Item 1. Interim Financial Statements
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
|
|
September 30,
2016
|
|
December 31,
2015
|
|
|
(US $)
|
|
(US $)
|
|
|
(Unaudited)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,246
|
|
|
$
|
5,503
|
|
Term deposit
|
|
|
3,175
|
|
|
|
3,265
|
|
Accounts receivable, net
|
|
|
3,484
|
|
|
|
2,549
|
|
Other receivables, net
|
|
|
355
|
|
|
|
1,910
|
|
Prepayment and deposit to suppliers
|
|
|
6,844
|
|
|
|
5,843
|
|
Due from related parties
|
|
|
368
|
|
|
|
41
|
|
Other current assets
|
|
|
28
|
|
|
|
45
|
|
Assets classified as held for sale
|
|
|
1,764
|
|
|
|
1,882
|
|
Total current assets
|
|
|
17,264
|
|
|
|
21,038
|
|
|
|
|
|
|
|
|
|
|
Long-term investments
|
|
|
1,550
|
|
|
|
1,133
|
|
Property and equipment, net
|
|
|
511
|
|
|
|
681
|
|
Intangible assets, net
|
|
|
6,467
|
|
|
|
5,638
|
|
Deposit and prepayment for purchasing of software technology
|
|
|
996
|
|
|
|
1,024
|
|
Goodwill
|
|
|
4,275
|
|
|
|
4,396
|
|
Deferred tax assets-non current
|
|
|
1,365
|
|
|
|
1,550
|
|
Total Assets
|
|
$
|
32,428
|
|
|
$
|
35,460
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term bank loan *
|
|
$
|
449
|
|
|
$
|
-
|
|
Accounts payable *
|
|
|
115
|
|
|
|
95
|
|
Advances from customers *
|
|
|
1,177
|
|
|
|
1,313
|
|
Accrued payroll and other accruals *
|
|
|
537
|
|
|
|
685
|
|
Guarantee payment and prepayment from new investors
|
|
|
918
|
|
|
|
944
|
|
Taxes payable *
|
|
|
3,068
|
|
|
|
3,186
|
|
Other payables *
|
|
|
517
|
|
|
|
234
|
|
Liabilities classified as held for sale *
|
|
|
710
|
|
|
|
913
|
|
Total current liabilities
|
|
|
7,491
|
|
|
|
7,370
|
|
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except for number of shares and per share data)
|
|
September 30,
2016
|
|
December 31,
2015
|
|
|
(US $)
|
|
(US $)
|
|
|
(Unaudited)
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Deferred tax liability-non current *
|
|
|
29
|
|
|
|
118
|
|
Long-term borrowing from a director
|
|
|
131
|
|
|
|
135
|
|
Total Liabilities
|
|
|
7,651
|
|
|
|
7,623
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
-
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
ChinaNet Online Holdings, Inc.’s stockholders’ equity
|
|
|
|
|
|
|
|
|
Common stock (US$0.001 par value; authorized 50,000,000 shares; issued and outstanding 12,158,542 shares and 11,856,304 shares at September 30, 2016 and December 31, 2015, respectively)
|
|
|
12
|
|
|
|
12
|
|
Additional paid-in capital
|
|
|
28,246
|
|
|
|
26,528
|
|
Statutory reserves
|
|
|
2,607
|
|
|
|
2,607
|
|
Retained deficit
|
|
|
(8,033
|
)
|
|
|
(3,870
|
)
|
Accumulated other comprehensive income
|
|
|
1,457
|
|
|
|
2,056
|
|
Total ChinaNet Online Holdings, Inc.’s stockholders’ equity
|
|
|
24,289
|
|
|
|
27,333
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests
|
|
|
488
|
|
|
|
375
|
|
Total equity
|
|
|
24,777
|
|
|
|
27,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
32,428
|
|
|
$
|
35,460
|
|
*All of the VIEs' assets can be used to settle obligations of their
primary beneficiary. Liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s
general assets (Note 2).
** Number of issued and outstanding shares and share amounts for
all periods have been retroactively restated to reflect the Company’s 1 for 2.5 reverse stock split, which was effective
on August 19, 2016 (Note 1).
See notes to condensed consolidated financial statements
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
(In thousands)
|
|
Nine Months Ended September 30,
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(US $)
|
|
(US $)
|
|
(US $)
|
|
(US $)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From unrelated parties
|
|
$
|
25,017
|
|
|
$
|
23,114
|
|
|
$
|
11,741
|
|
|
$
|
8,279
|
|
From related parties
|
|
|
381
|
|
|
|
687
|
|
|
|
161
|
|
|
|
219
|
|
Total revenues
|
|
|
25,398
|
|
|
|
23,801
|
|
|
|
11,902
|
|
|
|
8,498
|
|
Cost of revenues
|
|
|
19,269
|
|
|
|
19,234
|
|
|
|
9,874
|
|
|
|
7,047
|
|
Gross profit
|
|
|
6,129
|
|
|
|
4,567
|
|
|
|
2,028
|
|
|
|
1,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses
|
|
|
3,069
|
|
|
|
3,437
|
|
|
|
1,126
|
|
|
|
1,207
|
|
General and administrative expenses
|
|
|
5,290
|
|
|
|
5,346
|
|
|
|
1,752
|
|
|
|
2,207
|
|
Research and development expenses
|
|
|
1,530
|
|
|
|
1,658
|
|
|
|
514
|
|
|
|
595
|
|
Total operating expenses
|
|
|
9,889
|
|
|
|
10,441
|
|
|
|
3,392
|
|
|
|
4,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,760
|
)
|
|
|
(5,874
|
)
|
|
|
(1,364
|
)
|
|
|
(2,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
72
|
|
|
|
91
|
|
|
|
19
|
|
|
|
28
|
|
Interest expense
|
|
|
(4
|
)
|
|
|
(46
|
)
|
|
|
(4
|
)
|
|
|
(12
|
)
|
Other (expenses)/income
|
|
|
(112
|
)
|
|
|
26
|
|
|
|
(99
|
)
|
|
|
(5
|
)
|
Total other (expenses)/income
|
|
|
(44
|
)
|
|
|
71
|
|
|
|
(84
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense, equity method investments, noncontrolling interests and discontinued operation
|
|
|
(3,804
|
)
|
|
|
(5,803
|
)
|
|
|
(1,448
|
)
|
|
|
(2,547
|
)
|
Income tax (expense)/benefit
|
|
|
(155
|
)
|
|
|
699
|
|
|
|
(3
|
)
|
|
|
391
|
|
Loss before equity method investments, noncontrolling interests and discontinued operation
|
|
|
(3,959
|
)
|
|
|
(5,104
|
)
|
|
|
(1,451
|
)
|
|
|
(2,156
|
)
|
Share of losses in equity investment affiliates
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
Loss from continuing operations
|
|
|
(3,959
|
)
|
|
|
(5,106
|
)
|
|
|
(1,451
|
)
|
|
|
(2,160
|
)
|
Loss from and on disposal of discontinued operation, net of income tax
|
|
|
(60
|
)
|
|
|
(204
|
)
|
|
|
-
|
|
|
|
(95
|
)
|
Net loss
|
|
|
(4,019
|
)
|
|
|
(5,310
|
)
|
|
|
(1,451
|
)
|
|
|
(2,255
|
)
|
Net (income)/loss attributable to noncontrolling interests from continuing operations
|
|
|
(144
|
)
|
|
|
232
|
|
|
|
(21
|
)
|
|
|
174
|
|
Net loss attributable to ChinaNet Online Holdings, Inc.
|
|
$
|
(4,163
|
)
|
|
$
|
(5,078
|
)
|
|
$
|
(1,472
|
)
|
|
$
|
(2,081
|
)
|
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS (CONTINUED)
(In thousands, except for number of shares and per share data)
|
|
Nine Months Ended September 30,
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(US $)
|
|
(US $)
|
|
(US $)
|
|
(US $)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,019
|
)
|
|
$
|
(5,310
|
)
|
|
$
|
(1,451
|
)
|
|
$
|
(2,255
|
)
|
Foreign currency translation loss
|
|
|
(630
|
)
|
|
|
(1,127
|
)
|
|
|
(152
|
)
|
|
|
(1,150
|
)
|
Comprehensive loss
|
|
$
|
(4,649
|
)
|
|
$
|
(6,437
|
)
|
|
$
|
(1,603
|
)
|
|
$
|
(3,405
|
)
|
Comprehensive (income)/loss attributable to noncontrolling interests
|
|
|
(113
|
)
|
|
|
226
|
|
|
|
(19
|
)
|
|
|
168
|
|
Comprehensive loss attributable to ChinaNet Online Holdings, Inc.
|
|
$
|
(4,762
|
)
|
|
$
|
(6,211
|
)
|
|
$
|
(1,622
|
)
|
|
$
|
(3,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.36
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.18
|
)
|
Loss from discontinued operations per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
-
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
11,353,657
|
|
|
|
10,675,308
|
|
|
|
11,358,971
|
|
|
|
10,765,637
|
|
** Weighted average number of shares outstanding and per
share amounts for all periods have been retroactively restated to reflect the Company’s 1 for 2.5 reverse stock split, which
was effective on August 19, 2016 (Note 1).
See notes to condensed consolidated financial statements
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
(US $)
|
|
(US $)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,019
|
)
|
|
$
|
(5,310
|
)
|
Adjustments to reconcile net
loss
to net cash (used in)/provided by operating
activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,170
|
|
|
|
1,321
|
|
Share-based compensation expenses
|
|
|
1,718
|
|
|
|
1,637
|
|
Loss on disposal of fixed assets/other long-term assets
|
|
|
117
|
|
|
|
63
|
|
Provision for allowances for doubtful accounts
|
|
|
-
|
|
|
|
106
|
|
Share of losses in equity investment affiliates
|
|
|
-
|
|
|
|
2
|
|
Loss on deconsolidation of VIEs
|
|
|
9
|
|
|
|
-
|
|
Deferred taxes
|
|
|
155
|
|
|
|
(723
|
)
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,196
|
)
|
|
|
(1,766
|
)
|
Other receivables
|
|
|
1,416
|
|
|
|
1,908
|
|
Prepayment and deposit to suppliers
|
|
|
(1,172
|
)
|
|
|
2,099
|
|
Due from related parties
|
|
|
(24
|
)
|
|
|
(33
|
)
|
Other current assets
|
|
|
16
|
|
|
|
(32
|
)
|
Accounts payable
|
|
|
(129
|
)
|
|
|
(53
|
)
|
Advances from customers
|
|
|
(109
|
)
|
|
|
1,439
|
|
Accrued payroll and other accruals
|
|
|
(146
|
)
|
|
|
81
|
|
Other payables
|
|
|
403
|
|
|
|
140
|
|
Taxes payable
|
|
|
66
|
|
|
|
(25
|
)
|
Commitment and contingencies
|
|
|
(128
|
)
|
|
|
419
|
|
Net cash (used in)/provided by operating activities
|
|
|
(1,853
|
)
|
|
|
1,273
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Payment for office equipment and leasehold improvement
|
|
|
(150
|
)
|
|
|
(310
|
)
|
Long-term investment in and advance to cost/equity method investees
|
|
|
(787
|
)
|
|
|
(185
|
)
|
Payment for purchasing of software technology
|
|
|
(1,977
|
)
|
|
|
(3,878
|
)
|
Proceeds from disposal of VIEs
|
|
|
28
|
|
|
|
-
|
|
Cash effect on deconsolidation of VIEs
|
|
|
(18
|
)
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(2,904
|
)
|
|
|
(4,373
|
)
|
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
(US $)
|
|
(US $)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from short-term bank loan
|
|
|
456
|
|
|
|
-
|
|
Repayment of short-term bank loan
|
|
|
-
|
|
|
|
(810
|
)
|
Repayment of short-term loan to noncontrolling interest of VIE
|
|
|
-
|
|
|
|
(81
|
)
|
Guarantee payment and prepayment from new investors
|
|
|
-
|
|
|
|
993
|
|
Net cash provided by financing activities
|
|
|
456
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
Changes in cash and cash equivalents included in assets held for sale
|
|
|
132
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuation on cash and cash equivalents
|
|
|
(88
|
)
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(4,257
|
)
|
|
|
(3,096
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of the period
|
|
|
5,503
|
|
|
|
5,037
|
|
Cash and cash equivalents at end of the period
|
|
$
|
1,246
|
|
|
$
|
1,941
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax paid
|
|
$
|
2
|
|
|
$
|
133
|
|
Interest expense paid
|
|
$
|
4
|
|
|
$
|
46
|
|
See notes to condensed consolidated financial statements
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
1.
|
Organization and nature of operations
|
ChinaNet Online Holdings, Inc. (the “Company”)
was incorporated in the State of Texas in April 2006 and re-domiciled to become a Nevada corporation in October 2006. On June 26,
2009, the Company consummated a share exchange transaction with China Net Online Media Group Limited (the “Share Exchange”),
a company organized under the laws of British Virgin Islands (“China Net BVI”). As a result of the Share Exchange,
China Net BVI became a wholly owned subsidiary of the Company and the Company is now a holding company, which, through certain
contractual arrangements with operating companies in the People’s Republic of China (the “PRC”), is engaged in
providing advertising, precision marketing, online to offline (O2O) sales channel expansion and the related data services to small
and medium enterprises (“SMEs”) and entrepreneurial management and networking services for entrepreneurs in the PRC.
The Company’s wholly owned subsidiary, China Net
BVI was incorporated in the British Virgin Islands. China Net BVI is the parent holding company of CNET Online Technology Limited,
a Hong Kong company (“China Net HK”), which established and is the parent company of Rise King Century Technology Development
(Beijing) Co., Ltd., a wholly foreign-owned enterprise (“WFOE”) established in the PRC (“Rise King WFOE”).
To satisfy PRC laws and regulations, the Company conducts
certain business in the PRC through its Variable Interest Entities (“VIEs”). Through a series of contractual agreements
between Rise King WFOE and Business Opportunity Online (Beijing) Network Technology Co., Ltd. (“Business Opportunity Online”)
and Beijing CNET Online Advertising Co., Ltd. (“Beijing CNET Online”) (collectively the “PRC Operating Entities”
or the “VIEs”), the Company, through the WFOE, secures significant rights to influence the PRC Operating Entities’
business operations, policies and management, approve all matters requiring shareholder approval, and the right to receive 100%
of the income earned by the VIEs. Pursuant to the contractual agreements, all of the equity owners' rights and obligations of the
VIEs were assigned to Rise King WFOE, which resulted in the equity owners lacking the ability to make decisions that have a significant
effect on the VIEs, Rise King WFOE's ability to extract the profits from the operation of the VIEs and assume the residual benefits
of the VIEs. Due to the fact that Rise King WFOE and its indirect parent are the sole interest holders of the VIEs, the Company
included the assets, liabilities, revenues and expenses of the VIEs in its consolidated financial statements, which is consistent
with the provisions of FASB Accounting Standards Codification ("ASC") Topic 810 “Consolidation”, subtopic
10.
As of September 30, 2016, the Company operated its business
primarily in China through its PRC subsidiaries and PRC operating entities, or VIEs as discussed in the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2015, previously filed with the Securities and Exchange Commission (the
“2015 Form 10-K”).
On August 18, 2016, the Company filed a Certificate of
Amendment to its Articles of Incorporation with the Secretary of State of Nevada to effect a one-for-two and one-half (1 for 2.5)
reverse stock split of the Company’s common stock (the “Common Stock”), which became effective on August 19,
2016 (the “Reverse Stock Split”). When the Reverse Stock Split became effective, each two and one-half shares of issued
and outstanding Common Stock were converted into one newly issued and outstanding share of Common Stock. No fractional shares were
issued in connection with the reverse stock split. Any fractional shares of Common Stock that would have otherwise resulted from
the reverse stock split were rounded up to the nearest full share. The Reverse Stock Split did not change the par value of the
Common Stock and had no effect on the number of authorized shares of Common Stock of the Company. As a result of the Reverse Stock
Split, 30,395,722 shares of Common Stock that were issued and outstanding at August 19, 2016 was reduced to 12,158,542 shares of
Common Stock (taking into account the rounding of fractional shares). All number of shares and per share data have been retroactively
restated to reflect the 1 for 2.5 reverse stock split of the Company wherever applicable for all the periods presented.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
2.
|
Variable interest entities
|
Summarized below is the information related to the consolidated
VIEs’ assets and liabilities as of September 30, 2016 and December 31, 2015, respectively:
|
|
September 30,
2016
|
|
December 31,
2015
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,134
|
|
|
$
|
4,942
|
|
Term deposit
|
|
|
3,175
|
|
|
|
3,265
|
|
Accounts receivable, net
|
|
|
3,477
|
|
|
|
2,492
|
|
Other receivables, net
|
|
|
313
|
|
|
|
1,712
|
|
Prepayment and deposit to suppliers
|
|
|
6,750
|
|
|
|
5,841
|
|
Due from related parties
|
|
|
351
|
|
|
|
24
|
|
Other current assets
|
|
|
8
|
|
|
|
27
|
|
Assets classified as held for sale
|
|
|
1,764
|
|
|
|
1,882
|
|
Total current assets
|
|
|
16,972
|
|
|
|
20,185
|
|
|
|
|
|
|
|
|
|
|
Long-term investments
|
|
|
194
|
|
|
|
1,113
|
|
Property and equipment, net
|
|
|
301
|
|
|
|
503
|
|
Intangible assets, net
|
|
|
4,562
|
|
|
|
5,630
|
|
Deposit and prepayment for purchasing of software technology
|
|
|
996
|
|
|
|
1,024
|
|
Goodwill
|
|
|
4,275
|
|
|
|
4,396
|
|
Deferred tax assets-non current
|
|
|
1,003
|
|
|
|
1,249
|
|
Total Assets
|
|
$
|
28,303
|
|
|
$
|
34,100
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term bank loan
|
|
$
|
449
|
|
|
$
|
-
|
|
Accounts payable
|
|
|
99
|
|
|
|
88
|
|
Advances from customers
|
|
|
1,177
|
|
|
|
1,304
|
|
Accrued payroll and other accruals
|
|
|
260
|
|
|
|
309
|
|
Due to Control Group
|
|
|
10
|
|
|
|
11
|
|
Taxes payable
|
|
|
2,617
|
|
|
|
2,733
|
|
Other payables
|
|
|
181
|
|
|
|
67
|
|
Liabilities classified as held for sale
|
|
|
710
|
|
|
|
913
|
|
Total current liabilities
|
|
|
5,503
|
|
|
|
5,425
|
|
|
|
|
|
|
|
|
|
|
Deferred tax Liabilities-non current
|
|
|
29
|
|
|
|
118
|
|
Total Liabilities
|
|
$
|
5,532
|
|
|
$
|
5,543
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
-
|
|
|
|
129
|
|
All of the VIEs' assets can be used
to settle obligations of their primary beneficiary. Liabilities recognized as a result of consolidating these VIEs do not represent
additional claims on the Company’s general assets.
Summarized below is the information
related to the financial performance of the VIEs reported in the Company’s condensed consolidated statements of operations
and comprehensive loss for the nine and three months ended September 30, 2016 and 2015, respectively:
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
|
|
|
Revenues
|
|
$
|
25,289
|
|
|
$
|
23,499
|
|
Cost of revenues
|
|
|
(19,186
|
)
|
|
|
(19,234
|
)
|
Total operating expenses
|
|
|
(6,384
|
)
|
|
|
(7,821
|
)
|
Loss from discontinued operations
|
|
|
(60
|
)
|
|
|
(204
|
)
|
Net loss before allocation to noncontrolling interests
|
|
|
(603
|
)
|
|
|
(2,993
|
)
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
|
|
|
Revenues
|
|
$
|
11,902
|
|
|
$
|
8,422
|
|
Cost of revenues
|
|
|
(9,872
|
)
|
|
|
(7,047
|
)
|
Total operating expenses
|
|
|
(2,290
|
)
|
|
|
(2,959
|
)
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
(95
|
)
|
Net loss before allocation to noncontrolling interests
|
|
|
(343
|
)
|
|
|
(1,283
|
)
|
|
3.
|
Summary of significant accounting policies
|
The condensed consolidated interim
financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States
of America (“U.S. GAAP”).
The condensed consolidated interim
financial information as of September 30, 2016 and for the nine and three months ended September 30, 2016 and 2015 have been prepared
without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain
information and footnote disclosures, which are normally included in annual consolidated financial statements prepared in accordance
with U.S. GAAP, have been omitted pursuant to those rules and regulations. The condensed consolidated interim financial information
should be read in conjunction with the financial statements and the notes thereto, included in the 2015 Form 10-K.
In the opinion of management, all
adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated
financial position as of September 30, 2016, its consolidated results of operations for the nine and three months ended September
30, 2016 and 2015, and its consolidated cash flows for the nine months ended September 30, 2016 and 2015, as applicable, have been
made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any
future periods.
|
b)
|
Principles of consolidation
|
The condensed consolidated interim
financial statements include the financial statements of all the subsidiaries and VIEs of the Company. All transactions and balances
between the Company and its subsidiaries and VIEs have been eliminated upon consolidation.
|
c)
|
Comparability due to discontinued operation
|
In the fourth fiscal quarter of 2015,
the Company exited its brand management and sales channel building business segment, which qualified for presentation as a discontinued
operation in accordance with ASC Topic 205. As a result, the results of operations of this business was reported in discontinued
operation as a separate component in the Company’s condensed consolidated statements of operations and comprehensive loss
for all periods presented. Certain accounts in the condensed consolidated statements of operations and comprehensive loss for the
nine and three months ended September 30, 2015 and related notes have been retrospectively adjusted to reflect the effect of reclassification
of results of operations reported in discontinued operation as a separate component.
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the related disclosure of contingent assets and liabilities at the date of these condensed consolidated financial
statements, and the reported amounts of revenue and expenses during the reporting period. The Company continually evaluates these
estimates and assumptions based on the most recently available information, historical experience and various other assumptions
that the Company believes to be reasonable under the circumstances. Since the use of estimates is an integral component of the
financial reporting process, actual results could differ from those estimates.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
e)
|
Foreign currency translation
|
The exchange rates used to translate
amounts in RMB into US$ for the purposes of preparing the condensed consolidated financial statements are as follows:
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Balance sheet items, except for equity accounts
|
|
|
6.6778
|
|
|
|
6.4936
|
|
|
|
Nine
Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Items in the statements of operations and comprehensive
loss, and statements of cash flows
|
|
|
6.5771
|
|
|
|
6.1738
|
|
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
Items in the statements of operations and comprehensive loss, and statements of cash flows
|
|
|
6.6648
|
|
|
|
6.2576
|
|
No representation
is made that the RMB amounts could have been, or could be converted into US$ at the above rates.
Advertising costs for the Company’s
own brand building are not includable in cost of revenues, they are expensed when incurred or amortized over the estimated beneficial
period and are included in “sales and marketing expenses” in the statements of operations and comprehensive loss. For
the nine months ended September 30, 2016 and 2015, advertising expenses for the Company’s own brand building were approximately
US$1,684,000 and US$1,740,000, respectively. For the three months ended September 30, 2016 and 2015, advertising expenses for the
Company’s own brand building were approximately US$724,000 and US$520,000, respectively.
|
g)
|
Research and development expenses
|
The Company accounts for the cost
of developing and upgrading technologies and platforms and intellectual property that are used in its daily operations in research
and development cost. Research and development costs are charged to expense when incurred. Expenses for research and development
for the nine months ended September 30, 2016 and 2015 were approximately US$1,530,000 and US$1,658,000, respectively. Expenses
for research and development for the three months ended September 30, 2016 and 2015 were approximately US$514,000 and US$595,000,
respectively.
|
h)
|
Recent accounting standards
|
In February 2016, the FASB issued
ASU No. 2016-02, “Leases (Topic 842)”. The amendments in this ASU requires that a lessee recognize the assets and
liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to
make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the
lease term. For leases with a term of 12 months or less, a lessee is permitted to make an
accounting
policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors
are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective
approach. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15,
2018, including interim periods within those fiscal years. Early application of the amendments in this ASU is permitted for all
entities. The Company is currently evaluating the impact on its consolidated financial position and results of operations upon
adopting these amendments
.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
In April 2016, the FASB issued
ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”.
The amendments in this ASU do not change the core principle of the guidance in Topic 606. Rather, the amendments in this ASU clarify
the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining
the related principles for those areas. The amendments in this ASU affect the guidance in ASU 2014-09, Revenue from Contracts
with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this
ASU are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09).
ASU 2015-14 defers the effective date of ASU 2014-09 by one year. The Company is currently evaluating the impact on its consolidated
financial position and results of operations upon adopting these amendments.
In May 2016, the FASB issued ASU No.
2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”.
The amendments in this ASU do not change the core principle of the guidance in Topic 606. Rather, the amendments in this ASU affect
only the narrow aspects of Topic 606, which include (1) Assessing the Collectibility Criterion and Accounting for Contracts That
Do Not Meet the Criteria for Step 1; (2) Presentation of Sales Taxes and Other Similar Taxes Collected from Customers; (3) Noncash
Consideration; (4) Contract Modifications at Transition Completed Contracts at Transition; (5); and (6) Technical Correction.
The amendments in this ASU affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not
yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date
and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14 defers the effective date
of ASU 2014-09 by one year. The Company is currently evaluating the impact on its consolidated financial position and results
of operations upon adopting these amendments.
Other accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s
consolidated financial statements upon adoption.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Term deposit as of September 30, 2016 and December 31,
2015 represented the amount of cash placed as a term deposit by one of the Company’s operating VIEs in a major financial
institution in China, which management believes is of high credit quality. The term deposit matured on July 7, 2016 and was extended
to July 7, 2017. The interest rate of the term deposit is 2.25% per annum.
|
5.
|
Accounts receivable, net
|
|
|
September 30,
2016
|
|
December 31,
2015
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
6,339
|
|
|
|
5,619
|
|
Allowance for doubtful accounts
|
|
|
(2,855
|
)
|
|
|
(3,070
|
)
|
Accounts receivable, net
|
|
|
3,484
|
|
|
|
2,549
|
|
All of the accounts receivable are non-interest bearing. Based on the assessment of the collectability of
the accounts receivable as of September 30, 2016 and December 31, 2015, the Company provided approximately US$2,855,000 and US$3,070,000
allowance for doubtful accounts, which were primarily related to the accounts receivable of the Company’s internet advertising
and TV advertising business segment with an aging over six months. The Company determines the allowance based on aging data, historical
collection experience, customer specific facts and economic conditions. For the nine and three months ended September 30, 2016,
no allowance for doubtful accounts was provided or reversed. For the nine months ended September 30, 2015, the Company reversed
approximately US$56,000 allowance for doubtful accounts. For the three months ended September 30, 2015, the Company provided approximately
US$21,000 allowance for doubtful accounts. For the nine months ended September 30, 2016, accounts receivable and the related allowance
decreased by approximately US$0.22 million and US$0.13 million, respectively, due to disposal of a VIE during the period.
|
6.
|
Other receivables, net
|
|
|
September 30,
2016
|
|
December 31,
2015
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Term deposit interest receivable
|
|
|
18
|
|
|
|
48
|
|
Staff advances for normal business purpose
|
|
|
37
|
|
|
|
243
|
|
TV advertisement deposit and prepayment receivable
|
|
|
-
|
|
|
|
1,157
|
|
Overdue deposits
|
|
|
949
|
|
|
|
1,130
|
|
Allowance for doubtful debts
|
|
|
(649
|
)
|
|
|
(668
|
)
|
Other receivables, net
|
|
|
355
|
|
|
|
1,910
|
|
TV advertisement deposit
and prepayment receivable as of December 31, 2015 represented the uncollected portion of the deposit and prepayment made to an
agent of one of the provincial satellite TV stations partnered with the Company. The Company terminated its cooperation with this
TV station and its agent upon expiration of the 2014 contract on December 31, 2014. The remaining balance of this deposit and prepayment
as of December 31, 2015 was collected in January 2016.
For advertising resources
purchase contracts signed by the Company with its resources providers, the Company was required to make deposits, which were either
applied to the contract amounts that were needed to be paid with the consent of the counterparty or to be refunded to the Company
of the remaining balance upon expiration of the cooperation. Overdue deposits represented the portion of the contractual deposits,
which related advertising resources purchase contracts had been completed as of each of the reporting dates with no further cooperation.
Based on the assessment of the collectability of these overdue deposits as of September 30, 2016 and December 31, 2015, the Company
provided approximately US$649,000 and US$668,000 allowance for doubtful accounts, respectively, which was related to the deposits
of its internet advertising and TV advertising business segment. For the nine and three months ended September 30, 2016, no allowance
for doubtful accounts was provided or reversed. For the nine and three months ended September 30, 2015, approximately US$162,000
allowance for doubtful accounts was provided.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
7.
|
Prepayments and deposit to suppliers
|
|
|
September 30,
2016
|
|
December 31,
2015
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Deposits to internet resources providers
|
|
|
1,116
|
|
|
|
622
|
|
Prepayments to internet resources providers
|
|
|
4,108
|
|
|
|
3,623
|
|
Deposits to other services providers
|
|
|
1,497
|
|
|
|
1,540
|
|
Other deposits and prepayments
|
|
|
123
|
|
|
|
58
|
|
|
|
|
6,844
|
|
|
|
5,843
|
|
The Company purchases
internet resources from large internet search engines and technical services from suppliers to attract more internet traffic to
its advertising portals and provide value-added services to its clients.
Deposits to internet
resources providers are paid as contractual deposits to the Company’s resources and services suppliers. As of September 30,
2016 and December 31, 2015, deposit to internet resources providers primarily consisted of the contractual deposits paid for purchasing
internet resources from two of the Company’s largest internet resources suppliers.
According to the contracts
signed between the Company and its suppliers, the Company is normally required to pay the contract amounts in advance. These prepayments
will be transferred to cost of revenues when the related services are provided.
Deposits to other
service providers consisted of an approximately US$0.75 million deposit to an intermediary service provider, which the Company
engaged to facilitate the Company to find, select and negotiate with its internet, TV or other media resource suppliers, and another
approximately US$0.75 million deposit for an advisory contract related to finding buyers for liansuo.com and new investors for
the Company. The contract with the intermediary service provider expired on April 30, 2016 and was extended to October 31, 2016.
In accordance with the extended contract, the deposit will be refunded to the Company no later than December 31, 2016.
|
8.
|
Due from related parties
|
|
|
September 30,
2016
|
|
December 31,
2015
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Beijing Saimeiwei Food Equipment Technology Co., Ltd.
|
|
|
33
|
|
|
|
35
|
|
Chuangshi Meiwei (Beijing) International Investment Management Co., Ltd.
|
|
|
157
|
|
|
|
4
|
|
Guohua Shiji (Beijing) Communication Co., Ltd.
|
|
|
178
|
|
|
|
-
|
|
Beijing Saturday Education Technology Co., Ltd.
|
|
|
-
|
|
|
|
2
|
|
|
|
|
368
|
|
|
|
41
|
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Related parties of
the Company represented direct or indirect unconsolidated investees of the Company or entities that are directly or indirectly
owned by Mr. Handong Cheng or Mr. Xuanfu Liu, the owners of the Company’s PRC VIEs, Business Opportunities Online and Beijing
CNET Online before the Offshore Restructuring. The Company provides advertising and marketing services to these related parties
in its normal course of business on the same terms as those provided to its unrelated clients. Due from related parties represented
the outstanding receivables for the advertising and marketing services that the Company provided to these related parties as of
each reporting date. As of September 30, 2016, due from related parties also included short-term working capital loans of RMB1.0
million (approximately US$0.15 million) and RMB1.05 million (approximately US$0.16 million) to Chuangshi Meiwei and Guohua Shiji,
respectively. The working capital loans are non-interest bearing and needs to be repaid to the Company within one year.
|
9.
|
Assets and liabilities classified as held for sale
|
In the fourth fiscal
quarter of 2015, the Company committed to a plan to sell one of its internet advertising operating VIEs, Beijing Chuang Fu Tian
Xia, also known as liansuo.com., which did not qualify for presentation as a discontinued operation, as it was not considered a
significant portion of the Company’s internet advertising and data service business segment. The Company expects to consummate
the transaction before March 31, 2017 and does not expect to have any continued involvement with the entity after the disposal
date.
The Company classified
the assets and liabilities of the disposal group as held for sale as of each reporting date and presented separately in the asset
and liability section, respectively. The assets and liabilities held by the disposal group are as follows:
|
|
September 30,
2016
|
|
December 31,
2015
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
Assets classified as held for sale
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
46
|
|
|
|
181
|
|
Accounts receivable, net
|
|
|
136
|
|
|
|
53
|
|
Other receivables, net
|
|
|
116
|
|
|
|
95
|
|
Advance to suppliers
|
|
|
348
|
|
|
|
366
|
|
Property and equipment, net
|
|
|
35
|
|
|
|
43
|
|
Deferred tax assets
|
|
|
194
|
|
|
|
298
|
|
Goodwill allocated to the disposal group
(1)
|
|
|
889
|
|
|
|
914
|
|
Inter-co balances elimination
(2)
|
|
|
-
|
|
|
|
(68
|
)
|
Total assets classified as held for sale
|
|
|
1,764
|
|
|
|
1,882
|
|
|
|
|
|
|
|
|
|
|
Liabilities classified as held for sale
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
-
|
|
|
|
154
|
|
Advance from customers
|
|
|
550
|
|
|
|
588
|
|
Accrued payroll and other accruals
|
|
|
37
|
|
|
|
50
|
|
Taxes payable
|
|
|
-
|
|
|
|
9
|
|
Other payables
|
|
|
123
|
|
|
|
364
|
|
Inter-co balances elimination
(2)
|
|
|
-
|
|
|
|
(252
|
)
|
Total liabilities classified as held for sale
|
|
|
710
|
|
|
|
913
|
|
|
(1)
|
Liansuo.com (the disposal group) is a portion of the Company’s internet advertising and data
service reporting unit that constitutes a business. Goodwill allocated to the disposal group is calculated based on the relative
fair value of liansuo.com and the remaining portion of the reporting unit that will be retained.
|
|
(2)
|
Inter-company balances are part of the disposal group’s assets or liabilities, but were eliminated
in deriving the consolidated financial statements.
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
10.
|
Long-term investments
|
|
|
September 30,
2016
|
|
December 31,
2015
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Equity method investments:
|
|
|
|
|
|
|
|
|
Investment in equity method investees
|
|
|
737
|
|
|
|
778
|
|
Advance to equity method investees
|
|
|
78
|
|
|
|
80
|
|
Impairment on equity method investments
|
|
|
(815
|
)
|
|
|
(838
|
)
|
Total equity method investments
|
|
|
-
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
Cost method investments:
|
|
|
|
|
|
|
|
|
Investment in cost method investees
|
|
|
1,550
|
|
|
|
1,113
|
|
|
|
|
|
|
|
|
|
|
Total long-term investments
|
|
|
1,550
|
|
|
|
1,133
|
|
Equity method investments
As of December 31,
2015, the Company beneficially owned 23.18% and 25.5% equity interest in Shenzhen Mingshan and Zhao Shang Ke Hubei, respectively.
Based on the facts of the significant decline in level of business activities during 2015, insufficient amount of working capital
and the lack of commitment from majority shareholders, these two investment affiliates had become dormant and the possibility of
the business recovery is remote. As a result, the Company reduced the carrying value of these investments to zero as of December
31, 2015.
In 2015, the Company
co-incorporated ChinaNet Korea with three unaffiliated individuals and obtained 40% of the equity interest in ChinaNet Korea. During
the first fiscal quarter of 2016, the Company and other investors of ChinaNet Korea deregistered the entity and re-incorporated
it with new investors involved. The Company invested US$7,500 and obtained 15% of the equity interest in ChinaNet Korea through
the re-incorporation, which is now accounted for under cost method of accounting (See table below). ChinaNet Korea has not conducted
any business activities.
Cost method investments
As of September 30,
2016, the Company beneficially owned a 19% equity interest in ChinaNet Chuang Tou and Guohua Shiji, respectively, a 15% equity
interest in ChinaNet Korea and a 10% equity interest in Chuangshi Meiwei and Beijing Saturday, respectively. The Company accounts
for these investments under cost method of accounting. The following table summarizes the movement of the investments in cost method
investees for the nine months ended September 30, 2016:
|
|
ChinaNet
Korea
|
|
Beijing
Saturday
|
|
Chuangshi
Meiwei
|
|
Guohua
Shiji
|
|
ChinaNet
Chuang Tou
|
|
Total
|
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015 (audited)
|
|
|
-
|
|
|
|
17
|
|
|
|
154
|
|
|
|
3
|
|
|
|
939
|
|
|
|
1,113
|
|
Investments during the year
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26
|
|
|
|
434
|
|
|
|
468
|
|
Exchange translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
(27
|
)
|
|
|
(31
|
)
|
Balance as of September 30, 2016 (Unaudited)
|
|
|
8
|
|
|
|
17
|
|
|
|
150
|
|
|
|
29
|
|
|
|
1,346
|
|
|
|
1,550
|
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
11.
|
Property and equipment, net
|
|
|
September 30,
2016
|
|
December 31,
2015
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Leasehold improvement
|
|
|
234
|
|
|
|
382
|
|
Vehicles
|
|
|
749
|
|
|
|
839
|
|
Office equipment
|
|
|
1,478
|
|
|
|
1,376
|
|
Electronic devices
|
|
|
1,139
|
|
|
|
1,171
|
|
Property and equipment, cost
|
|
|
3,600
|
|
|
|
3,768
|
|
Less: accumulated depreciation
|
|
|
(2,929
|
)
|
|
|
(2,922
|
)
|
Less: impairment loss on abandoned fixed assets
|
|
|
(160
|
)
|
|
|
(165
|
)
|
Property and equipment, net
|
|
|
511
|
|
|
|
681
|
|
Depreciation expenses
in the aggregate for the nine months ended September 30, 2016 and 2015 were approximately US$193,000 and US$258,000, respectively.
Depreciation expenses in the aggregate for the three months ended September 30, 2016 and 2015 were approximately US$56,000 and
US$84,000, respectively.
12.
|
Intangible assets, net
|
|
|
September 30,
2016
|
|
December 31,
2015
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
Domain name
|
|
|
1,446
|
|
|
|
1,488
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
Contract backlog
|
|
|
-
|
|
|
|
191
|
|
Customer relationship
|
|
|
1,995
|
|
|
|
3,340
|
|
Non-compete agreements
|
|
|
1,098
|
|
|
|
1,321
|
|
Software technologies
|
|
|
307
|
|
|
|
316
|
|
Cloud compute software technology
|
|
|
1,390
|
|
|
|
1,429
|
|
Intelligent marketing data service platform
|
|
|
4,835
|
|
|
|
4,973
|
|
Internet safety, information exchange security and data encryption software
|
|
|
1,947
|
|
|
|
-
|
|
Other computer software
|
|
|
106
|
|
|
|
108
|
|
Intangible assets, cost
|
|
|
13,124
|
|
|
|
13,166
|
|
Less: accumulated amortization
|
|
|
(4,709
|
)
|
|
|
(4,845
|
)
|
Less: accumulated impairment losses
|
|
|
(1,948
|
)
|
|
|
(2,683
|
)
|
Intangible assets, net
|
|
|
6,467
|
|
|
|
5,638
|
|
Amortization expenses
in aggregate for the nine months ended September 30, 2016 and 2015 were approximately US$977,000 and US$1,063,000, respectively.
Amortization expenses in aggregate for the three months ended September 30, 2016 and 2015 were approximately US$354,000 and US$349,000,
respectively.
Based on the current
carrying value of the finite-lived intangible assets recorded, which weighted average remaining useful life was 7.01 years as of
September 30, 2016, and assuming no further subsequent impairment of the underlying intangible assets, the estimated future amortization
expenses is approximately US$353,000 for the three months ended December 31, 2016, approximately US$945,000 for the year ended
December 31, 2017 and approximately US$940,000 each year for the year ended December 31, 2018 through 2020.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
For the nine months ended September 30, 2016, intangible assets, the related accumulated amortization and
accumulated impairment loss decreased by approximately US$1.63 million, US$0.97 million and US$0.66 million, respectively, due
to disposal of a VIE during the period.
13.
|
Deposit and prepayment for purchasing of software technology
|
In May 2015, the Company entered into a contract to purchase
software products related to cloud video management system from an unrelated third party with a total contract amount of RMB9.5
million (approximately US$1.4 million). As of September 30, 2016 and December 31, 2015, the Company had paid in the aggregate of
RMB6.65 million (approximately US$1.0 million) in accordance with the payment schedule set forth in the contract. The Company is
currently in test trials for this system. The transaction as contemplated under the contract is expected to be consummated in 2016.
|
|
Amount
|
|
|
US$(’000)
|
|
|
|
Balance as of December 31, 2015 (audited)
|
|
|
4,396
|
|
Exchange translation adjustment
|
|
|
(121
|
)
|
Balance as of September 30, 2016 (unaudited)
|
|
|
4,275
|
|
Short-term bank loan as of September 30, 2016 represented
a short-term bank loan of RMB3 million (approximately US$0.45 million) borrowed by one of the Company’s VIEs from a major
financial institution in China, under a bank credit facility of RMB5 million (approximately US$0.75 million), to supplement its
short-term working capital needs. The short-term bank loan will mature on July 18, 2017. The interest rate of the short-term bank
loan is 5.22% per annum, which is 20% over the benchmark rate of the People’s Bank of China (the “PBOC”).
|
16.
|
Accrued payroll and other accruals
|
|
|
September 30,
2016
|
|
December 31,
2015
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Accrued payroll and staff welfare
|
|
|
325
|
|
|
|
345
|
|
Accrued operating expenses
|
|
|
212
|
|
|
|
340
|
|
|
|
|
537
|
|
|
|
685
|
|
|
17.
|
Guarantee payment and prepayment from new investors
|
In May 2015, the Company entered into Securities
Purchase Agreements with Beijing Jinrun Fangzhou Science & Technology Co, Ltd. (“Jinrun Fangzhou”) and
Dongsys Innovation (Beijing) Technology Development Co., Ltd. (“Dongsys Innovation”), public companies listed on
the National Equities Exchange and Quotations of the PRC (the “NEEQ”), respectively, pursuant to which these
companies agreed to purchase a certain number of shares of common stock of the Company. The Company had received the 10%
guarantee payment and 15% prepayment in an aggregate amount equal to US$802,000 from Jinrun Fangzhou, and the 10% guarantee
payment in an amount equal to US$116,000 from Dongsys Innovation, respectively.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Due to certain restriction stipulated in the “Measures
for Overseas Investment Management” issued by the Ministry of Commerce of the PRC (the “MOFCOM”), the Company
and its investors experienced difficulties in obtaining approval for the transactions from the MOFCOM. As a result, on May 12,
2016, the Company terminated the security purchase agreements with the two investors, respectively. As agreed by the parties, if
the Company fails to fully refund the amounts before December 31, 2016, beginning on January 1, 2017, the Company will bear a 12%
annualized interest rate for the unpaid amounts and the amounts shall be refunded to the investors no later than December 31, 2017.
The entities within the Company file separate tax returns
in the respective tax jurisdictions in which they operate.
i). The Company is incorporated in the state of Nevada.
Under the current law of Nevada, the Company is not subject to state corporate income tax. Following the Share Exchange, the Company
became a holding company and does not conduct any substantial operations of its own. No provision for federal corporate income
tax has been made in the financial statements as the Company has no assessable profits for the nine and three months ended September
30, 2016, or any prior periods. The Company does not provide for U.S. taxes or foreign withholding taxes on undistributed earnings
from its non-U.S. subsidiaries because such earnings are intended to be reinvested indefinitely. If undistributed earnings were
distributed, foreign tax credits could become available under current law to reduce the resulting U.S. income tax liability.
ii). China Net BVI was incorporated in the British Virgin
Islands (“BVI”). Under the current law of the BVI, China Net BVI is not subject to tax on income or capital gains.
Additionally, upon payments of dividends by China Net BVI to its shareholders, no BVI withholding tax will be imposed.
iii). China Net HK was incorporated in Hong Kong and
does not conduct any substantial operations of its own. No provision for Hong Kong profits tax has been made in the financial statements
as China Net HK has no assessable profits for the nine and three months ended September 30, 2016 or any prior periods. Additionally,
upon payments of dividends by China Net HK to its shareholders, no Hong Kong withholding tax will be imposed.
iv). The Company’s PRC operating subsidiaries
and VIEs, being incorporated in the PRC, are governed by the income tax law of the PRC and is subject to PRC enterprise income
tax (“EIT”). The EIT rate of PRC is 25%, which applies to both domestic and foreign invested enterprises.
|
l
|
In July 2012, Business Opportunity Online was approved by the related PRC governmental authorities
as a High and New Technology Enterprise under the current EIT law, and was approved by the local tax authorities of Beijing, the
PRC, to be entitled to a favorable statutory tax rate of 15% until December 31, 2014. During 2015, Business Opportunity Online
reapplied for the qualification as a High and New Technology Enterprise. In November 2015, Business Opportunity Online received
the formal certificate as a High and New Technology Enterprise, which enabled the entity to continue to enjoy the favorable statutory
tax rate of 15% until November 2018. Therefore, for the nine and three months ended September 30, 2016 and 2015, the applicable
income tax rate of Business Opportunity Online was 15%.
|
|
l
|
Business Opportunity Online Hubei was approved by the related PRC governmental authorities to be
qualified as a software company and was approved by the local tax authorities of Xiaogan City, Hubei province, the PRC, to be entitled
to a EIT exemption for fiscal 2012 and a 50% reduction of its applicable EIT rate from 25% to 12.5% for its taxable income for
the succeeding three years through fiscal 2015, as its first profitable year was determined as fiscal 2011 instead of fiscal 2012
in August 2013 by the local tax authorities of Xiaogan City, Hubei province. Therefore, the applicable income tax rate for Business
Opportunity Online Hubei was 25% for the nine and three months ended September 30, 2016, and was 12.5% for the nine and three months
ended September 30, 2015.
|
|
l
|
The applicable income tax rate for other PRC operating entities of the Company was 25% for the
nine and three months ended September 30, 2016 and 2015.
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
l
|
The current EIT law also imposed a 10% withholding income tax for dividends distributed by a foreign
invested enterprise to its immediate holding company outside China. A lower withholding tax rate will be applied if there is a
tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Holding companies in Hong Kong,
for example, will be subject to a 5% withholding tax rate.
|
For the nine and three months ended September 30, 2016
and 2015, all of the preferential income tax treatments enjoyed by the Company’s PRC subsidiaries and VIEs were based on
the current applicable laws and regulations of the PRC and approved by the related government regulatory authorities and local
tax authorities where the Company’s respective PRC subsidiaries and VIEs operate in. Business Opportunity Online and Business
Opportunity Online Hubei were most affected by these preferential income tax treatments within the structure of the Company. The
preferential income tax treatments are subject to change in accordance with the PRC government economic development policies and
regulations. These preferential income tax treatments are primarily determined by the regulation and policies of the PRC government
in the context of the overall economic policy and strategy. As a result, the uncertainty of theses preferential income tax treatments
are subject to, but not limited to, the PRC government policy on supporting any specific industry’s development under the
outlook and strategy of overall macroeconomic development.
|
2)
|
Turnover taxes and the relevant surcharges
|
Service revenues provided by the Company’s PRC
operating subsidiaries and VIEs were subject to Value Added Tax (“VAT”). VAT rate for provision of modern services
(other than lease of corporeal movables) is 6% and for small scale taxpayer, 3%. Therefore, for the nine and three months ended
September 30, 2016 and 2015, the Company’s service revenues are subject to VAT at a rate of 6%, after deducting the VAT paid
for the services purchased from suppliers, or at a rate of 3% without any deduction of VAT paid for the services purchased from
suppliers. The surcharges of the VAT is 12%-14% of the VAT, depending on which tax jurisdiction the Company’s PRC operating
subsidiaries and VIE operate in.
As of September 30, 2016 and December 31, 2015, taxes
payable consists of:
|
|
September 30,
2016
|
|
December 31,
2015
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Turnover tax and surcharge payable
|
|
|
1,237
|
|
|
|
1,272
|
|
Enterprise income tax payable
|
|
|
1,831
|
|
|
|
1,914
|
|
Total taxes payable
|
|
|
3,068
|
|
|
|
3,186
|
|
For the nine months ended September 30, 2016, taxes payable
of approximately US$0.10 million was decreased due to disposal of a VIE during the period.
For the nine and three months ended September 30, 2016
and 2015, the Company’s income tax (expense)/benefit consisted of:
|
|
Nine Months Ended September 30,
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Current-PRC
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
2
|
|
Deferred-PRC
|
|
|
(155
|
)
|
|
|
701
|
|
|
|
(3
|
)
|
|
|
389
|
|
Income tax (expenses)/benefit
|
|
|
(155
|
)
|
|
|
699
|
|
|
|
(3
|
)
|
|
|
391
|
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
The Company’s deferred tax liabilities at September
30, 2016 and changes for the nine months then ended were as follows:
|
|
Amount
|
|
|
US$(’000)
|
|
|
|
Balance as of December 31, 2015 (audited)
|
|
|
118
|
|
Reversal during the period
|
|
|
(86
|
)
|
Exchange translation adjustment
|
|
|
(3
|
)
|
Balance as of September 30, 2016 (unaudited)
|
|
|
29
|
|
Deferred tax liabilities arose on the recognition of
the identifiable intangible assets acquired from acquisition transactions in previous years. Reversal for the nine months ended
September 30, 2016 of approximately US$86,000 was due to amortization of the acquired intangible assets.
The Company’s deferred tax assets at September
30, 2016 and December 31, 2015 were as follows:
|
|
September 30,
2016
|
|
December 31,
2015
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Tax effect of net operating losses carried forward
|
|
|
8,781
|
|
|
|
7,921
|
|
Bad debts provision
|
|
|
906
|
|
|
|
932
|
|
Valuation allowance
|
|
|
(8,322
|
)
|
|
|
(7,303
|
)
|
Total deferred tax assets
|
|
|
1,365
|
|
|
|
1,550
|
|
The net operating losses carried forward incurred by
the Company (excluding its PRC operating subsidiary and VIEs) were approximately US$16,725,000 and US$14,903,000 at September 30,
2016 and December 31, 2015, respectively, which loss carry forwards gradually expire over time, the last of which expires in 2036.
A full valuation allowance has been recorded because it is considered more likely than not that the deferred tax assets will not
be realized through sufficient future earnings of the entity to which the operating losses relate.
The net operating losses carried forward (excluding bad
debts provision, amortization of intangible assets acquired from business combinations and non-deductible expenses) incurred by
the Company’s PRC subsidiary and VIEs were approximately US$17,008,000 and US$15,657,000 at September 30, 2016 and December
31, 2015, respectively, which loss carry forwards gradually expire over time, the last of which expires in 2021. The related deferred
tax asset was calculated based on the respective net operating losses incurred by each of the PRC subsidiaries and VIEs and the
respective corresponding enacted tax rate that will be in effect in the period in which the losses are expected to be utilized.
The Company recorded approximately US$446,000 and US$148,000 net valuation allowance for the nine months ended September 30, 2016
and 2015, respectively, and recorded approximately US$149,000 and US$52,000 net valuation allowance for the three months ended
September 30, 2016 and 2015, respectively, because it is considered more likely than not that this portion of the deferred tax
assets will not be realized through sufficient future earnings of the entities to which the operating losses relate. The Company
also utilized approximately US$267,000 and US$74,000 deferred tax assets for the nine and three months ended September 30, 2016,
respectively.
Full valuation allowance to bad debts provision related
deferred tax assets were recorded because it is considered more likely than not that this portion of deferred tax assets will not
be realized through bad debts verification by the local tax authorities where the PRC subsidiary and VIEs operate in.
The Company’s deferred tax assets and deferred
tax liabilities were attributable to different tax-paying components of the entity, which were under different tax jurisdictions.
Therefore, in accordance with ASC Topic 740 “Income taxes”, the non-current portion of deferred tax assets and deferred
tax liabilities were presented separately in the Company’s balance sheets.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
The tax authority of the PRC government conducts periodic
and ad hoc tax filing reviews on business enterprises operating in the PRC after those enterprises had completed their relevant
tax filings, hence the Company’s tax filings may not be finalized. It is therefore uncertain as to whether the PRC tax authority
may take different views about the Company’s tax filings which may lead to additional tax liabilities.
|
19.
|
Long-term borrowing from a director
|
Long-term borrowing from a director is a non-interest
bearing loan from a director of the Company relating to the original paid-in capital contribution in the Company’s wholly-owned
subsidiary Rise King WFOE, which is not expected to be repaid within one year.
|
20.
|
Restricted net assets
|
As most of the Company’s operations are conducted
through its PRC subsidiary and VIEs, the Company’s ability to pay dividends is primarily dependent on receiving distributions
of funds from its PRC subsidiary and VIEs. Relevant PRC statutory laws and regulations permit payments of dividends by its PRC
subsidiary and VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and
regulations and after it has met the PRC requirements for appropriation to statutory reserves. Paid in capital of the PRC subsidiary
and VIEs included in the Company’s consolidated net assets are also non-distributable for dividend purposes.
In accordance with the PRC regulations on Enterprises
with Foreign Investment, a WFOE established in the PRC is required to provide certain statutory reserves, namely general reserve
fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the
enterprise’s PRC statutory accounts. A WFOE is required to allocate at least 10% of its annual after-tax profit to the general
reserve until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. Appropriations
to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors. The aforementioned
reserves can only be used for specific purposes and are not distributable as cash dividends. Rise King WFOE is subject to the above
mandated restrictions on distributable profits. Additionally, in accordance with the Company Law of the PRC, a domestic enterprise
is required to provide a statutory common reserve of at least 10% of its annual after-tax profit until such reserve has reached
50% of its registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to
provide for a discretionary surplus reserve, at the discretion of the board of directors. The aforementioned reserves can only
be used for specific purposes and are not distributable as cash dividends. All of the Company’s PRC VIEs are subject to the
above mandated restrictions on distributable profits.
As a result of these PRC laws and regulations, the Company’s
PRC subsidiary and VIEs are restricted in their ability to transfer a portion of their net assets to the Company. As of September
30, 2016 and December 31, 2015, net assets restricted in the aggregate, which include paid-in capital and statutory reserve funds
of the Company’s PRC subsidiary and VIEs that are included in the Company’s consolidated net assets, was approximately
US$8.1 million and US$6.7 million, respectively.
The current PRC Enterprise Income Tax Law also imposed
a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside
China. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction
of the foreign holding company. Holding companies in Hong Kong, for example, will be subject to a 5% rate.
The ability of the Company’s PRC subsidiary and
VIEs to make dividends and other payments to the Company may also be restricted by changes in applicable foreign exchange and other
laws and regulations.
Foreign currency exchange regulation in China is primarily
governed by the following rules:
|
l
|
Foreign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules;
|
|
l
|
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration
Rules.
|
Currently, under the Administration Rules, Renminbi is
freely convertible for current account items, including the distribution of dividends, interest payments, trade and service related
foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments
and investments in securities outside of China, unless the prior approval of the State Administration of Foreign Exchange (the
“SAFE”) is obtained and prior registration with the SAFE is made. Foreign-invested enterprises like Rise King WFOE
that need foreign exchange for the distribution of profits to its shareholders may effect payment from their foreign exchange accounts
or purchase and pay foreign exchange rates at the designated foreign exchange banks to their foreign shareholders by producing
board resolutions for such profit distribution. Based on their needs, foreign-invested enterprises are permitted to open foreign
exchange settlement accounts for current account receipts and payments of foreign exchange along with specialized accounts for
capital account receipts and payments of foreign exchange at certain designated foreign exchange banks.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Although the current Exchange Rules allow the convertibility
of Chinese Renminbi into foreign currency for current account items, conversion of Chinese Renminbi into foreign exchange for capital
items, such as foreign direct investment, loans or securities, requires the approval of SAFE, which is under the authority of the
People’s Bank of China. These approvals, however, do not guarantee the availability of foreign currency conversion. The Company
cannot be sure that it will be able to obtain all required conversion approvals for its operations or the Chinese regulatory authorities
will not impose greater restrictions on the convertibility of Chinese Renminbi in the future. Currently, most of the Company’s
retained earnings are generated in Renminbi. Any future restrictions on currency exchanges may limit the Company’s ability
to use its retained earnings generated in Renminbi to make dividends or other payments in U.S. dollars or fund possible business
activities outside China.
As of September 30, 2016 and December 31, 2015, there
was approximately US$19.9 million and US$22.9 million retained earnings in the aggregate, respectively, which was generated by
the Company’s PRC subsidiary and VIEs in Renminbi included in the Company’s consolidated net assets, aside from US$2.6
million and US$2.8 million of statutory reserve funds as of September 30, 2016 and December 31, 2015, respectively, that may be
affected by increased restrictions on currency exchanges in the future, and accordingly, may further limit the Company’s
PRC subsidiary’s and VIEs’ ability to make dividends or other payments in U.S. dollars to the Company, in addition
to the approximately US$8.1 million and US$6.7 million of restricted net assets as of September 30, 2016 and December 31, 2015,
as discussed above.
|
21.
|
Related party transactions
|
Revenue from related parties:
|
|
Nine Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Beijing Saimeiwei Food Equipment Technology Co., Ltd.
|
|
|
31
|
|
|
|
85
|
|
|
|
10
|
|
|
|
27
|
|
Chuangshi Meiwei (Beijing) International Investment Management Co., Ltd.
|
|
|
146
|
|
|
|
351
|
|
|
|
63
|
|
|
|
2
|
|
Beijing Saturday Education Technology Co., Ltd.
|
|
|
204
|
|
|
|
251
|
|
|
|
88
|
|
|
|
190
|
|
|
|
|
381
|
|
|
|
687
|
|
|
|
161
|
|
|
|
219
|
|
|
22.
|
Employee defined contribution plan
|
Full time employees of the Company in the PRC participate
in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing
fund and other welfare benefits are provided to employees. Chinese labor regulations require that the PRC subsidiaries of the Company
make contributions to the government for these benefits based on certain percentages of the employees’ salaries. The employee
benefits were expensed as incurred. The Company has no legal obligation for the benefits beyond the contributions made. The total
amounts for such employee benefits were approximately US$456,000 and US$467,000 for the nine months ended September 30, 2016 and
2015, respectively. The total amounts for such employee benefits were approximately US$158,000 and US$188,000 for the three months
ended September 30, 2016 and 2015, respectively.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
23.
|
Concentration of risk
|
Credit risk
Financial instruments that potentially subject the Company
to significant concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable and prepayments
and deposits to suppliers. As of September 30, 2016 and December 31, 2015, substantially all of the Company’s cash and cash
equivalents were held by major financial institutions located in Mainland China, which management believes are of high credit quality.
For accounts receivables, the Company extends credit based on an evaluation of the customer’s financial condition, generally
without requiring collateral or other security. In order to minimize the credit risk, the Company delegated a team responsible
for credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. Further,
the Company reviews the recoverable amount of each individual trade debt at each balance sheet date to ensure that adequate allowances
are made for doubtful accounts. In this regard, the Company considers that the Company’s credit risk for accounts receivables
is significantly reduced. For prepayments and deposits to suppliers, as of September 30, 2016 and December 31, 2015, majority of
the prepayments and deposits to suppliers were paid for purchase services from two of the largest search engine companies in the
PRC, which management believes are of high credit quality.
Risk arising from operations in foreign
countries
All of the Company’s operations are conducted within
the PRC. The Company’s operations in the PRC are subject to various political, economic, and other risks and uncertainties
inherent in the PRC. Among other risks, the Company’s operations in the PRC are subject to the risks of restrictions on transfer
of funds, changing taxation policies, foreign exchange restrictions; and political conditions and governmental regulations.
Currency convertibility risk
Significant part of the Company’s businesses is
transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either
through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted
by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory
institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts. These
exchange control measures imposed by the PRC government authorities may restrict the ability of the Company’s PRC subsidiary
and VIEs to transfer its net assets, which to the Company through loans, advances or cash dividends.
Concentration of customers
For the three months ended September 30, 2016, two customers
individually accounted for 14% and 12% of the Company’s revenues. Except for the aforementioned customers, there was no other
single customer who accounted for more than 10% of the Company’s revenues for the nine or three months ended September 30,
2016.
For the nine months ended September 30, 2015, two customers
individually accounted for 15% and 13% of the Company’s revenues, respectively. For the three months ended September 30,
2015, one of the two customers individually accounted for 11% of the Company’s revenues. Except for the aforementioned customers,
there was no other single customer who accounted for more than 10% of the Company’s revenues for the nine or three months
ended September 30, 2015.
As of September 30, 2016, two customers individually
accounted for 29% and 14% of the Company’s accounts receivables, respectively. As of December 31, 2015, the same two customers
individually accounted for 17% and 24% of the Company’s accounts receivables, respectively. Except for the aforementioned,
there was no other single customer who accounted for more than 10% of the Company’s accounts receivable as of September 30,
2016 or December 31, 2015.
Concentration of suppliers
For the nine months ended September 30, 2016, two suppliers
individually accounted for 28% and 37% of the Company’s cost of revenues, respectively. For the three months ended September
30, 2016, the same two suppliers individually accounted for 52% and 16% of the Company’s cost of revenues, respectively.
Except for the afore-mentioned, there was no other single supplier who accounted for more than 10% of the Company’s cost
of revenues for the nine or three months ended September 30, 2016.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
For the nine months ended September 30, 2015, two suppliers
individually accounted for 43% and 39% of the Company’s cost of revenues, respectively. For the three months ended September
30, 2015, the same two suppliers individually accounted for 31% and 50% of the Company’s cost of revenues, respectively.
Except for the afore-mentioned, there was no other single supplier who accounted for more than 10% of the Company’s cost
of revenues for the nine or three months ended September 30, 2015.
24.
|
Commitments and contingencies
|
The following table sets forth the Company’s operating
lease commitment as of September 30, 2016:
|
|
Office Rental
|
|
|
US$(’000)
|
|
|
(Unaudited)
|
Three months ending December 31,
|
|
|
-2016
|
|
|
137
|
|
Year ending December 31,
|
|
|
|
|
-2017
|
|
|
550
|
|
-2018
|
|
|
549
|
|
-2019
|
|
|
111
|
|
Total
|
|
$
|
1,347
|
|
Excluding rental expenses included in discontinued operation,
for the nine months ended September 30, 2016 and 2015, rental expenses under operating leases were approximately US$447,000 and
US$319,000, respectively. For the three months ended September 30, 2016 and 2015, rental expenses under operating leases were approximately
US$137,000 and US$109,000, respectively.
In May 2015, the Company entered into a contract to purchase
software products related to cloud video management system from an unrelated third party with a total contract amount of RMB9.5
million (approximately US$1.4 million). As of September 30, 2016, the Company had paid in the aggregate of RMB6.65 million (approximately
US$1.0 million) in accordance with the payment schedule set forth in the contract. The transaction as contemplated under the contract
is expected to be consummated in 2016 and the remaining unpaid contract amount is expected to be paid in 2016.
In accordance with the contract entered into between
the Company and one of its largest internet resources suppliers, the Company agreed to purchase in the aggregate of RMB100 million
(“the minimum consumption amount”) (approximately US$15.1 million) from this supplier for a one-year period commencing
on June 13, 2015. In accordance with this contract, if the Company fails to meet the minimum consumption amount, the supplier is
allowed to require the Company to retroactively compensate the supplier in cash the difference between the granted discount rate
set forth based on the minimum consumption amount and any revised discount rate set forth based on further negotiation between
the two parties, if the Company is able to achieve 50% of the minimum consumption amount. If the Company fails to achieve 50% of
the minimum consumption amount, the Company is not eligible to enjoy any discount. The contract expired on June 12, 2016, based
on the final agreed compensation plan between the two parties, the Company compensated the supplier approximately US$0.13 million
for failing to meet the minimum consumption amount, which equaled to the deposit withheld by the supplier upon entering into the
original contract in June 2015.
Legal Proceedings
On October 26, 2015, Business Opportunity Online, one
of the Company’s indirect wholly owned VIEs, filed a civil action against Beijing 58 Information Technology Co., Ltd. (“Beijing
58”) in the Chaoyang District People’s Court of Beijing. Business Opportunity Online is seeking a court order to establish
that it owns a 17.5% equity interest in Beijing 58, one of the VIEs owned by 58.com Inc. On January 20, 2016, the Chaoyang District
People’s Court of Beijing rendered its ruling that Business Opportunity Online did not own 17.5% equity interest in Beijing
58. On February 15, 2016, Business Opportunity Online appealed the decision in the Beijing Third Intermediate People’s Court.
On May 30, 2016, the Beijing Third Intermediate People’s Court rendered its final ruling that Business Opportunity Online
did not own 17.5% equity interest in Beijing 58.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
25.
|
Discontinued operation
|
The Company exited its brand management and sales channel
building business segment in the fourth fiscal quarter of 2015, operated by one of its VIEs, Quanzhou City Zhilang Network Technology
Co., Ltd. (“Quanzhou Zhi Lang”), which qualified for presentation as a discontinued operation. In June 2016, the Company
disposed Quanzhou Zhi Lang to an unaffiliated third-party, the loss incurred from the disposal was also included in results of
operations of discontinued operation, presented as a separate component in the condensed consolidated statements of operations
and comprehensive loss for all periods presented. Major classes of line items constituting pre-tax net loss and net loss of the
discontinued operation for the nine and three months ended September 30, 2016 and 2015, respectively, are as follows:
|
|
Nine Months Ended September 30,
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
-
|
|
|
|
212
|
|
|
|
-
|
|
|
|
45
|
|
Cost of revenues
|
|
|
-
|
|
|
|
122
|
|
|
|
-
|
|
|
|
18
|
|
Total operating expenses
|
|
|
51
|
|
|
|
314
|
|
|
|
-
|
|
|
|
126
|
|
Not loss before income tax benefit
|
|
|
(51
|
)
|
|
|
(224
|
)
|
|
|
-
|
|
|
|
(99
|
)
|
Income tax benefit
|
|
|
-
|
|
|
|
20
|
|
|
|
-
|
|
|
|
4
|
|
Loss from discontinued operation, net of income tax
|
|
|
(51
|
)
|
|
|
(204
|
)
|
|
|
-
|
|
|
|
(95
|
)
|
Loss on disposal of discontinued operation, net of income tax
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss from and on disposal of discontinued operation, net of income tax
|
|
|
(60
|
)
|
|
|
(204
|
)
|
|
|
-
|
|
|
|
(95
|
)
|
For the nine and three months ended September 30, 2016
and 2015, depreciation and amortization expenses included in operating expenses of the discontinued operation were immaterial.
There were no significant capital expenditures, operating or investing noncash items incurred in the discontinued operation for
the nine and three months ended September 30, 2016 or 2015.
The Company follows ASC Topic 280 “Segment Reporting”,
which requires that companies disclose segment data based on how management makes decisions about allocating resources to segments
and evaluating their performance. Reportable operating segments include components of an entity about which separate financial
information is available and which operating results are regularly reviewed by the chief operating decision maker (“CODM”),
the Company’s Chief Executive Officer, to make decisions about resources to be allocated to the segment and assess each operating
segment’s performance.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Nine Months Ended September 30, 2016 (Unaudited)
|
|
Internet Ad.
and data service
|
|
TV &
Bank kiosks
Ad.
|
|
Others
|
|
Inter-
segment
and
reconciling
item
|
|
Total
|
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
25,398
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,398
|
|
Cost of revenues
|
|
|
19,269
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,269
|
|
Total operating expenses
|
|
|
6,625
|
|
|
|
106
|
|
|
|
3,158
|
(1)
|
|
|
-
|
|
|
|
9,889
|
|
Depreciation and amortization expense included in total operating expenses
|
|
|
1,079
|
|
|
|
15
|
|
|
|
76
|
|
|
|
-
|
|
|
|
1,170
|
|
Operating loss
|
|
|
(496
|
)
|
|
|
(106
|
)
|
|
|
(3,158
|
)
|
|
|
-
|
|
|
|
(3,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure for long-term assets
|
|
|
2,036
|
|
|
|
-
|
|
|
|
103
|
|
|
|
-
|
|
|
|
2,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(758
|
)
|
|
|
(105
|
)
|
|
|
(3,096
|
)
|
|
|
-
|
|
|
|
(3,959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets – September 30, 2016
|
|
|
28,206
|
|
|
|
973
|
|
|
|
16,045
|
(2)
|
|
|
(12,796
|
)
|
|
|
32,428
|
|
Total assets – December 31, 2015
|
|
|
33,727
|
|
|
|
3,148
|
|
|
|
17,362
|
(3)
|
|
|
(18,777
|
)
|
|
|
35,460
|
|
|
(1)
|
Including approximately US$1,718,000 share-based compensation expenses.
|
|
(2)
|
Including approximately US$1,764,000 total assets classified as held for sale.
|
|
(3)
|
Including approximately US$182,000 total assets held by brand management and sale channel building
segment and US$1,882,000 assets classified as held for sale.
|
Three Months Ended September 30, 2016 (Unaudited)
|
|
Internet Ad.
and data service
|
|
TV &
Bank kiosks
Ad.
|
|
Others
|
|
Inter-
segment
and
reconciling
item
|
|
Total
|
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
11,902
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,902
|
|
Cost of revenues
|
|
|
9,874
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,874
|
|
Total operating expenses
|
|
|
2,418
|
|
|
|
30
|
|
|
|
944
|
(1)
|
|
|
-
|
|
|
|
3,392
|
|
Depreciation and amortization expense included in total operating expenses
|
|
|
367
|
|
|
|
14
|
|
|
|
29
|
|
|
|
-
|
|
|
|
410
|
|
Operating loss
|
|
|
(390
|
)
|
|
|
(30
|
)
|
|
|
(944
|
)
|
|
|
-
|
|
|
|
(1,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure for long-term assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(474
|
)
|
|
|
(29
|
)
|
|
|
(948
|
)
|
|
|
-
|
|
|
|
(1,451
|
)
|
|
(1)
|
Including approximately US$583,000 share-based compensation expenses.
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Nine Months Ended September 30, 2015 (Unaudited)
|
|
Internet Ad.
and data service
|
|
TV &
Bank kiosks
Ad.
|
|
Others
|
|
Inter-
segment
and
reconciling
item
|
|
Total
|
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
22,540
|
|
|
|
1,261
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,801
|
|
Cost of revenues
|
|
|
18,171
|
|
|
|
1,063
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,234
|
|
Total operating expenses
|
|
|
7,570
|
|
|
|
322
|
|
|
|
2,549
|
(1)
|
|
|
-
|
|
|
|
10,441
|
|
Depreciation and amortization expense included in total operating expenses
|
|
|
1,152
|
|
|
|
92
|
|
|
|
29
|
|
|
|
|
|
|
|
1,273
|
|
Operating loss
|
|
|
(3,201
|
)
|
|
|
(124
|
)
|
|
|
(2,549
|
)
|
|
|
-
|
|
|
|
(5,874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure for long-term assets
|
|
|
4,036
|
|
|
|
-
|
|
|
|
152
|
|
|
|
-
|
|
|
|
4,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(2,458
|
)
|
|
|
(98
|
)
|
|
|
(2,550
|
)
|
|
|
-
|
|
|
|
(5,106
|
)
|
|
(1)
|
Including approximately US$1,637,000 share-based compensation expenses.
|
Three Months Ended September 30, 2015 (Unaudited)
|
|
Internet Ad.
and data service
|
|
TV &
Bank kiosks
Ad.
|
|
Others
|
|
Inter-
segment
and
reconciling
item
|
|
Total
|
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
8,456
|
|
|
|
42
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,498
|
|
Cost of revenues
|
|
|
7,030
|
|
|
|
17
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,047
|
|
Total operating expenses
|
|
|
2,938
|
|
|
|
41
|
|
|
|
1,030
|
(1)
|
|
|
-
|
|
|
|
4,009
|
|
Depreciation and amortization expense included in total operating expenses
|
|
|
375
|
|
|
|
29
|
|
|
|
13
|
|
|
|
-
|
|
|
|
417
|
|
Operating loss
|
|
|
(1,512
|
)
|
|
|
(16
|
)
|
|
|
(1,030
|
)
|
|
|
-
|
|
|
|
(2,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure for long-term assets
|
|
|
2,072
|
|
|
|
-
|
|
|
|
138
|
|
|
|
-
|
|
|
|
2,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income from continuing operations
|
|
|
(1,127
|
)
|
|
|
1
|
|
|
|
(1,034
|
)
|
|
|
-
|
|
|
|
(2,160
|
)
|
|
(1)
|
Including approximately US$681,000 share-based compensation expenses.
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Basic and diluted loss per share (retroactively restated
to reflect the Company’s 1 for 2.5 reverse stock split, which was effective on August 19, 2016) for each of the periods presented
are calculated as follows (All amounts, except number of shares and per share data, are presented in thousands of U.S. dollars):
|
|
Nine Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ChinaNet Online Holdings, Inc. from continuing operations (numerator for basic and diluted loss per share from continuing operations)
|
|
$
|
(4,103
|
)
|
|
$
|
(4,874
|
)
|
|
$
|
(1,472
|
)
|
|
$
|
(1,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ChinaNet Online Holdings, Inc. from discontinued operation (numerator for basic and diluted loss per share from discontinued operation)
|
|
$
|
(60
|
)
|
|
$
|
(204
|
)
|
|
$
|
-
|
|
|
$
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - Basic
|
|
|
11,353,657
|
|
|
|
10,675,308
|
|
|
|
11,358,971
|
|
|
|
10,765,637
|
|
Effect of diluted securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted common stocks
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common stock purchase options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted average number of common shares outstanding -Diluted
|
|
|
11,353,657
|
|
|
|
10,675,308
|
|
|
|
11,358,971
|
|
|
|
10,765,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share-Basic and diluted from continuing operations
|
|
$
|
(0.36
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.18
|
)
|
Loss per share-Basic and diluted from discontinued operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
-
|
|
|
$
|
(0.01
|
)
|
For the nine and three months ended September 30, 2016,
the diluted loss per share calculation for continuing and discontinued operations did not include options to purchase up to 835,216
shares of the Company’s common stock, because they were out of the money, and did not include 799,571 shares of unvested
restricted common stock, because their effect was anti-dilutive, as the Company incurred a loss for the periods from both continuing
and discontinued operations.
For the nine and three months ended September 30, 2015,
the diluted loss per share calculation for continuing and discontinued operations did not include 1,066,667 shares of unvested
restricted common stock, because their effect was anti-dilutive, as the Company incurred a loss for the periods from both continuing
and discontinued operations. For the nine and three months ended September 30, 2015, the diluted loss per share calculation for
continuing and discontinued operations also did not include exercisable in-the-money options to purchase up to 290,949 shares and
159,080 shares of the Company’s common stock, respectively, because their effect was anti-dilutive, as the Company incurred
a loss for the periods from both continuing and discontinued operations.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
**The number of unvested restricted common stocks and
common stock purchase options discussed in the above paragraphs for all period presented have been retroactively restated to reflect
the Company’s 1 for 2.5 reverse stock split, which was effective on August 19, 2016.
28.
|
Share-based compensation expenses
|
The Company granted 40,000 shares of the Company’s
restricted common stock to its investor relations services provider, in exchange for its services to the Company for the years
ended December 31, 2016 and 2015. These shares were valued at US$3.00 per share, the closing bid price of the Company’s common
stock on the date of grant. Total compensation expense recognized for the service was US$45,000 for the nine months ended September
30, 2016 and 2015, and US$15,000 for the three months ended September 30, 2016 and 2015.
The Company granted 140,000 shares of the Company’s
restricted common stock to a management consulting service provider in exchange for its services to the Company for a 24-month
period commencing on May 1, 2015. These shares were valued at US$3.93 per share, the closing bid price of the Company’s common
stock on the date of grant. Total compensation expense recognized for the nine months ended September 30, 2016 and 2015 was approximately
US$206,100 and US$114,500, respectively. Total compensation expense recognized for the three months ended September 30, 2016 and
2015 was approximately US$68,700.
The Company granted 120,000 shares of the Company’s
restricted common stock to a technical service provider in exchange for its services to the Company for a 12-month period commencing
on August 1, 2014. These shares were valued at US$1.68 per share, the closing bid price of the Company’s common stock on
the date of grant. Total compensation expense recognized for the nine and three months ended September 30, 2015 was approximately
US$117,250 and US$16,750, respectively.
On December 30, 2014, the Company issued 1,680,000 shares
of the Company’s restricted common stock to its executive officers, of which 613,334 restricted shares were vested upon issuance,
533,333 restricted shares were vested on December 30, 2015 and the remaining 533,333 restricted shares will be vested on December
30, 2016. The restricted stock was valued at $2.93 per share, the closing bid price of the Company’s common stock on the
date of grant. Total compensation expenses recognized for the nine months ended September 30, 2016 and 2015 was US$1,170,000. Total
compensation expenses recognized for the three months ended September 30, 2016 and 2015 was US$390,000.
On September 14, 2015, under its 2015 Omnibus Securities
and Incentive Plan, the Company granted its employees in the aggregate of 266,238 shares of the Company’s restricted common
stock, which will be vested on the third anniversary of the date of the grant. These shares were valued at $2.10 per share, the
closing bid price of the Company’s common stock on the date of grant. The Company adopted a 5% forfeiture rate for recognition
of the related compensation expenses of these unvested shares, total compensation expenses recognized for the nine and three months
ended September 30, 2016 was approximately US$132,790 and US$44,600, respectively. Total compensation expenses recognized for these
shares for the nine and three months ended September 30, 2015 was approximately US$8,240.
On September 14, 2015, under its 2015 Omnibus Securities
and Incentive Plan, the Company also granted 5-year common stock purchase options to its employees, in the aggregate, to purchase
up to 477,240 shares of the Company’s restricted common stock at an exercise price of US$2.10 per share, of which 159,080
options were vested upon the date of grant, 159,080 options were vested on September 14, 2016 and the remaining 159,080 options
will be vested on September 14, 2017. These options were valuated at US$1.03-US$1.39 per option. The Company adopted a 5% forfeiture
rate for recognition of the related compensation expenses of the unvested part of options, total compensation expenses recognized
for these options for the nine and three months ended September 30, 2016 was approximately US$149,970 and US$57,480, respectively.
Total compensation expenses recognized for these options for the nine and three months ended September 30, 2015 was approximately
US$182,460.
On April 1, 2016, the Company granted 16,000 shares of
the Company’s restricted common stock in aggregate to two marketing service providers in exchange for their services to the
Company for a 12-month period commencing on April 1, 2016. These shares were valued at US$1.73 per share, the closing bid price
of the Company’s common stock on the date of grant. Total compensation expense recognized for the nine and three months ended
September 30, 2016 was approximately US$13,800 and US$6,900, respectively.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Options issued and outstanding at September 30, 2016
and their movements during the nine months then ended are as follows:
|
|
Option Outstanding
|
|
Option Exercisable
|
|
|
Number of
underlying
shares
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number of
underlying
shares
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015 (audited)
|
|
|
835,216
|
|
|
|
5.04
|
|
|
$
|
2.49
|
|
|
|
517,056
|
|
|
|
5.24
|
|
|
$
|
2.73
|
|
Granted/Vested
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
159,080
|
|
|
|
3.95
|
|
|
$
|
2.10
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2016 (unaudited)
|
|
|
835,216
|
|
|
|
4.29
|
|
|
$
|
2.49
|
|
|
|
676,136
|
|
|
|
4.37
|
|
|
$
|
2.59
|
|
The aggregate unrecognized share-based compensation expenses as of September
30, 2016 and 2015 is approximately US$1,111,000 and US$3,306,000, respectively.
**The number of restricted common stocks, common stock purchase options and
the related stock price discussed in the above paragraphs and tables for all period presented have been retroactively restated
to reflect the Company’s 1 for 2.5 reverse stock split, which was effective on August 19, 2016.
The Company has performed an evaluation of
subsequent events through the date the financial statements were issued, and has determined that there
are no such events that are material to the financial statements.
Item 2 Management’s Discussion
and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
You should read the following
discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements
and the related notes included elsewhere in this interim report. Our consolidated financial statements have been prepared in accordance
with U.S. GAAP. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding
our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,”
“intend,” “believe,” or similar language. All forward-looking statements included in this document are
based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements.
Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially
from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information
set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31,
2015. Readers are cautioned not to place undue reliance on these forward-looking statements.
We were incorporated in the State
of Texas in April 2006 and re-domiciled to become a Nevada corporation in October 2006. On June 26, 2009, we consummated a share
exchange transaction with China Net Online Media Group Limited (the “Share Exchange”), a company organized under the
laws of British Virgin Islands (“China Net BVI”). As a result of the Share Exchange, China Net BVI became a wholly
owned subsidiary of us and we are now a holding company, which, through certain contractual arrangements with operating entities
in the PRC, is engaged in providing advertising, marketing, communication, online-to-offline (O2O) sales channel expansion and
the related data services to SMEs in China and networking services for entrepreneurs in the PRC.
Through our PRC operating subsidiaries
and VIEs, we primarily operate a one-stop services for our clients on our integrated service platform, primarily including Omni-channel
precision advertising and marketing system, CloundX and data analysis management system. Our Omni-channel precision advertising
and marketing system, primarily consists of digital advertising and marketing portals, include internet and mobile, and our other
non-digital advertising units, such as TV. We provide and monitor varieties of advertising and marketing campaigns through this
service system which generates effective sales leads through the combination of the Internet, mobile, content and others, including
TV and schemes, we also provide search engine marketing services through this system to maximize market exposure and effectiveness
for our clients. Our data analysis management system is an information and data analysis portal for SMEs or entrepreneurs who plans
to start their own business, helping them for a higher survival and faster deal closing rate. It is built to further expand our
service and data-link to assist our clients in developing their sales both online and offline, so that the overall service platform
can create a traceable looped online to offline (O2O) ecosystem for our clients in their ground sales expansion throughout the
cities in the PRC. During the past two years, we have been developing our SMEs intelligent operation and marketing data service
applications, which consists of several online cloud technology based advertising and marketing, lead management, elite store management,
client membership management and other administrative operational management tools specifically designed for small business in
China to match their simplicity. We are intending to use these applications to create social community-based consumption ecosystem,
by deploying our Big Data technologies and analyze both online and offline businesses’ operational and customers’ consumption
data to help the SMEs improve their marketing efficiency and sales effectiveness with their target customers.
On August 18, 2016, we filed
a Certificate of Amendment to our Articles of Incorporation with the Secretary of State of Nevada to effect a one-for-two and
one-half (1 for 2.5) reverse stock split of the Company’s common stock (the “Common Stock”), which became
effective on August 19, 2016 (the “Reverse Stock Split”). When the Reverse Stock Split became effective, each two
and one-half shares of issued and outstanding Common Stock were converted into one newly issued and outstanding share of
Common Stock. No fractional shares were issued in connection with the reverse stock split. Any fractional shares of Common
Stock that would have otherwise resulted from the reverse stock split were rounded up to the nearest full share. The Reverse
Stock Split did not change the par value of the Common Stock and had no effect on the number of authorized shares of Common
Stock of the Company. As a result of the Reverse Stock Split, 30,395,722 shares of Common Stock that were issued and
outstanding at August 19, 2016 was reduced to 12,158,542 shares of Common Stock (taking into account the rounding of
fractional shares). All number of shares and per share data have been retroactively restated to reflect the 1 for 2.5
reverse stock split of the Company wherever applicable for all the periods presented.
Basis of presentation, management
estimates and critical accounting policies
Our unaudited condensed consolidated
interim financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X, as promulgated by the SEC, and include the accounts of our Company, and all of our
subsidiaries and VIEs. We prepare financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the
financial statements and the reported amounts of revenues and expenses during the financial reporting period. We continually evaluate
these estimates and assumptions based on the most recently available information, our own historical experience and various other
assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the
financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees
of judgment than others in their application. In order to understand the significant accounting policies that we adopted for the
preparation of our condensed consolidated interim financial statements, you should refer to the information set forth in Note 3
“Summary of significant accounting policies” to our audited financial statements in our 2015 Form 10-K.
A. RESULTS
OF OPERATIONS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
The following table sets forth
a summary, for the periods indicated, of our consolidated results of operations. Our historical results presented below are not
necessarily indicative of the results that may be expected for any future period. All amounts, except number of shares and per
share data, are presented in thousands of U.S. dollars.
|
|
Nine Months Ended September 30,
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
US$
|
|
US$
|
|
US$
|
|
US$
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From unrelated parties
|
|
$
|
25,017
|
|
|
$
|
23,114
|
|
|
$
|
11,741
|
|
|
$
|
8,279
|
|
From related parties
|
|
|
381
|
|
|
|
687
|
|
|
|
161
|
|
|
|
219
|
|
Total revenues
|
|
|
25,398
|
|
|
|
23,801
|
|
|
|
11,902
|
|
|
|
8,498
|
|
Cost of revenues
|
|
|
19,269
|
|
|
|
19,234
|
|
|
|
9,874
|
|
|
|
7,047
|
|
Gross profit
|
|
|
6,129
|
|
|
|
4,567
|
|
|
|
2,028
|
|
|
|
1,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses
|
|
|
3,069
|
|
|
|
3,437
|
|
|
|
1,126
|
|
|
|
1,207
|
|
General and administrative expenses
|
|
|
5,290
|
|
|
|
5,346
|
|
|
|
1,752
|
|
|
|
2,207
|
|
Research and development expenses
|
|
|
1,530
|
|
|
|
1,658
|
|
|
|
514
|
|
|
|
595
|
|
Total operating expenses
|
|
|
9,889
|
|
|
|
10,441
|
|
|
|
3,392
|
|
|
|
4,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,760
|
)
|
|
|
(5,874
|
)
|
|
|
(1,364
|
)
|
|
|
(2,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
72
|
|
|
|
91
|
|
|
|
19
|
|
|
|
28
|
|
Interest expense
|
|
|
(4
|
)
|
|
|
(46
|
)
|
|
|
(4
|
)
|
|
|
(12
|
)
|
Other (expenses)/income
|
|
|
(112
|
)
|
|
|
26
|
|
|
|
(99
|
)
|
|
|
(5
|
)
|
Total other (expenses)/income
|
|
|
(44
|
)
|
|
|
71
|
|
|
|
(84
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense, equity method investments, noncontrolling interests and discontinued operation
|
|
|
(3,804
|
)
|
|
|
(5,803
|
)
|
|
|
(1,448
|
)
|
|
|
(2,547
|
)
|
Income tax (expense)/benefit
|
|
|
(155
|
)
|
|
|
699
|
|
|
|
(3
|
)
|
|
|
391
|
|
Loss before equity method investments, noncontrolling interests and discontinued operation
|
|
|
(3,959
|
)
|
|
|
(5,104
|
)
|
|
|
(1,451
|
)
|
|
|
(2,156
|
)
|
Share of losses in equity investment affiliates
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
Loss from continuing operations
|
|
|
(3,959
|
)
|
|
|
(5,106
|
)
|
|
|
(1,451
|
)
|
|
|
(2,160
|
)
|
Loss from and on disposal of discontinued operation, net of income tax
|
|
|
(60
|
)
|
|
|
(204
|
)
|
|
|
-
|
|
|
|
(95
|
)
|
Net loss
|
|
|
(4,019
|
)
|
|
|
(5,310
|
)
|
|
|
(1,451
|
)
|
|
|
(2,255
|
)
|
Net (income)/loss attributable to noncontrolling interests from continuing operations
|
|
|
(144
|
)
|
|
|
232
|
|
|
|
(21
|
)
|
|
|
174
|
|
Net loss attributable to ChinaNet Online Holdings, Inc.
|
|
$
|
(4,163
|
)
|
|
$
|
(5,078
|
)
|
|
$
|
(1,472
|
)
|
|
$
|
(2,081
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.36
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operation per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
-
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
11,353,657
|
|
|
|
10,675,308
|
|
|
|
11,358,971
|
|
|
|
10,765,637
|
|
** Weighted average number of shares
outstanding and per share amounts for all periods have been retroactively restated to reflect the Company’s 1 for 2.5 reverse
stock split, which was effective on August 19, 2016 (Note 1).
The following tables set forth
a breakdown of our total revenues, divided into five segments for the periods indicated, with inter-segment transactions eliminated:
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
Revenue type
|
|
(Amounts expressed in thousands of US dollars, except percentages)
|
|
|
|
|
|
|
|
|
|
-Internet advertisement and data service
|
|
|
13,676
|
|
|
|
53.8
|
%
|
|
$
|
13,706
|
|
|
|
57.6
|
%
|
-Technical services
|
|
|
21
|
|
|
|
0.1
|
%
|
|
|
301
|
|
|
|
1.3
|
%
|
-Search engine marketing service
|
|
|
11,701
|
|
|
|
46.1
|
%
|
|
|
8,533
|
|
|
|
35.8
|
%
|
Internet advertisement and related services
|
|
$
|
25,398
|
|
|
|
100
|
%
|
|
$
|
22,540
|
|
|
|
94.7
|
%
|
TV and Bank kiosk advertisement
|
|
|
-
|
|
|
|
-
|
|
|
|
1,261
|
|
|
|
5.3
|
%
|
Total
|
|
$
|
25,389
|
|
|
|
100
|
%
|
|
$
|
23,801
|
|
|
|
100
|
%
|
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
Revenue type
|
|
(Amounts expressed in thousands of US dollars, except percentages)
|
|
|
|
|
|
|
|
|
|
-Internet advertisement and data service
|
|
$
|
4,387
|
|
|
|
36.9
|
%
|
|
$
|
5,491
|
|
|
|
64.6
|
%
|
-Technical services
|
|
|
-
|
|
|
|
-
|
|
|
|
75
|
|
|
|
0.9
|
%
|
-Search engine marketing service
|
|
|
7,515
|
|
|
|
63.1
|
%
|
|
|
2,890
|
|
|
|
34.0
|
%
|
Internet advertisement and related services
|
|
$
|
11,902
|
|
|
|
100
|
%
|
|
$
|
8,456
|
|
|
|
99.5
|
%
|
TV and Bank kiosk advertisement
|
|
|
-
|
|
|
|
-
|
|
|
|
42
|
|
|
|
0.5
|
%
|
Total
|
|
$
|
11,902
|
|
|
|
100
|
%
|
|
$
|
8,498
|
|
|
|
100
|
%
|
Total Revenues:
Our total revenues increased
to US$25.4 million and US$11.9 million, respectively, for the nine and three months ended September 30, 2016 from US$23.8 million
and US$8.5 million, respectively, for the same period last year, which was primarily due to increase in revenues from search engine
marketing service during the periods.
We derive the majority of our service
revenues from the sale of advertising space on our internet portals and providing the related data service, sales of effective
sales lead information, providing search engine marketing (“SEM”) service and other related value added technical support
and services and content management services to unrelated third parties and to certain related parties. Our advertising and marketing
services to related parties were provided in the ordinary course of business on the same terms as those provided to our unrelated
customers. For the nine and three months ended September 30, 2016 and 2015, our service revenues from related parties in the aggregate
was less than 3% of the total revenues for each respective reporting period.
The tables below summarize the
revenues, cost of revenues, gross profit/(loss) and net (loss)/income generated from each of our VIEs and subsidiaries for the
nine and three months ended September 30, 2016 and 2015, respectively, with inter-company transactions eliminated:
For the nine months ended September 30, 2016:
Name of subsidiary or VIE
|
|
Revenue
from unrelated parties
|
|
Revenue from
related parties
|
|
Total
|
|
|
($’000)
|
|
($’000)
|
|
($’000)
|
|
|
|
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
109
|
|
|
|
-
|
|
|
|
109
|
|
Business Opportunity Online and subsidiaries
|
|
|
24,908
|
|
|
|
381
|
|
|
|
25,289
|
|
Beijing CNET Online and subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total revenues
|
|
|
25,017
|
|
|
|
381
|
|
|
|
25,398
|
|
For the three month ended September 30, 2016:
Name of subsidiary or VIE
|
|
Revenue from
unrelated parties
|
|
Revenue from
related parties
|
|
Total
|
|
|
($’000)
|
|
($’000)
|
|
($’000)
|
|
|
|
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Business Opportunity Online and subsidiaries
|
|
|
11,741
|
|
|
|
161
|
|
|
|
11,902
|
|
Beijing CNET Online and subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total revenues
|
|
|
11,741
|
|
|
|
161
|
|
|
|
11,902
|
|
For the nine months ended September 30, 2016:
Name of subsidiary or VIE
|
|
Cost of Revenues
|
|
Gross Profit
|
|
|
($’000)
|
|
($’000)
|
|
|
|
|
|
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
83
|
|
|
|
26
|
|
Business Opportunity Online and subsidiaries
|
|
|
19,186
|
|
|
|
6,103
|
|
Beijing CNET Online and subsidiaries
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
19,269
|
|
|
|
6,129
|
|
For the three months ended September 30, 2016:
Name of subsidiary or VIE
|
|
Cost of Revenues
|
|
Gross Profit/(Loss)
|
|
|
($’000)
|
|
($’000)
|
|
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
2
|
|
|
|
(2
|
)
|
Business Opportunity Online and subsidiaries
|
|
|
9,872
|
|
|
|
2,030
|
|
Beijing CNET Online and subsidiaries
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
9,874
|
|
|
|
2,028
|
|
For the nine months ended September 30, 2016:
Name of subsidiary or VIE
|
|
Net Loss
|
|
|
($’000)
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
(1,595
|
)
|
Business Opportunity Online and subsidiaries
|
|
|
(437
|
)
|
Beijing CNET Online and subsidiaries
|
|
|
(105
|
)
|
ChinaNet Online Holdings, Inc.
|
|
|
(1,822
|
)
|
Total net loss from continuing operations before allocation to the noncontrolling interest
|
|
|
(3,959
|
)
|
Loss from discontinued operations
|
|
|
(60
|
)
|
Total net loss before allocation to the noncontrolling interest
|
|
|
(4,019
|
)
|
For the three months ended September 30, 2016:
Name of subsidiary or VIE
|
|
Net Loss
|
|
|
($’000)
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
(444
|
)
|
Business Opportunity Online and subsidiaries
|
|
|
(304
|
)
|
Beijing CNET Online and subsidiaries
|
|
|
(39
|
)
|
ChinaNet Online Holdings, Inc.
|
|
|
(664
|
)
|
Total net loss from continuing operations before allocation to the noncontrolling interest
|
|
|
(1,451
|
)
|
Loss from discontinued operations
|
|
|
-
|
|
Total net loss before allocation to the noncontrolling interest
|
|
|
(1,451
|
)
|
For the nine months ended September 30, 2015:
Name of subsidiary or VIE
|
|
Revenue from
unrelated parties
|
|
Revenue from
related parties
|
|
Total
|
|
|
($’000)
|
|
($’000)
|
|
($’000)
|
|
|
|
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
301
|
|
|
|
-
|
|
|
|
301
|
|
Business Opportunity Online and subsidiaries
|
|
|
22,653
|
|
|
|
687
|
|
|
|
23,340
|
|
Beijing CNET Online and subsidiaries
|
|
|
160
|
|
|
|
-
|
|
|
|
160
|
|
Total revenues
|
|
|
23,114
|
|
|
|
687
|
|
|
|
23,801
|
|
For the three months ended September 30, 2015:
Name of subsidiary or VIE
|
|
Revenue from
unrelated parties
|
|
Revenue from
related parties
|
|
Total
|
|
|
($’000)
|
|
($’000)
|
|
($’000)
|
|
|
|
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
75
|
|
|
|
-
|
|
|
|
75
|
|
Business Opportunity Online and subsidiaries
|
|
|
8,183
|
|
|
|
219
|
|
|
|
8,402
|
|
Beijing CNET Online and subsidiaries
|
|
|
21
|
|
|
|
-
|
|
|
|
21
|
|
Total revenues
|
|
|
8,279
|
|
|
|
219
|
|
|
|
8,498
|
|
For the nine months ended September 30, 2015:
Name of subsidiary or VIE
|
|
Cost of Revenues
|
|
Gross Profit
|
|
|
($’000)
|
|
($’000)
|
|
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
-
|
|
|
|
301
|
|
Business Opportunity Online and subsidiaries
|
|
|
19,228
|
|
|
|
4,112
|
|
Beijing CNET Online and subsidiaries
|
|
|
6
|
|
|
|
154
|
|
Total
|
|
|
19,234
|
|
|
|
4,567
|
|
For the three months ended September 30, 2015:
Name of subsidiary or VIE
|
|
Cost of Revenues
|
|
Gross Profit
|
|
|
($’000)
|
|
($’000)
|
|
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
-
|
|
|
|
75
|
|
Business Opportunity Online and subsidiaries
|
|
|
7,046
|
|
|
|
1,356
|
|
Beijing CNET Online and subsidiaries
|
|
|
1
|
|
|
|
20
|
|
Total
|
|
|
7,047
|
|
|
|
1,451
|
|
For the nine months ended September 30, 2015:
Name of subsidiary or VIE
|
|
Net Loss
|
|
|
($’000)
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
(381
|
)
|
Business Opportunity Online and subsidiaries
|
|
|
(2,773
|
)
|
Beijing CNET Online and subsidiaries
|
|
|
(15
|
)
|
Shanghai Jing Yang
|
|
|
(1
|
)
|
ChinaNet Online Holdings, Inc.
|
|
|
(1,936
|
)
|
Total net loss from continuing operations before allocation to the noncontrolling interest
|
|
|
(5,106
|
)
|
Loss from discontinued operations
|
|
|
(204
|
)
|
Total net loss before allocation to the noncontrolling interest
|
|
|
(5,310
|
)
|
For the
three months
ended September 30, 2015:
Name of subsidiary or VIE
|
|
Net Loss/(Profit)
|
|
|
($’000)
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
(184
|
)
|
Business Opportunity Online and subsidiaries
|
|
|
(1,223
|
)
|
Beijing CNET Online and subsidiaries
|
|
|
35
|
|
Shanghai Jing Yang
|
|
|
-
|
|
ChinaNet Online Holdings, Inc.
|
|
|
(788
|
)
|
Total net loss from continuing operations before allocation to the noncontrolling interest
|
|
|
(2,160
|
)
|
Loss from discontinued operations
|
|
|
(95
|
)
|
Total net loss before allocation to the noncontrolling interest
|
|
|
(2,255
|
)
|
Management considers revenues generated
from internet advertising and data service, SEM services and other related technical services as one aggregate business operation
and relies upon the consolidated results of all the operations in this business unit to make decisions about allocating resources
and evaluating performance.
|
l
|
Internet advertising and data service revenues was approximately US$13.7 million for both the nine
months ended September 30, 2016 and 2015. For the three months ended September 30, 2016, Internet advertising and data service
revenues decreased to US$4.39 million from US$5.49 million for the same period in 2015. We believe that the temporary decrease
in our internet advertising and data service revenues during the third quarter of 2016 reflected our strategy to further upgrading
our internet advertising, marketing and data services to our larger SME clients and eliminating smaller and non-profitable clients.
During 2016, we optimized our online promotion analysis and cost control system to provide more data and feedback to our users,
which is especially helpful to our larger clients, we also optimized our online promotion tactics to improve cost efficiency, which
helped the Company and our clients achieve more accurate promotion and placement effects with acceptable costs, thereby increasing
sales lead conversion rate and overall client satisfaction with our services. As a result, along with eliminating smaller and non-profitable
clients, the number of larger customers served by us continued to increase, we believe that upgrading existing services and launching
new services will help increase our market penetration in the SME segment, thereby continuing to increase our recurring revenues
in future periods.
|
|
l
|
Revenues generated from technical services offered by Rise King WFOE were US$0.02 million and US$nil
for the nine and three months ended September 30, 2016, respectively, compared to US$0.30 million and US$0.08 million for the same
periods in 2015, respectively.
|
|
l
|
Revenue generated from search engine marketing services for the nine and three months ended September
30, 2016 was approximately US$11.7 million and US$7.5 million, respectively, compared to US$8.5 million and US$2.9 million for
the same periods in 2015, respectively. This enhanced third-party search engine marketing service is designed to help our clients
select the most effective key words and to prioritize the ranking of the anticipated search engine results on selected key words
in order to increase the sales lead conversion rate for our clients’ business promotion on both mobile and PC searches. Management
believes this service will be an effective supplement to the internet advertising and data service provided to our clients, and
will help increase the overall satisfaction with our services, thereby increasing recurring revenues and the number of clients
in the future.
|
|
l
|
As discussed in our 2015 Form 10-K, we exited our bank kiosk advertisement business segment in
the fourth fiscal quarter of 2015. We did not generate any TV advertisement revenues for the nine and three months ended September
30, 2016, since we did not finalize any TV advertisement resources contracts with suppliers during the periods. For the nine months
ended September 30, 2015, our total revenues generated from TV and bank kiosk advertisement was approximately US$1.26 million,
of which approximately US$1.10 million was generated from TV advertisement and US$0.16 million was generated from bank kiosk advertisement.
For the three months ended September 30, 2015, our total revenues generated from TV and bank kiosk advertisement was approximately
US$0.04 million, of which approximately US$0.02 million was generated form TV advertisement and US$0.02 million was generated from
bank kiosk advertisement.
|
Cost of revenues
Our cost of revenues consisted
of costs directly related to the offering of our advertising, marketing and data services and technical services. The following
table sets forth our cost of revenues, divided into five segments, by amount and gross profit ratio for the periods indicated,
with inter-segment transactions eliminated:
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
(Amounts expressed in thousands of US dollars, except percentages)
|
|
|
Revenue
|
|
Cost
|
|
GP ratio
|
|
Revenue
|
|
Cost
|
|
GP ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Internet advertisement and data service
|
|
$
|
13,676
|
|
|
$
|
7,863
|
|
|
|
43
|
%
|
|
$
|
13,706
|
|
|
$
|
9,468
|
|
|
|
31
|
%
|
-Contingent internet resources cost accrued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
419
|
|
|
|
-
|
|
-Technical services
|
|
|
21
|
|
|
|
4
|
|
|
|
81
|
%
|
|
|
301
|
|
|
|
-
|
|
|
|
100
|
%
|
-Search engine marketing service
|
|
|
11,701
|
|
|
|
11,402
|
|
|
|
2.6
|
%
|
|
|
8,533
|
|
|
|
8,284
|
|
|
|
3
|
%
|
Internet advertisement and related services
|
|
$
|
25,398
|
|
|
$
|
19,269
|
|
|
|
24
|
%
|
|
$
|
22,540
|
|
|
$
|
18,171
|
|
|
|
19
|
%
|
TV and Bank kiosks advertisement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,261
|
|
|
|
1,063
|
|
|
|
16
|
%
|
Total
|
|
$
|
25,398
|
|
|
$
|
19,269
|
|
|
|
24
|
%
|
|
$
|
23,801
|
|
|
$
|
19,234
|
|
|
|
19
|
%
|
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
(Amounts expressed in thousands of US dollars, except percentages)
|
|
|
Revenue
|
|
Cost
|
|
GP ratio
|
|
Revenue
|
|
Cost
|
|
GP ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Internet advertisement and data service
|
|
$
|
4,387
|
|
|
$
|
2,534
|
|
|
|
42
|
%
|
|
$
|
5,491
|
|
|
$
|
3,806
|
|
|
|
31
|
%
|
-Contingent internet resources cost accrued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
419
|
|
|
|
-
|
|
-Technical services
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
75
|
|
|
|
-
|
|
|
|
100
|
%
|
-Search engine marketing service
|
|
|
7,515
|
|
|
|
7,338
|
|
|
|
2.4
|
%
|
|
|
2,890
|
|
|
|
2,805
|
|
|
|
3
|
%
|
Internet advertisement and related services
|
|
$
|
11,902
|
|
|
$
|
9,874
|
|
|
|
17
|
%
|
|
$
|
8,456
|
|
|
$
|
7,030
|
|
|
|
17
|
%
|
TV and Bank kiosks advertisement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
42
|
|
|
|
17
|
|
|
|
60
|
%
|
Total
|
|
$
|
11,902
|
|
|
$
|
9,874
|
|
|
|
17
|
%
|
|
$
|
8,498
|
|
|
$
|
7,047
|
|
|
|
17
|
%
|
Cost of revenues:
Our total cost of revenues
increased to US$19.3 million and US$9.9 million, respectively, for the nine and three months ended September 30, 2016, compared
to US$19.2 million and US$7.0 million, respectively, for the same period in 2015. The increase in our total cost of revenues for
both periods were primarily due to the increase in costs associated with providing search engine marketing service during the periods,
which was in line with the increase in the related revenues as discussed above, and the increase in our search engine marketing
cost of revenues for the nine and three months ended September 30, 2016 was partially offset by the decrease in cost of revenues
associated with providing internet advertisement and data service, due to the improvement in gross margin of this business in 2016. Our
cost of revenues related to our advertising, marketing and data services primarily consists of internet resources purchased from
key search engines and technical services providers related to lead generation, sponsored search and other direct cost associated
with providing services.
|
l
|
For internet advertising and data service, cost associated with obtaining internet resources was
the largest component of our cost of revenues, accounting for over 80% of our total internet advertising and data service cost
of revenues. We purchased these internet resources from other well-known search engines and portal websites in China, such as:
Baidu, Qihu 360 and Sohu (Sogou). The purchase of these internet resources in large volumes allowed us to negotiate discounts with
our suppliers. For the nine and three months ended September 30, 2016, our total cost of revenues for internet advertising and
data service was approximately US$7.86 million and US$2.53 million, respectively, compared to US$9.47 million and US$3.81 million
for the same periods last year, respectively. For the nine and three months ended September 30, 2015, we also accrued an approximately
US$0.41 million contingent additional internet resources cost that might be charged by our supplier due to not meeting the minimum
consumption amount requirement set forth in the purchase contract, which amount was subsequently reduced to US$0.13 million based
on the final agreement reached between the two parties. During 2016, we continued developing our precision advertising and marketing
system, CloudX and optimized our digital marketing tactics by conglomerating different products of a single large customer and
relatively increasing our classified segment and industry level marketing scheme to improve cost efficiency, which helped us and
our clients achieve lead results and effects with acceptable or lower costs. As a result, excluding the contingent additional cost
accrued for the nine and three months ended September 30, 2015, the gross margin for our internet advertising and data service
revenues increased to 43% and 42% for the nine and three months ended September 30, 2016, respectively, compared to 31% for both
the nine and three months ended September 30, 2015.
|
|
l
|
Costs for search engine marketing services were direct internet resource costs consumed for search
engine marketing services provided to clients as described above. We normally charge our clients service fees for this service
as a certain percentage of the related direct cost consumed, which is normally 2%-3%. Gross margin of this service for the nine
and three months ended September 30, 2016 and 2015 was approximately 2.4%-3%.
|
Gross Profit
As a result of the foregoing, our
gross profit increased to US$6.13 million and US$2.03 million, respectively, for the nine and three months ended September
30, 2016, from US$4.57 million and US$1.45 million, respectively, for the nine and three months ended September 30, 2015. Our
overall gross margin increased to 24% for the nine months ended September 30, 2016, compared to 19% for the same period last year,
which was primarily due to the improvement in gross margin of our internet advertising and data service business, which was 43%
for the nine months ended September 30, 2016, compared to 31% for the same period last year. For the three months ended September
30, 2016, gross margin of our internet advertising and data service business also improved significantly to 42% from 31% for the
same period last year. However, due to the increase in relative lower margin revenues from search engine marketing services during
the period, which constituted approximately 63% of the total revenues during the period, compared to 34% of the total revenues
for the same period last year, our overall gross margin was 17% for both the three months ended September 30, 2016 and 2015.
Operating Expenses and Net Loss
Our operating expenses consist
of sales and marketing expenses, general and administrative expenses and research and development expenses. The following
tables set forth our operating expenses, divided into their major categories by amount and as a percentage of our total revenues
for the periods indicated.
We exited our brand management
and sales channel building business segment in the fourth fiscal quarter of 2015, which qualified for presentation as a discontinued
operation. The results of operation of this business was reported in discontinued operation as a separate component in the condensed
consolidated statements of operations and comprehensive loss for all periods presented. As a result, operating expenses amounts
in the condensed consolidated statements of operations and comprehensive loss for the nine and three months ended September 30,
2015 have been retrospectively adjusted to reflect the effect of reclassification of results of operations reported in discontinued
operation as a separate component.
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
(Amounts expressed in thousands of US dollars, except percentages)
|
|
|
Amount
|
|
% of total
revenue
|
|
Amount
|
|
% of total
revenue
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
25,398
|
|
|
|
100
|
%
|
|
$
|
23,801
|
|
|
|
100
|
%
|
Gross Profit
|
|
|
6,129
|
|
|
|
24
|
%
|
|
|
4,567
|
|
|
|
19
|
%
|
Sales and marketing expenses
|
|
|
3,069
|
|
|
|
12
|
%
|
|
|
3,437
|
|
|
|
14
|
%
|
General and administrative expenses
|
|
|
5,290
|
|
|
|
21
|
%
|
|
|
5,346
|
|
|
|
23
|
%
|
Research and development expenses
|
|
|
1,530
|
|
|
|
6
|
%
|
|
|
1,658
|
|
|
|
7
|
%
|
Total operating expenses
|
|
$
|
9,889
|
|
|
|
39
|
%
|
|
$
|
10,441
|
|
|
|
44
|
%
|
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
(Amounts expressed in thousands of US dollars, except percentages)
|
|
|
Amount
|
|
% of total
revenue
|
|
Amount
|
|
% of total
revenue
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
11,902
|
|
|
|
100
|
%
|
|
$
|
8,498
|
|
|
|
100
|
%
|
Gross Profit
|
|
|
2,028
|
|
|
|
17
|
%
|
|
|
1,451
|
|
|
|
17
|
%
|
Sales and marketing expenses
|
|
|
1,126
|
|
|
|
9
|
%
|
|
|
1,207
|
|
|
|
14
|
%
|
General and administrative expenses
|
|
|
1,752
|
|
|
|
15
|
%
|
|
|
2,207
|
|
|
|
26
|
%
|
Research and development expenses
|
|
|
514
|
|
|
|
4
|
%
|
|
|
595
|
|
|
|
7
|
%
|
Total operating expenses
|
|
$
|
3,392
|
|
|
|
28
|
%
|
|
$
|
4,009
|
|
|
|
47
|
%
|
Operating Expenses:
Our total operating
expenses decreased to US$9.89 million for the nine months ended September 30, 2016 from US$10.44 million for the
same period of 2015. For the three months ended September 30, 2016, our total operating expenses decreased to US$3.39 million from
US$4.01 million for the same period of 2015.
|
l
|
Sales and marketing expenses: Sales and marketing expenses decreased to US$3.07 million for the
nine months ended September 30, 2016 from US$3.44 million for the same period of 2015. For the three months ended September
30, 2016, sales and marketing expenses decreased to US$1.13 million from US$1.21 million for the same period of 2015. Our sales
and marketing expenses primarily consist of advertising expenses for brand development that we pay to different media outlets for
the promotion and marketing of our advertising web portals, other advertising and promotional expenses, staff salaries, staff benefits,
performance bonuses, travelling expenses, communication expenses and other general office expenses of our sales department. For
the nine and three months ended September 30, 2016, the decrease in our sales and marketing expenses was primarily due to the decrease
in server hosting expenses and other general office expenses of our sales department as compared with the same periods last year.
|
|
l
|
General and administrative expenses: General and administrative expenses decreased to US$5.29 million
for the nine months ended September 30, 2016 from US$5.35 million for the same period in 2015. For the three months ended
September 30, 2016, general and administrative expenses decreased to US$1.75 million from US$2.21 million for the same period of
2015. Our general and administrative expenses primarily consist of salaries and benefits for management, accounting and administrative
personnel, office rentals, depreciation and amortization, professional service fees, maintenance, utilities and other office expenses.
For the nine months ended September 30, 2016, the change in our general and administrative expenses was primarily due to the following
reasons: (1) the decrease in general administrative expenses, such as: professional service expenses, salary and benefit expenses,
office rental and other general office expenses of approximately US$0.09 million; and (2) the net effect of increase in allowances
for doubtful accounts, due to reversal of allowance for doubtful accounts of approximately US$0.03 million during the first nine
months of 2015 related to continuing operations. For the three months ended September 30, 2016, the change in our general and administrative
expenses was primarily due to the following reasons: (1) the decrease in general administrative expenses, such as: professional
service expenses, salary and benefit expenses, office rental and other general office expenses of approximately US$0.35 million;
and (2) the net effect of decrease in allowances for doubtful accounts, due to provision of allowance for doubtful accounts of
approximately US$0.11 million during the three months ended September 30, 2015 related to continuing operations, which resulted
in a net decrease in general and administration expenses of US$0.46 million, as compared to the same period in 2015.
|
|
l
|
Research and development expenses: Research and development expenses were US$1.53 million and US$0.51
million for the nine and three months ended September 30, 2016, respectively, compared to US$1.66 million and US$0.60 million for
the nine and three months ended September 30, 2015, respectively. Our research and development expenses primarily consist
of salaries and benefits for the research and development staff, equipment depreciation expenses, and office utilities and supplies
allocated to our research and development department.
|
Loss from operations:
As a result of the foregoing, we incurred a loss from operations of approximately US$3.76 million and US$5.87 million for the nine
months ended September 30, 2016 and 2015, respectively. We incurred a loss from operations of approximately US$1.36 million and
US$2.56 million for the three months ended September 30, 2016 and 2015, respectively.
Interest income:
For
the nine and three months ended September 30, 2016 and 2015, interest income we earned was primarily contributed from the approximately
US$3 million of term deposit we placed in one of the major financial institutions in the PRC.
Interest expense:
For
the nine and three months ended September 30, 2016 and 2015, interest expense we paid were primarily related to the short-term
bank loan we borrowed from major financial institutions in the PRC to supplement our short-term working capital needs.
Loss before income tax expense,
equity method investments, noncontrolling interests and discontinued operation:
As a result of the foregoing, our loss before income tax expense, equity method investment, noncontrolling
interest and discontinued operation was approximately US$3.80 million and US$5.80 million for the nine months ended September 30,
2016 and 2015, respectively.
Our loss before income tax expense, equity method investment, noncontrolling
interest and discontinued operation was approximately US$1.45 million and US$2.55 million for the three months ended September
30, 2016 and 2015, respectively
.
Income Tax (expense)/benefit:
We recognized a net deferred income tax expense of approximately US$0.16 million and US$0.003 million for the nine and
three months ended September 30, 2016, respectively. For the nine and three months ended September 30, 2016, approximately US$0.09
million and US$0.03 million of our income tax benefit, respectively, was in relation to the amortization of the intangible assets
identified in the acquisition transactions consummated in previous years; approximately US$0.07 million and US$nil of our income
tax benefit was in relation to the net operating loss incurred by our PRC operating VIEs for the period, respectively, which we
consider likely to be able to utilized with respect to future earnings of the entities to which the operating losses relate; and
we also incurred approximately US$0.31 million and US$0.033 million deferred income tax expense by utilizing deferred tax assets
recognized in previous years due to earnings generated during the periods, respectively.
For the nine and three months ended
September 30, 2015, we recognized a net income tax benefit of approximately US$0.70 million and US$0.39 million, respectively.
For the nine months ended September 30, 2015, current income tax expense was approximately US$0.002 million. For the three months
ended September 30, 2015, we reversed approximately US$0.002 million current income tax expenses accrued in previous quarter due
to decrease in pre-tax income during the period. For the nine months ended September 30, 2015, our deferred income tax benefit
was approximately US$0.70 million, of which approximately US$0.10 million was in relation to the amortization expenses of the intangible
assets identified in the acquisition transactions consummated in previous years, and approximately US$0.60 million was in relation
to the net operating loss incurred by our PRC operating VIEs for the period, which we consider likely to be able to be utilized
with respect to future earnings of the entities to which the operating losses relate. For the three months ended September 30,
2015, our deferred income tax benefit was approximately US$0.39 million, of which approximately US$0.03 million was in relation
to the amortization expenses of the intangible assets identified in the acquisition transactions consummated in previous years,
and approximately US$0.36 million was in relation to the net operating loss incurred by our PRC operating VIEs for the period,
which we consider likely to be able to be utilized with respect to future earnings of the entities to which the operating losses
relate.
Loss before equity method investments,
noncontrolling interests and discontinued operation:
As a result of the foregoing, our loss before equity method investment,
noncontrolling interest and discontinued operation was approximately US$3.96 million and US$5.10 million for the nine months ended
September 30, 2016 and 2015, respectively. Our loss before equity method investment, noncontrolling interest and discontinued operation
was approximately US$1.45 million and US$2.16 million for the three months ended September 30, 2016 and 2015, respectively.
Share of income in equity investment
affiliates:
For the nine and three months ended September 30, 2016 and 2015, we beneficially owned 23.18% and 25.5% equity
interest in Shenzhen Mingshan and Zhao Shang Ke Hubei, respectively. Accordingly, for the nine and three months ended September
30, 2015, we recognized our pro-rata share of losses in Shenzhen Mingshan and Zhao Shang Ke Hubei of approximately US$0.002 million
and US$0.004 million, respectively. For the nine and three months ended September 30, 2016, we did not recognize any pro-rata share
of loss in these equity investment affiliates, because the amounts were immaterial.
Loss from continuing operations:
As a result of the foregoing, we incurred a net loss from continuing operations of approximately US$3.96 million and US$5.11
million for the nine months ended September 30, 2016 and 2015, respectively. We incurred a net loss from continuing operations
of approximately US$1.45 million and US$2.16 million for the three months ended September 30, 2016 and 2015, respectively.
Loss from discontinued operation,
net of income tax:
We exited our brand management and sales channel building business segment in the fourth fiscal quarter
of 2015, operated by one of our VIEs, Quanzhou City Zhilang Network Technology Co., Ltd. (“Quanzhou Zhi Lang”), which
qualified for presentation as a discontinued operation. In June 2016, we disposed Quanzhou Zhi Lang to an unaffiliated third-party,
the loss incurred from the disposal was also included in results of operations of discontinued operation, presented as a separate
component in the condensed consolidated statements of operations and comprehensive loss for all periods presented. Major classes
of line items constituting pre-tax net loss and net loss of the discontinued operation for the nine and three months ended September
30, 2016 and 2015, respectively, are as follows:
|
|
Nine Months Ended September 30,
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
-
|
|
|
|
212
|
|
|
|
-
|
|
|
|
45
|
|
Cost of revenues
|
|
|
-
|
|
|
|
122
|
|
|
|
-
|
|
|
|
18
|
|
Total operating expenses
|
|
|
51
|
|
|
|
314
|
|
|
|
-
|
|
|
|
126
|
|
Not loss before income tax benefit
|
|
|
(51
|
)
|
|
|
(224
|
)
|
|
|
-
|
|
|
|
(99
|
)
|
Income tax benefit
|
|
|
-
|
|
|
|
20
|
|
|
|
-
|
|
|
|
4
|
|
Loss from discontinued operation, net of income tax
|
|
|
(51
|
)
|
|
|
(204
|
)
|
|
|
-
|
|
|
|
(95
|
)
|
Loss on disposal of discontinued operation, net of income tax
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss from and on disposal of discontinued operation, net of income tax
|
|
|
(60
|
)
|
|
|
(204
|
)
|
|
|
-
|
|
|
|
(95
|
)
|
Net loss:
As a result
of the foregoing, for the nine months ended September 30, 2016 and 2015, we incurred a total net loss from continuing and discontinued
operations of approximately US$4.02 million and US$5.31 million, respectively. For the three months ended September 30, 2016 and
2015, we incurred a total net loss from continuing and discontinued operations of approximately US$1.45 million and US$2.26 million,
respectively.
Net (income)/loss attributable
to noncontrolling interest from continuing operations:
Beijing Chuang Fu Tian Xia was 51% owned by Business Opportunity
Online upon incorporation. For the nine and three months ended September 30, 2016, net income allocated to the noncontrolling interests
of Beijing Chuang Fu Tian Xia was approximately US$0.14 million and US$0.02 million, respectively. For the nine and three months
ended September 30, 2015, net loss allocated to the noncontrolling interests of Beijing Chuang Fu Tian Xia was approximately US$0.23
million and US$0.17 million, respectively.
Net loss attributable to ChinaNet
Online Holdings, Inc.:
Total net loss as adjusted by net loss attributable to the noncontrolling interest shareholders
as discussed above yields the net loss attributable to ChinaNet Online Holdings, Inc. Net loss attributable to ChinaNet Online
Holdings, Inc. was US$4.16 million and US$5.08 million for the nine months ended September 30, 2016 and 2015, respectively. Net
loss attributable to ChinaNet Online Holdings, Inc. was US$1.47 million and US$2.08 million for the three months ended September
30, 2016 and 2015, respectively.
B. LIQUIDITY
AND CAPITAL RESOURCES
Cash and cash equivalents represent
cash on hand and deposits held at call with banks. We consider all highly liquid investments with original maturities of three
months or less at the time of purchase to be cash equivalents. As of September 30, 2016, we had cash and cash equivalents of approximately
US$1.2 million. We also had approximately US$3.2 million of term deposit placed in one of the major financial institutions in China
which will mature in July 2017.
Our liquidity needs include (i)
net cash used in operating activities that consists of (a) cash required to fund the initial build-out, continued expansion of
our network and new services and (b) our working capital needs, which include deposits and advance payments to internet resource
and technical services providers, payment of our operating expenses and financing of our accounts receivable; and (ii) net cash
used in investing activities that consist of the payment for acquisitions to further expand our business and client base, investment
in software technologies to enhance the functionality of the management tools for providing our advertising, marketing and data
services and to secure the safety of our general network, and investment in other general office equipment. To date, we have financed
our liquidity need primarily through proceeds from operating activities we generated. Our existing cash is adequate to fund operations
for the next twelve months.
The following table provides detailed
information about our net cash flow for the periods indicated:
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
Amounts in thousands of US dollars
|
|
|
|
|
|
Net cash (used in)/provided by operating activities
|
|
$
|
(1,853
|
)
|
|
$
|
1,273
|
|
Net cash used in investing activities
|
|
|
(2,904
|
)
|
|
|
(4,373
|
)
|
Net cash provided by financing activities
|
|
|
456
|
|
|
|
102
|
|
Changes in cash and cash equivalents included in assets held for sale
|
|
|
132
|
|
|
|
-
|
|
Effect of foreign currency exchange rate changes on cash
|
|
|
(88
|
)
|
|
|
(98
|
)
|
Net decrease in cash and cash equivalents
|
|
$
|
(4,257
|
)
|
|
$
|
(3,096
|
)
|
Net cash (used in)/provided by operating
activities
For the nine months ended September
30, 2016, our net cash used in operating activities of approximately US$1.85 million were primarily attributable to:
|
(1)
|
net loss excluding approximately US$1.17 million of non-cash expenses
of depreciation and amortizations; approximately US$1.72 million share-based compensation; approximately US$0.12 million of loss
on disposal of fixed assets, approximately US$0.01 million loss on deconsolidation of VIE and approximately US$0.16 million of
net deferred income tax expense of approximately US$0.85 million;
|
|
(2)
|
the receipt of cash from operations from changes in operating
assets and liabilities such as:
|
|
-
|
other receivable decreased by approximately US$1.42 million, primarily
due to subsequent collection of TV advertisement deposit and prepayment receivable related to a contract expired on December 31,
2014;
|
|
-
|
other current assets decreased by approximately US$0.02 million;
|
|
-
|
other payables increased by approximately US$0.40 million; and
|
|
-
|
taxes payable increased by approximately US$0.07 million.
|
|
(3)
|
offset by the use from operations from changes in operating assets
and liabilities such as:
|
|
-
|
accounts receivable and due from related parties for advertising
services provided increased by approximately US$1.22 million;
|
|
-
|
deposit and prepayment to suppliers increased by approximately
US$1.17 million;
|
|
-
|
advance from customers decreased by approximately US$0.11 million;
|
|
-
|
accounts payable decreased by approximately US$0.13 million;
|
|
-
|
accruals decreased by approximately US$0.15 million; and
|
|
-
|
contingent liability decreased by US$0.13 million.
|
For the nine months ended September
30, 2015, our net cash provided by operating activities of approximately US$1.27 million were primarily attributable to:
|
(1)
|
net loss of US$5.31 million, adjusted by excluding an approximately
US$0.72 million net deferred income tax benefit, a US$1.31 million non-cash expenses of depreciation, amortization, a US$1.64 million
share-based compensation expenses and a US$0.17 million allowance for doubtful accounts and written-off other long-term assets,
yielded the non-cash items excluded net loss of approximately US$2.91 million;
|
|
(2)
|
the receipt of cash from operations from changes in operating assets
and liabilities such as:
|
|
-
|
other receivable decreased by approximately US$1.91 million, primarily
due to the partial collection of the TV advertisement deposit and prepayment receivable related to a contract expired on December
31, 2014;
|
|
-
|
prepayment and deposit to suppliers decreased by approximately
US$2.10 million, primarily due to decrease in contractual deposit amount paid to internet resources providers in 2015 as compared
to that in 2014;
|
|
-
|
advance from customers increased by approximately US$1.44 million;
|
|
-
|
accruals and other payables increased by approximately US$0.22
million; and
|
|
-
|
we recognized an approximately US$0.42 million contingent liabilities
related to possible additional internet resources cost that might be charged by the supplier due to the fact that more likely than
not we may not able to meet the minimum consumption amount requirement set forth in the purchase contract.
|
|
(3)
|
offset by the use from operations from changes in operating assets
and liabilities such as:
|
|
-
|
accounts receivable and due from related parties for advertising
services provided increased by approximately US$1.80 million;
|
|
-
|
accounts payable decreased by approximately US$0.05 million,
|
|
-
|
taxes payable decreased by approximately US$0.03 million and
|
|
-
|
other current assets increased by approximately US$0.03 million.
|
Net cash used in investing activities
For the nine months ended September
30, 2016, our cash used in investing activities included the following transactions: (1) we spent approximately US$0.15 million
for the purchase of general office equipment and expenditures on leasehold improvements; (2) we paid approximately US$1.98 million
to purchase software technology related to Internet operation safety, information exchange security and data encryption and management;
(3) we lent two of our cost method investees an aggregate of approximately US$0.31 million of short-term working capital loans
during the period; (4) we made additional investments to our investee companies of approximately US$0.47 million in aggregate during
the period; (5) cash divested from deconsolidation of VIE of approximately US$0.02 million; and (6) proceeds from disposal of investee
companies of approximately US$0.03 million. In the aggregate, these transactions resulted in a net cash outflow from investing
activities of approximately US$2.90 million for the nine months ended September 30, 2016.
For the nine months ended September
30, 2015, our cash used in investing activities included the following transactions: (1) we spent approximately US$0.31 million
for the purchase of general office equipment and expenditures on leasehold improvements; (2) we paid approximately US$2.80 million
to settle the remaining balance related to the purchasing of software technology, which transaction consummated in December 2014
and US$1.08 million for purchasing of software products related to cloud video management system; and (3) we made investments of
approximately US$0.19 million in the aggregate to our cost/equity method investees during the period. In the aggregate, these transactions
resulted in a net cash outflow from investing activities of approximately US$4.37 million for the nine months ended September 30,
2015.
Net cash provided by financing activities
For the nine months ended September
30, 2016, we borrowed approximately US$0.46 million short-term bank loan from one of the major commercial banks in the PRC, which
was recorded as cash provided by financing activities during the period.
For the nine months ended September
30, 2015, our cash provided by financing activities included the following transactions: (1) we received approximately US$0.99
million guarantee payment and prepayment from two of our new investors in relation to the security purchase agreements entered
into in May 2015; (2) we repaid approximately US$0.08 million to the noncontrolling interest of one of our VIEs in relation to
the working capital loan we borrow from the noncontrolling interest in previous year; and (3) we repaid our short-term bank loan
of approximately US$0.81 million that matured in September 2015. In the aggregate, these transactions resulted in a net cash inflow
from financing activities of approximately US$0.10 million for the nine months ended September 30, 2015.
Restricted Net Assets
As most of our operations are conducted
through our PRC subsidiary and VIEs, our ability to pay dividends is primarily dependent on receiving distributions of funds from
our PRC subsidiary and VIEs. Relevant PRC statutory laws and regulations permit payments of dividends by our PRC subsidiary and
VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations and
after it has met the PRC requirements for appropriation to statutory reserves. Paid in capital of the PRC subsidiary and VIEs included
in our consolidated net assets are also not distributable for dividend purposes.
In accordance with the PRC regulations
on Enterprises with Foreign Investment, a WFOE established in the PRC is required to provide certain statutory reserves, namely
general reserve fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as
reported in the enterprise’s PRC statutory accounts. A WFOE is required to allocate at least 10% of its annual after-tax
profit to the general reserve until such reserve has reached 50% of its registered capital based on the enterprise’s PRC
statutory accounts. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the
board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends.
Rise King WFOE is subject to the above mandated restrictions on distributable profits. Additionally, in accordance with the Company
Law of the PRC, a domestic enterprise is required to provide a statutory common reserve of at least 10% of its annual after-tax
profit until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. A domestic
enterprise is also required to provide for a discretionary surplus reserve, at the discretion of the board of directors. The aforementioned
reserves can only be used for specific purposes and are not distributable as cash dividends. All of our PRC VIEs are subject to
the above mandated restrictions on distributable profits.
As a result of these PRC laws and
regulations, our PRC subsidiary and VIEs are restricted in their ability to transfer a portion of their net assets to us. As of
September 30, 2016 and December 31, 2015, net assets restricted in the aggregate, which includes paid-in capital and statutory
reserve funds of our PRC subsidiary and VIEs that are included in our consolidated net assets, was approximately US$8.1 million
and US$6.7 million, respectively.
The current PRC Enterprise Income
Tax Law also imposed a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding
company outside China. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China
and the jurisdiction of the foreign holding company. Holding companies in Hong Kong, for example, will be subject to a 5% rate.
The ability of our PRC subsidiaries
to make dividends and other payments to us may also be restricted by changes in applicable foreign exchange and other laws and
regulations.
Foreign currency exchange regulation
in China is primarily governed by the following rules:
|
l
|
Foreign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules;
|
|
l
|
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration
Rules.
|
Currently, under the Administration
Rules, Renminbi is freely convertible for current account items, including the distribution of dividends, interest payments, trade
and service related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation
of investments and investments in securities outside of China, unless the prior approval of the State Administration of Foreign
Exchange (the “SAFE”) is obtained and prior registration with the SAFE is made. Foreign-invested enterprises like Rise
King WFOE that need foreign exchange for the distribution of profits to its shareholders may effect payment from their foreign
exchange accounts or purchase and pay foreign exchange rates at the designated foreign exchange banks to their foreign shareholders
by producing board resolutions for such profit distribution. Based on their needs, foreign-invested enterprises are permitted to
open foreign exchange settlement accounts for current account receipts and payments of foreign exchange along with specialized
accounts for capital account receipts and payments of foreign exchange at certain designated foreign exchange banks.
Although the current Exchange Rules
allow the convertibility of Chinese Renminbi into foreign currency for current account items, conversion of Chinese Renminbi into
foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of SAFE, which
is under the authority of the People’s Bank of China. These approvals, however, do not guarantee the availability of foreign
currency conversion. We cannot be sure that it will be able to obtain all required conversion approvals for our operations or the
Chinese regulatory authorities will not impose greater restrictions on the convertibility of Chinese Renminbi in the future. Currently,
most of our retained earnings are generated in Renminbi. Any future restrictions on currency exchanges may limit our ability to
use retained earnings generated in Renminbi to make dividends or other payments in U.S. dollars or fund possible business activities
outside China.
As of September 30, 2016 and December
31, 2015, there were approximately US$19.9 million and US$22.9 million retained earnings in the aggregate, respectively, which
were generated by our PRC subsidiary and VIEs in Renminbi included in our consolidated net assets, aside from US$2.6 million and
US$2.8 million of statutory reserve funds as of September 30, 2016 and December 31, 2015, respectively, that may be affected by
increased restrictions on currency exchanges in the future, and accordingly, may further limit our PRC subsidiary’s or VIEs’
ability to make dividends or other payments in U.S. dollars to us, in addition to the approximately US$8.1 million and US$6.7 million
of restricted net assets as of September 30, 2016 and December 31, 2015, as discussed above.
C. OFF-BALANCE
SHEET ARRANGEMENTS
None.