10-Q 1 form10q.htm YOU ON DEMAND HOLDINGS 10-Q 6-30-2011 form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
o
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2011

o
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: 000-19644
 
Graphics
YOU On Demand Holdings, 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.)

27 Union Square West, Suite 502
New York, New York  10003
 (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 x No o
 
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 o No o
 
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 o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 785,034,721 shares as of August 15, 2011.
 


 
 

 
 
QUARTERLY REPORT ON FORM 10-Q
OF YOU ON DEMAND HOLDINGS, INC.
FOR THE PERIOD ENDED JUNE 30, 2011

 
PART I
-
FINANCIAL INFORMATION
 
       
Item 1.
 
3
Item 2.
 
22
Item 3
 
34
Item 4.
 
34
       
PART II
-
OTHER INFORMATION
 
       
Item 1.
 
35
Item 1A.
 
35
Item 2.
 
35
Item 3.
 
35
Item 4.
 
35
Item 5.
 
35
Item 6.
 
35
36

References

Except as otherwise indicated by the context, references in this report to (i) the “Company,” “we,” “us,” and “our” are to the combined business of YOU On Demand Holdings, Inc. (formerly China Broadband, Inc.), a Nevada corporation, and its consolidated subsidiaries; (ii) “Broadband Cayman” are to our wholly-owned subsidiary China Broadband, Ltd., a Cayman Islands company; (iii) “WFOE” are to our wholly-owned subsidiary Beijing China Broadband Network Technology Co., Ltd., a PRC company; (iv) “Jinan Broadband” are to our 51% owned subsidiary Jinan Guangdian Jia He Broadband Co. Ltd, a PRC company; (v) “Shandong Media” are to our 50% joint venture Shandong Lushi Media Co., Ltd., a PRC company; (vi) “AdNet” are to our wholly-owned subsidiary Wanshi Wangjing Media Technologies (Beijing) Co., Ltd. (a/k/a AdNet Media Technologies (Beijing) Co., Ltd.), a PRC company; (vii) “Sinotop Beijing” refers to Beijing Sino Top Scope Technology Co., Ltd, a PRC company controlled by Sinotop HK through contractual arrangements; (ix) “Sinotop HK” refers to Sinotop Group Limited, a Hong Kong company wholly-owned by CB Cayman; (x) “SEC” are to the United States Securities and Exchange Commission; (xi) “Securities Act” are to Securities Act of 1933, as amended; (xii) “Exchange Act” are to the Securities Exchange Act of 1934, as amended; (xiii) “PRC” and “China” are to People’s Republic of China; (xiv) “Renminbi” and “RMB” are to the legal currency of China; (xv) “U.S. dollar,” “$” and “US$” are to United States dollars; and (xvi) “VIEs” refers to our variable interest entities, including Jinan Broadband, Shandong Publishing and Sinotop Beijing.


PART I — FINANCIAL INFORMATION
 
 
YOU ON DEMAND HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010

 
Page
Consolidated Balance Sheets
4
Unaudited Consolidated Statements of Operations
5
Unaudited Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Loss
6
Unaudited Consolidated Statements of Cash Flows
7
Notes to Unaudited Consolidated Financial Statements
8
 
YOU On Demand Holdings, Inc. and Subsidiaries
(Formerly China Broadband, Inc.)
CONSOLIDATED BALANCE SHEETS
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 12,514,069     $ 6,584,396  
Marketable equity securities, available for sale
    4,287       9,433  
Accounts receivable, net
    465,573       220,926  
Inventory
    472,800       428,280  
Licensed content, current
    150,325       -  
Prepaid expenses
    779,011       756,461  
Loan receivable from related party
    311,492       304,529  
Amounts due from shareholders
    403,333       184,086  
Other current assets
    402,923       597,362  
Total current assets
    15,503,813       9,085,473  
                 
Property and equipment, net
    4,674,510       4,607,793  
Licensed content, non-current
    526,137       -  
Intangible assets, net
    7,401,047       8,592,244  
Goodwill
    6,105,478       6,105,478  
Amount due from non-controlling interest
    1,547,031       1,512,448  
Investment in equity investment
    574,545       574,486  
Other assets
    397,816       155,290  
Total assets
  $ 36,730,377     $ 30,633,212  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
  $ 2,056,142     $ 1,620,481  
Accrued expenses and liabilities
    1,604,042       804,341  
Deferred revenue
    1,680,009       1,711,796  
Loan payable
    298,960       398,960  
Payable to Jinan Parent
    140,948       137,797  
Other current liabilities
    796,150       792,413  
Total current liabilities
    6,576,251       5,465,788  
                 
Contingent purchase consideration liability
    5,613,631       3,362,105  
Deferred tax liability and uncertain tax position liability
    993,391       1,180,323  
Total liabilities
    13,183,273       10,008,216  
                 
Commitments and Contingencies
               
Convertible reedeemable preferred stock, $.001 par value; 50,000,000 shares authorized
               
Series A - 7,000,000 shares issued and outstanding,
    1,261,995       1,261,995  
liquidation preference of $3,500,000
               
Series B - 10,266,800 shares issued and outstanding,
    3,950,358       3,950,358  
liquidation preference of $5,133,400
               
                 
Shareholders' equity
               
Common stock, $.001 par value; 1,500,000,000 shares authorized, 785,034,721 and 660,768,748 issued and outstanding
    785,035       660,769  
Additional paid-in capital
    53,371,824       42,255,089  
Accumulated deficit
    (40,245,235 )     (32,434,324 )
Accumulated other comprehensive income
    149,328       246,983  
Total YOU On Demand shareholders' equity
    14,060,952       10,728,517  
Noncontrolling interests
    4,273,799       4,684,126  
                 
Total shareholders' equity
    18,334,751       15,412,643  
                 
Total liabilities and shareholders' equity
  $ 36,730,377     $ 30,633,212  
 
See notes to consolidated financial statements.
 

YOU On Demand Holdings, Inc. and Subsidiaries
(Formerly China Broadband, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
 
    Three Months Ended       Six Months Ended  
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenue
  $ 1,894,396     $ 1,817,306     $ 3,592,320     $ 3,692,987  
Cost of revenue
    1,100,675       1,035,276       2,350,745       2,109,084  
Gross profit
    793,721       782,030       1,241,575       1,583,903  
                                 
Selling, general and adminstrative expenses
    2,283,661       616,133       4,096,349       1,339,403  
Professional fees
    549,324       381,271       867,004       550,036  
Depreciation and amortization
    1,119,327       957,314       2,193,654       1,902,758  
Impairments of long-lived assets
    321,748       1,650,000       321,748       1,650,000  
                                 
Loss from operations
    (3,480,339 )     (2,822,688 )     (6,237,180 )     (3,858,294 )
                                 
Interest & other income / (expense)
                               
Interest income
    2,189       929       5,127       2,290  
Interest expense
    (361 )     (182,313 )     (916 )     (273,548 )
Right to purchase shares
    (155,166 )     -       (155,166 )     -  
Change in fair value of warrant liabilities
    -       21,932       -       63,746  
Change in fair value of contingent consideration
    (2,290,135 )     -       (2,251,526 )     -  
Gain on sale of securities
    -       1,350       -       1,350  
Loss on equity investment
    (6,106 )     -       (12,904 )     -  
Other
    1,786       (1,298 )     1,783       476  
                                 
Net loss before income taxes and noncontrolling interest
    (5,928,132 )     (2,982,088 )     (8,650,782 )     (4,063,980 )
                                 
Income tax benefit
    111,512       246,383       186,932       260,111  
                                 
Net loss, net of tax
    (5,816,620 )     (2,735,705 )     (8,463,850 )     (3,803,869 )
                                 
Plus:  Net loss attributable to noncontrolling interests
    232,315       1,316,554       652,939       1,580,209  
                                 
Net loss attributable to YOU On Demand shareholders
  $ (5,584,305 )   $ (1,419,151 )   $ (7,810,911 )   $ (2,223,660 )
                                 
                                 
Net loss per share
                               
Basic
  $ (0.01 )   $ (0.02 )   $ (0.01 )   $ (0.03 )
Diluted
  $ (0.01 )   $ (0.02 )   $ (0.01 )   $ (0.03 )
                                 
Weighted average shares outstanding
                               
Basic
    694,997,938       65,089,760       677,999,998       64,926,485  
Diluted
    694,997,938       65,089,760       677,999,998       64,926,485  
 
See notes to consolidated financial statements.
 
 
YOU On Demand Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS
For the Periods Ended June 30, 2011 (Unaudited) and December 31, 2010
 
   
Common
Shares
   
Par
Value
   
Additional
Paid-in
Capital
   
Accumulated
Deficit
   
Accumulated
Other
Comprehensive
Income(loss)
   
YOU On
Demand
Shareholders'
(Deficit)/Equity
   
Noncontrolling
Interest
   
Total
Equity
   
Comprehensive
Loss
 
                                                       
Balance December 31, 2009
    64,761,396     $ 64,762     $ 14,901,493     $ (17,215,041 )   $ 331,283     $ (1,917,503 )   $ 5,259,427     $ 3,341,924     $ (5,428,700 )
                                                                         
Shares issued as payment for convertible note interest
    653,119       653       131,982       -       -       132,635       -       132,635          
                                                                         
Stock option compensation expense
    -       -       503,372       -       -       503,372       -       503,372          
                                                                         
Interest expense related to discount and beneficial convertible features in connection with convertible note and warrants issuance
    -       -       90,000       -       -       90,000       -       90,000          
                                                                         
Common shares issued for services
    5,100,000       5,100       249,900       -       -       255,000       -       255,000          
                                                                         
Other adjustment
    -       -       22,126       -       -       22,126       -       22,126          
                                                                         
Common shares issued for cash
    62,500,000       62,500       1,997,164       -       -       2,059,664       -       2,059,664          
                                                                         
Beneficial conversion feature of Series A and Series B preferred stock issued
    -       -       2,315,309       -       -       2,315,309       -       2,315,309          
                                                                         
Warrants issued with common stock, Series A and Series B preferred stock
    -       -       4,486,383       -       -       4,486,383       -       4,486,383          
                                                                         
Common shares and warrants issued and costs related to the conversion of convertible notes
    62,855,048       62,855       9,786,038       -       -       9,848,893       -       9,848,893          
                                                                         
Warrants issued to placement agent
    -       -       135,774       -       -       135,774       -       135,774          
                                                                         
Issuance costs related to the issuance of shares and warrants
    -       -       (632,503 )     -       -       (632,503 )     -       (632,503 )        
                                                                         
Warrant liability reclassified to equity
    -       -       150,017       -       -       150,017       -       150,017          
                                                                         
Shares issued for Sinotop Group Ltd acquisition
    90,859,389       90,859       4,452,110       -       -       4,542,969       -       4,542,969          
                                                                         
Warrants and options issued for Sinotop Group Ltd acquisition
    -       -       4,039,964       -       -       4,039,964       -       4,039,964          
                                                                         
Sinotop Beijing joint venture
    -       -       -       -       -       -       1,492,961       1,492,961          
                                                                         
Shares issued in warrant exchange
    374,039,793       374,040       (374,040 )     -       -       -       -       -          
                                                                         
Comprehensive loss:
                                                                       
Net loss
    -       -       -       (15,219,283 )     -       (15,219,283 )     (2,616,032 )     (17,835,315 )     (15,219,283 )
Foreign currency translation adjustments
    -       -       -       -       (70,489 )     (70,489 )     547,770       477,281       477,281  
                                                                         
Unrealized gain on marketable equity securities
    -       -       -       -       (13,811 )     (13,811 )     -       (13,811 )     (13,811 )
Balance December 31, 2010
    660,768,748     $ 660,769     $ 42,255,089     $ (32,434,324 )   $ 246,983     $ 10,728,517     $ 4,684,126     $ 15,412,643     $ (14,755,813 )
                                                                         
                                                                         
Common shares issued for services
    200,000       200       9,800       -       -       10,000       -       10,000          
                                                                         
Warrants issued for service
    -       -       12,408       -       -       12,408       -       12,408          
                                                                         
Stock option compensation expense
    -       -       291,326       -       -       291,326       -       291,326          
                                                                         
Right to purchase shares
    -       -       155,166       -       -       155,166       -       155,166          
                                                                         
Stock warrants issued pursuant to licensed content
    -       -       676,462       -       -       676,462       -       676,462          
                                                                         
Common shares issued for cash
    124,065,973       124,066       10,793,740       -       -       10,917,806       -       10,917,806          
                                                                         
Issuance costs related to the issuance of shares
    -       -       (822,167 )     -       -       (822,167 )     -       (822,167 )        
                                                                         
Contribution from noncontrolling interest
    -       -       -       -       -       -       151,759       151,759          
                                                                         
Comprehensive loss:
                                                                       
Net loss
    -       -       -       (7,810,911 )     -       (7,810,911 )     (652,939 )     (8,463,850 )     (7,810,911 )
Foreign currency translation adjustments
    -       -       -       -       (92,509 )     (92,509 )     90,853       (1,656 )     (1,656 )
                                                                         
Unrealized loss on marketable equity securities
    -       -       -       -       (5,146 )     (5,146 )     -       (5,146 )     (5,146 )
                                                                         
Balance June 30, 2011
    785,034,721     $ 785,035     $ 53,371,824     $ (40,245,235 )   $ 149,328     $ 14,060,952     $ 4,273,799     $ 18,334,751     $ (7,817,713 )
 
See notes to consolidated financial statements.
 
 
YOU On Demand Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOW
 
    Six Months Ended  
   
June 30,
   
June 30,
 
   
2011
   
2010
 
Cash flows from operating
           
Net loss
  $ (8,463,850 )   $ (3,803,869 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
               
Stock compensation expense
    313,734       159,193  
Interest expense related to discount and beneficial convertible features  in connection with convertible note and warrant issuance
    -       90,000  
Depreciation and amortization
    2,193,654       1,902,758  
Noncash interest expense - original issue discount
    -       50,025  
Deferred income tax
    (186,932 )     (260,111 )
Gain on sale of marketable equity securities
    -       (1,350 )
Change in fair value of warrant liabilities
    -       (63,746 )
Change in fair value of contingent consideration liability
    2,251,526       -  
Cost of right to purchase shares
    155,166       -  
Adjustment to foreign currency translation account
    -       378,332  
Impairment charge to Shandong Media intangibles
    -       900,000  
Impairment charge to Jinan Broadband equipment
    -       750,000  
Impairment charge to Sinotop equipment
    110,303       -  
Impairment charge to AdNet assets, net of cash
    208,496       -  
Change in assets and liabilities,
               
Accounts receivable
    (234,240 )     39,573  
Inventory
    (31,953 )     15,684  
Prepaid expenses and other assets
    215,284       (268,862 )
Accounts payable and accrued expenses
    1,301,622       494,733  
Deferred revenue
    2,695       (126,461 )
Other
    (2,505 )     -  
Net cash (used in) provided by operating activities
    (2,167,000 )     255,899  
                 
Cash flows from investing activities:
               
Proceeds from sale of marketable equity securities
    -       9,350  
Acquisition of property and equipment
    (1,227,392 )     (468,887 )
Loan to Sinotop Group Ltd
    -       (580,000 )
Loan advances to Shandong Media shareholders
    (210,230 )     (526,141 )
Investments in intangibles
    (296,342 )     -  
Other
    (64,566 )     -  
Net cash used in investing activities
    (1,798,530 )     (1,565,678 )
                 
Cash flows from financing activities
               
Proceeds from sale of equity securities
    10,917,806       -  
Proceeds from issuance of convertible notes payable
    -       750,000  
Costs associated with financings and share issuances
    (822,167 )     -  
Proceeds from Jinan Parent
    151,759       -  
Payments to Jinan Parent
    -       (18,454 )
Net cash provided by financing activities
    10,247,398       731,546  
                 
Effect of exchange rate changes on cash
    (352,195 )     (5,318 )
                 
Net increase (decrease) in cash and cash equivalents
    5,929,673       (583,551 )
Cash and cash equivalents at beginning of period
    6,584,396       2,190,494  
                 
Cash and cash equivalents at end of period
  $ 12,514,069     $ 1,606,943  
                 
                 
Supplemental Cash Flow Information:
               
                 
Cash paid for taxes
  $ -     $ -  
Cash paid for interest
  $ 916     $ 824  
Value assigned to warrants issued pursuant to licensed content
  $ 676,462     $ -  
Value assigned to shares as payment for interest expense
  $ -     $ 132,635  
Repayment of convertible notes payable by assignment of Sinotop Group Ltd note receivable
  $ -     $ 580,000  
 
See notes to consolidated financial statements.

 
YOU ON DEMAND HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.             Basis of Presentation

YOU On Demand Holdings, Inc., a Nevada corporation (“YOU On Demand”, “we”, “us”, or “the Company”) (formerly China Broadband, Inc.), operates, in the Chinese media segment through our Chinese subsidiaries and variable interest entities (“VIEs”) (1) a cable broadband business, Beijing China Broadband Network Technology Co. Ltd ( “Jinan Broadband”), based in the Jinan region of China through which 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 through our VIE, Jinan Broadband, (2) a print based media and television programming guide publication, Shandong Lushi Media Co., Ltd. ( “Shandong Media”) and (3) an integrated value-added service solutions business for the delivery of pay-per-view (“PPV”), video on demand (“VOD”), and enhanced premium content for cable providers, Sino Top Scope Technology Co., Ltd. (“Sinotop”),
 
The unaudited consolidated financial statements include the accounts of YOU On Demand and (a) its wholly-owned subsidiary China Broadband Cayman, ("CB Cayman"), (b) two wholly-owned subsidiaries of CB Cayman:  Beijing China Broadband Network Technology Co, Ltd. (“WFOE”) and Sinotop Group Limited (“Sinotop Hong Kong”) and (c) six entities located in the PRC: Jinan Zhong Kuan, Jinan Broadband, Shandong Media, AdNet Media Technologies (Beijing) Co. Ltd (“AdNet”), Sinotop and Zhong Hai Video Information Technology Co., Ltd (“Zhong Hai Video”) which are controlled by the Company through contractual arrangements, as if they are wholly-owned subsidiaries of the Company.  All material intercompany transactions and balances are eliminated in consolidation.

In the opinion of management, our Financial Statements reflect all adjustments, which are of a normal, recurring nature necessary for a fair statement of the results for the periods presented in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and with the instructions to Form 10-Q in Article 10 of SEC Regulation S-X.  The results of operations for the interim periods presented are not necessarily indicative of results for the full year.

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 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, 2010.

 
2.             Going Concern and Management’s Plans
 
The Company incurred significant continuing losses during 2010 and the six months ended June 30, 2011 and has relied on debt and equity financings to fund operations.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  The Company believes that the acquisition of Sinotop in 2010 and the expected 2011 launch of its PPV and VOD business will generate positive cash flows for the business.

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.  The Company's independent registered public accounting firm's report of the financial statements for the year ended December 31, 2010, contained an explanatory paragraph regarding the Company's ability to continue as a going concern.

3.             Sinotop Contingent Consideration

In connection with the acquisition of Sinotop on July 30, 2010, if specified performance milestones are achieved, Weicheng Liu (“Mr. Liu” or “the Seller”) will be entitled to earn up to (i) an additional 30,286,464 shares of common stock of the Company, (ii) three-year warrants to purchase 42,845,654 shares of the Company’s common stock, equivalent to 5.0% of the total number of shares of the Company’s common stock underlying all outstanding warrants as of immediately following the closing of the financing  and  (iii) a four-year option to purchase a number of shares of the Company’s common stock that is equal to 5% of the total number of shares of the Company’s common stock underlying all outstanding options of the Company granted to individuals employed by the Company as of September 1, 2010 (collectively, the securities referred to in clauses (i), (ii) and (iii) are referred to herein as the “Earn-Out Securities”). The milestones are as follows:  Sinotop will ensure that (i) at the end of the first earn-out year (July 1, 2012), at least 3 million homes will have access to the Company’s PPV services, (ii) at the end of the second earn-out year (July 1, 2013), at least 11 million homes will have access to the Company’s PPV services, and (iii) at the end of the third earnout year (July 1, 2014), at least 30 million homes will have access to the Company’s PPV services. Although not yet formalized by the Board of the Directors, the intent is for the Seller to receive one-third of the total earn-out each year if the annual performances are achieved.

Subsequent to the acquisition of Sinotop, the Company underwent a warrant exchange that converted the three-year warrants to be potentially earned under clause (i) above to 24,900,152 shares of common stock.  As such, the Earn-Out Securities subject to the achievement of the specified performance milestones are 55,186,616 shares of common stock and a four-year option to purchase a number of shares of the Company's common stock that is equal to 5% of the total number of shares of the Company's common stock underlying all options of the Company granted simultaneous with the adoption of the Equity Incentive Plan to individuals employed by the Company as of September 1, 2010. 
 
The amount of contingent consideration recognized as of December 31, 2010 totaled $3,362,105, representing the fair value of the estimated payment of the full earn-out.   The contingent consideration is classified as a liability because the earn-out securities do not meet the fixed-for-fixed criteria under ASC 815-40-15 for equity classification.  Further ASC 815-40-15 requires us to re-measure the contingent consideration obligation at the end of every reporting period with the change in value reported in the consolidated statements of operations and, accordingly, we reported a loss of $2,251,526 for the six months ended June 30, 2011.

 
The following is a summary of the estimated fair value of contingent consideration for the acquisition of Sinotop at December 31, 2010 and June 30, 2011.
 
Class of consideration
 
Number of Instruments
   
Warrant Exchange Adjustment (a)
   
Post Warrant Exchange Number of Instruments
   
December 31, 2010 Fair Value
   
Change in Fair Value
   
June 30, 2011 Fair Value
 
Common stock of the Company
    30,286,464       24,900,152       55,186,616     $ 1,817,187     $ 3,405,124     $ 5,222,311  
Warrants
    42,845,654       -42,845,654       -     $ 1,358,715     $ (1,358,715 )   $ -  
Stock options
    6,000,000       -       6,000,000     $ 186,203     $ 205,117     $ 391,320  
Total contingent consideration
                          $ 3,362,105     $ 2,251,526     $ 5,613,631  
 
(a)  As a result of the Company's warrant exchange, the 42,845,654 warrants were exchanged for 24,900,152 shares of common stock
 
4.             Shandong Media Joint Venture - Cooperation Agreement Additional Payment
 
In connection with the Shandong Newspaper Cooperation Agreement, based on certain financial performance thresholds we were required to make an additional payment of RMB 5,000,000 (approximately US $773,500).  In 2008, we recorded the additional payment due as an increase to our Shandong Media non-controlling interest account.  We are currently in discussions with Shandong Broadcast & TV Weekly Press and Modern Movie & TV Biweekly Press with regards to this payment.
 
5.             Subsequent Event
 
We acquired AdNet during the first half of 2009.  Due to the shift of our business model to the PPV and VOD business, as of December 31, 2009 we permanently suspended day-to-day operations of AdNet.  Subsequently, we continued to maintain the technology and assets of AdNet, which we planned to use in our PPV and VOD business.
 
Due to recent advancements in other advertising technologies, the Company determined that AdNet’s remaining assets would no longer be used to support the PPV and VOD business.  As such, on August 3, 2011, the Company provided thirty-day notice of its termination of the VIE arrangement with AdNet, which will serve to relinquish the Company’s control and any right to economic benefit, as well as release the Company of any future liability, upon effectiveness of such termination on September 2, 2011.  Accordingly, the Company recognized a loss on the impairment of AdNet’s remaining assets in the amount of $212,180 and reversed the related deferred tax liability in the amount of $36,102.  In addition, as the Company continues to control AdNet through September 2, 2011, we continued to report AdNet’s liabilities as of June 30, 2011 in accordance with ASC 810, Consolidation.  Upon the effectiveness of termination during the third quarter of 2011, the Company will deconsolidate AdNet’s liabilities and recognize an estimated gain of $469,000 in accordance with ASC Code 810-10-40 Deconsolidation of a Subsidiary.
 
6.             Variable Interest Entities
 
Financial accounting standards require the “primary beneficiary” of a VIE to include the VIE’s assets, liabilities and operating results in its consolidated financial statements.   In general, a VIE is a corporation, partnership, limited-liability company, trust or any other legal structure used to conduct activities or hold assets that either (a) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (b) has a group of equity owners that are unable to make significant decisions about its activities, or (c) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. 
 
Our consolidated VIEs were recorded at fair value on the date we became the primary beneficiary.  Our VIEs include Sinotop Beijing, Zhong Hai Video, AdNet, Jinan Broadband and Shandong Media.
 
7.             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.

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

The fair value of the liabilities at June 30, 2011 was determined using the Monte Carlo simulation method, which is based on valuation theories underlying the Black-Scholes Merton model.  Our valuation incorporates the following assumptions: risk-free interest rate of 1.1%, expected volatility of 60% based on the (High – Low) / (High + Low) method, expected life of 4 years and expected dividend yield of 0%.
 
The fair value of the liabilities at December, 31 2010 was determined using the Black-Scholes Merton model which incorporates the following assumptions: risk-free interest rate of 0.6% to 1.7%, expected volatility of 60% based on the (High – Low) / (High + Low) method, expected life of 2.0 to 4.5 years and expected dividend yield of 0%.

The following tables present the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis at June 30, 2011 and December 31, 2010:
 
   
June 30, 2011
       
   
Fair Value Measurements
(Unaudited)
       
   
Level 1
   
Level 2
   
Level 3
   
Total Fair Value
 
Assets
                       
Available-for-sale securities
 
$
4,287
   
$
-
   
$
-
   
$
4,287
 
Liabilities
                               
Contingent purchase consideration
 
$
-
   
$
-
   
$
5,613,631
   
$
   5,613,631
 
 
   
December 31, 2010
         
   
Fair Value Measurements
         
   
Level 1
   
Level 2
   
Level 3
   
Total Fair Value
 
Assets
                               
Available-for-sale securities
 
$
9,433
   
$
-
   
$
-
   
$
9,433
 
Liabilities
                               
Fair value of warrants
 
$
-
   
$
-
   
$
3,362,105
   
$
3,362,105
 


The following table summarizes the activity for financial liabilities utilizing Level 3 fair value measurements:
 
   
June 30, 2011
   
December 31, 2010
 
   
Contingent
Purchase
   
Contingent
Purchase
       
   
Consideration
   
Consideration
   
Warrants
 
   
(Unaudited)
                 
Fair value at January 1,
 
$
3,362,105
   
$
-
   
$
    819,150
 
Purchases, sales and issuances and settlements
   
-
     
2,860,978
     
-
 
Realized losses
   
-
     
-
     
(669,133)
 
Unrealized losses
   
2,251,526
     
501,127
     
-
 
Transfer to equity
   
-
     
-
     
(150,017)
 
   
$
5,613,631
   
$
3,362,105
   
$
-
 
 
8.             Related Party Transactions
 
Loan Receivable

During the six months ended June 30, 2011, our loan receivable increased approximately $6,000, due to currency fluctuations.  At June 30, 2011 and December 31, 2010, approximately $311,000 and $305,000, respectively, is due the Company from Music Magazine.  The Company advanced funds in the form of a loan to Music Magazine to fund its operations.  The loan is unsecured, interest-free and is due on December 31, 2011.  Music Magazine is an affiliate of Modern Movie & TV Biweekly Press, our partner in our Shandong Media joint venture company.

Amounts due from Shareholders

As of June 30, 2011and December 31, 2010, amounts due from shareholders include approximately $403,000 and $184,000, respectively, advanced to both Shandong Broadcast & TV Weekly Press and to Modern Movie & TV Biweekly Press.  All of the parties are our partners in our Shandong Media joint venture company.  The amount due of approximately $97,000 and $95,000 at June 30, 2011 and December 31, 2010, respectively, from Shandong Broadcast & TV Weekly Press is unsecured, interest free and has no fixed repayment terms.  The amount due of approximately $306,000 and $89,000 at June 30, 2011 and December 31, 2010, respectively, from Modern Movie & TV Biweekly Press is unsecured, interest free and is due on December 31, 2011.
 
Payable to Jinan Parent

During the six months ended June 30, 2011, our payable to Jinan Parent increased approximately $3,000, due to currency fluctuations.  At June 30, 2011 and December 31, 2010, approximately $141,000 and $138,000, respectively, remained due to Jinan Parent.  This amount represents the remaining balance due from the initial acquisition which is unsecured, interest free and has no fixed repayment terms.
 
Loan Payable to Beneficial Owner

On March 9, 2010, CB Cayman entered into a Note Purchase Agreement and a non-binding Letter of Intent (“the LOI”) with Sinotop Hong Kong.  Through a series of contractual arrangements referred to herein as “VIE Contracts”, Sinotop Hong Kong controls Sinotop Beijing.  Sinotop Beijing, a corporation established in the PRC is, in turn, a party to a joint venture with two other PRC companies to provide integrated value-added service solutions for the delivery of PPV, VOD, and enhanced premium content for cable providers.
 
Pursuant to the Note Purchase Agreement, on March 9, 2010, CB Cayman acquired a Convertible Promissory Note from Sinotop Hong Kong in consideration of CB Cayman’s US$580,000 loan to Sinotop Hong Kong.

On March 9, 2010, a significant beneficial owner of the Company’s securities, Oliveira Capital LLC, advanced $600,000 to CB Cayman in order to make the loan to Sinotop Hong Kong, as described above.

On June 24, 2010, the Company repaid $580,000 of the $600,000 loan by assigning the Company’s Convertible Promissory Note from Sinotop Hong Kong in the amount of $580,000 to Oliveira Capital.
 
On July 30, 2010, Oliveira Capital LLC agreed to (i) cancel the remaining $20,000 of the March 9, 2010 loan and (ii) assign the $580,000 note of Sinotop Hong Kong to the Company, in exchange for (x) 1,200,000 shares of Series B Preferred Stock of the Company and (y) warrants to purchase of 36,000,000 shares of the Company’s common stock.

 
Receivable from Trustee

At the time we acquired Sinotop Hong Kong, one of the bank accounts acquired was in Zhang Yan’s name, our PRC trustee in the VIE agreements.  At December 31, 2010 this account remained open with a $172,000 balance and the amount was reported in other current assets in the consolidated balance sheet at December 31, 2010.  During the first quarter of 2011, the account was settled in full.
 
9.             Property and Equipment

During 2010, the Company analyzed for impairment the equipment at its Jinan Broadband subsidiary, as the equipment was taken out of service in July 2010 due to changes in customer needs.  As of December 31, 2010, the Company determined there were no other uses for the equipment and that the equipment cannot be sold.  As such, the Company recorded a total equipment impairment charge of approximately $1,505,000 in 2010.  During 2011, the impairment from 2010 was allocated to headend facilities and machinery.
 
During the second quarter of 2011, the Company reclassified approximately $144,000 of leasehold improvements from other assets to property and equipment and has reported the December 31, 2010 balance on a comparative basis.

Property and equipment approximated the following:

   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
Furniture and office equipment
 
$
2,078,000
   
$
1,241,000
 
Headend facilities and machinery
   
15,041,000
     
15,762,000
 
Leasehold improvements
   
161,000
     
144,000
 
Vehicles
   
30,000
     
30,000
 
Total property and equipment
   
17,310,000
     
17,033,000
 
Less:  accumulated depreciation
   
(12,520,000
)
   
(11,064,000
)
Less:  impairment charge
   
 (1164,000)
     
(1,505,000)
 
Net carrying value
 
$
4,674,000
   
$
4,608,000
 
                 
Depreciation expense
 
$
1,168,000
   
$
1,620,000
 
 
10.           Goodwill and Intangible Assets
 
The Company has intangible assets relating to the acquisitions of its Jinan Broadband subsidiary, Shandong Media joint venture and Sinotop.  The Company amortizes its intangible assets that have finite lives.  The service agreement, publication rights, operating permits and charter/cooperation agreements are amortized over 20 years.  Customer relationships, non-compete agreement, and software technology are amortized over 10 years, 2.5 years and 3 years, respectively.

As discussed in Note 5, the Company determined during 2011 that AdNet’s remaining assets would no longer be used.  As such, the Company recognized an impairment loss related to AdNet’s software technology in the amount of $189,241 during the quarter ended June 30, 2011.
 
 
A roll forward of our intangible assets activity from December 31, 2010 to June 30, 2011 follows:
 
   
Balance at
December 31,
2010
   
Additions
   
Amortization
Expense
   
Impairment
Charge
   
Other
Changes
   
Balance at
June 30,
2011
(Unaudited)
 
Amortized intangible assets:
                                   
Service agreement
 
$
1,397,042
   
$
-
   
$
(43,170)
   
$
-
   
$
-
   
$
1,353,872
 
Publication rights
   
425,253
     
-
     
(12,150)
     
-
     
-
     
413,103
 
Customer relationships
   
88,359
     
-
     
(5,890)
     
-
     
-
     
82,469
 
Operating permits
   
  636,519
     
-
     
(18,186)
     
-
     
-
     
618,333
 
Software technology
   
315,403
     
-
     
(126,162)
     
(189,241)
     
-
     
-
 
Charter / Cooperation agreements
   
2,698,408
     
-
     
(68,896)
     
-
     
-
     
2,629,512
 
Non-compete agreement
   
3,031,260
     
-
-
   
(727,502)
     
-
     
-
     
2,303,758
 
                                                 
Total amortized intangible assets
 
$
8,592,244
   
$
-
   
$
(1,001,956)
   
$
(189,241)
   
$
-
   
$
7,401,047
 
                                                 
Unamortized intangible assets:
                                               
Goodwill
 
$
6,105,478
   
$
-
   
$
-
   
$
-
   
$
-
   
$
6,105,478
 

In accordance with ASC 250, we recorded amortization expense related to our intangible assets of $1,001,957 and $235,990 for the six months ended June 30, 2011 and 2010, respectively.
 
The following table outlines the amortization expense for the next five years and thereafter:
 
   
Jinan
   
Shandong
             
Years ending December 31,
 
Broadband
   
Media
   
Sinotop
   
Total
 
2011 (six months)
 
$
42,980
   
$
36,227
   
$
796,398
   
$
875,605
 
2012
   
85,961
     
72,454
     
1,592,796
     
1,751,211
 
2013
   
85,961
     
72,454
     
259,041
     
417,456
 
2014
   
85,961
     
72,454
     
137,791
     
296,206
 
2015
   
85,961
     
72,454
     
137,791
     
296,206
 
Thereafter
   
967,048
     
787,862
     
2,009,453
     
3,764,363
 
Total amortization to be recognized
 
$
1,353,872
   
$
1,113,905
   
$
4,933,270
   
$
7,401,047
 
 
11.           Accrued Expenses and Liabilities
 
Accrued expenses and liabilities consist of the following:

   
June 30,
2011
   
December 31,
 
   
(Unaudited)
   
2010
 
             
Accrued expenses and liabilities
 
$
1,343,000
   
$
720,000
 
Accrued payroll
   
261,000
     
 84,000
 
   
$
1,604,000
   
$
804,000
 
 
12.           Private Financings, July 2010
 
In connection with our July 2010, Private Financing, we entered into a Registration Rights Agreement with the investors under which we agreed to use commercially reasonable efforts to file a registration statement with the Securities and Exchange Commission, registering the shares of common stock and the shares of common stock underlying the Series A and Series B Preferred Stock and the Warrants.  The Agreement required us to file the registration statement within 45 days of the closing (by September 13, 2010) and to have it effective within 180 days (by January 26, 2011).  The registration statement which was initially filed on October 7, 2010, and amended thereafter on May 10, 2011, became effective on May 13, 2011.  The agreement did not provide for any specific penalties for non-performance and we did not record any liability for any penalties.
 
 

13.           Private Financings, June 2011

On June 3, 2011, we completed a private placement transaction with FIL Investment Management (Hong Kong) Limited (“Fidelity”), professional fiduciary for various accounts from time to time. Pursuant to a securities purchase agreement between us and Fidelity, we issued to funds managed by Fidelity and its affiliates an aggregate of 73,440,972 shares of our common stock at a per share price of $0.088, resulting in aggregate gross proceeds to the Company of $6,462,806.  Pursuant to the securities purchase agreement with Fidelity, we may not, during the six month period following the closing, without the prior written consent of Fidelity, issue any shares of our common stock, including securities that are exercisable or convertible into common stock except for (i) up to 146,881,944 shares of our common stock at a per share price equal to or greater than US$0.088, (ii) shares of our common stock upon the exercise, exchange or conversion of our securities which were outstanding prior to the closing, (iii) shares of our common stock upon the exercise, exchange or conversion of callable warrants to purchase up to 50,000,000 shares of our common stock, with a per share exercise price equal to or greater than US$0.088, and (iv) pursuant to our 2010 Equity Incentive Plan, options to purchase up to an aggregate of 33,000,000 shares of our common stock to new and existing employees in the normal course of business.

In connection with the private placement transaction with Fidelity, we entered into a registration rights agreement with Fidelity pursuant to which we are obligated to file a registration statement with the U.S. Securities and Exchange Commission within thirty days following the closing to register the shares of common stock issued to Fidelity.  The registration statement was filed on June 29, 2011 and declared effective on July 8, 2011.

On June 7, 2011, we completed a private placement transaction with a group of twenty-seven accredited investors.  Pursuant to a securities purchase agreement between us and the investors, we issued to the investors an aggregate of 50,625,000 shares of our common stock at a per share price of $0.088, resulting in aggregate gross proceeds of $4,455,000.  The offer and sale of the shares to the accredited investors was made in compliance with the securities purchase agreement with Fidelity, and following the private placement with the accredited investors we may, without the prior written consent of Fidelity, sell up to an aggregate of 96,256,944 shares of our common stock during the six month period following the closing of the private placement transaction with Fidelity at a per share price equal or greater to US$0.088.

The Company paid issuance costs of $822,167 related to the June 2011 financings.

In connection with the June 3, 2011 private placement, we granted to Fidelity a right of first refusal during the six month period following the closing to purchase up to ten percent of the number of shares of common stock offered to other investors, as permitted in the securities purchase agreement, at a per share price of $0.088 and on identical terms as set forth in the securities purchase agreement.  This right qualifies as a derivative equity instrument in accordance with ASC 815, Derivatives and Hedging.  In the event the Company offers the maximum common shares permitted in the securities purchase agreement, the fair value of the derivative would be approximately $333,000 using the Black-Scholes Merton model.  Due to the short window in which this right exists, as well as the current intentions of the Company’s management, we determined the fair value of the derivative to be insignificant.

In connection with the June 7, 2011 private placement, Fidelity had the right to purchase up to 5,625,000 shares of our common stock, or up to ten percent of the number of shares sold to the accredited investors, at a per share price of $0.088.  On June 7, 2011, we agreed with Fidelity that they will maintain the right to purchase such shares until December 3, 2011.  We valued this right at approximately $155,000 based on the Black-Scholes Merton model and recorded it as a right to purchase shares expense in connection with the placement.
 
14.           Net Loss Per Common Share
 
Basic net loss per common share is calculated by dividing the net loss by the weighted average number of outstanding common shares during the period. Diluted net loss per common share includes the weighted average dilutive effect of stock options, warrants and series preferred stocks.
 
 
Potential common shares outstanding are as follows:
 
   
3 Months Ended
   
6 Months Ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
 
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
(Unaudited)
 
                         
Warrants
    26,643,500       17,874,800       26,643,500       17,874,800  
Right to purchase
    5,625,000       -       5,625,000       -  
Options
    99,017,500       317,500       99,017,500       317,500  
Series A Preferred Stock
    70,000,000       -       70,000,000       -  
Series B Preferred Stock
    102,668,000       -       102,668,000       -  
Total
    303,954,000       18,192,300       303,954,000       18,192,300  
 
For both the three month and six month periods ended June 30, 2011 and 2010, the number of securities not included in the diluted EPS because the effect would have been anti-dilutive was 303,954,000 and 18,192,300, respectively.

15.           Comprehensive Loss
 
During the second quarter of 2010, the Company received payments in full satisfaction of the amounts due from non-controlling interests.  Subsequently, the Company made certain balance sheet reclassifications to correct an error related to the original purchase accounting for our Shandong Media Joint Venture.  The reclassification had the effect of increasing foreign currency translation by approximately $378,000.  The Company assessed the impact of this adjustment on the current period and all prior periods and determined that the effect of this adjustment was not material to the full year 2008 or 2009, and that reclassification did not result in a material misstatement to any previously issued annual or quarterly financial statements.
 
Comprehensive loss for the periods ended June 30, 2011 and 2010 are as follows:
 
   
3 Months Ended
 
6 Months Ended
 
   
June 30,
 
June 30,
 
   
2011
   
2010
 
2011
 
2010
 
   
(Unaudited)
   
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
Net loss attributable to shareholders
  $ (5,854,305 )   $ (1,419,151 )   $ (7,810,911 )   $ (2,223,660 )
Other comprehensive income (loss):
                               
Currency translation adjustment
    (35,974 )     390,732       (1,656 )     410,349  
Unrealized (loss) gain on marketable equity securities
    (2,916 )     (67,937 )     (5,146 )     8,631  
Comprehensive loss
  $ (5,623,195 )   $ (1,096,356 )   $ (7,817,713 )   $ (1,804,680 )

16.           Interest Expense and Share Issuance

In connection with the Convertible Notes issued in 2008 and 2009, there was no interest expense incurred for the six months ended June 30, 2011 because the note holders converted 100% of the outstanding principal and interest owing on such notes into shares of common stock and warrants in connection with the closing of the financings on July 30, 2010 and pursuant to a Waiver and Agreement to Convert, dated May 20, 2010.  The Company incurred $183,000 of interest expense related to the notes in the six months ended June 30, 2010.  Also, as set forth in the related documents and with the consent of the note holders, we issued 653,119 shares to the note holders as payment for convertible note interest of approximately $133,000 for the six months ended June 30, 2010 (none in 2011).
 
17.           Warner Bros. License Agreement

On June 15, 2011, the Company, through its Chinese joint ventures Hua Cheng Hu Dong (Beijing) Film and Television Communication Co., Ltd. (“Hua Cheng”) and Zhong Hai Shi Xun Information Technology Co., Ltd. entered into a Transactional Video on Demand and Pay-Per-View License Agreement (the “WB Agreement”) with CAV Warner Home Entertainment Co., Ltd. (“CAVW”), Warner Bros. Home Entertainment Group’s joint venture in China.  Pursuant to the WB Agreement, Hua Cheng was granted a license under copyright for a total term of fifty-four months beginning on July 1, 2011. The contract is subject to annual minimum payments. 
 
 
In connection with the WB Agreement, the Company issued 15,000,000 warrants to Warner Bros. Entertainment Inc. exercisable at a price per share of $0.088 for a term of five years beginning on May 12, 2011. These warrants are subject to a right of redemption exerciseable by the Company in the event the closing price of the Company's common stock shall equal or exceed $0.176 per share for twenty consecutive trading days.  In accordance with ASC 505-50, Equity-based Payments to Non-employees, the fair value of equity instruments issued in the acquisition of goods or services should be recognized in the same manner as if an enterprise had paid cash.  As such, the Company estimated the fair value of the warrants granted using the Black-Scholes Merton model at $676,462 and capitalized the amount as licensed content.  Further, we classified the portion of total licensed content that we expect to amortize over the next twelve months in the amount of $150,325 as current licensed content with the remaining portion classified as non-current licensed content in the amount of $526,137.  The Company will begin amortizing this asset during the third quarter of 2011 and expects to recognize total amortization expense of approximately $75,000 during 2011.
 
18.           Share-Based Payments