Item 1. Financial Statements.
SEVEN STARS CLOUD GROUP, INC., ITS SUBSIDIARIES
AND VARIABLE INTEREST ENTITIES
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2017
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
UNAUDITED CONSOLIDATED BALANCE SHEETS
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,676,756
|
|
|
$
|
3,761,814
|
|
Accounts receivable, net
|
|
|
42,784,281
|
|
|
|
9,522,151
|
|
Licensed content, current
|
|
|
883,015
|
|
|
|
124,319
|
|
Notes receivable
|
|
|
-
|
|
|
|
1,749,830
|
|
Inventory
|
|
|
375,693
|
|
|
|
203,697
|
|
Prepaid expenses
|
|
|
370,041
|
|
|
|
375,944
|
|
Other current assets
|
|
|
2,163,878
|
|
|
|
3,581,822
|
|
Total current assets
|
|
|
48,253,664
|
|
|
|
19,319,577
|
|
Property and equipment, net
|
|
|
119,304
|
|
|
|
4,963,725
|
|
Licensed content, non-current
|
|
|
16,075,134
|
|
|
|
17,593,528
|
|
Intangible assets, net
|
|
|
151,069
|
|
|
|
453,242
|
|
Goodwill
|
|
|
-
|
|
|
|
6,648,911
|
|
Long term investments
|
|
|
6,958,411
|
|
|
|
6,654,664
|
|
Other non-current assets
|
|
|
-
|
|
|
|
112,643
|
|
Total assets
|
|
$
|
71,557,582
|
|
|
$
|
55,746,290
|
|
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
(including amounts of consolidated VIEs without
recourse to Seven Stars Cloud Group, Inc. See note 3)
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
43,128,270
|
|
|
$
|
13,341,680
|
|
Deferred revenue
|
|
|
207,112
|
|
|
|
1,350,054
|
|
Accrued interest due to a related party
|
|
|
397,852
|
|
|
|
557,918
|
|
Accrued other expenses
|
|
|
118,833
|
|
|
|
708,987
|
|
Accrued salaries
|
|
|
684,739
|
|
|
|
766,957
|
|
Payable for purchase of building
|
|
|
-
|
|
|
|
987,015
|
|
Amounts due to related parties
|
|
|
58,567
|
|
|
|
1,060,817
|
|
Other current liabilities
|
|
|
168,316
|
|
|
|
934,480
|
|
Accrued license content fees
|
|
|
-
|
|
|
|
1,236,661
|
|
Convertible promissory note due to a related party
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
Warrant liabilities
|
|
|
-
|
|
|
|
70,785
|
|
Total current liabilities
|
|
|
47,763,689
|
|
|
|
24,015,354
|
|
Total liabilities
|
|
$
|
47,763,689
|
|
|
$
|
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 September 30, 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, Nil and 7,154,997 shares issued and outstanding, liquidation preference of Nil and $12,521,245 as of September 30, 2017 and December 31, 2016, respectively
|
|
|
-
|
|
|
|
7,155
|
|
Common stock - $0.001 par value; 1,500,000,000 shares
authorized, 62,264,494 and 53,918,523 shares issued and outstanding as of September 30, 2017 and December 31,
2016, respectively
|
|
|
62,264
|
|
|
|
53,918
|
|
Additional paid-in capital
|
|
|
145,791,961
|
|
|
|
152,755,919
|
|
Accumulated deficit
|
|
|
(120,521,733
|
)
|
|
|
(115,669,268
|
)
|
Accumulated other comprehensive loss
|
|
|
(775,512
|
)
|
|
|
(1,353,302
|
)
|
Total Seven Stars Cloud shareholders’ equity
|
|
|
24,556,980
|
|
|
|
35,794,422
|
|
Non-controlling interest
|
|
|
(2,025,082
|
)
|
|
|
(5,325,481
|
)
|
Total equity
|
|
|
22,531,898
|
|
|
|
30,468,941
|
|
Total liabilities, convertible redeemable preferred stock and equity
|
|
$
|
71,557,582
|
|
|
$
|
55,746,290
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
30,223,638
|
|
|
$
|
1,626,844
|
|
|
$
|
106,712,428
|
|
|
$
|
4,377,034
|
|
Cost of revenue
|
|
|
28,273,862
|
|
|
|
893,796
|
|
|
|
100,888,964
|
|
|
|
2,609,975
|
|
Gross profit
|
|
|
1,949,776
|
|
|
|
733,048
|
|
|
|
5,823,464
|
|
|
|
1,767,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
3,630,949
|
|
|
|
2,320,247
|
|
|
|
7,771,561
|
|
|
|
6,294,206
|
|
Research and development expense
|
|
|
400,040
|
|
|
|
-
|
|
|
|
400,040
|
|
|
|
-
|
|
Professional fees
|
|
|
831,039
|
|
|
|
326,353
|
|
|
|
1,845,590
|
|
|
|
964,290
|
|
Depreciation and amortization
|
|
|
36,508
|
|
|
|
123,502
|
|
|
|
293,661
|
|
|
|
344,308
|
|
Impairment of other intangible assets
|
|
|
152,847
|
|
|
|
172,064
|
|
|
|
216,468
|
|
|
|
172,064
|
|
Total operating expense
|
|
|
5,051,383
|
|
|
|
2,942,166
|
|
|
|
10,527,320
|
|
|
|
7,774,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,101,607
|
)
|
|
|
(2,209,118
|
)
|
|
|
(4,703,856
|
)
|
|
|
(6,007,809
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(27,186
|
)
|
|
|
(24,971
|
)
|
|
|
(72,439
|
)
|
|
|
(225,154
|
)
|
Change in fair value of warrant liabilities
|
|
|
131,357
|
|
|
|
58,220
|
|
|
|
(112,642
|
)
|
|
|
201,826
|
|
Equity in loss of equity method investees
|
|
|
(23,632
|
)
|
|
|
17,487
|
|
|
|
(100,468
|
)
|
|
|
(19,862
|
)
|
Other
|
|
|
(806
|
)
|
|
|
(3,313
|
)
|
|
|
(111,448
|
)
|
|
|
(8,409
|
)
|
Loss before income taxes
|
|
|
(3,021,874
|
)
|
|
|
(2,161,695
|
)
|
|
|
(5,100,853
|
)
|
|
|
(6,059,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
-
|
|
|
|
8,612
|
|
|
|
-
|
|
|
|
25,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(3,021,874
|
)
|
|
|
(2,153,083
|
)
|
|
|
(5,100,853
|
)
|
|
|
(6,033,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (income) attributable to non-controlling interest
|
|
|
(22,723
|
)
|
|
|
105,879
|
|
|
|
608,910
|
|
|
|
261,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Seven Stars Cloud shareholders
|
|
$
|
(3,044,597
|
)
|
|
$
|
(2,047,204
|
)
|
|
$
|
(4,491,943
|
)
|
|
$
|
(5,771,763
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.18
|
)
|
Diluted loss per share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
62,146,168
|
|
|
|
41,184,037
|
|
|
|
59,594,289
|
|
|
|
31,640,230
|
|
Diluted
|
|
|
62,146,168
|
|
|
|
41,184,037
|
|
|
|
59,594,289
|
|
|
|
31,640,230
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,021,874
|
)
|
|
$
|
(2,153,083
|
)
|
|
$
|
(5,100,853
|
)
|
|
$
|
(6,033,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of nil tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
60,557
|
|
|
|
(67,764
|
)
|
|
|
760,363
|
|
|
|
(269,274
|
)
|
Comprehensive loss
|
|
|
(2,961,317
|
)
|
|
|
(2,220,847
|
)
|
|
|
(4,340,490
|
)
|
|
|
(6,302,846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to
non-controlling interest
|
|
|
17,517
|
|
|
|
(100,982
|
)
|
|
|
(647,074
|
)
|
|
|
(240,350
|
)
|
Comprehensive loss attributable to Seven Stars Cloud shareholders
|
|
$
|
(2,978,834
|
)
|
|
$
|
(2,119,865
|
)
|
|
$
|
(3,693,416
|
)
|
|
$
|
(6,062,496
|
)
|
The accompanying notes are an integral
part of these consolidated financial statements
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Nine Months Ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,100,853
|
)
|
|
$
|
(6,033,572
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
202,501
|
|
|
|
286,577
|
|
Provision for doubtful accounts
|
|
|
103,040
|
|
|
|
366,887
|
|
Depreciation and amortization
|
|
|
293,661
|
|
|
|
344,308
|
|
Amortization of debt issuance costs
|
|
|
-
|
|
|
|
122,696
|
|
Income tax benefit
|
|
|
-
|
|
|
|
(25,836
|
)
|
Equity in loss of equity method investees
|
|
|
100,468
|
|
|
|
19,862
|
|
Loss on disposal of assets
|
|
|
683,195
|
|
|
|
-
|
|
Change in fair value of warrant liabilities
|
|
|
112,642
|
|
|
|
(201,826
|
)
|
Impairment of long-lived assets
|
|
|
216,468
|
|
|
|
172,064
|
|
Foreign currency exchange losses
|
|
|
-
|
|
|
|
3,431
|
|
|
|
|
|
|
|
|
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(34,582,490
|
)
|
|
|
(2,890,663
|
)
|
Inventory
|
|
|
(159,240
|
)
|
|
|
-
|
|
Licensed content
|
|
|
759,698
|
|
|
|
(639,225
|
)
|
Prepaid expenses and other assets
|
|
|
3,679,359
|
|
|
|
(799
|
)
|
Accounts payable
|
|
|
29,792,542
|
|
|
|
177,354
|
|
Accrued expenses, salary and other current liabilities
|
|
|
(798,209
|
)
|
|
|
250,856
|
|
Deferred revenue
|
|
|
(1,139,357
|
)
|
|
|
(10,359
|
)
|
Accrued license content fees
|
|
|
-
|
|
|
|
112,896
|
|
Net cash used in operating activities
|
|
|
(5,836,575
|
)
|
|
|
(7,945,349
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(46,260
|
)
|
|
|
(3,130,862
|
)
|
Acquisition of leasehold improvements
|
|
|
-
|
|
|
|
(455,723
|
)
|
Proceeds from disposal of property and equipment
|
|
|
2,450,044
|
|
|
|
-
|
|
Disposal of subsidiary, net of cash disposed
|
|
|
(8,753
|
)
|
|
|
-
|
|
Cash paid for the acquisition of subsidiaries
|
|
|
(741,433
|
)
|
|
|
(650,000
|
)
|
Investments in intangibles
|
|
|
-
|
|
|
|
(2,811,346
|
)
|
Investment in long term investments
|
|
|
(250,000
|
)
|
|
|
(3,584,025
|
)
|
Net cash provided by (used in) investing activities
|
|
|
1,403,598
|
|
|
|
(10,631,956
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from private placement
|
|
|
2,529,344
|
|
|
|
-
|
|
Repayment of amounts due to related parties
|
|
|
(243,503
|
)
|
|
|
-
|
|
Costs associated with financing activities
|
|
|
-
|
|
|
|
(294,890
|
)
|
Proceeds from issuance of warrant and shares
|
|
|
-
|
|
|
|
18,000,000
|
|
Net cash provided by financing activities
|
|
|
2,285,841
|
|
|
|
17,705,110
|
|
Effect of exchange rate changes on cash
|
|
|
62,078
|
|
|
|
(57,416
|
)
|
Net increase (decrease) in cash
|
|
|
(2,085,058
|
)
|
|
|
(929,611
|
)
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
3,761,814
|
|
|
|
3,768,897
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
1,676,756
|
|
|
$
|
2,839,286
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange of Series E Preferred Stock for common stock
|
|
$
|
7,155
|
|
|
$
|
100
|
|
Issuance of convertible note for licensed content (Note 12)
|
|
$
|
-
|
|
|
$
|
17,717,847
|
|
Issuance of shares for the settlement of liability
|
|
$
|
-
|
|
|
$
|
75,000
|
|
Issuance of shares upon conversion of convertible note, including accrued interest and debt issuance cost
|
|
$
|
-
|
|
|
$
|
17,733,297
|
|
Payment of interest
|
|
$
|
250,000
|
|
|
$
|
-
|
|
Acquisition of long term investment through transfer of Game IP rights
|
|
$
|
-
|
|
|
$
|
2,714,441
|
|
Payable for Game IP rights acquired
|
|
$
|
-
|
|
|
$
|
93,828
|
|
Payable for workforce acquired
|
|
$
|
-
|
|
|
$
|
121,695
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF
EQUITY
For the Nine Months Ended September 30,
2016
|
|
Series E
Preferred
Stock
|
|
|
Series E
Par
Value
|
|
|
Common
Stock
|
|
|
Par
Value
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Seven Stars
Cloud
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
|
|
|
|
286,552
|
|
|
|
-
|
|
|
|
-
|
|
|
|
286,577
|
|
|
|
-
|
|
|
|
286,577
|
|
Common stock issuance
|
|
|
-
|
|
|
|
-
|
|
|
|
9,090,909
|
|
|
|
9,091
|
|
|
|
17,268,483
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,277,574
|
|
|
|
-
|
|
|
|
17,277,574
|
|
Warrants issued in connection
with common stock issuance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
722,426
|
|
|
|
-
|
|
|
|
-
|
|
|
|
722,426
|
|
|
|
-
|
|
|
|
722,426
|
|
Issuance cost in connection
with the issuance of common stock and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(411,223
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(411,223
|
)
|
|
|
-
|
|
|
|
(411,223
|
)
|
Common stock issued from
conversion of convertible note
|
|
|
-
|
|
|
|
-
|
|
|
|
9,208,860
|
|
|
|
9,209
|
|
|
|
17,724,088
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,733,297
|
|
|
|
-
|
|
|
|
17,733,297
|
|
Restricted Shares granted
in connection with acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
121,695
|
|
|
|
-
|
|
|
|
-
|
|
|
|
121,695
|
|
|
|
-
|
|
|
|
121,695
|
|
Common stock issued for
settlement of liability
|
|
|
-
|
|
|
|
-
|
|
|
|
41,780
|
|
|
|
42
|
|
|
|
74,958
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
75,000
|
|
Common stock issued from
series E preferred stock
|
|
|
(100,000
|
)
|
|
|
(100
|
)
|
|
|
100,000
|
|
|
|
100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,771,763
|
)
|
|
|
-
|
|
|
|
(5,771,763
|
)
|
|
|
(261,809
|
)
|
|
|
(6,033,572
|
)
|
Foreign
currency translation adjustments, net of nil tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(290,733
|
)
|
|
|
(290,733
|
)
|
|
|
21,459
|
|
|
|
(269,274
|
)
|
Balance,
September
30, 2016
|
|
|
7,154,997
|
|
|
$
|
7,155
|
|
|
|
42,715,658
|
|
|
$
|
42,716
|
|
|
$
|
133,299,521
|
|
|
$
|
(92,229,603
|
)
|
|
$
|
(705,643
|
)
|
|
$
|
40,414,146
|
|
|
$
|
(2,628,381
|
)
|
|
$
|
37,785,765
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY
For the Nine Months Ended September 30,
2017
|
|
Series E
Preferred
Stock
|
|
|
Series E
Par
Value
|
|
|
Common
Stock
|
|
|
Par
Value
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Seven Stars
Cloud
Shareholders'
Equity
|
|
|
Non-
controlling
Interest
|
|
|
Total
Equity
|
|
Balance,
January
1, 2017
|
|
|
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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
202,501
|
|
|
|
-
|
|
|
|
-
|
|
|
|
202,501
|
|
|
|
-
|
|
|
|
202,501
|
|
Common stock issuance
|
|
|
-
|
|
|
|
-
|
|
|
|
727,273
|
|
|
|
727
|
|
|
|
1,999,273
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,000,000
|
|
|
|
-
|
|
|
|
2,000,000
|
|
Common stock issuance for
RSU vested
|
|
|
-
|
|
|
|
-
|
|
|
|
111,465
|
|
|
|
112
|
|
|
|
(112
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common stock issuance for
option exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
41,131
|
|
|
|
41
|
|
|
|
39,862
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,903
|
|
|
|
-
|
|
|
|
39,903
|
|
Common stock issued for
warrant exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
311,105
|
|
|
|
311
|
|
|
|
681,916
|
|
|
|
-
|
|
|
|
-
|
|
|
|
682,227
|
|
|
|
-
|
|
|
|
682,227
|
|
Common stock issued from
conversion of series E preferred stock
|
|
|
(7,154,997
|
)
|
|
|
(7,155
|
)
|
|
|
7,154,997
|
|
|
|
7,155
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Disposal of Zhong Hai Shi
Xun
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,887,398
|
)
|
|
|
(360,522
|
)
|
|
|
(220,737
|
)
|
|
|
(10,468,657
|
)
|
|
|
3,947,473
|
|
|
|
(6,521,184
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,491,943
|
)
|
|
|
-
|
|
|
|
(4,491,943
|
)
|
|
|
(608,910
|
)
|
|
|
(5,100,853
|
)
|
Foreign
currency translation adjustments, net of nil tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
798,527
|
|
|
|
798,527
|
|
|
|
(38,164
|
)
|
|
|
760,363
|
|
Balance,
September
30, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
62,264,494
|
|
|
$
|
62,264
|
|
|
$
|
145,791,961
|
|
|
$
|
(120,521,733
|
)
|
|
$
|
(775,512
|
)
|
|
$
|
24,556,980
|
|
|
$
|
(2,025,082
|
)
|
|
$
|
22,531,898
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
Organization and Principal Activities
|
Seven Stars Cloud Group, Inc.,
formerly known as Wecast Network, Inc., is a Nevada corporation that primarily operates in China (“PRC”) through its
subsidiaries and consolidated variable interest entities (“VIEs”). Seven Stars Cloud Group, Inc., its subsidiaries
and consolidated VIEs are collectively referred to as Seven Stars Cloud (“SSC”, “we”, “us”,
or “the Company”).
SSC is aiming to become a global
leader in providing next-generation Artificial-Intelligent (AI) & Fintech Powered, Supply Chain + Digital Finance Solutions.
SSC’s innovative model helps businesses enhance and unlock operational and capital value from both the supply chain and real
assets. In addition, SSC offers a closed trade ecosystem for buyers and sellers designed to eliminate transactional middlemen and
create a more direct and margin-expanding path for principals. There are three engines that drive our business platform: 1. Intelligent
Supply Chain Management; 2. Asset Based Securitization and Tokenization Issuance and Trading Platform and 3. Digital Index and
Financial Derivatives Issuance and Trading Platform; All three engines are supported by “ABCD” Technology & Infrastructure
(A: Artificial IntelligenceI, B: Blockchain, C: Cloud Computing, D: Data). SSC is also leveraging its legacy operations as a premium
content Video On Demand (“VOD”) service provider in China.
On January 30, 2017, the Company
entered into a Securities Purchase Agreement (the “Sun Video SPA”) with BT Capital Global Limited, a British Virgin
Islands company (“BT”) and affiliate of the Company’s Chairman Bruno Wu, for the purchase by the Company of
all of the outstanding capital stock of Sun Video Group Hong Kong Limited. On January 31, 2017, the 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 disclosed in Note 4. After acquiring these
two entities, other than the Company’s legacy You On Demand (“YOD”) business, the Company became engaged in
consumer electronics and smart supply chain management operations.
On June 30, 2017, the Company
entered into another Securities Purchase Agreement (the “BT SPA”) with BT, pursuant to which the issued and outstanding
stock that SSC holds in three separate non-core assets were sold to BT in exchange for RMB100 million (approximately $14.75 million
at current exchange rates) in a combination of cash and publicly traded stock to be paid to SSC within one year of closing. A minimum
of 20% of the total consideration to SSC will be paid in cash (approximately $2.95 million). A portion of the consideration may
be paid in the form of publicly traded stock at the discretion of BT, and in that case, the securities will represent a public
company affiliated with BT, in an industry related to SSC’s and with an average daily trading value of at least $146,000.
The detail of this transaction has been disclosed in Note 11.
In the opinion of management,
all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as
of September 30, 2017, results of operations for the three and nine months ended September 30, 2017 and 2016, and cash flows for
the nine months ended September 30, 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 nine months ended September
30, 2017 and 2016, the Company incurred loss from operations of approximately $4.7 million and $6.0 million, respectively, and
incurred net loss of $5.1 million and $6.0 million, respectively, and cash used in operations was approximately $5.8 million and
$7.9 million, respectively. Further, the Company had accumulated deficit of approximately $120.5 million and $115.7 million as
of September 30, 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 four separate
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, with Sun Seven Stars Hong Kong Cultural
Development Limited (“SSSHK”) for $2.0 million on November 17, 2016 and with certain investors, officers & directors
and affiliates in a private placement for $2.0 million on May 19, 2017, respectively. Although the Company believes it has the
ability to
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
|
In response to 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. The Company has the ability to control Sinotop Beijing through a series
of contractual agreements entered into among YOD WFOE, YOD Hong Kong, Sinotop Beijing and the legal shareholders of Sinotop Beijing.
Prior to January 2016, the
Company entered into a series of contractual agreements to give it the ability to control Sinotop Beijing with Zhang Yan, the
former legal shareholder of Sinotop Beijing (the spouse of its then-CEO). In January 2016, in connection with the appointment
of a new CEO and in accordance with its rights under the contractual agreements, (1) the legal ownership of Sinotop Beijing was
transferred from Zhang Yan to Bing Wu, the brother of its 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 its rights under contractual agreements, (1) the legal ownership
of Sinotop Beijing was transferred from Bing Wu to Mei Chen, the former CFO of the 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
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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:
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 that can be used only to settle obligations of Sinotop Beijing, except for
the registered capital of the entity amounting to RMB10.6 million (approximately $1.6 million) as of September 30, 2017. As Sinotop
Beijing is incorporated as limited liability company under PRC Company Law, creditors of this entity 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
|
In response to 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
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $4.1 million) has been
injected as of September 30, 2017. As SSF is incorporated as limited liability company under PRC Company Law, creditors of this
entity do not have recourse to the general credit of other entities of the Company.
Financial Information
On June 30, 2017, Company entered
into BT SPA, under which Zhong Hai Shi Xun Media, which was formerly 80% owned by Sinotop Beijing, was sold to BT. The details
of this transaction are disclosed in Note 11.
The following financial information
of our VIEs, as applicable for the periods presented, affected the Company's consolidated financial statements.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
4,063
|
|
|
$
|
1,519,125
|
|
Accounts receivable, net
|
|
|
-
|
|
|
|
1,260,529
|
|
Prepaid expenses
|
|
|
2,156
|
|
|
|
30,455
|
|
Other current assets
|
|
|
1,503
|
|
|
|
191,427
|
|
Intercompany receivables due from the Company's subsidiaries
(i)
|
|
|
2,439,391
|
|
|
|
150,725
|
|
Total current assets
|
|
|
2,447,113
|
|
|
|
3,152,261
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
196,677
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
2,570
|
|
Long term investments
|
|
|
3,649,042
|
|
|
|
3,654,664
|
|
Other non-current assets
|
|
|
-
|
|
|
|
442,782
|
|
Total assets
|
|
$
|
6,096,155
|
|
|
$
|
7,448,954
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
-
|
|
|
$
|
5,817
|
|
Deferred revenue
|
|
|
-
|
|
|
|
824,563
|
|
Accrued expenses
|
|
|
-
|
|
|
|
268,074
|
|
Other current liabilities
|
|
|
40
|
|
|
|
394,314
|
|
Accrued license content fees
|
|
|
-
|
|
|
|
1,236,661
|
|
Intercompany payables due to the Company's subsidiaries
(i)
|
|
|
3,518,877
|
|
|
|
14,752,338
|
|
Total current liabilities
|
|
|
3,518,917
|
|
|
|
17,481,767
|
|
Total liabilities
|
|
$
|
3,518,917
|
|
|
$
|
17,481,767
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
$
|
794,273
|
|
|
$
|
4,377,034
|
|
Net loss
|
|
$
|
(4,293,469
|
)
|
|
$
|
(1,182,884
|
)
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net cash used in operating activities
|
|
$
|
(1,661,531
|
)
|
|
$
|
(3,777,951
|
)
|
Net cash used in investing activities
|
|
$
|
(43,047
|
)
|
|
$
|
(3,355,296
|
)
|
Net cash provided by financing activities
(i)
|
|
$
|
189,515
|
|
|
$
|
6,555,377
|
|
|
(i)
|
Intercompany receivables and payables are eliminated upon consolidation. The intercompany financing
activities include the capital injection of $0.2 million to Sinotop Beijing in the nine months period ended September 30, 2017.
|
After the disposal of Zhong
Hai Shi Xun Media as of June 30, 2017, the total assets consisted of receivables and long term investments. The Company expects
that a lower percentage of its total revenue will be generated from its VIEs in the foreseeable future.
On January 30, 2017, the Company
entered into a Securities Purchase Agreement (the “Sun Video SPA”) with BT Capital Global Limited, a British Virgin
Islands company (“BT”) which is controlled by Company’s Chairman Bruno Wu, for the purchase by SSC 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 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 the Company the shares of the Company’s common
stock or the 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.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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”),
the Company 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 of SVG,
the Company changed its name to Wecast Services Group Limited, and is therefore also referred to herein as Wecast Services.
On January 31, 2017, the Company
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 the Company 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
100% of the revenue and gross profit from Wide Angle in the calculation of the SVG Performance Guarantees set forth in the Sun
Video SPA considering the Company has consolidated Wide Angle.
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 September 30, 2017, the
Company recorded the $50 million SVG Note as additional paid in capital, as the Company believes that the Performance Guarantees
can be met within 12 months of the closing. Considering the proceeds transferred were larger than carrying amounts of the net assets
received, such $50 million was then recognized as a reduction to the Company’s additional paid in capital. The Company has
not begun accruing any reserves relating to potential Net Income Threshold earnout payments, since the Sun Video Business is currently
not close to exceeding this threshold.
Accounts receivable consists
of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accounts receivable, gross:
|
|
$
|
42,787,928
|
|
|
$
|
12,350,947
|
|
Less: allowance for doubtful accounts
|
|
|
(3,647
|
)
|
|
|
(2,828,796
|
)
|
Accounts receivable, net
|
|
$
|
42,784,281
|
|
|
$
|
9,522,151
|
|
The movement of the allowance
for doubtful accounts is as follows:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Balance at the beginning of the period
|
|
$
|
(2,828,796
|
)
|
|
$
|
(3,672
|
)
|
Additions charged to bad debt expense
|
|
|
(103,040
|
)
|
|
|
(2,825,124
|
)
|
Write-off of bad debt allowance
|
|
|
47,378
|
|
|
|
-
|
|
Disposal of Zhong Hai Shi Xun
|
|
|
2,880,811
|
|
|
|
-
|
|
Balance at the end of the period
|
|
$
|
(3,647
|
)
|
|
$
|
(2,828,796
|
)
|
|
6.
|
Property and Equipment
|
The following is a breakdown
of the Company’s property and equipment:
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Furniture and office equipment
|
|
$
|
296,161
|
|
|
$
|
1,063,481
|
|
Vehicle
|
|
|
146,466
|
|
|
|
267,023
|
|
Office Building
|
|
|
-
|
|
|
|
3,948,058
|
|
Leasehold improvements
|
|
|
-
|
|
|
|
939,844
|
|
Total property and equipment
|
|
|
442,627
|
|
|
|
6,218,406
|
|
Less: accumulated depreciation
|
|
|
(323,323
|
)
|
|
|
(1,254,681
|
)
|
Property and Equipment, net
|
|
$
|
119,304
|
|
|
$
|
4,963,725
|
|
The Company recorded depreciation
expense of approximately $8,508 and $209,139 for the three and nine months ended September 30, 2017 and $33,000 and $101,000 for
the three and nine months ended September 30, 2016, respectively.
As of September 30, 2017 and
December 31, 2016, the Company’s amortizing and indefinite lived intangible assets consisted of the following:
|
|
September
30, 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
|
)
|
|
$
|
-
|
|
Software and licenses
|
|
|
211,939
|
|
|
|
(195,160
|
)
|
|
|
-
|
|
|
|
16,779
|
|
|
|
267,991
|
|
|
|
(241,932
|
)
|
|
|
-
|
|
|
|
26,059
|
|
Patent and trademark (iv)
|
|
|
92,965
|
|
|
|
(39,943
|
)
|
|
|
(53,022
|
)
|
|
|
-
|
|
|
|
92,965
|
|
|
|
(39,943
|
)
|
|
|
-
|
|
|
|
53,022
|
|
Website and mobile app development
(ii)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
593,193
|
|
|
|
(421,129
|
)
|
|
|
(172,064
|
)
|
|
|
-
|
|
Workforce (i)
|
|
|
305,694
|
|
|
|
(152,847
|
)
|
|
|
(152,847
|
)
|
|
|
-
|
|
|
|
305,694
|
|
|
|
(76,422
|
)
|
|
|
-
|
|
|
|
229,272
|
|
Total
amortizing intangible assets
|
|
$
|
610,598
|
|
|
$
|
(387,950
|
)
|
|
$
|
(205,869
|
)
|
|
$
|
16,779
|
|
|
$
|
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 (iv)
|
|
|
10,599
|
|
|
|
-
|
|
|
|
(10,599
|
)
|
|
|
-
|
|
|
|
10,599
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,599
|
|
Total
intangible assets
|
|
$
|
755,487
|
|
|
$
|
(387,950
|
)
|
|
$
|
(216,468
|
)
|
|
$
|
151,069
|
|
|
$
|
4,160,553
|
|
|
$
|
(1,688,683
|
)
|
|
$
|
(2,018,628
|
)
|
|
$
|
453,242
|
|
(i) On April 1, 2016, the Company
entered into an agreement with Mr. Changsheng Liu, under which SSC agreed to pay Mr. Changsheng Liu 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 entered into three year employment contracts with
SSC effective 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. All cash consideration has been paid. If any of 3
key staff, as defined, terminated their employment with SSC during the first 12 months of employment, SSC has the right to forfeit
the unpaid cash consideration. In addition, Mr. Changsheng Liu would be required to pay a default penalty at minimal of $129,180.
SSC has accounted for the transaction as an asset acquisition in which SSC 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 $28,000 and $84,522 for the three and nine months ended September
30, 2017 and $90,000 and $243,000 for the three and nine months ended September 30, 2016 respectively, which included the amortization
expense of the workforce acquired as stated above.
In September, 2017, after evaluating
the cost and benefit, Company decided to terminate the service contract with this entire team and therefore Company recognize impairement
in the amount of $152,847.
(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 December 31,
2016. Fair value was determined using unobservable (Level 3) inputs. In June, 2017, this intangible asset has been disposed of
along with other net assets in Zhong Hai Shi Xun.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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. In June, 2017, this intangible asset has been disposed of along with other net assets in Zhong
Hai Shi Xun.
(iv) During the second quarter
of 2017, the Company determined that one of its subsidiaries in the US will not serve the non-core business or generate future
cash flow. As no future cash flows will be generated from using the patent owned by this subsidiary, the Company estimated the
fair value of those patent to be nil as of June 30, 2017. Fair value was determined using unobservable (Level 3) inputs. Impairment
loss from patent of $63,621 was recognized in 2017 to write off the entire book value of the patent.
The following table outlines
the amortization expense for the next three years and thereafter:
|
|
Amortization to be
|
|
Years ending December 31,
|
|
Recognized
|
|
2017 (3 months)
|
|
$
|
2,517
|
|
2018
|
|
|
10,067
|
|
2019
|
|
|
4,195
|
|
Total amortization to be recognized
|
|
$
|
16,779
|
|
Cost method
investments
Cost method investments
as of the period ended September 30, 2017 and December 31, 2016 are as follow:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Topsgame (i)
|
|
$
|
3,291,600
|
|
|
$
|
3,156,985
|
|
Frequency (ii)
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
DBOT (iii)
|
|
|
250,000
|
|
|
|
-
|
|
Total
|
|
$
|
6,541,600
|
|
|
$
|
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 RMB3,900,000 (approximately $584,000) and maintained its 13% equity ownership of Topsgame.
The investment continued to be accounted for using the cost method.
On June 30, 2017, the Company
entered into the BT SPA, pursuant to which, Topsgame has been agreed to be sold to BT in the consideration of the fair value of
Topsgame which approximates to its carrying book value (appraised by an independent third party). However, considering the payment
term is in one year, its collectability is uncertain and required legal transfer process was not completed as of September 30,
2017, Company did not account for this transaction as of September 30, 2017.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(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.
In August,
2017, Company made a strategic investment of US$250,000 in the Delaware Board of Trade Holdings, Inc. (“DBOT”) to acquire
187,970 common shares. DBOT is an approved and licensed FINRA- and SEC-regulated electronic trading platform with operations in
Delaware. One of our subsidiaries is powered by DBOT’s platform, trading system and technology. The Company accounts for
this investment using the cost method, as the Company owns less than 4% of the common shares and the Company has no significant
influence over DBOT.
Equity
method investments
Equity method investment movement
for the nine months ended on September 30, 2017 is as follow:
|
|
|
|
September 30, 2017
|
|
|
|
|
|
December 31,
2016
|
|
|
Capital increase
|
|
|
Loss on
investment
|
|
|
Impairment loss
|
|
|
Foreign currency
translation adjustments
|
|
|
September 30,
2017
|
|
Wecast Internet
|
|
(i)
|
|
|
132,782
|
|
|
|
-
|
|
|
|
(77,210
|
)
|
|
|
-
|
|
|
|
3,797
|
|
|
|
59,369
|
|
Hua Cheng
|
|
(ii)
|
|
|
364,897
|
|
|
|
-
|
|
|
|
(23,258
|
)
|
|
|
-
|
|
|
|
15,803
|
|
|
|
357,442
|
|
Shandong Media
|
|
(iii)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
|
$
|
497,679
|
|
|
|
-
|
|
|
$
|
(100,468
|
)
|
|
|
-
|
|
|
$
|
19,600
|
|
|
$
|
416,811
|
|
|
(i)
|
Investment in Wecast Internet
|
In October 2016, the Company’s
subsidiary, YOU On Demand (Asia) Ltd., invested RMB1,000,000 (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 September
30, 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 September
30, 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 September 30, 2017 and December 31, 2016.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 1,136,365 shares of the Company’s common stock for $1.76 per share, or a total purchase price
of $2.0 million to SSSHKCD. A 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.
On May
19, 2017, the Company entered into a subscription agreement with certain investors, including officers, directors and other affiliates
of the Company, pursuant to which the Company issued and sold to such investors, in a private placement, an aggregate of 727,273
shares of the common stock of the Company, for $2.75 per share, or a total purchase price of $2.0 million. Investors in the private
placement included Lan Yang, the wife of the Company’s Chairman Bruno Wu, and China Telenet Ventures Limited, an entity owned
and controlled by Sean Wang, a member of the Company’s Board of Directors. As of July 18, 2017, all subscription amounts
have been received by the Company.
|
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 was valued using Monte Carlo Simulation method at the year ended December 31, 2016. All the remaining warrant liabilities
have been expired as of August 30, 2017. The following assumptions were incorporated:
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
Monte Carlo
|
|
|
|
December 31,
|
|
|
|
2016
|
|
Risk-free interest rate
|
|
|
0.70
|
%
|
Expected volatility
|
|
|
55
|
%
|
Expected term
|
|
|
0.67 year
|
|
Expected dividend yield
|
|
|
0
|
%
|
The following tables present
the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2016:
|
|
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 nine months ended September 30, 2017:
|
|
Level 3 Assets and Liabilities
|
|
|
|
|
|
|
For the Nine Months Ended September 30 , 2017
|
|
|
|
|
|
|
January 1,
|
|
|
|
|
|
Change in
|
|
|
September 30,
|
|
|
|
2017
|
|
|
Settlements
|
|
|
Fair Value
|
|
|
2017
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note 13)
|
|
$
|
70,785
|
|
|
$
|
(183,427
|
)
|
|
$
|
112,642
|
|
|
$
|
-
|
|
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 and convertible promissory
note as of September 30, 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
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 and nine months ended September 30, 2017, the Company recorded interest expense of $30,247
and $89,753, respectively, related to the Note; For the three and nine months ended September 30, 2016, the Company recorded interest
expense of $30,000 and $90,000, respectively, related to the Note. In August, 2017, Company has paid $250,000 interest related
to the Note.
Hua Cheng, in which the Company
holds 39% of the equity shares, charged the Company licensed content fees of approximately Nil and $55,000 for the three months
ended September 30, 2017 and 2016, and approximately Nil and $148,000 for the nine months ended September 30, 2017 and 2016, 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)
|
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. 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, and as of September 30, 2017, Company still owed to BT in the amount of $58,567.
|
(e)
|
Assets Disposal to BT
|
On June 30, 2017, the Company
entered into a Securities Purchase Agreement (the BT SPA) with BT, pursuant to which the issued and outstanding stock that SSC
holds in three separate non-core assets were sold to BT in exchange for RMB100 million (approximately $14.75 million at current
exchange rate) in a combination of cash and publicly traded stock to be paid to SSC within one year of closing. A minimum of 20%
of the total consideration to SSC will be paid in cash (approximately $2.95 million). A portion of the consideration may be paid
in the form of publicly traded stock at the discretion of BT, and in that case the securities will represent a public company affiliated
with BT, in an industry related to SSC’s and with an average daily trading value of at least $146,000.
These three separate non-core
assets that sold to BT included 80% equity interest in Zhong Hai Shi Xun Media for zero, 13% equity interest in Nanjing Tops Game
and 25% share capital investment right in Pantaflix JV in consideration of RMB100 million. As Zhong Hai Shi Xun Media is the Company’s
subsidiary, sale of a subsidiary to a related party under common control would cause the Company to derecognize the net assets
transferred at its carrying amounts and recognize no gains or losses. The difference between proceeds received and the carrying
amount of the net assets transferred is recognized in additional paid in capital. At the same time, the Goodwill in the amount
of $6.6 million has been pushed down to Zhong Hai Shi Xun Media along with the disposal.
Meanwhile, considering the payment
term is one year, there is uncertainty with respect to collectability and required legal transfer process of Nanjing Tops Game
was not completed, Company did not account for the transaction of disposal of 13% equity interest in Nanjing Tops Game and 25%
share capital investment right in Pantaflix JV as of September 30, 2017 until the collectability is reasonably assured.
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 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
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(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 SSC 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 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
is remeasured at each reporting period based on the Monte Carlo valuation.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2016, the
warrant liability was revalued as disclosed in Note 10, and recorded at its fair value of approximately $70,785.
In 2017, there were 182,534
warrants exercised during nine months ended September 30, 2017, all the remaining 353,716 warrants were expired as of August 30,
2017.
As of September 30, 2017, the
Company had 1,845,010 options, 422,085 restricted shares and 3,118,181 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 and nine months ended September 30, 2017 and 2016 is as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Employees and directors share-based payments
|
|
$
|
54,846
|
|
|
$
|
75,000
|
|
|
$
|
202,501
|
|
|
$
|
287,000
|
|
Effective as of December 3,
2010, our Board of Directors approved the SSC 2010 Stock Incentive Plan (“the 2010 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 September 30, 2017, options available for issuance are 1,415,003 shares.
Stock option activity for the
nine months ended September 30, 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
|
|
|
2,101,425
|
|
|
$
|
2.42
|
|
|
|
4.59
|
|
|
$
|
-
|
|
Granted
|
|
|
170,000
|
|
|
|
1.57
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(78,211
|
)
|
|
|
1.63
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(45,662
|
)
|
|
|
2.90
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(302,542
|
)
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
1,845,010
|
|
|
|
2.67
|
|
|
|
4.46
|
|
|
|
0.39
|
|
Vested and expected to vest as of September 30, 2017
|
|
|
1,845,010
|
|
|
|
2.67
|
|
|
|
4.46
|
|
|
|
0.39
|
|
Options exercisable at September 30, 2017 (vested)
|
|
|
1,609,196
|
|
|
|
2.82
|
|
|
|
3.80
|
|
|
|
0.36
|
|
On January 4, March 1 and March
16, 2017, 90,000, 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 $61,200, $45,443 and $36,750, respectively.
As of September 30, 2017, approximately
$220,777 of total unrecognized compensation expense related to non-vested share options is expected to be recognized over a weighted
average period of approximately 1.98 years. The total fair value of shares vested during the nine months ended September 30, 2017
and 2016 was approximately $56,765 and $12,000, respectively.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(b) Warrants
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 September 30, 2017, the
weighted average exercise price of the warrants was $2.33 and the weighted average remaining life was 0.81 years. The following
table outlines the warrants outstanding and exercisable as of September 30, 2017 and December 31, 2016:
|
|
September 30,
|
|
|
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
|
|
|
$
|
1.50
|
|
|
|
08/30/17
|
|
2013 Broker Warrants (Series D Financing)
|
|
|
100,000
|
|
|
|
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
|
|
|
|
|
3,118,181
|
|
|
|
3,783,002
|
|
|
|
|
|
|
|
|
|
|
(i)
|
The warrants are classified as derivative liabilities as disclosed in Note 13.
|
(c) Restricted Shares
In January, 2017, the Company
granted 35,000 restricted shares to one employee under the “2010 Plan”. The restricted shares have a vesting period
of four years with the first one-fourth vesting on the first anniversary from grant date and the remaining three-fourth vesting
ratably over twelve quarters. The grant date fair value of the restricted shares was $43,750. As this employee left the Company
in February, no expense was recorded.
In March and April, 2017, the
Company granted 365,000 restricted shares to certain employees under the “2010 Plan”. The restricted shares have a
vesting period of four years with the first one-fourth vesting on the first anniversary from grant date and the remaining three-fourth
vesting ratably over twelve quarters. The grant date fair value of the restricted shares was $778,200.
A summary of the restricted
shares is as follows:
|
|
Shares
|
|
|
Weighted-average
fair value
|
|
Restricted shares outstanding at January 1, 2017
|
|
|
228,550
|
|
|
$
|
1.75
|
|
Granted
|
|
|
400,000
|
|
|
|
2.05
|
|
Forfeited
|
|
|
(95,000
|
)
|
|
|
1.65
|
|
Vested
|
|
|
(111,465
|
)
|
|
|
1.73
|
|
Restricted shares outstanding at September 30, 2017
|
|
|
422,085
|
|
|
$
|
2.07
|
|
|
15.
|
Loss Per Common Share
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net loss attributable to common stockholders
|
|
$
|
(3,044,597
|
)
|
|
$
|
(2,047,204
|
)
|
|
$
|
(4,491,943
|
)
|
|
$
|
(5,771,763
|
)
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
62,146,168
|
|
|
|
41,184,037
|
|
|
|
59,594,289
|
|
|
|
31,640,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
62,146,168
|
|
|
|
41,184,037
|
|
|
|
59,594,289
|
|
|
|
31,640,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.18
|
)
|
Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.18
|
)
|
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basic loss per common share
attributable to Seven Stars Cloud shareholders is calculated by dividing the net loss attributable to Seven Stars Cloud shareholders
by the weighted average number of outstanding common shares during the applicable period.
Diluted loss per share is calculated
by taking net loss, divided by the diluted weighted average common shares outstanding. Diluted loss per share for the three and
nine months ended September 30, 2017 and 2016 both equal to basic loss per share for respective periods because the effect of securities
convertible into common shares is anti-dilutive.
The following table includes
the number of shares that may be dilutive potential common shares in the future. These shares were not included in the computation
of diluted loss per share because the effect was either antidilutive or the performance condition was not met.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Warrants
|
|
|
3,118,181
|
|
|
|
3,783,002
|
|
|
|
3,118,181
|
|
|
|
3,783,002
|
|
Options
|
|
|
2,267,095
|
|
|
|
2,151,428
|
|
|
|
2,267,095
|
|
|
|
2,151,428
|
|
Series A Preferred Stock
|
|
|
933,333
|
|
|
|
933,333
|
|
|
|
933,333
|
|
|
|
933,333
|
|
Series E Preferred Stock
|
|
|
-
|
|
|
|
7,154,997
|
|
|
|
-
|
|
|
|
7,154,997
|
|
Convertible promissory note and interest
|
|
|
35,598,447
|
|
|
|
2,015,812
|
|
|
|
35,598,447
|
|
|
|
2,015,812
|
|
Total
|
|
|
41,917,056
|
|
|
|
16,038,572
|
|
|
|
41,917,056
|
|
|
|
16,038,572
|
|
As of September 30, 2017, the
Company had approximately $34.4 million of the U.S domestic cumulative tax loss carryforwards and approximately $15.0 million of
the foreign cumulative tax loss carryforwards, which may be available to reduce future income tax liabilities in certain jurisdictions.
These U.S. and foreign tax loss carryforwards will expire beginning in 2028 through 2036, and 2018 to 2022, respectively.
The income tax expense for the
nine months ended September 30, 2017 is nil because of net operating loss 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 increased approximately $1.0 million during the nine months ended September 30, 2017.
As of September 30, 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 as follows:
|
|
Leased Property
|
|
Years ending December 31,
|
|
Costs
|
|
2017(3 months)
|
|
$
|
19,711
|
|
2018
|
|
|
70,211
|
|
2019
|
|
|
36,269
|
|
2020
|
|
|
37,147
|
|
Thereafter
|
|
|
18,575
|
|
Total
|
|
$
|
181,913
|
|
|
(b)
|
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 September 30, 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.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
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 affected 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 SSC'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 SSC 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 SSC to Yanhua reaches the amount of RMB13,000,000, the revenue above RMB13,000,000 will be shared with SSC 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.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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 September 30, 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.
For the nine months ended September
30, 2016, three customers individually accounted for 31%, 16% and 13% of the Company’s revenue. Three customers individually
accounted for 33%, 14% and 12% of the Company’s net accounts receivables as of September 30, 2016.
Wecast Services
The holdings and businesses
from Company’s two acquisitions in January 2017 (Note 4) now reside under “Wecast Services”, our wholly-owned
subsidiary Wecast Services Group Limited. Wecast Services (which resides under the Product Sales Cloud) is currently primarily
engaged with consumer electronics 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 nine months ended September
30, 2017, three customers 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 September 30, 2017, respectively.
(c) Major Suppliers
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 nine months ended September
30, 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 September 30, 2016.
Wecast Services
The Company relies on agreements
with consumer electronics manufacturers to provide integrated circuit, printed circuit board assembly and other necessary assembly.
For the nine months ended September
30, 2017, five suppliers individually accounted for more than 10% of the Company’s cost of revenues. Three suppliers individually
accounted for more than 10% of the Company’s accounts payable as of September 30, 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 September
30, 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 to
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
RMB denominated bank deposits with financial institutions in the PRC
|
|
$
|
1,431,601
|
|
|
|
1,566,107
|
|
US dollar denominated bank deposits with financial institutions in the PRC
|
|
$
|
19,227
|
|
|
|
670,951
|
|
HKD denominated bank deposits with financial institutions in Hong Kong Special Administrative Region (“HK SAR”)
|
|
$
|
47,723
|
|
|
|
14,151
|
|
US dollar denominated bank deposits with financial institutions in Hong Kong Special Administrative Region (“HK SAR”)
|
|
$
|
117,528
|
|
|
|
1,402,842
|
|
US dollar denominated bank deposits with financial institutions in The United States of America (“USA”)
|
|
$
|
56,975
|
|
|
|
95,030
|
|
As of September 30, 2017 and
December 31, 2016 deposits of $407,903 and $384,545 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
|
For our U.S. employees, 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 4% 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 approximately $3,980 and $6,526 for the three and nine months ended September
30, 2017 respectively and $1,000 and $3,000 for the three and nine months ended September 30, 2016 respectively.
Full time employees in the PRC
participate in a government-mandated defined contribution plan pursuant to which certain pension benefits, medical care, unemployment
insurance, employee housing fund and other welfare benefits are provided to employees. PRC labor regulations require the Company
to make contributions based on certain percentages of the employees’ basic salaries. Other than such contributions, there
is no further obligation under these plans. The total contribution for such PRC employee benefits was $274,049 and $387,560 for
the nine months ended September 30, 2017 and 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 resides in,
including Legacy YOD segment and Wecast Service segment. Therefore, there are two reportable segments for the nine months ended
September 30, 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
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
both minimum guarantee payments
and revenue sharing arrangements with distribution partners as well as subscription or transactional fees from subscribers.
Wecast Services
-
Wecast Services (which resides under the Product Sales Cloud) is currently primarily engaged with consumer electronics and smart
supply chain management operations.
Segment disclosures are on a
performance basis consistent with internal management reporting. The Company does not allocate expenses below segment gross profit
since these segments share the same executive team, office space, occupancy expenses, information technology infrastructures, human
resources and finance department. The following tables summarized the Company’s revenue and cost generated from different
revenue streams.
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
NET SALES TO EXTERNAL CUSTOMERS
|
|
|
|
|
|
|
|
|
-Legacy YOD
|
|
$
|
794,273
|
|
|
$
|
4,377,034
|
|
-Wecast Services
|
|
|
105,918,155
|
|
|
|
-
|
|
Net sales
|
|
|
106,712,428
|
|
|
|
4,377,034
|
|
GROSS PROFIT
|
|
|
|
|
|
|
|
|
-Legacy YOD
|
|
|
31,659
|
|
|
|
1,767,059
|
|
-Wecast Services
|
|
|
5,791,805
|
|
|
|
-
|
|
Gross profit
|
|
|
5,823,464
|
|
|
|
1,767,059
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
TOTAL ASSETS
|
|
|
|
|
|
|
|
|
-Legacy YOD
|
|
$
|
26,377,184
|
|
|
$
|
36,975,911
|
|
-Wecast Services
|
|
|
46,125,371
|
|
|
|
14,448,702
|
|
-Unallocated assets
|
|
|
4,036,369
|
|
|
|
4,321,677
|
|
-Intersegment elimination
|
|
|
(4,981,342
|
)
|
|
|
-
|
|
Total
|
|
|
71,557,582
|
|
|
|
55,746,290
|
|
On October 17, 2017, Wecast
Services Group Limited (“Wecast”), a wholly owned subsidiary of the Company, entered into a Technical License Agreement
with Guangxi Dragon Coin Network Technology Co., Ltd. (“Guangxi”), pursuant to which Wecast has agreed to provide Guangxi
with a non-exclusive agreement to license the technology platform from Wecast’s Red Coin Chain. Pursuant to the terms of
the License Agreement, Guangxi, a subsidiary of Courage Investment Group Limited (1145.HK) (“Courage Investment Group”),
will be granted a non-exclusive license from Wecast and the Red Coin Chain (“Red Coin”), to use Red Coin’s technology
platform specifically and exclusively for real estate based securitization. In exchange and in consideration for, the non-exclusive
rights to the technology, the Company will receive 17.9% of the existing total equity of Courage Investment Group, which is Guangxi’s
Hong Kong listed parent company.
On October 23, 2017, the Company
entered into a Securities Purchase Agreement with Hong Kong Guo Yuan Group Capital Holdings Limited. Pursuant to the terms of the
agreement, the Company has agreed to sell and issue 5,494,505 shares of the Company’s common stock to the Hong Kong Guo Yuan
Group Capital Holdings Limited for $1.82 per share, or a total purchase price of $10.0 million.
On November 9, 2017, the Board
of Directors approved Amendment No. 7 to $3.0 million Convertible Promissory Notes (“Note”) issued to Mr. Shane McMahon,
our Vice Chairman, pursuant to which the maturity date of the Note was extended to December 31, 2019. The Note remains payable
on demand or convertible on demand into Common Stock at a conversion price of $1.50.
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. These forward-looking statements are not, however, 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. 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.
Consolidated Results of Operations
Comparison of Three Months Ended September
30, 2017 and 2016
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
Amount Change
|
|
|
% Change
|
|
Revenue
|
|
$
|
30,223,638
|
|
|
$
|
1,626,844
|
|
|
$
|
28,596,794
|
|
|
|
1758
|
%
|
Cost of revenue
|
|
|
28,273,862
|
|
|
|
893,796
|
|
|
|
27,380,066
|
|
|
|
3063
|
%
|
Gross profit
|
|
|
1,949,776
|
|
|
|
733,048
|
|
|
|
1,216,728
|
|
|
|
166
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses expenses
|
|
|
3,630,949
|
|
|
|
2,320,247
|
|
|
|
1,310,702
|
|
|
|
56
|
%
|
Research and development expenses
|
|
|
400,040
|
|
|
|
-
|
|
|
|
400,040
|
|
|
|
100
|
%
|
Professional fees
|
|
|
831,039
|
|
|
|
326,353
|
|
|
|
504,686
|
|
|
|
155
|
%
|
Impairment of other intangible assets
|
|
|
152,847
|
|
|
|
172,064
|
|
|
|
(19,217
|
)
|
|
|
(11
|
%)
|
Depreciation and amortization
|
|
|
36,508
|
|
|
|
123,502
|
|
|
|
(86,994
|
)
|
|
|
(70
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
5,051,383
|
|
|
|
2,942,166
|
|
|
|
2,109,217
|
|
|
|
72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,101,607
|
)
|
|
|
(2,209,118
|
)
|
|
|
(892,489
|
)
|
|
|
40
|
%
|
Interest expense, net
|
|
|
(27,186
|
)
|
|
|
(24,971
|
)
|
|
|
(2,215
|
)
|
|
|
9
|
%
|
Change in fair value of warrant liabilities
|
|
|
131,357
|
|
|
|
58,220
|
|
|
|
73,137
|
|
|
|
126
|
%
|
Equity in loss of equity method investees
|
|
|
(23,632
|
)
|
|
|
17,487
|
|
|
|
(41,119
|
)
|
|
|
(235
|
%)
|
Others
|
|
|
(806
|
)
|
|
|
(3,313
|
)
|
|
|
2,507
|
|
|
|
(76
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(3,021,874
|
)
|
|
|
(2,161,695
|
)
|
|
|
(860,179
|
)
|
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
-
|
|
|
|
8,612
|
|
|
|
(8,612
|
)
|
|
|
(100
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(3,021,874
|
)
|
|
|
(2,153,083
|
)
|
|
|
(868,791
|
)
|
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (income) attributable to non-controlling interest
|
|
|
(22,723
|
)
|
|
|
105,879
|
|
|
|
(128,602
|
)
|
|
|
(121
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
attributable to Seven Stars Cloud Group, Inc. shareholders
|
|
$
|
(3,044,597
|
)
|
|
$
|
(2,047,204
|
)
|
|
$
|
(997,393
|
)
|
|
|
49
|
%
|
Revenues
|
1>
|
OTT, Mobile App, IPTV and Digital Cable VOD Businesses
(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.
On January 30, 2017, the Company completed
the acquisition of Sun Video Group HK Limited ("SVG"), which has a 51% ownership stake in Shanghai Wecast Supply Chain
Management Limited ("Wecast SH"). On January 31, 2017, the Company acquired 55% of the outstanding capital stock of Wide
Angle Group Limited (“Wide Angle”). The holdings and businesses from both these acquisitions now reside under “Wecast
Services”, our wholly-owned subsidiary Wecast Services Limited. Wecast Services (which resides under the Product Sales Cloud)
business unit, is currently primarily engaged with consumer electronics and smart supply chain management operations. Our end customers
include British Telecom, Micromax and about 15 to 20 other corporations across the world.
|
|
2017Q3
|
|
|
2016Q3
|
|
|
Difference
|
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
|
%
|
|
Legacy YOD
|
|
|
-
|
|
|
|
1,626,844
|
|
|
|
(1,626,844
|
)
|
|
|
(100
|
%)
|
Wecast Services
|
|
|
30,223,638
|
|
|
|
-
|
|
|
|
30,223,638
|
|
|
|
100
|
%
|
Total
|
|
|
30,223,638
|
|
|
|
1,626,844
|
|
|
|
28,596,794
|
|
|
|
1758
|
%
|
Revenue for the three months ended September
30, 2017 was $30.2 million as compared to $1.6 million for the same period in 2016, an increase of approximately $28.6 million,
or 1,758%. The increase was mainly due to our new business line acquired in January 2017. This increase was partially offset by
a decrease of our legacy YOD business in the amount of $1.6 million, as the legacy YOD business shifts to a new exclusive distribution
agreement with Zhejiang Yanhua Culture Media Co., Ltd. ("Yanhua ") which was announced in Q4 2016. As revenue generated
by Yanhua did not exceed the revenue sharing threshold, no additional revenue was recorded in the quarter ended September 30, 2017.
Cost of revenues
|
|
2017Q3
|
|
|
2016Q3
|
|
|
Difference
|
|
|
|
|
USD
|
|
|
|
USD
|
|
|
|
USD
|
|
|
|
%
|
|
Legacy YOD
|
|
|
-
|
|
|
|
893,796
|
|
|
|
(893,796
|
)
|
|
|
(100
|
%)
|
Wecast Services
|
|
|
28,273,862
|
|
|
|
-
|
|
|
|
28,273,862
|
|
|
|
100
|
%
|
Total
|
|
|
28,273,862
|
|
|
|
893,796
|
|
|
|
27,380,066
|
|
|
|
3063
|
%
|
Cost of revenues was approximately $28.3
million for the three months ended September 30, 2017, as compared to $0.9 million for the three months ended September 30, 2016.
Our cost of revenues increased by $27.4 million which is in line with our increase in revenues. Our cost of revenues is primarily
comprised of cost to purchase electronics products from suppliers.
Gross profit
|
|
|
2017 Q3
|
|
|
|
2016Q3
|
|
|
|
Difference
|
|
|
|
|
USD
|
|
|
|
USD
|
|
|
|
USD
|
|
|
|
%
|
|
Legacy YOD
|
|
|
-
|
|
|
|
733,048
|
|
|
|
(733,048
|
)
|
|
|
(100
|
%)
|
Wecast Services
|
|
|
1,949,776
|
|
|
|
-
|
|
|
|
1,949,776
|
|
|
|
100
|
%
|
Total
|
|
|
1,949,776
|
|
|
|
733,048
|
|
|
|
1,216,728
|
|
|
|
166
|
%
|
Gross profit ratio for the three months
ended September 30, 2017 decreased by 38.61% from 45.06% to 6.45%, as the Wecast Services business, which currently is engaged
mostly in lower margin electronics, is still in its relative infancy and the business service offerings as well as profit-sharing
arrangements with a growing range of suppliers are in transition.
Selling, general and administrative
expenses
Selling,
general and administrative expense for the three months ended September 30, 2017 was $3.6 million as compared to $2.3 million
for the same period in 2016, an increase of approximately $1.3 million or 56%. The majority of the increase was due to 1) the
increase of our sales and marketing expense to introduce and promote our business models to various potential investors and business
partners, as well as promote Wecast Services, which was acquired in January, 2017; and 2) financial advisory expenses that were
paid to independent professional financial advisory companies to assist us being able to contact and negotiate with more business
partners. The Company is also continuing to focus on more cost saving activities to reduce daily operating expenses.
Professional fees
Professional fees for the three months
ended September 30, 2017 were $0.8 million as compared to $0.3 million for the same period in 2016, an increase of approximately
$0.5 million. The increase in professional fees was mainly caused by the legal, valuation and auditing service fees incurred for
three months ended September 30, 2017 in relation to the acquisitions in January 2017 and increased audit service fees charged
by our external auditor for the opening audit due to our auditor change in 2017.
Change in fair value of warrant liabilities
Certain of our warrants are recognized
as derivative liabilities and re-measured at the end of every reporting period and upon settlement, with the change in value reported
in the statement of operations. We reported a gain of approximately $0.13 million and a gain of approximately $0.06 million for
the three months ended September 30, 2017 and 2016, respectively. The changes are primarily due to expiration of all remaining
warrant liability in August, 2017.
Income tax expenses
The income tax expense for the three months
ended September 30, 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 valuation allowance.
Net loss attributable to non-controlling
interest
Hua Cheng previously had a 20% non-controlling interest in Zhong Hai Media and accounting for that interest under the equity
method by recording 20% of the operating losses of Zhong Hai Media. For the three months ended September 30, 2016, operating
loss attributable to Hua Cheng was approximately $0.1 million. The Company sold Zhong Hai Media on June 30, 2017 and no more
such allocation since then.
Dillon Yu has a 49% non-controlling interest
in Shanghai Wecast Supply Chain Management Limited (“Wecast SH”) and as such we allocate 49% of the operating loss
of Wecast SH to Dillon Yu. During the three months ended September 30, 2017, approximately $0.01 million of our operating loss
from Wecast SH was allocated to Dillon Yu, which was nil in the same period in 2016.
Swiss Guorong Limited has a 45%
non-controlling interest in Wide Angle and as such we allocate 45% of the operating profit of Wide Angle to Swiss Guorong
Limited. During the three months ended September 30, 2017, approximately $0.03 million of our operating income from Wide
Angle was allocated to Swiss Guorong Limited, which was nil for the same period in 2016.
Comparison of Nine Months Ended September
30, 2017 and 2016
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
Amount Change
|
|
|
% Change
|
|
Revenue
|
|
$
|
106,712,428
|
|
|
$
|
4,377,034
|
|
|
$
|
102,335,394
|
|
|
|
2338
|
%
|
Cost of revenue
|
|
|
100,888,964
|
|
|
|
2,609,975
|
|
|
|
98,278,989
|
|
|
|
3766
|
%
|
Gross profit
|
|
|
5,823,464
|
|
|
|
1,767,059
|
|
|
|
4,056,405
|
|
|
|
230
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses expenses
|
|
|
7,771,561
|
|
|
|
6,294,206
|
|
|
|
1,477,355
|
|
|
|
23
|
%
|
Research and development expenses
|
|
|
400,040
|
|
|
|
-
|
|
|
|
400,040
|
|
|
|
100
|
%
|
Professional fees
|
|
|
1,845,590
|
|
|
|
964,290
|
|
|
|
881,300
|
|
|
|
91
|
%
|
Impairment of other intangible assets
|
|
|
216,468
|
|
|
|
172,064
|
|
|
|
44,404
|
|
|
|
26
|
%
|
Depreciation and amortization
|
|
|
293,661
|
|
|
|
344,308
|
|
|
|
(50,647
|
)
|
|
|
(15
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
10,527,320
|
|
|
|
7,774,868
|
|
|
|
2,752,452
|
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,703,856
|
)
|
|
|
(6,007,809
|
)
|
|
|
1,303,953
|
|
|
|
(22
|
%)
|
Interest expense, net
|
|
|
(72,439
|
)
|
|
|
(225,154
|
)
|
|
|
152,715
|
|
|
|
(68
|
%)
|
Change in fair value of warrant liabilities
|
|
|
(112,642
|
)
|
|
|
201,826
|
|
|
|
(314,468
|
)
|
|
|
(156
|
%)
|
Equity in loss of equity method investees
|
|
|
(100,468
|
)
|
|
|
(19,862
|
)
|
|
|
(80,606
|
)
|
|
|
406
|
%
|
Others
|
|
|
(111,448
|
)
|
|
|
(8,409
|
)
|
|
|
(103,039
|
)
|
|
|
1225
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(5,100,853
|
)
|
|
|
(6,059,408
|
)
|
|
|
958,555
|
|
|
|
(16
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
-
|
|
|
|
25,836
|
|
|
|
(25,836
|
)
|
|
|
(100
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(5,100,853
|
)
|
|
|
(6,033,572
|
)
|
|
|
932,719
|
|
|
|
(15
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to non-controlling interest
|
|
|
608,910
|
|
|
|
261,809
|
|
|
|
347,101
|
|
|
|
133
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Seven Stars Cloud Group, Inc. shareholders
|
|
$
|
(4,491,943
|
)
|
|
$
|
(5,771,763
|
)
|
|
$
|
1,279,820
|
|
|
|
(22
|
%)
|
Revenues
|
|
YTD 2017Q3
|
|
|
YTD 2016Q3
|
|
|
Difference
|
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
|
%
|
|
Legacy YOD
|
|
|
794,273
|
|
|
|
4,377,034
|
|
|
|
(3,582,761
|
)
|
|
|
(82
|
%)
|
Wecast Services
|
|
|
105,918,155
|
|
|
|
-
|
|
|
|
105,918,155
|
|
|
|
100
|
%
|
Total
|
|
|
106,712,428
|
|
|
|
4,377,034
|
|
|
|
102,335,394
|
|
|
|
2338
|
%
|
Revenue for the nine months ended September
30, 2017 was approximately $106.7 million, as compared to $4.4 million for the same period in 2016. The increase in revenue of
approximately $102.3 million was attributable to the new consumer electronics business line acquired in January 2017, and to a
lesser extent, one-time consulting services that we provided to certain customers. These revenues were partially offset by the
decrease of our legacy YOD business, which is in line with our business strategy transition.
Gross profit
|
|
2017 1-9
|
|
|
2016 1-9
|
|
|
Diff
|
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
|
%
|
|
Legacy YOD
|
|
|
31,659
|
|
|
|
1,767,059
|
|
|
|
(1,735,400
|
)
|
|
|
(98
|
%)
|
Wecast Services
|
|
|
5,791,805
|
|
|
|
-
|
|
|
|
5,791,805
|
|
|
|
100
|
%
|
Total
|
|
|
5,823,464
|
|
|
|
1,767,059
|
|
|
|
4,056,405
|
|
|
|
230
|
%
|
Our gross profit for the nine months
ended September 30, 2017 was approximately $5.8 million, as compared to $1.8 million during the same period in 2016. Gross profit
ratio for the six months ended September 30, 2017 was 5.5%, a decrease from 40.4%, as the Wecast Services business, which currently
is engaged mostly in lower margin electronics, is still in its relative infancy and the business service offerings as well as
profit-sharing arrangements with a growing range of suppliers are in transition.
Selling, general and administrative
expenses
Our
selling, general and administrative expenses for the nine months ended September 30, 2017 increased approximately $1.5 million,
or 23%, as compared with the amount for the nine months ended September 30, 2016.
The
majority of the increase was due to 1) the increase
of our sales and marketing expense to introduce and promote of our business models to various potential investors and business
partners, as well as to promote Wecast Services business; and 2) financial advisory expenses that were paid to independent professional
companies to assist us in being able to contact and negotiate with more business partners.
Professional fees
Professional fees are generally related
to public company reporting and governance expenses as well as legal fees related to business transition and expansion. Our costs
for professional fees increased approximately $0.9 million, or 91%, to $1.8 million for the nine months ended September 30, 2017,
for the same period in 2016. The increase in professional fees was mainly caused by the legal, valuation and auditing service fees
incurred in relation to the acquisitions in January 2017.
Change in fair value of warrant liabilities
Certain of our warrants are recognized
as derivative liabilities and re-measured at the end of every reporting period and upon settlement, with the change in value reported
in the statement of operations. We reported a loss of approximately $0.1 million but a gain of approximately $0.2 million for the
nine months ended September 30, 2017 and 2016, respectively. The changes are primarily due to fluctuations in our closing stock
price.
Net loss attributable to non-controlling
interest
Hua Cheng previously had a 20% non-controlling
interest in Zhong Hai Media and accounting for that interest under the equity method by recording 20% of the operating losses
of Zhong Hai Media. For the nine months ended September 30, 2016, operating loss attributable to Hua Cheng was approximately $0.3
million. The Compnay sold Zhong Hai Media on June 30, 2017 and only $0.03 million operating loss were attributable to Hua Cheng
for the same period in 2017.
Dillon Yu has a 49% non-controlling interest
in Shanghai Wecast Supply Chain Management Limited (“Wecast SH”) and as such we allocate 49% of the operating loss
of Wecast SH to Dillon Yu. During the nine months ended September 30, 2017, approximately $0.6 million of our operating loss from
Wecast SH was allocated to Dillon Yu, which was nil in the same period in 2016.
Swiss Guorong Limited has a 45% non-controlling
interest in Wide Angle and as such we allocate 45% of the operating profit of Wide Angle to Swiss Guorong Limited. During the nine
months ended September 30, 2017, approximately $0.003 million of our operating loss from Wide Angle was allocated to Swiss Guorong
Limited, which was nil for the same period in 2016.
Liquidity and Capital Resources
As of September 30, 2017, the Company had
cash of approximately $1.7 million and had accumulated deficits of approximately $120.5 million and $115.7 million as of September
30, 2017 and December 31, 2016, respectively, due to recurring losses since our inception. These factors could raise substantial
doubt about the Company’s ability to continue as a going concern.
We continue to rely on debt and equity
financing to pay for ongoing operating expenses and execution of our business plan. On March 28, 2016, we completed a common stock
financing for $10.0 million. On July 19, 2016, we completed a stock financing with SSW for $4.0 million. On August 12, 2016, we
completed another common stock financing with Harvest Alternative Investment Opportunities SPC for $4.0 million. On November 17,
2016, we completed another common stock financing with SSSHK for $2.0 million. On May 19, 2017, we completed another common stock
financing with certain investors, including officers, directors and other affiliates of the Company for $2.0 million.
The consolidated financial statements included
in this report have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any
adjustment that might result from the outcome of this uncertainty.
The following table provides a summary of
our net cash flows from operating, investing and financing activities.
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net cash used in operating activities
|
|
$
|
(5,836,575
|
)
|
|
$
|
(7,945,349
|
)
|
Net cash provided by (used in) investing activities
|
|
|
1,403,598
|
|
|
|
(10,631,956
|
)
|
Net cash provided by financing activities
|
|
|
2,285,841
|
|
|
|
17,705,110
|
|
Effect of exchange rate changes on cash
|
|
|
62,078
|
|
|
|
(57,416
|
)
|
Net decrease in cash
|
|
|
(2,085,058
|
)
|
|
|
(929,611
|
)
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
3,761,814
|
|
|
|
3,768,897
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
1,676,756
|
|
|
$
|
2,839,286
|
|
Operating Activities
Cash used in operating activities decreased
for the nine months ended September 30, 2017 compared to 2016, primarily due to a decrease in our loss from operation from $6.0
million to $5.1 million.
Financing Activities
During the nine months ended on September
30, 2017, we entered into a subscription agreement with certain investors, including officers, directors and other affiliates,
pursuant to which we issued and sold to such investors, in a private placement, an aggregate of 727,273 shares of the common stock
of the Company, for $2.75 per share, or a total purchase price of $2.0 million. While in the same period in 2016, we received $10
million investment proceeds from the sales of 4,545,455 shares of our common stock and issuance of a two-year warrant to acquire
an additional 1,818,182 shares of our common stock at an exercise price of $2.75 per share to SSS.
Effects of Inflation
Inflation and changing prices have had
an effect on our business and we expect that inflation or changing prices could materially affect our business in the foreseeable
future. Our management will closely monitor price changes and make efforts to maintain effective cost control in operations.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements
that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor
in our securities.
Seasonality
Our operating results and operating cash
flows historically for our legacy YOD business have not been subject to seasonal variations. However, we expect a disproportionate
amount of our revenues generated from Wecast Services quarter over quarter due to the customers’ seasonal demand, as normally
holiday demand or new model of product introduction would increase our revenue. This pattern may change, however, as a result
of new market opportunities or new product introductions.
Critical Accounting Policies
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates,
and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies,
if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These
accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting
policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s
difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are
inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their
significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly
from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates
and judgments used in the preparation of our financial statements.
Variable Interest Entities
We account for entities qualifying as variable
interest entities (“VIEs”) in accordance with Financial Accounting Standards Boards (“FASB”) Accounting
Standards Codification (“ASC”) Topic 810,
Consolidation
. For our consolidated VIEs, management has made evaluations
of the relationships between our VIEs and the economic benefit flow of contractual arrangement with VIEs. In connection with such
evaluation, management also took into account the fact that, as a result of such contractual arrangements, we control the legal
shareholders’ voting interests and have power of attorney in the VIEs, and therefore we are able to direct all business activities
of the VIEs. As a result of such evaluation, management concluded that we are the primary beneficiary of our consolidated VIEs.
We have concluded that we can control our
PRC VIEs after consulting with our in-house PRC legal counsel. Enforecement of PRC laws and regulations that affect our ability
to control our PRC VIEs may preclude us from consolidating these companies in the future.
Revenue Recognition
When persuasive evidence of an arrangement
exists, the sales price is fixed or determinable and collectability is reasonably assured, we recognize revenue as services are
performed. For certain contracts that involve sub-licensing content within the specified license period, revenue is recognized
in accordance with ASC Subtopic 926-605, Entertainment-Films - Revenue Recognition, whereby revenue is recognized upon delivery
of films when the arrangement includes a nonrefundable minimum guarantee, delivery is complete and we have no substantive future
obligations to provide future additional services. Payments received from customers for the performance of future services are
recognized as deferred revenue, and subsequently recognized as revenue in the period that the service obligations are completed.
In accordance with ASC 605-25, Revenue
Recognition - Multiple Element Arrangements, contracts with multiple element deliverables are separated into individual units for
accounting purposes when the unit determined to have standalone value to the customer. Since the contract price is for all deliverables,
we allocated the arrangement consideration to all deliverables at the inception of the arrangement based on their relative selling
price. We use (a) vendor-specific objective evidence of selling price, if it exists, or, (b) the management’s best estimate
of the selling price for that deliverable to determine the relative selling price of each individual unit.
We also generate revenue from sales of
goods. Sales orders are confirmed after negotiation on price between customers and us. Purchase orders are confirmed after careful
selection of suppliers and negotiation on price. We purchase finished goods from suppliers in accordance with sales orders from
customers. Our suppliers then deliver goods to our customers directly. We are required to bear the direct risk of damage to the goods that the direct default risk that cannot be delivered to the
customer. When the delivery is completed, we recognize revenue and
the related cost at the same time. According to purchase orders with suppliers, we, as the owner of the goods, become the first
responsible party for the goods.
In accordance with ASC 605-45, Revenue
Recognition – Principal Agent Consideration, we account for revenue from sales of goods on a gross basis. We are the primary
obligor in the arrangements, as we have the ability to establish prices, and have discretion in selecting the independent suppliers
and other third-party that will perform the delivery service, we are responsible for the defective products and we bear credit
risk with customer payments. Accordingly, all such revenue billed to customers is classified as revenue and all corresponding payments
to suppliers are classified as cost of revenues.
The recognition of revenue involves certain
judgments and changes in our assumptions, judgments or estimations may have a material impact on the amount and timing of our revenue
recognition.
Licensed Content
We obtain content through content licensing
agreements with studios and distributors. We recognize licensed content when the license fee and the specified content titles are
known or reasonably determinable. Prepaid license fees are classified as an asset on the consolidated balance sheets as licensed
content and accrued license content fees payable are classified as a liability on the consolidated balance sheets.
We amortize licensed content in cost of
revenues over the contents contractual window of availability based on the expected revenue derived from the licensed content,
beginning with the month of first availability, such that our revenues bear a representative amount of the cost of the licensed
content. We review factors that impact the amortization of licensed content on a regular basis, including factors that may bear
direct impact on expected revenue from specific content titles. We estimate expected revenue by reviewing relevant factors, including
marketing considerations, programming efforts, relationship with our channel partners, expected customer renewals and content offered
by other distributors on the same platform. Changes in our expected revenue from licensed content could have a significant impact
on our amortization pattern.
Intangible Assets and Goodwill
We account for intangible assets and goodwill,
in accordance with ASC 350,
Intangibles – Goodwill and Other
. ASC 350 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be evaluated for impairment at least annually. ASC 350 also requires
that intangible assets with estimable useful lives be amortized over their respective estimated useful lives and reviewed for impairment
whenever events indicate the carrying amount may not be recoverable. In accordance with ASC 350, goodwill is allocated to reporting
units, which are either the operating segment or one reporting level below the operating segment. On an annual basis, we review
goodwill for impairment by first assessing qualitative factors to determine whether the existence of events or circumstances makes
it more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If we determine that it is more-likely-than-not
that the fair value of a reporting unit is less than its carrying amount, goodwill is further tested for impairment by comparing
the carrying value to the estimated fair value of its reporting units, determined using externally quoted prices (if available)
or a discounted cash flow model and, when deemed necessary, a market approach.
Application of goodwill impairment tests
requires significant management judgment, including the identification of reporting units, assigning assets, liabilities and goodwill
to reporting units and determination of fair value of each reporting unit. Judgment applied when performing the qualitative analysis
includes consideration of macroeconomic, industry and market conditions, overall financial performance of the reporting unit, composition,
personnel or strategy changes affecting the reporting unit and recoverability of asset groups within a reporting unit. Judgments
applied when performing the quantitative analysis includes estimating future cash flows, determining appropriate discount rates
and making other assumptions. Changes in these judgments, estimates and assumptions could materially affect the determination of
fair value for each reporting unit.
Standards Issued and Not Yet Implemented
In February 2016, the Financial Accounting
Standards Board issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). The new standard is effective for reporting
periods beginning after December 15, 2018 and early adoption is permitted. The standard will require lessees to report most leases
as assets and liabilities on the balance sheet, while lessor accounting will remain substantially unchanged. The standard requires
a modified retrospective transition approach for existing leases, whereby the new rules will be applied to the earliest year presented.
We do not expect the new lease standard to have a material effect on our financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers, or ASU 2014-09, a standard that will supersede virtually all of the existing revenue recognition
guidance in U.S. GAAP. The standard establishes a five-step model that will apply to revenue earned from a contract with a customer.
Extensive disclosures will be required, including disaggregation of total revenue, information about performance obligations,
changes in contract asset and liability account balances between periods and key judgments and estimates. The FASB has issued
several amendments to the standard, including clarification on accounting for licenses of intellectual property and identifying
performance obligations.
The guidance permits two methods of adoption:
retrospectively to each prior reporting period presented (the full retrospective method), or retrospectively with the cumulative
effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). We
currently anticipate adopting the standard using the modified retrospective method. The new standard will be effective for us beginning
January 1, 2018.
We are undertaking a comprehensive approach
to assess the impact of the guidance on our business by reviewing our current accounting policies and practices to identify any
potential differences that may result from applying the new requirements to our consolidated financial statements. We do not anticipate
that this standard will have a material impact to revenue recognition in both of our legacy YOD business and Wecast Service business.
Especially for Wecast Service business, we will continue to recognize revenue as principal for these contracts at the point in
time when the products are delivered. The new standard requires to disclose more information about revenue activities and related
transactions including quantitative and qualitative information about performance obligations, significant judgements and estimates,
contract assets and liabilities and disaggregation of revenue, which we are continuing to assess in the first quarter of 2018.
We are also identifying and implementing changes to the Company’s business processes, systems and controls to support adoption
of the new standard in 2018. We continue to make significant progress on our review of the standard. Our initial assessment may
change as we continue to refine these assumptions.
In May 2016, the FASB issued ASU 2016-12
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments in this Update
do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update affect only the narrow aspects
of Topic 606. The areas improved include: (1) Assessing the Collectability Criterion in Paragraph 606-10-25-1(e) and
Accounting for Contracts That Do Not Meet the Criteria for Step 1; (2) Presentation of Sales Taxes and Other Similar Taxes
Collected from Customers; (3) Noncash Consideration; (4) Contract Modifications at Transition; (5) Completed Contracts
at Transition; and (6) Technical Correction. The effective date and transition requirements for the amendments in this Update
are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). We
are planning to adopt the above standards on January 1, 2018. We may use either a full retrospective or a modified retrospective
approach to adopt this standard. We are currently evaluating this standard and the related updates, including which transition
approach to use as well as the impact of adoption on policies, practices and systems. The standard also requires us to evaluate
whether our businesses promise to transfer services to the customer itself (as a principal) or to arrange for services to be provided
by another party (as an agent). To make that determination, the standard uses a control model rather than the risks-and-rewards
model in current U.S. GAAP. At this stage in the evaluation, we do not anticipate that the new guidance will have a material impact
on our revenue recognition policies, practices or systems. We are currently evaluating the impact of this standard to its consolidated
financial statements upon adoption.
In June 2016, the FASB issued ASU 2016-13,
“Financial Instruments—Credit Losses (Topic 326)”. The pronouncement changes the impairment model for most financial
assets, and will require the use of an “expected loss” model for instruments measured at amortized cost. Under this
model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset
the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the
financial asset. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning
after December 15, 2019. We do not expect a material impact to its consolidated financial statement upon adoption of this ASU.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash, which requires companies to include amounts generally described as restricted
cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total
amounts shown on the statement of cash flows. This guidance will be effective in the first quarter of 2018 and early adoption is
permitted. Management is still evaluating the effect that this guidance will have on the consolidated financial statements and
related disclosures.
In January 2017, FASB issued ASU 2017-01,
“Business Combinations (Topic 805): Clarifying the Definition of a Business”. The update affects all companies and
other reporting organizations that must determine whether they have acquired or sold a business. The definition of a business affects
many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The update is intended to help companies
and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
The update provides a more robust framework to use in determining when a set of assets and activities is a business, and also provides
more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable.
For public companies, the update is effective for annual periods beginning after December 15, 2017, including interim periods within
those periods. The guidance should be applied prospectively upon its effective date. The effect of ASU 2017-01 on the consolidated
financial statements will be dependent on any future acquisitions.