys business is multifaceted and involves complex financial transactions.
Therefore, the Board believes that the Board should include some directors with
a high level of financial literacy and some directors who possess relevant
business experience as a Chief Executive Officer or President. Our business
involves complex technologies in a highly specialized industry. Therefore, the
Board believes that extensive knowledge of the Companys business and industry
should be represented on the Board.
Summary of Qualifications of Current Directors
Set forth below is a narrative disclosure that summarizes some
of the specific qualifications, attributes, skills and experiences of our
directors. For more detailed information, please refer to the biographical
information for each director set forth above.
Bruno Wu
. Mr. Wu is a leading media investor and
entrepreneur with experience in helping Chinese media companies achieve business
transformation, operational and financial performance improvement and
sustainable business growth. In light of our business and structure, Mr. Wus
extensive executive, industry and management experience led us to the conclusion
that he should serve as a director of our Company.
Shane McMahon
. Mr. McMahon has significant marketing and
promotion experience and has been instrumental in exploiting pay-per-view
programming on a global basis. In light of our business and structure, Mr.
McMahons extensive executive and industry experience led us to the conclusion
that he should serve as a director of our Company.
Mingcheng Tao
. Mr. Tao has significant operational and
executive management experience in the content distribution and video on demand
space in China, and has significant experience serving in senior executive
positions, including chief executive officer. In light of our business and
structure, Mr. Taos extensive industry and management experience led us to the
conclusion that he should serve as a director of our Company.
Arthur Wong
. Mr. Wong has an in-depth understanding of
the preparation and analysis of financial statements, and is considered an
"audit committee financial expert" under SEC rules, based on his lengthy
experience as a certified public accountant practicing public accounting. In
light of our business and structure, Mr. Wongs extensive accounting and
financial knowledge is an invaluable asset to the Board in its oversight of the
integrity of our financial statements, the financial reporting process and our
system of internal controls, which led us to the conclusion that he should serve
as a director of our Company.
James Cassano
. Mr. Cassano has significant senior
management experience, including service as chief executive officer, executive
vice president, chief financial officer, secretary and director. In light of our
business and structure, Mr. Cassanos extensive executive experience and his
educational background led us to the conclusion that he should serve as a
director of our Company.
Jerry Fan
. Mr. Fan has more than 20 years of experience
in top management positions in China and the Asia Pacific region, working for
several multinational technology companies. He also has served in senior
management positions of several U.S. public companies. In light of our business
and structure, Mr. Fans extensive industry and business experience and his
educational background led us to the conclusion that he should serve as a
director of our Company.
Jin Shi
. Mr. Shi provides our Board with significant
executive-level leadership expertise as well as extensive experience as
directors of various companies. In light of our business and structure, Mr.
Shis business experience and education background led us to the conclusion that
he should serve as a director of our Company.
Polly Wang
. Ms. Wang has more than 25 years of
experience in the Telecom and Media industry where she has held various key
positions in multinational companies. In light of our business and structure,
Ms. Wangs extensive operational, marketing and strategic planning experience
led us to the conclusion that she should service as director of our Company.
46
Xuesong Song
. Mr. Song has significant senior executive
experience including roles as Chairman and Chief Executive Officers of various
companies and provides the Board with financial and strategic planning
expertise. In light of our business and structure, Mr. Songs extensive
executive experience led us to the conclusion that he should serve as a director
of our Company.
Family Relationships
There are no family relationships among our directors and
officers.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or
executive officers has, during the past ten years:
|
.
|
been convicted in a criminal proceeding or been subject
to a pending criminal proceeding (excluding traffic violations and other
minor offences);
|
|
.
|
had any bankruptcy petition filed by or against the
business or property of the person, or of any partnership, corporation or
business association of which he was a general partner or executive
officer, either at the time of the bankruptcy filing or within two years
prior to that time;
|
|
.
|
been subject to any order, judgment, or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction or federal or state authority, permanently or temporarily
enjoining, barring, suspending or otherwise limiting, his involvement in
any type of business, securities, futures, commodities, investment,
banking, savings and loan, or insurance activities, or to be associated
with persons engaged in any such activity;
|
|
.
|
been found by a court of competent jurisdiction in a
civil action or by the Securities and Exchange Commission or the Commodity
Futures Trading Commission to have violated a federal or state securities
or commodities law, and the judgment has not been reversed, suspended, or
vacated;
|
|
.
|
been the subject of, or a party to, any federal or state
judicial or administrative order, judgment, decree, or finding, not
subsequently reversed, suspended or vacated (not including any settlement
of a civil proceeding among private litigants), relating to an alleged
violation of any federal or state securities or commodities law or
regulation, any law or regulation respecting financial institutions or
insurance companies including, but not limited to, a temporary or
permanent injunction, order of disgorgement or restitution, civil money
penalty or temporary or permanent cease-and-desist order, or removal or
prohibition order, or any law or regulation prohibiting mail or wire fraud
or fraud in connection with any business entity; or
|
|
.
|
been the subject of, or a party to, any sanction or
order, not subsequently reversed, suspended or vacated, of any
self-regulatory organization (as defined in Section 3(a)(26) of the
Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in
Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or
any equivalent exchange, association, entity or organization that has
disciplinary authority over its members or persons associated with a
member.
|
Except as set forth in our discussion below in Item 13
Certain Relationships and Related Transactions, and Director Independence
Transactions with Related Persons, none of our directors, director nominees or
executive officers has been involved in any transactions with us or any of our
directors, executive officers, affiliates or associates which are required to be
disclosed pursuant to the rules and regulations of the SEC.
Section 16(A) Beneficial Ownership Reporting Compliance
Under U.S. securities laws, Directors, certain executive
officers and persons holding more than 10% of our common stock must report their
initial ownership of the common stock, and any changes in that ownership, to the
SEC. The SEC has designated specific due dates for these reports. Based solely
on our review of copies of such reports filed with the SEC by and written
representations of our Directors and executive offers, we believe that our
Directors and executive offers filed the required reports on time during 2015.
Code of Ethics
Our board of directors adopted a code of business conduct and
ethics that applies to our directors, officers, employees and advisors, which
became effective in January 2015. We have posted a copy of our code of business
conduct and ethics on our website at corporate.yod.com
47
ITEM 11.
|
EXECUTIVE COMPENSATION
|
Summary Compensation Table (2015 and 2014)
The following table sets forth information concerning all cash
and non-cash compensation awarded to, earned by or paid to the named persons
(our named executive officers) for services rendered in all capacities during
the noted periods.
|
|
|
|
|
Cash
|
|
|
Stock
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
Awards
|
|
|
Compensation
|
|
|
Total
|
|
Name and
Principal Position
|
|
Year
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
Shane McMahon
|
|
2015
|
|
|
-
|
|
|
300,000
|
|
|
-
|
|
|
300,000
|
|
Vice Chairman
|
|
2014
|
|
|
255,000
|
(1)
|
|
275,000
|
|
|
-
|
|
|
530,000
|
|
Weicheng Liu
|
|
2015
|
|
|
358,265
|
|
|
-
|
|
|
-
|
|
|
358,265
|
|
Former Chief Executive Officer
(2)
|
|
2014
|
|
|
362,486
|
|
|
-
|
|
|
-
|
|
|
362,486
|
|
Grace He (
Vice President of
Finance
)
|
|
2015
|
|
|
142,500
|
|
|
-
|
|
|
-
|
|
|
142,500
|
|
Marc Urbach
|
|
2015
|
|
|
57,500
|
|
|
-
|
|
|
410,278
|
|
|
467,778
|
|
Former President and Chief
Financial Officer
(3)
|
|
2014
|
|
|
230,000
|
|
|
-
|
|
|
-
|
|
|
230,000
|
|
(1)
|
As of October 1, 2012, in an effort to conserve the
Companys working capital, Mr. McMahon elected to cease collecting salary
until such time as the Company has sufficient revenues from operations.
The remaining $63,750 due from 2012 and $255,000 due from 2014 will be
paid in 2016 to Mr. McMahon pursuant to his employment agreement dated
January 31, 2014.
|
|
|
(2)
|
On January 22, 2016 Mr. Liu was terminated from his
position as Chief Executive Officer of the Company.
|
|
|
(3)
|
On March 30, 2015, Mr. Urbach resigned from his positions
as President and Chief Financial Officer of the Company. Total severance
payment made to Mr. Urbach for the year ended December 31, 2015 was
$410,278. For the three months ended March 30, 2015, total cash and stock
compensation paid to Mr. Urbach was $57,500 and nil,
respectively.
|
Employment Agreements
Shane McMahon
Employment Agreement
On January 31, 2015, we entered into an employment agreement
with our Chairman, Shane McMahon. The agreement was for a term of two years,
which would automatically be extended for additional one year terms unless
terminated earlier. Mr. McMahon was also eligible to receive a bonus at the sole
discretion of our Board of Directors, and is entitled to participate in all of
the benefit plans of the Company. In the event that Mr. McMahon was terminated
without cause, he would be entitled to eighteen months of severance pay if
within the initial two years of the term and twelve months if after the initial
two years of the term. The agreement also contains customary restrictive
covenants regarding non-competition relating to the pay-per-view business in the PRC, non-solicitation of employees and customers and confidentiality.
On January 31, 2016, Mr. McMahon stepped down as Chairman and his employment
agreement was terminated on January 31, 2016. Mr. McMahon remains a member of
the Board of Directors.
Weicheng Liu
Employment Agreement
On January 31, 2015, we entered into an employment agreement
with our former Chief Executive Officer, Weicheng Liu. The agreement was for a
term of one year, which would automatically be extended for additional one year
terms unless terminated earlier by either party. Mr. Liu was also eligible to
receive a bonus at the sole discretion of the Board of Directors of the Company,
and was entitled to participate in all of the benefit plans of the Company. In
the event Mr. Liu was terminated without cause, he would be entitled to eighteen
months of severance pay if within the initial two years of the term and twelve
months if after the initial two years of the term. The Liu Agreement also
contains customary restrictive covenants regarding non-competition relating to
the pay-per-view business in the PRC, non-solicitation of employees and
customers and confidentiality.
48
Separation Agreement
On January 22, 2016, we terminated the employment of Mr. Liu as
Chief Executive Officer of the Company and entered into a separation agreement
with him as of such date. This agreement provides for the payment of $405,000,
less standard payroll withholdings as applicable, which amount is to be paid in
equal installments over a period of 18 months beginning in February 2016.
However, payment may be accelerated if, prior to February 28, 2016, Mr. Liu
completes all signature and documentation requirements to remove Mr. Liu and his
wife from the VIE structure and otherwise assist the Company in restructuring
its VIE to the Companys satisfaction. In such case, the Company will pay 1/3 of
the amount as a lump sum, with the remaining 2/3 paid equally over the following
12 months. We also agreed to provide Mr. Liu a one-time lump sum payment of
$60,000, earned and accrued but unpaid salary, and 4-week base salary for
accrued and earned but unused vacation time, with such amounts to be paid within
5 days following the effective date of the separation agreement. In addition,
all outstanding unvested options, warrants or restricted stock previously
granted to Mr. Liu became fully vested, and previously granted options and
warrants are exercisable for the full term of the option or warrant. Mr. Liu
agreed to provide certain transition services to the Company, including
implementation of employment decisions, restructuring the ownership and control
of the Companys VIE structure, assistance in renewing certain client
relationships, among others. If Mr. Liu is able to renew certain contractual
relationships and receive payments thereunder within defined timeframes, Mr. Liu
could earn additional sums. Finally, Mr. Liu agreed to certain lock-up
restrictions with respect to his shares of Company stock (or other securities)
until May 20, 2016, and also agreed that for so long as he is the beneficial
owner of more than 5% of the Companys common stock that he would enter into
lock-up or such other agreements as may be reasonably requested by the Company
or the managing underwriters or placement agents of any public offering of
securities of the Company.
Marc Urbach
Employment Agreement
On January 31, 2015, we entered into an employment agreement
with our former President and CFO, Marc Urbach. The agreement was for a term of
one year, which would automatically be extended for additional one year terms
unless terminated earlier. Mr. Urbach was also eligible to receive a bonus at
the sole discretion of our Board of Directors, and was entitled to participate
in all of the benefit plans of the Company. In the event that Mr. Urbach was
terminated without cause, he would be entitled to eighteen months of severance
pay if within the initial two years of the term and twelve months if after the
initial two years of the term. The agreement also contains customary restrictive
covenants regarding non-competition relating to the pay-per-view business in the
PRC, non-solicitation of employees and customers and confidentiality. Mr. Urbach
did not receive any compensation for service as member of the Companys Board of
Directors.
Separation Agreement
On March 30, 2015, we entered into a retention and separation
agreement with Mr. Urbach (the Urbach Separation Agreement), pursuant to which
Mr. Urbach resigned as President and Chief Financial Officer of the Company, and
from all other positions he held with respect to the Company, and each of its
parents, subsidiaries, affiliates and any of their employee benefit or pension
plans, effective March 31, 2015 (the Termination Date). Pursuant to the terms
of the Urbach Separation Agreement, we also entered into a consulting agreement
with Mr. Urbach (the Urbach Consulting Agreement), pursuant to which Mr.
Urbach provided general business and consulting services to the Company
following his resignation to assist in the transitional needs and activities of
the Company for a period of six (6) months (the Consulting Term). As
consideration for his consulting services to the Company during the Consulting
Term, the Company paid Mr. Urbach $9,583.50 per month plus 50,000 shares of
restricted stock over the course of the Consulting Term (with 8,333 shares of
restricted stock to be issued to Mr. Urbach each month of the Consulting Term
except for the sixth month when he was issued 8,335 shares of restricted stock).
Pursuant to the terms of the Urbach Separation Agreement, and subject to his
execution of a general release within 45 days of the Termination Date, in
connection with his resignation, Mr. Urbach will receive a severance payment
equal to his base salary then in effect ($345,000) for a period of 18 months
from the Termination Date, plus an additional payment equal to four weeks base
salary on account of vacation time earned but not taken by Mr. Urbach, payable
in a lump sum within the later of 10 days after the Termination Date or the date
of his delivery of the general release to the Company. Mr. Urbach will also be
entitled to receive, at his election, either (i) continued benefits under the
Companys group health and life insurance plans in which he participated prior
to the Termination Date for a period of 12 months from the Termination Date or
(ii) a lump sum equal to $47,586.12 (representing 80% of the cost to the Company
of such coverage), payable to him within 10 days of his delivering his election
to the Company. Mr. Urbach will also be entitled to receive all unpaid expenses,
earned but unpaid bonuses and earned but unpaid benefits from the Company and
its employee benefit plans on or before the Termination Date. In addition,
pursuant to the terms of the Urbach Separation Agreement, all outstanding unvested options, warrants or
restricted stock previously granted to Mr. Urbach became fully vested on the
Termination Date and, with respect to options and warrants, will thereafter be
exercisable for the full term of the option or warrant.
49
We have not provided retirement benefits (other than a state
pension scheme in which all of our employees in China participate) or change of
control benefits to our named executive officers.
Outstanding Equity Awards at Fiscal Year-End (2015)
The following table sets forth the equity awards outstanding at
December 31, 2015.
|
|
Option Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Equity incentive
|
|
|
|
|
|
|
securities
|
|
|
securities
|
|
|
plan awards:
|
|
|
|
|
|
|
underlying
|
|
|
underlying
|
|
|
Number of
Securities
|
|
|
|
|
|
|
unexercised
|
|
|
unexercised
|
|
|
underlying
unexercised
|
|
|
Option
|
|
|
|
options (#)
|
|
|
options (#)
|
|
|
unearned options
|
|
|
exercise price
|
|
Name
|
|
exercisable
|
|
|
unexercisable
|
|
|
(#)
|
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shane McMahon
|
|
166,666
|
|
|
-
|
|
|
-
|
|
|
2.00
|
|
|
|
533,333
|
|
|
-
|
|
|
-
|
|
|
3.00
|
|
|
|
40,000
|
|
|
-
|
|
|
-
|
|
|
4.50
|
|
Weicheng Liu
|
|
320,000
|
|
|
-
|
|
|
-
|
|
|
3.75
|
|
|
|
40,000
|
|
|
-
|
|
|
-
|
|
|
4.50
|
|
Marc Urbach
|
|
170,000
|
|
|
-
|
|
|
-
|
|
|
1.65
|
|
|
|
293,334
|
|
|
-
|
|
|
-
|
|
|
2.00
|
|
|
|
1,333
|
|
|
-
|
|
|
-
|
|
|
75.00
|
|
James Cassano
|
|
13,333
|
|
|
-
|
|
|
-
|
|
|
2.00
|
|
|
|
8,974
|
|
|
-
|
|
|
-
|
|
|
2.91
|
|
50
Compensation of Directors (2015)
The following table sets forth certain information concerning
the compensation paid to our directors for services rendered to us during the
fiscal year ended December 31, 2015. Mr. McMahon and Mr. Liu were not
compensated for their service as director in 2015.
|
|
Fees Earned or
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid in Cash
|
|
|
Stock Awards
|
|
|
Option Awards
|
|
|
Total
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xuesong Song
|
$
|
-
|
|
$
|
300,000
|
|
$
|
-
|
|
$
|
300,000
|
|
Arthur Wong
|
$
|
50,000
|
|
$
|
-
|
|
$
|
21,272
|
|
$
|
71,272
|
|
Clifford Higgerson
|
$
|
16,667
|
|
$
|
50,000
|
|
$
|
-
|
|
$
|
66,667
|
|
James Cassano
|
$
|
16,667
|
|
$
|
50,000
|
|
$
|
-
|
|
$
|
66,667
|
|
Jin Shi
|
$
|
16,667
|
|
$
|
50,000
|
|
$
|
-
|
|
$
|
66,667
|
|
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
|
Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth information regarding beneficial
ownership of our common stock as of March 28, 2016 (i) by each person who is
known by us to beneficially own more than 5% of our common stock; (ii) by each
of our named executive officers and directors; and (iii) by all of our executive
officers and directors as a group. Unless otherwise specified, the address of
each of the persons set forth below is in care of YOU On Demand Holdings, Inc.,
375 Greenwich Street, Suite 516, New York, New York 10013.
|
|
|
Shares
Beneficially Owned
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock,
|
|
Name and
|
|
|
|
|
|
|
|
|
Series A
Preferred
|
|
|
Series E
Preferred
|
|
|
Series A
and
|
|
Address of
|
|
|
Common
Stock
(2)
|
|
|
Stock
(3)
|
|
|
Stock
(4)
|
|
|
and Series
E
(5)
|
|
Beneficial
|
Office, If
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
Owner
|
Any
|
|
Shares
|
|
|
Class
|
|
|
Shares
|
|
|
Class
|
|
|
Shares
|
|
|
Class
|
|
|
Votes
(2
)(3)(4)
|
|
|
Percentage
|
|
Directors and Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruno Wu
|
Chairman
|
|
6,075,173
|
(13)
|
|
19.99%
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
6,075,173
|
|
|
13.8%
|
|
Mingcheng Tao
|
CEO and Director
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
Shane McMahon
|
Vice Chairman
|
|
3,064,599
|
(6)
|
|
10.4%
|
|
|
0
|
|
|
*
|
|
|
2,924,535
|
(6)
|
|
31.7%
|
|
|
4,753,686
|
|
|
10.5%
|
|
Grace He
|
Vice President of Finance
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
Weicheng Liu
|
Former CEO and
Director
|
|
2,956,454
|
(9)
|
|
10.1%
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
2,956,454
|
|
|
6.9%
|
|
Marc Urbach
|
Former President and CFO
|
|
539,667
|
(10)
|
|
1.8%
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
539,667
|
|
|
1.3%
|
|
Xuesong Song
|
Director
|
|
262,965
|
(8)
|
|
*
|
|
|
7,000,000
|
(7)
|
|
100%
|
|
|
5,923, 807
|
(7)
|
|
81.7%
|
|
|
13,017,636
|
|
|
30.7%
|
|
James Cassano
|
Director
|
|
76,989
|
(11)
|
|
*
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
76,989
|
|
|
*
|
|
Jin Shi
|
Director
|
|
44,682
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
44,682
|
|
|
*
|
|
Arthur Wong
|
Director
|
|
30,463
|
(12)
|
|
*
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
30,463
|
|
|
*
|
|
Jerry Fan
|
Director
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
Polly Wang
|
Director
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
All officers and directors as a group (12
persons named above)
|
|
|
13,050,992
|
|
|
40.8%
|
|
|
7,000,000
|
|
|
100%
|
|
|
8,848,342
|
|
|
95.6%
|
|
|
27,494,750
|
|
|
57.8%
|
|
5% Securities Holders
|
|
C Media Limited
CN11 Legend
Town, No. 1 Ba Li Zhuang Dong Li Chaoyang District, Beijing 100025 China
|
|
0
|
|
|
*
|
|
|
7,000,000
|
(7)
|
|
100%
|
|
|
5,923, 807
|
(7)
|
|
81.7%
|
|
|
12,754,671
|
|
|
30.1%
|
|
Sun Seven Stars Hong Kong Cultural Development
Limited
Wing On Centre, 111 Connaught Road Central, 16th Floor, Hong
Kong
|
|
6,075,173
|
(13))
|
|
19.99%
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
6,075,173
|
|
|
13.8%
|
|
* Less than 1%.
51
(1)
|
Beneficial Ownership is determined in accordance with the
rules of the SEC and generally includes voting or investment power with
respect to securities. Each of the beneficial owners listed above has
direct ownership of and sole voting power and investment power with
respect to our securities. For each beneficial owner above, any options
exercisable within 60 days have been included in the
denominator.
|
|
|
(2)
|
A total of 28,861,342 shares of our Common Stock are
considered to be outstanding pursuant to SEC Rule 13d-3(d)(1) as of March
28, 2016.
|
|
|
(3)
|
Based on 7,000,000 shares of Series A Preferred Stock
issued and outstanding as of March 28, 2016, with the holders thereof
being entitled to cast ten (10) votes for every share of Common Stock that
is issuable upon conversion of a share of Series A Preferred Stock (each
share of Series A Preferred Stock is convertible into 0.1333333 shares of
Common Stock), or a total of 9,333,330 votes.
|
|
|
(4)
|
Based on 7,254,997 shares of Series E Preferred Stock
issued and outstanding as of March 28, 2016. Each share of Series E
Preferred Stock is initially convertible into one share of Common Stock,
subject to certain adjustment. The holders of Series E Preferred Stock are
entitled to vote on all matters submitted to a vote of the Companys
stockholders and entitled to the number of votes equal to the lesser of
(i) the number of whole shares of Common Stock into which such shares of
Series E Preferred Stock are convertible at the record date for the
determination of stockholders entitled to vote on such matters, and (ii)
the number of whole shares of Common Stock issuable based on the
conversion price of $3.03, the closing trading price of the Companys
Common Stock as of the end of the trading day immediately preceding the
closing date of the financing contemplated by certain Series E Preferred
Stock Purchase Agreement by and among the Company, C Media Limited and
certain other purchasers, dated January 31, 2015.
|
|
|
(5)
|
Represents total voting power with respect to all shares
of our Common Stock, Series A Preferred Stock and Series E Preferred
Stock.
|
|
|
(6)
|
Includes (i) 2,324,600 shares of Common Stock, (ii)
533,333 shares of Common Stock underlying options exercisable within 60
days at $3.00 per share, (iii) 40,000 shares of Common Stock underlying
options exercisable within 60 days at $4.50 per share; and (iv) 166,666
shares of Common Stock underlying options exercisable within 60 days at
$2.00 per share. In addition, Mr. McMahons Series E Preferred Shares
includes 933,333 shares of Series E Preferred Stock and 1,991,202 shares
of Series E Preferred Stock, issuable within 60 days, upon conversion of a
promissory note which is convertible at any time between January 31, 2015
and December 31, 2016, at a price of $1.75 per share at the option of Mr.
McMahon.
|
|
|
(7)
|
Includes 7,000,000 shares of Series A Preferred Stock and
5,923,807 shares of Series E Preferred Stock directly owned by C Media
Limited of which Mr. Song is the Chairman and Chief Executive
Officer.
|
|
|
(8)
|
Includes 262,965 shares of Common Stock held by Chum
Capital Group Limited of which Mr. Song is the principal.
|
|
|
(9)
|
Includes 320,000 shares underlying options exercisable
within 60 days at $3.75 per share and 40,000 shares underlying options
exercisable within 60 days at $4.50 per share.
|
|
|
(10)
|
Includes 1,333 shares underlying options exercisable
within 60 days at $75.00 per share, 293,334 shares underlying options
exercisable within 60 days at $2.00 per share, and 170,000 shares
underlying options exercisable within 60 days at $1.65 per
share.
|
|
|
(11)
|
Includes 13,333 shares underlying options exercisable
within 60 days at $2.00 per share and 8,974 shares underlying options
exercisable within 60 days at $2.91 per share.
|
|
|
(12)
|
Includes 13,898 shares underlying options exercisable
within 60 days at $2.37 per share and 16,565 shares underlying options
exercisable within 60 days at $2.12 per share.
|
|
|
(13)
|
Includes (i) 4,545,454 shares of Common Stock, (ii)
1,818,182 shares underlying options exercisable within 60 days at$2.75 per
share, and (iii) 9,208,860 shares of Common Stock issuable within 60 days
upon the conversion of a promissory note. Under the terms of the warrants
and the promissory note, until receipt of necessary shareholder approvals,
the warrant in not exercisable and the promissory note is not convertible
to the extent that such conversion would result in the Sun Seven Stars
Hong Kong Cultural Development Limited and its affiliates beneficially
owning, as determined in accordance with Section 13(d) of the Exchange
Act, more than 19.99% of the Companys outstanding Common Stock. Based on
the Schedule 13D/A filed on February 25, 2016, the shares are beneficially
owned directly by Sun Seven Stars Hong Kong Cultural Development Limited,
a Hong Kong Company (SSSHKCD) a wholly-owned subsidiary of Shanghai Sun
Seven Stars Cultural Development Limited, a PRC company (SSSSCD) a
wholly-owned subsidiary of Tianjin Sun Seven Stars Culture Development
Limited, a PRC company (TSSSCD) a wholly-owned subsidiary of Beijing Sun
Seven Stars Culture Development Limited, a PRC company (SSS) a directly
controlled subsidiary of Tianjin Sun Seven Stars Partnership Management
Co., Ltd., a PRC company (TSSS). Lan Yang, who is the direct controlling
shareholder and the Chairperson of TSSS, is the spouse of the Companys
director Bruno Wu, who serves as the Chairman, Chief Executive Officer and
as a director of SSS. Each of SSS, Mr. Wu, TSSS, Mrs. Yang, TSSSCD and
SSSSCD shares with SSSHKCD voting and dispositive power over the
securities held by SSSHKCD. Each of SSS, Mr. Wu, TSSS, Mrs. Yang, TSSSCD
and SSSSCD expressly disclaims beneficial ownership of securities held by
any person or entity, except to the extent of their pecuniary interest
therein.
|
Changes in Control
There are no arrangements known to us, including any pledge by
any person of our securities, the operation of which may at a subsequent date
result in a change in control of the Company.
52
Securities Authorized for Issuance Under Equity Compensation
Plans
The following table includes the information as of December 31,
2015 for each category of our equity compensation plan:
|
|
|
|
|
|
|
|
Number of securities
remaining
|
|
|
|
Number of securities
to
|
|
|
Weighted-average
|
|
|
available for future
issuance
|
|
|
|
be issued upon
exercise
|
|
|
exercise price of
|
|
|
under equity
compensation
|
|
|
|
of outstanding
options
|
|
|
outstanding
options
|
|
|
plans (excluding
securities
|
|
Plan category
|
|
and rights (a)
|
|
|
and rights (b)
|
|
|
reflected in column (a)) (c)
|
|
Equity
compensation plans
approved by security
holders
(1)
|
|
1,930,906
|
|
$
|
2.77
|
|
|
1,997,964
|
|
Equity
compensation plans
not
approved by
security holders
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
1,930,906
|
|
|
|
|
|
1,997,964
|
|
|
(1)
|
On December 3, 2010, our Board of Directors approved the
YOU On Demand Holdings, Inc. 2010 Equity Incentive Plan, or the Plan,
pursuant to which incentive stock options, non-statutory stock options,
restricted stock, restricted stock units, stock appreciation rights,
performance units and performance shares may be granted to employees,
directors and consultants of the Company and its subsidiaries. The maximum
aggregate number of shares of our common stock that may be issued under
the Plan is 4,000,000 shares. The Plan was also approved by our majority
shareholders on December 3, 2010.
|
ITEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTION, AND DIRECTOR INDEPENDENCE.
|
Transactions with Related Persons
The following includes a summary of transactions since the
beginning of the 2014 fiscal year, or any currently proposed transaction, in
which we were or are to be a participant and the amount involved exceeded or
exceeds the lesser of $120,000 or one percent of the average of our total assets
at year-end for the last two completed years, and in which any related person
had or will have a direct or indirect material interest (other than compensation
described under Item 11
Executive Compensation. We believe the terms
obtained or consideration that we paid or received, as applicable, in connection
with the transactions described below were comparable to terms available or the
amounts that would be paid or received, as applicable, in arms-length
transactions.
On May 10, 2012, at the Companys request, our Chairman and
Chief Executive Officer, Shane McMahon, made a loan to the Company in the amount
of $3,000,000. In consideration for the loan, the Company issued a convertible
note to Mr. McMahon in the aggregate principal amount of $3,000,000 with
interest rate at 4% annually. Effective on January 31, 2014, the Company and Mr.
McMahon entered into an amendment to the McMahon Note pursuant to which the
McMahon Note will be, at Mr. McMahons option, payable on demand or convertible
on demand into shares of Series E Preferred Stock at a conversion price of
$1.75, until December 31, 2015. On December 30, 2014, the Company and Mr.
McMahon entered into an amendment pursuant to which the McMahon Note will be, at
Mr. McMahons option, payable on demand or convertible on demand into shares of
Series E Preferred Stock at a conversion price of $1.75, until December 31,
2016.
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. As of December 31, 2015, C Media is
our largest shareholder. For the year ended December 31, 2015, total revenue
recognized from the agreement with C Media amounted to $182,000. As of December
31, 2015, total accounts receivable due from C Media amounted to $92,000.
Except as set forth in our discussion above, none of our
Directors, director nominees or executive officers has been involved in any
transactions with us or any of our Directors, executive officers, affiliates or
associates which are required to be disclosed pursuant to the rules and
regulations of the SEC. For details, see Item 10 Directors, Executive Officers
and Corporate Governance.
53
Promoters and Certain Control Persons
We did not have any promoters at any time during the past five
fiscal years.
ITEM 14.
|
PRINCIPAL ACCOUNTING FEES AND SERVICES.
|
Independent Auditors Fees
The following is a summary of the fees billed to the Company by
its principal accountants for professional services rendered for the years ended
December 31, 2015 and 2014:
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Audit Fees
|
$
|
366,976
|
|
$
|
313,033
|
|
Audit-Related Fees
|
|
-
|
|
|
39,611
|
|
Tax Fees
|
|
-
|
|
|
-
|
|
All Other Fees
|
|
1,650
|
|
|
-
|
|
TOTAL
|
$
|
368,626
|
|
$
|
352,644
|
|
* Audit Fees consisted of the aggregate fees billed for
professional services rendered for the audit of our annual financial statements
and the reviews of the financial statements included in our Forms 10-Q and for
any other services that were normally provided in connection with our statutory
and regulatory filings or engagements.
Audit Related Fees consisted of the aggregate fees billed for
professional services rendered for assurance and related services that were
reasonably related to the performance of the audit or review of our financial
statements and were not otherwise included in Audit Fees.
Tax Fees consisted of the aggregate fees billed for
professional services rendered for tax compliance, tax advice and tax planning.
Included in such Tax Fees were fees for preparation of our tax returns and
consultancy and advice on other tax planning matters.
All Other Fees consisted of the aggregate fees billed for
products and services provided and not otherwise included in Audit Fees, Audit
Related Fees or Tax Fees.
Pre-Approval Policies and Procedures
Under the Sarbanes-Oxley Act of 2002, all audit and non-audit
services performed by our auditors must be approved in advance by our Board of
Directors to assure that such services do not impair the auditors independence
from us. In accordance with its policies and procedures, our Board of Directors
pre-approved the audit and non-audit services performed by KPMG Huazhen LLP for
our consolidated financial statements as of and for the year ended December 31,
2015 and 2014.
54
YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entity
CONSOLIDATED BALANCE SHEETS
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
$
|
3,768,897
|
|
$
|
10,812,371
|
|
Restricted cash
|
|
2,994,364
|
|
|
-
|
|
Accounts receivable, net
|
|
1,689,415
|
|
|
1,091,076
|
|
Licensed content, current
|
|
556,591
|
|
|
1,041,609
|
|
Prepaid expenses
|
|
362,421
|
|
|
196,474
|
|
Deferred issuance cost
|
|
551,218
|
|
|
-
|
|
Other current assets
|
|
157,594
|
|
|
22,442
|
|
Total current assets
|
|
10,080,500
|
|
|
13,163,972
|
|
Property and equipment, net
|
|
154,434
|
|
|
320,671
|
|
Licensed content, non-current
|
|
21,085
|
|
|
35,648
|
|
Intangible assets, net
|
|
2,412,591
|
|
|
2,320,103
|
|
Goodwill
|
|
6,648,911
|
|
|
6,648,911
|
|
Equity method investments
|
|
450,115
|
|
|
850,054
|
|
Other non-current assets
|
|
58,089
|
|
|
365,006
|
|
Total assets
|
$
|
19,825,725
|
|
$
|
23,704,365
|
|
|
|
|
|
|
|
|
LIABILITIES,
CONVERTIBLE REDEEMABLE PREFERRED STOCK AND EQUITY
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts
payable (including accounts payable of consolidated variable interest
entities
(VIEs) without
recourse to the Company of $44,867 and $8,598, respectively as of December
31, 2015
and 2014)
|
$
|
45,788
|
|
$
|
110,814
|
|
Deferred
revenue (including deferred revenue of VIEs without recourse to the
Company of
$15,080 and
$13,431, respectively as of December 31, 2015 and 2014)
|
|
15,080
|
|
|
13,431
|
|
Accrued
expenses (including accrued expenses of VIEs without
recourse to
the Company
of $280,038 and $303,766, respectively as of December 31, 2015 and 2014)
|
|
1,196,066
|
|
|
797,340
|
|
Accrued
salaries (including accrued salaries of VIEs without recourse to the
Company of $10,861
and nil,
respectively as of December 31, 2015 and 2014)
|
|
1,058,124
|
|
|
970,821
|
|
Other
current liabilities (including other current liabilities of VIEs without recourse
to the
Company of $298,422 and $269,854, respectively as of December 31, 2015 and
2014)
|
|
312,170
|
|
|
278,622
|
|
Deposit payable
|
|
2,994,364
|
|
|
-
|
|
Accrued
license fees (including accrued license fees of VIEs without recourse to
the Company
of $933,532
and $348,007, respectively as of December 31, 2015 and 2014)
|
|
933,532
|
|
|
348,007
|
|
Convertible promissory note
|
|
3,000,000
|
|
|
3,000,000
|
|
Warrant liabilities
|
|
395,217
|
|
|
585,050
|
|
Total current liabilities
|
|
9,950,341
|
|
|
6,104,085
|
|
Deferred income taxes
|
|
330,124
|
|
|
364,572
|
|
Total liabilities
|
|
10,280,465
|
|
|
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 as of December 31, 2015 and 2014, respectively
|
|
1,261,995
|
|
|
1,261,995
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
Series
E Preferred Stock - $0.001 par value; 16,500,000 shares authorized,
7,254,997 and
7,365,283 shares issued and outstanding, liquidation preference of
$12,696,245 and $12,889,250 as of December 31, 2015 and December 31, 2014,
respectively
|
|
7,255
|
|
|
7,365
|
|
Common
stock, $0.001 par value; 1,500,000,000 shares authorized, 24,249,109
and 23,793,702
shares issued and outstanding as of December 31, 2015 and
2014, respectively
|
|
24,249
|
|
|
23,794
|
|
Additional paid-in capital
|
|
97,512,542
|
|
|
96,347,272
|
|
Accumulated deficit
|
|
(86,457,840
|
)
|
|
(78,356,567
|
)
|
Accumulated other comprehensive loss
|
|
(414,910
|
)
|
|
(66,032
|
)
|
Total YOU On Demand
shareholder's equity
|
|
10,671,296
|
|
|
17,955,832
|
|
Non-controlling interest
|
|
(2,388,031
|
)
|
|
(1,982,119
|
)
|
Total equity
|
|
8,283,265
|
|
|
15,973,713
|
|
Total liabilities, convertible redeemable
preferred stock and equity
|
$
|
19,825,725
|
|
$
|
23,704,365
|
|
The accompanying notes are an integral part of these
consolidated financial statements
F-2
YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entity
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
2015
|
|
|
2014
|
|
Revenue
|
$
|
4,606,380
|
|
$
|
1,962,622
|
|
Cost of revenue
|
|
3,673,895
|
|
|
2,756,363
|
|
Gross profit/(loss)
|
|
932,485
|
|
|
(793,741
|
)
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
8,237,056
|
|
|
7,459,192
|
|
Professional fees
|
|
715,723
|
|
|
653,646
|
|
Depreciation and amortization
|
|
390,373
|
|
|
536,689
|
|
Total operating
expenses
|
|
9,343,152
|
|
|
8,649,527
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(8,410,667
|
)
|
|
(9,443,268
|
)
|
|
|
|
|
|
|
|
Interest and other
income/(expense)
|
|
|
|
|
|
|
Interest expense, net
|
|
(119,913
|
)
|
|
(2,374,368
|
)
|
Change in fair value of warrant liabilities
|
|
189,833
|
|
|
(621,239
|
)
|
Change in fair value of contingent consideration
|
|
-
|
|
|
(160,766
|
)
|
Equity share of loss on equity method investments
|
|
(156,135
|
)
|
|
(20,717
|
)
|
Impairment of equity method investments
|
|
(214,998
|
)
|
|
-
|
|
Loss from disposal of consolidated entities
|
|
-
|
|
|
(622,939
|
)
|
Others
|
|
136,511
|
|
|
(85,516
|
)
|
Loss before income taxes
and non-controlling interest
|
|
(8,575,369
|
)
|
|
(13,328,813
|
)
|
|
|
|
|
|
|
|
Income tax benefit
|
|
34,448
|
|
|
304,670
|
|
|
|
|
|
|
|
|
Net loss
|
|
(8,540,921
|
)
|
|
(13,024,143
|
)
|
|
|
|
|
|
|
|
Net loss attributable to
non-controlling interest
|
|
439,648
|
|
|
615,683
|
|
|
|
|
|
|
|
|
Net loss attributable to YOU
On Demand shareholders
|
|
(8,101,273
|
)
|
|
(12,408,460
|
)
|
|
|
|
|
|
|
|
Deemed dividends on preferred
stock
|
|
-
|
|
|
(16,402,161
|
)
|
|
|
|
|
|
|
|
Net loss attributable to
YOU On Demand common shareholders
|
$
|
(8,101,273
|
)
|
$
|
(28,810,621
|
)
|
|
|
|
|
|
|
|
Basic and diluted loss per
share
|
$
|
(0.34
|
)
|
$
|
(1.47
|
)
|
|
|
|
|
|
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
Basic and diluted
|
|
23,948,487
|
|
|
19,600,510
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entity
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
|
2015
|
|
|
2014
|
|
Net loss
|
$
|
(8,540,921
|
)
|
$
|
(13,024,143
|
)
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
(315,142
|
)
|
|
(36,974
|
)
|
Comprehensive loss
|
|
(8,856,063
|
)
|
|
(13,061,117
|
)
|
Comprehensive loss attributable to non-controlling interest
|
|
405,912
|
|
|
584,797
|
|
Comprehensive loss attributable to YOU On
Demand shareholders
|
$
|
(8,450,151
|
)
|
$
|
(12,476,320
|
)
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
YOU On
Demand
Holdings,
Inc., Its
Subsidiaries
and
Variable
Interest
Entity
CONSOLIDATED
STATEMENTS
OF
EQUITY
For the Year Ended
December
31,
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,
December
31,
2014
|
|
7,365,283
|
|
$
|
7,365
|
|
|
23,793,702
|
|
$
|
23,794
|
|
$
|
96,347,272
|
|
$
|
(78,356,567
)
|
|
$
|
(66,032
)
|
|
$
|
17,955,832
|
|
$
|
(1,982,119
)
|
|
$
|
15,973,713
|
|
Share-based compensation
|
|
-
|
|
|
-
|
|
|
120,755
|
|
|
121
|
|
|
640,494
|
|
|
-
|
|
|
-
|
|
|
640,615
|
|
|
-
|
|
|
640,615
|
|
Common stock issued for
settlement of liability
|
|
-
|
|
|
-
|
|
|
221,185
|
|
|
221
|
|
|
524,779
|
|
|
-
|
|
|
-
|
|
|
525,000
|
|
|
-
|
|
|
525,000
|
|
Conversion of Series E Preferred Stock into
common stock
|
|
(110,286
|
)
|
|
(110
|
)
|
|
110,286
|
|
|
110
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercise of options
|
|
-
|
|
|
-
|
|
|
3,181
|
|
|
3
|
|
|
(3
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net loss attributable to YOU On Demand
shareholders
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(8,101,273
|
)
|
|
-
|
|
|
(8,101,273
|
)
|
|
(439,648
|
)
|
|
(8,540,921
|
)
|
Foreign currency translation
adjustments, net of nil tax
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(348,878
|
)
|
|
(348,878
|
)
|
|
33,736
|
|
|
(315,142
|
)
|
Balance,
December 31,
2015
|
|
7,254,997
|
|
$
|
7,255
|
|
|
24,249,109
|
|
$
|
24,249
|
|
$
|
97,512,542
|
|
$
|
(86,457,840
|
)
|
$
|
(414,910
|
)
|
$
|
10,671,296
|
|
$
|
(2,388,031
|
)
|
$
|
8,283,265
|
|
F-5
YOU On
Demand
Holdings,
Inc., Its
Subsidiaries
and
Variable
Interest
Entity
CONSOLIDATED
STATEMENTS
OF
EQUITY
For the Year Ended
December
31,
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
2014
|
|
-
|
|
$
|
-
|
|
|
15,794,762
|
|
$
|
15,794
|
|
$
|
67,417,025
|
|
$
|
(65,856,053
|
)
|
$
|
(715,090
|
)
|
$
|
861,676
|
|
$
|
(1,397,322
|
)
|
$
|
(535,646
|
)
|
Share-based compensation
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
727,363
|
|
|
-
|
|
|
-
|
|
|
727,363
|
|
|
-
|
|
|
727,363
|
|
Common stock issued to
non-employees for services
|
|
-
|
|
|
-
|
|
|
73,600
|
|
|
74
|
|
|
142,426
|
|
|
-
|
|
|
-
|
|
|
142,500
|
|
|
-
|
|
|
142,500
|
|
Common stock and options issued earn-out for
YOD Hong Kong business
acquisition
|
|
-
|
|
|
-
|
|
|
245,275
|
|
|
245
|
|
|
739,265
|
|
|
-
|
|
|
-
|
|
|
739,510
|
|
|
-
|
|
|
739,510
|
|
Conversion of Series C
Preferred Stock into common stock
|
|
-
|
|
|
-
|
|
|
140,000
|
|
|
140
|
|
|
219,614
|
|
|
-
|
|
|
-
|
|
|
219,754
|
|
|
-
|
|
|
219,754
|
|
Series D Preferred Stock cash dividends
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(92,054
|
)
|
|
-
|
|
|
(92,054
|
)
|
|
-
|
|
|
(92,054
|
)
|
Series E Preferred Stock
issuance
|
|
14,285,714
|
|
|
14,286
|
|
|
-
|
|
|
-
|
|
|
24,985,714
|
|
|
-
|
|
|
-
|
|
|
25,000,000
|
|
|
-
|
|
|
25,000,000
|
|
Conversion of Series E Preferred Stock into
common stock
|
|
(6,920,431
|
)
|
|
(6,921
|
)
|
|
6,920,431
|
|
|
6,921
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Issuance costs in connection
with the issuance of Series E Preferred Stock
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,552,347
|
)
|
|
-
|
|
|
-
|
|
|
(4,552,347
|
)
|
|
-
|
|
|
(4,552,347
|
)
|
Warrants issued to placement agent in
connection with the issuance of Series E Preferred Stock
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,166,296
|
|
|
-
|
|
|
-
|
|
|
2,166,296
|
|
|
-
|
|
|
2,166,296
|
|
Beneficial conversion feature
related to convertible note modification
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,126,301
|
|
|
-
|
|
|
-
|
|
|
2,126,301
|
|
|
-
|
|
|
2,126,301
|
|
Disposal of consolidated entities
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
716,918
|
|
|
716,918
|
|
|
-
|
|
|
716,918
|
|
Exercise of warrants
|
|
-
|
|
|
-
|
|
|
607,480
|
|
|
608
|
|
|
2,374,575
|
|
|
-
|
|
|
-
|
|
|
2,375,183
|
|
|
-
|
|
|
2,375,183
|
|
Exercise of options
|
|
-
|
|
|
-
|
|
|
12,154
|
|
|
12
|
|
|
1,040
|
|
|
-
|
|
|
-
|
|
|
1,052
|
|
|
-
|
|
|
1,052
|
|
Net loss attributable to YOU
On Demand shareholders
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(12,408,460
|
)
|
|
-
|
|
|
(12,408,460
|
)
|
|
(615,683
|
)
|
|
(13,024,143
|
)
|
Foreign currency translation adjustments, net
of nil tax
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(67,860
|
)
|
|
(67,860
|
)
|
|
30,886
|
|
|
(36,974
|
)
|
Balance, December 31,
2014
|
|
7,365,283
|
|
$
|
7,365
|
|
|
23,793,702
|
|
$
|
23,794
|
|
$
|
96,347,272
|
|
$
|
(78,356,567
|
)
|
$
|
(66,032
|
)
|
$
|
17,955,832
|
|
$
|
(1,982,119
|
)
|
$
|
15,973,713
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
|
|
F-6
|
YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entity
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
2015
|
|
|
2014
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
Net loss
|
$
|
(8,540,921
|
)
|
$
|
(13,024,143
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities
|
|
|
|
|
|
|
Share-based compensation expense
|
|
1,240,615
|
|
|
1,339,863
|
|
Provision for
doubtful accounts
|
|
9,087
|
|
|
-
|
|
Depreciation and amortization
|
|
390,373
|
|
|
536,689
|
|
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
|
|
(34,448
|
)
|
|
(304,670
|
)
|
Equity share of loss on equity
method investments
|
|
156,135
|
|
|
20,717
|
|
Loss on disposal of
assets
|
|
2,538
|
|
|
49,118
|
|
Change in fair value of warrant
liabilities
|
|
(189,833
|
)
|
|
621,239
|
|
Change in fair
value of contingent consideration
|
|
-
|
|
|
160,766
|
|
Loss from disposal of
consolidated entities
|
|
-
|
|
|
622,939
|
|
Impairment of
long-term equity investments
|
|
214,998
|
|
|
-
|
|
Foreign currency exchange gain
|
|
(219,925
|
)
|
|
-
|
|
Change in assets and
liabilities,
|
|
|
|
|
|
|
Accounts receivable
|
|
(607,426
|
)
|
|
(915,865
|
)
|
Licensed content
|
|
499,581
|
|
|
(504,990
|
)
|
Prepaid expenses and other assets
|
|
(74,469
|
)
|
|
(79,072
|
)
|
Accounts payable
|
|
(65,026
|
)
|
|
(545,731
|
)
|
Accrued expenses, salary and other
current
liabilities
|
|
196,027
|
|
|
502,184
|
|
Deferred revenue
|
|
1,649
|
|
|
(55,538
|
)
|
Accrued license fees
|
|
585,525
|
|
|
(852,757
|
)
|
Net cash used in operating
activities
|
|
(6,435,520
|
)
|
|
(10,174,071
|
)
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
Acquisition of
property and equipment
|
|
(35,179
|
)
|
|
(67,297
|
)
|
Acquisition of intangibles
|
|
(218,020
|
)
|
|
(3,361
|
)
|
Cash paid for
equity method investment
|
|
-
|
|
|
(208,760
|
)
|
Sale of subsidiary
|
|
-
|
|
|
(7,549
|
)
|
Net cash used in investing activities
|
|
(253,199
|
)
|
|
(286,967
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Proceeds from sale of Series E Preferred Stock
|
|
-
|
|
|
19,000,000
|
|
Proceeds from the
exercise of warrants and options
|
|
-
|
|
|
995,607
|
|
Series D Preferred Stock dividend payment
|
|
-
|
|
|
(92,054
|
)
|
Prepaid cost
associated with financing activities
|
|
(310,156
|
)
|
|
(2,386,051
|
)
|
Net cash (used
in)/provided by financing activities
|
|
(310,156
|
)
|
|
17,517,502
|
|
Effect of exchange
rate changes on cash
|
|
(44,599
|
)
|
|
(66,982
|
)
|
Net (decrease)/increase in
cash
|
|
(7,043,474
|
)
|
|
6,989,482
|
|
|
|
|
|
|
|
|
Cash at the beginning of
the year
|
|
10,812,371
|
|
|
3,822,889
|
|
|
|
|
|
|
|
|
Cash at the end of the
year
|
$
|
3,768,897
|
|
$
|
10,812,371
|
|
|
|
|
|
|
|
|
Supplemental disclosure of
cash flow information:
|
|
|
|
|
|
|
Cash paid for income taxes
|
$
|
-
|
|
$
|
-
|
|
Cash paid for interest
|
$
|
-
|
|
$
|
-
|
|
Value of warrants issued for issuance costs
in connection with Preferred Series E shares
|
$
|
-
|
|
$
|
2,166,296
|
|
Exchange of Series E
Preferred Stock for Common stock
|
$
|
110
|
|
$
|
-
|
|
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
|
|
Issuance of common stock issued from
conversion of Preferred Series C shares
|
$
|
-
|
|
$
|
219,754
|
|
Issuance of shares and
options issued for YOD Hong Kong contingent consideration earn-out
|
$
|
-
|
|
$
|
739,510
|
|
Restricted cash related to the deposit of
financing activities
|
$
|
2,994,364
|
|
$
|
-
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
1.
|
Organization and Principal
Activities
|
YOU On Demand Holdings, Inc., is a
Nevada corporation that primarily operates in China (PRC) through its
subsidiaries, variable interest entities (VIEs) and the consolidated
subsidiary of its VIEs. The Company, its subsidiaries, its VIEs and the
consolidated subsidiary of its VIEs are collectively referred to as YOU On
Demand (YOU On Demand, we, us, or the Company).
YOU On Demand provides premium content
and integrated value-added service solutions for the delivery of VOD and paid
video programming to digital cable providers, Internet Protocol Television
(IPTV) providers, Over-the-Top (OTT) streaming providers, mobile
manufacturers and operators.
2.
|
Summary of Significant Accounting
Policies
|
(a) Principles of Consolidation
The consolidated financial statements
include the financial statements of YOU On Demand Holdings, Inc., its
wholly-owned subsidiaries, its VIEs in which the Company is the primary
beneficiary, and the subsidiary of its consolidated VIE. All material
intercompany transactions and balances are eliminated upon consolidation.
(b) Basis of Presentation
The Company prepares and presents its
consolidated financial statements in accordance with accounting principles
generally accepted in the United States (U.S. GAAP).
(c) Equity Method Investments
Investments in entities where the
Company can exercise significant influence, but not control, are accounted for
using the equity method. Under the equity method, the investment is initially
recorded at cost and adjusted for the Companys share of undistributed earnings
or losses of the investee. The Companys share of losses is not recognized when
the investment is reduced to zero since the Company does not guarantee the
investees obligations nor is the Company committed to providing additional
funding.
Management evaluates impairment on the
investments accounted for under the equity method of accounting based on performance and the financial position of
the investee, as well as other evidence of market value. Such evaluation
includes, but is not limited to, reviewing the investees cash position, recent
financings, projected and historical financial performance, cash flow forecasts
and financing needs. An impairment charge is recorded when the carrying amount
of the investment exceeds its fair value and the impairment is determined to be
other-than-temporary.
As of and for the years ended December
31, 2015 and 2014, the Companys investments accounted for under the equity
method of accounting are comprised of
(1) 30% equity ownership in Shandong Lushi Media Co., Ltd. (Shandong Media)
and (2) 39% equity ownership in Hua Cheng Hu Dong (Beijing) Film and Television
Communication Co., Ltd. (Hua Cheng), collectively held by Sinotop Beijing. We
recognized impairment loss of $80,000 and $135,000 on our investments in
Shandong Media and Hua Cheng, respectively.
(d) Use of Estimates
The preparation of consolidated
financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, as well as the related disclosure of
contingent assets and liabilities, at the date of the consolidated financial
statements and during the reporting period. Actual results could differ from
those estimates.
The most significant estimates include,
but not limited to, the determination of estimated selling prices of multiple
elements revenues contract, the expected revenue from licensed content,
allowances for doubtful accounts, share-based compensation and equity based
transactions with non-employees, determination of the estimated useful lives of
intangible assets, impairment assessment of goodwill, intangible assets and
long-term equity investments, determination of the fair value of financial
instruments, valuation of deferred income taxes assets and the accrual of
uncertain tax positions. These estimates may be adjusted as more current
information becomes available, and any adjustment made could be significant.
(e) Foreign Currency Translation
The Company uses the United States
dollar (US$ or USD) as its reporting currency. The functional currency of
YOU On Demand Holdings, Inc., CB Cayman and YOD Hong Kong is the USD while the
functional currency of Sinotop Beijing, Zhong Hai Video and YOD WFOE is the
Renminbi (RMB). In the consolidated financial statements, the financial
information of the entities which uses RMB as their functional currency has been
translated into USD. Assets and liabilities are translated at the exchange rates
on the balance sheet date, equity amounts are translated at the historical
exchange rates, and revenues, expenses, gains and losses are translated using
the average rate for the period. Translation adjustments arising from these are
reported as foreign currency translation adjustments and are shown as a
component of other comprehensive loss in the statement of comprehensive loss.
F-8
Transactions denominated in currencies
other than 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
translated in the functional currency at the applicable rates of exchange in
effect at the balance sheet date. The resulting exchange differences are
recorded in the consolidated statements of operations.
(f) Cash
Cash consist of cash on hand and demand
deposit as of the date of purchase of three months or less. The Company deposits
its cash balances with a limited number of banks.
(g) Restricted Cash
Restricted cash represents deposits
placed with banks which are restricted as to withdrawal or usage.
On December 21, 2015, the Company
entered into an Amended and Restated Securities Purchase Agreement (the Amended
and Restated SSS Purchase Agreement) with Beijing Sun Seven Stars Culture
Development Limited (SSS) (see Note 17). We received the restricted cash of
$2,994,000 from SSS as cash deposits upon the execution of the Amended and
Restated SSS Purchase Agreement.
(h) Accounts Receivable, net
Accounts receivable are recognized at
invoiced amounts and do not bear interest. The Company maintains an allowance
for doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. The Company reviews its allowance for
doubtful accounts receivable on an ongoing basis. In establishing the required
allowance, management considers any historical losses, the customers financial
condition, the accounts receivable aging, and the customers payment patterns.
After all attempts to collect a receivable have failed and the potential for
recovery is remote, the receivable is written off against the allowance.
(i) Property and Equipment
Property and equipment are stated at
cost less accumulated depreciation. Expenditures for major renewals and
improvements, which extend the original estimated economic useful lives of
applicable assets, are capitalized. Expenditures for normal repairs and
maintenance are charged to expense as incurred. The costs and related
accumulated depreciation of assets sold or retired are removed from the accounts
and any gain or loss thereon is recognized in the consolidated statement of
operations. Depreciation is provided for on a straight-line basis over the
estimated useful lives of the respective assets. The estimated useful life is 5
years for the furniture, 3 years for the electronic equipment and lesser of
lease terms or the estimated useful lives of the assets for the leasehold
improvements.
(j) Licensed Content
The Company obtains content through
content license agreements with studios and distributors. We recognize licensed
content when the license fee and the specified content titles are known or
reasonably determinable. Prepaid license fees are classified as an asset on the
consolidated balance sheets as licensed content and accrued license fees payable
are classified as a liability on the consolidated balance sheets.
We amortize licensed content in cost of
revenues over the contents contractual availability based on the expected
revenue derived from the licensed content, beginning with the month of first
availability, such that our revenues bear a representative amount of the cost of
the licensed content. We review factors that impact the amortization of licensed
content at each reporting date, including factors that may bear direct impact on
expected revenue from specific content titles. Changes in our expected revenue
from licensed content could have a significant impact on our amortization
pattern.
Commitments for license agreements
where the specified content titles or window of availability are not known or
reasonably determinable and do not meet the criteria for recognition as licensed
content are included in Note 14 to the consolidated financial statements.
(k) Intangible Assets
Intangible assets are stated at
acquisition fair value or cost, less accumulated amortization. The Company
amortizes its intangible assets with definite lives over their estimated useful
lives and reviews these assets for impairment when an indicator for potential
impairment exists. The Company is currently amortizing its intangible assets
with definite lives over periods generally ranging between 3 to 20 years. The
estimated useful lives are 20 years for the charter/cooperation agreements, 5
years for software licenses and 3 years for the mobile app developments.
(l) Website Development Costs
Website development costs are stated at
acquisition fair value or cost less accumulated amortization. The Company
capitalizes website development costs associated with
graphics design and development of the website application and infrastructure.
Costs related to planning, content input, and website operations are expensed as
incurred. The Company amortizes website development costs over three years.
F-9
(m) Goodwill
Goodwill is an asset representing the
future economic benefits arising from other assets acquired in a business
combination that are not individually identified and separately recognized.
Indefinite-lived intangible assets are assets that are not amortized as there is
no foreseeable limit to cash flows generated from them.
In accordance with Financial Accounting
Standards Boards (FASB) Accounting Standards Codification (ASC) 350-20,
Goodwill
, the Company performs impairment test for its goodwill annually as
of December 31, or more frequently, if indicators of potential impairment exist,
to determine if the carrying value of goodwill is impaired. The Company reviews
goodwill for impairment based on its identified reporting units, which are
defined as reportable segments or groupings of businesses one level below the
reportable segment level. In September 2011, the FASB issued amended guidance on
testing goodwill for impairment. The guidance provides entities with an option
to perform a qualitative assessment to determine whether further quantitative
impairment testing is necessary, or to proceed directly to performing the first
step of the goodwill impairment test.
Under the qualitative assessment, the
Company would first assess qualitative factors to determine if it is
more-likely-than-not the fair value of the reporting unit is less than its
carrying value of the reporting units assets and liabilities (including
goodwill). If management determines that it is more-likely-than-not that the
fair value of the reporting unit is less than its carrying value, or if
management is unable to reach a conclusion based on qualitative assessments,
then the first and second steps of the goodwill impairment is performed.
Under the quantitative assessment, if
the two-step goodwill impairment test is required, the fair value of the
reporting unit is first compared with its carrying amount (including goodwill).
If the fair value of the reporting unit is less than its carrying amount, an
indication of goodwill impairment exists for the reporting unit and the Company
must perform step two of the impairment test (measurement). Under step two, an
impairment loss is recognized for any excess of the carrying amount of the
reporting units goodwill over the implied fair value of that goodwill. The
implied fair value of goodwill is determined by allocating the fair value of the
reporting unit in a manner similar to a purchase price allocation and the
residual fair value after this allocation is the implied fair value of the
reporting unit goodwill. If the fair value of the reporting unit exceeds its
carrying amount, step two does not need to be performed.
For the purpose of goodwill impairment
testing, the Company is considered as a reporting unit. Based on the annual
goodwill impairment test performed in the fourth quarter of 2015 and 2014,
management concluded that the fair value of the reporting unit exceeded its
carrying value. No impairment loss was recognized for the years presented.
(n) Impairment of Long-Lived
Assets
Long-lived assets such as property and
equipment and intangible assets subject to amortization are reviewed for
impairment whenever events or changes in the circumstances indicate that the
carrying value of an asset may not be recoverable. When these events occur, the
Company assesses the recoverability of the long-lived assets by comparing the
carrying amount to the estimated future undiscounted cash flows associated from
the use of the asset and its eventual disposition, and recognize an impairment
of long-lived assets when the carrying value of such assets exceeds the
estimated future undiscounted cash flows such assets is expected to generate. If
the Company recognizes an impairment, the Company reduces the carrying amount of
the assets group to its estimated fair value based on a discounted cash flow
approach or, when available and appropriate, to comparable market values. No
impairment of long-lived assets was recognized for any of the years presented.
(o) Warrant Liabilities
We account for derivative instruments
and embedded derivative instruments in accordance with ASC 815,
Accounting
for Derivative Instruments and Hedging Activities
, as amended. The amended
standard requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure these instruments
at fair value. Fair value is estimated using the Monte Carlo simulation method.
We also follow ASC 815-40
Accounting
for Derivative Financial Instruments Indexed to and Potentially Settled in a
Companys Own Stock
, which requires freestanding contracts that are settled
in a companys own stock, including common stock warrants, to be designated as
an equity instrument, asset or a liability. Under these provisions a contract
classified as an asset or a liability must be carried at fair value, with any
changes in fair value recorded in the results of operations. The asset/liability
derivatives are valued on an annual basis using the Monte Carlo simulation
method. A contract classified as an equity instrument must be included in
equity, with no fair value adjustments required. Significant assumptions used in
the valuation included exercise dates, fair value for our common stock,
volatility of our common stock and a risk-free interest rate. Gains or losses on
warrants are included in Changes in fair value of warrant liabilities in our
consolidated statement of operations.
F-10
(p) Revenue Recognition
Revenue from sub-licensing content
within the specified license period is recognized in accordance with ASC
Subtopic 926-605,
Entertainment-Films Revenue Recognition
. That is, if
the arrangement includes a nonrefundable minimum guarantee, all contents have
been delivered in accordance with the terms of the arrangement and there are no
substantive future obligations from the Company, then revenue is recognized upon
delivery.
Revenue for services is recorded as
services are provided. The Company generally recognizes all revenues in the
period in which the service is rendered, provided that persuasive evidence of an
arrangement exists, the sales price is fixed or determinable, and collection is
reasonably assured. The Company records deferred revenue for payments received
from customers for the performance of future services and recognize the
associated revenue in the period that the services are performed.
In accordance with ASC 605-25,
Revenue Recognition Multiple Element Arrangements
, contracts with multiple
element deliverables are separated into individual units for accounting purposes
when the unit determined to have standalone value to the customer. Since the
contract price is for all deliverables, the Company allocates the arrangement
consideration to all deliverables at the inception of the arrangement on the
basis of their relative selling price. Revenue related to each unit is
recognized when the Companys obligations under the contract have been satisfied
and all revenue recognition criteria are met.
(q) Advertising & Marketing
Expenses
The Company expenses advertising and
marketing costs as incurred, which are included in selling expense. Advertising
and marketing costs were approximately $773,000 and $359,000 for the years ended
December 31, 2015 and 2014, respectively.
(r) Share-Based Payment and
Equity-based Payments to Non-Employees
The Company awards share options and
other equity-based instruments to its employees, directors and consultants
(collectively share-based payments). Compensation cost related to such awards
is measured based on the fair value of the instrument on the grant date. The
Company recognizes the compensation cost over the period the employee is
required to provide service in exchange for the award, which generally is the
vesting period. The amount of cost recognized is adjusted to reflect the
expected forfeiture prior to vesting. When no future services are required to be
performed by the employee in exchange for an award of equity instruments, and if
such award does not contain a performance or market condition, the cost of the
award is expensed on the grant date. The Company recognizes compensation cost
for an award with only service conditions that has a graded vesting schedule on
a straight-line basis over the requisite service period for the entire award,
provided that the cumulative amount of compensation cost recognized at any date
at least equals the portion of the grant-date value of such award that is vested
at that date.
The Company also awards stocks and
warrants for service to consultants for service and accounts for these awards
under ASC 505-50,
Equity Equity-Based Payments to Non-Employees
. The
fair value of the awards is assessed at measurement date and is recognized as
cost or expenses when the services are provided. If the related services are
completed upon issuance date, measurement date is determined to be the date the
awards are issued.
(s) Income Taxes
The Company accounts for income taxes
in accordance with the asset and liability method. Deferred taxes are recognized
for the future tax consequences attributable to temporary differences between
the carrying amounts of assets and liabilities for financial statement purposes
and income tax purposes using enacted rates expected to be in effect when such
amounts are realized or settled. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is established, as needed to reduce the amount of deferred
tax assets if it is considered more likely than not that some portion or all of
the deferred tax assets will not be realized.
The Company recognizes the effect of
income tax positions only if those positions are more likely than not of being
sustained. Recognized income tax positions are measured at the largest amount
that is greater than 50% likely of being realized. Changes in recognition or
measurement are reflected in the period in which the change in judgment occurs.
The Company records interest related to unrecognized tax benefits in interest
expense and penalties in general and administrative expenses.
The Company recognizes accrued interest
and penalties related to unrecognized tax benefits in the provision for income
taxes in our consolidated statements of operation.
(t) Related parties
Parties are considered to be related if
one party has the ability, directly or indirectly, to control the other party or
exercise significant influence over the other party in making financial and
operating decisions.
F-11
(u) Net Loss Per Share
Attributable to YOU On Demand Shareholders
Net loss per share attributable to YOU
On Demand shareholders is computed in accordance with ASC 260, Earnings per
Share. The two-class method is used for computing earnings per share. Under the
two-class method, net income is allocated between ordinary shares and
participating securities based on dividends declared (or accumulated) and
participating rights in undistributed earnings as if all the earnings for the
reporting period had been distributed. The Companys convertible redeemable
preferred shares are participating securities because they are entitled to
receive dividends or distributions on an as converted basis. For the years
presented herein, the computation of basic loss per share using the two-class
method is not applicable as the Group is in a net loss position and net loss is
not allocated to other participating securities, since these securities are not
obligated to share the losses in accordance with the contractual terms.
Basic net loss per share is computed
using the weighted average number of ordinary shares outstanding during the
period. Options and warrants are not considered outstanding in computation of
basic earnings per share. Diluted net loss per share is computed using the
weighted average number of ordinary shares and potential ordinary shares
outstanding during the period under treasury stock method. Potential ordinary
shares include options and warrants to purchase ordinary shares, preferred
shares and convertible promissory note, unless they were anti-dilutive. The
computation of diluted net loss per share does not assume conversion, exercise,
or contingent issuance of securities that would have an anti-dilutive effect
(i.e. an increase in earnings per share amounts or a decrease in loss per share
amounts) on net loss per share.
(v) Reportable Segment
The Company has one operating business
segment, video content and media, in which the chief operating decision maker
reviews the operating results of the segment to determine the allocation of
resources and the measuring of performance.
(w) Recent Accounting
Pronouncements
In May 2014, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09,
creating a new Topic 606, Revenue from Contracts with Customers, to supersede
the revenue recognition under current Topic 605, Revenue Recognition, and most
industry-specific guidance. The core principle of the new guidance is that an
entity should recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those good or services. The
guidance also specifies the accounting for some costs to obtain or fulfill a
contract with a customer, as well as disclosure requirements for qualitative and
quantitative information that should be included in financial statements. For
public entities, the amendment becomes effective for annual or interim reporting
periods beginning after December 15, 2017. Early adoption is not permitted. The
Company is currently evaluating the impact on its consolidated financial
statement of adopting this guidance.
In February 2015, the FASB issued
Consolidation (Topic 810) Amendments to the Consolidation Analysis. The
amendments in Topic 810 respond to stakeholders concerns about the current
accounting for consolidation of variable interest entities, by changing aspects
of the analysis that a reporting entity must perform to determine whether it
should consolidate such entities. Under the amendments, all reporting entities
are within the scope of Subtopic 810-10, ConsolidationOverall, including
limited partnerships and similar legal entities, unless a scope exception
applies. The amendments are intended to be an improvement to current U.S. GAAP,
as they simplify the codification of FASB Statement No. 167, Amendments to FASB
Interpretation No. 46(R), with changes including reducing the number of
consolidation models through the elimination of the indefinite deferral of
Statement 167 and placing more emphasis on risk of loss when determining a
controlling financial interest. The amendments are effective for public business
companies for fiscal years beginning after December 15, 2015, and for interim
periods within those fiscal years. Earlier adoption is permitted. Management is
currently evaluating the impact on our consolidated financial statements of
adopting this guidance.
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.
In November 2015, the FASB issued
Accounting Standard Updates (ASU) 2015-17 (ASU 2015-17), Balance Sheet
Classification of Deferred Taxes. The ASU required that deferred tax liabilities
and assets be classified as noncurrent in a classified statement of financial
position. For public business entities, ASU 2015-17 is effective for financial
statements issued for annual periods beginning after December 15, 2016, and
interim periods within those annual periods. Earlier application is permitted
for all entities as of beginning of an interim or annual reporting period.
Management is currently evaluating the impact on our consolidated financial
statements of adopting this guidance.
F-12
3.
|
Going Concern and Managements
Plans
|
For the years ended December 31, 2015
and 2014, we incurred net losses from continuing operations of approximately
$8.5 million and $13.0 million, respectively, and we used cash for operations of
approximately $6.4 million and $10.2 million, respectively. Further, we had
accumulated deficits of approximately $86.5 million and $78.4 million as of
December 31, 2015 and 2014, respectively, due to recurring losses since our
inception.
The Company must continue to rely on
proceeds from debt and equity issuances to pay for ongoing operating expenses in
order to execute its business plan. On January 31, 2014, we completed a Series E
Preferred Share financing in which we raised an additional $19.0 million. See
Note 9 for additional information. We also may have the ability to raise funds
by various methods, including utilization of our $50 million shelf registration,
of which $47.3 million is remaining. On December 21, 2015, the Company entered
into an Amended and Restated Securities Purchase Agreement, subject to certain
closing conditions, to issue and sell 4,545,454 shares of its common stock, par
value $0.001 per share (the Common Stock) for $2.20 per share, or a total
purchase price of $10.0 million to Beijing Sun Seven Stars Culture Development
Limited (SSS), a PRC company. However, additional 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.
These conditions raise substantial
doubt about the Companys ability to continue as a going concern. The
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern and, accordingly, do not include any
adjustments that might result from the outcome of this uncertainty.
4.
|
VIE Structure and
Arrangements
|
To comply with PRC laws and regulation
that prohibit or restrict foreign ownership of companies that provides
value-added telecommunication services, the Company provides its services
through Sinotop Beijing and Sinotop Beijings subsidiary, Zhong Hai Video, which
holds the licenses and approvals to provide digital distribution and Internet
content services in the PRC. The Company has the ability to control Sinotop
Beijing and Zhong Hai 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
Sinotop Beijings future payment obligations.
The Management Services Agreement also
provides YOD Hong Kong, or its designee, with a right of first refusal to
acquire all or any portion of the equity of Sinotop Beijing upon any proposal by
the sole shareholder of Sinotop Beijing to transfer such equity. In addition, at
the sole discretion of YOD Hong Kong, Sinotop Beijing is obligated to transfer
to YOD Hong Kong, or its designee, any part or all of the business, personnel,
assets and operations of Sinotop Beijing which may be lawfully conducted,
employed, owned or operated by YOD Hong Kong, including:
(a) business opportunities presented
to, or available to Sinotop Beijing may be pursued and contracted for in the
name of YOD Hong Kong rather than Sinotop Beijing, and at its discretion, YOD
Hong Kong may employ the resources of Sinotop Beijing to secure such
opportunities;
(b) any tangible or intangible property
of Sinotop Bejing, any contractual rights, any personnel, and any other items or
things of value held by Sinotop Beijing may be transferred to YOD Hong Kong at
book value;
(c) real property, personal or
intangible property, personnel, services, equipment, supplies and any other
items useful for the conduct of the business may be obtained by YOD Hong Kong by
acquisition, lease, license or otherwise, and made available to Sinotop Beijing
on terms to be determined by agreement between YOD Hong Kong and Sinotop
Beijing;
(d) contracts entered into in the name
of Sinotop Beijing may be transferred to YOD Hong Kong, or the work under such
contracts may be subcontracted, in whole or in part, to YOD Hong Kong, on terms
to be determined by agreement between YOD Hong Kong and Sinotop Beijing; and
(e) any changes to, or any expansion or
contraction of, the business may be carried out in the exercise of the sole
discretion of YOD Hong Kong, and in the name of and at the expense of, YOD Hong
Kong; provided, however, that none of the foregoing may cause or have the effect
of terminating (without being substantially replaced under the name of YOD Hong
Kong) or adversely affecting any license, permit or regulatory status of Sinotop
Beijing.
F-13
The term of the Management Services
Agreement is 20 years, and may not be terminated by Sinotop Beijing, except with
the consent of, or a material breach by, YOD Hong Kong.
Equity Pledge Agreement
Pursuant to an Equity Pledge Agreement
among YOD Hong Kong, Sinotop Beijing and the sole shareholder of Sinotop Beijing
(the Shareholder), dated March 9, 2010, the Shareholder pledged all of its
equity interests in Sinotop Beijing (the Collateral) to YOD Hong Kong as
security for the performance of the obligations of Sinotop Beijing to make all
of the required management fee payments pursuant to the Management Services
Agreement. The term of the Equity Pledge Agreement expires two years from
Sinotop Beijings satisfaction of all obligations under the Management Services
Agreement.
Option Agreement
Pursuant to an Option Agreement among
YOD Hong Kong, Sinotop Beijing and Shareholder, dated March 9, 2010, and entered
into in connection with the Management Services Agreement, the Shareholder
granted an exclusive option to YOD Hong Kong, or its designee, to purchase, at
any time and from time to time, to the extent permitted under PRC law, all or
any portion of the Shareholders equity in Sinotop Beijing. The aggregate
purchase price of the option is equal to the registered paid-in capital of the
Shareholder. The term of the agreement is until all of the equity interest in
Sinotop Beijing held by the Shareholder is transferred to YOD Hong Kong, or its
designee, or until the maximum period allowed by law has run, and may not be
terminated by any party to the agreement without the consent of the other
parties.
Voting Rights Proxy Agreement
Pursuant to a Voting Rights Proxy
Agreement among YOD Hong Kong, Sinotop Beijing and the Shareholder, dated March
9, 2010, the Shareholder granted to YOD Hong Kong an irrevocable proxy, for the
maximum period of time permitted by law, all of its voting rights as a
shareholder of Sinotop Beijing. The Shareholder may not transfer any of its
equity interest in Sinotop Beijing to any party other than YOD Hong Kong. The
Voting Rights Proxy Agreement may not be terminated except upon the written
consent of all parties, or unilaterally by YOD Hong Kong upon 30 days notice.
On June 4, 2012, YOD Hong Kong assigned
all rights under the above agreement to YOD WFOE, its wholly-owned subsidiary.
Accordingly, YOD WFOE may exercise the above agreements in place of YOD Hong
Kong.
Under the above contractual agreements,
YOD WFOE has the power to direct the activities of the Sinotop Beijing, and can
have the assets transferred freely out of Sinotop Beijing without any
restrictions. Therefore, YOD WFOE considers that there is no asset of Sinotop
Beijing or Zhong Hai Video that can be used only to settle obligations of
Sinotop Beijing or Zhong Hai Video, except for the registered capital of these
two entities amounting to RMB17.0 million (approximately $2.6 million) as of
December 31, 2015. As Sinotop Beijing and Zhong Hai Video are incorporated as
limited liability companies under PRC Company Law, creditors of these two
entities do not have recourse to the general credit of other entities of the
Company.
Financial Information
The following financial information of
our VIEs, as applicable for the periods presented, affected the Company's
consolidated financial statements.
F-14
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash
|
$
|
1,001,094
|
|
$
|
506,525
|
|
|
Accounts receivable, net
|
|
1,689,415
|
|
|
1,091,076
|
|
|
Licensed content, current
|
|
556,591
|
|
|
1,041,609
|
|
|
Prepaid expenses
|
|
98,893
|
|
|
105,918
|
|
|
Other current assets
|
|
133,582
|
|
|
12,811
|
|
|
Intercompany receivables due from the Company's subsidiaries (i)
|
|
161,017
|
|
|
572,192
|
|
|
Total current assets
|
|
3,640,592
|
|
|
3,330,131
|
|
|
Property and equipment, net
|
|
149,880
|
|
|
297,898
|
|
|
Licensed content, non-current
|
|
21,085
|
|
|
35,648
|
|
|
Intangible assets, net
|
|
253,771
|
|
|
5,291
|
|
|
Long-term equity investments
|
|
450,115
|
|
|
850,054
|
|
|
Other non-current assets
|
|
58,026
|
|
|
272,657
|
|
|
Total assets
|
$
|
4,573,469
|
|
$
|
4,791,679
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
44,867
|
|
$
|
8,598
|
|
|
Deferred revenue
|
|
15,080
|
|
|
13,431
|
|
|
Accrued expenses
|
|
280,038
|
|
|
303,766
|
|
|
Other current liabilities
|
|
298,422
|
|
|
269,854
|
|
|
Accrued salaries
|
|
10,861
|
|
|
-
|
|
|
Accrued license fees
|
|
933,532
|
|
|
348,007
|
|
|
Intercompany payables due to the Company's subsidiaries
(i)
|
|
12,512,954
|
|
|
11,200,536
|
|
|
Total current liabilities
|
|
14,095,754
|
|
|
12,144,192
|
|
|
Total liabilities
|
$
|
14,095,754
|
|
$
|
12,144,192
|
|
(i)
Intercompany receivables and
payables are eliminated upon consolidation.
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Net revenue
|
$
|
4,606,380
|
|
$
|
1,962,622
|
|
|
Net loss
|
$
|
(2,573,046
|
)
|
$
|
(3,173,010
|
)
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Net cash used in operating
activities
|
$
|
(782,670
|
)
|
$
|
(2,284,452
|
)
|
|
Net cash used in investing activities
|
$
|
(35,179
|
)
|
$
|
(278,469
|
)
|
|
Net cash provided by
financing activities
|
$
|
1,312,418
|
|
$
|
-
|
|
The revenue producing assets that are
held by the VIEs and a VIEs subsidiary comprise of licensed content, network
equipment, charter/cooperation agreements, software and licenses and website and
mobile app development. Substantially all of such assets are recognized in the
Companys consolidated financial statements, except for certain Internet Content
Provider Licenses, internally developed software, trademarks and patent
applications which were not recorded on the Companys consolidated balance
sheets as they do not meet all the capitalization criteria. The VIEs and a VIEs
subsidiary also hire assembled work force on sales, research and development and
operations whose costs are expensed as incurred.
5.
|
Property and Equipment
|
The following is a breakdown of our
property and equipment:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Furniture and office
equipment
|
$
|
910,420
|
|
$
|
959,080
|
|
|
Leasehold improvements
|
|
190,722
|
|
|
190,722
|
|
|
Total property and
equipment
|
|
1,101,142
|
|
|
1,149,802
|
|
|
Less: accumulated depreciation
|
|
(946,708
|
)
|
|
(829,131
|
)
|
|
Net carrying value
|
$
|
154,434
|
|
$
|
320,671
|
|
F-15
We recorded depreciation expense of
approximately $190,000 and $233,000, which is included in our operating expense
for the years ended December 31, 2015 and 2014, respectively.
The Company intangible assets primarily
arose from the acquisition of YOD Hong Kong.
As of December 31, 2015 and 2014, the
Companys amortizing and indefinite lived intangible assets consisted of the
following:
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
Amortizing Intangible
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net
|
|
|
assets
|
|
Amount
|
|
|
Amortization
|
|
|
Balance
|
|
|
Amount
|
|
|
Amortization
|
|
|
Balance
|
|
|
Charter/Cooperation agreements
|
$
|
2,755,821
|
|
$
|
(746,372
|
)
|
$
|
2,009,449
|
|
$
|
2,755,821
|
|
$
|
(608,580
|
)
|
$
|
2,147,241
|
|
|
Software and licenses
|
|
253,930
|
|
|
(234,947
|
)
|
|
18,983
|
|
|
253,930
|
|
|
(215,358
|
)
|
|
38,572
|
|
|
Website and
mobile app development
|
|
653,830
|
|
|
(403,961
|
)
|
|
249,869
|
|
|
356,425
|
|
|
(356,425
|
)
|
|
-
|
|
|
Total
Amortizing
Intangible assets
|
$
|
3,663,581
|
|
$
|
(1,385,280
|
)
|
$
|
2,278,301
|
|
$
|
3,366,176
|
|
$
|
(1,180,363
|
)
|
$
|
2,185,813
|
|
|
Indefinite lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Website
name
|
|
134,290
|
|
|
-
|
|
|
134,290
|
|
|
134,290
|
|
|
-
|
|
|
134,290
|
|
|
Total intangible
assets
|
$
|
3,797,871
|
|
$
|
(1,385,280
|
)
|
$
|
2,412,591
|
|
$
|
3,500,466
|
|
$
|
(1,180,363
|
)
|
$
|
2,320,103
|
|
During the year ended December 31,
2015, our acquired intangible asset was comprised of mobile app development,
which is amortized over the weighted-average amortization period of 3.0 years.
We recorded amortization expense
related to our finite lived intangible assets of approximately $200,000 and
$304,000 during the years ended December 31, 2015 and 2014, respectively.
The following table outlines the
amortization expense for the next five years and thereafter:
|
|
|
Amortization to be
|
|
|
Years ending December 31,
|
|
Recognized
|
|
|
2016
|
$
|
251,576
|
|
|
2017
|
|
236,825
|
|
|
2018
|
|
193,210
|
|
|
2019
|
|
138,409
|
|
|
2020
|
|
137,792
|
|
|
Thereafter
|
|
1,320,489
|
|
|
Total amortization to be recognized
|
$
|
2,278,301
|
|
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
annually to determine if the fair value measurements are still appropriate, and
to evaluate and adjust the unobservable inputs used in
the fair value measurements based on current market conditions and third party
information.
F-16
The fair value of the warrant
liabilities at December 31, 2015 and 2014 were valued using the Monte Carlo
Simulation method which incorporated the following assumptions:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Risk-free interest rate
|
|
0.92%
|
|
|
1.040%
|
|
|
Expected volatility
|
|
60%
|
|
|
70%
|
|
|
Expected term (years)
|
|
1.67
|
|
|
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 December 31, 2015 and December 31, 2014, respectively:
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair Value
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note10)
|
$
|
-
|
|
$
|
-
|
|
$
|
395,217
|
|
$
|
395,217
|
|
|
|
|
December
31, 2014
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair Value
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note10)
|
$
|
-
|
|
$
|
-
|
|
$
|
585,050
|
|
$
|
585,050
|
|
The table below reflects the components
effecting the change in fair value for the years ended December 31, 2015 and
2014, respectively:
|
|
|
Level 3
Assets and Liabilities
|
|
|
|
|
|
|
|
For the Year Ended December 31,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
January 1,
|
|
|
|
|
|
Fair Value
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
Settlements
|
|
|
gain
|
|
|
2015
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note10)
|
$
|
585,050
|
|
$
|
-
|
|
$
|
(189,833
|
)
|
$
|
395,217
|
|
|
|
|
Level 3
Assets and Liabilities
|
|
|
|
|
|
|
|
For the Year Ended December 31,
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
January 1,
|
|
|
|
|
|
Fair Value
|
|
|
December 31,
|
|
|
|
|
2014
|
|
|
Settlements
|
|
|
loss
|
|
|
2014
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note10)
|
$
|
1,344,440
|
|
$
|
(1,380,629
|
)
|
$
|
621,239
|
|
$
|
585,050
|
|
|
Contingent purchase price
consideration
|
$
|
578,744
|
|
$
|
(739,510
|
)
|
$
|
160,766
|
|
$
|
-
|
|
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, restricted
cash, accounts receivable, accounts payable, accrued expenses and other payables
as of December 31, 2015 and 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, the 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) at a
4% interest rate computed on the basis of a 365 day year. 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. 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, could not be less than
$4.75, which amount represented 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.
F-17
On April 12, 2013, the Majority
Shareholders approved an amendment to the Note, as amended on May 21, 2012, to
remove the $4.75 floor to the conversion price of the Note and such approval and
such amendment was effective following the expiration of the 20-day period
mandated by Rule 14c-2.
Effective May 10, 2013, the Company and
Mr. McMahon entered into Amendment No.3 to the note pursuant to which (i) the
Note would be due to mature on November 10, 2014, 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, 2014, 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 is beat 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, 2015. As a
result, in 2014, 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 in 2014 was reflected as interest expense and additional
paid-in capital since the note was payable upon demand.
Effective December 30, 2014, the
Company and Mr. McMahon entered into Amendment No. 5 pursuant to which the
maturity date of the Note was extended to December 31, 2016. The Note remains
payable on demand or convertible on demand into shares of Series E Preferred
Stock at a conversion price of $1.75 at Mr. McMahons option.
For the years ended December 31, 2015
and 2014, the Company recorded interest expense of $120,000 and $2,444,000
related to the Note.
(b) Short-term Loans
On June 10, 2013, Shane McMahon made a
short-term loan in the amount of $40,000 to the Company which was repaid in full
on July 11, 2014.
(c) 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 to C Medias proprietary railway Wi-Fi service platform for $182,000. C
Media is one of our shareholders. The Company delivered the content to C Media
in March 2015 recognized the revenue of $182,000. As of December, 2015, total
accounts receivable due from C Media amounted to $92,000.
(d) Cost of Revenue
Hua Cheng, the minority shareholder of
Zhong Hai Video, charged us licensed content fees of approximately $174,000 and
$163,000 for the years ended December 31, 2015 and 2014, respectively. As of
December 31, 2015 and 2014, total accrued license fees due to Hua Cheng amounted
to $19,000 and nil, respectively.
(e) Sale of WFOE
Effective March 25, 2014, Beijing China
Broadband Network Technology Co., Ltd. (WFOE), our wholly-owned subsidiary,
was sold to Linkstar Global Investment Limited, whose sole shareholder is a
family member of one of our management personnel. Total consideration received
from the sale of WFOE amounted to $50,000.
F-18
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.
On January 31, 2014, the Company
exchanged the Series D Preferred Stock to Series E Preferred Stock. Previously
recognized beneficial conversion feature of $183,000 related to the Series D
Preferred Stock original issuance 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. Upon the issuance of the Series E
Preferred Stock on January 31, 2014, the Bridge Note was automatically converted
into 1,142,857 shares of Series E Preferred Stock, with no gain or loss
recognized for the conversion of the Bridge Note for Series E Preferred Stock.
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.
F-19
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 reporting period based on the Monte Carlo
valuation.
As of December 31, 2015 and 2014, the
warrant liability was re-valued as disclosed in Note 7, and was adjusted to its
estimated fair value of approximately $395,000 and $585,000 as determined by the
Company, resulting in a gain of approximately $190,000 for the year ended
December 31, 2015. During the year ended December 31, 2015, no warrant was
exercised.
As of December 31, 2015, the Company
has 1,734,429 options and 2,191,487 warrants outstanding to purchase shares of
our common stock.
The following table provides the
details of the approximate total share-based payments expense during the years
ended December 31, 2015 and 2014:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Employees and directors
share-based payments
|
$
|
1,091,000
|
|
$
|
1,340,000
|
|
|
Non-employee awards
|
$
|
150,000
|
|
$
|
-
|
|
The Company awards common stock and
stock options to employees, non-employees and directors compensation for their
services. The stock option awards to employees and directors are accounted for
pursuant to the provisions of ASC 718,
Compensation Stock Compensation
.
The fair value of each option award is estimated on the date of grant using the
Black-Scholes Merton valuation model. The Company recognizes the fair value of
each option as compensation expense ratably using the straight-line attribution
method over the service period, which is generally the vesting period.
(a) Stock Options
Effective as of December 3, 2010, our
Board of Directors approved the YOU On Demand Holdings, Inc. 2010 Stock
Incentive Plan (the Plan) pursuant to which options or other similar
securities may be granted. The maximum aggregate number of shares of our common
stock that may be issued under the Plan is 4,000,000 shares. As of December 31,
2015, options available for issuance are 1,997,964 shares.
Stock option activity for the year
ended December 31, 2015 is summarized as follows:
F-20
|
|
|
|
|
|
|
|
|
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
|
|
|
6.68
|
|
$
|
156,572
|
|
|
Granted
|
|
16,565
|
|
|
2.12
|
|
|
|
|
|
|
|
|
Exercised
|
|
(19,042
|
)
|
|
1.79
|
|
|
|
|
|
|
|
|
Expired
|
|
(17,356
|
)
|
|
1.80
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(45,964
|
)
|
|
1.68
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
1,734,429
|
|
$
|
2.77
|
|
|
5.59
|
|
$
|
58,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to be vested as of
December 31, 2015
|
|
1,734,429
|
|
$
|
2.77
|
|
|
5.59
|
|
$
|
58,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2015
(vested)
|
|
1,703,517
|
|
$
|
2.79
|
|
|
5.55
|
|
$
|
51,113
|
|
The weighted average grant-date fair value of options granted
during the years ended December 31, 2015, and 2014, was $1.28 and $1.70. The
total intrinsic value of options exercised during the years ended December 31,
2015, and 2014, was $6,192 and $27,820.
As of December 31, 2015, approximately
$39,000 of total unrecognized compensation expense related to non-vested share
options is expected to be recognized over a weighted average period of
approximately 1.6 years. The total fair value of shares vested during the years
ended December 31, 2015 and 2014 was approximately $341,000 and $619,000,
respectively.
The following table summarizes the
assumptions used to estimate the fair values of the share options granted in the
years presented:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Exercise multiple
|
|
2.12
|
|
|
2.52~2.91
|
|
|
Expected term
|
|
5.5 years
|
|
|
10 years
|
|
|
Expected volatility
|
|
70%
|
|
|
70%
|
|
|
Expected dividend yield
|
|
0%
|
|
|
0%
|
|
|
Risk free interest rate
|
|
1.56%
|
|
|
1.43%~2.66%
|
|
|
Fair value
|
|
1.28
|
|
|
1.33~2.23
|
|
(b) Warrants
In connection with the Companys
financings, the Warner Brother Agreement and service agreements, the Company
issued warrants to investors and service providers to purchase common stock of
the Company.
As of December 31, 2015, the weighted
average exercise price was $2.20 and the weighted average remaining life was
2.39 years. The following table outlines the warrants outstanding and
exercisable as of December 31, 2015 and December 31, 2014:
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Exercise
|
|
|
Expiration
|
|
|
|
|
Outstanding and
|
|
|
Outstanding and
|
|
|
|
|
|
|
|
|
Warrants Outstanding
|
|
Exercisable
|
|
|
Exercisable
|
|
|
Price
|
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2011 Warner Brothers
Warrants
|
|
200,000
|
|
|
200,000
|
|
$
|
6.60
|
|
|
05/11/16
|
|
|
2011 Service Agreement Warrants
|
|
26,667
|
|
|
26,667
|
|
$
|
7.20
|
|
|
06/15/16
|
|
|
2012 August Financing
Warrants
(i)
|
|
536,250
|
|
|
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 derivative liabilities as disclosed in Note 10.
F-21
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 period. Diluted net loss per share
equals basic net loss per share because the effect of securities convertible
into common shares is anti-dilutive.
For the years ended December 31, 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:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Warrants
|
|
2,191,487
|
|
|
2,191,487
|
|
|
Options
|
|
1,734,429
|
|
|
1,800,226
|
|
|
Series A Preferred Stock
|
|
933,333
|
|
|
933,333
|
|
|
Series E Preferred Stock
|
|
7,254,997
|
|
|
7,365,283
|
|
|
Convertible promissory note
and interest
|
|
1,964,337
|
|
|
1,895,765
|
|
|
Total
|
|
14,078,583
|
|
|
14,186,094
|
|
The Company has reserved its authorized
but unissued common stock for possible future issuance in connection with the
following:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Exercise of stock warrants
|
|
2,191,487
|
|
|
2,191,487
|
|
|
Exercise and future grants of stock options
|
|
3,928,870
|
|
|
3,986,074
|
|
|
Conversion of preferred stock
|
|
8,188,330
|
|
|
8,298,616
|
|
|
Issuable shares from conversion of promissory
notes and interest
|
|
1,964,337
|
|
|
1,895,765
|
|
|
Total
|
|
16,273,024
|
|
|
16,371,942
|
|
(a) Corporate Income Tax (CIT)
YOD was incorporated in Nevada and is
subject to U.S. federal and state income tax.
CB Cayman was incorporated in Cayman
Islands as an exempted company and is not subject to income tax under the
current laws of Cayman Islands.
YOD Hong Kong was incorporated in HK as
a holding company. The statutory income tax rate in HK is 16.5% .
All of the Companys income is
generated in the PRC. WFOE, YOD WFOE, Sinotop Beijing, Zhong Hai Video, Jinan
Zhong Kuan are PRC entities. The income tax provision of these entities is
calculated at the applicable tax rates on the taxable income for the periods
based on existing legislation, interpretations and practices in the PRC.
In accordance with the Corporate Income
Tax Law of the PRC (CIT Law), effective beginning on January 1, 2008,
enterprises established under the laws of foreign countries or regions and whose
place of effective management is located within the PRC territory are
considered PRC resident enterprises and subject to the PRC income tax at the
rate of 25% on worldwide income. The definition of place of effective
management refers to an establishment that exercises, in substance, and among
other items, overall management and control over the production and business,
personnel, accounting, and properties of an enterprise. If the Companys non-PRC
incorporated entities are deemed PRC tax residents, such entities would be
subject to PRC tax under the CIT Law. Since our non-PRC entities have
accumulated loss, the application of this tax rule will not result in any PRC
tax liability, if our non-PRC incorporated entities are deemed PRC tax
residents.
The CIT Law imposes a 10% withholding
income tax, subject to reduction based on tax treaty where applicable, for
dividends distributed by a foreign invested enterprise to its immediate holding
company outside China. Under the PRC-HK tax treaty, the withholding tax on
dividends is 5% provided that a HK holding company qualifies as a HK tax
resident as defined in the tax treaty. No provision was made for the withholding
income tax liability as the Companys foreign subsidiaries were in accumulated
loss.
Loss before tax and the provision for
income tax benefit consists of the following components:
F-22
|
|
|
2015
|
|
|
2014
|
|
|
Loss before tax
|
$
|
(8,575,369
|
)
|
$
|
(13,328,813
|
)
|
|
Deferred tax benefit of net operating loss
|
|
|
|
|
|
|
|
United States
|
$
|
-
|
|
$
|
-
|
|
|
PRC/Hong Kong
|
|
(34,448
|
)
|
|
(304,670
|
)
|
|
|
|
(34,448
|
)
|
|
(304,670
|
)
|
|
Deferred tax benefit other than benefit of
net operating loss
|
|
|
|
|
|
|
|
United States
|
|
-
|
|
|
-
|
|
|
PRC/Hong Kong
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit
|
$
|
(34,448
|
)
|
$
|
(304,670
|
)
|
A reconciliation of the expected income
tax derived by the application of the 34.0% U.S. corporate income tax rate to
the Company's loss before income tax benefit is as follows:
|
|
|
2015
|
|
|
2014
|
|
|
U. S. statutory income tax
rate
|
|
34.0%
|
|
|
34.0%
|
|
|
Non-deductible expenses
|
|
-5.1%
|
|
|
-2.5%
|
|
|
Non-deductible interest
expenses
|
|
-0.5%
|
|
|
-6.1%
|
|
|
Non-taxable change in fair
value warrant liabilities
|
|
0.8%
|
|
|
-1.6%
|
|
|
Non-taxable loss on
contingent consideration
|
|
-
|
|
|
-0.4%
|
|
|
Forfeiture of capital loss
|
|
-0.7%
|
|
|
-3.2%
|
|
|
Increase in valuation
allowance
|
|
-34.0%
|
|
|
-18.5%
|
|
|
Tax benefit from the lapse of the statute of limitations
|
|
6.8%
|
|
|
-
|
|
|
Others
|
|
-0.9%
|
|
|
0.5%
|
|
|
Effective income tax rate
|
|
0.4%
|
|
|
2.3%
|
|
Deferred income taxes are recognized
for future tax consequences attributable to temporary differences between the
carrying amounts of assets and liabilities for financial statement purposes and
income tax purposes using enacted rates expected to be in effect when such
amounts are realized or settled. Significant components of the Companys
deferred tax assets and liabilities at December 31, 2015 and 2014 are as
follows:
|
|
|
2015
|
|
|
2014
|
|
|
U.S. NOL
|
$
|
11,885,880
|
|
$
|
9,563,551
|
|
|
Foreign NOL
|
|
3,641,553
|
|
|
2,790,913
|
|
|
Accrued payroll and expense
|
|
237,076
|
|
|
479,116
|
|
|
Nonqualified options
|
|
768,071
|
|
|
829,354
|
|
|
Marketable securities
|
|
-
|
|
|
131,691
|
|
|
Capital loss carryover
|
|
-
|
|
|
72,660
|
|
|
Others
|
$
|
687,721
|
|
$
|
92,675
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
17,220,301
|
|
|
13,959,960
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
(16,695,412
|
)
|
|
(13,783,420
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
Intangible assets
|
|
(502,363
|
)
|
|
(536,811
|
)
|
|
Others
|
|
(352,650
|
)
|
|
(4,301
|
)
|
|
Total deferred tax
liabilities
|
|
(855,013
|
)
|
|
(541,112
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
$
|
(330,124
|
)
|
$
|
(364,572
|
)
|
As of December 31, 2015, the Company
had approximately $27.1 million U.S domestic cumulative tax loss carryforwards and approximately $14.6 million
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. The non-recognition of the tax benefits,
while reducing the net operating loss carryovers, gives rise to a capital loss
carryover of approximately $165,000, which expired in 2015. Utilization of net
operating losses may be subject to an annual limitation due to ownership change
limitations provided in the Internal Revenue Code and similar state and foreign
provisions. This annual limitation may result in the expiration of net operating
losses before utilization.
F-23
Realization of the Companys net
deferred tax assets is dependent upon the Companys ability to generate future
taxable income in appropriate tax jurisdictions to obtain benefit from the
reversal of temporary differences and net operating loss carryforwards. The
valuation allowance increased approximately $2.9 million and $2.5 million during
the years ended December 31, 2015 and 2014, respectively. The increase was
primarily related to increases in net operating loss carryovers, which the
Company does not expect to realize.
(b) Uncertain Tax Positions
Accounting guidance for recognizing and
measuring uncertain tax positions prescribes a threshold condition that a tax
position must meet for any of the benefit of uncertain tax position to be
recognized in the financial statements. As of December 31, 2014, the
unrecognized tax benefit of USD 1,718,000 resulted from the capital transaction
where the Company received the shares of a third-party company with a zero tax
basis. The unrecognized tax benefit was reduced to zero as a result from the
lapse of the statute of limitations in 2015. A reconciliation of the beginning
and ending amounts of unrecognized tax benefit is as follows:
|
|
|
2015
|
|
|
2014
|
|
|
Balance, beginning of year
|
$
|
584,451
|
|
$
|
584,451
|
|
|
Lapse of the statute of limitations
|
|
(584,451
|
)
|
|
-
|
|
|
Balance, end of year
|
$
|
-
|
|
$
|
584,451
|
|
As of December 31, 2015 and 2014, the Company did not accrue any material
interest and penalties.
The Company's United States income tax
returns are subject to examination by the Internal Revenue Service for at least
2010 and later years. Due to the uncertainty regarding the filing of tax returns
for years before 2007, it is possible that the Company is subject to examination
by the IRS for earlier years. All of the Chinese tax returns for the Chinese
operating companies are subject to examination by the Chinese tax authorities
for all periods from the companies' inceptions in 2007 through 2015 as
applicable.
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 December 31, 2015, the Company's potential minimum cash obligation to
these employees was approximately $1,417,000.
(b) Operating Lease Commitment
The Company is committed to paying
leased property costs related to our offices in China as follows:
|
|
|
Leased Property
|
|
|
Year ending December 31,
|
|
Costs
|
|
|
2016
|
$
|
539,000
|
|
|
Total
|
$
|
539,000
|
|
(c) Licensed Content Commitment
The Company is committed to paying
content costs through 2017 as follows:
|
Years ending December 31,
|
|
Content Costs
|
|
|
2016
|
$
|
5,082,000
|
|
|
2017
|
|
200,000
|
|
|
Total
|
$
|
5,282,000
|
|
(d) Advertising and Marketing
Expenses
The Company is committed to paying
advertising and marketing expenses
as follows:
F-24
|
|
|
Advertising and
|
|
|
|
|
Marketing
|
|
|
Year ending December 31,
|
|
Expenses
|
|
|
2016
|
$
|
450,000
|
|
|
Total
|
$
|
450,000
|
|
(e) 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 Zhong Hai Video, which the Group consolidates as a result of a
series of contractual arrangements entered among YOD WFOE, Sinotop Beijing as
the parent company of Zhong Hai Video and the legal shareholder of Sinotop
Beijing. The Company believes that these contractual arrangements are in
compliance with PRC law and are legally enforceable. If Sinotop Beijing or its
legal shareholder fails to perform the obligations under the contractual
arrangements or any dispute relating to these contracts remains unresolved, YOD
WFOE or YOD HK can enforce its rights under the VIE contracts through the
operations of PRC law and courts. However, uncertainties in the PRC legal system
could limit the Companys ability to enforce these contractual arrangements. In
particular, the interpretation and enforcement of these laws, rules and
regulations involve uncertainties. If YOD WFOE had direct ownership of Sinotop
Beijing, it would be able to exercise its rights as a shareholder to effect
changes in the board of directors of Sinotop Beijing, which in turn could effect
changes at the management level, subject to any applicable fiduciary
obligations. However, under the current contractual arrangements, the Company
relies on Sinotop Beijing and its legal shareholder to perform their contractual
obligations to exercise effective control. The Company also gives no assurance
that PRC government authorities will not take a view in the future that is
contrary to the opinion of the Company. If the current ownership structure of
the Company and its contractual arrangements with the VIEs and their equity
holders were found to be in violation of any existing or future PRC laws or
regulations, the Company's ability to conduct its business could be impacted and
the Company may be required to restructure its ownership structure and
operations in the PRC to comply with the changes in the PRC laws which may
result in deconsolidation of the VIEs.
In addition, the telecommunications,
information and media industries remain highly regulated. Restrictions are
currently in place and are unclear with respect to which segments of these
industries foreign owned entities, like YOD WFOE, may operate. The PRC
government may issue from time to time new laws or new interpretations on
existing laws to regulate areas such as telecommunications, information and
media, some of which are not published on a timely basis or may have retroactive
effect. For example, there is substantial uncertainty regarding the Draft
Foreign Investment Law, including, among others, what the actual content of the
law will be as well as the adoption and effective date of the final form of the
law. Administrative and court proceedings in China may also be protracted,
resulting in substantial costs and diversion of resources and management
attention. While such uncertainty exists, the Group cannot assure that the new
laws, when it is adopted and becomes effective, and potential related
administrative proceedings will not have a material and adverse effect on the
Company's ability to control the affiliated entities through the contractual
arrangements. Regulatory risk also encompasses the interpretation by the tax
authorities of current tax laws, and the Groups legal structure and scope of
operations in the PRC, which could be subject to further restrictions resulting
in limitations on the Groups ability to conduct business in the PRC.
(b) Major Customers
The Company has agreements with
distribution partners, including digital cable operators, IPTV operators, OTT
streaming operators and mobile smartphone manufacturers and operators. A
distribution partner that individually generates more than 10% of the Companys
revenue is considered a major customer.
For the year ended December 31, 2015,
three customers which are MIGU Co., Ltd, Shenzhen Tianhua Century Media Limited
(Tianhua) and Shanxi Fenteng Interaction Technology Limited (Fenteng)
individually accounted for more than 10% of the Companys revenue. Four
customers which are Fenteng, Guangzhou Aosemu Limited, Shenzhen Pingan
Communication Technology Limited and Tianhua individually accounted for 10% of
the Companys net accounts receivables as of December 31, 2015.
For the year ended December 31, 2014,
two customers which are Tai Sheng Si Information System Development (Beijing)
Limited (Tai Sheng Si) and Tianhua individually accounted for more than 10% of
the Companys revenue. Three customers which are Tai Sheng Si, Tianhua and
Beijing Tiantian Culture Spread Limited, Sichuan Branch individually accounted
for 10% of the Companys net accounts receivables as of December 31, 2014.
F-25
(c) Major Suppliers
The Company relies on agreements with
studio content partners to acquire video contents. A content partner that
accounts for more than 10% of the Companys cost of revenues is considered a
major supplier.
For the year ended December 31, 2015,
four suppliers which are Paramount, Disney, Universal and Twentieth Century Fox
individually accounted for more than 10% of the Companys cost of revenues. One
supplier which is Universal individually accounted for 10% of the Companys
accrued license fees as of December 31, 2015.
For the year ended December 31, 2014,
three suppliers which are Paramount, Disney and Universal individually accounted
for more than 10% of the Companys cost of revenues. Two suppliers which are
Universal and Paramount individually accounted for 10% of the Companys accrued
license fees as of December 31, 2014.
(d) Concentration of Credit Risks
Financial instruments that potentially
subject the Group to significant concentration of credit risk primarily consist
of cash, accounts receivable and other receivables. As of December 31, 2015 and
2014, the Groups cash were held by financial institutions located in the PRC,
Hong Kong and the United States that management believes are of high-credit
ratings and quality. Accounts receivable are typically unsecured and are mainly
derived from revenues from the Groups VOD content distribution partners. The
risk with respect to accounts receivable is mitigated by regular credit
evaluations that the Group performs on its distribution partners and its ongoing
monitoring of outstanding balances.
(e) Foreign Currency Risks
A majority of the Groups operating
transactions are denominated in RMB and a significant portion of the Groups
assets and liabilities is denominated in RMB. RMB is not freely convertible into
foreign currencies. The value of the RMB is subject to changes in the central
government policies and to international economic and political developments. In
the PRC, certain foreign exchange transactions are required by laws to be
transacted only by authorized financial institutions at exchange rates set by
the Peoples Bank of China (PBOC). Remittances in currencies other than RMB by
the Group in China must be processed through PBOC or other China foreign
exchange regulatory bodies which require certain supporting documentation in
order to complete the remittance.
Cash consist of cash on hand and cash
in bank, which are unrestricted as to withdrawal.
Time deposits, which mature within one
year as of the balance sheet date, represent interest-bearing certificates of
deposit with an initial term of greater than three months when purchased. Time
deposits which mature over one year as of the balance sheet date are included in
non-current assets.
Cash and time deposits maintained at
banks consist of the following:
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
RMB denominated bank deposits
with financial institutions in the PRC
|
$
|
1,076,430
|
|
$
|
535,184
|
|
|
US dollar denominated bank deposits with a
financial institutions in the PRC
|
$
|
2,613,834
|
|
$
|
6,548,974
|
|
|
US dollar denominated bank
deposits with financial institutions in Hong Kong Special Administrative
Region (HK SAR)
|
$
|
23,460
|
|
$
|
3,125,398
|
|
|
US dollar denominated bank deposits with
financial institutions in The United States of America (USA)
|
$
|
53,231
|
|
$
|
599,958
|
|
|
US dollar denominated bank
deposits with financial institutions in Cayman Islands (Cayman)
|
$
|
99
|
|
$
|
186
|
|
|
RMB restricted cash denominated bank deposits
with financial institutions in the PRC
|
$
|
2,994,364
|
|
$
|
-
|
|
To limit exposure to credit risk
relating to bank deposits, the Company primarily places bank deposits only with
large financial institutions in the PRC, HK SAR, USA and Cayman with acceptable
credit rating.
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 $8,000 and $31,000 for the years ended December
31, 2015 and 2014, respectively.
F-26
(a) On November 23, 2015, the Company
entered into a Securities Purchase Agreement (the SSS Securities Purchase
Agreement) with Beijing Sun Seven Stars Culture Development Limited (SSS), a
PRC company, pursuant to which the Company agreed to sell and SSS agreed to
purchase 4,545,454 shares of common stock of the Company (the Common Stock)
for $2.20 per share, or total purchase price of $10.0 million. In addition, the
Company agreed to issue SSS a two-year warrant (the Warrant) to acquire an
additional 1,818,182 shares of Common Stock (the Warrant Shares) at an
exercise price of $2.75 per share. In connection with the SSS Securities
Purchase Agreement, the Company will enter into a Content License Agreement (the
Content Agreement) with SSS pursuant to which SSS shall grant the Company a
non-exclusive, royalty-free content distribution right for certain assets valued
at approximately $29.1 million, in exchange for 9,208,860 shares of Common
Stock, at exchange value of $3.16 per share.
On December 21, 2015, the Company
entered into an Amended and Restated Securities Purchase Agreement (the Amended
and Restated SSS Purchase Agreement) with SSS, pursuant to which the Company
agreed to issue and sell and SSS agreed to purchase 4,545,454 shares of common
stock of the Company Common Stock for $2.20 per share, or total purchase price
of $10.0 million, and issue SSS a Warrant to purchase 1,818,182 Warrant Shares
at an exercise price of $2.75 per share. In connection with the closing of the
Amended and Restated SSS purchase Agreement, on December 21, 2016, the Company
entered into the Revised Content License Agreement (the Revised Content
Agreement) pursuant to which SSS will grant the Company a non-exclusive
royalty-free content distribution rights for certain assets in exchange for a
promissory note (the Note) that is convertible into 9,208,860 shares of Common
Stock (the IP Shares). The Note has a stated principal amount of $17.7
million, bears interest at the rate of 0.56% per annum and matures May 21, 2016.
In the event of default, the Note will become immediately due and payable. Until
receipt of necessary shareholder approvals, the Warrant and the Note may not be
exercised or converted to the extent that such exercise or conversion would
result in SSS beneficially owning more than 19.99% of the Companys outstanding
Common Stock. Once the necessary shareholder approval is received, the unpaid
principal and interest of the Note will automatically convert into the IP
Shares.
As of December 31, 2015, the closing of
the aforementioned transaction was subject to certain conditions. On March 28,
2015, upon the completion of all closing conditions, the Company issued
4,545,455 shares of Common Stock, the Warrants and the Note in exchange for $10
million cash investment and content assets from SSS.
(b) On November 23, 2015, the Company
entered into a Share Purchase Agreement with Tianjin Enternet Network Technology
Limited (Tianjin Enternet), an affiliate of SSS incorporated in Tianjin, China
(the Tianjin Agreement). Under the Tianjin Agreement, Tianjin Enternet agreed
to contribute 100% equity interest of Tianjin Sevenstarsflix Network Technology
Limited (SSFlix), a to-be-formed subsidiary of Tianjin Enternet in the PRC.
SSFlix will offer a branded paid content service delivered to customers
ubiquitously through platform partners, will track and share consumer payment
and other behavioral data, will operate a customer management and data-based
service and will develop mobile social TV-based customer management portals. In
exchange for the sale of the equity interest in SSFlix, Tianjin Enternet shall
receive shares of common stock of the Company not to exceed 5.0 million Common
Stock (the Earn Out Share Award) for each of 2016, 2017 and 2018, with exact
amount based on earn-out provisions (the SSFlix Earn-Out) as detailed as
follows:
|
|
For 2016, if either (i) the number of homes
and/or users subscribing to one or more of the content services provided
by SSFlix (the Homes/Users Passed) is greater than or equal to 50.0
million Homes/Users Passed, or (ii) the net income of SSFlixs business is
greater than or equal to the earn-out net income threshold of $4.0 million
net income;
|
|
|
|
|
|
For 2017, if either (i) the Homes/Users Passed
is greater than or equal to 100.0 million Homes/Users Passed, or (ii) the
net income of SSFlixs business is greater than or equal to the earn-out
net income threshold of $6.0 million net income;
|
|
|
|
|
|
For 2018, if either (i) the Homes/Users Passed
is greater than or equal to 150.0 million Homes/Users Passed, or (ii) the
net income of SSFlixs business is greater than or equal to the earn-out
net income threshold of $8.0 million net income.
|
On December 21, 2015, the Company and
Tianjin Enternet entered into an Amended and Restated Share Purchase Agreement
(the Amended Tianjin Agreement) pursuant to which the Earn-Out Share Award is
further subject to approval from either (i) the holders of a majority of the
total votes cast in person or by proxy at a meeting of the Companys
shareholders or (ii) the holders of a majority of the outstanding voting
securities of the Company entitled to vote on the relevant matters, if such
action is taken by written consent (the Earn-Out Required Vote). In the event
the Company has not obtained the Earn-Out Required Vote but SSFlix has met one
of the target thresholds described above, the Company will not issue an Earn-Out
Share Award to Tianjin Entertnet, but instead will issue to Tianjin a Promissory
Note (the Tianjin Note), with a principal amount equal to the quotient
obtained by multiplying 5.0 million Common Stock by the Companys applicable
stock price.
As of December 31, 2015, certain
closing conditions, including transfer of SSFlix to the Company, was yet to be
completed.
(c) On January 22, 2016, the Company
terminated the employment of Mr. Weicheng Liu as Chief Executive Officer (CEO)
of the Company and entered into a separation agreement with him as of such date
(the Liu Separation Agreement). In connection therewith, the Board of
Directors of the Company (the Board) appointed Mr. Mingcheng Tao as the new
CEO of the Company, and entered into an employment agreement with Mr. Tao on
such date.
Pursuant to the Liu Separation
Agreement, the Company agreed to provide Mr. Liu with payment of $405,000, less
standard payroll withholdings as applicable, which shall be paid to Mr. Liu in
equal installments over a period of 18 months beginning in February 2016.
However, payment may be accelerated if Mr. Liu completes all signature and
documentation requirements and assist the Company in restructuring its VIE to
the Companys satisfaction prior to February 28, 2016, under which the Company
shall pay 1/3 of $405,000 as a lump sum, with the remaining 2/3 paid equally
over the following 12 months. In addition, the Company also agreed to provide
Mr. Liu (1) a one-time lump sum payment of $60,000, (2) earned, accrued but
unpaid salary through January 22, 2015, and (3) four weeks base salary for accrued, earned but unused vacation
time, and made these payments to Mr. Liu on February 1, 2016. Furthermore, all
outstanding unvested options, warrants or restricted stock previously granted to
Mr. Liu became fully vested, and previously granted options and warrants are
exercisable for the full term of the option or warrant.
F-27
Mr. Liu also agreed to provide certain
transition services to the Company, including implementation of employment
decisions, restructuring the ownership and control of the Companys VIE
structure, assistance in renewing certain client relationships, among others. If
Mr. Liu is able to renew certain contractual relationships and receive payments
thereunder within defined timeframes, Mr. Liu could earn additional sums.
(d) On February 24, 2016, the Company
entered into a property rights transfer agreement with Beijing Kuntin Taiming
Investment Management Co., Ltd. (Taiming) to purchase office premise located
in Xinghu Innovation Park, Taihu Town, Tongzhou District, Beijing (the Property
Agreement). Total area of land use right is 48,263.497 square meters and land
use term is from September 29, 2010 to August 19, 2060. Total purchase price of
the building was approximately RMB27 million (approximately $4,158,000).
(e) On January 22, 2016, the Company
entered into a Termination Agreement (the Termination Agreement) with Sinotop
Beijing and Zhang Yan to terminate certain contractual arrangements, including
the Option Agreement, dated March 9, 2010, among YOD HK, Sinotop Beijing and
Zhang Yan, the sole shareholder of Sinotop Beijing, the Termination, Assignment
and Assumption Agreement among YOD HK, YOD WFOE, Sinotop Beijing and Zhang Yan
dated June 4,2012, Voting Rights Proxy Agreement among YOD HK, YOD WFOE, Sinotop
Beijing and Zhang Yan dated June 4, 2012, Equity Pledge Agreement among YOD HK,
YOD WFOE, Sinotop Beijing and Zhang Yan dated June 4, 2012 and Power of Attorney
Agreement among YOD HK, YOD WFOE, Sinotop Beijing and Zhang Yan dated June
4,2012 (collectively, the Old Sinotop VIE Agreements). Simultaneously, Zhang
Yan entered into an Equity Transfer Agreement with Bing Wu and Yun Zhu, whereby
Zhang Yan transferred 100% of her equity ownership in Sinotop Beijing to Bing Wu
and Yun Zhu. Upon the conclusion of the transfer arrangement, Bing Wu and Yun
Zhu held 95% and 5%, respectively, of equity ownership in Sinotop Beijing.
On the same day, the Company entered
into the following contractual arrangements with Bing Wu and Yun Zhu: Call
Option Agreement among YOD WFOE, Sinotop Beijing, Bing Wu and Yun Zhu, dated as
of January 25, 2016; Equity Pledge Agreement among YOD WFOE, Sinotop Beijing,
Bing Wu and Yun Zhu, dated as of January 25, 2016; Power of Attorney Agreement
among YOD WFOE, Sinotop Beijing and Bing Wu and YOD WFOE, Sinotop Beijing and
Yun Zhu, both dated as of January 25, 2016; Technical Services Agreement among YOD WFOE and Sinotop Beijing, dated as of January 25, 2016 (collectively, the
New Sinotop VIE Agreements).
Although the New Sinotop VIE Agreements
will result in a change to the legal shareholders of Sintop Beijing, there will
be no change in the Companys ability to control Sinotop Beijing or the
Companys rights to 100% of the economic benefit of Sinotop Beijing. The Company
was the primary beneficiary of Sinotop Beijing prior to the signing of the New
Sinotop VIE Agreements and the Company will remain the primary beneficiary of
Sinotop Beijing upon the signing of the New Sinotop VIE Agreements.
F-28
EXHIBIT INDEX
Exhibit
3.1
|
Articles of Incorporation of the Company, as amended to
date [incorporated by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K (File No. 001-35561) filed on March 30, 2012].
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3.2
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Second Amended and Restated Bylaws, adopted on January
31, 2014 [incorporated by reference to Exhibit 3.1 to the Company's
Current Report on Form 8-K (File No. 001-35561) filed on February 6,
2014].
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3.3
|
Amendment No. 1 to the Second Amended and Restated
Bylaws, adopted on March 26, 2015 [incorporated by reference to Exhibit
3.3 to the Companys Annual Report on Form 10-K (File No. 001-35561) filed
on March 30, 2015].
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3.4
|
Amendment No. 2 to the Second Amended and Restated
Bylaws, adopted on November 20, 2015. [incorporated by reference to
Exhibit 3.3 to the Companys Current Report on Form 8-K (File No.
001-35561) filed on November 24, 2015]
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3.5
|
Certificate of Designation of Series A Preferred Stock
[incorporated by reference to Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q (File No. 001-35561) filed on August 23, 2010].
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3.6
|
Certificate of Designation of Series C Preferred Stock
[incorporated by reference to Exhibit 4.2 to the Company's Current Report
on Form 8-K (File No. 001-35561) filed on August 31, 2012].
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3.7
|
Certificate of Designation of Series D 4% Convertible
Preferred Stock [incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K (File No. 001-35561) filed on July 11, 2013].
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3.8
|
Certificate of Designation of Series E Convertible
Preferred Stock [incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K (File No. 001-35561) filed on February 6,
2014].
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4.2
|
Form of Warrant issued on July 30, 2010 to Shane McMahon
[incorporated by reference to Exhibit 4.2 to the Company's Quarterly
Report on Form 10-Q (File No. 001-35561) filed August 23, 2010].
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4.4
|
Form of Warrant issued pursuant to the Securities
Purchase Agreement dated August 30, 2012 [incorporated by reference to
exhibit 4.1 to the Company's Current Report on Form 8-K (File No.
001-35561) filed on August 31, 2012].
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4.5#
|
YOU On Demand Holdings, Inc. 2010 Equity Incentive Plan
[incorporated by reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-8 (File No. 001-35561) filed on June 16, 2015]
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4.6#
|
Forms of Stock Option Agreement [incorporated by
reference to Exhibit 4.4 to the Company's Registration Statement on Form
S-8 (File No. 001-35561) filed on June 16, 2015]
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4.7#
|
Form of Restricted Stock Grant Agreement [incorporated by
reference to Exhibit 4.5 to the Company's Registration Statement on Form
S-8 (File No. 001-35561) filed on June 16, 2015]
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4.8*
|
Warrant issued on December 21, 2015 to Beijing Sun Seven Stars Culture Development Limited.
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10.1
|
Management Services Agreement, dated March 9, 2010, by
and between Sinotop Beijing and Sinotop Hong Kong [incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K
(File No. 001-35561) filed on March 31, 2014].
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10.6#
|
Employment Agreement, dated January 31, 2014 between the
Company and Shane McMahon [incorporated by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K (File No. 001-35561) filed on
February 6, 2014].
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|
10.7#
|
Employment Agreement, dated January 31, 2014 between the
Company and Weicheng Liu [incorporated by reference to Exhibit 10.3 to the
Company's Current Report on Form 8-K (File No. 001-35561) filed on
February 6, 2014].
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10.8#
|
Employment Agreement, dated January 31, 2014 between the
Company and Marc Urbach [incorporated by reference to Exhibit 10.4 to the
Company's Current Report on Form 8-K (File No. 001-35561) filed on
February 6, 2014].
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10.9#
|
Employment Agreement, dated January 31, 2014 between the
Company and Xuesong Song [incorporated by reference to Exhibit 10.5 to the
Company's Current Report on Form 8-K (File No. 001-35561) filed on
February 6, 2014].
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10.10
|
Form of Securities Purchase Agreement, dated August 30,
2012, by and among the Company, the Investors and Chardan Capital
Management [incorporated by reference to exhibit 10.1 to the Company's
Current Report on Form 8-K (File No. 001-35561) filed on August 31, 2012].
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10.11
|
Form of Registration Rights Agreement, dated August 30,
2012, by and between the Company and the Investors [incorporated by
reference to exhibit 10.2 to the Company's Current Report on Form 8-K
(File No. 001-35561) filed on August 31, 2012].
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10.12
|
Convertible Promissory Note in $3,000,000 principal
amount issued to Shane McMahon [incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q (File No. 001-35561) filed
on May 15, 2012].
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10.13
|
Amendment No. 1 to Convertible Promissory Note in
$3,000,000 principal amount issued to Shane McMahon [incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
(File No. 001-35561) filed on May 21, 2012].
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10.14
|
Amendment No. 2 to Convertible Promissory Note in
$3,000,000 principal amount issued to Shane McMahon [incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
(File No. 001-35561) filed on October 23, 2012].
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|
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10.15
|
Amendment No. 3 to Convertible Promissory Note in
$3,000,000 principal amount issued to Shane McMahon [incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
(File No. 001-35561) filed on May 15, 2013].
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10.16
|
Amendment No. 4 to Convertible Promissory Note in
$3,000,000 principal amount issued to Shane McMahon [incorporated by
reference to Exhibit 10.6 to the Company's Current Report on Form 8-K
(File No. 001-35561) filed on February 6, 2014].
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10.17
|
Amendment No. 5 to Convertible Promissory Note in
$3,000,000 principal amount issued to Shane McMahon [incorporated by
reference to the Company's Current Report on Form 8-K (File No. 001-35561)
filed on January 2, 2015].
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|
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10.18
|
Waiver, dated November 4, 2013, between Shane McMahon and
the Company [incorporated by reference to Exhibit 10.4 to the Company's
Current Report on Form 8-K (File No. 001-35561) filed on November 8,
2013].
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10.19
|
Form of Series E Preferred Stock Purchase Agreement,
dated as of January 31, 2014, between the Company and certain investors
[incorporated by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K (File No. 001-35561) filed on February 6, 2014].
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10.20#
|
Retention and Separation Agreement, dated as of March 30,
2015, by and between the Company and Marc Urbach [incorporated by
reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K
(File No. 001-35561) filed on March 30, 2015]
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10.21#
|
Consulting Agreement dated as of March 31, 2015, by and
between the Company and Marc Urbach [incorporated by reference to Exhibit
10.27 to the Company's Annual Report on Form 10-K (File No. 001-35561)
filed on March 30, 2015].
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10.22
|
Mobile Phone Video-On-Demand (VOD) Business Cooperation
Agreement dated March 26, 2015 by and between Zhonghai Video Media
(Beijing) Co., Ltd. and C Media Limited [incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q/A (File No.
001-35561) filed on July 7, 2015].
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10.23
|
Supplement Agreement to Mobile Phone Video-On-Demand
(VOD) Business Cooperation Agreement dated April 28, 2015 [incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
(File No. 001-35561) filed on May 14, 2015].
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10.24
|
Voting Agreement, dated as of November 23, 2015, by and
between the Company and certain stockholders [incorporated by reference to
Exhibit 10.4 to the Company's Current Report on Form 8-K (File No.
001-35561) filed on November 24, 2015].
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|
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10.25*
|
Amended and Restated Securities Purchase Agreement, dated as of December 21, 2015, between the Company and Beijing Sun Seven Stars Culture Development Limited.
|
10.26*
|
Content License Agreement, dated as of December 21, 2015, by and between the Company andBeijing Sun Seven Stars Culture Development Limited,
|
|
|
10.27*
|
Amended and Restated Share Purchase Agreement, dated as of December 21, 2015, by and between the Company and Tianjin Enternet Network Technology Limited.
|
|
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10.28*
|
Convertible Promissory Note issued to Beijing Sun Seven Stars Culture Development Limited, dated December 21, 2015.
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10.29*#
|
Separation Agreement, dated as of January 22, 2016 by and between the Company and Weicheng Liu.
|
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10.30*#
|
Employment Agreement, dated as of January 22, 2016 by and between the Company and Mingcheng Tao.
|
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10.31#
|
Employment Agreement, dated as
of March 28, 2016 by and between the Company and Mei Chen [incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
(File No. 001-35561) filed on March 30, 2016]
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10.32#
|
Employment Agreement, dated as
of March 28, 2016 by and between the Company and Bing Yang [incorporated
by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K
(File No. 001-35561) filed on March 30, 2016]
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10.33*
|
Termination Agreement among Sinotop Beijing, YOD WFOE and Zhang Yan, dated January 22, 2016
|
|
|
10.34*
|
Call Option Agreement among YOD
WFOE, Sinotop Beijing, Bing Wu and Yun Zhu, dated as of January 25, 2016
|
|
|
10.35*
|
Equity Pledge Agreement among
YOD WFOE, Sinotop Beijing, Bing Wu and Yun Zhu, dated as of January 25,
2016.
|
|
|
10.36*
|
Power of Attorney agreements
among YOD WFOE, Sinotop Beijing, Bing Wu and Yun Zhu, dated as of January
25, 2016
|
|
|
10.37*
|
Technical Services Agreement
among YOD WFOE and Sinotop Beijing, dated as of January 25, 2016
|
|
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10.38*
|
Spousal Consents, dated January
25, 2016.
|
|
|
10.39*
|
Letter of Indemnification among
YOD WFOE, Bing Wu and Yun Zhu, dated as of January 25, 2016.
|
|
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21
|
List of subsidiaries of the
registrant [incorporated by reference to Exhibit 21 to the Company's
Amendment No. 1 to Annual Report on Form 10-K (File No. 001-35561) filed
on February 26, 2014.
|
|
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23.1*
|
Consent of KPMG Huazhen
LLP.
|
|
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31.1*
|
Certifications of Principal
Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
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31.2*
|
Certifications of Principal
Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
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32.1**
|
Certification of Principal
Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
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32.2**
|
Certification of Principal
Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
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* Filed herewith.
|
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|
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** Furnished herewith
|
#Indicates management contract or
compensatory plan, contract, or agreement.
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