|SEVEN STARS CLOUD GROUP, INC. filed this Form 10-Q on 11/13/2017|
Seven Stars Cloud Group, Inc., Its Subsidiaries
and Variable Interest Entities
Seven Stars Cloud Group, Inc., 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”). Seven Stars Cloud Group, Inc., its subsidiaries and consolidated VIEs are collectively referred to as Seven Stars Cloud (“SSC”, “we”, “us”, or “the Company”).
SSC is aiming to become a global leader in providing next-generation Artificial-Intelligent (AI) & Fintech Powered, Supply Chain + Digital Finance Solutions. SSC’s innovative model helps businesses enhance and unlock operational and capital value from both the supply chain and real assets. In addition, SSC offers a closed trade ecosystem for buyers and sellers designed to eliminate transactional middlemen and create a more direct and margin-expanding path for principals. There are three engines that drive our business platform: 1. Intelligent Supply Chain Management; 2. Asset Based Securitization and Tokenization Issuance and Trading Platform and 3. Digital Index and Financial Derivatives Issuance and Trading Platform; All three engines are supported by “ABCD” Technology & Infrastructure (A: Artificial IntelligenceI, B: Blockchain, C: Cloud Computing, D: Data). SSC is also leveraging its legacy operations as a premium content Video On Demand (“VOD”) service provider in China.
On January 30, 2017, the Company entered into a Securities Purchase Agreement (the “Sun Video SPA”) with BT Capital Global Limited, a British Virgin Islands company (“BT”) and affiliate of the Company’s Chairman Bruno Wu, for the purchase by the Company of all of the outstanding capital stock of Sun Video Group Hong Kong Limited. 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 disclosed in Note 4. After acquiring these two entities, other than the Company’s legacy You On Demand (“YOD”) business, the Company became engaged in consumer electronics 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 September 30, 2017, results of operations for the three and nine months ended September 30, 2017 and 2016, and cash flows for the nine months ended September 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”).
For the nine months ended September 30, 2017 and 2016, the Company incurred loss from operations of approximately $4.7 million and $6.0 million, respectively, and incurred net loss of $5.1 million and $6.0 million, respectively, and cash used in operations was approximately $5.8 million and $7.9 million, respectively. Further, the Company had accumulated deficit of approximately $120.5 million and $115.7 million as of September 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