VIE Structure and Arrangements

12 Months Ended

Dec. 31, 2015

VIE Structure and Arrangements [Text Block]

4. VIE Structure and Arrangements

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

Management Services Agreement

Pursuant to a Management Services Agreement, as of March 9, 2010, between Sinotop Beijing and YOD Hong Kong (the “Management Services Agreement”), 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 of Sinotop Beijing during the term of the Management Services Agreement. YOD Hong Kong may also request ad hoc quarterly payments of the aggregate fee, which payments will be credited against Sinotop Beijing’s future payment obligations.

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

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

(b) any tangible or intangible property of Sinotop Bejing, 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 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 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.

Equity Pledge Agreement

Pursuant to an Equity Pledge Agreement among YOD Hong Kong, Sinotop Beijing and the sole shareholder of Sinotop Beijing (the “Shareholder”), dated March 9, 2010, the Shareholder pledged all of its equity interests in Sinotop Beijing (the “Collateral”) to YOD Hong Kong as security for the performance of the obligations of Sinotop Beijing to make all of the required management fee payments pursuant to the Management Services Agreement. The term of the Equity Pledge Agreement expires two years from Sinotop Beijing’s satisfaction of all obligations under the Management Services Agreement.

Option Agreement

Pursuant to an Option Agreement among YOD Hong Kong, Sinotop Beijing and Shareholder, dated March 9, 2010, and entered into in connection with the Management Services Agreement, the Shareholder granted an exclusive option to YOD Hong Kong, 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 Shareholder’s equity in Sinotop Beijing. The aggregate purchase price of the option is equal to the registered paid-in capital of the Shareholder. The term of the agreement is until all of the equity interest in Sinotop Beijing held by the Shareholder is transferred to YOD Hong Kong, or its designee, or until the maximum period allowed by law has run, and may not be terminated by any party to the agreement without the consent of the other parties.

Voting Rights Proxy Agreement

Pursuant to a Voting Rights Proxy Agreement among YOD Hong Kong, Sinotop Beijing and the Shareholder, dated March 9, 2010, the Shareholder granted to YOD Hong Kong an irrevocable proxy, for the maximum period of time permitted by law, all of its voting rights as a shareholder of Sinotop Beijing. The Shareholder may not transfer any of its equity interest in Sinotop Beijing to any party other than YOD Hong Kong. The Voting Rights Proxy Agreement may not be terminated except upon the written consent of all parties, or unilaterally by YOD Hong Kong upon 30 days’ notice.

On June 4, 2012, YOD Hong Kong assigned all rights under the above agreement to YOD WFOE, its wholly-owned subsidiary. Accordingly, YOD WFOE may exercise the above agreements in place of YOD Hong Kong.

Under the above contractual agreements, YOD WFOE has the power to direct the activities of the Sinotop Beijing, and can have the assets transferred freely out of Sinotop Beijing without any restrictions. Therefore, YOD WFOE considers that there is no asset of Sinotop Beijing or Zhong Hai Video that can be used only to settle obligations of Sinotop Beijing or Zhong Hai Video, except for the registered capital of these two entities amounting to RMB17.0 million (approximately $2.6 million) as of December 31, 2015. As Sinotop Beijing and Zhong Hai Video are incorporated as limited liability companies under PRC Company Law, creditors of these two entities do not have recourse to the general credit of other entities of the Company.

Financial Information

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

		December 31,		December 31,
		2015		2014
ASSETS
Current assets:
Cash	$	1,001,094	$	506,525
Accounts receivable, net		1,689,415		1,091,076
Licensed content, current		556,591		1,041,609
Prepaid expenses		98,893		105,918
Other current assets		133,582		12,811
Intercompany receivables due from the Company's subsidiaries (i)		161,017		572,192
Total current assets		3,640,592		3,330,131
Property and equipment, net		149,880		297,898
Licensed content, non-current		21,085		35,648
Intangible assets, net		253,771		5,291
Long-term equity investments		450,115		850,054
Other non-current assets		58,026		272,657
Total assets	$	4,573,469	$	4,791,679
LIABILITIES
Current liabilities:
Accounts payable	$	44,867	$	8,598
Deferred revenue		15,080		13,431
Accrued expenses		280,038		303,766
Other current liabilities		298,422		269,854
Accrued salaries		10,861		-
Accrued license fees		933,532		348,007
Intercompany payables due to the Company's subsidiaries (i)		12,512,954		11,200,536
Total current liabilities		14,095,754		12,144,192
Total liabilities	$	14,095,754	$	12,144,192

(i) Intercompany receivables and payables are eliminated upon consolidation.

		December 31,			December 31,
		2015			2014
Net revenue	$	4,606,380		$	1,962,622
Net loss	$	(2,573,046	)	$	(3,173,010	)

		December 31,			December 31,
		2015			2014
Net cash used in operating activities	$	(782,670	)	$	(2,284,452	)
Net cash used in investing activities	$	(35,179	)	$	(278,469	)
Net cash provided by financing activities	$	1,312,418		$	-

The revenue producing assets that are held by the VIEs and a VIE’s subsidiary comprise of licensed content, network equipment, charter/cooperation agreements, software and licenses and website and mobile app development. Substantially all of such assets are recognized in the 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 and a VIE’s subsidiary also hire assembled work force on sales, research and development and operations whose costs are expensed as incurred.