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

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 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: 14,847,361 shares as of May 14, 2013.

QUARTERLY REPORT ON FORM 10-Q

OF YOU ON DEMAND HOLDINGS, INC.

FOR THE PERIOD ENDED MARCH 31, 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	25
Item 3		Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.		Controls and Procedures	31

PART II	-	OTHER INFORMATION

Item 1.		Legal Proceedings	32
Item 1A.		Risk Factors	32
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.		Defaults Upon Senior Securities	32
Item 4.		Mine Safety Disclosures	32
Item 5.		Other Information	32
Item 6.		Exhibits	32
Signatures			33

References

Except as otherwise indicated by the context, references in this report to (i) the “Company,” “we,” “us,” and “our” are to the combined business of YOU On Demand Holdings, Inc.), a Nevada corporation, and its consolidated subsidiaries; (ii) “CB Cayman” are to our wholly-owned subsidiary China Broadband, Ltd., a Cayman Islands company; (iii) “WFOE” are to our wholly-owned subsidiary Beijing China Broadband Network Technology Co., Ltd., a PRC company; (iv) “Jinan Broadband” are to our 51% owned subsidiary Jinan Guangdian Jia He Broadband Co. Ltd, a PRC company; (v) “Jinan Zhong Kuan” are to Jinan Zhong Kuan Information Technology Co. Ltd., a PRC company controlled by CB Cayman through a trust agreement with shareholder(s); (vi) “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 Jinan Zhong Kuan); (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 MARCH 31, 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

	March 31,			December 31,
	2013			2012
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,102,811		$	4,381,043
Marketable equity securities, available for sale		2,229			2,229
Inventories, net		412,911			384,088
Licensed content, current		787,770			681,457
Prepaid expenses		393,670			423,779
Other current assets		129,474			135,988
Total current assets		3,828,865			6,008,584

Property and equipment, net		3,982,265			4,098,594
Licensed content, noncurrent		339,032			530,367
Intangible assets, net		4,818,581			5,059,188
Goodwill		6,105,478			6,105,478
Investment in unconsolidated entities		655,662			655,834
Total assets	$	19,729,883		$	22,458,045

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	2,627,919		$	2,130,507
Accrued expenses and liabilities		2,369,447			2,456,542
Deferred revenue		1,895,395			2,091,788
Payable to Jinan Parent		145,215			144,592
Deferred license fees, current		678,372			-
Other current liabilities		1,033,797			920,888
Contingent purchase price consideration liability, current		389,452			368,628
Convertible promissory note		3,000,000			3,000,000
Warrant liabilities		903,785			878,380
Total current liabilities		13,043,382			11,991,325

Deferred license fees, noncurrent		-			460,547
Contingent purchase price consideration liability		389,452			368,628
Deferred tax and uncertain tax position liabilities		268,038			305,849
Total liabilities		13,700,872			13,126,349

Commitments and Contingencies
Convertible reedeemable preferred stock, $.001 par value; 50,000,000 shares authorized
Series A - 7,000,000 shares issued and outstanding, liquidation preference of $3,500,000 at March 31, 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 March 31, 2013 and December 31, 2012, respectively		-			3,223,575
Series C - 250,000 shares issued and outstanding, liquidation preference of $1,000,000 at March 31, 2013 and December 31, 2012, respectively		627,868			627,868

Equity:
Common stock, $.001 par value; 1,500,000,000 shares authorized, 14,819,691 and 13,742,394 shares issued at March 31, 2013 and December 31, 2012, respectively		14,820			13,742
Additional paid-in capital		65,962,090			62,388,502
Accumulated deficit		(62,186,429	)		(58,841,664	)
Accumulated other comprehensive income		623,693			604,632
Total YOU On Demand equity		4,414,174			4,165,212
Noncontrolling interests		(275,026	)		53,046

Total equity		4,139,148			4,218,258

Total liabilities and equity	$	19,729,883		$	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

	March 31,			March 31,
	2013			2012
	(unaudited)			(unaudited)

Revenue	$	1,312,061		$	2,037,579
Cost of revenue		1,732,500			1,792,021
Gross (loss) profit		(420,439	)		245,558

Operating expense:
Selling, general and administrative expenses		2,208,721			2,746,438
Professional fees		326,428			412,377
Depreciation and amortization		656,743			1,231,314
Total operating expense		3,191,892			4,390,129

Loss from operations		(3,612,331	)		(4,144,571	)

Interest & other income / (expense)
Interest income		950			2,713
Interest expense		(30,369	)		(1,673	)
Change in fair value of warrant liabilities		(25,405	)		-
Change in fair value of contingent consideration		(41,648	)		(712,065	)
Loss on investment in unconsolidated entities		(2,994	)		(4,192	)
Other		(1,181	)		(179	)

Net loss before income taxes and noncontrolling interest		(3,712,978	)		(4,859,967	)

Income tax benefit		37,811			75,438

Net loss		(3,675,167	)		(4,784,529	)

Plus: Net loss attributable to noncontrolling interests		330,402			564,457

Net loss attributable to YOU On Demand shareholders	$	(3,344,765	)	$	(4,220,072	)

Net income (loss) per share
Basic	$	(0.23	)	$	(0.40	)
Diluted	$	(0.23	)	$	(0.40	)

Weighted average shares outstanding
Basic		14,602,196			10,467,526
Diluted		14,602,196			10,467,526

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
	March 31,			March 31,
	2013			2012
	(unaudited)			(unaudited)
Net loss	$	(3,675,167	)	$	(4,784,529	)
Other comprehensive (loss) income:
Foreign currency translation adjustments		19,061			51,068
Less: Comprehensive loss attributable to non-controlling interest		328,072			543,423
Comprehensive loss attributable to YOU On Demand shareholders	$	(3,328,034	)	$	(4,190,038	)

See notes to consolidated financial statements.

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YOU On Demand Holdings, Inc. and Its Subsidiaries

CONSOLIDATED STATEMENTS OF EQUITY

For the Three Months Ended March 31, 2013 (unaudited)

										Accumulated		YOU On
					Additional					Other		Demand
	Common		Par		Paid-in		Accumulated			Comprehensive		Shareholders'			Noncontrolling			Total
	Shares		Value		Capital		Deficit			Income		Equity			Interest			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		-		-		108,031		-			-		108,031			-			108,031

Common shares issued for services		28,390		29		79,348		-			-		79,377			-			79,377

Stock option compensation expense		-		-		163,683		-			-		163,683			-			163,683

Conversion of Series B preferred shares
into common shares		1,048,907		1,049		3,222,526		-			-		3,223,575			-			3,223,575

Net loss		-		-		-	$	(3,344,765	)		-		(3,344,765	)		(330,402	)		(3,675,167	)

Foreign currency translation adjustments		-		-		-		-			19,061		19,061			2,330			21,391

Balance, March 31, 2013		14,819,691	$	14,820	$	65,962,090	$	(62,186,429	)	$	623,693	$	4,414,174		$	(275,026	)	$	4,139,148

See notes to consolidated financial statements.

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YOU On Demand Holdings, Inc. and Its Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended
	March 31,			March 31,
	2013			2012
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net loss	$	(3,675,167	)	$	(4,784,529	)
Adjustments to reconcile net loss to net cash used in operating activities
Equity securities compensation expense		351,091			175,104
Depreciation and amortization		656,743			1,231,314
Amortization of licensed content		37,581			37,581
Deferred income tax		(37,811	)		(75,438	)
Loss on investment in unconsolidated entities		2,994			4,191
Provision for bad debt expense		-			144,877
Change in fair value of warrant liabilities		25,405			-
Change in fair value of contingent purchase price consideration liability		41,648			712,065
Change in assets and liabilities,
Other current assets		-			(135,666	)
Inventory		(26,751	)		8,028
Licensed content		205,697			(637,989	)
Prepaid expenses and other assets		37,678			129,068
Accounts payable		492,066			416,948
Accrued expenses and liabilities		(361,665	)		208,857
Deferred revenue		61,949			50,555
Deferred license fee		18,905			96,592
Other current liabilities		153,297			16,670
Net cash used in operating activities		(2,016,340	)		(2,401,772	)

Cash flows from investing activities:
Acquisition of property and equipment		(242,243	)		(162,127	)
Investments in intangibles		(20,437	)		(103,550	)
Leasehold improvements		-			(26,479	)
Net cash used in investing activities		(262,680	)		(292,156	)

Net cash provided by financing activities		-			-

Effect of exchange rate changes on cash		788			35,856

Net decrease in cash and cash equivalents		(2,278,232	)		(2,658,072	)
Cash and cash equivalents at beginning of period		4,381,043			7,519,574

Cash and cash equivalents at end of period	$	2,102,811		$	4,861,502

Supplemental Cash Flow Information:

Cash paid for taxes	$	-		$	325
Cash paid for interest	$	765		$	1,673
Value of common stock issued from conversion of Preferred Series B shares	$	3,223,575		$	-

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 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 a VIE of the Company. All material intercompany transactions and balances are eliminated in consolidation.

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

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

In presenting the Company’s consolidated balance sheet at December 31, 2012, we presented accounts receivable, net as a separate line item. In presenting the Company’s unaudited consolidated balance sheet at March 31, 2013, we reclassified accounts receivable, net amounting to $382 to other current assets.

2.	Going Concern and Management’s Plans

For the three months ended March 31, 2013, we had a net loss of approximately $3,345,000 and we used cash for operations of approximately $2,016,000. We had a working capital deficit of approximately $9,215,000 and accumulated deficit of approximately $62 million, at March 31, 2013. The Company will continue to rely on debt and equity to pay for ongoing operating expenses in order to execute its business plan. 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 that 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.

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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 for the year ended December 31, 2012, contained an explanatory paragraph regarding the Company's ability to continue as a going concern.

3.	VIE Structure and Arrangements

Management Services Agreement

Pursuant to a Management Services Agreement, dated as of March 9, 2010, between Sinotop Beijing and Sinotop Hong Kong (the “Management Services Agreement”), Sinotop Hong Kong has the exclusive right to provide to Sinotop Beijing management, financial and other services related to the operation of Sinotop Beijing’s business, and Sinotop Beijing is required to take all commercially reasonable efforts to permit and facilitate the provision of the services by Sinotop Hong Kong. As compensation for providing the services, Sinotop Hong Kong is entitled to receive a fee from Sinotop Beijing, upon demand, equal to 100% of the annual Net Profits of Sinotop Beijing during the term of the Management Services Agreement (Sinotop Hong Kong may request ad hoc quarterly payments of the aggregate fee, which payments will be credited against Sinotop Hong Kong’s future payment obligations).

The Management Services Agreement also provides Sinotop Hong Kong or its designee with a right of first refusal to acquire all or any portion of the equity of Sinotop Beijing upon any proposal by the sole shareholder of Sinotop Beijing to transfer such equity. In addition, at the sole discretion of Sinotop Hong Kong, Sinotop Beijing may be obligated to transfer to Sinotop Hong Kong or its designee any part or all of the business, personnel, assets and operations of Sinotop Beijing which may be lawfully conducted, employed, owned or operated by Sinotop Hong Kong, including:

(a)

business opportunities presented to, or available to Sinotop Beijing may be pursued and contracted for in the name of Sinotop Hong Kong rather than Sinotop Beijing, and at its discretion Sinotop Hong Kong may employ the resources of Sinotop Beijing to secure such opportunities;

(b)

any tangible or intangible property of Sinotop Beijing, any contractual rights, any personnel, and any other items or things of value held by Sinotop Beijing may be transferred to Sinotop Hong Kong at book value;

(c)

real property, personal or intangible property, personnel, services, equipment, supplies and any other items useful for the conduct of the Business may be obtained by Sinotop Hong Kong by acquisition, lease, license or otherwise, and made available to Sinotop Beijing on terms to be determined by agreement between Sinotop Hong Kong and Sinotop Beijing;

(d)

contracts entered into in the name of Sinotop Beijing may be transferred to Sinotop Hong Kong, or the work under such contracts may be subcontracted, in whole or in part, to Sinotop Hong Kong, on terms to be determined by agreement between Sinotop Hong Kong and Sinotop Beijing; and

(e)

any changes to, or any expansion or contraction of, the Business may be carried out in the exercise of the sole discretion of Sinotop Hong Kong, and in the name of and at the expense of, Sinotop Hong Kong;

provided, however, that none of the foregoing may cause or have the effect of terminating (without being substantially replaced under the name of Sinotop Hong Kong) or adversely affecting any license, permit or regulatory status of Sinotop Beijing.

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The term of the Management Services Agreement is 20 years, and may not be terminated by Sinotop Beijing except with the consent of, or a material breach by, Sinotop Hong Kong.

Equity Pledge Agreement

Pursuant to an Equity Pledge Agreement among Sinotop Hong Kong, Sinotop Beijing and the sole shareholder of Sinotop Beijing (the “Shareholder”), dated March 9, 2010, the Shareholder pledged all of its equity interests in Sinotop Beijing (the “Collateral”) to Sinotop Hong Kong as security for the performance of the obligations of Sinotop Beijing to make all of the required management fee payments pursuant to the Management Services Agreement. The term of the Equity Pledge Agreement expires two years from Sinotop Beijing’s satisfaction of all obligations under the Management Services Agreement.

Option Agreement

Pursuant to an Option Agreement among Sinotop Hong Kong, Sinotop Beijing and the sole shareholder of Sinotop Beijing (the “Shareholder”), dated March 9, 2010, and entered into in connection with the Management Services Agreement, the Shareholder granted an exclusive option to Sinotop Hong Kong or its designee to purchase, at any time and from time to time, to the extent permitted under PRC law, all or any portion of the Shareholder’s equity in Sinotop Beijing. The aggregate purchase price of the option is equal to the paid-in registered capital of the Shareholder. The term of the agreement is until all of the equity interest in Sinotop Beijing held by the Shareholder is transferred to Sinotop Hong Kong or its designee, or until the maximum period allowed by law has run, and may not be terminated by any party to the agreement without the consent of the other parties.

Voting Rights Proxy Agreement

Pursuant to a Voting Rights Proxy Agreement among Sinotop Hong Kong, Sinotop Beijing and the sole shareholder of Sinotop Beijing (the “Shareholder”), dated March 9, 2010, the Shareholder granted to Sinotop Hong Kong an irrevocable proxy, for the maximum period of time permitted by law, all of its voting rights as a shareholder of Sinotop Beijing. The Shareholder may not transfer any of its equity interest in Sinotop Beijing to any party other than Sinotop Hong Kong. The Voting Rights Proxy Agreement may not be terminated except upon the written consent of all parties, or unilaterally by Sinotop Hong Kong upon 30 days’ notice.

Jinan Broadband

The corporate structure for our broadband business consists of:

●

a Cooperation Agreement, dated as of December 26, 2006, between CB Cayman and Jinan Parent (the “December 2006 Cooperation Agreement”);

●

a Cooperation Agreement dated as of January 2007, between Jinan Broadband and Networks Center (the “January 2007 Cooperation Agreement”); and

●

two Exclusive Service Agreements, dated December 2006 and March 2007, between Jinan Broadband, Jinan Parent and Networks Center (collectively, the “Exclusive Service Agreements”).

Pursuant to the December 2006 Cooperation Agreement, CB Cayman and Jinan Parent set up a joint venture, Jinan Broadband. CB Cayman contributed in cash and owns a 51% controlling interest, and Jinan Parent contributed the assets in exchange of 49% ownership in Jinan broadband. Jinan Broadband is a corporate joint venture with a term of 20 years. Jinan Broadband is considered as a VIE based on ASC 810-10-25-38 due to the fact that CB Cayman has a controlling financial interest in Jinan Broadband and therefore deemed to be the primary beneficiary based on the terms stipulated in the December 2006 Cooperation Agreement below:

●

CB Cayman appointed 3 directors and Jinan Parent appointed 2 directors;

●

The general manager and financial manager are appointed by CB Cayman; and

●

CB Cayman is entitled to receive 51% of net profit/loss of Jinan Broadband.

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Pursuant to the January 2007 Cooperation Agreement, Networks Center, the PRC governmental agency which controls Jinan Parent, affirmed the arrangement set forth in the December 2006 Cooperation Agreement which provided that all of the pre-tax revenues of Jinan Broadband would be assigned to our WFOE for 20 years.

Under the terms of the Exclusive Service Agreements, Jinan Broadband is obligated to provide certain technical services needed by Jinan Parent and is entitled to receive 100% of the pre-tax revenue of access services from Jinan Parent as a service charge in exchange.

Shandong Media

Effective July 1, 2012, we deconsolidated Shandong Media due to a decrease in ownership from 50% to 30%.

On March 7, 2008, we entered into the Shandong Cooperation Agreement with the Shandong Newspaper Entities. The Shandong Cooperation Agreement provided for, among other terms, the creation of a joint venture entity in the PRC, Shandong Media, which would own and operate the television program guide, newspaper and magazine publishing businesses previously owned and operated by the Shandong Newspaper Entities pursuant to exclusive licenses. In addition, Shandong Media entered into an exclusive advertising agency agreement and an exclusive consulting services agreement with the Shandong Newspaper Entities and another third party, Music Review Press, which requires that the Shandong Newspaper Entities and Music Review Press shall appoint Shandong Media as their exclusive advertising agent and provider of technical and management support for a fee.

Under the terms of the Shandong Cooperation Agreement and related pledge and trust documents, the Shandong Newspaper Entities contributed their entire Shandong newspaper business and transferred certain employees to Shandong Media in exchange for a 50% stake in Shandong Media, with the other 50% of Shandong Media to be owned directly by Jinan Zhong Kuan and indirectly by our WFOE in the PRC in the second quarter of 2008, with the joint venture becoming operational in July of 2008. In exchange, therefore, the Shandong Cooperation Agreement provided for total initial consideration from us of approximately $1.5 million (approximately 10 million RMB). As part of the transaction, and to facilitate our subsidiary’s ownership and control over Shandong Newspaper under PRC law, through our WFOE in the PRC, this acquisition was completed in accordance with a pledge and loan agreement, pursuant to which all of the shares of Shandong Media which we acquired are held in trust on our behalf by a nominee holder, as security for a loan to Shandong Media’s parent seller.

On January 19, 2012, through Jinan Zhong Kuan, we entered into a Memorandum of Understanding with the Shandong Newspaper Entities pursuant to which we expressed the intention to amend the terms of the Shandong Cooperation Agreement to transfer an aggregate of 20% of our ownership interest in Shandong Media to the Shandong Newspaper Entities. Shandong Media received notice of approval by the PRC State Administration for Industry & Commerce to effect the changes made in the Articles of Association and complete the transaction. The equity transfer ownership was effective as of July 1, 2012, and we have deconsolidated Shandong Media and recorded our 30% ownership under the equity method of accounting.

We are entitled to 100% of the pre-tax income of Jinan Zhong Kuan, in two ways which are discussed below. First, there are two individual owners of Jinan Zhong Kuan which hold all of the equity in that company in trust for the benefit of CB Cayman, pursuant to trustee arrangements entered into with them in 2008. The trustee arrangements relieve the individual shareholders from any responsibilities for the day-to-day operations of the company and any liability arising from their role as equity holders. All actions taken by them as shareholders will be in accordance with instructions provided by CB Cayman. The trustee arrangements provide that, in consideration for an up-front fee paid by CB Cayman, and monthly cash payments thereafter, the equity holders of Jinan Zhong Kuan will hold the equity of Jinan Zhong Kuan in trust for, and only for the benefit of, CB Cayman. We believe CB Cayman’s right to receive 100% of the dividends paid on the equity held in trust for it by the two individuals is appropriate under PRC transfer pricing rules, which are found in Arts. 41-48 of the PRC Enterprise Income Tax Law and Arts. 109-123 of the Implementing Regulations thereunder, and complies with the “arm’s length principle” mandated by Art. 41 of the Enterprise Income Tax Law, because those individuals have no responsibilities and take no risk in connection with their role as trustee shareholders other than to vote when requested and as directed by CB Cayman.

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As a practical matter, however, there are not likely to be any dividends paid on the equity of Jinan Zhong Kuan, because all of its pre-tax income is required to be paid over to the WFOE under the terms of an exclusive services agreement entered into in January 2008. Under the terms of the exclusive services agreement, the WFOE is obligated to provide all management, technical and support services needed by Jinan Zhong Kuan and is entitled to receive 100% of the pre-tax income of Jinan Zhong Kuan in exchange. Jinan Zhong Kuan has no income other than profit distributions from Shandong Media. Jinan Zhong Kuan and our WFOE are related parties, and all of the risk and burden of the operations of Jinan Zhong Kuan is shifted to the WFOE under the exclusive services agreement, and therefore all of the economic benefit is shifted to the WFOE, as well. If the PRC tax authorities were to disagree with our position regarding the pricing under the exclusive services agreement between Jinan Zhong Kuan and the WFOE, there is no potential for past-due tax liability with respect to Jinan Zhong Kuan because, as noted above, Jinan Zhong Kuan has never recognized any profits.

The Company, through CB Cayman, is the sole owner of the WFOE, and exercises the overall voting power over the WFOE. In addition, through the various contractual agreements between CB Cayman, the trustees, the WFOE and Jinan Zhong Kuan, as discussed above, Jinan Zhong Kuan is considered a VIE. As the Company bears all risks and is entitled to all benefits relating to the investment in Jinan Zhong Kuan, the Company is a primary beneficiary of Jinan Zhong Kuan and is required to consolidate Jinan Zhong Kuan under the variable interest model. With respect to Shandong Media, it cannot finance its own activities without the cash contribution from Jinan Zhong Kuan. In addition, apart from its equity interest in Shandong Media, Jinan Zhong Kuan has the obligation to bear expected losses and receive expected returns through the exclusive services agreement, which entitles Jinan Zhong Kuan to all net profits of Shandong Media.

4.	Content Accounting

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

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

5.	Property and Equipment

During 2012, we reviewed the equipment assets at our Jinan Broadband subsidiary and determined that an additional impairment should be recorded based on the estimated realizable values. We initially reserved a portion of these assets in 2010. During 2012, we recorded an additional estimated impairment of $840,000 related to the facilities and machinery assets. The assets being impaired are considered to have no salvageable value.

	March 31,			December 31,
	2013			2012

Furniture and office equipment	$	3,247,000		$	3,202,000
Facilities and machinery		16,072,000			15,779,000
Leasehold improvements		179,000			178,000
Vehicles		55,000			54,000
Total property and equipment		19,553,000			19,213,000
Less: accumulated depreciation		(15,571,000	)		(15,114,000	)
Net carrying value	$	3,982,000		$	4,099,000

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We recorded depreciation expense of approximately $390,000 and $744,000 for the three months ended March 31, 2013 and 2012, respectively.

6.	Goodwill and Intangible Assets

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

A roll forward of our intangible assets activity for the three months ended March 31, 2013 is as follows:

	Balance at							Foreign		Balance at
	December 31,				Amortization			Currency		March 31,
	2012		Additions		Expense			Transl Adj		2013
Amortized intangible assets:
Service agreement	$	1,516,163	$	-	$	(26,714	)	$	6,538	$	1,495,987
Charter / Cooperation agreements		2,422,824		-		(34,448	)		-		2,388,376
Noncompete agreement		121,252		-		(121,252	)		-		-
Software and licenses		630,681		15,907		(54,669	)		2,398		594,317
Website development		233,978		-		(29,373	)		1,006		205,611
Total amortized intangible assets	$	4,924,898	$	15,907	$	(266,456	)	$	9,942	$	4,684,291

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 $266,000 and $487,000, for the three months ended March 31, 2013 and 2012, respectively.

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

	Jinan		Sinotop
Years ending December 31,	Broadband		Hong Kong		Sinotop		Total
2013 (9 months)	$	117,432	$	103,343	$	208,543	$	429,318
2014		152,531		137,791		255,191		545,513
2015		137,502		137,791		117,206		392,499
2016		117,624		137,791		90,904		346,319
2017		110,568		137,791		-		248,359
Thereafter		988,414		1,733,869		-		2,722,283
Total amortization to be recognized	$	1,624,071	$	2,388,376	$	671,844	$	4,684,291

7.	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.

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●

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

●

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

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

Common stock is valued at closing price reported on the active market on which the individual securities are traded.

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 year.

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

	March 31, 2013
	Fair Value Measurements
	(Unaudited)
	Level 1		Level 2		Level 3		Total Fair Value
Assets
Available-for-sale securities	$	2,229	$	-	$	-	$	2,229
Investment in unconsolidated entities (Shandong Media)		-		-		-		-

Liabilities
Warrant liabilities	$	-	$	-	$	903,785	$	903,785
Contingent purchase price consideration, current (see Note 8)		-		-		389,452		389,452
Contingent purchase price consideration, noncurrent (see Note 8)		-		-		389,452		389,452

	December 31, 2012 Fair Value Measurements
	Level 1		Level 2		Level 3		Total Fair Value
Assets
Available-for-sale securities	$	2,229	$	-	$	-	$	2,229
Investment in unconsolidated entities (Shandong Media)		-		-		-		-

Liabilities
Warrant liabilities	$	-	$	-	$	878,380	$	878,380
Contingent purchase price consideration, current (see Note 8)		-		-		368,628		368,628
Contingent purchase price consideration, noncurrent (see Note 8)		-		-		368,628		368,628

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The table below reflects the components effecting the change in fair value for the three months ended March 31, 2013:

	Level 3 Assets and Liabilities
	For the Three Months Ended March 31, 2013

	1/1/2013		Purchases, sales and issuances and settlements		Unrealized (gain) / loss		3/31/2013

Liabilities:
Warrant liabilities	$	878,380	$	-	$	25,405	$	903,785
Contingent purchase price consideration		737,256		-		41,648	$	778,904

	Quantitative Information about Level 3 Fair Value Measurements
	For the Three Months Ended March 31, 2013

	Fair Value at		Valuation	Unobservable
	3/31/2013		Techniques	Inputs	Input

Warrant liabilities	$	903,785	Monte Carlo Simulation Method	Risk-free rate of interest		0.638	%
				Expected volatility		75	%
				Expected life (years)		4.42
				Expected dividend yield		0	%


Contingent consideration	$	778,904	Black-Scholes Merton Model	Risk-free rate of interest		0.570	%
				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 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.

8.	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.

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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 $41,648 and $712,065for the three months ended March 31, 2013and 2012, respectively.

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

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

	January 1,						March 31,
	2013		Earned		Change in		2013
Class of consideration	Fair Value		Fair Value		Fair Value		Fair Value
Common shares	$	711,294	$	-	$	39,244	$	750,538
Stock options		25,962		-		2,404		28,366
Total earned and contingent consideration	$	737,256	$	-	$	41,648	$	778,904

The following table represents the estimated fair value of the current and the noncurrent portion of the consideration liability for the acquisition of Sinotop Hong Kong at March 31, 2013.

	As of March 31, 2013
	Number of		Current		Noncurrent		Total
	Instruments		Liability		Liability		Liability
Shares July 2013		245,274	$	375,269	$	-	$	375,269
Shares July 2014		245,274		-		375,269		375,269
Total Common Shares		490,548	$	375,269	$	375,269	$	750,538

Options July 2013		26,667	$	14,183	$	-	$	14,183
Options July 2014		26,666		-		14,183		14,183
Total Options		53,333	$	14,183	$	14,183	$	28,366

Total Shares and Options		543,881	$	389,452	$	389,452	$	778,904

9.	Related Party Transactions

$3M Convertible Note

On May 10, 2012, our Chairman and Chief Executive Officer, Mr. Shane McMahon, made a loan to the Company in the amount of $3,000,000. In consideration for the loan, the Company issued a convertible note to Mr. McMahon in 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.

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On April 12, 2013, the Majority Shareholders approved an amendment to Section 3(a)(i) of 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 will be 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.

Jinan Broadband

Payable to Jinan Parent

As of March 31, 2013 and December 31, 2012, our payable to Jinan Guangdian Jiahe Digital Television Co., Ltd. (“Jinan Parent”) remained the same in the amount of approximately $145,000. This amount represents the remaining balance due from the initial acquisition which is unsecured, interest free and has no fixed repayment terms.

Revenue

During the three months ended March 31, 2012 (none in 2013), Jinan Broadband generated $102,000 of value-added service revenue from an affiliate, Jinan Radio and Television Networks Center (“Networks Center”). Networks Center is the owner of Jinan Parent who has a 49% ownership interest in Jinan Broadband.

Cost of Revenue

During the three months ended March 31, 2012 (none in 2013), Jinan Broadband incurred service fees to Networks Center of approximately $12,000. To minimize administrative fees and maintain a low headcount at Jinan Broadband, Networks Center collects customer payments on behalf of Jinan Broadband and then remits the funds to Jinan Broadband. Networks Center charges Jinan Broadband a 2% service fee on the payments collected.

General and Administrative Expense

During the three months ended March 31, 2012 (none in 2013), Jinan Broadband paid sales agency fees of approximately $22,000 to Networks Center for revenue collection on behalf of Jinan Broadband and network maintenance.

Accounts Payable

As of March 31, 2013 and December 31, 2012, respectively, Jinan Broadband had accounts payable to Networks Center of approximately $272,000 and $270,000, respectively, relating to maintenance, network leasing and facility rental fees. Jinan Broadband’s operation is located in a building that is owned by Networks Center. As such, Jinan Broadband shares the cable network usage with Networks Center. Additionally, Jinan Broadband utilizes Networks Center’s staff to provide cable network maintenance support to their customers. As such, Network Center charges Jinan Broadband fees for these services and usage of their facility.

Accrued Expense

Jinan Broadband had accrued network maintenance fees, network leasing fees and rental fees to Networks Center of approximately $1,216,000 and $1,087,000 as of March 31, 2013 and December 31, 2012, respectively.

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Sinotop

Cost of Revenue

During the three months ended March 31, 2013 and 2012, Zhong Hai Video paid licensed content fees of approximately $40,000 to Hua Cheng Film and Television Digital Program Co., Ltd., a related party.

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 is $4.25.

The Company recognized a beneficial conversion feature discount on Series C Convertible Preferred Stock at its intrinsic value, which was the fair value of the common stock at the commitment date for Series C Convertible Preferred Stock investment, less the effective conversion price. The Company recognized approximately $342,000 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 March 31, 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’s 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 March 31, 2013 and December 31, 2012, the warrant liability was re-valued using the Monte Carlo valuation as disclosed in Note 7, Fair Value Measurement, and was adjusted to its current fair value of approximately $904,000 and $878,000 as determined by the Company, resulting in a loss of approximately $25,000 for the three months ended March 31, 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 shall be obligated to issue to each Investor of Class A Units only, for no additional consideration, that number of Common Shares as is equal to (i) the number of Common Shares that would have been issuable to such Class A Investor at closing if the Per Unit Purchase Price were equal to the greater of (A) the Public Financing Price and (B) $2.50, minus (ii) the number of Common Shares issued to the Class A Investor at the closing. 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. As of March 31, 2013, the Company accrued such charge which is included in other current liabilities since it was subject to shareholders’ approval which was approved in the second quarter of 2013.

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.

Lastly, related to the August 2012 financings, the Company paid to the placement agent issuance costs of approximately $119,000 and issued shares and warrants. As of March 31, 2013, the shares and warrants were valued at approximately $471,000.

12.	Net Loss Per Common Share

Basic net loss per common share attributable to YOU On Demand shareholders is calculated by dividing the net loss attributable to YOU On Demand shareholders by the weighted average number of outstanding common shares during the period. Diluted net loss per common share includes the weighted average dilutive effect of stock options, warrants and series preferred stocks.

In January 2013, the remainder of our Series B Preferred Shares (7,866,800) was converted to 1,048,907 common shares.

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For the three months ended March 31, 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:

	March 31,		March 31,
	2013		2012
	(unaudited)		(unaudited)
Warrants		1,367,063		361,912
Stock purchase right		-		75,000
Options		1,584,501		1,579,634
Series A Preferred Stock		933,333		933,333
Series B Preferred Stock		-		1,368,907
Series C Preferred Stock		250,000		-
Convertible promissory note		2,030,835		-
Total		6,165,733		4,318,786

At March 31, 2013, the Company has reserved 9,738,968 shares of its authorized but unissued common stock for possible future issuance in connection with the following:

	March 31,
	2013
	(unaudited)
Exercise of stock warrants		1,367,063
Exercise and future grants of stock options		4,051,986
Exercise of preferred stock		1,333,333
Issuance of restricted stock grants		28,965
Contingent issuable shares in connection with Sinotop acquisition		490,548
Issuable shares from conversion of promissory note payable		2,030,835
Additional common stock due to reset provision		436,238
Total		9,738,968

13.	Share-Based Payments

Stock Options

As of March 31, 2013, the Company has 1,584,501 options and 1,367,063 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 months ended March 31, 2013 and 2012:

	March 31,		March 31,
	2013		2012
	(unaudited)		(unaudited)
Stock option amortization	$	164,000	$	163,000	(a)
Stock issued for services		79,000		-	(b)
Stock warrants issued for services		108,000		12,000	(c)
	$	351,000	$	175,000

(a)

The Company accounts for its stock option awards pursuant to the provisions of ASC 718, Stock Compensation. The fair value of each option award is estimated on the date of grant using the Black-Scholes Merton valuation model. The Company recognizes the fair value of each option as compensation expense ratably using the straight-line attribution method over the service period, which is generally the vesting period. The Black-Scholes Merton model incorporated the following assumptions for the options granted in 2012: risk-free interest rate of 1.73% to 1.98%, expected volatility of 75%, expected life of 10.0 years and expected dividend yield of 0%. There have been no options granted in 2013.

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(b)	During 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.

Also, during 2012, the Company granted 196,620 shares to certain consultants and Directors for services. As of March 31, there were 210,010 shares vested. We recorded the common shares at the closing price on the issue date and expensed to consulting and marketing services $193,000 during the three months ended March 31, 2013 (none in 2012).

(c)

In 2013, we issued 166,677 consulting warrants and 3,333 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 $44,000 during the three months ended March 31, 2013 and recorded $64,000 to prepaid expense to be recognized for services provided in the remainder of 2013. For the three months ended March 31, 2012, we recorded $12,000 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.

Stock option activity for the three months ended March 31, 2013 is summarized as follows:

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

Outstanding at January 1, 2013		1,585,401		$	3.54
Granted		-			-
Exercised		-			-
Canceled		(900	)		45.00
Outstanding at March 31, 2013		1,584,501		$	3.55

Options exercisable at March 31, 2013 (vested)		1,131,160		$	3.30

Options available for issuance		2,415,499

As of March 31, 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 March 31, 2013:

			Weighted Average
			Remaining
	Number		Contractual Life		Weighted Average		Number		Weighted Average
Range of Exercise Prices	Outstanding		(Years)		Exercise Price		Exerciseable		Exercise Price
$3 - $4		1,338,000		7.92	$	3.04		1,050,028	$	3.04
$4 - $8		243,168		8.70		6.43		77,799		6.60
$8 - $33		0		0		0.00		0		0
$33 - $74		2,000		0.21		33.75		2,000		33.75
$74 - $75		1,333		4.95		75.00		1,333		75.00
		1,584,501		7.85	$	3.41		1,131,160	$	3.30

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As of March 31, 2013, there were 1,584,501 options outstanding with 1,131,160 options exercisable.

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

				Weighted
				Average
				Grant Date
	Options			Fair Value
Non-vested at January 1, 2013		525,396		$	3.67
Granted		0			0.00
Vested		(64,656	)		3.45
Canceled		(900	)		45.00
Non-vested at March 31, 2013		459,840		$	3.62

As of March 31, 2013 the Company had total unrecognized compensation expense related to options granted of approximately $1,243,000 which will be recognized over a remaining service period of 3.0 years.

Warrants

In connection with the Company’s Share Exchange, capital raising efforts in 2007, the Company’s January 2008 Financing of Convertible Notes and Class A Warrants, the April 2010 Convertible Note, the July 2010, August 2012 and December 2012 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 March 31, 2013, the weighted average exercise price was $4.37 and the weighted average remaining life was 4.26 years. The following table outlines the warrants outstanding as of March 31, 2013 and December 31, 2012:

	March 31,		December 31,
	2013		2012
	(unaudited)
	Number of		Number of
	Warrants		Warrants		Exercise		Expiration
Warants Outstanding	Outstanding		Outstanding		Price		Date
Share Exchange Consulting Warrants ($45.00 exercise price)		-		59,664	$	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)		23,333		20,000	$	7.20	6/15/2016
2012 August Financing Warrants ($4.25 exercise price)		977,063		977,063	$	4.25	8/30/2017	(1)
2013 Service Agreement Warrants ($2.00 exercise price)		166,667		-	$	2.00	2/26/2018
		1,367,063		1,348,975

(1)	After receiving shareholder approval in the second quarter of 2013 and as a result of the negative clawback provisions included in our warrant agreements associated with our August 2012 private financings, the exercise price of $4.25 per share will be reset to $1.50 per share.

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14.	Commitments and Contingencies

The Company has employment agreements with certain employees that provide severance payments upon termination of employment under certain circumstances, as defined in the applicable agreements. As of March 31, 2013, the Company's potential minimum cash obligation to these employees was approximately $941,000.

The Company is committed to paying leased property costs related to our China offices through 2014 as follows:

	Leased
	Property
Years ending December 31,	Costs
2013 (9 months)	$	226,000
2014		17,000
Total	$	243,000

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

	Content
Years ending December 31,	Costs
2013 (9 months)	$	1,972,000
2014		2,163,000
2015		2,297,000
2016		1,035,000
Total	$	7,467,000

The Company is committed to paying service fees to certain consultants of $154,000 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.	Subsequent Events

On April 19, 2013, the Compensation Committee of the Board of Directors (acting as Administrator) reduced the exercise price of 534,500 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. In the second quarter of 2013, we expect to record a charge of approximately $51,000 in our statement of operations to record the effect of this change in exercise price.

A former employee of the Company has recently communicated to the Company that she believes she has claims against the Company and the CEO in connection with the termination of her employment. The Company believes it has complied with all laws in connection with her termination, as well as her contract, and intends to vigorously defend if such claims are formally made by the former employee.

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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 andAnalysis 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, (1) a business which provides integrated value-added service solutions for the delivery of VOD and enhanced premium content for cable providers and (2) a cable broadband business based in the Jinan region of China.

Through our VIE, Sinotop, and it’s 80% owned operating joint venture Zhong Hai Video, we provide integrated value-added service solutions for the delivery of VOD, and enhanced premium content for cable providers. Zhong Hai Video's revenue will be derived primarily from a VOD model, consisting of a fee to view movies, popular titles and live events. At year end our VOD product was implemented on a limited basis for testing. Our product launch occurred in conjunction with the Chinese New Year halfway through our first quarter of 2013. Results were minimal during the initial promotional period.

Through our VIE, Jinan Broadband, we provide cable and wireless broadband services, principally internet services, Internet Protocol Point wholesale services, related network equipment rental and sales, and fiber network construction and maintenance. Jinan Broadband’s revenue consists primarily of sales to our PRC-based internet consumers, cable modem consumers, business customers and other internet and cable services.

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.

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●

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

●

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

Taxation

United States

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

Cayman Islands

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

Hong Kong

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

The People’s Republic of China

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

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

Consolidated Results of Operations

Comparison of Three Months Ended March 31, 2013 and 2012

In order to provide a more meaningful comparison of our financial results, our presentation of the Company’s Consolidated Results of Operations utilizes Pro Forma 2012 financial information to exclude the impact of Shandong Media which was deconsolidated effective July 1, 2012.

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	Pro Forma Comparisons
	Three Months Ended
	As Reported			Shandong Media			Pro Forma
	March 31,			3 months			March 31,
	2012						2012
							(excluding Shandong Media)

Revenue	$	2,038,000		$	764,000		$	1,274,000
Cost of revenue		1,792,000			646,000			1,146,000
Gross profit		246,000			118,000			128,000

Operating expense:
Selling, general and administrative expenses		2,747,000			491,000			2,256,000
Professional fees		412,000			-			412,000
Depreciation and amortization		1,231,000			31,000			1,200,000
Impairments of long-lived assets					-			-
Total operating expense		4,390,000			522,000			3,868,000

Loss from operations		(4,144,000	)		(404,000	)		(3,740,000	)

Interest & other income / (expense)
Interest income		3,000			-			3,000
Interest expense		(2,000	)		-			(2,000	)
Change in fair value of warrant liabilities		-			-			-
Change in fair value of contingent consideration		(712,000	)		-			(712,000	)
Loss on investment in unconsolidated entities		(4,000	)		-			(4,000	)
Other					-			-

Loss before income taxes and noncontrolling interests		(4,859,000	)		(404,000	)		(4,455,000	)

Income tax benefit		75,000			4,000			71,000

Net loss		(4,784,000	)		(400,000	)		(4,384,000	)

Net loss attributable to noncontrolling interests		564,000			200,000			364,000

Net loss attributable to YOU On Demand shareholders	$	(4,220,000	)	$	(200,000	)	$	(4,020,000	)

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	Three Months Ended
	March 31,			March 31,			Amount			%
	2013			2012			Change			Change
				(Pro Forma)

Revenue	$	1,312,000		$	1,274,000		$	38,000			3	%
Cost of revenue		1,732,000			1,146,000			586,000			51	%
Gross (loss) profit		(420,000	)		128,000			(548,000	)		-428	%

Operating expense:
Selling, general and administrative expenses		2,209,000			2,256,000			(47,000	)		-2	%
Professional fees		326,000			412,000			(86,000	)		-21	%
Depreciation and amortization		657,000			1,200,000			(543,000	)		-45	%
Total operating expense		3,192,000			3,868,000			(676,000	)		-17	%

Loss from operations		(3,612,000	)		(3,740,000	)		128,000			-3	%

Interest & other income / (expense)
Interest income		1,000			3,000			(2,000	)		-67	%
Interest expense		(30,000	)		(2,000	)		(28,000	)		1400	%
Change in fair value of warrant liabilities		(26,000	)		-			(26,000	)		-
Change in fair value of contingent consideration		(42,000	)		(712,000	)		670,000			-94	%
Loss on investment in unconsolidated entities		(3,000	)		(4,000	)		1,000			-25	%
Other		(1,000	)		-			(1,000	)		-

Loss before income taxes and noncontrolling interests		(3,713,000	)		(4,455,000	)		742,000			-17	%

Income tax benefit		38,000			71,000			(33,000	)		-46	%

Net loss		(3,675,000	)		(4,384,000	)		709,000			-16	%

Net loss attributable to noncontrolling interests		330,000			364,000			(34,000	)		-9	%

Net loss attributable to YOU On Demand shareholders	$	(3,345,000	)	$	(4,020,000	)	$	675,000			-17	%

Revenues

Revenues for the three months ended March 31, 2013, totaled $1,312,000, as compared to $1,274,000 for 2012. The increase in revenue of approximately $38,000, or 3%, is attributable to increased revenue from Jinan Broadband. Jinan Broadband’s revenue consisted primarily of sales to our PRC based internet consumers, cable modem consumers, business customers and other internet and cable services.

Gross (loss) Profit

Our gross (loss) profit for the three months ended March 31, 2013 was $(420,000), as compared to $128,000 during 2012. The decrease in gross (loss) profit of approximately $548,000, or 428%, is mainly due to the amortization of content costs related to our VOD business.

Gross (loss) profit as a percentage of revenue was (32)% for the three months ended March 31, 2013, as compared to 10% during 2012. The decrease is mainly due to content acquisition costs related to our VOD business.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses for the three months ended March 31, 2013, decreased approximately $47,000 to $2,209,000, as compared to $2,256,000 for the three months ended March 31, 2012.

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Salaries and personnel costs are the primary components of selling, general and administrative expenses. For the three months ended March 31, 2013, salaries and personnel costs accounted for 58% of our selling, general and administrative expenses. For the three months ended March 31, 2013, salaries and personnel costs totaled $1,286,000, a decrease of $142,000, or 10%, as compared to $1,428,000 for the same period of 2012.

The other major components of our selling, general and administrative expenses include marketing and promotions, technology, rent and travel. For the three months ended March 31, 2013, these costs totaled $486,000, an increase of $220,000, or 82% as compared to $266,000 in 2012. The increase is mainly due to the growth and development of 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 VOD business. Our costs for professional fees decreased $86,000, or 21%, to $326,000 for the three months ended March 31, 2013, from $412,000 during 2012. The decrease in professional fees was primarily due to a reduction in legal fees.

Depreciation and Amortization

Our depreciation expense decreased $340,000, or 46%, to $390,000 in the three months ended March 31, 2013, from $730,000 during 2012, The decrease is due to certain equipment at Jinan Broadband being taken out of service due to changes in customer needs. As such, the Company ceased depreciating such equipment.

Our amortization expense decreased $203,000, or 43%, to $267,000 in the three months ended March 31, 2013, from $470,000 during 2012. The decrease is due to Sinotop Hong Kong Non-compete Agreement having been fully amortized as of January 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 $26,000 for the three months ended March 31, 2013 (none 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 $42,000 and $712,000 for the three months ended March 31, 2013 and 2012, respectively. The loss is primarily due to increases in our closing stock price.

Net Loss Attributable to Non-controlling Interest

49% of the operating loss of our Jinan Broadband subsidiary is allocated to Jinan Parent, the 49% co-owner of this business. During the three months ended March 31, 2013, $113,000 of our operating losses from Jinan Broadband was allocated to Jinan Parent, as compared to $283,000 during the same period of 2012.

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 March 31, 2013, 217,000 of our operating loss from Zhong Hai Video was allocated to Hua Cheng, as compared to $81,000 during the same period of 2012.

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Liquidity and Capital Resources

As of March 31, 2013, we had cash and cash equivalents of approximately $2,103,000. Approximately $1,060,000 is held in our Chinese subsidiaries. The company has no plans to repatriate these funds. We had a working capital deficit at March 31, 2013, of approximately $9,215,000.

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

	Three Months Ended
	March 31,			March 31,
	2013			2012
	(unaudited)			(unaudited)
Net cash used in operating activities	$	(2,016,000	)	$	(2,402,000	)
Net cash used in investing activities		(263,000	)		(292,000	)
Net cash provided by financing activities		-			-
Effect of exchange rate changes on cash		1,000			36,000
Net decrease in cash and cash equivalents		(2,278,000	)		(2,658,000	)
Cash and cash equivalents at beginning of period		4,381,000			7,520,000
Cash and cash equivalents at end of period		2,103,000			4,862,000

Operating Activities

The increase in cash used in operating activities relates to corporate and operational costs incurred primarily in the development of our VOD business.

Investing Activities

Cash used in investing activities for the three months ended March 31, 2013 and 2012 was used primarily for (i) additions to property and equipment of $242,000 and $162,000, respectively, and (ii) investments in intangibles of $20,000 and $104,000, respectively.

Financing activities

We anticipate that we will need to raise additional funds to fully implement our business model and related strategies. We believe we have the ability to raise funds by various methods including utilization of our $50 million shelf registration as well as other means of financing. 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 March 31, 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 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.

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Seasonality

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

Critical Accounting Policies 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 March 31, 2013. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 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

Item1.

Legal Proceedings.

There are no material pending legal proceedings to which we are a party or to which any of our property is subject.

Item1A.

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 March 31, 2013.

Item 3.

Defaults Upon Senior Securities.

There were no defaults upon senior securities during the fiscal quarter ended March 31, 2013.

Item 4.

Mine Safety Disclosures.

Item 5.

Other Information.

On May 10, 2012, at our request, Shane McMahon, our Chairman and Chief Executive Officer, 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 principal amount of $3,000,000 (the “Note”). As amended on May 21, 2012 and October 19, 2012, (i) the Note will mature on May 10, 2013, (ii) Mr. McMahon and the Company agreed that the net proceeds of an underwritten public offering of equity or equity-linked securities of the Company is consummated within 60 days of October 19, 2012 (an “Excluded Public Offering”), will not be used to prepay any portion of the outstanding principal or interest owing on the Note prior to May 10, 2013, and (iii) if the Company consummates financing of equity or equity-linked securities of the Company prior to May 10, 2013, other than an Excluded Public Offering, the net proceeds of such financing will be used to prepay the outstanding principal and interest then owing on the Note.

The foregoing description of Amendment No. 3 to the Note is qualified in its entirety by reference to the actual Amendment No. 3 to the Note, a copy of which is filed as Exhibit 10.1 hereto and incorporated herein by reference.

Item 6.

Exhibits.

EXHIBIT INDEX

10.1	Amendment No. 3 to Convertible Promissory Note in $3,000,000 principal amount issued to Shane McMahon.
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

Table of Contents

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 May 15, 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)

Table of Contents

Exhibit Index

Exhibit No.	Description
10.1	Amendment No. 3 to Convertible Promissory Note in $3,000,000 principal amount issued to Shane McMahon.
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