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Summary

  • The stock is likely a donut (worth zero).
  • This is the first widely distributed negative report on the company.
  • Revenues were only $165K last quarter, $300K last year.
  • Management have high salaries.
  • Fully diluted, the share count is 34.7M, for a market cap of $120M, and only 4% short interest.

YOU On Demand (NASDAQ:YOD) is an American company that sells movies on demand solely in China. It has gotten on the radar of many American investors from speculation that it is the "Netflix of China". In March, there was a "retail investor frenzy" that caused the stock to rise to over $7 per share. The stock is still working off this frenzy, and has dropped considerably along with other Chinese stocks. I believe if that frenzy hadn't started, it would be trading somewhere between $1.50-$2 today.

Upon analysis, I have found this company is nothing even close to a Netflix of China. Many YOD investors don't know the negative facts about the company, and this is the first widely distributed negative report. The current short position is only about 4% of fully diluted shares, and should rise once the facts are known.

I have a price target on YOD of $1.50 per share by the end of 2014, and $0.50 by the end of 2015.

YOD's Revenues Speaks For Itself

YOD only had $300K in revenues in 2013. For quarter ending 12/31/13 revenues was $162K, and quarter ending 9/30/13 was $95K. This is after its Video On Demand has been available on cable in Chinese households since 2011. The company didn't give any 2014 guidance in its 2013 annual conference call.

These dismal revenue results shows how far YOD is from reaching their goal to justify its current market cap. They are miles away from this goal, and probably will never get close.

As shown on the company's investor fact sheet , YOD has fully diluted shares outstanding of 34.7M, which puts its current market cap at $120M. This puts its P/S multiple at 400x. Its 2013 gross loss was $2.8M, and net loss was $8.1M. It ended the year with $3.8M in cash.

YOD's Cable Business Is Likely Dead

Looking at the business trends, it doesn't take an expert to see that it's likely YOD's cable business is dead. The company has been trying to make it work for years without any success at all. In YOD's 2011 10K it reads:

We currently have distribution agreements with Warner Bros., Disney Media Distribution, Lionsgate, Gravitas Ventures, American Media Works, K2 Communications and Film Buff. We currently reach 3 million cable television homes, having launched in Jinan, Jilin and Cixi in January of 2012. In addition, we plan to expand our content offering to include Kids, Sports, Music, Karaoke and Events. Currently, there is no other provider offering VOD or SVOD services on a national level in China.

In YOD's 2012 10K it reads:

YOU On Demand currently has distribution agreements with Warner Bros. Entertainment, Disney Media Distribution, Paramount Pictures, NBCUniversal, Miramax, Lionsgate, Magnolia Pictures, Screen Media Ventures, Gravitas Ventures, 3Net,,K2 Communications and Film Buff. As of December 31, 2012, YOU On Demand has distribution agreements with 7 Chinese Cable TV broadcast companies in 7 provinces which can reach approximately 18.2 million households. In addition, we plan to expand our content offering to include YOU 3D, YOU TV, YOU Kids, YOU Sports, YOU Music, YOU Karaoke and YOU Events. Currently, there is no other provider offering VOD or SVOD services on a national level in China through a secured digital cable TV set-top box.

In the 10-K for 2013 it says similar to 2012 but that it has potentially reached 20 million households.

As written above, starting in 2013 YOD's distribution agreements had potentially reached over 18 million households starting in 2013. What were the revenues earned from its video on demand service in all those households during 2013? A whopping $300,000. That's an average of $0.16 per household per year. Virtually unused. I could make more revenues running a hot dog stand in Manhattan.

There is no evidence that even the YOD bulls have given that suggests YOD will increase revenues significantly in the coming years. Even if it increases its revenues 3x in 2014 to $1 million, the stock would still be trading at over 120x sales and having negative gross profit. It would take approximately $5 million in revenues to finally have positive gross profit but would still have operating losses. There doesn't appear to be any way the company can ever reach $5 million in sales.

YOD management says they are trying to put the You On Demand logo and movies on the home page of the cable companies. Supposedly that's one of the reasons why the company isn't doing well, because cable viewers don't know where to go to order the movies. But since customers aren't buying YOD's service, cable operators aren't going to give YOD this exclusive real estate. The company has recently spoken about starting a subscription service for Disney movies. But that is nothing new for the company. Here is a video from 2012 of YOD's CEO/Chairman, Shane McMahon, discussing the company and how it's going to do Disney movie subscriptions. At the beginning of the video, it says: "piracy is so common in China, that You On Demand will entice people to pay for movies instead of stealing." Trying to get people to pay for movies that they are getting for free predictably hasn't worked for You On Demand.

After trying this for over two years now with no traction, I believe it is about time YOD calls it quits with the cable business. But does the company have any other options? It already sold the rest of its broadband business in November, 2013 to replenish its cash. Video on demand is its only business now.

YOD Is Trying Out Mobile

In November, 2013, YOD announced that it is going mobile. It announced a partnership with Huawei, and starting in 2013 the YOU Cinema App will come preinstalled on the Huawei Mate smartphone.

The Huwei Ascend Mate is Huawei's phone with the biggest screen of 6.1", and is its "movie phone" . Here is a detailed review of the new Huawei Ascend Mate 2.

YOD is hoping for good things from this relationship, and tells investors that its mobile business will succeed where its cable business has not. I don't predict there will be any significant YOD movie sales with this phone.

The obvious question is: if people aren't buying movies to watch on TV in the comfort of their home, which YOD states is in 20 million households, what would motivate them to buy on their cell phones?

This is a specialized phone, and is more of a "phablet". Those people who are sophisticated enough to buy such a phone already know how to access Baidu, Youku, and LeTV, all competitors to YOD and already have apps on smartphones. Furthermore, they already know how to access free movies in China on Baidu and Youku, so would have no need for You On Demand.

Too Much Competition - Including Piracy

With video on demand and video subscription services, it's a winner takes all business. Think about the two companies that dominate in the US - Amazon and Netflix, mostly Netflix. As small as YOD is, and with its limited resources, there's no way it can ever break out of its slump with the companies it's up against.

YOKU and LeTV are in VOD service and dominate online and mobile video. Like YOD, YOKU and LeTV also have Hollywood content deals.

As shown here, LeTV is a Chinese video website that rakes in over $100 million in revenues per quarter. It has recently invested in the China smart TV market and is moving into cloud computing like Youku and iQiyi (one of Baidu's video sites). How can You On Demand ever compete with that?

LeTV ranks above Tencent and Sohu, but still is far behind Yokou in terms of total monthly watch time for all users. There's also Baidu's sites QVOD, PPS, and iQiyi.

Piracy is also a major competitor. In China, the vast majority of people don't pay for content. Piracy is just a normal way of life for them. They don't even pay for eBooks. In cities, there are pirated DVDs of American movies on every street corner. If someone in China wants to watch a movie, they can just search for it on Baidu and watch it for free. There's even a lot of piracy in the US. For example, here you can watch the new movie Noah for free. In the US, you have to specifically know that URL. In China you can just type in "free movies" on Baidu to watch the movies.

To try and fight piracy in China, in November more than a dozen of China's biggest online video providers sued Baidu for RMB 300 million ($49 million). They claimed that Baidu is the biggest enabler of video piracy in the country. According to them, 90% of pirated content is American movies. These companies would rather Chinese people pay to watch American movies on their sites, and not from Baidu.

Baidu said it is taking measures to end connecting to pirating sites. But that won't stop the problem. Until the Chinese government makes an effort to crack down on pirated movie sites, piracy will prevail. And that isn't happening right now, and will likely not happen for many years. China is still a comparatively reckless, third world country. Piracy won't stop, and even if it did, that's only one of the many competitors for YOD.

YOD's License Fees Are Higher Than Revenues

In YOD's latest report, on page 26 it says:

"Our content license agreements with production companies incorporate minimum guaranteed payment levels and that, as our operations are just evolving, revenues from operations do not yet meet the threshold at which they exceed those costs."

On the balance sheet, it showed deferred current license fees of $1.2M. As this is in current liabilities, it needs to be paid off within the three months. The company didn't report any non-current license fees.

YOD Is Most Likely A Zero

It's clear that the stock is currently massively overvalued. But is there any value there at all? I don't think so. There's no indication that YOD's cash flow will significantly improve in the next couple quarters. Its investment banker, Chardan Capital Markets, earlier this month reiterated a $10 price target and predicts $6M in revenues for 2014. However, the report gave no explanation of how the company will achieve $6M in revenues this year.

Management is fleecing shareholders. SG&A for the last quarter was a whopping $8.3M. That expense generated the paltry $162K for the company in revenues. Page 47 of the latest 10-K shows the executive compensation:

    

Stock

Option

 
  

Salary

Bonus

Awards

Awards (2)

Total

Name and Principal Position

Year

($)

($)

($)

($)

($)

Shane McMahon

2013

255,000 (1)

-

-

-

255,000 (1)

Chairman

2012

255,000 (1)

-

-

141,536

396,536(1)

Weicheng Liu

2013

276,476

-

-

-

276,476

Chief Executive Officer

2012

270,039

-

-

141,536

411,575

Marc Urbach

2013

229,900

-

-

214,795

444,695

President and Chief Financial Officer

2012

229,075

-

-

28,544

257,619

(1) As of October 1, 2012, in an effort to conserve the Company's working capital, Mr. McMahon elected to cease collecting salary until such time as the Company has sufficient revenues from operations. During 2012, the Company paid to Mr. McMahon $191,250. The remaining $63,750 due from 2012 and $255,000 due from 2013 will be paid in 2014 to Mr. McMahon pursuant to his employment agreement dated January 31, 2014.

(2) The assumptions for the valuation of the option awards are included in Note 17 of our audited consolidated financial statements included in this report.

Each one of the directors above got paid equal or more money last year than the company made in revenues. The option awards put many of their total compensation at or above $400K per year. Management will continue paying themselves these salaries as long as investors don't complain and keep buying shares.

Notice the first bullet point. It says "As of October 1, 2012, in an effort to conserve the Company's working capital, Mr. McMahon elected to cease collecting salary until such time as the Company has sufficient revenues from operations."

Now, Mr. McMahon wants to get paid again, and will collect a salary for 2014. Huh? The company hasn't earned sufficient revenues from operations yet, so why is he collecting a salary again?

Indications A Massive Selloff Will Happen This Year

As shown in this SEC filing, C Media limited purchased another $19 million worth of convertible preferred stock in January of this year at an exercise price of $1.75 per share, to total $25 million. I wonder how many were exercised when the stock had went on its run in March. C Media can convert the preferred stock and sell the shares anytime it wants.

On page 52 of the annual report, it states that Shane McMahon loaned the company $3,000,000 on May 10, 2012. McMahon is receiving 4% interest on that note, as well as a convertible option to turn it into preferred stock at a conversion price of $1.75 until December 31, 2014. This conversion is at McMahon's discretion. He has until December 31, 2014 to do this, so he has to convert before the year ends.

Also in the latest 10-K on page 33, a reset provision was enacted. It says:

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.

With the many exercise prices of the warrants and preferred stock below $2 per share, the stock could fall to that level soon if the warrant and preferred stock holders get worried and convert and sell their stock before it falls any closer to the exercise price.

Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: You On Demand Is Likely A Zero