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EX-32.2 - EXHIBIT 32.2 - IDEANOMICS, INC.t1701446_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - IDEANOMICS, INC.t1701446_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - IDEANOMICS, INC.t1701446_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - IDEANOMICS, INC.t1701446_ex31-1.htm
EX-10.1 - EXHIBIT 10.1 - IDEANOMICS, INC.t1701446_ex10-1.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2017

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number: 001-35561

 

 

 

 

WECAST NETWORK, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Nevada 20-1778374
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   

Building B4, Tai Ming International Business Court,

Tai Hu Town, Tongzhou District, Beijing, China 101116

(Address of principal executive offices)

 

212-206-1216

(Registrant's telephone number, including area code)

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ¨      No x

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x      No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “larger accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer                    ¨
Non-accelerated filer   ¨ Smaller reporting company x

 

Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨      No x

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 61,189,047 shares as of May 9, 2017. 

 

 

 

 

 

 

QUARTERLY REPORT ON FORM 10-Q

OF WECAST NETWORK, INC.

FOR THE PERIOD ENDED MARCH 31, 2017

 

TABLE OF CONTENTS

 

PART I -FINANCIAL INFORMATION  
     
Item 1.  Financial Statements  3
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
Item 3  Quantitative and Qualitative Disclosures About Market Risk 37
Item 4.  Controls and Procedures 37
     
PART II -OTHER INFORMATION  
     
Item 1.  Legal Proceedings 38
Item 1A.  Risk Factors 38
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 38
Item 3.  Defaults Upon Senior Securities 38
Item 4.  Mine Safety Disclosures 38
Item 5.  Other Information 39
Item 6.  Exhibits 39
Signatures 40

 

References

 

Except as otherwise indicated by the context, references in this report to (i) the “Company,” “Wecast Network,” “we,” “us,” and “our” are to Wecast Network, Inc. (formerly known as YOU On Demand Holdings, Inc.), a Nevada corporation, and its consolidated subsidiaries and variable interest entities; (ii) “CB Cayman” refers to our wholly-owned subsidiary China Broadband, Ltd., a Cayman Islands company; (iii) “YOD Hong Kong” refers to YOU On Demand (Asia) Limited (formerly known as Sinotop Group Limited), a Hong Kong company wholly-owned by CB Cayman; (iv) “YOD WFOE” refers to YOU On Demand (Beijing) Technology Co., Ltd., a PRC company wholly-owned by YOD Hong Kong; (v) “Sinotop Beijing” or “Sinotop” refers to Beijing Sino Top Scope Technology Co., Ltd, a PRC company controlled by YOD Hong Kong through contractual arrangements; (vi) “Zhong Hai Media” refers to Zhong Hai Shi Xun Media Co., Ltd., a PRC company 80% owned by Sinotop Beijing; (vii) “SSF” refers to Tianjin Sevenstarflix Network Technology Limited, a PRC company controlled by YOD Hong Kong through contractual arrangements; (viii) “Hua Cheng” refers to Hua Cheng Hu Dong (Beijing) Film and Television Communication Co., Ltd., a PRC company 39% owned by Sinotop Beijing and 20% owner of Zhong Hai Media; (ix) “Wecast Services” refers to our wholly-owned subsidiary Wecast Services Limited (formerly known as Sun Video Group Hong Kong Limited) a Hong Kong company; (x) “Wide Angle” refers to Wide Angle Group Limited, a Hong Kong company 55% owned by the Company; (xi) “Wecast SH” refers to Shanghai Wecast Supply Chain Management Limited, a PRC company 51% owned by the Company; (xii) “SEC” refers to the United States Securities and Exchange Commission; (xiii) “Securities Act” refers to Securities Act of 1933, as amended; (xiv) “Exchange Act” refers to the Securities Exchange Act of 1934, as amended; (xv) “PRC” and “China” refer to People’s Republic of China; (xvi) “Renminbi” and “RMB” refer to the legal currency of China; (xvii) “U.S. dollar,” “$” and “US$” refer to United States dollars; and (xviii) “VIEs” refers to our current variable interest entities, Sinotop Beijing, and Tianjin Sevenstarflix Network Technology Limited. 

 

 2 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

WECAST NETWORK, INC., ITS SUBSIDIARIES AND VARIABLE INTEREST ENTITIES

INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31, 2017

 

  Page 
Unaudited Consolidated Balance Sheets 4
Unaudited Consolidated Statements of Operations 5
Unaudited Consolidated Statements of Comprehensive Income (Loss) 6
Unaudited Consolidated Statements of Cash Flows 7
Unaudited Consolidated Statements of Equity 8
Notes to Unaudited Consolidated Financial Statements 10

  

 3 

 

Wecast Network, Inc., Its Subsidiaries and Variable Interest Entities
UNAUDITED CONSOLIDATED BALANCE SHEETS

 

   March 31, 2017   December 31, 2016 
       (As adjusted*) 
ASSETS          
Current assets:          
Cash  $1,054,142   $3,761,814 
Accounts receivable, net   29,196,591    9,522,151 
Licensed content, current   

883,015

    124,319 
Notes receivable   421,475    1,749,830 
Inventory   217,383    203,697 
Prepaid expenses   347,968    375,944 
Other current assets   6,925,012    3,581,822 
Total current assets   39,045,586    19,319,577 
Property and equipment, net   4,760,976    4,963,725 
Licensed content, non-current   16,075,134    17,593,528 
Intangible assets, net   425,113    453,242 
Goodwill   6,648,911    6,648,911 
Long term investments   6,635,483    6,654,664 
Other non-current assets   57,846    112,643 
Total assets  $73,649,049   $55,746,290 
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND EQUITY          
Current liabilities: (including amounts of the consolidated VIEs without recourse to Wecast Network, Inc. See note 3)          
Accounts payable  $27,231,787   $13,341,680 
Deferred revenue   609,466    1,350,054 
Accrued interest due to a related party   587,688    557,918 
Accrued other expenses   1,415,774    708,987 
Accrued salaries   807,952    766,957 
Payable for purchase of building   992,000    987,015 
Amount due to related parties   

2,173,891

    - 
Other current liabilities   331,719    1,995,297 
Accrued license content fees   1,189,453    1,236,661 
Convertible promissory note due to a related party   3,000,000    3,000,000 
Warrant liabilities   340,901    70,785 
Total current liabilities    38,680,631     24,015,354 
Total liabilities  $38,680,631     24,015,354 
Commitments and contingencies (Note 17)          
Convertible redeemable preferred stock:          
Series A - 7,000,000 shares issued and outstanding, liquidation and deemed liquidation preference of $3,500,000 as of March 31, 2017 and December 31, 2016, respectively   1,261,995    1,261,995 
Equity:          
Series E Preferred Stock - $0.001 par value; 16,500,000 shares authorized, 1,216,904 and 7,154,997 shares issued and outstanding, liquidation preference of  $2,129,586 and $12,521,245 as of March 31, 2017 and December 31, 2016, respectively   1,217    7,155 
Common stock - $0.001 par value; 1,500,000,000 shares authorized,  59,891,201 and 53,918,523 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively   59,891    53,918 
Additional paid-in capital   

152,836,057

     152,755,919 
Accumulated deficit   (113,456,389)   (115,669,268)
Accumulated other comprehensive loss   (3,282)   (1,353,302)
Total Wecast Network shareholders’ equity   39,437,494    35,794,422 
Non-controlling interest   (5,731,071)   (5,325,481)
Total equity    33,706,423    30,468,941 
Total liabilities, convertible redeemable preferred stock and equity  $73,649,049   $55,746,290 

 

*The above consolidated balance sheets present the Wecast Services Limited and Wide Angle Group Limited acquired from BT Capital Global Limited (“BT”) on January 30 and January 31, 2017, respectively as if they had been owned by the Company since November 10, 2016 in accordance with ASC Subtopic 805-50 (See Note 4 “Acquisition”)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 4 

  

Wecast Network, Inc., Its Subsidiaries and Variable Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Three Months Ended 
   March 31, 2017   March 31, 2016 
         
Revenue  $33,164,351   $1,269,726 
Cost of revenue   29,342,379    915,780 
Gross profit    3,821,972    353,946 
           
Operating expenses:          
Selling, general and administrative expense   1,265,172    2,165,053 
Professional fees   267,133    367,446 
Depreciation and amortization   196,211    97,463 
Total operating expense   1,728,516    2,629,962 
           
Income (loss) from operations   2,093,456    (2,276,016)
           
Interest and other income (expense)          
Interest expense   (41,557)   (33,473)
Change in fair value of warrant liabilities   (270,116)   37,023 
Equity in loss of equity method investees   (43,746)   (10,348)
Other   (99,570)   162
Income (loss) before income taxes   

1,638,467

    (2,282,652)
           
Income tax benefit   -    8,612 
           
Net income (loss)   1,638,467    (2,274,040)
           
Net loss attributable to non-controlling interest   

(574,412

)   (137,569)
           
Net income (loss) attributable to Wecast Network, Inc. shareholders  $2,212,879   $(2,136,471)
           
Basic earnings (loss) per share  $0.04   $(0.09)
Diluted earnings (loss) per share  $0.04   $(0.09)
           
Weighted average shares outstanding:          
Diluted   60,715,721    24,484,562 
Basic   55,382,002    24,484,562 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 5 

  

Wecast Network, Inc., Its Subsidiaries and Variable Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

   Three Months Ended 
   March 31, 2017   March 31, 2016 
         
Net income (loss)  $1,638,467   $(2,274,040)
           
Other comprehensive income (loss), net of nil tax          
Foreign currency translation adjustments   1,518,842    13,132 
Comprehensive income (loss)   3,157,309    (2,260,908)
           
Comprehensive loss attributable to non-controlling interest   (405,590)   (142,956) 
Comprehensive income (loss) attributable to Wecast Network, Inc. shareholders  $3,562,899   $(2,117,952)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 6 

  

Wecast Network, Inc., Its Subsidiaries and Variable Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Three Months Ended 
   March 31, 2017   March 31, 2016 
         
Cash flows from operating activities:          
Net income (loss)  $1,638,467   $(2,274,040)
Adjustments to reconcile net loss to net cash used in operating activities          
Share-based compensation expense   71,428    138,770 
Depreciation and amortization   196,211    97,463 
Income tax benefit   -    (8,612)
Equity in loss of equity method investees   43,746   10,348 
Loss on disposal of assets   40,139    - 
Change in fair value of warrant liabilities   270,116     (37,023)
Foreign currency exchange losses   -    10,590
           
Change in assets and liabilities:          
Accounts receivable   (19,674,440)   (1,153,595)
Licensed content   

1,518,394

    263,913 
Prepaid expenses and other assets   (1,932,566)   140,391 
Accounts payable   13,890,107    237 
Accrued expenses, salary and other current liabilities   (881,051)   691,914 
Amount due to related parties   2,173,891    - 
Deferred revenue   (740,588)   (15,080)
Accrued license content fees   -    402,508 
Net cash used in operating activities   (3,386,146)   (1,732,216)
           
Cash flows from investing activities:          
Acquisition of and deposit for property and equipment   (5,473)   -
Net cash used in investing activities   (5,473)   -
           
Cash flows from financing activities          
Proceeds from issuance of warrant and shares    

8,745

    10,000,000 
Net cash provided by financing activities   

8,745

    10,000,000 
Effect of exchange rate changes on cash   675,202    (1,361)
Net increase (decrease) in cash   (2,707,672)   8,266,423 
           
Cash at beginning of period   3,761,814    3,768,897 
           
Cash at end of period  $1,054,142   $12,035,320 
           
Supplemental Cash Flow Information:          
           
Issuance of convertible note for licensed content (Note 12)  $-   $17,717,847 
Payable for purchase of building  $992,000   $- 
Issuance of shares for the settlement of liability  $-   $75,000 

 

The accompanying notes are an integral part of these consolidated financial statements.

  

 7 

 

Wecast Network, Inc., Its Subsidiaries and Variable Interest Entities

UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY

For the Three Months Ended March 31, 2016

 

   Series E
Preferred
Stock
   Series E
Par
Value
   Common
Stock
   Par
Value
   Additional
Paid-in
Capital
   Accumulated
Deficit
   Accumulated
Other
Comprehensive
Loss
   Wecast
Network , Inc.
Shareholders'
Equity
   Non-
controlling
Interest
    Total
Equity
 
Balance, January 1, 2016   7,254,997   $7,255    24,249,109   $24,249   $97,512,542   $(86,457,840)  $(414,910)  $10,671,296   $(2,388,031)   $8,283,265 
Share-based compensation   -    -    25,000    25    88,745    -    -    88,770    -     88,770 
Common stock issuance   -    -    4,545,455    4,545    9,273,029    -    -    9,277,574    -     9,277,574 
Warrants issued in connection with common stock issuance   -    -    -    -    722,426    -    -    722,426    -     722,426 
Issuance cost in connection with the issuance of common stock and warrants   -    -    -    -    (442,500)   -    -    (442,500)   -     (442,500)
Common stock issued for settlement of liability   -    -    41,780    42    74,958    -    -    75,000    -     75,000 
Net loss   -    -    -    -    -    (2,136,471)   -    (2,136,471)   (137,569)    (2,274,040)
Foreign currency translation adjustments, net of nil tax   -    -    -    -    -    -    18,519    18,519    (5,387)    13,132 
Balance, March 31, 2016   7,254,997   $7,255    28,861,344   $28,861   $107,229,200   $(88,594,311)  $(396,391)  $18,274,614   $(2,530,987)   $

15,743,627

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 8 

 

Wecast Network, Inc., Its Subsidiaries and Variable Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY

For the Three Months Ended March 31, 2017

 

   Series E
Preferred
Stock
   Series E
Par
Value
   Common
Stock
   Par
Value
   Additional
Paid-in
Capital
   Accumulated
Deficit
   Accumulated
Other
Comprehensive
Loss
   Wecast Network
Shareholders'
Equity
   Non-
controlling
Interest
    Total
Equity
 
Balance, January 1, 2017 (As adjusted*)   7,154,997   $7,155    53,918,523   $53,918   $152,755,919   $(115,669,268)  $(1,353,302)  $35,794,422   $(5,325,481)   $30,468,941 
Share-based compensation   -    -    -    -    71,428    -    -    71,428    -     71,428 
Common stock issuance   -    -    

29,585

    30    (30)    -    -    -    -     - 
Common stock issued for warrant exercised   -    -    5,000    5    8,740    -    -    8,745    -     8,745 
Common stock issued from conversion of series E preferred stock   (5,938,093)   (5,938)   5,938,093    5,938    -     -    -    -    -     - 
Net profit (loss)   -    -    -    -    -    2,212,879    -    2,212,879    (574,412)    1,638,467 
Foreign currency translation adjustments, net of nil tax   -    -    -    -    -    -    1,350,020    1,350,020    168,822     1,518,842 
Balance, March 31, 2017   1,216,904   $1,217    59,891,201   $59,891   $152,836,057   $(113,456,389)  $(3,282)  $39,437,494   $(5,731,071)   $33,706,423 

 

 *The above consolidated statements of equity present the Wecast Services Limited and Wide Angle Group Limited acquired from BT Capital Global Limited on January 30 and January 31, 2017, respectively as if they had been owned by the Company since November 10, 2016 in accordance with ASC Subtopic 805-50 (See Note 4 “Acquisition”)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 9 

 

1.Organization and Principal Activities

 

Wecast Network, Inc. (the “Company”), formerly known as YOU On Demand Holdings, Inc., is a Nevada corporation that primarily operates in China (“PRC”) through its subsidiaries and consolidated variable interest entities (“VIEs”). The Company, its subsidiaries and consolidated VIEs are collectively referred to as Wecast Network (“Wecast Network”, “we”, “us”, or “the Company”).

 

Wecast Network is leveraging its legacy operations as a premium content Video On Demand (“VOD”) service provider in China and aiming to be the leading provider of total B2B business solutions for today’s constantly evolving business landscape. With a focus on “BASE” or Blockchain, Artificial Intelligence, Supply Chain & Exchanges, Wecast is organized into three cloud-based categories and business units: Brand IP Cloud, Product Sales Cloud, and the Financial Product Cloud. With the three clouds functioning both independently and interdependently, Wecast is creating a vertical, transactional and flexible platform for today’s global enterprises.

 

The Company’s mission and vision is to be the world’s leading cloud-based, total B2B enterprise solution and platform provider that empowers businesses to grow with Big Data technology.

 

Wecast Network launched its legacy VOD service through acquisition of YOD Hong Kong, formerly Sinotop Group Limited, in July 30, 2010 through its subsidiary China CB Cayman. Through a series of contractual arrangements, YOD WFOE, the subsidiary of YOD Hong Kong, controls Sinotop Beijing, a corporation established in the PRC. Sinotop Beijing is the 80% owner of Zhong Hai Media, through which we provide: 1) integrated value-added business-to-business (“B2B”) service solutions for the delivery of VOD and enhanced premium content for digital cable; 2) integrated value-added business-to-business-to-customer (“B2B2C”) service solutions for the delivery of VOD and enhanced premium content for IPTV and OTT providers and; 3) a direct to user, or B2C, mobile video service app. As a result of the contractual arrangements with Sinotop Beijing, we have the right to control management decisions and direct the economic activities that most significantly impact Sinotop Beijing and Zhong Hai Media, and accordingly, under generally accepted accounting principles in the United States (“U.S. GAAP”), we consolidate these operating entities in our consolidated financial statements.

 

On October 8, 2016, the Company signed an agreement with Zhejiang Yanhua (“Yanhua Agreement”), where Zhejiang Yanhua (“Yanhua”) will act as the exclusive distribution operator (within the territory of the People’ Republic of China) of Wecast Network’s licensed library of major studio films. According to the Yanhua Agreement, the existing legacy Hollywood studio paid contents as well as other IP contents specified in the agreement, along with the corresponding authorized rights letter that Wecast Network is entitled to, will be turned over to Yanhua as a whole package, which was agreed to be priced at RMB13,000,000. In addition to the above-mentioned minimal guarantee fee of RMB13,000,000 specified, there is a provision in the Yanhua Agreement which states that once the revenue recognized from the existing contents transferred from Wecast Network to Yanhua reaches the amount of RMB13,000,000, the revenue above RMB13,000,000 will be shared with Wecast Network from the date when this revenue threshold is reached based on certain revenue-sharing mechanism stipulated in the Yanhua Agreement.

 

On January 30, 2017, Company entered into a Securities Purchase Agreement (the “Sun Video SPA”) with BT Capital Global Limited which has been controlled by Company’s chairman Bruno Wu, for the purchase by us of all of the outstanding capital stock of Sun Video Group Hong Kong Limited. On January 31, 2017, Company entered into another Securities Purchase Agreement (the “Wide Angle SPA”) with BT and Sun Seven Stars Media Group Limited, one of the Company’s largest shareholders, controlled by Mr. Wu, as guarantor, for the purchase by us of 55% of the outstanding capital stock of Wide Angle Group Limited (“Wide Angle”). Details of these two acquisitions are in Note 4. After acquiring these two entities, other than Company’s legacy YOD business, Company is also engaged with consumer electronics and smart hand held device design and supply chain management business.

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statements of the financial position as of March 31, 2017, results of operations for the three months ended March 31, 2017 and 2016, and cash flows for the three months ended March 31, 2017 and 2016, have been made. All significant intercompany transactions and balances are eliminated on consolidation.

 

Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission on March 31, 2017 (“2016 Annual Report”).

 

2.Going Concern and Management’s Plans

 

For the three months ended March 31, 2017 and 2016, the Company incurred net income of approximately $1.6 million and net loss of $2.3 million, respectively, and cash used in operations was approximately $3.4 million and $1.7 million, respectively. Further, the Company had accumulated deficit of approximately $113.5 million and $115.7 million as of March 31, 2017 and December 31, 2016, respectively, due to recurring losses since the inception of its business.

 

 10 

  

The Company must continue to rely on proceeds from debt and equity issuances to pay for ongoing operating expenses in order to execute its business plan. On March 28, 2016, the Company completed a common stock financing for $10.0 million. In addition, the Company completed three common stock financings with Seven Star Works Co. Ltd. (“SSW”) for $4.0 million on July 19, 2016, with Harvest Alternative Investment Opportunities SPC (“Harvest”) for $4.0 million on August 12, 2016, and with Sun Seven Stars Hong Kong Cultural Development Limited (“SSSHK”) for $2.0 million on November 17, 2016, respectively. Although the Company believes it has the ability to raise funds by issuing debt or equity instruments, additional financing may not be available to the Company on terms acceptable to the Company or at all or such resources may not be received in a timely manner.

 

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty.

  

3.VIE Structure and Arrangements

 

a)Sinotop VIE structure and arrangement

 

To comply with PRC laws and regulations that prohibit or restrict foreign ownership of companies that provides value-added telecommunication services, the Company provides its services through Sinotop Beijing and its subsidiary, Zhong Hai Media, which holds the licenses and approvals to provide digital distribution and Internet content services in the PRC. The Company has the ability to control Sinotop Beijing and Zhong Hai Media through a series of contractual agreements entered into among YOD WFOE, YOD Hong Kong, Sinotop Beijing and the legal shareholders of Sinotop Beijing.

 

Prior to January 2016, we entered into a series of contractual agreements to give us the ability to control Sinotop Beijing with Zhang Yan, the former legal shareholder of Sinotop Beijing (the spouse of our then-CEO). In January 2016, in connection with the appointment of new CEO and in accordance with our rights under the contractual agreements, (1) the legal ownership of Sinotop Beijing was transferred from Zhang Yan to Bing Wu, the brother of our current Chairman and Yun Zhu, the former Vice President of Beijing Sun Seven Stars Culture Development Limited (“SSS”), (2) the Company terminated the series of contractual arrangements with Zhang Yan, and (3) the Company entered into new contractual agreements with Bing Wu and Yun Zhu (collectively, the “Former Sinotop VIE Agreements”). In October 2016, in accordance with our rights under contractual agreements, (1) the legal ownership of Sinotop Beijing was transferred from Bing Wu to Mei Chen, the former CFO of our Company, (2) the Company terminated the series of contractual arrangements with Bing Wu, and (3) the Company entered into new contractual agreements with Mei Chen (collectively, the “New Sinotop VIE Agreements”). Although the Former Sinotop VIE Agreements and New Sinotop VIE Agreements resulted in changes to the legal shareholders of Sinotop Beijing, there was no change in the Company’s ability to control Sinotop Beijing or the Company’s rights to 100% of the economic benefits of Sinotop Beijing. The Company was the primary beneficiary of Sinotop Beijing prior to the signing of the Former Sinotop VIE Agreements and New Sinotop VIE Agreements and the Company remained the primary beneficiary of Sinotop Beijing after the signing of the former Sinotop VIE Agreements and the New Sinotop VIE Agreements. Accordingly, the change in legal ownership of Sinotop Beijing did not have any impact to the Company’s consolidation of Sinotop Beijing. The key terms of the New Sinotop VIE Agreements are summarized as follows:

 

Equity Pledge Agreement

 

Pursuant to the Equity Pledge Agreement among YOD WFOE, Sinotop Beijing, Mei Chen and Yun Zhu (collectively, the “Nominee Shareholders”), the Nominee Shareholders pledged all of their equity interests in Sinotop Beijing (the “Collateral”) to YOD WFOE as security for the performance of the obligations of Sinotop Beijing to make all the required technical service fee payments pursuant to the Technical Services Agreement and for performance of the Nominee Shareholders’ obligation under the Call Option Agreement. The terms of the Equity Pledge Agreement expire upon satisfaction of all obligations under the Technical Services Agreement and Call Option Agreement.

 

Call Option Agreement

 

Pursuant to the Call Option Agreement among YOD WFOE, Sinotop Beijing and the Nominee Shareholders, the Nominee Shareholders granted an exclusive option to YOD WFOE, or its designee, to purchase, at any time and from time to time, to the extent permitted under PRC law, all or any portion of the Nominee Shareholders’ equity in Sinotop Beijing. The exercise price of the option shall be determined by YOD WFOE at its sole discretion, subject to any restrictions imposed by PRC law. The term of the agreement is until all of the equity interest in Sinotop Beijing held by the Nominee Shareholders are transferred to YOD WFOE, or its designee and may not be terminated by any part to the agreement without consent of the other parties.

 

 11 

  

Power of Attorney

 

Pursuant to the Power of Attorney agreements among YOD WFOE, Sinotop Beijing and each of the respective Nominee Shareholders, each of the Nominee Shareholders granted YOD WFOE the irrevocable right, for the maximum period permitted by law, all of its voting rights as shareholders of Sinotop Beijing. The Nominee Shareholders may not transfer any of its equity interest in Sinotop Beijing to any party other than YOD WFOE. The Power of Attorney agreements may not be terminated except until all of the equity in Sinotop Beijing has been transferred to YOD WFOE or its designee.

 

Technical Service Agreement

 

Pursuant to the Technical Service Agreement between YOD WFOE and Sinotop Beijing, YOD WFOE has the exclusive right to provide technical service, marketing and management consulting service, financial support service and human resource support services to Sinotop Beijing, and Sinotop Beijing is required to take all commercially reasonable efforts to permit and facilitate the provision of the services by YOD WFOE. As compensation for providing the services, YOD WFOE is entitled to receive service fees from Sinotop Beijing equivalent to YOD WFOE’s cost plus 30% of such costs as calculated on accounting policies generally accepted in the PRC. YOD WFOE and Sinotop Beijing agree to periodically review the service fee and make adjustments as deemed appropriate. The term of the Technical Services Agreement is perpetual, and may only be terminated upon written consent of both parties.

 

Spousal Consent

 

Pursuant to the Spousal Consent, undersigned by the respective spouse of Nominee Shareholders (collectively, the “Spouses”), the Spouses unconditionally and irrevocably agreed to the execution of the Equity Pledge Agreement, Call Option Agreement and Power of Attorney agreement. The Spouses agreed to not make any assertions in connection with the equity interest of Sinotop Beijing and to waived consent on further amendment or termination of the Equity Pledge Agreement, Call Option Agreement and Power of Attorney agreement. The Spouses further pledge to execute all necessary documents and take all necessary actions to ensure appropriate performance under these agreements upon YOD WFOE’s request. In the event the Spouses obtain any equity interests of Sinotop Beijing which are held by the Nominee Shareholders, the Spouses agreed to be bound by the New Sinotop VIE Agreements, including the Technical Services Agreement, and comply with the obligations thereunder, including sign a series of written documents in substantially the same format and content as the New Sinotop VIE Agreements.

 

Letter of Indemnification

 

Pursuant to the Letter of Indemnification among YOD WFOE and Mei Chen and YOD WFOE and Yun Zhu, YOD WFOE agreed to indemnify Nominee Shareholders against any personal, tax or other liabilities incurred in connection with their role in equity transfer to the greatest extent permitted under PRC law. YOD WFOE further waived and released Nominee Shareholders from any claims arising from, or related to, their role as the legal shareholder of Sinotop Beijing, provided that their actions as a nominee shareholder are taken in good faith and are not opposed to YOD WFOE’s best interests. Conversely, the Nominee Shareholders will not be entitled to dividends or other benefits generated therefrom, or receive any compensation in connection with this arrangement. The Letter of Indemnification will remain valid until either Nominee Shareholders or YOD WFOE terminates the agreement by giving the other party hereto 60 days’ prior written notice.

 

In addition to the New Sinotop VIE Agreements, the Management Service Agreement between Sinotop Beijing and YOD Hong Kong continued to remain in effect, the key terms of which are as follows:

 

Management Services Agreement

 

Pursuant to a Management Services Agreement, as of March 9, 2010, YOD Hong Kong has the exclusive right to provide to Sinotop Beijing management, financial and other services related to the operation of Sinotop Beijing’s business, and Sinotop Beijing is required to take all commercially reasonable efforts to permit and facilitate the provision of the services by YOD Hong Kong. As compensation for providing the services, YOD Hong Kong is entitled to receive a fee from Sinotop Beijing, upon demand, equal to 100% of the annual net profits as calculated on accounting policies generally accepted in the PRC of Sinotop Beijing during the term of the Management Services Agreement. YOD Hong Kong may also request ad hoc quarterly payments of the aggregate fee, which payments will be credited against Sinotop Beijing’s future payment obligations.

 

The Management Services Agreement also provides YOD Hong Kong, or its designee, with a right of first refusal to acquire all or any portion of the equity of Sinotop Beijing upon any proposal by the sole shareholder of Sinotop Beijing to transfer such equity. In addition, at the sole discretion of YOD Hong Kong, Sinotop Beijing is obligated to transfer to YOD Hong Kong, or its designee, any part or all of the business, personnel, assets and operations of Sinotop Beijing which may be lawfully conducted, employed, owned or operated by YOD Hong Kong, including:

 

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(a)          business opportunities presented to, or available to Sinotop Beijing may be pursued and contracted for in the name of YOD Hong Kong rather than Sinotop Beijing, and at its discretion, YOD Hong Kong may employ the resources of Sinotop Beijing to secure such opportunities;

 

(b)          any tangible or intangible property of Sinotop Beijing, any contractual rights, any personnel, and any other items or things of value held by Sinotop Beijing may be transferred to YOD Hong Kong at book value;

 

(c)          real property, personal or intangible property, personnel, services, equipment, supplies and any other items useful for the conduct of the business may be obtained by YOD Hong Kong by acquisition, lease, license or otherwise, and made available to Sinotop Beijing on terms to be determined by agreement between YOD Hong Kong and Sinotop Beijing;

 

(d)          contracts entered into in the name of Sinotop Beijing may be transferred to YOD Hong Kong, or the work under such contracts may be subcontracted, in whole or in part, to YOD Hong Kong, on terms to be determined by agreement between YOD Hong Kong and Sinotop Beijing; and

 

(e)          any changes to, or any expansion or contraction of, the business may be carried out at the sole discretion of YOD Hong Kong, and in the name of and at the expense of, YOD Hong Kong; provided, however, that none of the foregoing may cause or have the effect of terminating (without being substantially replaced under the name of YOD Hong Kong) or adversely affecting any license, permit or regulatory status of Sinotop Beijing.

 

The term of the Management Services Agreement is 20 years, and may not be terminated by Sinotop Beijing, except with the consent of, or a material breach by, YOD Hong Kong.

 

Pursuant to the above contractual agreements, YOD WFOE can have the assets transferred freely out of Sinotop Beijing without any restrictions. Therefore, YOD WFOE considers that there is no asset of Sinotop Beijing or Zhong Hai Media that can be used only to settle obligations of Sinotop Beijing or Zhong Hai Media, except for the registered capital of these two entities amounting to RMB 21.8 million (approximately $3.3 million) as of March 31, 2017. As Sinotop Beijing and Zhong Hai Media are incorporated as limited liability companies under PRC Company Law, creditors of these two entities do not have recourse to the general credit of other entities of the Company.

 

b)Tianjin Sevenstarflix Network Technology Limited (“SSF”) VIE structure and arrangements

 

To comply with PRC laws and regulations that prohibit or restrict foreign ownership of companies that provides value-added telecommunication services, the Company plans to also provide its services through SSF, which is applying to hold the licenses and approvals to provide digital distribution and Internet content services in the PRC. The Company has the ability to control SSF through a series of contractual agreements, as described below, entered into among YOD WFOE, YOD Hong Kong, SSF and the legal shareholders of SSF.

 

On April 5, 2016, YOD WFOE entered into variable interest entity agreements with SSF and its nominee shareholders pursuant to the Amended Tianjin Agreement dated December 21, 2015 (see Note 12(c)) (the “SSF VIE Agreements”). Lan Yang, holder of 99% equity ownership in SSF and a party to certain of the SSF VIE Agreements, is the spouse of Bruno Zheng Wu, the Company’s Chairman. Yun Zhu, holder of 1% equity ownership in SSF and a party to certain of the SSF VIE Agreements, is the Vice President of SSS.

 

The terms of the SSF VIE Agreements are as follows:

 

Equity Pledge Agreement

 

Pursuant to the Equity Pledge Agreement among YOD WFOE, Lan Yang and Yun Zhu (the “Nominee Shareholders”), dated April 5, 2016, the Nominee Shareholders pledged all of their capital contribution rights in SSF to YOD WFOE as security for the performance of the obligations of SSF to make all the required technical service fee payments pursuant to the Technical Services Agreement and for performance of the Nominee Shareholders’ obligation under the Call Option Agreement. The terms of the Equity Pledge Agreement expire upon satisfaction of all obligations under the Technical Services Agreement and Call Option Agreement.

 

Call Option Agreement

 

Pursuant to the Call Option Agreement among YOD WFOE, SSF and the Nominee Shareholders, dated April 5, 2016, the Nominee Shareholders granted an exclusive option to YOD WFOE, or its designee, to purchase, at any time and from time to time, to the extent permitted under PRC law, all or any portion of the Nominee Shareholders’ equity in SSF. The exercise price of the option shall be determined by YOD WFOE at its sole discretion, subject to any restrictions imposed by PRC law. The term of the agreement is until all of the equity interest in SSF held by the Nominee Shareholders is transferred to YOD WFOE, or its designee and may not be terminated by any party to the agreement without consent of the other parties.

 

 13 

  

Power of Attorney

 

Pursuant to the Power of Attorney agreements among YOD WFOE, SSF and each of the respective Nominee Shareholders, dated April 5, 2016, each of the Nominee Shareholders granted YOD WFOE the irrevocable right, for the maximum period permitted by law, to all of its voting rights as shareholders of SSF. The Nominee Shareholders may not transfer any of their equity interest in SSF to any party other than YOD WFOE. The Power of Attorney agreements may not be terminated except until all of the equity in SSF has been transferred to YOD WFOE or its designee.

 

Technical Service Agreement

 

Pursuant to the Technical Service Agreement, dated April 5, 2016, between YOD WFOE and SSF, YOD WFOE has the exclusive right to provide technical service, marketing and management consulting service, financial support service and human resource support services to SSF, and SSF is required to take all commercially reasonable efforts to permit and facilitate the provision of the services by YOD WFOE. As compensation for providing the services, YOD WFOE is entitled to receive service fees from SSF equivalent to YOD WFOE’s cost plus 20-30% of such costs as calculated on accounting policies generally accepted in the PRC. YOD WFOE and SSF agree to periodically review the service fee and make adjustments as deemed appropriate. The term of the Technical Services Agreement is perpetual, and may only be terminated upon written consent of both parties.

 

Spousal Consent

 

Pursuant to the Spousal Consent, dated April 5, 2016, undersigned by the respective spouse of the Nominee Shareholders (collectively, the “Spouses”), the Spouses unconditionally and irrevocably agreed to the execution of the Equity Pledge Agreement, Call Option Agreement and Power of Attorney agreement. The Spouses agreed to not make any assertions in connection with the equity interest of SSF and to waive consent on further amendment or termination of the Equity Pledge Agreement, Call Option Agreement and Power of Attorney agreement. The Spouses further pledge to execute all necessary documents and take all necessary actions to ensure appropriate performance under these agreements upon YOD WFOE’s request. In the event the Spouses obtain any equity interests of SSF which are held by the Nominee Shareholders, the Spouses agreed to be bound by the SSF VIE Agreements, including the Technical Services Agreement, and comply with the obligations thereunder, including sign a series of written documents in substantially the same format and content as the SSF VIE Agreements.

 

Letter of Indemnification

 

Pursuant to the Letter of Indemnification among YOD WFOE and Lan Yang and YOD WFOE and Yun Zhu, both dated as of April 5, 2016, YOD WFOE agreed to indemnify Nominee Shareholders against any personal, tax or other liabilities incurred in connection with their role in equity transfer to the greatest extent permitted under PRC law. YOD WFOE further waived and released the Nominee Shareholders from any claims arising from, or related to, their role as the legal shareholder of SSF, provided that their actions as a nominee shareholder are taken in good faith and are not opposed to YOD WFOE’s best interests. The Nominee Shareholders will not be entitled to dividends or other benefits generated therefrom, or receive any compensation in connection with this arrangement. The Letter of Indemnification will remain valid until either the Nominee Shareholders or YOD WFOE terminates the agreement by giving the other party hereto 60 days’ prior written notice.

 

Loan Agreement

 

Pursuant to the Loan Agreement among YOD WFOE and the Nominee Shareholders, dated April 5, 2016, YOD WFOE agrees to lend RMB 19.8 million and RMB 0.2 million, respectively, to the Nominee Shareholders for the purpose of establishing SSF and for development of its business. As of December 31, 2016, RMB 27.6 million (US $4.2 million) and RMB nil have been lent to Lan Yang and Yun Zhu, respectively. Lan Yang has contributed all of the RMB 27.6 million (US $4.2 million) in the form of capital contribution. The loan can only be repaid by a transfer by the Nominee Shareholders of their equity interests in SSF to YOD WFOE or YOD WFOE’s designated persons, through (i) YOD WFOE having the right, but not the obligation to at any time purchase, or authorize a designated person to purchase, all or part of the Nominee Shareholders’ equity interests in SSF at such price as YOD WFOE shall determine (the “Transfer Price”), (ii) all monies received by the Nominee Shareholders through the payment of the Transfer Price being used solely to repay YOD WFOE for the loans, and (iii) if the Transfer Price exceeds the principal amount of the loans, the amount in excess of the principal amount of the loans being deemed as interest payable on the loans, and to be payable to YOD WFOE in cash. Otherwise, the loans shall be deemed to be interest-free. The term of the Loan Agreement is perpetual, and may only be terminated upon the Nominee Shareholders receiving repayment notice, or upon the occurrence of an event of default under the terms of the agreement. The loan extended to the Nominee Shareholders and the capital of SSF are fully eliminated in the consolidated financial statements.

 

 14 

  

Management Services Agreement

 

In addition to the SSF VIE Agreements, the Company’s subsidiary and the parent company of YOD WFOE, YOU On Demand (Asia) Limited, a company incorporated under the laws of Hong Kong (“YOD Hong Kong”) entered into a Management Services Agreement with SSF, dated as of April 6, 2016 (the “Management Services Agreement”). Pursuant to a Management Services Agreement, YOD Hong Kong has the exclusive right to provide to SSF management, financial and other services related to the operation of SSF’s business, and SSF is required to take all commercially reasonable efforts to permit and facilitate the provision of the services by YOD Hong Kong. As compensation for providing the services, YOD Hong Kong is entitled to receive a fee from SSF, upon demand, equal to 100% of the annual net profits as calculated on accounting policies generally accepted in the PRC of SSF during the term of the Management Services Agreement. YOD Hong Kong may also request ad hoc quarterly payments of the aggregate fee, which payments will be credited against SSF’s future payment obligations.

 

In addition, at the sole discretion of YOD Hong Kong, SSF is obligated to transfer to YOD Hong Kong, or its designee, any part or all of the business, personnel, assets and operations of SSF which may be lawfully conducted, employed, owned or operated by YOD Hong Kong, including:

 

(a)          business opportunities presented to, or available to SSF may be pursued and contracted for in the name of YOD Hong Kong rather than SSF, and at its discretion, YOD Hong Kong may employ the resources of SSF to secure such opportunities;

 

(b)          any tangible or intangible property of SSF, any contractual rights, any personnel, and any other items or things of value held by SSF may be transferred to YOD Hong Kong at book value;

 

(c)          real property, personal or intangible property, personnel, services, equipment, supplies and any other items useful for the conduct of the business may be obtained by YOD Hong Kong by acquisition, lease, license or otherwise, and made available to SSF on terms to be determined by agreement between YOD Hong Kong and SSF;

 

(d)          contracts entered into in the name of SSF may be transferred to YOD Hong Kong, or the work under such contracts may be subcontracted, in whole or in part, to YOD Hong Kong, on terms to be determined by agreement between YOD Hong Kong and SSF; and

(e)          any changes to, or any expansion or contraction of, the business may be carried out in the exercise of the sole discretion of YOD Hong Kong, and in the name of and at the expense of, YOD Hong Kong;

 

provided, however, that none of the foregoing may cause or have the effect of terminating (without being substantially replaced under the name of YOD Hong Kong) or adversely affecting any license, permit or regulatory status of SSF.

 

The term of the Management Services Agreement is 20 years, and may not be terminated by SSF, except with the consent of, or a material breach by, YOD Hong Kong.

 

Pursuant to the above contractual agreements, YOD WFOE can have the assets transferred freely out of SSF without any restrictions. Therefore, YOD WFOE considers that there is no asset of SSF that can be used only to settle obligation of YOD WFOE, except for the registered capital of SSF amounting to RMB 50.0 million (approximately $7.5 million), among which RMB 27.6 million (approximately $4.2 million) has been injected as of March 31, 2017. As SSF is incorporated as limited liability company under PRC Company Law, creditors of these two entities do not have recourse to the general credit of other entities of the Company.

 

 15 

  

Financial Information

 

The following financial information of our VIEs, as applicable for the periods presented, affected the Company's consolidated financial statements. 

 

   March 31,   December 31, 
   2017  

2016

 
ASSETS          
Current assets:          
Cash  $385,911   $1,519,125 
Accounts receivable, net   1,186,291    1,260,529 
Prepaid expenses   62,881    30,455 
Other current assets   1,798,108    191,427 
Intercompany receivables due from the Company's subsidiaries(i)   896,512    150,725 
Total current assets   4,329,703    3,152,261 
Property and equipment, net   206,106    196,677 
Intangible assets, net   2,312    2,570 
Long term investments   4,984,167    3,654,664 
Other non-current assets   57,846    442,782 
Total assets  $9,580,134   $7,448,954 
           
LIABILITIES          
Current liabilities:          
Accounts payable  $1,191,076   $5,817 
Deferred revenue   3,522    824,563 
Accrued expenses   248,226    268,074 
Other current liabilities   413,327    394,314 
Accrued license content fees   1,189,453    1,236,661 
Intercompany payables due to the Company's subsidiaries(i)   14,793,082    14,752,338 
Total current liabilities   17,838,686    17,481,767 
Total liabilities  $17,838,686   $17,481,767 

 

   Three Months Ended 
   March 31,   March 31, 
   2017  

2016

 
Revenue  $787,328   $1,269,726 
Net income (loss)  $258,760   $(479,887)

 

   Three Months Ended 
   March 31,   March 31, 
   2017  

2016

 
Net cash used in operating activities  $ (1,322,729)   $(603,884)
Net cash used in investing activities  $-   $- 
Net cash provided by financing activities(i)  $189,515   $21,855 

 

(i)Intercompany receivables and payables are eliminated upon consolidation. The intercompany financing activities include the capital injection of $0.29 million to Sinotop Beijing in the three months period ended March 31, 2017.

 

The revenue producing assets that are held by the VIEs and a VIE’s subsidiary primarily comprise of licensed content, network equipment, software and licenses and website. Substantially all of such assets are recognized in the Company’s consolidated financial statements, except for certain Internet Content Provider licenses, internally developed software, trademarks and patent applications which were not recorded on the Company’s consolidated balance sheets as they do not meet all the capitalization criteria. The VIEs also have assembled work force for sales, marketing and operations.

 

4.Acquisition

 

On January 30, 2017, we entered into a Securities Purchase Agreement (the “Sun Video SPA”) with BT Capital Global Limited, a Hong Kong company (“BT”) which has been controlled by Company’s chairman Bruno Wu, for the purchase by us of all of the outstanding capital stock of Sun Video Group Hong Kong Limited, a Hong Kong corporation (“SVG”) for an aggregate purchase price of $800,000 and a $50 million Promissory Note (the “SVG Note”) with the principal and interest thereon convertible into shares of the Company’s common stock at a conversion rate of $1.50 per share. BT has guaranteed that SVG will achieve certain financial goals within 12 months of the closing. Until receipt of necessary shareholder approvals, the SVG Note is not convertible into shares of our common stock, but once the necessary shareholder approval is received, the unpaid principal and interest thereon will automatically convert. Under the terms of the Sun Video SPA, BT has guaranteed that the business of the SVG and its subsidiaries (the “Sun Video Business”) shall achieve revenue of $250 million and $15 million of gross profit (collectively the “Performance Guarantees”) within 12 months of the closing. If the Sun Video Business fails to meet either of the Performance Guarantees within such time, BT shall forfeit back to us the shares of our common stock or SVG Note, on a pro rata basis based on the Performance Guarantee for which the Sun Video Business achieves the lowest percentage of the respective amount guaranteed.

 

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In addition, if the Sun Video Business achieves more than $50 million in cumulative net income within 3 years of closing, (the “Net Income Threshold”), we shall pay BT 50% of the amount of any cumulative net income above the Net Income Threshold. Profit share payments shall be made on an annual basis, in either cash or stock at the discretion of our Board of Directors. If the Board decides to make the payment in stock, the number of our shares of common stock to be awarded shall be calculated based on the market price of such shares.

 

After the acquisition SVG changed its name to Wecast Services Limited, and is therefore also referred to herein as Wecast Services.

 

On January 31, 2017, we entered into a Securities Purchase Agreement (the “Wide Angle SPA”) with BT and Sun Seven Stars Media Group Limited, a Hong Kong company (“SSS”), one of the Company’s largest shareholders, controlled by our chairman Bruno Wu, as guarantor, for the purchase by us of 55% of the outstanding capital stock of Wide Angle for the sole consideration of the Company adding Wide Angle to the Sun Video Business acquired by the Company under the Sun Video SPA and thereby including the revenue and gross profit from Wide Angle in the calculation of the SVG Performance Guarantees set forth in the Sun Video SPA.

 

Since the Company, Wecast Services and Wide Angle were controlled by our chairman Bruno Wu since November 10, 2016, as well as both before and after the acquisition, this transaction was accounted for as a business combination between entities under common control by Mr. Wu. Therefore, in accordance with ASC Subtopic 805-50, the consolidated financial statements of the Company include the acquired assets and liabilities of the SVG and Wide Angle at their historical carrying amounts. In addition, the Company’s consolidated financial statements as of December 31, 2016 have been prepared as if the Wecast Services and Wide Angle had been owned by the Company since November 10, 2016 presented and the Company’s consolidated financial statements as of December 31, 2016 has been retrospectively adjusted accordingly.

 

As of March 31, 2017, the Company recorded SVG note in $50 million as Company’s additional paid in capital as Company believed that Performance Guarantees would be met within 12 months of the closing, but Net Income Threshold might probably not be met within 3 years of closing. Considering the proceeds transferred was larger than carrying amounts of the net assets received, such $50 million was then recognized as reduction to Company’s additional paid in capital.

 

5.Accounts Receivable

 

Accounts receivable is consisted of the following:

 

   March 31,   December 31, 
   2017  

2016

 
Accounts receivable, gross:  $32,040,818   $12,350,947 
Less: allowance for doubtful accounts   (2,844,227)   (2,828,796)
Accounts receivable, net  $29,196,591   $9,522,151 

 

The movement of the allowance for doubtful accounts is as follows:

 

   March 31,
2017
  

December 31,
2016

 
Balance at the beginning of the period  $(2,828,796)  $(3,672)
Additions charged to bad debt expense   

(15,431

)   (2,825,124)
Write-off of bad debt allowance   -   - 
Balance at the end of the period  $(2,844,227)  $(2,828,796)

 

6.Property and Equipment

 

The following is a breakdown of the Company’s property and equipment:

 

   March 31,   December 31, 
   2017  

2016

 
Furniture and office equipment  $1,070,443   $1,061,762 
Vehicle   144,544    267,022 
Office Building   3,969,632    3,948,058 
Leasehold improvements   702,634    760,931 
Total property and equipment   5,887,253    6,037,773 
Less: accumulated depreciation   (1,126,277)   (1,074,048)
Property and Equipment, net  $4,760,976   $4,963,725 

 

The Company recorded depreciation expense of approximately $168,082 and $34,000 for the three months ended March 31, 2017 and 2016 respectively.

 

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7.Intangible Assets

 

As of March 31, 2017 and December 31, 2016, the Company’s amortizing and indefinite lived intangible assets consisted of the following:

 

   March 31, 2017   December 31, 2016 
Amortizing Intangible  Gross
Carrying
   Accumulated   Impairment   Net   Gross
Carrying
   Accumulated   Impairment   Net 
Assets  Amount   Amortization   Loss   Balance   Amount   Amortization   Loss   Balance 
Charter/ Cooperation agreements (iii)  $2,755,821    (909,257)   (1,846,564)   -   $2,755,821   $(909,257)  $(1,846,564)  $- 
Software and licenses   267,991    (244,585)   -    23,406    267,991    (241,932)   -    26,059 
Patent and trademark   92,965    (39,943)   -     53,022    92,965    (39,943)   -    53,022 
Website and mobile app development (ii)   593,193    (421,129)   (172,064)   -    593,193    (421,129)   (172,064)   - 
Workforce (i)   305,694    (101,898)   -    203,796    305,694    (76,422)   -    229,272 
Total amortizing intangible assets  $4,015,664    (1,716,812)   (2,018,628)   280,224   $4,015,664   $(1,688,683)  $(2,018,628)  $308,353 
Indefinite lived intangible assets                                      - 
Website name   134,290     -     -    134,290    134,290    -    -    134,290 
Patent   10,599    -    -    10,599    10,599    -    -    10,599 
Total intangible assets  $4,160,553    (1,716,812)   (2,018,622)   425,113   $4,160,553   $(1,688,683)  $(2,018,628)  $453,242 

 

(i) On April 1, 2016, Wecast Network entered into an agreement with Mr. Liu Changsheng, under which Wecast Network agreed to pay Mr. Liu Changsheng cash consideration of $187,653 and 66,500 shares of restricted shares with a six month restriction period and a fair value of $121,695 in exchange for a workforce of 10 personnel experienced in programing content mobile apps. All 10 personnel enter into three year employment contracts with Wecast Network effective from April 1, 2016. The Company also acquired certain laptop and desktop computers with fair value of $3,655. According to the agreement, 30% of the cash consideration is due upon the signing of the agreement, 20% is due 2 months after the signing of the agreement and 50% is due 6 months after the signing of the agreement. Cash consideration of $93,825 has been paid as of March 31, 2017, and $93,828 was paid on October 31, 2016. If any of three key staff, as defined, terminated their employment with Wecast Network during the first 12 months of employment, Wecast Network has right to forfeit the unpaid cash consideration. In addition, Mr. Liu Changsheng would be required to pay a default penalty at minimal of $129,180. Wecast Network has accounted for the transaction as an asset acquisition in which Wecast Network mainly acquired a workforce, which is recognized as an intangible asset at cost. Subsequently, the workforce intangible is amortized over the employment term of three years.

 

The Company recorded amortization expense related to our amortizing intangible assets of approximately $28,129 and $63,000 for the three months ended March 31, 2017 and March 31, 2016 respectively, which included the amortization expense of the workforce acquired as stated above.

 

(ii) Considering a new mobile app has been developed to be put into market in October, 2016, the Company determined that the future cash flows generated from the old mobile app was nil. In accordance with ASC 350, Intangibles – Goodwill and Other, recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. The Company estimated the fair value of this intangible asset to be nil as of March 31, 2017 and December 31, 2016. Fair value was determined using unobservable (Level 3) inputs. Impairment loss from mobile app development of $172,000 was recognized in 2016 to write off the entire book value of the old mobile app.

 

(iii) During the fourth quarter of 2016, the Company determined that the Charter/Cooperation agreements will not serve the business or generate future cash flow. As no future cash flows will be generated from the Charter/Cooperation agreements, the Company estimated the fair value of the Charter/Cooperation agreements to be nil as of December 31, 2016. Fair value was determined using unobservable (Level 3) inputs. Impairment loss from Charter/Cooperation agreements of $1,846,000 was recognized in 2016 to write off the entire book value of the Charter/Cooperation agreements.

.

 

The following table outlines the amortization expense for the next five years and thereafter:

 

   Amortization to be 
Years ending December 31,  Recognized 
2017(9 months)   90,277 
2018   118,254 
2019   35,794 
2020 and thereafter   35,899 
Total amortization to be recognized  $280,224 

 

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8.Long Term Investments

 

Cost method investments

 

Cost method investments  as of the period ended March 31, 2017 and December 31, 2016 are as follow:

 

   March 31,   December 31, 
   2017   2016 
Topsgame (i)  $3,174,235   $3,156,985 
Frequency (ii)   3,000,000    3,000,000 
Total  $6,174,235   $6,156,985 

 

(i)Investment in Topsgame

 

On April 13, 2016, SSF entered into a Game Right Assignment Agreement with SSS for the acquisition of certain game IP rights (“Game IP Rights”) for approximately $2.7 million (RMB18 million) in cash. On April 15, 2016, SSF entered into a Capital Increase Agreement with Nanjing Tops Game Co., Ltd. (“Topsgame”) and its shareholders whereby SSF transferred the Game IP Rights acquired from SSS to Topsgame in exchange for 13% of Topsgame’s equity ownership. Topsgame is a PRC company that specializes in the independent development and operation of online, stand-alone and other games as well as the distribution of domestic and overseas games. The Company’s 13% ownership interest does not provide the Company with the right to nor does the Company have representation on the board of directors of Topsgame.

 

The Company has recognized the cost of the investment in Topsgame, which is a private company with no readily determinable fair value, based on the acquisition cost of Game IP Rights of approximately $2.7 million and accounts for the investment by the cost method.

 

On September 14, 2016, SSF increased its investment in Topsgame by RMB 3,900,000 (approximately $584,000) and maintained its 13% equity ownership of Topsgame. The investment continued to be accounted for using the cost method..

 

(ii)Investment in Frequency

 

In April 2016, the Company and Frequency Networks Inc. (“Frequency”) entered into a Series A Preferred Stock Purchase Agreement (the “SPA”) for the purchase of 8,566,271 shares of Series A Preferred Stock, Frequency (the “Frequency Preferred Stock”) for a total purchase price of $3 million. The 8,566,271 Series A Preferred Stock represent 9% ownership and voting interest on an as converted basis and does not provide the Company with the right to nor does the Company have representation on the board of directors of Frequency.

 

The Frequency Preferred Stock is entitled to non-cumulative dividends at the rate of $0.02548 per share per annum, declared at the discretion of Frequency’s board of directors. The Frequency Preferred Stock is also convertible into shares of Frequency common stock at the Company’s election any time after issuance on a 1:1 basis, subject to certain adjustment. Each share of Frequency Preferred Stock also has a liquidation preference of $0.42467 per share, plus any declared but unpaid dividends.

 

The Company has recognized the cost of the investment in Frequency, which is a private company with no readily determinable fair value, at its cost of $3 million and accounts for the investment by the cost method.

 

There were no identified events or changes in circumstances that may have had a significant adverse effect on the fair value of our cost method investments, accordingly the fair value of our cost method investments are not estimated.

 

Equity method investments

 

Equity method investment movement for the three months ended on March 31, 2017 is as follow:

 

   March 31, 2017 
      December
31, 2016
   Capital increase   Gain/(Loss)
on investment
   Impairment loss   Foreign currency
translation adjustments
   March 31,
2017
 
Wecast Internet  (i)   132,782    -    (37,382)   -    3,804    99,204 
Hua Cheng  (ii)   364,897    -    (6,364)   (38,448)   41,959    362,044 
Shandong Media  (iii)   -    -    -    -    -    - 
Total      497,679    -    (43,746)   (38,448)   45,763    461,248 

 

 19 

  

(i)Investment in Wecast Internet

 

In October 2016, the Company’s subsidiary, YOU On Demand (Asia) Ltd., invested RMB 1,000,000 (approximately $149,750) in Wecast Internet Limited (“Wecast Internet”) and held its 50% equity ownership.

 

(ii)Investment in Hua Cheng

 

As of the period ended March 31, 2017 and December 31, 2016, the Company held 39% equity ownership in Hua Cheng, and accounted for the investment by the equity method.

 

(iii)Investment in Shandong Media

 

As of the period ended March 31, 2017 and December 31, 2016, the Company held 30% equity ownership in Shandong Media, and accounts for the investment by the equity method. The investment was fully impaired as of March 31, 2017 and December 31, 2016.

 

9.Stockholders’ Equity

 

On July 6, 2016, the Company entered into a Common Stock Purchase Agreement (the “SSW SPA”) with Seven Stars Works Co., Ltd., a Korea company (“SSW”) and an affiliate of SSS. Pursuant to the terms of the SSW SPA, the Company has agreed to sell and issue 2,272,727 shares of the Company’s common stock for $1.76 per share, or a total purchase price of $4.0 million to SSW. A total of $4.0 million was received and 2,272,727 shares were issued on July 19, 2016.

 

On August 11, 2016, the Company entered into Common Stock Purchase Agreement (the “Harvest SPA”) with Harvest Alternative Investment Opportunities SPC (“Harvest”), a Cayman Islands company. Pursuant to the terms of the Harvest SPA, the Company has agreed to sell and issue 2,272,727 shares of the Company’s common stock, for $1.76 per share, or a total purchase price of $4.0 million to Harvest. A total of $4.0 million was received and 2,272,727 shares were issued on August 12, 2016.

 

On November 11, 2016, the Company entered into Common Stock Purchase Agreement (the “SSSHKCD SPA”) with Sun Seven Stars Hong Kong Cultural Development Limited, a Hong Kong company (“SSSHKCD”) and an affiliate of SSS. Pursuant to the terms of the SSSHKCD SPA, the Company has agreed to sell and issue 1,136,3654 shares of the Company’s common stock for $1.76 per share, or a total purchase price of $2.0 million to SSSHKCD. A total of $2.0 million was received and 1,136,365 shares were issued on November 17, 2016.

 

As described in Note 12, the Company and SSS entered into a series of agreements, including an agreement pursuant to which the Company agreed to sell and issue 4,545,455 shares of the Company's common stock and warrants to acquire an additional 1,818,182 shares (at an exercise price of $2.75 per share) for an aggregate purchase price of $10 million to SSS.

 

10.Fair Value Measurements

 

Accounting standards require the categorization of financial assets and liabilities, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The various levels of the fair value hierarchy are described as follows:

 

·Level 1 — Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market that we have the ability to access.

 

·Level 2 — Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.

 

·Level 3 — Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.

 

Accounting standards require the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

 

 20 

  

The Company reviews the valuation techniques used to determine if the fair value measurements are still appropriate on an annual basis, and evaluate and adjust the unobservable inputs used in the fair value measurements based on current market conditions and third party information.

 

Common stock is valued at closing price reported on the active market on which the individual securities are traded.

 

The fair value of the warrant liabilities at March 31, 2017 were valued using the Black-Scholes Merton method as an estimate for the Monte Carlos Simulation method which was the method used at the year ended December 31, 2016. The following assumptions were incorporated:

   Black Scholes   Monte Carlo 
   March 31,   December 31, 
   2017   2016 
Risk-free interest rate   0.91%   0.70%
Expected volatility   55%   55%
Expected term   0.42  year    0.67 year 
Expected dividend yield   0%   0%

 

The following tables present the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016, respectively:

 

   March 31, 2017     
   Fair Value Measurements     
   Level 1   Level 2   Level 3   Total Fair Value 
Liabilities                    
Warrant liabilities (see Note 13)  $-   $-   $340,901   $340,901 

 

   December 31, 2016     
   Fair Value Measurements     
   Level 1   Level 2   Level 3   Total Fair Value 
Liabilities                    
Warrant liabilities (see Note 13)  $-   $-   $70,785   $70,785 

 

The table below reflects the components effecting the change in fair value for the three months ended March 31, 2017:

 

   Level 3 Assets and Liabilities     
   For the Three  Months Ended March 31 , 2017     
    January 1,       Change in   March 31, 
   2017   Settlements   Fair Value   2017 
Liabilities:                    
Warrant liabilities (see Note 13)  $70,785   $-   $270,116   $340,901 

 

The significant unobservable inputs used in the fair value measurement of the Company’s warrant includes the risk free interest rate, expected volatility, expected term and expected dividend yield. Significant increases or decreases in any of those inputs in isolation would result in a significantly different fair value measurement.

 

The carrying amount of cash, accounts receivable, notes receivable, accounts payable, accrued other expenses, other current liabilities payables and convertible promissory note as of March 31, 2017 and December 31, 2016, approximate fair value because of the short maturity of these instruments.

 

11.Related Party Transactions

 

(a)$3.0 Million Convertible Note 

 

On May 10, 2012, the Executive Chairman and Principal Executive Officer, Mr. Shane McMahon, made a loan to the Company in the amount of $3,000,000. In consideration for the loan, the Company issued a convertible note to Mr. McMahon in the aggregate principal amount of $3,000,000 (the “Note”) at a 4% interest rate computed on the basis of a 365 day year. Upon issuance, the conversion price of the Note was equal to the price per share paid for securities by investors in the most recent financing (as of the date of conversion) of equity or equity-linked securities of the Company.

 

Effective on January 31, 2014, the Company and Mr. McMahon entered into Amendment No. 4 to the Note pursuant to which the Note is at Mr. McMahon’s option, payable on demand or convertible on demand into shares of Series E Preferred Stock of the Company (the “Series E Preferred Stock”) at a conversion price of $1.75, until December 31, 2015. As a result, in 2014, the Company recognized a beneficial conversion feature discount calculated as the difference between the Series E Preferred Stock at its intrinsic value, which was the fair value of the common stock at the commitment date for the Series E Preferred Stock investment and the effective conversion price. As such, we recognized a beneficial conversion feature of approximately $2,126,000 in 2014 which was reflected as interest expense and additional paid-in capital since the note was payable upon demand.

 

 21 

  

Effective December 30, 2014, the Company and Mr. McMahon entered into Amendment No. 5 pursuant to which the maturity date of the Note was extended to December 31, 2016. The Note remains payable on demand or convertible on demand into shares of Series E Preferred Stock at a conversion price of $1.75 at Mr. McMahon’s option.

 

On December 31, 2016, the Company and Mr. McMahon entered into an amendment pursuant to which the Note will be at Mr. McMahon’s option, payable on demand or convertible on demand into shares of the Company’s Series E Preferred Stock, provided that the Note will no longer be convertible into Series E Preferred Stock upon the conversion of the Series E Preferred stock owned by C Media into the Company’s Common Stock (pursuant to which all Series E Preferred Stock will be automatically converted) but then convertible only into Common Stock at a conversion price of $1.50, until December 31, 2018.

 

For the three months ended March 31, 2017 and 2016, the Company recorded interest expense of $30,000 and $30,000 related to the Note.

 

(b)

Cost of revenue

 

Hua Cheng, the minority shareholder of Zhong Hai Media, charged Company licensed content fees of approximately nil and $56,000 for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017 and December 31, 2016, total accrued license fees due to Hua Cheng amounted to nil and $54,000, respectively.

 

(c)Purchase of Game IP Rights

 

On April 13, 2016, SSF entered into a Game Right Assignment Agreement with SSS for the acquisition of certain Game IP Rights for cash of $2.7 million (RMB 18 million), which was paid in full in 2016. The Game IP Rights was recorded at cost and then subsequently transferred in exchange for the investment in Topsgame as disclosed in Note 8 above. 

 

(d)Short term entrust loans

 

During the first quarter of 2017, the company entered into a series of entrust loans with the entities controlled by Bruno Wu to obtain short-term financial support for the Company’s daily operation. As of March 31, 2017 and December 31, 2016, the Company had such borrowings in the amount of $2,173,891 and nil, respectively. As of the date of this report, all of such entrust loans have been paid back to related parties.

 

(e)Deposit for Investment in MYP

 

On September 19, 2016, the Company signed a non-binding term sheet with Sun Video Group HK Limited ("SVG") in purchase for its 51% ownership of M.Y. Products, LLC ("MYP"), a video commerce and supply chain management operator, in exchange for $50 million worth of Wecast Network common stock and $800,000 cash.

 

In accordance with the Term Sheet, the Company wired $800,000 (or its RMB equivalent) to MYP upon signing the term sheet as Good Faith Deposit. As of March 31, 2017, the transaction has already been closed, and all of the deposit paid to MYP has been transferred into liability due to BT, which is the former shareholder of SVG.

 

12.SSS Agreements

 

On November 23, 2015, the Company entered into a series of agreements for a strategic investment by SSS, a PRC company in the media and entertainment industry that is controlled by the Company’s Chairman, Bruno Zheng Wu. The strategic investment by SSS included a private placement of equity securities of the Company, a content licensing agreement, and the potential for Tianjin Enternet Network Technology Limited (“Tianjin Enternet”), an affiliate of SSS, to earn additional shares of the Company’s common stock contingent on the performance of SSF. SSF intends to provide a branded pay content service, consumer payments and behavior data analysis service, customer management and data-based service and mobile social TV-based customer management service.

 

On December 21, 2015, the Company entered into an Amended and Restated Securities Purchase Agreement (the “Amended SSS Purchase Agreement”) and a Revised Content License Agreement (the “Revised Content Agreement”) with SSS which amended certain terms of the original agreements dated November 23, 2015. In addition, the Company also entered into an Amended and Restated Share Purchase Agreement (the “Amended Tianjin Agreement”) with Tianjin Enternet.

 

 22 

  

On July 6, 2016, the Company entered into a Common Stock Purchase Agreement with Seven Stars Works Co., Ltd., a Korea company (“SSW”) and an affiliate of SSS for the purchase by SSW of 2,272,727 shares of the Company’s common stock, for $1.76 per share, or a total purchase price of $4.0 million.

 

On November 11, 2016, the Company entered into a Common Stock Purchase Agreement with Sun Seven Stars Hong Kong Cultural Development Limited, a Hong Kong company (“SSSHKCD”) and an affiliate of SSS. Pursuant to the terms of the SPA, the Company has agreed to sell and issue 1,136,365 shares of the Company’s common stock, for $1.76 per share, or a total purchase price of $2.0 million to SSSHKCD.

 

(a)Amended SSS Purchase Agreement

 

On March 28, 2016, pursuant to the Amended SSS Purchase Agreement, the Company sold, and SSS purchased, 4,545,455 shares of the Company’s common stock for a purchase price of $2.20 per share, or an aggregate of $10.0 million. In addition, SSS received a two-year warrant to acquire an additional 1,818,182 shares of the Company’s common stock at an exercise price of $2.75 per share (the “SSS Warrant”). Until receipt of necessary shareholder approvals, the SSS Warrant may not be exercised to the extent that such exercise would result in SSS and its affiliates beneficially owning more than 19.99% of the Company’s outstanding common stock. On June 27, 2016, shareholder approval was obtained.

 

Since the SSS Warrant does not embody any future obligation for the Company to repurchase its own shares, is indexed to the Company’s own stock, may only be settled by the physical delivery of shares, and no conditions exist in which net cash settlement could be forced upon the Company by SSS in any other circumstances, the SSS Warrant is considered an equity classified instrument. The proceeds of $10.0 million, net of issuance cost of approximately $411,000,was allocated to common stock and SSS Warrant based on their relative fair value as of March 28, 2016 of approximately $8,227,000 and $673,000, respectively. Accordingly, the Company recorded approximately $725,000 in additional paid-in capital for the SSS Warrant.

 

(b)Revised Content Agreement

 

On March 28, 2016, pursuant to the Amended and Restated SSS Purchase Agreement, SSS granted the Company non-exclusive royalty-free distribution rights for certain video content value in exchange for a convertible promissory note (the “SSS Note”). The SSS Note has a stated principal amount of approximately $17,718,000, was originally due to mature on May 21, 2016. On May 12, 2016, the Company and SSS entered into an amendment agreement to extend the maturity date of the SSS Note to July 31, 2016. The SSS Note beard an interest at the rate of 0.56% per annum. Immediately upon the receipt of the required shareholder approval to allow SSS to beneficially own more than 19.99% of the Company’s outstanding common stock, which was obtained on June 27, 2016, the SSS Note was converted into 9,208,860 shares of the Company’s common stock.

 

In connection with the issuance of the SSS Note, the Company recorded debt issuance costs of approximately $131,000 which was to be amortized over the period of the SSS Note’s maturity date, of which approximately $123,000 was recognized during the year ended December 31, 2016.

 

The Company measured the effective conversion price of the SSS Note using its carrying value on March 28, 2016 and compared it to the fair value of the Company’s common stock on that date. As the effective conversion price of the SSS Note of $1.91 exceeded the fair value of the Company’s common stock of $1.81, no beneficial conversion feature was recognized.

 

The carrying value of the SSS Note as of June 27, 2016, which included the unamortized issuance costs of $8,000 and, pursuant to the terms of SSS Note, accrued interest expense of $25,000 has been recorded into the common shares issued on June 27, 2016.

 

(c)Amended Tianjin Agreement

 

Pursuant to the Amended Tianjin Agreement dated December 21, 2015, Tianjin Enternet was to contribute 100% of the equity ownership of SSF, a newly-formed subsidiary of Tianjin Enternet to the Company. Contingent on the performance of SSF, Tianjin Enternet was to receive shares of the Company’s common stock over three years, with the exact number not exceeding 5.0 million per year, provided the earn-out provisions for each of the 2016, 2017 and 2018 annual periods (the “Earn-Out Share Award”) was achieved. The earn-out provision for 2016, 2017 and 2018 are either 50.0 million homes/users passed or $4.0 million net income, 100.0 million homes/users passed or $6.0 million net income and 150.0 million homes/users passed or $8.0 million net income, respectively. In the event that the Company has not obtained the required vote from shareholders to issue the earn-out shares to Tianjin Enternet, the Company was required to issue a promissory note with a principal amount equal to the quotient by multiplying 5.0 million by the applicable stock price defined in the agreement.

 

 23 

  

On April 5, 2016, in lieu of Tianjin Enternet contributing 100% of the equity ownership of SSF to the Company, YOD WFOE entered into VIE agreements with SSF and its legal shareholders in order to comply with PRC regulatory requirements on certain industries. SSF is 99% owned by Lan Yang, the spouse of Bruno Zheng Wu, the Company’s Chairman, and 1% owned by Yun Zhu, a Vice President of Wecast Network. By virtue of these VIE agreements; YOD WFOE obtained financial controlling interest in SSF, including the power to direct the activities of SSF, and therefore is the primary beneficiary of SSF. As the control of SSF was transferred to YOD WFOE through both the VIE agreements and physical handover of company documents on April 5, 2016, the transaction was determined to be completed on that date.

 

At the time YOD WFOE obtained control over SSF, SSF had no assets, liabilities, employees or operating activities, nor did it hold any licenses, trade names or other intellectual properties. The Company also did not receive any assets, employees, contracts, sales or distribution systems or intellectual property from Tianjin Enternet in connection with the transaction. Since the acquisition of SSF did not include any input or processes, as defined under ASC 805-10-20, the transaction was not considered a business combination under ASC 805.

 

The earn-out provision was originally based on either the number of home/user pass or the net income of SSF. While the net income was to be measured based on the operations of SSF, the number of home/user pass is measured based on number of home/user pass of SSF’s distributors. Such earn-out provision is based on an index that is not calculated solely by reference to the operations of SSF, which is not considered indexed to the Company’s own shares. Also the earn-out provisions permit cash settlement if the Company cannot issue the earn-out shares. Therefore, the earn-out provision is classified as a liability and measured initially and subsequently at fair value with changes in fair value recognized in earnings at each reporting periods.

 

On June 27, 2016, the Company held its 2016 annual meeting of stockholders and received approval from its stockholders to allow SSS to beneficially own more than 19.99% of the Company’s outstanding common stock. Accordingly, the Earn-Out Share Award became issuable at the time when the earn-out provisions are considered to have been met pursuant to the Amended Tianjin Agreement.

 

On November 10, 2016, the Board of Directors (the “Board”) of Wecast Network held a special meeting. At the recommendation of the Company’s audit committee, the Board determined that it is in the best interests of the Company and the Company’s shareholders to amend the terms of the Earn-Out Share Award to (1) reduce the total Earn-Out Share Award from 15,000,000 shares of Common Stock to 10,000,000 shares of Common Stock and (2) measure the achievement of the earn-out provisions based on the Companywide achievement of homes passed in lieu of the measurement being measured by SFF’s stand-alone achievement of homes passed. Based on evidence provided to the Board, the requisite thresholds necessary to trigger issuance of all shares of Common Stock subject to the Earn-Out Share Award have been achieved. Accordingly, on November 10, 2016, the Board approved the issuance of 10,000,000 shares of its common stock, par value $0.001 per share (“Common Stock to SSS”) and the shares were issued on November 11, 2016,

 

The Company recognized the fair value of the Common Stock to SSS of approximately $13,700,000, based on the market price of the Company’s Common Stock, as Earn-out share award expense in the accompanying consolidated statement of operations for the year ended December 31, 2016.

 

13.Warrant Liabilities

 

In connection with our August 30, 2012 private financing, the Company issued 977,063 warrants to investors and the broker. In accordance with ASC 815-40, Contracts in Entity’s Own Equity, the warrants have been accounted as derivative liabilities to be re-measured at the end of every reporting period with the change in fair value reported in the consolidated statement of operations. On August 30, 2012, such warrants were valued at $1,525,000 utilizing a valuation model and were initially recorded as a liability. The fair value of the warrants are remeasured at each reporting period based on the Monte Carlo valuation.

 

As of March 31, 2017 and December 31, 2016, the warrant liability was re-valued as disclosed in Note 10, and recorded at its fair value of approximately $340,901 and $70,785, respectively, resulting in a loss of approximately $270,116 for the three months ended March 31, 2017. There were no warrants exercised during three months ended March 31, 2017.

 

14.Share-Based Payments

 

As of March 31, 2017, the Company had 2,251,428 options and 3,778,002 warrants outstanding (including the 1,818,182 warrants issued to SSS as disclosed in Note 12 (a) to purchase shares of our common stock.

 

The Company awards common stock and stock options to employees and directors as compensation for their services, and accounts for its stock option awards to employees and directors pursuant to the provisions of ASC 718, Stock Compensation. The fair value of each option award is estimated on the date of grant using the Black-Scholes Merton valuation model. The Company recognizes the fair value of each option as compensation expense ratably using the straight-line attribution method over the service period, which is generally the vesting period.

 

 24 

  

Total share-based payments expense recorded by the Company during the three months ended March 31, 2017 and 2016 is as follows:

 

   Three Months Ended 
   March 31   March 31 
   2017   2016 
Employees and directors share-based payments  $71,428   $139,000 

 

Effective as of December 3, 2010, our Board of Directors approved the Wecast Network, Inc. 2010 Stock Incentive Plan (“the Plan”) pursuant to which options or other similar securities may be granted. The maximum aggregate number of shares of our common stock that may be issued under the Plan is 4,000,000 shares. As of March 31, 2017, options available for issuance are  1,069,465 shares.

 

(a)Stock Options

 

Stock option activity for the three months ended March 31, 2017 is summarized as follows:

 

           Weighted Average     
           Remaining   Aggregated 
   Options   Weighted Average   Contractual Life   Intrinsic 
   Outstanding   Exercise Price   (Years)   Value 
Outstanding at January 1, 2017   2,101,428   $2.42    4.59    - 
Granted   150,000    1.62           
Exercised   -                
Expired   -                
Forfeited   -                
Outstanding at March 31, 2017   2,251,428    2.33    4.67    - 
Vested and expected to vest as of March 31, 2017   2,251,428    2.33    4.67    - 
Options exercisable at March 31, 2017 (vested)   1,687,051    2.80    3.38    - 

 

On January 4, 2017 and March 1 and March 16, 2017, 70,000, 45,000 and 35,000 shares stock options, respectively, were issued to certain employees for services provided to us. The fair value of the stock options granted were valued using the Black-Scholes Merton method on the grant date, amounting to $47,415, $45,443 and $36,750, respectively.

 

The following table summarizes the assumptions used to estimate the fair values of the share options granted in the three months ended March 31, 2017 presented:

 

   Black Scholes 
Risk-free interest rate   2.26% ~ 2.34%
Expected volatility   55%
Expected term    5.88 years 
Expected dividend yield   0%

  

As of March 31, 2017, approximately $501,000 of total unrecognized compensation expense related to non-vested share options is expected to be recognized over a weighted average period of approximately 2.40 years. The total fair value of shares vested during the three months ended March 31, 2017 and 2016 was approximately nil  and $16,000,  respectively.

 

(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.

 

 25 

  

As of March 31, 2017, the weighted average exercise price of the warrants was $2.20 and the weighted average remaining life was 1.19 years. The following table outlines the warrants outstanding and exercisable as of March 31, 2017 and December 31, 2016:

 

   March 31,   December 31,        
   2017   2016        
   Number of   Number of        
   Warrants   Warrants     
Warrants Outstanding  Outstanding and
Exercisable
   Outstanding and
Exercisable
   Exercise
Price
   Expiration
Date
                
2012 August Financing Warrants  (i)   536,250    536,250   $1.50   08/30/17
2013 Broker Warrants (Series D Financing)   223,571    228,571   $1.75   07/05/18
2013 Broker Warrants (Convertible Note)   114,285    114,285   $1.75   11/04/18
2014 Broker Warrants (Series E Financing)   1,085,714    1,085,714   $1.75   01/31/19
2016 Warrants to SSS (Note 12)   1,818,182    1,818,182   $2.75   03/28/18
    3,778,002    3,783,002         

 

(i)The warrants are classified as derivative liabilities as disclosed in Note 13.

 

15.Earnings (Loss) Per Common Share

 

   March 31,   March 31, 
   2017   2016 
   Basic   Diluted   Basic   Diluted 
Net earnings/(loss) attributable to common stockholders   2,212,879    2,212,879    (2,136,471)   (2,136,471)
Average equivalent shares                    
Weighted-average common shares outstanding   55,382,002    55,382,002    24,484,562    24,484,562 
Convertible preferred shares   -    2,150,237    -    - 
Dilutive effect of convertible promissory notes   -    3,183,482    -    - 
Total average equivalent shares   55,382,002    60,715,721    24,484,562    24,484,562 
Earnings/(loss) per common share   0.04    0.04    (0.09)   (0.09)

 

Basic earnings (loss) per common share attributable to Wecast Network shareholders is calculated by dividing the net earnings (loss) attributable to Wecast Network shareholders by the weighted average number of outstanding common shares during the applicable period.

 

Diluted earnings (loss) per share is calculated by taking net earnings (loss), divided by the diluted weighted average common shares outstanding. Diluted loss per share for the three months ended March 31, 2016 equals basic loss per share because the effect of securities convertible into common shares is anti-dilutive.

 

For the three months ended March 31, 2017 and 2016, the number of securities convertible into common shares not included in diluted loss per common share because the effect would have been anti-dilutive consists of the following:

 

   March 31,  March 31,
   2017  2016
Warrants   3,778,002    4,009,669 
Options   2,251,428    1,722,325 
Series A Preferred Stock   —      933,333 
Series E Preferred Stock   —      7,254,997 
Convertible promissory note and interest   —      11,190,292 
Total   6,029,430    25,110,616 

 

16.Income Taxes

 

As of March 31, 2017, the Company had approximately $28.9 million of the U.S domestic cumulative tax loss carryforwards and approximately $17.5 million of the foreign cumulative tax loss carryforwards, which may be available to reduce future income tax liabilities in certain jurisdictions. These U.S. and foreign tax loss carryforwards will expire beginning year 2028 through 2036 and year 2018 to year 2022, respectively.

 

The income tax expense for the three months ended March 31, 2017 is nil because net operating loss carryovers offset current taxable income and deferred tax assets related to the net operating loss carryovers utilized had been offset by a valuations allowance. Company had established a 100% valuation allowance against its net deferred tax assets due to its history of pre-tax losses and the likelihood that the deferred tax assets will not be realized. The valuation allowance was decreased approximately $0.4 million during the three months ended March 31, 2017.

 

As of March 31, 2017, there are no unrecorded tax benefits which would impact our financial position or our results of operations.

  

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17.Contingencies and Commitments

 

(a)Operating Lease Commitment

 

The Company is committed to paying leased property costs related to our offices in China as follows:

 

   Leased Property 
Years ending December 31,  Costs 
2017(9 months)   235,000 
2018   266,000 
2019   193,000 
2020   199,000 
Thereafter   84,000 
Total  $977,000 

 

(b)Licensed Content Commitment

 

The Company is committed to paying content costs through 2019 as follows:

 

Years ending December 31,  Content Costs 
     
2017 (9 months)   1,454,000 
2018   217,000 
2019   217,000 
Total  $1,888,000 

 

(c)Lawsuits and Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. As of March 31, 2017, there are no such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

 

(d)Acquisition of Property Commitment

 

In consideration of the Company’s business expansion and rising rental costs, in February 2016, the Company entered into an agreement with Beijing Kuntin Taiming Investment Management Co., Ltd. for purchase of an office building. Total consideration for the property acquisition was RMB27.4 million (approximately $4,239,000), which the Company has paid RMB20.5 million (approximately $3,247,000) at the end of first quarter of 2017 and is committed to paying the remaining balance in 2017 as follows:

 

Years ending December 31,  Property 
2017 (9 months)   992,000 
Total  $992,000 

 

(e)Advertising and Marketing Expense Commitment

 

The Company is committed to paying advertising and marketing expense through 2016 as follows:

 

Years ending December 31,  Marketing expenses 
2017 (9 months)   106,000 
Total  $106,000 

 

18.Concentration, Credit and Other Risks

 

(a)PRC Regulations 

 

The PRC market in which the Company operates poses certain macro-economic and regulatory risks and uncertainties. These uncertainties extend to the ability of the Company to conduct wireless telecommunication services through contractual arrangements in the PRC since the industry remains highly regulated. The Company conducts legacy YOD business in China through Zhong Hai Media, which the Company controls as a result of a series of contractual arrangements entered among YOD WFOE, Sinotop Beijing as the parent company of Zhong Hai Media, SSF and the respective legal shareholders of Sinotop Beijing and SSF. The Company believes that these contractual arrangements are in compliance with PRC law and are legally enforceable. If Sinotop Beijing, SSF or their respective legal shareholders fail to perform the obligations under the contractual arrangements or any dispute relating to these contracts remains unresolved, YOD WFOE or YOD HK can enforce its rights under the VIE contracts through PRC law and courts. However, uncertainties in the PRC legal system could limit the Company’s ability to enforce these contractual arrangements. In particular, the interpretation and enforcement of these laws, rules and regulations involve uncertainties. If YOD WFOE had direct ownership of Sinotop Beijing and SSF, it would be able to exercise its rights as a shareholder to effect changes in the board of directors of Sinotop Beijing or SSF, which in turn could effect changes at the management level, subject to any applicable fiduciary obligations. However, under the current contractual arrangements, the Company relies on Sinotop Beijing, SSF and their respective legal shareholders to perform their contractual obligations to exercise effective control. The Company also gives no assurance that PRC government authorities will not take a view in the future that is contrary to the opinion of the Company. If the current ownership structure of the Company and its contractual arrangements with the VIEs and their equity holders were found to be in violation of any existing or future PRC laws or regulations, the Company's ability to conduct its business could be impacted and the Company may be required to restructure its ownership structure and operations in the PRC to comply with the changes in the PRC laws which may result in deconsolidation of the VIEs.

 

 27 

  

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.

 

(b)Major Customers

 

Legacy YOD business

 

The Company has agreements with distribution partners, including digital cable operators, IPTV operators, OTT streaming operators and mobile smartphone manufacturers and operator. A distribution partner that individually generates more than 10% of the Company’s revenue is considered a major customer.

 

On October 8, 2016, the Company signed an agreement to form a partnership with Zhejiang Yanhua ("Yanhua Agreement"), where Yanhua will act as the exclusive distribution operator (within the territory of the People's Republic of China) of WCST's licensed library of major studio films. According to the Yanhua Agreement, the existing legacy Hollywood studio paid contents as well as other IP contents specified in the agreement, along with the corresponding authorized rights letter that WCST is entitled to, will be turned over to Yanhua as a whole package, which was agreed to be priced at RMB13,000,000. In addition to the above-mentioned minimal guarantee fee of RMB13,000,000 specified, there is a provision in the Yanhua Agreement which states that once the revenue recognized from the existing contents transferred from WCST to Yanhua reaches the amount of RMB13,000,000, the revenue above RMB13,000,000 will be shared with WCST from the date when this revenue threshold is reached based on certain revenue-sharing mechanism stipulated in the Yanhua Agreement.

 

Pursuant to ASC Subtopic 926-605, Entertainment-Films - Revenue Recognition, for certain contracts that involve sub-licensing content within the specified license period, revenue is recognized upon delivery of films when the arrangement includes a nonrefundable minimum guarantee, delivery is complete and there are no substantive future obligations to provide future additional services.

 

According to the Yanhua Agreement, the total price of the Existing Contents to be transferred is RMB13,000,000. The payment is agreed to be paid in two installments, the first half of RMB6,500,000 was received on December 30, 2016 . The remaining RMB6,500,000 will be paid under the scenario that the license content fees due to Studios for the existing legacy Hollywood paid contents will be settled. Due to the fact that the second installment will depend upon some future events and is contingent in nature, we deem this portion of the fee is not fixed or determinable and therefore, this portion of the revenue did not meet the revenue recognition criteria to be recognized accordingly.

 

In terms of the additional revenue-sharing fee over the above-mentioned RMB13,000,000 fee specified, considering that this part of arrangement fee is not fixed or determinable at the time point as of March 31, 2017, it has not met the criteria for revenue recognition, management will recognize it once it becomes determinable and meet the other revenue recognition criteria in the future.

 

Pursuant to the Yanhua Agreement, RMB6,500,000 was recognized as revenue in the first three months ended March 31, 2017 based on the relative fair value of licensed content delivered to Yanhua.

 

For the three months ended March 31, 2016, two customers individually accounted for more than 10% of the Company’s revenue. Four customers individually accounted for 10% of the Company’s net accounts receivables as of March 31, 2016.

 

Wecast Services

 

The holdings and businesses from Company’s two acquisitions in January (Note 4) now reside under “Wecast Services”, our whollyowned subsidiary Wecast Services Limited. Wecast Services (which resides under the Product Sales Cloud) is currently primarily engaged with consumer electronics e-commerce and smart supply chain management operations. The Company’s ending customers include British Telecom, Micromax and about 15 to 20 other corporations across the world.

 

For the three months ended March 31, 2017, one customer individually accounted for more than 10% of the Company’s revenue. Three customers individually accounted for more than 10% of the Company’s net accounts receivables as of March 31, 2017, respectively.

  

(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 three months ended March 31, 2016, four suppliers individually accounted for more than 10% of the Company’s cost of revenues. Two suppliers individually accounted for 10% of the Company’s accounts payable as of March 31, 2016.

 

Wecast Services

 

The Company relies on agreements with consumer electronics manufactures.

  

For the three months ended March 31, 2017, two suppliers individually accounted for more than 10% of the Company’s cost of revenues. One supplier individually accounted for more than 10% of the Company’s accounts payable as of March 31, 2017.

  

(d)Concentration of Credit Risks

 

Financial instruments that potentially subject the Company to significant concentration of credit risk primarily consist of cash and accounts receivable. As of March 31, 2017 and December 31, 2016, the Company’s cash was held by financial institutions located in the PRC, Hong Kong and the United States that management believes have acceptable credit. Accounts receivable are typically unsecured and are mainly derived from revenues from the Company’s VOD content distribution partners, and smart sales products customers. The risk with respect to accounts receivable is mitigated by regular credit evaluations that the Company performs on its distribution partners and its ongoing monitoring of outstanding balances.

 

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(e)Foreign Currency Risks

 

A majority of the Company’s operating transactions are denominated in RMB and a significant portion of the Company’s assets and liabilities is denominated in RMB. RMB is not freely convertible into foreign currencies. The value of the RMB is subject to changes in the central government policies and to international economic and political developments. In the PRC, certain foreign exchange transactions are required by laws to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by the Company in China must be processed through PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to complete the remittance.

 

Cash consist of cash on hand and demand deposits at banks, which are unrestricted as to withdrawal.

 

Time deposits, which mature within one year as of the balance sheet date, represent interest-bearing certificates of deposit with an initial term of greater than three months when purchased. Time deposits which mature over one year as of the balance sheet date are included in non-current assets.

 

Cash and time deposits maintained at banks consist of the following:

   March 31,   December 31, 
   2017   2016 
RMB denominated bank deposits with financial institutions in the PRC  $474,523    1,566,107 
US dollar denominated bank deposits with financial institutions in the PRC  $177,570    670,951 
HKD denominated bank deposits with financial institutions in Hong Kong Special Administrative Region (“HK SAR”)   38,635    14,163 
US dollar denominated bank deposits with financial institutions in Hong Kong Special Administrative Region (“HK SAR”)  $296,197    1,403,000 
US dollar denominated bank deposits with financial institutions in The United States of America (“USA”)  $58,637    95,030 

 

As of March 31, 2017 and December 31, 2016 deposits of $371,824 and $384,515 were insured, respectively. To limit exposure to credit risk relating to bank deposits, the Company primarily places bank deposits only with large financial institutions in the PRC, HK SAR, USA and Cayman with acceptable credit rating.

 

19.Defined Contribution Plan

 

During 2011, the Company began sponsoring a 401(k) defined contribution plan ("401(k) Plan") that provides for a 100% employer matching contribution of the first 3% and a 50% employer matching contribution of each additional percent contributed by an employee up to 5% of each employee’s pay. Employees become fully vested in employer matching contributions after six months of employment. Company 401(k) matching contributions were approximately $1,233 and $1,000 for the three months ended March 31, 2017 and March 31, 2016 respectively.

 

20.Segment Reporting

 

The Company’s chief operating decision maker has been identified as the chief executive officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Company. In fiscal year 2016, the Company operated and reported its performance in one segment. However, starting from fiscal year 2017, since Company has acquired Wecast Services Limited and Wide Angle Group Limited in January (see note 4), the Company has operated two segments based on different clouds that major business reside in, including Legacy YOD segement and Wecast Service segment. Therefore, there are two reportable segments for the three months ended March 31, 2017. The two reportable segments are: 

 

Legacy YOD - Provides premium content and integrated value-added service solutions for the delivery of VOD and paid video programming to digital cable providers, Internet Protocol Television (“IPTV”) providers. The core revenues are being generated from both minimum guarantee payments and revenue sharing arrangements with distribution partners as well as subscription or transactional fees from subscribers.

 

Wecast Service - Wecast Services (which resides under the Product Sales Cloud) is currently primarily engaged with consumer electronics e-commerce and smart supply chain management operations.

 

Segment disclosures are on a performance basis consistent with internal management reporting. The following tables summarized the Company’s revenue and cost generated from different revenue streams.

 

Three Months Ended
March 31, March 31,
2017     2016
NET SALES TO EXTERNAL CUSTOMERS
-Legacy YOD $ 787,328 $ 1,269,726
-Wecast Service 32,377,023 -
Net sales 33,164,351 1,269,726
             
GROSS PROFIT
-Legacy YOD 27,493 353,946
-Wecast Service 3,794,479 -
Gross profit 3,821,972 353,946
             
March 31, December 31,
2017 2016
TOTAL ASSETS
-Legacy YOD $ 35,955,219 $ 36,975,911
-Wecast Service 33,714,959 14,448,702
-Unallocated assets 4,181,904 4,321,677
-Intersegment elimination (203,033) -
Total 73,649,049 55,746,290

 

21.Subsequent Event

 

As at May 15, 2017 (reporting date approved by Board of Directors), there is no material subsequent event to be disclosed.

 

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Cautionary Note Regarding Forward Looking Statements

 

This Form 10-Q contains “forward-looking” statements that involve risks and uncertainties. You can identify these statements by the use of forward-looking words such as "may", "will", "expect", "anticipate", "estimate", "believe", "continue", or other similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or financial condition or state other "forward-looking" information. We believe that it is important to communicate our future expectations to our investors. However, these forward-looking statements are not guarantees of future performance and actual results may differ materially from the expectations that are expressed, implied or forecasted in any such forward-looking statements. There may be events in the future that we are unable to accurately predict or control, including weather conditions and other natural disasters which may affect demand for our products, and the product–development and marketing efforts of our competitors. Examples of these events are more fully described in the Company’s 2016 Annual Report under Part I. Item 1A. Risk Factors.

 

Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the reports and documents the Company files from time to time with the SEC, particularly its Quarterly Reports on Form 10-Q, Annual Report on Form 10-K , Current Reports on Form 8-K and all amendments to those reports.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 

 

The following management’s discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion contains certain forward-looking information. See “Cautionary Note Regarding Forward Looking Statements” above for certain information concerning those forward-looking statements.

 

Overview

 

Wecast Network, Inc. (the “Company”), formerly known as YOU On Demand Holdings, Inc., is a Nevada corporation that primarily operates in China (“PRC”) through its subsidiaries and consolidated variable interest entities (“VIEs”). The Company, its subsidiaries and consolidated VIEs are collectively referred to as Wecast Network (“Wecast Network”, “we”, “us”, or “the Company”).

 

Wecast Network is leveraging its legacy operations as a premium content Video On Demand (“VOD”) service provider in China and aiming to be the leading provider of total B2B business solutions for today’s constantly evolving business landscape. With a focus on “BASE” or Blockchain, Artificial Intelligence, Supply Chain & Exchanges, Wecast is organized into three cloud-based categories and business units: Brand Intellectual Property Cloud, Product Sales Cloud, and the Financial Product Cloud. With the three clouds functioning both independently and interdependently, Wecast is creating a vertical, transactional and flexible platform for today’s global enterprises.

 

The Company’s mission and vision is to be the world’s leading cloud-based, total B2B enterprise solution and platform provider that empowers businesses to grow with Big Data technology.

 

Wecast Network launched its VOD service through acquisition of YOD Hong Kong, formerly Sinotop Group Limited, in July 30, 2010 through its subsidiary China CB Cayman. Through a series of contractual arrangements, YOD WFOE, the subsidiary of YOD Hong Kong, controls Sinotop Beijing, a corporation established in the PRC. Sinotop Beijing is the 80% owner of Zhong Hai Media, through which we provide: 1) integrated value–added business–to–business (“B2B”) service solutions for the delivery of VOD and enhanced premium content for digital cable; 2) integrated value–added business–to–business–to–customer (“B2B2C”) service solutions for the delivery of VOD and enhanced premium content for IPTV and OTT providers and; 3) a direct to user, or B2C, mobile video service app.

 

On October 8, 2016, the Company signed an agreement to form a partnership with Zhejiang Yanhua ("Yanhua Agreement"), where Yanhua will act as the exclusive distribution operator (within the territory of the People's Republic of China) of WCST's licensed library of major studio films. According to the Yanhua Agreement, the existing legacy Hollywood studio paid contents as well as other IP contents specified in the agreement, along with the corresponding authorized rights letter that WCST is entitled to, will be turned over to Yanhua as a whole package, which was agreed to be priced at RMB 13,000,000. In addition to the above-mentioned minimal guarantee fee of RMB 13,000,000 specified, there is a provision in the Yanhua Agreement which states that once the revenue recognized from the existing contents transferred from WCST to Yanhua reaches the amount of RMB 13,000,000, the revenue above RMB 13,000,000 will be shared with WCST from the date when this revenue threshold is reached based on certain revenue-sharing mechanism stipulated in the Yanhua Agreement.

 

On January 30, 2017, the Company entered into a Securities Purchase Agreement (the “Sun Video SPA”) with BT Capital Global Limited which has been controlled by Company’s chairman Bruno Wu, for the purchase by us of all of the outstanding capital stock of Sun Video Group Hong Kong Limited. On January 31, 2017, 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. After acquiring these two entities, other than our legacy YOD business, we are also engaged with consumer electronics and smart hand held device design and supply chain management business.

 

Wecast Network is a next generation global brand licensing, IP sales and video commerce company driven by AI and Big Data. With a firm focus on 4 strategy pillars which include: Brand, Content, Commerce and Licensing, the Company is leveraging and optimizing its legacy operations as a premium content Video On Demand service provider in China to evolve into a global, vertical, ubiquitous and transactional B2B2C, mobile–driven, consumer and supply chain management platform. By aiming to establish the world’s premier multimedia, social networking and smart e–commerce–enabled network with the largest global effective connected user base, Wecast Network, through this expanded, cloud–based, ecosystem of connected screens combined with strong partnerships with leading global providers, will be capable of delivering a vast array of WCST –branded products and services to enterprise customers and end–use consumers – anytime and anywhere, across multiple platforms and devices.

 

Principal Factors Affecting Our Financial Performance

 

Our operating results are primarily affected by the following factors:

 

·Our ability to adapt our product and service offerings to meet consumer demands. Our expansion prospects are dependent on continued development of our product and services. The content distribution industry in China is highly competitive and dominated by large Internet companies that have more resources than us. Also the commerce industry for sales of consumer electronics and smart hand held device design and supply chain management business is highly competitive as well. The growth of our business will depend on whether we can develop new services and products that can offer higher quality contents, technological innovation and unique user experience.

  

 30 

  

·Our ability to expand our subscriber base. Our business is affected by the overall size of our user base, which in turn is determined by, among other factors, (i) user experience of our service and products, (ii) our relationship with distribution platforms, such as digital cable and IPTV providers and mobile product manufacturers, (iii) expansion of our business to include increased service offerings and (iv) the expansion of our subscribers beyond smartphones to mobile tablets and other Internet-enabled mobile devices.

 

·Our ability to achieve revenue growth and meet internal or external expectations of future performance. In the latter half of 2013, we shifted our focus to our core multi-platform video streaming services and our business model is still evolving. Beginning in 2016, we also put more focus on consumer electronics and smart hand held device design and supply chain management business. Our financial performance is affected by, among other things, our ability to come to favorable business terms with our distribution partners, manage and procure contents in a cost-effective manner and manage our operating expenses. Overall, our normalized operating expenses have been decreasing but we have also incurred certain additional costs related to our financing activities, maintaining our public company status and making staff reductions.

 

·Changes in China’s economic, political or social policies or conditions. All of our legacy YOD business revenues were from sales to customers in China and all of our suppliers for Wecast Services were operated in China. Accordingly, our business, financial condition and results of operation is significantly influenced by the political, social and economic policies and conditions in China. While the Chinese economy has experienced significant growth over the past decade, growth has been uneven, both geographically and among various sectors of the economy. In addition, the Chinese government continues to play a significant role in regulating telecommunication and Internet industry development by imposing certain laws and regulations concerning Internet access and distribution of video content and other information over traditional and new media platforms. Some of the laws and regulations are also relatively new and involving and their interpretation and enforcement involve significant uncertainty.

 

Taxation 

 

United States

 

Wecast Network, Inc. and M. Y. Products, LLC are subject to United States tax. No provision for income taxes in the United States has been made as both companies had no taxable profit in the United States since inception.

 

Cayman Islands and the British Virgin Islands

 

Under the current laws of the Cayman Islands and the British Virgin Islands, we are not subject to tax on our income or capital gains. In addition, dividend payments are not subject to withholding tax in the Cayman Islands.

 

Hong Kong

 

Our subsidiaries that were incorporated in Hong Kong were under the current laws of Hong Kong, are subject to Profits Tax of 16.5%. No provision for Hong Kong Profits Tax has been made as net operating loss carryovers offset current taxable income.

 

The People’s Republic of China

 

Under the Enterprise Income Tax Law, our Chinese subsidiaries and VIEs are subject to an earned income tax of 25.0%.

 

Our future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax income and non-tax deductible expenses incurred. Our management carefully monitors these legal developments to determine if there will be any change in the statutory income tax rate.

 

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Consolidated Results of Operations 

 

Comparison of Three Months Ended March 31, 2017 and 2016

 

   Three Months Ended         
   March 31, 2017   March 31, 2016   Amount Change   % Change 
Revenue  $33,164,351   $1,269,726   $31,894,625    2,512%
Cost of revenue   29,342,379    915,780    28,426,599    3,104%
Gross profit   3,821,972    353,946    3,468,026    980%
                     
Operating expense:                    
Selling, general and administrative expenses expenses   1,265,172    2,165,053    (899,881)   (42)%
Professional fees   267,133    367,446    (100,313)   (27)%
Depreciation and amortization   196,211    97,463    98,748    101%
                     
Total operating expense   1,728,516    2,629,962    (901,446)   (34)%
                     
Income (loss) from operations   2,093,456    (2,276,016)   4,369,472    (192)%
Interest expense, net   (41,557)   (33,473)   (8,084)   24%
Change in fair value of warrant liabilities   (270,116)   37,023    (307,139)   (830)%
Equity in loss of equity method investees   (43,746)   (10,348)   (33,398)   323%
Others   (99,570)   162   (99,732)   (61,563)%
                     
Income (loss) before income taxes   1,638,467    (2,282,652)   3,921,119    (172)%
                     
Income tax benefit   -    8,612    (8,612)   (100)%
                     
Net income (loss)   1,638,467    (2,274,040)   3,912,507    (172)%
                     
Net loss attributable to non-controlling interest   (574,412)   (137,569)   (436,843)   318%
                     
Net income (loss) attributable to Wecast Network, Inc. shareholders  $2,212,879   $(2,136,471)  $4,349,350    (204)%

 

 

Revenues

 

We are leveraging our legacy operations as a premium content VOD service provider in China and aiming to be the leading provider of total B2B business solutions for today’s constantly evolving business landscape. With a focus on “BASE” or Blockchain, Artificial Intelligence, Supply Chain & Exchanges, we are organized into three cloud-based categories and business units: Brand IP Cloud, Product Sales Cloud, and the Financial Product Cloud. With the three clouds functioning both independently and interdependently, we are creating a vertical, transactional and flexible platform for today’s global enterprises, including:

 

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.

 

2> Wecast Services

 

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 of these aforementioned 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 e-commerce and smart supply chain management operations. Our ending customers include British Telecom, Micromax and about 15 to 20 other corporations across the world.

 

 

 

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3>   Consulting Services

This one time revenue was attributable to platform build out consulting services to some of our customers.

 

   2017Q1   2016Q1   Diff 
   USD   %   USD   USD   % 

Legacy YOD

   787,328    2%   1,269,726    (482,398)   -38%
Wecast Services   27,719,067    84%   -    27,719,067    100%
Consulting Services   4,657,956    14%   -    4,657,956    100%
Total   33,164,351    100%   1,269,726    31,894,625    2512%

 

Revenue for the three months ended March 31, 2017 was $33.2 million as compared to $1.3 million for the same period in 2016, an increase of approximately $31.9 million, or 2512%. The increase was mainly due to our new business line acquired in January 2017 and one time consulting services that we provided to several customers. This was partially offset by a decrease of our legacy YOD business in the amount of $0.5 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.

 

Cost of revenues

 

Cost of revenues was approximately $29.3 million for the three months ended March 31, 2017, as compared to $0.9 million for the three months ended March 31, 2016. Our cost of revenues was increased by $28.4 million which is in line with our increase of revenues. Our cost of revenues is primarily comprised of electronics products purchasing cost from Wecast Services.

 

Gross profit

 

Gross profit ratio for the three months ended March 31, 2017 was decreased by 16.36% from 27.88% to 11.52%, mainly due to the shift to the Wecast Services business from the legacy YOD business.

 

Selling, general and administrative expenses

 

Selling, general and administrative expense for the three months ended March 31, 2017 was $1.3 million as compared to $2.2 million for the same period in 2016, a decrease of approximately $0.9 million or 42% mainly due to:

 

1>Salaries and compensation for the three months ended March 31, 2017 was $0.8 million, a decrease of $0.64 million, Rent expenses for the three months ended March 31, 2017 was $0.1 million. The decrease were mainly attributable to certain existing employees and offices that had been used to provide consulting services, whose cost was recorded and shifted to cost of sales in the three months ended March 31, 2017.

 

2>Travel and entertainment expenses for the three months ended March 31, 2017 was $0.4 million, a decrease of $0.3 million, and advertising and promotion expenses for the three months ended March 31, 2017 was $0.02 million, a decrease of $0.03 million. This was due to the legacy YOD business was transitioning to Yanhua, which reduced our sales expenses related to that part of our business.

 

Professional fees

 

Professional fees for the three months ended March 31, 2017 was $0.3 million as compared to $0.4 million for the same period in 2016, a decrease of approximately $0.1 million. This was mainly due to the decrease of audit and valuation fee.

 

Depreciation and amortization

 

Depreciation and amortization for the three months ended March 31, 2017 was $0.2 million as compared to $0.1 million for the same period in 2016, an increase of approximately $0.1 million, mainly due to the new office building purchased in November 2016.

 

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 $0.3 million and a gain of approximately $0.04 million for the three months ended March 31, 2017 and 2016, respectively. The changes are primarily due to fluctuation in our closing stock price.

 

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Income tax expenses

 

The income tax expense for the three months ended March 31, 2017 is nil because net operating loss carryovers offset current taxable income and deferred tax assets related to the net operating loss carryovers utilized had been offset by a valuations allowance.

 

Net loss attributable to non-controlling interest

 

Hua Cheng has a 20% non-controlling interest in Zhong Hai Media and as such we allocate 20% of the operating loss of Zhong Hai Media to Hua Cheng. During the three months ended March 31, 2017, approximately $0.01 million of our operating loss from Zhong Hai Media was allocated to Hua Cheng. For the three months ended March 31, 2016, operating loss attributable to non-controlling interest was approximately $0.01 million as well.

 

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 March 31, 2017, approximately $0.5 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 loss of Wide Angle to Swiss Guorong Limited. During the three months ended March 31, 2017, approximately $0.03 million of our operating loss from Wide Angle was allocated to Swiss Guorong Limited, which was nil in the same period in 2016.

 

Liquidity and Capital Resources

 

As of March 31, 2017, the Company had cash of approximately $1.1 million and we had accumulated deficits of approximately $113.4 million and $115.7 million as of March 31, 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. We have the ability to raise funds through various methods by either issuing debt or equity instruments.

 

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. 

 

   Three Months Ended 
   March 31,   March 31, 
   2017  

2016

 
Net cash used in operating activities  $(3,386,146)  $(1,732,216)
Net cash used in investing activities   (5,473)   -
Net cash provided by financing activities   8,745    10,000,000 
Effect of exchange rate changes on cash   675,202    (1,361)
Net increase in cash   (2,707,672)   8,266,423 
           
Cash at beginning of period   3,761,814    3,768,897 
           
Cash at end of period  $1,054,142   $12,035,320 

 

Operating Activities

 

Cash used in operating activities increased for the three months ended March 31, 2017 compared to 2016, primarily caused by decrease in collection from accounts receivable, mainly due to the recent acquisition of Wide Angle, which is a trading company with longer credit collection period, and changes in accrued expenses and other liabilities, which was partially offset by net profit gained during the three months ended March 31, 2017.

 

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Financing Activities

 

There was little financing activities cash flow for three months period ended March 31, 2017, 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 the price change 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 have not been subject to seasonal variations. 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 consulted our PRC legal counsel in assessing our ability to control our PRC VIEs. Any changes in 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.

 

For sale of smart products, we recognize revenue when persuasive evidence of an arrangement exists, products are delivered, the price to the buyer is fixed or determinable and collectability is reasonably assured.

 

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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.

 

Recent Accounting Pronouncements 

 

In May 2014, Financial Accounting Standards Board (or “FASB”) issued Accounting Standards Updates (or “ASU”) 2014-09, “Revenue from Contracts with Customers” (Topic 606). This guidance supersedes current guidance on revenue recognition in Topic 605, Revenue Recognition. In addition, there are disclosure requirements related to the nature, amount, timing, and uncertainty of revenue recognition. In August 2015, the FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09 for all entities by one year. For public business entities that follow U.S. GAAP, the deferral results in the new revenue standard are being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted for interim and annual periods beginning after December 15, 2016. Management is currently evaluating the impact of adopting this standard on our consolidated financial statements.

 

In July 2015, the FASB issued ASU 2015-11 as part of its simplification initiative. The ASU changes the way of measurement on inventory, which currently requires an entity to measure inventory at the lower of cost or market. The amendments in this Update require an entity to measure inventory within the scope of this Update at the lower of cost and net realizable value. We do not expect a material impact on our consolidated financial statement upon adoption of this ASU.

 

In January 2016, the FASB issued ASU 2016-01 "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities". ASU 2016-01 amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. With respect to our consolidated financial statements, the most significant impact relates to the recognition and measurement for warrant liabilities. Additionally, ASU 2016-01 will impact the disclosure and presentation of financial assets and liabilities. ASU 2016-01 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2017. Early adoption by public entities is permitted only for certain provisions. Management is currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

 

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In February 2016, the FASB issued ASU 2016-02 which amends the FASB Accounting Standards Codification and created Topic 842, "Leases". Under Topic 842, lessees are required to recognize assets and liabilities on the balance sheet for most leases and provides for enhanced disclosures. Leases will continue to be classified as either finance or operating. ASU 2016-02 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2018. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited and early adoption by public entities is permitted. Management is currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

 

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.

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The update simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The update also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The update should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. For public companies, the update is effective for any annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The guidance should be applied prospectively upon its effective date. We do not anticipate that the adoption of ASU 2017-04 will have a material impact on the consolidated financial statements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer , as appropriate, to allow timely decisions regarding required disclosure.

 

As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2017. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2017, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were not effective to satisfy the objectives for which they are intended, as a result of one material weakness and one significant deficiency described below.

 

Changes in Internal Control Over Financial Reporting 

 

On February 4, 2017, Ms. Mei Chen resigned from her position as Chief Financial Officer of the Company and was replaced by Mr. Simon Wang, as the Chief Financial Officer and principal financial officer and principal accounting officer.

 

In the first quarter of 2017, one significant deficiency was identified as we did not maintain effective internal controls over the accounting for and related disclosures of significant non-routine transactions. Specifically, we did not maintain a sufficient complement of resources with an appropriate level of accounting knowledge, experience and training commensurate with our structure and financial reporting requirements related to the financial presentation associated with the consolidation of our newly acquired business under common control. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the Company's financial reporting. This control deficiency resulted in the reasonable possibility that a material misstatement would not be prevented or detected on a timely basis. This significant deficiency was identified and resulting errors corrected prior to the completion of our consolidated financial statements and segment reporting included in our Quarterly Report on Form 10-Q for the three months ended March 31, 2017.

 

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In 2016, a material weakness identified in the internal control of financial reporting related to the design, documentation and implementation of effective internal controls over the review of the cash flow forecasts used in the accounting for licensed content recoverability. Specifically, the Company did not design and maintain effective internal controls related to management’s review of the data inputs and assumptions used in its cash flow forecasts for licensed content recoverability.

 

Other than the changes stated above, there have been no other significant changes in internal control for the three months ended March 31, 2017, which have materially affected or would likely materially affect our internal control over financial reporting. The Company continues to invest resources in order to upgrade internal controls.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There are no material pending legal proceedings to which we are a party or to which any of our property is subject. To the best of our knowledge, no such actions against us are contemplated or threatened.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our 2016 Annual Report which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K is not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. Other than as noted below, there have been no material changes in the risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2016.

 

The Company experiences significant competitive pressure, which may negatively impact its results.

 

The market for the Company’s products and services is very competitive and subject to rapid technological advances, new market entrants, non-traditional competitors, changes in industry standards and changes in customer needs and consumption models. Not only does the Company compete with global distributors, it also competes for customers with regional distributors and some of the Company’s own suppliers that maintain direct sales efforts. In addition, as the Company expands its offerings and geographies, the Company may encounter increased competition from current or new competitors. The Company’s failure to maintain and enhance its competitive position could adversely affect its business and prospects. Furthermore, the Company’s efforts to compete in the marketplace could cause deterioration of gross profit margins and, thus, overall profitability.

 

The size of the Company’s competitors vary across market sectors, as do the resources the Company has allocated to the sectors and geographic areas in which it does business. Therefore, some competitors may have greater resources or a more extensive customer or supplier base than the Company has in one or more of its market sectors and geographic areas, which may result in the Company not being able to effectively compete in certain markets which could impact the Company’s profitability and prospects.

 

Item 2. Unregistered Sales of Sales of Equity Securities and Use of Proceeds

 

There were no unregistered sales of equity securities during the fiscal quarter ended March 31, 2017, other than those that were previously reported in our Current Reports on Form 8-K .

 

Item 3. Defaults Upon Senior Securities

 

There were no defaults upon senior securities during the fiscal quarter ended March 31, 2017.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

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Item 5. Other Information

 

On May 11, 2017, Wecast Network, Inc. (the “Company”) received the written consent of the shareholders holding a majority of the voting power of the Company approving the issuance of up to $50 million shares of its common stock, par value $0.001 per share (the “Shares”), upon conversion of a promissory note issued as consideration in the acquisition of Sun Video Group Hong Kong Limited, a Hong Kong corporation and 55% of the outstanding capital stock of Wide Angle Group Limited, a Hong Kong company (together, the “Transaction”), which were previously approved by the Company’s Board of Directors and Audit Committee, as disclosed in the Company’s current reports on Form 8-K filed on February 1 and February 2, 2017, respectively.

 

The issuance of the Shares was approved by a total of 41,832,590 of the outstanding votes entitled to vote on the matter, representing 59.3%  of the votes of the Company’s issued and outstanding voting shares. The written consent will not take effect until 20 calendar days after the Company has filed  a final definitive Schedule 14C Information Statement with the United States Securities and Exchange Commission regarding the Transaction and the written shareholder consent and mailed that Information Statement to the Company’s shareholders.  No proxy soliciting material was utilized in connection with the approval by written consent.

 

Item 6. Exhibits

 

Exhibit     
No.    Description 
10.1   English translation of Equity Agreement, dated March 31, 2017, by and between Shanghai Blue World Investment Management Consulting Limited and Shanghai Pulse Consulting Company Limited*
31.1     Certifications of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*  
31.2     Certifications of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*  
32.1     Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2     Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
101.INS   XBRL Instance Document
101.SCH   Taxonomy Extension Schema Document
101.CAL   Taxonomy Extension Calculation Linkbase Document
101.DEF   Taxonomy Extension Definition Linkbase Document
101.LAB   Taxonomy Extension Label Linkbase Document
101.PRE   Taxonomy Extension Presentation Linkbase Document

 

*Filed herewith
**Furnished herewith

 

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SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on May 15, 2017.

 

Wecast Network, Inc.

 

By: /s/ Simon Wang  

 

Name: Simon Wang
Title: Chief Financial Officer
(Principal Financial Officer and an Authorized Officer) 

  

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