Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2015

Summary of Significant Accounting Policies [Text Block]

2. Summary of Significant Accounting Policies

(a) Principles of Consolidation

The consolidated financial statements include the financial statements of YOU On Demand Holdings, Inc., its wholly-owned subsidiaries, its VIEs in which the Company is the primary beneficiary, and the subsidiary of its consolidated VIE. All material intercompany transactions and balances are eliminated upon consolidation.

(b) Basis of Presentation

The Company prepares and presents its consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).

(c) Equity Method Investments

Investments in entities where the Company can exercise significant influence, but not control, are accounted for using the equity method. Under the equity method, the investment is initially recorded at cost and adjusted for the Company’s share of undistributed earnings or losses of the investee. The Company’s share of losses is not recognized when the investment is reduced to zero since the Company does not guarantee the investees’ obligations nor is the Company committed to providing additional funding.

Management evaluates impairment on the investments accounted for under the equity method of accounting based on performance and the financial position of the investee, as well as other evidence of market value. Such evaluation includes, but is not limited to, reviewing the investee’s cash position, recent financings, projected and historical financial performance, cash flow forecasts and financing needs. An impairment charge is recorded when the carrying amount of the investment exceeds its fair value and the impairment is determined to be other-than-temporary.

As of and for the years ended December 31, 2015 and 2014, the Company’s investments accounted for under the equity method of accounting are comprised of (1) 30% equity ownership in Shandong Lushi Media Co., Ltd. (“Shandong Media”) and (2) 39% equity ownership in Hua Cheng Hu Dong (Beijing) Film and Television Communication Co., Ltd. (“Hua Cheng”), collectively held by Sinotop Beijing. We recognized impairment loss of $80,000 and $135,000 on our investments in Shandong Media and Hua Cheng, respectively.

(d) Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the related disclosure of contingent assets and liabilities, at the date of the consolidated financial statements and during the reporting period. Actual results could differ from those estimates.

The most significant estimates include, but not limited to, the determination of estimated selling prices of multiple elements revenues contract, the expected revenue from licensed content, allowances for doubtful accounts, share-based compensation and equity based transactions with non-employees, determination of the estimated useful lives of intangible assets, impairment assessment of goodwill, intangible assets and long-term equity investments, determination of the fair value of financial instruments, valuation of deferred income taxes assets and the accrual of uncertain tax positions. These estimates may be adjusted as more current information becomes available, and any adjustment made could be significant.

(e) Foreign Currency Translation

The Company uses the United States dollar (“US$” or “USD”) as its reporting currency. The functional currency of YOU On Demand Holdings, Inc., CB Cayman and YOD Hong Kong is the USD while the functional currency of Sinotop Beijing, Zhong Hai Video and YOD WFOE is the Renminbi (“RMB”). In the consolidated financial statements, the financial information of the entities which uses RMB as their functional currency has been translated into USD. Assets and liabilities are translated at the exchange rates on the balance sheet date, equity amounts are translated at the historical exchange rates, and revenues, expenses, gains and losses are translated using the average rate for the period. Translation adjustments arising from these are reported as foreign currency translation adjustments and are shown as a component of other comprehensive loss in the statement of comprehensive loss.

Transactions denominated in currencies other than functional currency are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated in the functional currency at the applicable rates of exchange in effect at the balance sheet date. The resulting exchange differences are recorded in the consolidated statements of operations.

(f) Cash

Cash consist of cash on hand and demand deposit as of the date of purchase of three months or less. The Company deposits its cash balances with a limited number of banks.

(g) Restricted Cash

Restricted cash represents deposits placed with banks which are restricted as to withdrawal or usage.

On December 21, 2015, the Company entered into an Amended and Restated Securities Purchase Agreement (the “Amended and Restated SSS Purchase Agreement”) with Beijing Sun Seven Stars Culture Development Limited (“SSS”) (see Note 17). We received the restricted cash of $2,994,000 from SSS as cash deposits upon the execution of the Amended and Restated SSS Purchase Agreement.

(h) Accounts Receivable, net

Accounts receivable are recognized at invoiced amounts and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company reviews its allowance for doubtful accounts receivable on an ongoing basis. In establishing the required allowance, management considers any historical losses, the customer’s financial condition, the accounts receivable aging, and the customer’s payment patterns. After all attempts to collect a receivable have failed and the potential for recovery is remote, the receivable is written off against the allowance.

(i) Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Expenditures for major renewals and improvements, which extend the original estimated economic useful lives of applicable assets, are capitalized. Expenditures for normal repairs and maintenance are charged to expense as incurred. The costs and related accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss thereon is recognized in the consolidated statement of operations. Depreciation is provided for on a straight-line basis over the estimated useful lives of the respective assets. The estimated useful life is 5 years for the furniture, 3 years for the electronic equipment and lesser of lease terms or the estimated useful lives of the assets for the leasehold improvements.

(j) Licensed Content

The Company obtains content through content license 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 fees payable are classified as a liability on the consolidated balance sheets.

We amortize licensed content in cost of revenues over the contents contractual 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 at each reporting date, including factors that may bear direct impact on expected revenue from specific content titles. Changes in our expected revenue from licensed content could have a significant impact on our amortization pattern.

Commitments for license agreements where the specified content titles or window of availability are not known or reasonably determinable and do not meet the criteria for recognition as licensed content are included in Note 14 to the consolidated financial statements.

(k) Intangible Assets

Intangible assets are stated at acquisition fair value or cost, less accumulated amortization. The Company amortizes its intangible assets with definite lives over their estimated useful lives and reviews these assets for impairment when an indicator for potential impairment exists. The Company is currently amortizing its intangible assets with definite lives over periods generally ranging between 3 to 20 years. The estimated useful lives are 20 years for the charter/cooperation agreements, 5 years for software licenses and 3 years for the mobile app developments.

(l) Website Development Costs

Website development costs are stated at acquisition fair value or cost less accumulated amortization. The Company capitalizes website development costs associated with graphics design and development of the website application and infrastructure. Costs related to planning, content input, and website operations are expensed as incurred. The Company amortizes website development costs over three years.

(m) Goodwill

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Indefinite-lived intangible assets are assets that are not amortized as there is no foreseeable limit to cash flows generated from them.

In accordance with Financial Accounting Standards Boards (“FASB”) Accounting Standards Codification (“ASC”) 350 - 20, Goodwill , the Company performs impairment test for its goodwill annually as of December 31, or more frequently, if indicators of potential impairment exist, to determine if the carrying value of goodwill is impaired. The Company reviews goodwill for impairment based on its identified reporting units, which are defined as reportable segments or groupings of businesses one level below the reportable segment level. In September 2011, the FASB issued amended guidance on testing goodwill for impairment. The guidance provides entities with an option to perform a qualitative assessment to determine whether further quantitative impairment testing is necessary, or to proceed directly to performing the first step of the goodwill impairment test.

Under the qualitative assessment, the Company would first assess qualitative factors to determine if it is more-likely-than-not the fair value of the reporting unit is less than its carrying value of the reporting unit’s assets and liabilities (including goodwill). If management determines that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying value, or if management is unable to reach a conclusion based on qualitative assessments, then the first and second steps of the goodwill impairment is performed.

Under the quantitative assessment, if the two-step goodwill impairment test is required, the fair value of the reporting unit is first compared with its carrying amount (including goodwill). If the fair value of the reporting unit is less than its carrying amount, an indication of goodwill impairment exists for the reporting unit and the Company must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. If the fair value of the reporting unit exceeds its carrying amount, step two does not need to be performed.

For the purpose of goodwill impairment testing, the Company is considered as a reporting unit. Based on the annual goodwill impairment test performed in the fourth quarter of 2015 and 2014, management concluded that the fair value of the reporting unit exceeded its carrying value. No impairment loss was recognized for the years presented.

(n) Impairment of Long-Lived Assets

Long-lived assets such as property and equipment and intangible assets subject to amortization are reviewed for impairment whenever events or changes in the circumstances indicate that the carrying value of an asset may not be recoverable. When these events occur, the Company assesses the recoverability of the long-lived assets by comparing the carrying amount to the estimated future undiscounted cash flows associated from the use of the asset and its eventual disposition, and recognize an impairment of long-lived assets when the carrying value of such assets exceeds the estimated future undiscounted cash flows such assets is expected to generate. If the Company recognizes an impairment, the Company reduces the carrying amount of the assets group to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values. No impairment of long-lived assets was recognized for any of the years presented.

(o) Warrant Liabilities

We account for derivative instruments and embedded derivative instruments in accordance with ASC 815, Accounting for Derivative Instruments and Hedging Activities , as amended. The amended standard requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value. Fair value is estimated using the Monte Carlo simulation method.

We also follow ASC 815-40 Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock , which requires freestanding contracts that are settled in a company’s own stock, including common stock warrants, to be designated as an equity instrument, asset or a liability. Under these provisions a contract classified as an asset or a liability must be carried at fair value, with any changes in fair value recorded in the results of operations. The asset/liability derivatives are valued on an annual basis using the Monte Carlo simulation method. A contract classified as an equity instrument must be included in equity, with no fair value adjustments required. Significant assumptions used in the valuation included exercise dates, fair value for our common stock, volatility of our common stock and a risk-free interest rate. Gains or losses on warrants are included in “Changes in fair value of warrant liabilities” in our consolidated statement of operations.

(p) Revenue Recognition

Revenue from sub-licensing content within the specified license period is recognized in accordance with ASC Subtopic 926-605, En tertainment-Films – Revenue Recognition . That is, if the arrangement includes a nonrefundable minimum guarantee, all contents have been delivered in accordance with the terms of the arrangement and there are no substantive future obligations from the Company, then revenue is recognized upon delivery.

Revenue for services is recorded as services are provided. The Company generally recognizes all revenues in the period in which the service is rendered, provided that persuasive evidence of an arrangement exists, the sales price is fixed or determinable, and collection is reasonably assured. The Company records deferred revenue for payments received from customers for the performance of future services and recognize the associated revenue in the period that the services are performed.

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, the Company allocates the arrangement consideration to all deliverables at the inception of the arrangement on the basis of their relative selling price. Revenue related to each unit is recognized when the Company’s obligations under the contract have been satisfied and all revenue recognition criteria are met.

(q) Advertising & Marketing Expenses

The Company expenses advertising and marketing costs as incurred, which are included in selling expense. Advertising and marketing costs were approximately $773,000 and $359,000 for the years ended December 31, 2015 and 2014, respectively.

(r) Share-Based Payment and Equity-based Payments to Non-Employees

The Company awards share options and other equity-based instruments to its employees, directors and consultants (collectively “share-based payments”). Compensation cost related to such awards is measured based on the fair value of the instrument on the grant date. The Company recognizes the compensation cost over the period the employee is required to provide service in exchange for the award, which generally is the vesting period. The amount of cost recognized is adjusted to reflect the expected forfeiture prior to vesting. When no future services are required to be performed by the employee in exchange for an award of equity instruments, and if such award does not contain a performance or market condition, the cost of the award is expensed on the grant date. The Company recognizes compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award, provided that the cumulative amount of compensation cost recognized at any date at least equals the portion of the grant-date value of such award that is vested at that date.

The Company also awards stocks and warrants for service to consultants for service and accounts for these awards under ASC 505-50, Equity – Equity-Based Payments to Non-Employees . The fair value of the awards is assessed at measurement date and is recognized as cost or expenses when the services are provided. If the related services are completed upon issuance date, measurement date is determined to be the date the awards are issued.

(s) Income Taxes

The Company accounts for income taxes in accordance with the asset and liability method. Deferred taxes are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and income tax purposes using enacted rates expected to be in effect when such amounts are realized or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established, as needed to reduce the amount of deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits in interest expense and penalties in general and administrative expenses.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in our consolidated statements of operation.

(t) Related parties

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions.

(u) Net Loss Per Share Attributable to YOU On Demand Shareholders

Net loss per share attributable to YOU On Demand shareholders is computed in accordance with ASC 260, Earnings per Share. The two-class method is used for computing earnings per share. Under the two-class method, net income is allocated between ordinary shares and participating securities based on dividends declared (or accumulated) and participating rights in undistributed earnings as if all the earnings for the reporting period had been distributed. The Company’s convertible redeemable preferred shares are participating securities because they are entitled to receive dividends or distributions on an as converted basis. For the years presented herein, the computation of basic loss per share using the two-class method is not applicable as the Group is in a net loss position and net loss is not allocated to other participating securities, since these securities are not obligated to share the losses in accordance with the contractual terms.

Basic net loss per share is computed using the weighted average number of ordinary shares outstanding during the period. Options and warrants are not considered outstanding in computation of basic earnings per share. Diluted net loss per share is computed using the weighted average number of ordinary shares and potential ordinary shares outstanding during the period under treasury stock method. Potential ordinary shares include options and warrants to purchase ordinary shares, preferred shares and convertible promissory note, unless they were anti-dilutive. The computation of diluted net loss per share does not assume conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect (i.e. an increase in earnings per share amounts or a decrease in loss per share amounts) on net loss per share.

(v) Reportable Segment

The Company has one operating business segment, video content and media, in which the chief operating decision maker reviews the operating results of the segment to determine the allocation of resources and the measuring of performance.

(w) Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU) 2014-09, creating a new Topic 606, Revenue from Contracts with Customers, to supersede the revenue recognition under current Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those good or services. The guidance also specifies the accounting for some costs to obtain or fulfill a contract with a customer, as well as disclosure requirements for qualitative and quantitative information that should be included in financial statements. For public entities, the amendment becomes effective for annual or interim reporting periods beginning after December 15, 2017. Early adoption is not permitted. The Company is currently evaluating the impact on its consolidated financial statement of adopting this guidance.

In February 2015, the FASB issued Consolidation (Topic 810) —Amendments to the Consolidation Analysis. The amendments in Topic 810 respond to stakeholders’ concerns about the current accounting for consolidation of variable interest entities, by changing aspects of the analysis that a reporting entity must perform to determine whether it should consolidate such entities. Under the amendments, all reporting entities are within the scope of Subtopic 810-10, Consolidation—Overall, including limited partnerships and similar legal entities, unless a scope exception applies. The amendments are intended to be an improvement to current U.S. GAAP, as they simplify the codification of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R), with changes including reducing the number of consolidation models through the elimination of the indefinite deferral of Statement 167 and placing more emphasis on risk of loss when determining a controlling financial interest. The amendments are effective for public business companies for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. Earlier adoption is permitted. Management is currently evaluating the impact on our consolidated financial statements of adopting this guidance.

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-05, Customer Accounting for Fees Paid in Cloud Computing Arrangement, under ASC 350-40, Intangibles – Goodwill and Other – Internal-Use Software. This amendment provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This amendment is effective for annual and interim periods beginning after December 15, 2015, and early adoption is permitted. Management is currently evaluating the impact of this amendment on our financial position, statement of operations or cash flow.

In November 2015, the FASB issued Accounting Standard Updates (“ASU”) 2015-17 (“ASU 2015-17”), Balance Sheet Classification of Deferred Taxes. The ASU required that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. For public business entities, ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of beginning of an interim or annual reporting period. Management is currently evaluating the impact on our consolidated financial statements of adopting this guidance.