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SCHEDULE 14C INFORMATION

Information Statement Pursuant to Section 14(c) of the Securities Exchange Act of 1934

Check the appropriate box:

o	Preliminary Information Statement	o	Confidential, For Use of the Commission only
			(as permitted by Rule 14c-5(d)(2))
x	Definitive Information Statement

YOU ON DEMAND HOLDINGS, INC.

(Name of Registrant as Specified in Its Charter)

Payment of Filing Fee (Check the appropriate box):

x	No Fee Required
o	Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.

(1) Title of each class of securities to which transaction applies:

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(2) Aggregate number of securities to which transaction applies:

 

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(3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

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(4) Proposed maximum aggregate value of transaction:

 

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(5) Total fee paid:

 

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o  Fee paid previously with preliminary materials:

o  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.

(1) Amount previously paid:

 

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(2) Form, Schedule or Registration Statement No.:

 

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(3) Filing party:

 

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(4) Date filed:

 

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YOU ON DEMAND HOLDINGS, INC.

27 Union Square, West Suite 502

New York, New York  10003

212-206-1216

INFORMATION STATEMENT

WE ARE NOT ASKING YOU FOR A PROXY AND

YOU ARE REQUESTED NOT TO SEND US A PROXY

This Information Statement is first being mailed on or about January 3, 2014, to the holders of record of the outstanding common stock, $0.001 par value per share (the “Common Stock”), of YOU On Demand Holdings, Inc., a Nevada corporation (the “Company”), as of the close of business on December 23, 2013  (the “Record Date”), pursuant to Rule 14c-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  This Information Statement relates to a written consent in lieu of a meeting, dated December 23, 2013 (the “Written Consent”), of the shareholders of the Company owning at least a majority of the outstanding shares entitled to vote on the matters set forth in this Information Statement as of the Record Date (the “Majority Shareholders”).  Except as otherwise indicated by the context, references in this Information Statement to “Company,” “we,” “us” or “our” are references to YOU On Demand Holdings, Inc.

The Written Consent approved the following corporate actions:

·

Approval 1:  Conditionally approved the sale and issuance of up to 16,500,000 shares of the Company’s Series E Convertible Preferred Stock, par value $0.001 (the “Series E Shares”), with such rights, preferences and designations as set forth on the form of Certificate of Designation of Series E Preferred Stock attached hereto as Appendix A (the “Series E COD”), pursuant to a Series E Preferred Stock Purchase Agreement, the form of which is attached hereto as Appendix B (the “Series E Purchase Agreement”);

·

Approval 2:  Conditionally approved, should the Series E Shares not be issued on or before January 31, 2014, the removal of the limitation on the number of shares of the Company’s Common Stock issuable upon conversion of the Company’s Series D 4% Convertible Preferred Stock, par value $0.001 (the “Series D Shares”) as set forth in Section 6(d) of the Certificate of Designation of the Series D Shares filed with the Secretary of State of the State of Nevada on July 5, 2013 (the “Series D COD”); and

·

Approval 3:  Conditionally approved, should the Series E Shares not be issued on or before January 31, 2014, an amendment to the Company’s Articles of Incorporation to increase in the number of authorized Series D Shares issuable by the Company pursuant to the Series D COD from 2,500,000 to 4,000,000.

The Written Consent constitutes the consent of a majority of the total number of shares eligible to vote on matters submitted to a vote of holders of our Common Stock and is sufficient under the Nevada Revised Statutes and our bylaws to approve each of the matters set forth therein.  Accordingly, the matters approved in the Written Consent are not currently being submitted to our other shareholders for a vote.  The action taken by Written Consent will become effective approximately 20 days after the filing of this Information Statement (the “Effective Date”).

This is not a notice of a meeting of shareholders and no shareholders’ meeting will be held to consider the matters described herein.  This Information Statement is being furnished to you solely for the purpose of informing you of the matters described herein pursuant to Section 14 of the Exchange Act and the regulations promulgated thereunder, including Regulation 14C.

By Order of the Board of Directors,

 

Marc Urbach

President

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GENERAL INFORMATION

 

This Information Statement is being first mailed on or about January 3, 2014 to our shareholders by our Board of Directors to provide material information regarding corporate actions that have been approved by the Written Consent of the Majority Shareholders.

Only one copy of this Information Statement is being delivered to two or more shareholders who share an address unless we have received contrary instruction from one or more of such shareholders.  We will promptly deliver, upon written or oral request, a separate copy of the Information Statement to a security holder at a shared address to which a single copy of the document was delivered.  If you would like to request additional copies of the Information Statement, if in the future you would like to receive multiple copies of information statements, proxy statements or annual reports, or if you are currently receiving multiple copies of these documents and would like to receive only a single copy, please so instruct us by calling or writing to our corporate secretary at the Company’s executive offices at the telephone number or address specified above.

PLEASE NOTE THAT THIS IS NOT A REQUEST FOR YOUR VOTE OR A PROXY STATEMENT, BUT RATHER AN INFORMATION STATEMENT DESIGNED TO INFORM YOU OF CORPORATE ACTIONS TAKEN BY THE MAJORITY SHAREHOLDERS.

The entire cost of furnishing this Information Statement will be borne by the Company.  We will request brokerage houses, nominees, custodians, fiduciaries and other like parties to forward this Information Statement to the beneficial owners of the Common Stock held of record by them.

AUTHORIZATION BY THE BOARD OF DIRECTORS

AND THE MAJORITY SHAREHOLDERS

Under the Nevada Revised Statutes and our bylaws, any action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting if, before or after the action, a written consent thereto is signed by shareholders holding at least a majority of the voting power of the outstanding securities entitled to vote on the relevant matters.

On the Record Date, we had (i) 15,793,314 shares of Common Stock issued and outstanding, with the holders thereof being entitled to cast one vote per share, (ii) 7,000,000 shares of the Company’s Series A Preferred Stock, par value $0.001 (the “Series A Shares”) issued and outstanding, with the holders thereof being entitled to cast ten (10) votes for every share of Common Stock that is issuable upon conversion of a Series A Share (each Series A Share is convertible into 0.1333333 shares of Common Stock), and (iii) 2,285,714 Series D Shares issued and outstanding, with the holders thereof being entitled to cast one (1) vote for every share of Common stock that is issuable upon conversion of the Series D Shares (as of the Record Date, each Series D Share is convertible into one (1) share of Common Stock).

Pursuant to the listing rules of the Nasdaq Stock Market, the holders of the Series D Shares are not permitted to vote on the matters set forth in Approval 2, and the Series D Shares are therefore excluded from the calculation of votes in favor of Approval 2 on the Written Consent.

CONSENTING SHAREHOLDERS

On December 23, 2013, the Majority Shareholders consented in writing to the approval of the matters set forth herein.  The Majority Shareholders consist of three shareholders which hold a combined 4,651,180 shares of Common Stock, 7,000,000 Series A Shares and 2,285,714 Series D Shares (which Series D Shares, as discussed above, were not counted with respect to the vote on the matters set forth in Approval 2), or approximately 60% of our total outstanding voting securities (and 55.7% of our total outstanding voting securities entitled to vote on Approval 2).  The approvals by the Majority Shareholders will be effective following the expiration of the 20-day period mandated by Rule 14c-2.

PROPOSALS BY SHAREHOLDERS

No shareholder entitled to vote has transmitted any proposal to be acted upon by the Company.

DISSENTERS’ RIGHTS

Under the Nevada Revised Statutes, holders of our Common Stock are not entitled to dissenters’ rights of appraisal with respect to the Written Consent.

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APPROVAL 1:  CONDITIONAL APPROVAL OF THE ISSUANCE OF UP TO 16,500,000 SERIES E SHARES

 

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

In connection with the sale of the Series D Shares, the Company and the Investor agreed to act in good faith and with fair dealing to finalize an agreement, on or before October 31, 2013, for an additional investment of between $12 million and $21 million of Series E Shares, which investment would be contingent upon the Investor obtaining the required funds for the investment and the satisfaction of the closing conditions set forth in the Series E Purchase Agreement (the “Series E Financing”).  The Company and the Investor further agreed that the terms of the Series E Shares would be substantially as set forth in the form of Series E COD attached as an exhibit to the Series D Purchase Agreement.  

On November 4, 2013, in connection with the issuance of the Bridge Note (as defined below), the Company and the Investor entered into Amendment No. 1 to the Series D Purchase Agreement (the “Series D Amendment”), pursuant to which the parties agreed that (i) each party would act in good faith and with fair dealing to finalize the Series E Purchase Agreement on or before the 30^th day following the issuance of the Bridge Note or, at the Investor’s sole option if applicable, January 31, 2014, and (ii) if the Series E Financing is not consummated, the Company shall have until 3 business days following the 30^th day after issuance of the Bridge Note in order to file a registration statement covering the resale of the Series D Shares, or, at the Investor’s sole option if applicable, February 5, 2014.  In connection with the Series D Amendment, the Investor executed a waiver and consent with the Company agreeing, among other things, to waive its right to redeem its Series D Shares as of October 31, 2013, and agreeing that it will not redeem the Series D Shares until the 30^th day following the issuance of the Bridge Note or, at the Investor’s sole option if applicable, January 31, 2014.

On December 4, 2013, the Investor notified the Company that it was exercising its option to (i) extend the date on which the Company and the Investor will agree to act in good faith and with fair dealing to finalize the Series E Agreement to January 31, 2014, (ii) extend the date on which the Company must file a registration statement covering the resale of the Series D Shares until February 5, 2014, and (iii) extend the date on which the Series D Shares become redeemable to January 31, 2014 (the “Extension Notice”).

 

Our Common Stock is listed on the NASDAQ Capital Market and, as a result, we are subject to NASDAQ’s Listing Rules. The potential consummation of the Series E Financing implicates certain of the NASDAQ listing standards requiring prior stockholder approval in order to maintain our listing on the NASDAQ Capital Market, including the following:

  

•

NASDAQ Listing Rule 5635(b) requires stockholder approval when any issuance or potential issuance will result in a “change of control” of the issuer; and

 

•

NASDAQ Listing Rule 5635(d) requires prior stockholder approval for the issuance, other than in a public offering, of common stock (or securities convertible into common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.

 

In order to comply with the above NASDAQ Listing Rules, the Company would need to obtain the approval of its shareholders prior to the issuance of the Series E Shares upon consummation of the Series E Financing.  Accordingly, the Written Consent of the Majority Shareholders will enable the Company to proceed with the Series E Financing on the terms as set forth below.

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On November 4, 2013, the Company issued a convertible note to the Investor in $2,000,000 principal amount (the “Bridge Note”) in consideration for a $2,000,000 contribution to the Company by the Investor. The Bridge Note has an annual interest rate of 4% and matures on January 5, 2015, unless earlier converted or repaid in full.  Upon the consummation of the Series E Financing, the principal amount and all unpaid interest of the Bridge Note shall automatically be converted into Series E Shares at a conversion price equal to the per share purchase price paid for the Series E Shares in the Series E Financing.  The $2,000,000 principal amount of the Bridge Note would be included in, and not in addition to, the total $12 million to $21 million investment in the Series E Financing. 

In addition to the Series E Shares issuable in connection with the Series E Financing, additional Series E Shares may be issuable upon and after the Series E Financing pursuant to that certain Convertible Promissory Note issued by the Company to Mr. Shane McMahon, the Company’s Chairman, dated as of May 10, 2012, as amended as of May 18, 2012, October 19, 2012 and May 10, 2013, in principal amount of $3,000,000.00 (as amended, restated, supplemented or otherwise modified from time to time, including without limitation that certain Waiver concerning provisions of the note between the Company and Mr. McMahon, dated November 4, 2013, the "McMahon Note").  Pursuant to the McMahon Note and the Series D Purchase Agreement, upon consummation of the Series E Financing, the McMahon Note shall be, at Mr. McMahon’s option, repaid in full at the closing of the Series E Financing, or convertible for a period of six months from the closing of the Series E Financing into Series E Shares at a conversion price of $1.75.  As of January 31, 2014, the total amount of principal and accrued interest on the McMahon Note will be $3,207,780.82 (convertible into 1,833,018 Series E Shares), and as of July 31, 2014 (approximately six months following the closing of the Series E Financing and the last date on which Mr. McMahon could opt to convert the McMahon Note into Series E Shares) the total amount of principal and accrued interest on the McMahon Note would be $3,267,287.67 (convertible into 1,867,022 Series E Shares).

Accordingly, following consummation of the Series E Financing, the Company would (i) issue to the Investor between 9,142,857 Series E Shares (for an additional investment of $12 million, or a total investment of $16 million including the Series D Financing) and 14,285,714 Series E Shares (for an additional investment of $21,000,000, or a total investment of $25 million including the Series D Financing), and (ii) potentially issue to Mr. McMahon if he opts to convert the McMahon Note between 1,833,018 Series E Shares (upon immediate conversion) and 1,867,022 Series E Shares (upon a conversion six months following the closing of the Series E Financing). 

The table below sets forth the potential breakdowns of the number of shares which could be issued in the Series E Financing and the total voting power of the Company’s securities held by the Investor following the consummation of the Series E Financing and assumes that Mr. McMahon opts NOT to convert the McMahon Note:

Total Investment1	Series E Shares Issued to  Investor	Voting Power of Series E Shares Issued to the Investor2	Exchange of Series A Shares for Series E Shares	Total Voting Power of Investor Following Series E Financing3
				If McMahon Note Never Converted	If McMahon Note Converted At Closing	If McMahon Note Converted After Six Months
$16 Million	9,142,857	26.7%	(933,333)	51.2%	48.6%	48.5%
$21 Million	12,000,000	32.3%	(933,333)	55.0%	52.4%	52.3%
$25 Million	14,285,714	36.2%	(933,333)	57.6%	55.0%	54.9%

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If issued, the Series E Shares will have such preferences, rights and limitations as set forth in the Series E COD attached hereto as Appendix A.   The Series E Shares would be entitled to vote on all matters submitted to a vote of the Company’s stockholders and entitled to the number of votes equal to the lesser of (i) the number of whole shares of Common Stock into which such Series E Shares are convertible at the record date for the determination of stockholders entitled to vote on such matters, and (ii) the number of whole shares of Common Stock issuable if the conversion price of the Series E Shares is the closing trading price of the Company’s Common Stock as of the end of the trading day immediately preceding the closing date of the Series E Financing.  In addition, the holder of the Series E Shares would be entitled to elect 3 directors to the Company’s board of directors (and such directors may only be removed without cause by the affirmative vote of the holders of a majority of the Series E Shares); provided that the number of directors which the holders of Series E Shares are entitled to appoint shall at all times be in compliance with NASDAQ Stock Market Listing Rule 5640, including without limitation, the requirement that at such time as the holders of Series E Shares hold less than 5% of the total voting securities of the Corporation, the holders of Series E Shares shall no longer have the right to elect or remove such directors. Each Series E Share is initially convertible into one share of Common Stock, subject to adjustment as provided for in the Series E COD.  If the Investor determines in its discretion to convert its Series E Shares into Common Stock, all of the then outstanding Series E Shares must be converted into Common Stock.

In addition, the Series E COD would provide that, so long as at least 25% of the Series E Shares remain outstanding, the Company will not, without the consent of the holders of a majority of the outstanding Series E Shares, and except as otherwise provided in the Series E COD, (i) liquidate, dissolve or wind-up the business and affairs of the Company, or effect any material merger, acquisition or consolidation, or sale of all or substantially all of the assets of the Company, (ii) amend, alter or repeal any provision of the Articles of Incorporation or bylaws of the Company, (iii) alter or change the powers, preferences or rights given to the Series E Shares or alter or amend the Series E COD, (iv) directly and/or indirectly, designate, issue, authorize, create or otherwise permit to exist, any additional shares of senior or parity securities, (v) directly and/or indirectly increase the number of authorized shares of any class or series of the Company’s capital stock, (vi) purchase or redeem (or permit any subsidiary to purchase or redeem) any junior, senior or parity securities, (vii) directly and/or indirectly create, incur or assume any liability or indebtedness for borrowed money that is secured other than equipment leases and other permitted indebtedness, (viii) directly and/or indirectly create, incur or assume any liability or indebtedness for borrowed money that is unsecured, (ix) enter into any agreement with respect to the acquisition of any material business, assets or property, (x) sell, lease, license, surrender, relinquish, encumber, pledge, transfer, amend, convey or otherwise dispose of any business, property or assets having a material market value, except in the ordinary course of business, (xi) enter into any transaction with any affiliate of the Company which would be required to be disclosed in any public filing with the U.S. Securities and Exchange Commission, unless such transaction is expressly approved by a majority of the disinterested directors of the Company, (xii) except with respect to Beijing China Broadband Network Technology Co., Ltd.  and Shandong Lushi Media Co., Ltd. and their respective direct or indirect subsidiaries, create or hold capital stock in any subsidiary that is not wholly owned (either directly or through one or more subsidiaries) by the Company, or sell, transfer or otherwise dispose of any capital stock of any direct or indirect subsidiary of the Company or permit any direct or indirect subsidiary to sell, lease, transfer, exclusively license or otherwise dispose of all or substantially all of the assets of such subsidiary, (xiii) increase or decrease the authorized number of directors constituting the  Company’s board of directors, (xiv) effect any material change to the Company’s business plan or nature of its business, (xv) increase the number of shares of common stock authorized under the Company’s stock option plan, (xvi) alter or change the powers, preferences or rights or increase the number of outstanding shares of any series of preferred stock, or (xvii) approve or finalize the annual budget of the Company, except with the approval of the Company’s financial oversight committee.

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The issuance of the Series E Shares may have a dilutive effect on our existing disinterested shareholders to the extent that the Investor could, in the future, convert the Series E Shares (or cause all Series E Shares to be converted) into between 9,142,857 and 16,500,000 shares of Common Stock (depending on the ultimate size of the investment in the Series E Financing and whether the McMahon Note is converted into Series E Shares). 

 

On December 23, 2013, the Majority Shareholders approved the Company’s entry into the Series E Purchase Agreement, the consummation of the transactions contemplated thereby and the issuance of up to 16,500,000 Series E Shares pursuant thereto.

 

APPROVAL 2: CONDITIONAL APPROVAL OF THE REMOVAL OF THE CONVERSION LIMITATION SET FORTH IN THE SERIES D COD

 

On July 5, 2013, in connection with the Series D Purchase Agreement, the Company sold and issued to the Investor 2,285,714 Series D Shares for $1.75 per share, or a total purchase price of $4,000,000.  Pursuant to Section 6(d) of the Series D COD, the Company shall not issue, upon conversion of the Series D Shares, a number of shares of Common Stock which, when aggregated with any shares of Common Stock issued (i) in connection with any conversion of Series D Shares issued pursuant to the Purchase Agreement and (ii) as a dividend on the Series D Shares issued pursuant to the Purchase Agreement, would exceed 19.99% of the issued and outstanding shares of Common Stock on the day immediately prior to the date of issuance of the Series D Shares (the “Conversion Limitation”).  The Conversion Limitation was included in the Series D COD to ensure compliance with NASDAQ Listing Rule 5635(d) which, as discussed above, requires prior stockholder approval for the issuance, other than in a public offering, of common stock (or securities convertible into common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.  As of the Record Date, the issued and outstanding Series D Shares were convertible into approximately 12.6% of the Company’s Common Stock.

 

The removal of the Conversion Limitation could potentially have a dilutive effect on our existing disinterested shareholders to the extent that all Series D Shares are converted into Common Stock (assuming that the Bridge Note is, prior to such conversion to Common Stock, converted into Series D Shares as discussed in Approval 3 below).  The extent of such dilution would be determinate on the total number of Series D Shares issuable upon conversion of the then outstanding principal and accrued and unpaid interest of the Bridge Note at the time of such conversion.

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On December 23, 2013, the Majority Shareholders (excluding the votes of the Series D Shares as discussed above) approved, in the event that the Company does not consummate the Series E Financing by January 31, 2014,  the removal of the Conversion Limitation set forth in Section 6(d) of the Series D COD. 

 

APPROVAL 3:  CONDITIONAL APPROVAL OF AN AMENDMENT TO THE COMPANY’S ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SERIES D SHARES FROM 2,500,000 TO 4,000,000

 

On November 4, 2013, the Company issued a convertible note to the Investor in $2,000,000 principal amount (the “Bridge Note”) in consideration for a $2,000,000 contribution to the Company by the Investor. The Bridge Note has an annual interest rate of 4% and matures on January 5, 2015, unless earlier converted or repaid in full.  Upon the closing of the Series E Financing, the principal amount and all unpaid interest of the Bridge Note shall automatically be converted into Series E Shares at a conversion price equal to the per share purchase price paid for Series E Shares by the Investor in the Series E Financing.  Pursuant to the terms of the Bridge Note, the Series D Amendment and the Extension Notice, if the Bridge Note is not converted into Series E Shares by January 31, 2014, the principal amount and all accrued and unpaid interest on the Bridge Note may, at the Investor’s option, be converted into Series D Shares at a conversion price of $1.75 per share. 

As of the Record Date, the Company had 2,500,000 Series D Shares authorized for issuance, and 2,285,714 Series D Shares issued and outstanding.  In order to allow for the conversion of the Bridge Note into Series D Shares as discussed above, the Company would need to increase the number of Series D Shares authorized for issuance.  With up to 4,000,000 Series D Shares authorized, the Investor would be able to convert all of the outstanding principal of the Bridge Note and all interest which could accrue during the entire term of the Bridge Note.

The increase in authorized Series D Shares could potentially have a dilutive effect on our existing disinterested shareholders to the extent that the Bridge Note is converted into Series D Shares and such Series D Shares are subsequently converted into Common Stock.  The extent of such dilution would be determinate on the total number of Series D Shares issuable upon conversion of the then outstanding principal and accrued and unpaid interest on the Bridge Note at the time of such conversion.

 

On December 23, 2013, the Majority Shareholders approved, in the event that the Company does not consummate the Series E Financing by January 31, 2014,  an amendment to the Company’s Articles of Incorporation to increase the number of Series D Shares authorized pursuant to the Series D COD from 2,500,000 to 4,000,000. 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this information statement.

In addition to historical information, this information statement contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products or services; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including, and without limitation those identified in Item 1A, “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievements.  Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date of this Information Statement to conform our prior statements to actual results or revised expectations.

Overview

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

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

Principal Factors Affecting Our Financial Performance

Our operating results are primarily affected by the following factors:

·

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

  

·

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

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·

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

Our subsidiary, China Broadband Ltd., 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 Enterprise Income Tax Law, our Chinese subsidiaries and VIEs are subject to an earned income tax of 25.0%.

  

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

Consolidated Results of Operations

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 and 2011 financial information to exclude the impact of Shandong Media which was deconsolidated effective July 1, 2012 (See Note 11 to the audited financial statements included in this report for more information regarding the Deconsolidation of Shandong Media).

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		Pro Forma Comparisons
		Year Ended
		As Reported December 31, 2012				Shandong Media 6 months				Pro Forma December 31, 2012 (excluding Shandong Media)
Revenue		$	6,873,000			$	1,696,000			$	5,177,000
Cost of revenue			7,083,000				1,229,000				5,854,000
Gross profit (loss)			(210,000	)			467,000				(677,000	)
Operating expense:
Selling, general and administrative expenses			10,811,000				717,000				10,094,000
Professional fees			1,345,000				-				1,345,000
Depreciation and amortization			4,083,000				58,000				4,025,000
Impairments of long-lived assets			840,000				-				840,000
Total operating expense			17,079,000				775,000				16,304,000
Loss from operations			(17,289,000	)			(308,000	)			(16,981,000	)
Interest & other income / (expense)
Interest income			9,000				-				9,000
Interest expense			(79,000	)			-				(79,000	)
Right to purchase expense			(44,000	)			-				(44,000	)
Cost of reset provision			(659,000	)			-				(659,000	)
Change in fair value of warrant liabilities			647,000				-				647,000
Change in fair value of contingent consideration			1,313,000				-				1,313,000
Gain on investment in unconsolidated entities			68,000				-				68,000
Loss on investment write-off			(95,000	)			-				(95,000	)
Loss on write-off of uncollectible loans			(514,000	)			(473,000	)			(41,000	)
Gain on deconsolidation of Shandong Media			142,000				-				142,000
Other			(140,000	)			-				(140,000	)
Loss before income taxes and noncontrolling interests			(16,641,000	)			(781,000	)			(15,860,000	)
Income tax benefit			353,000				9,000				344,000
Net loss			(16,288,000	)			(772,000	)			(15,516,000	)
Net loss attributable to noncontrolling interests			2,074,000				386,000				1,688,000
Net loss attributable to YOU On Demand shareholders		$	(14,214,000	)		$	(386,000	)		$	(13,828,000	)
Deemed dividends on preferred stock			(924,000	)			-				(924,000	)
Net loss attributable to YOU on Demand common shareholders		$	(15,138,000	)		$	(386,000	)		$	(14,752,000	)

 

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		Pro Forma Comparisons
		Year Ended
		As Reported December 31, 2011				Shandong Media 12 months				Pro Forma December 31, 2011 (excluding Shandong Media)
Revenue		$	7,868,000			$	2,993,000			$	4,875,000
Cost of revenue			5,526,000				2,159,000				3,367,000
Gross profit			2,342,000				834,000				1,508,000
Operating expense:
Selling, general and administrative expenses			8,801,000				1,306,000				7,495,000
Professional fees			2,115,000				5,000				2,110,000
Depreciation and amortization			4,424,000				110,000				4,314,000
Impairments of long-lived assets			244,000				-				244,000
Total operating expense			15,584,000				1,421,000				14,163,000
Loss from operations			(13,242,000	)			(587,000	)			(12,655,000	)
Interest & other income / (expense)
Interest income			11,000				-				11,000
Interest expense			(2,000	)			-				(2,000	)
Stock purchase right			(194,000	)			-				(194,000	)
Change in fair value of contingent consideration			3,000				-				3,000
Loss on investment in unconsolidated entities			(14,000	)			-				(14,000	)
Gain on deconsolidation of AdNet			470,000				-				470,000
Other			(44,000	)			(2,000	)			(42,000	)
Loss before income taxes and noncontrolling interests			(13,012,000	)			(589,000	)			(12,423,000	)
Income tax benefit			370,000				95,000				275,000
Net loss			(12,642,000	)			(494,000	)			(12,148,000	)
Net loss attributable to noncontrolling interests			1,372,000				247,000				1,125,000
Net loss attributable to YOU On Demand shareholders		$	(11,270,000	)		$	(247,000	)		$	(11,023,000	)

 

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The following table sets forth key components of our results of operations. As noted above, the table shows a Pro Forma 2012 and 2011 which excludes the impact of Shandong Media.

		Year Ended
		December 31, 2012 (Pro Forma)				December 31, 2011 (Pro Forma)				Amount Change				% Change
Revenue		$	5,177,000			$	4,875,000			$	302,000				6	%
Cost of revenue			5,854,000				3,367,000				2,487,000				74	%
Gross (loss) profit			(677,000	)			1,508,000				(2,185,000	)			-145	%
Operating expense:
Selling, general and administrative expenses			10,094,000				7,495,000				2,599,000				35	%
Professional fees			1,345,000				2,110,000				(765,000	)			-36	%
Depreciation and amortization			4,025,000				4,314,000				(289,000	)			-7	%
Impairments of long-lived assets			840,000				244,000				596,000				244	%
Total operating expense			16,304,000				14,163,000				2,141,000				15	%
Loss from operations			(16,981,000	)			(12,655,000	)			(4,326,000	)			34	%
Interest & other income / (expense)
Interest income			9,000				11,000				(2,000	)			-18	%
Interest expense			(79,000	)			(2,000	)			(77,000	)			3,850	%
Stock purchase right			(44,000	)			(194,000	)			150,000				-77	%
Cost of reset provision			(659,000	)			-				(659,000	)			-
Change in fair value of warrant liabilities			647,000				-				647,000				-
Change in fair value of contingent consideration			1,313,000				3,000				1,310,000				43667	%
Gain on investment in unconsolidated entities			68,000				(14,000	)			82,000				-586	%
Loss on investment write-off			(95,000	)			-				(95,000	)			-
Loss on write-off of uncollectible loans			(41,000	)			-				(41,000	)			-
Gain on deconsolidation of Shandong Media			142,000				-				142,000				-
Gain on disposal of AdNet			-				470,000				(470,000	)			-100	%
Other			(140,000	)			(42,000	)			(98,000	)			233	%
Loss before income taxes and noncontrolling interests			(15,860,000	)			(12,423,000	)			(3,437,000	)			28	%
Income tax benefit			344,000				275,000				69,000				25	%
Net  loss			(15,516,000	)			(12,148,000	)			(3,368,000	)			28	%
Net loss attributable to noncontrolling interests			1,688,000				1,125,000				563,000				50	%
Net loss attributable to YOU On Demand shareholders		$	(13,828,000	)		$	(11,023,000	)		$	(2,805,000	)			25	%
Deemed dividends on preferred stock			(924,000	)			-				(924,000	)			-
Net loss attributable to YOU on Demand common shareholders		$	(14,752,000	)		$	(11,023,000	)		$	(3,729,000	)

 

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The information provided below represents pro forma amounts for 2011 to exclude the impact of Shandong Media, which was deconsolidated effective July 1, 2012 (see Note 11 to the audited financial statements included in this report for more information on the Deconsolidation of Shandong Media).

Revenues

Revenues for the year ended December 31, 2012, totaled $5,177,000, as compared to $4,875,000 for 2011. The increase in revenue of approximately $302,000, or 6%, 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 of $5,172,000, an increase of $320,000, or 7%, as compared to $4,852,000 during 2011. The increase is primarily related to an increase in sales to our business customers.

Gross (loss) Profit

Our gross (loss) profit for the year ended December 31, 2012 was $(677,000), as compared to $1,508,000 during 2011.  The decrease in gross (loss) profit of approximately $2,185,000, or 145%, is mainly due to the amortization of content costs related to our VOD business.

Gross (loss) profit as a percentage of revenue was (13)% for the year ended December 31, 2012, as compared to 30% during 2011. The decrease is mainly due to content acquisition costs related to our VOD business.

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Selling, General and Administrative Expenses

Our selling, general and administrative expenses for the year ended December 31, 2012, increased approximately $2,599,000 to $10,094,000, as compared to $7,495,000 for the year ended December 31, 2011.  The increase is mainly due to increased costs related to the development of our VOD business.

Salaries and personnel costs are the primary components of selling, general and administrative expenses. For the year ended December 31, 2012, salaries and personnel costs accounted for 56% of our selling, general and administrative expenses. For the year ended December 31, 2012, salaries and personnel costs totaled $5,566,000, an increase of $1,502,000, or 37%, as compared to $4,064,000 for the same period of 2011. The increase in our salaries and personnel costs increased because of the growth and development of our VOD business.

The other major components of our selling, general and administrative expenses include marketing and promotions, technology, rent and travel. For the year ended December 31, 2012, these costs totaled $2,447,000, an increase of $694,000, or 40% as compared to $1,753,000 in 2011.  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 $765,000, or 36%, to $1,345,000 for the year ended December 31, 2012, from $2,110,000 during 2011.  Such decrease in professional fees was primarily due to increased legal fees in 2011 during the early stages of development of our VOD business.

Depreciation and Amortization

Our depreciation expense decreased $438,000, or 18%, to $2,033,000 in the year ended December 31, 2012, from $2,471,000 during 2011, 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 increased $149,000, or 8%, to $1,992,000 in the year ended December 31, 2012, from $1,843,000 during 2011.  The increase is due to software, licenses and website development costs being recognized in 2012.

Impairment of Long-lived Assets

In 2012, we recorded an impairment charge of $840,000 related to our equipment assets at our Jinan Broadband subsidiary as discussed in Note 7 of our audited consolidated financial statements included in this report.

  

Right to Purchase Expense

 

FIL Investment Management (Hong Kong) Limited (“Fidelity”), a professional fiduciary for various accounts, had the right to purchase up to 5,625,000 shares of our common stock pursuant to the June 7, 2011 private placement. We recorded a charge of $44,000 for the year ended December 31, 2012, as compared to $194,000 for the same period of 2011, related to the valuation of this right to purchase.

Cost of Reset Provision

As a result of the negative clawback provisions included in our warrant agreements associated with our August 2012 private financings, we have reset the exercise price from $4.25 per share to $1.50 per share.  Accordingly, we valued the cost of this reset provision and recorded a charge to operations of $659,000 for the year ended December 31, 2012.

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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 gain of $647,000 for the year ended December 31, 2012.  The gain is primarily due to the decrease 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 gain of approximately $1,313,000 and $3,000 for the years ended December 31, 2012 and 2011, respectively. The gain is primarily due to decreases in our closing stock price.

Loss on Investment Write-off

In 2011, we entered into a purchase agreement with “Shandong Fu Ren” whereby we were obligated to pay approximately $157,000 to acquire 51% ownership of Shanghai Tianduo.  We advanced approximately $47,000 in 2011.  Since we entered into the agreement in 2011, the direction of our company has changed and thus the value of the investment has diminished.  As such, as of December 31, 2012, we wrote-off the initial investment of $47,000 and accrued a liability of $47,000 as an expected settlement payment to terminate the agreement for a total of $95,000.  In addition, in connection with the investment we advanced funds in the form of a loan for $40,000 which we wrote-off and recorded as loss on uncollectible loan.

 

Gain on Deconsolidation of Shandong Media

Effective July 1, 2012, we deconsolidated our ownership in Shandong Media and recorded a gain of $141,814 as discussed in Note 11 of our audited consolidated financial statements included in this report.

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 year ended December 31, 2012, $1,278,000 of our operating losses from Jinan Broadband was allocated to Jinan Parent, as compared to $705,000 during the same period of 2011.

20% of the operating loss of our Zhong Hai Video joint venture is allocated to Hua Cheng, our 20% joint venture partner. During the year ended December 31, 2012, $399,000 of our operating loss from Zhong Hai Video was allocated to Hua Cheng, as compared to $420,000 during the same period of 2011.

Deemed Dividends on Preferred Stock

We recorded a beneficial conversion feature associated with the Series C Preferred Stock, which was limited to the proceeds allocated to them. Because the preferred stock is immediately convertible at the option of the holder, we recorded deemed dividends of $924,000 from the beneficial conversion feature associated with the issuance of the Series C Preferred Stock.

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

		Three Months Ended
		September 30, 2013 (unaudited)				September 30, 2012 (unaudited)				Amount Change				% Change
Revenue		$	95,000			$	4,000			$	91,000				2275	%
Cost of revenue			712,000				714,000				(2,000	)			0	%
Gross loss			(617,000	)			(710,000	)			93,000				-13	%
Operating expense:
Selling, general and administrative expenses			1,658,000				2,331,000				(673,000	)			-29	%
Professional fees			147,000				138,000				9,000				7	%
Depreciation and amortization			155,000				534,000				(379,000	)			-71	%
Total operating expense			1,960,000				3,003,000				(1,043,000	)			-35	%
Loss from operations			(2,577,000	)			(3,713,000	)			1,136,000				-31	%
Interest & other income / (expense)
Interest income			1,000				-				1,000				-
Interest expense			(30,000	)			(28,000	)			(2,000	)			7	%
Change in fair value of warrant liabilities			(7,000	)			(636,000	)			629,000				-99	%
Change in fair value of contingent consideration			(16,000	)			538,000				(554,000	)			-103	%
Gain on investment in unconsolidated entities			9,000				65,000				(56,000	)			-86	%
Gain on deconsolidation of Shandong Media			-				142,000				(142,000	)			-100	%
Other			(12,000	)			(2,000	)			(10,000	)			500	%
Loss from continuing operations before income taxes and noncontrolling interests			(2,632,000	)			(3,634,000	)			1,002,000				-28	%
Income tax benefit			21,000				96,000				(75,000	)			-78	%
Net loss from continuing operations			(2,611,000	)			(3,538,000	)			927,000				-26	%
Net gain (loss) from discontinued operations (including gain on disposal of $5,616,269)			5,590,000				(899,000	)			6,489,000				-722	%
Net gain (loss)			2,979,000				(4,437,000	)			7,416,000				-167	%
Net loss attributable to noncontrolling interests			193,000				389,000				(196,000	)			-50	%
Net gain (loss) attributable to YOU On Demand shareholders			3,172,000				(4,048,000	)			7,220,000				-178	%
Dividends on preferred stock			(1,030,000	)			-				(1,030,000	)			-
Net gain (loss) attributable to YOU on Demand common shareholders		$	2,142,000			$	(4,048,000	)		$	6,190,000

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Revenues

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

Gross Loss

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

Selling, General and Administrative Expenses

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

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

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

Professional Fees

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

Depreciation and Amortization

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

Our amortization expense decreased $382,000, or 82%, to $85,000 in the three months ended September 30, 2013, from $467,000 during 2012. The decrease is because our non-compete agreement was fully amortized as of January 31, 2013.

Change in Fair value of Warrant Liabilities

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

Change in Fair Value of Contingent Consideration

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

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Gain on sale of Jinan Broadband

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

Net Loss from Discontinued Operations

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

Net Loss Attributable to Non-controlling Interest

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

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

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

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		Pro Forma Comparisons
		Nine Months Ended
		As Reported September 30, 2012				Shandong Media 6 months				Pro Forma September 30, 2012 (excluding Shandong Media)
		(unaudited)				(unaudited)
Revenue		$	1,700,000			$	1,696,000			$	4,000
Cost of revenue			2,739,000				1,229,000				1,510,000
Gross profit			(1,039,000	)			467,000				(1,506,000	)
Operating expense:
Selling, general and administrative expenses			7,131,000				716,000				6,415,000
Professional fees			1,079,000				-				1,079,000
Depreciation and amortization			1,625,000				58,000				1,567,000
Total operating expense			9,835,000				774,000				9,061,000
Loss from operations			(10,874,000	)			(307,000	)			(10,567,000	)
Interest & other income / (expense)
Interest income			3,000				-				3,000
Interest expense			(48,000	)			-				(48,000	)
Right to purchase expense			(44,000	)			-				(44,000	)
Change in fair value of warrant liabilities			(636,000	)			-				(636,000	)
Change in fair value of contingent consideration			74,000				-				74,000
Loss on investment in unconsolidated entities			52,000				-				52,000
Loss on write-off of uncollectible loans			(474,000	)			(474,000	)			-
Gain on deconsolidation of Shandong Media			142,000				-				142,000
Other			(60,000	)			-				(60,000	)
Loss before income taxes and noncontrolling interests			(11,865,000	)			(781,000	)			(11,084,000	)
Income tax benefit			266,000				9,000				257,000
Net  loss from continuing operations			(11,599,000	)			(772,000	)			(10,827,000	)
Net loss from discontinued operations			(1,874,000	)			-				(1,874,000	)
Net loss			(13,473,000	)			(772,000	)			(12,701,000	)
Net loss attributable to noncontrolling interests			1,483,000				386,000				1,097,000
Net loss attributable to YOU On Demand shareholders		$	(11,990,000	)		$	(386,000	)		$	(11,604,000	)

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		Nine Months Ended
		September 30, 2013				September 30, 2012 (Pro Forma)				Amount Change				% Change
		(unaudited)				(unaudited)
Revenue		$	147,000			$	4,000			$	143,000				3575	%
Cost of revenue			2,351,000				1,510,000				841,000				56	%
Gross loss			(2,204,000	)			(1,506,000	)			(698,000	)			46	%
Operating expense:
Selling, general and administrative expenses			5,558,000				6,415,000				(857,000	)			-13	%
Professional fees			773,000				1,079,000				(306,000	)			-28	%
Depreciation and amortization			621,000				1,567,000				(946,000	)			-60	%
Impairments of long-lived assets			311,000				-				311,000				-
Total operating expense			7,263,000				9,061,000				(1,798,000	)			-20	%
Loss from operations			(9,467,000	)			(10,567,000	)			1,100,000				-10	%
Interest & other income / (expense)
Interest income			1,000				3,000				(2,000	)			-67	%
Interest expense			(90,000	)			(48,000	)			(42,000	)			88	%
Right to purchase expense			-				(44,000	)			44,000				-100	%
Change in fair value of warrant liabilities			(37,000	)			(636,000	)			599,000				-94	%
Change in fair value of contingent consideration			(99,000	)			74,000				(173,000	)			-234	%
Loss on investment in unconsolidated entities			8,000				52,000				(44,000	)			-85	%
Gain on deconsolidation of Shandong Media			-				142,000				(142,000	)			-100	%
Other			59,000				(60,000	)			119,000				-198	%
Loss from continuing operations before income taxes and noncontrolling interests			(9,625,000	)			(11,084,000	)			1,459,000				-13	%
Income tax benefit			82,000				257,000				(175,000	)			-68	%
Net loss from continuing operations			(9,543,000	)			(10,827,000	)			1,284,000				-12	%
Net gain (loss) from discontinued operations (including gain on disposal of $5,616,269)			5,255,000				(1,874,000	)			7,129,000				-380	%
Net loss			(4,288,000	)			(12,701,000	)			8,413,000				-66	%
Net loss attributable to noncontrolling interests			835,000				1,097,000				(262,000	)			-24	%
Net loss attributable to YOU On Demand shareholders			(3,453,000	)			(11,604,000	)			8,151,000				-70	%
Dividends on preferred stock			(1,030,000	)			-				(1,030,000	)			-
Net loss attributable to YOU on Demand common shareholders		$	(4,483,000	)		$	(11,604,000	)		$	7,121,000

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Revenues

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

Gross Loss

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

Selling, General and Administrative Expenses

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

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

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

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

Professional Fees

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

Depreciation and Amortization

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

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

Impairment of Long-lived Assets

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

Change in Fair value of Warrant Liabilities

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

Change in Fair Value of Contingent Consideration

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

Gain on sale of Jinan Broadband

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

Net Loss from Discontinued Operations

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

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Net Loss Attributable to Non-controlling Interest

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

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

Liquidity and Capital Resources

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

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

		Nine Months Ended
		September 30, 2013 (unaudited)				September 30, 2012 (unaudited)
Net cash used in operating activities		$	(5,694,000	)		$	(8,258,000	)
Net cash used in investing activities			(638,000	)			(916,000	)
Net cash provided by financing activities			3,151,000				6,466,000
Effect of exchange rate changes on cash			15,000				19,000
Net decrease in cash and cash equivalents			(3,167,000	)			(2,690,000	)
Total cash and cash equivalents at beginning of period			4,381,000				7,520,000
Less cash and cash equivalents of discontinued operations at beginning of period			1,103,000				1,087,000
Cash and cash equivalents of continuing operations at beginning of period			3,278,000				6,433,000
Cash and cash equivalents at end of period		$	1,214,000			$	4,830,000

Operating Activities

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

Investing Activities

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

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Financing activities

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

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

The fact that we have incurred significant continuing losses and continue to rely on debt and equity financings to fund our operations to date, could raise substantial doubt about our ability to continue as a going concern. The unaudited consolidated financial statements included in this report have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty.  As of September 30, 2013 the Company has an accumulated operating loss of approximately $62 million.

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

  

Effects of Inflation

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

 

Off Balance Sheet Arrangements

 

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

Seasonality

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

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.

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Recent Accounting Pronouncements

Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying financial statements.

Security Ownership of Certain Beneficial Owners and Management

 

The following table sets forth information regarding beneficial ownership of our common stock as of December 20, 2013 (i) by each person who is known by us to beneficially own more than 5% of our common stock; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group.

Unless otherwise specified, the address of each of the persons set forth below is c/o YOU On Demand Holdings, Inc., 27 Union Square West, Suite 502, New York, New York, 10003.

 

		Shares Beneficially Owned(1)
		Common Stock(2)		Series A Preferred Stock(3)		Series C  Preferred Stock(4)		Series D Preferred Stock(5)		% Total Voting Power(6)
Name and Address of Beneficial Owner	Office, if any	Shares	% of Class	Shares	% of Class	Shares	% of Class	Shares	% of Class
Directors and Officers
Shane McMahon(7)	Chairman	3,039,999	18.4%	7,000,000	100%	-	-	-	-	44.0%
Xuesong Song	Executive Chairman	-	-	-	-	-	-	2,285,714	100%	8.3%
Weicheng Liu(8)	CEO and Director	2,684,516	16.6%	-	-	-	-	-	-	10.5%
Marc Urbach(9)	CFO	288,070	1.8%	-	-	-	-	-	-	*
James Cassano(10)	Director	15,667	*	-	-	-	-	-	-	*
Michael Birkin	Director	5,000	*	-	-	-	-	-	-	*
Michael Jackson	Director	5,000	*	-	-	-	-	-	-	*
All officers and directors as a group (7 persons named above)		6,038,252	35.2%	7,000,000	100%	-	-	2,285,714	100%	61.3%
5% Security Holders
Shane McMahon	Chairman	3,039,999	18.4%	7,000,000	100%	-	-	-	-	44.0%
Xuesong Song	Executive Chairman	-	-	-	-	-	-	2,285,714	100%	8.3%
Weicheng Liu	CEO and Director	2,684,516	16.6%	-	-	-	-	-	-	10.5%
Steven Oliveira(11) 18 Fieldstone Ct. New City, NY  10956	-	558,980	3.5%	-	-	87,500	100%	-	-	*
FMR LLC(12) 82 Devonshire St. Boston, MA 02109	-	1,334,402	8.4%	-	-	-	-	-	-	4.8%

* Less than 1%

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(1)

Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to our ordinary shares. For each beneficial owner above, any options exercisable within 60 days have been included in the denominator.

 

(2)	Based on 15,793,314 shares of Common Stock issued and outstanding as of December 20, 2013.

 

(3)

Based on 7,000,000 shares of Series A Preferred Stock issued and outstanding as of December 20, 2013.  Each share of Series A Preferred Stock is (i) convertible, at any time at the option of the holder, into 0.13333 shares of Common Stock, and (ii) is entitled to ten votes for each one share of Common Stock that is issuable upon conversion of a shares of Series A Preferred Stock.  Accordingly, the 7,000,000 outstanding shares of Series A Preferred Stock are convertible into 933,333 shares of Common Stock and have the voting power of 9,333,330 shares of Common Stock

 

(4)

Based on 87,500 shares of Series C Preferred Stock issued and outstanding as of December 20, 2013.  Each share of Series B Preferred Stock is convertible, at the holder’s option, into one share of Common Stock; provided, however, that the holder of Series B Preferred Stock may not convert the Series B Preferred Stock into Common Stock to the extent that such holder would beneficially own in excess of 9.99% of the number of shares of Common Stock of the Company outstanding immediately after giving effect to such conversion.  The holder of Series B Preferred Stock may waive the restriction on the conversion of the Series B Shares into Common Stock upon 61 days’ notice to the Company.  In addition, the holders of Series B Preferred Stock are not entitled to vote on matters submitted to a vote of the shareholders of the Company.

 

(5)

Based on 2,285,714 shares of Series D Preferred Stock issued and outstanding as of December 20, 2013.  Each share of Series D Preferred Stock is initially convertible, at the holder’s option, into one share of Common Stock; provided, however, that the holder of Series D Preferred Stock may not convert the Series B Preferred Stock into Common Stock to the extent that such holder would beneficially own in excess of 19.99% of the number of shares of Common Stock of the Company outstanding immediately after giving effect to such conversion.

(6)	Represents total voting power with respect to all shares of our Common Stock and each outstanding series of Preferred Stock.

 

(7)	Includes 533,333 shares underlying options exercisable within 60 days at $3.00 per share, 40,000 shares underlying options exercisable within 60 days at $4.50 per share, and 166,666 shares underlying options exercisable within 60 days at $2.00 per share

  

(8)	Includes 319,167 shares underlying options exercisable within 60 days at $3.75 per share, and 14,167 shares underlying options exercisable within 60 days at $4.50 per share.

 

(9

Includes 1,333 shares underlying options exercisable within 60 days at $75.00 per share, 266,667 shares underlying options exercisable within 60 days at $3.00 per share, 6,667 shares underlying options exercisable within 60 days at $4.50 per share, and 10,625 shares underlying options exercisable within 60 days at $1.65 per share.

(10)	Includes 667 shares underlying options exercisable within 60 days at $33.75 per share, and 10,000 shares underlying options exercisable within 60 days at $3.00 per share.

 

(11)

Includes 226,216 shares of Common Stock underlying warrants which are exercisable within 60 days.  Mr. Steven Oliveira is the sole member of Oliveira Capital, LLC and has voting and dispositive over securities owned by Oliveira Capital, LLC. See Note 4 above with respect to Shares of Series C Preferred Stock and the restrictions on conversion thereof.

 

(12)	Includes 175,000 shares of Common Stock underlying warrants which are exercisable within 60 days.  FMR LLC carries out the voting of the shares under written guidelines established by the Boards of Trustees of the funds over which FMR LLC is deemed to have beneficial ownership.

FINANCIAL STATEMENTS

The full text of our audited consolidated financial statements as of December 31, 2012 and 2011, and our unaudited consolidated financial statements for the nine months ended September 30, 2013, begins on page F-1 of this information statement.

OTHER INFORMATION

For more detailed information about us and other information about the business and operations of our Company, you may refer to our Annual Report on Form 10-K filed on April 5, 2013, which is hereby incorporated herein by reference.  Copies of these documents are available on the SEC’s EDGAR database at www.sec.gov. Copies may also be obtained by written or oral request made to the address and telephone number specified above.

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