Item 1.01 Entry Into A Material Definitive
Agreement.
Frequency Networks, Inc. Joint Venture and Series A
Preferred Stock Purchase
Joint Venture Agreement
On April 13, 2016, YOU On Demand, Inc. (the Company) and
Frequency Networks, Inc. (Frequency) entered into a Joint Venture Agreement
(the JV Agreement), pursuant to which the Company and Frequency have agreed to
form a new jointly owned company (the JVC) to, among other things, launch
Frequency in certain parts of Asia, undertake certain third party integrations
and create over-the-top packages and digital networks that will aggregate both
parties licensed content into branded, genre-specific channels.
Frequency is a cloud-based internet video service that
aggregates and distributes video from thousands of the worlds top providers,
including the leading TV and Multi-Channel Networks, and individual creators.
TV, mobile and over-the-top operators use Frequency to deliver a complete
internet video service to their subscribers. Frequency was founded by Blair
Harrison in Los Angeles in 2010. Mr. Harrison previously founded FastTV, an
early internet video search site, and was the CEO of online video entertainment
site IFILM, sold to Viacom in 2005.
The JVC will have exclusive distribution rights for such
channels and content in the JV territory (which includes Singapore, Brunei,
Malaysia, Thailand, Indonesia, Philippines, Vietnam, Laos, Cambodia, Myanmar and
China, including Hong Kong, Macao and Taiwan) and Frequency will have exclusive
distribution rights for these channels outside the JV territory and will have
certain obligations to provide such content to third parties and other vendors
outside the JV territory.
The JVCs share capital will be 49% owned by Frequency and 51%
owned by the Company. Frequencys initial contribution to the JVC shall be
exclusive use of its platform and licensed content in the JV territory and the
Company shall contribute certain licensed content, sales and marketing, and
operating capital (to be determined by the Company).
The Company will be entitled to appoint 3 directors to the
JVCs board of directors and Frequency will be entitled to appoint 2 directors.
The chairman shall be one of the directors appointed by the Company. Under the
terms of the JV Agreement, certain corporate actions (Reserved Matters)
require a board resolution voted for by at least one of the Frequency appointed
directors and one of the Companys appointed directors to be valid. Reserved
Matters include, among other things, issuance of JVC shares, material changes to
the articles of associations or bylaws, sale of the whole or a substantial part
of the JVC, approval of annual budget and operating plan,any expansion of the
operating and marketing territory of the JVC beyond the JV territory, material
reorganization affecting the JVC, and any fundamental change to the nature of
the business of the JVC.
Further, the Company and Frequency have agreed to create a
three year business plan, which shall define the business objectives of the
parties with respect to the JVC, and which shall be reviewed at least every
twelve months. They have also agreed to act in good faith towards the other in
order to promote the JVCs success and to consult on matters materially
affecting the development of the JVCs business and the execution of the
business plan. Each party shall use commercially reasonable efforts to ensure
that the formation of the JVC is accomplished as soon as possible, but if the
formation of the JVC has not occurred by May 31, 2016, the JV Agreement shall,
unless otherwise agreed, automatically terminate and neither party shall have
any claim of any nature whatsoever against the other party, provided, however,
that in any event the Company shall have the exclusive right to enter into a
joint venture with Frequency with respect to the JV territory for a period of 2
years.
In connection with the JV Agreement, Frequency also issued a
6-year warrant to the Company exercisable at any time into up to 3,000,000
shares of Frequency Preferred Stock for an exercise price of $0.42467 per share,
subject to certain adjustments.
Series A Preferred Stock Purchase Agreement
On April 13, 2016, the Company and Frequency also entered into
a Series A Preferred Stock Purchase Agreement (the SPA) for the purchase of
5,710,847 shares of Series A Preferred Stock, par value $0.001 per share, of
Frequency (the Frequency Preferred Stock) for a total purchase price of $2
million. The shares of Frequency Preferred Stock are convertible into shares of
Frequency common stock, par value $0.001 (Frequency Common Stock) at any time
after the issuance upon the option of the holder on a one for one basis, subject
to certain adjustment.
Each share of Frequency Preferred Stock is entitled to
non-cumulative annual dividends at the rate of $0.02548 per annum, at the
discretion of Frequencys board of directors, and is convertible into one share
of the Frequency Common Stock at any time by the Company, subject to adjustment
for stock dividends, stock splits, and similar events. Each share of Frequency
Preferred Stock is entitled to one vote as if converted into Frequency Common
Stock. The holders of the outstanding Frequency Preferred Stock, as a class,
will have the right to elect one member of the board of directors of Frequency.
Each share of Frequency Preferred Stock will have a liquidation preference of
$0.42467 per share plus any declared but unpaid dividends.
In connection with entering into the SPA, the Company also
became party to Frequencys Series A Preferred Stock Voting Agreement,
Investors Rights Agreement and Right of First Refusal and Co-Sale Agreement
(the Ancillary Agreements). The Ancillary Agreements, among other things,
provide customary registration rights for the Frequency Common Stock issuable
upon conversion of the Series A Preferred Stock, establishes voting agreements
for director elections, and provides certain secondary rights of refusal and
rights to participate in sales by other major Frequency Preferred Stock holders.
Nanjing Tops Game Co., Ltd
.
Investment
On April 13, 2016, the Company through its PRC subsidiary
Tianjin Sevenstarflix Network Technology Limited (SSF), entered into an Game
Right Assignment Agreement with Beijing Sun Seven Stars Cultural Development
Limited (SSS), a PRC company and affiliate of the Company, for the acquisition
of certain game IP rights (the Game IP Rights), for total fair value of
approximately $2.7 million (RMB18 million). SSF then transferred the Game IP
Rights to Nanjing Tops Game Co., Ltd. (Topgame) as a strategic investment in
Topgame, a fast-growing PRC company specialized in the independent development
and operation of online, stand-alone and other games as well as the distribution
of domestic and overseas games, in exchange for 13% equity ownership in Topgame
through a Capital Increase Agreement entered into on April 15, 2016 between SSF,
Topgame and Topgames shareholders (the Capital Increase Agreement).
The Game IP Rights were acquired from SSS at fair value. Due to
the related party nature of the transaction, the Company engaged an independent
valuation firm to determine the fair value of the Game IP Rights. The
transaction was approved by the Companys Board of Directors (the Board),
without directors Bruno Wu and Polly Wang, who did not vote because of their
affiliate relationship with SSS.
Game Right Assignment Agreement
Under the terms of the Game Rights Assignment Agreement, SSS
assigned the Game IP Rights, which consist of all of its rights in certain
prospective animated movies (the SSS Movies) for the purpose of developing,
producing and distributing Chinese-language games and video games of all formats
and types including, but not limited to, card-based video games, mobile and
internet games, role playing games, action role playing games, and massively
multiplayer online role playing games based on the SSS Movies, to SSF. SSF paid
SSS cash consideration of $2.7 million (RMB18 million) for the Game IP Rights.
If any of the SSS Movies are not fully and finally developed and distributed to
the public or if the name or description of the SSS Movies are changed or
altered, SSS shall compensate the SSF for any direct losses incurred. The Game
Rights Assignment Agreement also includes standard warranty, indemnification,
and confidentiality terms.
Capital Increase Agreement
The Capital Increase Agreement transfers the Game IP Rights
from SSF to Topgame, as an increase of Topgames registered capital, in exchange
for 13% of Topgames equity. Topgames shareholders have approved of the capital
increase and SSF as a new shareholder. Under the terms of the Capital Increase
Agreement, SSF shall, within one month following the completion of the
production of the SSS Movies, deliver to Topgame, among other things, the video
files of the SSS Movies as well as related roles, figures, images, music, text,
plots. Topgame has the right to make use of all the elements related to the SSS
Movies for game adaption, unless otherwise agreed by SSF and Topgame. SSFs delay of delivery, if any, is subject to the
negotiations between the parties. SSF also undertakes and warrants to complete
production, distribution and marketing of the SSS Movies and shall compensate
Topgame for any and all economic losses incurred by Topgame as a result of any
breach by SSF of such warranties.
The Capital Increase Agreement can be terminated with the
mutual consent of the parties if it becomes inconsistent with the new laws and
regulations that are enacted during the period between the execution of the
Capital Increase Agreement and the completion of shareholder registration
change, and the parties if the parties have failed to reach consensus on
amending or modifying the Capital Increase Agreement pursuant to such new laws
and regulations.
The foregoing description of the JV Agreement, SPA, Game Rights
Assignment Agreement and Capital Increase Agreement is not purported to be
complete and is qualified in its entirety by reference to the complete text of
such agreements which we will file as exhibits to our next Quarterly Report on
Form 10-Q.