Wecast Network, Inc., Its Subsidiaries
and Variable Interest Entities
UNAUDITED CONSOLIDATED BALANCE SHEETS
|
|
March 31,
2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
(As adjusted*)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,054,142
|
|
|
$
|
3,761,814
|
|
Accounts receivable, net
|
|
|
29,196,591
|
|
|
|
9,522,151
|
|
Licensed content, current
|
|
|
883,015
|
|
|
|
124,319
|
|
Notes receivable
|
|
|
421,475
|
|
|
|
1,749,830
|
|
Inventory
|
|
|
217,383
|
|
|
|
203,697
|
|
Prepaid expenses
|
|
|
347,968
|
|
|
|
375,944
|
|
Other current assets
|
|
|
6,925,012
|
|
|
|
3,581,822
|
|
Total current assets
|
|
|
39,045,586
|
|
|
|
19,319,577
|
|
Property and equipment, net
|
|
|
4,760,976
|
|
|
|
4,963,725
|
|
Licensed content, non-current
|
|
|
16,075,134
|
|
|
|
17,593,528
|
|
Intangible assets, net
|
|
|
425,113
|
|
|
|
453,242
|
|
Goodwill
|
|
|
6,648,911
|
|
|
|
6,648,911
|
|
Long term investments
|
|
|
6,635,483
|
|
|
|
6,654,664
|
|
Other non-current assets
|
|
|
57,846
|
|
|
|
112,643
|
|
Total assets
|
|
$
|
73,649,049
|
|
|
$
|
55,746,290
|
|
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
(including
amounts of the consolidated VIEs without recourse to Wecast Network, Inc. See note 3)
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
27,231,787
|
|
|
$
|
13,341,680
|
|
Deferred revenue
|
|
|
609,466
|
|
|
|
1,350,054
|
|
Accrued interest due to a related party
|
|
|
587,688
|
|
|
|
557,918
|
|
Accrued other expenses
|
|
|
1,415,774
|
|
|
|
708,987
|
|
Accrued salaries
|
|
|
807,952
|
|
|
|
766,957
|
|
Payable for purchase of building
|
|
|
992,000
|
|
|
|
987,015
|
|
Amount due to related parties
|
|
|
2,173,891
|
|
|
|
-
|
|
Other current liabilities
|
|
|
331,719
|
|
|
|
1,995,297
|
|
Accrued license content fees
|
|
|
1,189,453
|
|
|
|
1,236,661
|
|
Convertible promissory note due to a related party
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
Warrant liabilities
|
|
|
340,901
|
|
|
|
70,785
|
|
Total current liabilities
|
|
|
38,680,631
|
|
|
|
24,015,354
|
|
Total liabilities
|
|
$
|
38,680,631
|
|
|
|
24,015,354
|
|
Commitments and contingencies (Note 17)
|
|
|
|
|
|
|
|
|
Convertible redeemable preferred stock:
|
|
|
|
|
|
|
|
|
Series A - 7,000,000 shares issued and outstanding, liquidation and deemed liquidation preference of $3,500,000 as of March 31, 2017 and December 31, 2016, respectively
|
|
|
1,261,995
|
|
|
|
1,261,995
|
|
Equity:
|
|
|
|
|
|
|
|
|
Series E Preferred Stock - $0.001 par value; 16,500,000
shares authorized, 1,216,904 and 7,154,997 shares issued and outstanding, liquidation preference of $2,129,586
and $12,521,245 as of March 31, 2017 and December 31, 2016, respectively
|
|
|
1,217
|
|
|
|
7,155
|
|
Common stock - $0.001 par value; 1,500,000,000 shares
authorized, 59,891,201 and 53,918,523 shares issued and outstanding as of March 31, 2017 and December 31,
2016, respectively
|
|
|
59,891
|
|
|
|
53,918
|
|
Additional paid-in capital
|
|
|
152,836,057
|
|
|
|
152,755,919
|
|
Accumulated deficit
|
|
|
(113,456,389
|
)
|
|
|
(115,669,268
|
)
|
Accumulated other comprehensive loss
|
|
|
(3,282
|
)
|
|
|
(1,353,302
|
)
|
Total Wecast Network shareholders’ equity
|
|
|
39,437,494
|
|
|
|
35,794,422
|
|
Non-controlling interest
|
|
|
(5,731,071
|
)
|
|
|
(5,325,481
|
)
|
Total equity
|
|
|
33,706,423
|
|
|
|
30,468,941
|
|
Total liabilities, convertible redeemable preferred stock and equity
|
|
$
|
73,649,049
|
|
|
$
|
55,746,290
|
|
*The above consolidated balance sheets
present the Wecast Services Limited and Wide Angle Group Limited acquired from BT Capital Global Limited (“BT”) on January 30 and January
31, 2017, respectively as if they had been owned by the Company since November 10, 2016 in accordance with ASC
Subtopic 805-50 (See Note 4 “
Acquisition
”)
The accompanying notes are an integral
part of these consolidated financial statements.
Wecast Network, Inc., Its Subsidiaries
and Variable Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Three
Months Ended
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
33,164,351
|
|
|
$
|
1,269,726
|
|
Cost of revenue
|
|
|
29,342,379
|
|
|
|
915,780
|
|
Gross profit
|
|
|
3,821,972
|
|
|
|
353,946
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
1,265,172
|
|
|
|
2,165,053
|
|
Professional fees
|
|
|
267,133
|
|
|
|
367,446
|
|
Depreciation and amortization
|
|
|
196,211
|
|
|
|
97,463
|
|
Total operating expense
|
|
|
1,728,516
|
|
|
|
2,629,962
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
2,093,456
|
|
|
|
(2,276,016
|
)
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(41,557
|
)
|
|
|
(33,473
|
)
|
Change in fair value of warrant liabilities
|
|
|
(270,116
|
)
|
|
|
37,023
|
|
Equity in loss of equity method investees
|
|
|
(43,746
|
)
|
|
|
(10,348
|
)
|
Other
|
|
|
(99,570
|
)
|
|
|
162
|
|
Income (loss) before income taxes
|
|
|
1,638,467
|
|
|
|
(2,282,652
|
)
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
-
|
|
|
|
8,612
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
1,638,467
|
|
|
|
(2,274,040
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to non-controlling interest
|
|
|
(574,412
|
)
|
|
|
(137,569
|
)
|
|
|
|
|
|
|
|
|
|
Net income
(loss) attributable to Wecast Network, Inc. shareholders
|
|
$
|
2,212,879
|
|
|
$
|
(2,136,471
|
)
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.04
|
|
|
$
|
(0.09
|
)
|
Diluted earnings (loss) per share
|
|
$
|
0.04
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
60,715,721
|
|
|
|
24,484,562
|
|
Basic
|
|
|
55,382,002
|
|
|
|
24,484,562
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
Wecast Network, Inc., Its Subsidiaries
and Variable Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
Three
Months Ended
|
|
|
|
March 31,
2017
|
|
|
March 31,
2016
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,638,467
|
|
|
$
|
(2,274,040
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of nil tax
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
1,518,842
|
|
|
|
13,132
|
|
Comprehensive income (loss)
|
|
|
3,157,309
|
|
|
|
(2,260,908
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to non-controlling interest
|
|
|
(405,590
|
)
|
|
|
(142,956)
|
|
Comprehensive
income (loss) attributable to Wecast Network, Inc. shareholders
|
|
$
|
3,562,899
|
|
|
$
|
(2,117,952
|
)
|
The accompanying notes are an integral
part of these consolidated financial statements.
Wecast Network, Inc., Its Subsidiaries
and Variable Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Three
Months Ended
|
|
|
|
March
31, 2017
|
|
|
March
31, 2016
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,638,467
|
|
|
$
|
(2,274,040
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
71,428
|
|
|
|
138,770
|
|
Depreciation and amortization
|
|
|
196,211
|
|
|
|
97,463
|
|
Income tax benefit
|
|
|
-
|
|
|
|
(8,612
|
)
|
Equity in loss of equity method investees
|
|
|
43,746
|
|
|
|
10,348
|
|
Loss on disposal of assets
|
|
|
40,139
|
|
|
|
-
|
|
Change in fair value of warrant liabilities
|
|
|
270,116
|
|
|
|
(37,023
|
)
|
Foreign currency exchange losses
|
|
|
-
|
|
|
|
10,590
|
|
|
|
|
|
|
|
|
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(19,674,440
|
)
|
|
|
(1,153,595
|
)
|
Licensed content
|
|
|
1,518,394
|
|
|
|
263,913
|
|
Prepaid expenses and other assets
|
|
|
(1,932,566
|
)
|
|
|
140,391
|
|
Accounts payable
|
|
|
13,890,107
|
|
|
|
237
|
|
Accrued expenses, salary and other current liabilities
|
|
|
(881,051
|
)
|
|
|
691,914
|
|
Amount due to related parties
|
|
|
2,173,891
|
|
|
|
-
|
|
Deferred revenue
|
|
|
(740,588
|
)
|
|
|
(15,080
|
)
|
Accrued license content fees
|
|
|
-
|
|
|
|
402,508
|
|
Net cash used in operating activities
|
|
|
(3,386,146
|
)
|
|
|
(1,732,216
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of and deposit for property and equipment
|
|
|
(5,473
|
)
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(5,473
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of warrant and shares
|
|
|
8,745
|
|
|
|
10,000,000
|
|
Net cash provided by financing activities
|
|
|
8,745
|
|
|
|
10,000,000
|
|
Effect of exchange rate changes on cash
|
|
|
675,202
|
|
|
|
(1,361
|
)
|
Net increase
(decrease) in cash
|
|
|
(2,707,672
|
)
|
|
|
8,266,423
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
3,761,814
|
|
|
|
3,768,897
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
1,054,142
|
|
|
$
|
12,035,320
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of convertible note for licensed content (Note
12)
|
|
$
|
-
|
|
|
$
|
17,717,847
|
|
Payable for purchase of building
|
|
$
|
992,000
|
|
|
$
|
-
|
|
Issuance of shares for the settlement of liability
|
|
$
|
-
|
|
|
$
|
75,000
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
Wecast Network, Inc., Its Subsidiaries
and Variable Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF
EQUITY
For the Three Months Ended March 31,
2016
|
|
Series E
Preferred
Stock
|
|
|
Series E
Par
Value
|
|
|
Common
Stock
|
|
|
Par
Value
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Wecast
Network , Inc.
Shareholders'
Equity
|
|
|
Non-
controlling
Interest
|
|
|
Total
Equity
|
|
Balance, January 1,
2016
|
|
|
7,254,997
|
|
|
$
|
7,255
|
|
|
|
24,249,109
|
|
|
$
|
24,249
|
|
|
$
|
97,512,542
|
|
|
$
|
(86,457,840
|
)
|
|
$
|
(414,910
|
)
|
|
$
|
10,671,296
|
|
|
$
|
(2,388,031
|
)
|
|
$
|
8,283,265
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
25
|
|
|
|
88,745
|
|
|
|
-
|
|
|
|
-
|
|
|
|
88,770
|
|
|
|
-
|
|
|
|
88,770
|
|
Common stock issuance
|
|
|
-
|
|
|
|
-
|
|
|
|
4,545,455
|
|
|
|
4,545
|
|
|
|
9,273,029
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,277,574
|
|
|
|
-
|
|
|
|
9,277,574
|
|
Warrants issued in connection with common stock issuance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
722,426
|
|
|
|
-
|
|
|
|
-
|
|
|
|
722,426
|
|
|
|
-
|
|
|
|
722,426
|
|
Issuance cost in connection with the issuance of common stock and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(442,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(442,500
|
)
|
|
|
-
|
|
|
|
(442,500
|
)
|
Common stock issued for settlement of liability
|
|
|
-
|
|
|
|
-
|
|
|
|
41,780
|
|
|
|
42
|
|
|
|
74,958
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
75,000
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,136,471
|
)
|
|
|
-
|
|
|
|
(2,136,471
|
)
|
|
|
(137,569
|
)
|
|
|
(2,274,040
|
)
|
Foreign currency translation adjustments, net of nil tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,519
|
|
|
|
18,519
|
|
|
|
(5,387
|
)
|
|
|
13,132
|
|
Balance, March 31, 2016
|
|
|
7,254,997
|
|
|
$
|
7,255
|
|
|
|
28,861,344
|
|
|
$
|
28,861
|
|
|
$
|
107,229,200
|
|
|
$
|
(88,594,311
|
)
|
|
$
|
(396,391
|
)
|
|
$
|
18,274,614
|
|
|
$
|
(2,530,987
|
)
|
|
$
|
15,743,627
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
Wecast Network, Inc., Its Subsidiaries
and Variable Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY
For the Three Months Ended March 31,
2017
|
|
Series E
Preferred
Stock
|
|
|
Series E
Par
Value
|
|
|
Common
Stock
|
|
|
Par
Value
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Wecast Network
Shareholders'
Equity
|
|
|
Non-
controlling
Interest
|
|
|
Total
Equity
|
|
Balance,
January 1, 2017 (As adjusted*)
|
|
|
7,154,997
|
|
|
$
|
7,155
|
|
|
|
53,918,523
|
|
|
$
|
53,918
|
|
|
$
|
152,755,919
|
|
|
$
|
(115,669,268
|
)
|
|
$
|
(1,353,302
|
)
|
|
$
|
35,794,422
|
|
|
$
|
(5,325,481
|
)
|
|
$
|
30,468,941
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
71,428
|
|
|
|
-
|
|
|
|
-
|
|
|
|
71,428
|
|
|
|
-
|
|
|
|
71,428
|
|
Common
stock issuance
|
|
|
-
|
|
|
|
-
|
|
|
|
29,585
|
|
|
|
30
|
|
|
|
(30
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common
stock
issued for warrant exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
5,000
|
|
|
|
5
|
|
|
|
8,740
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,745
|
|
|
|
-
|
|
|
|
8,745
|
|
Common
stock issued from conversion of series E preferred stock
|
|
|
(5,938,093
|
)
|
|
|
(5,938
|
)
|
|
|
5,938,093
|
|
|
|
5,938
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
profit (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,212,879
|
|
|
|
-
|
|
|
|
2,212,879
|
|
|
|
(574,412
|
)
|
|
|
1,638,467
|
|
Foreign
currency translation adjustments, net of nil tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,350,020
|
|
|
|
1,350,020
|
|
|
|
168,822
|
|
|
|
1,518,842
|
|
Balance, March
31, 2017
|
|
|
1,216,904
|
|
|
$
|
1,217
|
|
|
|
59,891,201
|
|
|
$
|
59,891
|
|
|
$
|
152,836,057
|
|
|
$
|
(113,456,389
|
)
|
|
$
|
(3,282
|
)
|
|
$
|
39,437,494
|
|
|
$
|
(5,731,071
|
)
|
|
$
|
33,706,423
|
|
*The above consolidated statements
of equity present the Wecast Services Limited and Wide Angle Group Limited acquired from BT Capital Global Limited on January
30 and January 31, 2017, respectively as if they had been owned by the Company since November 10, 2016 in accordance
with ASC Subtopic 805-50 (See Note 4 “
Acquisition
”)
The accompanying notes are an integral
part of these consolidated financial statements.
|
1.
|
Organization
and Principal Activities
|
Wecast Network, Inc. (the “Company”),
formerly known as 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 Wecast Network (“Wecast Network”, “we”, “us”, or “the
Company”).
Wecast Network is
leveraging its legacy operations as a premium content Video On Demand (“VOD”) service provider in China and
aiming to be the leading provider of total B2B business solutions for today’s constantly evolving business landscape.
With a focus on “BASE” or Blockchain, Artificial Intelligence, Supply Chain & Exchanges, Wecast is organized
into three cloud-based categories and business units: Brand IP Cloud, Product Sales Cloud, and the Financial
Product Cloud. With the three clouds functioning both independently and interdependently, Wecast is creating a vertical,
transactional and flexible platform for today’s global enterprises.
The Company’s mission
and vision is to be the world’s leading cloud-based, total B2B enterprise solution and platform provider that empowers businesses
to grow with Big Data technology.
Wecast Network launched its
legacy VOD service through acquisition of YOD Hong Kong, formerly Sinotop Group Limited, in July 30, 2010 through its subsidiary
China CB Cayman. Through a series of contractual arrangements, YOD WFOE, the subsidiary of YOD Hong Kong, controls Sinotop Beijing,
a corporation established in the PRC. Sinotop Beijing is the 80% owner of Zhong Hai Media, through which we provide: 1) integrated
value-added business-to-business (“B2B”) service solutions for the delivery of VOD and enhanced premium content for
digital cable; 2) integrated value-added business-to-business-to-customer (“B2B2C”) service solutions for the delivery
of VOD and enhanced premium content for IPTV and OTT providers and; 3) a direct to user, or B2C, mobile video service app. As
a result of the contractual arrangements with Sinotop Beijing, we have the right to control management decisions and direct the
economic activities that most significantly impact Sinotop Beijing and Zhong Hai Media, and accordingly, under generally accepted
accounting principles in the United States (“U.S. GAAP”), we consolidate these operating entities in our consolidated
financial statements.
On October 8, 2016, the
Company signed an agreement with Zhejiang Yanhua (“Yanhua Agreement”), where Zhejiang Yanhua
(“Yanhua”) will act as the exclusive distribution operator (within the territory of the People’ Republic of
China) of Wecast Network’s licensed library of major studio films. According to the Yanhua Agreement, the existing
legacy Hollywood studio paid contents as well as other IP contents specified in the agreement, along with the corresponding
authorized rights letter that Wecast Network is entitled to, will be turned over to Yanhua as a whole package, which was
agreed to be priced at RMB13,000,000. In addition to the above-mentioned minimal guarantee fee of RMB13,000,000 specified,
there is a provision in the Yanhua Agreement which states that once the revenue recognized from the existing contents
transferred from Wecast Network to Yanhua reaches the amount of RMB13,000,000, the revenue above RMB13,000,000 will be
shared with Wecast Network from the date when this revenue threshold is reached based on certain revenue-sharing mechanism
stipulated in the Yanhua Agreement.
On January 30, 2017, Company
entered into a Securities Purchase Agreement (the “Sun Video SPA”) with BT Capital Global Limited which has been controlled
by Company’s chairman Bruno Wu, for the purchase by us of all of the outstanding capital stock of Sun Video Group Hong Kong
Limited. On January 31, 2017, Company entered into another Securities Purchase Agreement (the “Wide Angle SPA”) with
BT and Sun Seven Stars Media Group Limited, one of the Company’s largest shareholders, controlled by Mr. Wu, as guarantor,
for the purchase by us of 55% of the outstanding capital stock of Wide Angle Group Limited (“Wide Angle”). Details
of these two acquisitions are in Note 4. After acquiring these two entities, other than Company’s legacy YOD business, Company
is also engaged with consumer electronics and smart hand held device design and supply chain management business.
In the opinion of management,
all adjustments (which include normal recurring adjustments) necessary to present a fair statements of the financial position
as of March 31, 2017, results of operations for the three months ended March 31, 2017 and 2016, and cash flows for the three months
ended March 31, 2017 and 2016, 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 Company’s Annual Report on Form 10-K for the year ended
December 31, 2016 filed with the Securities and Exchange Commission on March 31, 2017 (“2016 Annual Report”).
|
2.
|
Going
Concern and Management’s Plans
|
For the three months ended
March 31, 2017 and 2016, the Company incurred net income of approximately $1.6 million and net loss of $2.3
million, respectively, and cash used in operations was approximately $3.4 million and $1.7 million, respectively.
Further, the Company had accumulated deficit of approximately $113.5 million and $115.7 million as of March
31, 2017 and December 31, 2016, respectively, due to recurring losses since the inception of its 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. In addition, the Company completed three
common stock financings with Seven Star Works Co. Ltd. (“SSW”) for $4.0 million on July 19, 2016, with Harvest Alternative
Investment Opportunities SPC (“Harvest”) for $4.0 million on August 12, 2016, and with Sun Seven Stars Hong Kong Cultural
Development Limited (“SSSHK”) for $2.0 million on November 17, 2016, respectively. 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 Company’s 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 Media, 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 Media 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 former legal shareholder
of Sinotop Beijing (the spouse of our then-CEO). In January 2016, in connection with the appointment of 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, the 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 “Former Sinotop VIE Agreements”).
In October 2016, in accordance with our rights under contractual agreements, (1) the legal ownership of Sinotop Beijing was transferred
from Bing Wu to Mei Chen, the former CFO of our Company, (2) the Company terminated the series of contractual arrangements with
Bing Wu, and (3) the Company entered into new contractual agreements with Mei Chen (collectively, the “New Sinotop VIE Agreements”).
Although the Former Sinotop VIE Agreements and New Sinotop VIE Agreements resulted in changes to the legal shareholders of Sinotop
Beijing, there was no change in the Company’s ability to control Sinotop Beijing or the Company’s 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
Former Sinotop VIE Agreements and New Sinotop VIE Agreements and the Company remained the primary beneficiary of Sinotop Beijing
after the signing of the former Sinotop VIE Agreements and the New Sinotop VIE Agreements. Accordingly, the change in legal ownership
of Sinotop Beijing did not have any impact to the Company’s consolidation of Sinotop Beijing. The key terms of the New Sinotop
VIE Agreements are summarized as follows:
Equity Pledge Agreement
Pursuant to the Equity Pledge
Agreement among YOD WFOE, Sinotop Beijing, Mei Chen 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 WFOE’s 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 WFOE’s request. In the event the Spouses obtain any equity interests of Sinotop Beijing which
are held by the Nominee Shareholders, the Spouses agreed to be bound by the New Sinotop VIE Agreements, including the Technical
Services Agreement, and comply with the obligations thereunder, including sign a series of written documents in substantially
the same format and content as the New Sinotop VIE Agreements.
Letter of Indemnification
Pursuant to the Letter of Indemnification
among YOD WFOE and Mei Chen 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 WFOE’s 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 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 Beijing’s 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 Beijing’s 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 Media that can be used only to settle obligations of Sinotop
Beijing or Zhong Hai Media, except for the registered capital of these two entities amounting to RMB 21.8 million (approximately
$3.3 million) as of March 31, 2017. As Sinotop Beijing and Zhong Hai Media 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.
|
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 12(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 Company’s 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 WFOE’s 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 WFOE’s 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.
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 WFOE’s 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 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 December
31, 2016, RMB 27.6 million (US $4.2 million) and RMB nil have been lent to Lan Yang and Yun Zhu, respectively. Lan Yang has contributed
all of the RMB 27.6 million (US $4.2 million) in the form of capital contribution. The loan can only be repaid by a transfer by
the Nominee Shareholders of their equity interests in SSF to YOD WFOE or YOD WFOE’s 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. The loan
extended to the Nominee Shareholders and the capital of SSF are fully eliminated in the consolidated financial statements.
Management Services Agreement
In addition to the SSF VIE
Agreements, the Company’s 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 SSF’s 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 SSF’s 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
(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 27.6 million (approximately $4.2 million) has been
injected as of March 31, 2017. 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.
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
385,911
|
|
|
$
|
1,519,125
|
|
Accounts receivable, net
|
|
|
1,186,291
|
|
|
|
1,260,529
|
|
Prepaid expenses
|
|
|
62,881
|
|
|
|
30,455
|
|
Other current assets
|
|
|
1,798,108
|
|
|
|
191,427
|
|
Intercompany receivables due from the Company's subsidiaries
(i)
|
|
|
896,512
|
|
|
|
150,725
|
|
Total current assets
|
|
|
4,329,703
|
|
|
|
3,152,261
|
|
Property and equipment, net
|
|
|
206,106
|
|
|
|
196,677
|
|
Intangible assets, net
|
|
|
2,312
|
|
|
|
2,570
|
|
Long term investments
|
|
|
4,984,167
|
|
|
|
3,654,664
|
|
Other non-current assets
|
|
|
57,846
|
|
|
|
442,782
|
|
Total assets
|
|
$
|
9,580,134
|
|
|
$
|
7,448,954
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,191,076
|
|
|
$
|
5,817
|
|
Deferred revenue
|
|
|
3,522
|
|
|
|
824,563
|
|
Accrued expenses
|
|
|
248,226
|
|
|
|
268,074
|
|
Other current liabilities
|
|
|
413,327
|
|
|
|
394,314
|
|
Accrued license content fees
|
|
|
1,189,453
|
|
|
|
1,236,661
|
|
Intercompany payables due to the Company's subsidiaries
(i)
|
|
|
14,793,082
|
|
|
|
14,752,338
|
|
Total current liabilities
|
|
|
17,838,686
|
|
|
|
17,481,767
|
|
Total liabilities
|
|
$
|
17,838,686
|
|
|
$
|
17,481,767
|
|
|
|
Three
Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
$
|
787,328
|
|
|
$
|
1,269,726
|
|
Net income (loss)
|
|
$
|
258,760
|
|
|
$
|
(479,887
|
)
|
|
|
Three
Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net cash used in operating activities
|
|
$
|
(1,322,729)
|
|
|
$
|
(603,884
|
)
|
Net cash used in investing activities
|
|
$
|
-
|
|
|
$
|
-
|
|
Net
cash provided by financing activities
(i)
|
|
$
|
189,515
|
|
|
$
|
21,855
|
|
|
(i)
|
Intercompany receivables and payables
are eliminated upon consolidation. The intercompany financing activities include the
capital injection of $0.29 million to Sinotop Beijing in the three months period
ended March 31, 2017.
|
The revenue producing assets
that are held by the VIEs and a VIE’s subsidiary primarily comprise of licensed content, network equipment, software and
licenses and website. Substantially all of such assets are recognized in the Company’s consolidated financial statements,
except for certain Internet Content Provider licenses, internally developed software, trademarks and patent applications which
were not recorded on the Company’s consolidated balance sheets as they do not meet all the capitalization criteria. The
VIEs also have assembled work force for sales, marketing and operations.
On January 30, 2017, we entered
into a Securities Purchase Agreement (the “Sun Video SPA”) with BT Capital Global Limited, a Hong Kong company (“BT”)
which has been controlled by Company’s chairman Bruno Wu, for the purchase by us of all of the outstanding capital stock
of Sun Video Group Hong Kong Limited, a Hong Kong corporation (“SVG”) for an aggregate purchase price of $800,000
and a $50 million Promissory Note (the “SVG Note”) with the principal and interest thereon convertible into shares
of the Company’s common stock at a conversion rate of $1.50 per share. BT has guaranteed that SVG will achieve certain
financial goals within 12 months of the closing. Until receipt of necessary shareholder approvals, the SVG Note is not convertible
into shares of our common stock, but once the necessary shareholder approval is received, the unpaid principal and interest thereon
will automatically convert. Under the terms of the Sun Video SPA, BT has guaranteed that the business of the SVG and its subsidiaries
(the “Sun Video Business”) shall achieve revenue of $250 million and $15 million of gross profit (collectively the
“Performance Guarantees”) within 12 months of the closing. If the Sun Video Business fails to meet either of the Performance
Guarantees within such time, BT shall forfeit back to us the shares of our common stock or SVG Note, on a pro rata basis based
on the Performance Guarantee for which the Sun Video Business achieves the lowest percentage of the respective amount guaranteed.
In addition, if the Sun Video
Business achieves more than $50 million in cumulative net income within 3 years of closing, (the “Net Income Threshold”),
we shall pay BT 50% of the amount of any cumulative net income above the Net Income Threshold. Profit share payments shall be
made on an annual basis, in either cash or stock at the discretion of our Board of Directors. If the Board decides to make the
payment in stock, the number of our shares of common stock to be awarded shall be calculated based on the market price of such
shares.
After the acquisition SVG
changed its name to Wecast Services Limited, and is therefore also referred to herein as Wecast Services.
On January 31, 2017, we entered
into a Securities Purchase Agreement (the “Wide Angle SPA”) with BT and Sun Seven Stars Media Group Limited, a Hong
Kong company (“SSS”), one of the Company’s largest shareholders, controlled by our chairman Bruno Wu, as guarantor,
for the purchase by us of 55% of the outstanding capital stock of Wide Angle for the
sole consideration of the Company adding Wide Angle to the Sun Video Business acquired by the Company under the Sun Video SPA
and thereby including the revenue and gross profit from Wide Angle in the calculation of the SVG Performance Guarantees set forth
in the Sun Video SPA.
Since the Company, Wecast
Services and Wide Angle were controlled by our chairman Bruno Wu since November 10, 2016, as well as both before and
after the acquisition, this transaction was accounted for as a business combination between entities under common control by Mr.
Wu. Therefore, in accordance with ASC Subtopic 805-50, the consolidated financial statements of the Company include the
acquired assets and liabilities of the SVG and Wide Angle at their historical carrying amounts. In addition, the Company’s
consolidated financial statements as of December 31, 2016 have been prepared as if the Wecast Services and
Wide Angle had been owned by the Company since November 10, 2016 presented and the Company’s consolidated financial
statements as of December 31, 2016 has been retrospectively adjusted accordingly.
As of March 31, 2017, the
Company recorded SVG note in $50 million as Company’s additional paid in capital as Company believed that Performance Guarantees
would be met within 12 months of the closing, but Net Income Threshold might probably not be met within 3 years of closing. Considering
the proceeds transferred was larger than carrying amounts of the net assets received, such $50 million was then recognized as
reduction to Company’s additional paid in capital.
Accounts receivable is consisted
of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accounts receivable, gross:
|
|
$
|
32,040,818
|
|
|
$
|
12,350,947
|
|
Less: allowance for doubtful accounts
|
|
|
(2,844,227
|
)
|
|
|
(2,828,796
|
)
|
Accounts receivable, net
|
|
$
|
29,196,591
|
|
|
$
|
9,522,151
|
|
The movement of the allowance
for doubtful accounts is as follows:
|
|
March
31,
2017
|
|
|
December
31,
2016
|
|
Balance at the beginning of the period
|
|
$
|
(2,828,796
|
)
|
|
$
|
(3,672
|
)
|
Additions charged to bad debt expense
|
|
|
(15,431
|
)
|
|
|
(2,825,124
|
)
|
Write-off of bad debt allowance
|
|
|
-
|
|
|
|
-
|
|
Balance at the end of the period
|
|
$
|
(2,844,227
|
)
|
|
$
|
(2,828,796
|
)
|
|
6.
|
Property
and Equipment
|
The following is a breakdown
of the Company’s property and equipment:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Furniture and office equipment
|
|
$
|
1,070,443
|
|
|
$
|
1,061,762
|
|
Vehicle
|
|
|
144,544
|
|
|
|
267,022
|
|
Office Building
|
|
|
3,969,632
|
|
|
|
3,948,058
|
|
Leasehold improvements
|
|
|
702,634
|
|
|
|
760,931
|
|
Total property and equipment
|
|
|
5,887,253
|
|
|
|
6,037,773
|
|
Less: accumulated depreciation
|
|
|
(1,126,277
|
)
|
|
|
(1,074,048
|
)
|
Property and Equipment, net
|
|
$
|
4,760,976
|
|
|
$
|
4,963,725
|
|
The Company recorded
depreciation expense of approximately $168,082 and $34,000 for the three months ended March 31, 2017 and 2016 respectively.
As of March 31, 2017 and December
31, 2016, the Company’s amortizing and indefinite lived intangible assets consisted of the following:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Amortizing Intangible
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
Impairment
|
|
|
Net
|
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
Impairment
|
|
|
Net
|
|
Assets
|
|
Amount
|
|
|
Amortization
|
|
|
Loss
|
|
|
Balance
|
|
|
Amount
|
|
|
Amortization
|
|
|
Loss
|
|
|
Balance
|
|
Charter/ Cooperation agreements (iii)
|
|
$
|
2,755,821
|
|
|
|
(909,257
|
)
|
|
|
(1,846,564
|
)
|
|
|
-
|
|
|
$
|
2,755,821
|
|
|
$
|
(909,257
|
)
|
|
$
|
(1,846,564
|
)
|
|
$
|
-
|
|
Software and licenses
|
|
|
267,991
|
|
|
|
(244,585
|
)
|
|
|
-
|
|
|
|
23,406
|
|
|
|
267,991
|
|
|
|
(241,932
|
)
|
|
|
-
|
|
|
|
26,059
|
|
Patent and trademark
|
|
|
92,965
|
|
|
|
(39,943
|
)
|
|
|
-
|
|
|
|
53,022
|
|
|
|
92,965
|
|
|
|
(39,943
|
)
|
|
|
-
|
|
|
|
53,022
|
|
Website and mobile app development (ii)
|
|
|
593,193
|
|
|
|
(421,129
|
)
|
|
|
(172,064
|
)
|
|
|
-
|
|
|
|
593,193
|
|
|
|
(421,129
|
)
|
|
|
(172,064
|
)
|
|
|
-
|
|
Workforce (i)
|
|
|
305,694
|
|
|
|
(101,898
|
)
|
|
|
-
|
|
|
|
203,796
|
|
|
|
305,694
|
|
|
|
(76,422
|
)
|
|
|
-
|
|
|
|
229,272
|
|
Total amortizing intangible assets
|
|
$
|
4,015,664
|
|
|
|
(1,716,812
|
)
|
|
|
(2,018,628
|
)
|
|
|
280,224
|
|
|
$
|
4,015,664
|
|
|
$
|
(1,688,683
|
)
|
|
$
|
(2,018,628
|
)
|
|
$
|
308,353
|
|
Indefinite lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Website name
|
|
|
134,290
|
|
|
|
-
|
|
|
|
-
|
|
|
|
134,290
|
|
|
|
134,290
|
|
|
|
-
|
|
|
|
-
|
|
|
|
134,290
|
|
Patent
|
|
|
10,599
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,599
|
|
|
|
10,599
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,599
|
|
Total intangible assets
|
|
$
|
4,160,553
|
|
|
|
(1,716,812
|
)
|
|
|
(2,018,622
|
)
|
|
|
425,113
|
|
|
$
|
4,160,553
|
|
|
$
|
(1,688,683
|
)
|
|
$
|
(2,018,628
|
)
|
|
$
|
453,242
|
|
(i) On April 1, 2016, Wecast
Network entered into an agreement with Mr. Liu Changsheng, under which Wecast Network agreed to pay Mr. Liu Changsheng cash consideration
of $187,653 and 66,500 shares of restricted shares with a six month restriction period and a fair value of $121,695 in exchange
for a workforce of 10 personnel experienced in programing content mobile apps. All 10 personnel enter into three year employment
contracts with Wecast Network effective from April 1, 2016. The Company also acquired certain laptop and desktop computers with
fair value of $3,655. According to the agreement, 30% of the cash consideration is due upon the signing of the agreement, 20%
is due 2 months after the signing of the agreement and 50% is due 6 months after the signing of the agreement. Cash consideration
of $93,825 has been paid as of March 31, 2017, and $93,828 was paid on October 31, 2016. If any of three key staff, as defined,
terminated their employment with Wecast Network during the first 12 months of employment, Wecast Network 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.
Wecast Network has accounted for the transaction as an asset acquisition in which Wecast Network 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.
The Company recorded
amortization expense related to our amortizing intangible assets of approximately $28,129 and $63,000 for the three
months ended March 31, 2017 and March 31, 2016 respectively, which included the amortization expense of the workforce acquired
as stated above.
(ii) Considering a new mobile
app has been developed to be put into market in October, 2016, the Company determined that the future cash flows
generated from the old mobile app was nil. In accordance with ASC 350,
Intangibles – Goodwill and Other
, recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future
cash flows expected to be generated by the asset. The Company estimated the fair value of this intangible asset to be nil
as of March 31, 2017 and December 31, 2016. Fair value was determined using unobservable (Level 3) inputs. Impairment loss
from mobile app development of $172,000 was recognized in 2016 to write off the entire book value of the old mobile app.
(iii) During the fourth
quarter of 2016, the Company determined that the Charter/Cooperation agreements will not serve the business or generate future
cash flow. As no future cash flows will be generated from the Charter/Cooperation agreements, the Company estimated the fair value
of the Charter/Cooperation agreements to be nil as of December 31, 2016. Fair value was determined using unobservable (Level 3)
inputs. Impairment loss from Charter/Cooperation agreements of $1,846,000 was recognized in 2016 to write off the entire book
value of the Charter/Cooperation agreements.
.
The following table outlines
the amortization expense for the next five years and thereafter:
|
|
Amortization to be
|
|
Years
ending December 31,
|
|
Recognized
|
|
2017(9 months)
|
|
|
90,277
|
|
2018
|
|
|
118,254
|
|
2019
|
|
|
35,794
|
|
2020 and thereafter
|
|
|
35,899
|
|
Total amortization to be recognized
|
|
$
|
280,224
|
|
Cost method
investments
Cost method investments
as of the period ended March 31, 2017 and December 31, 2016 are as follow:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Topsgame (i)
|
|
$
|
3,174,235
|
|
|
$
|
3,156,985
|
|
Frequency (ii)
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
Total
|
|
$
|
6,174,235
|
|
|
$
|
6,156,985
|
|
|
(i)
|
Investment in Topsgame
|
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. 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 Topsgame’s 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
Company’s 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, based
on the acquisition cost of Game IP Rights of approximately $2.7 million and accounts for the investment by the cost method.
On September 14, 2016, SSF
increased its investment in Topsgame by RMB 3,900,000 (approximately $584,000) and maintained its 13% equity ownership of Topsgame.
The investment continued to be accounted for using the cost method..
|
(ii)
|
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 million. The 8,566,271 Series A Preferred Stock represent 9% 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 Frequency’s
board of directors. The Frequency Preferred Stock is also convertible into shares of Frequency common stock at the Company’s
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 accounts for the investment by the cost method.
There
were no identified events or changes in circumstances that may have had a significant adverse effect on the fair value of our
cost method investments, accordingly the fair value of our cost method investments are not estimated.
Equity method investments
Equity method investment movement
for the three months ended on March 31, 2017 is as follow:
|
|
March 31, 2017
|
|
|
|
|
|
December
31, 2016
|
|
|
Capital increase
|
|
|
Gain/(Loss)
on investment
|
|
|
Impairment loss
|
|
|
Foreign currency
translation adjustments
|
|
|
March 31,
2017
|
|
Wecast Internet
|
|
(i)
|
|
|
132,782
|
|
|
|
-
|
|
|
|
(37,382
|
)
|
|
|
-
|
|
|
|
3,804
|
|
|
|
99,204
|
|
Hua Cheng
|
|
(ii)
|
|
|
364,897
|
|
|
|
-
|
|
|
|
(6,364
|
)
|
|
|
(38,448
|
)
|
|
|
41,959
|
|
|
|
362,044
|
|
Shandong Media
|
|
(iii)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
|
|
497,679
|
|
|
|
-
|
|
|
|
(43,746
|
)
|
|
|
(38,448
|
)
|
|
|
45,763
|
|
|
|
461,248
|
|
|
(i)
|
Investment in
Wecast Internet
|
In October 2016, the Company’s
subsidiary, YOU On Demand (Asia) Ltd., invested RMB 1,000,000 (approximately $149,750) in Wecast Internet Limited (“Wecast
Internet”) and held its 50% equity ownership.
|
(ii)
|
Investment in
Hua Cheng
|
As of the period ended
March 31, 2017 and December 31, 2016, the Company held 39% equity ownership in Hua Cheng, and accounted for the investment by
the equity method.
|
(iii)
|
Investment in
Shandong Media
|
As of the period ended
March 31, 2017 and December 31, 2016, the Company held 30% equity ownership in Shandong Media, and accounts for the investment
by the equity method. The investment was fully impaired as of March 31, 2017 and December 31, 2016.
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
Company’s 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 and 2,272,727 shares were issued on July 19, 2016.
On August 11, 2016, the Company
entered into 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 Company’s 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 and 2,272,727 shares were issued on August 12, 2016.
On November 11, 2016, the Company
entered into Common Stock Purchase Agreement (the “SSSHKCD SPA”) with Sun Seven Stars Hong Kong Cultural Development
Limited, a Hong Kong company (“SSSHKCD”) and an affiliate of SSS. Pursuant to the terms of the SSSHKCD SPA, the Company
has agreed to sell and issue 1,136,3654 shares of the Company’s common stock for $1.76 per share, or a total purchase price
of $2.0 million to SSSHKCD. A total of $2.0 million was received and 1,136,365 shares were issued on November 17, 2016.
As described in Note 12, the
Company and SSS entered into a series of agreements, including an agreement pursuant to which the Company agreed to sell and issue
4,545,455 shares of the Company's common stock and warrants to acquire an additional 1,818,182 shares (at an exercise price of
$2.75 per share) for an aggregate purchase price of $10 million to SSS.
|
10.
|
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.
The Company reviews
the valuation techniques used to determine if the fair value measurements are still appropriate on an annual basis, and evaluate
and adjust the unobservable inputs used in the fair value measurements based on current market conditions and third party information.
Common stock is valued at closing
price reported on the active market on which the individual securities are traded.
The fair value of the warrant
liabilities at March 31, 2017 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, 2016. The following assumptions were incorporated:
|
|
Black Scholes
|
|
|
Monte Carlo
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Risk-free interest rate
|
|
|
0.91
|
%
|
|
|
0.70
|
%
|
Expected volatility
|
|
|
55
|
%
|
|
|
55
|
%
|
Expected term
|
|
|
0.42 year
|
|
|
|
0.67 year
|
|
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 as of March 31, 2017 and
December 31, 2016, respectively:
|
|
March 31, 2017
|
|
|
|
|
|
|
Fair
Value Measurements
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
Fair Value
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note 13)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
340,901
|
|
|
$
|
340,901
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
Fair
Value Measurements
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
Fair Value
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note 13)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
70,785
|
|
|
$
|
70,785
|
|
The table
below reflects the components effecting the change in fair value for the three months ended March 31, 2017:
|
|
Level 3 Assets and Liabilities
|
|
|
|
|
|
|
For
the Three Months Ended March 31 , 2017
|
|
|
|
|
|
|
January
1,
|
|
|
|
|
|
Change in
|
|
|
March 31,
|
|
|
|
2017
|
|
|
Settlements
|
|
|
Fair
Value
|
|
|
2017
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note 13)
|
|
$
|
70,785
|
|
|
$
|
-
|
|
|
$
|
270,116
|
|
|
$
|
340,901
|
|
The significant unobservable
inputs used in the fair value measurement of the Company’s 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, notes receivable, accounts payable, accrued other expenses, other current liabilities
payables and convertible promissory note as of March 31, 2017 and December 31, 2016, approximate fair value because of
the short maturity of these instruments.
|
11.
|
Related Party Transactions
|
|
(a)
|
$3.0
Million Convertible Note
|
On May 10, 2012, the Executive
Chairman and Principal Executive Officer, Mr. Shane McMahon, made a loan to the Company in the amount of $3,000,000. In consideration
for the loan, the Company issued a convertible note to Mr. McMahon in the aggregate principal amount of $3,000,000 (the “Note”)
at a 4% interest rate computed on the basis of a 365 day year. Upon issuance, the conversion price of the Note was equal to the
price per share paid for securities by investors in the most recent financing (as of the date of conversion) of equity or equity-linked
securities of the Company.
Effective on January 31, 2014,
the Company and Mr. McMahon entered into Amendment No. 4 to the Note pursuant to which the Note is at Mr. McMahon’s option,
payable on demand or convertible on demand into shares of Series E Preferred Stock of the Company (the “Series E Preferred
Stock”) at a conversion price of $1.75, until December 31, 2015. As a result, in 2014, the Company recognized a beneficial
conversion feature discount calculated as the difference between the Series E Preferred Stock at its intrinsic value, which was
the fair value of the common stock at the commitment date for the Series E Preferred Stock investment and the effective conversion
price. As such, we recognized a beneficial conversion feature of approximately $2,126,000 in 2014 which was reflected as interest
expense and additional paid-in capital since the note was payable upon demand.
Effective December 30, 2014,
the Company and Mr. McMahon entered into Amendment No. 5 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. McMahon’s option.
On December 31, 2016, the Company
and Mr. McMahon entered into an amendment pursuant to which the Note will be at Mr. McMahon’s option, payable on demand
or convertible on demand into shares of the Company’s Series E Preferred Stock, provided that the Note will no longer be
convertible into Series E Preferred Stock upon the conversion of the Series E Preferred stock owned by C Media into the Company’s
Common Stock (pursuant to which all Series E Preferred Stock will be automatically converted) but then convertible only into Common
Stock at a conversion price of $1.50, until December 31, 2018.
For the three months ended
March 31, 2017 and 2016, the Company recorded interest expense of $30,000 and $30,000 related to the Note.
Hua Cheng, the minority shareholder
of Zhong Hai Media, charged Company licensed content fees of approximately nil and $56,000 for the three months ended March 31,
2017 and 2016, respectively. As of March 31, 2017 and December 31, 2016, total accrued license fees due to Hua Cheng amounted
to nil and $54,000, respectively.
|
(c)
|
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 of $2.7 million (RMB 18
million), which was paid in full in 2016. The Game IP Rights was recorded at cost and then subsequently transferred in exchange
for the investment in Topsgame as disclosed in Note 8 above.
|
(d)
|
Short term entrust loans
|
During the first quarter
of 2017, the company entered into a series of entrust loans with the entities controlled by Bruno Wu
to obtain short-term financial support for the Company’s daily operation. As of March 31, 2017 and
December 31, 2016, the Company had such borrowings in the amount of $2,173,891 and nil, respectively. As of the date of this report, all of such entrust loans have been paid back to related parties.
|
(e)
|
Deposit for Investment in MYP
|
On September 19, 2016, the Company
signed a non-binding term sheet with Sun Video Group HK Limited ("SVG") in purchase for its 51% ownership of M.Y. Products,
LLC ("MYP"), a video commerce and supply chain management operator, in exchange for $50 million worth of Wecast Network
common stock and $800,000 cash.
In accordance with the Term Sheet,
the Company wired $800,000 (or its RMB equivalent) to MYP upon signing the term sheet as Good Faith Deposit. As of March 31, 2017,
the transaction has already been closed, and all of the deposit paid to MYP has been transferred into liability
due to BT, which is the former shareholder of SVG.
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 Company’s 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 Company’s 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.
On July 6, 2016, the Company
entered into a Common Stock Purchase Agreement with Seven Stars Works Co., Ltd., a Korea company (“SSW”) and an affiliate
of SSS for the purchase by SSW of 2,272,727 shares of the Company’s common stock, for $1.76 per share, or a total purchase
price of $4.0 million.
On November
11, 2016, the Company entered into a Common Stock Purchase Agreement with Sun Seven Stars Hong Kong Cultural Development Limited,
a Hong Kong company (“SSSHKCD”) and an affiliate of SSS. Pursuant to the terms of the SPA, the Company has agreed
to sell and issue 1,136,365 shares of the Company’s common stock, for $1.76 per share, or a total purchase price
of $2.0 million to SSSHKCD.
|
(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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 $411,000,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
$725,000 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 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. 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. The SSS Note 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 Company’s outstanding common stock, which was obtained on June 27, 2016, the SSS Note was converted
into 9,208,860 shares of the Company’s common stock.
In connection with the issuance
of the SSS Note, the Company recorded debt issuance costs of approximately $131,000 which was to be amortized over the period
of the SSS Note’s maturity date, of which approximately $123,000 was recognized during the year ended December 31, 2016.
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 Company’s
common stock on that date. As the effective conversion price of the SSS Note of $1.91 exceeded the fair value of the Company’s
common stock of $1.81, no beneficial conversion feature was recognized.
The carrying value of the SSS
Note as of June 27, 2016, which included the unamortized issuance costs of $8,000 and, pursuant to the terms of SSS Note, accrued
interest expense of $25,000 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 Enternet was to receive shares of the Company’s
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”) was 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 was required
to 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 Company’s Chairman, and 1% owned by Yun Zhu, a Vice President of Wecast Network.
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 was
originally based on either the number of home/user pass or the net income of SSF. While the net income was to be measured based
on the operations of SSF, the number of home/user pass is measured based on number of home/user pass of SSF’s 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 Company’s 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 Company’s 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.
On November 10, 2016, the Board
of Directors (the “Board”) of Wecast Network held a special meeting. At the recommendation of the Company’s
audit committee, the Board determined that it is in the best interests of the Company and the Company’s shareholders to
amend the terms of the Earn-Out Share Award to (1) reduce the total Earn-Out Share Award from 15,000,000 shares of Common Stock
to 10,000,000 shares of Common Stock and (2) measure the achievement of the earn-out provisions based on the Companywide achievement
of homes passed in lieu of the measurement being measured by SFF’s stand-alone achievement of homes passed. Based on evidence
provided to the Board, the requisite thresholds necessary to trigger issuance of all shares of Common Stock subject to the Earn-Out
Share Award have been achieved. Accordingly, on November 10, 2016, the Board approved the issuance of 10,000,000 shares of its
common stock, par value $0.001 per share (“Common Stock to SSS”) and the shares were issued on November 11, 2016,
The Company recognized the
fair value of the Common Stock to SSS of approximately $13,700,000, based on the market price of the Company’s Common Stock,
as Earn-out share award expense in the accompanying consolidated statement of operations for the year ended December 31,
2016.
In connection with our August
30, 2012 private financing, the Company issued 977,063 warrants to investors and the broker. In accordance with ASC 815-40,
Contracts in Entity’s Own Equity, the warrants have been accounted as derivative liabilities to be re-measured at the end
of every reporting period with the change in fair 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 fair value
of the warrants are remeasured at each reporting period based on the Monte Carlo valuation.
As of March 31, 2017 and December
31, 2016, the warrant liability was re-valued as disclosed in Note 10, and recorded at its fair value of approximately $340,901
and $70,785, respectively, resulting in a loss of approximately $270,116 for the three months ended March 31, 2017. There were
no warrants exercised during three months ended March 31, 2017.
As of March 31, 2017, the Company
had 2,251,428 options and 3,778,002 warrants outstanding (including the 1,818,182 warrants issued to SSS as disclosed in
Note 12 (a) 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 months ended March 31, 2017 and 2016 is as follows:
|
|
Three
Months Ended
|
|
|
|
March 31
|
|
|
March 31
|
|
|
|
2017
|
|
|
2016
|
|
Employees and directors share-based payments
|
|
$
|
71,428
|
|
|
$
|
139,000
|
|
Effective as of December 3,
2010, our Board of Directors approved the Wecast Network, Inc. 2010 Stock Incentive Plan (“the Plan”) pursuant to
which options or other similar securities may be granted. The maximum aggregate number of shares of our common stock that may
be issued under the Plan is 4,000,000 shares. As of March 31, 2017, options available for issuance are 1,069,465
shares.
Stock option activity for the
three months ended March 31, 2017 is summarized as follows:
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregated
|
|
|
|
Options
|
|
|
Weighted Average
|
|
|
Contractual Life
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
Exercise
Price
|
|
|
(Years)
|
|
|
Value
|
|
Outstanding at January 1, 2017
|
|
|
2,101,428
|
|
|
$
|
2.42
|
|
|
|
4.59
|
|
|
|
-
|
|
Granted
|
|
|
150,000
|
|
|
|
1.62
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
2,251,428
|
|
|
|
2.33
|
|
|
|
4.67
|
|
|
|
-
|
|
Vested and expected to vest as of March 31, 2017
|
|
|
2,251,428
|
|
|
|
2.33
|
|
|
|
4.67
|
|
|
|
-
|
|
Options exercisable at March 31, 2017 (vested)
|
|
|
1,687,051
|
|
|
|
2.80
|
|
|
|
3.38
|
|
|
|
-
|
|
On January 4, 2017 and March
1 and March 16, 2017, 70,000, 45,000 and 35,000 shares stock options, respectively, were issued to certain
employees for services provided to us. The fair value of the stock options granted were valued using the Black-Scholes Merton
method on the grant date, amounting to $47,415, $45,443 and $36,750, respectively.
The following table summarizes
the assumptions used to estimate the fair values of the share options granted in the three months ended March 31, 2017
presented:
|
|
Black Scholes
|
|
Risk-free interest rate
|
|
|
2.26% ~ 2.34
|
%
|
Expected volatility
|
|
|
55
|
%
|
Expected term
|
|
|
5.88 years
|
|
Expected dividend yield
|
|
|
0
|
%
|
As of March 31, 2017, approximately
$501,000 of total unrecognized compensation expense related to non-vested share options is expected to be recognized over
a weighted average period of approximately 2.40 years. The total fair value of shares vested during the three months ended
March 31, 2017 and 2016 was approximately nil and $16,000, respectively.
In connection with the Company’s
financings, the Warner Brother Agreement and the service agreements, the Company issued warrants to service providers to purchase
common stock of the Company.
As of March 31, 2017, the weighted
average exercise price of the warrants was $2.20 and the weighted average remaining life was 1.19 years. The following table outlines
the warrants outstanding and exercisable as of March 31, 2017 and December 31, 2016:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
Number
of
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
Warrants
|
|
|
|
|
|
|
Warrants
Outstanding
|
|
Outstanding
and
Exercisable
|
|
|
Outstanding
and
Exercisable
|
|
|
Exercise
Price
|
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 August Financing Warrants (i)
|
|
|
536,250
|
|
|
|
536,250
|
|
|
$
|
1.50
|
|
|
08/30/17
|
2013 Broker Warrants (Series D Financing)
|
|
|
223,571
|
|
|
|
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
|
2016 Warrants to SSS (Note 12)
|
|
|
1,818,182
|
|
|
|
1,818,182
|
|
|
$
|
2.75
|
|
|
03/28/18
|
|
|
|
3,778,002
|
|
|
|
3,783,002
|
|
|
|
|
|
|
|
|
(i)
|
The warrants are classified as derivative
liabilities as disclosed in Note 13.
|
|
15.
|
Earnings
(Loss) Per Common Share
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
Net earnings/(loss) attributable to common stockholders
|
|
|
2,212,879
|
|
|
|
2,212,879
|
|
|
|
(2,136,471
|
)
|
|
|
(2,136,471
|
)
|
Average equivalent shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
55,382,002
|
|
|
|
55,382,002
|
|
|
|
24,484,562
|
|
|
|
24,484,562
|
|
Convertible preferred shares
|
|
|
-
|
|
|
|
2,150,237
|
|
|
|
-
|
|
|
|
-
|
|
Dilutive effect of convertible promissory notes
|
|
|
-
|
|
|
|
3,183,482
|
|
|
|
-
|
|
|
|
-
|
|
Total average equivalent shares
|
|
|
55,382,002
|
|
|
|
60,715,721
|
|
|
|
24,484,562
|
|
|
|
24,484,562
|
|
Earnings/(loss) per common share
|
|
|
0.04
|
|
|
|
0.04
|
|
|
|
(0.09
|
)
|
|
|
(0.09
|
)
|
Basic earnings (loss)
per common share attributable to Wecast Network shareholders is calculated by dividing the net earnings (loss)
attributable to Wecast Network shareholders by the weighted average number of outstanding common shares during the applicable
period.
Diluted earnings (loss)
per share is calculated by taking net earnings (loss), divided by the diluted weighted average common shares outstanding. Diluted
loss per share for the three months ended March 31, 2016 equals basic loss per share because the effect of securities convertible
into common shares is anti-dilutive.
For the three months ended March
31, 2017 and 2016, 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:
|
|
March 31,
|
|
March 31,
|
|
|
2017
|
|
2016
|
Warrants
|
|
|
3,778,002
|
|
|
|
4,009,669
|
|
Options
|
|
|
2,251,428
|
|
|
|
1,722,325
|
|
Series A Preferred Stock
|
|
|
—
|
|
|
|
933,333
|
|
Series E Preferred Stock
|
|
|
—
|
|
|
|
7,254,997
|
|
Convertible promissory note and interest
|
|
|
—
|
|
|
|
11,190,292
|
|
Total
|
|
|
6,029,430
|
|
|
|
25,110,616
|
|
As of March 31, 2017, the Company
had approximately $28.9 million of the U.S domestic cumulative tax loss carryforwards and approximately $17.5 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 2018 to year 2022,
respectively.
The income tax expense for
the three months ended March 31, 2017 is nil because net operating loss carryovers offset current taxable income and deferred
tax assets related to the net operating loss carryovers utilized had been offset by a valuations allowance. Company had established
a 100% valuation allowance against its net deferred tax assets due to its history of pre-tax losses and the likelihood that the
deferred tax assets will not be realized. The valuation allowance was decreased approximately $0.4 million during the three months
ended March 31, 2017.
As of March 31, 2017, there
are no unrecorded tax benefits which would impact our financial position or our results of operations.
|
17.
|
Contingencies and Commitments
|
|
(a)
|
Operating
Lease Commitment
|
The Company is committed to
paying leased property costs related to our offices in China as follows:
|
|
Leased Property
|
|
Years ending December 31,
|
|
Costs
|
|
2017(9 months)
|
|
|
235,000
|
|
2018
|
|
|
266,000
|
|
2019
|
|
|
193,000
|
|
2020
|
|
|
199,000
|
|
Thereafter
|
|
|
84,000
|
|
Total
|
|
$
|
977,000
|
|
|
(b)
|
Licensed
Content Commitment
|
The Company is committed to
paying content costs through 2019 as follows:
Years ending December 31,
|
|
Content Costs
|
|
|
|
|
|
2017 (9 months)
|
|
|
1,454,000
|
|
2018
|
|
|
217,000
|
|
2019
|
|
|
217,000
|
|
Total
|
|
$
|
1,888,000
|
|
|
(c)
|
Lawsuits
and Legal Proceedings
|
From time to time, we may become
involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject
to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
As of March 31, 2017, 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.
|
(d)
|
Acquisition
of Property Commitment
|
In consideration of the Company’s
business expansion and rising rental costs, in 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
RMB27.4 million (approximately $4,239,000), which the Company has paid RMB20.5 million (approximately $3,247,000)
at the end of first quarter of 2017 and is committed to paying the remaining balance in 2017 as follows:
Years ending December 31,
|
|
Property
|
|
2017 (9 months)
|
|
|
992,000
|
|
Total
|
|
$
|
992,000
|
|
|
(e)
|
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
|
|
2017 (9 months)
|
|
|
106,000
|
|
Total
|
|
$
|
106,000
|
|
|
18.
|
Concentration, Credit and Other Risks
|
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 legacy YOD business in China through Zhong Hai Media, 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
Media, 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 Company’s 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 Company’s legal
structure and scope of operations in the PRC, which could be subject to further restrictions resulting in limitations on the Company’s
ability to conduct business in the PRC.
Legacy YOD business
The Company has agreements
with distribution partners, including digital cable operators,
IPTV operators, OTT streaming operators and mobile smartphone manufacturers and operator.
A distribution partner that individually generates more than 10% of the Company’s revenue is considered a major customer.
On October 8, 2016, the Company
signed an agreement to form a partnership with Zhejiang Yanhua ("Yanhua Agreement"), where Yanhua will act as the exclusive
distribution operator (within the territory of the People's Republic of China) of WCST's licensed library of major studio films.
According to the Yanhua Agreement, the existing legacy Hollywood studio paid contents as well as other IP contents specified in
the agreement, along with the corresponding authorized rights letter that WCST is entitled to, will be turned over to Yanhua as
a whole package, which was agreed to be priced at RMB13,000,000. In addition to the above-mentioned minimal guarantee fee of RMB13,000,000
specified, there is a provision in the Yanhua Agreement which states that once the revenue recognized from the existing contents
transferred from WCST to Yanhua reaches the amount of RMB13,000,000, the revenue above RMB13,000,000 will be shared with WCST
from the date when this revenue threshold is reached based on certain revenue-sharing mechanism stipulated in the Yanhua Agreement.
Pursuant to ASC Subtopic 926-605,
Entertainment-Films - Revenue Recognition, for certain contracts that involve sub-licensing content within the specified license
period, revenue is recognized upon delivery of films when the arrangement includes a nonrefundable minimum guarantee, delivery
is complete and there are no substantive future obligations to provide future additional services.
According
to the Yanhua Agreement, the total price of the Existing Contents to be transferred is RMB13,000,000. The payment is agreed to
be paid in two installments, the first half of RMB6,500,000 was received on December 30, 2016
.
The remaining RMB6,500,000 will be paid under the scenario that the license content fees due to Studios for the existing legacy
Hollywood paid contents will be settled. Due to the fact that the second installment will depend upon some future events and is
contingent in nature, we deem this portion of the fee is not fixed or determinable and therefore, this portion of the revenue
did not meet the revenue recognition criteria to be recognized accordingly.
In terms of the additional revenue-sharing
fee over the above-mentioned RMB13,000,000 fee specified, considering that this part of arrangement fee is not fixed or determinable
at the time point as of March 31, 2017, it has not met the criteria for revenue recognition, management will recognize it once
it becomes determinable and meet the other revenue recognition criteria in the future.
Pursuant to the Yanhua Agreement,
RMB6,500,000 was recognized as revenue in the first three months ended March 31, 2017 based on the relative fair value of licensed
content delivered to Yanhua.
For the three months ended March
31, 2016, two customers individually accounted for more than 10% of the Company’s revenue. Four customers individually accounted
for 10% of the Company’s net accounts receivables as of March 31, 2016.
Wecast Services
The holdings and
businesses from Company’s two acquisitions in January (Note 4) now reside under “Wecast Services”, our
whollyowned subsidiary Wecast Services Limited. Wecast Services (which resides under the Product Sales Cloud) is currently
primarily engaged with consumer electronics e-commerce and smart supply chain management operations. The Company’s
ending customers include British Telecom, Micromax and about 15 to 20 other corporations across the world.
For the three months
ended March 31, 2017, one customer individually accounted for more than 10% of the Company’s revenue.
Three customers individually accounted for more than 10% of the Company’s net accounts receivables as of March
31, 2017, respectively.
Legacy YOD business
The Company relies on agreements
with studio content partners to acquire video contents. A content partner that accounts for more than 10% of the Company’s
cost of revenues is considered a major supplier.
As of December 31, 2016, all
licensed contents have been recognized as cost of revenues other than the ones that acquired from SSS in the amount of $17.7 million
(note 12).
For the three months ended March
31, 2016, four suppliers individually accounted for more than 10% of the Company’s cost of revenues. Two suppliers individually
accounted for 10% of the Company’s accounts payable as of March 31, 2016.
Wecast Services
The Company relies
on agreements with consumer electronics manufactures.
For the three months
ended March 31, 2017, two suppliers individually accounted for more than 10% of the Company’s cost of revenues.
One supplier individually accounted for more than 10% of the Company’s accounts payable as of
March 31, 2017.
|
(d)
|
Concentration of Credit Risks
|
Financial instruments that
potentially subject the Company to significant concentration of credit risk primarily consist of cash and accounts receivable.
As of March 31, 2017 and December 31, 2016, the Company’s 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 Company’s VOD content distribution partners, and smart sales products customers.
The risk with respect to accounts receivable is mitigated by regular credit evaluations that the Company performs on its distribution
partners and its ongoing monitoring of outstanding balances.
|
(e)
|
Foreign Currency Risks
|
A majority of the Company’s
operating transactions are denominated in RMB and a significant portion of the Company’s 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 People’s 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.
Time deposits, which mature
within one year as of the balance sheet date, represent interest-bearing certificates of deposit with an initial term of greater
than three months when purchased. Time deposits which mature over one year as of the balance sheet date are included in non-current
assets.
Cash and time deposits
maintained at banks consist of the following:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
RMB denominated bank deposits with financial institutions in the PRC
|
|
$
|
474,523
|
|
|
|
1,566,107
|
|
US dollar denominated bank deposits with financial institutions in the PRC
|
|
$
|
177,570
|
|
|
|
670,951
|
|
HKD denominated bank deposits with financial institutions in Hong Kong Special Administrative Region (“HK SAR”)
|
|
|
38,635
|
|
|
|
14,163
|
|
US dollar denominated bank deposits with financial institutions in Hong Kong Special Administrative Region (“HK SAR”)
|
|
$
|
296,197
|
|
|
|
1,403,000
|
|
US dollar denominated bank deposits with financial institutions in The United States of America (“USA”)
|
|
$
|
58,637
|
|
|
|
95,030
|
|
As of March 31, 2017 and December
31, 2016 deposits of $371,824 and $384,515 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.
|
19.
|
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
employee’s pay. Employees become fully vested in employer matching contributions after six months of employment. Company
401(k) matching contributions were approximately $1,233 and $1,000 for the three months ended March 31, 2017 and March 31, 2016
respectively.
The Company’s chief operating
decision maker has been identified as the chief executive officer, who reviews consolidated results when making decisions about
allocating resources and assessing performance of the Company. In fiscal year 2016, the Company operated and reported its performance
in one segment. However, starting from fiscal year 2017, since Company has acquired Wecast Services Limited and Wide Angle Group
Limited in January (see note 4), the Company has operated two segments based on different clouds that major business reside in,
including Legacy YOD segement and Wecast Service segment. Therefore, there are two reportable segments for the three months ended
March 31, 2017. The two reportable segments are:
Legacy YOD
- Provides
premium content and integrated value-added service solutions for the delivery of VOD and paid video programming to digital cable
providers, Internet Protocol Television (“IPTV”) providers. The core revenues are being generated from both minimum
guarantee payments and revenue sharing arrangements with distribution partners as well as subscription or transactional fees from
subscribers.
Wecast Service
-
Wecast Services (which resides under the Product Sales Cloud) is currently primarily engaged with consumer electronics e-commerce
and smart supply chain management operations.
Segment disclosures are on a
performance basis consistent with internal management reporting. The following tables summarized the Company’s revenue and
cost generated from different revenue streams.
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2017
|
|
|
2016
|
|
NET
SALES TO EXTERNAL CUSTOMERS
|
|
|
|
|
|
|
-Legacy
YOD
|
$
|
787,328
|
|
$
|
1,269,726
|
|
-Wecast
Service
|
|
32,377,023
|
|
|
-
|
|
Net
sales
|
|
33,164,351
|
|
|
1,269,726
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
|
|
|
|
-Legacy
YOD
|
|
27,493
|
|
|
353,946
|
|
-Wecast
Service
|
|
3,794,479
|
|
|
-
|
|
Gross
profit
|
|
3,821,972
|
|
|
353,946
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
TOTAL
ASSETS
|
|
|
|
|
|
|
-Legacy
YOD
|
$
|
35,955,219
|
|
$
|
36,975,911
|
|
-Wecast
Service
|
|
33,714,959
|
|
|
14,448,702
|
|
-Unallocated
assets
|
|
4,181,904
|
|
|
4,321,677
|
|
-Intersegment
elimination
|
|
(203,033)
|
|
|
-
|
|
Total
|
|
73,649,049
|
|
|
55,746,290
|
|
|
|
|
|
|
|
|
As at May 15, 2017 (reporting
date approved by Board of Directors), there is no material subsequent event to be disclosed.
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 product–development
and marketing efforts of our competitors. Examples of these events are more fully described in the Company’s 2016
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.