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YOD > SEC Filings for YOD > Form 10-K on 8-Apr-2013All Recent SEC Filings

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Form 10-K for YOU ON DEMAND HOLDINGS, INC.


8-Apr-2013

Annual Report


ITEM 7. 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 "Special Note Regarding Forward Looking Statements" above for certain information concerning those forward looking statements.

Overview

We operate in the Chinese media segment, through our Chinese subsidiaries and VIEs, (1) a business which provides integrated value-added service solutions for the delivery of VOD and enhanced premium content for cable providers and (2) a cable broadband business based in the Jinan region of China.

Through our VIE, Sinotop, and it's 80% owned operating joint venture Zhong Hai Video, we provide integrated value-added service solutions for the delivery of VOD, and enhanced premium content for cable providers. Zhong Hai Video's revenue will be derived primarily from a VOD model, consisting of a fee to view movies, popular titles and live events. At year end our VOD product was implemented on a limited basis for testing. Our full product launch occurred in conjunction with the Chinese New Year during our first quarter of 2013. Full roll out of our video on demand products began in the first quarter of 2013.


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Through our VIE, Jinan Broadband, we provide cable and wireless broadband services, principally internet services, Internet Protocol Point wholesale services, related network equipment rental and sales, and fiber network construction and maintenance. Jinan Broadband's revenue consists primarily of sales to our PRC-based internet consumers, cable modem consumers, business customers and other internet and cable services.

Through Shandong Media, we operate our publishing business, which includes the distribution of periodicals, the publication of advertising, the organization of public relations events, the provision of information related services, copyright transactions, the production of audio and video products, and the provision of audio value added communication services. Shandong Media's revenue consists primarily of sales of publications and advertising revenues. The Company has deconsolidated the net assets of Shandong Media as of July 1, 2012 and accounts for the remaining 30% interest in Shandong Media by the equity method.

Principal Factors Affecting Our Financial Performance

Our operating results are primarily affected by the following factors:

Growth in the Chinese Economy. We operate in China and derive all of our revenues from sales to customers in China. Economic conditions in China, therefore, affect virtually all aspects of our operations, including the demand for our products, the availability and prices of our supplies and our other expenses. China has experienced significant economic growth, achieving an average annual growth rate of approximately 10% in gross domestic product from 1996 through 2011. China is expected to experience continued growth in all areas of investment and consumption, even in the face of a global economic recession. However, China has not been entirely immune to the global economic slowdown and is experiencing a slowing of its growth rate.

PRC Economic Stimulus Plans. The PRC government has issued a policy entitled "Central Government Policy On Stimulating Domestic Consumption To Counter The Damage Result From Export Business Of The Country," pursuant to which the PRC Central Government is dedicating approximately $580 billion to stimulate domestic consumption. Companies that are either directly or indirectly related to construction, and to the manufacture and sale of building materials, electrical household appliances and telecommunication equipment, are expected to benefit. We could potentially benefit if the stimulus plan injects funds into cable infrastructure allowing access to our PPV network.

Deployment of Value-added Services. To augment our product offerings and create other revenue sources, we work with strategic partners to deploy value-added services to our cable customers. Value-added services, including but not limited to the synergies created by the additions of our new assets, will become a focus of revenue generation for our company. No assurance can be made that we will add other value-added services, or if added, that they will succeed.

Taxation

United States

YOU On Demand Holdings, Inc. is subject to United States tax at a tax rate of 34%. No provision for income taxes in the United States has been made as YOU On Demand Holdings, Inc. had no income taxable in the United States.

Cayman Islands

CB Cayman was incorporated in the Cayman Islands. Under the current law of the Cayman Islands, it is not subject to income or capital gains tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands.

Hong Kong

Our subsidiary, Sinotop Hong Kong, was incorporated in Hong Kong and under the current laws of Hong Kong, is subject to Profits Tax of 16.5%. No provision for Hong Kong Profits Tax has been made as Sinotop Hong Kong has no taxable income.

The People's Republic of China

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


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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.

Consolidated Results of Operations

Comparison of Years Ended December 31, 2012 and 2011

In order to provide a more meaningful comparison of our financial results, our presentation of the Company's Consolidated Results of Operations utilizes Pro Forma 2012 and 2011 financial information to exclude the impact of Shandong Media which was deconsolidated effective July 1, 2012 (See Note 11 to the audited financial statements included in this report for more information regarding the Deconsolidation of Shandong Media).


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                                                                      Pro Forma Comparisons
                                                                            Year Ended
                                                      As Reported       Shandong Media          Pro Forma
                                                     December 31,          6 months           December 31,
                                                         2012                                     2012
                                                                                               (excluding
                                                                                             Shandong Media)

Revenue                                              $   6,873,000     $      1,696,000     $       5,177,000
Cost of revenue                                          7,083,000            1,229,000             5,854,000
Gross profit (loss)                                       (210,000 )            467,000              (677,000 )

Operating expense:
Selling, general and administrative expenses            10,811,000              717,000            10,094,000
Professional fees                                        1,345,000                    -             1,345,000
Depreciation and amortization                            4,083,000               58,000             4,025,000
Impairments of long-lived assets                           840,000                    -               840,000
Total operating expense                                 17,079,000              775,000            16,304,000

Loss from operations                                   (17,289,000 )           (308,000 )         (16,981,000 )

Interest & other income / (expense)
Interest income                                              9,000                    -                 9,000
Interest expense                                           (79,000 )                  -               (79,000 )
Right to purchase expense                                  (44,000 )                  -               (44,000 )
Cost of reset provision                                   (659,000 )                  -              (659,000 )
Change in fair value of warrant liabilities                647,000                    -               647,000
Change in fair value of contingent consideration         1,313,000                    -             1,313,000
Gain on investment in unconsolidated entities               68,000                    -                68,000
Loss on investment write-off                               (95,000 )                  -               (95,000 )
Loss on write-off of uncollectible loans                  (514,000 )           (473,000 )             (41,000 )
Gain on deconsolidation of Shandong Media                  142,000                    -               142,000
Other                                                     (140,000 )                  -              (140,000 )

Loss before income taxes and noncontrolling
interests                                              (16,641,000 )           (781,000 )         (15,860,000 )

Income tax benefit                                         353,000                9,000               344,000

Net loss                                               (16,288,000 )           (772,000 )         (15,516,000 )

Net loss attributable to noncontrolling interests        2,074,000              386,000             1,688,000

Net loss attributable to YOU On Demand
shareholders                                         $ (14,214,000 )   $       (386,000 )   $     (13,828,000 )

Deemed dividends on preferred stock                       (924,000 )                  -              (924,000 )

Net loss attributable to YOU on Demand common
shareholders                                         $ (15,138,000 )   $       (386,000 )   $     (14,752,000 )


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                                                                         Pro Forma Comparisons
                                                                               Year Ended
                                                         As Reported       Shandong Media          Pro Forma
                                                        December 31,         12 months           December 31,
                                                            2011                                     2011
                                                                                                  (excluding
                                                                                                Shandong Media)

Revenue                                                 $   7,868,000     $      2,993,000     $       4,875,000
Cost of revenue                                             5,526,000            2,159,000             3,367,000
Gross profit                                                2,342,000              834,000             1,508,000

Operating expense:
Selling, general and administrative expenses                8,801,000            1,306,000             7,495,000
Professional fees                                           2,115,000                5,000             2,110,000
Depreciation and amortization                               4,424,000              110,000             4,314,000
Impairments of long-lived assets                              244,000                    -               244,000
Total operating expense                                    15,584,000            1,421,000            14,163,000

Loss from operations                                      (13,242,000 )           (587,000 )         (12,655,000 )

Interest & other income / (expense)
Interest income                                                11,000                    -                11,000
Interest expense                                               (2,000 )                  -                (2,000 )
Stock purchase right                                         (194,000 )                  -              (194,000 )
Change in fair value of contingent consideration                3,000                    -                 3,000
Loss on investment in unconsolidated entities                 (14,000 )                  -               (14,000 )
Gain on deconsolidation of AdNet                              470,000                    -               470,000
Other                                                         (44,000 )             (2,000 )             (42,000 )

Loss before income taxes and noncontrolling interests     (13,012,000 )           (589,000 )         (12,423,000 )

Income tax benefit                                            370,000               95,000               275,000

Net loss                                                  (12,642,000 )           (494,000 )         (12,148,000 )

Net loss attributable to noncontrolling interests           1,372,000              247,000             1,125,000

Net loss attributable to YOU On Demand shareholders     $ (11,270,000 )   $       (247,000 )   $     (11,023,000 )


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The following table sets forth key components of our results of operations. As noted above, the table shows a Pro Forma 2012 and 2011 which excludes the impact of Shandong Media.

                                                     Year Ended
                                           December 31,      December 31,         Amount            %
                                               2012              2011             Change         Change
                                            (Pro Forma)       (Pro Forma)

Revenue                                    $   5,177,000     $   4,875,000     $    302,000             6 %
Cost of revenue                                5,854,000         3,367,000        2,487,000            74 %
Gross (loss) profit                             (677,000 )       1,508,000       (2,185,000 )        -145 %

Operating expense:
Selling, general and administrative
expenses                                      10,094,000         7,495,000        2,599,000            35 %
Professional fees                              1,345,000         2,110,000         (765,000 )         -36 %
Depreciation and amortization                  4,025,000         4,314,000         (289,000 )          -7 %
Impairments of long-lived assets                 840,000           244,000          596,000           244 %
Total operating expense                       16,304,000        14,163,000        2,141,000            15 %

Loss from operations                         (16,981,000 )     (12,655,000 )     (4,326,000 )          34 %

Interest & other income / (expense)
Interest income                                    9,000            11,000           (2,000 )         -18 %
Interest expense                                 (79,000 )          (2,000 )        (77,000 )       3,850 %
Stock purchase right                             (44,000 )        (194,000 )        150,000           -77 %
Cost of reset provision                         (659,000 )               -         (659,000 )           -
Change in fair value of warrant
liabilities                                      647,000                 -          647,000             -
Change in fair value of contingent
consideration                                  1,313,000             3,000        1,310,000         43667 %
Gain on investment in unconsolidated
entities                                          68,000           (14,000 )         82,000          -586 %
Loss on investment write-off                     (95,000 )               -          (95,000 )           -
Loss on write-off of uncollectible loans         (41,000 )               -          (41,000 )           -
Gain on deconsolidation of Shandong
Media                                            142,000                 -          142,000             -
Gain on disposal of AdNet                              -           470,000         (470,000 )        -100 %
Other                                           (140,000 )         (42,000 )        (98,000 )         233 %

Loss before income taxes and
noncontrolling interests                     (15,860,000 )     (12,423,000 )     (3,437,000 )          28 %

Income tax benefit                               344,000           275,000           69,000            25 %

Net loss                                     (15,516,000 )     (12,148,000 )     (3,368,000 )          28 %

Net loss attributable to noncontrolling
interests                                      1,688,000         1,125,000          563,000            50 %

Net loss attributable to YOU On Demand
shareholders                               $ (13,828,000 )   $ (11,023,000 )   $ (2,805,000 )          25 %

Deemed dividends on preferred stock             (924,000 )               -         (924,000 )           -

Net loss attributable to YOU on Demand
common shareholders                        $ (14,752,000 )   $ (11,023,000 )   $ (3,729,000 )


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The information provided below represents pro forma amounts for 2011 to exclude the impact of Shandong Media, which was deconsolidated effective July 1, 2012 (see Note 11 to the audited financial statements included in this report for more information on the Deconsolidation of Shandong Media).

Revenues

Revenues for the year ended December 31, 2012, totaled $5,177,000, as compared to $4,875,000 for 2011. The increase in revenue of approximately $302,000, or 6%, is attributable to increased revenue from Jinan Broadband. Jinan Broadband's revenue consisted primarily of sales to our PRC based internet consumers, cable modem consumers, business customers and other internet and cable services of $5,172,000, an increase of $320,000, or 7%, as compared to $4,852,000 during 2011. The increase is primarily related to an increase in sales to our business customers.

Gross (loss) Profit

Our gross (loss) profit for the year ended December 31, 2012 was $(677,000), as compared to $1,508,000 during 2011. The decrease in gross (loss) profit of approximately $2,185,000, or 145%, is mainly due to the amortization of content costs related to our VOD business.

Gross (loss) profit as a percentage of revenue was (13)% for the year ended December 31, 2012, as compared to 30% during 2011. The decrease is mainly due to content acquisition costs related to our VOD business.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses for the year ended December 31, 2012, increased approximately $2,599,000 to $10,094,000, as compared to $7,495,000 for the year ended December 31, 2011. The increase is mainly due to increased costs related to the development of our VOD business.

Salaries and personnel costs are the primary components of selling, general and administrative expenses. For the year ended December 31, 2012, salaries and personnel costs accounted for 56% of our selling, general and administrative expenses. For the year ended December 31, 2012, salaries and personnel costs totaled $5,566,000, an increase of $1,502,000, or 37%, as compared to $4,064,000 for the same period of 2011. The increase in our salaries and personnel costs increased because of the growth and development of our VOD business.

The other major components of our selling, general and administrative expenses include marketing and promotions, technology, rent and travel. For the year ended December 31, 2012, these costs totaled $2,447,000, an increase of $694,000, or 40% as compared to $1,753,000 in 2011. The increase is mainly due to the growth and development of our VOD business.

Professional Fees

Professional fees are generally related to public company reporting and governance expenses as well as legal fees related to our VOD business. Our costs for professional fees decreased $765,000, or 36%, to $1,345,000 for the year ended December 31, 2012, from $2,110,000 during 2011. Such decrease in professional fees was primarily due to increased legal fees in 2011during the early stages of development of our VOD business.

Depreciation and Amortization

Our depreciation expense decreased $438,000, or 18%, to $2,033,000 in the year ended December 31, 2012, from $2,471,000 during 2011, The decrease is due to certain equipment at Jinan Broadband being taken out of service due to changes in customer needs. As such, the Company ceased depreciating such equipment.

Our amortization expense increased $149,000, or 8%, to $1,992,000 in the year ended December 31, 2012, from $1,843,000 during 2011. The increase is due to software, licenses and website development costs being recognized in 2012.

Impairment of Long-lived Assets

In 2012, we recorded an impairment charge of $840,000 related to our equipment assets at our Jinan Broadband subsidiary as discussed in Note 7 of our audited consolidated financial statements included in this report.


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Right to Purchase Expense

FIL Investment Management (Hong Kong) Limited ("Fidelity"), a professional fiduciary for various accounts, had the right to purchase up to 5,625,000 shares of our common stock pursuant to the June 7, 2011 private placement. We recorded a charge of $44,000 for the year ended December 31, 2012, as compared to $194,000 for the same period of 2011, related to the valuation of this right to purchase.

Cost of Reset Provision

As a result of the negative clawback provisions included in our warrant agreements associated with our August 2012 private financings, we have reset the exercise price from $4.25 per share to $1.50 per share. Accordingly, we valued the cost of this reset provision and recorded a charge to operations of $659,000 for the year ended December 31, 2012.

Change in Fair value of Warrant Liabilities

Our warrants are characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations and, accordingly, we reported a gain of $647,000 for the year ended December 31, 2012. The gain is primarily due to the decrease in our closing stock price.

Change in Fair Value of Contingent Consideration

Our contingent consideration related to our acquisition of Sinotop Hong Kong is classified as a liability because the earn-out securities do not meet the fixed-for-fixed criteria under ASC 815-40-15. Further, ASC 815-40-15 requires us to re-measure at the end of every reporting period with the change in value reported in the statement of operations and, accordingly, we reported a gain of approximately $1,313,000 and $3,000 for the years ended December 31, 2012 and 2011, respectively. The gain is primarily due to decreases in our closing stock price.

Loss on Investment Write-off

In 2011, we entered into a purchase agreement with "Shandong Fu Ren" whereby we were obligated to pay approximately $157,000 to acquire 51% ownership of Shanghai Tianduo. We advanced approximately $47,000 in 2011. Since we entered into the agreement in 2011, the direction of our company has changed and thus the value of the investment has diminished. As such, as of December 31, 2012, we wrote-off the initial investment of $47,000 and accrued a liability of$47,000 as an expected settlement payment to terminate the agreement for a total of $95,000. In addition, in connection with the investment we advanced funds in the form of a loan for $40,000 which we wrote-off and recorded as loss on uncollectible loan.

Gain on Deconsolidation of Shandong Media

Effective July 1, 2012, we deconsolidated our ownership in Shandong Media and recorded a gain of $141,814 as discussed in Note 11 of our audited consolidated financial statements included in this report.

Net Loss Attributable to Non-controlling Interest

49% of the operating loss of our Jinan Broadband subsidiary is allocated to Jinan Parent, the 49% co-owner of this business. During the year ended December 31, 2012, $1,278,000 of our operating losses from Jinan Broadband was allocated to Jinan Parent, as compared to $705,000 during the same period of 2011.

20% of the operating loss of our Zhong Hai Video joint venture is allocated to Hua Cheng, our 20% joint venture partner. During the year ended December 31, 2012, $399,000 of our operating loss from Zhong Hai Video was allocated to Hua Cheng, as compared to $420,000 during the same period of 2011.

Deemed Dividends on Preferred Stock

We recorded a beneficial conversion feature associated with the Series C Preferred Stock, which was limited to the proceeds allocated to them. Because the preferred stock is immediately convertible at the option of the holder, we recorded deemed dividends of $924,000 from the beneficial conversion feature associated with the issuance of the Series C Preferred Stock.


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