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10-Q
SEVEN STARS CLOUD GROUP, INC. filed this Form 10-Q on 08/14/2017
Entire Document
 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number: 001-35561

 

 

 

 

SEVEN STARS CLOUD GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Nevada 20-1778374
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

Building B4, Tai Ming International Business Court,

Tai Hu Town, Tongzhou District, Beijing, China 101116

(Address of principal executive offices)

 

212-206-1216

(Registrant's telephone number, including area code)

 

Wecast Network, Inc.

(Former name, former address and former fiscal year if changed since last report.)

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ¨      No x

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x      No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “larger accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer                  ¨
Non-accelerated filer   ¨ Smaller reporting company x

Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨      No x

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 62,153,149 shares as of August 11, 2017.

 

 

 

 

 

QUARTERLY REPORT ON FORM 10-Q

OF SEVEN STARS CLOUD GROUP, INC.

FOR THE PERIOD ENDED JUNE 30, 2017

 

TABLE OF CONTENTS

PART I -FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32
Item 3 Quantitative and Qualitative Disclosures About Market Risk 42
Item 4. Controls and Procedures 42
     
PART II -OTHER INFORMATION  
     
Item 1. Legal Proceedings 44
Item 1A. Risk Factors 44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 44
Item 3. Defaults Upon Senior Securities 44
Item 4. Mine Safety Disclosures 44
Item 5. Other Information 44
Item 6. Exhibits 45
Signatures 46

 

References

 

Except as otherwise indicated by the context, references in this report to (i) the “Company,” “Seven Stars Cloud,”, “SSC”, “we,” “us,” and “our” are to Seven Stars Cloud Group, Inc. (formerly known as Wecast Network, Inc.), a Nevada corporation, and its consolidated subsidiaries and variable interest entities; (ii) “CB Cayman” refers to our wholly-owned subsidiary China Broadband, Ltd., a Cayman Islands company; (iii) “YOD Hong Kong” refers to YOU On Demand (Asia) Limited (formerly known as Sinotop Group Limited), a Hong Kong company wholly-owned by CB Cayman; (iv) “YOD WFOE” refers to YOU On Demand (Beijing) Technology Co., Ltd., a PRC company wholly-owned by YOD Hong Kong; (v) “Sinotop Beijing” or “Sinotop” refers to Beijing Sino Top Scope Technology Co., Ltd, a PRC company controlled by YOD Hong Kong through contractual arrangements; (vi) “Zhong Hai Media” refers to Zhong Hai Shi Xun Media Co., Ltd., a PRC company 80% owned by Sinotop Beijing until June 30, 2017; (vii) “SSF” refers to Tianjin Sevenstarflix Network Technology Limited, a PRC company controlled by YOD Hong Kong through contractual arrangements; (viii) “Hua Cheng” refers to Hua Cheng Hu Dong (Beijing) Film and Television Communication Co., Ltd., a PRC company 39% owned by Sinotop Beijing and 20% owner of Zhong Hai Media; (ix) “Wecast Services” refers to our wholly-owned subsidiary Wecast Services Group Limited (formerly known as Sun Video Group Hong Kong Limited) a Hong Kong company; (x) “Wide Angle” refers to Wide Angle Group Limited, a Hong Kong company 55% owned by the Company; (xi) “Wecast SH” refers to Shanghai Wecast Supply Chain Management Limited, a PRC company 51% owned by the Company; (xii)“SEC” refers to the United States Securities and Exchange Commission; (xiii) “Securities Act” refers to Securities Act of 1933, as amended; (xiv) “Exchange Act” refers to the Securities Exchange Act of 1934, as amended; (xv) “PRC” and “China” refer to People’s Republic of China; (xvi) “Renminbi” and “RMB” refer to the legal currency of China; (xvii) “U.S. dollar,” “$” and “US$” refer to United States dollars; and (xviii) “VIEs” refers to our current variable interest entities, Sinotop Beijing, and Tianjin Sevenstarflix Network Technology Limited.

 

 

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

SEVEN STARS CLOUD GROUP, INC., ITS SUBSIDIARIES AND VARIABLE INTEREST ENTITIES

 

INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2017

  Page
Unaudited Consolidated Balance Sheets 4
Unaudited Consolidated Statements of Operations 5
Unaudited Consolidated Statements of Comprehensive Income (Loss) 6
Unaudited Consolidated Statements of Cash Flows 7
Unaudited Consolidated Statements of Equity 8
Notes to Unaudited Consolidated Financial Statements 10

 

 3 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities

 


UNAUDITED CONSOLIDATED BALANCE SHEETS

 

   June 30, 2017   December 31, 2016 
         
ASSETS          
Current assets:          
Cash  $3,163,470   $3,761,814 
Accounts receivable, net   41,967,360    9,522,151 
Licensed content, current   883,015    124,319 
Notes receivable   -    1,749,830 
Inventory   216,453    203,697 
Prepaid expenses   534,573    375,944 
Other current assets   4,318,995    3,581,822 
Total current assets   

51,083,866

    19,319,577 
Property and equipment, net   117,389    4,963,725 
Licensed content, non-current   16,075,134    17,593,528 
Intangible assets, net   331,564    453,242 
Goodwill   -    6,648,911 
Long term investments   

6,664,547

    6,654,664 
Other non-current assets   1,239    112,643 
Total assets  $

74,273,739

   $55,746,290 
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND EQUITY      
Current liabilities: (including amounts of the consolidated VIEs without recourse to Seven Stars Cloud Group, Inc. See note 3)          
Accounts payable  $42,536,415   $13,341,680 
Advance from customers   720,073    1,350,054 
Accrued interest due to a related party   617,605    557,918 
Accrued other expenses   327,958    708,987 
Accrued salaries   760,848    766,957 
Payable for purchase of building   -    987,015 
Amount due to related parties   106,813    1,060,817 
Other current liabilities   151,019    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   137,587    70,785 
Total current liabilities   48,358,318    24,015,354 
Total liabilities  $48,358,318   $24,015,354 
Commitments and contingencies (Note 17)          
Convertible redeemable preferred stock:          
Series A - 7,000,000 shares issued and outstanding, liquidation and deemed liquidation preference of $3,500,000 as of June 30, 2017 and December 31, 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 June 30, 2017 and December 31, 2016, respectively   -    7,155 
Common stock - $0.001 par value; 1,500,000,000 shares authorized,  61,964,057 and 53,918,523 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively   61,963    53,918 
Additional paid-in capital   144,952,445    152,755,919 
Accumulated deficit   (117,477,132)   (115,669,268)
Accumulated other comprehensive loss   (841,255)   (1,353,302)
Total Seven Stars Cloud shareholders’ equity   

26,696,021

    35,794,422 
Non-controlling interest   (2,042,595)   (5,325,481)
Total equity   

24,653,426

    30,468,941 
Total liabilities, convertible redeemable preferred stock and equity  $

74,273,739

   $55,746,290 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 4 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities

 


UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30,   June 30,   June 30, 
   2017   2016   2017   2016 
                 
Revenue  $43,324,439   $1,480,464   $76,488,790   $2,750,190 
Cost of revenue   43,272,723    800,399    72,615,102    1,716,179 
Gross profit   51,716    680,065    3,873,688    1,034,011 
                     
Operating expenses:                    
Selling, general and administrative expense   2,875,440    1,808,906    4,140,612    3,973,959 
Professional fees   747,418    270,491    1,014,551    637,937 
Depreciation and amortization   60,942    123,343    257,153    220,806 
Impairment of other intangible assets   63,621    -    63,621    - 
Total operating expense   3,747,421    2,202,740    5,475,937    4,832,702 
                     
Loss from operations   (3,695,705)   (1,522,675)   (1,602,249)   (3,798,691)
                     
Interest and other income (expense)                    
Interest expense, net   (3,696)   (166,710)   (45,253)   (200,183)
Change in fair value of warrant liabilities   26,117    106,583    (243,999)   143,606 
Equity in loss of equity method investees   (33,090)   (27,001)   (76,836)   (37,349)
Other   (11,072)   (5,258)   (110,642)   (5,096)
Loss before income taxes   (3,717,446)   (1,615,061)   (2,078,979)   (3,897,713)
                     
Income tax benefit   -    8,612    -    17,224 
                     
Net loss   (3,717,446)   (1,606,449)   (2,078,979)   (3,880,489)
                     
Net loss attributable to non-controlling interest   57,221    18,360    631,633    155,929 
                     
Net loss attributable to Seven Stars Cloud shareholders  $(3,660,225)  $(1,588,089)  $(1,447,346)  $(3,724,560)
                     
Basic  loss per share  $(0.06)  $(0.05)  $(0.02)  $(0.14)
Diluted loss per share  $(0.06)  $(0.05)  $(0.02)  $(0.14)
                     
Weighted average shares outstanding:                    
Basic   61,180,365    29,197,899    58,297,202    26,815,888 
Diluted   61,180,365    29,197,899    58,297,202    26,815,888 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 5 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities

 


UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30,   June 30,   June 30, 
    2017      2016     2017   2016 
                 
Net loss  $

(3,717,446

)  $(1,606,449)  $(2,078,979)  $(3,880,489)
                     
Other comprehensive income (loss), net of nil tax                    
Foreign currency translation adjustments   (819,036)   (214,641)   699,806    (201,509)
Comprehensive loss    (4,536,482)   (1,821,090)   

(1,379,173

)   (4,081,998)
                     
Comprehensive income (loss) attributable to non-controlling interest   259,001    (3,588)   664,591    139,368 
Comprehensive loss attributable to Seven Stars Cloud shareholders  $

(4,277,481)

   $(1,824,678)  $

(714,582

)  $(3,942,630)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 6 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities

 


UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Six Months Ended 
   June 30, 2017   June 30, 2016 
         
Cash flows from operating activities:          
Net loss  $(2,078,979)  $(3,880,489)
Adjustments to reconcile net loss to net cash used in operating activities          
Share-based compensation expense   147,652    211,840 
Provision for doubtful accounts   103,043    - 
Depreciation and amortization   257,153    220,806 
Income tax benefit   -    (17,224)
Equity in  loss of equity method investees   76,836    37,349 
Loss on disposal of assets   679,091    - 
Change in fair value of warrant liabilities   243,999    (143,606)
Foreign currency exchange losses   -    (153,334)
Impairment of intangible assets   63,621    - 
Amortization of debt issuance costs   -    122,696 
           
Change in assets and liabilities:          
Accounts receivable   (33,765,572)   (1,405,355)
Licensed content   759,698    (143,000)
Prepaid expenses and other assets   3,713,053    (116,540)
Accounts payable   29,200,687    605,466 
Accrued expenses, salary and other current liabilities   (209,478)   (6,084)
Deferred revenue   (626,396)   (13,848)
Accrued license content fees   -    584,580 
Net cash used in operating activities   (1,435,592)   (4,096,743)
           
Cash flows from investing activities:          
Acquisition of property and equipment   (38,326)   (2,070,672)
Proceeds from disposal of property and equipment   743    - 
Disposal of Zhong Hai Shi Xun, net of cash disposed   (115,060)   - 
Cash paid for the acquisition of SVG   (693,187)   - 
Investments in intangibles   -    (2,163,872)
Investment in long term investments   -    (3,000,000)
Net cash used in investing activities   (845,830)   (7,234,544)
           
Cash flows from financing activities          
Proceeds from private placement   1,866,301    - 
Repayment of amounts due to related parties   (215,951)   - 
Proceeds from issuance of warrant and shares   -    10,000,000 
Net cash provided by financing activities   1,650,350    10,000,000 
Effect of exchange rate changes on cash   32,728    (33,849)
Net increase (decrease) in cash   (598,344)   (1,365,136)
           
Cash at beginning of period   3,761,814    3,768,897 
           
Cash at end of period  $3,163,470   $2,403,761 
           
Supplemental Cash Flow Information:          
           
Exchange of Series E Preferred Stock for common stock  $7,155   $100 
Issuance of convertible note for licensed content (Note 12)  $-   $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  $-   $17,733,297 
Acquisition of long term investment through transfer of Game IP rights  $-   $2,714,441 
Payable for Game IP rights acquired  $-   $603,209 
Payable for workforce acquired  $-   $131,358 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 7 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities

 

UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY

For the Six Months Ended June 30, 2016

 

   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, 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    161,815    -    -    161,840    -    161,840 
Common stock issuance   -    -    4,545,455    4,545    9,273,029    -    -    9,277,574    -    9,277,574 
Warrants issued in connection with common stock issuance   -    -    -    -    722,426    -    -    722,426    -    722,426 
Issuance cost in connection with the issuance of common stock and warrants   -    -    -    -    (411,223)   -    -    (411,223)   -    (411,223)
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   -    -              121,695    -    -    121,695    -    121,695 
Common stock issued for settlement of liability   -    -    41,780    42    74,958    -    -    75,000    -    75,000 
Common stock issued from series E preferred stock   (100,000)   (100)   100,000    100    -    -    -    -    -    - 
Net loss   -    -    -    -    -    (3,724,560)   -    (3,724,560)   (155,929)   (3,880,489)
Foreign currency translation adjustments, net of nil tax   -    -    -    -    -    -    (218,070)   (218,070)   16,561    (201,509)

Balance, 

June 30, 2016

   7,154,997   $7,155    38,170,204   $38,170   $125,179,330   $(90,182,400)  $(632,980)  $34,409,275   $(2,527,399)  $31,881,876 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 8 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities

 


UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY

For the Six Months Ended June 30, 2017

 

   Series E
Preferred
Stock
   Series E
Par
Value
   Common
Stock
   Par
Value
   Additional
Paid-in
Capital
   Accumulated
Deficit
   Accumulated
Other
Comprehensive
Income (Loss)
   Seven Stars Cloud
Shareholders'
Equity
   Non-
controlling
Interest
   Total
Equity
 

Balance,

January 1, 2017

   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   -    -    -    -    147,652    -    -    147,652    -    147,652 
Common stock issuance   -    -    538,182    538    1,479,463    -    -    1,480,001    -    1,480,001 
Common stock issuance for RSU vested   -    -    105,215    105    (105)   -    -    -    -    - 
Common stock issuance for option exercised   -    -    11,035    11    (11)   -    -    -    -    - 
Common stock issued for warrant exercised   -    -    236,105    236    563,261    -    -    563,497    -    563,497 
Common stock issued from conversion of series E preferred stock   (7,154,997)   (7,155)   7,154,997    7,155    -    -    -    -    -    - 
Disposal of Zhong Hai Shi Xun   -    -    -    -    (9,993,734)   (360,518)   (220,717)   (10,574,969)   3,947,477    (6,627,492)
Net loss   -    -    -    -    -    (1,447,346)    -    (1,447,346)    (631,633)   (2,078,979) 
Foreign currency translation adjustments, net of nil tax   -    -    -    -    -    -    732,764    732,764    (32,958)   699,806 

Balance, 

June 30, 2017

   -   $-    61,964,057   $61,963   $144,952,445   $(117,477,132)  $(841,255)  $26,696,021   $(2,042,595)  $24,653,426 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 9 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED 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 be a leading Intelligent Industrial Internet company with solutions designed to provide operational efficiencies in today’s constantly evolving business landscape. With a focus on “BASE” technology and infrastructure (Blockchain, Artificial Intelligence, Supply Chain & Exchanges) to power our Virtual Platform as a Service or “VPaaS”, SSC is creating a closed trade ecosystem for buyers and sellers designed to eliminate supply chain and transactional middlemen and create a more direct and margin-expanding trading path for principals. SSC is applying BASE plus VPaaS to focus on three Core Cloud Areas, including Intellectual Property Cloud, Product Sales Cloud, and the Finance Services Cloud. With the three clouds functioning both independently and interdependently, SSC is creating a vertical, transactional and flexible platform for today’s global enterprises. SSC is also still leveraging its legacy operations as a premium content Video On Demand (“VOD”) service provider in China.

 

The Company’s mission and vision is to be the world’s leading cloud-based, total B2B enterprise solution and platform provider that empowers businesses to grow with Big Data technology.

 

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. 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 4. 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.

 

On June 30, 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 three separate non-core assets were sold to BT in exchange for RMB100 million (approximately $14.75 million at current exchange rates) 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. The detail of this transaction has been disclosed in Note 11.

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of June 30, 2017, results of operations for the three and six months ended June 30, 2017 and 2016, and cash flows for the six months ended June 30, 2017 and 2016, have been made. All significant intercompany transactions and balances are eliminated on consolidation.

 

Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission on March 31, 2017 (“2016 Annual Report”).

 

2.Going Concern and Management’s Plans

 

For the six months ended June 30, 2017 and 2016, the Company incurred loss from operations of approximately $1.6 million and $3.8 million, respectively, and incurred net loss of $2.1 million and of $3.9 million, respectively, and cash used in operations was approximately $1.4 million and $4.1 million, respectively. Further, the Company had accumulated deficit of approximately $117.5 million and $115.7 million as of June 30, 2017 and December 31, 2016, respectively, due to recurring losses since the inception of its business.

 

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. Although the Company believes it has the ability to

 

 10 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

3.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.

 

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Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 waived 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;

 

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Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(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 June 30, 2017. As Sinotop Beijing 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.

 

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

 

 13 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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, 2016, 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.

 

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Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 June 30, 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

 

On June 30, 2017, Company entered into BT SPA, under which Zhong Hai Shi Xun Media, which was formerly 80% owned by Sinotop Beijing, was sold to BT. The details of this transaction are disclosed in Note 11.

 

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

 

   June 30,   December 31, 
   2017   2016 
ASSETS          
Current assets:          
Cash  $8,416   $1,519,125 
Accounts receivable, net   -    1,260,529 
Prepaid expenses   2,596    30,455 
Other current assets   1,475    191,427 
Intercompany receivables due from the Company's subsidiaries(i)   2,733,143    150,725 
Total current assets   2,745,630    3,152,261 
Property and equipment, net   -    196,677 
Intangible assets, net   -    2,570 
Long term investments   3,584,639    3,654,664 
Other non-current assets   -    442,782 
Total assets  $6,330,269   $7,448,954 

 

LIABILITIES          
Current liabilities:          
Accounts payable  $-   $5,817 
Deferred revenue   -    824,563 
Accrued expenses   1,943    268,074 
Other current liabilities   40    394,314 
Accrued license content fees   -    1,236,661 
Intercompany payables due to the Company's subsidiaries(i)   4,069,514    14,752,338 
Total current liabilities   4,071,497    17,481,767 
Total liabilities  $4,071,497   $17,481,767 
 15 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

   Six Months Ended 
   June 30,   June 30, 
   2017   2016 
Revenue  $794,273   $2,750,190 
Net income (loss)  $132,231   $(671,644)

 

   Six Months Ended 
   June 30,   June 30, 
   2017   2016 
Net cash used in operating activities  $(1,558,586)  $(730,019)
Net cash used in investing activities  $(141,639)  $(2,165,477)
Net cash provided by financing activities(i)  $189,515   $2,630,642 

 

(i)Intercompany receivables and payables are eliminated upon consolidation. The intercompany financing activities include the capital injection of $0.2 million to Sinotop Beijing in the six months period ended June 30, 2017.

 

After the disposal of Zhong Hai Shi Xun Media as of June 30, 2017, the total assets consisted of receivables and long term investments. The Company expects that a lower percentage of its total revenue will be generated from its VIEs in the foreseeable future.

 

4.Acquisition

 

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

 16 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 June 30, 2017, the Company recorded the $50 million SVG Note as additional paid in capital, as the Company believes that the Performance Guarantees can be met within 12 months of the closing. Considering the proceeds transferred were larger than carrying amounts of the net assets received, such $50 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.

 

5.Accounts Receivable

 

Accounts receivable consists of the following:

 

   June 30,   December 31, 
   2017   2016 
Accounts receivable, gross:  $42,018,388   $12,350,947 
Less: allowance for doubtful accounts   (51,028)   (2,828,796)
Accounts receivable, net  $41,967,360   $9,522,151 

 

The movement of the allowance for doubtful accounts is as follows:

 

   June 30, 2017   December 31, 2016 
Balance at the beginning of the period  $(2,828,796)  $(3,672)
Additions charged to bad debt expense   (103,043)   (2,825,124)
Disposal of Zhong Hai Shi Xun   2,880,811    - 
Balance at the end of the period  $(51,028)  $(2,828,796)

 

6.Property and Equipment

 

The following is a breakdown of the Company’s property and equipment:

 

   June 30,   December 31,  
   2017   2016  
Furniture and office equipment  $286,143   $1,063,481  
Vehicle   145,311    267,023  
Office Building   -    3,948,058  
Leasehold improvements   3,827    939,844  
Total property and equipment   435,281    6,218,406  
Less: accumulated depreciation   (317,892)   (1,254,681 )
Property and Equipment, net  $117,389   $4,963,725  

 

The Company recorded depreciation expense of approximately $32,549 and $200,631 for the three and six months ended June 30, 2017 and $34,000 and $68,000 for the three and six months ended June 30, 2016 respectively.

 

 17 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7.Intangible Assets

 

As of June 30, 2017 and December 31, 2016, the Company’s amortizing and indefinite lived intangible assets consisted of the following:

 

   June 30, 2017   December 31, 2016 
Amortizing Intangible  

Gross

Carrying

   Accumulated   Impairment   Net  

Gross

Carrying

   Accumulated   Impairment   Net 
Assets  Amount   Amortization   Loss   Balance   Amount   Amortization   Loss   Balance 
Charter/Cooperation agreements (iii)  $-   $-  $-  $-   $2,755,821   $(909,257)  $(1,846,564)  $- 
Software and licenses   210,070    (191,118)   -    18,952    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    (127,372)   -    178,322    305,694    (76,422)   -    229,272 
Total amortizing intangible assets  $608,729   $(358,433)  $(53,022)  $197,274   $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  $753,618   $(358,433)  $(63,621)  $331,564   $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.

 

The Company recorded amortization expense related to our amortizing intangible assets of approximately $28,393 and $56,522 for the three and six months ended June 30, 2017 and $90,000 and $153,000 for the three and six months ended June 30, 2016 respectively, which included the amortization expense of the workforce acquired as stated above.

 

(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 next three years and thereafter:

   Amortization to be 
Years ending December 31,  Recognized 
2017 (6 months)  $55,904 
2018   111,778 
2019   29,592 
Total amortization to be recognized  $197,274 

 

 18 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8.Long Term Investments

 

Cost method investments

 

Cost method investments as of the period ended June 30, 2017 and December 31, 2016 are as follow:

 

   June 30,   December 31, 
   2017   2016 
Topsgame (i)  $3,230,422   $3,156,985 
Frequency (ii)   3,000,000    3,000,000 
Total  $6,230,422   $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.

 

On June 30, 2017, the Company entered into the BT SPA, pursuant to which, Topsgame has been agreed to sold to BT in the consideration of the fair value of Topsgame which approximates to its carrying book value (appraised by an independent third party). However, considering the payment term is in one year, its collectability is uncertain and required legal transfer process was not completed as of June 30, 2017, Company did not account for this transaction as of June 30, 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.

 

 

 19 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Equity method investments

 

Equity method investment movement for the six months ended on June 30, 2017 is as follow:

 

   June 30, 2017 
      December 31,
2016
   Capital increase   Loss on investment   Impairment loss   Foreign currency
translation adjustments
   June 30,
2017
 
Wecast Internet  (i)   132,782    -    (57,644)   -    4,771    79,909 
Hua Cheng  (ii)   364,897    -    (19,192)   -    8,511    354,216 
Shandong Media  (iii)   -    -    -    -    -    - 
Total     $497,679    -   $(76,836)   -   $13,282   $434,125 

 

(i)Investment in Wecast Internet

 

In October 2016, the Company’s subsidiary, YOU On Demand (Asia) Ltd., invested RMB1,000,000 (approximately $149,750) in Wecast Internet Limited (“Wecast Internet”) and held its 50% equity ownership.

 

(ii)Investment in Hua Cheng

 

As of the period ended June 30, 2017 and December 31, 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 period ended June 30, 2017 and December 31, 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 June 30, 2017 and December 31, 2016.

 

9.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 12, 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.

 

10.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.

 

 20 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

·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 at June 30, 2017 were valued using the Black-Scholes Merton method as an estimate for the Monte Carlos Simulation method which was the method used at the year ended December 31, 2016. The following assumptions were incorporated:

 

   Black Scholes   Monte Carlo 
   June 30,   December 31, 
   2017   2016 
Risk-free interest rate   1.03%   0.70%
Expected volatility   55%   55%
Expected term   0.17 year    0.67 year 
Expected dividend yield   0%   0%

 

The following tables present the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016, respectively:

 

   June 30, 2017     
   Fair Value Measurements     
   Level 1   Level 2   Level 3   Total Fair Value 
Liabilities                    
Warrant liabilities (see Note 13)  $-   $-   $137,587   $137,587 

 

   December 31, 2016     
   Fair Value Measurements     
   Level 1   Level 2   Level 3   Total Fair Value 
Liabilities                    
Warrant liabilities (see Note 13)  $-   $-   $70,785   $70,785 

 

The table below reflects the components effecting the change in fair value for the six months ended June 30, 2017:

 

   Level 3 Assets and Liabilities     
   For the Six  Months Ended June 30 , 2017     
    January 1,       Change in   June 30, 
   2017   Settlements   Fair Value   2017 
Liabilities:                    
Warrant liabilities (see Note 13)  $70,785   $(177,197)  $243,999   $137,587 

 

The significant unobservable inputs used in the fair value measurement of the Company’s warrant 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 June 30, 2017 and December 31, 2016, approximate fair value because of the short maturity of these instruments.

 

 21 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

11.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.

 

For the three and six months ended June 30, 2017, the Company recorded interest expense of $29,507 and $59,507, respectively, related to the Note; For the three and six months ended June 30, 2016, the Company recorded interest expense of $30,000 and $60,000, respectively, related to the Note.

 

(b) Cost of Revenue

 

Hua Cheng, in which the Company holds 39% of the equity shares, charged the Company licensed content fees of approximately Nil and $37,000 for the three months ended June 30, 2017 and 2016, and approximately Nil and $93,000 for the six months ended June 30, 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 8 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 June 30, 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

 

 22 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

Meanwhile, considering the payment term is one year, there is uncertainty with respect to collectivebility and required legal transfer process of Nanjing Tops Game was not completed, Company did not account for the transaction of disposal of 13% equity interest in Nanjing Tops Game and 25% share capital investment right in Pantaflix JV as of June 30, 2017 until the collectivebility is probable.

 

12.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.

 

 23 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

 24 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 consolidated statement of operations for the year ended December 31, 2016.

 

13.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 June 30, 2017 and December 31, 2016, the warrant liability was revalued as disclosed in Note 10, and recorded at its fair value of approximately $137,587 and $70,785, respectively, resulting in a loss of approximately $243,999 for the six months ended June 30, 2017. There were 107,534 warrants exercised during six months ended June 30, 2017.

 

14.Share-Based Payments

 

As of June 30, 2017, the Company had 1,999,528 options, 463,335 restricted shares and 3,546,897 warrants outstanding (including the 1,818,182 warrants issued to SSS as disclosed in Note 12 (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.

 

Total share-based payments expense recorded by the Company during the three months ended June 30, 2017 and 2016 is as follows:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30,   June 30,   June 30, 
   2017   2016   2017   2016 
Employees and directors share-based payments  $76,224   $73,000   $147,652   $212,000 

 

Effective as of December 3, 2010, our Board of Directors approved the Wecast Network, Inc. 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 June 30, 2017, options available for issuance are 1,215,327 shares.

 

(a)Stock Options

 

Stock option activity for the six months ended June 30, 2017 is summarized as follows:

 

           Weighted Average     
           Remaining   Aggregated 
   Options   Weighted Average   Contractual Life   Intrinsic 
   Outstanding   Exercise Price   (Years)   Value 
Outstanding at January 1, 2017   2,101,425   $2.42    4.59   $- 
Granted   170,000    1.57           
Exercised   (11,035)   2.00           
Expired   -    -           
Forfeited   (260,862)   1.49           
Outstanding at June 30, 2017   1,999,528    2.62    3.14    0.04 
Vested and expected to vest as of June 30, 2017   1,999,528    2.62    3.14    0.04 
Options exercisable at June 30, 2017 (vested)   1,683,238    2.80    2.00    0.02 

 

On January 4, March 1 and March 16, 2017, 90,000, 45,000 and 35,000 shares stock options, respectively, were issued to certain employees for services provided to us. The fair value of the stock options granted were valued using the Black-Scholes Merton method on the grant date, amounting to $61,200, $45,443 and $36,750, respectively.

 

 25 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2017, approximately $279,108 of total unrecognized compensation expense related to non-vested share options is expected to be recognized over a weighted average period of approximately 1.87 years. The total fair value of shares vested during the six months ended June 30, 2017 and 2016 was approximately $19,357 and $16,000,  respectively. 

 

(b) Warrants

 

In connection with the Company’s financings, the Warner Brother Agreement and the service agreements, the Company issued warrants to service providers to purchase common stock of the Company.

 

As of June 30, 2017, the weighted average exercise price of the warrants was $2.23 and the weighted average remaining life was 0.96 years. The following table outlines the warrants outstanding and exercisable as of June 30, 2017 and December 31, 2016:

 

    June 30,     December 31,            
    2017     2016            
    Number of     Number of            
    Warrants     Warrants            
Warrants Outstanding   Outstanding and
Exercisable
    Outstanding and
Exercisable
    Exercise
Price
    Expiration
Date
                       
2012 August Financing Warrants  (i)     428,716       536,250     $ 1.50     08/30/17
2013 Broker Warrants (Series D Financing)     100,000       228,571     1.75     07/05/18
2013 Broker Warrants (Convertible Note)     114,285       114,285     1.75     11/04/18
2014 Broker Warrants (Series E Financing)     1,085,714       1,085,714     1.75     01/31/19
2016 Warrants to SSS (Note 12)     1,818,182       1,818,182     $ 2.75     03/28/18
      3,546,897       3,783,002              

 

(i)The warrants are classified as derivative liabilities as disclosed in Note 13.

 

(c) Restricted Shares

 

In January, 2017, the Company granted 35,000 restricted shares to one employee under the “2010 Plan”. The restricted shares have a vesting period of four years with the first one-fourth vesting on the first anniversary from grant date and the remaining three-fourth vesting ratably over twelve quarters. The grant date fair value of the restricted shares was $43,750. As this employee left the Company in February, no expense was recorded.

 

In March and April, 2017, the Company granted 365,000 restricted shares to certain employees under the “2010 Plan”. The restricted shares have a vesting period of four years with the first one-fourth vesting on the first anniversary from grant date and the remaining three-fourth vesting ratably over twelve quarters. The grant date fair value of the restricted shares was $778,200.

 

A summary of the restricted shares is as follows:

 

   Shares   Weighted-average
fair value
 
Restricted shares outstanding at January 1, 2017   228,550   $1.75 
Granted   400,000    2.05 
Forfeited   (60,000)   1.49 
Vested   (105,215)   1.72 
Restricted shares outstanding at June 30, 2017   463,335   $2.05 

 

 26 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

15.Loss Per Common Share

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30,   June 30,   June 30, 
   2017   2016   2017   2016 
Net loss attributable to common stockholders  $(3,660,225)  $(1,588,089)  $(1,447,346)  $(3,724,560)
Basic                    
Basic weighted average shares outstanding   61,180,365    29,197,899    58,297,202    26,851,888 
                     
Diluted                    
Diluted weighted average common shares outstanding   61,180,365    29,197,899    58,297,202    26,851,888 
                     
Net loss per share:                    
Basic  $(0.06)  $(0.05)  $(0.02)  $(0.14)
Diluted  $(0.06)  $(0.05)  $(0.02)  $(0.14)

 

Basic loss per common share attributable to Seven Stars Cloud shareholders is calculated by dividing the net loss attributable to Seven Stars Cloud shareholders by the weighted average number of outstanding common shares during the applicable period.

 

Diluted loss per share is calculated by taking net loss, divided by the diluted weighted average common shares outstanding. Diluted loss per share for the three and six months ended June 30, 2017 and 2016 both equal to basic loss per share for respective periods because the effect of securities convertible into common shares is anti-dilutive.

 

The following table includes the number of shares that may be dilutive potential common shares in the future. These shares were not included in the computation of diluted loss per share because the effect was either antidilutive or the performance condition was not met.

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30,   June 30,   June 30, 
   2017   2016   2017   2016 
Warrants   3,546,897    3,783,002    3,546,897    3,783,002 
Options   2,462,863    1,696,428    2,462,863    1,696,428 
Series A Preferred Stock   933,333    933,333    933,333    933,333 
Series E Preferred Stock   -    7,154,997    -    7,154,997 
Convertible promissory note and interest   35,745,070    1,998,528    35,745,070    1,998,528 
Total   42,688,163    15,566,288    42,688,163    15,566,288 

 

16.Income Taxes

 

As of June 30, 2017, the Company had approximately $29.9 million of the U.S domestic cumulative tax loss carryforwards and approximately $16.5 million of the foreign cumulative tax loss carryforwards, which may be available to reduce future income tax liabilities in certain jurisdictions. These U.S. and foreign tax loss carryforwards will expire beginning year 2028 through 2036 and year 2018 to year 2022, respectively.

 

The income tax expense for the six months ended June 30, 2017 is nil because of net operating loss and deferred tax assets related to the net operating loss carryovers utilized had been offset by a valuations allowance. Company had established a 100% valuation allowance against its net deferred tax assets due to its history of pre-tax losses and the likelihood that the deferred tax assets will not be realized. The valuation allowance was decreased approximately $0.3 million during the six months ended June 30, 2017.

 

As of June 30, 2017, there are no unrecorded tax benefits which would impact our financial position or our results of operations.

 

 27 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

17.Contingencies and Commitments

 

(a) Operating Lease Commitment

 

The Company is committed to paying leased property costs related to our offices as follows:

 

   Leased Property 
Years ending December 31,  Costs 
2017 (6 months)  $41,375 
2018   69,585 
2019   35,595 
2020   36,457 
Thereafter   18,228 
Total  $201,240 

 

(b) Lawsuits and Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. As of June 30, 2017, there are no such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

 

18.Concentration, Credit and Other Risks

 

(a) PRC Regulations

 

The PRC market in which the Company operates poses certain macro-economic and regulatory risks and uncertainties. These uncertainties extend to the ability of the Company to conduct wireless telecommunication services through contractual arrangements in the PRC since the industry remains highly regulated. The Company conducts legacy YOD business in China through Zhong Hai Media, which the Company controls as a result of a series of contractual arrangements entered among YOD WFOE, Sinotop Beijing as the parent company of Zhong Hai Media, SSF and the respective legal shareholders of Sinotop Beijing and SSF. The Company believes that these contractual arrangements are in compliance with PRC law and are legally enforceable. If Sinotop Beijing, SSF or their respective legal shareholders fail to perform the obligations under the contractual arrangements or any dispute relating to these contracts remains unresolved, YOD WFOE or YOD HK can enforce its rights under the VIE contracts through PRC law and courts. However, uncertainties in the PRC legal system could limit the Company’s ability to enforce these contractual arrangements. In particular, the interpretation and enforcement of these laws, rules and regulations involve uncertainties. If YOD WFOE had direct ownership of Sinotop Beijing and SSF, it would be able to exercise its rights as a shareholder to effect changes in the board of directors of Sinotop Beijing or SSF, which in turn could effect changes at the management level, subject to any applicable fiduciary obligations. However, under the current contractual arrangements, the Company relies on Sinotop Beijing, SSF and their respective legal shareholders to perform their contractual obligations to exercise effective control. The Company also gives no assurance that PRC government authorities will not take a view in the future that is contrary to the opinion of the Company. If the current ownership structure of the Company and its contractual arrangements with the VIEs and their equity holders were found to be in violation of any existing or future PRC laws or regulations, the Company's ability to conduct its business could be affected and the Company may be required to restructure its ownership structure and operations in the PRC to comply with the changes in the PRC laws which may result in deconsolidation of the VIEs.

 

In addition, the telecommunications, information and media industries remain highly regulated. Restrictions are currently in place and are unclear with respect to which segments of these industries foreign owned entities, like YOD WFOE, may operate. The PRC government may issue from time to time new laws or new interpretations on existing laws to regulate areas such as telecommunications, information and media, some of which are not published on a timely basis or may have retroactive effect. For example, there is substantial uncertainty regarding the Draft Foreign Investment Law, including, among others, what the actual content of the law will be as well as the adoption and effective date of the final form of the law. Administrative and court proceedings in China may also be protracted, resulting in substantial costs and diversion of resources and management attention. While such uncertainty exists, the Company cannot assure that the new laws, when it is adopted and becomes effective, and potential related administrative proceedings will not have a material and adverse effect on the Company's ability to control the affiliated entities through the contractual arrangements. Regulatory risk also encompasses the interpretation by the tax authorities of current tax laws, and the Company’s legal structure and scope of operations in the PRC, which could be subject to further restrictions resulting in limitations on the Company’s ability to conduct business in the PRC.

 

 28 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(b) Major Customers

 

Legacy YOD business

 

The Company has agreements with distribution partners, including digital cable operators, IPTV operators, OTT streaming operators and mobile smartphone manufacturers and operator. A distribution partner that individually generates more than 10% of the Company’s revenue is considered a major customer.

 

On October 8, 2016, the Company signed an agreement to form a partnership with Zhejiang Yanhua ("Yanhua Agreement"), where Yanhua will act as the exclusive distribution operator (within the territory of the People's Republic of China) of WCST's licensed library of major studio films. According to the Yanhua Agreement, the existing legacy Hollywood studio paid contents as well as other IP contents specified in the agreement, along with the corresponding authorized rights letter that WCST is entitled to, will be turned over to Yanhua as a whole package, which was agreed to be priced at RMB13,000,000. In addition to the above-mentioned minimal guarantee fee of RMB13,000,000 specified, there is a provision in the Yanhua Agreement which states that once the revenue recognized from the existing contents transferred from WCST to Yanhua reaches the amount of RMB13,000,000, the revenue above RMB13,000,000 will be shared with WCST from the date when this revenue threshold is reached based on certain revenue-sharing mechanism stipulated in the Yanhua Agreement.

 

Pursuant to ASC Subtopic 926-605, Entertainment-Films - Revenue Recognition, for certain contracts that involve sub-licensing content within the specified license period, revenue is recognized upon delivery of films when the arrangement includes a nonrefundable minimum guarantee, delivery is complete and there are no substantive future obligations to provide future additional services.

 

According to the Yanhua Agreement, the total price of the Existing Contents to be transferred is RMB13,000,000. The payment is agreed to be paid in two installments, the first half of RMB6,500,000 was received on December 30, 2016. The remaining RMB6,500,000 will be paid under the scenario that the license content fees due to Studios for the existing legacy Hollywood paid contents will be settled. Due to the fact that the second installment will depend upon some future events and is contingent in nature, we deem this portion of the fee is not fixed or determinable and therefore, this portion of the revenue did not meet the revenue recognition criteria to be recognized accordingly.

 

In terms of the additional revenue-sharing fee over the above-mentioned RMB13,000,000 fee specified, considering that this part of arrangement fee is not fixed or determinable at the time point as of June 30, 2017, it has not met the criteria for revenue recognition, management will recognize it once it becomes determinable and meet the other revenue recognition criteria in the future.

 

Pursuant to the Yanhua Agreement, RMB6,500,000 was recognized as revenue in the first six months ended June 30, 2017 based on the relative fair value of licensed content delivered to Yanhua.

 

For the six months ended June 30, 2016, four customers individually accounted for more than 10% of the Company’s revenue. Four customers individually accounted for 10% of the Company’s net accounts receivables as of June 30, 2016.

 

Wecast Services

 

The holdings and businesses from Company’s two acquisitions in January 2017 (Note 4) now reside under “Wecast Services”, our wholly-owned subsidiary Wecast Services Group Limited. Wecast Services (which resides under the Product Sales Cloud) is currently primarily engaged with consumer electronics e-commerce and smart supply chain management operations. The Company’s ending customers include British Telecom, Micromax and about 15 to 20 other corporations across the world.

 

For the six months ended June 30, 2017, one customer individually accounted for more than 10% of the Company’s revenue. Two customers individually accounted for more than 10% of the Company’s net accounts receivables as of June 30, 2017, respectively.

 

(c) Major Suppliers

 

Legacy YOD business

 

The Company relies on agreements with studio content partners to acquire video contents. A content partner that accounts for more than 10% of the Company’s cost of revenues is considered a major supplier.

 

As of December 31, 2016, all licensed contents have been recognized as cost of revenues other than the ones that acquired from SSS in the amount of $17.7 million (note 12).

 

 29 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the six months ended June 30, 2016, four suppliers individually accounted for more than 10% of the Company’s cost of revenues. Two suppliers individually accounted for 10% of the Company’s accounts payable as of June 30, 2016.

 

Wecast Services

 

The Company relies on agreements with consumer electronics manufactures.

 

For the six months ended June 30, 2017, three suppliers individually accounted for more than 10% of the Company’s cost of revenues. Three suppliers individually accounted for more than 10% of the Company’s accounts payable as of June 30, 2017.

 

(d) Concentration of Credit Risks

 

Financial instruments that potentially subject the Company to significant concentration of credit risk primarily consist of cash and accounts receivable. As of June 30, 2017 and December 31, 2016, the Company’s cash was held by financial institutions located in the PRC, Hong Kong and the United States that management believes have acceptable credit. Accounts receivable are typically unsecured and are mainly derived from revenues from the Company’s VOD content distribution partners, and smart sales products to customers. The risk with respect to accounts receivable is mitigated by regular credit evaluations that the Company performs on its distribution partners and its ongoing monitoring of outstanding balances.

 

(e) Foreign Currency Risks

 

A majority of the Company’s operating transactions are denominated in RMB and a significant portion of the Company’s assets and liabilities is denominated in RMB. RMB is not freely convertible into foreign currencies. The value of the RMB is subject to changes in the central government policies and to international economic and political developments. In the PRC, certain foreign exchange transactions are required by laws to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by the Company in China must be processed through PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to complete the remittance.

 

Cash consist of cash on hand and demand deposits at banks, which are unrestricted as to withdrawal.

 

Time deposits, which mature within one year as of the balance sheet date, represent interest-bearing certificates of deposit with an initial term of greater than three months when purchased. Time deposits which mature over one year as of the balance sheet date are included in non-current assets.

 

Cash and time deposits maintained at banks consist of the following:

 

   June 30,   December 31, 
   2017   2016 
RMB denominated bank deposits with financial institutions in the PRC  $1,298,945    1,566,107 
US dollar denominated bank deposits with financial institutions in the PRC  $16,728    670,951 
HKD denominated bank deposits with financial institutions in Hong Kong Special Administrative Region (“HK SAR”)   68,083    14,151 
US dollar denominated bank deposits with financial institutions in Hong Kong Special Administrative Region (“HK SAR”)  $1,039,362    1,402,842 
US dollar denominated bank deposits with financial institutions in The United States of America (“USA”)  $730,602    95,030 

 

As of June 30, 2017 and December 31, 2016 deposits of $415,530 and $384,545 were insured, respectively. To limit exposure to credit risk relating to bank deposits, the Company primarily places bank deposits only with large financial institutions in the PRC, HK SAR, USA and Cayman with acceptable credit rating.

 

19.Defined Contribution Plan

 

For our U.S. employees, during 2011, the Company began sponsoring a 401(k) defined contribution plan ("401(k) Plan") that provides for a 100% employer matching contribution of the first 3% and a 50% employer matching contribution of each additional percent contributed by an employee up to 5% of each employee’s pay. Employees become fully vested in employer matching contributions after six months of employment. Company 401(k) matching contributions were approximately approximately $904 and $2,100 for the three and six months ended June 30, 2017 respectively and $1,000 and $2,000 for the three and six months ended June 30, 2016 respectively.

 

Full time employees in the PRC participate in a government-mandated defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. PRC labor regulations require the Company to make contributions based on certain percentages of the employees’ basic salaries. Other than 

 30 

 

Seven Stars Cloud Group, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

such contributions, there is no further obligation under these plans. The total contribution for such PRC employee benefits was $233,676 and $224,134 for the six months ended June 30, 2017 and 2016, respectively.

 

20.Segment Reporting

 

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 4), the Company has operated two segments based on different clouds that major business reside in, including Legacy YOD segment and Wecast Service segment. Therefore, there are two reportable segments for the six months ended June 30, 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 and smart supply chain management operations.

 

Segment disclosures are on a performance basis consistent with internal management reporting. The Company does not allocate expenses below segment gross profit since these segments share the same executive team, office space, occupancy expenses, information technology infrastructures, human resources and finance department. The following tables summarized the Company’s revenue and cost generated from different revenue streams.

 

   Six Months Ended 
   June 30,   June 30, 
   2017   2016 
NET SALES TO EXTERNAL CUSTOMERS          
-Legacy YOD  $794,273   $2,750,190 
-Wecast Service   75,694,517    - 
Net sales   76,488,790    2,750,190 
GROSS PROFIT          
-Legacy YOD   31,659    1,034,011 
-Wecast Service   3,842,029    - 
Gross profit   3,873,688    1,034,011 
           
   June 30,   December 31, 
   2017   2016 
TOTAL ASSETS          
-Legacy YOD  $23,781,011   $36,975,911 
-Wecast Service   46,426,638    14,448,702 
-Unallocated assets   4,386,182    4,321,677 
-Intersegment elimination   (320,092)   - 
Total   74,273,739    55,746,290 

 

21.Subsequent Event

 

As at August 14, 2017 (reporting date approved by Board of Directors), there is no material subsequent event to be disclosed.

 

 31 

 

Cautionary Note Regarding Forward Looking Statements

 

This Form 10-Q contains “forward-looking” statements that involve risks and uncertainties. You can identify these statements by the use of forward-looking words such as "may", "will", "expect", "anticipate", "estimate", "believe", "continue", or other similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or financial condition or state other "forward-looking" information. We believe that it is important to communicate our future expectations to our investors. However, these forward-looking statements are not guarantees of future performance and actual results may differ materially from the expectations that are expressed, implied or forecasted in any such forward-looking statements. There may be events in the future that we are unable to accurately predict or control, including weather conditions and other natural disasters which may affect demand for our products, and the product–development and marketing efforts of our competitors. Examples of these events are more fully described in the Company’s 2016 Annual Report under Part I. Item 1A. Risk Factors.

 

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

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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

 

Overview

 

Seven Stars Cloud Group, Inc. (the “Company” or “SSC”), 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 be a leading Intelligent Industrial Internet company with solutions designed to provide operational efficiencies in today’s constantly evolving business landscape. With a focus on “BASE” technology and infrastructure (Blockchain, Artificial Intelligence, Supply Chain & Exchanges) to power our Virtual Platform as a Service or “VPaaS”, SSC is creating a closed trade ecosystem for buyers and sellers designed to eliminate supply chain and transactional middlemen and create a more direct and margin-expanding trading path for principals. SSC is applying BASE plus V PaaS to focus on three Core Cloud Areas, including Intellectual Property Cloud, Product Sales Cloud, and the Finance Services Cloud. With the three clouds functioning both independently and interdependently, SSC is creating a vertical, transactional and flexible platform for today’s global enterprises. SSC is also still leveraging its legacy operations as a premium content Video On Demand (“VOD”) service provider in China.

 

The Company’s mission and vision is to be the world’s leading cloud-based, total B2B enterprise solution and platform provider that empowers businesses to grow with Big Data technology.

 

SSC launched its VOD service through acquisition of YOD Hong Kong, formerly Sinotop Group Limited, in July 30, 2010 through its subsidiary China CB Cayman. Through a series of contractual arrangements, YOD WFOE, the subsidiary of YOD Hong Kong, controls Sinotop Beijing, a corporation established in the PRC. Sinotop Beijing is the 80% owner of Zhong Hai Media until June 30, 2017, through which we provide: 1) integrated value–added business–to–business (“B2B”) service solutions for the delivery of VOD and enhanced premium content for digital cable; 2) integrated value–added business–to–business–to–customer (“B2B2C”) service solutions for the delivery of VOD and enhanced premium content for IPTV and OTT providers and; 3) a direct to user, or B2C, mobile video service app.

 

On October 8, 2016, the Company signed an agreement to form a partnership with Zhejiang Yanhua ("Yanhua Agreement"), where Yanhua will act as the exclusive distribution operator (within the territory of the People's Republic of China) of WCST's licensed library of major studio films. According to the Yanhua Agreement, the existing legacy Hollywood studio paid contents as well as other IP contents specified in the agreement, along with the corresponding authorized rights letter that WCST is entitled to, will be turned over to Yanhua as a whole package, which was agreed to be priced at RMB 13,000,000. In addition to the above-mentioned minimal guarantee fee of RMB 13,000,000 specified, there is a provision in the Yanhua Agreement which states that once the revenue recognized from the existing contents transferred from WCST to Yanhua reaches the amount of RMB 13,000,000, the revenue above RMB 13,000,000 will be shared with WCST from the date when this revenue threshold is reached based on certain revenue-sharing mechanism stipulated in the Yanhua Agreement.

 

 32 

 

On January 30, 2017, the Company entered into a Securities Purchase Agreement (the “Sun Video SPA”) with BT Capital Global Limited which has been controlled by Company’s chairman Bruno Wu, for the purchase by us of all of the outstanding capital stock of Sun Video Group Hong Kong Limited. 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. After acquiring these two entities, other than our legacy YOD business, we are also engaged with consumer electronics and smart hand held device design and supply chain management business.

 

On June 30, 2017, Company entered into another 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.

 

Principal Factors Affecting Our Financial Performance

 

The Company is in the process of transforming its business model and is aiming to be a leading Intelligent Industrial Internet company with solutions designed to provide operational efficiencies in today's constantly evolving business landscape. With a focus on 'BASE' technology and infrastructure (Blockchain, Artificial Intelligence, Supply Chain & Exchanges) to power our V PaaS (Virtual Platform as a Service), SSC is creating a closed trade ecosystem for buyers and sellers designed to eliminate supply chain and transactional middlemen and create a more direct and margin-expanding trading path for principals. SSC is applying BASE + V PaaS to focus on 3 Core Cloud Areas: I. Intellectual Property Cloud; II. Product Sales Cloud; III. Financial Services Cloud. With the three clouds functioning both independently and interdependently, SSC is creating a vertical, transactional and flexible platform for today's global enterprises. In connection with this transformation, the Company has recently assembled a new experienced management team, stabilized the foundation, capitalized and rebranded the Company, reconfigured the business structure, expanded the Company’s mission and business lines, made several key investments and finally, injected several privately held and revenue producing assets into the corporation. It is uncertain whether these efforts will prove beneficial or whether we will be able to develop the necessary business models, infrastructure and systems to support the business. This includes having or hiring the right talent to execute our business strategy. Market acceptance of new product and service offerings will be dependent in part on our ability to include functionality and usability that address customer requirements, and optimally price our products and services to meet customer demand and cover our costs.

 

Taxation

 

United States

 

Seven Stars Cloud Group, Inc. and M. Y. Products, LLC are subject to United States tax. No provision for income taxes in the United States has been made as both companies had no taxable profit in the United States since inception.

 

Cayman Islands and the British Virgin Islands

 

Under the current laws of the Cayman Islands and the British Virgin Islands, we are not subject to tax on our income or capital gains. In addition, dividend payments are not subject to withholding tax in the Cayman Islands or British Virgin Islands.

 

 33 

 

Hong Kong

 

Our subsidiaries that were incorporated in Hong Kong were under the current laws of Hong Kong, are subject to Profits Tax of 16.5%. No provision for Hong Kong Profits Tax has been made as net operating loss carryovers offset current taxable income.

 

The People’s Republic of China

 

Under the Enterprise Income Tax Law, our Chinese subsidiaries and VIEs are subject to an earned income tax of 25.0%.

 

Our future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax income and non-tax deductible expenses incurred. Our management carefully monitors these legal developments to determine if there will be any change in the statutory income tax rate.

 

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Consolidated Results of Operations

 

Comparison of Three Months Ended June 30, 2017 and 2016

 

   Three Months Ended         
   June 30, 2017   June 30, 2016   Amount Change   % Change 
Revenue  $43,324,439   $1,480,464   $41,843,975    2,826%
Cost of revenue   43,272,723    800,399    42,472,324    5,306%
Gross profit   51,716    680,065    (628,349)   (92%)
                     
Operating expense:                    
Selling, general and administrative expenses expenses   2,875,440    1,808,906    1,066,534    59%
Professional fees   747,418    270,491    476,927    176%
Impairment of other intangible assets   63,621    -    63,621    100%
Depreciation and amortization   60,942    123,343    (62,401)   (51%)
                     
Total operating expense   3,747,421    2,202,740    1,544,681    70%
                     
Loss from operations   (3,695,705)   (1,522,675)   (2,173,030)   143%
Interest expense, net   (3,696)   (166,710)   163,014    (98%)
Change in fair value of warrant liabilities   26,117    106,583    (80,466)   (75%)
Equity in loss of equity method investees   (33,090)   (27,001)   (6,089)   23%
Others   (11,072)   (5,258)   (5,814)   111%
                     
Loss before income taxes   (3,717,446)   (1,615,061)   (2,102,385)   130%
                     
Income tax benefit   -    8,612    (8,612)   (100%)
                     
Net loss   

(3,717,446

)   (1,606,449)   

(2,110,997

)   131%
                     
Net loss attributable to non-controlling interest   57,221    18,360    38,861    212%
                     
Net loss attributable to Seven Stars Cloud Group, Inc. shareholders  $

(3,660,225

)  $(1,588,089)  $(2,072,136)   130%

 

Revenues

 

We are refocusing from our legacy operations as a premium content VOD service provider in China and aiming to be a leading Intelligent Industrial Internet company with solutions designed to provide operational efficiencies in today’s constantly evolving business landscape. With a focus on “BASE” or Blockchain, Artificial Intelligence, Supply Chain & Exchanges, we are organized into three cloud-based categories and business units: Brand, Content & Intellectual Property Cloud, Product Sales Cloud, and the Transactional Finance Product Cloud. With the three clouds functioning both independently and interdependently, we are creating a vertical, transactional and flexible platform for today’s global enterprises, including:

 

1>OTT, Mobile App, IPTV and Digital Cable VOD Businesses (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.

 

2>Wecast Services

On January 30, 2017, the Company completed the acquisition of Sun Video Group HK Limited ("SVG"), which has a 51% ownership stake in Shanghai Wecast Supply Chain Management Limited ("Wecast SH"). On January 31, 2017, the Company acquired 55% of the

 

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outstanding capital stock of Wide Angle Group Limited (“Wide Angle”). The holdings and businesses from both of these aforementioned acquisitions now reside under “Wecast Services”, our wholly-owned subsidiary Wecast Services Limited. Wecast Services (which resides under the Product Sales Cloud) business unit, is currently primarily engaged with consumer electronics e-commerce and smart supply chain management operations. Our ending customers include British Telecom, Micromax and about 15 to 20 other corporations across the world.

 

   2017Q2   2016Q2   Diff 
   USD   %   USD   USD   % 
Legacy YOD   -    -    1,480,464    (1,480,464)   (100%)
Wecast Services   43,324,439    100%   -    43,324,439    100%
Total   43,324,439    100%   1,480,464    41,843,975    2826%

 

Revenue for the three months ended June 30, 2017 was $43.3 million as compared to $1.5 million for the same period in 2016, an increase of approximately $41.8 million, or 2,826%. The increase was mainly due to our new business line acquired in January 2017. This was partially offset by a decrease of our legacy YOD business in the amount of $1.5 million, as the legacy YOD business shifts to a new exclusive distribution agreement with Zhejiang Yanhua Culture Media Co., Ltd. ("Yanhua ") which was announced in Q4 2016. As revenue generated by Yanhua was not over revenue sharing threshold yet, no additional revenue was recorded in the quarter ended June 30, 2017.

 

Cost of revenues

 

   2017Q2   2016Q2  Diff 
   USD   %   USD   USD   % 
 Legacy YOD   -    -    800,399    (800,399)   (100%)
Wecast Services   43,272,723    100%   -    43,272,723    100%
 Total   43,272,723    100%   800,399    42,472,324    5306%

 

Cost of revenues was approximately $43.3 million for the three months ended June 30, 2017, as compared to $0.8 million for the three months ended June 30, 2016. Our cost of revenues increased by $42.5 million which is in line with our increase in revenues. Our cost of revenues is primarily comprised of electronics products purchasing cost from Wecast Services.

 

Gross profit

 

   2017Q2   2016Q2  Diff 
   USD   %   USD   USD   % 
 Legacy YOD   -    -    680,065    (680,065)   (100%)
Wecast Services   51,716    100%   -    51,716    100%
 Total   51,716    100%   680,065    (628,349)   (92%)

 

Gross profit ratio for the three months ended June 30, 2017 decreased by 45.82% from 45.94% to 0.12%, as the Wecast Services business, which currently is engaged mostly in lower margin electronics e-commerce, is still in its relative infancy and the business service offerings as well as profit-sharing arrangements with a growing range of suppliers are in transition.

 

Selling, general and administrative expenses

 

Selling, general and administrative expense for the three months ended June 30, 2017 was $2.9 million as compared to $1.8 million for the same period in 2016, an increase of approximately $1.1 million or 59%. The increase was primarily attributed to the recent business transformation and headcount expansion during the first and second quarter as well as an increase in share based compensation due to recently vested restricted share units granted to our management. In second quarter of 2017, the Company terminated one of our office leases in Shanghai, which resulted in an approximate $0.5 million impairment of leasehold improvements. In addition, there was an approximate $0.2 million increase in D&O insurance expenses.

 

Professional fees

 

Professional fees for the three months ended June 30, 2017 were $0.7 million as compared to $0.3 million for the same period in 2016, an increase of approximately $0.4 million. This increase was mainly due to audit and valuation fees that were incurred in the second quarter for additional audit services rendered in relation to our January acquisitions of Wide Angle and Wecast Services and therefore increased review service fees charged by our external auditor.

 

Change in fair value of warrant liabilities

 

Certain of our warrants are recognized as derivative liabilities and re-measured at the end of every reporting period and upon settlement, with the change in value reported in the statement of operations. We reported a loss of approximately $0.03 million and a gain of approximately $0.1 million for the three months ended June 30, 2017 and 2016, respectively. The changes are primarily due to fluctuations in our closing stock price.

 

 

 

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Income tax expenses

 

The income tax expense for the three months ended June 30, 2017 is nil because net operating loss carryovers offset current taxable income and deferred tax assets related to the net operating loss carryovers utilized had been offset by a valuation allowance.

 

Net loss attributable to non-controlling interest

 

Hua Cheng has a 20% non-controlling interest in Zhong Hai Media and as such we allocate 20% of the operating loss of Zhong Hai Media to Hua Cheng. During the three months ended June 30, 2017, approximately $0.1 million of our operating profit from Zhong Hai Media was allocated to Hua Cheng. For the three months ended June 30, 2016, operating loss attributable to non-controlling interest was approximately $0.02 million.

 

Dillon Yu has a 49% non-controlling interest in Shanghai Wecast Supply Chain Management Limited (“Wecast SH”) and as such we allocate 49% of the operating loss of Wecast SH to Dillon Yu. During the three months ended June 30, 2017, approximately $0.2 million of our operating loss from Wecast SH was allocated to Dillon Yu, which was nil in the same period in 2016.

 

Swiss Guorong Limited has a 45% non-controlling interest in Wide Angle and as such we allocate 45% of the operating profit of Wide Angle to Swiss Guorong Limited. During the three months ended June 30, 2017, approximately $0.01 million of our operating loss from Wide Angle was allocated to Swiss Guorong Limited, which was nil in the same period in 2016.

 

Comparison of Six Months Ended June 30, 2017 and 2016

 

   Six Months Ended         
   June 30, 2017   June 30, 2016   Amount Change   % Change 
Revenue  $76,488,790   $2,750,190   $73,738,600    2,681%
Cost of revenue   72,615,102    1,716,179    70,898,923    4,131%
Gross profit   3,873,688    1,034,011    2,839,677    275%
                     
Operating expense:                    
Selling, general and administrative expenses expenses   4,140,612    3,973,959    166,653    4%
Professional fees   1,014,551    637,937    376,614    59%
Impairment of other intangible assets   63,621    -    63,621    100%
Depreciation and amortization   257,153    220,806    36,347    16%
                     
Total operating expense   5,475,937    4,832,702    643,235    13%
                     
Loss from operations   (1,602,249)   (3,798,691)   2,196,442    (58%)
Interest expense, net   (45,253)   (200,183)   154,930    (77%)
Change in fair value of warrant liabilities   (243,999)   143,606    (387,605)   (270%)
Equity in loss of equity method investees   (76,836)   (37,349)   (39,487)   106%
Others   (110,642)   (5,096)   (105,546)   2071%
                     
Loss before income taxes   (2,078,979)   (3,897,713)   1,818,734    (47%)
                     
Income tax benefit   -    17,224    (17,224)   (100%)
                     
Net loss   (2,078,979)   (3,880,489)   1,801,510    (46%)
Net loss attributable to non-controlling interest   631,633    155,929    475,704    305%
                     
Net loss attributable to Seven Stars Cloud Group, Inc. shareholders  $(1,447,346)  $(3,724,560)  $2,277,214    (61%)

  

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Revenues

 

   2017 1-6   2016 1-6  Diff 
   USD   %   USD   USD   % 
 Legacy YOD   794,273    -    2,750,190    (1,955,917)   (71%)
Wecast Services   75,694,517    100%   -    75,694,517    100%
 Total   76,488,790    100%   2,750,190    73,738,600    2681%

 

Revenue for the six months ended June 30, 2017 was approximately $76.5 million, as compared to $2.8 million for the same period in 2016. The increase in revenue of approximately $75.7 million was attributable to the new consumer electronics e-commerce business line acquired in January 2017, and to a lesser extent, a one-time consulting services that we provided to certain customers. These revenues were partially offset by the decrease of our legacy YOD business, which is in line with our business strategy transition.

 

Gross profit

 

   2017 1-6   2016 1-6  Diff 
   USD   %   USD   USD   % 
 Legacy YOD   31,659    -    1,034,011    (1,002,352)   (97%)
Wecast Services   3,842,029    100%   -    3,842,029    100%
 Total   3,873,688    100%   1,034,011    2,839,677    275%

 

Our gross profit for the six months ended June 30, 2017 was approximately $3.9 million, as compared to $1.0 million during the same period in 2016. Gross profit ratio for the six months ended June 30, 2017 was 5.06%, a decrease from 37.60%, as the Wecast Services business, which currently is engaged mostly in lower margin electronics e-commerce, is still in its relative infancy and the business service offerings as well as profit-sharing arrangements with a growing range of suppliers are in transition.

 

Selling, general and administrative expenses

 

Our selling, general and administrative expenses for the six months ended June 30, 2017 increased approximately $0.2 million, or 4%, as compared with the amount for the six months ended June 30, 2016.

 

Salaries and personnel costs are the primary components of selling, general and administrative expenses, accounting for 55% and 43% of our selling, general and administrative expenses for the six months ended June 30, 2017 and June 30, 2016, respectively. For the half year of 2017, salaries and personnel costs totaled $2.4 million, an increase of approximately $0.7 million, or 41%, as compared to the same period of 2016. The increase was primarily due to the increase in headcount as part of our business transformation and expansion strategy in 2017.

 

Professional fees

 

Professional fees are generally related to public company reporting and governance expenses as well as legal fees related to business transition and expansion. Our costs for professional fees increased approximately $0.4 million, or 59%, to $1.0 million for the six months ended June 30, 2017, for the same period in 2016. The increase in professional fees was mainly caused by the legal, valuation and auditing service fees incurred in relation to the acquisitions in January 2017.

 

Interest expense, net

 

Our interest expense decreased by approximately $0.2 million for the six months ended June 30, 2017. In the same period of 2016, we incurred approximately $0.1 million in interest expense related to the amortization of debt costs from the issuance of the $17.7 million convertible note to SSS which was no longer incurred in 2017.

 

Change in fair value of warrant liabilities

 

Certain of our warrants are recognized as derivative liabilities and re-measured at the end of every reporting period and upon settlement, with the change in value reported in the statement of operations. We reported a loss of approximately $0.3 million but a gain of approximately $0.1 million for the six months ended June 30, 2017 and 2016, respectively. The changes are primarily due to fluctuations in our closing stock price.

 

 

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Net loss attributable to non-controlling interest

 

For the period ended June 30, 2017, Hua Cheng has a 20% non-controlling interest in Zhong Hai Media and as such we allocate 20% of the operating loss of Zhong Hai Media to Hua Cheng. During the six months ended June 30, 2017, approximately $0.03 million of our operating profit from Zhong Hai Media was allocated to Hua Cheng. For the six months ended June 30, 2016, operating loss attributable to non-controlling interest was approximately $0.2 million.

 

Dillon Yu has a 49% non-controlling interest in Shanghai Wecast Supply Chain Management Limited (“Wecast SH”) and as such we allocate 49% of the operating loss of Wecast SH to Dillon Yu. During the six months ended June 30, 2017, approximately $0.6 million of our operating loss from Wecast SH was allocated to Dillon Yu, which was nil in the same period in 2016.

 

Swiss Guorong Limited has a 45% non-controlling interest in Wide Angle and as such we allocate 45% of the operating profit of Wide Angle to Swiss Guorong Limited. During the six months ended June 30, 2017, approximately $0.03 million of our operating loss from Wide Angle was allocated to Swiss Guorong Limited, which was nil in the same period in 2016.

 

Liquidity and Capital Resources

 

As of June 30, 2017, the Company had cash of approximately $3.2 million and had accumulated deficits of approximately $117.5 million and $115.7 million as of June 30, 2017 and December 31, 2016, respectively, due to recurring losses since our inception. These factors could raise substantial doubt about the Company’s ability to continue as a going concern.

 

We continue to rely on debt and equity financing to pay for ongoing operating expenses and execution of our business plan. On March 28, 2016, we completed a common stock financing for $10.0 million. On July 19, 2016, we completed a stock financing with SSW for $4.0 million. On August 12, 2016, we completed another common stock financing with Harvest Alternative Investment Opportunities SPC for $4.0 million. On November 17, 2016, we completed another common stock financing with SSSHK for $2.0 million. On May 19, 2017, we completed another common stock financing with certain investors, including officers, directors and other affiliates of the Company for $2.0 million. We have the ability to raise funds through various methods by either issuing debt or equity instruments.

 

The consolidated financial statements included in this report have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any adjustment that might result from the outcome of this uncertainty.

 

The following table provides a summary of our net cash flows from operating, investing and financing activities.

 

   Six  Months Ended 
   June 30,   June 30, 
   2017   2016 
Net cash used in operating activities  $(1,435,592)  $(4,097,000)
Net cash used in investing activities   (845,830)   (7,234,000)
Net cash provided by financing activities   1,650,350    10,000,000 
Effect of exchange rate changes on cash   32,728    (34,000)
Net decrease in cash   (598,344)   (1,365,000)
           
Cash at beginning of period   3,761,814    3,769,000 
           
Cash at end of period  $3,163,470   $2,404,000 

 

Operating Activities

 

Cash used in operating activities decreased for the six months ended June 30, 2017 compared to 2016, primarily due to a decrease in our loss from operation from $3.8 million to $2.1 million.

 

Financing Activities

 

We entered into a subscription agreement with our certain investors, including officers, directors and other affiliates, pursuant to which we 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, and as of June 30, 2017, we already received $1.5 million, and all the remaining subscription have been received as of July 18, 2017; While in the same period in 2016, we received $10 million investment proceeds from the sales of 4,545,455 shares of our common stock and issuance of a two-year warrant to acquire an additional 1,818,182 shares of our common stock at an exercise price of $2.75 per share to SSS.

 

Effects of Inflation

 

Inflation and changing prices have had an effect on our business and we expect that inflation or changing prices could materially affect our business in the foreseeable future. Our management will closely monitor the price change and make efforts to maintain effective cost control in operations.

 

 39 

 

Off Balance Sheet Arrangements

 

We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities.

 

Seasonality

 

Our operating results and operating cash flows historically have not been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introductions.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates, and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements.

 

Variable Interest Entities

 

We account for entities qualifying as variable interest entities (“VIEs”) in accordance with Financial Accounting Standards Boards (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation. For our consolidated VIEs, management has made evaluations of the relationships between our VIEs and the economic benefit flow of contractual arrangement with VIEs. In connection with such evaluation, management also took into account the fact that, as a result of such contractual arrangements, we control the legal shareholders’ voting interests and have power of attorney in the VIEs, and therefore we are able to direct all business activities of the VIEs. As a result of such evaluation, management concluded that we are the primary beneficiary of our consolidated VIEs.

 

We have consulted our PRC legal counsel in assessing our ability to control our PRC VIEs. Any changes in PRC laws and regulations that affect our ability to control our PRC VIEs may preclude us from consolidating these companies in the future.

 

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, we allocated the arrangement consideration to all deliverables at the inception of the arrangement based on their relative selling price. We use (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.

 

We also generate 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. We purchase finished goods from suppliers in accordance with sales orders from customers. Our suppliers then deliver goods to our customers directly. When the delivery is completed, we recognizes revenue and transfers cost at same time. According to purchase orders with suppliers, we, as the owner of the goods, become the first responsible party for the goods. We are required to bear the direct risk of damage to the goods and the direct default risk that can not be delivered to the customer.

 

In accordance with ASC 605-45, Revenue Recognition — Principal Agent Consideration, we account for revenue from sales of goods on a gross basis. We are the primary obligor in the arrangements, as we have the ability to establish prices, and have discretion in selecting the independent suppliers and other third-party that will perform the delivery service, we are responsible for the defective products and we bear 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.

 

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.

 

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Licensed Content

 

We obtain content through content licensing 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 content fees payable are classified as a liability on the consolidated balance sheets.

 

We amortize licensed content in cost of revenues over the contents contractual window of 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 on a regular basis, including factors that may bear direct impact on expected revenue from specific content titles. We estimate expected revenue by reviewing relevant factors, including marketing considerations, programming efforts, relationship with our channel partners, expected customer renewals and content offered by other distributors on the same platform. Changes in our expected revenue from licensed content could have a significant impact on our amortization pattern.

 

Intangible Assets and Goodwill

 

We account 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.

 

Recent Accounting Pronouncements

 

In May 2014, Financial Accounting Standards Board (or “FASB”) issued Accounting Standards Updates (or “ASU”) 2014-09, “Revenue from Contracts with Customers” (Topic 606). This guidance supersedes current guidance on revenue recognition in Topic 605, Revenue Recognition. In addition, there are disclosure requirements related to the nature, amount, timing, and uncertainty of revenue recognition. In August 2015, the FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09 for all entities by one year. For public business entities that follow U.S. GAAP, the deferral results in the new revenue standard are being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted for interim and annual periods beginning after December 15, 2016. Management is currently evaluating the impact of adopting this standard on our consolidated financial statements.

 

In January 2016, the FASB issued ASU 2016-01 "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities". ASU 2016-01 amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. With respect to our consolidated financial statements, the most significant impact relates to the recognition and measurement for warrant liabilities. Additionally, ASU 2016-01 will impact the disclosure and presentation of financial assets and liabilities. ASU 2016-01 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2017. Early adoption by public entities is permitted only for certain provisions. Management is currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02 which amends the FASB Accounting Standards Codification and created Topic 842, "Leases". Under Topic 842, lessees are required to recognize assets and liabilities on the balance sheet for most leases and provides for enhanced disclosures. Leases will continue to be classified as either finance or operating. ASU 2016-02 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2018. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited and early adoption by public entities is permitted. Management is currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

 

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In May 2016, the FASB issued ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update affect only the narrow aspects of Topic 606. The areas improved include: (1) Assessing the Collectability Criterion in Paragraph 606-10-25-1(e) and Accounting for Contracts That Do Not Meet the Criteria for Step 1; (2) Presentation of Sales Taxes and Other Similar Taxes Collected from Customers; (3) Noncash Consideration; (4) Contract Modifications at Transition; (5) Completed Contracts at Transition; and (6) Technical Correction. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). We are planning to adopt the above standards on January 1, 2018. We may use either a full retrospective or a modified retrospective approach to adopt this standard. We are currently evaluating this standard and the related updates, including which transition approach to use as well as the impact of adoption on policies, practices and systems. The standard also requires us to evaluate whether our businesses promise to transfer services to the customer itself (as a principal) or to arrange for services to be provided by another party (as an agent). To make that determination, the standard uses a control model rather than the risks-and-rewards model in current U.S. GAAP. At this stage in the evaluation, we do not anticipate that the new guidance will have a material impact on our revenue recognition policies, practices or systems. We are currently evaluating the impact of this standard to its consolidated financial statements upon adoption.

 

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.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer , as appropriate, to allow timely decisions regarding required disclosure.

 

As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2017. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2017, and as of the date that the evaluation of the

 

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effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were not effective to satisfy the objectives for which they are intended, as a result of one material weakness and one significant deficiency described below.

 

Changes in Internal Control Over Financial Reporting

 

On February 4, 2017, Ms. Mei Chen resigned from her position as Chief Financial Officer of the Company and was replaced by Mr. Simon Wang, as the Chief Financial Officer and principal financial officer and principal accounting officer.

 

In the first quarter of 2017, one significant deficiency was identified as we did not maintain effective internal controls over the accounting for and related disclosures of significant non-routine transactions. Specifically, we did not maintain a sufficient complement of resources with an appropriate level of accounting knowledge, experience and training commensurate with our structure and financial reporting requirements related to the financial presentation associated with the consolidation of our newly acquired business under common control. We have undertaken certain remedial steps to address the significant deficiency, including strengthened our financial reporting function by hiring additional competent professionals with appropriate understanding of U.S. GAAP accounting issues and the SEC reporting requirements and enhanced our monitoring control over financial reporting, including additional review by our finance controller and finance director over the application of U.S. GAAP accounting knowledge and the selection and evaluation of U.S. GAAP accounting policies, critical accounting judgments and estimates, reporting and disclosures. As of June 30, 2017, we have concluded that the significant deficiency described in our quarterly report on Form 10-Q for the quarter ended March 31, 2017 have been remediated.

 

In 2016, a material weakness identified in the internal control of financial reporting related to the design, documentation and implementation of effective internal controls over the review of the cash flow forecasts used in the accounting for licensed content recoverability. Specifically, the Company did not design and maintain effective internal controls related to management’s review of the data inputs and assumptions used in its cash flow forecasts for licensed content recoverability.

 

Other than the changes stated above, there have been no other significant changes in internal control for the six months ended June 30, 2017, which have materially affected or would likely materially affect our internal control over financial reporting. The Company continues to invest resources in order to upgrade internal controls.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There are no material pending legal proceedings to which we are a party or to which any of our property is subject. To the best of our knowledge, no such actions against us are contemplated or threatened.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our 2016 Annual Report which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. Other than as noted below, there have been no material changes in the risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2016.

 

The Company is in the process of transforming its business model and this transformation may not be successful.

 

The Company is in the process of transforming its business model and is aiming to be a leading Intelligent Industrial Internet company with solutions designed to provide operational efficiencies in today's constantly evolving business landscape. With a focus on 'BASE' technology and infrastructure (Blockchain, Artificial Intelligence, Supply Chain & Exchanges) to power our V PaaS (Virtual Platform as a Service), SSC is creating a closed trade ecosystem for buyers and sellers designed to eliminate supply chain and transactional middlemen and create a more direct and margin-expanding trading path for principals. SSC is applying BASE + V PaaS to focus on 3 Core Cloud Areas: I. Intellectual Property Cloud; II. Product Sales Cloud; III. Financial Services Cloud. With the three clouds functioning both independently and interdependently, SSC is creating a vertical, transactional and flexible platform for today's global enterprises. In connection with this transformation, the Company has recently assembled a new experienced management team, stabilized the foundation, capitalized and rebranded the Company, reconfigured the business structure, expanded the Company’s mission and business lines, made several key investments and finally, injected several privately held and revenue producing assets into the corporation. It is uncertain whether these efforts will prove beneficial or whether we will be able to develop the necessary business models, infrastructure and systems to support the business. This includes having or hiring the right talent to execute our business strategy. Market acceptance of new product and service offerings will be dependent in part on our ability to include functionality and usability that address customer requirements, and optimally price our products and services to meet customer demand and cover our costs.

 

Any failure to implement this plan in accordance with our expectations could have a material adverse effect on our financial results. Even if the anticipated benefits and savings are substantially realized, there may be consequences, internal control issues, or business impacts that were not expected. Additionally, as a result of our restructuring efforts in connection with our business transformation plan, we may experience a loss of continuity, loss of accumulated knowledge or loss of efficiency during transitional periods. Reorganization and restructuring can require a significant amount of management and other employees' time and focus, which may divert attention from operating activities and growing our business. If we fail to achieve some or all of the expected benefits of these activities, it could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.

 

The Company experiences significant competitive pressure, which may negatively impact its results.

 

The market for the Company’s products and services is very competitive and subject to rapid technological advances, new market entrants, non-traditional competitors, changes in industry standards and changes in customer needs and consumption models. Not only does the Company compete with global distributors, it also competes for customers with regional distributors and some of the Company’s own suppliers that maintain direct sales efforts. In addition, as the Company expands its offerings and geographies, the Company may encounter increased competition from current or new competitors. The Company’s failure to maintain and enhance its competitive position could adversely affect its business and prospects. Furthermore, the Company’s efforts to compete in the marketplace could cause deterioration of gross profit margins and, thus, overall profitability.

 

The size of the Company’s competitors varies across market sectors, as do the resources the Company has allocated to the sectors and geographic areas in which it does business. Therefore, some competitors may have greater resources or a more extensive customer or supplier base than the Company has in one or more of its market sectors and geographic areas, which may result in the Company not being able to effectively compete in certain markets which could impact the Company’s profitability and prospects.

 

Our International Operations Expose Us to a Number of Risks

 

Our international activities are significant to our revenues and profits, and we plan to further expand internationally. In certain international market segments, we have relatively little operating experience and may not benefit from any first-to-market advantages or otherwise succeed. It is costly to establish, develop, and maintain international operations and platforms, and promote our brand internationally.

 

Our international sales and operations are subject to a number of risks, including:

 

local economic and political conditions;
government regulation of e-commerce and other services, electronic devices, and competition, and restrictive governmental actions (such as trade protection measures, including export duties and quotas and custom duties and tariffs), nationalization, and restrictions on foreign ownership;
restrictions on sales or distribution of certain products or services and uncertainty regarding liability for products, services, and content, including uncertainty as a result of less Internet-friendly legal systems, local laws, lack of legal precedent, and varying rules, regulations, and practices regarding the physical and digital distribution of media products and enforcement of intellectual property rights;
limitations on the repatriation and investment of funds and foreign currency exchange restrictions;
limited technology infrastructure;
shorter payable and longer receivable cycles and the resultant negative impact on cash flow;
laws and regulations regarding consumer and data protection, privacy, network security, encryption, payments, and restrictions on pricing or discounts;
geopolitical events, including war and terrorism.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

There were no unregistered sales of equity securities during the fiscal quarter ended June 30, 2017, other than those that were previously reported in our Current Reports on Form 8-K.

 

Item 3. Defaults Upon Senior Securities

 

There were no defaults upon senior securities during the fiscal quarter ended June 30, 2017.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicable.

 

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Item 6. Exhibits

 

Exhibit No.    Description 
10.1   Form of Subscription Agreement, dated May 19, 2017, by and between Wecast Network, Inc. and its certain investors, including officers, directors and other affiliates of the Company.*
10.2   Securities Purchase Agreement, dated June 9, 2017, by and between Wecast Network, Inc. and Redrock Capital Group Limited.*
10.3   Securities Purchase Agreement, dated June 30, 2017, by and between Wecast Network, Inc. and BT Capital Global Limited.*
31.1     Certifications of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*  
31.2     Certifications of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*  
32.1     Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2     Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
101.INS   XBRL Instance Document
101.SCH   Taxonomy Extension Schema Document
101.CAL   Taxonomy Extension Calculation Linkbase Document
101.DEF   Taxonomy Extension Definition Linkbase Document
101.LAB   Taxonomy Extension Label Linkbase Document
101.PRE   Taxonomy Extension Presentation Linkbase Document

 

*Filed herewith

**Furnished herewith

 

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SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on August 14, 2017.

 

Seven Stars Cloud Group, Inc.

 

By: /s/ Simon Wang  
   
Name: Simon Wang  
Title: Chief Financial Officer
(Principal Financial Officer and an Authorized Officer)  

 

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Exhibit 10.1

 

FORM OF SUBSCRIPTION AGREEMENT

 

This SUBSCRIPTION AGREEMENT (this “Subscription Agreement”) is made by and between Wecast Network, Inc. a Nevada corporation (the “Company”), and the undersigned (“Subscriber”) as of the date this Subscription Agreement is accepted by the Company, as set forth on the Company’s signature page hereto.

 

WHEREAS, subject to the terms and conditions set forth in this Agreement, and pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), Rule 506 promulgated thereunder and/or Regulation S under the Securities Act, the Company desires to issue and sell to the Subscriber, and the Subscriber desires to purchase from the Company, that number of shares of the Company’s common stock, $0.001 par value per share (“Common Stock”) set forth on the signature page hereto, to persons who are not U.S. persons under Regulation S and persons who are “accredited investors” (as defined in Rule 501 of Regulation D under the Securities Act), in a private placement (the “Offering”); and

 

WHEREAS, the Subscriber understands that the Offering is being made without registration of the Common Stock under the Securities Act of 1933, as amended (the “Securities Act”), or any securities law of any state of the United States or of any other jurisdiction, and is being made only to “accredited investors” or non-U.S. persons.

 

NOW, THEREFORE, for and in consideration of the premises and the mutual covenants hereinafter set forth, the parties hereto do hereby agree as follows:

 

1. Subscription for Securities.

 

(a) Subscription for Securities. Subject to the terms and conditions hereinafter set forth, Subscriber hereby irrevocably subscribes for and agrees to purchase from the Company such amounts of Common Stock as is set forth on the signature page hereof (the “Shares”) at a price per Share equal to $2.75, for an aggregate purchase price as set forth on the signature page hereof (the “Purchase Price”), and the Company agrees to sell such Shares to Subscriber for the Purchase Price, subject to the Company’s right, in its sole discretion, to reject this subscription, in whole or in part, at any time prior to the Closing (as defined below). Subscriber acknowledges that Subscriber is not entitled to cancel, terminate or revoke this Subscription Agreement. Subscriber further acknowledges that the Shares will be subject to restrictions on transfer as set forth in this Subscription Agreement.

 

2. Terms of Subscription.

 

(a) Payment. Subscriber shall make payment for the Shares to an account designated by the Company in an amount equal to the Purchase Price by wire transfer of immediately available funds at or prior to the Closing.

 

(b) Acceptance of Subscription and Issuance of Shares. It is understood and agreed that the Company shall have the sole right, at its complete discretion, to accept or reject this subscription, in whole or in part, for any reason and that the same shall be deemed to be accepted by the Company only when it is signed by a duly authorized officer of the Company and delivered to the undersigned at the Closing (as defined below). Notwithstanding anything in this Subscription Agreement to the contrary, the Company shall have no obligation to issue any of the Shares to any person who is a resident of a jurisdiction in which the issuance of Shares to such person would constitute a violation of the securities, “blue sky” or other similar laws.

 

(c) Closing. The Offering may be consummated at such place (or by electronic transmission) as may be mutually agreed upon by the parties at a closing (the “Closing”) to occur on a date as may be determined by the Company, at a time as may be determined by the Company. Subsequent closings may occur at the discretion of the Company.

 

(d) Closing Deliverables. At the Closing: (i) Subscriber shall deliver the Purchase Price; and (ii) the Company shall deliver a share certificate representing the Shares to Subscriber that bears an

 

 1 
 

 

appropriate legend referring to the fact that the Shares are subject to transfer restrictions as set forth in the Securities Act.

 

(e) Lock Up Agreement. During the period beginning on the date hereof through and including the date that is the six month anniversary of the date of this Subscription Agreement (the “Lock-Up Period”), the Subscriber will not, without the prior written consent of the Company, directly or indirectly, (i) offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of, or announce the intention to otherwise dispose of, any shares of common stock of the Company (including, without limitation, such common stock which may be deemed to be beneficially owned by the Subscriber in accordance with the rules and regulations promulgated under the Securities Act of 1933, as amended (such shares, the Beneficially Owned Shares”), or securities convertible into or exercisable or exchangeable for common stock of the Company, (ii) enter into any swap, hedge or similar agreement or arrangement that transfers in whole or in part, the economic risk of ownership of the Beneficially Owned Shares or securities convertible into or exercisable or exchangeable for common stock of the Company, whether now owned or hereafter acquired by the Subscriber or with respect to which the Subscriber has or hereafter acquires the power of disposition, or (iii) engage in any short selling of the common stock of the Company or securities convertible into or exercisable or exchangeable for common stock of the Company.

 

In order to enable this covenant to be enforced, the Subscriber hereby consents to the placing of legends or stop transfer instructions with the Company’s transfer agent with respect to any common stock of the Company or securities convertible into or exercisable or exchangeable for common stock of the Company.

 

This Subscription Agreement and all authority herein conferred are irrevocable and shall survive the death or incapacity of the Subscriber and shall be binding upon the heirs, personal representatives, successors and assigns of the Subscriber.

 

3. Representations and Warranties of Subscriber.

 

Subscriber represents and warrants to the Company that:

 

(a) Reliance on Exemptions. Subscriber understands that the Shares are being offered and sold in reliance upon specific exemptions from registration provided in the Securities Act, and upon exemptions from registration under State securities laws, and acknowledges that the Offering has not been reviewed by the Securities and Exchange Commission or any state agency because it is intended to be a nonpublic offering exempt from the registration requirements of the Securities Act and State securities laws. Subscriber understands that the Company is relying upon, and intends that the Company rely upon, the truth and accuracy of, and Subscriber’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of Subscriber set forth herein in order to determine the availability of such exemptions and the eligibility of Subscriber to acquire the Shares. The Company may only make offers to sell the Shares to persons outside the United States in this Offering and, if applicable, at the time any buy order is originated, the buyer is outside the United States. The undersigned has not received an offer to purchase Shares inside the United States and will not originate a buy order inside the United States.

 

(b) Investment Purpose. The undersigned is either (i) an “accredited investor” if a U.S. investor, or (ii) not a U.S. person as defined under Rule 902 of Regulation S, and the Shares are being purchased for Subscriber’s own account, for investment purposes only and not for distribution or resale to others in contravention of the registration requirements of the Securities Act. Subscriber agrees that it will not sell or otherwise transfer the Shares unless they are registered under the Securities Act or unless an exemption from such registration is available under the Securities Act and permitted by the certificate of incorporation of the Company. Subscriber has no contract, undertaking, agreement, or arrangement with any person to sell, distribute, transfer, or pledge to such person or anyone else the Shares which Subscriber hereby subscribes to purchase, or any interest therein, and Subscriber has no present plans to enter into any such contract, undertaking, agreement, or arrangement. Subscriber agrees that the Company and its affiliates shall not be required to give effect to any purported transfer of such Shares

 

 2 
 

 

except upon compliance with the foregoing restrictions.

 

(c) Accredited Investor. Subscriber, if a U.S. investor, is an “accredited investor” as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act, as amended to date, a summary of which is attached hereto as Exhibit B, and Subscriber is able to bear the economic risk of any investment in the Shares and in the Company. Subscriber shall complete and deliver to the Company prior to Closing an executed copy of the Accredited Investor Questionnaire attached hereto as Exhibit A.

 

(d) Risk of Investment. Subscriber recognizes that the purchase of the Shares involves a high degree of risk in that: (i) an investment in the Company is highly speculative and only investors who can afford the loss of their entire investment should consider investing in the Company and the Shares; (ii) transferability of the Shares is limited; and (iii) the Company may require substantial additional funds to operate its business and there can be no assurance that the Offering will be completed.

 

(e) Use of Proceeds. Subscriber understands that the net proceeds of the Offering will be used for operations of the Company and general corporate purposes.

 

(f) Prior Investment Experience. Subscriber understands the business in which the Company is engaged and has such knowledge and experience in business and financial matters that Subscriber is capable of evaluating the merits and risks of the investment in the Shares. Subscriber has prior investment experience, and Subscriber recognizes the highly speculative nature of this investment.

 

(g) Information and Non-Reliance.

 

(i) Subscriber acknowledges that Subscriber has carefully reviewed this Subscription Agreement, which Subscriber acknowledges has been provided to Subscriber. Subscriber has been given the opportunity to ask questions of, and receive answers from, the Company concerning the terms and conditions of this Offering and the Subscription Agreement and to obtain such additional information, to the extent the Company possesses such information or can acquire it without unreasonable effort or expense, necessary to verify the accuracy of same as Subscriber reasonably desires in order to evaluate the investment. Subscriber understands the Subscription Agreement, and Subscriber has had the opportunity to discuss any questions regarding the Subscription Agreement with Subscriber’s counsel or other advisor. Notwithstanding the foregoing, the only information upon which Subscriber has relied is that set forth in the Subscription Agreement and the results of independent investigation by Subscriber. Subscriber has received no representations or warranties from the Company, its employees, agents or attorneys in making this investment decision other than as set forth in the Subscription Agreement. Subscriber does not desire to receive any further information.

 

(ii) The Subscriber represents that it is not relying on (and will not at any time rely on) any communication (written or oral) of the Company, as investment advice or as a recommendation to purchase the Shares, it being understood that information and explanations related to the terms and conditions of the Shares and the Subscription Agreement shall not be considered investment advice or a recommendation to purchase the Shares.

 

(iii) The Subscriber confirms that the Company has not (i) given any guarantee or representation as to the potential success, return, effect or benefit (either legal, regulatory, tax, financial, accounting or otherwise) an of investment in the Shares or (ii) made any representation to the Subscriber regarding the legality of an investment in the Shares under applicable legal investment or similar laws or regulations. In deciding to purchase the Shares, the Subscriber is not relying on the advice or recommendations of the Company and the Subscriber has made its own independent decision that the investment in the Shares is suitable and appropriate for the Subscriber.

 

(h) Tax Consequences. Subscriber acknowledges that the Offering may involve tax consequences and that the contents of the Subscription Agreement do not contain tax advice or

 

 3 
 

 

information. Subscriber acknowledges that Subscriber must retain Subscriber’s own professional advisors to evaluate the tax and other consequences of an investment in the Shares. Subscriber intends to acquire the Shares without regard to tax consequences.

 

(i) Transfer or Resale. The Subscriber is acquiring the Shares solely for the Subscriber’s own beneficial account, for investment purposes, and not with a view to, or for resale in connection with, any distribution of the Shares. Subscriber understands that the Shares have not been registered under the Securities Act or the securities laws of any state and, as a result thereof, are subject to substantial restrictions on transfer. Subscriber acknowledges that Subscriber may be precluded from selling or otherwise disposing of the Shares for an indefinite period of time. Subscriber consents that the Company may, if it desires, permit the transfer of the Shares out of Subscriber’s name only when Subscriber’s request for transfer is accompanied by an opinion of counsel reasonably satisfactory to the Company that neither the sale nor the proposed transfer results in a violation of the Securities Act or any applicable state “blue sky” laws. The Company pledges to use its commercially reasonable efforts to have the Shares registered and the restrictions removed at the earliest practical date after 6 months from this Offering.

 

(j) No General Solicitation. Subscriber was not induced to invest in the Company or in the Shares by any form of general solicitation or general advertising including, but not limited to, the following: (i) any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over the news or radio; (ii) any seminar or meeting whose attendees were invited by any general solicitation or advertising; and (iii) any solicitation within the United States.

 

(k) Due Authorization: Enforcement. Subscriber has all requisite power and authority (and in the case of an individual, capacity) to purchase and hold the Shares, to execute, deliver and perform Subscriber’s obligations under this Subscription Agreement and when executed and delivered by Subscriber, this Subscription Agreement will constitute legal, valid and binding agreements of Subscriber enforceable against Subscriber in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ and contracting parties’ rights generally, and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

 

(l) Address. The residence address of Subscriber furnished by Subscriber on the signature page hereto is Subscriber’s principal residence if Subscriber is an individual or its principal business address if it is a corporation, partnership, trust or other entity.

 

(m) Compliance with Laws. The Subscriber will comply with all applicable laws and regulations in effect in any jurisdiction in which the Subscriber purchases or sells Shares and obtain any consent, approval or permission required for such purchases or sales under the laws and regulations of any jurisdiction to which the Subscriber is subject or in which the Subscriber makes such purchases or sales, and the Company shall have no responsibility therefore.

 

(n) Accuracy of Representations and Warranties. The information set forth herein concerning Subscriber is true and correct. The Subscriber understands that, unless the Subscriber notifies the Company in writing to the contrary at or before the Closing, each of the Subscriber’s representations and warranties contained in this Subscription Agreement will be deemed to have been reaffirmed and confirmed as of the Closing, taking into account all information received by the Subscriber.

 

(o) Entity Representation. If Subscriber is a corporation, partnership, trust or other entity, such entity further represents and warrants that it was not formed for the purpose of investing in the Company.

 

4. Representations and Warranties of the Company.

 

The Company represents and warrants to Subscriber that:

 

 4 
 

 

(a) Organization. The Company is organized and validly existing in good standing under the laws of the State of Nevada.

 

(b) Due Authorization, Enforcement and Valid Issuance. The Company has all requisite power and authority to execute, deliver and perform its obligations under this Subscription Agreement, and when executed and delivered by the Company, this Subscription Agreement will constitute legal, valid and binding agreements of the Company enforceable against the Company in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ and contracting parties’ rights generally, and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). The Shares have been duly authorized and, when issued and paid for in accordance with the terms of this Subscription Agreement, will be duly and validly issued, fully paid and nonassessable.

 

(c) Noncontravention. The execution and delivery of this Subscription Agreement and the consummation of the transactions contemplated hereby will not conflict with or constitute a violation of, or default under (i) any material agreement to which the Company is a party or by which it or any of its properties are bound or (ii) the organizational documents of the Company.

 

5. Conditions to Obligations of the Subscriber and the Company.

 

The obligations of the Subscriber to purchase and pay for the Shares specified on the signature page hereof and of the Company to sell the Shares are subject to the satisfaction at or prior to the Closing of the following conditions precedent:

 

(a) Representations and Warranties. The representations and warranties of the Subscriber contained in Section 3 hereof and of the Company contained in Section 4 hereof shall be true and correct as of the Closing in all respects with the same effect as though such representations and warranties had been made as of the Closing.

 

6. Legends.

 

The certificates representing the Securities sold pursuant to this Subscription Agreement will be imprinted with legends in substantially the following form:

 

“THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). SUCH SHARES MAY NOT BE SOLD, PLEDGED, OR TRANSFERRED PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.”

 

and other legend language that may be determined by the Company and its counsel from time to time. The Company pledges to use its commercially reasonable efforts to have the Shares registered and the restrictions removed at the earliest practical date after 6 months from this Offering.

 

7. Miscellaneous

 

(a) Notice. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Subscription Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by

 

 5 
 

 

the sending party); or (iii) one (1) business day after deposit with an overnight courier service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:

 

If to the  
Company:  
  Wecast Network, Inc.
  Building B4, Tai Ming International Business Court,
  Tai Hu Town, Tongzhou District, Beijing, China 101116
  Attn: Simon Wang, CFO
  Telecopy:
with a copy  
to:  
  Cooley LLP
  1114 Avenue of the Americas
  New York, NY 10036-7798
  Attention: William N. Haddad
  Telecopy: (212) 479-6275

 

If to Subscriber, to its residence address (or mailing address, if different) and facsimile number set forth at the end of this Subscription Agreement, or to such other address and/or facsimile number and/or to the attention of such other person as specified by written notice given to the Company five (5) calendar days prior to the effectiveness of such change.

 

(b) Entire Agreement; Amendment. This Subscription Agreement, which includes the exhibits referred to herein, supersedes all other prior oral or written agreements between Subscriber, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and constitutes the entire understanding of the parties with respect to the matters covered herein. No provision of this Subscription Agreement may be amended or waived other than by an instrument in writing signed by the Company and Subscriber.

 

(c) Severability. If any provision of this Subscription Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Subscription Agreement in that jurisdiction or the validity or enforceability of any provision of this Subscription Agreement in any other jurisdiction.

 

(d) Governing Law. This Subscription Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule.

 

(e) Successors and Assigns. This Subscription Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. Subscriber shall not assign its rights hereunder without the prior written consent of the Company.

 

(f) No Third Party Beneficiaries. This Subscription Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

 

(g) Notification of Changes. The Subscriber hereby covenants and agrees to notify the Company upon the occurrence of any event prior to the closing of the purchase of the Shares pursuant to this Subscription Agreement which would cause any representation, warranty or covenant of the Subscriber contained in this Subscription Agreement to be false or incorrect.

 

(h) Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Subscription Agreement and the consummation of the transactions

 

 6 
 

 

contemplated hereby.

 

(i) Legal Representation. Subscriber acknowledges that: (i) Subscriber has read this Subscription Agreement and the exhibits referred to herein; (ii) Subscriber understands that the Company has been represented in the preparation, negotiation and execution of the Subscription Agreement; and (iii) Subscriber understands the terms and conditions of the Subscription Agreement and is fully aware of their legal and binding effect.

 

(j) Expenses. Each party will bear its own costs and expenses (including legal and accounting fees and expenses) incurred in connection with this Subscription Agreement and the transactions contemplated hereby.

 

(k) Counterparts. This Subscription Agreement may be executed in counterparts, all of which shall be considered one and the same agreement. The exchange of signature pages by facsimile transmission, by electronic mail in “portable document format” (“.pdf”) form or by any other electronic means intended to preserve the original graphic and pictorial appearance of a document shall constitute effective execution and delivery of this Agreement as to the parties.

 

[SIGNATURE PAGES FOLLOW]

 

 7 
 

 

SUBSCRIBER SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT

 

IN WITNESS WHEREOF, and intending to be legally bound hereby, Subscriber has caused this Subscription Agreement to be duly executed and, by executing this signature page, hereby executes, adopts and agrees to all terms, conditions, and representations contained in the foregoing Subscription Agreement and hereby subscribes for the Shares offered by the Company in the amount set forth below.

 

SUBSCRIBER:    
     
     
Signature   Social Security Number (if any)
     
Sijie Wang    
Print Name    
     
     
Signature of joint investor, if applicable   Social Security Number (if any)
     
     
Print name of joint investor, if applicable    
     
Check one (if applicable)   Tenants in Common
    JTWROS
    Tenants by Entirety
     
May 19, 2017    
     
Number of Shares subscribed for:    
     
shares of Common Stock at $2.75 per share    
     
Residence Address:   Mailing Address, if different from
    Residence Address:
     
     
     
     

 

 8 
 

 

COMPANY SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT

 

–PLEASE DO NOT WRITE BELOW THIS LINE

 

COMPANY USE ONLY

 

  Accepted and Agreed:
     
  WECAST NETWORK, INC.
     
  By:  
  Name:  
  Title:  

 

As of: _______, 2017

 

 9 
 

 

EXHIBIT A

 

Confidential Accredited Investor Questionnaire

 

To: Wecast Network, Inc.

 

Wecast Network, Inc., a Nevada corporation (the “Company”), is offering in a private placement (“Offering) pursuant to an accompanying subscription agreement including, without limitation, all exhibits and annexes made a part thereto (collectively, the Subscription Agreement”) shares of its Common Stock, par value $0.001 per share (the “Shares”). The undersigned Subscriber is purchasing Shares pursuant to the Offering and acknowledges that all capitalized terms not otherwise defined herein have the meanings set forth in the Subscription Agreement.

 

I. The Subscriber represents and warrants that he or it comes within one category marked below, and that for any category marked, he or it has truthfully set forth, where applicable, the factual basis or reason the Subscriber comes within that category. ALL INFORMATION IN RESPONSE TO THIS SECTION WILL BE KEPT STRICTLY CONFIDENTIAL EXCEPT AS NECESSARY FOR THE COMPANY TO COMPLY WITH LAW AND/OR ANY RULES PROMULGATED BY ANY REGULATORY AGENCY. The undersigned shall furnish any additional information which the Company deems necessary in order to verify the answers set forth below.

 

Category A____ The undersigned is an individual (not a partnership, corporation, etc.) whose individual net worth, or joint net worth with his or her spouse, presently exceeds $1,000,000.
   
  Explanation. In calculating net worth you may include equity in personal property and real estate (other than the value, after deducting mortgage obligations, of Subscriber’s principal residence which may not be included in such net worth calculation), cash, short-term investments, stock and securities. Equity in personal property and real estate should be based on the fair market value of such property less debt secured by such property.
   
Category B____ The undersigned is an individual (not a partnership, corporation, etc.) who had an individual income in excess of $200,000 in each of the two most recent years, or joint income with his or her spouse in excess of $300,000 in each of those years (in each case including foreign income, tax exempt income and full amount of capital gains and losses but excluding any income of other family members and any unrealized capital appreciation) and has a reasonable expectation of reaching the same income level in the current year.
   
Category C____ The undersigned is a director or executive officer of the Company which is issuing and selling the Shares.
   
Category D____ The undersigned is a bank; a savings and loan association; insurance company; registered investment company; registered business development company; licensed small business investment company (“SBIC”); or employee benefit plan within the meaning of Title 1 of ERISA and (a) the investment decision is made by a plan fiduciary which is either a bank, savings and loan association, insurance company or registered investment advisor, or (b) the plan has total assets in excess of $5,000,000 or is a self directed plan with investment decisions made solely by persons that are accredited investors.

 

     
     
    (describe entity)

 

Category E____ The undersigned is a private business development company as defined in section 202(a)(22) of the Investment Advisors Act of 1940.

 

     
     
    (describe entity)

 

Category F____ The undersigned is either a corporation, partnership, Massachusetts business trust, or non-profit organization within the meaning of Section 501(c)(3) of the Internal Revenue Code, in each case not formed for the specific purpose of acquiring the Shares and with total assets in excess of $5,000,000.

 

 A-1 
 

 

     
     
    (describe entity)

 

Category G____ The undersigned is a trust with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Shares, where the purchase is directed by a “sophisticated person” as defined in Regulation 506(b)(2)(ii) under the Securities Act of 1933.
   
Category H____ The undersigned is an entity (other than a trust) all the equity owners of which are “accredited investors” within one or more of the above categories. If relying upon this Category alone, each equity owner must complete a separate copy of this Agreement.

 

     
     
    (describe entity)

 

Category I____ The undersigned is not within any of the categories above and is therefore not an accredited investor.

 

For purposes hereof, “individual income’’ means adjusted gross income less any income attributable to a spouse or to property owned by a spouse, increased by the following amounts (but not including any amounts attributable to a spouse or to property owned by a spouse): (i) the amount of any interest income received which is tax-exempt under Section 103 of the Internal Revenue Code of 1986, as amended (the “Code”), (ii) the amount of losses claimed as a limited partner in a limited partnership (as reported on Schedule E of Form 1040), (iii) any deduction claimed for depletion under Section 611 et seq. of the Code, and (iv) any amount by which income from long-term capital gains has been reduced in arriving at adjusted gross income pursuant to the provisions of Section 12.02 of the Code.

 

The undersigned agrees that the undersigned will notify the Company at any time on or prior to the execution of the Subscription Agreement or this Questionnaire in the event that the representations and warranties in the Subscription Agreement or in this Questionnaire shall cease to be true, accurate and complete.

 

II.Disqualification Events.

 

1.Certain Criminal Convictions.

 

Have you been convicted, within the past ten (10) years (or five (5) years, in the case of the Company, its predecessors and affiliated issuers), of any felony or misdemeanor involving:

 

¨in connection with the purchase or sale of any security:
¨involving the making of any false filing with the SEC; or
¨arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, investment advisor or paid solicitor of purchasers of securities?

 

¨Yes. If yes, please explain:

 

   
   
   
   
   

 

¨No.

 

2.Certain Court Injunctions and Restraining Orders.

 

Are you subject to any order, judgment or decree of any court of competent jurisdiction that was entered within the past five (5) years and currently restrains or enjoins you from engaging in any conduct or practice:

 

¨in connection with the purchase or sale of any security;
¨involving the making of any false filing with the SEC; or
¨arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, investment adviser or paid solicitor of purchasers of securities?

 

¨Yes. If yes, please explain:

 

   

 

 A-2 
 

 

   
   
   

 

¨No.

 

3.Final Orders of Certain State and Federal Regulators.

 

Are you subject to a Final Order (as defined below) of state regulators of securities, insurance, banking, savings associations or credit unions; federal banking agencies; the Commodity Futures Trading Commission; or the National Credit Union Administration that:

 

¨bars you from:

 

¨associating with an entity regulated by any of the aforementioned regulators;
¨engaging in the business of securities, insurance or banking; or
¨engaging in savings association or credit union activities; or

 

¨constitutes a Final Order based on a violation of any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct entered within the past ten (10) years?

 

¨Yes. If yes, please explain:

 

   
   
   
   
   

 

¨No.

 

The term “Final Order” means a written directive or declaratory statement issued by a federal or state agency described in Rule 506(d)(1)(iii) under the Securities Act of 1933 under applicable statutory authority that provides for notice and an opportunity for a hearing, which constitutes a final disposition or action by that federal or state agency.

 

4.SEC Disciplinary Orders.

 

Are you subject to any order of the Securities and Exchange Commission (“SEC”) that currently:

 

¨suspends or revokes your registration as a broker, dealer, municipal securities dealer or investment adviser;
¨places limitations on the activities, functions or operations of, or imposes civil money penalties on, such person: or
¨bars you from being associated with any entity or from participating in the offering of any penny stock?1

 

¨Yes. If yes, please explain:

 

   
   
   
   
   

 

¨No.

 

 

 

1 A disqualification based on a suspension or limitation of activities expires when the suspension or limitation expires.

 

5.SEC Cease-and-Desist Orders.

 

Are you subject to any order of the SEC that was entered within the past five (5) years and currently orders you to cease and desist from committing or causing a future violation of:

 

 A-3 
 

 

¨any scienter-based (intent-based) anti-fraud provision of the federal securities laws (including, for example, but not limited to):

 

¨Section 17(a)(1) of the Securities Act of 1933,

  ¨ Section 10(b) of the Exchange Act and Rule 10b-5, and

  ¨ Section 15 (c) (1) of the Securities Exchange Act); or

 

¨Section 5 of the Securities Act, of 1933, which generally requires that securities be registered and prohibits the sale of unregistered securities.

 

¨Yes. If yes, please explain:

 

   
   
   
   
   

 

¨No.

 

6.SRO Suspension/Expulsion.

 

Have you been suspended or expelled from membership in, or suspended or barred from association with a member of, a securities self-regulatory organization (“SRO”, such as a registered national securities exchange or a registered national or affiliated securities association, including FINRA) for any act or omission to act constituting conduct inconsistent with just and equitable principles of trade?

 

¨Yes. If yes, please explain:

 

   
   
   
   
   

 

¨No.

 

7.SEC Stop Orders.

 

Have you filed (as a registrant or issuer), or were you named as an underwriter in any registration statement or Regulation A offering statement filed with the SEC that, within the past five (5) years, was the subject of a refusal order, stop order, or order suspending the Regulation A exemption, or is currently the subject of an investigation or proceeding to determine whether a stop order or suspension order should be issued?

 

¨Yes. If yes, please explain:

 

   
   
   
   
   

 

¨No.

 

8.USPS False Representations Order.

 

Are you subject to a United States Postal Service (“USPS”) false representation order entered within the past five (5) years, or are you currently subject to a temporary restraining order or preliminary injunction with respect to conduct alleged by the USPS to constitute a scheme or device for obtaining money or property through the mail by means of false representations?

 

¨Yes. If yes, please explain:

 

   
   
   
   
   

 

¨No.

 

 A-4 
 

 

III. The undersigned is informed of the significance to the Company of the foregoing representations and answers contained in this Questionnaire contained herein and such answers have been provided under the assumption that the Company will rely on them.

 

IV. In furnishing the above information, the undersigned acknowledges that the Company will be relying thereon in determining, among other things, whether there are reasonable grounds to believe that the undersigned qualifies as a Purchaser under Section 4(a)(2) and/or Regulation D of the Securities Act of 1933 and applicable state securities laws for the purposes of the proposed investment.

 

V. The undersigned understands and agrees that the Company may request further information of the undersigned in verification or amplification of the undersigned’s knowledge of business affairs, the undersigned’s assets and the undersigned’s ability to bear the economic risk involved in an investment in the securities of the Company.

 

VI. The undersigned represents to you that (a) the information contained herein is complete and accurate on the date hereof and may be relied upon by you, (b) the undersigned will notify you immediately of any change in any such information occurring prior to the acceptance of the subscription and will promptly send you written confirmation of such change. The undersigned hereby certifies that he, she or it has read and understands the Subscription Agreement related hereto and (c) the undersigned acknowledges that you may be required to publicly disclose the information provided in this Questionnaire and that he or it consents to such public disclosure.

 

VII. INFORMATION VERIFICATION CONSENT.

 

BY SIGNING THIS QUESTIONNAIRE, SUBSCRIBER HEREBY GRANTS THE COMPANY PERMISSION TO REVIEW ALL PUBLICLY AVAILABLE INFORMATION REGARDING SUBSCRIBER, INCLUDING, BUT NOT LIMITED TO INFORMATION PROVIDED BY THE OFFICE OF FOREIGN ASSETS CONTROL (“OFAC”) FOR THE PURPOSE OF VERIFYING INFORMATION PROVIDED BY SUBSCRIBER HEREIN.

 

[SIGNATURE PAGE FOLLOWS]

 

 A-5 
 

 

INVESTOR QUESTIONNAIRE EXECUTION PAGE

 

     
Signature   Signature (if purchasing jointly)
     
     
Name Typed or Printed   Name Typed or Printed
     
     
Entity Name   Entity Name
     
     
Address   Address
     
     
City, State and Zip Code   City, State and Zip Code

 

 A-6 
 

 

EXHIBIT B

 

DEFINITION OF ACCREDITED INVESTOR

 

Accredited investor” means any person who comes within any of the following categories, or who the Company reasonably believes comes within any of the following categories, at the time of the sale of the Shares to that person:

 

1.Any bank as defined in Section 3(a)(2) of the Securities Act, or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934; any insurance company as defined in Section 2(13) of the Securities Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;

 

2.Any private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940;