YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entities
UNAUDITED CONSOLIDATED BALANCE SHEETS
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
$
|
2,403,761
|
|
$
|
3,768,897
|
|
Restricted cash
|
|
-
|
|
|
2,994,364
|
|
Accounts receivable, net
|
|
3,094,770
|
|
|
1,689,415
|
|
Licensed
content, current
|
|
711,683
|
|
|
556,591
|
|
Prepaid expenses
|
|
512,445
|
|
|
362,421
|
|
Deferred
issuance cost
|
|
-
|
|
|
551,218
|
|
Other current assets
|
|
159,482
|
|
|
157,594
|
|
Total current assets
|
|
6,882,141
|
|
|
10,080,500
|
|
Property and equipment,
net
|
|
93,589
|
|
|
154,434
|
|
Licensed
content, non-current
|
|
17,726,840
|
|
|
21,085
|
|
Intangible assets, net
|
|
2,591,122
|
|
|
2,412,591
|
|
Goodwill
|
|
6,648,911
|
|
|
6,648,911
|
|
Long term investments
|
|
6,118,445
|
|
|
450,115
|
|
Other
non-current assets
|
|
2,124,417
|
|
|
58,089
|
|
Total assets
|
$
|
42,185,465
|
|
$
|
19,825,725
|
|
|
|
|
|
|
|
|
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 $651,254
and
$44,867
as of June 30, 2016 and December 31, 2015, respectively)
|
$
|
651,254
|
|
$
|
45,788
|
|
Deferred revenue (including
deferred revenue of VIEs without recourse to
the
Company
of $1,232 and $15,080 as of June 30, 2016 and December
31,
2015,
respectively)
|
|
1,232
|
|
|
15,080
|
|
Accrued
expenses (including accrued expenses of VIEs without recourse to
the
Company
of $390,176 and $280,038 as of June 30, 2016 and
December
31,
2015, respectively)
|
|
1,440,228
|
|
|
1,196,066
|
|
Accrued salaries (including
accrued salaries of VIEs without recourse to
the
Company
of nil and $10,861 as of June 30, 2016 and December 31,
2015,
respectively)
|
|
1,344,883
|
|
|
1,058,124
|
|
Other current
liabilities (including other current liabilities of VIEs without
recourse
to
the Company of $361,908 and $298,422, as of June
30,
2016
and December 31, 2015, respectively)
|
|
521,374
|
|
|
312,170
|
|
Accrued license content fees
(including accrued license content fees
of VIEs
without
recourse to the Company of $1,518,112 and $933,532 as of
June
30,
2016 and December 31, 2015, respectively)
|
|
1,518,112
|
|
|
933,532
|
|
Convertible promissory
notes
|
|
3,000,000
|
|
|
3,000,000
|
|
Warrant
liabilities
|
|
251,611
|
|
|
395,217
|
|
Deposit payable
|
|
-
|
|
|
2,994,364
|
|
Total current
liabilities
|
|
8,728,694
|
|
|
9,950,341
|
|
Deferred income taxes
|
|
312,900
|
|
|
330,124
|
|
Total liabilities
|
$
|
9,041,594
|
|
$
|
10,280,465
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible redeemable
preferred stock:
|
|
|
|
|
|
|
Series A -
7,000,000 shares issued and outstanding, liquidation and
deemed
liquidation
preference of $3,500,000 as of June 30, 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,
7,154,997
and 7,254,997 shares issued and outstanding, liquidation
preference
of
$12,521,245 and $12,696,245 as of June 30, 2016 and December 31,
2015,
respectively
|
|
7,155
|
|
|
7,255
|
|
Common stock - $0.001 par
value; 1,500,000,000 shares authorized, 38,170,204
and
24,249,109
shares issued and outstanding as of June 30, 2016 and December
31,
2015,
respectively
|
|
38,170
|
|
|
24,249
|
|
Additional paid-in
capital
|
|
125,179,330
|
|
|
97,512,542
|
|
Accumulated deficit
|
|
(90,182,400
|
)
|
|
(86,457,840
|
)
|
Accumulated other
comprehensive loss
|
|
(632,980
|
)
|
|
(414,910
|
)
|
Total YOU On Demand
shareholders equity
|
|
34,409,275
|
|
|
10,671,296
|
|
Non-controlling interest
|
|
(2,527,399
|
)
|
|
(2,388,031
|
)
|
Total equity
|
|
31,881,876
|
|
|
8,283,265
|
|
Total liabilities, convertible redeemable
preferred stock and equity
|
$
|
42,185,465
|
|
$
|
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 Entities
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
1,480,464
|
|
$
|
1,479,648
|
|
$
|
2,750,190
|
|
$
|
2,507,576
|
|
Cost of revenue
|
|
800,399
|
|
|
829,039
|
|
|
1,716,179
|
|
|
1,872,038
|
|
Gross profit
|
|
680,065
|
|
|
650,609
|
|
|
1,034,011
|
|
|
635,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general
and administrative expense
|
|
1,808,906
|
|
|
1,658,814
|
|
|
3,973,959
|
|
|
4,107,116
|
|
Professional fees
|
|
270,491
|
|
|
151,363
|
|
|
637,937
|
|
|
440,081
|
|
Depreciation and
amortization
|
|
123,343
|
|
|
95,082
|
|
|
220,806
|
|
|
184,825
|
|
Total operating
expense
|
|
2,202,740
|
|
|
1,905,259
|
|
|
4,832,702
|
|
|
4,732,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(1,522,675
|
)
|
|
(1,254,650
|
)
|
|
(3,798,691
|
)
|
|
(
4,096,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other
income/(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense,
net
|
|
(166,710
|
)
|
|
(30,232
|
)
|
|
(200,183
|
)
|
|
(58,555
|
)
|
Change in fair value of warrant liabilities
|
|
106,583
|
|
|
49,344
|
|
|
143,606
|
|
|
34,049
|
|
Equity in losses
of equity method investees
|
|
(27,001
|
)
|
|
(60,621
|
)
|
|
(37,349
|
)
|
|
(93,024
|
)
|
Other
|
|
(5,258
|
)
|
|
(36,576
|
)
|
|
(5,096
|
)
|
|
(46,343
|
)
|
Loss before income taxes and
non-controlling interest
|
|
(1,615,061
|
)
|
|
(1,332,735
|
)
|
|
(3,897,713
|
)
|
|
(4,260,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
8,612
|
|
|
8,612
|
|
|
17,224
|
|
|
17,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(1,606,449
|
)
|
|
(1,324,123
|
)
|
|
(3,880,489
|
)
|
|
(4,243,133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to non-controlling
interest
|
|
18,360
|
|
|
7,303
|
|
|
155,929
|
|
|
127,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to YOU On Demand
shareholders
|
$
|
(1,588,089
|
)
|
$
|
(1,316,820
|
)
|
$
|
(3,724,560
|
)
|
$
|
(4,115,609
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
$
|
(0.05
|
)
|
$
|
(0.06
|
)
|
$
|
(0.14
|
)
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
29,197,899
|
|
|
23,851,602
|
|
|
26,815,888
|
|
|
23,833,760
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
6
YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
LOSS
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net loss
|
$
|
(1,606,449
|
)
|
$
|
(1,324,123
|
)
|
$
|
(3,880,489
|
)
|
$
|
(4,243,133
|
)
|
Other comprehensive loss, net of nil tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustments
|
|
(214,641
|
)
|
|
(1,683
|
)
|
|
(201,509
|
)
|
|
(722
|
)
|
Comprehensive loss
|
|
(1,821,090
|
)
|
|
(1,325,806
|
)
|
|
(4,081,998
|
)
|
|
(4,243,855
|
)
|
Comprehensive
loss (gain) attributable to non-controlling interest
|
|
(3,588
|
)
|
|
7,196
|
|
|
139,368
|
|
|
128,641
|
|
Comprehensive loss
attributable to YOU On Demand
shareholders
|
$
|
(1,824,678
|
)
|
$
|
(1,318,610
|
)
|
$
|
(3,942,630
|
)
|
$
|
(4,115,214
|
)
|
The accompanying notes are an integral part of these
consolidated financial statements.
7
YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
Net loss
|
$
|
(3,880,489
|
)
|
$
|
(4,243,133
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities
|
|
|
|
|
|
|
Share-based compensation expense
|
|
211,840
|
|
|
681,376
|
|
Provision for doubtful accounts
|
|
-
|
|
|
9,087
|
|
Depreciation and amortization
|
|
220,806
|
|
|
184,825
|
|
Amortization of debt issuance costs
|
|
122,696
|
|
|
-
|
|
Income tax benefit
|
|
(17,224
|
)
|
|
(17,224
|
)
|
Equity in losses of equity method investees
|
|
37,349
|
|
|
93,024
|
|
Loss
on disposal of assets
|
|
-
|
|
|
2,421
|
|
Change in fair value of warrant liabilities
|
|
(143,606
|
)
|
|
(34,049
|
)
|
Foreign currency exchange losses
|
|
(153,334
|
)
|
|
-
|
|
|
|
|
|
|
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
Accounts receivable
|
|
(1,405,355
|
)
|
|
(1,598,494
|
)
|
Licensed content
|
|
(143,000
|
)
|
|
328,164
|
|
Prepaid expenses and other assets
|
|
(116,540
|
)
|
|
(447,411
|
)
|
Accounts payable
|
|
605,466
|
|
|
(80,200
|
)
|
Accrued expenses, salary and other current liabilities
|
|
(6,084
|
)
|
|
375,847
|
|
Deferred revenue
|
|
(13,848
|
)
|
|
317,746
|
|
Accrued license content fees
|
|
584,580
|
|
|
547,792
|
|
Net cash used in operating activities
|
|
(4,096,743
|
)
|
|
(3,880,229
|
)
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
(2,070,672
|
)
|
|
(30,116
|
)
|
Investments in intangibles and research and development
|
|
(2,163,872
|
)
|
|
(35,202
|
)
|
Investment in long term investments
|
|
(3,000,000
|
)
|
|
-
|
|
Net cash used in investing activities
|
|
(7,234,544
|
)
|
|
(65,318
|
)
|
|
|
|
|
|
|
|
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
|
|
(33,849
|
)
|
|
(1,314
|
)
|
Net decrease in cash
|
|
(1,365,136
|
)
|
|
(3,946,861
|
)
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
3,768,897
|
|
|
10,812,371
|
|
|
|
|
|
|
|
|
Cash at end of period
|
$
|
2,403,761
|
|
$
|
6,865,510
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
$
|
-
|
|
$
|
-
|
|
Cash paid for interest
|
$
|
-
|
|
$
|
-
|
|
Exchange of Series E Preferred Stock for
common stock
|
$
|
100
|
|
$
|
39
|
|
Issuance of convertible note
for licensed content (Note 9)
|
$
|
17,717,847
|
|
$
|
-
|
|
Issuance of shares for the settlement of
liability
|
$
|
75,000
|
|
$
|
-
|
|
Issuance of shares upon
conversion of convertible note, including accrued interest and debt issuance
cost (Note 9)
|
$
|
17,733,297
|
|
$
|
-
|
|
Acquisition of long term investment through
transfer of Game IP rights (Note 6)
|
$
|
2,714,441
|
|
$
|
-
|
|
Payable for Game IP rights
acquired (Note 6)
|
$
|
603,209
|
|
$
|
-
|
|
Payable for workforce acquired (Note 5)
|
$
|
131,358
|
|
$
|
-
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
8
YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entities
CONSOLIDATED STATEMENTS OF EQUITY
For the Six
Months Ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
YOU On
|
|
|
|
|
|
|
|
|
|
Series E
|
|
|
Series E
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Demand
|
|
|
Non-
|
|
|
|
|
|
|
Preferred
|
|
|
Par
|
|
|
Common
|
|
|
Par
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Shareholders'
|
|
|
controlling
|
|
|
Total
|
|
|
|
Stock
|
|
|
Value
|
|
|
Stock
|
|
|
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Equity
|
|
|
Interest
|
|
|
Equity
|
|
Balance,
January 1, 2015
|
|
7,365,283
|
|
$
|
7,365
|
|
|
23,793,702
|
|
$
|
23,794
|
|
$
|
96,347,272
|
|
$
|
(78,356,567)
|
|
$
|
(66,032
|
)
|
$
|
17,955,832
|
|
$
|
(1,982,119)
|
|
$
|
15,973,713
|
|
Share-based compensation
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
251,356
|
|
|
-
|
|
|
-
|
|
|
251,356
|
|
|
-
|
|
|
251,356
|
|
Common stock
issued for services
|
|
-
|
|
|
-
|
|
|
24,999
|
|
|
25
|
|
|
92,495
|
|
|
-
|
|
|
-
|
|
|
92,520
|
|
|
-
|
|
|
92,520
|
|
Conversion of Series E
Preferred Stock into common stock
|
|
(38,857
|
)
|
|
(39
|
)
|
|
38,857
|
|
|
39
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercise of
options
|
|
|
|
|
|
|
|
2,811
|
|
|
3
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to YOU On
Demand shareholders
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,115,609
|
)
|
|
-
|
|
|
(4,115,609
|
)
|
|
(127,524
|
)
|
|
(4,243,133
|
)
|
Foreign
currency translation adjustments
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
395
|
|
|
395
|
|
|
(1,117
|
)
|
|
(722
|
)
|
Balance,
June 30, 2015
|
|
7,326,426
|
|
$
|
7,326
|
|
|
23,860,369
|
|
$
|
23,861
|
|
$
|
96,691,120
|
|
$
|
(82,472,176)
|
|
$
|
(65,637
|
)
|
$
|
14,184,494
|
|
$
|
(2,110,760)
|
|
$
|
12,073,734
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
9
YOU On Demand Holdings, Inc., Its Subsidiaries and Variable
Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY
For the Six Months Ended June 30, 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
|
|
|
161,815
|
|
|
-
|
|
|
-
|
|
|
161,840
|
|
|
-
|
|
|
161,840
|
|
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
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(411,223
|
)
|
|
-
|
|
|
-
|
|
|
(411,223
|
)
|
|
-
|
|
|
(411,223
|
)
|
Common stock issued from
conversion of convertible note
|
|
-
|
|
|
-
|
|
|
9,208,860
|
|
|
9,209
|
|
|
17,724,088
|
|
|
-
|
|
|
-
|
|
|
17,733,297
|
|
|
-
|
|
|
17,733,297
|
|
Restricted
Shares granted in connection with acquisition
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
121,695
|
|
|
-
|
|
|
-
|
|
|
121,695
|
|
|
-
|
|
|
121,695
|
|
Common stock issued for
settlement of liability
|
|
-
|
|
|
-
|
|
|
41,780
|
|
|
42
|
|
|
74,958
|
|
|
-
|
|
|
-
|
|
|
75,000
|
|
|
-
|
|
|
75,000
|
|
Common stock
issued from conversion of series E preferred stock
|
|
(100,000
|
)
|
|
(100
|
)
|
|
100,000
|
|
|
100
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net loss attributable to YOU On
Demand shareholders
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,724,560
|
)
|
|
-
|
|
|
(3,724,560
|
)
|
|
(155,929
|
)
|
|
(3,880,489
|
)
|
Foreign
currency translation adjustments, net of nil tax
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(218,070
|
)
|
|
(218,070
|
)
|
|
16,561
|
|
|
(201,509
|
)
|
Balance,
June 30, 2016
|
|
7,154,997
|
|
$
|
7,155
|
|
|
38,170,204
|
|
$
|
38,170
|
|
$
|
125,179,330
|
|
$
|
(90,182,400
|
)
|
$
|
(632,980
|
)
|
$
|
34,409,275
|
|
$
|
(2,527,399
|
)
|
$
|
31,881,876
|
|
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). 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 Video-on-Demand
(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, all
adjustments (which include normal recurring adjustments) necessary to present a
fair statements of the financial position as of June 30, 2016, results of
operations for the three and six months ended June 30, 2016 and 2015, and cash
flows for the six months ended June 30, 2016 and 2015, have been made. All
significant intercompany transactions and balances are eliminated on
consolidation.
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 Company's 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.
When the cost is incurred before receipt of the debt or funding, entities will
continue to record the cost of issuing debt as separate 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 six months ended June 30, 2016
and 2015, the Company incurred net losses of approximately $3.9 million and $4.2 million,
respectively, and cash used in operations was approximately $4.1 million and
$3.9 million, respectively. Further, the Company had net current liabilities
of $8.7 million as of June 30, 2016 and accumulated deficit of
approximately $90.2 million and $82.5 million as of June 30, 2016 and 2015,
respectively, due to recurring losses since the inception of our business.
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 March 28, 2016, the Company completed a
common stock financing for $10.0 million. On July 6, 2016, the Company entered
into a Common Stock Purchase Agreement with Seven Star Works Co. Ltd. (SSW)
for a common stock financing of $4.0 million, and on August 11, 2016, the
Company entered into a Common Stock Purchase Agreement with Harvest Alternative
Investment Opportunities SPC (Harvest) for a common stock financing of $4.0
million. Although the Company believes it has the ability to raise funds by issuing debt or
equity instruments. Additional financing may not be available to the
Company on terms acceptable to the Company 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
|
|
a)
|
Sinotop VIE structure and
arrangement
|
To comply with PRC laws and regulations
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, we
entered into a series of contractual agreements to give us the ability to
control Sinotop Beijing with Zhang Yan, the legal shareholder of Sinotop Beijing
(the spouse of our then-CEO). 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 Beijing Sun Seven
Stars Culture Development Limited (SSS), (2) the Company terminated the series
of contractual arrangements 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
change in legal ownership of Sinotop Beijing did not 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, 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
as calculated on accounting policies generally accepted in the PRC. 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 are 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 as calculated on accounting policies generally
accepted in the PRC 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 June 30, 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
|
b)
|
Tianjin Sevenstarflix Network Technology Limited (SSF) VIE structure and
arrangements
|
To comply with PRC laws and regulations
that prohibit or restrict foreign ownership of companies that provides
value-added telecommunication services, the Company plans to also provide its
services through SSF, which is applying to hold the licenses and approvals to
provide digital distribution and Internet content services in the PRC. The
Company has the ability to control SSF through a series of contractual
agreements, as described below, entered into among YOD WFOE, YOD Hong Kong, SSF
and the legal shareholders of SSF.
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)) (the SSF VIE Agreements). Lan Yang, holder of 99% equity ownership in SSF
and a party to certain of the SSF VIE Agreements, is the spouse of Bruno Zheng
Wu, the Companys Chairman. Yun Zhu, holder of 1% equity ownership in SSF and a
party to certain of the SSF VIE Agreements, is the Vice President of SSS.
The terms of the SSF VIE Agreements are
as follows:
Equity Pledge Agreement
Pursuant to the Equity Pledge Agreement
among YOD WFOE, Lan Yang and Yun Zhu (the Nominee Shareholders), dated April
5, 2016, the Nominee Shareholders pledged all of their capital contribution
rights in SSF to YOD WFOE as security for the performance of the obligations of
SSF 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, SSF and the Nominee Shareholders, dated April 5, 2016, 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 SSF. 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 SSF held by the Nominee Shareholders is
transferred to YOD WFOE, or its designee and may not be terminated by any party
to the agreement without consent of the other parties.
Power of Attorney
Pursuant to the Power of Attorney
agreements among YOD WFOE, SSF and each of the respective Nominee Shareholders,
dated April 5, 2016, each of the Nominee Shareholders granted YOD WFOE the
irrevocable right, for the maximum period permitted by law, to all of its voting
rights as shareholders of SSF. The Nominee Shareholders may not transfer any of
their equity interest in SSF to any party other than YOD WFOE. The Power of
Attorney agreements may not be terminated except until all of the equity in SSF
has been transferred to YOD WFOE or its designee.
Technical Service Agreement
Pursuant to the Technical Service
Agreement, dated April 5, 2016, between YOD WFOE and SSF, YOD WFOE has the
exclusive right to provide technical service, marketing and management
consulting service, financial support service and human resource support
services to SSF, and SSF 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 SSF equivalent to YOD WFOEs cost plus 20-30% of such costs as
calculated on accounting policies generally accepted in the PRC. YOD WFOE and
SSF 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
April 5, 2016, undersigned by the respective spouse of the 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 SSF and to waive 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 SSF which are held by the Nominee
Shareholders, the Spouses agreed to be bound by the SSF 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 SSF VIE
Agreements.
14
Letter of Indemnification
Pursuant to the Letter of
Indemnification among YOD WFOE and Lan Yang and YOD WFOE and Yun Zhu, both dated
as of April 5, 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 the Nominee Shareholders from any claims arising from, or
related to, their role as the legal shareholder of SSF, provided that their
actions as a nominee shareholder are taken in good faith and are not opposed to
YOD WFOEs best interests. 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 the Nominee Shareholders or YOD WFOE terminates the agreement
by giving the other party hereto sixty (60) days prior written notice.
Loan Agreement
Pursuant to the Loan Agreement among
YOD WFOE and the Nominee Shareholders, dated April 5, 2016, YOD WFOE agrees to
lend RMB 19.8 million and RMB 0.2 million, respectively, to the Nominee
Shareholders for the purpose of establishing SSF and for development of its
business. As of June 30, 2016, RMB 17.8 million (US $2.7 million) and RMB nil
have been lent to Lan Yang and Yun Zhu, respectively. Lan Yang has contributed
all of the RMB 17.8 million (US $2.7 million) in the form of capital
contribution and accordingly the loan is eliminated with the capital of SSF upon
consolidation. The loan can only be repaid by a transfer by the Nominee
Shareholders of their equity interests in SSF to YOD WFOE or YOD WFOEs
designated persons, through (i) YOD WFOE having the right, but not the
obligation to at any time purchase, or authorize a designated person to
purchase, all or part of the Nominee Shareholders equity interests in SSF at
such price as YOD WFOE shall determine (the Transfer Price), (ii) all monies
received by the Nominee Shareholders through the payment of the Transfer Price
being used solely to repay YOD WFOE for the loans, and (iii) if the Transfer
Price exceeds the principal amount of the loans, the amount in excess of the
principal amount of the loans being deemed as interest payable on the loans, and
to be payable to YOD WFOE in cash. Otherwise, the loans shall be deemed to be
interest-free. The term of the Loan Agreement is perpetual, and may only be
terminated upon the Nominee Shareholders receiving repayment notice, or upon the
occurrence of an event of default under the terms of the agreement.
Management Services
Agreement
In addition to the SSF VIE Agreements,
the Companys subsidiary and the parent company of YOD WFOE, YOU On Demand
(Asia) Limited, a company incorporated under the laws of Hong Kong (YOD Hong
Kong) entered into a Management Services Agreement with SSF, dated as of April
6, 2016 (the Management Services Agreement). Pursuant to a Management Services
Agreement, YOD Hong Kong has the exclusive right to provide to SSF management,
financial and other services related to the operation of SSFs business, and SSF
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 SSF, upon demand,
equal to 100% of the annual net profits as calculated on accounting policies
generally accepted in the PRC of SSF 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 SSFs future payment
obligations.
In addition, at the sole discretion of
YOD Hong Kong, SSF is obligated to transfer to YOD Hong Kong, or its designee,
any part or all of the business, personnel, assets and operations of SSF which
may be lawfully conducted, employed, owned or operated by YOD Hong Kong,
including:
(a) business opportunities presented
to, or available to SSF may be pursued and contracted for in the name of YOD
Hong Kong rather than SSF, and at its discretion, YOD Hong Kong may employ the
resources of SSF to secure such opportunities;
(b) any tangible or intangible property
of SSF, any contractual rights, any personnel, and any other items or things of
value held by SSF 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 SSF on terms to
be determined by agreement between YOD Hong Kong and SSF;
(d) contracts entered into in the name
of SSF 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 SSF; and
15
(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 SSF.
The term of the Management Services
Agreement is 20 years, and may not be terminated by SSF, 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 SSF without
any restrictions. Therefore, YOD WFOE considers that there is no asset of SSF
that can be used only to settle obligation of YOD WFOE, except for the
registered capital of SSF amounting to RMB 50.0 million (approximately $7.5
million), among which RMB 17.8 million (approximately $2.8 million) has been
injected as of June 30, 2016. As SSF is incorporated as limited liability
company 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.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash
|
$
|
736,240
|
|
$
|
1,001,094
|
|
|
Accounts receivable, net
|
|
3,094,770
|
|
|
1,689,415
|
|
|
Licensed content, current
|
|
711,683
|
|
|
556,591
|
|
|
Prepaid expenses
|
|
219,242
|
|
|
98,893
|
|
|
Other current assets
|
|
130,810
|
|
|
133,582
|
|
|
Intercompany receivables due from the
Company's subsidiaries
(i)
|
|
157,676
|
|
|
161,017
|
|
|
Total current
assets
|
|
5,050,421
|
|
|
3,640,592
|
|
|
Property and equipment, net
|
|
88,776
|
|
|
149,880
|
|
|
Licensed content, non-current
|
|
8,993
|
|
|
21,085
|
|
|
Intangible assets, net
|
|
200,098
|
|
|
253,771
|
|
|
Long term investments
|
|
3,118,445
|
|
|
450,115
|
|
|
Other non-current assets
|
|
59,355
|
|
|
58,026
|
|
|
Total assets
|
$
|
8,526,088
|
|
$
|
4,573,469
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
651,254
|
|
$
|
44,867
|
|
|
Deferred revenue
|
|
1,232
|
|
|
15,080
|
|
|
Accrued expenses
|
|
390,176
|
|
|
280,038
|
|
|
Other current liabilities
|
|
361,908
|
|
|
298,422
|
|
|
Accrued salaries
|
|
-
|
|
|
10,861
|
|
|
Accrued license content fees
|
|
1,518,112
|
|
|
933,532
|
|
|
Intercompany payables due to the Company's
subsidiaries
(i)
|
|
12,904,733
|
|
|
12,512,954
|
|
|
Total current liabilities
|
|
15,827,415
|
|
|
14,095,754
|
|
|
Total
liabilities
|
$
|
15,827,415
|
|
$
|
14,095,754
|
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Revenue
|
$
|
2,750,190
|
|
$
|
2,507,576
|
|
|
Net loss
|
$
|
(671,644
|
)
|
$
|
(731,763
|
)
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Net cash used in operating
activities
|
$
|
(730,019
|
)
|
$
|
329,740
|
|
|
Net cash used in investing activities
|
$
|
(2,165,477
|
)
|
$
|
(64,002
|
)
|
|
Net cash provided by
intercompany financing activities
(i)
|
$
|
2,630,642
|
|
$
|
-
|
|
16
|
(i)
|
Intercompany receivables and payables 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.
4.
|
Property and Equipment
|
The following is a breakdown of our
property and equipment:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Furniture and office
equipment
|
$
|
919,685
|
|
$
|
910,420
|
|
|
Leasehold improvements
|
|
190,722
|
|
|
190,722
|
|
|
Total property and
equipment
|
|
1,110,407
|
|
|
1,101,142
|
|
|
Less: accumulated depreciation
|
|
(1,016,818
|
)
|
|
(946,708
|
)
|
|
Property and Equipment,
net
|
$
|
93,589
|
|
$
|
154,434
|
|
We recorded depreciation expense of
approximately $34,000 and $68,000 for the three and six months ended June 30,
2016 and $49,000 and $100,000 for the three and six months ended June 30, 2015
respectively.
As of June 30, 2016 and December 31,
2015, the Companys amortizing and indefinite lived intangible assets consisted
of the following:
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
Amortizing Intangible
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net
|
|
|
Assets
|
|
Amount
|
|
|
Amortization
|
|
|
Balance
|
|
|
Amount
|
|
|
Amortization
|
|
|
Balance
|
|
|
Charter/ Cooperation
agreements
|
$
|
2,755,821
|
|
|
(815,268
|
)
|
|
1,940,553
|
|
$
|
2,755,821
|
|
$
|
(746,372
|
)
|
$
|
2,009,449
|
|
|
Software and licenses
|
|
284,233
|
|
|
(245,016
|
)
|
|
39,217
|
|
|
253,930
|
|
|
(234,947
|
)
|
|
18,983
|
|
|
Website and mobile app
development
|
|
653,830
|
|
|
(456,987
|
)
|
|
196,843
|
|
|
653,830
|
|
|
(403,961
|
)
|
|
249,869
|
|
|
Workforce
|
|
305,693
|
|
|
(25,474
|
)
|
|
280,219
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total amortizing
intangible assets
|
$
|
3,999,577
|
|
|
(1,542,745
|
)
|
|
2,456,832
|
|
$
|
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
|
$
|
4,133,867
|
|
|
(1,542,745
|
)
|
|
2,591,122
|
|
$
|
3,797,871
|
|
$
|
(1,385,280
|
)
|
$
|
2,412,591
|
|
On April 1, 2016, YOD entered into an
agreement with Mr. Liu Changsheng, under which YOD agreed to pay Mr.
Liu Changsheng cash consideration of $187,653 and 66,500 shares of restricted
shares with six month restriction period in exchange for a workforce of 10 personnel experienced in programing
content mobile apps to enter into three year employment contracts with YOD
effective from April 1, 2016, as well as certain laptops and desktops with fair
value of $3,655. According to the agreement, 30% of the cash consideration is
due right after the signing of agreement, 20% is due in 2 months after the
signing of agreement and the rest of 50% is due in 6 months after the signing of
agreement. Cash consideration of $59,295 has been paid as of June 30, 2016, and
$37,530 was paid on July 4, 2016. If any of three key staff, as
defined, terminated their employment with YOD during the first 12 months of
employment, YOD has right to forfeit the unpaid cash consideration. In addition,
Mr. Liu Changsheng would be required to pay a default penalty at minimal of $129,180. YOD has
accounted for the transaction as an asset acquisition in which YOD mainly
acquired a workforce, which is recognized as an intangible asset at cost.
Subsequently, the workforce intangible is amortized over the employment term of
three years.
We recorded amortization expense
related to our amortizing intangible assets of approximately $90,000 and
$153,000 for the three and six months ended June 30, 2016 and $46,000 and
$85,000 for the three and six months ended June 30, 2015 respectively, which
included the amortization expense of the workforce acquired as stated above.
The following table outlines the
amortization expense for the next five years and thereafter:
17
|
|
|
Amortization to be
|
|
|
Years ending December 31,
|
|
Recognized
|
|
|
2016 (6 months)
|
$
|
179,641
|
|
|
2017
|
|
346,769
|
|
|
2018
|
|
304,061
|
|
|
2019
|
|
168,079
|
|
|
2020
|
|
137,792
|
|
|
2021
|
|
137,792
|
|
|
Thereafter
|
|
1,182,698
|
|
|
Total amortization to be recognized
|
$
|
2,456,832
|
|
|
(1)
|
Long Term Investments under Cost
Method
|
|
(a)
|
Investment in
Topsgames
|
On April 13, 2016, SSF entered into a
Game Right Assignment Agreement with SSS for the acquisition of certain game IP
rights (Game IP Rights) for approximately $2.7 million (RMB18 million)
in cash. As of June 30, 2016, approximately $2.1 million has been paid out to
SSS. 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 acquired from SSS to Topsgame in exchange for 13% of Topsgames
equity ownership. Topsgame is a 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 transformation and expansion strategy. The Companys 13%
ownership interest does not provide the Company with the right to nor does the
Company have representation on the board of directors of Topsgame.
The Company has recognized the cost of the investment in Topsgame, which
is a private company with no readily determinable fair value, equal to the fair value of
Game IP Rights of approximately $2.7 million and account for
the investment using the cost method of accounting.
(b)
Investment in Frequency
In April 2016, the Company and
Frequency Networks Inc. (Frequency) entered into a Series A Preferred Stock
Purchase Agreement (the SPA) for the purchase of 8,566,271 shares of Series A
Preferred Stock, Frequency (the Frequency Preferred Stock) for a total
purchase price of $3.0 million. The 8,566,271 Series A Preferred Stock represent
13% ownership and voting interest on an as converted basis and does not provide
the Company with the right to nor does the Company have representation on the
board of directors of Frequency.
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. Each share of Frequency Preferred Stock also has a
liquidation preference of $0.42467 per share, plus any declared but unpaid
dividends.
The Company has recognized the cost of
the investment in Frequency, which is a private company with no readily
determinable fair value, at its cost of $3 million and account
for the investment using the cost method of accounting.
|
(2)
|
Long Term Investment under Equity
Method
|
|
(c)
|
Investment in Shandong Media and Hua
Cheng
|
Investments in entities where the
Company can exercise significant influence, but not control, is classified as a
long-term equity investment and accounted for using the equity method. Under the
equity method, the investment is initially recorded at cost and adjusted for the
Companys share of undistributed earnings or losses of the investee. Investment
losses are recognized until the investment is written down to nill provided the Company
does not guarantee the investees obligations nor it is committed to provide
additional funding.
As of and for the period ended June
30, 2016 and December 31, 2015, the Companys long term equity investments are
comprised of the Company investment in Shandong Lushi Media Co., Ltd.
(Shandong Media) and Hua Cheng Hu Dong (Beijing) Film and Television
Communication Co., Ltd. (Hua Cheng), which are 30% and 39%, respectively,
owned by Sinotop Beijing. The long term investment in Shandong Media was nil and
nil as of June 30, 2016 and December 31, 2015 respectively, and the long term
investment in Hua Cheng was $0.4 million and $0.5 million as of
June 30, 2016 and December 31, 2015 respectively.
18
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 June 30, 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
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Risk-free interest rate
|
|
0.45%
|
|
|
0.92%
|
|
|
Expected volatility
|
|
60%
|
|
|
60%
|
|
|
Expected term
|
|
1.17 years
|
|
|
1.67 years
|
|
|
Expected dividend yield
|
|
0%
|
|
|
0%
|
|
The following tables present the fair
value hierarchy for those assets and liabilities measured at fair value on a
recurring basis at June 30, 2016 and December 31, 2015, respectively:
|
|
|
June 30,
2016
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair Value
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note 10)
|
$
|
-
|
|
$
|
-
|
|
$
|
251,611
|
|
$
|
251,611
|
|
|
|
|
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
|
|
The table below reflects the components
effecting the change in fair value for the six months ended June 30, 2016:
|
|
|
Level 3
Assets and Liabilities
|
|
|
|
|
|
|
|
For the Six
Months Ended June
30 , 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
January 1,
|
|
|
|
|
|
Fair Value
|
|
|
June 30,
|
|
|
|
|
2016
|
|
|
Settlements
|
|
|
gain
|
|
|
2016
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note 10)
|
$
|
395,217
|
|
$
|
-
|
|
$
|
(143,606
|
)
|
$
|
251,611
|
|
19
On March 28, 2016, the Company issued
common stock and warrant 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
|
|
2 years
|
|
|
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, other payables and convertible
note as of June 30, 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 then
Executive 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 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.
Effective on January 31, 2014, the
Company and Mr. McMahon entered into an amendment the Note pursuant to which the
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. As such, the Company 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 another amendment pursuant to which the
maturity date of the Note was extended to December 31, 2016. The Note remains
payable on demand or convertible on demand into shares of Series E Preferred
Stock at a conversion price of $1.75 at Mr. McMahons option.
For the three and six months ended June
30, 2016, the Company recorded interest expense of $30,000 and $60,000,
respectively, related to the Note; For the three and six months ended June 30,
2015, the Company recorded interest expense of $30,000 and $60,000,
respectively, related to the Note.
|
(b)
|
Revenue and Accounts
Receivable
|
In March 2015, Zhong Hai Video entered
into an agreement with C Media Limited (C Media), a beneficial owner of more
than 5% of our capital stock, 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 June 30, 2016 and June 30, 2015, total
revenue recognized amounted to nil and nil, respectively. For the six months
ended June 30, 2016 and June 30, 2015, total revenue recognized amounted to nil
and $182,000, respectively. As of June 30, 2016, total accounts receivable due
from C Media amounted to approximately $91,000.
Hua Cheng, the minority shareholder of
Zhong Hai Video, charged us licensed content fees of approximately $37,000 and
$56,000 for the three months ended June 30, 2016 and 2015, and approximately
$93,000 and $80,000 for the six months ended June 30, 2016 and 2015,
respectively. As of June 30 2016, total accrued license content fees due to Hua
Cheng amounted to approximately $112,000.
20
|
(d)
|
Purchase of Game IP
Rights
|
On April 13, 2016, SSF entered into a
Game Right Assignment Agreement with SSS for the acquisition of certain 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). The Game IP Rights
was recorded at cost and then subsequently transferred in exchange for the
investment in Topsgame as disclosed in Note 6 above.
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 the
Companys Chairman, Bruno Zheng 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 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 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. On June 27,
2016, shareholder approval was obtained.
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 in any other circumstances, the SSS Warrant is
considered an equity classified instrument. The 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 and Restated 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, was originally due to mature on May 21, 2016, and beard an
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, which was obtained on June 27,
2016 the SSS Note was automatically
converted into 9,208,860 shares of the Companys common stock. On June 27, 2016,
shareholder approval was obtained.
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 $115,000 and $122,000 was recognized during the three and
six months ended June 30, 2016 respectively.
The Company measured the effective
conversion price of the SSS Note using its carrying value 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 $1.91 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.
21
In the Annual Meeting of Shareholders
(the Annual Meeting) of the Company held on June 27, 2016, shareholders
approved the issuance of 9,208,860 shares of the Companys common stock upon the
conversion of the SSS Note and it was automatically converted into 9,208,860
shares of the Companys common stock on June 27, 2016.
The carrying value of the SSS Note as of June 27, 2016,
which included the unamortized
issuance costs of $9,000 and, pursuant to the terms of SSS Note, accrued interest expense
(as to the date of conversion) of $24,000 has been recorded into the common shares issued on June 27, 2016.
|
(c)
|
Amended Tianjin
Agreement
|
Pursuant to the Amended Tianjin
Agreement dated December 21, 2015, Tianjin Enternet was to contribute 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 shares of
the Companys common stock over three years, with the exact number not exceeding
5.0 million per year, 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. In the event that the Company has not obtained the
required vote from shareholders to issue the earn-out shares to Tianjin
Enternet, the Company shall issue a promissory note with a principal amount
equal to the quotient by multiplying 5.0 million by the applicable stock price
defined in the agreement.
On April 5, 2016, in lieu of Tianjin
Enternet contributing 100% of the equity ownership of SSF to the Company, 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 therefore is 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.
The earn-out provision is based on
either the number of home/user pass or the net income of SSF. While the net
income is measured based on the operations of SSF, the number of home/user pass
is measured based on number of home/user pass of SSFs distributors. Such
earn-out provision is based on an index that is not calculated solely by
reference to the operations of SSF, which is not considered indexed to the
Companys own shares. Also the earn-out provisions permit cash settlement if the
Company cannot issue the earn-out shares. Therefore, the earn-out provision is
classified as a liability and measured initially and subsequently at
fair value with changes in fair value recognized in earnings at each reporting
periods.
On June 27, 2016, the Company held its
2016 annual meeting of stockholders and received approval from its stockholders
to allow SSS to beneficially own more than 19.99% of the Companys outstanding
common stock. Accordingly, the Earn-Out Share Award became issuable at the time
when the earn-out provisions are considered to have been met pursuant to the
Amended Tianjin Agreement.
The Company obtained control of SSF on
April 5, 2016. As of June 30, 2016, SSF had yet to receive all business licenses
necessary to conduct its new business, including any Internet, telecommunication
or content related sales and operations. Accordingly, the liability
recognized was nil as of June 30, 2016 because the conditions to trigger the
issuance of the
Earn-Out Share Award were not probable of being met.
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, of which 440,813 shares were
exercised prior to January 1, 2015. In accordance with FASB ASC 815-40-15-5,
Determining Whether an Instrument (or Embedded Feature) is indexed to an
Entitys Own Stock; the warrants have been accounted as derivative liabilities
to be re- measured at the end of every reporting period with the change in value
reported in the consolidated statement of operations. On August 30, 2012, such
warrants were valued at $1,525,000 utilizing a valuation model and were
initially recorded as a liability. The warrants are revalued at each year end
based on the Monte Carlo valuation.
As of June 30, 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 $252,000 and $395,000, respectively,
as determined by the Company, resulting in a gain of approximately $143,000 for
the six months ended June 30, 2016. There were no warrants exercised during six
months ended June 30, 2016 and 2015, respectively.
22
As of June 30, 2016, the Company had
1,696,428 options and 1,964,820 warrants outstanding to purchase shares of our
common stock.
The Company awards common stock and
stock options to employees and directors as compensation for their services, and
accounts for its stock option awards to employees and directors pursuant to the
provisions of ASC 718,
Stock Compensation
. The fair value of each option
award is estimated on the date of grant using the Black-Scholes Merton valuation
model. The Company recognizes the fair value of each option as compensation
expense ratably using the straight-line attribution method over the service
period, which is generally the vesting period.
Total share-based payments expense
recorded by the Company during the three and six months ended June 30, 2016 and
2015 is as follows:
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30
|
|
|
June 30
|
|
|
June 30
|
|
|
June 30
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Employees and directors
share-based payments
|
$
|
73,000
|
|
$
|
277,000
|
|
$
|
212,000
|
|
$
|
681,000
|
|
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 June 30,
2016, options available for issuance are 1,694,467 shares.
Stock option activity for the six
months ended June 30, 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
|
|
(25,897
|
)
|
|
1.65
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(12,104
|
)
|
|
1.65
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
1,696,428
|
|
|
2.79
|
|
|
3.99
|
|
|
-
|
|
|
Vested and expected to vest
as of June 30, 2016
|
|
1,696,428
|
|
|
2.79
|
|
|
3.99
|
|
|
-
|
|
|
Options exercisable at June 30, 2016 (vested)
|
|
1,684,707
|
|
|
2.80
|
|
|
3.97
|
|
|
-
|
|
As of June 30, 2016, approximately
$15,000 of total unrecognized compensation expense related to non-vested share
options is expected to be recognized over a weighted average period of
approximately 1.17 years. The total fair value of shares vested during the six
months ended June 30, 2016 and 2015 was approximately $9,000 and $251,000
respectively.
In connection with the Companys
financings, the Warner Brother Agreement and the service agreements, the Company
issued warrants to investors and service providers to purchase common stock of
the Company.
As of June 30, 2016, the weighted
average exercise price of the warrants was $1.68 and the weighted average
remaining life was 2.12 years. The May 2011 Warner Brothers Warrants of 200,000
and 2011 Service Agreement Warrants of 26,667 expired as of June 30, 2016. The
following table outlines the warrants outstanding and exercisable as of June 30,
2016 and December 31, 2015:
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
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
|
|
$
|
6.60
|
|
|
05/11/16
|
|
|
2011 Service Agreement Warrants
|
|
-
|
|
|
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
|
|
|
|
|
1,964,820
|
|
|
2,191,487
|
|
|
|
|
|
|
|
(i)
|
The warrants are classified as derivative liabilities as
disclosed in Note 10.
|
12.
|
Net Loss Per Common Share
|
Basic net loss per common share
attributable to YOU On Demand shareholders is calculated by dividing the net
loss attributable to YOU On Demand shareholders by the weighted average number
of outstanding common shares during the applicable period. Diluted net loss per
share equals basic net loss per share because the effect of securities
convertible into common shares is anti-dilutive.
For the six months ended June 30, 2016
and 2015, the number of securities convertible into common shares not included
in diluted loss per common share because the effect would have been
anti-dilutive consists of the following:
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Warrants
|
|
3,783,002
|
|
|
2,191,487
|
|
|
Options
|
|
1,696,428
|
|
|
1,723,153
|
|
|
Series A Preferred Stock
|
|
933,333
|
|
|
933,333
|
|
|
Series E Preferred Stock
|
|
7,154,997
|
|
|
7,326,426
|
|
|
Convertible promissory notes
|
|
1,998,528
|
|
|
1,929,769
|
|
|
Total
|
|
15,566,288
|
|
|
14,104,168
|
|
The Company has reserved its authorized
but unissued common stock for possible future issuance in connection with the
following:
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Exercise of stock warrants
|
|
3,783,002
|
|
|
2,191,487
|
|
|
Issuable shares for stock options and restricted
shares
|
|
3,928,870
|
|
|
3,983,263
|
|
|
Conversion of preferred stock
|
|
8,088,330
|
|
|
8,259,759
|
|
|
Issuable shares from conversion of promissory
notes payable
|
|
1,998,528
|
|
|
1,929,769
|
|
|
Total
|
|
17,798,730
|
|
|
16,364,278
|
|
As of June 30, 2016, the Company had
approximately $27.6 million of the U.S domestic cumulative tax loss
carryforwards and approximately $16.0 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 2016 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
$0.3 million and $1.5 million during the three and six months ended June 30,
2016, respectively.
As of June 30, 2016, there are no
unrecorded tax benefits which would impact our financial position or our results
of operations.
14.
|
Contingencies and
Commitments
|
The Company has employment agreements
with certain employees that provide severance payments upon termination of
employment under certain circumstances, as defined in the applicable agreements.
As of June 30, 2016, the Company's potential minimum cash obligation to these
employees was approximately $280,000.
24
|
(b)
|
Operating Lease
Commitment
|
The Company is committed to paying
operating leases related to our offices in China through 2020 and
thereafter as follows:
|
|
|
Leased Property
|
|
|
Years ending December 31,
|
|
Costs
|
|
|
2016 (6 months)
|
$
|
315,000
|
|
|
2017
|
|
306,000
|
|
|
2018
|
|
311,000
|
|
|
2019
|
|
268,000
|
|
|
2020
|
|
206,000
|
|
|
Thereafter
|
|
88,000
|
|
|
Total
|
$
|
1,494,000
|
|
|
(c)
|
Licensed Content
Commitment
|
The Company is committed to paying
content costs through 2019 as follows:
|
Years ending December 31,
|
|
Content Costs
|
|
|
2016 (6 months)
|
$
|
3,830,000
|
|
|
2017
|
|
426,000
|
|
|
2018
|
|
226,000
|
|
|
2019
|
|
226,000
|
|
|
Total
|
$
|
4,708,000
|
|
|
(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 June 30, 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 property
acquisition was approximately $4,239,000 (RMB27 million), which the Company has
paid half in RMB in 2016 Q2 and is committed to paying the following through
2016 as follows:
|
Years ending December 31,
|
|
Property
|
|
|
2016 (6 months)
|
|
2,065,000
|
|
|
Total
|
$
|
2,065,000
|
|
|
(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 (6 months)
|
|
299,000
|
|
|
Total
|
$
|
299,000
|
|
|
(g)
|
Investment Commitment
|
The Company entered into a Joint
Venture Agreement (the JV Agreement) with Megtron Hong Kong Investment Group
Co., Limited on May 30, 2016, pursuant to which the Company is committed to
contribute $5.0 million to the Joint-Venture Company to be formed in
installment.
15.
|
Concentration, Credit and Other
Risks
|
25
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, SSF and the respective legal shareholders
of Sinotop Beijing and SSF. The Company believes that these contractual
arrangements are in compliance with PRC law and are legally enforceable. If
Sinotop Beijing, SSF or their respective 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 and SSF, it would be able to exercise its rights as a
shareholder to effect changes in the board of directors of Sinotop Beijing or
SSF, 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, SSF and their respective
legal shareholders 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 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.
The Company relies on agreements with
distribution partners, including digital cable operators, IPTV operators, OTT
streaming operators and mobile smartphone manufacturers and operators, during
the course of its business. A distribution partner that individually generates
more than 10% of the Companys revenue is considered a major customer.
For the six months ended June 30, 2016,
four customers individually accounted for 25%, 17%, 14%, and 12% of the
Companys revenue. Four customers individually accounted for 16%, 13%, 11% and
11% of the Companys net accounts receivables as of June 30, 2016.
For the six months ended June 30, 2015,
three customers individually accounted for 19%, 18% and 12% of the Companys
revenue. Four customers individually accounted for 19%, 18%, 12% and 12% of the
Companys net accounts receivables as of June 30, 2015.
The Company relies on agreements with
studio content partners to acquire video contents. A content partner that
accounts for more than 10% of the Companys cost of revenues is considered a
major supplier.
For the six months ended June 30, 2016,
four suppliers individually accounted for 31%, 24%, 19% and 13% of the Companys
cost of revenues. Two suppliers individually accounted for 83% and 10% of the
Companys accrued license content fees as of June 30, 2016.
For the six months ended June 30, 2015,
four suppliers individually accounted for 35%, 22%, 22% and 14% of the Companys
cost of revenues. Two suppliers individually accounted for 59% and 41% the
Companys accrued license content fee as of June 30, 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 June 30, 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.
26
|
(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:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
RMB denominated bank deposits
with financial institutions in the PRC
|
$
|
762,100
|
|
|
1,076,430
|
|
|
US dollar denominated bank deposits with financial institutions in the PRC
|
$
|
1,211,548
|
|
|
2,613,834
|
|
|
US dollar denominated bank
deposits with financial institutions in Hong Kong Special Administrative
Region (HK SAR)
|
|
427,343
|
|
|
23,460
|
|
|
US dollar denominated bank deposits with
financial institutions in The United States of America (USA)
|
$
|
1,766
|
|
|
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 June 30, 2016 and December 31,
2015 deposits of $291,003 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 $2,000 for the three and six months
ended June 30, 2016 respectively and $5,000 and $6,000 for the three and six
months ended June 30, 2015 respectively.
17.
|
Subsequent Event
|
|
|
|
|
(a)
|
On July 6, 2016, the Company entered into a Common Stock
Purchase Agreement (the SSW SPA) with Seven Stars Works Co., Ltd., a
Korea company (SSW) and an affiliate of SSS. Pursuant to the terms of
the SSW SPA, the Company has agreed to sell and issue 2,272,727 shares of
the Companys common stock for $1.76 per share, or a total purchase price
of $4.0 million to SSW. A total of $4.0 million was received on July 19,
2016.
|
|
|
|
|
(b)
|
On August 11, 2016, the Company entered into a Common
Stock Purchase Agreement (the Harvest SPA) with Harvest Alternative
Investment Opportunities SPC (Harvest), a Cayman Islands company.
Pursuant to the terms of the Harvest SPA, the Company has agreed to sell
and issue 2,272,727 shares of the Companys Common Stock, for $1.76 per
share, or a total purchase price of $4.0 million to
Harvest. A total of $4.0 million was received on August 12, 2016.
|
27
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.