IDEANOMICS, INC. - Quarter Report: 2013 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2013

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

For the transition period from __________ to __________

Commission File Number: 000-19644

YOU On Demand Holdings, Inc.

(Exact name of registrant as specified in its charter)

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

27 Union Square West, Suite 502

New York, New York 10003

(Address of principal executive offices)

212-206-1216

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 15,793,314 shares as of November 14, 2013.

QUARTERLY REPORT ON FORM 10-Q

OF YOU ON DEMAND HOLDINGS, INC.

FOR THE PERIOD ENDED SEPTEMBER 30, 2013

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	27
Item 3		Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.		Controls and Procedures	37

PART II	-	OTHER INFORMATION

Item 1.		Legal Proceedings	38
Item 1A.		Risk Factors	38
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.		Defaults Upon Senior Securities	38
Item 4.		Mine Safety Disclosures	38
Item 5.		Other Information	38
Item 6.		Exhibits	38
Signatures			39

References

Except as otherwise indicated by the context, references in this report to (i) the “Company,” “we,” “us,” and “our” are to the combined business of YOU On Demand Holdings, Inc.), a Nevada corporation, and its consolidated subsidiaries; (ii) “CB Cayman” are to our wholly-owned subsidiary China Broadband, Ltd., a Cayman Islands company; (iii) “WFOE” are to our wholly-owned subsidiary Beijing China Broadband Network Technology Co., Ltd., a PRC company; (iv) “Jinan Broadband” are to our 51% owned subsidiary Jinan Guangdian Jia He Broadband Co. Ltd, a PRC company, effective July 31, 2013, the Company sold its 51% interest in Jinan Broadband; (v) “Jinan Zhong Kuan” are to Jinan Zhong Kuan Information Technology Co. Ltd., a PRC company controlled by CB Cayman through a trust agreement with shareholder(s); (vi) “Sinotop Hong Kong” are to Sinotop Group Limited, a Hong Kong company wholly-owned by CB Cayman; (vii) “YOD WFOE” are to YOU On Demand (Beijing) Technology Co., Ltd., a PRC company wholly-owned by Sinotop Hong Kong; (viii) “Sinotop Beijing” or “Sinotop” are to Beijing Sino Top Scope Technology Co., Ltd, a PRC company controlled by Sinotop Hong Kong through contractual arrangements; (ix) “Zhong Hai Video” are to Zhong Hai Shi Xun Information Technology Co., Ltd., a PRC company 80% owned by Sinotop Beijing; (x) “Hua Cheng” are to Hua Cheng Hu Dong (Beijing) Film and Television Communication Co., Ltd., a PRC company 39% owned by Sinotop Beijing; (xi) “Shandong Media” are to our previously 50% joint venture Shandong Lushi Media Co., Ltd., a PRC company, effective July 1,2012, Shandong Media our 30% owned company by Sinotop Beijing; (xii) “SEC” are to the United States Securities and Exchange Commission; (xiii) “Securities Act” are to Securities Act of 1933, as amended; (xiv) “Exchange Act” are to the Securities Exchange Act of 1934, as amended; (xv) “PRC” and “China” are to People’s Republic of China; (xvi) “Renminbi” and “RMB” are to the legal currency of China; (xvii) “U.S. dollar,” “$” and “US$” are to United States dollars; and (xviii) “VIEs” refers to our variable interest entities, including Jinan Broadband and Sinotop Beijing.

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PART I — FINANCIAL INFORMATION

Item 1.

Financial Statements.

YOU ON DEMAND HOLDINGS, INC. AND ITS SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2013

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

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YOU On Demand Holdings, Inc. and Its Subsidiaries

CONSOLIDATED BALANCE SHEETS

	September 30, 2013			December 31, 2012
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,214,490		$	3,277,891
Marketable equity securities, available for sale		1,714			2,229
Accounts receivable, net		111,943			-
Licensed content, current		737,017			681,457
Prepaid expenses		279,452			412,669
Note receivable, sale of Jinan Broadband		3,911,088			-
Other current assets		4,684			135,486
Current assets of discontinued operations		-			1,498,852
Total current assets		6,260,388			6,008,584

Property and equipment, net		566,877			729,763
Licensed content, noncurrent		200,227			530,367
Intangible assets, net		2,705,635			3,416,858
Goodwill		6,105,478			6,105,478
Investment in unconsolidated entities		681,304			655,834
Non-current assets of discontinued operations		-			5,011,161
Total assets	$	16,519,909		$	22,458,045

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	1,575,448		$	885,366
Accrued expenses and liabilities		1,161,910			953,134
Deferred license fees, current		988,401			-
Other current liabilities		36,429			708,367
Contingent purchase price consideration liability, current		426,124			368,628
Convertible promissory note		3,000,000			3,000,000
Warrant liabilities		915,510			878,380
Current liabilities of discontinued operations		-			5,197,450
Total current liabilities		8,103,822			11,991,325

Deferred license fees, noncurrent		-			460,547
Contingent purchase price consideration liability		-			368,628
Deferred tax liability		154,946			237,075
Non-current liabilities of discontinued operations		-			68,774
Total liabilities		8,258,768			13,126,349

Commitments and Contingencies

Convertible reedeemable preferred stock, $.001 par value; 50,000,000shares authorized
Series A - 7,000,000 shares issued and outstanding, liquidation preference of $3,500,000 at September 30, 2013 and December 31, 2012, respectively		1,261,995			1,261,995
Series B - 0 and 7,866,800 shares issued and outstanding, liquidation preference of $0 and $3,933,400 at September 30, 2013 and December 31, 2012, respectively		-			3,223,575
Series C - 87,500 and 250,000 shares issued and outstanding, liquidation preference of $350,000 and $1,000,000 at September 30, 2013 and December 31, 2012, respectively		219,754			627,868
Series D 4% - 2,285,714 and 0 shares issued and outstanding, liquidation preference of $4,000,000 and $0 at September 30, 2013 and December 31, 2012		3,711,794			-

Equity:
Common stock, $.001 par value; 1,500,000,000 shares authorized, 15,793,314 and 13,742,394 shares issued at September 30, 2013 and December 31, 2012, respectively		15,793			13,742
Additional paid-in capital		67,438,268			62,388,502
Accumulated deficit		(62,477,818	)		(58,841,664	)
Accumulated other comprehensive income		(737,100	)		604,632
Total YOU On Demand equity		4,239,143			4,165,212
Noncontrolling interests		(1,171,545	)		53,046

Total equity		3,067,598			4,218,258

Total liabilities and equity	$	16,519,909		$	22,458,045

See notes to consolidated financial statements.

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YOU On Demand Holdings, Inc. and Its Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended						Nine Months Ended
	September 30, 2013			September 30, 2012			September 30, 2013			September 30, 2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)

Revenue	$	95,295		$	4,176		$	146,852		$	1,699,702
Cost of revenue		712,327			714,250			2,350,931			2,739,032
Gross loss		(617,032	)		(710,074	)		(2,204,079	)		(1,039,330	)

Operating expense:
Selling, general and administrative expenses		1,658,255			2,331,402			5,558,195			7,130,959
Professional fees		147,091			138,063			772,403			1,078,855
Depreciation and amortization		154,719			533,557			620,946			1,625,146
Impairments of long-lived assets		-			-			311,249			-
Total operating expense		1,960,065			3,003,022			7,262,793			9,834,960

Loss from operations		(2,577,097	)		(3,713,096	)		(9,466,872	)		(10,874,290	)

Interest & other income / (expense)
Interest income		611			360			1,185			2,763
Interest expense		(30,429	)		(27,802	)		(90,067	)		(47,699	)
Stock purchase right		-			-			-			(43,748	)
Change in fair value of warrant liabilities		(6,840	)		(636,308	)		(37,130	)		(636,308	)
Change in fair value of contingent consideration		(15,649	)		537,784			(99,343	)		74,351
Gain on investment in unconsolidated entities		8,592			64,797			7,873			52,291
Loss on write-off of uncollectible loans		-			-			-			(473,698	)
Gain on deconsolidation of Shandong Media		-			141,814			-			141,814
Other		(11,827	)		(1,473	)		58,769			(60,035	)

Net loss from continuing operations before income taxes and noncontrolling interest		(2,632,639	)		(3,633,924	)		(9,625,585	)		(11,864,559	)

Income tax benefit		21,168			96,026			82,129			266,126

Net loss from continuing operations		(2,611,471	)		(3,537,898	)		(9,543,456	)		(11,598,433	)

Net gain (loss) from discontinued operations (including gain on disposal of $5,616,269)		5,589,872			(899,529	)		5,255,474			(1,873,947	)

Net income (loss)		2,978,401			(4,437,427	)		(4,287,982	)		(13,472,380	)

Plus: Net loss attributable to noncontrolling interests		193,512			389,274			834,685			1,482,536

Net income (loss) attributable to YOU On Demand shareholders		3,171,913			(4,048,153	)		(3,453,297	)		(11,989,844	)
Dividends on preferred stock		(1,029,829	)		-			(1,029,829	)		-

Net income (loss) attributable to YOU on Demand common shareholders	$	2,142,084		$	(4,048,153	)	$	(4,483,126	)	$	(11,989,844	)

Basic earnings (loss) per share
Loss from continuing operations	$	(0.22	)	$	(0.32	)	$	(0.65	)	$	(1.02	)
Gain (loss) from discontinued operations		0.36			(0.04	)		0.35			(0.09	)
Basic earnings (loss) per shares	$	0.14		$	(0.36	)	$	(0.30	)	$	(1.11	)

Diluted earnings (loss) per share
Loss from continuing operations	$	(0.22	)	$	(0.32	)	$	(0.65	)	$	(1.02	)
Gain (loss) from discontinued operations		0.36			(0.04	)		0.35			(0.09	)
Diluted earnings (loss) per shares	$	0.14		$	(0.36	)	$	(0.30	)	$	(1.11	)

Weighted average shares outstanding
Basic		15,553,097			11,293,895			15,034,841			10,765,931
Diluted		15,553,097			11,293,895			15,034,841			10,765,931

See notes to consolidated financial statements.

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YOU On Demand Holdings, Inc. and Its Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

	Three Months Ended						Nine Months Ended
	September 30, 2013			September 30, 2012			September 30, 2013			September 30, 2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net income (loss)	$	2,978,401		$	(4,437,427	)	$	(4,287,982	)	$	(13,472,380	)
Other comprehensive income (loss):
Foreign currency translation adjustments		(1,424,011	)		(112,719	)		(1,341,217	)		(57,067	)
Unrealized gains (losses) on available for sale securities		343			1,029			(515	)		1,201
Plus: Comprehensive loss attributable to non-controlling interest		200,353			463,908			821,583			1,534,792
Comprehensive income (loss) attributable to YOU On Demand shareholders	$	1,755,086		$	(4,085,209	)	$	(4,808,131	)	$	(11,993,454	)

See notes to consolidated financial statements.

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YOU On Demand Holdings, Inc. and Its Subsidiaries

CONSOLIDATED STATEMENT OF EQUITY

For the Nine Months Ended September 30, 2013 (unaudited)

	Common Shares		Par Value		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			YOU On Demand Shareholders 'Equity			Noncontrolling Interest			Total Equity

Balance January 1, 2013		13,742,394	$	13,742	$	62,388,502		$	(58,841,664	)	$	604,632		$	4,165,212		$	53,046		$	4,218,258

Warrants issued for services		-		-		108,840			-			-			108,840			-			108,840

Common shares issued for services		60,501		61		163,694			-			-			163,755			-			163,755

Common shares issued for clawback reset provision		436,238		436		658,283			-			-			658,719			-			658,719

Common shares and options issued for Sinotop acquisition earnout		245,274		245		410,230			-			-			410,475			-			410,475

Stock option compensation expense and revised modification		-		-		456,323			-			-			456,323			-			456,323

Conversion of Series B and Series C preferred shares into common shares		1,308,907		1,309		3,630,379			-			-			3,631,688			-			3,631,688

Accretion from Series D preferred shares		-		-		(808,835	)		-			-			(808,835	)		-			(808,835	)

Valuation of warrants issued to placement agent for July 2013 Seried D 4% Preferred Share issuance		-		-		247,995			-			-			247,995			-			247,995

Beneficial conversion feature of Series D preferred stock issued		-		-		182,857			(182,857	)		-			-			-			-

Sale of Jinan Broadband		-		-		-			-			(1,461,100	)		(1,461,100	)		(403,009	)		(1,864,109	)

Net loss		-		-		-		$	(3,453,297	)		-			(3,453,297	)		(834,685	)		(4,287,982	)

Foreign currency translation adjustments		-		-		-			-			119,883			119,883			13,103			132,986

Unrealized losses on marketable securities		-		-		-			-			(515	)		(515	)		-			(515	)

Balance, September 30, 2013		15,793,314	$	15,793	$	67,438,268		$	(62,477,818	)	$	(737,100	)	$	4,239,143		$	(1,171,545	)	$	3,067,598

See notes to consolidated financial statements.

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YOU On Demand Holdings, Inc. and Its Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended
	September 30, 2013 (unaudited)			September 30, 2012 (unaudited)
Cash flows from operating activities:
Net loss	$	(4,287,982	)	$	(13,472,380	)
Adjustments to reconcile net loss to net cash used in operating activities
Equity securities compensation expense		728,917			816,921
Depreciation and amortization		1,463,900			3,726,701
Amortization of licensed content		112,743			112,743
Deferred income tax		(82,129	)		(282,244	)
Loss on investment in unconsolidated entities		(7,873	)		(52,291	)
Provision for bad debt expense		-			163,076
Change in fair value of warrant liabilities		37,130			636,308
Change in fair value of contingent purchase price consideration liability		99,343			(74,351	)
Cost of right to purchase		-			43,748
Gain on sale of Jinan Broadband		(5,616,269	)		-
Gain on deconsolidation of Shandong Media, net of cash		-			(334,589	)
Impairment of long-lived assets		311,249			420,000
Loss on uncollectible shareholder loan and related party loan		-			473,698
Change in assets and liabilities,
Accounts receivable		(111,371	)		(182,094	)
Inventory		(65,367	)		2,024
Licensed content		650,939			135,242
Prepaid expenses and other assets		278,543			(855,786	)
Accounts payable		594,940			(434,828	)
Accrued expenses and liabilities		(12,546	)		231,579
Deferred revenue		119,483			176,818
Deferred license fee		(2,795	)		462,966
Other current liabilities		95,938			16,031
Other		(742	)		12,054
Net cash used in operating activites		(5,693,949	)		(8,258,654	)

Cash flows from investing activities:
Acquisition of property and equipment		(424,689	)		(789,967	)
Investments in intangibles		(22,662	)		(111,914	)
Cash received from sale of Jinan Broadband (net of cash sold)		(190,760	)		-
Leasehold improvements		-			(10,754	)
Loans to Shandong Media shareholders		-			(32,771	)
Loan repayments from Shandong Media shareholders		-			29,663
Net cash used in investing activities		(638,111	)		(915,743	)

Cash flows from financing activities
Proceeds from sale of Preferred D converitble shares		4,000,000			-
Proceeds from sale of equity securities		-			3,585,000
Proceeds from issuance of convertible note		-			3,000,000
Costs associated with financings and share issuances		(849,046	)		(118,906	)
Net cash provided by financing activities		3,150,954			6,466,094

Effect of exchange rate changes on cash		14,553			18,760

Net decrease in cash and cash equivalents		(3,166,553	)		(2,689,543	)

Total cash and cash equivalents at beginning of period		4,381,043			7,519,574
Less cash and cash equivalents of discontinued operations at beginning of period		1,103,152			1,086,627
Cash and cash equivalents of continuing operations at beginning of period		3,277,891			6,432,947

Cash and cash equivalents at end of period		1,214,490			4,830,031


Supplemental Cash Flow Information:

Cash paid for taxes	$	-		$	-
Cash paid for interest	$	1,011		$	1,170
Value of warrants issued for issuance costs in connection with Preferred Series D shares	$	247,995		$	-
Value of shares and warrants issued for issuance costs in connection with private financing	$	-		$	514,840
Value of shares and options issued for Sinotop contingent consideration earnout	$	410,475		$	1,308,391
Value of common stock issued from conversion of Preferred Series B shares	$	3,223,575		$	726,783
Value of common stock issued from conversion of Preferred Series C shares	$	408,114		$	-
Software contributed in lieu of issued capital included in intangibles	$	-		$	398,183

See notes to consolidated financial statements.

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YOU ON DEMAND HOLDINGS, INC. AND ITS SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.	Basis of Presentation

YOU On Demand Holdings, Inc., a Nevada corporation (“YOU On Demand”, “we”, “us”, or “the Company”) , operates in the Chinese media segment through our Chinese subsidiaries and variable interest entities (“VIEs”) (1) an integrated value-added service solutions business for the delivery of video on demand (“VOD”) and enhanced premium content for cable providers, Beijing Sino Top Scope Technology Co., Ltd. (“Sinotop Beijing” or “Sinotop”), (2) a cable broadband business, Jinan Guangdian Jia He Broadband Co. Ltd. ( “Jinan Broadband”), based in the Jinan region of China through which we provide cable and wireless broadband services, principally internet services, Internet Protocol Point wholesale services, related network equipment rental and sales, and fiber network construction and maintenance (effective July 31, 2013, the Company sold its 51% interest in Jinan Broadband) and (3) a print based media and television programming guide publication, Shandong Lushi Media Co., Ltd. (“Shandong Media”). Effective July 1, 2012, the Company deconsolidated Shandong Media.

The unaudited consolidated financial statements include the accounts of YOU On Demand and (a) its wholly-owned subsidiary China Broadband, Ltd., ("CB Cayman"), (b) two wholly-owned subsidiaries of CB Cayman: Beijing China Broadband Network Technology Co., Ltd. (“WFOE”) and Sinotop Group Limited (“Sinotop Hong Kong”) and (c) six entities located in the PRC: Jinan Zhong Kuan, Jinan Broadband, Shandong Media, Sinotop, Zhong Hai Shi Xun Information Technology Co., Ltd. (“Zhong Hai Video”), and YOU On Demand (Beijing) Technology Co., Ltd. (“YOD WFOE”), which are controlled by the Company through contractual arrangements, as if they are majority owned subsidiaries of the Company. As of July 1, 2012, Shandong Media was deconsolidated because it was no longer deemed a VIE of the Company. All material intercompany transactions and balances are eliminated in consolidation.

Effective July 31, 2013, the Company sold its 51% interest in Jinan Broadband and as such, Jinan Broadband’s assets and liabilities have been classified on the balance sheet as assets and liabilities of discontinued operations. The operating results of Jinan Broadband have been classified as discontinued operations in our statements of operations for all periods presented (see Note 3). Unless otherwise indicated, all disclosures and amounts in the Notes to the Consolidated Financial Statements relate to the Company’s continuing operations.

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

Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited 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, 2012 filed with the Securities and Exchange Commission on April 5, 2013.

Reclassifications

Certain prior year information has been reclassified to be comparable with the current period presentation. This reclassification has no effect on previously reported net loss.

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2.	Going Concern and Management’s Plans

For the nine months ended September 30, 2013, we had a net loss of approximately $3.5 million and we used cash for operations of approximately $5.7 million. We had a working capital deficit of approximately $1.8 million and accumulated deficit of approximately $62 million, at September 30, 2013.

On November 4, 2013, we entered into an amendment to the Series D Stock Purchase Agreement. Pursuant to the Series D Amendment, the parties agreed that each party would act in good faith and with fair dealing to finalize an agreement on or before the 30^th day following the issuance of the Bridge Note (a Bridge Note in the amount of $2 million was entered into on November 4, 2013 between the Company and C Media – see subsequent events for additional information).

This additional investment is contingent on several factors. If the additional investment does not occur, we have the ability to raise funds by various methods including utilization of our $50 million shelf registration of which $47.3 million is remaining as well as other means of financing such as debt or private investment. However, financing may not be available to the Company on terms acceptable to us or at all or such resources will be received in a timely manner. Further we may need approval to seek additional financing from the shareholders from the August 2012 private financing in the event we do a public financing.

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. We anticipate that we will need to raise additional funds to fully implement our business model and related strategies.

The unaudited consolidated financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty. The Company's independent registered public accounting firm's report of the financial statements as of and for the year ended December 31, 2012, contained an explanatory paragraph regarding the Company's ability to continue as a going concern.

3.	Discontinued Operations

On May 20, 2013, we entered into an Equity Transfer Agreement with Shandong Broadcast Network (“Shandong Broadcast”) pursuant to which the parties conditionally agreed to the sale to Shandong Broadcast of our 51% equity interest in Jinan Broadband. Pursuant to its terms, and a separate letter agreement between the parties dated July 23, 2013, the 51% interest transfer in Jinan Broadband would become effective upon (i) approval of the relevant PRC governmental authorities, and (ii) agreement between the parties of final terms for the payment of the RMB 29,000,000 (approximately $4.7 million) payment price by Shandong Broadcast. On June 20, 2013, the sale was approved by the PRC Administration for Industry and Commerce. On July 31, 2013, the parties agreed on pricing terms whereby Shandong Broadcast would pay (i) RMB 5,000,000 by July 31, 2013, (ii) RMB 10,000,000 by November 20, 2013, and (ii) the remaining RMB 14,000,000 by May 20, 2014. Accordingly, based on the agreements between the parties, the sale of Jinan Broadband to Shandong Broadcast became final on July 31, 2013. In order to focus on our core VOD business and help with cash flow needs, the Company decided to sell our ownership of Jinan Broadband. In the third quarter of 2013, we recorded a gain of approximately $5.6 million related to the sale of Jinan Broadband.

On November 1, 2013, we received early payment of the entire remaining balance (RMB 24,000,000) from Shandong Broadcast.

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Jinan Broadband meets the criteria for being reported as a discontinued operation and has been segregated from continuing operations for all periods presented. The following table summarizes the result from discontinued operations:

	Three Months Ended						Nine Months Ended
	September 30, 2013 (1 month) (unaudited)			September 30, 2012 (3 months) (unaudited)			September 30, 2013 (7 months) (unaudited)			September 30, 2012 (9 months) (unaudited)
Revenue	$	550,068		$	1,189,423		$	3,095,148		$	3,814,881
Cost of revenue		306,320			833,512			1,954,552			2,527,901
Gross profit		243,748			355,911			1,140,596			1,286,980

Operating expense:
Selling, general and administrative		151,190			128,306			656,615			657,772
Professional fees		-			1,274			1,416			1,274
Depreciation and amortization		119,172			713,417			844,233			2,101,555
Impairmentsof long-lived assets		-			420,000			-			420,000
Total operating expense		270,362			1,262,997			1,502,264			3,180,601

Loss from operations		(26,614	)		(907,086	)		(361,668	)		(1,893,621	)

Interest & other income / (expense)
Interest income		244			2,382			1,765			4,369
Interest expense		(28	)		(198	)		(893	)		(813	)

Net loss before income taxes and noncontrolling interest		(26,398	)		(904,902	)		(360,796	)		(1,890,065	)
Income tax (expense) benefit		-			5,373			-			16,118
Net loss from discontinued operations		(26,398	)		(899,529	)		(360,796	)		(1,873,947	)
Plus: Net loss attributable to noncontrolling interest		12,935			440,769			176,790			918,234
Net loss attributable to YOU On Demand shareholders	$	(13,463	)	$	(458,760	)	$	(184,006	)	$	(955,713	)

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The following table summarizes the assets and the liabilities from discontinued operations as of the disposal date and December 31, 2012 in the Company’s Consolidated Balance Sheets:

	July 31, 2013 (Unaudited)		December 31, 2012
Assets
Cash and cash equivalents	$	1,002,277	$	1,103,152
Inventories, net		459,520		384,088
Pepaid expenses		-		11,110
Other current assets		4,596		502
Total current assets	$	1,466,393	$	1,498,852

Property and equipment, net	$	3,135,943	$	3,368,831
Intangible assets, net		1,596,950		1,642,330
Total noncurrent assets	$	4,732,893	$	5,011,161

Liabilities
Accounts payable	$	1,172,741	$	1,245,141
Accrued expenses and liabilities		1,582,274		1,503,408
Deferred revenue		1,984,973		2,091,788
Amount due to Jia He DTV		147,564		144,592
Other current liabilities		287,630		212,521
Total current liabilities	$	5,175,182	$	5,197,450

Deferred tax liabilities	$	68,774	$	68,774
Total noncurrent liabilities	$	68,774	$	68,774

4.	Property and Equipment

The following is a breakdown of our property and equipment:

	September 30, 2013			December 31, 2012

Furniture and office equipment	$	974,149		$	926,962
Leasehold improvements		183,349			178,555
Total property and equipment		1,157,498			1,105,517
Less: accumulated depreciation		(590,621	)		(375,754	)
Net carrying value	$	566,877		$	729,763

We recorded depreciation expense of $70,064 and $206,549 for the three and nine months ended September 30, 2013. We recorded depreciation expense of $66,300 and $192,257 for the three and nine months ended September 30, 2012.

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5.	Goodwill and Intangible Assets

A roll forward of our intangible assets activity for the nine months ended September 30, 2013 is as follows:

	Balance at January 1, 2013		Additions		Amortization Expense			Impairment Charge			Foreign Currency Transl Adj		Balance at September 30, 2013
Amortized intangible assets:
Charter / Cooperation agreements	$	2,422,824	$	-	$	(103,344	)	$	-		$	-	$	2,319,480
Noncompete agreement		121,252		-		(121,252	)		-			-		-
Software and licenses		504,514		2,234		(101,824	)		(311,249	)		8,030		101,704
Website development		233,978		-		(90,097	)		-			6,280		150,161
Total amortized intangible assets	$	3,282,568	$	2,234	$	(416,517	)	$	(311,249	)	$	14,310	$	2,571,345

Unamortized intangible assets:
Website name		134,290		-		-			-			-		134,290
Goodwill		6,105,478		-		-			-			-		6,105,478
Total unamortized intangible assets	$	6,239,768	$	-	$	-		$	-		$	-	$	6,239,768

In accordance with ASC 250, we recorded amortization expense related to our intangible assets of approximately $84,655 and $414,397 for the three and nine months ended September 30, 2013, respectively and $467,257 and $1,375,177 for the three and nine months ended September 30, 2012, respectively.

During the second quarter of 2013, we recorded a software impairment charge of $311,249 due to the lack of adoption by the Multi System Operators (our VOD clients) who preferred to use their own software.

The following table outlines the amortization expense for the next five years and thereafter:

Years ending December 31,	Sinotop Hong Kong		Sinotop		Total
2013 (3 months)	$	34,448	$	50,402	$	84,850
2014		137,791		165,812		303,603
2015		137,791		18,594		156,385
2016		137,791		16,150		153,941
2017		137,791		638		138,429
Thereafter		1,733,867		270		1,734,137
Total amortization to be recognized	$	2,319,479	$	251,866	$	2,571,345

6.	Fair Value Measurements

Accounting standards require the categorization of financial assets and liabilities, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The various levels of the fair value hierarchy are described as follows:

●

Level 1 — Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market that we have the ability to access.

●

Level 2 — Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.

●

Level 3 — Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.

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Accounting standards require the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

Common stock is valued at closing price reported on the active market on which the individual securities are traded. Our contingent purchase price consideration is valued using the Black Scholes Merton Model method and our warrant liabilities are valued using the Monte Carlo simulation method, which is based on valuation theories underlying the Black-Scholes Merton model.

Annually we review the valuation techniques used and determine if the fair value measurements are still appropriate and evaluate and adjust the unobservable inputs used in the fair value measurements based on current market conditions and third party information. There were no changes in the valuations techniques during the current quarter.

The following tables present the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis at September 30, 2013 and December 31, 2012, respectively:

	September 30, 2013 Fair Value Measurements (Unaudited)
	Level 1		Level 2		Level 3		Total Fair Value
Assets
Available-for-sale securities	$	1,714	$	-	$	-	$	1,714

Liabilities
Warrant liabilities (see Note 11)	$	-	$	-	$	915,510	$	915,510
Contingent purchase price consideration, current (see Note 7)		-		-		426,124		426,124
Contingent purchase price consideration, noncurrent (see Note 7)		-		-		-		-

	December 31, 2012 Fair Value Measurements
	Level 1		Level 2		Level 3		Total Fair Value
Assets
Available-for-sale securities	$	2,229	$	-	$	-	$	2,229

Liabilities
Warrant liabilities (See Note 11)	$	-	$	-	$	878,380	$	878,380
Contingent purchase price consideration, current (see Note 7)		-		-		368,628		368,628
Contingent purchase price consideration, noncurrent (see Note 7)		-		-		368,628		368,628

The table below reflects the components effecting the change in fair value for the nine months ended September 30, 2013:

	Level 3 Assets and Liabilities
	For the Nine Months Ended September 30, 2013

	1/1/2013		Purchases, sales and issuances and settlements			Change in Fair Value (gain) / loss		9/30/2013

Liabilities:
Warrant liabilities (See Note 11)	$	878,380	$	-		$	37,130	$	915,510
Contingent purchase price consideration (See Note 7)		737,256		(410,475	)		99,343	$	426,124

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	Quantitative Information about Level 3 Fair Value Measurements
	For the Nine Months Ended September 30, 2013

	Fair Value at 9/30/2013		Valuation Techniques	Unobservable Inputs	Input

Warrant liabilities	$	915,510	Monte Carlo Simulation Method	Risk-free rate of interest		1.128	%
				Expected volatility		70	%
				Expected life (years)		3.92
				Expected dividend yield		0	%


Contingent consideration	$	426,124	Black-Scholes Merton Model	Risk-free rate of interest		1.010	%
				Expected volatility		75	%
				Expected life (years)		4.00
				Expected dividend yield		0	%

The significant unobservable inputs used in the fair value measurement of the Company’s warrant liability and contingent consideration includes the risk free interest rate, expected volatility, expected life and expected dividend yield. Significant increases or decreases in any of those inputs in isolation would result in a significantly different fair value measurement.

In accordance with our deconsolidation in 2012 of Shandong Media, we recorded the fair value of our 30% equity investment. Utilizing forecasts based on recent historical performance we computed a discounted cash flow valuation of $0.00.

7.	Sinotop Contingent Consideration

In connection with the acquisition of Sinotop Hong Kong on July 30, 2010, if specified performance milestones are achieved, Weicheng Liu (“Mr. Liu” or “the Seller”) will be entitled to earn up to (i) an additional 403,820 shares of common stock of the Company, (ii) three-year warrants to purchase 571,275 shares of the Company’s common stock, equivalent to 5.0% of the total number of shares of the Company’s common stock underlying all outstanding warrants as of immediately following the closing of the July 2010 financing and (iii) a four-year option to purchase 80,000 shares of the Company’s common stock which was equal to 5% of the total number of shares of the Company’s common stock underlying all outstanding options of the Company granted to individuals employed by the Company as of September 1, 2010 (collectively, the securities referred to in clauses (i), (ii) and (iii) are referred to herein as the “Earn-Out Securities”). The milestones are as follows: Sinotop Hong Kong will ensure that (i) at the end of the first earn-out year (July 1, 2012), at least 3 million homes will have access to the Company’s VOD services, (ii) at the end of the second earn-out year (July 1, 2013), at least 11 million homes will have access to the Company’s VOD services, and (iii) at the end of the third earn-out year (July 1, 2014), at least 30 million homes will have access to the Company’s VOD services.

Subsequent to the acquisition of Sinotop, the Company underwent a warrant exchange that converted the three-year warrants to be potentially earned under clause (ii) above to 332,002 shares of common stock. As such, the Earn-Out Securities subject to the achievement of the specified performance milestones were 735,822 shares of common stock and a four-year option to purchase 80,000 shares of common stock.

The Company recorded a contingent consideration obligation related to the Earn-Out Securities at the time of acquisition which totaled $2,750,966, representing the fair value of the estimated payment of the full earn-out. The contingent consideration is classified as a liability because the earn-out securities do not meet the fixed-for-fixed criteria under ASC 815-40-15 for equity classification. Further ASC 815-40-15 requires us to re-measure the contingent consideration obligation at the end of every reporting period with the change in value reported in the consolidated statements of operations and, accordingly, we reported a loss of $15,649 and $99,343 for the three and nine months ended September 30, 2013, respectively. We reported a gain of $537,784 and $74,351 for the three months and nine months ended September 30, 2012, respectively.

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As of the end of the second earn-out year (July 1, 2013), the second year milestone was achieved with over 11 million homes having access to our VOD services. As such, we have issued in total 490,548 shares of our common stock and 53,333 options to Mr. Liu for achieving the first two year milestones. As of September 30, 2013, we recorded a purchase price consideration liability in the amount of $426,124 related to the remaining earn-out year.

The following is a summary of the earned purchase price consideration and the estimated fair value of the contingent consideration obligation for the acquisition of Sinotop Hong Kong at September 30, 2013 and December 31, 2012.

Class of consideration	January 1, 2013 Fair Value		Earned Fair Value			Change in Fair Value		September 30, 2013 Fair Value
Common shares	$	711,294	$	(394,892	)	$	93,205	$	409,607
Stock options		25,962		(15,583	)		6,138		16,517
Total earned and contingent consideration	$	737,256	$	(410,475	)	$	99,343	$	426,124

The number of instruments remaining to be earned consists of 245,274 common shares and 26,666 options.

8.	Related Party Transactions

$3M Convertible Note

On May 10, 2012, our 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”). 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. Thereafter, on May 21, 2012, at the Company’s request, the Company and Mr. McMahon entered into Amendment No. 1 to the Note, pursuant to which the price per share at which the Note, or any convertible Securities into which the Note is converted, may be converted into shares of the Company’s common stock, shall not be less than $4.75, which amount represents the closing bid price of the Company’s common stock on the trading day immediately prior to the date of the Note in accordance with the rules and regulations of The Nasdaq Stock Market, Inc.

On April 12, 2013, the Majority Shareholders approved an amendment to the Note, as amended on May 21, 2012, to remove the $4.75 floor to the conversion price of the Note and such approval and such amendment was effective following the expiration of the 20-day period mandated by Rule 14c-2.

Effective May 10, 2013, the Company and Mr. McMahon entered into Amendment No. 3 to the note pursuant to which (i) the Note will mature on November 10, 2013, and (ii) the net proceeds of any financing of equity or equity-linked securities of the Company occurring on or before such date will be used to repay the Note until the full amount of the Note, and all accrued interest on the Note, is repaid.

In connection with the Series E Amendment, on November 4, 2013, the Company and Mr. McMahon entered into a Waiver (the “McMahon Note Waiver”), pursuant to which (i) Mr. McMahon waived the Company’s obligation to repay the McMahon Note on November 10, 2013, (ii) the Company and Mr. McMahon agreed that the principal and all interest on the McMahon Note shall become due and payable on the earlier of (a) the closing of the Series E Financing, or (b) if there is no Series E Financing, the date when the Bridge Note is repaid in full or converted into Series D Shares, and (iii) Mr. McMahon waived the Company’s obligation to repay the McMahon Note with the proceeds received from the issuance of the Bridge Note. See Subsequent event footnote below for further information.

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On June 10, 2013, Shane McMahon made a short-term loan in the amount of $40,000 to the Company which was repaid in full on July 11, 2013.

On June 26, 2013, at the Company’s request, Shane McMahon made a loan to the Company in the amount of $150,000 in order for the Company to make certain payments, pending consummation of the Series D investment transaction described in Note 9. In consideration for the loan, the Company issued a Promissory Note to Mr. McMahon in the aggregate principal amount of $150,000 (the “Note”). The Note was to mature on the earlier of the Series D investment transaction, or, if that transaction was not consummated, six months from the date of issuance. On July 11, 2013, the Company repaid all amounts owed to Mr. McMahon under the Note.

Sinotop

Cost of Revenue

Zhong Hai Video paid licensed content fees of approximately $41,000 and $40,000 for the three months ended September 30, 2013 and 2012, and $121,000 and $119,000 for the nine months ended September 30, 2013 and 2012, respectively, to Hua Cheng Film and Television Digital Program Co., Ltd., the minority shareholder of Sinotop.

9.	Series D and Series E Preferred Stock Financing, July 2013

The components of Series D Preferred Stock, classified as temporary equity in the consolidated balance sheet, are summarized as follows:

	September 30, 2013
4% convertible preferred stock - face value	$	4,000,000
Unamortized discount		(288,206	)
4% convertible preferred stock, net of discount	$	3,711,794

On July 5, 2013, we entered into a Series D Preferred Stock Purchase Agreement with C Media Limited (the “Investor”), pursuant to which we sold to the Investor 2,285,714 shares of Series D 4% Convertible Redeemable Preferred Stock of the Company (the “Series D Preferred Stock”) for $1.75 per share, or a total purchase price of $4,000,000.

The Preferred Stock and any dividends thereon may be converted into shares of our common stock at any time by the Investor at a conversion price of $1.75 per share. The dividends on the Preferred Stock are payable, at our option, in cash, if permissible, or in additional shares of common stock. In the event the Series E Preferred Stock financing transaction is not consummated on or prior to October 31, 2013, the Series D Preferred Stock shall become immediately redeemable at the option of the Investor. The redemption may be exercised in whole or in part at $1.75 dollars per share, plus all unpaid and accrued dividends. The Investor shall have the right to vote with our stockholders in any matter. The Investor shall be entitled to one vote per common stock on an as-converted basis, based on the conversion price of $1.75 per share. Upon any liquidation, dissolution or winding-up of the Corporation, the Investor shall be entitled to receive an amount equal to the then-outstanding Series D Preferred Stock at $1.75 per share, plus any accrued and unpaid dividends, prior to and in preference of holders of common stock or Series A, B or C preferred stock.

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The Preferred Stock when issued was a hybrid instrument comprised of a (i) a preferred stock and (ii) an option to convert the preferred stock into shares of our common stock (the “Conversion Option”). The Conversion Option derives its value based on the underlying fair value of the shares of our common stock as does the Preferred Stock, and therefore is clearly and closely related to the underlying preferred stock. Since the Preferred Stock may ultimately be redeemed at the option of the holder, the carrying value of the shares, net of unamortized discount and accumulated dividends, has been classified as temporary equity.

The Company paid issuance costs of approximately $849,000 in cash and issued warrants to the placement agent to purchase 228,571 shares of our common stock at $1.75 per share. The fair value of the warrants was calculated using the Black-Scholes model with the following assumptions: expected life of 5 years, expected dividend rate of 0%, volatility of 70% and an interest rate of 1.60%. The exercise price of the warrants was $1.75. The warrants were valued at $247,995 at the date of issuance. The preferred stock was recorded net of issuance costs of $1,097,041 at the issuance date, which was accreted over a period from July 5, 2013 to October 31, 2013 with the initial redemption terms, as a charge to additional paid-in capital, due to our deficit in retained earnings during the period ended September 30, 2013. For the three months ended September 30, 2013, the Company recorded $808,835 as accretion on Series D Preferred stock and to additional paid-in capital.

The Company recognized a beneficial conversion feature discount on Series D Convertible Preferred Stock at its intrinsic value, which was the fair value of the common stock at the commitment date for Series D Convertible Preferred Stock investment, less the effective conversion price. The Company recognized approximately $183,000 of beneficial conversion feature as a deemed dividend and increase in Series D Preferred Stock on the date of issuance since these shares were convertible at the issuance date. Further, the Company is obligated to pay cumulative dividends of 4% annum, payable annually on December 31 and as of September 30, 2013 the amount of undeclared dividends payable was approximately $38,000.

In connection with the sale of the Series D Preferred Stock, both parties agreed to act in good faith and with fair dealing to finalize an agreement, on or before October 31, 2013, for an additional investment of between $12 million and $21 million of a new class of preferred stock of the Company. The subsequent investment, which would be designated as Series E Preferred Stock, would be contingent upon the Investor obtaining the required funds for the investment and the satisfaction of the closing conditions set forth in a Series E Preferred Stock Purchase Agreement.

Further, the Company and the Investor have agreed that the material terms set forth in the Series E Purchase Agreement and Series E Certificate of Designation are not subject to change, including, without limitation, that the price per share of the Series E Preferred Stock would be $1.75 and that the promissory note in the principal amount of $3,000,000, dated May 10, 2012 (as thereafter amended), issued by the Company to Shane McMahon would be, at Mr. McMahon’s option, convertible into shares of Series E Preferred Stock at a conversion price of $1.75 per share or repayable at any time upon demand by Mr. McMahon. In addition, Mr. McMahon and the Investor entered into an agreement whereby Mr. McMahon agreed that upon the consummation of the Series E Financing he will exchange all shares of the Company’s Series A Preferred Stock owned by him for 933,333 shares of the Investor’s Series E Preferred Stock received in the Series E Financing, and then to immediately convert all such shares of Series E Preferred Stock into shares of the Company’s common stock.

On November 4, 2013, in connection with the Company’s Series D Preferred Stock Purchase Agreement we issued a convertible note to C Media and entered into an amendment to the Series D Agreement. See subsequent events footnote below for additional information.

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10.	Retail Financing, December 2012

On December 14, 2012, we entered into an underwriting agreement with Chardan Capital Markets LLC, as representative of several underwriters, and National Securities Corporation, as qualified independent underwriter (collectively, the “Underwriters”) in connection with the offer and sale by the Company of 1,800,000 shares of the Company’s common stock, par value $0.001 per share, at a price to the public of $1.50 per share. The Company received net proceeds from this offering of $2,193,738, after deducting underwriting discounts and commissions. The shares were offered and sold under a prospectus supplement and related prospectus filed with the U.S. Securities and Exchange Commission pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-183689). The offering closed on December 19, 2012.

11.	Private Financing, August 2012

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

On August 30, 2012, the Company closed the transactions contemplated by the Purchase Agreement and issued and sold to Investors (i) an aggregate of 646,250 Class A Units (consisting of an aggregate of 646,250 shares of Common Stock and Warrants to purchase 646,250 shares of Common Stock), and (ii) an aggregate of 250,000 Class B Units (consisting of an aggregate of 250,000 shares of Series C Preferred Stock and Warrants to purchase 250,000 shares of Common Stock). The Company received aggregate gross proceeds of $3,585,000.

The proceeds from the sale were allocated to Common Stock, Series C Convertible, Preferred Stock, warrants and beneficial conversion features based on the relative fair value of the securities in accordance with ASC 470-20-30. The value of the Common Stock and Series C Preferred stock was based on the closing price paid by investors. The fair value of the warrants was calculated using the Black-Scholes model with the following assumptions: expected life of 5 years, expected dividend rate of 0%, volatility of 75% and an interest rate of .66%. The exercise price of the warrants was $4.25.

The Company recognized a beneficial conversion feature discount on Series C Convertible Preferred Stock at its intrinsic value, which was the fair value of the common stock at the commitment date for Series C Convertible Preferred Stock investment, less the effective conversion price. The Company recognized approximately $342,000 of beneficial conversion feature as an increase in additional paid in capital in the accompanying consolidated balance sheet on the date of issuance of Series C Convertible Preferred Stocks since these shares were convertible at the issuance date. The Series C Preferred Stock is classified as temporary equity at September 30, 2013, based on its conversion characteristics. The Series C Preferred Stock is not deemed to be an embedded derivative instrument to be bifurcated since it is indexed to its own stock.

In accordance with FASB ASC 815-40-15-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”, the warrants have been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the consolidated statement of operations. On August 30, 2012, such warrants were valued at $1,525,000 utilizing a valuation model and were initially recorded as a liability. As of September 30, 2013 and December 31, 2012, the warrant liability was re-valued using the Monte Carlo valuation as disclosed in Note 6, Fair Value Measurement, and was adjusted to its current fair value of approximately $916,000 and $878,000 as determined by the Company, resulting in a loss of approximately $7,000 and $37,000 for the three and nine months ended September 30, 2013.

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As a result of the Negative Clawback provisions included in the warrant agreement we have reset the exercise price from $4.25 per share to $1.50 per share. The fair value calculation on our warrant liability includes this reset.

The Purchase Agreement contained customary representations, warranties and covenants. In addition, the Company agreed to a negative clawback provision. Under the Negative Clawback, if at any time after the closing the Company consummated an underwritten public offering with respect to the purchase and sale of Common Stock or preferred stock (collectively, “Additional Securities”) of the Company resulting in a price per share of such Additional Securities (after giving effect to the conversion of any preferred stock to be issued in the Subsequent Public Financing) of less than $4.00, then, simultaneously with the closing of such Subsequent Public Financing, the Company would be obligated to issue to each Investor of Class A Units only, for no additional consideration, that number of Common Shares that was equal to (i) the number of Common Shares that would have been issuable to such Class A Investor at closing if the Per Unit Purchase Price were equal to the greater of (A) the Public Financing Price and (B) $2.50, minus (ii) the number of Common Shares issued to the Class A Investor at the closing. As a result of our December 2012 retail financing the Company adjusted the number of shares in accordance with the negative clawback provisions and recorded a charge to operations of $659,000 for the issuance of additional shares. On June 12, 2013, we issued 436,238 shares to fulfill this obligation.

The holder of shares of Series C Preferred Stock does not have the right to vote and does not have full voting rights and powers equal to the voting rights and powers of holders of the Company’s Common Stock. In addition, the holders of Series C Preferred Stock is not entitled to convert any shares of Series C Preferred Stock into shares of the Common Stock if, after giving effect to the conversion, such holder would hold in excess of 9.99% of the Company’s outstanding Common Stock. Each share of Series C Preferred Stock is convertible, at any time at the option of the holder, into such number of shares of common stock equal to the product of (i) the number of shares of Series C Preferred Stock to be converted, multiplied by (ii) $4.00 divided by (iii) the conversion price, which is equal to the lesser of (x) $4.00 and (y) the price per share paid by investors in a Subsequent Public Financing; provided , however , that the conversion price shall not, in any event, be less than $2.50. Notwithstanding the foregoing, the conversion price shall equal $4.00, and there shall be no adjustment to the conversion price resulting from the price per share paid by investors in a Subsequent Public Financing, until the provisions of the Certificate regarding the adjustment to the conversion price are approved by shareholders holding a majority of the outstanding voting securities of the Company. As a result of our December 2012 retail financing, we adjusted the conversion price of the Preferred C Shares to the floor of $2.50 and as such reflected the additional value amounting to $924,000 as a deemed dividend in the consolidated statement of operations in the year ended December 31, 2012.

12.	Net Profit (Loss) Per Common Share

Basic profit (net) loss per common share attributable to YOU On Demand shareholders is calculated by dividing the profit (net) loss attributable to YOU On Demand shareholders by the weighted average number of outstanding common shares during the period. Diluted net profit (loss) per common share includes the weighted average dilutive effect of stock options, warrants and series preferred stocks. In determining the income (loss) to common stockholders, net income (loss) has been reduced by dividends and accretion on Series D Preferred Stock.

In January 2013, the remainder of our Series B Preferred Shares (7,866,800) was converted to 1,048,907 common shares. In September 2013, 162,500 shares of our Series C Preferred Shares were converted to 260,000 common shares.

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For the three and nine months ended September 30, 2013 and 2012, the number of securities convertible into common shares not included in diluted EPS because the effect would have been anti-dilutive consists of the following:

	Three Months Ended				Nine Months Ended
	September 30, 2013 (unaudited)		September 30, 2012 (unaudited)		September 30, 2013 (unaudited)		June 30, 2012 (unaudited)
Warrants		621,905		1,345,642		1,598,968		1,345,642
Stock purchase right		-		75,000		-		75,000
Options		1,606,501		1,601,245		1,606,501		1,601,245
Series A Preferred Stock		933,333		933,333		933,333		933,333
Series B Preferred Stock		-		1,048,907		-		1,048,907
Series C Preferred Stock		140,000		250,000		140,000		250,000
Series D 4% Preferred Stock		2,308,551		-		2,308,551		-
Convertible promissory note		1,896,612		-		1,896,612		-
Total		7,506,902		5,254,127		8,483,965		5,254,127

At September 30, 2013, the Company has reserved 11,148,057 shares of its authorized but unissued common stock for possible future issuance in connection with the following:

	September 30,2013 (unaudited)
Exercise of stock warrants		1,598,968
Exercise and future grants of stock options		4,025,319
Conversion of preferred stock		3,381,884
Contingent issuable shares in connection with Sinotop acquisition		245,274
Issuable shares from conversion of promissory note payable		1,896,612
Total		11,148,057

13.	Share-Based Payments

Stock Options

As of September 30, 2013, the Company has 1,606,501 options and 1,598,968 warrants outstanding to purchase shares of our common stock.

The following table provides the details of the approximate total share based payments expense during the three and nine months ended September 30, 2013 and 2012:

	3 Months Ended September 30,				9 Months Ended September 30,
	2013 (unaudited)		2012 (unaudited)		2013 (unaudited)		2012 (unaudited)
Stock option amortization	$	112,000	$	192,000	$	401,000	$	602,000	(a)
Cost of stock option price reduction		-		-		55,000		-	(b)
Stock issued for services		57,000		139,000		442,000		178,000	(c)
Stock warrants issued for services		21,000		10,000		109,000		36,000	(d)
Right to purchase shares		-		-		-		44,000
	$	190,000	$	341,000	$	1,007,000	$	860,000

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(a)

The Company accounts for its stock option awards pursuant to the provisions of ASC 718, Stock Compensation. The fair value of each option award is estimated on the date of grant using the Black-Scholes Merton valuation model. The Company recognizes the fair value of each option as compensation expense ratably using the straight-line attribution method over the service period, which is generally the vesting period. The Black-Scholes Merton model incorporated the following assumptions for the options granted in 2013 and 2012: risk-free interest rate of 1.04% to 1.98%, expected volatility of 75%, expected life of 4.0 to 10.0 years and expected dividend yield of 0%.

(b)

The Compensation Committee of the Board of Directors (acting as Administrator) reduced the exercise price of 701,167 outstanding stock options granted under the Company’s 2010 Equity Incentive Plan to $2.00. The Plan permits the Administrator to reduce the exercise price of any award granted under the Plan if the fair market value of the award has declined since the date of grant. All other terms of these options, including, without limitation, the exercise date, vesting schedule and the number of shares to which each option pertains, remain unchanged. The exercise prices of stock options held by the Company’s Chairman, Shane McMahon, and the Company’s CEO, Weicheng Liu, were not reduced by the Committee. We recorded approximately $55,000 for the modification charge in the second quarter of 2013. The modification resulted in a gain of approximately $409,000 related to the unrecognized compensation expense which will be recognized over the vesting periods of the new options. These vesting periods range from 17 months to 38 months.

(c)	In 2012, the Company appointed two new “independent” (as defined under the NASDAQ listing requirements) members to the Board of Directors. In connection with the appointment we granted each of our three “independent” directors 10,000 restricted shares to be vested quarterly over one year.

During 2012 and 2013, the Company granted a total of 242,120 shares to certain consultants and Directors for services. As of September 30, 2013 all of these shares were vested. We record the common shares at the closing price on the issue date. We expensed to consulting and marketing services $57,000 and $442,000 during the three months and nine months ended September 30, 2013 and $139,000 and $178,000 during the three and nine months ended September 30, 2012.

(d)

In 2013, we issued 166,677 consulting warrants and 6,667 warrants vested during the period. The fair value of the warrants was estimated on the date of grant using the Black-Scholes Merton valuation model. We expensed to marketing $21,000 and $109,000 during the three months and nine months ended September 30, 2013. For the three and nine months ended September 30, 2012, we recorded $10,000 and $36,000, respectively, for marketing services.

Effective as of December 3, 2010, our Board of Directors approved the YOU On Demand Holdings, Inc. 2010 Stock Incentive Plan (“the Plan”) pursuant to which options or other similar securities may be granted. The maximum aggregate number of shares of our common stock that may be issued under the Plan is 4,000,000 shares.

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Stock option activity for the nine months ended September 30, 2013 is summarized as follows:

	Options Outstanding			Weighted Average Exercise Price
Approved plan		4,000,000

Outstanding at January 1, 2013		1,585,401		$	3.54
Granted		26,667			3.75
Exercised		-			-
Canceled		(5,567	)		20.36
Outstanding at September 30, 2013		1,606,501		$	2.71

Options exercisable at September 30, 2013 (vested)		1,279,612		$	2.65

Options available for issuance		2,393,499

As of September 30, 2013, there was no aggregate intrinsic value of shares outstanding and exercisable since our closing stock price was below all of the exercise prices.

The following table summarizes information concerning outstanding and exercisable options as of September 30, 2013:

Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number Exerciseable		Weighted Average Exercise Price
$2 - $3		698,501		7.44	$	2.00		538,834	$	2.00
$3 - $5		906,667		7.37		3.18		739,445		3.13
$5 - $74		-		-		-		-		-
$74 - $75		1,333		4.45		75.00		1,333		75.00
		1,606,501		7.40	$	2.72		1,279,612	$	2.73

The following table summarizes the status of options which contain vesting provisions:

	Options			Weighted Average Grant Date Fair Value
Non-vested at January 1, 2013		518,330		$	2.71
Granted		26,667			3.75
Vested		(216,441	)		2.85
Canceled		(1,667	)		2.00
Non-vested at September 30, 2013		326,889		$	2.71

As of September 30, 2013 the Company had total unrecognized compensation expense related to options granted of approximately $658,000 which will be recognized over a remaining service period of 2.67 years.

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Warrants

In connection with the Company’s Share Exchange, capital raising efforts in 2007, the July 2010, August 2012, December 2012 and July 2013 financings, the WB Agreement and service agreements, the Company issued warrants to investors and service providers to purchase common stock of the Company.

As of September 30, 2013, the weighted average exercise price was $2.32 and the weighted average remaining life was 3.9 years. The following table outlines the warrants outstanding and exerciseable as of September 30, 2013 and December 31, 2012:

	September 30, 2013 (unaudited)		December 31, 2012
Warrants Outstanding	Number of Warrants Outstanding		Number of Warrants Outstanding		Exercise Price		Expiration Date
Share Exchange Consulting Warrants ($45.00 exercise price)		-		59,664	$	45.00	1/11/2013
2007 Private Placement Broker Warrants ($45.00 exercise price)		-		8,533	$	45.00	1/11/2013
2007 Private Placement Investor Warrants ($150.00 exercise price)		-		53,333	$	150.00	1/11/2013
July 2010 Sinotop Acquisition Warrants ($45.00 exercise price)		-		17,049	$	45.00	1/11/2013
July 2010 Sinotop Acquisition Warrants ($150.00 exercise price)		-		13,333	$	150.00	1/11/2013
May 2011 Warner Brothers Warrants ($6.60 excercise price)		200,000		200,000	$	6.60	5/11/2016
2011 Service Agreement Warrants ($7.20 exercise price)		26,667		20,000	$	7.20	6/15/2016
2012 August Financing Warrants ($1.50 exercise price)		977,063		977,063	$	1.50	8/30/2017
2013 Service Agreement Warrants ($2.00 exercise price)		166,667		-	$	2.00	2/26/2018
2013 Broker Warrants ($1.75 exercise price)		228,571		-	$	1.75	7/5/2018
		1,598,968		1,348,975

14.	Commitments and Contingencies

Severance Commitment

The Company has employment agreements with certain employees that provide severance payments upon termination of employment under certain circumstances, as defined in the applicable agreements. As of September 30, 2013, the Company's potential minimum cash obligation to these employees was approximately $717,000.

Operating Lease Commitment

The Company is committed to paying leased property costs related to our offices in China through 2016 as follows:

Years ending December 31,	Leased Property Costs
2013 (3 months)	$	77,000
2014		610,000
2015		596,000
2016		500,000
Thereafter		-
Total	$	1,783,000

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Licensed Content Commitment

The Company is committed to paying content costs through 2016 as follows:

Years ending December 31,	Content Costs
2013 (3 months)	$	1,215,000
2014		2,178,000
2015		2,321,000
2016		1,056,000
Thereafter		-
Total	$	6,770,000

Other

The Company is committed to paying service fees to certain consultants of $85,000 through the first quarter of 2014.

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

15.	Income Taxes

As of September 30, 2013, the Company had approximately $18.4 million of the U.S domestic cumulative tax loss carryforwards (which excludes the NOL carryforwards of approximately $1.7 million because of the uncertainty of the position being sustained) and approximately $12.0 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 2027 through 2033 and year 2013 (at year-end) to year 2018, respectively. We have established a 100% valuation allowance against our net deferred tax assets due to our history of pre-tax losses and the likelihood that the deferred tax assets will not be realizable. Due to our historical equity transactions, the utilization of certain tax loss carryforwards may be subject to annual limitations imposed by Internal Revenue Code Section 382 relating to the change of control provisions.

We are not aware of any unrecorded tax liabilities which would impact our financial position or our results of operations.

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16.	Subsequent Events

Convertible Note

On November 4, 2013, YOU On Demand Holdings, Inc. issued a convertible note to C Media in $2,000,000 principal amount (the “Bridge Note”) in consideration for a $2,000,000 loan to the Company by C Media. The Bridge Note has an annual interest rate of 4% and matures on January 5, 2015. Upon the closing of a financing pursuant to the terms of that certain Series D Stock Purchase Agreement by and between the Company and C Media, dated as of July 5, 2013, as amended as of November 4, 2013 (as discussed below) in which C Media invests funds in the Company in exchange for shares of the Series E Convertible Preferred Stock of the Company, the principal amount and all unpaid interest of the Bridge Note shall automatically be converted into Series E Shares at a conversion price equal to the per share purchase price paid for Series E Shares by C Media. If the Bridge Note is not converted into Series E Shares within 30 days following the issuance of the Bridge Note (or, in the event that all of the conditions to the Series E Financing contained in the Series E Agreement (defined below) have been satisfied except the condition set forth in Section 6.1(i)(ii) of the Series E Agreement, then, at C Media’s option, by January 31, 2014 (the “Optional Extension Date”)), the principal amount and all accrued and unpaid interest under the Bridge Note may, at C Media’s option, be converted into shares of the Company’s Series D 4% Convertible Redeemable Preferred Stock at a conversion price of $1.75 per share.

Amendment to Series D Stock Purchase Agreement

On November 4, 2013, in connection with the issuance of the Bridge Note, the Company and C Media entered into Amendment No. 1 to the Series D Agreement. Pursuant to the original Series D Agreement, dated July 5, 2013, the Company and C Media agreed, among other things, that each party would act in good faith and with fair dealing to finalize an agreement for the purchase and sale of shares Series E Shares pursuant to the terms of a Series E Preferred Stock Purchase Agreement on or before October 31, 2013. Pursuant to the Series D Amendment, the parties agreed that each party would act in good faith and with fair dealing to finalize the Series E Agreement on or before the 30^th day following the issuance of the Bridge Note. In addition, the Series D Agreement provided that the Company would file a registration statement covering the Series D Shares on or before November 1, 2013. Pursuant to the Series D Amendment, the Company shall have until 3 business days following the 30^th day after issuance of the Bridge Note in order to file such registration statement.

Also in connection with the Series D Amendment, C Media executed a waiver and consent with the Company as of October 31, 2013 agreeing, among other things, to waive its right to redeem its Series D Shares as of October 31, 2013 until the 30^th day following the issuance of the Bridge Note or the Optional Extension Date.

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Cautionary Note Regarding Forward Looking Statements

This Form 10-Q contains “forward-looking” statements that involve risks and uncertainties. You can identify these statements by the use of forward-looking words such as "may", "will", "expect", "anticipate", "estimate", "believe", "continue", or other similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or financial condition or state other "forward-looking" information. We believe that it is important to communicate our future expectations to our investors. However, these forward-looking statements are not guarantees of future performance and actual results may differ materially from the expectations that are expressed, implied or forecasted in any such forward-looking statements. There may be events in the future that we are unable to accurately predict or control, including weather conditions and other natural disasters which may affect demand for our products, and the product–development and marketing efforts of our competitors. Examples of these events are more fully described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 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 unaudited consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion contains certain forward-looking information. See “Cautionary Note Regarding Forward Looking Statements” above for certain information concerning those forward looking statements.

Overview

We operate in the Chinese media segment, through our Chinese subsidiaries and VIEs, a business which provides integrated value-added service solutions for the delivery of VOD and enhanced premium content for cable providers.

Through our VIE, Sinotop, and it’s 80% owned operating joint venture Zhong Hai Video, we provide integrated value-added service solutions for the delivery of VOD, and enhanced premium content for cable providers and other distribution platforms. Zhong Hai Video's revenue will be derived primarily from a VOD model, consisting of a fee to view movies, popular titles and live events.

Principal Factors Affecting Our Financial Performance

Our operating results are primarily affected by the following factors:

Growth in the Chinese Economy. We operate in China and derive all of our revenues from sales to customers in China. Economic conditions in China, therefore, affect virtually all aspects of our operations, including the demand for our products, the availability and prices of our supplies and our other expenses. China has experienced significant economic growth, achieving an average annual growth rate of approximately 10% in gross domestic product from 1996 through 2011. China is expected to experience continued growth in all areas of investment and consumption, even in the face of a global economic recession. However, China has not been entirely immune to the global economic slowdown and is experiencing a slowing of its growth rate.

PRC Economic Stimulus Plans. The PRC government has issued a policy entitled “Central Government Policy On Stimulating Domestic Consumption To Counter The Damage Result From Export Business Of The Country,” pursuant to which the PRC Central Government is dedicating approximately $580 billion to stimulate domestic consumption. Companies that are either directly or indirectly related to construction, and to the manufacture and sale of building materials, electrical household appliances and telecommunication equipment, are expected to benefit. We could potentially benefit if the stimulus plan injects funds into cable infrastructure allowing access to our PPV network.

Deployment of Value-added Services. To augment our product offerings and create other revenue sources, we work with strategic partners to deploy value-added services to our cable customers. Value-added services, including but not limited to the synergies created by the additions of our new assets, will become a focus of revenue generation for our company. No assurance can be made that we will add other value-added services, or if added, that they will succeed.

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Taxation

United States

YOU On Demand Holdings, Inc. is subject to United States tax at a tax rate of 34%. No provision for income taxes in the United States has been made as YOU On Demand Holdings, Inc. had no income taxable in the United States.

Cayman Islands

CB Cayman was incorporated in the Cayman Islands. Under the current law of the Cayman Islands, it is not subject to income or capital gains tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands.

Hong Kong

Our subsidiary, Sinotop Hong Kong, was incorporated in Hong Kong and under the current laws of Hong Kong, is subject to Profits Tax of 16.5%. No provision for Hong Kong Profits Tax has been made as Sinotop Hong Kong has no taxable income.

The People’s Republic of China

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

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

Consolidated Results of Operations

Comparison of Three Months Ended September 30, 2013 and 2012

The operating results of Jinan Broadband are classified as discontinued operations in the Company’s unaudited Consolidated Results of Operations.

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	Three Months Ended
	September 30, 2013 (unaudited)			September 30, 2012 (unaudited)			Amount Change			% Change

Revenue	$	95,000		$	4,000		$	91,000			2275	%
Cost of revenue		712,000			714,000			(2,000	)		0	%
Gross loss		(617,000	)		(710,000	)		93,000			-13	%

Operating expense:
Selling, general and administrative expenses		1,658,000			2,331,000			(673,000	)		-29	%
Professional fees		147,000			138,000			9,000			7	%
Depreciation and amortization		155,000			534,000			(379,000	)		-71	%
Total operating expense		1,960,000			3,003,000			(1,043,000	)		-35	%

Loss from operations		(2,577,000	)		(3,713,000	)		1,136,000			-31	%

Interest & other income / (expense)
Interest income		1,000			-			1,000			-
Interest expense		(30,000	)		(28,000	)		(2,000	)		7	%
Change in fair value of warrant liabilities		(7,000	)		(636,000	)		629,000			-99	%
Change in fair value of contingent consideration		(16,000	)		538,000			(554,000	)		-103	%
Gain on investment in unconsolidated entities		9,000			65,000			(56,000	)		-86	%
Gain on deconsolidation of Shandong Media		-			142,000			(142,000	)		-100	%
Other		(12,000	)		(2,000	)		(10,000	)		500	%

Loss from continuing operations before income taxes and noncontrolling interests		(2,632,000	)		(3,634,000	)		1,002,000			-28	%

Income tax benefit		21,000			96,000			(75,000	)		-78	%

Net loss from continuing operations		(2,611,000	)		(3,538,000	)		927,000			-26	%

Net gain (loss) from discontinued operations (including gain on disposal of $5,616,269)		5,590,000			(899,000	)		6,489,000			-722	%

Net gain (loss)		2,979,000			(4,437,000	)		7,416,000			-167	%

Net loss attributable to noncontrolling interests		193,000			389,000			(196,000	)		-50	%

Net gain (loss) attributable to YOU On Demand shareholders		3,172,000			(4,048,000	)		7,220,000			-178	%

Dividends on preferred stock		(1,030,000	)		-			(1,030,000	)		-

Net gain (loss) attributable to YOU on Demand common shareholders	$	2,142,000		$	(4,048,000	)	$	6,190,000

Revenues

Revenues for the three months ended September 30, 2013, totaled $95,000, as compared to $4,000 for 2012. The increase in revenue of approximately $91,000 is attributable to the growth of our VOD business.

Gross Loss

Our gross loss for the three months ended September 30, 2013 was $617,000, as compared to $710,000 during 2012. The decrease in gross loss of approximately $93,000, or 13%, is due to increased revenues.

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Selling, General and Administrative Expenses

Our selling, general and administrative expenses for the three months ended September 30, 2013, decreased approximately $673,000 to $1,658,000, as compared to $2,331,000 for the three months ended September 30, 2012.

Salaries and personnel costs are the primary components of selling, general and administrative expenses. For the three months ended September 30, 2013, salaries and personnel costs accounted for 53% of our selling, general and administrative expenses. For the three months ended September 30, 2013, salaries and personnel costs totaled $872,000 (excluding $252,000 for severance pay), a decrease of $389,000, or 31%, as compared to $1,262,000 for the same period of 2012 due to staff reductions made as a part of our cost savings initiatives.

The other major components of our selling, general and administrative expenses include marketing and promotions, technology, rent and travel. For the three months ended September 30, 2013, these costs totaled $273,000, a decrease of $731,000, or 73% as compared to $1,004,000 in 2012. The decrease is because we incurred more marketing related and technology expense in the prior period while developing our VOD business.

Professional Fees

Professional fees are generally related to public company reporting and governance expenses as well as legal fees related to our business. Our costs for professional fees increased $9,000, or 7%, to $147,000 for the three months ended September 30, 2013, from $138,000 during 2012.

Depreciation and Amortization

Our depreciation expense increased $4,000, or 6%, to $70,000 in the three months ended September 30, 2013, from $66,000 during 2012.

Our amortization expense decreased $382,000, or 82%, to $85,000 in the three months ended September 30, 2013, from $467,000 during 202. The decrease is because our non-compete agreement was fully amortized as of January 31, 2013.

Change in Fair value of Warrant Liabilities

Our warrants are characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations and, accordingly, we reported a loss of $7,000 for the three months ended September 30, 2013 compared to $636,000 for the same period in 2012. The loss is primarily due to the increase in our closing stock price.

Change in Fair Value of Contingent Consideration

Our contingent consideration related to our acquisition of Sinotop Hong Kong is classified as a liability because the earn-out securities do not meet the fixed-for-fixed criteria under ASC 815-40-15. Further, ASC 815-40-15 requires us to re-measure at the end of every reporting period with the change in value reported in the statement of operations and, accordingly, we reported a loss of approximately $16,000 and a gain of $538,000 for the three months ended September 30, 2013 and 2012, respectively. The change is primarily due to the fluctuation in our closing stock price.

Gain on sale of Jinan Broadband

Effective July 31, 2013, we sold our interest in Jinan Broadband and recorded a gain of approximately $5.6 million as discussed in Note 3 of our consolidated financial statements.

Net Loss from Discontinued Operations

Net loss from discontinued operations reflects the operating results of Jinan Broadband for the one month period ended July 31, 2013 (sold date). Our sale of Jinan Broadband was consummated on July 31, 2013 (see Footnote 3 for additional information on this sale). Discontinued operations reflects losses of approximately $26,000 (one month period) and $899,000 for the one and three months ended September 30, 2013 and 2012, respectively.

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Net Loss Attributable to Non-controlling Interest

49% of the operating loss of our Jinan Broadband subsidiary is allocated to Shandong Cable (previously Jinan Parent), the 49% co-owner of this business. During the one month ended July 31, 2013, $13,000 of our operating losses from Jinan Broadband was allocated to Shandong Cable (previously Jinan parent), as compared to $441,000 of operating loss during the three months ended September 30, 2012. Effective July 31, 2013, the Company sold its 51% interest in Jinan Broadband.

20% of the operating loss of our Zhong Hai Video joint venture is allocated to Hua Cheng, our 20% joint venture partner. During the three months ended September 30, 2013, $180,000 of our operating loss from Zhong Hai Video was allocated to Hua Cheng, as compared to $52,000 of our operating income during the same period of 2012.

Comparison of Nine Months Ended September 30, 2013 and 2012

In order to provide a more meaningful comparison of our financial results, our presentation of the Company’s unaudited Consolidated Results of Operations utilizes Pro Forma 2012 financial information to exclude the impact of Shandong Media which was deconsolidated effective July 1, 2012. The operating results of Jinan Broadband are classified as discontinued operations in the Company’s unaudited Consolidated Results of Operations.

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	Pro Forma Comparisons
	Nine Months Ended
	As Reported September 30, 2012			Shandong Media 6 months			Pro Forma September 30, 2012 (excluding Shandong Media)
	(unaudited)			(unaudited)

Revenue	$	1,700,000		$	1,696,000		$	4,000
Cost of revenue		2,739,000			1,229,000			1,510,000
Gross profit		(1,039,000	)		467,000			(1,506,000	)

Operating expense:
Selling, general and administrative expenses		7,131,000			716,000			6,415,000
Professional fees		1,079,000			-			1,079,000
Depreciation and amortization		1,625,000			58,000			1,567,000
Total operating expense		9,835,000			774,000			9,061,000

Loss from operations		(10,874,000	)		(307,000	)		(10,567,000	)

Interest & other income / (expense)
Interest income		3,000			-			3,000
Interest expense		(48,000	)		-			(48,000	)
Right to purchase expense		(44,000	)		-			(44,000	)
Change in fair value of warrant liabilities		(636,000	)		-			(636,000	)
Change in fair value of contingent consideration		74,000			-			74,000
Loss on investment in unconsolidated entities		52,000			-			52,000
Loss on write-off of uncollectible loans		(474,000	)		(474,000	)		-
Gain on deconsolidation of Shandong Media		142,000			-			142,000
Other		(60,000	)		-			(60,000	)

Loss before income taxes and noncontrolling interests		(11,865,000	)		(781,000	)		(11,084,000	)

Income tax benefit		266,000			9,000			257,000

Net loss from continuing operations		(11,599,000	)		(772,000	)		(10,827,000	)

Net loss from discontinued operations		(1,874,000	)		-			(1,874,000	)

Net loss		(13,473,000	)		(772,000	)		(12,701,000	)

Net loss attributable to noncontrolling interests		1,483,000			386,000			1,097,000

Net loss attributable to YOU On Demand shareholders	$	(11,990,000	)	$	(386,000	)	$	(11,604,000	)

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	Nine Months Ended
	September 30, 2013 (unaudited)			September 30, 2012 (Pro Forma) (unaudited)			Amount Change			% Change

Revenue	$	147,000		$	4,000		$	143,000			3575	%
Cost of revenue		2,351,000			1,510,000			841,000			56	%
Gross loss		(2,204,000	)		(1,506,000	)		(698,000	)		46	%

Operating expense:
Selling, general and administrative expenses		5,558,000			6,415,000			(857,000	)		-13	%
Professional fees		773,000			1,079,000			(306,000	)		-28	%
Depreciation and amortization		621,000			1,567,000			(946,000	)		-60	%
Impairments of long-lived assets		311,000			-			311,000			-
Total operating expense		7,263,000			9,061,000			(1,798,000	)		-20	%

Loss from operations		(9,467,000	)		(10,567,000	)		1,100,000			-10	%

Interest & other income / (expense)
Interest income		1,000			3,000			(2,000	)		-67	%
Interest expense		(90,000	)		(48,000	)		(42,000	)		88	%
Right to purchase expense		-			(44,000	)		44,000			-100	%
Change in fair value of warrant liabilities		(37,000	)		(636,000	)		599,000			-94	%
Change in fair value of contingent consideration		(99,000	)		74,000			(173,000	)		-234	%
Loss on investment in unconsolidated entities		8,000			52,000			(44,000	)		-85	%
Gain on deconsolidation of Shandong Media		-			142,000			(142,000	)		-100	%
Other		59,000			(60,000	)		119,000			-198	%

Loss from continuing operations before income taxes and noncontrolling interests		(9,625,000	)		(11,084,000	)		1,459,000			-13	%

Income tax benefit		82,000			257,000			(175,000	)		-68	%

Net loss from continuing operations		(9,543,000	)		(10,827,000	)		1,284,000			-12	%

Net gain (loss) from discontinued operations (including gain on disposal of $5,616,269)		5,255,000			(1,874,000	)		7,129,000			-380	%

Net loss		(4,288,000	)		(12,701,000	)		8,413,000			-66	%

Net loss attributable to noncontrolling interests		835,000			1,097,000			(262,000	)		-24	%

Net loss attributable to YOU On Demand shareholders		(3,453,000	)		(11,604,000	)		8,151,000			-70	%

Dividends on preferred stock		(1,030,000	)		-			(1,030,000	)		-

Net loss attributable to YOU on Demand common shareholders	$	(4,483,000	)	$	(11,604,000	)	$	7,121,000

Revenues

Revenues for the nine months ended September 30, 2013, totaled $147,000, as compared to $4,000 for 2012. The increase in revenue of approximately $143,000 is attributable to the growth of our VOD business.

Gross Loss

Our gross loss for the nine months ended September 30, 2013 was $2,204,000, as compared to $1,510,000 during 2012. The increase in gross loss of approximately $698,000, or 46%, is primarily due to the amortization of additional content costs.

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Selling, General and Administrative Expenses

Our selling, general and administrative expenses for the nine months ended September 30, 2013, decreased approximately $857,000 to $5,558,000, as compared to $6,415,000 for the nine months ended September 30, 2012.

Salaries and personnel costs are the primary components of selling, general and administrative expenses. For the nine months ended September 30, 2013, salaries and personnel costs accounted for 54% of our selling, general and administrative expenses. For the nine months ended September 30, 2013, salaries and personnel costs totaled $3,000,000 (excluding $252,000 for severance pay), a decrease of $866,000, or 22%, as compared to $3,866,000 for the same period of 2012 due to staff reductions made as a part of our cost savings initiatives.

The other major components of our selling, general and administrative expenses include marketing and promotions, technology, rent and travel. For the nine months ended September 30, 2013, these costs totaled $1,238,000, a decrease of $390,000, or 24% as compared to $1,628,000 in 2012. The decrease is because we incurred more marketing related and technology expense in the prior period while developing our VOD business.

We reduced the exercise price of 701,167 outstanding stock options granted under the Company’s 2010 Equity Incentive Plan to $2.00, as permitted by the Plan. All other terms of these options, including, without limitation, the exercise date, vesting schedule and the number of shares to which each option pertains, remain unchanged. We recorded approximately $55,000 for the modification charge in the second quarter of 2013.

Professional Fees

Professional fees are generally related to public company reporting and governance expenses as well as legal fees related to our business. Our costs for professional fees decreased $306,000, or 28%, to $773,000 for the nine months ended September 30, 2013, from $1,079,000 during 2012. The decrease in professional fees was primarily due to a reduction in legal fees.

Depreciation and Amortization

Our depreciation expense increased $15,000, or 7%, to $207,000 in the nine months ended September 30, 2013, from $192,000 during 2012.

Our amortization expense decreased $961,000, or 70%, to $414,000 in the nine months ended September 30, 2013, from $1,375,000 during 2012. The decrease is because our non-compete agreement was fully amortized as of January 31, 2013.

Impairment of Long-lived Assets

During the second quarter of 2013, we recorded a software impairment charge of $311,249 due to lack of adoption by the Multi System Operators, our VOD clients, who preferred to use their own software.

Change in Fair value of Warrant Liabilities

Our warrants are characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations and, accordingly, we reported a loss of $37,000 for the nine months ended September 30, 2013 compared to $636,000 for the same period in 2012. The loss is primarily due to the increase in our closing stock price.

Change in Fair Value of Contingent Consideration

Our contingent consideration related to our acquisition of Sinotop Hong Kong is classified as a liability because the earn-out securities do not meet the fixed-for-fixed criteria under ASC 815-40-15. Further, ASC 815-40-15 requires us to re-measure at the end of every reporting period with the change in value reported in the statement of operations and, accordingly, we reported a loss of $99,000 and a gain of $74,000 for the nine months ended September 30, 2013 and 2012, respectively. The change is primarily due to the fluctuation in our closing stock price.

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Gain on sale of Jinan Broadband

Effective July 31, 2013, we sold our interest in Jinan Broadband and recorded a gain of approximately $5.6 million as discussed in Note 3 of our consolidated financial statements.

Net Loss from Discontinued Operations

Net loss from discontinued operations reflects the operating results of Jinan Broadband for the seven month period ended July 31, 2013 (sold date). Our sale of Jinan Broadband was consummated on July 31, 2013 (see Footnote 3 for additional information on this sale). Discontinued operations reflects losses of approximately $361,000 and $1,874,000 for the seven and nine months ended September 30, 2013 and 2012, respectively.

Net Loss Attributable to Non-controlling Interest

49% of the operating loss of our Jinan Broadband subsidiary is allocated to Shandong Cable (previously Jinan Parent), the 49% co-owner of this business. During the nine months ended September 30, 2013, $178,000 of our operating losses from Jinan Broadband was allocated to Shandong Cable (previously Jinan Parent), as compared to $918,000 of operating loss during the same period of 2012. Effective July 31, 2013, the Company sold its 51% interest in Jinan Broadband.

20% of the operating loss of our Zhong Hai Video joint venture is allocated to Hua Cheng, our 20% joint venture partner. During the nine months ended September 30, 2013, $657,000 of our operating loss from Zhong Hai Video was allocated to Hua Cheng, as compared to $179,000 during the same period of 2012.

Liquidity and Capital Resources

As of September 30, 2013, we had cash and cash equivalents of approximately $1,214,000. Approximately $907,000 is held in our Chinese subsidiaries. The company has no plans to repatriate these funds. We had a working capital deficit at September 30, 2013, of approximately $1,843,000.

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

	Nine Months Ended
	September 30, 2013 (unaudited)			September 30, 2012 (unaudited)
Net cash used in operating activities	$	(5,694,000	)	$	(8,258,000	)
Net cash used in investing activities		(638,000	)		(916,000	)
Net cash provided by financing activities		3,151,000			6,466,000
Effect of exchange rate changes on cash		15,000			19,000
Net decrease in cash and cash equivalents		(3,167,000	)		(2,690,000	)

Total cash and cash equivalents at beginning of period		4,381,000			7,520,000
Less cash and cash equivalents of discontinued operations at beginning of period		1,103,000			1,087,000
Cash and cash equivalents of continuing operations at beginning of period		3,278,000			6,433,000

Cash and cash equivalents at end of period	$	1,214,000		$	4,830,000

Operating Activities

Cash used in operating activities decreased for the nine months ended in 2013 compared to 2012 due to increased corporate and operational costs incurred in the development of our VOD business in the prior year.

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Investing Activities

Cash used in investing activities for the nine months ended September 30, 2013 and 2012 was used primarily for (i) additions to property and equipment of $425,000 and $790,000, respectively, and (ii) investments in intangibles of $23,000 and $112,000, respectively.

Financing activities

The Company must continue to rely on debt and equity to pay for ongoing operating expenses in order to execute its business plan. On July 5, 2013 the Company raised $4.0 million from the sale of Series D Preferred Stock to C Media Limited (“C Media”). In connection with the sale of the Series D Preferred, both parties agreed to act in good faith and with fair dealing to finalize an agreement, on or before October 31, 2013, for an additional investment of between $12 million and $21 million of a new class of preferred stock of the Company. This additional investment is contingent on several factors. If the additional investment does not occur, we have the ability to raise funds by various methods including utilization of our $50 million shelf registration of which $47.3 million is remaining as well as other means of financing such as debt or private investment. However, financing may not be available to the Company on terms acceptable to us or at all or such resources will be received in a timely manner. Further we may need approval to seek additional financing from the shareholders from the August 2012 private financing in the event we do a public financing.

The fact that we have incurred significant continuing losses and continue to rely on debt and equity financings to fund our operations to date, could raise substantial doubt about our ability to continue as a going concern. The unaudited 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 adjustments that might result from the outcome of this uncertainty. As of September 30, 2013 the Company has an accumulated operating loss of approximately $62 million.

The Company’s independent registered public accounting firm’s report of the financial statements as of and for year ended December 31, 2012, contained an explanatory paragraph regarding the Company’s ability to continue as a going concern.

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.

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.

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Critical Accounting Policies and Significant Judgments and Estimates

The discussion and analysis of our financial condition and results of operation are based upon our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012 includes a summary of our most significant accounting policies.

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventories, income taxes, stock-based compensation and contingent liabilities. Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Periodically, we review our critical accounting estimates with the Audit Committee of our Board of Directors.

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 September 30, 2013. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2013 and as of the date that the evaluation of the 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.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control. 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 Annual Report on Form 10-K for the year ended December 31, 2012, 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.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

There were no unregistered sales of equity securities during the fiscal quarter ended September 30, 2013.

Item 3.

Defaults Upon Senior Securities.

There were no defaults upon senior securities during the fiscal quarter ended June 30, 2013.

Item 4.

Mine Safety Disclosures.

Item 5.

Other Information.

Item 6.

Exhibits.

EXHIBIT INDEX

Exhibit No.		Description
4.1		Series D 4% Convertible Preferred Stock Certificate of Designation (Incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on July 11, 2013)
10.1		Series D Preferred Stock Purchase Agreement, dated as of July 5, 2013, between the Company and the C Media Limited (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on July 11, 2013)
10.2		Equity Transfer Agreement, dated May 20, 2013, between Beijing China Broadband Network Technology Co., Ltd. and Shandong Broadcast Network [English Translation] (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on August 6, 2013)
10.3		Letter Agreement, dated July 23, 2013, between Beijing China Broadband Network Technology Co., Ltd. and Shandong Broadcast Network [English Translation] (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on August 6, 2013)
10.4		Letter Agreement, dated July 31, 2013, between Beijing China Broadband Network Technology Co., Ltd. and Shandong Broadcast Network [English Translation] (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on August 6, 2013)
31.1		Certification by Chief Executive Officer pursuant to Sarbanes Oxley Section 302.
31.2		Certification by Chief Financial Officer pursuant to Sarbanes Oxley Section 302.
32.1		Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
32.2		Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101.INS		Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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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 November 14, 2013.

	YOU ON DEMAND HOLDINGS, INC
	By:	/s/ Marc Urbach
		Name: Marc Urbach
		Title: President and Chief Financial Officer (Principal
		Accounting Officer and Principal Financial Officer)

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Exhibit Index

Exhibit No.		Description
4.1		Series D 4% Convertible Preferred Stock Certificate of Designation (Incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on July 11, 2013)
10.1		Series D Preferred Stock Purchase Agreement, dated as of July 5, 2013, between the Company and the C Media Limited (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on July 11, 2013)
10.2		Equity Transfer Agreement, dated May 20, 2013, between Beijing China Broadband Network Technology Co., Ltd. and Shandong Broadcast Network [English Translation] (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on August 6, 2013)
10.3		Letter Agreement, dated July 23, 2013, between Beijing China Broadband Network Technology Co., Ltd. and Shandong Broadcast Network [English Translation] (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on August 6, 2013)
10.4		Letter Agreement, dated July 31, 2013, between Beijing China Broadband Network Technology Co., Ltd. and Shandong Broadcast Network [English Translation] (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on August 6, 2013)
31.1		Certification by Chief Executive Officer pursuant to Sarbanes Oxley Section 302.
31.2		Certification by Chief Financial Officer pursuant to Sarbanes Oxley Section 302.
32.1		Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
32.2		Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101.INS		Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document