To the shareholders and the board of directors
of Seven Stars Cloud Group, Inc.
We have audited the accompanying consolidated
balance sheets of Seven Stars Cloud Group, Inc. and its subsidiaries and variable interest entities (the "Company") as
of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive loss, equity, and cash flows for
the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion,
the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017
and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As discussed in note 3 to the financial statements, the
Company incurred recurring losses from operations, has net current liabilities and an accumulated deficit that raise substantial
doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described
in note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required
to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
As described in Note 5 to the financial
statements, the Company’s financial statements as of and for the year ended December 31, 2016 have been retrospectively adjusted
in accordance with FASB Accounting Standards Codification (“ASC”) Subtopic 805-50 due to business acquisition of entities
controlled by the Company’s Chairman in January 2017.
The Company has significant transactions
and relationships with related parties, including entities controlled by the Company’s Chairman, which are described in Note
12 to the financial statements. Transactions involving related parties cannot be presumed to be carried out on an arm's length
basis, as the requisite conditions of competitive, free market dealings may not exist.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
CONSOLIDATED BALANCE SHEETS
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(As adjusted*)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
7,205,096
|
|
|
$
|
3,761,814
|
|
Accounts receivable, net
|
|
|
26,962,085
|
|
|
|
9,522,151
|
|
Licensed content, current
|
|
|
16,958,149
|
|
|
|
124,319
|
|
Notes receivable
|
|
|
-
|
|
|
|
1,749,830
|
|
Inventory
|
|
|
216,453
|
|
|
|
203,697
|
|
Prepaid expenses
|
|
|
2,202,728
|
|
|
|
375,944
|
|
Other current assets
|
|
|
2,256,727
|
|
|
|
3,581,822
|
|
Total current assets
|
|
|
55,801,238
|
|
|
|
19,319,577
|
|
Property and equipment, net
|
|
|
113,993
|
|
|
|
4,963,725
|
|
Licensed content, non-current
|
|
|
-
|
|
|
|
17,593,528
|
|
Intangible assets, net
|
|
|
148,874
|
|
|
|
453,242
|
|
Goodwill
|
|
|
-
|
|
|
|
6,648,911
|
|
Long-term investments
|
|
|
6,975,511
|
|
|
|
6,654,664
|
|
Other non-current assets
|
|
|
-
|
|
|
|
112,643
|
|
Total assets
|
|
$
|
63,039,616
|
|
|
$
|
55,746,290
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
(including
amounts of consolidated VIEs without recourse to Seven Stars Cloud Group, Inc. See note 4)
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
26,829,593
|
|
|
|
13,341,680
|
|
Advance from customers
|
|
|
222,350
|
|
|
|
1,350,054
|
|
Accrued interest due to a related party
|
|
|
20,055
|
|
|
|
557,918
|
|
Accrued other expenses
|
|
|
174,358
|
|
|
|
708,987
|
|
Accrued salaries
|
|
|
737,072
|
|
|
|
766,957
|
|
Payable for purchase of building
|
|
|
-
|
|
|
|
987,015
|
|
Amount due to related parties
|
|
|
45,639
|
|
|
|
1,060,817
|
|
Other current liabilities
|
|
|
625,942
|
|
|
|
934,480
|
|
Accrued license content fees
|
|
|
-
|
|
|
|
1,236,661
|
|
Convertible promissory note due to a related party
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
Warrant liabilities
|
|
|
-
|
|
|
|
70,785
|
|
Total current liabilities
|
|
|
31,655,009
|
|
|
|
24,015,354
|
|
Total liabilities
|
|
|
31,655,009
|
|
|
|
24,015,354
|
|
Commitments and contingencies: (Note 18)
|
|
|
|
|
|
|
|
|
Convertible redeemable preferred stock:
|
|
|
|
|
|
|
|
|
Series A - 7,000,000 shares issued and outstanding, liquidation and deemed liquidation preference of $3,500,000 as of December 31, 2017 and 2016, respectively
|
|
|
1,261,995
|
|
|
|
1,261,995
|
|
Equity:
|
|
|
|
|
|
|
|
|
Series E Preferred Stock - $0.001 par value; 16,500,000 shares authorized, nil and 7,154,997 shares issued and outstanding, liquidation preference of nil and $12,521,245 as of December 31, 2017 and December 31, 2016, respectively
|
|
|
-
|
|
|
|
7,155
|
|
Common stock - $0.001 par value; 1,500,000,000 shares authorized, 68,509,090 and 53,918,523 shares issued and outstanding as of December 31, 2017 and 2016, respectively
|
|
|
68,509
|
|
|
|
53,918
|
|
Additional paid-in capital
|
|
|
157,968,548
|
|
|
|
152,755,919
|
|
Accumulated deficit
|
|
|
(125,865,391
|
)
|
|
|
(115,669,268
|
)
|
Accumulated other comprehensive loss
|
|
|
(759,687
|
)
|
|
|
(1,353,302
|
)
|
Total Seven Stars Cloud shareholder’s equity
|
|
|
31,411,979
|
|
|
|
35,794,422
|
|
Non-controlling interest
|
|
|
(1,289,367
|
)
|
|
|
(5,325,481
|
)
|
Total equity
|
|
|
30,122,612
|
|
|
|
30,468,941
|
|
Total liabilities, convertible redeemable preferred stock and equity
|
|
$
|
63,039,616
|
|
|
$
|
55,746,290
|
|
*The above consolidated balance sheets
present the Wecast Services Limited and Wide Angle Group Limited acquired from BT Capital Global Limited (“BT”) on
January 30 and January 31, 2017, respectively as if they had been owned by the Company since November 10, 2016 in accordance with
ASC Subtopic 805-50 (See Note 5 “
Acquisition
”)
The accompanying notes are an integral
part of these consolidated financial statements.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(As adjusted*)
|
|
Revenue from third parties
|
|
$
|
125,365,751
|
|
|
$
|
35,185,508
|
|
Revenue from related party
|
|
|
18,973,054
|
|
|
|
-
|
|
Total revenue
|
|
|
144,338,805
|
|
|
|
35,185,508
|
|
Cost of revenue
|
|
|
137,188,353
|
|
|
|
35,551,198
|
|
Gross profit
|
|
|
7,150,452
|
|
|
|
(365,690
|
)
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
12,848,184
|
|
|
|
10,898,323
|
|
Research and development expense
|
|
|
406,845
|
|
|
|
-
|
|
Professional fees
|
|
|
3,153,697
|
|
|
|
1,400,139
|
|
Depreciation and amortization
|
|
|
306,801
|
|
|
|
505,028
|
|
Impairment of other intangible assets (Note 8)
|
|
|
216,468
|
|
|
|
2,018,628
|
|
Earn-out share award expense (Note 13)
|
|
|
-
|
|
|
|
13,700,000
|
|
Total operating expenses
|
|
|
16,931,995
|
|
|
|
28,522,118
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(9,781,543
|
)
|
|
|
(28,887,808
|
)
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(95,658
|
)
|
|
|
(254,725
|
)
|
Change in fair value of warrant liabilities
|
|
|
(112,642
|
)
|
|
|
324,432
|
|
Equity in loss of equity method investees
|
|
|
(129,193
|
)
|
|
|
(31,557
|
)
|
Impairment of equity method investments
|
|
|
-
|
|
|
|
(38,448
|
)
|
Others
|
|
|
(73,833
|
)
|
|
|
57,017
|
|
Loss before income taxes and non-controlling interest
|
|
|
(10,192,869
|
)
|
|
|
(28,831,089
|
)
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
-
|
|
|
|
330,124
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(10,192,869
|
)
|
|
|
(28,500,965
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to non-controlling interest
|
|
|
357,268
|
|
|
|
2,092,991
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Seven Stars Cloud shareholders
|
|
$
|
(9,835,601
|
)
|
|
$
|
(26,407,974
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.16
|
)
|
|
$
|
(0.73
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
61,182,209
|
|
|
|
35,998,001
|
|
*The above consolidated balance sheets
present the Wecast Services Limited and Wide Angle Group Limited acquired from BT Capital Global Limited (“BT”) on
January 30 and January 31, 2017, respectively as if they had been owned by the Company since November 10, 2016 in accordance with
ASC Subtopic 805-50 (See Note 5 “
Acquisition
”)
The accompanying notes are an integral
part of these consolidated financial statements.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
LOSS
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(As adjusted*)
|
|
Net loss
|
|
$
|
(10,192,869
|
)
|
|
$
|
(28,500,965
|
)
|
Other comprehensive loss, net of nil tax
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
770,261
|
|
|
|
(928,776
|
)
|
Comprehensive loss
|
|
|
(9,422,608
|
)
|
|
|
(29,429,741
|
)
|
Comprehensive loss attributable to non-controlling interest
|
|
|
401,359
|
|
|
|
2,051,010
|
|
Comprehensive loss attributable to Seven Stars Cloud shareholders
|
|
$
|
(9,021,249
|
)
|
|
$
|
(27,378,731
|
)
|
*The above consolidated balance sheets
present the Wecast Services Limited and Wide Angle Group Limited acquired from BT Capital Global Limited (“BT”) on
January 30 and January 31, 2017, respectively as if they had been owned by the Company since November 10, 2016 in accordance with
ASC Subtopic 805-50 (See Note 5 “
Acquisition
”)
The accompanying notes are an integral
part of these consolidated financial statements.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
CONSOLIDATED STATEMENTS OF EQUITY
For the Year Ended December 31, 2017
|
|
Series
E
Preferred
Stock
|
|
|
Series
E
Par
Value
|
|
|
Common
Stock
|
|
|
Par
Value
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Seven
Stars Cloud
Shareholders’
Equity
|
|
|
Non-
controlling
Interest
|
|
|
Total
Equity
|
|
Balance, January 1, 2017 (As adjusted*)
|
|
|
7,154,997
|
|
|
$
|
7,155
|
|
|
|
53,918,523
|
|
|
$
|
53,918
|
|
|
$
|
152,755,919
|
|
|
$
|
(115,669,268
|
)
|
|
$
|
(1,353,302
|
)
|
|
$
|
35,794,422
|
|
|
$
|
(5,325,481
|
)
|
|
$
|
30,468,941
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,305,829
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,305,829
|
|
|
|
-
|
|
|
|
1,305,829
|
|
Common
stock issuance
|
|
|
-
|
|
|
|
-
|
|
|
|
6,221,778
|
|
|
|
6,222
|
|
|
|
11,969,368
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,975,590
|
|
|
|
-
|
|
|
|
11,975,590
|
|
Common
stock issuance for RSU vested
|
|
|
-
|
|
|
|
-
|
|
|
|
117,715
|
|
|
|
118
|
|
|
|
(118
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common
stock issuance for option exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
188,687
|
|
|
|
189
|
|
|
|
100,129
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,318
|
|
|
|
-
|
|
|
|
100,318
|
|
Common
stock issued for warrant exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
907,390
|
|
|
|
907
|
|
|
|
1,724,819
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,725,726
|
|
|
|
-
|
|
|
|
1,725,726
|
|
Common
stock issued from conversion of series E preferred stock
|
|
|
(7,154,997
|
)
|
|
|
(7,155
|
)
|
|
|
7,154,997
|
|
|
|
7,155
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Disposal
of one subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,887,398
|
)
|
|
|
(360,522
|
)
|
|
|
(220,737
|
)
|
|
|
(10,468,657
|
)
|
|
|
3,947,473
|
|
|
|
(6,521,184
|
)
|
Capital
contribution from noncontrolling interest shareholder
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
490,000
|
|
|
|
490,000
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,835,601
|
)
|
|
|
-
|
|
|
|
(9,835,601
|
)
|
|
|
(357,268
|
)
|
|
|
(10,192,869
|
)
|
Foreign
currency translation adjustments, net of nil tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
814,352
|
|
|
|
814,352
|
|
|
|
(44,091
|
)
|
|
|
770,261
|
|
Balance, December
31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
68,509,090
|
|
|
|
68,509
|
|
|
|
157,968,548
|
|
|
|
(125,865,391
|
)
|
|
|
(759,687
|
)
|
|
|
31,411,979
|
|
|
|
(1,289,367
|
)
|
|
|
30,122,612
|
|
*The above consolidated balance sheets
present the Wecast Services Limited and Wide Angle Group Limited acquired from BT Capital Global Limited (“BT”) on
January 30 and January 31, 2017, respectively as if they had been owned by the Company since November 10, 2016 in accordance with
ASC Subtopic 805-50 (See Note 5 “
Acquisition
”)
The accompanying notes are an integral
part of these consolidated financial statements.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
CONSOLIDATED STATEMENTS OF EQUITY
For the Year Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
E
|
|
|
Series
E
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Seven Stars
Cloud
|
|
|
Non-
|
|
|
|
|
|
|
Preferred
|
|
|
Par
|
|
|
Common
|
|
|
Par
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Shareholders’
|
|
|
controlling
|
|
|
Total
|
|
|
|
Stock
|
|
|
Value
|
|
|
Stock
|
|
|
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Equity
|
|
|
Interest
|
|
|
Equity
|
|
Balance, January 1, 2016
|
|
|
7,254,997
|
|
|
$
|
7,255
|
|
|
|
24,249,109
|
|
|
$
|
24,249
|
|
|
$
|
97,512,542
|
|
|
$
|
(86,457,840
|
)
|
|
$
|
(414,910
|
)
|
|
$
|
10,671,296
|
|
|
$
|
(2,388,031
|
)
|
|
$
|
8,283,265
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
25
|
|
|
|
319,693
|
|
|
|
-
|
|
|
|
-
|
|
|
|
319,718
|
|
|
|
-
|
|
|
|
319,718
|
|
Common stock
issuance
|
|
|
-
|
|
|
|
-
|
|
|
|
5,681,819
|
|
|
|
5,681
|
|
|
|
9,994,319
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000,000
|
|
|
|
-
|
|
|
|
10,000,000
|
|
Common stock
issued to SSS
|
|
|
-
|
|
|
|
-
|
|
|
|
4,545,455
|
|
|
|
4,545
|
|
|
|
9,270,665
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,275,210
|
|
|
|
-
|
|
|
|
9,275,210
|
|
Warrant issued
to SSS
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
724,790
|
|
|
|
-
|
|
|
|
-
|
|
|
|
724,790
|
|
|
|
-
|
|
|
|
724,790
|
|
Issuance
cost in connection with the issuance of common stock and warrant to SSS
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(411,223
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(411,223
|
)
|
|
|
|
|
|
|
(411,223
|
)
|
Earn-out
shares issued to SSS
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000,000
|
|
|
|
10,000
|
|
|
|
13,690,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,700,000
|
|
|
|
-
|
|
|
|
13,700,000
|
|
Common stock
issued from conversion of convertible note
|
|
|
-
|
|
|
|
-
|
|
|
|
9,208,860
|
|
|
|
9,209
|
|
|
|
17,724,088
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,733,297
|
|
|
|
-
|
|
|
|
17,733,297
|
|
Restricted
shares granted in connection with acquisition of intangible assets
|
|
|
-
|
|
|
|
-
|
|
|
|
66,500
|
|
|
|
67
|
|
|
|
121,628
|
|
|
|
-
|
|
|
|
-
|
|
|
|
121,695
|
|
|
|
-
|
|
|
|
121,695
|
|
Common stock
issued for settlement of liability
|
|
|
-
|
|
|
|
-
|
|
|
|
41,780
|
|
|
|
42
|
|
|
|
74,958
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
75,000
|
|
Common stock
issued from conversion of series E preferred stock
|
|
|
(100,000
|
)
|
|
|
(100
|
)
|
|
|
100,000
|
|
|
|
100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Acquisition
of MYP and WAG
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,734,459
|
|
|
|
(2,803,454
|
)
|
|
|
32,365
|
|
|
|
963,370
|
|
|
|
(886,440
|
)
|
|
|
76,930
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(26,407,974
|
)
|
|
|
-
|
|
|
|
(26,407,974
|
)
|
|
|
(2,092,991
|
)
|
|
|
(28,500,965
|
)
|
Foreign
currency translation adjustments, net of nil tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(970,757
|
)
|
|
|
(970,757
|
)
|
|
|
41,981
|
|
|
|
(928,776
|
)
|
Balance,
December 31, 2016 (As adjusted*)
|
|
|
7,154,997
|
|
|
$
|
7,155
|
|
|
|
53,918,523
|
|
|
$
|
53,918
|
|
|
$
|
152,755,919
|
|
|
$
|
(115,669,268
|
)
|
|
$
|
(1,353,302
|
)
|
|
$
|
35,794,422
|
|
|
$
|
(5,325,481
|
)
|
|
$
|
30,468,941
|
|
*The above consolidated balance sheets
present the Wecast Services Limited and Wide Angle Group Limited acquired from BT Capital Global Limited (“BT”) on
January 30 and January 31, 2017, respectively as if they had been owned by the Company since November 10, 2016 in accordance with
ASC Subtopic 805-50 (See Note 5 “
Acquisition
”)
The accompanying notes are an integral
part of these consolidated financial statements.
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
As adjusted*
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,192,869
|
)
|
|
$
|
(28,500,965
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
1,305,829
|
|
|
|
319,718
|
|
Provision for doubtful accounts
|
|
|
145,512
|
|
|
|
2,825,124
|
|
Depreciation and amortization
|
|
|
306,801
|
|
|
|
505,028
|
|
Amortization of debt issuance costs
|
|
|
-
|
|
|
|
122,696
|
|
Income tax benefit
|
|
|
-
|
|
|
|
(330,124
|
)
|
Equity in losses of equity method investees
|
|
|
129,193
|
|
|
|
31,557
|
|
Loss on disposal of assets
|
|
|
688,098
|
|
|
|
-
|
|
Change in fair value of warrant liabilities
|
|
|
112,642
|
|
|
|
(324,432
|
)
|
Earn-out share award expense
|
|
|
-
|
|
|
|
13,700,000
|
|
Impairment of other intangible assets
|
|
|
216,468
|
|
|
|
2,018,628
|
|
Impairment of equity method investments
|
|
|
-
|
|
|
|
38,448
|
|
Impairment of licensed content
|
|
|
-
|
|
|
|
496,467
|
|
Foreign currency exchange gain
|
|
|
-
|
|
|
|
(81,666
|
)
|
|
|
|
|
|
|
|
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(18,802,766
|
)
|
|
|
(4,263,094
|
)
|
Licensed content
|
|
|
759,698
|
|
|
|
37,568
|
|
Inventory
|
|
|
-
|
|
|
|
122,107
|
|
Prepaid expenses and other assets
|
|
|
3,748,873
|
|
|
|
(4,788,796
|
)
|
Accounts payable
|
|
|
13,493,865
|
|
|
|
6,960,916
|
|
Accrued expenses, salary and other current liabilities
|
|
|
(759,918
|
)
|
|
|
10,489
|
|
Deferred revenue
|
|
|
(1,124,119
|
)
|
|
|
1,294,427
|
|
Accrued license content fees
|
|
|
-
|
|
|
|
378,964
|
|
Net cash used in operating activities
|
|
|
(9,972,693
|
)
|
|
|
(9,426,940
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(48,555
|
)
|
|
|
(3,826,697
|
)
|
Proceeds from disposal of property and equipment
|
|
|
2,515,923
|
|
|
|
-
|
|
Disposal of subsidiaries, net of cash disposed
|
|
|
(8,753
|
)
|
|
|
-
|
|
Cash paid for the acquisition of subsidiaries
|
|
|
(754,361
|
)
|
|
|
-
|
|
Investments in intangible assets
|
|
|
-
|
|
|
|
(2,992,072
|
)
|
Acquisition of MYP and WAG, net of cash acquired
|
|
|
-
|
|
|
|
527,217
|
|
Payments for long term investments
|
|
|
(2,250,000
|
)
|
|
|
(3,733,750
|
)
|
Capital decrease in long term investment
|
|
|
35,612
|
|
|
|
-
|
|
Deposit for investment
|
|
|
-
|
|
|
|
(172,077
|
)
|
Net cash used in investing activities
|
|
|
(510,134
|
)
|
|
|
(10,197,379
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of shares and warrant (Note 10 and Note 13)
|
|
|
13,618,207
|
|
|
|
20,000,000
|
|
Repayment of amounts due to related parties
|
|
|
(243,507
|
)
|
|
|
-
|
|
Capital contribution from noncontrolling interest shareholder
|
|
|
490,000
|
|
|
|
-
|
|
Cost associated with financing activities
|
|
|
-
|
|
|
|
(294,890
|
)
|
Net cash provided by financing activities
|
|
|
13,864,700
|
|
|
|
19,705,110
|
|
Effect of exchange rate changes on cash
|
|
|
61,409
|
|
|
|
(87,874
|
)
|
Net increase (decrease) in cash
|
|
|
3,443,282
|
|
|
|
(7,083
|
)
|
|
|
|
|
|
|
|
|
|
Cash at the beginning of the year
|
|
|
3,761,814
|
|
|
|
3,768,897
|
|
|
|
|
|
|
|
|
|
|
Cash at the end of the year
|
|
$
|
7,205,096
|
|
|
$
|
3,761,814
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange of Series E Preferred Stock for Common stock
|
|
$
|
7,155
|
|
|
$
|
100
|
|
Issuance of convertible note for licensed content (Note 13)
|
|
$
|
-
|
|
|
$
|
17,717,847
|
|
Issuance of shares for the settlement of liability
|
|
$
|
-
|
|
|
$
|
75,000
|
|
Issuance of shares upon conversion of convertible note, including accrued interest and debt issuance cost (Note 13)
|
|
$
|
-
|
|
|
$
|
17,733,297
|
|
Issuance of earn-out shares (Note 13)
|
|
$
|
-
|
|
|
$
|
13,700,000
|
|
Acquisition of long term investment through transfer of Game IP rights (Note 12)
|
|
$
|
-
|
|
|
$
|
2,714,441
|
|
Workforce intangible acquired for shares (Note 8)
|
|
$
|
-
|
|
|
$
|
121,695
|
|
Payable for purchase of building
|
|
$
|
-
|
|
|
$
|
987,015
|
|
*The above consolidated balance sheets
present the Wecast Services Limited and Wide Angle Group Limited acquired from BT Capital Global Limited (“BT”) on
January 30 and January 31, 2017, respectively as if they had been owned by the Company since November 10, 2016 in accordance with
ASC Subtopic 805-50 (See Note 5 “
Acquisition
”)
The accompanying notes are an integral
part of these consolidated financial statements.
1. Organization and Principal Activities
Seven Stars Cloud Group, Inc. (the “Company”),
formerly known as Wecast Network, Inc., is a Nevada corporation that primarily operates in China (“PRC”) through its
subsidiaries and consolidated variable interest entities (“VIEs”). The Company, its subsidiaries and consolidated VIEs
are collectively referred to as Seven Stars Cloud (“SSC”, “we”, “us”, or “the Company”).
SSC is aiming to become a digital financial
services company with seven products engines which are financial technologies based. Through acquisitions made in 2017 and establishment
of joint ventures, engine seven “Supply Chain Finance and Management for Vertical Products” is in operation. SSC is
also leveraging its legacy operations as a premium content Video On Demand (“VOD”) service provider in China.
On January 30, 2017, the Company entered
into a Securities Purchase Agreement (the “Sun Video SPA”) with BT Capital Global Limited, a British Virgin Islands
company (“BT”) and affiliate of the Company’s Chairman Bruno Wu, for the purchase by the Company of all of the
outstanding capital stock of Sun Video Group Hong Kong Limited (“Wecast Services”). On January 31, 2017, the Company
entered into another Securities Purchase Agreement (the “Wide Angle SPA”) with BT and Sun Seven Stars Media Group Limited,
one of the Company’s largest shareholders, controlled by Mr. Wu, as guarantor, for the purchase by us of 55% of the outstanding
capital stock of Wide Angle Group Limited (“Wide Angle”). Details of these two acquisitions are in Note 5. After acquiring
these two entities, other than Company’s legacy You On Demand (“YOD”) business, the Company became engaged in
consumer electronics e-commerce and smart supply chain management operations.
In 2017, the Company entered into another
Securities Purchase Agreement (the “BT SPA”) with BT, pursuant to which the issued and outstanding stock that SSC holds
in one loss-generating non-core assets was sold to BT for zero. The detail of this transaction has been disclosed in Note 12.
2. Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include
the financial statements of Seven Stars Cloud Group, Inc., its wholly-owned subsidiaries, its VIEs in which the Company is the
primary beneficiary, and the subsidiary of its consolidated VIE. All material intercompany transactions and balances are eliminated
upon consolidation.
(b) Basis of Presentation
The Company prepares and presents its consolidated
financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
The Company’s consolidated financial statements as of December 31, 2016 have been prepared as if the Wecast Services and
Wide Angle had been owned by the Company since November 10, 2016 presented and the Company’s consolidated financial statements
as of December 31, 2016 has been retrospectively adjusted accordingly.
(c) Long term investments
Equity method investment
Investments in entities where the Company
can exercise significant influence, but not control, are accounted for using the equity method. Under the equity method, the investment
is initially recorded at cost and adjusted for the Company’s share of undistributed earnings or losses of the investee. The
Company’s share of losses is not recognized when the investment is reduced to zero since the Company does not guarantee the
investees’ obligations nor is the Company committed to providing additional funding.
Management evaluates impairment on the
investments accounted for under the equity method of accounting based on performance and the financial position of the investee,
as well as other evidence of market value. Such evaluation includes, but is not limited to, reviewing the investee’s cash
position, recent financings, projected and historical financial performance, cash flow forecasts and financing needs. An impairment
charge is recorded when the carrying amount of the investment exceeds its fair value and the impairment is determined to be other-than-temporary.
2. Summary of Significant Accounting Policies- continued
(c) Long term investments- continued
Cost method investment
Investment in entities over which the Company
neither has significant influence nor control are accounted for using under the cost method. Under the cost method, the Company
records the investment at cost and recognizes income for any dividends declared from distribution of investee’s earnings.
The Company reviews the cost method investments for impairment whenever events or changes in circumstances indicate that the carrying
value may no longer be recoverable. We impair our cost method investment when we determine that there has been an “other-than
temporary” decline in the investments fair value compared to its carrying value. The fair value of the investment would then
become the new cost basis of the investment. There were no indicators of impairment in 2017.
(d) Use of Estimates
The preparation of consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses, as well as the related disclosure of contingent assets and liabilities, at the date
of the consolidated financial statements and during the reporting period. Actual results could differ from those estimates.
The significant estimates include, but
not limited to, the determination of estimated selling prices of multiple elements revenues contract, the expected revenue from
licensed content, allowances for doubtful accounts, share-based compensation and equity based transactions with non-employees,
determination of the estimated useful lives of intangible assets, impairment assessment of goodwill, intangible assets, and licensed
content, determination of the fair value of financial instruments and valuation of deferred income taxes assets. These estimates
may be adjusted as more current information becomes available, and any adjustment made could be significant.
(e) Foreign Currency Translation
The Company uses the United States dollar
(“$” or “USD”) as its reporting currency. The functional currency of Seven Stars Cloud Group, Inc., CB
Cayman, YOD Hong Kong, M.Y. Products LLC, Amer and Seven Stars Energy is the USD while the functional currency of other subsidiaries
and VIEs is either the Renminbi (“RMB”) or Hong Kong dollars (“HKD”). In the consolidated financial statements,
the financial information of the entities which use RMB and HKD as their functional currency has been translated into USD. Assets
and liabilities are translated at the exchange rates on the balance sheet date, equity amounts are translated at the historical
exchange rates, and revenues, expenses, gains and losses are translated using the average rate for the period. Translation adjustments
arising from these are reported as foreign currency translation adjustments and are shown as a component of other comprehensive
loss in the statement of comprehensive loss.
Transactions denominated in currencies
other than functional currency are translated into the functional currency using the exchange rates prevailing at the dates of
the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated in
the functional currency at the applicable rates of exchange in effect at the balance sheet date. The resulting exchange differences
are recorded in the consolidated statements of operations.
(f) Cash
Cash consist of cash on hand and demand
deposit as of the date of purchase of three months or less. The Company deposits its cash balances with a limited number of banks.
(g) Accounts Receivable, net
Accounts receivable are recognized at invoiced
amounts and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses resulting from
the inability of its customers to make required payments. The Company reviews its allowance for doubtful accounts receivable on
an ongoing basis. In establishing the required allowance, management considers any historical losses, the customer’s financial
condition, the accounts receivable aging, and the customer’s payment patterns. After all attempts to collect a receivable
have failed and the potential for recovery is remote, the receivable is written off against the allowance.
2. Summary of Significant Accounting Policies- continued
(h) Property and Equipment, net
Property and equipment are stated at cost
less accumulated depreciation. Expenditures for major renewals and improvements, which extend the original estimated economic useful
lives of applicable assets, are capitalized. Expenditures for normal repairs and maintenance are charged to expense as incurred.
The costs and related accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss thereon
is recognized in the consolidated statement of operations. Depreciation is provided for on a straight-line basis over the estimated
useful lives of the respective assets. The estimated useful life is 5 years for the furniture, 3 years for the electronic equipment,
5 to 10 years for the vehicles, 20 years for the office building and lesser of lease terms or the estimated useful lives of the
assets for the leasehold improvements.
(i) Licensed Content
The Company obtains content through content
license agreements with studios and distributors. We recognize licensed content when the license fee and the specified content
titles are known or reasonably determinable. Prepaid license fees are classified as an asset on the consolidated balance sheets
as licensed content and accrued license fees payable are classified as a liability on the consolidated balance sheets.
We amortize licensed content in cost of
revenues over the contents contractual availability based on the expected revenue derived from the licensed content, beginning
with the month of first availability, such that our revenues bear a representative amount of the cost of the licensed content.
We review factors that impact the amortization of licensed content at each reporting date, including factors that may bear direct
impact on expected revenue from specific content titles. Changes in our expected revenue from licensed content could have a significant
impact on our amortization pattern.
Management evaluates the recoverability
of the licensed content whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. For
the years ended December 31, 2017 and 2016, an impairment loss of nil and $496,467 was recognized in cost of revenue, respectively.
(j) Intangible Assets and Goodwill
Company accounts for intangible assets
and goodwill, in accordance with ASC 350, Intangibles – Goodwill and Other. ASC 350 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be evaluated for impairment at least annually. ASC 350
also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives and
reviewed for impairment whenever events indicate the carrying amount may not be recoverable. In accordance with ASC 350, goodwill
is allocated to reporting units, which are either the operating segment or one reporting level below the operating segment. On
an annual basis, we review goodwill for impairment by first assessing qualitative factors to determine whether the existence of
events or circumstances makes it more-likely-than-not that the fair value of a reporting unit is less than its carrying amount.
If we determine that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, goodwill
is further tested for impairment by comparing the carrying value to the estimated fair value of its reporting units, determined
using externally quoted prices (if available) or a discounted cash flow model and, when deemed necessary, a market approach.
Application of goodwill impairment tests
requires significant management judgment, including the identification of reporting units, assigning assets, liabilities and goodwill
to reporting units and determination of fair value of each reporting unit. Judgment applied when performing the qualitative analysis
includes consideration of macroeconomic, industry and market conditions, overall financial performance of the reporting unit, composition,
personnel or strategy changes affecting the reporting unit and recoverability of asset groups within a reporting unit. Judgments
applied when performing the quantitative analysis includes estimating future cash flows, determining appropriate discount rates
and making other assumptions. Changes in these judgments, estimates and assumptions could materially affect the determination of
fair value for each reporting unit.
(k) Warrant Liabilities
We account for derivative instruments and
embedded derivative instruments in accordance with ASC 815,
Accounting for Derivative Instruments and Hedging Activities
,
as amended. The amended standard requires an entity to recognize all derivatives as either assets or liabilities in the statement
of financial position and measure these instruments at fair value. Fair value is estimated using the Monte Carlo simulation method.
We also follow ASC 815-40
Contracts
in Entity’s Own Equity
, which requires freestanding contracts that are settled in a company’s own stock, including
common stock warrants, to be designated as an equity instrument, asset or a liability. Under these provisions a contract classified
as an asset or a liability must be carried at fair value, with any changes in fair value recorded in the results of operations.
The asset/liability derivatives are valued on an annual basis using the Monte Carlo simulation method. A contract classified as
an equity instrument must be included in equity, with no fair value adjustments required. Significant assumptions used in the valuation
included exercise dates, fair value for our common stock, volatility of our common stock and a risk-free interest rate. Gains or
losses on warrants are included in “Changes in fair value of warrant liabilities” in our consolidated statement of
operations.
(l) Revenue Recognition
When persuasive evidence of an arrangement
exists, the sales price is fixed or determinable and collectability is reasonably assured, we recognize revenue as services are
performed. For certain contracts that involve sub-licensing content within the specified license period, revenue is recognized
in accordance with ASC Subtopic 926-605, Entertainment-Films - Revenue Recognition, whereby revenue is recognized upon delivery
of films when the arrangement includes a nonrefundable minimum guarantee, delivery is complete and we have no substantive future
obligations to provide future additional services. Payments received from customers for the performance of future services are
recognized as deferred revenue, and subsequently recognized as revenue in the period that the service obligations are completed.
In accordance with ASC 605-25, Revenue
Recognition - Multiple Element Arrangements, contracts with multiple element deliverables are separated into individual units for
accounting purposes when the unit determined to have standalone value to the customer. Since the contract price is for all deliverables,
company allocated the arrangement consideration to all deliverables at the inception of the arrangement based on their relative
selling price. Company uses (a) vendor-specific objective evidence of selling price, if it exists, or, (b) the management’s
best estimate of the selling price for that deliverable to determine the relative selling price of each individual unit.
Company also generates revenue from sales
of goods. Sales orders are confirmed after negotiation on price between customers and us. Purchase orders are confirmed after careful
selection of suppliers and negotiation on price. Company purchases finished goods from suppliers in accordance with sales orders
from customers. Our suppliers then deliver goods to our customers directly. Company is required to bear the direct risk of damage
to the goods that the direct default risk that cannot be delivered to the customer. When the delivery is completed, company recognizes
revenue and the related cost at the same time. According to purchase orders with suppliers, company, as the owner of the goods,
becomes the first responsible party for the goods.
In accordance with ASC 605-45, Revenue
Recognition – Principal Agent Consideration, company accounts for revenue from sales of goods on a gross basis. Company is
the primary obligor in the arrangements, as company has the ability to establish prices, and has discretion in selecting the independent
suppliers and other third-party that will perform the delivery service, company is responsible for the defective products and company
bears credit risk with customer payments. Accordingly, all such revenue billed to customers is classified as revenue and all corresponding
payments to suppliers are classified as cost of revenues.
The recognition of revenue involves certain
judgments and changes in our assumptions, judgments or estimations may have a material impact on the amount and timing of our revenue
recognition.
(m) Share-Based Compensation
The Company awards share options and other
equity-based instruments to its employees, directors and consultants (collectively “share-based payments”). Compensation
cost related to such awards is measured based on the fair value of the instrument on the grant date. The Company recognizes the
compensation cost over the period the employee is required to provide service in exchange for the award, which generally is the
vesting period. The amount of cost recognized is adjusted to reflect the expected forfeiture prior to vesting. When no future services
are required to be performed by the employee in exchange for an award of equity instruments, and if such award does not contain
a performance or market condition, the cost of the award is expensed on the grant date. The Company recognizes compensation cost
for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service
period for the entire award, provided that the cumulative amount of compensation cost recognized at any date at least equals the
portion of the grant-date value of such award that is vested at that date.
The Company also awards stocks and warrants
for service to consultants for service and accounts for these awards under ASC 505-50,
Equity - Equity-Based Payments to Non-Employees
.
The fair value of the awards is assessed at measurement date and is recognized as cost or expenses when the services are provided.
If the related services are completed upon issuance date, measurement date is determined to be the date the awards are issued.
(n) Income Taxes
The Company accounts for income taxes in
accordance with the asset and liability method. Deferred taxes are recognized for the future tax consequences attributable to temporary
differences between the carrying amounts of assets and liabilities for financial statement purposes and income tax purposes using
enacted rates expected to be in effect when such amounts are realized or settled. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date. A valuation allowance is established, as needed to
reduce the amount of deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax
assets will not be realized.
The Company recognizes the effect of income
tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured
at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in
the period in which the change in judgment occurs. There were no such interest or penalty for the years ended December 31, 2017
and 2016.
On December 22, 2017 the U.S. Tax Reform,
which among other effects, reduces the U.S. federal corporate income tax rate to 21% from 34% (or 35% in certain cases) beginning
in 2018, requires companies to pay a one-time transition tax on certain unrepatriated earnings from non-U.S. subsidiaries that
is payable over eight years, makes the receipt of future non-U.S. sourced income of non-U.S. subsidiaries tax-free to U.S. companies
and creates a new minimum tax on the earnings of non-U.S. subsidiaries relating to the parent’s deductions for payments to
the subsidiaries. Our provisional estimate is that no tax will be due under this provision. We continue to gather information relating
to this estimate.
(o) Net Loss Per Share Attributable
to Seven Stars Cloud Shareholders
Net loss per share attributable to Seven
Stars Cloud shareholders is computed in accordance with ASC 260, Earnings per Share. The two-class method is used for computing
earnings per share. Under the two-class method, net income is allocated between ordinary shares and participating securities based
on dividends declared (or accumulated) and participating rights in undistributed earnings as if all the earnings for the reporting
period had been distributed. The Company’s convertible redeemable preferred shares are participating securities because the
holders are entitled to receive dividends or distributions on an as converted basis. For the years presented herein, the computation
of basic loss per share using the two-class method is not applicable as the Group is in a net loss position and net loss is not
allocated to other participating securities, since these securities are not obligated to share the losses in accordance with the
contractual terms.
Basic net loss per share is computed using
the weighted average number of ordinary shares outstanding during the period. Options and warrants are not considered outstanding
in computation of basic earnings per share. Diluted net loss per share is computed using the weighted average number of ordinary
shares and potential ordinary shares outstanding during the period under treasury stock method. Potential ordinary shares include
options and warrants to purchase ordinary shares, preferred shares and convertible promissory note, unless they were anti-dilutive.
The computation of diluted net loss per share does not assume conversion, exercise, or contingent issuance of securities that would
have an anti-dilutive effect (i.e. an increase in earnings per share amounts or a decrease in loss per share amounts) on net loss
per share.
(p) Reportable Segment
The Company’s chief operating decision
maker has been identified as the chief executive officer, who reviews consolidated results when making decisions about allocating
resources and assessing performance of the Company. In fiscal year 2016, the Company operated and reported its performance in one
segment. However, starting from fiscal year 2017, since Company has acquired Wecast Services Limited and Wide Angle Group Limited
in January (see note 5), the Company has operated two segments based on different clouds that major business resides in, including
Legacy YOD segment and Wecast Service segment. Therefore, there are two reportable segments for the year ended December 31, 2017.
The two reportable segments are:
Legacy YOD - Provides premium content and
integrated value-added service solutions for the delivery of VOD and paid video programming to digital cable providers, Internet
Protocol Television (“IPTV”) providers. The core revenues are being generated from both minimum guarantee payments
and revenue sharing arrangements with distribution partners as well as subscription or transactional fees from subscribers.
Wecast Service - Wecast Services (which
resides under the Product Sales Cloud) is currently primarily engaged with consumer electronics e-commerce, smart supply chain
management operations and oil trading primarily operated in Singapore.
(q) Standards Issued and Not Yet
Implemented
In February 2016, the Financial Accounting
Standards Board issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). The new standard is effective for reporting
periods beginning after December 15, 2018 and early adoption is permitted. The standard will require lessees to report most leases
as assets and liabilities on the balance sheet, while lessor accounting will remain substantially unchanged. The standard requires
a modified retrospective transition approach for existing leases, whereby the new rules will be applied to the earliest year presented.
We do not expect the new lease standard to have a material effect on our financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers, or ASU 2014-09, a standard that will supersede virtually all of the existing revenue recognition
guidance in U.S. GAAP. The standard establishes a five-step model that will apply to revenue earned from a contract with a customer.
Extensive disclosures will be required, including disaggregation of total revenue, information about performance obligations, changes
in contract asset and liability account balances between periods and key judgments and estimates. The FASB has issued several amendments
to the standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations.
The guidance permits two methods of adoption:
retrospectively to each prior reporting period presented (the full retrospective method), or retrospectively with the cumulative
effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). We
currently anticipate adopting the standard using the modified retrospective method. The new standard will be effective for us beginning
January 1, 2018.
We are undertaking a comprehensive approach
to assess the impact of the guidance on our business by reviewing our current accounting policies and practices to identify any
potential differences that may result from applying the new requirements to our consolidated financial statements. We do not anticipate
that this standard will have a material impact to revenue recognition in both of our legacy YOD business and Wecast Service business.
Especially for Wecast Service business, we will continue to recognize revenue as principal for these contracts at the point in
time when the products are delivered and performance obligation is fulfilled. The new standard requires to disclose more information
about revenue activities and related transactions including quantitative and qualitative information about performance obligations,
significant judgements and estimates, contract assets and liabilities and disaggregation of revenue, which we are continuing to
assess in the first quarter of 2018. We are also identifying and implementing changes to the Company’s business processes,
systems and controls to support adoption of the new standard in 2018. We continue to make significant progress on our review of
the standard. Our initial assessment may change as we continue to refine these assumptions.
In June 2016, the FASB issued ASU 2016-13,
“Financial Instruments—Credit Losses (Topic 326)”. The pronouncement changes the impairment model for most financial
assets, and will require the use of an “expected loss” model for instruments measured at amortized cost. Under this
model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset
the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the
financial asset. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning
after December 15, 2019. We do not expect a material impact to its consolidated financial statement upon adoption of this ASU.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash, which requires companies to include amounts generally described as restricted
cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total
amounts shown on the statement of cash flows. This guidance will be effective in the first quarter of 2018 and early adoption is
permitted. Management is still evaluating the effect that this guidance will have on the consolidated financial statements and
related disclosures.
In January 2017, FASB issued ASU 2017-01,
“Business Combinations (Topic 805): Clarifying the Definition of a Business”. The update affects all companies and
other reporting organizations that must determine whether they have acquired or sold a business. The definition of a business affects
many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The update is intended to help companies
and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
The update provides a more robust framework to use in determining when a set of assets and activities is a business, and also provides
more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable.
For public companies, the update is effective for annual periods beginning after December 15, 2017, including interim periods within
those periods. The guidance should be applied prospectively upon its effective date. The effect of ASU 2017-01 on the consolidated
financial statements will be dependent on any future acquisitions.
3. Going Concern and Management’s Plans
For the years ended December 31, 2017 and
2016, the Company incurred losses from operations of approximately $9.8 million and $28.9 million, respectively, and incurred net
loss of $10.2 million and $28.5 million, respectively, and the Company used cash for operations of approximately $10.0 million
and $9.4 million, respectively. Further, the Company had accumulated deficits of approximately $125.9 million and $115.7 million
as of December 31, 2017 and 2016, respectively, due to recurring losses since its inception.
The Company must continue to rely on proceeds
from debt and equity issuances to pay for ongoing operating expenses in order to execute its business plan. On March 28, 2016,
the Company completed a common stock financing for $10.0 million. In addition, the Company completed four separate common stock
financings with Seven Star Works Co. Ltd. (“SSW”) for $4.0 million on July 19, 2016, with Harvest Alternative Investment
Opportunities SPC (“Harvest”) for $4.0 million on August 12, 2016, with Sun Seven Stars Hong Kong Cultural Development
Limited (“SSSHK”) for $2.0 million on November 17, 2016 and with certain investors, officers & directors and affiliates
in a private placement for $2.0 million on May 19, 2017, respectively. On October 23, 2017, the Company entered into a Securities
Purchase Agreement with Hong Kong Guo Yuan Group Capital Holdings Limited. Pursuant to the terms of the agreement, the Company
has agreed to sell and issue 5,494,505 shares of the Company’s common stock to the Hong Kong Guo Yuan Group Capital Holdings
Limited for $1.82 per share, or a total purchase price of $10.0 million. Although the Company believes it has the ability to raise
funds by issuing debt or equity instruments, additional financing may not be available to the Company on terms acceptable to the
Company or at all or such resources may not be received in a timely manner.
These conditions raise substantial doubt
about the Company’s ability to continue as a going concern. 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.
4. VIE Structure and Arrangements
a) Sinotop VIE structure and arrangement
To comply with PRC laws and regulations
that prohibit or restrict foreign ownership of companies that provides value-added telecommunication services, the Company provides
its services through Sinotop Beijing. The Company has the ability to control Sinotop Beijing through a series of contractual agreements
entered into among YOD WFOE, YOD Hong Kong, Sinotop Beijing and the legal shareholders of Sinotop Beijing.
Prior to January 2016, the Company entered
into a series of contractual agreements to give it the ability to control Sinotop Beijing with Zhang Yan, the former legal shareholder
of Sinotop Beijing (the spouse of its then-CEO). In January 2016, in connection with the appointment of a new CEO and in accordance
with its rights under the contractual agreements, (1) the legal ownership of Sinotop Beijing was transferred from Zhang Yan to
Bing Wu, the brother of its current Chairman and Yun Zhu, the former Vice President of Beijing Sun Seven Stars Culture Development
Limited (“SSS”), (2) the Company terminated the series of contractual arrangements with Zhang Yan, and (3) the Company
entered into new contractual agreements with Bing Wu and Yun Zhu (collectively, the “Former Sinotop VIE Agreements”).
In October 2016, in accordance with its rights under contractual agreements, (1) the legal ownership of Sinotop Beijing was transferred
from Bing Wu to Mei Chen, the former CFO of the Company, (2) the Company terminated the series of contractual arrangements with
Bing Wu, and (3) the Company entered into new contractual agreements with Mei Chen (collectively, the “New Sinotop VIE Agreements”).
Although the Former Sinotop VIE Agreements and New Sinotop VIE Agreements resulted in changes to the legal shareholders of Sinotop
Beijing, there was no change in the Company’s ability to control Sinotop Beijing or the Company’s rights to 100% of
the economic benefits of Sinotop Beijing. The Company was the primary beneficiary of Sinotop Beijing prior to the signing of the
Former Sinotop VIE Agreements and New Sinotop VIE Agreements and the Company remained the primary beneficiary of Sinotop Beijing
after the signing of the former Sinotop VIE Agreements and the New Sinotop VIE Agreements. Accordingly, the change in legal ownership
of Sinotop Beijing did not have any impact to the Company’s consolidation of Sinotop Beijing. The key terms of the New Sinotop
VIE Agreements are summarized as follows:
Equity Pledge Agreement
Pursuant to the Equity Pledge Agreement
among YOD WFOE, Sinotop Beijing, Mei Chen and Yun Zhu (collectively, the “Nominee Shareholders”), the Nominee Shareholders
pledged all of their equity interests in Sinotop Beijing (the “Collateral”) to YOD WFOE as security for the performance
of the obligations of Sinotop Beijing to make all the required technical service fee payments pursuant to the Technical Services
Agreement and for performance of the Nominee Shareholders’ obligation under the Call Option Agreement. The terms of the Equity
Pledge Agreement expire upon satisfaction of all obligations under the Technical Services Agreement and Call Option Agreement.
Call Option Agreement
Pursuant to the Call Option Agreement among
YOD WFOE, Sinotop Beijing and the Nominee Shareholders, the Nominee Shareholders granted an exclusive option to YOD WFOE, or its
designee, to purchase, at any time and from time to time, to the extent permitted under PRC law, all or any portion of the Nominee
Shareholders’ equity in Sinotop Beijing. The exercise price of the option shall be determined by YOD WFOE at its sole discretion,
subject to any restrictions imposed by PRC law. The term of the agreement is until all of the equity interest in Sinotop Beijing
held by the Nominee Shareholders are transferred to YOD WFOE, or its designee and may not be terminated by any part to the agreement
without consent of the other parties.
Power of Attorney
Pursuant to the Power of Attorney agreements
among YOD WFOE, Sinotop Beijing and each of the respective Nominee Shareholders, each of the Nominee Shareholders granted YOD WFOE
the irrevocable right, for the maximum period permitted by law, all of its voting rights as shareholders of Sinotop Beijing. The
Nominee Shareholders may not transfer any of its equity interest in Sinotop Beijing to any party other than YOD WFOE. The Power
of Attorney agreements may not be terminated except until all of the equity in Sinotop Beijing has been transferred to YOD WFOE
or its designee.
Technical Service Agreement
Pursuant to the Technical Service Agreement
between YOD WFOE and Sinotop Beijing, YOD WFOE has the exclusive right to provide technical service, marketing and management consulting
service, financial support service and human resource support services to Sinotop Beijing, and Sinotop Beijing is required to take
all commercially reasonable efforts to permit and facilitate the provision of the services by YOD WFOE. As compensation for providing
the services, YOD WFOE is entitled to receive service fees from Sinotop Beijing equivalent to YOD WFOE’s cost plus 30% of
such costs as calculated on accounting policies generally accepted in the PRC. YOD WFOE and Sinotop Beijing agree to periodically
review the service fee and make adjustments as deemed appropriate. The term of the Technical Services Agreement is perpetual, and
may only be terminated upon written consent of both parties.
Spousal Consent
Pursuant to the Spousal Consent, undersigned
by the respective spouse of Nominee Shareholders (collectively, the “Spouses”), the Spouses unconditionally and irrevocably
agreed to the execution of the Equity Pledge Agreement, Call Option Agreement and Power of Attorney agreement. The Spouses agreed
to not make any assertions in connection with the equity interest of Sinotop Beijing and to waive consent on further amendment
or termination of the Equity Pledge Agreement, Call Option Agreement and Power of Attorney agreement. The Spouses further pledge
to execute all necessary documents and take all necessary actions to ensure appropriate performance under these agreements upon
YOD WFOE’s request. In the event the Spouses obtain any equity interests of Sinotop Beijing which are held by the Nominee
Shareholders, the Spouses agreed to be bound by the New Sinotop VIE Agreements, including the Technical Services Agreement, and
comply with the obligations thereunder, including sign a series of written documents in substantially the same format and content
as the New Sinotop VIE Agreements.
Letter of Indemnification
Pursuant to the Letter of Indemnification
among YOD WFOE and Mei Chen and YOD WFOE and Yun Zhu, YOD WFOE agreed to indemnify Nominee Shareholders against any personal, tax
or other liabilities incurred in connection with their role in equity transfer to the greatest extent permitted under PRC law.
YOD WFOE further waived and released Nominee Shareholders from any claims arising from, or related to, their role as the legal
shareholder of Sinotop Beijing, provided that their actions as a nominee shareholder are taken in good faith and are not opposed
to YOD WFOE’s best interests. Conversely, the Nominee Shareholders will not be entitled to dividends or other benefits generated
therefrom, or receive any compensation in connection with this arrangement. The Letter of Indemnification will remain valid until
either Nominee Shareholders or YOD WFOE terminates the agreement by giving the other party hereto 60 days’ prior written
notice.
In addition to the New Sinotop VIE Agreements,
the Management Service Agreement between Sinotop Beijing and YOD Hong Kong continued to remain in effect, the key terms of which
are as follows:
Management Services Agreement
Pursuant to a Management Services Agreement,
as of March 9, 2010, YOD Hong Kong has the exclusive right to provide to Sinotop Beijing management, financial and other services
related to the operation of Sinotop Beijing’s business, and Sinotop Beijing is required to take all commercially reasonable
efforts to permit and facilitate the provision of the services by YOD Hong Kong. As compensation for providing the services, YOD
Hong Kong is entitled to receive a fee from Sinotop Beijing, upon demand, equal to 100% of the annual net profits as calculated
on accounting policies generally accepted in the PRC of Sinotop Beijing during the term of the Management Services Agreement. YOD
Hong Kong may also request ad hoc quarterly payments of the aggregate fee, which payments will be credited against Sinotop Beijing’s
future payment obligations.
The Management Services Agreement also
provides YOD Hong Kong, or its designee, with a right of first refusal to acquire all or any portion of the equity of Sinotop Beijing
upon any proposal by the sole shareholder of Sinotop Beijing to transfer such equity. In addition, at the sole discretion of YOD
Hong Kong, Sinotop Beijing is obligated to transfer to YOD Hong Kong, or its designee, any part or all of the business, personnel,
assets and operations of Sinotop Beijing which may be lawfully conducted, employed, owned or operated by YOD Hong Kong, including:
(a) business
opportunities presented to, or available to Sinotop Beijing may be pursued and contracted for in the name of YOD Hong Kong rather
than Sinotop Beijing, and at its discretion, YOD Hong Kong may employ the resources of Sinotop Beijing to secure such opportunities;
(b) any
tangible or intangible property of Sinotop Beijing, any contractual rights, any personnel, and any other items or things of value
held by Sinotop Beijing may be transferred to YOD Hong Kong at book value;
(c) real
property, personal or intangible property, personnel, services, equipment, supplies and any other items useful for the conduct
of the business may be obtained by YOD Hong Kong by acquisition, lease, license or otherwise, and made available to Sinotop Beijing
on terms to be determined by agreement between YOD Hong Kong and Sinotop Beijing;
(d) contracts
entered into in the name of Sinotop Beijing may be transferred to YOD Hong Kong, or the work under such contracts may be subcontracted,
in whole or in part, to YOD Hong Kong, on terms to be determined by agreement between YOD Hong Kong and Sinotop Beijing; and
(e) any
changes to, or any expansion or contraction of, the business may be carried out at the sole discretion of YOD Hong Kong, and in
the name of and at the expense of, YOD Hong Kong; provided, however, that none of the foregoing may cause or have the effect of
terminating (without being substantially replaced under the name of YOD Hong Kong) or adversely affecting any license, permit or
regulatory status of Sinotop Beijing.
The term of the Management Services Agreement
is 20 years, and may not be terminated by Sinotop Beijing, except with the consent of, or a material breach by, YOD Hong Kong.
Pursuant to the above contractual agreements,
YOD WFOE can have the assets transferred freely out of Sinotop Beijing without any restrictions. Therefore, YOD WFOE considers
that there is no asset of Sinotop Beijing that can be used only to settle obligations of Sinotop Beijing, except for the registered
capital of the entity amounting to RMB10.6 million (approximately $1.6 million) as of December 31, 2017. As Sinotop Beijing is
incorporated as limited liability companies under PRC Company Law, creditors of this entity do not have recourse to the general
credit of other entities of the Company.
b) Tianjin Sevenstarflix Network Technology Limited (“SSF”)
VIE structure and arrangements
To comply with PRC laws and regulations
that prohibit or restrict foreign ownership of companies that provides value-added telecommunication services, the Company plans
to also provide its services through SSF, which is applying to hold the licenses and approvals to provide digital distribution
and Internet content services in the PRC. The Company has the ability to control SSF through a series of contractual agreements,
as described below, entered into among YOD WFOE, YOD Hong Kong, SSF and the legal shareholders of SSF.
On April 5, 2016, YOD WFOE entered into
variable interest entity agreements with SSF and its nominee shareholders pursuant to the Amended Tianjin Agreement dated December
21, 2015 (see Note 12(c)) (the “SSF VIE Agreements”). Lan Yang, holder of 99% equity ownership in SSF and a party to
certain of the SSF VIE Agreements, is the spouse of Bruno Zheng Wu, the Company’s Chairman. Yun Zhu, holder of 1% equity
ownership in SSF and a party to certain of the SSF VIE Agreements, is the Vice President of SSS.
The terms of the SSF VIE Agreements are
as follows:
Equity Pledge Agreement
Pursuant to the Equity Pledge Agreement
among YOD WFOE, Lan Yang and Yun Zhu (the “Nominee Shareholders”), dated April 5, 2016, the Nominee Shareholders pledged
all of their capital contribution rights in SSF to YOD WFOE as security for the performance of the obligations of SSF to make all
the required technical service fee payments pursuant to the Technical Services Agreement and for performance of the Nominee Shareholders’
obligation under the Call Option Agreement. The terms of the Equity Pledge Agreement expire upon satisfaction of all obligations
under the Technical Services Agreement and Call Option Agreement.
Call Option Agreement
Pursuant to the Call Option Agreement among
YOD WFOE, SSF and the Nominee Shareholders, dated April 5, 2016, the Nominee Shareholders granted an exclusive option to YOD WFOE,
or its designee, to purchase, at any time and from time to time, to the extent permitted under PRC law, all or any portion of the
Nominee Shareholders’ equity in SSF. The exercise price of the option shall be determined by YOD WFOE at its sole discretion,
subject to any restrictions imposed by PRC law. The term of the agreement is until all of the equity interest in SSF held by the
Nominee Shareholders is transferred to YOD WFOE, or its designee and may not be terminated by any party to the agreement without
consent of the other parties.
Power of Attorney
Pursuant to the Power of Attorney agreements
among YOD WFOE, SSF and each of the respective Nominee Shareholders, dated April 5, 2016, each of the Nominee Shareholders granted
YOD WFOE the irrevocable right, for the maximum period permitted by law, to all of its voting rights as shareholders of SSF. The
Nominee Shareholders may not transfer any of their equity interest in SSF to any party other than YOD WFOE. The Power of Attorney
agreements may not be terminated except until all of the equity in SSF has been transferred to YOD WFOE or its designee.
Technical Service Agreement
Pursuant to the Technical Service Agreement,
dated April 5, 2016, between YOD WFOE and SSF, YOD WFOE has the exclusive right to provide technical service, marketing and management
consulting service, financial support service and human resource support services to SSF, and SSF is required to take all commercially
reasonable efforts to permit and facilitate the provision of the services by YOD WFOE. As compensation for providing the services,
YOD WFOE is entitled to receive service fees from SSF equivalent to YOD WFOE’s cost plus 20-30% of such costs as calculated
on accounting policies generally accepted in the PRC. YOD WFOE and SSF agree to periodically review the service fee and make adjustments
as deemed appropriate. The term of the Technical Services Agreement is perpetual, and may only be terminated upon written consent
of both parties.
Spousal Consent
Pursuant to the Spousal Consent, dated
April 5, 2016, undersigned by the respective spouse of the Nominee Shareholders (collectively, the “Spouses”), the
Spouses unconditionally and irrevocably agreed to the execution of the Equity Pledge Agreement, Call Option Agreement and Power
of Attorney agreement. The Spouses agreed to not make any assertions in connection with the equity interest of SSF and to waive
consent on further amendment or termination of the Equity Pledge Agreement, Call Option Agreement and Power of Attorney agreement.
The Spouses further pledge to execute all necessary documents and take all necessary actions to ensure appropriate performance
under these agreements upon YOD WFOE’s request. In the event the Spouses obtain any equity interests of SSF which are held
by the Nominee Shareholders, the Spouses agreed to be bound by the SSF VIE Agreements, including the Technical Services Agreement,
and comply with the obligations thereunder, including sign a series of written documents in substantially the same format and content
as the SSF VIE Agreements.
Letter of Indemnification
Pursuant to the Letter of Indemnification
among YOD WFOE and Lan Yang and YOD WFOE and Yun Zhu, both dated as of April 5, 2016, YOD WFOE agreed to indemnify Nominee Shareholders
against any personal, tax or other liabilities incurred in connection with their role in equity transfer to the greatest extent
permitted under PRC law. YOD WFOE further waived and released the Nominee Shareholders from any claims arising from, or related
to, their role as the legal shareholder of SSF, provided that their actions as a nominee shareholder are taken in good faith and
are not opposed to YOD WFOE’s best interests. The Nominee Shareholders will not be entitled to dividends or other benefits
generated therefrom, or receive any compensation in connection with this arrangement. The Letter of Indemnification will remain
valid until either the Nominee Shareholders or YOD WFOE terminates the agreement by giving the other party hereto 60 days’
prior written notice.
Loan Agreement
Pursuant to the Loan Agreement among YOD
WFOE and the Nominee Shareholders, dated April 5, 2016, YOD WFOE agrees to lend RMB 19.8 million and RMB 0.2 million, respectively,
to the Nominee Shareholders for the purpose of establishing SSF and for development of its business. As of December 31, 2017, RMB
27.6 million (US $4.2 million) and RMB nil have been lent to Lan Yang and Yun Zhu, respectively. Lan Yang has contributed all of
the RMB 27.6 million (US $4.2 million) in the form of capital contribution. The loan can only be repaid by a transfer by the Nominee
Shareholders of their equity interests in SSF to YOD WFOE or YOD WFOE’s designated persons, through (i) YOD WFOE having the
right, but not the obligation to at any time purchase, or authorize a designated person to purchase, all or part of the Nominee
Shareholders’ equity interests in SSF at such price as YOD WFOE shall determine (the “Transfer Price”), (ii)
all monies received by the Nominee Shareholders through the payment of the Transfer Price being used solely to repay YOD WFOE for
the loans, and (iii) if the Transfer Price exceeds the principal amount of the loans, the amount in excess of the principal amount
of the loans being deemed as interest payable on the loans, and to be payable to YOD WFOE in cash. Otherwise, the loans shall be
deemed to be interest-free. The term of the Loan Agreement is perpetual, and may only be terminated upon the Nominee Shareholders
receiving repayment notice, or upon the occurrence of an event of default under the terms of the agreement. The loan extended to
the Nominee Shareholders and the capital of SSF are fully eliminated in the consolidated financial statements.
Management Services Agreement
In addition to the SSF VIE Agreements,
the Company’s subsidiary and the parent company of YOD WFOE, YOU On Demand (Asia) Limited, a company incorporated under the
laws of Hong Kong (“YOD Hong Kong”) entered into a Management Services Agreement with SSF, dated as of April 6, 2016
(the “Management Services Agreement”). Pursuant to a Management Services Agreement, YOD Hong Kong has the exclusive
right to provide to SSF management, financial and other services related to the operation of SSF’s business, and SSF is required
to take all commercially reasonable efforts to permit and facilitate the provision of the services by YOD Hong Kong.
As compensation for providing the services,
YOD Hong Kong is entitled to receive a fee from SSF, upon demand, equal to 100% of the annual net profits as calculated on accounting
policies generally accepted in the PRC of SSF during the term of the Management Services Agreement. YOD Hong Kong may also request
ad hoc quarterly payments of the aggregate fee; which payments will be credited against SSF’s future payment obligations.
In addition, at the sole discretion of
YOD Hong Kong, SSF is obligated to transfer to YOD Hong Kong, or its designee, any part or all of the business, personnel, assets
and operations of SSF which may be lawfully conducted, employed, owned or operated by YOD Hong Kong, including:
(a) business
opportunities presented to, or available to SSF may be pursued and contracted for in the name of YOD Hong Kong rather than SSF,
and at its discretion, YOD Hong Kong may employ the resources of SSF to secure such opportunities;
(b) any
tangible or intangible property of SSF, any contractual rights, any personnel, and any other items or things of value held by SSF
may be transferred to YOD Hong Kong at book value;
(c) real
property, personal or intangible property, personnel, services, equipment, supplies and any other items useful for the conduct
of the business may be obtained by YOD Hong Kong by acquisition, lease, license or otherwise, and made available to SSF on terms
to be determined by agreement between YOD Hong Kong and SSF;
(d) contracts
entered into in the name of SSF may be transferred to YOD Hong Kong, or the work under such contracts may be subcontracted, in
whole or in part, to YOD Hong Kong, on terms to be determined by agreement between YOD Hong Kong and SSF; and
(e) any
changes to, or any expansion or contraction of, the business may be carried out in the exercise of the sole discretion of YOD Hong
Kong, and in the name of and at the expense of, YOD Hong Kong;
provided, however, that none of the foregoing
may cause or have the effect of terminating (without being substantially replaced under the name of YOD Hong Kong) or adversely
affecting any license, permit or regulatory status of SSF.
The term of the Management Services Agreement
is 20 years, and may not be terminated by SSF, except with the consent of, or a material breach by, YOD Hong Kong.
Pursuant to the above contractual agreements,
YOD WFOE can have the assets transferred freely out of SSF without any restrictions. Therefore, YOD WFOE considers that there is
no asset of SSF that can be used only to settle obligation of YOD WFOE, except for the registered capital of SSF amounting to RMB
50.0 million (approximately $7.5 million), among which RMB 27.6 million (approximately $4.2 million) has been injected as of December
31, 2017. As SSF is incorporated as limited liability company under PRC Company Law, creditors of this entity do not have recourse
to the general credit of other entities of the Company.
Financial Information
The following financial information of
our VIEs’, as applicable for the periods presented, affected the Company’s consolidated financial statements.
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,898
|
|
|
$
|
1,519,125
|
|
Accounts receivable, net
|
|
|
-
|
|
|
|
1,260,529
|
|
Prepaid expenses
|
|
|
3,604
|
|
|
|
30,455
|
|
Other current assets
|
|
|
1,537
|
|
|
|
191,427
|
|
Intercompany receivables due from the Company’s subsidiaries
(i)
|
|
|
2,494,505
|
|
|
|
150,725
|
|
Total current assets
|
|
|
2,503,544
|
|
|
|
3,152,261
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
196,677
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
2,570
|
|
Long-term investments
|
|
|
3,719,467
|
|
|
|
3,654,664
|
|
Other non-current assets
|
|
|
-
|
|
|
|
442,782
|
|
Total assets
|
|
$
|
6,223,011
|
|
|
$
|
7,448,954
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
-
|
|
|
$
|
5,817
|
|
Deferred revenue
|
|
|
-
|
|
|
|
824,563
|
|
Accrued expenses
|
|
|
-
|
|
|
|
268,074
|
|
Other current liabilities
|
|
|
41
|
|
|
|
394,314
|
|
Accrued license content fees
|
|
|
-
|
|
|
|
1,236,661
|
|
Intercompany payables due to the Company’s subsidiaries
(i)
|
|
|
3,601,454
|
|
|
|
14,752,338
|
|
Total current liabilities
|
|
|
3,601,495
|
|
|
|
17,481,767
|
|
Total liabilities
|
|
$
|
3,601,495
|
|
|
$
|
17,481,767
|
|
|
|
2017
|
|
|
2016
|
|
Net revenue
|
|
$
|
794,273
|
|
|
$
|
4,543,616
|
|
Net loss
|
|
$
|
(4,356,188
|
)
|
|
$
|
(6,557,639
|
)
|
|
|
2017
|
|
|
2016
|
|
Net cash used in operating activities
|
|
$
|
(1,661,696
|
)
|
|
$
|
(2,497,637
|
)
|
Net cash used in investing activities
|
|
$
|
(43,047
|
)
|
|
$
|
(2,896,492
|
)
|
Net cash provided by financing activities
(i)
|
|
$
|
189,515
|
|
|
$
|
6,555,377
|
|
|
(i)
|
Intercompany receivables
and payables are eliminated upon consolidation. The intercompany financing activities include the capital injection of $0.2 million
to SSF in 2017.
|
The decrease in assets and liabilities
mainly due to disposal of Zhong Hai Shi Xun Media as of June 30, 2017.
5. Acquisition
(i) Acquisition of SVG and Wide Angle
On January 30, 2017, the Company entered
into a Securities Purchase Agreement (the “Sun Video SPA”) with BT Capital Global Limited, a British Virgin Islands
company (“BT”) which is controlled by Company’s Chairman Bruno Wu, for the purchase by SSC of all of the outstanding
capital stock of Sun Video Group Hong Kong Limited, a Hong Kong corporation (“SVG”), for an aggregate purchase price
of $800,000 and a $50 million Promissory Note (the “SVG Note”) with the principal and interest thereon convertible
into shares of the Company’s common stock at a conversion rate of $1.50 per share. BT has guaranteed that SVG will achieve
certain financial goals within 12 months of the closing. Until receipt of necessary shareholder approvals, the SVG Note is not
convertible into shares of our common stock, but once the necessary shareholder approval is received, the unpaid principal and
interest thereon will automatically convert. Under the terms of the Sun Video SPA, BT has guaranteed that the business of SVG and
its subsidiaries (the “Sun Video Business”) shall achieve revenue of $250 million and $15 million of gross profit (collectively
the “Performance Guarantees”) within 12 months of the closing. If the Sun Video Business fails to meet either of the
Performance Guarantees within such time, BT shall forfeit back to the Company the shares of the Company’s common stock or
the SVG Note, on a pro rata basis based on the Performance Guarantee for which the Sun Video Business achieves the lowest percentage
of the respective amount guaranteed.
In addition, if the Sun Video Business
achieves more than $50 million in cumulative net income within 3 years of closing, (the “Net Income Threshold”), the
Company shall pay BT 50% of the amount of any cumulative net income above the Net Income Threshold. Profit share payments shall
be made on an annual basis, in either cash or stock at the discretion of our Board of Directors. If the Board decides to make the
payment in stock, the number of our shares of common stock to be awarded shall be calculated based on the market price of such
shares.
After the acquisition SVG, the Company
changed its name to Wecast Services Group Limited, and is therefore also referred to herein as Wecast Services.
On January 31, 2017, the Company entered
into a Securities Purchase Agreement (the “Wide Angle SPA”) with BT and Sun Seven Stars Media Group Limited, a Hong
Kong company (“SSS”), one of the Company’s largest shareholders, controlled by our Chairman Bruno Wu, as guarantor,
for the purchase by the Company of 55% of the outstanding capital stock of Wide Angle for the sole consideration of the Company
adding Wide Angle to the Sun Video Business acquired by the Company under the Sun Video SPA and thereby including 100% of the revenue
and gross profit from Wide Angle in the calculation of the SVG Performance Guarantees set forth in the Sun Video SPA considering
the Company has consolidated Wide Angle.
Since the Company, Wecast Services and
Wide Angle were controlled by our Chairman Bruno Wu since November 10, 2016, as well as both before and after the acquisition,
this transaction was accounted for as a business combination between entities under common control by Mr. Wu. Therefore, in accordance
with ASC Subtopic 805-50, the consolidated financial statements of the Company include the acquired assets and liabilities of the
SVG and Wide Angle at their historical carrying amounts. In addition, the Company’s consolidated financial statements as
of December 31, 2016 have been prepared as if the Wecast Services and Wide Angle had been owned by the Company since November 10,
2016 presented and the Company’s consolidated financial statements as of December 31, 2016 has been retrospectively adjusted
accordingly.
As of December 31, 2017, the Company recorded
the $24.3 million SVG Note as additional paid in capital based on the actual performance Considering the proceeds transferred were
larger than carrying amounts of the net assets received, such $24.3 million was then recognized as a reduction to the Company’s
additional paid in capital. The Company has not begun accruing any reserves relating to potential Net Income Threshold earnout
payments, since the Sun Video Business is currently not close to exceeding this threshold.
(ii) Acquisition of BBD Capital
On December 7, 2017, the Company entered
into a Securities Purchase Agreement (the “BBD Purchase Agreement”) with Tiger Sports Media Limited, a Hong Kong limited
liability company (“Tiger”) pursuant to which the Company agreed to purchase Tiger’s 20% equity ownership in
BBD Digital Capital Group Ltd. (“BBD Capital”), a New York corporation. SSC will purchase the 20% equity from Tiger
for a total purchase price of $9.8 million (the “Transaction”) which consists of $2 million in cash and $7.8 million
to be paid in the form of the Company’s capital stock (valued at $2.60 per share and equal to 3 million shares of the Company’s
common stock). The valuation report will be received post-signing of the BBD Purchase Agreement with both parties agreeing that
there is no obligation to close the Transaction until a satisfactory valuation report has been received, evaluated and approved
by the Company’s Audit Committee. The Company shall pay the $2 million in cash upon the execution of the BBD Purchase Agreement
and will issue the 3 million shares of Company common stock upon the closing of the Transaction which is contingent upon the receipt
of a valuation report satisfactory to the Audit Committee. If the closing conditions to the Transaction are not satisfied, then
Tiger has agreed to refund the $2 million cash payment to SSC within 15 days of notice from the Company. As of December 31, 2017,
the Company has paid $2 million cash, however considering the deal was not closed until a satisfactory valuation report was obtained
and approved by Audit Committee, and valuation report was not yet finished, the Company recorded it as prepaid expenses in its
consolidated balance sheet.
6. Accounts Receivable
Accounts receivable is consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accounts receivable, gross
|
|
$
|
26,965,731
|
|
|
$
|
12,350,947
|
|
Less: allowance for doubtful accounts
|
|
|
(3,646
|
)
|
|
|
(2,828,796
|
)
|
Accounts receivable, net
|
|
$
|
26,962,085
|
|
|
$
|
9,522,151
|
|
The movement of the allowance for doubtful accounts is as follows:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Balance at the beginning of the year
|
|
$
|
(2,828,796
|
)
|
|
$
|
-
|
|
Additions charged to bad debt expense
|
|
|
(145,512
|
)
|
|
|
(2,825,124
|
)
|
Write-off of bad debt allowance
|
|
|
89,851
|
|
|
|
-
|
|
Disposal of Zhong Hai Shi Xun
|
|
|
2,880,811
|
|
|
|
-
|
|
Acquisition of WAG
|
|
|
-
|
|
|
|
(3,672
|
)
|
Balance at the end of the year
|
|
$
|
(3,646
|
)
|
|
$
|
(2,828,796
|
)
|
7. Property and Equipment, net
The following is a breakdown of property
and equipment:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Furniture and office equipment
|
|
$
|
301,006
|
|
|
$
|
1,063,481
|
|
Vehicle
|
|
|
147,922
|
|
|
|
267,023
|
|
Office Building
|
|
|
-
|
|
|
|
3,948,058
|
|
Leasehold improvements
|
|
|
-
|
|
|
|
939,844
|
|
Total property and equipment
|
|
|
448,928
|
|
|
|
6,218,406
|
|
Less: accumulated depreciation
|
|
|
(334,935
|
)
|
|
|
(1,254,681
|
)
|
Property and Equipment, net
|
|
$
|
113,993
|
|
|
$
|
4,963,725
|
|
The Company recorded depreciation expense
of approximately $ 219,705 and $194,174, which is included in its operating expense for the years ended December 31, 2017 and 2016,
respectively.
8. Intangible Assets
As of December 31, 2017 and 2016, the Company’s
amortizing and indefinite lived intangible assets consisted of the following:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
Gross
Carry
Amount
|
|
|
Accumulated
Amortization
|
|
|
Impairment
Loss
|
|
|
Net
Balance
|
|
|
Gross
Carry
Amount
|
|
|
Accumulated
Amortization
|
|
|
Impairment
Loss
|
|
|
Net
Balance
|
|
Amortizing Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter/ Cooperation agreements (iii)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,755,821
|
|
|
$
|
(909,257
|
)
|
|
$
|
(1,846,564
|
)
|
|
$
|
-
|
|
Software and licenses
|
|
|
214,210
|
|
|
|
(199,626
|
)
|
|
|
-
|
|
|
|
14,584
|
|
|
|
267,991
|
|
|
|
(241,932
|
)
|
|
|
-
|
|
|
|
26,059
|
|
Patent and trademark (iv)
|
|
|
92,965
|
|
|
|
(39,943
|
)
|
|
|
(53,022
|
)
|
|
|
-
|
|
|
|
92,965
|
|
|
|
(39,943
|
)
|
|
|
-
|
|
|
|
53,022
|
|
Website and mobile app development (ii)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
593,193
|
|
|
|
(421,129
|
)
|
|
|
(172,064
|
)
|
|
|
-
|
|
Workforce (i)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
305,694
|
|
|
|
(76,422
|
)
|
|
|
-
|
|
|
|
229,272
|
|
Total
amortizing intangible assets
|
|
$
|
307,175
|
|
|
|
(239,569
|
)
|
|
|
(53,022
|
)
|
|
|
14,584
|
|
|
$
|
4,015,664
|
|
|
$
|
(1,688,683
|
)
|
|
$
|
(2,018,628
|
)
|
|
$
|
308,353
|
|
Indefinite lived intangible
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Website name
|
|
|
134,290
|
|
|
|
-
|
|
|
|
-
|
|
|
|
134,290
|
|
|
|
134,290
|
|
|
|
-
|
|
|
|
-
|
|
|
|
134,290
|
|
Patent (iv)
|
|
|
10,599
|
|
|
|
-
|
|
|
|
(10,599
|
)
|
|
|
-
|
|
|
|
10,599
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,599
|
|
Total
intangible assets
|
|
$
|
452,064
|
|
|
|
(239,569
|
)
|
|
|
(63,621
|
)
|
|
|
148,874
|
|
|
$
|
4,160,553
|
|
|
$
|
(1,688,683
|
)
|
|
$
|
(2,018,628
|
)
|
|
$
|
453,242
|
|
|
(i)
|
On April 1, 2016, the Company
entered into an agreement with Mr. Liu Changsheng, under which SSC agreed to pay Mr. Liu Changsheng cash consideration of $187,653
and 66,500 shares of restricted shares with a six-month restriction period and a fair value of $121,695 in exchange for a workforce
of 10 personnel experienced in programing content mobile apps. All 10 personnel entered into three-year employment contracts with
SSC effective April 1, 2016. The Company also acquired certain laptop and desktop computers with fair value of $3,655. According
to the agreement, 30% of the cash consideration is due upon the signing of the agreement, 20% is due 2 months after the signing
of the agreement and 50% is due 6 months after the signing of the agreement. All cash consideration has been paid. If any of 3
key staff, as defined, terminated their employment with SSC during the first 12 months of employment, SSC has the right to forfeit
the unpaid cash consideration. In addition, Mr. Liu Changsheng would be required to pay a default penalty at minimal of $129,180.
SSC has accounted for the transaction as an asset acquisition in which SSC mainly acquired a workforce, which is recognized as
an intangible asset at cost. Subsequently, the workforce intangible is amortized over the employment term of three years.
|
In September, 2017, after evaluating the
cost and benefit, Company decided to terminate the service contract with this entire team and therefore Company recognize impairment
in the amount of $152,847, and at the December 31, 2017, the Company already terminated the service, and disposed of this intangible
assets from consolidated balance sheet.
|
(ii)
|
Considering a new mobile
app has been developed to be put into market in October 2016, the Company determined that the future cash flows generated from
the old mobile app was nil. In accordance with ASC 350,
Intangibles - Goodwill and Other
, recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected
to be generated by the asset. The Company estimated the fair value of this intangible asset to be nil as of December 31, 2016.
Fair value was determined using unobservable (Level 3) inputs. In June, 2017, this intangible asset has been disposed of along
with other net assets in Zhong Hai Shi Xun.
|
|
(iii)
|
During the fourth quarter
of 2016, the Company determined that the Charter/Cooperation agreements will not serve the business or generate future cash flow.
As no future cash flows will be generated from the Charter/Cooperation agreements, the Company estimated the fair value of the
Charter/Cooperation agreements to be nil as of December 31, 2016. Fair value was determined using unobservable (Level 3) inputs.
Impairment loss from Charter/Cooperation agreements of $1,846,000 was recognized in 2016 to write off the entire book value of
the Charter/Cooperation agreements. In June, 2017, this intangible asset has been disposed of along with other net assets in Zhong
Hai Shi Xun.
|
|
(iv)
|
During the second quarter
of 2017, the Company determined that one of its subsidiaries in the US will not serve the non-core business or generate future
cash flow. As no future cash flows will be generated from using the patent owned by this subsidiary, the Company estimated the
fair value of those patent to be nil as of June 30, 2017. Fair value was determined using unobservable (Level 3) inputs. Impairment
loss from patent of $63,621 was recognized in 2017 to write off the entire book value of the patent.
|
The following table outlines the amortization
expense for the following years:
|
|
Amortization to be
|
|
Years ending December 31,
|
|
recognized
|
|
2018
|
|
$
|
10,295
|
|
2019
|
|
|
4,289
|
|
Total amortization to be recognized
|
|
$
|
14,584
|
|
9. Long-term Investments
Cost method investments
Cost method investments as of the year ended December 31, 2017
and 2016 are as follow:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Topsgame (i)
|
|
$
|
3,365,969
|
|
|
$
|
3,156,985
|
|
Frequency (ii)
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
DBOT (iii)
|
|
|
250,000
|
|
|
|
-
|
|
Total
|
|
$
|
6,615,969
|
|
|
$
|
6,156,985
|
|
(i) Investment in Topsgame
On April 13, 2016, SSF entered into a Game
Right Assignment Agreement with SSS for the acquisition of certain game IP rights (“Game IP Rights”) for approximately
$2.7 million (RMB18 million) in cash. On April 15, 2016, SSF entered into a Capital Increase Agreement with Nanjing Tops Game Co.,
Ltd. (“Topsgame”) and its shareholders whereby SSF transferred the Game IP Rights acquired from SSS to Topsgame in
exchange for 13% of Topsgame’s equity ownership. Topsgame is a PRC company that specializes in the independent development
and operation of online, stand-alone and other games as well as the distribution of domestic and overseas games. The Company’s
13% ownership interest does not provide the Company with the right to nor does the Company have representation on the board of
directors of Topsgame.
The Company has recognized the cost of
the investment in Topsgame, which is a private company with no readily determinable fair value, based on the acquisition cost of
Game IP Rights of approximately $2.7 million and accounts for the investment by the cost method.
On September 14, 2016, SSF increased its
investment in Topsgame by RMB 3,900,000 (approximately $584,000) and maintained its 13% equity ownership of Topsgame. The investment
continued to be accounted for using the cost method.
The Company plans to sell investment in
Topsgame, certain owned IP and investment in Frequency to one independent third party with consideration larger than its net book
amount in 2018. The Company already signed the letter of intent with purchaser, and management believed that we can close the deal
in 2018, along with one additional valuation report provided by qualified independent valuation firm, the Company did not make
any impairment to either of these three long-lived assets as of December 31, 2017.
(ii) Investment in Frequency
In April 2016, the Company and Frequency
Networks Inc. (“Frequency”) entered into a Series A Preferred Stock Purchase Agreement (the “SPA”) for
the purchase of 8,566,271 shares of Series A Preferred Stock, Frequency (the “Frequency Preferred Stock”) for a total
purchase price of $3 million. The 8,566,271 Series A Preferred Stock represent 9% ownership and voting interest on an as converted
basis and does not provide the Company with the right to nor does the Company have representation on the board of directors of
Frequency.
The Frequency Preferred Stock is entitled
to non-cumulative dividends at the rate of $0.02548 per share per annum, declared at the discretion of Frequency’s board
of directors. The Frequency Preferred Stock is also convertible into shares of Frequency common stock at the Company’s election
any time after issuance on a 1:1 basis, subject to certain adjustment. Each share of Frequency Preferred Stock also has a liquidation
preference of $0.42467 per share, plus any declared but unpaid dividends.
The Company has recognized the cost of
the investment in Frequency, which is a private company with no readily determinable fair value, at its cost of $3 million and
accounts for the investment by the cost method.
There were no identified events or changes
in circumstances that may have had a significant adverse effect on the fair value of our cost method investments, accordingly the
fair value of our cost method investments are not estimated.
(iii) Investment in DBOT
In August, 2017, the Company made a strategic
investment of US$250,000 in the Delaware Board of Trade Holdings, Inc. (“DBOT”) to acquire 187,970 common shares. DBOT
is an approved and licensed FINRA- and SEC-regulated electronic trading platform with operations in Delaware. One of our subsidiaries
is powered by DBOT’s platform, trading system and technology. The Company accounts for this investment using the cost method,
as the Company owns less than 4% of the common shares and the Company has no significant influence over DBOT.
On December 18, 2017, the Company enters
into stock purchase agreement with certain existing DBOT shareholders to acquire their owned shares of common stock of DBOT in
an aggregate amount of 2,543,546 shares. To acquire those shares, the Company agreed to issue in the aggregate amount of 1,627,869
SSC common stock. The closing of this transaction shall occur within 30 days of the execution of this agreement and obtain necessary
approval such as FINRA, and therefore the Company did not issue the shares and recorded it as investment as of December 31, 2017.
Equity method investments
Equity method investment movement for the year of 2017 is as
follow:
|
|
|
|
December 31, 2017
|
|
|
|
|
|
January 1,
2017
|
|
|
Capital
increase
|
|
|
Loss on
investment
|
|
|
Impairment
loss
|
|
|
Foreign
currency
translation
adjustments
|
|
|
December 31,
2017
|
|
Wecast Internet
|
|
(i)
|
|
|
132,782
|
|
|
|
(35,612
|
)
|
|
|
(93,481
|
)
|
|
|
-
|
|
|
|
2,355
|
|
|
|
6,044
|
|
Hua Cheng
|
|
(ii)
|
|
|
364,897
|
|
|
|
-
|
|
|
|
(35,712
|
)
|
|
|
-
|
|
|
|
24,313
|
|
|
|
353,498
|
|
Shandong Media
|
|
(iii)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
|
|
497,679
|
|
|
|
(35,612
|
)
|
|
|
(129,193
|
)
|
|
|
-
|
|
|
|
26,668
|
|
|
|
359,542
|
|
(i) Investment in Wecast Internet
In October 2016, the Company’s subsidiary,
YOU On Demand (Asia) Ltd., invested RMB 1,000,000 (approximately $149,750) in Wecast Internet Limited (“Wecast Internet”)
and held its 50% equity ownership. In 2017, Wecast Internet closed its 100% owned subsidiary and the Company received $35,612 previous
capital investment, and expects to receive the remaining from Wecast Internet in 2018.
(ii) Investment in Hua Cheng
As of the years ended December 31, 2017
and 2016, the Company held 39% equity ownership in Hua Cheng, and accounted for the investment by the equity method.
(iii) Investment in Shandong Media
As of the years ended December 31 2017
and 2016, the Company held 30% equity ownership in Shandong Media, and accounts for the investment by the equity method. The investment
was fully impaired as of December 31, 2017 and 2016.
10. Stockholders’ Equity
On July 6, 2016, the Company entered into
a Common Stock Purchase Agreement (the “SSW SPA”) with Seven Stars Works Co., Ltd., a Korea company (“SSW”)
and an affiliate of SSS. Pursuant to the terms of the SSW SPA, the Company has agreed to sell and issue 2,272,727 shares of the
Company’s common stock for $1.76 per share, or a total purchase price of $4.0 million to SSW. A total of $4.0 million was
received and 2,272,727 shares were issued on July 19, 2016.
On August 11, 2016, the Company entered
into Common Stock Purchase Agreement (the “Harvest SPA”) with Harvest Alternative Investment Opportunities SPC (“Harvest”),
a Cayman Islands company. Pursuant to the terms of the Harvest SPA, the Company has agreed to sell and issue 2,272,727 shares of
the Company’s common stock, for $1.76 per share, or a total purchase price of $4.0 million to Harvest. A total of $4.0 million
was received and 2,272,727 shares were issued on August 12, 2016.
On November 11, 2016, the Company entered
into Common Stock Purchase Agreement (the “SSSHKCD SPA”) with Sun Seven Stars Hong Kong Cultural Development Limited,
a Hong Kong company (“SSSHKCD”) and an affiliate of SSS. Pursuant to the terms of the SSSHKCD SPA, the Company has
agreed to sell and issue 1,136,365 shares of the Company’s common stock for $1.76 per share, or a total purchase price of
$2.0 million to SSSHKCD. A total of $2.0 million was received and 1,136,365 shares were issued on November 17, 2016.
As described in Note 13, the Company and
SSS entered into a series of agreements, including an agreement pursuant to which the Company agreed to sell and issue 4,545,455
shares of the Company's common stock and warrants to acquire an additional 1,818,182 shares (at an exercise price of $2.75 per
share) for an aggregate purchase price of $10 million to SSS.
On May 19, 2017, the Company entered into
a subscription agreement with certain investors, including officers, directors and other affiliates of the Company, pursuant to
which the Company issued and sold to such investors, in a private placement, an aggregate of 727,273 shares of the common stock
of the Company, for $2.75 per share, or a total purchase price of $2.0 million. Investors in the private placement included Lan
Yang, the wife of the Company’s Chairman Bruno Wu, and China Telenet Ventures Limited, an entity owned and controlled by
Sean Wang, a member of the Company’s Board of Directors. As of July 18, 2017, all subscription amounts have been received
by the Company.
On October 23, 2017, the Company entered
into a Securities Purchase Agreement with Hong Kong Guo Yuan Group Capital Holdings Limited. Pursuant to the terms of the agreement,
the Company has agreed to sell and issue 5,494,505 shares of the Company’s common stock to the Hong Kong Guo Yuan Group Capital
Holdings Limited for $1.82 per share, or a total purchase price of $10.0 million.
11. 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.
The Company reviews the valuation techniques
used to determine if the fair value measurements are still appropriate on an annual basis, and evaluate and adjust the unobservable
inputs used in the fair value measurements based on current market conditions and third party information.
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
was valued using Monte Carlo Simulation method at the year ended December 31, 2016. All the remaining warrant liabilities have
been expired as of August 30, 2017. The following assumptions were incorporated:
|
|
December 31,
|
|
|
|
2016
|
|
Risk-free interest rate
|
|
|
0.70
|
%
|
Expected volatility
|
|
|
55
|
%
|
Expected term
|
|
|
0.67 year
|
|
Expected dividend yield
|
|
|
0
|
%
|
The following tables present the fair value
hierarchy for those assets and liabilities measured at fair value on a recurring basis at December 31, 2016:
|
|
December 31, 2016
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair Value
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note14)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
70,785
|
|
|
$
|
70,785
|
|
The table below reflects the components
effecting the change in fair value for the years ended December 31, 2017 and 2016, respectively:
|
|
Level 3 Assets and Liabilities
|
|
|
|
|
|
|
For the Year Ended December 31, 2017
|
|
|
|
|
|
|
January 1,
2017
|
|
|
Settlements
|
|
|
Change in
Fair Value
gain
|
|
|
December 31,
2017
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note 14)
|
|
$
|
70,785
|
|
|
$
|
(183,427
|
)
|
|
$
|
112,642
|
|
|
$
|
-
|
|
|
|
Level 3 Assets and Liabilities
|
|
|
|
|
|
|
For the Year Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
January 1,
|
|
|
|
|
|
Fair Value
|
|
|
December 31,
|
|
|
|
2016
|
|
|
Settlements
|
|
|
gain
|
|
|
2016
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (see Note14)
|
|
$
|
395,217
|
|
|
$
|
-
|
|
|
$
|
(324,432
|
)
|
|
$
|
70,785
|
|
The significant unobservable inputs used
in the fair value measurement of the Company’s warrant liability includes the risk-free interest rate, expected volatility,
expected term and expected dividend yield. Significant increases or decreases in any of those inputs in isolation would result
in a significantly different fair value measurement.
The carrying amount of cash, accounts receivable,
notes receivable, accounts payable, accrued other expenses, other current liabilities and convertible promissory note as of December
31, 2017 and 2016, respectively, approximate fair value because of the short maturity of these instruments.
12. Related Party Transactions
(a) $3.0 Million Convertible Note
On May 10, 2012, the Executive Chairman
and Principal 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 the aggregate principal amount of $3,000,000 (the “Note”)
at a 4% interest rate computed on the basis of a 365-day year. Upon issuance, the conversion price of the Note was equal to the
price per share paid for securities by investors in the most recent financing (as of the date of conversion) of equity or equity-linked
securities of the Company.
Effective on January 31, 2014, the Company
and Mr. McMahon entered into Amendment No. 4 to the Note pursuant to which the Note is at Mr. McMahon’s option, payable on
demand or convertible on demand into shares of Series E Preferred Stock of the Company (the “Series E Preferred Stock”)
at a conversion price of $1.75, until December 31, 2015. As a result, in 2014, the Company recognized a beneficial conversion feature
discount calculated as the difference between the Series E Preferred Stock at its intrinsic value, which was the fair value of
the common stock at the commitment date for the Series E Preferred Stock investment and the effective conversion price. As such,
we recognized a beneficial conversion feature of approximately $2,126,000 in 2014 which was reflected as interest expense and additional
paid-in capital since the note was payable upon demand.
Effective December 30, 2014, the Company
and Mr. McMahon entered into Amendment No. 5 pursuant to which the maturity date of the Note was extended to December 31, 2016.
The Note remains payable on demand or convertible on demand into shares of Series E Preferred Stock at a conversion price of $1.75
at Mr. McMahon’s option.
On December 31, 2016, the Company and Mr.
McMahon entered into an amendment pursuant to which the Note will be at Mr. McMahon’s option, payable on demand or convertible
on demand into shares of the Company’s Series E Preferred Stock, provided that the Note will no longer be convertible into
Series E Preferred Stock upon the conversion of the Series E Preferred stock owned by C Media into the Company’s Common Stock
(pursuant to which all Series E Preferred Stock will be automatically converted) but then convertible only into Common Stock at
a conversion price of $1.50, until December 31, 2018.
On November 9, 2017, the Board of Directors
approved Amendment No. 7 to $3.0 million Convertible Promissory Notes (“Note”) issued to Mr. Shane McMahon, our Vice
Chairman, pursuant to which the maturity date of the Note was extended to December 31, 2019. The Note remains payable on demand
or convertible on demand into Common Stock at a conversion price of $1.50.
In November, 2017, the Company paid such
interest in the amount of $407,863 to Mr. Shane McMahon, and the accumulated interest payable as of December 31, 2017 was $20,055.
For the years ended December 31, 2017 and
2016, the Company recorded interest expense of $120,000 and $120,000 related to the Note.
(b) Cost of Revenue
Hua Cheng, in which the Company holds 39%
of the equity shares, charged us licensed content fees of approximately nil and $219,000 for the years ended December 31, 2017
and 2016, respectively.
(c) Purchase of Game IP Rights
On April 13, 2016, SSF entered into a Game
Right Assignment Agreement with SSS for the acquisition of certain Game IP Rights for cash of $2.7 million (RMB 18 million), which
was paid in full in 2016. The Game IP Rights was recorded at cost and then subsequently transferred in exchange for the investment
in Topsgame as disclosed in Note 9 above.
(d) Deposit for Investment in MYP
On September 19, 2016, the Company signed
a non-binding term sheet with Sun Video Group HK Limited (“SVG”) in purchase for its 51% ownership of M.Y. Products,
LLC (“MYP”), a video commerce and supply chain management operator, in exchange for $50 million worth of Wecast Network
common stock and $800,000 cash.
In accordance with the Term Sheet, the
Company wired $800,000 (or its RMB equivalent) to MYP upon signing the term sheet as Good Faith Deposit. As of December 31, 2017,
the transaction has already been closed, and all of the deposit paid to MYP has been transferred into liability due to BT, which
is the former shareholder of SVG.
(e) Assets Disposal to BT
On June 30, 2017, the Company entered into
a Securities Purchase Agreement (the BT SPA) with BT, pursuant to which the issued and outstanding stock that SSC holds in three
separate non-core assets were sold to BT in exchange for RMB100 million (approximately $14.75 million at current exchange rate)
in a combination of cash and publicly traded stock to be paid to SSC within one year of closing. A minimum of 20% of the total
consideration to SSC will be paid in cash (approximately $2.95 million). A portion of the consideration may be paid in the form
of publicly traded stock at the discretion of BT, and in that case the securities will represent a public company affiliated with
BT, in an industry related to SSC’s and with an average daily trading value of at least $146,000.
These three separate non-core assets that
sold to BT included 80% equity interest in Zhong Hai Shi Xun Media for zero, 13% equity interest in Nanjing Tops Game and 25% share
capital investment right in Pantaflix JV in consideration of RMB100 million. As Zhong Hai Shi Xun Media is the Company’s
subsidiary, sale of a subsidiary to a related party under common control would cause the Company to derecognize the net assets
transferred at its carrying amounts and recognize no gains or losses. The difference between proceeds received and the carrying
amount of the net assets transferred is recognized in additional paid in capital. At the same time, the Goodwill in the amount
of $6.6 million has been pushed down to Zhong Hai Shi Xun Media along with the disposal.
On November 28, 2017, due to strategic
reasons, the Company and BT have agreed to amend the BT SPA, in which the Company will neither sell to BT the equity of Nanjing
Tops Game Co., Ltd, and the equity of the Pantaflix joint venture nor receive the previously agreed upon consideration for such
sales. But the Company will still sell to BT 80% of the outstanding capital stock of Zhong Hai Shi Xun Media to streamline the
operations of the Company and to eliminate the Company’s exposure to any liabilities and obligations of Zhong Hai Shi Xun
Media. As of December 31, 2017, the legal ownership transfer administration of Zhong Hai Shi Xun Media was still not yet finished,
however based on the agreement signed between the Company and BT and the consent obtained from minority shareholder of Zhong Hai
Shi Xun Media, the Company believed it no longer have right over its asset and no obligation to its liability, and the Company
therefore no longer consolidate Zhong Hai Shi Xun Media since July 1, 2017.
(f) Acquisition of Guang Ming
On December 7, 2017, the Company entered
into a Securities Purchase Agreement with Shanghai Guang Ming Investment Management Limited, a PRC limited liability entity (“Guang
Ming”), Tianjin Sun Seven Stars Culture Development Co. Ltd. (“Tianjin”) and Beijing Nanbei Huijin Investment
Co. Ltd. SSC will purchase 100% of Guang Ming’s issued and outstanding shares for a total purchase price of RMB 2.4 million
(approximately $363,436). Guang Ming holds a special fund management license and SSC’s purpose for making the acquisition
is to develop a fund management platform. The closing of the acquisition is conditioned upon, among other things, the sellers,
including Guang Ming, obtaining all of the necessary approvals from the Asset Management Association of China (“AMAC”),
a self-regulatory organization which oversees and regulates fund management companies in China. In the event that AMAC does not
accept the sellers’ submission for change of ownership, this agreement shall be rescinded and the sellers shall continue
their ownership of Guang Ming and shall refund any portion of the purchase price previously paid within 15 days of notice from
the Company. This agreement was approved by the Company’s Audit Committee and the closing of the Acquisition is also subject
to the receipt of a fairness opinion and valuation report satisfactory to the Company and which concludes that the purchase price
of the acquisition is fair from a financial point of view to the Company. The acquisition is deemed to be a related party transaction
because Tianjin is an affiliate of Bruno Wu, the Company’s Chairman and Chief Executive Officer. As of December 31,
2017, the fairness opinion was not yet obtained, and the Company did account for this acquisition as of year-end of 2017 due to
closing condition was not satisfied.
(g) Crude Oil Trading
In December, 2017, One of our crude oil transaction was sold
to one entity of which our minority shareholder has significant influence upon. Even though the crude oil was eventually sold to
independent third party, the Company has recorded this sale as one separate related party sale in its financial statement.
13. SSS Agreements
On November 23, 2015, the Company entered
into a series of agreements for a strategic investment by SSS, a PRC company in the media and entertainment industry that is controlled
by the Company’s Chairman, Bruno Zheng Wu. The strategic investment by SSS included a private placement of equity securities
of the Company, a content licensing agreement, and the potential for Tianjin Enternet Network Technology Limited (“Tianjin
Enternet”), an affiliate of SSS, to earn additional shares of the Company’s common stock contingent on the performance
of SSF. SSF intends to provide a branded pay content service, consumer payments and behavior data analysis service, customer management
and data-based service and mobile social TV-based customer management service.
On December 21, 2015, the Company entered
into an Amended and Restated Securities Purchase Agreement (the “Amended SSS Purchase Agreement”) and a Revised Content
License Agreement (the “Revised Content Agreement”) with SSS which amended certain terms of the original agreements
dated November 23, 2015. In addition, the Company also entered into an Amended and Restated Share Purchase Agreement (the “Amended
Tianjin Agreement”) with Tianjin Enternet.
On July 6, 2016, the Company entered into
a Common Stock Purchase Agreement with Seven Stars Works Co., Ltd., a Korea company (“SSW”) and an affiliate of SSS
for the purchase by SSW of 2,272,727 shares of the Company’s common stock, for $1.76 per share, or a total purchase price
of $4.0 million.
On November 11, 2016, the Company entered
into a Common Stock Purchase Agreement with Sun Seven Stars Hong Kong Cultural Development Limited, a Hong Kong company (“SSSHKCD”)
and an affiliate of SSS. Pursuant to the terms of the SPA, the Company has agreed to sell and issue 1,136,365 shares of the Company’s
common stock, for $1.76 per share, or a total purchase price of $2.0 million to SSSHKCD.
(a) Amended SSS Purchase Agreement
On March 28, 2016, pursuant to the Amended
SSS Purchase Agreement, the Company sold, and SSS purchased, 4,545,455 shares of the Company’s common stock for a purchase
price of $2.20 per share, or an aggregate of $10.0 million. In addition, SSS received a two-year warrant to acquire an additional
1,818,182 shares of the Company’s common stock at an exercise price of $2.75 per share (the “SSS Warrant”). Until
receipt of necessary shareholder approvals, the SSS Warrant may not be exercised to the extent that such exercise would result
in SSS and its affiliates beneficially owning more than 19.99% of the Company’s outstanding common stock. On June 27, 2016,
shareholder approval was obtained.
Since the SSS Warrant does not embody any
future obligation for the Company to repurchase its own shares, is indexed to the Company’s own stock, may only be settled
by the physical delivery of shares, and no conditions exist in which net cash settlement could be forced upon the Company by SSS
in any other circumstances, the SSS Warrant is considered an equity classified instrument. The proceeds of $10.0 million, net of
issuance cost of approximately $411,000, was allocated to common stock and SSS Warrant based on their relative fair value as of
March 28, 2016 of approximately $8,227,000 and $673,000, respectively. Accordingly, the Company recorded approximately $725,000
in additional paid-in capital for the SSS Warrant.
(b) Revised Content Agreement
On March 28, 2016, pursuant to the Amended
and Restated SSS Purchase Agreement, SSS granted the Company non-exclusive royalty-free distribution rights for certain video content
value in exchange for a convertible promissory note (the “SSS Note”). The SSS Note has a stated principal amount of
approximately $17,718,000, was originally due to mature on May 21, 2016. On May 12, 2016, the Company and SSS entered into an amendment
agreement to extend the maturity date of the SSS Note to July 31, 2016. The SSS Note beard an interest at the rate of 0.56% per
annum. Immediately upon the receipt of the required shareholder approval to allow SSS to beneficially own more than 19.99% of the
Company’s outstanding common stock, which was obtained on June 27, 2016, the SSS Note was converted into 9,208,860 shares
of the Company’s common stock.
In connection with the issuance of the
SSS Note, the Company recorded debt issuance costs of approximately $131,000 which was to be amortized over the period of the SSS
Note’s maturity date, of which approximately $123,000 was recognized during the year ended December 31, 2016.
The Company measured the effective conversion
price of the SSS Note using its carrying value on March 28, 2016 and compared it to the fair value of the Company’s common
stock on that date. As the effective conversion price of the SSS Note of $1.91 exceeded the fair value of the Company’s common
stock of $1.81, no beneficial conversion feature was recognized.
The carrying value of the SSS Note as of
June 27, 2016, which included the unamortized issuance costs of $8,000 and, pursuant to the terms of SSS Note, accrued interest
expense of $25,000 has been recorded into the common shares issued on June 27, 2016.
(c) Amended Tianjin Agreement
Pursuant to the Amended Tianjin Agreement
dated December 21, 2015, Tianjin Enternet was to contribute 100% of the equity ownership of SSF, a newly-formed subsidiary of Tianjin
Enternet to the Company. Contingent on the performance of SSF, Tianjin Enternet was to receive shares of the Company’s common
stock over three years, with the exact number not exceeding 5.0 million per year, provided the earn-out provisions for each of
the 2016, 2017 and 2018 annual periods (the “Earn-Out Share Award”) was achieved. The earn-out provision for 2016,
2017 and 2018 are either 50.0 million homes/users passed or $4.0 million net income, 100.0 million homes/users passed or $6.0 million
net income and 150.0 million homes/users passed or $8.0 million net income, respectively. In the event that the Company has not
obtained the required vote from shareholders to issue the earn-out shares to Tianjin Enternet, the Company was required to issue
a promissory note with a principal amount equal to the quotient by multiplying 5.0 million by the applicable stock price defined
in the agreement.
On April 5, 2016, in lieu of Tianjin Enternet
contributing 100% of the equity ownership of SSF to the Company, YOD WFOE entered into VIE agreements with SSF and its legal shareholders
in order to comply with PRC regulatory requirements on certain industries. SSF is 99% owned by Lan Yang, the spouse of Bruno Zheng
Wu, the Company’s Chairman, and 1% owned by Yun Zhu, a Vice President of Wecast Network. By virtue of these VIE agreements;
YOD WFOE obtained financial controlling interest in SSF, including the power to direct the activities of SSF, and therefore is
the primary beneficiary of SSF. As the control of SSF was transferred to YOD WFOE through both the VIE agreements and physical
handover of company documents on April 5, 2016, the transaction was determined to be completed on that date.
At the time YOD WFOE obtained control over
SSF, SSF had no assets, liabilities, employees or operating activities, nor did it hold any licenses, trade names or other intellectual
properties. The Company also did not receive any assets, employees, contracts, sales or distribution systems or intellectual property
from Tianjin Enternet in connection with the transaction. Since the acquisition of SSF did not include any input or processes,
as defined under ASC 805-10-20, the transaction was not considered a business combination under ASC 805.
The earn-out provision was originally based
on either the number of home/user pass or the net income of SSF. While the net income was to be measured based on the operations
of SSF, the number of home/user pass is measured based on number of home/user pass of SSF’s distributors. Such earn-out provision
is based on an index that is not calculated solely by reference to the operations of SSF, which is not considered indexed to the
Company’s own shares. Also the earn-out provisions permit cash settlement if the Company cannot issue the earn-out shares.
Therefore, the earn-out provision is classified as a liability and measured initially and subsequently at fair value with changes
in fair value recognized in earnings at each reporting periods.
On June 27, 2016, the Company held its
2016 annual meeting of stockholders and received approval from its stockholders to allow SSS to beneficially own more than 19.99%
of the Company’s outstanding common stock. Accordingly, the Earn-Out Share Award became issuable at the time when the earn-out
provisions are considered to have been met pursuant to the Amended Tianjin Agreement.
On November 10, 2016, the Board of Directors
(the “Board”) of SSC held a special meeting. At the recommendation of the Company’s audit committee, the Board
determined that it is in the best interests of the Company and the Company’s shareholders to amend the terms of the Earn-Out
Share Award to (1) reduce the total Earn-Out Share Award from 15,000,000 shares of Common Stock to 10,000,000 shares of Common
Stock and (2) measure the achievement of the earn-out provisions based on the Companywide achievement of homes passed in lieu of
the measurement being measured by SFF’s stand-alone achievement of homes passed. Based on evidence provided to the Board,
the requisite thresholds necessary to trigger issuance of all shares of Common Stock subject to the Earn-Out Share Award have been
achieved. Accordingly, on November 10, 2016, the Board approved the issuance of 10,000,000 shares of its common stock, par value
$0.001 per share (“Common Stock to SSS”) and the shares were issued on November 11, 2016.
The Company recognized the fair value of
the Common Stock to SSS of approximately $13,700,000, based on the market price of the Company’s Common Stock, as Earn-out
share award expense in the accompanying consolidated statement of operations for the year ended 31 December, 2016. No such share
award expense was recorded for the year ended December 31, 2017.
14. Warrant Liabilities
In connection with our August 30, 2012
private financing, the Company issued 977,063 warrants to investors and the broker. In accordance with ASC 815-40,
Contracts
in Entity’s Own Equity
, the warrants have been accounted as derivative liabilities to be re- measured at the end of every
reporting period with the change in fair value reported in the consolidated statement of operations. On August 30, 2012, such warrants
were valued at $1,525,000 utilizing a valuation model and were initially recorded as a liability. The fair value of the warrants
is remeasured at each reporting period based on the Monte Carlo valuation.
As of December 31, 2016, the warrant liability
was revalued as disclosed in Note 10, and recorded at its fair value of approximately $70,785.
In 2017, there were 182,534 warrants exercised
and all the remaining 353,716 warrants were expired as of August 30, 2017.
15. Share-Based Payments
As of December 31, 2017, the Company has
1,853,391 options, 109,586 restricted shares and 2,521,896 warrants outstanding (including the 1,818,182 warrants issued to SSS
as disclosed in Note 13 (a)) to purchase shares of our common stock.
The Company awards common stock and stock
options to employees and directors as compensation for their services, and accounts for its stock option awards to employees and
directors 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 following table provides the details
of the total share-based payments expense during the years ended December 31, 2017 and 2016:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Employees and directors share-based payments
|
|
$
|
1,305,829
|
|
|
$
|
319,718
|
|
Effective as of December 3, 2010, our Board
of Directors approved the SSC 2010 Stock Incentive Plan (“the 2010 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. As of December 31, 2017, options available for issuance are 1,368,243 shares.
(a) Stock Options
Stock option activity for the year ended
December 31, 2017 is summarized as follows: