10-Q 1 form10q.htm YOU ON DEMAND HOLDINGS, INC 10-Q 9-30-2012 form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

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
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 x 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: 11,827,827 shares as of November 14, 2012.
 


 
 

 
 
QUARTERLY REPORT ON FORM 10-Q
OF YOU ON DEMAND HOLDINGS, INC.
FOR THE PERIOD ENDED SEPTEMBER 30, 2012

 
PART I
-
FINANCIAL INFORMATION
 
       
Item 1.
 
3
Item 2.
 
22
Item 3
 
32
Item 4.
 
32
       
PART II 
-
OTHER INFORMATION
 
       
Item 1.
 
34
Item 1A.
 
34
Item 2.
 
34
Item 3.
 
34
Item 4.
 
34
Item 5.
 
34
Item 6.
 
34
35

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.), a Nevada corporation, and its consolidated subsidiaries; (ii) “CB 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) “Jinan Zhong Kuan” are to Jinan Zhong Kuan Information Technology Co. Ltd., a PRC company controlled by CB Cayman through a trust agreement with shareholder(s); (vi) “AdNet” are to our previously controlled subsidiary Wanshi Wangjing Media Technologies (Beijing) Co., Ltd. (a/k/a AdNet Media Technologies (Beijing) Co., Ltd.), a PRC company; (vii) “Sinotop Hong Kong” are to Sinotop Group Limited, a Hong Kong company wholly-owned by CB Cayman; (viii) “YOD WFOE” are to YOU On Demand (Beijing) Technology Co., Ltd., a PRC company wholly-owned by Sinotop Hong Kong; (ix) “Sinotop Beijing” or “Sinotop” are to Beijing Sino Top Scope Technology Co., Ltd, a PRC company controlled by Sinotop Hong Kong through contractual arrangements; (x) “Zhong Hai Video” are to Zhong Hai Shi Xun Information Technology Co., Ltd., a PRC company 80% owned by Sinotop Beijing; (xi) “Hua Cheng” are to Hua Cheng Hu Dong (Beijing) Film and Television Communication Co., Ltd., a PRC company 39% owned by Sinotop Beijing; (xii) “Shandong Media” are to our previously 50% joint venture Shandong Lushi Media Co., Ltd., a PRC company, effective July 1,2012, Shandong Media our 30% owned company by Jinan Zhong Kuan);  (xiii) “SEC” are to the United States Securities and Exchange Commission; (xiv) “Securities Act” are to Securities Act of 1933, as amended; (xv) “Exchange Act” are to the Securities Exchange Act of 1934, as amended; (xvi) “PRC” and “China” are to People’s Republic of China; (xvii) “Renminbi” and “RMB” are to the legal currency of China; (xviii) “U.S. dollar,” “$” and “US$” are to United States dollars; and (xix) “VIEs” refers to our variable interest entities, including Jinan Broadband and Sinotop Beijing.
 
 
PART I — FINANCIAL INFORMATION
 
 
YOU ON DEMAND HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2012

 
Page
Consolidated Balance Sheets
4
Unaudited Consolidated Statements of Operations
5
Unaudited Consolidated Statements of Comprehensive Loss
6
Unaudited Consolidated Statement of Equity
7
Unaudited Consolidated Statements of Cash Flows
8
Notes to Unaudited Consolidated Financial Statements
9

 
YOU On Demand Holdings, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
 
   
September 30,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 4,830,031     $ 7,519,574  
Marketable equity securities, available for sale
    3,430       2,229  
Accounts receivable, net
    380       399,791  
Inventories
    414,086       413,562  
Licensed content, current
    1,004,962       150,325  
Prepaid expenses
    85,440       438,712  
Loan receivable from related party
    -       316,660  
Amounts due from shareholders
    -       414,743  
Amount due from non-controlling interest
    -       1,572,699  
Other current assets
    221,067       340,175  
Total current assets
    6,559,396       11,568,470  
                 
Property and equipment, net
    3,063,039       5,099,050  
Licensed content, noncurrent
    338,232       450,975  
Intangible assets, net
    5,267,038       7,149,748  
Goodwill
    6,105,478       6,105,478  
Investment in unconsolidated entities
    637,903       582,652  
Other assets
    54,092       101,031  
Total assets
  $ 22,025,178     $ 31,057,404  
                 
LIABILITIES AND EQUITY
               
Current liabilities:
               
Accounts payable
  $ 1,720,813     $ 3,298,041  
Accrued expenses and liabilities
    1,046,080       862,473  
Deferred revenue
    1,943,557       1,856,674  
Deferred license fees, current
    539,402       -  
Payable to Jinan Parent
    144,012       143,286  
Other current liabilities
    55,016       543,163  
Contingent purchase price consideration liability, current
    988,174       1,091,571  
Convertible promissory note
    3,000,000       -  
Warrant liabilities
    2,161,990       -  
Total current liabilities
    11,599,044       7,795,208  
                 
Other long-term payable
    17,071       76,670  
Contingent purchase price consideration liability, net of current
    988,174       2,267,518  
Deferred tax and uncertain tax position liabilities
    376,690       810,616  
Total liabilities
    12,980,979       10,950,012  
                 
Commitments and Contingencies
               
Convertible reedeemable preferred stock, $.001 par value; 50,000,000 shares authorized
               
Series A - 7,000,000 shares issued and outstanding, liquidation preference of $3,500,000 at September 30, 2012 and December 31, 2011
    1,261,995       1,261,995  
Series B - 7,866,800 and 10,266,825 shares issued and outstanding, liquidation preference of $3,933,400 and $5,133,400 at September 30, 2012 and December 31, 2011, respectively
    3,223,575       3,950,358  
Series C - 250,000 and 0 shares issued and outstanding, liquidation preference of $1,000,000 and $0 at September 30, 2012 and December 31, 2011, respectively
    285,536       -  
                 
Equity:
               
Common stock, $.001 par value; 1,500,000,000 shares authorized, 11,804,748 and 10,467,400 issued and outstanding at September 30, 2012 and December 31, 2011, respectively
    11,804       10,467  
Additional paid-in capital
    59,055,205       54,505,825  
Accumulated deficit
    (55,694,069 )     (43,704,225 )
Accumulated other comprehensive income
    412,605       468,471  
Total YOU On Demand equity
    3,785,545       11,280,538  
Noncontrolling interests
    487,548       3,614,501  
                 
Total equity
    4,273,093       14,895,039  
                 
Total liabilities and equity
  $ 22,025,178     $ 31,057,404  
 
See notes to consolidated financial statements.
 
 
YOU On Demand Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
                         
Revenue
  $ 1,193,599     $ 1,980,878     $ 5,514,583     $ 5,573,198  
Cost of revenue
    1,547,762       1,440,666       5,266,933       3,791,411  
Gross (loss) profit
    (354,163 )     540,212       247,650       1,781,787  
                                 
Operating expense:
                               
Selling, general and administrative expenses
    2,459,708       2,214,997       7,788,731       6,311,346  
Professional fees
    139,337       790,891       1,080,129       1,657,895  
Depreciation and amortization
    1,246,974       1,087,002       3,726,701       3,280,656  
Impairment of long-lived assets
    420,000       19,023       420,000       340,771  
Total operating expense
    4,266,019       4,111,913       13,015,561       11,590,668  
                                 
Loss from operations
    (4,620,182 )     (3,571,701 )     (12,767,911 )     (9,808,881 )
                                 
Interest & other income / (expense)
                               
Interest income
    2,742       2,168       7,132       7,295  
Interest expense
    (28,000 )     (325 )     (48,512 )     (1,241 )
Stock purchase right
    -       -       (43,748 )     (155,166 )
Change in fair value of warrant liabilities
    (636,308 )     -       (636,308 )     -  
Change in fair value of contingent consideration
    537,784       3,189,048       74,351       937,522  
Gain (loss) on investment in unconsolidated entities
    64,797       5,604       52,291       (7,300 )
Loss on write-off of uncollectible loans
    -       -       (473,698 )     -  
Gain on deconsolidation of Shandong Media
    141,814       -       141,814       -  
Gain on disposal of AdNet
    -       470,041       -       470,041  
Other
    (1,473 )     (43,736 )     (60,035 )     (41,954 )
                                 
(Loss) income before income taxes and noncontrolling interest
    (4,538,826 )     51,099       (13,754,624 )     (8,599,684 )
                                 
Income tax benefit
    101,399       74,631       282,244       261,563  
                                 
Net (loss) income
    (4,437,427 )     125,730       (13,472,380 )     (8,338,121 )
                                 
Plus:  Net loss attributable to noncontrolling interests
    389,274       418,060       1,482,536       1,071,000  
                                 
Net (loss) income attributable to YOU On Demand shareholders
  $ (4,048,153 )   $ 543,790     $ (11,989,844 )   $ (7,267,121 )
                                 
Net loss per share attributable to YOU On Demand shareholders
                               
Basic
  $ (0.36 )   $ -     $ (1.11 )   $ (0.01 )
Diluted
  $ (0.36 )   $ -     $ (1.11 )   $ (0.01 )
                                 
Weighted average shares outstanding
                               
Basic
    11,293,895       10,467,130       10,765,931       9,555,941  
Diluted
    11,293,895       10,780,941       10,765,931       9,555,941  
 
See notes to consolidated financial statements.
 
 
YOU On Demand Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Net (loss) income
  $ (4,437,427 )   $ 125,730     $ (13,472,380 )   $ (8,338,121 )
Other comprehensive (loss) income:
                               
Foreign currency translation adjustments
    (112,719 )     35,800       (57,067 )     34,145  
Unrealized losses (gains) on available for sale securities
    1,029       (2,573 )     1,201       (7,719 )
Less:  Comprehensive loss attributable to non-controlling interest
    463,908       418,060       1,534,792       1,071,000  
Comprehensive (loss) gain attributable to YOU On Demand shareholders
  $ (4,085,209 )   $ 577,017     $ (11,993,454 )   $ (7,240,695 )
 
See notes to consolidated financial statements.
 
 
YOU On Demand Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF EQUITY
For the Nine Months Ended September 30, 2012 (unaudited)

                           
Accumulated
   
YOU On
             
               
Additional
         
Other
   
Demand
             
   
Common
   
Par
   
Paid-in
   
Accumulated
   
Comprehensive
   
Shareholders'
   
Noncontrolling
   
Total
 
   
Shares
   
Value
   
Capital
   
Deficit
   
Income(loss)
   
(Deficit)/Equity
   
Interest
   
Equity
 
                                                 
Balance December 31, 2011
    10,467,400     $ 10,467     $ 54,505,825     $ (43,704,225 )   $ 468,471     $ 11,280,538     $ 3,614,501     $ 14,895,039  
                                                                 
Warrants issued for service
    -       -       36,023       -       -       36,023       -       36,023  
                                                                 
Common shares issued for service
    43,971       44       178,388       -       -       178,432       -       178,432  
                                                                 
Stock option compensation expense
    -       -       602,466       -       -       602,466       -       602,466  
                                                                 
Stock purchase right
    -       -       43,748       -       -       43,748       -       43,748  
                                                                 
Conversion of Series B preferred shares into common
    320,000       320       726,463       -       -       726,783       -       726,783  
                                                                 
Common shares and options issued for Sinotop acquisition earnout
    245,274       245       1,308,145       -       -       1,308,390       -       1,308,390  
                                                                 
Common shares and warrants issued for cash in connection with August 2012 private placement
    646,250       646       2,287,894       -       -       2,288,540       -       2,288,540  
                                                                 
Issuance costs in connection with August 2012 private placement
    80,813       81       (633,746 )     -       -       (633,665 )     -       (633,665 )
                                                                 
Deconsolidation of Shandong Media
    -       -       -       -       -       -       (497,383 )     (497,383 )
                                                                 
Reduction of registered capital for Zhong Hai Video
    -       -       -       -       -       -       (1,094,778 )     (1,094,778 )
                                                                 
Exercise of options
    324       -       -       -       -       -       -       -  
                                                                 
Share adjustment for round lot holders in connection with 75-for-1 reverse split
    716       1       (1 )     -       -       -       -       -  
                                                                 
Net loss
    -       -       -     $ (11,989,844 )     -       (11,989,844 )     (1,482,536 )     (13,472,380 )
                                                                 
Foreign currency translation adjustments
    -       -       -       -       (57,067 )     (57,067 )     (52,256 )     (109,323 )
                                                                 
Unrealized losses on marketable securities
    -       -       -       -       1,201       1,201       -       1,201  
                                                                 
Balance, September 30, 2012
    11,804,748     $ 11,804     $ 59,055,205     $ (55,694,069 )   $ 412,605     $ 3,785,545     $ 487,548     $ 4,273,093  
 
See notes to consolidated financial statements.
 
 
YOU On Demand Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
 
   
(unaudited)
   
(unaudited)
 
Cash flows from operating
           
Net loss
  $ (13,472,380 )   $ (8,338,121 )
Adjustments to reconcile net loss to net cash used in operating activities
               
Stock compensation expense
    816,921       464,109  
Depreciation and amortization
    3,726,701       3,280,656  
Amortization of licensed content
    112,743       -  
Deferred income tax
    (282,244 )     (261,563 )
Gain on investment in unconsolidated entities
    (52,291 )     -  
Provision for bad debt expense
    163,076       48,445  
Change in fair value of warrant liabilities
    636,308       -  
Change in fair value of contingent purchase price consideration liability
    (74,351 )     (937,522 )
Value of right to purchase shares
    43,748       155,166  
Loss on uncollectible shareholder loan and related party loan
    473,698       -  
Gain on deconsolidation of Shandong Media, net of cash
    (334,589 )     -  
Impairment charge for Jinan Broadband equipment
    420,000       -  
Impairment charge for Sinotop equipment
    -       130,566  
Impairment charge to AdNet assets, net of cash
    -       209,497  
Gain on deconsolidation of AdNet
    -       (470,041 )
Change in assets and liabilities,
               
Accounts receivable
    (182,094 )     (246,148 )
Inventory
    2,024       (4,428 )
Prepaid expenses and other assets
    135,242       601,755  
Licensed content
    (855,786 )     37,581  
Accounts payable
    (434,828 )     1,755,087  
Accrued expenses and liabilities
    231,579       378,931  
Deferred revenue
    176,818       78,041  
Deferred license fee
    462,966       -  
Other current liabilities
    16,031       -  
Other
    12,054       (5,075 )
Net cash used in operating activities
    (8,258,654 )     (3,123,064 )
                 
Cash flows from investing activities:
               
Acquisition of property and equipment
    (789,967 )     (2,395,875 )
Investments in intangibles
    (111,914 )     (428,313 )
Leasehold improvements
    (10,754 )     -  
Loan advances to Shandong Media shareholders
    (32,771 )     (214,570 )
Loan repayments from Shandong Media shareholders
    29,663       -  
Loan to related party
    -       (3,350 )
Other
    -       (77,199 )
Net cash used in investing activities
    (915,743 )     (3,119,307 )
Cash flows from financing activities
               
Proceeds from sale of equity securities
    3,585,000       10,917,806  
Proceeds from issuance of convertible note
    3,000,000       -  
Costs associated with financings and share issuances
    (118,906 )     (822,167 )
Capital contribution from Jinan Parent
    -       151,759  
Net cash provided by financing activities
    6,466,094       10,247,398  
                 
Effect of exchange rate changes on cash
    18,760       (463,134 )
                 
Net (decrease) increase in cash and cash equivalents
    (2,689,543 )     3,541,893  
Cash and cash equivalents at beginning of period
    7,519,574       6,584,396  
                 
Cash and cash equivalents at end of period
  $ 4,830,031     $ 10,126,289  
                 
Supplemental Cash Flow Information:
               
                 
Cash paid for taxes
  $ -     $ -  
Cash paid for interest
  $ 48,512     $ 1,241  
Software contributed in lieu of issued capital included in intangibles
  $ 398,183     $ -  
Value of shares and warrants issued in connection with private financing
  $ 514,840     $ -  
Value of shares and options issued for Sinotop contingent consideration earnout   $ 1,308,391     $ -  
Value of common stock issued from conversion of Preferred Series B shares   $ 726,783     $ -  
Value of warrants issued for licensed content
  $ -     $ 676,462  
 
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) 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, Beijing Sino Top Scope Technology Co., Ltd. (“Sinotop Beijing” or “Sinotop”) , (2) a cable broadband business, Jinan Guangdian Jia He Broadband 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 and (3) a print based media and television programming guide publication, Shandong Lushi Media Co., Ltd. (“Shandong Media”).  Effective July 1, 2012, the Company deconsolidated Shandong Media as discussed below in Note 5.

The unaudited consolidated financial statements include the accounts of YOU On Demand and (a) its wholly-owned subsidiary China Broadband, Ltd., ("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, Sinotop, Zhong Hai Shi Xun Information Technology Co., Ltd. (“Zhong Hai Video”), and YOU On Demand (Beijing) Technology Co., Ltd. (“YOD WFOE”), which are controlled by the Company through contractual arrangements, as if they are majority owned subsidiaries of the Company. As of July 1, 2012, Shandong Media was deconsolidated since it was no longer a VIE of the Company (see Note 5).  During the third quarter 2011, AdNet was also deconsolidated as a result of the Company’s termination of control. All material intercompany transactions and balances are eliminated in consolidation.

The Company’s Board of Directors authorized a 75:1 reverse stock split on February 9, 2012, which took effect on February 9, 2012. All share and related option information presented in these unaudited consolidated financial statements and related notes has been retroactively adjusted to reflect the reduced number of shares resulting from this reverse stock split.

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, 2011 filed with the Securities and Exchange Commission on March 30, 2012.
 
2.
Going Concern and Management’s Plans

For the nine months ended September 30, 2012, we had a net loss of approximately $11,990,000 and we used cash for operations of approximately $8,259,000. We had a working capital deficit at September 30, 2012 of approximately $5,040,000. The Company will continue to rely on debt and equity to pay for ongoing operating expenses.  We have the ability to raise funds by various methods including utilization of our $50 million shelf registration as well as other means of financing.  On May 10, 2012, the Company’s Chairman and Chief Executive Officer, Mr. Shane McMahon made a loan to the Company in the amount of $3,000,000. In consideration for the loan, the Company issued a convertible note to Mr. McMahon in $3,000,000 principal amount. The note has an annual interest rate of 4% and matures on the earlier of (i) the date on which the Company closes the next financing of equity or equity-linked securities of the Company in which at least $5,000,000 in gross proceeds is raised, and (ii) May 10, 2013. The note is convertible at any time into shares of the Company’s common stock at a conversion price of $10.00 per share; provided, however, that if the Company raises capital at any time prior to the maturity of the note, the note may be converted into the securities received by the investors in the most recent capital raise (as of the date of conversion) at a price not less than $4.75, which represents the closing bid price of the Company’s common stock on the trading day immediately prior to the date of the Note.
 
 
The Company has incurred significant recurring losses from operations 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. We anticipate that we will need to raise additional funds to fully implement our business model and related strategies.

See Note 17, subsequent events, regarding additional financing subsequent to September 30, 2012.

The unaudited 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, 2011, 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 Hong Kong 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 403,820 shares of common stock of the Company, (ii) three-year warrants to purchase 571,275 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 July 2010 financing and (iii) a four-year option to purchase 80,000 shares of the Company’s common stock which was 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 Hong Kong 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 earn-out year (July 1, 2014), at least 30 million homes will have access to the Company’s PPV services.

Subsequent to the acquisition of Sinotop, the Company underwent a warrant exchange that converted the three-year warrants to be potentially earned under clause (ii) above to 332,002 shares of common stock. As such, the Earn-Out Securities subject to the achievement of the specified performance milestones were 735,822 shares of common stock and a four-year option to purchase 80,000 shares of common stock.
 
The Company recorded a contingent consideration obligation related to the Earn-Out Securities at the time of acquisition which totaled $2,750,966, 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 gains of $537,784 and 74,351, for the three and nine months ended September 30, 2012, respectively.
 

At the end of the first earn-out year (July 1, 2012), the first milestone was achieved with over 3 million homes having access to our PPV services. As such, we issued 245,274 shares of our common stock and 26,667 options to Mr. Liu.

The following is a summary of the earned purchase price consideration and the estimated fair value of the contingent consideration obligation for the acquisition of Sinotop Hong Kong at September 30, 2012 and December 31, 2011.

   
December 31,
               
September 30,
 
   
2011
   
Earned
   
Change in
   
2012
 
Class of consideration
 
Fair Value
   
Fair Value
   
Fair Value
   
Fair Value
 
Common shares
  $ 3,147,109     $ (1,226,369 )   $ (56,659 )   $ 1,864,081  
Stock options
    211,980       (82,021 )     (17,692 )     112,267  
Total earned and contingent consideration
  $ 3,359,089     $ (1,308,390 )   $ (74,351 )   $ 1,976,348  
 
The following table represents the estimated fair value of the current and the noncurrent portion of the consideration liability for the acquisition of Sinotop Hong Kong at September 30, 2012.

   
As of September 30, 2012
 
   
Number of
   
Current
   
Noncurrent
   
Total
 
   
Instruments
   
Liability
   
Liability
   
Liability
 
Shares July 2013
    245,274     $ 932,041     $ -     $ 932,041  
Shares July 2014
    245,274       -       932,041       932,041  
Total Common Shares
    490,548     $ 932,041     $ 932,041     $ 1,864,082  
                                 
Options July 2013
    26,667     $ 56,133     $ -     $ 56,133  
Options July 2014
    26,666       -       56,133       56,133  
Total Options
    53,333     $ 56,133     $ 56,133     $ 112,266  
                                 
Total Shares and Options
    543,881     $ 988,174     $ 988,174     $ 1,976,348  
 
4. 
Deconsolidation of AdNet

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 a thirty-day notice of its termination of the VIE arrangement with AdNet, which served 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, as of June 30, 2011, the Company recognized a loss on the impairment of AdNet’s remaining assets in the amount of $212,180. Upon the effectiveness of termination during the third quarter of 2011, the Company deconsolidated AdNet’s liabilities and recognized a gain of $470,041 in accordance with ASC 810-10-40, Deconsolidation of a Subsidiary.
 
 
5. 
Deconsolidation of Shandong Media Joint Venture
 
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 $791,900) to Shandong Media.  In January 2012, the Company, through Jinan Zhong Kuan, signed a Memorandum of Understanding (“MOU”) with Shandong Broadcast and Modern Movie, our partners in our Shandong Media joint venture company, whereby upon execution of a formal agreement, the Company was relieved of its obligation to make the additional payment of RMB 5,000,000 (approximately US $791,900) described above in exchange for payment of RMB 1,000,000 (approximately US$158,300) to Shandong Media and the transfer of 20% of the Company’s 50% ownership interest in Shandong Media to Shandong Broadcast and Modern Movie. In April 2012, Jinan Zhong Kuan made payment of RMB 1,000,000 to Shandong Broadcast in connection with the signed MOU.

Shandong Media has received notice of approval by the PRC State Administration for Industry & Commerce (“AIC”) to effect the changes made in the Articles of Association (“AOA”) and complete the transaction. The equity transfer ownership is effective as of July 1, 2012 and we have deconsolidated Shandong Media and recorded our 30% ownership under the equity method of accounting in accordance with ASC 810-10-40, Deconsolidation of a Subsidiary.  We valued the 30% investment in Shandong Media at fair value based on historical and forecasted performance utilizing discounted cash flow methodology.  Due to current performance and risks associated with future cash flow we valued Shandong Media at $0.00 as of the date of deconsolidation.  As part of the deconsolidation we have removed the net assets associated with Shandong and recognized a gain of $141,814 on such deconsolidation.

Also in accordance with ASC 810-10-40, Deconsolidation of a Subsidiary, we will maintain a balance for our 30% investment in Shandong Median not to go below $0.00.  Based on our valuation for our 30% ownership and the net loss from Q3 our balance is currently negative and as such is recorded as a $0.00 balance on our financial statements.
 
6.
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 stock is valued at closing price reported on the active market on which the individual securities are traded.
 

The fair value of the warrant liabilities at September 30, 2012 was valued using the Black-Scholes Merton model which incorporated the following assumptions: risk-free rate of interest .66%, expected volatility of 75%, expected life of 4 years and expected dividend yield of 0%.

The fair value of the option portion of our contingent purchase consideration liabilities at September 30, 2012 was valued using the Black-Scholes Merton model and at December 31, 2011 it was valued using the Monte Carlo simulation method, which is based on valuation theories underlying the Black-Scholes Merton model. Estimated probabilities related to achieving the earn-out milestones were incorporated into our December 31, 2011 valuation. In addition, our valuation incorporates the following assumptions:

   
September 30,
   
December 31,
 
   
2012
   
2011
 
   
(Black-Scholes)
   
(Monte Carlo)
 
Risk-free interest rate
    0.337 %     0.410 %
Expected volatility
    75 %     75 %
Expected life
 
4 years
   
4 years
 
Expected dividend yield
    0 %     0 %

The following tables present the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis at September 30, 2012 and December 31, 2011:
 
   
September 30, 2012
       
   
Fair Value Measurements
       
   
Level 1
   
Level 2
   
Level 3
   
Total Fair Value
 
Assets
                       
Available-for-sale securities
  $ 3,430     $ -     $ -     $ 3,430  
Property and equipment, net (Jinan)     -       427,801       -       427,801  
Investment in unconsolidated etities (Shandong Media)     -       -       -       -  
Liabilities
                               
Warrant liabilities
  $ -     $ -     $ 2,161,990     $ 2,161,990  
Contingent purchase price consideration, current (see Note 3)
    -       -       988,174       988,174  
Contingent purchase price consideration, noncurrent (see Note 3)
    -       -       988,174       988,174  
 
Long lived assets in our Jinan subsidiary held and used with a carrying amount of $2,352,809 were written down to their fair value of $427,801 resulting in an impairment charge of $1,925,008 of which $420,000 was included in earnings for the year.

In accordance with our deconsolidation of Shandong Media we recorded the fair value of our 30% equity investment.  Utilizing forecasts based on recent historical performance we computed a discounted cash flow valuation of $0.00. 
 
7. 
Related Party Transactions

Jinan Broadband

Payable to Jinan Parent

As of September 30, 2012, our payable to Jinan Guangdian Jiahe Digital Television Co., Ltd. (“Jinan Parent”) increased approximately $1,000, due to currency fluctuations. At September 30, 2012 and December 31, 2011, approximately $144,000 and $143,000, 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.

Revenue

During the three and nine months ended September 30, 2012, Jinan Broadband generated $0 and $124,000, respectively, and during the three and nine months ended September 30, 2011, generated $120,000 and $190,000, respectively, of value-added service revenue from an affiliate, Jinan Radio and Television Networks Center (“Networks Center”). Networks Center is the owner of Jinan Parent who has a 49% ownership interest in Jinan Broadband.
 

Cost of Revenue

During the three and nine months ended September 30, 2012, Jinan Broadband incurred service fees to Networks Center of approximately $12,000 and $35,000, respectively, and during the three and nine months ended September 30, 2011, incurred service fees of approximately $12,000 and $37,000, respectively. To minimize administrative fees and maintain a low headcount at Jinan Broadband, Networks Center collects customer payments on behalf of Jinan Broadband and then remits the funds to Jinan Broadband. Networks Center charges Jinan Broadband a 2% service fee on the payments collected.

General and Administrative Expense

During the three and nine months ended September 30, 2012, Jinan Broadband paid sales agency fees of approximately $12,000 and $48,000, respectively, and during the three and nine months ended September 30, 2011, paid sales agency fees of approximately $7,000 and $28,000, respectively, to Networks Center for revenue collection on behalf of Jinan Broadband and network maintenance.

Accounts Payable

As of September 30, 2012 and December 31, 2011, Jinan Broadband had accounts payable to Networks Center of approximately $269,000 and $268,000, respectively, relating to maintenance, network leasing and facility rental fees. Jinan Broadband’s operation is located in a building that is owned by Networks Center. As such, Jinan Broadband shares the cable network usage with Networks Center. Additionally, Jinan Broadband utilizes Networks Center’s staff to provide cable network maintenance support to their customers. As such, Network Center charges Jinan Broadband fees for these services and usage of their facility.

Accrued Expense

Jinan Broadband had accrued network leasing fees to Networks Center of approximately $47,000 as of December 31, 2011 (none in 2012).

Sinotop

Amount due from Non-controlling Interest
 
Subsequent to our acquisition of Sinotop Hong Kong in July 2010, Sinotop and Hua Cheng entered into a variable interest entity agreement to form and operate Zhong Hai Video with equity ownership interests of 80% and 20%, respectively, on total registered capital of RMB 50 million.  Sinotop contributed RMB 10 million and had a commitment to fund the remaining RMB 30 million. At December 31, 2011, Hua Cheng had not made its capital contribution of RMB 10 million.  Accordingly, we recorded an amount due from non-controlling interest in the amount of $1,572,699.

During the third quarter of 2012, we reduced the total registered capital from RMB 50 million (USD 7,903,000) to RMB 12.5 million (USD 1,871,000).  As of September 30, 2012, Sinotop contributed RMB 10 million (USD 1,473,000) in cash and Hua Cheng contributed a software management system valued at RMB 2,519,700 (USD 398,000).   As such, at September 30, 2012 there is no amount due from our non-controlling interest.

8. 
Property and Equipment

During the third quarter in 2012, we reviewed the equipment assets at our Jinan Broadband subsidiary and determined that an additional impairment should be recorded based on the estimated realizable values.  We initally reserved a portion of these assets in 2010.  In the current quarter we recorded an additional estimated impairment of $420,000 which represents approximately 50% of the remaining equipment asset balance net of depreciation at July 1, 2012. The assets being impaired are considered to have no salvageable value.
 
 
9. 
Goodwill and Intangible Assets

The Company has intangible assets primarily relating to the acquisitions of Jinan Broadband and Sinotop Hong Kong. The Company amortizes its intangible assets that have finite lives. As discussed in Note 4, 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. For Jinan Broadband, we reclassified $159,132 from fixed assets to software and licenses during the quarter ended June 30, 2012.

A roll forward of our intangible assets activity for the nine months ended September 30, 2012 is as follows:

   
Balance at
               
Deconsolidation
   
Foreign
   
Balance at
 
   
December 31,
         
Amortization
   
of Shandong
   
Currency
   
September 30,
 
   
2011
   
Additions
   
Expense
   
Media
   
Transl Adj
   
2012
 
                                 
(unaudited)
 
Amortized intangible assets:
                                   
Service agreement
  $ 1,310,892     $ -     $ (64,470 )   $ -     $ -     $ 1,246,422  
Publication rights
    400,953       -       (12,150 )     (388,803 )     -       -  
Customer relationships
    76,579       -       (5,890 )     (70,689 )     -       -  
Operating permits
    600,147       -       (18,186 )     (581,961 )     -       -  
Charter / Cooperation agreements
    2,560,616       -       (103,343 )     -       -       2,457,273  
Noncompete agreement
    1,576,256       -       (1,091,254 )     -       -       485,002  
Software and licenses
    240,015       569,106       (123,625 )     (4,066 )     487       681,917  
Website development
    250,000       100,000       (87,423 )     -       (443 )     262,134  
Total amortized intangible assets
  $ 7,015,458     $ 669,106     $ (1,506,341 )   $ (1,045,519 )   $ 44     $ 5,132,748  
                                                 
Unamortized intangible assets:
                                               
Website name
    134,290       -       -       -       -       134,290  
Goodwill
    6,105,478       -       -       -       -       6,105,478  
Total unamortized intangible assets
  $ 6,239,768     $ -     $ -     $ -     $ -     $ 6,239,768  

In accordance with ASC 250, we recorded amortization expense related to our intangible assets of approximately $504,000 and $1,507,000 for the three and nine months ended September 30, 2012 and $437,000 and $1,463,000 for the three and nine months ended September 30, 2011.
 
   
Jinan
   
Sinotop
             
Years ending December 31,
 
Broadband
   
Hong Kong
   
Sinotop
   
Total
 
2012 (three months)
  $ 36,043     $ 398,199     $ 69,034     $ 503,276  
2013
    134,303       259,041       276,134       669,478  
2014
    127,824       137,791       240,727       506,342  
2015
    112,909       137,791       97,317       348,017  
2016
    93,485       137,791       94,923       326,199  
Thereafter
    881,085       1,871,662       26,689       2,779,436  
Total amortization to be recognized
  $ 1,385,649     $ 2,942,275     $ 804,824     $ 5,132,748  

10.
Private Financing, August 2012
 
On August 30, 2012, we entered into a Securities Purchase Agreement with certain accredited investors, pursuant to which the Company offered the Investors the option to purchase either (i) Class A Units, with each Class A Unit consisting of one share of the Company’s common stock, par value $0.001 per share and (b) a common stock purchase warrant (each a “Warrant,” and, collectively, the “Warrants”) to purchase one share of Common Stock at an exercise price of $4.25 per share, or (ii) Class B Units, with each Class B Unit consisting of one share of the Company’s Series C Preferred Stock, par value $0.001 per share, and a Warrant. The per unit price for each of the Class A Units and the Class B Units was $4.00.
 

On August 30, 2012, the Company closed the transactions contemplated by the Purchase Agreement and issued and sold to Investors (i) an aggregate of 646,250 Class A Units (consisting of an aggregate of 646,250 shares of Common Stock and Warrants to purchase 646,250 shares of Common Stock), and (ii) an aggregate of 250,000 Class B Units (consisting of an aggregate of 250,000 shares of Series C Preferred Stock and Warrants to purchase 250,000 shares of Common Stock). The Company received aggregate gross proceeds of $3,585,000.
 
The proceeds from the sale were allocated to Common Stock, Series C Convertible, Preferred Stock, warrants and beneficial conversion features based on the relative fair value of the securities in accordance with ASC 470-20-30.  The value of the Common Stock and Series C Preferred stock was based on the closing price paid by investors.  The fair value of the warrants was calculated using the Black-Scholes model with the following assumptions: expected life of 5 years, expected dividend rate of 0%, volatility of 75% and an interest rate of .66%.  The exercise price of the warrants is $4.25.

The Company recognized a beneficial conversion feature discount on Series C Convertible Preferred Stock at its intrinsic value, which was the fair value of the common stock at the commitment date for Series C Convertible Preferred Stock investment, less the effective conversion price. The Company recognized approximately $342,000 beneficial conversion feature as an increase in additional paid in capital in the accompanying unaudited consolidated balance sheet on the date of issuance of Series C Convertible Preferred Stocks since these shares were convertible at the issuance date.

In accordance with FASB ASC 815-40-15-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”, the warrants have been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the consolidated statement of operations.  As of September 30, 2012, the warrant liability was adjusted to its new fair value of $2,161,990 as determined by the Company, resulting in a loss of $636,000.
 
The Purchase Agreement contains customary representations, warranties and covenants. In addition, the Company agreed to a negative clawback provision. Under the Negative Clawback, if at any time after the closing the Company consummates an underwritten public offering with respect to the purchase and sale of Common Stock or preferred stock (collectively, “Additional Securities”) of the Company resulting in a price per share of such Additional Securities (after giving effect to the conversion of any preferred stock to be issued in the Subsequent Public Financing) of less than $4.00, then, simultaneously with the closing of such Subsequent Public Financing, the Company shall be obligated to issue to each Investor of Class A Units only, for no additional consideration, that number of Common Shares as is equal to (i) the number of Common Shares that would have been issuable to such Class A Investor at closing if the Per Unit Purchase Price were equal to the greater of (A) the Public Financing Price and (B) $2.50, minus (ii) the number of Common Shares issued to the Class A Investor at the closing.

The holder of shares of Series C Preferred Stock will not have the right to vote and will not have full voting rights and powers equal to the voting rights and powers of holders of the Company’s Common Stock.  In addition, the holders of Series C Preferred Stock will not be entitled to convert any shares of Series C Preferred Stock into shares of the Common Stock if, after giving effect to the conversion, such holder would hold in excess of 9.99% of the Company’s outstanding Common Stock.  Each share of Series C Preferred Stock is convertible, at any time at the option of the holder, into such number of shares of common stock equal to the product of (i) the number of shares of Series C Preferred Stock to be converted, multiplied by (ii) $4.00 divided by (iii) the conversion price, which is equal to the lesser of (x) $4.00 and (y) the price per share paid by investors in a Subsequent Public Financing;  provided ,  however , that the conversion price shall not, in any event, be less than $2.50.  Notwithstanding the foregoing, the conversion price shall equal $4.00, and there shall be no adjustment to the conversion price resulting from the price per share paid by investors in a Subsequent Public Financing, until the provisions of the Certificate regarding the adjustment to the conversion price are approved by shareholders holding a majority of the outstanding voting securities of the Company.

The Company paid issuance costs of approximately $119,000 and issued shares and warrants valued at approximately $515,000 to the placement agent related to the August 2012 financings.

11.
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 979,213 shares of our common stock at a per share price of $6.60, resulting in aggregate gross proceeds to the Company of $6,462,806. Pursuant to the securities purchase agreement with Fidelity, we could 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 were exercisable or convertible into common stock except for (i) up to 1,958,426 shares of our common stock at a per share price equal to or greater than $6.60, (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 666,667 shares of our common stock, with a per share exercise price equal to or greater than $6.60, and (iv) pursuant to our Stock Incentive Plan, options to purchase up to an aggregate of 440,000 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 were 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 675,000 shares of our common stock at a per share price of $6.60, 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.

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

Stock Purchase Right

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 $6.60 and on identical terms as set forth in the securities purchase agreement.
 
In connection with the June 7, 2011 private placement, Fidelity had the right to purchase up to 75,000 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 $6.60. On June 7, 2011, we agreed to modify the right with Fidelity to extend the right to purchase these shares until December 3, 2011 at a price of $6.60 per share. 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. On December 4, 2011, we granted Fidelity an extension of this right to purchase for an additional six months and valued this right at approximately $39,000 and in June 2012, we granted another six month extension and valued this right at approximately $44,000. Both valuations were based on the Black-Scholes Merton model and were recorded as a right to purchase shares expense in connection with the placement.
 
12.
Net Loss Per Common Share

Basic net loss per common share attributable to YOU On Demand shareholders is calculated by dividing the net loss attributable to YOU On Demand shareholders 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.

In June 2012, 2.4 million Series B Preferred Shares were converted to 320,000 shares of common stock.

For the three and nine month periods ended September 30, 2012 and 2011, the number of securities not included in diluted EPS because the effect would have been anti-dilutive consists of the following:
 

   
3 Months Ended
   
9 Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Warrants
    1,345,642       355,247       1,345,642       355,247  
Stock purchase right
    75,000       75,000       75,000       75,000  
Options
    1,601,245       18,900       1,601,245       1,336,233  
Series A Preferred Stock
    933,333       933,333       933,333       933,333  
Series B Preferred Stock
    1,048,907       1,368,907       1,048,907       1,368,907  
Series C Preferred Stock
    250,000       -       250,000       -  
Total
    5,254,127       2,751,387       5,254,127       4,068,720  
 
13.
Content Accounting

The Company obtains content through content license agreements and revenue sharing agreements with studios and distributors. The license agreement may or may not be recognized in licensed content.

When the license fee is not known or reasonably determinable for a specific title, the title does not meet the criteria for recognition in licensed content in accordance with ASC 920-350-25-2. We expense as costs of revenues the greater of revenue sharing costs incurred through the end of the reporting period or the proportionate value of total minimum license fees expensed on a straight-line basis over the term of each license agreement. As the Company expenses license fees on a straight-line basis, it may result in deferred or prepaid license fees. Deferred license fees are classified on the consolidated balance sheets as “Deferred license fees”. Commitments for license agreements that do not meet the criteria for recognition in licensed content are included in Note 16 to the consolidated financial statements.
 
14.
Warner Bros. License Agreement

On July 1, 2011, the Company, through its Chinese joint venture Zhong Hai Video 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, Zhong Hai Video 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 200,000 warrants to Warner Bros. Entertainment Inc. exercisable at a price per share of $6.60 for a term of five years beginning on May 12, 2011. These warrants are subject to a right of redemption exercisable by the Company in the event the closing price of the Company's common stock shall equal or exceed $13.20 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 initially 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. At September 30, 2012, the non-current licensed content amounted to $338,232. The Black-Scholes Merton model incorporated the following assumptions: risk-free interest rate of 1.89%, expected volatility of 60.0%, expected life of 5.0 years and expected dividend yield of 0%. The Company began amortizing this asset during the third quarter of 2011 and recognized approximately $113,000 during the nine months ended September 30, 2012.
 
 
15.
Share-Based Payments

Stock Options

Through September 30, 2012, the Company has 1,601,245 options and 1,420,642 warrants and stock purchase rights outstanding to purchase shares of our common stock.

The following table provides the details of the approximate total share based payments expense during the three months and nine months ended September 30, 2012 and 2011:
 
   
3 Months Ended
   
9 Months Ended
   
   
September 30,
   
September 30,
   
   
2012
   
2011
   
2012
   
2011
   
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
Stock option amortization
  $ 192,000     $ 150,000     $ 602,000     $ 442,000  
(a)
Stock issued for services
    139,000       -       178,000       10,000  
(b)
Stock warrants issued for services
    10,000       -       36,000       12,000    
Right to purchase shares
    -       -       44,000       155,000  
(see note 11)
    $ 341,000     $ 150,000     $ 860,000     $ 619,000    
 
(a)
The Company accounts for its stock option awards pursuant to the provisions of ASC 718, Stock Compensation. The fair value of each option award is estimated on the date of grant using the Black-Scholes Merton valuation model. The Company recognizes the fair value of each option as compensation expense ratably using the straight-line attribution method over the service period, which is generally the vesting period. The Black-Scholes Merton model incorporated the following assumptions for the options granted in 2012 and 2011: risk-free interest rate of 1.73% to 3.43%, expected volatility of 60% and 75%, expected life of 10.0 years and expected dividend yield of 0%.
 
(b)
In the second quarter of 2012, the Company appointed two new “independent” (as defined under the NASDAQ listing requirements) members to the Board of Directors. In connection with the appointment we granted each of our three “independent” directors 10,000 restricted shares to be vested quarterly over one year.  In the third quarter of 2012, the Company granted 101,542 shares to certain consultants for services.  As of September 30, 2012, there were 43,972 shares vested.  We recorded the common shares at the closing price on the issue date and expensed to consulting and marketing services $139,000 and $178,000 during the three and nine months ended September 30, 2012.  During the three and nine months ended September 30, 2011, we recorded $10,000 for other consulting services.
 
Effective as of December 3, 2010, our Board of Directors approved the YOU On Demand Holdings, Inc. 2010 Stock Incentive Plan (“the Plan”) pursuant to which options or other similar securities may be granted. The maximum aggregate number of shares of our common stock that may be issued under the Plan is 4,000,000 shares.

Stock option activity for the nine months ended September 30, 2012 is summarized as follows:
 
 
   
September 30, 2012
 
         
Weighted
   
Aggregate
 
         
Average
   
Intrinsic
 
   
Shares
   
Exercise Price
   
Value
 
Options outstanding at beginning of year
    1,383,567     $ 3.32        
Granted
    227,567       4.48        
Exercised
    (1,347 )     3.80        
Cancelled/expired
    (8,542 )     4.20        
Options outstanding at end of period
    1,601,245     $ 3.51     $ 1,016,634  
                         
Options exercisable at end of period
    1,012,198     $ 3.32     $ 732,047  
                         
Options available for issuance
    2,398,755                  
 
As of September 30, 2012, there were 1,601,245 options outstanding with 1,012,198 options exercisable at a weighted average exercise price of $3.32 with a weighted average remaining contractual life of 8.25 years.

As of September 30, 2012 the Company had total unrecognized compensation expense related to options granted of approximately $1,618,000 which will be recognized over a remaining service period of 4.0 years.

Warrants

In connection with the Company’s Share Exchange, capital raising efforts in 2007, the Company’s January 2008 Financing of Convertible Notes and Class A Warrants, the April 2010 Convertible Note, the July 2010, June 2011 and August 2012 financings, the WB Agreement and a service agreement, the Company issued warrants to investors and service providers to purchase common stock of the Company. As of September 30, 2012, the weighted average exercise price was $14.02 and the weighted average remaining life was 4.03 years. The following table outlines the warrants outstanding as of September 30, 2012 and December 31, 2011:

   
September 30,
   
December 31,
         
   
2012
   
2011
         
   
(unaudited)
               
   
Number of
   
Number of
         
   
Warrants
   
Warrants
   
Exercise
 
Expiration
Warants Outstanding
 
Outstanding
   
Outstanding
   
Price
 
Date
Share Exchange Consulting Warrants ($45.00 exercise price)
    59,664       59,664     $ 45.00  
1/11/2013
2007 Private Placement Broker Warrants ($45.00 exercise price)
    8,533       8,533     $ 45.00  
1/11/2013
2007 Private Placement Investor Warrants ($150.00 exercise price)
    53,333       53,333     $ 150.00  
1/11/2013
July 2010 Sinotop Acquisition Warrants ($45.00 exercise price)
    17,049       17,049     $ 45.00  
1/11/2013
July 2010 Sinotop Acquisition Warrants ($150.00 exercise price)
    13,333       13,333     $ 150.00  
1/11/2013
May 2011 Warner Brothers Warrants ($6.60 excercise price)
    200,000       200,000     $ 6.60  
5/11/2016
June 2011 Fidelity Right to Purchase ($6.60 exercise price)
    75,000       75,000     $ 6.60  
12/3/2012
2011 Service Agreement Warrants ($7.20 exercise price)
    16,667       6,667     $ 7.20  
6/15/2016
2012 August Financing Warrants ($4.25 exercise price)
    977,063       -     $ 4.25  
8/30/2017
      1,420,642       433,579            

 
16.
Commitments and Contingencies

The Company has employment agreements with certain employees that provide severance payments upon termination of employment under certain circumstances, as defined in the applicable agreements. As of September 30, 2012, the Company's potential minimum cash obligation to these employees was approximately $915,000.

The Company is committed to paying leased property costs related to our China offices through 2015 as follows:
 
   
Leased
 
   
Property
 
Years ending December 31,
 
Costs
 
2012 (three months)
  $ 82,092  
2013
    362,008  
2014
    73,342  
2015
    18,968  
Total
  $ 536,410  

The Company is committed to paying product related costs through 2015 as follows:

   
Product
 
   
Related
 
Years ending December 31,
 
Costs
 
2012 (three months)
  $ 86,750  
2013
    1,401,032  
2014
    1,870,063  
2015
    1,949,126  
2016     924,126  
Total
  $ 6,231,097  

According to the purchase agreement with “Shandong Fu Ren”, Zhong Hai Video was obligated to pay RMB 1,000,000 (USD 157,270) to acquire 51% ownership of Shanghai Tianduo, of which RMB 700,000 (USD 110,646) remains.

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
 
17. 
Subsequent Events

As of the date of this filing we are in discussions regarding an offering in which we will issue and sell to certain investors shares of our common stock in order to raise funds for ongoing operating cost of our business. The offering would be effected as a takedown off the Company’s shelf registration statement on Form S-3 (File No. 333-183689), which became effective on September 12, 2012.
 
 
Cautionary Note Regarding Forward Looking Statements

This Form 10-Q contains “forward-looking” statements that involve risks and uncertainties. You can identify these statements by the use of forward-looking words such as "may", "will", "expect", "anticipate", "estimate", "believe", "continue", or other similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or financial condition or state other "forward-looking" information. We believe that it is important to communicate our future expectations to our investors. However, these forward-looking statements are not guarantees of future performance and actual results may differ materially from the expectations that are expressed, implied or forecasted in any such forward-looking statements. There may be events in the future that we are unable to accurately predict or control, including weather conditions and other natural disasters which may affect demand for our products, and the product–development and marketing efforts of our competitors. Examples of these events are more fully described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 under Part I. Item 1A. Risk Factors.

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


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

Overview

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 PPV, 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 PPV, 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.

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. As discussed in Note 5 to the unaudited consolidated financial statements 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%.

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 Three Months Ended September 30, 2012 and 2011
 
In order to more effectively show comparative numbers our Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations is utilizing a Pro Forma 2011 Results of Operations.  The Pro Forma Results of Operations exclude the impact of Shandong Media.  This shows a more meaningful comparison to our 2012 results in which Shandong Media was deconsolidated effective July 1, 2012 (See Note 5 for more information regarding the Deconsolidation of Shandong Media).
 

 
   
Three Months Ended
 
   
As Reported
   
Shandong Media
   
Pro Forma
 
   
September 30,
   
3 months
   
September 30,
 
   
2011
         
2011
 
               
(excluding 
Shandong Media)
 
                   
Revenue
  $ 1,981,000     $ 798,000     $ 1,183,000  
Cost of revenue
    1,441,000       548,000       893,000  
Gross profit
    540,000       250,000       290,000  
                         
Operating expense:
                       
Selling, general and administrative expenses
    2,215,000       440,000       1,775,000  
Professional fees
    791,000       -       791,000  
Depreciation and amortization
    1,087,000       28,000       1,059,000  
Impairments of long-lived assets
    19,000       -       19,000  
Total operating expense
    4,112,000       468,000       3,644,000  
                         
Loss from operations
    (3,572,000 )     (218,000 )     (3,354,000 )
                         
Interest & other income / (expense)
                       
Interest income
    2,000       -       2,000  
Change in fair value of contingent consideration
    3,189,000