YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entity
UNAUDITED CONSOLIDATED BALANCE SHEETS
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
$
|
12,035,320
|
|
$
|
3,768,897
|
|
Restricted cash
|
|
-
|
|
|
2,994,364
|
|
Accounts
receivable, net
|
|
2,843,010
|
|
|
1,689,415
|
|
Licensed content, current
|
|
298,711
|
|
|
556,591
|
|
Prepaid
expenses
|
|
278,809
|
|
|
362,421
|
|
Deferred issuance cost
|
|
-
|
|
|
551,218
|
|
Other
current assets
|
|
163,534
|
|
|
157,594
|
|
Total current assets
|
|
15,619,384
|
|
|
10,080,500
|
|
Property
and equipment, net
|
|
120,625
|
|
|
154,434
|
|
Licensed content,
non-current
|
|
17,732,899
|
|
|
21,085
|
|
Intangible assets, net
|
|
2,350,399
|
|
|
2,412,591
|
|
Goodwill
|
|
6,648,911
|
|
|
6,648,911
|
|
Equity
method investments
|
|
441,916
|
|
|
450,115
|
|
Other non-current assets
|
|
58,318
|
|
|
58,089
|
|
Total assets
|
$
|
42,972,452
|
|
$
|
19,825,725
|
|
|
|
|
|
|
|
|
LIABILITIES,
CONVERTIBLE REDEEMABLE PREFERRED STOCK AND EQUITY
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable (including
accounts payable of consolidated variable interest entity (VIE)
without recourse
to the Company of $44,306 and $44,867 as of March 31, 2016 and December
31, 2015, respectively)
|
$
|
46,025
|
|
$
|
45,788
|
|
Deferred
revenue (including deferred revenue of VIE without recourse to the Company
of nil and
$15,080 as
of March 31, 2016 and December 31, 2015, respectively)
|
|
-
|
|
|
15,080
|
|
Accrued expenses (including
accrued expenses of VIE without recourse to the Company of $599,891
and $280,038
as of March 31, 2016 and December 31, 2015, respectively)
|
|
1,619,330
|
|
|
1,196,066
|
|
Accrued
salaries (including accrued salaries of VIE without recourse to the
Company of nil and $10,861
as of
March 31, 2016 and December 31, 2015, respectively)
|
|
1,335,554
|
|
|
1,058,124
|
|
Other current liabilities
(including other current liabilities of VIE without recourse to the
Company
of $343,890
and $298,422 as of March 31, 2016 and December 31, 2015, respectively)
|
|
356,208
|
|
|
312,170
|
|
Accrued license
content fees (including accrued license content fees of VIE without
recourse to
the Company
of $1,336,040 and $933,532 as of March 31, 2016 and December 31, 2015,
respectively)
|
|
1,336,040
|
|
|
933,532
|
|
Convertible promissory notes
|
|
20,593,967
|
|
|
3,000,000
|
|
Warrant liabilities
|
|
358,194
|
|
|
395,217
|
|
Deposit payable
|
|
-
|
|
|
2,994,364
|
|
Total current liabilities
|
|
25,645,318
|
|
|
9,950,341
|
|
Deferred income taxes
|
|
321,512
|
|
|
330,124
|
|
Total liabilities
|
|
25,966,830
|
|
|
10,280,465
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible redeemable preferred stock:
|
|
|
|
|
|
|
Series A - 7,000,000 shares
issued and outstanding, liquidation or deemed liquidation preference
of $3,500,000
as of March 31, 2016 and December 31, 2015, respectively
|
|
1,261,995
|
|
|
1,261,995
|
|
Equity:
|
|
|
|
|
|
|
Series E Preferred Stock -
$0.001 par value; 16,500,000 shares authorized, 7,254,997 shares issued
and outstanding,
liquidation preference of $12,696,245 as of March 31, 2016 and December
31, 2015, respectively
|
|
7,255
|
|
|
7,255
|
|
Common stock,
$0.001 par value; 1,500,000,000 shares authorized, 28,861,344 and
24,249,109 shares
issued and
outstanding as of March 31, 2016 and December 31, 2015, respectively
|
|
28,861
|
|
|
24,249
|
|
Additional paid-in capital
|
|
107,229,200
|
|
|
97,512,542
|
|
Accumulated deficit
|
|
(88,594,311
|
)
|
|
(86,457,840
|
)
|
Accumulated other comprehensive loss
|
|
(396,391
|
)
|
|
(414,910
|
)
|
Total YOU On Demand shareholders
equity
|
|
18,274,614
|
|
|
10,671,296
|
|
Non-controlling interest
|
|
(2,530,987
|
)
|
|
(2,388,031
|
)
|
Total equity
|
|
15,743,627
|
|
|
8,283,265
|
|
Total liabilities,
convertible redeemable preferred stock and equity
|
$
|
42,972,452
|
|
$
|
19,825,725
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
5
YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entity
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
1,269,726
|
|
$
|
1,027,928
|
|
Cost of revenue
|
|
915,780
|
|
|
1,042,999
|
|
Gross profit (loss)
|
|
353,946
|
|
|
(15,071
|
)
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Selling, general
and administrative expense
|
|
2,165,053
|
|
|
2,448,302
|
|
Professional fees
|
|
367,446
|
|
|
288,718
|
|
Depreciation and
amortization
|
|
97,463
|
|
|
89,743
|
|
Total operating
expense
|
|
2,629,962
|
|
|
2,826,763
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(2,276,016
|
)
|
|
(2,841,834
|
)
|
|
|
|
|
|
|
|
Interest and other
income (expense)
|
|
|
|
|
|
|
Interest expense,
net
|
|
(33,473
|
)
|
|
(28,323
|
)
|
Change in fair value of warrant liabilities
|
|
37,023
|
|
|
(15,295
|
)
|
Equity share of
losses on equity method investments
|
|
(10,348
|
)
|
|
(32,403
|
)
|
Other
|
|
162
|
|
|
(9,767
|
)
|
|
|
|
|
|
|
|
Loss before income taxes
and non-controlling interest
|
|
(2,282,652
|
)
|
|
(2,927,622
|
)
|
|
|
|
|
|
|
|
Income tax benefit
|
|
8,612
|
|
|
8,612
|
|
|
|
|
|
|
|
|
Net loss
|
|
(2,274,040
|
)
|
|
(2,919,010
|
)
|
|
|
|
|
|
|
|
Net loss attributable to
non-controlling interest
|
|
137,569
|
|
|
120,221
|
|
|
|
|
|
|
|
|
Net loss attributable to
YOU On Demand common shareholders
|
$
|
(2,136,471
|
)
|
$
|
(2,798,789
|
)
|
|
|
|
|
|
|
|
Basic and diluted loss per
share
|
$
|
(0.09
|
)
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
Basic and
diluted
|
|
24,484,562
|
|
|
23,815,720
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
6
YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entity
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
LOSS
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net loss
|
$
|
(2,274,040
|
)
|
$
|
(2,919,010
|
)
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
13,132
|
|
|
961
|
|
Comprehensive loss
|
|
(2,260,908
|
)
|
|
(2,918,049
|
)
|
Comprehensive loss attributable to non-controlling interest
|
|
142,956
|
|
|
121,445
|
|
Comprehensive loss attributable to YOU On
Demand shareholders
|
$
|
(2,117,952
|
)
|
$
|
(2,796,604
|
)
|
The accompanying notes are an integral part of these
consolidated financial statements.
7
YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entity
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
Net loss
|
$
|
(2,274,040
|
)
|
$
|
(2,919,010
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities
|
|
|
|
|
|
|
Share-based compensation expense
|
|
138,770
|
|
|
403,676
|
|
Provision for doubtful accounts
|
|
-
|
|
|
9,087
|
|
Depreciation and amortization
|
|
97,463
|
|
|
89,743
|
|
Income tax benefit
|
|
(8,612
|
)
|
|
(8,612
|
)
|
Equity share of loss on equity method
investments
|
|
10,348
|
|
|
32,403
|
|
Loss on disposal of assets
|
|
-
|
|
|
941
|
|
Change in fair value of warrant liabilities
|
|
(37,023
|
)
|
|
15,295
|
|
Foreign currency exchange losses
|
|
10,590
|
|
|
-
|
|
|
|
|
|
|
|
|
Change in assets and
liabilities:
|
|
|
|
|
|
|
Accounts receivable
|
|
(1,153,595
|
)
|
|
(693,574
|
)
|
Licensed content
|
|
263,913
|
|
|
(133,819
|
)
|
Prepaid expenses and other assets
|
|
140,391
|
|
|
(364,559
|
)
|
Accounts payable
|
|
237
|
|
|
(80,485
|
)
|
Accrued expenses, salary and other current liabilities
|
|
691,914
|
|
|
876,426
|
|
Deferred revenue
|
|
(15,080
|
)
|
|
116,442
|
|
Accrued license content fees
|
|
402,508
|
|
|
259,564
|
|
Net cash used in operating
activities
|
|
(1,732,216
|
)
|
|
(2,396,482
|
)
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
Acquisition of property
and equipment
|
|
-
|
|
|
(20,693
|
)
|
Net cash used in investing
activities
|
|
-
|
|
|
(20,693
|
)
|
|
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
|
|
Proceeds from issuance of
shares and warrant (Note 9)
|
|
10,000,000
|
|
|
-
|
|
Net cash provided by
financing activities
|
|
10,000,000
|
|
|
-
|
|
Effect of exchange rate
changes on cash
|
|
(1,361
|
)
|
|
296
|
|
Net increase (decrease) in
cash
|
|
8,266,423
|
|
|
(2,416,879
|
)
|
|
|
|
|
|
|
|
Cash at beginning of
period
|
|
3,768,897
|
|
|
10,812,371
|
|
|
|
|
|
|
|
|
Cash at end of period
|
$
|
12,035,320
|
|
$
|
8,395,492
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow
Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
$
|
-
|
|
$
|
-
|
|
Cash paid for interest
|
$
|
-
|
|
$
|
-
|
|
Exchange of Series E
Preferred Stock for common stock
|
$
|
-
|
|
$
|
39
|
|
Issuance of convertible note for licensed
content (Note 9)
|
$
|
17,717,847
|
|
$
|
-
|
|
Issuance of shares for the
settlement of liability
|
$
|
75,000
|
|
$
|
-
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
8
YOU On
Demand
Holdings,
Inc. and
Its
Subsidiaries
CONSOLIDATED
STATEMENTS
OF
EQUITY
For the Three
Months
Ended
March 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, January 1,
2015
|
|
7,365,283
|
|
$
|
7,365
|
|
|
23,793,702
|
|
$
|
23,794
|
|
$
|
96,347,272
|
|
$
|
(78,356,567
|
)
|
$
|
(66,032
|
)
|
$
|
17,955,832
|
|
$
|
(1,982,119
|
)
|
$
|
15,973,713
|
|
Share-based compensation
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
214,404
|
|
|
-
|
|
|
-
|
|
|
214,404
|
|
|
-
|
|
|
214,404
|
|
Common stock issued for
services
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
39,272
|
|
|
-
|
|
|
-
|
|
|
39,272
|
|
|
-
|
|
|
39,272
|
|
Conversion of Series E Preferred
Stock into common stock
|
|
(38,857
|
)
|
|
(39
|
)
|
|
38,857
|
|
|
39
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net loss attributable to YOU
On Demand shareholders
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,798,789
|
)
|
|
-
|
|
|
(2,798,789
|
)
|
|
(120,221
|
)
|
|
(2,919,010
|
)
|
Foreign currency
translation adjustments
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,185
|
|
|
2,185
|
|
|
(1,224
|
)
|
|
961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2015
|
|
7,326,426
|
|
$
|
7,326
|
|
|
23,832,559
|
|
$
|
23,833
|
|
$
|
96,600,948
|
|
$
|
(81,155,356
|
)
|
$
|
(63,847
|
)
|
$
|
15,412,904
|
|
$
|
(2,103,564
|
)
|
$
|
13,309,340
|
|
The
accompanying
notes are an
integral
part of these
consolidated
financial
statements.
9
YOU On
Demand
Holdings,
Inc., Its
Subsidiaries
and
Variable
Interest
Entity
UNAUDITED
CONSOLIDATED
STATEMENTS
OF
EQUITY
For the Three
Months
Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
2016
|
|
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
|
|
Share-based compensation
|
|
-
|
|
|
-
|
|
|
25,000
|
|
|
25
|
|
|
88,745
|
|
|
-
|
|
|
-
|
|
|
88,770
|
|
|
-
|
|
|
88,770
|
|
Common stock issuance
|
|
-
|
|
|
-
|
|
|
4,545,455
|
|
|
4,545
|
|
|
9,273,029
|
|
|
-
|
|
|
-
|
|
|
9,277,574
|
|
|
-
|
|
|
9,277,574
|
|
Warrants issued in connection
with common stock
issuance
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
722,426
|
|
|
-
|
|
|
-
|
|
|
722,426
|
|
|
-
|
|
|
722,426
|
|
Issuance cost in connection
with the issuance of
common stock and warrants
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(442,500
|
)
|
|
-
|
|
|
-
|
|
|
(442,500
|
)
|
|
-
|
|
|
(442,500
|
)
|
Common stock issued for
settlement of liability
|
|
-
|
|
|
-
|
|
|
41,780
|
|
|
42
|
|
|
74,958
|
|
|
-
|
|
|
-
|
|
|
75,000
|
|
|
-
|
|
|
75,000
|
|
Net loss attributable to YOU
On Demand shareholders
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,136,471
|
)
|
|
-
|
|
|
(2,136,471
|
)
|
|
(137,569
|
)
|
|
(2,274,040
|
)
|
Foreign currency
translation adjustments,
net of nil tax
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
18,519
|
|
|
18,519
|
|
|
(5,387
|
)
|
|
13,132
|
|
Balance, March 31,
2016
|
|
7,254,997
|
|
$
|
7,255
|
|
|
28,861,344
|
|
|
28,861
|
|
|
107,229,200
|
|
|
(88,594,311
|
)
|
|
(396,391
|
)
|
|
18,274,614
|
|
|
(2,530,987
|
)
|
|
15,743,627
|
|
The
accompanying
notes are an
integral
part of these
consolidated
financial
statements.
10
1.
|
Organization and Principal Activities
|
|
|
|
YOU On Demand Holdings, Inc., is a Nevada corporation
that primarily operates in China (PRC) through its subsidiaries and
consolidated variable interest entities (VIEs) and the consolidated
subsidiary of its VIEs. The Company, its subsidiaries and consolidated
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.
|
|
|
|
In the opinion of management, these financial statements
reflect all adjustments, which are of a normal and recurring nature that
is necessary for a fair statement of the results for the periods presented
in accordance with U.S. Generally Accepted Accounting Principles (U.S.
GAAP) and with the instructions to Form 10-Q in Article 10 of SEC
Regulation S-X. The results of operations for the interim periods
presented are not necessarily indicative of results for the full
year.
|
|
|
|
Certain information and footnote disclosures normally
included in the annual consolidated financial statements prepared in
accordance with U.S. GAAP have been condensed or omitted. These unaudited
consolidated financial statements should be read in conjunction with the
Companys audited consolidated financial statements and notes thereto
included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2015 filed with the Securities and Exchange Commission on
March 30, 2016 (our 2015 Annual Report).
|
|
|
|
In 2016, the Company adopted the Accounting Standards
Update ("ASU") No. 2015-03,
Simplifying the Presentation of Debt
Issuance Costs
, which requires the debt issuance costs be presented on
the balance sheet as a direct deduction from the carrying amount of the
related debt liability, instead of reported on the balance sheet as an
asset. The costs will continue to be amortized as interest expense using
the effective interest method. The adoption of ASU 2015-03 did not have
any impact on prior period financial statements as no debt
issuance cost were incurred for the debt that was outstanding as of December 31, 2015.
|
|
|
2.
|
Going Concern and Managements Plans
|
|
|
|
For the three months ended March 31, 2016 and 2015, we
incurred net losses from continuing operations of approximately $2.3
million and $2.9 million, respectively, and cash used in operations was
approximately $1.7 million and $2.4 million, respectively. Further, we had
an accumulated deficit of approximately $88.6 million and $81.2 million as
of March 31, 2016 and 2015, respectively, due to recurring losses since
our inception. Due to the issuance of a convertible promissory note during
the three months ended March 31, 2016, we had negative working capital of
approximately $10.0 million as of March 31, 2016.
|
|
|
|
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 $19.0 million
and on March 28, 2016, we completed a common stock financing in which we
raised an additional $10.0
million. In addition, the convertible promissory note issued to Beijing
Sun Seven Stars Culture Development Limited (SSS) is automatically
convertible into our common stock upon receiving the necessary shareholder
approvals so we do not anticipate to settle this note of approximately
$17.7 million by use of cash. We also have the ability to raise funds
through various
methods by either issuing debt or equity instruments. 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.
|
|
|
3.
|
VIE Structure and Arrangements
|
|
|
|
To comply with PRC laws and regulation that prohibit or
restrict foreign ownership of companies that provides value-added
telecommunication services, the Company provides its services through
Sinotop Beijing and its subsidiary, 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 shareholders of Sinotop Beijing.
|
|
|
|
Prior to January 2016, the legal shareholder of Sinotop
Beijing was Zhang Yan (the spouse of our then-CEO) and we entered into a
series of contractual agreements to give us the ability to control Sinotop
Beijing with Zhang Yan. In January 2016, in connection with the
appointment of our new CEO and in accordance with our rights under the
contractual agreements, (1) the legal ownership of Sinotop Beijing was
transferred from Zhang Yan to Bing Wu, the brother of our current Chairman
and Yun Zhu, our Vice President and former Vice President of SSS, (2) the
Company terminated the series of contractual arrangement with Zhang Yan,
and (3) the Company entered into new contractual agreements with
Bing Wu and Yun Zhu (collectively, the New Sinotop VIE Agreements). Although the New Sinotop VIE Agreements resulted in changes to the legal shareholders of Sinotop
Beijing, there was no change in the Companys ability to control Sinotop Beijing
or the Companys rights to 100% of the economic benefits 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 remained the primary beneficiary
of Sinotop Beijing after the signing of the New Sinotop VIE Agreements.
Accordingly, the Company did not consider the change in legal ownership of
Sinotop Beijing to have any impact to the Companys consolidation of Sinotop
Beijing. The key terms of the New Sinotop VIE Agreements are summarized as
follows:
|
11
Equity Pledge Agreement
Pursuant to the Equity Pledge Agreement
among YOD WFOE, Sinotop Beijing, Bing Wu and Yun Zhu (collectively, the Nominee
Shareholders), 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, 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.
Power of Attorney
Pursuant to the Power of Attorney
agreements among YOD WFOE, Sinotop Beijing and each of the respective Nominee
Shareholders, 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 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,
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.
12
Letter of Indemnification
Pursuant to the Letter of
Indemnification among YOD WFOE and Bing Wu and YOD WFOE and Yun Zhu, 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 to the New Sinotop VIE
Agreements, the Management Service Agreement between Sinotop Beijing and YOD
Hong Kong 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, 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 Beijing, 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 at 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.
Pursuant to the above contractual
agreements, YOD WFOE 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 March 31, 2016. 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.
13
Financial Information
The following financial information of
our VIEs, as applicable for the periods presented, affected the Company's
consolidated financial statements.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
$
|
419,065
|
|
$
|
1,001,094
|
|
Accounts
receivable, net
|
|
2,843,010
|
|
|
1,689,415
|
|
Licensed content, current
|
|
298,711
|
|
|
556,591
|
|
Prepaid expenses
|
|
78,600
|
|
|
98,893
|
|
Other current assets
|
|
137,502
|
|
|
133,582
|
|
Intercompany
receivables due from the Company's subsidiaries
(i)
|
|
161,825
|
|
|
161,017
|
|
Total current assets
|
|
3,938,713
|
|
|
3,640,592
|
|
Property and equipment,
net
|
|
117,432
|
|
|
149,880
|
|
Licensed
content, non-current
|
|
15,052
|
|
|
21,085
|
|
Intangible assets, net
|
|
230,203
|
|
|
253,771
|
|
Long-term
equity investments
|
|
441,916
|
|
|
450,115
|
|
Other non-current assets
|
|
58,317
|
|
|
58,026
|
|
Total assets
|
$
|
4,801,633
|
|
$
|
4,573,469
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
$
|
44,306
|
|
$
|
44,867
|
|
Deferred revenue
|
|
-
|
|
|
15,080
|
|
Accrued expenses
|
|
599,891
|
|
|
280,038
|
|
Other current
liabilities
|
|
343,890
|
|
|
298,422
|
|
Accrued salaries
|
|
-
|
|
|
10,861
|
|
Accrued license
content fees
|
|
1,336,040
|
|
|
933,532
|
|
Intercompany payables due to the Company's subsidiaries
(i)
|
|
12,534,809
|
|
|
12,512,954
|
|
Total current liabilities
|
|
14,858,936
|
|
|
14,095,754
|
|
Total liabilities
|
$
|
14,858,936
|
|
$
|
14,095,754
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
$
|
1,269,726
|
|
$
|
1,027,928
|
|
Net loss
|
$
|
(479,887
|
)
|
$
|
(633,487
|
)
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net cash used in operating
activities
|
$
|
(603,884
|
)
|
$
|
(233,114
|
)
|
Net cash used in investing activities
|
$
|
-
|
|
$
|
(20,693
|
)
|
Net cash provided by
intercompany financing activities
(i)
|
$
|
21,855
|
|
$
|
-
|
|
|
(i)
|
Intercompany receivables, payables and financing
activities are eliminated upon
consolidation
|
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 also have
assembled work force for sales, marketing and operations.
14
4.
|
Property and Equipment
|
|
|
|
The following is a breakdown of our property and
equipment:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Furniture and office
equipment
|
$
|
910,420
|
|
$
|
910,420
|
|
Leasehold improvements
|
|
190,722
|
|
|
190,722
|
|
Total property and
equipment
|
|
1,101,142
|
|
|
1,101,142
|
|
Less: accumulated depreciation
|
|
(980,517
|
)
|
|
(946,708
|
)
|
Property and Equipment,
net
|
$
|
120,625
|
|
$
|
154,434
|
|
We recorded depreciation expense of
approximately $34,000 and $51,000, which is included in our selling, general and
administrative expense for the three months ended March 31, 2016 and 2015,
respectively.
5.
|
Intangible Assets
|
|
|
|
The Company intangible assets primarily arose from the
acquisition of YOD Hong Kong.
|
|
|
|
As of March 31, 2016 and December 31, 2015, the Companys
amortizing and indefinite lived intangible assets consisted of the
following:
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Amortizing Intangible
assets
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Balance
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Balance
|
|
Charter/ Cooperation
agreements
|
$
|
2,755,821
|
|
|
(780,821
|
)
|
|
1,975,000
|
|
$
|
2,755,821
|
|
$
|
(746,372
|
)
|
$
|
2,009,449
|
|
Software and licenses
|
|
253,930
|
|
|
(238,495
|
)
|
|
15,435
|
|
|
253,930
|
|
|
(234,947
|
)
|
|
18,983
|
|
Website and mobile app
development
|
|
653,830
|
|
|
(428,156
|
)
|
|
225,674
|
|
|
653,830
|
|
|
(403,961
|
)
|
|
249,869
|
|
Total amortizing
intangible
assets
|
$
|
3,663,581
|
|
|
(1,447,472
|
)
|
|
2,216,109
|
|
$
|
3,663,581
|
|
$
|
(1,385,280
|
)
|
$
|
2,278,301
|
|
Indefinite lived
intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Website name
|
|
134,290
|
|
|
-
|
|
|
134,290
|
|
|
134,290
|
|
|
-
|
|
|
134,290
|
|
Total intangible
assets
|
$
|
3,797,871
|
|
|
(1,447,472
|
)
|
|
2,350,399
|
|
$
|
3,797,871
|
|
$
|
(1,385,280
|
)
|
$
|
2,412,591
|
|
We recorded amortization expense
related to our finite lived intangible assets of approximately $63,000 and
$39,000 for the three months ended March 31, 2016 and 2015, respectively.
The following table outlines the
amortization expense for the next five years and thereafter:
Years ending December 31,
|
|
Amortization to be
Recognized
|
|
2016 (9 months)
|
$
|
187,764
|
|
2017
|
|
238,162
|
|
2018
|
|
193,490
|
|
2019
|
|
138,412
|
|
2020
|
|
137,792
|
|
2021
|
|
137,792
|
|
Thereafter
|
|
1,182,697
|
|
Total amortization to be recognized
|
$
|
2,216,109
|
|
15
7.
|
Fair Value Measurements
|
Accounting standards require the
categorization of financial assets and liabilities, based on the inputs to the
valuation technique, into a three-level fair value hierarchy. The various levels
of the fair value hierarchy are described as follows:
|
|
Level 1 Financial assets and liabilities whose values
are based on unadjusted quoted market prices for identical assets and
liabilities in an active market that we have the ability to access.
|
|
|
|
|
|
Level 2 Financial assets and liabilities whose values
are based on quoted prices in markets that are not active or model inputs
that are observable for substantially the full term of the asset or
liability.
|
|
|
|
|
|
Level 3 Financial assets and liabilities whose values
are based on prices or valuation techniques that require inputs that are
both unobservable and significant to the overall fair value measurement.
|
Accounting standards require the use of
observable market data, when available, in making fair value measurements. When
inputs used to measure fair value fall within different levels of the hierarchy,
the level within which the fair value measurement is categorized is based on the
lowest level input that is significant to the fair value measurement.
We review the valuation techniques used
to determine if the fair value measurements are still appropriate on an annual
basis, and evaluate and adjust the unobservable inputs used in the fair value
measurements based on current market conditions and third party information.
Common stock is valued at closing price
reported on the active market on which the individual securities are traded.
The fair value of the warrant
liabilities at March 31, 2016 were valued using the Black-Scholes Merton method
as an estimate for the Monte Carlos Simulation method which was the method used
at the year ended December 31, 2015. The following assumptions were
incorporated:
|
|
Black Scholes
|
|
|
Monte Carlo
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Risk-free interest rate
|
|
0.66%
|
|
|
0.92%
|
|
Expected volatility
|
|
60%
|
|
|
60%
|
|
Expected term (years)
|
|
1.42
|
|
|
1.67
|
|
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 March 31, 2016 and December 31, 2015, respectively:
|
|
March 31,
2016
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair Value
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note
10)
|
$
|
-
|
|
$
|
-
|
|
$
|
358,194
|
|
$
|
358,194
|
|
|
|
December
31, 2015
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair Value
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note
10)
|
$
|
-
|
|
$
|
-
|
|
$
|
395,217
|
|
$
|
395,217
|
|
16
The table below reflects the components
effecting the change in fair value for the three months ended March 31, 2016:
|
|
Level 3 Assets and
Liabilities
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
January 1,
|
|
|
|
|
|
Fair Value
|
|
|
March 31,
|
|
|
|
2016
|
|
|
Settlements
|
|
|
gain
|
|
|
2016
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note 10)
|
$
|
395,217
|
|
$
|
-
|
|
$
|
(37,023
|
)
|
$
|
358,194
|
|
On March 28, 2016, the Company issued
common stock and warrant for the purchase of the Companys unregistered shares
to SSS (see Note 9). The warrant
is considered an equity classified instrument and the fair value of the warrant
on March 28, 2016 was $672,727, which was valued using the Monte Carlos
Simulation method. The following assumptions were incorporated:
|
|
Monte Carlo
|
|
|
|
March 28, 2016
|
|
Risk-free interest rate
|
|
0.89%
|
|
Expected volatility
|
|
60%
|
|
Expected term (years)
|
|
2
|
|
Expected dividend yield
|
|
0%
|
|
The significant unobservable inputs
used in the fair value measurement of the Companys warrant 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, accounts
receivable, accounts payable, accrued expenses and other payables as of March
31, 2016 and December 31, 2015, 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 Companys thenExecutive
Chairman and Principal Executive Officer and current Vice Chairman, 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 McMahon Note) at a 4% interest
rate computed on the basis of a 365day year. Upon issuance, the conversion
price of the McMahon 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.
Effective on January 31, 2014, the
Company and Mr. McMahon entered into an amendment pursuant to which the
McMahon Note is, at Mr. McMahons option, payable on demand or convertible on demand
into shares of Series E Preferred Stock of the Company (the Series E Preferred
Stock) at a conversion price of $1.75, until December 31, 2015. As a result, in
2014, the Company recognized a beneficial conversion feature discount calculated
as the difference between the fair value of the common stock at the commitment
date for the Series E Preferred Stock investment and the effective conversion
price and recognized a beneficial conversion feature of
approximately $2,126,000 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 another amendment pursuant to which the
maturity date of the McMahon Note was extended to December 31, 2016. The McMahon Note remains
payable on demand or convertible on demand into shares of Series E Preferred
Stock at a conversion price of $1.75 at Mr. McMahons option.
For the three months ended March 31,
2016 and 2015, the Company recorded interest expense of $30,000 and $30,000
related to the Note.
(b) Revenue and Accounts
Receivable
In March 2015, Zhong Hai Video entered
into an agreement with C Media Limited (C Media), a beneficial owner of more
than 5% of our capital stock and controlled by our director, Xuesong Song, to
provide video content services via C Medias proprietary railway Wi-Fi service
platform. For the three months ended March 31, 2016 and 2015, total revenue
recognized amounted to nil and $182,000, respectively. As of March 31, 2016,
total accounts receivable due from C Media amounted to $93,000.
17
(c) Cost of Revenue
Hua Cheng, the minority shareholder of
Zhong Hai Video, charged us licensed content fees of approximately $56,000 and
$39,000 for the three months ended March 31, 2016 and 2015, respectively. As of
March 31, 2016, total accrued license content fees due to Hua Cheng amounted to
$75,000.
9.
|
SSS Agreements
|
|
|
|
|
On November 23, 2015, the Company entered into a series
of agreements for a strategic investment by SSS, a PRC company in the
media and entertainment industry that is controlled by our Chairman, Bruno
Wu. The strategic investment by SSS included a private placement of equity
securities of the Company, a content licensing agreement and the
potential for Tianjin Enternet Network Technology Limited (Tianjin
Enternet), an affiliate of SSS, to earn additional shares of the
Companys common stock contingent on the performance of a to-be formed
subsidiary, Tianjin Sevenstarflix Network Technology Limited (SSF). SSF
intends to provide a branded pay content service, consumer payments and
behavior data analysis service, customer management and data-based service
and mobile social TV-based customer management service.
|
|
|
|
|
On December 21, 2015, the Company entered into an Amended
and Restated Securities Purchase Agreement (the Amended SSS Purchase
Agreement) and a Revised Content License Agreement (the Revised Content
Agreement) with SSS which amended certain terms of the original
agreements dated November 23, 2015. In addition, the Company also entered
into an Amended and Restated Share Purchase Agreement (the Amended
Tianjin Agreement) with Tianjin Enternet.
|
|
|
|
|
(a)
Amended SSS Purchase
Agreement
|
|
|
|
|
On March 28, 2016, pursuant to the Amended SSS Purchase
Agreement, the Company sold, and SSS purchased, 4,545,455 shares of the
Companys common stock for a purchase price of $2.20 per share, or an
aggregate of $10.0 million. In addition, SSS received a two-year warrant
to acquire an additional 1,818,182 unregistered shares of the Companys
common stock at an exercise price of $2.75 per share (the SSS Warrant).
Until receipt of necessary shareholder approvals, the SSS Warrant may not
be exercised to the extent that such exercise would result in SSS and its
affiliates beneficially owning more than 19.99% of the Companys
outstanding common stock.
|
|
|
|
|
Since the SSS Warrant does not embody any future
obligation for the Company to repurchase its own shares, is indexed to the
Companys own stock, may only be settled by the physical delivery of
shares and no conditions exist in which net cash settlement could be
forced upon the Company by SSS or in any other circumstances, the SSS
Warrant is considered an equity classified instrument. The investment
proceeds of $10.0 million, net of issuance cost of approximately $443,000,
was allocated to common stock and SSS Warrant based on their relative fair
value as of March 28, 2016 of approximately $8,227,000 and $673,000,
respectively. Accordingly, the Company recorded approximately $722,000 in
additional paid-in capital for the SSS Warrant.
|
|
|
|
|
(b)
Revised Content
Agreement
|
|
|
|
|
On March 28, 2016, pursuant to the Amended SSS Purchase Agreement, SSS granted the Company non-exclusive royalty-free
distribution rights for certain video content value at approximately $29.1
million in exchange for a convertible promissory note (the SSS Note).
The SSS Note has a stated principal amount of approximately $17,718,000,
matures on May 21, 2016 and bears interest at the rate of 0.56% per
annum. Immediately upon the receipt of the required shareholder approval
to allow SSS to beneficially own more than 19.99% of the Companys
outstanding common stock, the SSS Note is automatically converted into
9,208,860 unregistered shares of the Companys common stock.
|
|
|
|
|
In connection with the issuance of the SSS Note, the
Company recorded debt issuance costs of approximately $131,000 which is to
be amortized over the period of the SSS Notes maturity date, of which
approximately $7,000 was recognized during the three months ended March
31, 2016.
|
|
|
|
|
The Company measured the effective conversion price of
the SSS Note on March 28, 2016 and compared it to the fair value of the
Companys common stock on that date. As the effective conversion price of
the SSS Note of $1.92 exceeded the fair value of the Companys common
stock, no beneficial conversion feature was recognized.
|
|
|
|
|
On May 12, 2016, the Company and SSS entered into an
amendment agreement to extend the maturity date of the SSS Note to July
31, 2016 (see Note 17(e)).
|
18
|
|
|
(c) Amended Tianjin Agreement
|
|
|
|
Pursuant to the Amended Tianjin Agreement dated December
21, 2015, Tianjin Enternet agreed to grant 100% of the equity ownership of
SSF, a newly-formed subsidiary of Tianjin Enternet, to the Company.
Contingent on the performance of SSF, Tianjin will receive unregistered
shares of the Companys common stock over three years, with the exact
number not exceeding 5.0 million shares, provided the earn- out provisions for
each of the 2016, 2017 and 2018 annual periods (the Earn-Out Share
Award) are achieved. The earn-out provision for 2016, 2017 and 2018 are
either 50.0 million homes/users passed or $4.0 million net income, 100.0
million homes/users Passed or $6.0 million net income and 150.0 million
homes/users passed or $8.0 million net income, respectively.
|
|
|
|
If the Company is unable to obtain the required
shareholder approval to allow SSS to beneficially own more than 19.99% of
the Companys outstanding common stock by the time of settlement of the
Earn-Out Share Award, the Company shall be obligated to issue a
convertible promissory note to Tianjin Enternet with the principal amount
equal to 5,000,000 shares multiplied by the Applicable Stock Price as defined in
the Amended Tianjin Agreement. This convertible promissory note shall bear
interest at 0.56% per annum and be automatically converted into the
Companys common stock once the necessary shareholder approval for SSS to
beneficially own more than 19.99% of the Companys outstanding common
stock is received.
|
|
|
|
On April 5, 2016, YOD WFOE entered into VIE agreements
with SSF and its legal shareholders in order to comply with PRC regulatory
requirements on certain industries. SSF is 99% owned by Lan Yang, the
spouse of Bruno Zheng Wu, the Companys Chairman, and 1% owned by Yun Zhu,
a Vice President of YOD. By virtue of these VIE agreements, YOD WFOE
obtained financial controlling interest in SSF, including the power to
direct the activities of SSF, and is therefore the primary beneficiary
of SSF. As the control of SSF was transferred to YOD WFOE through both the
VIE agreements and physical handover of company documents on April 5,
2016, the transaction was determined to be completed on that date.
|
|
|
|
At the time YOD WFOE obtained control over SSF, SSF had
no assets, liabilities, employees or operating activities, nor did it hold
any licenses, trade names or other intellectual properties. The Company
also did not receive any assets, employees, contracts, sales or
distribution systems or intellectual property from Tianjin Enternet in
connection with the transaction. Since the acquisition of SSF did not
include any input or processes, as defined under ASC 805-10-20, the
transaction was not considered a business combination under ASC 805.
Accordingly, the Company accounted for the acquisition of SSF as an asset
acquisition.
|
|
|
10.
|
Warrant Liabilities
|
|
|
|
In connection with our August 30, 2012 private financing,
we issued investors and a broker warrants to acquire 977,063 shares of the
Companys common stock. In accordance with FASB ASC 815-40-15-5,
Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entitys Own Stock
, the
warrants have been accounted as derivative liabilities to be re- measured
at the end of every reporting period with the change in value reported in
the consolidated statement of operations. On August 30, 2012, such
warrants were valued at $1,525,000 utilizing a valuation model and were
initially recorded as a liability. The warrants are revalued at each year
end based on the Monte Carlo valuation.
|
|
|
|
As of March 31, 2016 and December 31, 2015, the warrant
liability was re-valued as disclosed in Note 7, and recorded at its
current fair value of approximately $358,000 and $395,000, respectively,
as determined by the Company, resulting in a gain of approximately $37,000
for the three months ended March 31, 2016. There were no warrants
exercised during three months ended March 31, 2016.
|
|
|
|
|
11.
|
Share-Based Payments
|
|
|
|
As of March 31, 2016, the Company had 1,722,325 options
and 2,191,847 warrants outstanding to purchase shares of our common stock.
|
|
|
|
(a) Stock Options
|
|
|
|
The Company awards common stock and stock options to
employees and directors as compensation for their services, and accounts
for its stock option awards to employees and directors pursuant to the
provisions of ASC 718,
Stock Compensation
. The fair value of each
option award is estimated on the date of grant using the Black-Scholes
Merton valuation model. The Company recognizes the fair value of each
option as compensation expense ratably using the straight-line attribution
method over the service period, which is generally the vesting period.
|
19
Total share-based payments expense
recorded by the Company during the three months ended March 31, 2016 and 2015 is
as follows:
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
March 31
|
|
|
|
2016
|
|
|
2015
|
|
Employees and directors
share-based payments
|
$
|
139,000 $
|
|
|
404,000
|
|
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 March 31,
2016, options available for issuance are 1,860,068 shares.
Stock option activity for the three
months ended March 31, 2016 is summarized as follows:
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregated
|
|
|
|
Options
|
|
|
Weighted Average
|
|
|
Contractual Life
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
(Years)
|
|
|
Value
|
|
Outstanding at January 1,
2016
|
|
1,734,429
|
|
$
|
2.77
|
|
|
|
|
|
|
|
Granted
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Expired
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Forfeited
|
|
(12,104
|
)
|
|
1.65
|
|
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
1,722,325
|
|
|
2.78
|
|
|
4.13
|
|
|
46,079
|
|
Vested and expected to vest
as of March 31, 2016
|
|
1,722,325
|
|
|
2.78
|
|
|
4.13
|
|
|
46,079
|
|
Options exercisable at March 31, 2016
(vested)
|
|
1,708,261
|
|
|
2.79
|
|
|
4.11
|
|
|
43,267
|
|
As of March 31, 2016, approximately
$18,000 of total unrecognized compensation expense related to non-vested share
options is expected to be recognized over a weighted average period of
approximately 1.42 years. The total fair value of shares vested during the three
months ended March 31, 2016 and 2015 was approximately $16,000 and $214,000
respectively.
(b) Warrants
In connection with the Companys
financings, the Warner Brother Agreement and the service agreements, the Company issued warrants to service providers to
purchase unregistered common stock of the Company.
As of March 31, 2016, the weighted
average exercise price of the warrants was $2.20 and the weighted average
remaining life was 2.14 years. The following table outlines the warrants
outstanding and exercisable as of March 31, 2016 and December 31, 2015:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Exercise
|
|
|
Expiration
|
|
Warrants Outstanding
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Price
|
|
|
Date
|
|
|
|
and Exercisable
|
|
|
and Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2011 Warner Brothers
Warrants
|
|
200,000
|
|
|
200,000
|
|
$
|
6.60
|
|
|
05/11/16
|
|
2011 Service Agreement Warrants
|
|
26,667
|
|
|
26,667
|
|
$
|
7.20
|
|
|
06/15/16
|
|
2012 August Financing
Warrants
(i)
|
|
536,250
|
|
|
536,250
|
|
$
|
1.50
|
|
|
08/30/17
|
|
2013 Broker Warrants (Series D Financing)
|
|
228,571
|
|
|
228,571
|
|
$
|
1.75
|
|
|
07/05/18
|
|
2013 Broker Warrants
(Convertible Note)
|
|
114,285
|
|
|
114,285
|
|
$
|
1.75
|
|
|
11/04/18
|
|
2014 Broker Warrants (Series E Financing)
|
|
1,085,714
|
|
|
1,085,714
|
|
$
|
1.75
|
|
|
01/31/19
|
|
|
|
2,191,487
|
|
|
2,191,487
|
|
|
|
|
|
|
|
|
(i)
|
The warrants are classified as derivative liabilities as
disclosed in Note 10
|
20
12.
|
Net Loss Per Common Share
|
Basic net loss per common share
attributable to YOU On Demand shareholders is calculated by dividing the net
loss attributable to YOU On Demand shareholders by the weighted average number
of outstanding common shares during the applicable period. Diluted net loss per
share equals basic net loss per share because the effect of securities
convertible into common shares is anti-dilutive.
For the three months ended March 31,
2016 and 2015, the number of securities convertible or exercisable into common
shares but not included in diluted loss per common share because the effect
would have been anti-dilutive consists of the following:
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Warrants
|
|
4,009,669
|
|
|
2,191,487
|
|
|
Options
|
|
1,722,325
|
|
|
1,764,447
|
|
|
Series A Preferred Stock
|
|
933,333
|
|
|
933,333
|
|
|
Series E Preferred Stock
|
|
7,254,997
|
|
|
7,326,426
|
|
|
Convertible promissory notes
|
|
11,190,292
|
|
|
1,912,673
|
|
|
Total
|
|
25,110,616
|
|
|
14,128,366
|
|
The Company has reserved its authorized
but unissued common stock for possible future issuance in connection with the
following:
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Exercise of stock warrants
|
|
4,009,669
|
|
|
2,191,487
|
|
|
Exercise and future grants of stock options
|
|
3,928,870
|
|
|
3,986,074
|
|
|
Conversion of preferred stock
|
|
8,188,330
|
|
|
8,259,759
|
|
|
Issuable shares from conversion of promissory
notes payable
|
|
11,190,292
|
|
|
1,912,673
|
|
|
Total
|
|
27,317,161
|
|
|
16,349,993
|
|
As of March 31, 2016, the Company had
approximately $27.4 million of the U.S domestic cumulative tax loss
carryforwards and approximately $15.4 million of the foreign cumulative tax loss
carryforwards, which may be available to reduce future income tax liabilities in
certain jurisdictions. These U.S. and foreign tax loss carryforwards will expire
beginning year 2028 through 2036 and year 2017 to year 2021, respectively. We
have established a 100% valuation allowance against our net deferred tax assets
due to our history of pre-tax losses and the likelihood that the deferred tax
assets will not be realizable. The valuation allowance increased approximately
$1.2 million during the three months ended March 31, 2016.
As of March 31, 2016, there are no
unrecorded tax benefits which would impact our financial position or our results
of operations.
14.
|
Contingencies and
Commitments
|
(a) Severance Commitment
The Company has employment agreements
with certain employees that provide severance payments upon termination of
employment under certain circumstances, as defined in the applicable agreements.
As of March 31, 2016, the Company's potential minimum cash obligation to these
employees was approximately $252,000.
(b) Operating Lease Commitment
The Company is committed to paying
leased property costs related to our offices in China through 2019 as follows:
|
|
|
Leased Property
|
|
|
Years ending December 31,
|
|
Costs
|
|
|
2016 (9 months)
|
$
|
345,000
|
|
|
2017
|
|
118,000
|
|
|
2018
|
|
118,000
|
|
|
2019
|
|
59,000
|
|
|
Total
|
$
|
640,000
|
|
21
(c) Licensed Content Commitment
The Company is committed to paying
content costs through 2017 as follows:
|
Years ending December 31,
|
|
Content Costs
|
|
|
2016 (9 months)
|
$
|
5,269,000
|
|
|
2017
|
|
200,000
|
|
|
Total
|
$
|
5,469,000
|
|
(d) Lawsuits and Legal
Proceedings
From time to time, we may become
involved in various lawsuits and legal proceedings which arise in the ordinary
course of business. However, litigation is subject to inherent uncertainties,
and an adverse result in these or other matters may arise from time to time that
may harm our business. As of March 31, 2016, there are no such legal proceedings
or claims that we believe will have a material adverse effect on our business,
financial condition or operating results.
(e) Acquisition of Property
Commitment
In consideration of the Companys
business expansion and rising rental costs, on February 2016, the Company
entered into an agreement with Beijing Kuntin Taiming Investment Management Co.,
Ltd. for purchase of an office building. Total consideration for the office
building acquisition is approximately $4,239,000 (RMB27 million) and the Company
expects to receive the title transfers after payment is complete. As of March
31, 2016, the Company is committed to paying office building acquisition costs through 2016 as follows:
|
Years ending December 31,
|
|
Property
|
|
|
2016 (9 months)
|
|
4,239,000
|
|
|
Total
|
$
|
4,239,000
|
|
(f) Advertising and Marketing
Expense Commitment
The Company is committed to paying
advertising and marketing expense through 2016 as follows:
|
Years ending December 31,
|
|
Marketing expenses
|
|
|
2016 (9 months)
|
|
421,000
|
|
|
Total
|
$
|
421,000
|
|
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 Company controls 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 shareholders 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 shareholders fail 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 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.
22
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 Company 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 Companys legal structure and scope of
operations in the PRC, which could be subject to further restrictions resulting
in limitations on the Companys ability to conduct business in the PRC.
(b) Major Customers
The Company relies on agreements with
distribution partners, including digital cable operators, IPTV operators, OTT
streaming operators and mobile smartphone manufacturers and operators, during
the course of its business. A distribution partner that individually generates
more than 10% of the Companys revenue is considered a major customer.
For the three months ended March 31,
2016, two customers individually accounted for more than 10% of the Companys
revenue. Four customers individually accounted for 10% of the Companys net
accounts receivables as of March 31, 2016.
For the three months ended March 31,
2015, four customers individually accounted for more than 10% of the Companys
revenue. Four customers individually accounted for 10% of the Companys net
accounts receivables as of March 31, 2015.
(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 three months ended March 31,
2016, four suppliers individually accounted for more than 10% of the Companys
cost of revenues. Two suppliers individually accounted for 10% of the Companys
accrued license content fees as of March 31, 2016.
For the three months ended March 31,
2015, four suppliers individually accounted for more than 10% of the Companys
cost of revenues. Two suppliers individually accounted for 10% of the Companys
accrued license content fees as of March 31, 2015.
(d) Concentration of Credit Risks
Financial instruments that potentially
subject the Company to significant concentration of credit risk primarily
consist of cash and accounts receivable. As of March 31, 2016 and 2015, the
Companys cash was held by financial institutions located in the PRC, Hong Kong
and the United States that management believes have acceptable credit. Accounts
receivable are typically unsecured and are mainly derived from revenues from the
Companys VOD content distribution partners. The risk with respect to accounts
receivable is mitigated by regular credit evaluations that the Company performs
on its distribution partners and its ongoing monitoring of outstanding balances.
(e) Foreign Currency Risks
A majority of the Companys operating
transactions are denominated in RMB and a significant portion of the Companys
assets and liabilities is denominated in RMB. RMB is not freely convertible into
foreign currencies. The value of the RMB is subject to changes in the central
government policies and to international economic and political developments. In
the PRC, certain foreign exchange transactions are required by laws to be
transacted only by authorized financial institutions at exchange rates set by
the Peoples Bank of China (PBOC). Remittances in currencies other than RMB by
the Company in China must be processed through PBOC or other China foreign
exchange regulatory bodies which require certain supporting documentation in
order to complete the remittance.
Cash consist of cash on hand and demand
deposits at banks, which are unrestricted as to withdrawal.
Demand deposits maintained at banks
consist of the following:
23
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
RMB denominated bank deposits
with financial institutions in the PRC
|
$
|
457,704
|
|
|
1,076,430
|
|
|
US dollar denominated bank deposits with a
financial institutions in the PRC
|
$
|
2,318,379
|
|
|
2,613,834
|
|
|
US dollar denominated bank
deposits with financial institutions in Hong Kong Special Administrative
Region (HK SAR)
|
$
|
9,234,058
|
|
|
23,460
|
|
|
US dollar denominated bank deposits with
financial institutions in The United States of America (USA)
|
$
|
24,132
|
|
|
53,231
|
|
|
US dollar denominated bank
deposits with financial institutions in Cayman Islands (Cayman)
|
$
|
157
|
|
|
99
|
|
|
RMB restricted cash denominated bank deposits
with financial institutions in the PRC
|
$
|
-
|
|
|
2,994,364
|
|
As of March 31, 2016 and December 31,
2015 deposits of $296,636 and $241,807 were insured, respectively. 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 $1,000 and $5,000 for the three months ended
March 31, 2016 and 2015, respectively.
|
(a)
|
In order to comply with PRC regulatory requirements, on
April 5, 2016, YOD WFOE entered into variable interest entity agreements
with SSF and its nominee shareholders pursuant to the Amended Tianjin
Agreement dated December 21, 2015 (see Note 9 (c)).
|
|
|
|
|
(b)
|
On April 13, 2016, the Company entered into a Series A
Preferred Stock Agreement (the Frequency SPA) with Frequency Networks,
Inc. (Frequency) for purchase of 5,710,847 shares of Frequencys Series
A Preferred Stock (the Frequency Preferred Stock), par value $0.001 per
share, for total cash investment of $2.0 million. In a subsequent closing
on April 28, 2016, the Company purchased an additional 2,855,424 shares of
Frequency Preferred Stock for a total cash investment of $1.0
million.
|
The Frequency Preferred Stock is
entitled to non-cumulative dividends at the rate of $0.02548 per share per
annum, declared at the discretion of Frequencys board of directors. The
Frequency Preferred Stock is also convertible into shares of Frequency common
stock at the Companys election any time after issuance on a 1:1 basis, subject
to certain adjustment. Holders of the Frequency Preferred Stock may also vote on
an as-converted basis and the holders of the outstanding Frequency Preferred
Stock, as a class, have the right to elect one member of the board of directors
of Frequency. Each share of Frequency Preferred Stock also has a liquidation
preference of $0.42467 per share, plus any declared but unpaid dividends.
|
(c)
|
On April 13, 2016, simultaneous with the Frequency SPA,
the Company and Frequency also entered into a Joint Venture Agreement (the
Frequency JV Agreement), pursuant to which the Company and Frequency
have agreed to form a new joint-venture 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.
|
The JVC will have exclusive
distribution rights for such channels and content in certain territories,
including Singapore, Brunei, Malaysia, Thailand, Indonesia, Philippines,
Vietnam, Laos, Cambodia, Myanmar and China, including Hong Kong, Macao and
Taiwan. The equity ownership of the JVC 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 aforementioned
territories and the Company shall contribute certain licensed content, sales and
marketing, and operating capital, as determined by the Company. As of the date
of this report, the JVC has yet to be established.
|
(d)
|
On April 13, 2016, SSF entered into a Game Right
Assignment Agreement with SSS for the acquisition of certain game IP
rights (the Game IP Rights) for cash based on total fair value of the
Game IP Rights, which was determined to be approximately $2.7 million
(RMB18 million). On April 15, 2016, SSF entered into a Capital Increase
Agreement with Nanjing Tops Game Co., Ltd. (Topsgame) and its
shareholders whereby SSF transferred the Game IP Rights to Topsgame in
exchange for 13% of Topsgames equity ownership. Topsgame is a
fast-growing PRC company that specializes in the independent development
and operation of online, stand-alone and other games as well as the
distribution of domestic and overseas games. The investment was part of
the Companys strategy to enter into the gaming
industry.
|
|
|
|
|
(e)
|
On May 12, 2016, the Company and SSS entered into
Amendment No. 1 to the SSS Note, pursuant to which the maturity date of
the SSS Note was extended to July 31, 2016. The SSS Note remains
automatically convertible into 9,208,860 shares of the Companys common
stock upon receipt of the required shareholder approval to allow SSS to
beneficially own more than 19.99% of the Companys outstanding common
stock.
|
24
Cautionary Note Regarding Forward Looking Statements
This Form 10-Q contains forward-looking statements that
involve risks and uncertainties. You can identify these statements by the use of
forward-looking words such as "may", "will", "expect", "anticipate", "estimate",
"believe", "continue", or other similar words. You should read statements that
contain these words carefully because they discuss our future expectations,
contain projections of our future results of operations or financial condition
or state other "forward-looking" information. We believe that it is important to
communicate our future expectations to our investors. However, these
forward-looking statements are not guarantees of future performance and actual
results may differ materially from the expectations that are expressed, implied
or forecasted in any such forward-looking statements. There may be events in the
future that we are unable to accurately predict or control, including weather
conditions and other natural disasters which may affect demand for our products,
and the productdevelopment and marketing efforts of our competitors. Examples
of these events are more fully described in the Companys 2015 Annual Report
under Part I. Item 1A. Risk Factors.
Unless required by law, the Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. However, readers should carefully
review the reports and documents the Company files from time to time with the
SEC, particularly its Quarterly Reports on Form 10-Q, Annual Report on Form 10-K, Current Reports on Form 8-K and all amendments to those reports.