PART
I
ITEM
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not
Applicable.
ITEM
2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not
Applicable.
ITEM
3. KEY INFORMATION
A.
Selected financial data.
The
selected historical consolidated financial statement of operations data for the years ended December 31, 2014, 2015 and 2016 and
the selected historical consolidated balance sheet data as of December 31, 2015 and 2016 set forth below are derived from our
audited historical consolidated financial statements included elsewhere in this annual report. The selected historical consolidated
statement of operations data for the years ended December 31, 2012 and 2013 and the selected historical consolidated balance sheet
data as of December 31, 2012, 2013 and 2014 set forth below are derived from our audited historical consolidated financial statements,
which are not included in this annual report. This data may not be indicative of our future condition or results of operations
and should be read in conjunction with “Operating and Financial Review and Prospects” and the consolidated financial
statements and accompanying notes.
|
|
For
the year ended December 31,
|
|
(in thousands of U.S.
dollars, except per share or per ADS data)
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Consolidated statement of operations and comprehensive
income (loss) data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
29,599
|
|
|
$
|
52,738
|
|
|
$
|
83,696
|
|
|
$
|
107,405
|
|
|
$
|
83,058
|
|
Cost of revenues
|
|
|
(8,089
|
)
|
|
|
(10,570
|
)
|
|
|
(20,353
|
)
|
|
|
(19,739
|
)
|
|
|
(20,380
|
)
|
Gross profit
|
|
|
21,510
|
|
|
|
42,168
|
|
|
|
63,343
|
|
|
|
87,666
|
|
|
|
62,678
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
(11,387
|
)
|
|
|
(15,210
|
)
|
|
|
(17,592
|
)
|
|
|
(17,994
|
)
|
|
|
(19,837
|
)
|
Product development
|
|
|
(10,736
|
)
|
|
|
(9,033
|
)
|
|
|
(11,148
|
)
|
|
|
(10,739
|
)
|
|
|
(14,485
|
)
|
Sales and marketing
|
|
|
(13,072
|
)
|
|
|
(30,588
|
)
|
|
|
(43,761
|
)
|
|
|
(46,474
|
)
|
|
|
(50,083
|
)
|
Loss from impairment
of intangible assets
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,802
|
)
|
|
|
(250
|
)
|
|
|
(1,111
|
)
|
Loss from impairment
of goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,150
|
)
|
|
|
-
|
|
|
|
(6,660
|
)
|
Total operating
expenses
|
|
|
(35,195
|
)
|
|
|
(54,831
|
)
|
|
|
(82,453
|
)
|
|
|
(75,457
|
)
|
|
|
(92,176
|
)
|
Government subsidies
|
|
|
76
|
|
|
|
11
|
|
|
|
659
|
|
|
|
252
|
|
|
|
1,195
|
|
Income (loss)
from operations
|
|
|
(13,609
|
)
|
|
|
(12,652
|
)
|
|
|
(18,451
|
)
|
|
|
12,461
|
|
|
|
(28,303
|
)
|
Interest income
|
|
|
3,178
|
|
|
|
1,341
|
|
|
|
4,044
|
|
|
|
2,648
|
|
|
|
1,051
|
|
Interest expense
|
|
|
(518
|
)
|
|
|
(197
|
)
|
|
|
(12
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
Exchange gain
(loss), net
|
|
|
72
|
|
|
|
557
|
|
|
|
(112
|
)
|
|
|
(766
|
)
|
|
|
(55
|
)
|
Gain on the interest
sold and retained noncontrolling investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
20,568
|
|
Gain from sale
of cost method investment
|
|
|
-
|
|
|
|
-
|
|
|
|
4,338
|
|
|
|
4,648
|
|
|
|
-
|
|
Gain (loss) from
equity method investment
|
|
|
-
|
|
|
|
2,774
|
|
|
|
-
|
|
|
|
(67
|
)
|
|
|
(138
|
)
|
Short-term investments
income
|
|
|
435
|
|
|
|
132
|
|
|
|
58
|
|
|
|
216
|
|
|
|
379
|
|
Other income (expense),
net
|
|
|
(634
|
)
|
|
|
(29
|
)
|
|
|
18
|
|
|
|
(937
|
)
|
|
|
(305
|
)
|
Income (loss)
before income tax expense
|
|
|
(11,076
|
)
|
|
|
(8,074
|
)
|
|
|
(10,117
|
)
|
|
|
28,202
|
|
|
|
(6,805
|
)
|
Income tax expense
|
|
|
(884
|
)
|
|
|
(100
|
)
|
|
|
(514
|
)
|
|
|
(1,384
|
)
|
|
|
(4,161
|
)
|
Net income (loss)
|
|
|
(11,960
|
)
|
|
|
(8,174
|
)
|
|
|
(10,631
|
)
|
|
|
26,818
|
|
|
|
(10,966
|
)
|
Less: net income
(loss) attributable to the noncontrolling interests
|
|
|
(105
|
)
|
|
|
399
|
|
|
|
(3,463
|
)
|
|
|
4,335
|
|
|
|
(9,287
|
)
|
Net income (loss)
attributable to China Finance Online Co. Limited
|
|
$
|
(11,855
|
)
|
|
$
|
(8,573
|
)
|
|
$
|
(7,168
|
)
|
|
$
|
22,483
|
|
|
$
|
(1,679
|
)
|
Net income (loss)
per share attributable to China Finance Online Co. Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-basic
|
|
$
|
(0.11
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
0.20
|
|
|
$
|
(0.01
|
)
|
-diluted
|
|
$
|
(0.11
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
0.18
|
|
|
$
|
(0.01
|
)
|
Net income (loss)
per ADS equivalent attributable to China Finance Online Co. Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-basic (1)
|
|
$
|
(0.54
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
1.01
|
|
|
$
|
(0.07
|
)
|
-diluted (1)
|
|
$
|
(0.54
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
0.90
|
|
|
$
|
(0.07
|
)
|
(in thousands of U.S. dollars)
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Consolidated balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
40,906
|
|
|
$
|
36,371
|
|
|
$
|
32,539
|
|
|
$
|
85,734
|
|
|
$
|
66,151
|
|
Current working capital (2)
|
|
|
70,360
|
|
|
|
56,677
|
|
|
|
55,771
|
|
|
|
76,976
|
|
|
|
64,701
|
|
Total assets
|
|
|
121,371
|
|
|
|
133,493
|
|
|
|
113,903
|
|
|
|
144,065
|
|
|
|
167,624
|
|
Short-term loan
|
|
|
13,546
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Deferred revenue, current
|
|
|
7,551
|
|
|
|
6, 150
|
|
|
|
4,936
|
|
|
|
6,659
|
|
|
|
6,526
|
|
Total current liabilities
|
|
|
36,331
|
|
|
|
39,203
|
|
|
|
36,443
|
|
|
|
43,759
|
|
|
|
85,130
|
|
Deferred revenue, non-current
|
|
|
3,155
|
|
|
|
1,986
|
|
|
|
1,373
|
|
|
|
692
|
|
|
|
609
|
|
Total China Finance Online Co. limited shareholders’ equity
|
|
|
79,965
|
|
|
|
75,771
|
|
|
|
64,615
|
|
|
|
88,038
|
|
|
|
86,165
|
|
(1)
|
Each
ADS represents five ordinary shares.
|
(2)
|
Current
working capital is the difference between total current assets and total current liabilities.
|
Exchange
Rate Information
We have published our financial statements
in U.S. dollars. Our business is primarily conducted in China and is denominated in Renminbi. Periodic reports will be made to
shareholders and will be expressed in U.S. dollars using the then-current exchange rates. The conversion of Renminbi into U.S.
dollars in this annual report is based on the official base exchange rate published by the People’s Bank of China. Unless
otherwise noted, all translations from Renminbi to U.S. dollars in this annual report were made at $1.00 to RMB6.9370,
which were the prevailing exchange rate on December 31, 2016. The prevailing exchange rate on April 12, 2017 was $1.00 to RMB6.8940. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars
or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes controls
over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through
restrictions on foreign trade.
The
People’s Bank of China sets and publishes a daily base exchange rate. Until July 21, 2005, the People’s Bank of China
set this rate with reference primarily to the supply and demand of Renminbi against the U.S. dollar in the market during the prior
day. Beginning on July 21, 2005, the People’s Bank of China has set this rate with reference primarily to the supply and
demand of Renminbi against a basket of currencies in the market during the prior day. The People’s Bank of China also takes
into account other factors such as the general conditions existing in the international foreign exchange markets. Although governmental
policies were introduced in the PRC in 1996 to reduce restrictions on the convertibility of Renminbi into foreign currency for
current account items, conversion of Renminbi into foreign exchange for capital items, such as foreign direct investment, loans
or security, requires the approval of the State Administration for Foreign Exchange and other relevant authorities.
The
following table sets forth various information concerning exchange rates between the Renminbi and the U.S. dollar for the periods
indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this
annual report or will use in the preparation of our periodic reports or any other information to be provided to you.
|
|
Average(1)
|
|
|
High
|
|
|
Low
|
|
|
Period-end
|
|
|
|
(RMB per U.S.$1.00)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
6.3085
|
|
|
|
6.3495
|
|
|
|
6.2670
|
|
|
|
6.2855
|
|
December 31, 2013
|
|
|
6.1896
|
|
|
|
6.2898
|
|
|
|
6.0969
|
|
|
|
6.0969
|
|
December 31, 2014
|
|
|
6.1453
|
|
|
|
6.1710
|
|
|
|
6.0930
|
|
|
|
6.1190
|
|
December 31, 2015
|
|
|
6.2401
|
|
|
|
6.4936
|
|
|
|
6.1079
|
|
|
|
6.4936
|
|
December 31, 2016
|
|
|
6.6529
|
|
|
|
6.9508
|
|
|
|
6.4565
|
|
|
|
6.9370
|
|
Most recent six months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2016
|
|
|
6.7442
|
|
|
|
6.7858
|
|
|
|
6.7008
|
|
|
|
6.7641
|
|
November 2016
|
|
|
6.8375
|
|
|
|
6.9168
|
|
|
|
6.7491
|
|
|
|
6.8865
|
|
December 2016
|
|
|
6.9182
|
|
|
|
6.9508
|
|
|
|
6.8575
|
|
|
|
6.9370
|
|
January 2017
|
|
|
6.8918
|
|
|
|
6.9526
|
|
|
|
6.8331
|
|
|
|
6.8588
|
|
February 2017
|
|
|
6.8713
|
|
|
|
6.8898
|
|
|
|
6.8456
|
|
|
|
6.8750
|
|
March 2017
|
|
|
6.8932
|
|
|
|
6.9125
|
|
|
|
6.8701
|
|
|
|
6.8993
|
|
April 2017 (through 12th)
|
|
|
6.8954
|
|
|
|
6.9042
|
|
|
|
6.8906
|
|
|
|
6.8940
|
|
(1)
|
Annual
averages are calculated using the average of month-end rates of the relevant year. Monthly averages are calculated using the
average of the daily rates during the relevant period.
|
B.
Capitalization and indebtedness.
Not
Applicable.
C.
Reasons for the offer and use of proceeds.
Not
Applicable.
D.
Risk factors.
Risks
relating to our business
Any
prolonged or substantial slowdown in the global or Chinese economy could adversely affect Chinese investors’ interests and
engagement in the securities market, which may in turn have a significantly negative impact on our business.
Our
business can be adversely affected by the general macroeconomic environment. Global economic, securities market and financial
developments all could significantly influence the overall interests and engagement of Chinese investors in the stock market.
China macro-economic growth has also slowed down due to various factors, including concerns over China’s economic transformation
and the bleak corporate earnings prospects and deteriorating global economic conditions. Any prolonged or substantial slowdown
in the global or Chinese economy could adversely affect Chinese investors’ interests and engagement in the securities market,
which may in turn have a significant negative impact on our business.
Increasing
challenges in China’s securities markets, economic conditions, inflation, regulatory policies, interests rates, the availability
of hedging instruments and other factors that could affect investors’ interests in investing in China’s securities
markets could have an adverse effect on our business.
We
believe that the level of investors’ interest in investing in China’s securities market could significantly influence
the demand for market intelligence on China’s securities markets and our products and services. Such demand could be affected
by the level of trading activities in China’s securities markets. However, irregular activities involving China’s
securities markets, including, without limitation, insider trading, large-scale selling shares by executive officers of newly
listed companies, over issuance of IPOs and inadequate legal protections of individual investors, have become increasingly intense
in recent years and resulted in market weakness and decreased investor confidence in China’s securities markets. Any factors
that lead to weakness or intensified volatility in China’s securities markets in the future may diminish investors’
interest in China’s securities markets, and our business could be adversely affected accordingly.
The
China Securities Regulatory Commission, or the CSRC, officially approved the trial margin trading and short selling rules at Shanghai
and Shenzhen Stock Exchanges in late 2011, which indicates that margin trading and short selling have become the regular trading
activities within China’s securities market. On July 1, 2015, CSRC announced regulations that capped the volume of brokerages’
margin trading businesses as part of an effort to minimize the risks associated with highly leveraged stock market. And in the
wake of the stock market’s dramatic fall in early July 2015, CSRC took another step to curb volatility, launching investigations
into “malicious short selling” in the equity futures market. Both the Shanghai and Shenzhen stock exchanges published
new rules on their websites in early August 2015 barring investors from borrowing and repaying stocks on the same day. In November
2015, the Shanghai and Shenzhen stock exchanges further announced rule changes that would double the required base ratio for margin
financing as the government looks to reduce excessive leverage. Despite the measures by the government, it is possible that these
hedging instruments, among other things, could cause increased volatility in China’s securities market, which, in turn,
may have a negative impact on Chinese investors’ participation in the securities market, and materially and adversely affect
our business.
The
Interim Measures on Administration of the Business Activities of Peer-to-Peer Lending Information Intermediaries may adversely
affect our business, financial conditions and results of operations.
The
laws and regulations governing the peer-to-peer (“P2P”) lending service industry in China are developing and evolving
and subject to changes. On December 28, 2015, the China Banking Regulatory Commission (the “CBRC”) revealed proposed
rules on the regulation of online P2P lending platform for public comment. The proposed rules require P2P lending platforms to
publicly disclose aggregate loan information and performance. All P2P lenders are required to register with local financial authorities
to improve transparency. Online lenders will not be allowed to use any outside funding.
On
August 24, 2016, the CBRC, the Ministry of Industry and Information Technology (“MIIT”), the Ministry of Public Security
and the Cyber Administration of China (“CAC”) jointly released the Interim Measures on Administration of the Business
Activities of Peer-to-Peer Lending Information Intermediaries (the “Interim Measures”). The Interim Measures comprise
the first comprehensive legal framework specifically regulating P2P lending activities in China. The Interim Measures provide
a 12-month transitional period for existing P2P lending platforms to achieve compliance. Any violation of the Interim Measures
by a P2P lending platform may subject such platform to certain penalties as determined by applicable laws and regulations, or
by relevant government authorities if the applicable laws and regulations are silent on the penalties. The applicable penalties
may include, but are not limited to, criminal liabilities, warning, rectification, tainted integrity record and fines of up to
RMB30,000 (approximately US$4,000).
The
Interim Measures require, among other things, that (i) the information intermediary must apply to the MIIT or other relevant
telecommunications authority for a telecommunications business permit; (ii) the information intermediary intending to provide
P2P lending information agency services (excluding to its own subsidiaries and branches) must make relevant filings and
registrations with local financial regulatory authorities with which it is registered after obtaining its business license;
and (iii) the information intermediary must separate its own funds from the funds of lenders and borrowers and engage a
qualified financial institution as a third-party banking custodian. Yinglibao is in the process of making the relevant
filings, registrations and custodian arrangements. However, we cannot guarantee that we will be able to obtain and/or
establish any or all of the required permit, license, and custodian arrangements prior to the expiration of the 12-month
transitional period for existing P2P lending platforms to achieve compliance under the Interim Measures. Yinglibao’s
operations may be suspended or terminated if we fail to comply with the filing and custodian requirements of the Interim
Measures and our business, financial conditions and results of operations would be materially and adversely
affected.
The
Interim Measures prohibit information intermediaries from engaging in activities including taking deposits from members of the
public or creating asset pools, conducting offline promotion of financing projects, providing guarantees for borrowers (unless
facilitated through a third party), or selling wealth management products. The Interim Measures also imposed limits on the size
of the online borrowing transactions. Under the Interim Measures, the total amount that an individual can borrow on a single platform
must not exceed RMB200,000, and RMB1 million on multiple platforms. The respective caps for a corporate entity are RMB1 million
and RMB5 million. Currently, a significant number of borrowers using Yinglibao borrow money in amounts that exceed such caps.
Yinglibao is planning to take measures to comply with the size limits the size of the online borrowing transactions within the
12-month transitional period. As a result, we may incur extra costs (especially if we are to monitor the borrowing amounts of
on multiple platforms), and the size of Yinglibao’s business will be adversely effected unless we can attract more users
to make up for the decrease in individual borrowing amounts.
Furthermore,
the information intermediaries shall comply with the relevant provisions of national security and national information security
protection system, to carry out the information system classification and grading test, with solid firewall, intrusion detection,
data encryption and disaster recovery network security facilities and management system, and to establish the rule of the management
of technology information, risk and audit. Information intermediaries shall record and retain the debit online log information
and interactive information content for five years after the expiration date of the loan contract. At least once every two years,
information intermediaries should carry out a comprehensive safety assessment, and accept the examination and review of information
security by competent governments, and shall establish or use facilities application level disaster recovery system. Complying
with these new requirements may cause Yinglibao to incur significant compliance costs and eventually reduce the profitability
of Yinglibao.
Downturns,
disruptions and volatility in Hong Kong securities markets and global financial markets, and increasing challenges in the business,
economic and market conditions that could affect investors’ investments in Hong Kong securities markets and global financial
markets could have a material and adverse impact on our business in the future.
We
provide a diversified portfolio of brokerage and information service to our clients in connection with their investment in Hong
Kong securities market and global financial markets through our subsidiaries in Hong Kong. Lower trading volumes and price levels
of securities transactions in Hong Kong securities market may affect investors’ participation in Hong Kong’s securities
markets and have a material and adverse impact on our business in the future.
Historically,
securities trading volume and price level in Hong Kong have fluctuated considerably. After reaching its all-time high on October
30, 2007, the Hang Seng Index (HSI) lost approximately 65.18% of its value from October 30, 2007 through October 27, 2008. In
2016, the HSI had an increase of 0.39% for the year, down/up from 21,914.4 points on December 31, 2015 to 22,000.56 on December
30, 2016.
On November 17, 2014, the Shanghai-Hong
Kong Stock Connect was formally launched granting investors mutual access to the stock market in Shanghai and Hong Kong. On December
5, 2016, the Shenzhen-Hong Kong Stock Connect was formally launched, granting investors mutual access to the stock market in Shenzhen
and Hong Kong. In 2016, the average daily turnover of Shanghai-Hong Kong Stock Connect was RMB3.22 billion northbound and HK$3.57
billion southbound and the average daily turnover of the Hong Kong stock market was HK$66.9 billion, representing a decrease
of 36.6% as compared with HK$105.6 billion for the year 2015.
Continued
significant fluctuations and weak investor confidence in the Hong Kong securities markets may materially and adversely impact
our business.
Our
securities brokerage, futures trading and securities advising business in Hong Kong operate in a highly regulated industry and
compliance failures could materially and adversely affect our business.
iSTAR International Securities Co.
Limited (later renamed Rifa Securities Limited, or Rifa Securities), holds a Type 1 license and provides a diversified
portfolio brokerage and other related services to our customers who invest in stocks listed on the Hong Kong Stock Exchanges
and Clearing Limited, or HKEx. iSTAR International Futures Co. Limited (later named as Rifa Futures Limited, or Rifa
Futures), holds a Type 2 license and commences futures contract trading business in Hong Kong. iSTAR International Credit Co.
Limited (later renamed as Rifa Credit Limited, or Rifa Credit), holds a Money Lenders License. The securities brokerage,
securities advising, futures contracts trading, futures contracts advising, asset management and money lending business and
operations in Hong Kong are subject to extensive regulations by Hong Kong Securities and Futures Commission
(“SFC”), and Hong Kong Police Force, which may increase our cost of doing business and may be a limiting factor
on the operations and development of such businesses. The regulation on our businesses in Hong Kong is also an ever-changing
area of law and is subject to modification by the Hong Kong legislature, government, regulatory and judicial actions. As our
business has expanded into these areas in Hong Kong, we devote more time to regulatory matters.
On April 12, 2017, Rifa Futures resolved
a disciplinary action with SFC. The disciplinary action was instituted against Rifa Futures by the SFC under section 194 of the
Securities and Futures Ordinance with respect to Rifa Futures’ internal control deficiencies during the period between January
1, 2014 and July 31, 2014 (the “Relevant Period”). The SFC found that during the Relevant Period, Rifa Futures failed
to take sufficient steps to mitigate the risk of unlawful money remittance when handling third party deposits and transfers to
be in compliance with the applicable regulatory requirements. The SFC issued a press release on April 12, 2017 reprimanding Rifa
Futures and announcing a fine against Rifa Futures in the amount of HK$3 million. For further details, see “Item 8 –
Financial Information – Consolidated financial statements and other financial information – Legal proceedings - Disciplinary
Action by the SFC.” Although this disciplinary action has been resolved with SFC, we cannot guarantee that we will not be
challenged by SFC or other governmental authorities in Hong Kong in the future. Failure to comply with any of the laws, rules,
regulations, codes or guidelines applicable to our businesses in Hong Kong could lead to adverse consequences including, without
limitation, investigations, fines, law suits and other penalties from regulatory agencies, which could materially and adversely
affect our operation of such businesses.
We
have incurred significant net losses in the past, and we may not be able to achieve or subsequently maintain profitability.
Although the net income
attributable to the Company was $22.5 million in 2015, we incurred net losses attributable to the Company of $7.2 million and
$1.7 million in 2014 and 2016, respectively. Our ability to achieve and/or sustain profitability depends on a lot of
factors, many of which are beyond our control, such as the continuous development of securities market in China and Hong Kong,
as well as the online financial investment services industry. We may incur losses in the near future due to our continued investments
in technology, research and development and our sales and marketing initiatives. Changes in macroeconomics and regulatory environment
or competitive dynamics and our inability to respond to these changes in a timely and effectively manner may also impact our profitability.
We
may not be able to successfully continue to innovate, improve and provide products and services to attract and retain paying subscribers
and registered users, which could have a material and adverse impact on our business in the future.
In
order to attract and retain users and compete against our competitors, we must continue to invest significant resources in research
and development to enhance our Internet technology, improve our existing products and services and introduce additional high-quality
products and services. If we are unable to anticipate user preferences or industry changes, or if we are unable to modify our
products and services on a timely basis, or if we introduce a new feature or a new research tool that is not favorably received,
we may lose users. Our operating results may also suffer if our innovations do not respond to the needs of our users, are not
appropriately timed with market opportunities or are not effectively brought to market. Furthermore, our research tools or features
may contain errors, including without limitation, programming errors, which are not discovered by our internal testing or are
discovered after the services are introduced. Our business operation and our reputation shall be damaged by those errors, and
we may need to significantly modify the design of these research tools or features to correct these errors, which could result
in significant cost and expense. As Internet technology and products continue to develop, our competitors may be able to offer
services and products including news, data, analytics and brokerage-related services through web portals, desktop solutions and
mobile handsets that are, or that are perceived to be, substantially similar to or better than those generated by our services.
This may force us to expend significant resources in order to remain competitive.
Our
transition to a new business model and our recently started venture into new business areas may not be successful. We cannot guarantee
that each of these businesses will be profitable, which may materially and adversely affect our performance.
Beginning
in April 2012, while we continue to offer basic versions of paid individual subscription services to individual investors through
our flagship portal sites and accumulated paid subscribers with basic software and information services, we no longer accept new
paid subscribers or renewals for our premium individual subscription services. We implemented a strategic transition of our core
businesses shifting from providing premium subscription services to individual investors to developing Internet-based financial
services, including securities, commodities, wealth management products and investment advisory services. Beginning in 2013, as
part of our transition to a new business model, we also started providing commodities brokerage services. In 2014, the Company
launched “Securities Master” (“Zhengquantong”), a fully integrated securities-trading platform and “Investment
Masters” (“iTougu”), an investment advisory service platform. In 2015, we launched the updated version 2.0 and
version 3.0 of iTougu for iOS and android.
While
securities investment advisory, wealth management product and commodities brokerage businesses have attractive market potential
in China, such businesses are relatively new and the related business models are unproven. Our limited experience in new business
areas that we may venture into also gives rise to higher unpredictability to our success in these new business areas. We face
a variety of risks and uncertainties during the transition and exploration of new business opportunities, many of which will be
new and unexpected. In particular, volatility in commodities trading prices may affect investors’ investment interest and
sentiments towards commodities, which may adversely affect our revenues and our results of operations. In addition, for our commodities
brokerage business, we receive commissions calculated on the basis of our customers’ trading volumes. As a result, if our
customers are reluctant to trade, our revenues would be adversely affected. We are also acting as one of the market makers on
the commodities exchanges. We commit to accept all the trade executions by offering to buy or sell trading products from/to our
clients. As counterparty to our clients, we may earn trading gains or incur trading losses, depending on market conditions. As
a result, we may not be able to accurately forecast our revenues from our commodities brokerage business and financial performance
in general, which in turn may contribute to the volatility of our overall operating results.
As
we make the transition into taking up commodities brokerage services as our new principal businesses, our subscription revenue
has started to drop. We are uncertain when, if ever, revenues from our new areas of business will compensate for this revenue
loss. If we are unable to successfully and smoothly transition into the new principal businesses and implement our growth strategies,
or, if we fail to generate profit in business areas other than our principal businesses in a timely and cost-effective manner,
loss of profits may occur and our overall business and financial results may suffer.
Our
new Internet-based financial platforms “Yinglibao”, “Securities Master” and “Investment Masters”
may not be successful as they may face intensive competition and/or future regulatory hurdles.
In
August 2013, the Company launched “Yinglibao”, which is now a mobile-based financial platform that integrates wealth
management solutions and mutual fund distribution. For users who maintain Yinglibao balances, their balances would be used to
subscribe for the money market fund managed by third-party mutual fund management companies. Yinglibao users have the option of
purchasing mutual fund and other wealth management products directly through their accounts.
In
2014, the Company launched new platforms, namely “Securities Master” and “Investment Masters”. “Securities
Master” has been designed as a fully integrated securities-trading platform for retail investors with a highly-intuitive
user interface via computers, smartphones, tablets and over time smart TVs. “Investment Masters”, i.e. iTougu, our
web-based mobile investment advisory service platform, facilitates securities investment advisors to communicate with their clients
and followers directly in real-time and for 24 hours, allowing a large number of Chinese individual investors to obtain advice
and recommended portfolios from thousands of investment advisors that was inaccessible previously.
Yinglibao,
Securities Master and Investment Masters may be subject to future additional Chinese laws and regulations relating to banking,
securities and wealth management businesses. In the event that any of those platforms becomes restricted or even prohibited by
Chinese laws, our customers’ financial activities may be affected and there may be a material adverse impact on our business
operations.
Competitors
with larger customer base and greater market visibility, such as Alibaba Group Holding Limited (“Alibaba”), Tencent
Holdings Limited (“Tencent”) and Baidu, Inc. (“Baidu”), also launched their respective Internet-based
financial platform which provides financial services similar to that of Yinglibao. In the future, banks and fund management companies
may also enter this market and offer similar services to customers. Because of such expected influx of new market entrants, competition
in this industry may become more intense. Many of our competitors, especially Alibaba, Tencent and Baidu, have greater financial
and marketing resources than we do. Securities Master and Investment Masters also face intense competitions. Several financial
websites in China have also launched similar services. In addition, securities brokers in China have also begun to develop their
own Internet-based financial service platforms. Thus, we may not be able to compete effectively or provide compelling service
alternatives to potential customers. Our financial results may suffer as a result.
While
we continue to innovate and develop Yinglibao, Securities Master and Investment Masters, we expect improvements to their technical
and operational stability to gradually take place over time. If program errors, such as “bugs” and other undetected
errors become issues of any of these platforms, there may be a negative impact on our reputation and the level of our customer
satisfaction will decrease.
Uncertain
legal regulation in our new areas of business may adversely impact our business.
Laws
and regulations governing the securities investment advisory and wealth management services industries in China, are developing
and are subject to further changes. As a result, substantial uncertainties exist regarding the evolution of the regulatory system
and the interpretation and implementation of current and any future Chinese laws and regulations applicable to such industries.
In recent years, China has tightened regulations on commodities transactions in the spot market. The Ministry of Commerce, the
People’s Bank of China and the CSRC jointly issued Interim Provisions on Commodities Transactions in the Spot Market, effective
from January 1, 2014 (“Circular 3”). New requirements imposed by Circular 3 and the uncertainties in subsequent implementations
and administration of such requirements by related agencies may negatively impact our businesses and business performance.
Our
commodities brokerage business is subject to regulation by the local government presiding over the city where an exchange is situated.
Each local government implements applicable rules promulgated by the Ministry of Commerce separately, resulting in substantial
uncertainties for our commodities brokerage business. As the regulatory environment surrounding commodities brokerage business
continues to evolve, we may devote more time and resources to regulatory matters, which may increase our cost of doing business
and may be a limiting factor on the operations and development of such business. The local government conducts inspections on the
local exchanges on a non-routine basis. We cannot guarantee you that the exchange where we conduct our commodities brokerage business
can successfully pass the inspection, and if such exchange does not pass the inspection and as a result is ordered to rectify
the irregularities, our commodities brokerage business will be materially and adversely affected.
We
cannot guarantee you that we will be able to obtain or maintain our existing licenses and permits, renew any of them when their
current terms expire, or obtain additional licenses requisite for our strategic transition and venture into new areas of business.
Any changes in the regulatory landscape may materially and adversely affect our business.
We
face significant competition in the securities investment advisory and wealth management services industry as we transition into
the new principal businesses, and our operations and financial condition may suffer if we fail to compete effectively.
As
a new market entrant competing in the highly competitive and fragmented securities investment advisory and wealth management services
industries in China, we may not be able to compete effectively or provide a compelling service alternative for potential customers.
Securities investment advisory and wealth management services industries in China are at their early stages of development and
are highly fragmented and competitive, but they provide vast opportunities, and thus we expect competition to persist and could
even intensify in the future. We face competition from independent firms providing wealth management services, securities advisory
and investment corporations providing securities investment advisory services, brokerage firms providing securities investment
advisory services and domestic commercial banks with in-house sales force and private banking functions, among others. Many of
our competitors, especially brokerage firms and commercial banks, have greater financial and marketing resources than we do. Many
brokerage firms, trust companies and commercial banks we compete with enjoy significant competitive advantages due to their nationwide
distribution network, longer operational history, broader client base, and settlement capabilities. Moreover, many of the securities
investment advisory and wealth management services and product providers, such as brokerage firms, commercial banks and trust
companies, are also engaged in, or may in the future, engage in the distribution of wealth management products and they may benefit
from the integration of wealth management products with their other services and product offerings, which may provide them competitive
advantage in this market.
For
our commodities brokerage business, we face competitions from early market entrants such as local commodities exchanges which
could own a large number of membership units and have more experience than us in this business. As a result, we may not be able
to compete effectively or provide a compelling service alternative for potential customers.
Cash
arrangements with brokers for the procurement of our overseas futures contract trading business expose us to third-party risk,
which could in turn have a material adverse effect on our financial condition, reputation, client relationships, operations and
prospects.
With
respect to Rifa Futures’ future contracts trading business, as we currently do not hold membership at overseas futures exchanges,
such as the London Metal Exchange or the CME Group, we rely on third party brokers who are members of these exchanges to hold
our customers’ funds and execute our customers’ trades. This business arrangement with third party brokers involves
various risks, primarily, third party credit risks and default risks. In the event that one or more of these brokers become insolvent
or bankrupt, we and our clients may have difficulty recovering money deposited with such broker. Although we enforce and implement
strict risk management policies and procedures, such policies and procedures may not be fully effective in mitigating our clients’
risk exposure to third party insolvency or bankruptcy. If we fail to identify any material financial weakness of any of those
brokers who hold our customers’ funds in a timely manner, and as a result our customers suffer financial loss or other damages
resulting from such broker’s insolvency or bankruptcy, then accordingly, our financial conditions, reputation, client relationships,
operations and prospects will be adversely affected.
We
are subject to counterparty risk whereby defaults by parties with whom we do business can have an adverse effect on our business,
financial condition and results of operations and cash flows.
Rifa
Securities’ margin financing business requires a commitment of capital and involves risks of losses due to the potential
failure of our customers to perform their obligations under their transactions with us. Our margin policy allows our margin clients
to borrow cash from us to buy stocks listed in HKEx in amounts that may be significantly larger than their cash balances. While
we closely monitor each customer’s exposure, it does not guarantee our ability to eliminate negative customer account balances
prior to the occurrence of adverse market changes relative to a customer’s position(s). Moreover, we are exposed to debit/deficit
risk with our customers. If our customers default on their obligations, we remain financially liable for such obligations, and
although these obligations are collateralized, we are subject to market risk in the liquidation of customer collateral to satisfy
such obligations since the value of our customers’ positions are subject to fluctuation as market prices change. In addition,
if an adverse market move relative to a customer’s position(s) occurs and we are unable to collect the margin loan in a
timely manner, the customer account may incur a loss resulting in a debit balance. In light of the current turbulence in the global
economy, we face increasing risk of default by our customers and other counterparties. Any default by our counterparties or partners
could have a material adverse effect on our business, financial condition and results of operations and cash flows.
If
we are unable to hire high quality personnel for the securities investment advisory and wealth management businesses, our new
business model will suffer, which may materially and adversely affect our overall business performance.
We
are also facing fierce competition hiring competent licensed securities investment advisors. Highly skilled and qualified financial
advisors are in high demand throughout wealth management industries in China. The total number of individuals qualified to provide
securities investment advisory and wealth management services in China is limited due to the early development stage of the industry.
In addition, the rate of wage inflation in most areas of the economy remains persistently high in recent years. There is no assurance
that we can recruit and retain enough licensed securities investment advisors and qualified wealth management financial advisors
who meet our high quality requirements to support our further growth into the new principal business, or, if we do, that the cost
of doing so will permit us to realize reasonable margins. We may incur disproportional compensation, training and other administrative
expenses in order to retain such recruits in light of the aggressive hiring competition from other securities investment advisory
firms, brokerage firms, commercial banks and trust companies that are better situated financially for recruitment of this kind.
These factors may materially and adversely affect our business and our strategy.
We
may incur higher operating expenses in connection with the ongoing business transition and expansion into other new business areas.
In
transitioning into commodities brokerage business and our internet-based financial services, we are required to incur development,
operation and potential acquisition costs in order to keep pace with the new market and technology needs for the industry. In
the meantime, we have also ventured into other business areas aside from our principal businesses, which ventures may incur increased
administrative costs and other input. As a result, our cost-cutting initiatives to increase efficiency and improve our operational
performance may not prove to be effective in the short-term and we may experience losses in connection with our new businesses.
Our
business could be materially and adversely affected if the stock exchanges and indexes providers from which we receive data and
information fail to deliver us reliable data and price quotes or other trading related information, or if we cannot maintain our
current business relationships with our historical data providers on commercially reasonable terms.
We
provide real-time stock, bond, mutual fund and financial futures quotes and other trading related information from Shanghai Stock
Exchange (“SSE”) and Shenzhen Stock Exchange (“SZSE”), and, we also provide delayed trading related information from Hong Kong stock
market indexes from HSI. We primarily rely on contractual arrangements with SSE Infonet Co.,
Ltd. which is associated with SSE, SZSE, and HSI, pursuant to which we pay fixed service fees in exchange for receiving real-time
or delayed price quotes and other trading related information.
We
renew our agreements with each of SSE Infonet Co., Ltd., SZSE and HSI on an annual basis, respectively. Under these agreements,
each of the three data providers can terminate its respective agreement with us if we materially breach relevant terms, such as
delay in payment of, or failure to pay, fees to these providers. However, we cannot assure investors that we will be able to timely
renew all of these business arrangements on commercially reasonable terms, or at all, after our current terms expire. In addition,
we cannot assure investors that the three securities data providers will not change their current mode of providing stock information
to us, change the packages of stock information authorized to us, change their current qualification requirements on the authorized
information service provider, or charge us service fees substantially higher than the service fees we are currently paying. If
they did so, our business, financial condition and results of operations could be materially and adversely affected. Even if we
are able to maintain our current business arrangements for data on commercially reasonable terms, either of these three securities
data providers may fail to deliver us reliable price quotes or other trading related information. And it would be difficult for
us to obtain reliable price quotes and other trading related information from an alternative source, which could materially and
adversely affect our business.
We
rely on Shenzhen Genius Information Technology, Ltd. (“CFO Genius”) as the provider of all historical data and information
on listed companies, bonds and mutual funds, any disruption to CFO Genius may have a material adverse effect on our business.
We
have transferred to and made CFO Genius, which we acquired in September 2006, the primary source of historical data and information
on listed companies, bonds and mutual funds. CFO Genius has become our primary provider of historical data and information, thereby
mitigating our reliance on third-party backup providers of such historical data and information. Any problems arising in or any
disruption to CFO Genius as the primary provider of historical data and information may have a material adverse effect on our
business.
Our
business would be adversely affected if we do not continue to maintain an effective telemarketing and customer support force or
if our customer support staff fails to comply with applicable laws and regulations.
We
market our service offerings through our websites, as well as through our telemarketing and customer service centers. In addition
to sales and marketing functions, we depend on our customer support force to market our service offerings to our existing and
potential customers and to resolve our subscribers’ technical problems. Many of our telemarketing and customer support personnel
have only worked for us for a short period of time and some of them may not have received sufficient training or gained sufficient
experience to effectively serve our customers. We may not be able to hire, retain, integrate or motivate additional customer support
personnel without any short-term disruptions of our operations. As a result, our business could be adversely affected if we do
not continue to maintain an effective customer support force.
The
CSRC’s Provisional Regulations on Securities Investment Advisory Business (“Provisional Regulations”), effective
from January 1, 2011, has considerably increased requirements on pre-sale disclosures, standardized contract signing and service
provisions, and after-sales product return policies in the course of providing securities investment advisory services to customers.
The Interim Provisions on Strengthening the Supervision and Control of Engagement in Securities Investment Advisory Business by
Utilizing “Securities Analysis Software” promulgated by the CSRC and effective on January 1, 2013 (“Circular
40”) further provide that securities investment advisory companies shall provide contact information of companies and certain
reminders to clients when promoting products or providing services via the Internet, telephone or SMS.
We
require our customer support staff to study and comply with these new requirements imposed by the Provisional Regulations and
the Circular 40 in their work. However, we cannot assure investors that our customer support staff would fully comply with the
Provisional Regulations and the Circular 40. Our business could be subject to severe penalties if the failure of our customer
support staff to comply with those requirements is detected by or complained to regulatory authorities.
Our
acquisitions and investments may not recognize our strategic goals, and may result in operating difficulties and other harmful
consequences that may adversely impact our business and results of operations.
Acquisitions
and investments are important elements of our overall corporate strategy and we expect to continue to acquire and invest in companies,
products, services and technologies in the future. In the past several years, we acquired certain businesses and intangible assets,
including products, services, trademarks, customer relationships, users list and other assets such as CFO Genius, a financial
information database provider mainly serving Chinese domestic institutional customers, and Rifa Securities, a licensed securities
brokerage firm incorporated in Hong Kong. We intend to make other strategic investments and acquisitions in the future if suitable
opportunities arise. Investments and acquisitions involve uncertainties and risks that may have a material adverse effect on our
financial condition and results of operation, including:
●
|
we
may not identify suitable candidates and successfully complete acquisition and investment transactions, and may not be able
to manage post-closing issues such as the integration of acquired businesses, products or employees;
|
|
|
●
|
we
may not fully realize all of the anticipated benefits of any acquisition and investment transaction;
|
|
|
●
|
the
pricing and other terms of contracts for acquisition and investment transactions require us to make estimates and assumptions
at the time we enter into these contracts, so that we may pay more than it is worth;
|
●
|
we
may not identify all of the problems during the course of our due diligence, such as factors necessary to estimate our costs
accurately, and issues with unlicensed use of intellectual property;
|
|
|
●
|
any
increased or unexpected costs, unanticipated delays or failure to meet contractual obligations, and failure of investments
to perform as expected, could make these transactions less profitable or unprofitable;
|
|
|
●
|
if
we fail to successfully complete acquisitions that further our strategic objectives, we may be required to expend resources
to develop products and technology internally, and we may be at a competitive disadvantage or we may be adversely affected
by negative market perceptions;
|
|
|
●
|
our
ongoing business may be disrupted and our management’s attention may be diverted by transition or integration issues;
|
|
|
●
|
we
may have legal and tax exposures or lose anticipated tax benefits as a result of unforeseen difficulties in our legal entity
integration activities;
|
|
|
●
|
we
may face contingencies related to intellectual property, financial disclosures and accounting practices or internal controls;
|
|
|
●
|
when
goodwill, intangible assets and investments, in connection with potential acquisition and investment transactions become impaired,
we may be required to incur additional material charges relating to the impairment of those assets;
|
|
|
●
|
we
may incur additional amortization expense over the useful lives of certain intangible assets acquired in connection with acquisitions;
|
|
|
●
|
any
acquisition and investment transactions may require a significant amount of capital investment, which would decrease the amount
of cash available for working capital or capital expenditures;
|
●
|
we
may issue common stock, potentially creating dilution for existing stockholders to complete acquisition and investment transactions;
|
|
|
●
|
we
may borrow to finance these transactions, the amount and terms of which as well as other factors could affect our liquidity
and financial condition, and debt instruments may contain restrictive covenants that could, among other things, restrict us
from distributing dividends;
|
|
|
●
|
we
may experience risks relating to the challenges and costs of closing acquisition and investment transactions and the risk
that an announced acquisition and investment transaction may not close.
|
Techniques
employed by manipulative short sellers may drive down the trading price of our ADSs.
Short
selling is the practice of selling securities that the seller does not own but rather has, supposedly, borrowed from a third
party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes
to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the
replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is therefore
in the short seller’s best interests for the price of the stock to decline, many short sellers (sometimes known as
“disclosed shorts”) publish, or arrange for the publication of, negative opinions regarding the issuer and its
business prospects in order to create negative market momentum and generate profits for themselves after selling a stock
short. While traditionally these disclosed shorts were limited in their ability to access mainstream business media or to
otherwise create negative market rumors, the rise of the Internet and technological advancements regarding document creation,
videotaping and publication by weblog, or blogging, have allowed many disclosed shorts to publicly attack a company’s
credibility, strategy and veracity by means of so-called research reports that mimic the type of investment analysis
performed by large Wall Street firms and independent research analysts. These short attacks have, in the past, led to selling
of shares in the market, on occasion in large scale and broad base. Issuers who have limited trading volumes and are
susceptible to higher volatility levels than large-cap stocks, can be particularly vulnerable to such short seller attacks.
These short seller publications are not regulated by any governmental, self-regulatory organization or other official
authority in the U.S., are not subject to the certification requirements imposed by the U.S. Securities and
Exchange Commission, or the SEC and, accordingly, the opinions they express may be based on distortions of actual facts or,
in some cases, fabrications of facts. In light of the limited risks involved in publishing such information, and the enormous
profit that can be made from running just one successful short attack, unless the short sellers become subject to significant
penalties, it is more likely than not that disclosed short sellers will continue to issue such reports.
We
have been in the past and may in the future be the subject of short seller attacks. While we intend to strongly defend our public
filings against any short seller attack, oftentimes we are constrained, either by principles of freedom of speech, applicable
state law (often called “Anti-SLAPP statutes”), or issues of commercial confidentiality, in the manner in which we
can proceed against the relevant short seller. Investors should also be aware that in light of the relative freedom to operate
that such persons enjoy, should we be targeted for such an attack, the trading price of our ADSs will likely suffer from a temporary,
or possibly long term, decline should the rumors created not be dismissed by market participants.
We
have recorded losses from impairment of goodwill and intangible assets in 2015 and 2016. We may be required to record a significant
charge to earnings if we are required to reassess our goodwill or other intangible assets arising from our acquisitions.
In
the course of our operating history, we have acquired assets and businesses, which have resulted in the recording of goodwill
and/or intangible assets on our financial statements. We are required under U.S. GAAP to test goodwill for impairment at least
annually or sooner if we determine there are indicators of impairment and to review our intangible assets for impairment when
events or changes in circumstance indicate the carrying value may not be recoverable. Factors that could lead to impairment of
goodwill and intangible assets include, but not limited to, significant adverse changes in the business climate (affecting our
company as a whole or affecting any particular segment), unfavorable changes in our stock price and market capitalization, and
declines in the financial condition of our business.
In
the second quarter of 2014, due to the new business redirection to develop our online brokerage service “Securities Master”,
the Company is expected to suffer reduced cash flow in our investment advisory services in the short term. In light of this new
business redirection, with the assistance of a third party appraiser, the Company wrote-off the goodwill of $8.1 million associated
with our investment advisory services and recorded an impairment loss of US$1.8 million for our intangible assets.
In
the fourth quarter of 2015, the Company wrote-off the intangible assets of Zhengjin (Fujian) Precious Metal Investment Co., Ltd.
(“Zhengjin Fujian”), and recorded an impairment loss of $0.3 million.
In
2016, the Company concluded that goodwill allocated to the commodities brokerage reporting unit was fully impaired because the
estimated growth rates and profit margins for future periods were expected to be lower than that of prior years based on that
assessment. The Group recognized an impairment loss of $6.7 million related to the commodities brokerage reporting unit for the
year ended December 31, 2016. The Company also recorded an impairment loss on its intangible assets of Henghui (Tianjin) Precious
Metals Investment Co., Ltd (“CFO Henghui”), which was fully disposed by the Company in 2016 for $1.1 million.
If
we reassess our goodwill and intangible assets in the next years, or if we acquire new assets and businesses in the future, we
may record additional goodwill and/or intangible assets. The possible write-off of the goodwill and/or intangible assets could
negatively impact our future earnings and, as a result, the market price of our common stock could decline.
Stricter
securities investment advisory, wealth management regulations may materially weaken the investors’ desire to subscribe or
renew subscription for our securities investment advisory and wealth management services.
The
Provisional Regulations and the Circular 40 expressly state that the business of providing securities investment advisory or other
similar service through software tools or any other terminal equipment (“Securities Analysis Software”) should be
subject to regulation by the CSRC. The Regulations on Securities Investment Funds (2012 Amended), which took effect on June 1,
2013, further require companies providing advisory services for investment in public funds should be registered and filed pursuant
to the regulations of the CSRC.
While
we have acquired requisite securities investment advisory license, in accordance with the Provisional Regulations and we will
continue to devote resources to regulatory compliance, the failure to comply with such regulations could lead to adverse consequences
which could materially affect our securities investment advisory business. In order to comply with the Provisional Regulations,
we have considerably increased pre-sales disclosure requirements, standardized contract signing and service provisions among others.
Through fully disclosing the limitation of making investment decisions based on software tools and advice provided by licensed
professionals, we emphasize to clients that they must be able to bear the risks of their own investments. Combined with the continuously
sluggish stock market, customers’ desire to purchase new or renew existing products and services is increasingly and significantly
weakened.
Although
the Provisional Regulations benefits the healthy development of securities investment advisory business in China in the long run,
such negative impact on our business is anticipated to remain in the foreseeable future.
Further,
China has tightened regulations on wealth management in recent years. China Banking Regulatory Commission issued a Notice on Regulating
Operation of Wealth Management Business in Commercial Banks on March 25, 2013 (“Circular 8”), pursuant to which, banks
must clearly link wealth-management products with specific assets. Circular 8 also stipulates that banks must disclose who will
ultimately use the funds and for what purposes, and that each product must be audited.
None
of our group companies is a bank and therefore we are currently not subject to the provisions of Circular 8. However, we cannot
assure you that China will not proceed to issue similar laws and regulations on wealth management that may become applicable to
companies like us. In the event we become subject to such restrictions and regulation, our wealth management business may be materially
and adversely affected
.
Interruption
or failure of our own electronic systems or those of third-party service providers we rely upon could impair our ability to provide
our products and services, which could damage our reputation and harm our operating results.
We
have limited backup systems and have previously experienced system failures that have disrupted our operations. Any damage to
or failure of our systems could interrupt our service. Service interruptions could reduce our revenues and profits and damage
our brand and reduce competitiveness if our system is perceived to be unreliable. Our systems are vulnerable to damage or interruption
as a result of terrorist attacks, wars, earthquakes, floods, fires, power loss, telecommunications failures, undetected errors
or “bugs” in our software, computer viruses, interruptions in access to our websites through the use of “denial
of service” or similar attacks, hacking or other attempts to harm our systems, and similar events. Any security breach caused
by hackings, which involve efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions
or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses
could cause our users to question the safety or reliability of our website and our services and could have a material adverse
effect on our business results of operations and financial condition.
If
we experience frequent or persistent system failures on our websites and products due to interruptions and failures of third-party
service providers we rely upon, including internet content providers and securities data providers, our reputation and brand could
be severely harmed. In addition, our users depend on Internet service providers, online service providers and other website operators
for access to our website and they may experience outages, delays and other difficulties due to system failures unrelated to our
systems. These types of occurrences could cause users to perceive our website as not functioning properly and therefore cause
them to use other methods to obtain the financial data and information services they need.
The
trading software of Rifa Securities and Rifa Futures are provided by third parties. In addition, in 2013, we launched our commodities
brokerage business, which operates on trading platforms provided by third party individual trading exchanges. Because our trading
software and trading platforms are provided by third parties, we are unable to assure the technical stability and soundness of
such trading platforms. If there are technical issues related to these third party systems, such as “bugs” or undetected
errors, our services may be temporarily halted and our customers may choose to subscribe to our competitors’ services instead
and our overall business and financial results may suffer as result.
If
we are unable to adapt or expand our existing technology infrastructure to accommodate greater traffic or additional customer
requirements, our business may be harmed.
In
the past, our websites and mobile applications regularly serve a large number of daily unique visitors when there are significant
business developments, financial news and activities, or stock market trading activities. In addition, the number of visitors
has continued to increase over time and we are seeking to further increase our user base. Therefore, our servers must accommodate
a high volume of traffic to meet peak user demand and deliver frequently updated information. Our servers have in the past experienced
and may in the future experience slower response time or login delays for a variety of reasons. It is essential to our success
that our servers are able to accommodate our users in an efficient manner so that our users’ experience with us is viewed
favorably and without frequent delays. Therefore we may be required to upgrade our technology infrastructure to keep up with the
increasing traffic on our websites, such as increasing the capacity of our hardware servers and the sophistication of our software.
If we fail to adapt our technology infrastructure to accommodate greater traffic or customer requirements, our users and customers
may become dissatisfied with our services and switch to our competitors, which could harm our business.
We
depend largely on the infrastructure of the telecommunications operators in China, and any interruption of their network infrastructure
may result in severe disruptions to our business.
Although
private Internet service providers exist in China, substantially all access to the Internet in China is maintained through the
telecommunications operators, under the administrative control and regulatory supervision of the Ministry of Industry and Information
Technology, or MIIT. In addition, local networks connect to the Internet through a government-owned international gateway. We
rely on this infrastructure and to a lesser extent, certain other Internet data centers in China to provide data communications
capacity primarily through local telecommunications lines. In the event of a large-scale infrastructure disruption or failure,
we may not have access to alternative networks and services, on a timely basis or at all.
We
may not be able to lease additional bandwidth from the telecommunications operators in China on acceptable terms, on a timely
basis or at all. In addition, we may not have means of getting access to alternative networks and services on a timely basis or
at all in the event of any disruption or failure of the network. Consequently, our business, financial condition and results of
operations may be adversely affected.
The
Internet infrastructure in China, which is not as well developed as in the United States or other more developed countries, may
limit our growth.
The
Internet infrastructure in China is not as well developed as in the United States or other more developed countries. In particular,
we depend significantly on the PRC government and fixed line telecommunications operators in China to establish and maintain a
reliable Internet infrastructure to reach a growing base of Internet users in China. We cannot assure investors that the Internet
infrastructure in China will support the demands associated with the continued growth of the Internet industry in China. If the
necessary infrastructure standards or protocols, or complementary products, services or facilities are not developed in China
on a timely basis or at all by these enterprises, our business, financial condition and results of operations could be materially
adversely affected.
Concerns
about the security and confidentiality of information on the Internet may reduce use of our network and impede our growth.
A
significant barrier to confidential communications over the Internet in general has been a public concern over security and privacy,
including the transmission of confidential information. To address such concerns, the Standing Committee of the National People’s
Congress of China issued the Decisions on Strengthening the Protection of Internet Information, effective on December 28, 2012
(“Information Protection Decisions”), which prescribe detailed measures to protect confidential information transmitted
via the Internet and the liabilities for violation of the provisions. If these concerns are not adequately addressed pursuant
to the Information Protection Decisions and other relevant regulations, they may inhibit the growth of the Internet and other
online services generally. If a well-publicized Internet breach of security were to occur, general Internet usage could decline,
which could reduce traffic to our websites and impede our growth.
We
may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by these breaches.
If unauthorized persons are able to penetrate our network security, they could misappropriate proprietary information, including
personal information regarding our subscribers, or cause interruptions in our services. As a result, we may be required to incur
substantial costs and divert our other resources to protect against or to alleviate these problems. Security breaches could have
a material adverse effect on our reputation, business, financial condition and results of operations.
We
may be subject to, and may expend significant resources in defending against claims based on the content and services that we
provide through our website and research tools.
Due
to the manner in which we obtain, collect, categorize and integrate content for our website, and because our services, including
our online bulletin boards and discussion forums, may be used for the distribution of information and expression of opinions,
claims may be filed against us for defamation, subversion, negligence, copyright or trademark infringement or other violations
due to the nature and content of such information. For example, our bulletin boards and online forums reflect the statements and
views of persons we do not control and we cannot be assured that such information is true and correct and is not misleading. These
persons may also have conflicts of interest in relation to their statements or views regarding securities or other financial matters.
Liability insurance for these types of claims is not currently available in the PRC. While we do not take responsibility for statements
or views presented on our website, we may incur significant costs investigating and defending these types of claims even if they
do not result in liability. Any such claim may also damage our reputation if our users and subscribers do not view this content
as reliable or accurate, which could materially and adversely affect our business.
We
have been and may continue to be subject to intellectual property infringement claims, which may force us to incur substantial
legal expenses and, if determined adversely against us, may materially disrupt our business.
We
cannot be certain that our website content, online services and our research tools do not or will not infringe upon patents, valid
copyrights or other intellectual property rights held by third parties. We may become subject to legal proceedings and claims
from time to time relating to the intellectual property of others in the ordinary course of our business. If we are found to have
violated the intellectual property rights of others, we may be enjoined from using such intellectual property, and we may incur
licensing fees or be forced to develop alternatives. In addition, we may incur substantial expenses in defending against these
third-party infringement claims, regardless of their merit. Successful infringement or licensing claims against us may result
in substantial monetary liabilities, which may materially and adversely affect our business.
Unauthorized
use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may
materially and adversely affect our business.
We
regard our copyrights, trademarks, trade secret and other intellectual property as critical to our success. Unauthorized use of
the intellectual property used in our business may materially and adversely affect our business and reputation. We rely on trademark
and copyright law, trade secret protection and confidentiality agreements with our employees, customers, business partners and
others to protect our intellectual property rights. Despite our precautions, it may be possible for third parties to obtain and
use our intellectual property without authorization. In particular, the laws and enforcement procedures in the PRC do not protect
intellectual property rights to the same extent as do the laws and enforcement procedures in the United States. Moreover, litigation
may be necessary in the future to enforce our intellectual property rights. Future litigation could result in substantial costs
and diversion of our resources, and could disrupt our business, as well as have a material adverse effect on our financial condition
and results of operations.
We
depend on our key personnel and our business and growth prospects may be severely disrupted if we lose their services.
Our
future success is dependent upon the continued service of our key executives and employees. We rely on their expertise in our
business operations. If one or more of our key executives are unable or unwilling to continue in their present positions, or if
they join a competitor or form a competing company in violation of their employment agreements, we may not be able to easily replace
them.
Furthermore,
since our industry is characterized by high demand and intense competition for talent, we may need to offer higher compensation
and other benefits in order to attract and retain key personnel in the future. We currently do not maintain key-man life insurance
for any of our key personnel. We cannot assure investors that we will be able to retain the services of our executives or key
personnel, or attract and retain experienced executives or key personnel that we will need to achieve our business objectives
in the future. As a result, our business may be significantly disrupted and our financial condition and results of operations
may be adversely affected.
Because
there is limited business insurance coverage in China, any business disruption or litigation we experience might result in us
incurring substantial costs and the diversion of resources.
The
insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance
products and do not, to our knowledge, offer business liability insurance. While business disruption insurance is available to
a limited extent in China, we have determined that the risks of disruption, cost of such insurance and the difficulties associated
with acquiring such insurance make having such insurance impractical for us.
Our
results of operations may fluctuate, which makes our results difficult to predict and you should not rely on our past operating
results as an indication of our future performance, because our results of operations are subject to significant fluctuations.
We
may experience significant fluctuations in our operating results including but not limited to strategic transformation initiative,
cost-cutting initiative and its effect on efficiency and operational performance, potential business consolidation amidst the
new regulatory environment, the market prospect of the businesses of securities investment advisory and wealth management, the
difficulty in forecasting revenues from our commodities brokerage services business and the transition period to adapt to the
new compliance requirements, due to a variety of factors, many of which are outside our control. Significant fluctuations in our
operating results could be caused by any of the factors identified in this section, including but not limited to, our ability
to retain existing clients, attract new clients at a steady rate and maintain client satisfaction; technical difficulties, system
downtime or Internet failures; operators’ policies; changing customer needs, regulatory environment and market condition;
seasonal trends in Internet use; wavering investor confidence that could impact our business; possible non-cash goodwill, intangible
assets and investment impairment that may adversely affect our net income; the unpredictability of our strategic transformation
and upgrade; general economic conditions and economic conditions specific to the Internet and wireless, financial information
and services, securities investment advisory and wealth management, and the China and Hong Kong securities markets. As a result
of these and other factors, comparing our results of operations on a period-to-period basis may not be meaningful, and you should
not rely on our past results as an indication of our future performance. Our quarterly and annual revenues and costs and expenses
as a percentage of our revenues may be significantly different from our historical or projected figures. Our results of operations
in the future may fall below expectations.
The
effects of war, acts of terrorism, health epidemics, natural disasters or other unforeseen wide-scale events could have a material
adverse effect on our operating results and financial condition.
The
continued threat of terrorism and associated heightened security measures and military actions in response to acts of terrorism
has disrupted commerce and has intensified uncertainties in the U.S. and international economies. Any further acts of terrorism,
a future war, a widespread natural disaster, or a health epidemic, such as the influenza H7N9, may disrupt commerce, undermine
consumer confidence and lead to a further downturn in China or international economies, which could negatively impact our revenues.
Furthermore, an act of terrorism or war, or the threat thereof, or any natural disaster that results in unforeseen interruptions
of commerce, could negatively impact our business by interfering with our ability to obtain products from our manufacturers.
Risks
relating to our corporate structure
We
primarily rely on contractual arrangements with our significant PRC-incorporated affiliates and their shareholders to maintain
control over our China operations indirectly. If the affiliates fail to perform their obligations under these contractual arrangements
or PRC laws impair the enforceability of these contracts, our business, financial condition and results of operations may be materially
and adversely affected.
Because
PRC regulations restrict our ability to provide Internet content directly in China, we rely on contractual arrangements, or VIE
agreements, with our significant PRC-incorporated affiliates and their shareholders for the operation of our businesses. We have
no direct equity ownership interest in these onshore affiliates. These contractual arrangements may not be as effective in providing
control over these entities as direct ownership. For example, these entities could fail to take actions required for our business
or fail to perform its obligations under these contractual arrangements.
The
VIE agreements are governed by PRC law. In the event any of these significant PRC affiliates fails to perform its obligations
under these contractual arrangements, we may have to rely on legal remedies under PRC law, including seeking specific performance
or injunctive relief, and claiming damages, which we cannot be sure would be effective. The uncertainties in the PRC legal system
could limit our ability to enforce these contractual arrangements. In the event that we are unable to enforce these contractual
arrangements, our business, financial condition and results of operations could be materially and adversely affected.
The
VIE agreements we entered into include share pledge agreements. We are in the process of registering the pledges of equity interests
by nominee shareholders of some of our consolidated affiliated entities. The nominee shareholders of each of our consolidated
affiliated entities have pledged all of their equity interests in the relevant consolidated affiliated entities to our subsidiaries.
An equity pledge agreement becomes effective among the parties upon execution, but according to the PRC Property Rights Law, an
equity pledge is not perfected as a security property right unless it is registered with the relevant local administration for
industry and commerce. There is no assurance that we can have these equity pledges registered successfully. Prior to the completion
of the registration, we may not be able to successfully enforce the equity pledge against any third parties who have acquired
property right interests in good faith in the equity interests in the relevant consolidated affiliated entity.
If
the PRC government finds that the agreements that establish the structure for operating our online financial data and information
services and securities investment advisory services no longer comply with PRC government restrictions on foreign investment in
the Internet content services industry, we could be subject to severe penalties
.
PRC
regulations currently limit foreign ownership of companies that provide Internet content services, which include operating financial
data and information services through the Internet, to be no more than 50%. Accordingly, foreign and wholly foreign-owned enterprises
are currently not able to apply for the required licenses for operating such services in China.
We
are a foreign enterprise and each of our significant subsidiaries, CFO Beijing, Fortune Software (Beijing) Co., Ltd., or CFO Software,
CFO Genius and Zhengning Information & Technology (Shanghai) Co., Ltd., or CFO Zhengning, accordingly, neither we, nor any
of these significant subsidiaries is eligible to apply for licenses to operate our website. In order to comply with foreign ownership
restrictions, we operated our website in China through CFO Fuhua, which holds the licenses required to be an Internet information
content provider under the relevant PRC laws. Zhiwei Zhao and Jun Wang hold 45% and 55% of the equity interests in CFO Fuhua,
respectively. We are expected to continue to be dependent on CFO Fuhua to host www.jrj.com. We have entered into VIE agreement
with CFO Fuhua, its shareholders to maintain substantial control over CFO Fuhua. There are, however, substantial uncertainties
regarding the interpretation and application of current or future PRC laws and regulations. And VIE agreements have been under
increasing scrutiny by the relevant government authorizes in recent years. Accordingly, we cannot assure investors that the PRC
regulatory authorities will ultimately take a view that our arrangements with CFO Fuhua comply with PRC law.
Although
we believe we comply with current PRC laws and regulations, we cannot assure you that the PRC government would agree that our
contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with
requirements or policies that may be adopted in the future. The PRC government has broad discretion in determining penalties for
violations of laws and regulations. If the PRC government determines that we do not comply with applicable law, it could revoke
our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues,
block our websites, require us to restructure our operations, impose additional conditions or requirements with which we may not
be able to comply, impose restrictions on our business operations or on our customers, or take other regulatory or enforcement
actions against us that could be harmful to our business. Any of these or similar occurrences could significantly disrupt our
business operations or restrict us from conducting a substantial portion of our business operations, which could materially and
adversely affect our business, financial condition and results of operations. If any of these occurrences results in our inability
to direct the activities of any of our consolidated affiliated entities that most significantly impact its economic performance,
and/or our failure to receive the economic benefits from any of our consolidated affiliated entities, we may not be able to consolidate
the entity in our consolidated financial statements in accordance with U.S. GAAP.
VIE
agreements that we have entered into with our PRC affiliates may be subject to scrutiny by the PRC tax authorities and a finding
that we or our PRC affiliates owe additional taxes could substantially reduce our consolidated net income.
Under
PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC
tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual
arrangements among our PRC-incorporated subsidiaries and PRC-incorporated affiliates do not represent an arm’s length price
and adjust the income of our PRC-incorporated subsidiaries or that of our PRC-incorporated affiliates in the form of transfer
pricing adjustments. Transfer pricing adjustments could, among other things, result in a reduction, for PRC tax purposes, of expense
deductions recorded by our PRC incorporated subsidiaries or affiliates, which could in turn increase their respective tax liabilities.
In addition, the PRC tax authorities may impose late payment fees and other penalties on our PRC-incorporated subsidiaries or
affiliates for underpayment of taxes. Our consolidated net income may be materially and adversely affected if our PRC-incorporated
subsidiaries or affiliates’ tax liabilities increase or if they are found to be subject to late payment fees or other penalties.
Substantial
uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment
Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.
The
MOFCOM published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment,
replace the existing laws regulating foreign investment in China. The MOFCOM has solicited comments on this draft and substantial
uncertainties exist with respect to its enactment timetable, interpretation and implementation. The draft Foreign Investment Law,
if enacted as proposed, may materially impact the viability of our current corporate structure, corporate governance, business
operations and financial results.
Among
other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of “actual
control” in determining whether a company is considered a foreign-invested enterprise, or an FIE. The draft Foreign Investment
Law specifically provides that entities established in China but “controlled” by foreign investors will be treated
as FIEs, whereas an entity set up in a foreign jurisdiction would nonetheless be, upon market entry clearance by the MOFCOM, treated
as a PRC domestic investor provided that the entity is “controlled” by PRC entities and/or citizens. In this
connection, “control” is broadly defined in the draft law to cover the following summarized categories: (i) holding
50% or more of the voting rights of the subject entity; (ii) holding less than 50% of the voting rights of the subject entity
but having the power to secure at least 50% of the seats on the board or other equivalent decision making bodies, or having the
voting power to exert material influence on the board, the shareholders’ meeting or other equivalent decision making bodies;
or (iii) having the power to exert decisive influence, via contractual or trust arrangements, over the subject entity’s
operations, financial matters or other key aspects of business operations. Once an entity is determined to be an FIE and its investment
amount exceeds certain thresholds or its business operation falls within a “negative list,” which is to be separately
issued by the State Council in the future, market entry clearance by the MOFCOM or its local branches would be required. Otherwise,
all foreign investors may make investments on the same terms as Chinese investors without being subject to additional approval
from the government authorities as mandated by the existing foreign investment legal regime.
The
“variable interest entity” structure, or VIE structure, has been adopted by many PRC-based companies, including
us, to obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions
in China. See “— If the PRC government finds that the structure we have adopted for our business operations does
not comply with PRC governmental restrictions on foreign investment in internet businesses, or if these laws or regulations
or interpretations of existing laws or regulations change in the future, we could be subject to severe penalties, including
the shutting down of our platform and our business operations” and “Item 4. Information on the Company — C.
Organizational Structure — Contractual Arrangements with Our VIEs.” Under the draft Foreign Investment Law, VIEs
that are controlled via contractual arrangement would also be deemed as FIEs, if they are ultimately “controlled”
by foreign investors. Therefore, for any companies with a VIE structure in an industry category that is on the
“negative list,” the VIE structure may be deemed legitimate only if the ultimate controlling
person(s) is/are of PRC nationality (either PRC companies or PRC citizens). Conversely, if the actual controlling
person(s) is/are of foreign nationalities, then the VIEs will be treated as FIEs and any operation in the industry
category on the “negative list” without market entry clearance by the MOFCOM may be considered
as illegal.
It
remains uncertain whether the ownership by multiple Chinese persons in a foreign company would be aggregated or separately counted
in determining “control” under the draft Foreign Investment Law. The draft Foreign Investment Law has not taken a
position on what actions will be taken with respect to the existing companies with a VIE structure, whether or not these companies
are controlled by Chinese parties, although a few possible options were proposed at the comment solicitation stage. Moreover,
it is uncertain whether the internet industry, in which our VIEs and a VIE’s subsidiary operate, will be subject to the
foreign investment restrictions or prohibitions set forth in the “negative list” to be issued. If the enacted
version of the Foreign Investment Law and the final “negative list” mandate further actions, if any, such as MOFCOM
market entry clearance or certain restructuring of our corporate structure and operations, to be completed by companies with existing
VIE structure like us, we may face substantial uncertainties as to whether these actions can be timely completed, or at all, and
our business and financial condition may be materially and adversely affected.
The
draft Foreign Investment Law, if enacted as proposed, may also materially impact our corporate governance practice and increase
our compliance costs. For instance, the draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting
requirements on foreign investors and the applicable FIEs. Aside from investment implementation report and investment amendment
report that are required at each investment and alteration of investment specifics, an annual report is mandatory, and large foreign
investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant with these
information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons
directly responsible may be subject to criminal liabilities.
We
rely principally on dividends and other distributions on equity paid by our wholly owned operating subsidiaries to fund any cash
and financing requirements we may have.
We
are a holding company, and our ability to pay dividends and other cash distributions to our shareholders, repay any debt we may
incur and meet our other cash requirements depends solely on our ability to receive dividends and other distributions from our
PRC subsidiaries and consolidated affiliated entities to our offshore affiliates and/or other contractual arrangements, more specifically:
(a)
|
Earnings
of our PRC subsidiaries that we directly own and operate inside the PRC are transferred to us by means of dividend payments.
The amount of dividends paid to us by our directly owned PRC subsidiaries depends mainly on the service fees paid to them
from our consolidated affiliated entities.
|
|
|
(b)
|
Earnings
of our PRC subsidiaries that we indirectly hold through an intermediary Hong Kong or British Virgin Islands company are transferred
to us by means of dividend payments via such intermediary company. The transfer of dividend payments from such intermediary
company to us is not subject to PRC taxation or other regulatory restrictions.
|
(c)
|
Earnings
of the VIEs, which we exert control via VIE contracts including without limitation exclusive technology consulting and management
service agreement, exclusive purchase right agreement, power of attorney and pledge agreement, are first transferred in full
(pre-tax) to our wholly foreign owned enterprise via such contractual arrangements.
|
However,
there are restrictions under PRC laws for the payment of dividends to us by our PRC subsidiaries. For example, if our PRC subsidiaries
incur debt on its own behalf, the instruments governing the debt may restrict its ability to make payments or distributions to
us. Furthermore, relevant PRC laws and regulations permit payments of dividends by the PRC subsidiaries only out of their retained
earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC laws and regulations, the
PRC subsidiaries are required to set aside at least 10% of its after-tax profits based on PRC accounting standards each year to
fund a statutory reserve. This reserve is not distributable as dividends until the accumulated amount of such reserve has exceeded
50.0% of its registered capital. Consequently, each of our PRC subsidiaries is restricted in its ability to transfer a portion
of its net assets to us or any of our other subsidiaries in the form of dividends, loans or advances. In addition, PRC tax authorities
may require us to amend the VIE contractual arrangements that would materially and adversely affect the ability to pay dividends
and other distributions to us. The foregoing restrictions on the ability of the PRC subsidiaries to pay dividends to us could
materially and adversely limit our ability to pay dividends to holders of our ADSs.
Risks
relating to doing business in the People’s Republic of China
A
slowdown of the Chinese economy or adverse changes in economic and political policies of the PRC government could negatively impact
China’s overall economic growth, which could materially adversely affect our business.
Substantially
all of our assets are located in China and substantially all of our revenues are derived from our operations in China. Accordingly,
our business, financial condition, results of operations and prospects are subject, to a significant extent, to economic, political
and legal developments in China.
The
annual growth rate of China’s economy declined from 7.3% in 2014 to 6.9% in 2015 and 6.7% in 2016. According to a recent
forecast by the National Bureau of Statistics of China, China’s economic growth rate 2017 is expected to slow further to
6.5%, its lowest since 1990. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic
developments in China may materially reduce the demand for the Company’s services and may have materially adverse effects
on our business.
The
PRC economy differs from the economies of most developed countries in many respects, including the amount of government involvement,
level of development, growth rate, and control of foreign exchange and allocation of resources. While the PRC economy has experienced
significant growth in the past 20 years, growth has been uneven, both geographically and among various sectors of the economy.
The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of
these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition
and results of operations may be adversely affected by government control over capital investments or changes in tax regulations
that are applicable to us.
The
PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although the PRC government has implemented
measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership
of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of
productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant
role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control
over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations,
setting monetary policy and providing preferential treatment to particular industries or companies. These actions, as well as
future actions and policies of the PRC government, could materially affect the financial markets in China and our business and
operations.
The
PRC legal system embodies uncertainties which could limit the legal protections available to you and us.
The
PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal
cases have little precedential value. Our significant PRC operating subsidiaries are enterprises incorporated in China and wholly
owned by foreign investors and are subject to laws and regulations applicable to foreign investment in China in general and laws
and regulations applicable to wholly foreign-owned enterprises in particular. However, these laws, regulations and legal requirements
are constantly changing, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal
protections available to us and other foreign investors, including you. In addition, we cannot predict the effect of future developments
in the PRC legal system, particularly with regard to the Internet, securities investment advisory and wealth management, including
the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local
regulations by national laws.
The
PRC government may prevent us from, and we may be subject to liability for, distributing content online that it believes to be
inappropriate.
China
has enacted laws and regulations governing Internet access and the distribution of news, information or other content, as well
as products and services, through the Internet. In the past, the PRC government has stopped the distribution of information through
the Internet that it believes violates PRC law. MIIT, the General Administration of Press and Publication, Radio, Film and Television,
and the Ministry of Culture have promulgated regulations which prohibit information from being distributed through the Internet
if it contains content that is found to, among other things, propagate obscenity, gambling or violence, instigate crimes, undermine
public morality or the cultural traditions of the PRC, or compromise state security or secrets.
In
addition, MIIT has published regulations that subject website operators to potential liability for content included on their websites
and the actions of users and others using their systems, including liability for violations of PRC laws prohibiting the distribution
of content deemed to be socially destabilizing. The PRC’s Ministry of Public Security has the authority to order any local
Internet service provider, or ISP, to block any Internet website maintained outside China at its sole discretion. Periodically,
the Ministry of Public Security has stopped the distribution over the Internet of information which it believes to be socially
destabilizing. The PRC’s State Secrecy Bureau, which is directly responsible for the protection of state secrets of the
PRC government, is authorized to block any website it deems to be leaking state secrets or failing to meet the relevant regulations
relating to the protection of state secrets in the distribution of online information.
Under
applicable PRC regulations, we may be held liable and be subject to penalties for any content we offer or will offer through our
website, including information posted on bulletin boards and online forums which we host and maintain on our website. Furthermore,
we are required to delete any content we transmit through our website if such content clearly violates PRC laws and regulations.
Where any content is considered suspicious, we are required to report such content to PRC governmental authorities.
It
may be difficult to determine the type of content that may result in liability for us. If any financial data and information services
we offer through our website were deemed to have violated any of such content restrictions, we could be forced to discontinue
such services and provision of financial data and be subject to penalties, including confiscation of income, fines, suspension
of business and revocation of licenses for operating online financial data and information services, which would materially and
adversely affect our business, financial condition and results of operations. Moreover, if any information posted on our bulletin
boards or online forums were deemed to have violated any of the content restrictions, we could be subject to similar penalties
that materially and adversely affect our business, financial condition and results of operations.
If
the current tax benefits we enjoy in PRC were no longer available, our effective tax rates for our PRC operations could increase.
The
PRC Enterprise Income Tax Law, or the EIT Law, and its implementation regulations adopted a uniform tax rate of 25% for all enterprises
(including domestically owned enterprises and foreign-invested enterprises) and revoked the previous tax exemption, reduction
and preferential treatments applicable to foreign-invested enterprises. However, there is a five-year transitional period during
which certain enterprises are allowed to continue to enjoy existing preferential tax treatments provided by the then-applicable
tax laws and administrative regulations.
According
to the Administrative Measures on the Recognition of “High and New Technology Enterprises”, or the Recognition Rules,
issued in 2008, the Ministry of Science and Technology, the Ministry of Finance and the State Administration of Taxation shall
jointly determine whether an enterprise is qualified as a “High and New Technology Enterprise”, or HNTE, under the
EIT Law and be entitled to enjoy a preferential enterprise income tax rate of 15%. The qualification is valid for three years
from the date of award, and enterprises should submit the application for renewal. CFO Genius obtained the HNTE status in 2012.
There is no assurance that they will continue to be classified as the HNTE when they are subject to reevaluation in the future.
In 2014, CFO Meining obtained renewal of its HNTE status successfully, which initially obtained the HNTE in 2011. In 2015, CFO
Genius also obtained renewal of its HNTE status, which will be valid through November 2018. In 206, CFO Fuhua obtained the HNTE
and enjoy the preferential tax rate of 15% from 2016 to 2018. Following the closing of the sale of 90% of equity interest in CFO
Meining, CFO Genius and CFO Fuhua will be the only two subsidiaries having HNTE status. In the event that the preferential tax
treatment for CFO Genius and CFO Fuhua are discontinued, it will become subject to the uniform tax rate of 25%, which materially
increase our tax obligations.
In
addition, companies that develop their own software and register the software with relevant authorities in China were generally
entitled to a value-added tax, or VAT, refund. With respect to revenue generated from the sale of certain online subscriptions,
including our service packages, nine of our subsidiaries obtained VAT refunds that reduce their effective VAT rates from 17% to
3% before 2011. The VAT refund policy was reconfirmed pursuant to the Notice on VAT Policy for Software Products, effective January
1, 2011, jointly promulgated by the Ministry of Finance and the State Administration of Taxation on October 13, 2011, or Caishui
Circular 100. Although the Notice on VAT Policy for Software Products does not specify policy expiration date, in the event that
the VAT refund policy for our subsidiaries is discontinued, our subsidiaries will become subject to the standard tax rate at 17%,
which materially increase our tax obligations.
Pursuant
to the implementation rules of EIT Law in the Tibet Autonomous Region of China (“Tibet”), companies incorporated and
operated in Tibet could enjoy a preferential enterprise income tax rate of 15%. In addition, a further 6% is exempted for the
years ended December 31, 2015, 2016 and 2017, which reduces the enterprise income tax rate to 9%. Tibet Fortune Jinyuan Network
Technology Co., Ltd. (“CFO Tibet”) and Tibet Zhisheng Gold Industry Co., Ltd. (“CFO Tibet Zhisheng”),
an affiliate of the Company was in Tibet and enjoyed a preferential tax rate of 9% from 2015 and 2016, respectively.
Uncertainties
in the PRC tax system may lead to penalties, termination of preferential tax treatment or change of tax levy method imposed on
us because of a difference in interpretation of the applicable law by the relevant governmental authority. For example, under
current tax laws and regulations, the local tax authority approved certain of our entities to file the income tax by adopting
the “deemed-profit method”. Under the method, the entities filed the income tax by calculating the tax as 2.5% of
the gross revenues. However, since there is no clear guidance as to the applicability of certain areas of preferential tax treatment
and tax levy position, we may be found to be in violation of the tax laws and regulations based on the interpretation of local
tax authorities with regard to taxable income and the applicable tax rates, and therefore might be subject to penalties, including
but not limited to monetary penalties, termination of preferential tax treatment or change of tax levy method, or claw-back and
late payment interest. Reduction or elimination of the preferential tax treatments we have enjoyed or change of our tax levy method
on us or our combined entities in China may significantly increase our income tax expenses and materially reduce our net income,
which could have a material adverse effect on our business, prospects, results of operations and financial condition.
In
addition, we cannot predict the effect of future tax application and tax developments in the PRC legal system, including the promulgation
of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by
national laws. The discontinuation of tax application could materially and adversely affect our financial condition. Any significant
increase in our income tax expenses may materially and adversely affect our profit.
Enhanced
scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may
pursue in the future.
In
connection with the EIT Law, the Ministry of Finance and the State Administration of Taxation jointly issued, on April 30, 2009,
the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59. On December
10, 2009, the State Administration of Taxation issued the Notice on Strengthening the Management on Enterprise Income Tax for
Non-resident Enterprises Equity Transfer, or Circular 698. On July 26, 2010, the State Administration of Taxation issued the Bulletin
Concerning Promulgation of Administrative Measures on the Enterprise Income Tax Treatment of Enterprise Reorganization, or Bulletin
4. On March 28, 2011, the State Administration of Taxation issued the Bulletin Concerning the Tax Administration of Non-resident
Enterprises, or Bulletin 24. Both Circular 59 and Circular 698 became effective retroactively on January 1, 2008. Bulletin 4 became
effective retroactively on January 1, 2010. Bulletin 24 took effective since April 1, 2011 and also applies to transactions that
have occurred prior to its effectiveness for which the relevant PRC tax matters have not been dealt with. On February 3, 2015,
the State Administration of Taxation issued the Announcement on Several Issues Related to Enterprise Income Tax for Indirect Asset
Transfer by Non-PRC Resident Enterprises, or Announcement 7, effective from February 3, 2015, which in part supersedes Circular
698 and Bulletin 24. On June 24, 2015, the State Administration of Taxation issued the Bulletin Concerning Certain Issues on the
Administration of the Enterprise Income Tax of Enterprise Reorganization, or Bulletin 48, which in part supersedes Bulletin 4.
By
promulgating and implementing these circulars, the PRC tax authorities have enhanced their scrutiny over the direct or indirect
transfer of equity interests in a PRC resident enterprise by a non-resident enterprise. The PRC tax authorities have the discretion
under Circular 59, and Circular 698, Bulletin 4, Bulletin 24 and Bulletin 48 to make adjustments to the taxable capital gains
based on the difference between the fair value of the equity interests transferred and the cost of investment. The PRC tax authorities
may also, under Announcement 7, treat an indict transfer of the equity interests in a PRC resident enterprise by a non-resident
enterprise as a direct transfer of PRC taxable assets subject to PRC corporate income tax, if it is established that such transfer
is made through an arrangement without a reasonable commercial purpose but to avoid PRC corporate income tax.
If
the PRC tax authorities make adjustments under Circular 59, Circular 698, Bulletin 4, Bulletin 24, Bulletin 48 or Announcement
7, our income tax costs associated with such potential acquisitions will be increased. We may also be at risk of being imposed
a penalty under the above rules and regulations and may be required to expend valuable resources to comply with or to establish
that we (or such foreign investor) should not be taxed under those rules and regulations, which could have a material adverse
effect on our financial condition and results of operations.
Dividends
we receive from our operating subsidiaries located in the PRC may be subject to PRC withholding tax.
The
EIT Law provides that a maximum income tax rate of 20% may be applicable to dividends payable to non-PRC investors that are “non-resident
enterprises” to the extent such dividends are derived from sources within the PRC, and the State Council has reduced such
rate to 10% through the implementation regulations unless any such non-PRC investor’s jurisdiction of incorporation has
a tax treaty with China that provides for a different withholding arrangement. We are a Hong Kong incorporated company and substantially
all of our income may be derived from dividends we receive from our operating subsidiaries located in the PRC. According to mainland
and Hong Kong Special Administrative Region Arrangement on Avoiding Double Taxation or Evasion of Taxation on Income agreed between
the Mainland and Hong Kong Special Administrative Region in August 2006, dividends payable by a subsidiary located in the PRC
to the company in Hong Kong who directly holds at least 25% of the equity interests in the subsidiary will be subject to a maximum
5% withholding tax under certain conditions. Since the preferential withholding tax is subject to the approval from competent
taxation authorities in PRC, it remains uncertain whether our company in Hong Kong actually would be able to enjoy preferential
withholding taxes for dividends distributed by our subsidiaries in China. If we are not able to enjoy the preferential withholding
taxes and the tax rate may be 10% for dividends distributed by our subsidiaries, it will materially and adversely affect the amount
of dividends, if any, we may pay to our shareholders and ADS holders.
We
may be deemed a PRC resident enterprise under the EIT Law and be subject to the PRC taxation on our worldwide income.
Under
the PRC Enterprise Income Tax Law and its Implementing Rules, an enterprise established outside of the PRC with “de facto
management bodies” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax at
the rate of 25% on its worldwide income. The Implementing Rules define the term “de facto management bodies” as “establishments
that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting,
properties, etc. of an enterprise”.
On
April 22, 2009, the State Administration of Taxation, or the SAT, issued the Notice Regarding the Determination of Chinese-Controlled
Offshore Incorporated Enterprises as PRC Tax Resident Enterprise on the Basis of De Facto Management Bodies, or SAT Circular 82,
which provided certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled
offshore- incorporated enterprise is located in China. In addition, the SAT issued the Bulletin 45 on July 27, 2011 to provide
more guidance on the implementation of the above circular with an effective date to be September 1, 2011. The Bulletin 45 made
clarification in the areas of resident status determination, post-determination administration, as well as competent tax authorities.
It also specifies that when provided with a copy of PRC tax resident determination certificate from a resident PRC -controlled
offshore incorporated enterprise, the payer should not withhold 10% income tax when paying the PRC-sourced dividends, interest
or royalties to the PRC-controlled offshore incorporated enterprise.
Although
SAT Circular 82 and the Bulletin 45 only apply to offshore enterprises controlled by PRC enterprises, not those controlled by
PRC individuals, the determining criteria set forth in SAT Circular 82 and the administration clarification made in Bulletin 45
may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining
the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals.
Accordingly, we may be considered a resident enterprise and may therefore be subject to the enterprise income tax at 25% on our
worldwide income. If we are considered a resident enterprise and earn income other than dividends from our PRC subsidiary, a 25%
enterprise income tax on our worldwide income could significantly increase our tax burden and materially and adversely affect
our cash flow and profitability.
Dividends
payable by us to our foreign investors and gain on the sale of our ADSs or ordinary shares may become subject to taxes under PRC
tax laws.
Under
the EIT Law and implementation regulations issued by the State Council, PRC income tax at the rate of 10% is applicable to dividends
generated on or after January 1, 2008 payable to investors that are “non-resident enterprises”, which do not have
an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income
is not effectively connected with the establishment or place of business, to the extent such dividends have their sources within
the PRC. Similarly, any gain realized on the transfer of ADSs or shares by such investors is also subject to 10% PRC income tax
if such gain is regarded as income derived from sources within the PRC. If we are considered a PRC “resident enterprise”,
it is unclear whether dividends we pay with respect to our ordinary shares or ADSs, or the gain you may realize from the transfer
of our ordinary shares or ADSs, would be treated as income derived from sources within the PRC and be subject to PRC tax. If we
are required under the EIT Law to withhold PRC income tax on dividends payable to our non-PRC investors that are “non-resident
enterprises” or if you are required to pay PRC income tax on the transfer of our ordinary shares or ADSs, the value of your
investment in our ordinary shares or ADSs may be materially and adversely affected.
Restrictions
on currency exchange may limit our ability to utilize our revenues effectively.
The
majority of our revenues and operating expenses are denominated in Renminbi. The PRC government imposes controls on the convertibility
of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. Pursuant to the Foreign
Currency Administration Rules promulgated on January 29, 1996 and amended on January 14, 1997 and various regulations issued by
the Administration for Foreign Exchange (“SAFE”) and other relevant PRC government authorities, Renminbi is freely
convertible only to the extent of current account items, such as trade-related receipts and payments, interest and dividends.
Capital account items, such as direct equity investments, loans and repatriation of investment, require the prior approval from
the SAFE or its local branch for conversion of Renminbi into a foreign currency, such as U.S. dollars, and remittance of the foreign
currency outside the PRC. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to
remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy its foreign currency-denominated
obligations. Currently, each of our PRC subsidiaries and affiliates may purchase foreign exchange for settlement of “current
account transactions”, including payment of dividends to us and payment of license fees and service fees to foreign licensors
and service providers, without the approval of SAFE. However, approval from the SAFE or its local branch is required where Renminbi
is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated
in foreign currencies.
Each
of our PRC subsidiaries and affiliates may also retain foreign exchange in their current accounts to satisfy foreign exchange
liabilities or to pay dividends. However, we cannot assure investors that the relevant PRC governmental authorities will not limit
or eliminate our ability to purchase and retain foreign currencies in the future. If the foreign exchange control system prevents
us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign
currencies to our shareholders. Since a significant amount of our future revenues will be in the form of Renminbi, the existing
and any future restrictions on currency exchange may limit our ability to utilize revenues generated in Renminbi to fund our business
activities outside China, if any, or expenditures denominated in foreign currencies.
In
addition, as further explained in disclosures below, each of our PRC subsidiary and affiliated consolidated entities is required
to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves or statutory
capital reserve fund until the accumulative amount of such reserve reaches 50% of its respective registered capital. These reserves
are not distributable as cash dividends.
Fluctuations
in exchange rates could result in foreign currency exchange losses.
Because
substantially all of our revenues and expenditures are denominated in Renminbi and the net proceeds from our initial public offering
were denominated in U.S. dollars, fluctuations in the exchange rate between U.S. dollars and Renminbi affect the relative purchasing
power of these proceeds and our balance sheet and earnings per ADS in U.S. dollars. In addition, we report our financial results
in U.S. dollars, and appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial
results reported in U.S. dollars without giving effect to any underlying change in our business or results of operations. Fluctuations
in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars and
earnings from and the value of any U.S. dollar-denominated investments we make in the future.
Since
July 2005, the Renminbi has no longer been pegged to the U.S. dollar. Although beginning in April, 2012, the Renminbi exchange
rate verses the U.S. dollar is restricted to a rise or fall of no more than 1% per day and increased to 2% beginning in March,
2014, and the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term
fluctuations in the exchange rate, the Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in
the medium- to long-term. Moreover, it is possible that in the future, PRC authorities may expand the Renminbi exchange rate’s
floating range, lift restrictions on fluctuations in the Renminbi exchange rate and lessen intervention in the foreign exchange
market.
Very
limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not
entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide
to enter into hedging transactions in the future, the availability and effectiveness of these hedging transactions may be limited
and we may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by
PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency.
The
audit report included in this annual report are prepared by auditors who are not inspected by the U.S. Public Company Accounting
Oversight Board (“PCAOB”), as such, our investors currently do not have the benefits of PCAOB oversight.
Our
independent registered public accounting firm that issues the audit reports included in our annual reports filed with the U.S.
Securities and Exchange Commission, or SEC, as auditors of companies that are traded publicly in the United States and a firm
registered with the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess
its compliance with the laws of the United States and applicable professional standards. Because our auditors are located in China,
a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our
auditors are not currently inspected by the PCAOB.
Inspections
of other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures
and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This
lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control
procedures. As a result, our investors may be deprived of the benefits of PCAOB inspections.
The
inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our
auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB
inspections. Investors may consequently lose confidence in our reported financial information and procedures and the quality of
our financial statements.
PRC’s
new labor law restricts our ability to reduce our workforce in the PRC in the event of an economic downturn and may increase our
labor costs.
The
PRC Labor Contract Law became and was implemented on January 1, 2008. The Labor Contract Law has reinforced the protection for
employees who, under the PRC Labor Contract Law, have the right, among others, to have written labor contracts, to enter into
labor contracts with no fixed terms under certain circumstances, to receive overtime wages and to terminate or alter terms in
labor contracts. Furthermore, the Labor Contract Law establishes additional restrictions and increases the costs involved with
dismissing employees. There remains significant uncertainty as to its interpretation and application by the PRC government and
courts. In the event that we decide to significantly reduce our workforce, particularly in the period with sluggish prospect in
securities market, the Labor Contract Law could adversely affect our ability to do so in a timely and cost effective manner, and
our results of operations could be adversely affected. In addition, for employees whose contracts include non-competition terms,
the Labor Contract Law requires employers to pay monthly compensation after such employment ends, which will increase employers’
operating expenses.
Risks
relating to our shares and ADSs
Due
to recent credit crisis of U.S.-listed Chinese companies caused by Chinese companies’ accounting scandals and the short
selling agencies’ raider activities in the aggregate, the price of our underlying common stock might fluctuate significantly
and if our stock price drops sharply, we may not satisfy the continued listing requirements of NASDAQ.
Since
2011, there have been well-publicized accounting problems at several U.S.-listed Chinese companies that have resulted in significant
drops in the trading prices of their shares and, in some cases, have led to the resignation of outside auditors, trading halts
or share de-listings by NASDAQ or the New York Stock Exchange, and investigations by the Division of Enforcement of the SEC. Many, but not all, of the companies involved in these scandals had entered the U.S. trading market through
“reverse mergers” into publicly traded shells. The scandals have had a broad effect on Chinese companies with shares
listed in the United States., Such accounting scandals in other Chinese companies could have an adverse effect on the market for
shares of our underlying common stock. Investors could lose confidence in PRC companies in general, which could lead to fluctuations
in the market prices of our underlying common stock and, if such prices were to drop sharply below $1.00 for 30 days consecutively,
could cause us not to satisfy the continued listing requirements of NASDAQ.
In
addition, some short selling agencies have been targeting U.S.-listed Chinese companies. Although the research reports issued
by those short selling agencies regarding some U.S.-listed Chinese companies are largely meritless, targeted companies had suffered
from significant fluctuations on their share prices. We cannot assure investors that we will not be the target of the short selling
agencies in the future. If we were to become their target, even if their claims are meritless, our share price may drop significantly,
and if such prices were to drop sharply below $1.00 for 30 days consecutively, could cause us not to satisfy the continued listing
requirements of NASDAQ.
Stock
prices of Internet-related companies, particularly companies with business operations primarily in China, have fluctuated widely
in recent years, and the trading prices of our ADSs are likely to be volatile, which could result in substantial losses to investors.
The
trading prices of our ADSs have been volatile and could fluctuate widely in response to factors beyond our control. Since the
completion of our initial public offering in October 2004, the trading prices of our ADSs have ranged between a high of $47.68
per ADS to a low of $1.02 per ADS as of December 31, 2016. During the twelve-month period ended December 31, 2016, the price of
our ADSs has ranged from a low of $3.48 to a high of $6.1 per ADS. The market prices of the securities of Internet-related companies
have generally been especially volatile.
In
particular, the performance and fluctuation of the market prices of other technology companies with business operations mainly
in China that have listed their securities in the United States may affect the volatility in the price of and trading volumes
for our ADSs. Some of these companies have experienced significant volatility, including significant price declines in connection
with their initial public offerings and as a result of the global financial crisis. The trading performances of these Chinese
companies’ securities at the time of or after their offerings may affect the overall investor sentiment towards PRC companies
listed in the United States and consequently may impact the trading performance of our ADSs. Changes in the U.S. stock market
generally or as it concerns our industry, as well as geopolitical, economic, and business factors unrelated to us, may also affect
the market price and volatility of our ADSs, regardless of our actual operating performance.
In
addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for business specific
reasons. Factors such as variations in our revenue, earnings and cash flow, announcements of strategic transition and new investments,
cooperation arrangements or acquisitions, and fluctuations in market prices for our services could cause the market price for
our ADSs to change substantially. The global financial crisis may have substantial negative impact on our financial and business
performance. Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.
We cannot assure investors that these factors will not occur in the future.
The
sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.
Sales
of our ADSs in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to
decline. Such sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time
and price that we deem appropriate. If any existing shareholder or shareholders sell a substantial amount of ADSs, the prevailing
market price for our ADSs could be adversely affected. In addition, if we pay for our future acquisitions in whole or in part
with additionally issued ordinary shares, your ownership interests in our company would be diluted and this, in turn, could have
a material and adverse effect on the price of our ADSs.
The
82,837,921 ordinary shares that were outstanding prior to our initial public offering are “restricted securities”
as defined in Rule 144 promulgated under the Securities Act of 1933, as amended, or the Securities Act and may not be sold in
the absence of registration other than in accordance with Rule 144 under the Securities Act or another exemption from registration.
These “restricted securities” are available for sale subject to volume and other restrictions as applicable under
Rule 144 of the Securities Act. To the extent ordinary shares are sold to the market, the market price of our ADSs could decline.
A
significant percentage of our outstanding ordinary shares are held by a small number of our shareholders, and these shareholders
may have significantly greater influence on us and our corporate actions by nature of the size of their shareholdings relative
to our public shareholders.
As
of December 31, 2016, five of our existing shareholders, including Zhiwei Zhao, IDG Technology Venture Investment, LP, IDG Technology
Venture Investment, Inc., Ling Zhang and Jianping Lu, beneficially owned, collectively, approximately 50.0% of our outstanding
ordinary shares.
For
more information regarding our principal shareholders and their affiliated entities, see “ITEM 6.E. Directors, Senior
Management and Employees — Share Ownership.”
Accordingly,
these shareholders have had, and may continue to have, significant influence in determining the outcome of any corporate transaction
or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially
all of our assets, election of directors and other significant corporate actions. In addition, without the consent of these shareholders,
we could be prevented from entering into transactions that could be beneficial to us.
Provisions
in our charter documents and certain provisions under Hong Kong law may discourage our acquisition by a third party, which could
limit your opportunity to sell your shares at a premium
Our
constituent documents and Hong Kong law include provisions that could limit the ability of others to acquire control of us, modify
our structure or cause us to engage in change in control transactions, including, among other things, the following:
●
|
Our
articles of association provide for a staggered board, which means that half of the directors for the time being (excluding
our chief executive officer) or if their number is not a multiple of two, then the whole number nearest to but not exceeding
one-half, shall retire at every annual general meeting and the retiring directors shall be eligible for re-election. Our chief
executive officer will at all times serves as a director, and will not retire as a director, so long as he remains our chief
executive officer. This means that, with our staggered board, at least two annual general meetings, instead of one, are generally
required to effect a change in a majority of our directors, making it more difficult for any potential acquirer to take control
of our board in a relatively short period of time, which may discourage contests for the election of our directors and purchases
of substantial blocks of our shares.
|
●
|
Hong
Kong law permits shareholders of a company to remove directors by a shareholders’ resolution. Our articles of association
require any shareholder who wishes to remove a director by a resolution passed at a general meeting to give us advanced notice
in writing of the intention at least 120 days before the meeting at which it is to be proposed, making it more difficult and
time consuming for a potential acquirer who has accumulated a substantial voting rights to obtain control of our board by
removing opposing directors.
|
|
|
●
|
Our articles
of association provide that our board can have no less than five and no more than nine directors. Our board has five directors
as of the date of this report. Any increase in the maximum number of directors on our board beyond nine directors can only
be accomplished by resolution of the board and by further amending our articles of association, which under Hong Kong law
requires a special resolution that is passed by a majority of at least 75%. These restrictions can make it more difficult
for a potential acquirer who has accumulated a majority of our shares to take control of us by promptly increasing the size
of our board and appointing new directors that are its nominees.
|
|
|
●
|
Hong Kong does
not have merger laws that permit Hong Kong companies to merge in the same way as U.S. companies could in the United States.
However, the Hong Kong Companies Ordinance (Cap. 622 of the Laws of Hong Kong) has provisions that facilitate arrangements
for the reconstruction and amalgamation of companies. The arrangement must be approved by a majority in number of each class
of shareholders and creditors (as appropriate) with whom the arrangement is to be made, representing at least 75% of the voting
rights of each such class of shareholders or creditors that are present and voting either in person or by proxy at meetings
ordered by the High Court of Hong Kong. The arrangements may be sanctioned by the High Court of Hong Kong after approval by
shareholders or creditors and the court order has to be registered with the Registrar of Companies.
|
|
|
●
|
Our shareholders
have authorized our board of directors, without any further action by shareholders, to issue additional shares. Under Hong
Kong law, the authority granted by our shareholders will remain valid until the conclusion of the annual general meeting,
or the time when our next annual general meeting is required to be held. For as long as this approval remains effective, or
is renewed, our board of directors will have the power to issue additional ordinary shares (including ordinary shares represented
by ADSs) and preference shares without any further authorization from the shareholders.
|
We
are a Hong Kong company and because the legal and procedural protections of minority shareholders under Hong Kong law differ from
those under U.S. law, you may have difficulty protecting your interests as our shareholder relative to shareholders of corporations
organized in the U.S.
We are a Hong Kong company and are subject
to the laws of Hong Kong. The fiduciary responsibilities of our directors and the ability of minority shareholders to take successful
legal action in Hong Kong against us or our directors are governed by the laws and court procedures of Hong Kong. Shareholders
of a Hong Kong company would not be able to bring class action lawsuits against that company or its directors in a Hong Kong court
in the same way that shareholders of a U.S. corporation might be able to bring such lawsuits in a U.S. court. In addition, professional
conduct rules applicable to Hong Kong lawyers generally prohibit Hong Kong lawyers from accepting contingency fee arrangements,
where a lawyer representing the plaintiffs is paid a fee only if the lawsuit is successful. Without contingency fee arrangements
or the ability to bring class action lawsuits, our shareholders may find it more costly and difficult to take legal action against
us or our directors in the Hong Kong courts. The Hong Kong courts are also less likely to recognize or enforce against us judgments
of courts of the U.S. based on the civil liability provisions of U.S. securities laws, or, to allow original actions brought in
Hong Kong, based on the civil liability provisions of U.S. securities laws that are penal in nature.
In
addition, there is no automatic statutory recognition in Hong Kong of judgments obtained in the United States. Moreover, Hong
Kong companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.
As
a result, minority public shareholders may have more difficulties in protecting their interests in the face of actions taken by
management, directors or controlling shareholders than they would as minority public shareholders of a U.S. corporation. Moreover,
substantially all of our assets are located outside of the United States and all of our current operations are conducted in the
PRC. In addition, most of our directors and officers are nationals and residents of countries other than the United States, whose
substantial portion of assets of are located outside the United States. As a result, it may be difficult for you to effect service
of process within the United States upon these persons.
The
voting rights of holders of ADSs must be exercised in accordance with the terms of the deposit agreement, the American depositary
receipts, and the procedures established by the depositary. The process of voting through the depositary may involve delays that
limit the time available to you to consider proposed shareholders’ actions and also may restrict your ability to subsequently
revise your voting instructions.
A
holder of ADSs may exercise his/her/its voting rights with respect to the underlying ordinary shares only in accordance with the
provisions of the deposit agreement and the American depositary shares.
When
the depositary receives from us notice of any shareholders meeting, it will distribute the information in the meeting notice and
any proxy solicitation materials to you. The depositary will determine the record date for distributing these materials, and only
ADS holders registered with the depositary on that record date will, subject to applicable laws, be entitled to instruct the depositary
to vote the underlying ordinary shares. The depositary will also determine and inform you of the manner for you to give your voting
instructions, including instructions to give discretionary proxies to a person designated by us. Upon receipt of voting instructions
of a holder of ADSs, the depositary will endeavor to vote the underlying ordinary shares in accordance with these instructions.
Although Hong Kong law requires us to call annual shareholders’ meetings by not less than 21 days’ notice in writing,
and all other shareholders’ meeting by not less than 14 days’ notice in writing, these minimum notice requirements
can be shortened or completely waived by the consent of all holders of our ordinary shares entitled to attend and vote (in the
case of annual shareholders’ meetings) or a majority in number of the holders of our ordinary shares representing at least
95% in nominal value of the shares giving the right to attend and vote (in the case of all other shareholders’ meetings).
If the minimum notice periods are shortened or waived, you may not receive sufficient notice of a shareholders’ meeting
for you to withdraw your ordinary shares and cast your vote with respect to any proposed resolution, as a holder of our ordinary
shares. In addition, the depositary and its agents may not be able to send materials relating to the meeting and voting instruction
forms to you, or to carry out your voting instructions, in a timely manner. We cannot assure investors that you will receive the
voting materials in time to ensure that you can instruct the depositary to vote your shares. The additional time required for
the depositary to receive from us and distribute to you meeting notices and materials, and for you to give voting instructions
to the depositary with respect to the underlying ordinary shares, will result in your having less time to consider meeting notices
and materials than holders of ordinary shares who receive such notices and materials directly from us and who vote their ordinary
shares directly. If you have given your voting instructions to the depositary and subsequently decide to change those instructions,
you may not be able to do so in time for the depositary to vote in accordance with your revised instructions.
Furthermore,
the depositary has deemed any holders who do not send in voting instructions at all or in a timely manner as having instructed
the depository to give a discretionary voting proxy to the person(s) designated by us to receive voting proxies, with full power
to exercise such holder’s (or holders’) voting rights under the ADSs’ underlying ordinary shares in the manner
as the proxy holder deems fit. Accordingly, matters that favor the incumbent board of directors and management will have a higher
likelihood of passing than would otherwise be the case.
The
depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which
any vote is cast or for the effect of any such vote.
You
may not receive distributions on our ordinary shares or any value for them if such distribution is illegal or if any requisite
government approval cannot be obtained in order to make such distribution available to you.
The
depositary of our ADSs has agreed to pay to you the cash dividends or other distributions (which may include securities or rights
distributions) it or the custodian for our ADSs receives on our ordinary shares or other deposited securities after deducting
its fees and expenses. You will receive these distributions in proportion to the number of our ordinary shares your ADSs represent.
However, the depositary is not responsible to make a distribution available to any holders of ADSs if it decides that it is unlawful
to make such distribution. For example, it would be unlawful to make a distribution to holder of ADSs if it consisted of securities
that required registration under the Securities Act but that were not properly registered or distributed pursuant to an applicable
exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any
government approval or registration required for such distribution cannot be obtained after reasonable efforts made by the depositary.
We have no obligation to take any other action to permit the distribution of our ADSs, ordinary shares, rights or anything else
to holders of our ADSs. This means that you may not receive the distributions we make on our ordinary shares or any value for
them if it is unlawful or unreasonable from a regulatory perspective for us to make them available to you. These restrictions
may have a material adverse effect on the value of your ADSs.
You
may be subject to limitations on transfers of your ADSs.
Your
ADSs, each of which represents five ordinary shares, are transferable on the books of the depositary. However, the depositary
may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties.
The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such
as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified
period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse
to deliver, transfer or register transfers of our ADSs generally when the books of the depositary are closed, or at any time if
we or the depositary thinks it is advisable to do so because of any requirement of law or any government or governmental body,
or under any provision of the deposit agreement, or for any other reason.
Your
right as a holder of ADSs to participate in any future rights offerings may be limited, which may cause dilution to your holdings.
We
may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make
rights available to our ADS holders in the United States unless we register the rights and the securities to which the rights
relate under the Securities Act or an exemption from the registration requirements is available. In addition, the deposit agreement
provides that the depositary bank will not make rights available to you unless the distribution to ADS holders of both the rights
and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act.
We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause
such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration
under the Securities Act. Accordingly, ADS holders may be unable to participate in our rights offerings and may experience dilution
in their holdings.
In
addition, if the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or
reasonably practicable, it will allow the rights to lapse, in which case you will receive no value for these rights.
ITEM
4. INFORMATION ON THE COMPANY
China
Finance Online Co. Limited was incorporated in Hong Kong in November 1998. In April 2001, we launched our online financial and
listed company data and information services.
In
October 2004, we completed the initial public offering of our ADSs, each of which represents five of our ordinary shares, and
listed our ADSs on The NASDAQ Stock Market. On January 3, 2011, our ADSs were elevated to trade on the NASDAQ Global Select Market.
The NASDAQ Global Select Market is designated for public companies that meet the highest initial listing standards in the world.
Inclusion in the world-class blue chip market is a significant milestone of our progress and is indicative of our commitment to
high standards and good governance, and demonstrates our achievement, leadership and stature.
In
April 2000, we acquired the financial information website
www.jrj.com.cn
and in October 2004 we acquired the domain name
www.jrj.com
, and commenced operating our subscription-based financial information business in March 2005. We maintain the
same content under both domain names.
In
2006 we acquired the website
www.stockstar.com
, which was established in 1996 and is one of the leading finance and securities
websites in China.
Also
in 2006, we acquired CFO Genius, a financial information database provider primarily serving domestic securities and investment
institutions.
In
2007, we acquired Daily Growth Securities Limited, (renamed iSTAR International Securities Co. Limited in February 2013, and further
renamed Rifa Securities Limited, or Rifa Securities, in 2016), a licensed securities brokerage firm incorporated in Hong
Kong.
Based
on our assessment of changes in customer demand, market and regulatory environment and industry outlook, the Board of Directors
approved the strategic transition. The goal of our strategic transition is to deliver to investors and our clients and customers
a one-stop financial platform providing investment advisory, securities trading and wealth management services. In order to address
the demand for alternative investment opportunities, the Company established new affiliates and acquired and invested in other
business entities engaged in alternative investments.
In January 2013, Zhengjin
(Fujian) Precious Metal Investment Co., Ltd. (“Zhengjin Fujian”), a new affiliate of the Company we established in
2013, became a member of the SAIC (State Administration for Industry and Commerce) – approved Haixi Commodity Exchange (“Haixi”).
Haixi is the only commodities spot market which provides electronic trading in Fujian province. In September 2013, Zhengjin (Tianjin)
Precious Metal Management Co., Ltd. (“Zhengjin Tianjin”), another affiliate of the Company, became the member of Tianjin
Precious Metal Exchange (“TJPME”). In September 2013, we acquired 60% equity of Shenzhen Tahoe Investment and Development
Co., Ltd. (“Tahoe”). Henghui (Tianjin) Precious Metals Management Co., Ltd. (“Henghui”), a subsidiary
of Tahoe, is also a member of TJPME. We are also the members of some other commodities exchanges, such as Qilu Commodity Exchange
in Qingdao, Shandong Province.
In
August 2013, the Company launched “Yinglibao”, a mobile-based financial platform that integrates wealth management
solutions and mutual fund distribution. For users who maintained Yinglibao balances, they could receive a money market fund rate
of return on their balances, which is higher than the current bank demand deposit rate. In addition, Yinglibao users have the
option of purchasing mutual fund and other wealth management products directly through their accounts.
In
the second quarter of 2014, as part of our strategic transition, the Board of Directors determined that online brokerage services
should be one of the Company’s core businesses going forward. In December 2014, we continued our strategic transition efforts
by launching an investment advisory service platform, “Investment Masters” (“iTougu”), designed to provide
securities investment advisors and their clients a real-time communication channel, where messages, market analytics, research
report and investment strategies are exchanged. Further, this platform is connected to our securities-trading platform, Securities
Master, to enable our users to place trade orders directly while using Investment Masters. In December 2015, we launched the updated
version 3.0 of iTougu.
In March 2015, we signed a contract with a
third party buyer to transfer the entire equity interest in Rifa Futures and iSTAR Wealth Management to a third party for a total
consideration of $6.5 million (HK$ 50.7 million equivalently), comprising $1.0 million (HK$8.0 million equivalently) and a sum
equal to the net assets of the Rifa Futures and iSTAR Wealth Management as of March 31, 2015. The contract has not been fulfilled
and expired automatically on December 31, 2015, as a result Rifa Futures remains in our Group. In April 2016, we signed a new
agreement with the same third party buyer to transfer the entire equity interest in iSTAR Wealth Management for a total consideration
of $3.0 million (HK$23.3 million equivalently), and such transfer was completed in September, 2016.
In December 2015, we signed a framework
agreement with Shanghai EBI Capital Co., Ltd., a Chinese private equity firm ("Shanghai EBI"), to sell (i) Shanghai Fenxin
Information Technology Co., Ltd. ("CFO Fenxin") which owns 90% of equity stake in CFO Meining which wholly owns the
financial portal stockstar.com; and (ii) Zhongcheng Futong Co., Ltd. ("CFO Zhongcheng") which owns 90% equity stake in
Shanghai Stockstar Securities Advisory and Investment Co., Ltd. (“CFO Securities Consulting”). The considerations
were approximately $21.6 million (RMB140.0 million, equivalently) and $9.3 million (RMB 60.0 million, equivalently), respectively.
The sale of CFO Zhongcheng was completed in December 2015, while the sale of CFO Fenxin was completed in April 2016.
In
November 2016, Beijing Zhongjun Sunshine Investment and Management Co., Ltd. completed a registration as general manager of private
equity fund under the category of securities investment fund with Asset Management Association of China. After the completion
of such registration, we will introduce a new equity fund in 2017.
B.
Business overview.
Overview:
China
Finance Online Co. Limited is a leading web-based financial services company in China. The company provides Chinese retail investors
with online access to securities and commodities trading services, wealth management products, securities investment advisory
services, as well as financial database and analytics services to institutional customers. The Company’s prominent flagship
portal site, www.jrj.com, is ranked among the top financial websites in China.
Since
early 2015, China’s leaders have acknowledged that the country is facing a “new normal” of slower growth, following
three decades of average annual growth in Gross Domestic Product (“GDP”) of 9.91%, from 1979 to 2010. In financial markets, the
“new normal” is unfamiliar to many investors who will need expert guidance and the best possible tools to assess market
trends and prospects. In addition, investors will also need guidance on the over-the-counter National Equities Exchange and Quotations
market, known as the third board, which hit a milestone in August 2015 with 3,000 listings, versus 2,800 for the combined Shanghai
and Shenzhen markets, as well as a new registration-based system for Initial Public Offerings, which is gradually replacing the
old approvals-based system.
With
the complexity of the Chinese financial markets increasing, we believe individual investors will increasingly seek out professional
investment advice and services. Leveraging our extensive experience and robust internet capabilities, we are adapting and strategically
transitioning our business to the new environment by rapidly building Investment Masters (iTougu) and Yinglibao, our two newest
businesses, into leading one-stop financial products and services platforms for individual investors in China
.
However,
with the introduction of the Interim Measures, although Yinglibao is not prohibited from directly engaging in
peer-to-peer lending, it must follow an application process that requires registration and filling with the relevant
government authorities. Please refer to Item 3. “Key Information – D. Risk Factors – The Interim Measures on Administration of
the Business Activities of Peer-to-Peer Lending Information Intermediaries may adversely
affect our business, financial conditions and results of operations.”
In
2016, we continue to develop our mutual fund distribution business, securities investment advisory business, individual research
tool subscription business, online P2P lending business, institutional subscription business, advertising business, commodities
brokerage services, as well as Hong Kong securities and futures contracts brokerage business.
Our
Business Sectors
Currently,
the Company’s net revenues are categorized under: (a) revenues from financial services, which include brokerage-related
revenues including commodities brokerage services; (b) revenues from financial information and advisory business, which include
subscription fees from individual customers and institutional customers; and (c) advertising revenues.
In
2014, 2015 and 2016, revenues from financial services business were $64.7 million, $83.0 million and $69.0 million, representing
approximately 77.3%, 77.1% and 83.0%, of our total net revenues, respectively. In 2014, 2015 and 2016, revenues from financial
information and advisory business were $10.3 million, $17.2 million and $10.7 million, representing approximately 12.4%, 16.0%
and 12.9%, of our total net revenues, respectively. In 2014, 2015 and 2016, revenues from advertising business were $8.2
million, $7.0 million and $2.9 million, representing approximately 9.7%, 6.5% and 3.5%, of our total net revenues, respectively.
For
a breakdown of total revenues by geographic market for each of the last financial years, see “Item 5.A. Operating and
Financial Review and Prospects — Operating Results — Net Revenues.”
a.
|
Subscription
Services and other Related Services in the PRC
|
(i)
|
Financial
Services Business
|
Mutual
Fund Distribution
We
obtained the license for mutual fund distribution issued by China Securities Regulatory Commission, or CSRC, in 2012, and launched
Yinglibao, an internet based financial platform that integrates cash management solutions and mutual fund distribution in August
2013. As of December 31, 2016, Yinglibao established business relationships with over 80% of the mutual fund companies in China,
and provided more than 2,700 mutual fund products.
In
order to facilitate and support our mutual fund distribution business, we conducted a trial launch of our proprietary robo-advisory
service, in preparation for launching such service in 2017.
(ii)
|
Financial
Information and Advisory Business
|
In
2014, 2015 and 2016, revenues from financial information and advisory business services represented approximately 12.4%,
16.0% and 12.9% of our total net revenues, respectively.
Securities
Investment Advisory Business (“iTougu”)
On
December 25, 2014, we launched an investment advisory service platform “Investment Masters (iTougu)” at its annual
conference “Leading China 2014: Financial Industry Innovation Forum”. The iTougu platform is designed to provide securities
investment advisors and their clients a real-time communication channel, where they may communicate directly and in real-time.
It also provides a vast number of Chinese individual investors access to securities investment advisors where they may attain
private investment advice from thousands of investment advisors. In addition, the iTougu platform provides these highly-demanded
features:
●
|
Text
and audio interactive messaging system for broadcast and Q&As between investment advisors and their clients;
|
|
|
●
|
Daily
market analytics, research reports and investment strategies for investment advisors;
|
|
|
●
|
Access
to fast trade order placement with direct connection to the Company’s Securities Masters platform; and
|
|
|
●
|
Client
Management system for every investment advisor to view and manage client profiles, historical data and activities.
|
In
May 2015, we launched the updated version 2.0 of iTougu with a new feature called “What to Buy”. With a monthly fee,
retail investors can receive stock picking advice and have access to the advisors’ recommended portfolios and their market
performance.
In
December 2015, we launched iTougu version 3.0 with an optimized broadcast system, up-to-the-minute stock news on webpages of individual
stock, improved stock charts, a streamlined login system and an optimized stock selection function to enhance the user experience.
Our
trading platform, "Securities Master" (Zhengquantong), was fully integrated within iTougu in 2015.
Individual
Research Tool Subscription Business
To
conduct our subscription services, we collect and process our website content through our research tools and provide to our subscribers
financial analysis tools, real-time and historical data, news, research reports and online forums in one integrated information
platform, providing them the means to make informed investment decisions with respect to China’s listed company stocks,
bonds, mutual funds and stock index futures based on specifications determined by them.
In
2016, while we did not accept new paid subscribers or renewal for premium individual subscription service, we continue to provide
our existing subscriber base premium individual subscription, basic software and information services.
Online
P2P Lending
We
provide services as information intermediary in online P2P lending business. We procure borrowing and lending information from
independent third parties, and our professional team evaluates and selects the information provided by third parties, from the
perspective of risks. Eventually we display the selected information on the platform of Yinglibao.
Institutional
Subscription Business
CFO Genius was founded in 1994. It
was the first professional financial database provider in China. In 2006, it became a fully-owned subsidiary of China Finance
Online Co., Ltd.
(iii)
|
Advertising
Business
|
We
believe that our website
www.jrj.com
is among the most popular financial information websites in China. While our internet
community is generally affluent and educated and thus represents a potentially attractive group for advertisement, in 2012, we
continued to allocate most of our advertising inventory to promote our own product and service offerings to individual investors.
In 2014, 2015 and 2016, revenues from advertising-related services represented approximately 9.7%, 6.5% and 3.5% of our total
net revenues respectively, and online advertising was not part of our core business.
b.
|
Commodities
Brokerage Services
|
In
2013, in order to address the market demand for alternative investment opportunities, the Company established Zhengjin Fujian
and Zhengjin Tianjin and acquired Henghui to help clients invest in and trade precious metals. Our clients mainly trade on the
Tianjin Precious Metals Exchange and the Guangdong Precious Metals Exchange. Our precious metals trading affiliates’ intended
scopes of business include precious metals spot trading, silver product sales and financial investment advisory services. During
the third quarter of 2015, we launched a heavy oil brokerage business and subsequently renamed this business as our commodities
brokerage services.
In
2014, 2015 and 2016, our net revenues derived from commodities brokerage business represented approximately 71.8 %, 74.2% and
72.2% of our total net revenues respectively.
c.
|
Hong
Kong Securities and Futures Contracts Brokerage Business
|
Following
our acquisition of Hong Kong-based Rifa Securities in November 2007, a licensed securities brokerage firm, we began providing
certain brokerage and related services to our customers who invest in stocks listed on HKEx. Rifa Securities is regulated by HKEx
and SFC.
Rifa
Securities, together with Rifa Futures, serve as our platform for developing financial services outside mainland China. In 2014,
2015 and 2016, the brokerage and related services provided by Rifa Securities and Rifa Futures contributed approximately 5.5%
, 2.9% and 10.8% of our total net revenues.
In
September, 2016, the Company transferred the entire equity interest in iSTAR Wealth Management to a third party for a total consideration
of $3.0 million (HK$23.3 million equivalently).
Customer
support
Our
customer support center provides our clients and users with real-time and professional support our customer support personnel
are available to explain various features of our offerings and provide investment advisory services directly over the phone. Customer
support is also available to provide assistance on technical problems to our users, as well as perform sales and marketing roles.
We have an in-house training program for our customer support personnel, which include training courses on China’s securities
markets, our service features and functionalities, technical problem solving skills and general customer service guidelines.
Sales
and Marketing
We
market our service offerings through online marketing, call centers, advertising and our customer support personnel. We will continue
to use our focused marketing strategy to further enhance awareness of our brand and acquire new customers. We conduct online marketing
mainly through our website www.jrj.com, which is among the most popular financial information websites in China. We also advertise
with radio stations and in subways and also conduct public relations activities in the major cities.
In
September 2015, we launched the first iTougu Masters Tournament (the “Tournament”) for “grass-roots” and
professional investment advisors across China. The purpose of the Tournament is to showcase featured investment advisors with
different investment styles and to enable retail investors to consult with the advisors online. The Tournament featured two events
with individual and institutional participants. Starting on September 7, 2015, all participants displayed the daily performance
of their investment portfolios over a three-month period. Throughout the Tournament, all registered users of China Finance Online's
flagship portal (jrj.com.cn and the iTouGu marketplaces) were be able to view the Tournament participants' stock portfolios and
live trading records free of charge.
In
December 2015, we successfully hosted "Leading China 2015: Financial Industry Innovation Forum" in Beijing. Regulators
and guests from the State Council of People's Republic of China, China Banking Association, Asset Management Association of China,
China Futures Association, Insurance Society of China, Tsinghua University PBC School of Finance and executives from Chinese securities
firms and commercial banks, among others, made important speeches covering topics including financial reforms, China’s “Internet
Plus” strategy, internet finance and mobile securities services. The Company also awarded the winners of iTougu’s
first Tournament.
In
December 2016, we hosted “2016 Fintech Forum & Leading China Annual Awards” in Beijing. The key-note speakers
for this event include senior management from financial companies and banks and also officials from regulatory commissions. The
forum had over 500 attendees from a large number of prestigious Chinese financial institutions, including banks, broker dealers,
asset management firms and insurance companies.
Research
and Development
We
seek to differentiate our products and optimizing our services as continue to strengthen our core competence. We have been focusing
on development and innovation of internet platforms and mobile internet applications, bringing cutting-edge technology shapes
including multimedia, social networking, big data, cloud computing and user behavior analysis into our financial service platform,
We
invested in research and development projects to continue to improve Yinglibao and iTougu in 2015.
We
continue to invest in research and development projects in 2016, including among others, conducting a trial launch of our proprietary
rob-advisory service in November 2016, which aimed at providing support to our mutual fund distribution business and iTougu.
When
designing products, we aim to anticipate our customers’ needs and to meet their increasingly complex and specific design
requirements. We also strive to design products that will achieve broad market acceptance and generate widespread end user demand.
Our product development team conducts frequent meetings with our sales and marketing team to discuss the feasibility of new service
offerings and the progress of existing product development efforts. Our research and development team also works closely with
our customer support team to develop features and content based on user feedback.
We
expect product development to remain an important part of our business as the online financial services industry in China becomes
increasingly sophisticated. We will keep placing significant emphasis on refining and upgrading our products and service platform,
and on creating new and innovative features to meet the changing needs of our customers. Our research and development team works
as an integral part of our overall service offering efforts.
Competition
Although
we pioneer in providing online financial services and information, we are still facing more competition in many aspects of our
business. New business ventures such as Investment Masters, Yinglibao, commodities brokerage services, securities investment advisory
and wealth management services are developing in accordance with our current business plan. We are operating in an increasingly
competitive environment and competing for clients on the basis of product choices, client services, reputation and brand names.
The potential competitions we face include the following:
●
|
competition
from traditional and online financial service providers offering similar services and products;
|
|
|
●
|
competition
from existing internet companies entering into financial service market offering similar services and products; and
|
|
|
●
|
competition
from new entrants providers offering similar services and products.
|
With
respect to our scaled-down of software-based financial information services, the number of competitors providing online financial
news and information has increased since we commenced operations. Competition is intensifying among companies that provide security
analysis software. More broadly, we also compete, directly and indirectly, for users and subscribers with companies in the business
of providing financial data and information services, including:
●
|
publishers
and distributors of traditional media, including print, radio and television as well as radio and television programs and
news programs focused on financial news and information;
|
|
|
●
|
internet
portals providing information on business, finance and investing;
|
|
|
●
|
financial
information web pages offered by websites;
|
|
|
●
|
stock
research software vendors, especially those that develop and market stock research software through stock brokerage companies;
|
|
|
●
|
stock
brokerage companies, especially stock brokerage companies with online trading capabilities; and
|
●
|
other
companies that provide similar products and services as ours.
|
Our
ability to compete depends on many factors, including the comprehensiveness, timeliness and trustworthiness of our content, market
acceptance of our services, pricing and sophistication of our products, ease of use of our information platform, the effectiveness
of our sales and marketing efforts and our ability to continue to innovate and develop new products.
In
addition, lack of substantial barriers to entry has historically enabled certain unqualified companies and low-quality products
to compete with us in the market. Certain unlicensed participants supplied counterfeit, illegal or low-quality and inferior products
or services under our name. Such unlawful acts not only distorted market order, but also negatively impacted our reputation and
materially and adversely affect our future developments. In addition, the resultant increase in expenses is becoming apparent
across the industry.
Intellectual
property
Our
intellectual property is an essential element of our business operations. We rely on copyright, trademark, trade secret and other
intellectual property law, as well as non-competition, confidentiality and license agreements with our employees, suppliers, business
partners and others to protect our intellectual property rights. Our employees are generally required to sign agreements to acknowledge
that all inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf are
our property, and to assign to us any ownership rights that they may claim in those works. Despite our precautions, it may be
possible for third parties to obtain and use intellectual property that we own or license without consent.
Our
PRC subsidiaries and PRC-incorporated affiliates are the registered owners of 200 software copyrights as of December 31, 2016,
each of which has been registered with the National Copyright Administration of the PRC.
We have registered one key domain name
relating to our website,
www.jrj.com
, with the Internet Corporation for Assigned Names and Numbers, or ICANN, an internationally
organized, non-profit corporation. We have also registered one domain name relating to our website,
www.jrj.com.cn
, with
the China Internet Network Information Center, a domain name registration service in the PRC. We currently have 59 trademarks
registered with the Trademark Office of State Administration of Industry and Commerce (the “SAIC”) and four trademarks
registered in Hong Kong as of December 31, 2016.
Regulation
We
operate our business primarily in the PRC under a legal regime consisting of the State Council, which is the highest authority
of the executive branch of the PRC central government, and several ministries and agencies under its leadership, including:
●
|
MIIT
(Ministry of Industry and Information Technology);
|
|
|
●
|
PBC
(The People’s Bank of China);
|
|
|
●
|
CSRC
(China Securities Regulatory Commission);
|
|
|
●
|
CBRC
(China Banking Regulatory Commission);
|
|
|
●
|
Asset
Management Association of China
|
|
|
●
|
Cyberspace
Administration of China
|
●
|
Ministry
of Culture;
|
|
|
●
|
General
Administration of Press and Publication (National Copyright Administration);
|
|
|
●
|
National
Development and Reform Commission (NDRC);
|
●
|
SAIC
(State Administration of Industry and Commerce);
|
|
|
●
|
Ministry
of Public Security;
|
|
|
●
|
Ministry
of Commerce; and
|
|
|
●
|
State
Administration of Radio Film and Television
|
The
State Council and these ministries and agencies have issued a series of rules that regulate a number of different substantive
areas of our business. And our businesses in the Hong Kong are subject to regulations by HKEx, Hong Kong Securities and Futures
Commission, or SFC, and Hong Kong Police Force, which are discussed below.
Regulation
of securities investment advisory business
Securities
investment advisory is intensely regulated in China, which mainly include the Securities Law (2005 and amended in 2013 and 2014),
the Tentative Measures for Administration of Securities and Futures Investment Consultancy (1997), the Notice on Several Issues
related to Regulation of Securities Investment Advisory provided to the Public (2001) and the Provisional Regulations. Those laws
and regulations impose licensing requirements on the provision of securities investment advisory to the public in China.
The
CSRC has adopted a series of rules regulating the methods of providing securities investment advisory to the public, including
without limitation Tentative Provisions for Issuance of Securities-related Research Reports (2010), Tentative Provisions for Securities
Investment Consultancy Business with Membership System (2005), Rules on Strengthening the Broadcast Management of Information
related to Securities and Futures (1997). Those rules established the requirements on companies engaged in securities investment
advisory business to set up branches in China, required securities investor advisors to disclose any conflict of interest and
set up firewall measures internally, and prohibited securities investor advisor from disseminating the information related to
securities investment on TV channels or radio programs without the approval by the CSRC and the State Administration of Radio
Film and Television.
The
Provisional Regulations promulgated by the CSRC in October 2010 and effective as of January 1, 2011 require that securities investment
advisory providers obtain a license.
The
CSRC issued the Interim Provisions on Strengthening the Supervision and Control of Engagement in Securities Investment Advisory
Business by Utilizing “Securities Analysis Software” (“Circular 40”). Pursuant to Circular 40, the sale
or provision of “Securities Analysis Software” to the investors to directly or indirectly obtain economic benefits
shall be deemed as engagement in securities investment advisory business, and any institution or individual engaging in such business
shall be licensed by the CSRC and obtain the securities investment advisory qualifications.
We
have obtained such license in accordance therewith to provide securities investment advisory services which assist in
clients’ investment decision-making process to its individual and corporate clients. Shenzhen Newrand
Securities Advisory and Investment CO., Ltd. (“CFO Newrand”) Training owns an investment education license issued by the
Shenzhen Bureau of Education.
Regulation
of securities brokerage, futures contracts brokerage, securities investment advisory and money lending businesses in Hong Kong
Rifa
Securities, regulated by HKEx and SFC, holds a type 1 license, which allows it to engage in securities trading and brokerage
business in Hong Kong. Rifa Futures, regulated by the SFC, holds a type 2 license, which allows it to engage in futures
contract trading business. iSTAR International Credit Co. Limited (later renamed Rifa Credit Limited, also Rifa Credit),
holds a Money Lenders License, is regulated by Hong Kong Police Force.
Regulation
of commodities brokerage business
While
the regulations on commodities brokerage business were generally not specific in the past, China has recently tightened regulations
on commodities transactions in the spot market. In November 2013, the Ministry of Commerce (“MOC”), the People’s
Bank of China (“PBC”) and the CSRC jointly issued Interim Provisions on Commodities Transactions in the Spot Market,
effective January 1, 2014 (“Circular 3”). According to Circular 3, MOC will be in charge of all matters related to
the planning, information and statistics consolidation of the markets and PBC will be responsible for the financial regulations
related to the spot market transactions as well as the supervision of non-financial institutions’ payment services. In addition,
each of our affiliates engaged in commodities brokerage business are subjection to the regulations of Tianjin Precious Metals
Exchange or the Guangdong Precious Metals Exchange, each of which is in charge of the local implementation of Circular 3.
Regulation
of mutual fund distribution business
Administrative
Measures for the Sale of Securities Investment Funds promulgated by the CSRC on June 9, 2011 and amended in 2013 are the principal
regulation for mutual fund distribution.
Wealth
management for private investors is still in early development stage in China. China has not adopted a unified and specific regulatory
framework governing the distribution of wealth management products and the provision of wealth management consulting services.
Nevertheless, there are ad hoc laws and regulations related to several types of wealth management products as the following:
●
|
PRC
Trust Law (2001) and the Administrative Rules Regarding Trust Company-Sponsored Collective Fund Trust Plans (2007 and amended
in 2009) are principal laws and regulations for trust products;
|
|
|
●
|
PRC
Partnership Enterprise Law (2006), the Notice on Further Standardizing the Development and Record-filing Administration of
Equity Investment Enterprises in Pilot Regions (2011) promulgated by the NDRC and a series of local regulations
promulgated by provinces and certain cities, including Beijing, Shanghai and Tianjin, to encourage and regulate the development
of private equity investment in the applicable region;
|
Regulation of online P2P lending business
Given
Yinglibao’s online lending functions, Yinglibao is subject to the regulations under the Interim Measures introduced in August
2016. See “Item 3.D. Key Information — Risk Factors — The Interim Measures on Administration of
the Business Activities of Peer-to-Peer Lending Information Intermediaries may adversely
affect our business, financial conditions and results of operations.”
In
addition, given the cash saving, transferring and management functions of Yinglibao, Yinglibao may be subject to futures additional
Chinese laws and regulations related to banking and securities businesses in the event Yinglibao became restricted or even prohibited
by Chinese laws, our customers’ financial activities may be affected and there may be a material adverse impact on our new
business ventures to provide users with alternative investment opportunities.
Regulation
of account management business
A
draft Account Management Operational Rules (the “
Draft
Rules”) was released by Securities Association of China (the “Association”) on March 16, 2015 for public comments.
Pursuant to the Draft Rules, account management refers to provision of value analysis or investment decision for clients in respect
of investing in or trading of securities, funds, futures and other relevant financial products, and carrying out investment or
trading management on behalf of clients. Securities houses and securities investment consulting firms are allowed to provide account
management services upon satisfying the following conditions:
●
|
obtained
the securities investment consulting services license, and with a registered capital of not less than RMB 50 million;
|
|
|
●
|
there
are at least 10 employees with securities investment consulting services license and more than 2 years’ relevant experience
in securities, funds or futures, and qualified senior management;
|
|
|
●
|
proper
operational management, internal control and investment protection systems commensurate with its businesses;
|
|
|
●
|
proper
operational premises and facilities and technology system commensurate with its businesses;
|
|
|
●
|
there
has been no criminal or administrative penalty relating to violation of law or regulations in the past three years, nor is
there ongoing investigation or correction involving potential violation of law or regulations; and
|
|
|
●
|
other
conditions pursuant to relevant laws or regulations and rules by the Association.
|
Employees
involving in the account management services are required to hold the securities investment consulting services license, registered
with the Association as investment consultant, have relevant experience in securities investment, research, investment consulting
or similar businesses, have sound credit and ethical record, and have not been subject to criminal or administrative penalty in
the past 3 years.
Notwithstanding
that we have not been engaged in account management business, in the event the Draft Rules becomes effective in the future and
we intend to be engaged by clients to provide investment or trading management services, the Draft Rules is expected have a positive
impact on our business.
Foreign
ownership restriction on Internet content provision business
According
to the Provisions on Administration of Foreign Invested Telecommunications Enterprises, or the FITE Provisions, promulgated by
the State Council in December 2001 and amended in September 2008 and 2016, foreign ownership in the companies that provide Internet
content services, including our business of providing financial information and data to Internet users, must not exceed 50%. In
order to comply with this foreign ownership restriction, we operate our website in China through CFO Fuhua, which is wholly owned
by Zhiwei Zhao, our chief executive officer, and Jun Wang, our chief financial officer, both of whom are PRC citizens. Under FITE
Provisions and other related regulations, we cannot directly hold the licenses and approvals necessary to operate our website
because those licenses and approvals cannot be held by foreign entities or majority foreign-owned entities. We, as a company incorporated
in Hong Kong, are a foreign entity for this purpose.
There
are, however, substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations.
Accordingly, we cannot assure investors that the PRC regulatory authorities will not ultimately take a view that is contrary to
the opinion of Jincheng Tongda & Neal Law Firm, our PRC legal counsel. If the PRC government finds that the agreements that
establish the structure of our operations in China do not comply with PRC government restrictions on foreign investment in our
industry, we could be subject to severe penalties.
Internet-related
licenses and permits
There
are a number of aspects of our business which require us to obtain licenses from a variety of PRC and Hong Kong regulatory authorities.
In
September 2000, the State Council promulgated the Telecommunications Regulations, or the Telecom Regulations, and amended in 2016.
The Telecom Regulations categorize all telecommunications businesses in the PRC as either basic or value-added. Internet content
services, or ICP services, are classified as value-added telecommunications businesses. Under the Telecom Regulations, commercial
operators of value-added telecommunications services must first obtain an operating license from the MIIT or its provincial level
counterparts. In September 2000, the State Council issued the Administrative Measures on Internet Information Services, or the
Internet Measures, according to which, commercial ICP service operators must obtain an ICP license from the relevant government
authorities before engaging in any commercial ICP operations within the PRC.
In
order to host our website, CFO Fuhua is required to hold an ICP license issued by MIIT or its local offices. Pursuant to the revised
Administrative Measures for Telecommunications Business Operating License promulgated by MIIT in March 2009, ICP operators providing
value-added services in multiple provinces are required to obtain an inter-regional license (or National License) and ICP operators
providing the same services in one province are required to obtain a local license (or Local License). CFO Fuhua currently holds
a Local License and an ICP license both issued by the local branch of MIIT in Beijing.
A
regulation issued by MIIT, the Notice on Certain Issues Regarding the Regulation of Short Messaging Services on April 29, 2004,
requires short message, or SMS, content providers to obtain an SMS license from MIIT or its local offices. We have obtained the
required SMS license via CFO Fuhua for the delivery of our financial short message content.
Furthermore,
MIIT has promulgated the Internet Electronic Messaging Service Administrative Measures in November 2000, or the BBS Measures,
requiring ICP license holders that provide online bulletin board services to register with, or obtain an approval from, the relevant
telecommunications authorities. CFO Fuhua has obtained such approval from Beijing Communications Administration and Shanghai Communications
Administration, respectively, the government agency in charge of this matter.
On
July 6, 2004, the State Administration of Radio Film and Television promulgated the Rules for the Administration of Broadcasting
of Audio/Video Programs through the Internet and Other Information Networks, or the A/V Broadcasting Rules. The A/V Broadcasting
Rules apply to the opening, broadcasting, integration, transmission or download of audio/video programs via the Internet and other
information networks. Anyone who wishes to engage in Internet broadcasting activities must first obtain an audio/video program
transmission license, with a term of two years, issued by the State Administration of Radio Film and Television and operate pursuant
to the scope as provided in such license. Foreign invested enterprises are not allowed to engage in this business nor obtain such
license. On December 20, 2007, the State Administration of Radio Film and Television and the MIIT jointly issued the Rules for
the Administration of Internet Audio and Video Program Services, commonly known as Document 56, which came into effect as of January
31, 2008. Document 56 reiterates the requirement set forth in the A/V Broadcasting Rules that online audio/video service provider
must obtain a license from the State Administration of Radio Film and Television. Furthermore, Document 56 requires all online
audio/video service providers to be either wholly state-owned or state-controlled. According to relevant official answers to press
questions published on the State Administration of Radio Film and Television’s website dated February 3, 2008, officials
from the State Administration of Radio Film and Television and the MIIT clarified that online audio/video service providers that
already had been operating lawfully prior to the issuance of Document 56 may re-register and continue to operate without becoming
state-owned or controlled, provided that such providers have not engaged in any unlawful activities. This exemption will not be
granted to online audio/video service providers established after Document 56 was issued. CFO Fuhua holds a Radio and TV Program
Production and Business Operation License which allows it to produce and publish cartoons, entertainment programs and special
topic programs and an Information Network Communicated Audio-Video Program License which allows it to broadcast securities and
futures information related audio-video programs through website.
Regulation of internet content
The
PRC government has promulgated measures relating to Internet content through a number of ministries and agencies, including MIIT,
the Ministry of Culture and the General Administration of Press and Publication. These measures specifically prohibit Internet
activities, which include provision of financial information through the Internet, that result in the publication of any content
which is found to, among other things, propagate obscenity, gambling or violence, instigate crimes, undermine public morality
or the cultural traditions of the PRC, or compromise State security or secrets. If an ICP license holder violates these measures,
the PRC government may revoke its ICP license and shut down its websites.
CFO
Fuhua’s ICP license expressly state that, in relation to its Internet content provision, among other things, it is not allowed
to publish general news on politics, society or culture, or establish a “news column”, or provide such information
under the express heading of “news”. On September 25, 2005, State Council Information Office and MIIT jointly promulgated
the Provisions for the Administration of Internet News Information Services, in which the authorities provided an applicable definition
of Internet news information services and defined such news information as general news information. It further required that
ICPs that provide Internet news information services within such definition must apply for a license. In practice, such license
is compulsorily required when political, military or diplomatic news is involved. Our current business, specifically the provision
of financial or securities related information through the Internet, will not be affected without procuring such license.
Regulation
of information security
The
National People’s Congress has enacted legislation that prohibits use of the Internet that breaches the public security,
disseminates socially destabilizing content or leaks state secrets. Breach of public security includes breach of national security
and infringement on legal rights and interests of the state, society or citizens. Socially destabilizing content includes any
content that incites defiance or violations of PRC laws or regulations or subversion of the PRC government or its political system,
spreads socially disruptive rumors or involves cult activities, superstition, obscenities, pornography, gambling or violence.
State secrets are defined broadly to include information concerning PRC national defense, state affairs and other matters as determined
by the PRC authorities.
According
to other relevant regulations, ICP operators must complete mandatory security filing procedures and regularly update information
security and censorship systems for their websites with local public security authorities, and must also report any public dissemination
of prohibited content.
In
addition, the State Secrecy Bureau has issued provisions authorizing the blocking of access to any website it deems to be leaking
state secrets or failing to comply with the relevant legislation regarding the protection of state secrets during online information
distribution. Specifically, Internet companies in China with bulletin boards, chat rooms or similar services must apply for specific
approval prior to operating such services.
On
November 23, 2005, the Ministry of Public Security promulgated Provisions on Technological Measures for Internet Security Protection,
or Internet Protection Measures. The Internet Protection Measures require all ICP operators to keep records of certain information
about its users (including user registration information, log-in and log-out time, IP address, content and time of posts by users)
for at least 60 days and submit the above information as required by laws and regulations. CFO Fuhua has already taken measures
to comply with these laws and regulations.
On
November 7, 2016, the Standing Committee of the National People’s Congress issued the Internet Security Law of the People’s
Republic of China, or the Internet Security Law, which will take effect on June 1, 2017. The Internet Security Law will require
providers of services over internet networks to keep user information that they have collected in strict confidence and to establish
improved systems for the protection of user information. Such service providers must provide notice of the purpose, methods and
scope of their collection and use of user information, and obtain the consent of each person whose personal information will be
collected. Providers of services over internet networks may not collect any personal information that is not related to the services
they provide, or disclose or tamper with personal information that they have collected, unless such information is encoded to
prevent identification of individuals whose information is so disclosed or tampered with. Service providers who do not comply
with the Internet Security Law may be subject to fines, suspension of their businesses, shutdown of their websites, and revocation
of their business licenses.
Regulation of online securities information
Securities
Association of China released the Online Securities Information System Technical Guidance for Securities Houses (the “Guidance”),
effective from March 13, 2015. According to Section 54 of the Guidance, securities houses are not allowed to provide port access
to third party service providers in respect of online securities services and trading related services. Securities trading instructions
are required to be processed exclusively and internally within the securities houses’ owned systems. We provide Securities
Link services which currently connect to securities houses’ trading port access through customer-end software, which services
include online securities services and trading services. Upon the Guidance becomes effective, we may need to adjust the current
technical arrangement. Having worked with the relevant securities houses, we are prepared to operate within the requirement of
the Guidance by changing our trading port access technology.
Regulation of intellectual property rights
The
State Council and the National Copyright Administration have promulgated various regulations and rules relating to protection
of software in China. Under these regulations and rules, software owners, licensees and transferees should register their rights
in software with the National Copyright Administration or its local offices and obtain software copyright registration certificates.
The National People’s Congress amended the Copyright Law in 2001 and 2010 to widen the scope of works and rights that are
eligible for copyright protection. The amended Copyright Law extends copyright protection to products disseminated over the Internet
and computer software. We have registered all of our self-developed software with the National Copyright Administration.
PRC
law requires owners of Internet domain names to register their domain names with qualified domain name registration agencies approved
by MIIT and obtain a registration certificate from such registration agencies. A registered domain name owner has an exclusive
use right over its domain name.
Unregistered
domain names may not receive proper legal protections and may be misappropriated by unauthorized third parties. We have registered
our domain name
www.jrj.com
with the ICANN and obtained a certificate for this domain name. ICANN is an internationally
organized, non-profit corporation that is responsible for Internet Protocol (IP) address space allocation, protocol identifier
assignment, generic (gTLD) and country code (ccTLD) Top-Level Domain name system management, and root server system management
functions.
Regulation
of website name
On
October 1, 2004, the Administrative Rules on Filing of Commercial Websites for Records were promulgated by the Beijing Municipal
Administration of Industry and Commerce, or Beijing AIC to replace the Implementing Measures of the Temporary Administration Rules
on Filing of Commercial Website for Record promulgated by the Beijing AIC on September 1, 2000. According to The Administrative
Rules on the Filing of Commercial websites, websites must comply with the following requirements:
●
|
filing
with the Beijing AIC and obtain electronic registration marks;
|
|
|
●
|
placing
the registration marks on their websites’ homepages; and
|
|
|
●
|
registering
their website names with the Beijing AIC.
|
CFO
Fuhua has registered website name, “JRJ Investment and Finance Network” with, and received electronic registration
marks from Beijing AIC.
Regulation
of privacy protection
PRC
law does not prohibit ICPs from collecting and analyzing personal information from their users. The Standing Committee of the
National People’s Congress issued the Decisions on Strengthening the Protection of Internet Information, effective on December
28, 2012 (“Information Protection Decisions”), pursuant to which, ICPs may collect users’ personal information
with the principals of legality, legitimacy and necessity and shall be consented by the users. We require our users to accept
a user agreement whereby they agree to provide certain personal information to us. The Information Protection Decisions prohibit
ICPs from disclosing to any third parties any information transmitted by users through their networks unless otherwise permitted
by law. If an ICP violates these regulations, MIIT or its local offices may impose penalties (including fines, confiscation of
revenues, revocation of permits, shut down of websites and criminal penalties, as appropriate) and the ICP may be liable for damages
caused to its users.
Regulation
of online advertising
The
PRC government regulates advertising, including online advertising, principally through the State Administration for Industry
and Commerce, although there are no national PRC laws or regulations specifically regulating online advertising business. Under
the Rules for Administration of Foreign-Invested Advertising Enterprise, promulgated by the State Administration for Industry
and Commerce and the Ministry of Commerce in March 2004 and amended in October 2008, foreign investors are permitted to own equity
interests in PRC advertising companies. However, foreign investors of wholly foreign-owned and joint venture advertising companies
are required to have at least three years and two years, respectively, of direct operations in the advertising industry outside
of China. Since we have not been involved in advertising outside of China for the required number of years, we cannot hold equity
interests in PRC companies engaged in advertising business directly.
On
November 30, 2004, the SAIC issued the Administrative Regulations for Advertising Operation Licenses, or the Advertising Regulations,
taking effect as of January 1, 2005. Pursuant to the Advertising Regulations and other related rulings, enterprises conducting
online advertising activities are exempted from the previous requirement to obtain an advertising permit in addition to a business
license. We proceed with our online advertising business through CFO Fuhua, which has procured business licenses that include
online advertising in its business scope.
In
January 2016, the Beijing Administration of Industry and Commerce issued an oral notice to the online platforms to suspend accepting
advertisements with respect to P2P and financial products. The existing advertisements falling within these categories were requested
to be taken down.
On
July 4, 2016, the SAIC issued the Interim Measures for Administration of Internet Advertising, or the Interim Measures for Internet
Advertising, effective since September 1, 2016, which defines the scope of services included within internet advertising; specifies
the respective obligations of internet advertisers, advertising agencies, advertising publishers and internet information service
providers; and provides penalties for violations. The Interim Measures for Internet Advertising forbids luring users to click
on the content of internet advertisements by any fraudulent means and attaching advertisements or advertising links to emails
sent by users without their permission. Under the Interim Measures for Internet Advertising, internet advertisers are responsible
for the authenticity of the contents of online advertisements, and internet advertising publishers and advertising agencies are
required to verify the content of advertisements, and employ inspectors who are familiar with PRC laws and regulations governing
online advertising.
Advertisers,
advertising operators and advertising distributors are required by PRC advertising laws and regulations to ensure that the contents
of the advertisements they prepare or distribute are true and in full compliance with applicable laws and regulations. In addition,
where a special government review is required for certain categories of advertisements before publishing, the advertisers, advertising
operators and advertising distributors are obligated to confirm that such review has been performed and that relevant approval
has been obtained. Violation of these regulations may result in penalties, including fines, confiscation of advertising income,
orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information.
In the case of serious violations, the State Administration for Industry and Commerce or its local branches may force the violator
to terminate its advertising operation or even revoke its business license. Furthermore, advertisers, advertising operators or
advertising distributors may be subject to civil liability if they infringe on the legal rights and interests of third parties.
The
Advertisement Law of the People's Republic of China of October 27, 1994, was amended and revised for the first time by the Standing
Committee of the People’s Congress on April 24, 2015, since its adoption on October 27, 1994. It was promulgated by the
Order No. 22 of the President of the People's Republic of China and came into force on September 1, 2015. The revised Law brings
the following significant changes to the regulatory regime for advertising activities in China, including online advertising:
●
|
establishing
strict regulations of the scope and content of advertisements relating to the expansion of definition of “advertisements”
and “advertisers”, the restrictions on advertising to children and the stringent controls over the advertising
of specific products and services;
|
|
|
●
|
providing
specific measures to deal with false advertising;
|
|
|
●
|
tightening
rules for methods of advertising; and
|
|
|
●
|
increasing
the penalties for illegal advertisements and the authorities’ powers of enforcement.
|
C.
Organizational structure.
The
following table sets forth the details of our principal subsidiaries and significant PRC-incorporated affiliates as of December
31, 2016:
|
|
Jurisdiction of
|
|
Legal Ownership
|
|
Name
|
|
Incorporation
|
|
Interest
|
|
Fortune Software (Beijing) Co., Ltd.
|
|
PRC
|
|
100%
|
|
China Finance Online (Beijing) Co., Ltd.
|
|
PRC
|
|
100%
|
|
Shenzhen Genius Information Technology Co., Ltd.
|
|
PRC
|
|
100%
|
|
Zhengyong Information & Technology (Shanghai) Co., Ltd.
|
|
PRC
|
|
100%
|
|
Zhengtong Information & Technology (Shanghai) Co., Ltd.
|
|
PRC
|
|
100%
|
|
Beijing Fuhua Innovation Technology Development Co., Ltd. *
|
|
PRC
|
|
Nil
|
|
Beijing Chuangying Advisory and Investment Co., Ltd.*
|
|
PRC
|
|
Nil
|
|
Zhongheng Xintai (Beijing) Asset Management Co., Ltd. *
|
|
PRC
|
|
Nil
|
|
Fortune (Beijing) Qicheng Technology Co., Ltd.*
|
|
PRC
|
|
Nil
|
|
Shenzhen Shangtong Software Co., Ltd.*
|
|
PRC
|
|
Nil
|
|
Shenzhen Newrand Securities Advisory and Investment Co., Ltd.*
|
|
PRC
|
|
Nil
|
|
Shenzhen Newrand Securities Training Center*
|
|
PRC
|
|
Nil
|
|
Shanghai Stockstar Wealth Management Co., Ltd.*
|
|
PRC
|
|
Nil
|
|
Beijing Zhongjun Sunshine Investment and Management Co., Ltd
|
|
PRC
|
|
Nil
|
|
Fortune (Beijing) Huiying Investment Consulting Co., Ltd.*
|
|
PRC
|
|
Nil
|
|
Zhengjin (Fujian) Precious Metals Investment Co., Ltd.*
|
|
PRC
|
|
Nil
|
|
Zhengjin (Tianjin) Precious Metals Management Co., Ltd. *
|
|
PRC
|
|
Nil
|
|
Zhengjin (Beijing) Wisdom Petroleum and Chemical Investment Management Co., Ltd. *
|
|
PRC
|
|
Nil
|
|
Zhengjin (Qingdao) Wisdom Trading Co., Ltd. *
|
|
PRC
|
|
Nil
|
|
Zhengjin (Jiangsu) Precious Metals Co., Ltd. *
|
|
PRC
|
|
Nil
|
|
Qingdao Zhengjin Zhida Trading Co., Ltd.
|
|
PRC
|
|
Nil
|
|
Tibet Zhisheng Gold Industry Co., Ltd.
|
|
PRC
|
|
Nil
|
|
Qingdao Zhengjin Taiji Trading Co., Ltd.
|
|
PRC
|
|
Nil
|
|
iTougu (Beijing) Network Technology Co., Ltd. *
|
|
PRC
|
|
Nil
|
|
Yinglibao (Beijing) Network Technology Co., Ltd.
|
|
PRC
|
|
Nil
|
|
Shenzhen Tahoe Investment and Development Co., Ltd.*
|
|
PRC
|
|
Nil
|
|
Tibet Fortune Jinyuan Network Technology Co., Ltd. *
|
|
PRC
|
|
Nil
|
|
Beijing Huizhi Fortune Technology Co., Ltd.
|
|
PRC
|
|
Nil
|
|
Rifa Financial Holdings Limited**
|
|
BVI
|
|
85%
|
|
Rifa Securities Limited**
|
|
Hong Kong
|
|
85%
|
|
Rifa Futures Limited**
|
|
Hong Kong
|
|
85%
|
|
Rifa Credit Limited**
|
|
Hong Kong
|
|
85%
|
|
Rifa Wealth Management Co.Limited
|
|
Hong Kong
|
|
85%
|
|
*
|
Denotes
variable interest entities or subsidiaries of variable interest entities
|
**
|
iSTAR
Financial Holdings Limited was renamed Rifa Financial Holdings Limited on June 14, 2016,
iSTAR International Securities Co. Limited was renamed Rifa Securities Limited on
June 15, 2016, iSTAR International Futures Co. Limited was renamed Rifa Futures Limited
on June 15, 2016, iSTAR International Credit Co., Limited was renamed Rifa Credit
Limited in 2016.
|
PRC
regulations currently limit foreign ownership of companies that provide ICP services, which include our business of providing
financial information and data to Internet users, not to exceed 50%. We are a Hong Kong company and we conduct our operations
solely in China through our wholly owned subsidiaries. We are a foreign enterprise and the wholly owned subsidiaries are all foreign
invested enterprises under PRC law and, accordingly, neither we nor our wholly owned subsidiaries are eligible for a license to
operate ICP services or provide online advertising services in China. In order to comply with foreign ownership restrictions,
we operate our online business in China through CFO Fuhua. We have entered into a series of contractual arrangements with CFO
Fuhua and its shareholders, including contracts relating to the leasing of equipment, the licensing of our domain name, the provision
of technical support services and strategic consulting and certain shareholder rights and corporate government matters in 2004.
CFO Fuhua is a PRC domestic company controlled by Zhiwei Zhao, our chairman and chief executive officer and Jun Wang, our chief
financial officer.
In
addition, to provide the Company with effective control over and the ability to receive substantially all of the economic benefits
of its VIEs, the Company’s wholly owned subsidiaries including CFO Beijing, CFO Software, CFO Zhengyong and Zhengtong Information
& Technology (Shanghai) Co., Ltd. (“CFO Zhengtong”) (collectively, the “WFOEs” and each a “WFOE”)
have entered into a series of contractual arrangements with the VIEs, which include CFO Fuhua, Beijing Huizhi Fortune Technology
Co., Ltd. (“CFO Huizhi”) CFO Qicheng, CFO Newrand and Shanghai Stockstar Wealth Management Co., Ltd. (“Stockstar
Wealth Management”). Specifically, these contractual arrangements enable us to:
●
|
have
the power to direct the activities that most significantly affect the economic performance of the VIEs and their subsidiaries;
|
|
|
●
|
receive
substantially all of the economic benefits from the VIEs and their subsidiaries in consideration for the services provided
by our WFOEs; and
|
|
|
●
|
have
an exclusive option to purchase from each of the shareholders of the VIEs all or part of the VIEs’ equity interest,
when and to the extent permitted by PRC law, or request any existing shareholder of VIEs to transfer all or part of the equity
interest in the VIEs to another PRC person or entity designated by us at any time in our discretion.
|
These
contractual arrangements are summarized in the following paragraphs.
Exclusive
Technology Consulting and Management Service Agreement
.
Pursuant to a series of technology support and service
agreements, the WFOEs retain the exclusive right to provide the VIEs and their subsidiaries technology support and consulting
services and exclusive management consulting service. As a result of these services, the WFOEs are entitled to charge the VIEs
and their subsidiaries annual service fees. The principal services agreements that the WFOEs have entered into with the VIEs include:
●
|
strategic
consulting services agreement, pursuant to which the amount of fees to be charged is 30% of each VIE’s income before
tax;
|
|
|
●
|
technical
support services agreement, pursuant to which the amount of fees to be charged is 30% of each VIE’s income before tax;
and
|
|
|
●
|
operating
support services agreement, pursuant to which the amount of fees to be charged is 40% of each VIE’s income before tax.
|
Power
of Attorney.
Pursuant to the power of attorney, each of the shareholders of the VIEs has executed an irrevocable
power of attorney assigning the WFOEs or individuals designated by the WFOEs as their attorney-in-fact to vote on their
behalf on all matters of the VIEs requiring shareholder approval under PRC laws and regulations and the articles of
association of VIEs. The articles of incorporation of the VIEs state that the major rights of the shareholders include the
right to appoint directors, the general manager and other senior management members.
Loan
Agreement.
We entered into a loan agreement with Zhiwei Zhao effective November 20, 2006 to extend to Mr. Zhao a loan
in the amount of $163,000 for the sole purpose of financing his acquisition of the equity interests of CFO Fuhua from one of its
two former shareholders (the “Zhao Loan”). The initial term of the foregoing loan is 10 years which may be extended
upon the parties’ agreement. Zhiwei Zhao can only repay the loan by transferring all of his interest in CFO Fuhua to us
or a third party designated by us. If and when Zhiwei Zhao transfers his interest in CFO Fuhua to us or our designee, if the actual
transfer price is higher than the principal amount of the loan, the amount exceeding the principal amount of the loan will be
deemed as interest accrued on such loan and repaid by Zhiwei Zhao to us. While Hong Kong law limits maximum interest payment payable
to 60% of the outstanding principal amount per annum, this limitation would be relevant only if, the actual value of CFO Fuhua
has increased at an average annual rate greater than 60% at the time Zhiwei Zhao transfers to us his interest in CFO Fuhua.
CFO
Fuhua’s assets currently consist primarily of registered capital and licenses to provide Internet content and advertising
related services, and its operations are primarily limited to operating our free website and providing advertising related services
on behalf of CFO Beijing. Accordingly, we do not believe this limitation will have a material effect on our business and operations,
or will result in a material amount being paid to the shareholders of CFO Fuhua if and when they are permitted to transfer their
interest in CFO Fuhua to us.
We
entered into a loan agreement with Jun Wang in October 2007 to extend to Mr. Wang a loan in the amount of $199,000 for the sole
purpose of financing his acquisition of the equity interests of CFO Fuhua from its other former shareholder (together with the
Zhao Loan, the “VIE Loans”). Such loan is subject to the same terms and conditions as the loan agreement we entered
into with Zhiwei Zhao as discussed above.
Purchase
Option Agreement
.
A purchase option agreement was entered into by us, CFO Beijing, CFO Fuhua and the two former shareholders
of CFO Fuhua on May 27, 2004. After the two former shareholders of CFO Fuhua completed the transfer of all of their equity interests
in CFO Fuhua to Zhiwei Zhao and Jun Wang in 2006 and 2007, respectively, each of Zhiwei Zhao and Jun Wang executed a new purchase
option agreement with us, CFO Beijing and CFO Fuhua, replacing the previous purchase option agreement. Pursuant to the current
purchase option agreement, each of Zhiwei Zhao and Jun Wang is obligated to sell to us, and we have an exclusive option to or
designate another party to purchase from each of them, all or any portion of their equity interest in CFO Fuhua when and to the
extent that applicable PRC law permits us to own part or all of the equity interest in CFO Fuhua. In addition, we have an exclusive
option to require CFO Fuhua to transfer all of its assets to us or our designee if and when Zhiwei Zhao and/or Jun Wang ceases
to be a director or employee of CFO Fuhua, or either Zhiwei Zhao or Jun Wang desires to transfer his equity interest in CFO Fuhua
to a party other than the existing shareholders of CFO Fuhua, to the extent permitted by PRC law.
The
exercise price of the option will equal (i)the total principal amount under the VIE Loans, or (ii)the price required by relevant
PRC law or government approval authority if such required price is higher than the total principal amount under the VIE Loans.
We may choose to pay the purchase price by canceling our loans to Zhiwei Zhao and Jun Wang.
Following
any exercise of the option, the parties will enter into a definitive share or asset purchase agreement and other related transfer
documents within 30 days after written notice of exercise is delivered by us. Pursuant to the purchase option agreement, at all
times before we or any party designated by us acquire 100% of CFO Fuhua’s equity interest or assets, CFO Fuhua may not (1)
sell, transfer, assign, dispose of in any manner or create any encumbrance in any form on any of its assets unless such sale,
transfer, assignment, disposal or encumbrance is related to the daily operation of CFO Fuhua or has been disclosed to and consented
to in writing by us; (2) enter into any transaction which may have a material effect on CFO Fuhua’s assets, liabilities,
operations, equity or other legal interest unless such transaction relates to the daily operation of CFO Fuhua or has been disclosed
to and consented to in writing by us; or (3) distribute any dividends to its shareholders in any manner. In addition, Zhiwei Zhao
and Jun Wang may not cause CFO Fuhua to amend its articles of association to the extent such amendment may have a material effect
on CFO Fuhua’s assets, liabilities, operations, equity or other legal interest except for pro rata increases of registered
capital required by law.
Voting
arrangement.
Upon Zhiwei Zhao’s receipt of Jun Ning’s holdings in CFO Fuhua on November 20, 2006, and Jun
Wang’s receipt of Wu Chen’s holdings in CFO Fuhua on October 18, 2007, each of Zhiwei Zhao and Jun Wang delivered
to us an executed proxy substantially identical to the proxy executed by Jun Ning and Wu Chen, respectively, with respect to their
voting rights as shareholders of CFO Fuhua. The foregoing proxy grants us the power to exercise the rights of the shareholders
as shareholders of CFO Fuhua, including the right to appoint all of the directors and senior management of CFO Fuhua. In addition,
we are entitled to all other voting rights provided to the shareholders of CFO Fuhua, as set forth in its articles of association,
to vote on their behalf on all matters, such as matters related to the transfer of their respective equity interests in CFO Fuhua
and the distribution of dividends or other proceeds from CFO Fuhua.
Share
Pledge Agreement
.
The share pledge agreement is an agreement which collateralizes equity interests in our VIEs as security
interest. Pursuant to a share pledge agreement, dated May 27, 2004, the two former shareholders of CFO Fuhua pledged all of their
equity interest in CFO Fuhua to CFO Beijing to secure the payment and the performance of all other obligations of CFO Fuhua under
the equipment leasing agreement, the technical support agreement and the amended and restated strategic consulting agreement between
CFO Beijing and CFO Fuhua.
In
November 2006 and October 2007, the two former shareholders of CFO Fuhua completed the transfer of all of their equity interests
in CFO Fuhua to Zhiwei Zhao and Jun Wang, respectively. Under this agreement entered into by and among Zhiwei Zhao, Jun Wang and
CFO Beijing, each of Zhiwei Zhao and Jun Wang have agreed not to transfer, assign, pledge or in any other manner dispose of his
interest in CFO Fuhua or create any other encumbrance on his interest in CFO Fuhua, which may have a material effect on CFO Beijing’s
interest without the written consent of CFO Beijing, except the transfer of their interest in CFO Fuhua to us or the third-party
assignee designated by us according to the purchase option agreement.
We
entered into contractual arrangements with our affiliates including significant affiliates such as CFO Newrand, CFO Huizhi,
Zhongheng Xintai (Beijing) Asset Management Co., Ltd., Beijing Chuangying Advisory and Investment Co., Ltd. (“CFO
Chuangying”) and Fortune (Beijing) Qicheng Technology Co., Ltd. (“CFO Qicheng”) and their shareholders
similar to agreements we had entered into with CFO Fuhua and its shareholders. As a result of these contractual arrangements
we obtained substantial control and became the primary beneficiary of our PRC-incorporated affiliates and, accordingly, we
consolidate the results of operations of our PRC-incorporated affiliates in our financial statements. The English translation
of the VIE contracts are attached as Exhibits 4.4-4.85 and Exhibits 4.141-4.152 to this Annual Report on Form 20-F and
incorporated herein by reference.
By
December 2015 and as part of the reorganizations prior to the sale of 90% of equity stake in CFO Meining and 100% equity in CFO
Zhongcheng to Shanghai EBI, the VIE contracts with Shanghai Stockstar Information & Technology Co., Ltd. and CFO Securities
Consulting were terminated. All the equity interest in Shanghai Stockstar Information & Technology Co., Ltd. was transferred
from CFO Meining, Na Zhang and Xun Zhao to other VIE entities we controlled. 90% of the equity interest in CFO Securities Consulting
was transferred from CFO Meining, Jun Wang, and Zhiwei Zhao to CFO Zhongcheng, the sale of which had been closed in December 2015.
By
June 2016, the VIE contracts with CFO Chongzhi were terminated. All the equity interest in CFO Chongzhi was transferred from Xun
Zhao and Jing Zhao to other VIE entities we controlled.
In
the opinion of Jincheng Tongda & Neal Law Firm, our PRC legal counsel:
●
|
the
corporate structure of the Company and its subsidiaries and our PRC-incorporated affiliates are in compliance with existing
PRC laws and regulations; and
|
●
|
the
contractual arrangements governing each of our VIE relationships are valid, binding and enforceable under, and do not violate
PRC laws or regulations currently in effect.
|
There
are, however, substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations.
Accordingly, there can be no assurance that the PRC regulatory authorities will not in the future take a view that is contrary
to the above opinion of our PRC legal counsel. We have been further advised by our PRC legal counsel that if the PRC government
finds that the agreements that establish the structure for our operations in China do not comply with PRC regulatory restrictions
on foreign investment in our industry, we could be subject to severe penalties. The imposition of any of these penalties could
result in a material adverse effect on our ability to conduct our business.
Business
Sectors Operated through our VIEs
The
following table sets forth the details of our variable interest entities and their respective business sectors as of December
31, 2016:
Variable interest entities
|
|
Business sector
|
Beijing Fuhua Innovation Technology Development Co., Ltd.
|
|
Web Portal and advertising services
|
Fortune (Beijing) Qicheng Technology Co., Ltd.
|
|
Subscription services and other related services
|
Shenzhen Newrand Securities Advisory and Investment Co., Ltd.
|
|
Subscription services and other related services
|
Shanghai Stockstar Wealth Management Co., Ltd.
|
|
Holding company of Commodities brokerage services
|
Beijing Chuangying Advisory and Investment Co., Ltd.
|
|
P2P Lending services
|
Zhongheng Xintai (Beijing) Asset Management Co., Ltd.
|
|
N/A
|
Beijing Huizhi Fortune Technology Co., Ltd.
|
|
N/A
|
D.
Property, Plants and equipment.
Our
principal executive offices as well as our subsidiaries and affiliates that locate in Beijing lease approximately 9600 square
meters. Our subsidiaries and affiliates that locate in Shanghai lease approximately 317 square meters. Our subsidiaries and affiliates
that locate in Shenzhen lease approximately 3700 square meters. Our subsidiaries and affiliates that locate in Chongqing lease
approximately 1800 square meters. Our subsidiaries and affiliates that locate in Shandong lease approximately 750 square meters.
Our subsidiaries and affiliates that locate in Fuzhou lease approximately 130 square meters. Our subsidiaries that locate in Hong
Kong lease approximately 720 square meters. We intend to seek additional office space as required for our operations as needed
on commercially reasonable terms. We believe that we will be able to obtain adequate facilities, principally through the leasing
of appropriate properties, to accommodate our future expansion plans.
ITEM
4A. UNRESOLVED STAFF COMMENTS
None
ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The
following discussion of our financial condition and results of operations is based upon and should be read in conjunction with
our consolidated financial statements and their related notes included in this annual report on Form 20-F. This report 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 annual report are based on information available to us on the date hereof,
and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those projected
in the forward-looking statements. In evaluating our business, you should carefully consider the information provided under the
caption “Risk factors” in this annual report on Form 20-F. We caution you that our businesses and financial performance
are subject to substantial risks and uncertainties.
A.
Operating Results
We
launched commodities brokerage business in 2013, which was former named precious metals trading services in 2013, as part of our
transition to a new business model. Our commodities brokerage affiliates’ intended scopes of business include precious metals
and other commodities’ spot trading, silver product sales and financial investment advisory services. We also offer subscription-based
services based on a single integrated information platform that combines financial analysis tools, real-time and historical data,
news, research reports and online forums.
Our
service offerings are used by and targeted at a broad range of investors in China, including individual investors managing their
own money, professional investors such as institutional investors managing large sums of money on behalf of their clients and
high net worth individuals, other financial professionals such as investment bankers, stock analysts and financial reporters,
and middle class individuals.
Our net revenues decreased by 22.7% to $83.1
million in 2016 from $107.4 million in 2015. The net loss attributable to China Finance Online Co. Limited was $1.7
million in 2016, compared with net income of $22.5 million in 2015.
Our
principal capital expenditures for 2014, 2015 and 2016 consisted of primarily purchases of servers, workstations, computers, computer
software, and other items related to our network infrastructure for a total of approximately $3.2 million, $3.4 million and $4.6
million, respectively.
Key
factors affecting our operating results and financial condition
Some
of the key factors affecting our operating results and financial condition include the following:
●
|
global
macroeconomic uncertainties, as well as the overall performance of China’s economy;
|
|
|
●
|
the
strategic transition of our core business from providing premium subscription services to developing fee-based securities
investment advisory services with wealth management services;
|
|
|
●
|
performance
of China’s securities markets, and user demand for market intelligence on China’s securities markets;
|
●
|
competition
in the PRC financial data and information services industry, precious metal trading business and other financial services
we may enter into;
|
|
|
●
|
PRC
governmental policies relating to the commodities brokerage industry and security advisory consulting industry;
|
|
|
●
|
possible
non-cash goodwill, intangible assets and investment impairment may adversely affect our net income;
|
|
|
●
|
contribution
of alternative revenue resources such as revenues from online advertising;
|
|
|
●
|
seasonality
associated with the level of activity of our users and subscribers and the trading activities of China’s securities
markets;
|
|
|
●
|
tax
refund from the PRC tax authorities for value-added-taxes we are required to pay on the sale of subscriptions to our service
packages;
|
|
|
●
|
other
tax incentives we receive from PRC tax authorities resulting from CFO Meining (the sale of 90% of equity interest in CFO Meining
was closed in the second quarter of 2016),CFO Genius and CFO Fuhua being the HNTE companies; CFO Tibet and Tibet Zhisheng
being the preferential tax rate for enterprises in Tibet;
|
|
|
●
|
our
cost structure, including, in particular, our cost for commission paid, raw data, bandwidth costs and personnel-related expenses;
|
|
|
●
|
the
desirability of our service packages relative to other products and offerings available in the market;
|
|
|
●
|
our
ability to benefit from the contractual arrangements with CFO Newrand, CFO Fuhua, CFO Qicheng, and Stockstar Wealth Management
and other VIEs; and
|
|
|
●
|
PRC
regulatory policies.
|
We
derive revenues primarily from our commodities brokerage services, subscription fees from subscribers to our financial data and
information services. We are developing our capacity in the securities investment advisory and wealth management services. The
level of public interests in investing in China’s commodities brokerage and securities market could significantly influence
our business.
To
a lesser extent, we also derive revenues through advertisement sales on our website, which contributed $2.9 million in 2016, a
decrease of 58.8% from the $7.0 million contributed in 2015. Revenues from advertising accounted for 3.5% of our net revenues
in 2016. We allocated most of our advertising inventories to promote our own product and services offerings, and hence online
advertising was not considered a core service line of our business in 2016. Our gross revenues also include the benefit of a refund
from the PRC tax authorities for VAT, which we are required to pay on the sale of subscriptions to our service packages. We receive
these refunds from the PRC tax authorities as part of the PRC government’s policy of encouraging software development in
the PRC. There is generally a one-month lapse between the time we complete a sale and pay the VAT on that sale and the time we
receive the refund. The VAT refund policy was reconfirmed pursuant to the Notice on VAT Policy for Software Products, effective
from January 1, 2011, jointly promulgated by the Ministry of Finance and the State Administration of Taxation on October 13, 2011,
or Caishui Circular 100. We recognized approximately $0.3 million in revenue for VAT refunds in 2016. Although the Notice on VAT
Policy for Software Products does not specify policy expiration date, in the event that the preferential tax treatment for them
is discontinued, these entities will become subject to the standard tax rate at 17%, which materially increase our tax obligations.
Gross
revenues
We
launched commodities brokerage services in 2013, which was part of our transition to a new business model. We generate commission
income and trading revenues from our clients’ commodities trading. We also generate subscription fee revenues from the sales
of the financial information and investment advisory services.
Net
revenues
Our
net revenues reflect a deduction from our gross revenues for business taxes and related surcharges incurred in connection with
our China operations. The gross revenues of PRC entities from sales that are not subject to VAT are subject to a business tax
at a rate ranging from 3% to 5%. We pay business tax on certain revenues from commodities brokerage services, depending on the
judgments of difference taxation authorities.
Starting
from January 1, 2012, the PRC Ministry of Finance and the State Administration of Taxation launched a Business Tax to VAT Transformation
Pilot Program (the “Pilot Program”) for certain industries in Shanghai. On September 1, 2012, the PRC Ministry of
Finance and the State Administration of Taxation extended the Pilot Program to certain industries in other eight regions, including
Beijing and Shenzhen. With the adoption of Pilot Program, our advertising-related revenues mobile value added services revenue
and certain subscription revenues started to be subject to VAT tax. These revenues are recognized after deducting VAT and other
related surcharges.
We
derive revenues from external customers for each of the following services during the years presented:
|
|
Years ended December 31, 2016
|
|
|
|
PRC
|
|
|
Hong Kong
|
|
|
Total
|
|
Commodities brokerage revenues
|
|
$
|
59,976,717
|
|
|
$
|
-
|
|
|
$
|
59,976,717
|
|
Hong Kong brokerage services revenues
|
|
|
-
|
|
|
|
8,956,501
|
|
|
|
8,956,501
|
|
Subscription services and other related services revenues
|
|
|
14,124,678
|
|
|
|
-
|
|
|
|
14,124,678
|
|
Total revenues from external customers
|
|
$
|
74,101,395
|
|
|
$
|
8,956,501
|
|
|
$
|
83,057,896
|
|
|
|
Years ended December 31, 2015
|
|
|
|
PRC
|
|
|
Hong Kong
|
|
|
Total
|
|
Commodities brokerage revenues
|
|
$
|
79,702,654
|
|
|
$
|
-
|
|
|
$
|
79,702,654
|
|
Hong Kong brokerage services revenues
|
|
|
-
|
|
|
|
3,149,063
|
|
|
|
3,149,063
|
|
Subscription services and other related services revenues
|
|
|
24,553,049
|
|
|
|
-
|
|
|
|
24,553,049
|
|
Total revenues from external customers
|
|
$
|
104,255,703
|
|
|
$
|
3,149,063
|
|
|
$
|
107,404,766
|
|
|
|
Years ended December 31, 2014
|
|
|
|
PRC
|
|
|
Hong Kong
|
|
|
Total
|
|
Commodities brokerage revenues
|
|
$
|
60,091,117
|
|
|
$
|
-
|
|
|
$
|
60,091,117
|
|
Hong Kong brokerage services revenues
|
|
|
-
|
|
|
|
4,610,516
|
|
|
|
4,610,516
|
|
Subscription services and other related services revenues
|
|
|
18,994,252
|
|
|
|
-
|
|
|
|
18,994,252
|
|
Total revenues from external customers
|
|
$
|
79,085,369
|
|
|
$
|
4,610,516
|
|
|
$
|
83,695,885
|
|
Cost
of revenues
A
large portion of costs of revenues are commission paid to sales agents of our financial services business and website maintenance
expenses, which consist of bandwidth costs, personnel-related expenses, rent and content expenses for our
jrj.com
website.
Cost of revenues accounted for 18.4% and 24.5% of our net revenues in 2015 and 2016, respectively.
Rebates.
We paid rebates to the financial advisors of our “iTougu” business, generally on a “50:50” basis.
The rebates paid were $3.5 million in 2016, constituting 17.0% of our cost of revenues.
Commission paid.
Commission paid
is the commission rebates paid to the account executives of our Hong Kong brokerage business and the commissions paid to the sales
agents of our commodities brokerage business. Commission paid constituted 43.7% of our cost of revenues in 2016.
Rent.
Rent attributable to cost of revenues reflects that portion of our rent expense that is directly used in the provision of
our web content. We allocate rent to cost of revenues to the extent the space is occupied by our web content personnel.
Bandwidth
Costs.
Bandwidth fees are the fees we pay to Internet Data Center, or the IDC, for telecommunications services and for hosting
our servers. We expect our bandwidth costs, as variable costs, to increase with the traffic on our websites. Our bandwidth costs
could also increase if the IDC increase their service charges. Our bandwidth fees constituted 6.9 % of our cost of revenues in
2016.
Cost
of raw data.
Our cost of raw data consists of fees we pay to the stock exchanges and our other data providers pursuant to
our commercial agreements with those parties. These contracts are typically for a fixed rate, and regard to the level of use,
for a term, typically less than three years, depending on the provider. Our cost of raw data is likely to be our most variable
element of cost of revenues. Our cost of raw data is expected to increase:
●
|
if
we enter into additional commercial agreements for purchasing data from new sources or if we obtain different or additional
data from existing sources; or
|
|
|
●
|
due
to rate increases we may experience in the future upon renewal of our existing agreements.
|
Salary
and compensation.
Salary and compensation expenses include wages, bonuses and other benefits, including welfare benefits.
Salary and compensation included in our cost of revenues relate to our web content personnel.
Operating
expenses
Our
operating expenses consist of general and administrative expenses, product development expenses, sales and marketing expenses
and impairment loss of intangible assets and goodwill, if any. Share-based compensation expenses are reported within each of the
operating expense financial statement line items, as appropriate.
General
and administrative expenses.
General and administrative expenses primarily consist of salary and compensation for our general
management, finance and administrative personnel, share-based compensation expenses, rent, professional services fees and other
expenses, including travel and other general business expenses, office supplies and depreciation for general office furniture
and equipment.
Product
development expenses.
Our product development expenses primarily consist of salary and compensation expenses of personnel
engaged in the research, development and implementation of our new service offerings, rent and depreciation of equipment attributable
to our product development efforts.
Sales
and marketing expenses.
Our sales and marketing expenses primarily consist of salary and compensation for our sales and marketing
personnel, as well as the marketing promotion fees.
Stock
incentive plans and nonvested shares
We adopted the 2004 Stock Incentive Plan,
or the 2004 Plan, in January 2004, and amended it in September 2004, August 2006, June 2009, and June 2010, respectively. As of
January 2 2014, selected employees and executives have been granted restricted shares of an aggregate 1,100,240 ordinary shares
with the certificates evidencing the shares shall only be issued to the participant if and when the applicable restrictions on
the restricted shares lapse in accordance with the terms of the agreement and the 2004 Plan. The 2004 Plan has expired on January
3, 2014, which is the 10
th
anniversary of the effective date of the 2004 Plan. The share-based compensation expenses
relating to the 2004 Plan were $3.4 million, $0.9 million and $0.2 million in 2014, 2015 and 2016, respectively.
We
adopted the 2007 Stock Incentive Plan, or the 2007 Plan, in July 2007. On July 2, 2007, we granted restricted stock awards covering
10,558,493 of our ordinary shares under the 2007 Plan to our employees who are eligible for the 2007 Plan. The vesting of the
restrictive stock is subject to us achieving certain financial performance targets stated in the 2007 Plan. In 2009, in light
of the significant global economic downturn and its impact on our performance, our board amended the terms of these grants to
extend the performance period and the vesting schedule for an additional three years ending on December 31, 2012. Based on the
Company’s operating performance during 2008 and 2009, 8,658,048 shares were vested as of December 31, 2010.
In
June 2014, the Annual General Meeting approved the amendment to the 2007 Plan and the Restricted Stock Issuance and Allocation
Agreement of 2007 Plan. Pursuant to such agreement, together with the remaining 1,900,445 ordinary shares which were not vested
due to the operating performance targets under 2007 Plan not being achieved, 3,000,000 ordinary shares were collectively granted
to the employees who were eligible. The fair value of a nonvested share on the grant date was measured at the quoted market price
of the Company's equity shares. The nonvested shares shall become activated and vest during the period commencing from the grant
date and ending on December 31, 2016 based on the Company's achievement of the performance targets. As of December 31, 2015, all
the 3,000,000 ordinary shares were activated based on the Company’s operating performance in 2015. The share-based compensation
expenses relating to the nonvested shares recognized were $1.5 million and $1.0 million in 2015 and 2016, respectively.
On November 1, 2010, iSTAR Financial Holdings
Limited (later renamed Rifa Financial Holdings Limited, or Rifa Financial) granted restricted stock awards representing 15% of
its ordinary shares pursuant to the 2010 Equity Incentive Plan (the "2010 Plan") of Rifa Financial to awardees
who are eligible to participate in the plan. In connection with such awards, we transferred 15% of the ordinary shares of Rifa
Financial to an entity representing the eligible awardees. In order to bind those awardees together to promote the common interests
of the awardees, Rifa Financial and the Company, the ordinary shares were transferred to, and are held by, Hopewin Asia Limited,
which was incorporated in BVI, on behalf of and exclusively for the benefit of the whole group of awardees eligible to participate
in the plan. We believe such incentive plan will attract, maintain and motivate our team, and we believe the plan is in our best
interests and the best interests of our stockholders. As of December 31, 2013, all compensation cost relating to the 2010 Plan
was recognized.
In July 2014, the Company adopted the 2014
stock incentive plan (the "2014 Plan") which allows the Company to offer a variety of incentive awards to employees,
directors, officers and other eligible persons in the Group, and consultants and advisors outside the Group. The maximum number
of ordinary Shares that may be delivered pursuant to awards granted to eligible persons under 2014 Plan during calendar year 2014
is equal to 5,000,000 ordinary shares; provided, that, as of January 1 of each calendar year thereafter during the term of
2014 plan, the maximum number of ordinary shares that may be delivered pursuant to awards granted to eligible persons under 2014
Plan shall be increased by 3,000,000 Ordinary Shares. As a result, the total number of ordinary shares authorized under the 2014
Plan was 11,000,000 as of December 31, 2016. 4,890,000 ordinary shares, 3,920,000 ordinary shares and 200,000 ordinary
shares were granted under 2014 Plan for the year ended 2014, 2015 and 2016, respectively. As of December 31, 2016, 4,332,100
shares were available for future grant of awards. The share-based compensation expenses relating to the 2014 Plan were $0.7
million, $1.5 million and $1.2 million in 2014, 2015 and 2016, respectively.
On July 1, 2014, Shanghai Shangtong Co., Ltd.
(“CFO Shangtong”) and Fortune Zhengjin Co., Ltd. (“Fortune Zhengjin”, formerly known as “Huifu Jinyuan
Co., Ltd.”), two affiliates of the Company, entered into a series of contractual arrangement with selected employees of
the Group. Pursuant to the agreement, these employees were granted 10% restricted shares of CFO Shangtong and Fortune Zhengjin.
The vesting of the restricted shares is subject to rendering service to the Company for five years. On July 1, 2015, Fortune Zhengjin
entered into another contractual arrangement to grant 8% restricted shares of Fortune Zhengjin to selected employees of the Group.
CFO Tahoe also entered an arrangement with selected employees of the Group. Pursuant to the agreement, these employees were granted
1.95% restricted shares of CFO Tahoe. On May 31, 2016, Fortune Zhengjin entered into another arrangement to grant 5.35% restricted
shares of Fortune Zhengjin to selected employees of the Group. The Company recognized share-based compensation expenses of
$7,000 and $0.6 million in 2014 relating to CFO Shangtong, Fortune Zhengjin, respectively. There were $10,000, $2.0 million and
$0.3 million share-based compensation expenses recorded in 2015 relating to CFO Shangtong, Fortune Zhengjin and CFO Tahoe, respectively.
There were $6,000 million, $2.8 million and $0.4 million share-based compensation expenses recorded in 2016 relating to CFO Shangtong,
Fortune Zhengjin and CFO Tahoe, respectively.
We
believe such incentive plan will attract, maintain and motivate our team, and we believe the plan is in our best interests and
the best interests of our stockholders.
Taxation
Hong
Kong Profits Tax
We
and our subsidiaries established in Hong Kong, including Rifa Securities, Rifa Futures, Rifa Credit and other nine subsidiaries
are subject to the uniform tax rate of 16.5% in Hong Kong. In addition, companies who incorporated outside of Hong Kong and carried
on a trade, profession or business in Hong Kong were also subject to Hong Kong profit tax in respect of their profits arising
in or derived from Hong Kong. The profits derived from outside Hong Kong are exempted from Hong Kong profits tax, and there are
no withholding taxes in Hong Kong on remittance of dividends. In 2014, 2015 and 2016, the income tax expenses charged in Hong
Kong are nil, nil and $462, respectively.
PRC
Enterprise Income Tax
In
2008, the Ministry of Science and Technology, the Ministry of Finance and the State Administration of Taxation jointly issued
the Administrative Measures on the Recognition of High and New Technology Enterprises, or the Recognition Rules, which stipulates
that the provincial counterparts of the Ministry of Science and Technology, the Ministry of Finance and the State Administration
of Taxation shall jointly determine an enterprise’s qualification as a high and new technology enterprise under the EIT
Law by considering, among other factors, ownership of its core technology, the scope of its high and new technology, the ratios
of technical personnel and research and development (R&D) personnel to total personnel, the ratio of R&D expenditures
to annual sales revenues, the ratio of revenues attributed to high and new technology products or services to total revenues,
and other measures set forth in relevant guidance. The HNTE qualification is valid for a term of three years and is subject to
application for renewal thereafter. CFO Meining and CFO Genius all successfully renewed their HNTE qualification in 2014 and 2015,
respectively, and enjoyed a preferential tax rate of 15% for another three years. CFO Fuhua obtained the HNTE qualification in
2016 and enjoyed the preferential tax rate of 15% from 2016 to 2018.
Withholding
Tax
The
EIT Law provides that a maximum income tax rate of 20% may be applicable to dividends payable to non-PRC investors that are “non-resident
enterprises” to the extent such dividends are derived from sources within the PRC, and the State Council has reduced such
rate to 10% through the implementation regulations unless any such non-PRC investor’s jurisdiction of incorporation has
a tax treaty with China that provides for a different withholding arrangement. We are a Hong Kong incorporated company and substantially
all of our income may be derived from dividends we receive from our operating subsidiaries located in the PRC. According to Mainland
and Hong Kong Special Administrative Region Arrangement on Avoiding Double Taxation or Evasion of Taxation on Income agreed between
the Mainland and Hong Kong Special Administrative Region in August 2006, dividends payable by a subsidiary located in the PRC
to the company in Hong Kong who directly holds at least 25% of the equity interests in the subsidiary will be subject to a maximum
5% withholding tax under certain conditions. Since the preferential withholding tax is subject to the approval from competent
taxation authorities in PRC, it remains uncertain whether our company in Hong Kong actually would be able to enjoy preferential
withholding taxes for dividends distributed by our subsidiaries in China. If we are not able to enjoy the preferential withholding
taxes and the tax rate may be 10% for dividends distributed by our subsidiaries, it will materially and adversely affect the amount
of dividends, if any, we may pay to our shareholders and ADS holders.
If
our PRC subsidiaries declare and distribute profits earned after January 1, 2008 to us in the future, such dividend payments will
be subject to withholding tax, which will increase our tax liabilities and reduce the amount of cash available to our company.
Tax
Residence
Under
the PRC Enterprise Income Tax Law and its Implementing Rules, an enterprise established outside of the PRC with “de facto
management bodies” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax at
the rate of 25% on its worldwide income. The Implementing Rules define the term “de facto management bodies” as “establishments
that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting,
properties, etc. of an enterprise”.
On
April 22, 2009, the State Administration of Taxation, or the SAT, issued the Notice Regarding the Determination of Chinese-Controlled
Offshore Incorporated Enterprises as PRC Tax Resident Enterprise on the Basis of De Facto Management Bodies, or SAT Circular 82,
which provided certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled
offshore- incorporated enterprise is located in China. In addition, the SAT issued the Bulletin 45 on July 27, 2011 to provide
more guidance on the implementation of the above circular with an effective date to be September 1, 2011. The Bulletin 45 made
clarification in the areas of resident status determination, post-determination administration, as well as competent tax authorities.
It also specifies that when provided with a copy of PRC tax resident determination certificate from a resident PRC -controlled
offshore incorporated enterprise, the payer should not withhold 10% income tax when paying the PRC-sourced dividends, interest
or royalties to the PRC-controlled offshore incorporated enterprise.
Although
SAT Circular 82 and the Bulletin 45 only apply to offshore enterprises controlled by PRC enterprises, not those controlled by
PRC individuals, the determining criteria set forth in SAT Circular 82 and the administration clarification made in Bulletin 45
may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining
the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals.
Accordingly, we may be considered a resident enterprise and may therefore be subject to the enterprise income tax at 25% on our
worldwide income. If we are considered a resident enterprise and earn income other than dividends from our PRC subsidiary, a 25%
enterprise income tax on our worldwide income could significantly increase our tax burden and materially and adversely affect
our cash flow and profitability.
Transition
from Business Tax to Value Added Tax
Starting
from January 1, 2012, the PRC Ministry of Finance and the State Administration of Taxation launched a Business Tax to VAT Transformation
Pilot Program (the “Pilot Program”), for certain industries in Shanghai. On September 1, 2012, the PRC Ministry of
Finance and the State Administration of Taxation extended the Pilot Program to certain industries in other eight regions, including
Beijing. With the adoption of Pilot Program, our advertising-related revenues and certain subscription revenues were subject to
VAT tax at rates ranging from 3% to 6%. These revenues were recognized after deducting VAT and other related surcharges.
The
implementation of the Pilot Program has not had a significant impact on our consolidated statements of comprehensive income for
the year ended December 31, 2016.
Critical
accounting policies and Estimates
We
prepare our 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 on 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. We consider the policies discussed below to be critical to an understanding of our
financial statements as their application places the most significant demands on our management’s judgment.
Revenue
recognition
. We charge subscription fee to our individual investors of “iTougu” and institutional subscribers
for the right to use our service packages. For “iTougu” provided to individual investors, service fee is paid in full
prior to the delivery of our service packages. With a monthly fee, individual investors could receive stock picking advices and
review their mentors’ current investment portfolios and living trading records as well. We began to recognize revenue over
the service period upon activation of the investors’ subscription. Services fees that have been paid but not yet recognized
are recorded as deferred revenue on our balance sheets. Deferred revenue is reduced proportionately as revenue is recognized ratably
over the service period.
We
derive advertising fees from advertising sales on our website principally for fixed periods of time, which are generally less
than one year. We recognize advertising fees ratably over the periods during which the advertisements are displayed on our website.
We
also derive commission from brokerage services provided by Rifa Securities and Rifa Futures, which buy or sell securities and
future contracts on their customers’ behalf. The commission income is recognized on a trade date basis as transactions occur.
Through
our commodities brokerage business, our customers could buy or sell the products provided by the exchanges. We derive commission
from their trading volumes. The commission income is recognized on a trade basis. In addition, we acted as one of the market makers
of the commodities exchanges. We commit to accept all the trade executions by offering to buy or sell trading products from/to
our clients. As a counterparty of our clients’ dealing, we may earn trading gains or incur trading losses, depending on
market conditions. Trading revenues, net, are recognized on a trade basis too, when trades are executed. Unrealized gains/losses
on open positions are marked to market at period end. Trading revenues, net, which comprise both realized and unrealized gains
and losses, are recognized on a net basis in the Statement of Comprehensive Income.
The
Group also derives revenue from providing services as information intermediary in online P2P lending business. We procure
borrowing and lending information from independent third parties, and our professional team evaluates and selects the
information provided by third parties, from the perspective of risks. Eventually we display the selected information on the
platform of Yinglibao, which is our online consumer finance marketplace. We charge borrowers interests for facilitating loan
transactions, and the revenues are recognized upon completion of the services.
Income
taxes.
Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and
their reported amounts in the financial statements, net operating loss carry forwards and credits by applying enacted statutory
tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are
provided for in accordance with the laws of the relevant taxing authorities.
Significant
management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets. The valuation allowance is based on our estimates of taxable
income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event
that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional
valuation allowance, which could materially impact our financial position and results of operations.
Uncertainties
exist with respect to how the EIT Law applies to our overall operations, and more specifically, with regard to our tax
residency status. The EIT Law includes a provision specifying that legal entities organized outside of the PRC will be
considered residents for PRC income tax purposes if their place of effective management or control is within the PRC. The
implementation rules to the EIT Law provide that non-resident legal entities will be considered PRC residents if substantial
and overall management and control over the manufacturing and business operations, personnel, accounting, properties, among
others, occur within the PRC. Despite the present uncertainties resulting from the limited PRC tax guidance on the issue, we
do not believe that our legal entities organized outside of the PRC should be treated as residents under EIT Law. If one or
more of our legal entities organized outside of the PRC were characterized as PRC tax residents, the impact would adversely
affect our results of operation. See “Item 3.D. Key Information — Risk Factors — Risks Relating to doing
business in the People’s Republic of China — We may be deemed a PRC resident enterprise under the EIT Law and be
subject to the PRC taxation on our worldwide income.
”
The
impact of an uncertain income tax position on the income tax return is recognized at the largest amount that is more-likely-than
not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Interest and penalties on income taxes will be classified as a component of the
provisions for income taxes.
Share-based
compensation
. Share-based compensation with employees is measured based on the grant date fair value of the equity instrument,
we recognizes the compensation costs net of a forfeiture rate using straight-line method or graded vesting attribution method,
over the requisite service period of the award, which is generally the vesting period of the award. The estimate of forfeitures
will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from
such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of
change.
The
fair values of our option awards granted to employees were estimated on the date of grant using Black-Scholes option-pricing model
that uses assumptions including the fair value of the ordinary shares underlying the options, expected volatility, risk-free interest
rate, expected option life, expected dividend yield and exercise price. Risk-free interest rate was estimated based on the yield
to maturity of treasury bonds of the United States with a maturity period close to the expected term of the options. The dividend
yield was estimated by the company based on its expected dividend policy over the expected term of the options. Options are generally
granted at an exercise price equal to the fair market value of the company’s shares at the date of grant.
The
volatility of the underlying ordinary shares during the life of the options was estimated based on the historical stock price
volatility of the company over the past years. The expected life was estimated based on historical information.
The
fair value of our restricted shares granted to employees was equal to the fair market value of our shares at the date of grant.
The
fair value of the stock options and restricted shares is remeasured as of the end of each reporting period until the services
of these non-employees are complete under the service contracts.
For
the nonvested shares granted with performance condition, share-based compensation expense is recognized based on the probable
outcome of the performance condition. A performance condition is not taken into consideration in determining fair value of the
nonvested shares granted.
Cost
method investment
. For investments in an investee over which we do not have significant influence, we carry the investment
at cost and recognize income as any dividends declared from distribution of investee’s earnings. We review the cost method
investments for impairment whenever events or changes in circumstances indicate that the carrying value may no longer be recoverable.
An impairment loss is recognized in earnings equal to the difference between the investment’s cost and its fair value at
the balance sheet date of the reporting period for which the assessment is made.
In 2014, the Group made another cost method
investment of $81,000 to
daokoudai.com
. In 2014, the Company sold its equity interests in Ocean Butterflies Holdings
Inc. to a third party, which was fully impaired as of December 31, 2011. Gains from the disposal of cost method investment recognized
in the consolidated statement of comprehensive income for the year ended December 31, 2014 was $4.3 million, which was
fully collected as of December 31, 2015.
In
2015, the Group sold all its equity interests in Beijing Cowboy Network Technology Co., Ltd. to a third party. The gain recorded
in this disposal was $4.6 million.
In December 2015, the Group signed a framework
agreement to sell 90% equity stake in CFO Meining and related businesses to a third party. As part of the framework, the sale
related to the equity of CFO Securities Consulting was completed in December 2015. The Group’s retained 10% noncontrolling
investment was recorded as cost method investment as the Group lost control over CFO Securities Consulting. After remeasurement,
the cost method investment in CFO Securities Consulting was recorded as $0.5 million. In April 2016, the Group completed
the disposal of its 90% equity interests in Shanghai Meining Computer Software Co., Ltd (“CFO Meining”) to third
parties, based on the arrangements signed in December 2015. With the assistance of a third party appraiser, the fair value of
the 10% retained noncontrolling investment of $0.8 million was recognized in the consolidated balance sheets.
In December 2016, the Group made a cost method
investment of $0.2 million.
The total carrying balance of such cost method
investments were $0.6 million and $1.5 million as of December 31, 2015 and 2016, respectively. There was no impairment
loss of the Group’s cost method investment.
Equity
method investment.
For investments in an investee over which we do have significant influence but lack control, we carry the
investment at cost and subsequently adjust the carrying amount of the investment to our proportionate share of each equity investee’s
net income or loss. We review the equity method investments for impairment whenever events or changes in circumstances indicate
that the carrying value may no longer be recoverable. An impairment loss is recognized in earnings equal to the difference between
the investment’s carrying amount and its fair value at the balance sheet date of the reporting period for which the assessment
is made.
In June 2015, the Group paid $0.3 million
to acquire 20% share interest of Beijing Niucai Technology Co., Ltd. In December 2015, the Group entered a contractual arrangement
with third parties to transfer its 15% equity interests in Aishang (Beijing) Fortune Technology Co., Ltd. ("CFO Aishang"),
which was previously owned 55% equity interests by the Company. The fair value of the 40% retained noncontrolling investment of
$1.0 million was recognized in the consolidated balance sheets at the disposal date, based on the valuation performed by
a third party.
The Company recognized equity method investment
losses of $67,000 and $0.1 million in the consolidated statement of comprehensive income for the year ended December
31, 2015 and 2016, respectively. The carrying balance of equity method investment was $1.2 million and $1.0 million
as of December 31, 2015 and 2016, respectively.
Impairment
of goodwill and indefinite-lived intangible assets.
The excess of the purchase price over the fair value of net assets acquired
is recorded on the consolidated balance sheet as goodwill.
We complete a two-step goodwill impairment
test. The first step is to compare the fair values of each reporting unit to its carrying amount, including goodwill. If the fair
value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not
be required. If the carrying amount of a reporting unit exceeds its fair value, the second step is to compare the implied fair
value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined
in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the
first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts
assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess
in the carrying value of goodwill over the implied fair value of goodwill. Based on the valuation performed by a third party appraiser
as of June 1, 2014 due to the business restructure, we recorded $8.1 million goodwill impairment losses in relation to
the reporting unit of investment advisory services for the years ended December 31, 2014 due to management’s
estimation of the expected future cash flows associated with these assets were insufficient to recover their carrying values.
The impairment test for other intangible assets
not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying value. If the
carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
The estimates of fair values of intangible assets not subject to amortization are determined using various discounted cash flow
valuation methodologies. A loss from impairment of intangible with indefinite life of $0.3 million was recorded in the
year ended December 31, 2015.
In
applying the income approach to the valuation of product sales unit, the discounted cash flow methodology was used. The following
are critical assumptions in determining the fair value of the reporting unit related to investment advisory services in 2015:
●
|
the revenue growth is projected at a compound annual
growth rate, or CAGR. The CAGR of the reporting unit is approximately 5.1% for 2016 through 2020, which is within the range of
comparable companies at the time of valuation.
|
|
|
●
|
operating
expenses, including selling expenses, R&D expenses and general and administrative expenses, as a percentage of sales is
expected to remain stable.
|
|
|
●
|
to
maintain normal operations, capital expenditures are estimated to be around 3% of revenue for each of the four reporting units,
respectively.
|
|
|
●
|
the
working capital requirement is estimated based on main accounts turnover days.
|
|
|
●
|
a
perpetual growth rate after 2020 is assumed to be at 3% per year for each of the four reporting units.
|
The
weighted average cost of capital, or WACC, used in the calculation is 18% for the reporting unit.
In 2016, we concluded that goodwill and indefinite-lived
intangible assets allocated to the commodities brokerage reporting unit was fully impaired because the estimated growth rates
and profit margins for future periods were expected to be lower than that of prior years based on that assessment. We recognized
losses from impairment of goodwill and indefinite-lived intangible assets of $6.7 million and $0.6 million for the
year ended December 31, 2016, respectively.
Estimates
of fair value result from a complex series of judgments about future events and uncertainties and rely heavily on estimates and
assumptions at a point in time. The judgments made in determining an estimate of fair value can materially impact our results
of operations. The valuations are based on information available as of the impairment review date and are based on expectations
and assumptions that have been deemed reasonable by management. Any changes in key assumptions, including unanticipated events
and circumstances, may affect the accuracy or validity of such estimates and could potentially result in an impairment charge.
Impairment of long-lived assets with definite
lives.
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may no longer be recoverable. When these events occur, we compare the carrying value of the long-lived assets
to the estimated undiscounted future cash flows expected to result from the use of the assets and our eventual disposition. If
the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, we would recognize an impairment
loss based on the fair value of the assets. Due to the business restructure, a third party appraiser performed the valuation as
of June 1, 2014. We recorded $1.8 million impairment losses in relation to the long-lived assets with definite lives for
the year ended December 31, 2014. No impairment loss was recorded for the long-lived assets with definite lives in 2015. In 2016,
we recorded a loss from impairment of long-lived assets with definite lives of $0.5 million allocated to the commodities
brokerage reporting unit because the estimated growth rates and profit margins for future periods were expected to be lower than
that of prior years based on that assessment.
Results
of operations
The
following table sets forth certain information relating to our results of operations, and our consolidated statements of operations
as a percentage of net revenues, for the periods indicated:
|
|
For the year ended December 31,
|
|
(in thousands of U.S. dollars, except as % of net revenues)
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Consolidated statement of comprehensive income (loss) data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenues
|
|
$
|
85,122
|
|
|
|
101.7
|
%
|
|
$
|
109,069
|
|
|
|
101.5
|
%
|
|
$
|
83,737
|
|
|
|
100.8
|
%
|
Business tax
|
|
|
(1,426
|
)
|
|
|
(1.7
|
)
|
|
|
(1,664
|
)
|
|
|
(1.5
|
)
|
|
|
(679
|
)
|
|
|
(0.8
|
)
|
Net revenues
|
|
|
83,696
|
|
|
|
100.0
|
%
|
|
|
107,405
|
|
|
|
100.0
|
%
|
|
|
83,058
|
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
(20,353
|
)
|
|
|
(24.3
|
)
|
|
|
(19,739
|
)
|
|
|
(18.4
|
)
|
|
|
(20,380
|
)
|
|
|
(24.5
|
)
|
Gross profit
|
|
|
63,343
|
|
|
|
75.7
|
|
|
|
87,666
|
|
|
|
81.6
|
|
|
|
62,678
|
|
|
|
75.5
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
(17,592
|
)
|
|
|
(21.0
|
)
|
|
|
(17,994
|
)
|
|
|
(16.8
|
)
|
|
|
(19,837
|
)
|
|
|
(23.9
|
)
|
Product development
|
|
|
(11,148
|
)
|
|
|
(13.3
|
)
|
|
|
(10,739
|
)
|
|
|
(10.0
|
)
|
|
|
(14,485
|
)
|
|
|
(17.4
|
)
|
Sales and marketing
|
|
|
(43,761
|
)
|
|
|
(52.3
|
)
|
|
|
(46,474
|
)
|
|
|
(43.3
|
)
|
|
|
(50,083
|
)
|
|
|
(60.3
|
)
|
Loss from impairment of intangible assets
|
|
|
(1,802
|
)
|
|
|
(2.2
|
)
|
|
|
(250
|
)
|
|
|
(0.2
|
)
|
|
|
(1,111
|
)
|
|
|
(1.3
|
)
|
Loss from impairment of goodwill
|
|
|
(8,150
|
)
|
|
|
(9.7
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,660
|
)
|
|
|
(8.0
|
)
|
Total operating expenses
|
|
|
(82,453
|
)
|
|
|
(98.5
|
)
|
|
|
(75,457
|
)
|
|
|
(70.3
|
)
|
|
|
(92,176
|
)
|
|
|
(111.0
|
)
|
Government subsidies
|
|
|
659
|
|
|
|
0.8
|
|
|
|
252
|
|
|
|
0.2
|
|
|
|
1,195
|
|
|
|
1.4
|
|
Income (loss) from operations
|
|
|
(18,451
|
)
|
|
|
(22.0
|
)
|
|
|
12,461
|
|
|
|
11.6
|
|
|
|
(28,303
|
)
|
|
|
(34.1
|
)
|
Interest income
|
|
|
4,044
|
|
|
|
4.8
|
|
|
|
2,648
|
|
|
|
2.5
|
|
|
|
1,051
|
|
|
|
1.3
|
|
Interest expense
|
|
|
(12
|
)
|
|
|
0.0
|
|
|
|
(1
|
)
|
|
|
(0.0
|
)
|
|
|
(2
|
)
|
|
|
(0.0
|
)
|
Exchange loss, net
|
|
|
(112
|
)
|
|
|
(0.1
|
)
|
|
|
(766
|
)
|
|
|
(0.7
|
)
|
|
|
(55
|
)
|
|
|
(0.1
|
)
|
Gain on the interest sold and retained noncontrolling investment
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
9.3
|
|
|
|
20,568
|
|
|
|
24.8
|
|
Gain from sales of cost method investment
|
|
|
4,338
|
|
|
|
5.2
|
|
|
|
4,648
|
|
|
|
4.3
|
|
|
|
-
|
|
|
|
-
|
|
Loss from equity method investment
|
|
|
-
|
|
|
|
-
|
|
|
|
(67
|
)
|
|
|
(0.1
|
)
|
|
|
(138
|
)
|
|
|
(0.2
|
)
|
Short-term investment income
|
|
|
58
|
|
|
|
0.1
|
|
|
|
216
|
|
|
|
0.2
|
|
|
|
379
|
|
|
|
0.5
|
|
Other income (expense), net
|
|
|
18
|
|
|
|
0.0
|
|
|
|
(937
|
)
|
|
|
(0.9
|
)
|
|
|
(305
|
)
|
|
|
(0.4
|
)
|
Income (loss) before income tax expense
|
|
|
(10,117
|
)
|
|
|
(12.1
|
)
|
|
|
28,202
|
|
|
|
26.3
|
|
|
|
(6,805
|
)
|
|
|
(8.2
|
)
|
Income tax expense
|
|
|
(514
|
)
|
|
|
(0.6
|
)
|
|
|
(1,384
|
)
|
|
|
(1.3
|
)
|
|
|
(4,161
|
)
|
|
|
(5.0
|
)
|
Net income (loss)
|
|
|
(10,631
|
)
|
|
|
(12.7
|
)
|
|
|
26,818
|
|
|
|
25.0
|
|
|
|
(10,966
|
)
|
|
|
(13.2
|
)
|
Less: net income (loss) attributable to noncontrolling interests
|
|
|
(3,463
|
)
|
|
|
(4.1
|
)
|
|
|
4,335
|
|
|
|
4.0
|
|
|
|
(9,287
|
)
|
|
|
(11.2
|
)
|
Net income (loss) attributable to China Finance Online Co. Limited
|
|
|
(7,168
|
)
|
|
|
(8.6
|
%)
|
|
|
22,483
|
|
|
|
20.9
|
%
|
|
|
(1,679
|
)
|
|
|
(2.0
|
%)
|
Year
ended December 31, 2016 compared to year ended December 31, 2015
Revenues
Our
gross revenues decreased by 23.2% from $109.1 million in 2015 to $83.7 million in 2016. The decrease was mainly due to the gross
revenues of $60.3 million provided by our commodities brokerage services in 2016, compared with f $80.1 million in 2015.
Our
business taxes and related surcharges attributable to our gross revenues decreased from $1.6 million in 2015 to $0.7 million in
2016. After taking into account business taxes and related surcharges attributable to our gross revenues, our net revenues decreased
by 22.7% to $83.1 million in 2016 from $107.4 million in 2015.
This
decrease was mainly due to the net revenues provided by our commodities brokerage services. Our net revenues derived from our
financial services, which include commodities brokerage and Hong Kong brokerage-related services, decreased to $69.0 million in
2016 from $83.0 million in 2015, representing 83.0% and 77.1% of our total net revenues for each year.
Our
net revenues derived from our financial information and advisory business, which included subscription fees from individual customers
and institutional customers, decreased by 37.8% from $17.2 million in 2015 to $10.7 million in 2016. The decrease was mainly due
to the sale of a less profitable division in the financial information segment.
Our
advertising revenues decreased to $2.9 million in 2016 from $7.0 million in 2015, representing 3.5% and 6.5% of total net revenues
for each year.
Cost
of revenues
Our
cost of revenues in 2016 increased by 3.2% to $20.4 million in 2016 from $19.7 million, primarily due to commission paid to our
sales agents related to our Hong Kong brokerage business.
Gross
profit
As
a result of the foregoing, our gross profit decreased by 28.5% to $62.7 million in 2016 from $87.7 million in 2015.
Operating
expenses
Our operating expenses increased by 22.2%
to $92.2 million in 2016 from $75.5 million in 2015. Operating expenses as a percentage of net revenues increase to 111.0% in
2016 from 70.3% in 2015.
General
and administrative.
Our general and administrative expenses increased by 10.2% to $19.8 million in 2016 from $18.0 million
in 2015. The increase in general and administrative expenses was mainly attributable to professional fees. Our general and administrative
expenses as a percentage of net revenues increased to 23.9% in 2016 from 16.8% in 2015.
Product
development.
Our product development expenses increased by 34.9% to $14.5 million in 2016 from $10.7 million in 2015. The
increase in product development expenses was mainly due to an increase in recruitment of senior software engineers and capital
market professionals to support further development in all lines of business. Our product development expenses increased as a
percentage of net revenues to 17.4% in 2016 from 10.0% in 2015.
Sales
and marketing.
Our sales and marketing expenses increased by 7.8% to $50.1 million in 2016 from $46.5 million in 2015. This
was primarily due to headcount related expenses. Our sales and marketing expenses as a percentage of net revenues increased to
60.3% in 2016 from 43.3% in 2015.
Loss
from impairment of intangible assets.
Our loss from impairment of intangible assets was $1.1 million associated with the acquired
commodities trading right and customer relationships in 2016 due to management's estimation of the expected future cash flows
associated with these assets were insufficient to recover their carrying values, compared to a loss from impairment of $0.3 million
in 2015.
Loss
from impairment of goodwill.
Our loss from impairment of goodwill was $6.7 million related to the commodities brokerage reporting
unit for the year ended December 31, 2016.
Income
(loss) from operations
Our
loss from operations was in $28.3 million in 2016 compared to an operating income of $12.5 million in 2015, and our operating
margin was negative 34.1% in 2016, compared that of 11.6% in 2015.
Interest
income
Our
interest income decreased by 60.3% to $1.1 million in 2016 from $2.6 million in 2015.
Interest
expense
Our
interest expense increased by 100% to $2,000 in 2016 from $1,000 in 2015.
Gain
on the interest sold and retained noncontrolling investment
We
recorded a gain on the interest sold and the retained noncontrolling investment of $20.6 million in the consolidated statement
of comprehensive income for the year ended December 31, 2016. We disposed our 100% equity interests in CFO Fenxin which owns 90%
equity interests in CFO Meining, and also fully disposed Henghui (Tianjin) Precious Metals Investment Co., Ltd. ("CFO Henghui")
and Shanghai Yongfu Enterprises Management Consulting Co., Ltd. ("CFO Yongfu") to third parties, respectively. Both
entities were previously owned 57.07% equity interests by us. Furthermore, we deregistered two insignificant affiliates in the
second quarter of 2016, which were both previously owned 70.25% equity interest by us.
We
recorded a gain on the interest sold and the retained noncontrolling investment of $10.0 million in the consolidated statement
of comprehensive income for the year ended December 31, 2015. We disposed our 100% equity interests in CFO Zhongcheng which owns
90% equity interests in CFO Securities Consulting, and also transferred our 15% equity interests in Aishang (Beijing) Fortune
Technology Co., Ltd. ("CFO Aishang"), which we previously owned 55% equity interests, to third parties in 2015.
Gain
from sale of cost method investment
In
2015, the Group sold a cost method investment in Beijing Cowboy Network Technology Co., Ltd. to third parties, which was acquired
during 2012 and 2013, and recognized a gain from the sale of cost method investment of $4.6 million in 2015.
Short-term
investment income
Our
gain from short-term investments, which are classified as trading securities, held-to-maturity or available-for-sale increased
to $0.4 million in 2016 from $0.2 million in 2015.
Other
income (loss), net
Our
other loss, net was $0.3 million in 2016 compared to other loss, net was $0.9 million in 2015.
Income
tax expense
Our income tax expense was $4.2 million
in 2016 compared to an income tax expense was $1.4 million in 2015.
Net income
(loss)
attributable to the Company
Our net loss attributable to the Company
was $1.7 million in 2016, compared to net income attributable to the Company was $22.5 million in 2015, and
our net income margin was negative 2.0% in 2016, and 20.9% in 2015.
Year
ended December 31, 2015 compared to year ended December 31, 2014
Revenues
Our
gross revenues increased by 28.1% from $85.1 million in 2014 to $109.1 million in 2015. The increase was mainly due to the gross
revenues of $80.1 million provided by our commodities brokerage services in 2015, compared with $61.1 million in 2014.
Our
business taxes and related surcharges attributable to our gross revenues increased from $1.4 million in 2014 to $1.6 million in
2015. After taking into account business taxes and related surcharges attributable to our gross revenues, our net revenues increased
by 28.3% to $107.4 million in 2015 from $83.7 million in 2014.
This
increase was mainly due to the net revenues provided by our commodities brokerage services. Our net revenues derived from our
financial services, which include commodities brokerage and Hong Kong brokerage-related services, increased to $82.9 million in
2015 from $64.7 million in 2014, representing 77.1% and 77.3% of our total net revenues for each year.
Our
net revenues derived from our financial information and advisory business, which included subscription fees from individual customers
and institutional customers, increased by 66.1% from $10.4 million to $17.2 million in 2015. The increase was mainly due to we
continued our strategic transition efforts by launching an investment advisory service platform, “Investment Masters”
(“iTougu”), designed to provide securities investment advisors and their clients a real-time communication channel,
where messages, market analytics, research report and investment strategies are exchanged.
Our
advertising revenues decreased to $7.0 million in 2015 from $8.2 million in 2014, representing 6.5% and 9.7% of total net revenues
for each year.
Cost
of revenues
Our
cost of revenues in 2015 decreased by 3.0% to $19.7 million from $20.4 million in 2014, primarily due to the commission paid to
our sales agents related to our commodities brokerage business.
Gross
profit
As
a result of the foregoing, our gross profit increased by 38.4% to $87.7 million in 2015 from $63.3 million in 2014.
Operating
expenses
Our
operating expenses decreased by 8.5% to $75.5 million in 2015 from $82.5 million in 2014. Operating expenses as a percentage of
net revenues decrease to 70.3% in 2015 from 98.5% in 2014.
General
and administrative.
Our general and administrative expenses increased by 2.3% to $18.0 million in 2015 from $17.6 million
in 2014. The increase in general and administrative expenses was mainly attributable to the share-based compensation expenses.
Our general and administrative expenses as a percentage of net revenues decreased to 16.8% in 2015 from 21.0% in 2014.
Product
development.
Our product development expenses decreased by 3.7% to $10.7 million in 2015 from $11.1 million in 2014. The decrease
in product development expenses was mainly due to the depreciation and share-based compensation expenses. Our product development
expenses decreased as a percentage of net revenues to 10.0% in 2015 from 13.3% in 2014. We expect to continue investing in iTouGu
as part of its long-term strategic goal of providing retail investors with a one-stop solution for their investment needs.
Sales
and marketing.
Our sales and marketing expenses increased by 6.2% to $46.5 million in 2015 from $43.8 million in 2014. This
was primarily due to the headcount related expenses and marketing, promotion expenses related to our commodities brokerage business.
Our sales and marketing expenses as a percentage of net revenues decreased to 43.3% in 2014 from 52.3% in 2014.
Loss
from impairment of intangible assets.
Our loss from impairment of intangible assets was $0.3 million in 2015, compared to
a loss from impairment of $1.8 million in 2014.
Income
(loss) from operations
Our
income from operations was $12.5 million compared to an operating loss of $18.5 million in 2014, and our operating margin was
11.6% in 2015, compared that of negative 22.0% in 2014.
Interest
income
Our
interest income decreased by 34.5% to $2.6 million in 2015 from $4.0 million in 2014, mainly due to the loan to Langfang Developer.
Interest
expense
Our
interest expense decreased by 91.7% to $1,000 in 2015 from $12,000 in 2014.
Gain
on the interest sold and retained noncontrolling investment
We
recorded a gain on the interest sold and the retained noncontrolling investment of $10.0 million in the consolidated statement
of comprehensive income for the year ended December 31, 2015. We disposed our 100% equity interests in CFO Zhongcheng which owns
90% equity interests in CFO Securities Consulting, and also transferred our 15% equity interests in Aishang (Beijing) Fortune
Technology Co., Ltd. ("CFO Aishang"), which we previously owned 55% equity interests, to third parties in 2015.
Gain
from sale of cost method investment
In
2015, the Group sold a cost method investment in Beijing Cowboy Network Technology Co., Ltd. to third parties, which was acquired
during 2012 and 2013, and recognized a gain from the sale of cost method investment of $4.6 million in 2015.
Short-term
investment income
Our
gain from short-term investments, which are classified as trading securities, held-to-maturity or available-for-sale decreased
to $0.2 million in 2015 from $58,000 in 2014.
Income
tax expense
Our
income tax expense was $1.4 million in 2015 compared to an income tax expense was $0.5 million in 2014.
Net
income (loss) attributable to the Company
Our
net income attributable to the Company was $22.5 million in 2015 compared to a net loss attributable to the Company of $7.2 million
in 2014, and our net income margin was 20.9% in 2015, and negative 8.6% in 2014.
B.
Liquidity and capital resources.
Cash
flows and working capital
As
of December 31, 2016, we had approximately $66.2 million in cash and cash equivalents. Our cash and cash equivalents primarily
consist of cash on hand. We generally deposit our excess cash in interest-bearing bank accounts.
The
following table shows our cash flows with respect to operating activities, investing activities and financing activities in 2014,
2015 and 2016:
|
|
For
the year ended December 31
|
|
(in
thousands of U.S. dollars)
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Net
cash provided by (used in) operating activities
|
|
$
|
1,172
|
|
|
$
|
19,817
|
|
|
$
|
(21,342
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
(4,598
|
)
|
|
|
40,558
|
|
|
|
(3,319
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(372
|
)
|
|
|
(5,592
|
)
|
|
|
9,702
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(3,832
|
)
|
|
|
53,195
|
|
|
|
(19,583
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
36,371
|
|
|
|
32,539
|
|
|
|
85,734
|
|
Cash
and cash equivalents at end of year
|
|
$
|
32,539
|
|
|
$
|
85,734
|
|
|
$
|
66,151
|
|
Net cash used in operating activities
for 2016 was $21.3 million, compared to net cash provided by operating activities was $19.8 million in 2015 and $1.2 million
in 2014. In 2016, the principal items accounting for the difference between our net cash used in operating activities and
our net loss of $11.0 million were changes in certain working capital accounts, principally an increase in account payable of
$3.6 million and an increase in income taxes payable of $2.3 million, partially offset by: (i) an increase in
accounts receivable-others of $2.1 million, (ii) an increase in accounts receivable-margin clients of $3.2 million, and (iii)
an increase in restricted cash of $2.6 million. Account payable increased primarily because of the increase in the amount due
to our Hong Kong brokerage services customers. The increase in accounts receivable-others was mainly due to the amount due
from the Commodities Exchanges related to our commodities brokerage services in the ordinary course of trading business.
The increase in accounts receivable-margin clients was due to the margin loan to customers for securities purchase related to
our Hong Kong brokerage services business. The increase in restricted cash was due to the cash we required the obligor to
deposit in bank accounts for providing guarantee to perform the contract obligation related to "Yinglibao",
an internet-based financial platform that integrates cash management solutions and mutual fund distribution.
In 2015, difference between our net
cash providing by operating activities and our net income of $26.8 million. The net cash provided by operating activities was
primarily due to the increase in cash receipt from commodities brokerage services.
In
2014, the principal items accounting for the difference between our net cash provided by operating activities and our net loss
of $10.6 million were changes in certain working capital accounts, principally an decrease in account receivable-others of $2.4
million and an decrease in account receivable-margin clients of $4.4 million, partially offset by: (i) an increase in amounts due
from noncontrolling shareholders of $1.8 million, (ii) an decrease in deferred revenue of $1.7 million, and (iii) an decrease
in account payable of $2.7 million. The decrease in account receivable-others we withdrew the cash deposited in commodities Exchanges
related to our commodities brokerage services business. The decrease in accounts receivable-margin clients was due to the margin
loan to customers for securities purchase related to our Hong Kong brokerage services business. The increase in amounts due from
noncontrolling shareholders was due to the interest free loans to the noncontrolling shareholders. The decrease in deferred revenue
was due to the deferred revenue related to our financial information and advisory service was earned and the relevant revenue
recognition requirements were met. The decrease in account payable was due to the amount due to sales agents related to our commodities
brokerage service business decreased during the 2014.
Net cash used in investing activities was
$3.3 million in 2016, compared to net cash provided by investing activities was $40.6 million in 2015, compared to net cash used
in investing activities of $4.6 million in 2014. In 2016, net cash used investing activities was primarily due to (i) the collection
of $23.8 million from disposal of 100% equity interest in CFO Fenxin, 90% equity interest in CFO Meining, and complete disposal
of CFO Henghui and CFO Yongfu; (ii) a net cash out of $16.6 million to purchase short-term investments; (iii) cash out to purchase
of property and equipment of $4.6 million; and (iv) the repayment of the partial consideration collected in 2015 related the disposal
of Rifa Futures and iSTAR Wealth Management in the amount of $5.3 million.
In 2015, net cash provided by investing
activities was primarily due to (i) the collection of $8.5 million from disposal of 100% equity interest in CFO Zhongcheng, 90%
equity interest in CFO Securities Consulting, and 15% equity interest in CFO Aishang; (ii) a net cash in of $22.6 million from
Langfang Developer; (iii) a net cash in of $8.0 million related to the sales of cost method investments; and (iv) the collection
of the partial consideration of $5.3 million related the disposal of Rifa Futures and iSTAR Wealth Management.
In
2014, net cash used in investing activities was primarily due to (i) a net cash in of $2.2 million related to the sale of cost
method investments (Beijing Cowboy Network Technology Co., Ltd); (ii) a net cash out of $2.9 million related to the business restructure;
(iii) cash payment of $0.7 million to acquire 20% CFO Tahoe; and (iv) cash payment of $3.2 million and $81,000 to purchase property
and equipment, as well as intangible assets, respectively.
Net cash provided by financing activities
was $9.7 million in 2016, compared to net cash used in financing activities was $5.6 million in 2015 and $0.4 million in 2014.
We paid dividends to our noncontrolling shareholders of $9.8 million, $6.5 million and $1.0 million in 2016, 2015 and 2014, respectively.
In 2016, we received the net funds committed by the clients through our wealth management platform (Yinglibao) in the
amount of $19.4 million.
We
currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business
and do not anticipate paying any cash dividends on our ordinary shares, or indirectly on our ADSs, for the foreseeable future.
Capital
resources
Our
principal capital expenditures for 2014, 2015 and 2016 consisted primarily of purchases of servers, workstations, computers, computer
software and other items related to our network infrastructure for a total of approximately $3.2 million, $3.4 million and $4.6
million, respectively.
Capital
expenditures in 2015 and 2016 have been, and our 2017 capital expenditures are expected to continue to be, funded through operating
cash flows and through our existing capital resources. We believe that our current cash and cash equivalents, and cash flow from
operations will be sufficient to meet our anticipated cash needs, including for our working capital and capital expenditure needs,
for the foreseeable future. We may, however, require additional cash resources due to changes in business conditions or other
future developments. If these sources are insufficient to satisfy our cash requirements, we may seek to sell debt securities or
additional equity securities or obtain a credit facility. The sale of convertible debt securities or additional equity securities
could result in additional dilution to our shareholders. The incurrence of indebtedness would result in debt service obligations
and could result in operating and financial covenants that would restrict our operations. We cannot assure investors that financing
will be available in amounts or on terms acceptable to us, if at all.
In
September 2014, the Company’s board of directors approved an extension of outstanding loan to December 31, 2014. Pursuant
to the arrangement, the loan receivable was charged an annual interest rate of 19-21% from October 21, 2014 to December 31, 2014.
In March, 2015, the Group collected approximately $2.1 million (RMB13 million, equivalently) from Langfang Developer. In December
2015, the Group received the remaining outstanding balance and relative interests of approximately $23.9 million (RMB155 million)
from Langfang Developer.
From
time to time, we also evaluate possible investments, acquisitions or divestments and may, if a suitable opportunity arises, make
an investment or acquisition or conduct a divestment.
Restricted
net assets
The
PRC Enterprise Income Tax Law, or the EIT Law, provides that a maximum income tax rate of 20% may be applicable to dividends payable
to non-PRC investors that are “non-resident enterprises”, to the extent such dividends are derived from sources within
the PRC, and the State Council of the PRC has reduced such rate to 10% through the implementation regulations.
We
are a Hong Kong holding company and the majority of our income is derived from dividends we receive from our PRC subsidiaries.
Thus, dividends paid to us by our PRC subsidiaries may be subject to the 10% income tax if we are considered to be a “non-resident
enterprise” under the EIT Law. If we are considered a PRC “resident enterprise”, it is unclear whether dividends
we pay with respect to our ordinary shares, or the gain our shareholders may realize from the transfer of our ordinary shares,
would be treated as income derived from sources within the PRC and be subject to PRC tax. In the event that we are required under
the EIT Law to withhold PRC income tax on dividends payable to our non-PRC investors that are “non-resident enterprises”,
or that a shareholder is required to pay PRC income tax on the transfer of our ordinary shares, the value of such shareholder’s
investment in our ordinary shares may be materially and adversely affected.
In
addition, prior to payment of dividends, pursuant to the laws applicable to the PRC Domestic Enterprises and PRC Foreign Investment
Enterprises, the PRC entities must make appropriations from after-tax profit to non-distributable statutory reserve funds, including
general reserve, enterprise expansion fund, and staff bonus and welfare fund. Subject to certain cumulative limits, the general
reserve fund requires annual appropriations of not less than 10% of after-tax profit (as determined under accounting principles
and financial regulations applicable to PRC enterprises at each year-end); the other two funds are to be made at the discretion
of the board of directors. These reserve funds can only be used for specific purposes and are not distributable as cash dividends.
As a result of the above and other restrictions
under PRC laws and regulations, our PRC subsidiaries and affiliates are restricted in their ability to transfer a portion of their
net assets to us either in the form of dividends, loans or advances. The restricted portion amounted to approximately $71.0
million as of December 31, 2016.
Even
though we currently do not require any such dividends, loans or advances from our PRC subsidiaries and affiliates, we may in the
future require additional cash resources from our PRC subsidiaries and affiliates due to changes in business conditions, to fund
future acquisitions or developments, or merely to declare and pay dividends or distributions to our shareholders, although we
currently have no intention to do so.
Restrictions
on Renminbi conversion
The value of the RMB against the U.S. dollar
and other currencies may fluctuate. Exchange rates are affected by, among other things, changes in political and economic conditions
and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging
the value of the RMB to the U.S. dollar. Under this policy, the RMB is permitted to fluctuate within a narrow and managed band
against a basket of foreign currencies. Following the removal of the U.S. dollar peg, the RMB appreciated more than 20% against
the U.S. dollar over three years. From July 2008 until June 2010, however, the RMB traded stably within a narrow range against
the U.S. dollar. On June 20, 2010, the PBOC announced that the PRC government would reform the RMB exchange rate regime and increase
the flexibility of the exchange rate. Since June 2010, the RMB has appreciated more than 10% against the U.S. dollar. In April
2012, the PRC government announced it would allow greater RMB exchange rate fluctuation. On August 11, 12 and 13, 2015, the PRC
government successively set the central parity rate for the RMB more than 3% lower in the aggregate than that of August 10, 2015
and announced that it will begin taking into account previous day’s trading in setting the central parity rate. In 2015,
the yuan experienced a 5.8% drop in value, and on January 4, 2016 the PRC government set the U.S. dollar-Chinese yuan currency
pair to a reference rate of 6.5%, the lowest rate in 4.5 years. However, it is difficult to predict how market forces or PRC or
U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. As significant international
pressure remains on the PRC government to adopt a more flexible currency policy, which could result in greater fluctuation of
the RMB against the U.S. dollar.
Our
revenues and costs are mostly denominated in RMB, and a significant portion of our financial assets are also denominated in RMB.
Any significant fluctuations in the exchange rate between the RMB and the U.S. dollar may materially adversely affect our cash
flows, revenues, earnings and financial position. Fluctuations in the exchange rate between the RMB and the U.S. dollar could
also result in foreign currency translation losses for financial reporting purposes.
The
majority of our revenues and operating expenses are denominated in Renminbi. The PRC government imposes controls on the convertibility
of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. Pursuant to the Foreign
Currency Administration Rules promulgated on January 29, 1996 and amended on January 14, 1997 and various regulations issued by
the SAFE and other relevant PRC government authorities, Renminbi is freely convertible only to the extent of current account items,
such as trade-related receipts and payments, interest and dividends. Capital account items, such as direct equity investments,
loans and repatriation of investment, require the prior approval from the SAFE or its local branch for conversion of Renminbi
into a foreign currency, such as U.S. dollars, and remittance of the foreign currency outside the PRC. Shortages in the availability
of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or
other payments to us, or otherwise satisfy its foreign currency-denominated obligations. Currently, each of our PRC subsidiaries
and affiliates may purchase foreign exchange for settlement of “current account transactions”, including payment of
dividends to us and payment of license fees and service fees to foreign licensors and service providers, without the approval
of SAFE. However, approval from the SAFE or its local branch is required where Renminbi is to be converted into foreign currency
and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies.
Each
of our PRC subsidiaries and affiliates may also retain foreign exchange in their current accounts to satisfy foreign exchange
liabilities or to pay dividends. However, we cannot assure investors that the relevant PRC governmental authorities will not limit
or eliminate our ability to purchase and retain foreign currencies in the future. If the foreign exchange control system prevents
us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign
currencies to our shareholders. Since a significant amount of our future revenues will be in the form of Renminbi, the existing
and any future restrictions on currency exchange may limit our ability to utilize revenues generated in Renminbi to fund our business
activities outside China, if any, or expenditures denominated in foreign currencies.
A
summary table, by respective denomination, is set forth below, including: (1) cash, cash equivalents and restricted cash held
inside of the PRC and subject to restrictions; (2) cash, cash equivalents and restricted cash held outside of the PRC; and (3)
for entities within the PRC, cash, cash equivalents and restricted cash held by VIEs and VIEs’ subsidiaries, as of December
31, 2015 and 2016, respectively:
|
|
For
the year ended
December 31,
|
|
|
|
2015
|
|
|
2016
|
|
Cash,
cash equivalents and restricted cash held inside of the PRC and subject to restrictions
|
|
|
|
|
|
|
Denomination
in RMB
|
|
$
|
79,153,967
|
|
|
$
|
51,011,403
|
|
Denomination
in foreign currencies
|
|
$
|
8,474
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents and restricted cash held by VIEs and VIEs’ subsidiaries in the PRC
|
|
|
|
|
|
|
|
|
Denomination
in RMB
|
|
$
|
47,788,398
|
|
|
$
|
45,477,997
|
|
Denomination
in foreign currencies
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents and restricted cash held outside of the PRC
|
|
|
|
|
|
|
|
|
Denomination
in RMB
|
|
$
|
307,313
|
|
|
$
|
246,061
|
|
Denomination
in foreign currencies
|
|
$
|
6,264,294
|
|
|
$
|
17,377,457
|
|
C.
Research and development.
In
the three years ended December 31, 2014, 2015 and 2016, our product development expenses were $11.1 million, $10.7 million and
$14.5 million, respectively. Our research and development efforts consist of continuing to:
●
|
increase
the breadth of our service offerings through the addition of new features and functions to our service packages;
|
|
|
●
|
enhance
our subscribers’ experience by improving the quality of our research tools and website; and
|
|
|
●
|
develop
additional research tools, features, content and services specifically targeting the high-end subscribers.
|
|
|
●
|
increase
in recruitment of senior software engineers and capital market professionals fo support further development in all lines of
business.
|
D.
Trend information.
Other
than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events
for the period from January 1, 2016 to December 31, 2016 that are reasonably likely to have a material effect on our net revenues,
income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily
indicative of future operating results or financial conditions.
E.
Off-balance sheet arrangements.
We
have not entered into any financial guarantee or other commitments to guarantee the payment obligations of any other parties.
We do not entered into any derivative financial instruments. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover,
we do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support
to us or engages in leasing, hedging or research and development services with us.
F.
Tabular disclosure of contractual obligations.
We
have entered into arrangements relating to office premises leasing and data purchase agreement. The following sets forth our known
contractual obligations as of December 31, 2016 and as of the types that are specified below:
|
|
Office Premises
|
|
|
Data Purchase
|
|
|
Total
|
|
|
|
(in
U.S. dollars)
|
|
Less than 1 year
|
|
$
|
4,653,630
|
|
|
$
|
1,682,330
|
|
|
$
|
6,335,960
|
|
1 - 3 years
|
|
|
2,933,055
|
|
|
|
2,705,706
|
|
|
|
5,638,761
|
|
3 - 5 years
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Apart
from such premises, as of December 31, 2016, we did not have any long-term debt obligations, capital (finance) lease obligations,
purchase obligations or any other long-term liabilities reflected on our balance sheets with durations to maturity as are set
forth in the chart directly above.
G.
Safe harbor.
See
the section headed “Forward-Looking Information”.
ITEM
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
Directors and senior management.
The
following table sets forth the name, age and position of each director and executive officer as of the date of this report.
Name
|
|
Age
|
|
Position
|
Zhiwei
Zhao
|
|
53
|
|
Chairman
of the Board of Directors and Chief Executive Officer
|
Jun
(Jeff) Wang
|
|
46
|
|
Director
and Chief Financial Officer
|
Zheng
(James) Chen (1)
|
|
51
|
|
Independent
Director
|
Jian
Wang (1) (2) (3)
|
|
54
|
|
Independent
Director
|
Yaowei
Zhang (1) (2) (3)
|
|
54
|
|
Independent
Director
|
(1)
|
Member,
audit committee
|
(2)
|
Member,
compensation committee
|
(3)
|
Member,
nominations committee
|
The
address of each of our executive officers and directors is 17th Floor of Fuzhuo Plaza A, No. 28 Xuanwai Street, Xicheng District,
Beijing, China 100052.
Biographical
Information
Zhiwei
Zhao
has served as our Chief Executive Officer since June 21, 2005 and our director since July 25, 2005. He was elected
as the Chairman of our Board of directors as of April 2012 and continues to serve as the Chief Executive Officer of the company.
Mr. Zhao was the Chairman of the Board of Directors of Abitcool Inc before joining us. Abitcool is a company that provides broadband
internet services in China. It boasts the largest private Internet Data Center in China. From 1998 to 2005, he served as the General
Manager of Huatong International Development Limited in Hong Kong. Mr. Zhao graduated with a Bachelor of Science degree from Huazhong
University of Science and Technology and he obtained his EMBA degree from PBC School of Finance of Tsinghua University.
Jun
(Jeff) Wang
joined our company as Vice President of Finance in May 2006 and has served as our Chief Financial Officer
since August 15, 2006. He was appointed to serve as a member of our Board in May 2012. Mr. Wang was a Senior Manager in the Tax
and Business Advisory Services at Deloitte Beijing Office before joining us. From 2002 to 2005 Jun Wang was founder and president
of Miracle Professional Services Inc., a company that provided training and financial consulting services to finance professionals.
Prior to that Mr. Wang worked in Deloitte’s Beijing, London and New York offices, providing tax and business advisory and
management consulting services. Mr. Wang obtained his Master of Business Administration from New York University’s Leonard
N. Stern School of Business, his Master of Economics in accounting from Beijing Technology and Business University and his B.A.
degree from Shandong University. Mr. Wang is a member of the U.S. Certified Management Accountants (“CMA”) and has
a professional designation of Chartered Financial Analyst (“CFA”).
James
(Zheng) Chen
has been the Chief Financial Officer of Aoxing Pharmaceutical since February 2016. Prior to Aoxing, Dr. Chen
was the Chief Financial Officer of Origin Agritech Limited since January 2012. Dr. Chen has also served as an Investment Manager
at Abu Dhabi Investment Authority (ADIA) and he worked as an equity research analyst at Morgan Joseph and BB&T Capital Markets.
Dr. Chen also worked as a Product Manager at Celanese and as a License Product Technology Manager at Univation Technologies, a
joint venture between ExxonMobil and Dow Chemical. Dr. Chen received his Ph.D. Degree in Chemical Engineering from the University
of Connecticut and his M.B.A degree from New York University. Mr. Chen has a professional designation of Chartered Financial Analyst
(“CFA”).
Jian Wang
has been the president
of Five Star Holdings Limited since 2013. Mr. Wang is a key founder of Jiangsu Five Star Appliances Corporation ("Five Star"),
a key member of Best Buy Co., Inc. ("Best Buy"), the world leading provider of technology products, services and solutions.
Mr. Wang was the Senior Global Vice President of Best Buy from 2012 to 2013. He was appointed to be the Global Vice President
of Best Buy and Chief Executive Officer of Five Star in 2011 after the Best Buy's acquisition of Five Star in 2009. He led the
joint venture of Five Star and Best Buy in 2006. Mr. Wang has been a major founder of Five Star and set up its retail merchandising
system in 2001. Five Star has been awarded "China's Best Employer" for four consecutive years since 2009 under Mr. Wang's
leadership and he himself has also been awarded "China's Best Entrepreneur on Employer's Development". In 2016, he was
honored the National Business Ethics Model by China General Chamber of Commerce. Mr. Wang obtained his Bachelor of International
Economic Management from Jiangsu Provincial CPC School. He received postgraduate education majoring in Business Administration
from the Business School of Nanjing University. He received his EMBA degree from China Europe International Business School (CEIBS).)
and obtained EMBA degree from PBC School of Finance of Tsinghua University.
Yaowei
Zhang
has been an Independent Director of Shanghai Everjoy Health Group Co., Ltd (formerly known as Shanghai Cimic Holdings
Co., Ltd..) since March 2014. Mr. Zhang was also a Director of China Communication Telecom Services Co., Ltd. Mr. Zhang is the
President of Yunshi Investment Management (Shanghai) Co., Ltd., Shanghai Daonan Culture Development Co. Ltd. and Shanghai Yunshi
Culture Communication Co. Ltd and the founder of Dao Nan School in Shanghai. Mr. Zhang is the General Partner of Zhuhai Shenzhouyun
Investment Fund, President of Zhuhai Yunzhou Investment Management Co. Ltd. and President of Zhuhai Yunshenzhou Investment Management
Co., Ltd. Mr. Zhang has served as Vice President of China Communication, which is a nation-wide network and telecom operator.
He has also served as Vice President of Shanghai People's Publishing House, General Manager of the advertising center of Jiefang
Daily Group and Deputy Director of the department of television production of Shanghai TV Station. Mr. Zhang obtained his Ph.D.
of Management Science and Engineering and Master of Business Administration from Tongji University, and he earned his Bachelor
of Economic Law from Fudan University.
B.
Compensation of directors and executive officers.
In
2016, we paid aggregate cash compensation of approximately $659,000 to our directors and executive officers as a group. We have
no service contracts with any of our directors or executive officers that provide benefits to them upon termination, except for
change in control agreements we entered into with each of our chief executive officer and chief financial officer. The change
in control agreements provide that if after a change-of-control of our Company has occurred, resulting in the chief executive
officer or the chief financial officer being terminated without cause or resigns for good reason, we are obligated to provide
severance benefits to the chief executive officer or chief financial officer, as the case may be.
All
of our current directors and executive officers have entered into indemnification agreements in which we agree to indemnify, to
the fullest extent allowed by Hong Kong law, our charter documents or other applicable law, our directors and executive officers
from any liability or expenses, unless the liability or expense arises from the director or executive officer’s own willful
negligence, intentional malfeasance, bad faith act, or other transactions from which the director or executive officer may not
be relieved of liability under applicable law. The indemnification agreements also specify the procedures to be followed with
respect to indemnification.
Directors’
and officers’ liability insurance
We
have renewed directors’ and officers’ liability insurance on behalf of our directors and officers that will expire
in January 2018.
Employee’s
stock incentive plans
2004
Stock Incentive Plan
The
2004 Plan has expired on January 3, 2014, which is the 10th anniversary of the effective date of the 2004 Plan. After the termination
of the Plan either upon such stated expiration date or its earlier termination by the Board, no additional awards may be granted
under the Plan, but previously granted awards (and the authority of the Administrator with respect thereto, including the authority
to amend such awards) shall remain outstanding in accordance with their applicable terms and conditions of the Plan.
Under the 2004 Plan, as of December 31, 2016,
we have a total number of 16,180,260 options that are currently vested and exercisable for ordinary shares. Based on the Company's
requisite service period stated in the 2004 Plan, all the granted restricted shares of 1,100,240 ordinary shares were vested
as of January 2, 2017, of which 330,085 shares were issued to employees as of December 31, 2016.
The
table below sets forth the options and restricted shares grants made to our current directors and executive officers as of December
31, 2016 pursuant to the 2004 Plan:
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
ordinary
Shares to
|
|
|
|
|
|
|
|
|
|
|
|
|
be issued
upon
|
|
|
|
|
|
|
|
|
|
|
|
|
exercise of options/vest of restricted shares
|
|
|
Exercise
price per ordinary
share
|
|
|
Date of grant
|
|
|
Date of expiration
|
|
Zhiwei Zhao
|
|
|
750,000
|
|
|
$
|
1.426
|
|
|
|
February 22, 2010
|
|
|
|
February 22, 2020
|
|
|
|
|
1,800,000
|
|
|
$
|
0.250
|
|
|
|
July
15, 2013
|
|
|
|
July
15, 2023
|
|
|
|
|
450,000
|
|
|
$
|
-
|
|
|
|
January
2, 2014
|
|
|
|
January
2, 2024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jun (Jeff) Wang
|
|
|
250,000
|
|
|
$
|
1.426
|
|
|
|
February
22, 2010
|
|
|
|
February
22, 2020
|
|
|
|
|
1,500,000
|
|
|
$
|
0.250
|
|
|
|
July
15, 2013
|
|
|
|
July
15, 2023
|
|
|
|
|
350,240
|
|
|
$
|
-
|
|
|
|
January
2, 2014
|
|
|
|
January
2, 2024
|
|
2014
Stock Incentive Plan
In
July 2014, the Company adopted the 2014 stock incentive plan (the "2014 Plan") which allows the Company to offer a variety
of incentive awards to employees, directors, officers and other eligible persons in the Group, and consultants and advisors outside
the Group.
Incentive
awards granted under the 2014 Plan generally do not vest unless the grantee remains under our employment or in service with us
on the given vesting date. However, in circumstances where there is a death or disability of the grantee, or a change in the control
of our company, the vesting of awards will be accelerated to permit immediate exercise of all awards granted to a grantee. Generally,
to the extent an outstanding awards granted under the 2014 Plan has not vested by the date the grantee’s employment or service
with us terminates, the awards will terminate and become unexercisable. Our board of directors may amend, alter, suspend or terminate
the 2014 Plan at any time, provided, however, that our board of directors must first seek the approval of our shareholders and,
if such amendment, alteration, suspension or termination would adversely affect the rights of a grantee under any award granted
prior to that date, the approval of such grantee.
During
2014 and 2015, the Company granted totaling 1,960,000 and 120,000 stock options under the 2014 Plan. We have a total number of
805,400 options that are currently vested and exercisable for ordinary shares as of December 31, 2016.
In 2014, the Company granted 2,930,000 restricted
shares to eligible persons under the 2014 Plan. As of December 31, 2016, 2,918,000 shares were vested, of which 200,885 shares
were issued. In 2015, the Company granted 3,800,000 restricted shares under the 2014 Plan to selected directors and employees.
Subject to the agreement, the awards shall become activated and vest during the period commencing on the grant date and ending
on November 16, 2018 (the "Vesting Term"), provided that the participant has achieved all the performance targets. As
of December 31, 2016, 2,414,500 granted shares were activated, of which 869,220 shares were vested based on the participant's
achievement of performance target and the Company's requisite service period of three years. Furthermore, there was no
share was issued as of December 31, 2016. In 2016, the Company granted 200,000 restricted shares under the 2014 Plan to one selected
employee. The vesting of the restricted shares is subject to rendering service to the Company for two years.
The
table below sets forth the restricted shares grants made to our current directors and executive officers as of December 31, 2016
pursuant to the 2014 Plan:
|
|
|
Number
of
|
|
|
|
|
|
|
|
|
|
|
|
|
ordinary
Shares to
|
|
|
|
|
|
|
|
|
|
|
|
|
be
issued upon
|
|
|
|
|
|
|
|
|
|
|
|
|
vest
of
restricted shares
|
|
|
|
Date
of grant
|
|
|
|
Date
of expiration
|
|
Zhiwei Zhao
|
|
|
*
|
|
|
|
November 16, 2015
|
|
|
|
November 16, 2025
|
|
Zheng (James) Chen
|
|
|
*
|
|
|
|
November
16, 2015
|
|
|
|
November
16, 2025
|
|
Jian Wang
|
|
|
*
|
|
|
|
November
16, 2015
|
|
|
|
November
16, 2025
|
|
Yaowei Zhang
|
|
|
*
|
|
|
|
November
16, 2015
|
|
|
|
November
16, 2025
|
|
Jun (Jeff) Wang
|
|
|
*
|
|
|
|
November
16, 2015
|
|
|
|
November
16, 2025
|
|
*
|
Upon
vesting of restricted shares granted, would beneficially own less than 1% of our outstanding ordinary shares.
|
2007
Equity Incentive Plan
As
of December 31, 2016, we had granted restricted stock awards covering 10,558,493 of our ordinary shares to our eligible employees
pursuant to our 2007 Plan. In order to bind the employees together in achieving the common goal, the ordinary shares are held
by C&F International Holdings Limited for the benefit of the whole group of eligible employees. C&F International Holdings
Limited is 100% owned by C&F Global Limited, which is in turn 100% owned by Zhiwei Zhao. As of December 31, 2016, restricted
stock awards have been allotted to selected employees pursuant to the 2007 Plan.
The
table below sets forth the shares issued and allotted to selected employees pursuant to the Plan:
Name
|
|
Number
|
|
|
Percent
|
|
Selected Employees
|
|
|
|
|
|
|
Zhiwei Zhao
|
|
|
8,958,493
|
|
|
|
7.59
|
%
|
Jun (Jeff) Wang
|
|
|
*
|
|
|
|
*
|
|
Caogang Li
|
|
|
*
|
|
|
|
*
|
|
All executive officers as a group (3 persons)
|
|
|
10,558,493
|
|
|
|
8.94
|
%
|
Based
on our operating performance for 2008, 8,658,048 shares were activated as of December 31, 2008. Based on our operating performance
for 2009, no granted shares were activated in 2009.
In
2009, in light of the significant global economic downturn and its impact on our performance, our board amended the Grant Agreement
to extend the Performance Period and the Vesting Term for an additional three years ending on December 31, 2012. Under the amended
agreement any granted shares that are not activated as of December 31, 2009 shall become activated and be eligible to vest based
on the company’s achievement of certain performance targets for 2010, 2011 and 2012. Any granted shares that are activated
but not yet vested as of December 31, 2009, shall continue to be eligible to vest during the remainder of the Vesting Term in
accordance with the terms of the Grant Agreement.
Based
on our operating performance for 2010 and 2011, no more granted shares were activated in 2010 and 2011. The total 8,658,048 shares
that were activated based on our operating performance for 2008 were fully vested as of December 31, 2011. All the shares granted
to C&F International Holdings Limited that have not been activated and vested by the end of calendar year 2012 have been forfeited.
In
June 2014, the Annual General Meeting approved the amendment to the Company’s 2007 Equity Incentive Plan and the Restricted
Stock Issuance and Allocation Agreement of 2007 Equity Incentive Plan. Pursuant to such agreement, together with the remaining
1,900,445 ordinary shares, which were not vested due to the operating performance targets under 2007 Plan not being achieved,
3,000,000 ordinary shares were collectively granted to the employees who were eligible. The fair value of a nonvested share on
the grant date was measured at the quoted market price of the Company's equity shares. The nonvested shares shall become activated
and vest during the period commencing from the grant date and ending on December 31, 2016 based on the Company's achievement of
the performance targets.
As of December 31, 2015, all of the 3,000,000
ordinary shares become activated and vested as one of the performance targets was achieved. As of December 31, 2016, the 1,099,555
vested ordinary shares remain unissued.
2010
Equity Incentive Plan of Rifa Financial
On
November 1, 2010, Rifa Financial granted restricted stock awards representing 15% of its ordinary shares pursuant to the 2010
Equity Incentive Plan of Rifa Financial to awardees who are eligible to participate in the plan. In connection with such awards,
we transferred 15% of the ordinary shares of Rifa Financial to an entity representing the eligible awardees. In order to bind
those awardees together to promote the common interests of the awardees, Rifa Financial and the Company, the ordinary shares were
transferred to, and are held by, Hopewin Asia Limited, which was incorporated in BVI, on behalf of and exclusively for the benefit
of the whole group of awardees eligible to participate in the plan. We believe such incentive plan will attract, maintain and
motivate our team, and we believe the plan is in our best interests and the best interests of our stockholders.
C.
Board practices.
In
2016, our directors met in person or passed resolutions by unanimous written consent total of five times. No director is entitled
to any severance benefits upon termination of his directorship with us. Our board of directors has also concluded that Dr. Zheng
(James) Chen meets the criteria for an “audit committee financial expert” as established by the SEC.
Board
committees
Our
board of directors has established an audit committee, a compensation committee and a nominations committee.
Audit
committee.
Our audit committee currently consists of Dr. Zheng (James) Chen, Mr. Jian Wang and Dr. Yaowei Zhang. Our board
of directors has determined that all of our audit committee members are “independent directors” within the meaning
of Nasdaq Listing Rule 5605(a)(2) and meet the criteria for independence set forth in Section 10A(m)(3) of the U.S. Securities
Exchange Act of 1934, or the Exchange Act. Our audit committee is responsible for, among other things:
●
|
recommending
to our shareholders, if appropriate, the annual re-appointment of our independent registered public accounting firm and pre-approving
all auditing and non-auditing service fees permitted to be performed by the independent registered public accounting firm;
|
|
|
●
|
annually
reviewing an independent registered public accounting firm’s report describing the independent registered public accounting
firm’s internal quality-control procedures, any material issues raised by the most recent internal quality control review,
or peer review, of the independent registered public accounting firm and all relationships between the independent registered
public accounting firm and our company;
|
|
|
●
|
setting
clear hiring policies for employees or former employees of the independent registered public accounting firm;
|
|
|
●
|
reviewing
with the independent registered public accounting firm any audit problems or difficulties and management’s response;
|
|
|
●
|
reviewing
and approving all proposed related-party transactions, as defined in Item 404 of Regulation S-K under the U.S. securities
laws;
|
|
|
●
|
discussing
the annual audited financial statements with management and the independent registered public accounting firm;
|
|
|
●
|
discussing
with management and the independent registered public accounting firm major issues regarding accounting principles and financial
statement presentations; reviewing reports prepared by management or the independent auditors relating to significant financial
reporting issues and judgments;
|
|
|
●
|
reviewing
reports prepared by management or the independent registered public accounting firm relating to significant financial reporting
issues and judgments;
|
●
|
discussing
earnings press releases, as well as financial information and earnings guidance provided to analysts and rating agencies;
|
|
|
●
|
reviewing
with management and the independent registered public accounting firm the effect of regulatory and accounting initiatives,
as well as off-balance sheet structures on our financial statements;
|
|
|
●
|
discussing
policies with respect to risk assessment and risk management;
|
|
|
●
|
reviewing
major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control
deficiencies;
|
|
|
●
|
timely
reviewing annual reports from the independent registered public accounting firm regarding all critical accounting policies
and practices to be adopted by our company, all alternative treatments of financial information within U.S. GAAP that have
been discussed with management and all other material written communications between the independent registered public accounting
firm and management;
|
●
|
establishing
procedures for the receipt, retention and treatment of complaints received from our employees regarding accounting, internal
accounting controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding
questionable accounting or auditing matters;
|
|
|
●
|
annually
reviewing and reassessing the adequacy of our audit committee charter;
|
|
|
●
|
such
other matters that are specifically delegated to our audit committee by our board of directors from time to time;
|
|
|
●
|
meeting
separately, periodically, with management and the independent registered public accounting firm; and
|
|
|
●
|
reporting
regularly to the full board of directors.
|
Compensation
committee.
Our current compensation committee consists of Mr. Jian Wang and Dr. Yaowei Zhang. Our board of directors has determined
that all of our compensation committee members are “independent directors” within the meaning of Nasdaq Listing Rule
5605(a) (2). Our compensation committee is responsible for:
●
|
determining
and recommending the compensation of our senior management;
|
|
|
●
|
reviewing
and making recommendations to our board of directors regarding our compensation policies and forms of compensation provided
to our directors and officers;
|
|
|
●
|
reviewing
and determining bonuses for our officers and other employees;
|
|
|
●
|
reviewing
and determining share-based compensation for our directors, officers, employees and consultants;
|
|
|
●
|
administering
our equity incentive plans in accordance with the terms thereof; and
|
|
|
●
|
such
other matters that are specifically delegated to the compensation committee by our board of directors from time to time.
|
Nominations
committee.
Our current nominations committee consists of Mr. Jian Wang and Dr. Yaowei Zhang. Our board of directors has determined
that all of our nominations committee members are “independent directors” within the meaning of Nasdaq Listing Rule
5605(a) (2). Our nominations committee is responsible for, among other things, selecting and recommending the appointment of new
directors to our board of directors.
Corporate
governance
Our
board of directors has adopted a code of ethics, which is applicable to our senior executive and financial officers. In addition,
our board of directors has adopted a code of conduct, which is applicable to all of our directors, officers and employees. Our
code of ethics and our code of conduct are publicly available on our website.
In
addition, our board of directors has adopted a set of corporate governance guidelines. The guidelines reflect certain guiding
principles with respect to our board’s structure, procedures and committees. The guidelines are not intended to change or
interpret any law, or our memorandum and articles of association.
Duties
of directors
Under
Hong Kong law, our directors have a duty of loyalty to act honestly in good faith with a view to our best interests. Our directors
also have a duty to exercise the care, diligence and skills that a reasonable person with that director’s qualifications
and experience would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance
with our memorandum and articles of association.
The
functions and powers of our board of directors include, among others:
●
|
convening
shareholders’ meetings and reporting its work to shareholders at such meetings;
|
|
|
●
|
implementing
shareholders’ resolutions;
|
|
|
●
|
determining
our business plans and investment proposals;
|
|
|
●
|
formulating
our profit distribution plans and loss recovery plans;
|
|
|
●
|
determining
our debt and finance policies and recommending proposals for the increase or decrease in our share capital and the issuance
of debentures;
|
|
|
●
|
formulating
our major acquisition and disposition plans, and plans for consolidation, division or dissolution;
|
|
|
●
|
proposing
amendments to our articles of association; and
|
|
|
●
|
exercising
any other powers conferred at shareholders’ meetings or under our memorandum and articles of association.
|
Terms
of directors and executive officers
We
have a staggered board, which means a subset of our directors (excluding our chief executive officer), retire at every annual
general meeting and the vacancies created by such retirement stand for election. Our chief executive officer will at all times
be a director, and will not retire as a director, so long as he remains our chief executive officer. Accordingly, our directors,
excluding our chief executive officer, hold office until the second annual meeting of shareholders following their election, or
until their successors have been duly elected and qualified. Our board has adopted a policy providing that no director may be
nominated for re-election or re-appointment to our board after reaching 70 years of age, unless our board concludes that such
person’s continued service as our director is in our best interest. Officers are elected by and serve at the discretion
of the board of directors. As of the date on which the statements are made in this annual report, the date of expiration for each
director’s current term of office is set forth below:
Name
|
|
Age
|
|
Position
|
|
Expiration
of Term
|
Zhiwei
Zhao
|
|
53
|
|
Chairman
of the Board of Directors and Chief Executive Officer
|
|
-
|
Jun
(Jeff) Wang
|
|
46
|
|
Director
and Chief Financial Officer
|
|
Date
of 2018 annual general meeting
|
Zheng
(James) Chen
|
|
51
|
|
Director
|
|
Date
of 2018 annual general meeting
|
Jian
Wang
|
|
54
|
|
Director
|
|
Date
of 2017 annual general meeting
|
Yaowei
Zhang
|
|
54
|
|
Director
|
|
Date
of 2017 annual general meeting
|
D.
Employees.
As
of December 31, 2014, 2015 and 2016, we employed approximately 1,500, 1,900 and 1900 employees. China enacted a new Labor
Contract Law, which became effective on January 1, 2008. We have updated our employment contracts and employee handbook and
are in compliance with the new law. We work with the employees to insure that the employees obtain the full benefit of the
new Labor Contract Law and its implementation rules. We consider our relations with our employees to be generally good.
However, as our operations and employee base further expand, we cannot assure you that we will always be able to maintain
good relations with all of our employees. See “Item 3.D. Key Information — Risk Factors — Risks relating
to doing business in the People’s Republic of China — PRC’s new labor law restricts our ability to reduce
our workforce in the PRC in the event of an economic downturn and may increase our labor costs.”
E.
Share ownership.
As
of December 31, 2016, 118,098,018 of our ordinary shares were outstanding, excluding shares issuable upon exercise of outstanding
options. On that date, a total of 21,219,601 of our ADSs were outstanding.
The
following table sets forth information with respect to the beneficial ownership, within the meaning of Section 13(d)(3) of the
Exchange Act of our ordinary shares by:
●
|
each
person known to us to own beneficially more than 5% of our ordinary shares; and
|
|
|
●
|
each
of our directors and executive officers who beneficially own any of our ordinary shares.
|
Beneficial
ownership includes voting or investment power with respect to the securities. Except as indicated below, and subject to applicable
community property laws, the persons named in the table have sole voting and investment power with respect to all ordinary shares
shown as beneficially owned by them. Percentage of beneficial ownership is based on 118,098,018 ordinary shares outstanding.
*
Unless otherwise specified, the business address of each shareholder set forth below is China Finance Online (Beijing) Co., Ltd.,
17th Floor of Fuzhuo Plaza A, No. 28 Xuanwai Street, Xicheng District, Beijing, China 100052.
Number of Shares Beneficially Owned
|
|
|
|
|
|
|
Name
|
|
Number
|
|
|
Percent
|
|
Directors and executive officers
|
|
|
|
|
|
|
Zhiwei Zhao
|
|
|
31,774,383
|
|
|
|
26.91
|
%
|
Zheng (James) Chen
|
|
|
*
|
|
|
|
*
|
|
Jian Wang
|
|
|
*
|
|
|
|
*
|
|
Yaowei Zhang
|
|
|
*
|
|
|
|
*
|
|
Jun (Jeff) Wang
|
|
|
2,537,240
|
|
|
|
2.15
|
%
|
All current directors and executive officers as of December 31, 2016 as a group (5 persons)
|
|
|
34,417,223
|
|
|
|
29.14
|
%
|
|
|
|
|
|
|
|
|
|
5% Shareholder
|
|
|
|
|
|
|
|
|
Zhiwei Zhao (1)
|
|
|
31,774,383
|
|
|
|
26.91
|
%
|
IDG Technology Venture Investment, LP (2)
|
|
|
6,723,115
|
|
|
|
5.69
|
%
|
IDG Technology Venture Investment, Inc. (3)
|
|
|
4,670,505
|
|
|
|
3.95
|
%
|
Jianping Lu (4)
|
|
|
7,156,121
|
|
|
|
6.06
|
%
|
Ling Zhang (5)
|
|
|
8,746,370
|
|
|
|
7.41
|
%
|
None
of our existing shareholders has voting rights that differ from the voting rights of other shareholders. We are not aware of any
arrangement that may, at a subsequent date, result in our change in control.
*
|
Upon
exercise of all options currently exercisable or vesting within 60 days of December 31, 2016, would beneficially own less
than 1% of our ordinary shares.
|
|
|
(1)
|
Mr.
Zhiwei Zhao is considered the beneficial owner of 31,774,383 ordinary shares of the Company, which consists of (i) 10,558,493
ordinary shares issued by the Company to C&F International Holdings Limited, whose parent company C&F Global Limited
is wholly held by Mr. Zhiwei Zhao, on behalf of and exclusively for the benefit of the Company’s employees pursuant
to the Company’s 2007 Plan and related Restricted Stock Issuance and Allocation Agreement; All the shares granted to
C&F International Holdings Limited that have not been activated and vested by the end of calendar year 2012 have been
forfeited to the company; (ii) 11,000,000 ordinary shares from IDG Technology Venture Investment, Inc. as of December
31, 2016 to Grand Continental Holdings Limited, a British Virgin Islands company wholly held by Mr. Zhiwei Zhao, as disclosed
in a Schedule 13D/A filed with the SEC on November 14, 2011; (iii) 7,101,490 ordinary shares from Vertex Technology Fund (III)
Ltd. as of December 31, 2016 to Grand Continental Holdings Limited, a British Virgin Islands company wholly held by Mr. Zhiwei
Zhao, as disclosed in a Schedule 13D/A filed with the SEC on August 6, 2013; and (iv) 3,114,400 ordinary shares considered
beneficially owned by Zhiwei Zhao upon exercise of all options and restricted shares exercisable or vesting within 60 days
of December 31, 2016.
|
(2)
|
Includes
6,723,115 ordinary shares held by IDG Technology Venture Investment, LP. as of December 31, 2016 in the form of 1,344,623
ADSs, according to a Schedule 13G/A filed with the SEC dated February 8, 2013. The general partner of IDG Technology Venture
Investment, LP is IDG Technology Venture Investments, LLC. Chi Sing Ho and Quan Zhou are managing members of IDG Technology
Venture Investments, LLC, both of whom disclaim beneficial ownership of our shares held by IDG Technology Venture Investments,
LLC. The registered address of IDG Technology Venture Investment, LP is One Exeter Plaza, Boston, MA 02109, U.S.A.
|
|
|
(3)
|
Includes
4,670,505 ordinary shares held by IDG Technology Venture Investment, Inc. as of December 31, 2016 in the form of 934,101 ADSs,
according to a Schedule 13G/A filed with the SEC dated February 8, 2013. IDG Technology Venture Investment, Inc. is a wholly
owned by International Data Group, Inc., whose controlling shareholder is Patrick J. McGovern. Patrick J. McGovern is citizen
of the United States of America. IDG Technology Venture Investment, Inc. and International Data Group, Inc. are each organized
under the laws of the Commonwealth of Massachusetts. The registered address of IDG Technology Venture Investment, Inc. is
One Exeter Plaza, Boston, MA 02109, U.S.A.
|
|
|
(4)
|
Includes
(i) 4,028,156 ordinary shares held by Cast Technology, Inc.; and (ii) 3,127,965 ordinary shares held by Fanasia Capital Limited.
Both Cast Technology, Inc. and Fanasia Capital Limited are held 45% and 55% by Jianping Lu and Ling Zhang, respectively.
|
|
|
(5)
|
Includes
(i) 4,923,302 ordinary shares held by Cast Technology, Inc.; and (ii) 3,823,068 ordinary shares held by Fanasia Capital Limited.
Both Cast Technology, Inc. and Fanasia Capital Limited are held 45% and 55% by Jianping Lu and Ling Zhang, respectively.
|
ITEM
7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major shareholders.
As
of December 31, 2016, we had 118,098,018 ordinary shares issued and outstanding, and JP Morgan Chase Bank N.A., as the depository
of our ADS facility, was the only record holder of our ordinary shares in the United States, holding approximately 89.84% of our
total outstanding ordinary shares. The number of beneficial owners of our ADSs in the United States is likely much larger than
the one record holder of our ordinary shares in the United States.
See “Item 6.E. Directors, Senior Management and Employees — Share Ownership.”
B.
Related party transactions
.
See
“Item 4.C. Information on the Company — Organizational Structure.”
The
English translation of the VIE contracts are attached as Exhibits 4.4-4.85 and Exhibits 4.141-4.152 to this Annual Report
on Form 20-F and incorporated herein by reference.
Our
subsidiaries, consolidated affiliated entities, and the subsidiaries of the consolidated affiliated entities have engaged, during
the ordinary course of business, in a number of customary transactions with each other. All of these inter-company balances have
been eliminated in consolidation.
As
of December 31, 2014, 2015 and 2016, we had $2.4 million, nil and nil, respectively due from related parties. It represented the
interest free loans to the noncontrolling shareholders. All the loans were for temporary cash turnover purpose and were received
in the first quarter of 2015. As of December 31, 2014, 2015 and 2016, we also had $0.9 million, $0.9 million and nil, respectively
due to related parties.
C.
Interests of experts and counsel.
Not
applicable
ITEM
8. FINANCIAL INFORMATION
A.
Consolidated financial statements and other financial information.
We
have appended consolidated financial statements filed as part of this annual report.
Legal
Proceedings
Class
Action against the Company
The Company was named as a defendant in
a putative securities class action, Wang, et al., v. China Finance Online Co. Limited, 1:15-cv-07894-RMB. The original complaint
was filed on June 5, 2015 in the Central District of California. The case was subsequently consolidated with several other similar
actions and transferred to the Southern District of New York, where an amended consolidated complaint was filed in December 2015.
The amended consolidated complaint alleged that the Company violated Exchange Act Section 10(b) and Rule 10b-5 by failing to disclose
certain of its transactions involving Langfang Shengshi Real Estate Development Co. Limited as related party transactions.
The amended consolidated complaint also
made claims under Exchange Act Section 10(b) and Rule 10b-5 against certain of the Company’s current officers and its current
and former auditors and under Exchange Act Section 20(a) against certain of its current officers and former directors. Lead plaintiffs
subsequently voluntarily dismissed (without prejudice) all defendants other than the Company from the action. The Company filed
a motion to dismiss the complaint on April 8, 2016, to which plaintiffs filed an opposition on May 6, 2016 and the Company filed
a reply on May 13, 2016.
During a mediation session in May 2016,
the parties agreed to settle the action for $3.0 million. The settlement was preliminarily approved on November 18, 2016 and notice
of the settlement was provided to putative class members. No class members objected to the settlement and none requested exclusion.
The settlement includes a release of all claims asserted in the Complaint (or any of the previous versions of the complaint) or
all claims that could have been asserted based on the same operative facts at issue in the Complaint. This release applies not
only as to the Company, but also as to individuals and entities included within the definition of “Releasees,” which
definition includes, among others, current and former officers and directors of the Company.
Following a March 21, 2017 fairness hearing,
an order was entered on March 24, 2017 approving the settlement. The order reflects that a judgment in the action will be entered
after lead plaintiffs file their motion for final distribution of the settlement amount, which is due on or before June 19, 2017.
Assuming the court enters the judgment as anticipated by the settlement approval order and there are no appeals, the approval
of the settlement will become final (and no longer subject to appeal) 30 days after the judgment is entered.
Disciplinary Action by the SFC
Rifa Futures resolved a disciplinary action
with the SFC on April 12, 2017. The disciplinary action was instituted against Rifa Futures by the SFC under section 194 of the
Securities and Futures Ordinance with respect to Rifa Futures’ internal control deficiencies during the period between January
1, 2014 and July 31, 2014 (the “Relevant Period”). The SFC found that during the Relevant Period, Rifa Futures failed
to take sufficient steps to mitigate the risk of unlawful money remittance when handling third party deposits and transfers to
be in compliance with the applicable regulatory requirements. The SFC issued a press release on April 12, 2017 reprimanding Rifa
Futures and announcing a fine against Rifa Futures in the amount of HK$3 million. In the press release, the SFC also acknowledged
that (i) Rifa Futures has taken steps to remediate its internal control deficiencies; (ii) Rifa Futures cooperated with the SFC
in resolving the disciplinary proceeding; (iii) Rifa Futures agreed to engage an independent reviewer to conduct a review of its
internal controls; and (iv) Rifa Futures has an otherwise clean disciplinary record.
All the officers and other key staff responsible
for the internal control deficiencies that are the subject of the disciplinary action have ceased to be employed by Rifa Futures.
The HK$3 million fine has been reflected in the financial results in 2016.
Other Litigations against the Company’s Subsidiaries
or PRC Affiliates
From time to time, we have
been involved in litigation or other disputes regarding, among other things, copyright infringement. In a copyright infringement
dispute, we are claimed for a public apology for the violation, and a damage of $7.7 million (RMB50.0 million, equivalently).
Through a series of litigation proceedings, among other things, cross-examination, China International Capital Corporation Limited
(“CICC”) currently has lower the claim to RMB10.0 million. The case was still pending as of December 31, 2016.
For many of these legal proceedings, we
are currently unable to estimate the reasonably possible loss or a range of reasonably possible loss as the proceedings are in
the early stages, or there is a lack of clear or consistent interpretation of laws specific to the industry-specific complaints
among different jurisdictions. As a result, there is considerable uncertainty regarding the timing or ultimate resolution of such
proceedings, which includes eventual loss, fine, penalty or business impact, if any, and therefore, an estimate for the reasonably
possible loss.
The ultimate outcome of any litigation
can have an adverse impact on our business because of defense costs, negative publicity, diversion of management resources
and other factors. The claims of infringement of intellectual property rights may harm our business and reputation. See
“Item 3.D. Risk Factors — Risks Related to Our Business — We have been and may continue to be subject to
intellectual property infringement claims, which may force us to incur substantial legal expenses and, if determined
adversely against us, may materially disrupt our business.”
Dividend
Policy
We
currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business
and do not anticipate paying any cash dividends on our ordinary shares, or indirectly on our ADSs, for the foreseeable future.
Investors seeking cash dividends should not purchase our ADSs. Future cash dividends, if any, will be at the discretion of our
board of directors and will depend upon our future operations and earnings, capital requirements and surplus, general financial
condition, contractual restrictions and other factors as our board of directors may deem relevant. In addition, we can pay dividends
only out of our profit or other distributable reserves. Any dividend we declare will be paid to the holders of ADSs, subject to
the terms of the deposit agreement, to the same extent as holders of our ordinary shares, less the fees and expenses payable under
the deposit agreement. Other distributions, if any, will be paid by the depositary to holders of our ADSs in any means it deems
legal, fair and practical. Any dividend will be distributed by the depositary, in the form of cash or additional ADSs, to the
holders of our ADSs. Cash dividends on our ADSs, if any, will be paid in U.S. dollars.
B.
Significant changes since December 31, 2016
.
Except
as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated
financial statements included in this annual report.
ITEM
9. THE OFFER AND LISTING
A.
Offering and listing details.
Our
ADSs, each representing five of our ordinary shares, have been listed on the NASDAQ Global Market (known as the Nasdaq National
Market prior to July 1, 2006) since October 15, 2004. Effective January 3, 2011, our ADSs have been elevated to trade on the NASDAQ
Global Select Market. Our ADSs trade under the symbol “JRJC”.
The
following table provides the high and low trading prices for our ADSs on NASDAQ for (i) the years 2012, 2013, 2014, 2015 and 2016;
(ii) each of the quarters since the first quarter in 2015; and (iii) each of the six months since October 2016.
|
|
Trading
Price
|
|
|
|
High
|
|
|
Low
|
|
Yearly highs and lows
|
|
|
|
|
|
|
Year 2012
|
|
|
2.91
|
|
|
|
1.02
|
|
Year 2013
|
|
|
6.45
|
|
|
|
1.14
|
|
Year 2014
|
|
|
11.88
|
|
|
|
2.33
|
|
Year 2015
|
|
|
6.85
|
|
|
|
2.90
|
|
Year 2016
|
|
|
6.10
|
|
|
|
3.48
|
|
Quarterly highs and lows
|
|
|
|
|
|
|
|
|
First Quarter 2015
|
|
|
6.75
|
|
|
|
4.10
|
|
Second Quarter 2015
|
|
|
6.40
|
|
|
|
3.90
|
|
Third Quarter 2015
|
|
|
5.59
|
|
|
|
2.90
|
|
Fourth Quarter 2015
|
|
|
6.85
|
|
|
|
3.37
|
|
First Quarter 2016
|
|
|
6.10
|
|
|
|
4.30
|
|
Second Quarter 2016
|
|
|
6.05
|
|
|
|
3.82
|
|
Third Quarter 2016
|
|
|
5.19
|
|
|
|
4.08
|
|
Fourth Quarter 2016
|
|
|
4.45
|
|
|
|
3.48
|
|
First Quarter 2017
|
|
|
3.65
|
|
|
|
3.01
|
|
Monthly highs and lows
|
|
|
|
|
|
|
|
|
October 2016
|
|
|
4.33
|
|
|
|
3.92
|
|
November 2016
|
|
|
4.34
|
|
|
|
3.66
|
|
December 2016
|
|
|
4.45
|
|
|
|
3.48
|
|
January 2017
|
|
|
3.65
|
|
|
|
3.06
|
|
February 2017
|
|
|
3.55
|
|
|
|
3.01
|
|
March 2017
|
|
|
3.27
|
|
|
|
3.01
|
|
April 2017 (through April 12, 2017)
|
|
|
3.56
|
|
|
|
3.00
|
|
B.
Plan of distribution.
Not
applicable
C.
Markets.
See
“Item 9.A. Offering and listing details.”
D.
Selling shareholders.
Not
applicable
E.
Dilution.
Not
applicable
F.
Expenses of the issue.
Not
applicable
ITEM
10. ADDITIONAL INFORMATION
A.
Share capital.
Not
applicable.
B.
Memorandum and articles of association.
We
incorporate by reference into this annual report on Form 20-F the description of our amended and restated memorandum of association
contained in our registration statement on Form F-1 (File No. 333-119166) filed with the Commission on October 14, 2004. Our shareholders
adopted our amended and restated memorandum and articles of association at an extraordinary shareholder meeting on October 14,
2004.
C.
Material contracts.
We
have not entered into any material contracts other than in the ordinary course of business and other than those described in
“
Item
4. Information on the Company
”
or elsewhere in this annual report on Form 20-F.
D.
Exchange controls.
China’s
government imposes control over the convertibility of RMB into foreign currencies. Under the current unified floating exchange
rate system, the People’s Bank of China publishes a daily exchange rate for RMB, based on the previous day’s dealings
in the inter-bank foreign exchange market. Financial institutions authorized to deal in foreign currency may enter into foreign
exchange transactions at exchange rates within an authorized range above or below the daily exchange rate according to market
conditions.
Pursuant
to the Foreign Exchange Control Regulations issued by the State Council on January 29, 1996 and effective as of April 1, 1996
(and amended on January 14, 1997) and the Administration of Settlement, Sale and Payment of Foreign Exchange Regulations which
came into effect on July 1, 1996 regarding foreign exchange control, or the Regulations, conversion of Renminbi into foreign exchange
by foreign investment enterprises for current account items, including the distribution of dividends and profits to foreign investors
of joint ventures, is permissible upon the proper production of qualified commercial vouchers or legal documents as required by
the Regulations. Foreign investment enterprises are permitted to remit foreign exchange from their foreign exchange bank account
in China upon the proper production of, inter alia, the board resolutions declaring the distribution of the dividend and payment
of profits. Conversion of RMB into foreign currencies and remittance of foreign currencies for capital account items, including
direct investment, loans, security investment, is still subject to the approval of the SAFE, in each such transaction. On January
14, 1997, the State Council amended the Foreign Exchange Control Regulations and added, among other things, an important provision,
as Article 5 provides that the State shall not impose restrictions on recurring international payments and transfers under current
accounts.
Under
the Regulations, foreign investment enterprises are required to open and maintain separate foreign exchange accounts for capital
account items (but not for other items). In addition, foreign investment enterprises may only buy, sell and/or remit foreign currencies
at those banks authorized to conduct foreign exchange business upon the production of valid commercial documents and, in the case
of capital account item transactions, document approval from SAFE.
Currently,
foreign investment enterprises are required to apply to SAFE for “foreign exchange registration certificates for foreign
investment enterprises”. With such foreign exchange registration certificates (which are granted to foreign investment enterprises,
upon fulfilling specified conditions and which are subject to review and renewal by SAFE on an annual basis) or with the foreign
exchange sales notices from the SAFE (which are obtained on a transaction-by-transaction basis), foreign-invested enterprises
may open foreign exchange bank accounts and enter into foreign exchange transactions at banks authorized to conduct foreign exchange
business to obtain foreign exchange for their needs.
On
December 6, 2016, National Development and Reform Commission (“NDRC”), Ministry of Commerce, People’s Bank of
China and SAFE (collectively, “Four Departments”), responded to media inquiries with respect to tightening foreign
investment regulations. In particular, Four Departments specified closer attention shall be paid to the recent tendency of “irrational
oversea investment” in real estate, hotel, film studio, entertainment, sports club and other fields, and the risks underlying
certain types of outbound investments, such as investments of considerable amount unrelated to the investor core business and
investments made by limited partnerships. In addition, closer attention shall be paid to any company group whose parent company
is considerably smaller than the subsidiaries by measure of capitalisation or assets, and any company that applies for foreign
direct investment immediately after its formation. It can be concluded from the answers of these authorities that foreign exchange
control has been tightened from the following perspectives:
●
|
intensified
the review for the authenticity of the projects. SAFE intensified the information sharing
and linking among other ministries and commissions (The People’ Bank of China,
NDRC, Ministry of Commerce) and companies may need to detail the declared projects to
the prepositive procedural departments, NDRC or Ministries of Commerce. On Dec 5, 2016,
NDRC issued the “Notices regarding Adjustment for Oversea Acquisition and Submission
Form of Bidding Project Information Report” (National Development and Reform Commission
Foreign Direct Investment and Investment Overseas Department [2016] No. 2613). The Notices
came up with new requirements for the contents in the oversea investment project information
report. In additional to the documents of intent and material documents that were already
required, audited financial statement and due diligence report of the projects are also
requested. The new requirements reflect the government departments’ attention to
the authenticity, compliance and risks of the oversea investment projects. Banks shall
agree to handle only after the review for the authenticity and compliance of the transaction.
|
|
|
●
|
four
categories to be specially supervised: large amount investment in non-principal industry,
limited partnerships’ investment in foreign countries, “small parent company
with big subsidiary”, “quick establishment and quick exit” and other
potential risks in oversea investment.
|
|
|
●
|
according
to some media, in the event of dealing with a transaction under capital and financial
account, purchasing or paying foreign exchange, or the expense of foreign exchange equals
US$5,000,000 or more (including US$5,000,000) each deal, the banks need to report for
the large amount to the SAFE capital and financial account bureau. After the review for
the authenticity and compliance and approval of relevant departments including Four Departments, the banks shall handle the transaction. The new policy in the report has not been verified
by any public documents nor been denied by the authorities.
|
E.
Taxation.
Hong
Kong taxation
Profits
tax.
No tax is imposed in Hong Kong in respect of capital gains from the sale of property, such as the ordinary shares underlying
our ADSs. However, trading gains from the sale of property by persons carrying on a trade, profession or business in Hong Kong
where such gains are derived from or arise in Hong Kong from such trade, profession or business will be chargeable to Hong Kong
profit tax. Liability for Hong Kong profits tax would therefore arise in respect of trading gains from the sale of ADSs or the
underlying ordinary shares realized by persons in the course of carrying on a business of trading or dealing in securities in
Hong Kong. From the year of assessment 2008/2009, the profits tax rate had been decreased to 16.5% for corporations and 15% for
unincorporated businesses.
In
addition, Hong Kong does not impose withholding tax on gains derived from the sale of stock in Hong Kong companies and does not
impose withholding tax on dividends paid outside of Hong Kong by Hong Kong companies. Accordingly, investors will not be subject
to Hong Kong withholding tax with respect to a disposition of their ADSs or with respect to the receipt of dividends on their
ADSs, if any. No income tax treaty relevant to the acquiring, withholding or dealing in the ADSs or the ordinary shares underlying
our ADSs exists between Hong Kong and the U.S.
Stamp
duty.
Hong Kong stamp duty is generally payable on the transfer of shares in companies incorporated in Hong Kong. The stamp
duty is payable both by the purchaser on every purchase and by the seller on every sale of such shares at the ad valorem rate
of HK$1.00 per HK$1,000 or part thereof, on the higher of the consideration for or the value of the shares transferred. In addition,
a fixed duty, currently of HK$5, is payable on an instrument of transfer of such shares. Where one party to the sale is a non-resident
of Hong Kong and does not pay the required stamp duty, the stamp duty not paid will be assessed on the instrument of transfer
of such shares (if any), and the purchaser will be liable for payment of such stamp duty. A withdrawal of ordinary shares upon
the surrender of ADSs, and the issuance of ADSs upon the deposit of ordinary shares, will also require payment of Hong Kong stamp
duty at the rate described above for sale and purchase transactions, unless such withdrawal or deposit does not result in a change
in the beneficial ownership of shares under Hong Kong law. The issuance of the ADSs upon the deposit of ordinary shares issued
directly to the depositary or for the account of the depositary does not require payment of stamp duty. In addition, no Hong Kong
stamp duty is payable upon the transfer of ADSs effected outside Hong Kong.
U.S.
federal income taxation
This
discussion describes the material U.S. federal income tax consequences of the purchase, ownership and disposition of our ADSs.
This discussion does not address any aspect of U.S. federal gift or estate tax, or the state, local or foreign tax consequences
of an investment in our ADSs. This discussion applies to you only if you hold and beneficially own our ADSs as capital assets
for tax purposes. This discussion does not apply to you if you are a member of a class of holders subject to special rules, such
as:
●
|
dealers
in securities or currencies;
|
|
|
●
|
traders
in securities that elect to use a mark-to-market method of accounting for securities holdings;
|
|
|
●
|
banks
or other financial institutions;
|
|
|
●
|
insurance
companies;
|
|
|
●
|
tax-exempt
organizations;
|
|
|
●
|
regulated
investment companies or real estate investment trusts;
|
|
|
●
|
U.S.
expatriates;
|
|
|
●
|
partnerships
and other entities treated as partnerships for U.S. federal income tax purposes or persons holding ADSs through any such entities;
|
|
|
●
|
persons
that hold ADSs as part of a hedge, straddle, constructive sale, conversion transaction or other integrated investment;
|
|
|
●
|
U.S.
Holders (as defined below) whose functional currency for tax purposes is not the U.S. dollar;
|
|
|
●
|
persons
liable for alternative minimum tax; or
|
|
|
●
|
persons
who actually or constructively own 10% or more of the total combined voting power of all classes of our shares (including
ADSs) entitled to vote.
|
This
discussion is based on the U.S. Internal Revenue Code of 1986, as amended, which we refer to in this discussion as the Code, its
legislative history, existing and proposed regulations promulgated thereunder, published rulings and court decisions, all as currently
in effect. These laws are subject to change, possibly on a retroactive basis. In addition, this discussion relies on our assumptions
regarding the value of our shares and the nature of our business over time. Finally, this discussion is based in part upon the
representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreement will
be performed in accordance with its terms. For U.S. federal income tax purposes, as a holder of ADSs, you are treated as the owner
of the underlying ordinary shares represented by such ADSs.
U.S.
holders are urged to consult their own tax advisor concerning the particular U.S. federal income tax consequences to you of the
purchase, ownership and disposition of our ADSs, as well as the consequences to you arising under the laws of any other taxing
jurisdiction.
For
purposes of the U.S. federal income tax discussion below, you are a “U.S. Holder” if you beneficially own ADSs and
are:
●
|
a
citizen or individual resident of the United States;
|
|
|
●
|
a
corporation, or other entity taxable as a corporation for U.S. federal income purposes, that was created or organized in or
under the laws of the United States or any political subdivision thereof;
|
|
|
●
|
an
estate the income of which is subject to U.S. federal income tax regardless of its source; or
|
|
|
●
|
a
trust if (a) a court within the United States is able to exercise primary supervision over its administration and one or more
U.S. persons have the authority to control all substantial decisions of the trust, or (b) the trust has a valid election in
effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
|
If
you are not a U.S. person, please refer to the discussion below under “Non-U.S. Holders”.
For
U.S. federal income tax purposes, income earned through a foreign or domestic partnership or other flow-through entity is attributed
to its owners. Accordingly, if a partnership or other flow-through entity holds ADSs, the tax treatment of the holder will generally
depend on the status of the partner or other owner and the activities of the partnership or other flow-through entity.
U.S.
Holders
Dividends
on ADSs
We
do not anticipate paying dividends on our ordinary shares or indirectly on our ADSs, in the foreseeable future. See “Item 8.A. Financial Information - Consolidated financial statements and other financial information - Dividend policy”.
Subject
to the “Passive Foreign Investment Company” discussion below, if we do make distributions and you are a U.S. Holder,
the gross amount of any distributions you receive on your ADSs will generally be treated as dividend income if the distributions
are made from our current or accumulated earnings and profits, calculated according to U.S. federal income tax principles. Dividends
will generally be subject to U.S. federal income tax as ordinary income on the day you actually or constructively receive such
income. However, if you are an individual and have held your ADSs for a sufficient period of time, dividend distributions on our
ADSs will generally constitute qualified dividend income taxed at a preferential rate (generally 15% for dividend distributions
before January 1, 2009) as long as our ADSs continue to be readily tradable on NASDAQ and certain other conditions apply. You
should consult your own tax adviser as to the rate of tax that will apply to you with respect to dividend distributions, if any,
you receive from us.
We
do not intend to calculate our earnings and profits according to U.S. tax accounting principles. Accordingly, distributions on
our ADSs, if any, will generally be taxed to you as dividend distributions for U.S. tax purposes. Even if you are a corporation,
you will not be entitled to claim a dividends-received deduction with respect to distributions you receive from us. Dividends
generally will constitute foreign source passive income for U.S. foreign tax credit limitation purposes.
Sales
and other dispositions of ADSs
Subject
to the “Passive Foreign Investment Company” discussion below, when you sell or otherwise dispose of ADSs, you will
generally recognize capital gain or loss in an amount equal to the difference between the amounts realized on the sale or other
disposition and your adjusted tax basis in the ADSs, both as determined in U.S. dollars. Your adjusted tax basis will generally
equal the amount you paid for the ADSs. Any gain or loss you recognize will be long-term capital gain or loss if your holding
period in our ADSs is more than one year at the time of disposition. If you are an individual, any such long-term capital gain
will be taxed at preferential rates. Your ability to deduct capital losses will be subject to various limitations.
Passive
Foreign Investment Company
Based
on the market value of our ADSs and ordinary shares, the composition of our assets and income and our operations, we believe that
for our taxable year ended December 31, 2015 and 2016, we were not a passive foreign investment company (“PFIC”) for
United States federal income tax purposes. A non-U.S. corporation is considered a PFIC for any taxable year if either:
●
|
at
least 75% of its gross income is passive income (the “income test”), or
|
|
|
●
|
at
least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is
attributable to assets that produce or are held for the production of passive income (the “asset test”).
|
We
will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other
corporation in which we own, directly or indirectly, more than 25% (by value) of the shares.
We
must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change. In particular,
because the total value of our assets for purposes of the asset test will generally be calculated using the market price of our
ADSs and ordinary shares, our PFIC status will depend in large part on the market price of our ADSs and ordinary shares which
may fluctuate considerably. Accordingly, fluctuations in the market price of the ADSs and ordinary shares may result in our being
a PFIC for any year. If we are a PFIC for any year during which you hold ADS or ordinary shares, we will generally continue to
be treated as a PFIC for all succeeding years during which you hold ADS or ordinary shares. However, if we cease to be a PFIC,
provided that you have not made a mark-to-market election, as described below, you may avoid some of the adverse effects of the
PFIC regime by making a deemed sale election with respect to the ADSs or ordinary shares, as applicable.
If
we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, you will be subject to special tax rules with
respect to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including
a pledge) of the ADSs or ordinary shares, unless you make a “mark-to-market” election as discussed below. Distributions
you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of
the three preceding taxable years or your holding period for the ADSs or ordinary shares will be treated as an excess distribution.
Under these special tax rules:
●
|
the
excess distribution or gain will be allocated ratably over your holding period for the ADSs or ordinary shares,
|
|
|
●
|
the
amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we became a PFIC,
will be treated as ordinary income, and
|
|
|
●
|
the
amount allocated to each other taxable year will be subject to the highest tax rate in effect for that taxable year and the
interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such
taxable year.
|
The
tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset
by any net operating losses for such years, and gains (but not losses) realized on the sale of the ADSs or ordinary shares cannot
be treated as capital, even if you hold the ADSs or ordinary shares as capital assets.
Alternatively,
a U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock
of a PFIC to elect out of the tax treatment discussed in the two preceding paragraphs. If you make a valid mark-to-market election
for the ADSs or ordinary shares, you will include in income each year an amount equal to the excess, if any, of the fair market
value of the ADSs or ordinary shares as of the close of your taxable year over your adjusted basis in such ADSs or ordinary shares.
You are allowed a deduction for the excess, if any, of the adjusted basis of the ADSs or ordinary shares over their fair market
value as of the close of the taxable year. Such deductions, however, are allowable only to the extent of any net mark-to-market
gains on the ADSs or ordinary shares included in your income for prior taxable years. Amounts included in your income under a
mark-to-market election, as well as gain on the actual sale or other disposition of the ADSs or ordinary shares, are treated as
ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the ADSs or ordinary
shares, as well as to any loss realized on the actual sale or disposition of the ADSs or ordinary shares, to the extent that the
amount of such loss does not exceed the net mark-to-market gains previously included for such ADSs or ordinary shares. Your basis
in the ADSs or ordinary shares will be adjusted to reflect any such income or loss amounts. If you make such a mark-to-market
election, tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us (except
that the lower applicable capital gains rate would not apply).
The
mark-to-market election is available only for “marketable stock” which is stock that is traded in other than
de
minimis
quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange
or other market, as defined in applicable Treasury regulations. We expect that the ADSs will continue to be listed on the Nasdaq
National Market, which is a qualified exchange for these purposes, and, consequently, assuming that the ADSs are regularly traded,
if you are a holder of ADSs, it is expected that the mark-to-market election would be available to you were we to become a PFIC.
Alternatively,
if a non-U.S. corporation is a PFIC, a U.S. Holder may avoid the PFIC tax consequences described above in respect to its ADSs
and ordinary shares by making a timely “qualified electing fund”, or QEF, election. In order to comply with the requirements
of a QEF election, a U.S. Holder must receive certain information from us. We, however, currently do not intend to prepare or
provide such information.
If
you hold ADSs or ordinary shares in any year in which we are a PFIC, you will be required to file Internal Revenue Service Form
8621 regarding distributions received on the ADSs or ordinary shares and any gain realized on the disposition of the ADSs or ordinary
shares.
You
are urged to consult your tax advisor regarding the application of the PFIC rules to your investment in ADSs or ordinary shares.
Non-U.S.
Holders
If
you beneficially own ADSs and are not a U.S. Holder for U.S. federal income tax purposes (a “Non-U.S. Holder”), you
generally will not be subject to U.S. federal income tax or withholding on dividends received from us with respect to ADSs unless
that income is considered effectively connected with your conduct of a U.S. trade or business and, if an applicable income tax
treaty so requires as a condition for you to be subject to U.S. federal income tax with respect to income from your ADSs, such
dividends are attributable to a permanent establishment that you maintain in the United States. You generally will not be subject
to U.S. federal income tax, including withholding tax, on any gain realized upon the sale or exchange of ADSs, unless:
●
|
that
gain is effectively connected with the conduct of a U.S. trade or business and, if an applicable income tax treaty so requires
as a condition for you to be subject to U.S. federal income tax with respect to income from your ADSs, such gain is attributable
to a permanent establishment that you maintain in the United States; or
|
●
|
you
are a nonresident alien individual and are present in the United States for at least 183 days in the taxable year of the sale
or other disposition and either (1) your gain is attributable to an office or other fixed place of business that you maintain
in the United States or (2) you have a tax home in the United States.
|
If
you are engaged in a U.S. trade or business, unless an applicable tax treaty provides otherwise, the income from your ADSs, including
dividends and the gain from the disposition of ADSs, that is effectively connected with the conduct of that trade or business
will generally be subject to the rules applicable to U.S. Holders discussed above. In addition, if you are a corporation, you
may be subject to an additional branch profits tax at a rate of 30% or any lower rate under an applicable tax treaty.
U.S.
information reporting and backup withholding rules
In
general, dividend payments with respect to the ADSs and the proceeds received on the sale or other disposition of those ADSs may
be subject to information reporting to the IRS and to backup withholding (currently imposed at a rate of 28%). Backup withholding
will not apply, however, if you (1) are a corporation or come within certain other exempt categories and, when required, can demonstrate
that fact or (2) provide a taxpayer identification number, certify as to no loss of exemption from backup withholding and otherwise
comply with the applicable backup withholding rules. To establish your status as an exempt person, you will generally be required
to provide certification on IRS Form W-9, W-8BEN or W-8ECI, as applicable. Any amounts withheld from payments to you under the
backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability, provide that
you furnish the required information to the IRS.
Additional
Reporting Requirements
Effective
for taxable years beginning after March 18, 2010, individuals and, to the extent provided by the U.S. Secretary of Treasury in
regulations or other guidance, certain domestic entities that hold an interest in a “specified foreign financial asset”
will be required to attach certain information regarding such assets to their income tax return for any year in which the aggregate
value of all such assets exceeds US$50,000. A “specified foreign financial asset” includes any depository or custodial
accounts at foreign financial institutions, non-publicly traded debt or equity interests in a foreign financial institution, and
to the extent not held in an account at a financial institution, (i) stocks or securities issued by non-U.S. persons; (ii) any
financial instrument or contract held for investment that has an issuer or counterparty which is non-U.S. person; and (iii) any
interest in a non-U.S. entity. Penalties may be imposed for the failure to disclosure such information regarding specified foreign
financial assets. You are urged to consult your tax advisors regarding the potential reporting requirements that may be imposed
by this new legislation with respect to ownership of ADSs or ordinary shares.
New
Legislation Regarding Medicare Tax
For
taxable years beginning after December 31, 2012, certain U.S. Holders that are individuals, estates or trusts will be subject
to a 3.8% tax on all or a portion of their “net investment income,” which may include all or a portion of their dividends
and net gains from the sale or other disposition of ordinary shares. If you are a U.S. Holder that is an individual, estate or
trust, you should consult your tax advisors regarding the applicability of the Medicare tax to your income and gains in respect
of your investment in our ordinary shares.
HOLDERS
OF OUR ADSs SHOULD CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR
PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES RESULTING FROM PURCHASING, HOLDING OR DISPOSING OF THE ADSs, INCLUDING THE
APPLICABILITY AND EFFECT OF THE TAX LAWS OF ANY STATE, LOCAL OR FOREIGN JURISDICTION AND INCLUDING ESTATE, GIFT AND INHERITANCE
LAWS.
F.
Dividends and paying agents.
Not
applicable.
G.
Statement by experts.
Not
applicable.
H.
Documents on display.
We
have previously filed with the Commission our registration statement on Form F-1, as amended, and our prospectus under the Securities
Act, with respect to our ordinary shares.
We
are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are
required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within
four months after the end of each fiscal year for fiscal years ending on or after December 15, 2012. Copies of reports and other
information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities
maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information regarding the Washington,
D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also maintains a Web site at
www.sec.gov
that
contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with
the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the
furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt
from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
Our
financial statements have been prepared in accordance with U.S. GAAP.
In
accordance with NASDAQ Stock Market Rule 5250(d), we will post this annual report on Form 20-F on our website at
http://ir.chinafinanceonline.com
.
In addition, we will provide hardcopies of our annual report on Form 20-F free of charge to shareholders and ADS holders upon
request.
I.
Subsidiaries information.
Not
Applicable.
ITEM
11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
rate risk
Our
exposure to market rate risk for changes in interest rates relates primarily to the interest income generated by excess cash invested
in short term money market accounts and certificates of deposit, as well as the interest rate exposure related to the loan facility.
We have not used derivative financial instruments in our investment portfolio.
Our future interest income may fall short
of expectations due to adverse changes in interest rates. With respect to cash and cash equivalents as of December 31, 2016, a
hypothetical 1% (100 basis-point) decrease in interest rates would have decreased our interest income for the year then ended
from $1.1 million to $0.4 million. In addition, with respect to cash, cash equivalents and restricted cash as of December 31,
2015, a hypothetical 1% (100 basis-point) decrease in interest rates would have decreased our interest income for the year then
ended from $2.6 million to $1.8 million.
Foreign
currency risk
Substantially
all our revenues and expenses are denominated in Renminbi and HK Dollar, and a substantial portion of our cash is kept in Renminbi
and HK Dollar, but as noted above, a portion of our cash is also kept in U.S. dollars. Although we believe that, in general, our
exposure to foreign exchange risks should be limited, the value of our ADSs, will be affected by the foreign exchange rate between
U.S. dollars and Renminbi. For example, to the extent that we need to convert U.S. dollars into Renminbi for our operational needs
and the Renminbi appreciates against the U.S. dollar at that time, our financial position and the price of our ADSs may be adversely
affected. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of declaring dividends on our ADSs
or otherwise and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of our earnings from our subsidiaries
and controlled entities in China would be reduced.
We have recorded foreign exchange loss of $55,000 in net
loss in 2016, due to the recent revaluation of RMB against the U.S. dollar by Chinese government. On July 21, 2005, the
Chinese government changed its policy of pegging the value of the Renminbi to that of U.S. dollar. Under the new policy, the Renminbi
has fluctuated within a narrow and managed band against a basket of certain foreign currencies. As a result, the Renminbi appreciated
approximately -0.4%, -6.1% and -6.8% against the U.S. dollar in 2014, 2015 and 2016, respectively, and may appreciate or depreciate
significantly in value against the U.S. dollar or other foreign currencies in the long term. Since we have not engaged in any
hedging activities, we may experience economic loss as a result of any foreign currency exchange rate fluctuations. As of December
31, 2016, we had cash, cash equivalents and restricted cash of US$51.3 million (approximately RMB355.6 million) which were denominated
in RMB at the exchange of $1.00 for RMB6.9370 and US$17.4 million which were denominated in foreign currencies. Assuming a 1.0%
depreciation of the RMB against the U.S. dollar, cash, cash equivalents and restricted cash denominated in RMB would have decreased
to $50.8 million as of December 31, 2016.
ITEM
12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A.
Debt Securities
Not
Applicable.
B.
Warrants and Rights
Not
Applicable.
C.
Other Securities
Not
Applicable.
D.
American Depository Shares
Fees
and Charges Payable by ADS Holders
According
to the deposit agreement between us and the depositary, JPMorgan Chase Bank N.A., our ADR holders may have to pay the following
fees and charges to JPMorgan Chase Bank N.A. in connection with ownership of the ADR:
Category
|
|
Depositary
actions
|
|
Associated
fee
|
(a)
Depositing or substituting the underlying shares
|
|
Each
person to whom ADSs are issued against deposits of shares, including deposits and issuances in respect of:
|
|
US$5.00
for each 100 ADSs (or portion thereof) evidenced by the ADRs issued
|
|
|
|
|
|
|
|
●
Share distributions, stock dividend, stock split, merger
|
|
|
|
|
|
|
|
|
|
●
Exchange of securities or any other transaction or event affecting the ADSs or the deposited securities
|
|
|
|
|
|
|
|
(b)
Receiving or distributing dividends
|
|
Distribution
of cash dividends
|
|
US$0.02
or less per ADS
|
|
|
|
|
|
(c)
Selling or exercising rights
|
|
Distribution
or sale of securities, the fee being in an amount equal to the fee for the execution and delivery of ADSs which would have
been charged as a result of the deposit of such securities
|
|
Up
to US$5.00 for each 100 ADSs (or portion thereof)
|
|
|
|
|
|
(d)
Withdrawing an underlying security
|
|
Acceptance
of ADRs surrendered for withdrawal of deposited securities
|
|
US$5.00
for each 100 ADSs (or portion thereof) evidenced by the ADRs surrendered
|
|
|
|
|
|
(e)
Transferring, splitting or grouping receipts
|
|
Transfers
of depositary receipts
|
|
US$1.50
per ADS
|
Category
|
|
Depositary
actions
|
|
Associated
fee
|
(f)
General depositary services, particularly those charged on an annual basis
|
|
Services
performed by the depositary in administering the ADRs
|
|
US$0.02
per ADS (or portion thereof) not more than once each calendar year and payable at the sole discretion of the depositary by
billing ADR Holders or by deducting such charge from one or more cash dividends or other cash distributions
|
|
|
|
|
|
(g)
Expenses of the Depositary
|
|
Expenses
incurred on behalf of ADR Holders in connection with:
|
|
Expenses
payable at the sole discretion of the depositary by billing ADR Holders or by deducting such charges from one or more cash
dividends or other cash distributions
|
|
|
●
Compliance
with foreign exchange control regulations or any law or regulation relating to foreign investment
|
|
|
|
|
|
|
|
|
|
●
The
depositary’s or its custodian’s compliance with applicable law, rule or regulation
|
|
|
|
|
|
|
|
|
|
●
Stock
transfer or other taxes and other governmental charges
|
|
|
|
|
|
|
|
|
|
●
Cable,
telex and facsimile transmission and delivery charges
|
|
|
|
|
|
|
|
|
|
●
Fees
for the transfer or registration of deposited securities in connection with the deposit or withdrawal of deposited securities
|
|
|
|
|
|
|
|
|
|
●
Expenses
of the depositary in connection with the conversion of foreign currency into U.S. dollars (which are paid out of such foreign
currency)
|
|
|
|
|
|
|
|
|
|
●
Any
other charge payable by depositary or its agents in connection with the servicing of the shares or the deposited securities
|
|
|
We
will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements
from time to time between us and the depositary. The fees described above may be amended from time to time.
Fees
and Payments from the Depositary to Us
The
depositary has agreed to reimburse us annually for our expenses incurred in connection with the administration and maintenance
of our ADS facility including, but not limited to, investor relations expenses, exchange listing fees or any other program related
expenses. The depositary has also agreed to provide additional payments to us based on the applicable performance indicators relating
to our ADS facility. There are limits on the amount of expenses for which the depositary will reimburse us. On May 22, 2013, we
entered into a new contract with the depositary with a term of 5 years, which started from May 22, 2013. We were entitled to receive
the maximum amount as US$270,000 for the periods between May 22, 2014 and May 21, 2015, US$289,000 for the year between May 22,
2015 and May 21, 2016 and US$290,000 for the year between May 22, 2016 and May 21, 2017 (after withholding tax) from the depositary
as reimbursement for our expenses incurred in connection with, among other things, investor relationship programs related to the
ADS facility.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES
|
China
Finance Online Co. Limited (“China Finance Online” or the “Company”) was incorporated in Hong Kong on
November 2, 1998. China Finance Online, its subsidiaries, its variable interest entities (“VIEs”) and its VIEs’
subsidiaries (collectively, the "Group") is a leading web-based financial services company in China.
The
company provides Chinese retail investors with online access to securities and commodities trading services, wealth management
products, securities investment advisory services, as well as financial database and analytics services to institutional customers.
The Company’s prominent flagship portal site, www.jrj.com, is ranked among the top financial websites in China.
In
2015, the Company integrated its web-based trading platform
Yinglibao
, its internet-based financial platform that integrates
cash management solutions and mutual fund distribution, into
iTougu
which facilitates communication between securities
investment advisors and their respective clients and followers in real-time and for 24 hours a day, and enabling a vast number
of Chinese individual investors to obtain private advice from thousands of securities investment advisors. The Company also continued
to diversify its product offerings on the wealth management platform,
Yinglibao
. The Company also provides our rapidly
growing commodities brokerage services (formerly known as precious metals business) in mainland China along with brokerage services
in Hong Kong in order to address market demand for alternative investment opportunities. We further diversified our product offering
in the commodities brokerage services with the launch of a heavy oil brokerage business in 2015.
In
2016, the Company continue to develop our wealth management business, securities investment advisory business, financial database
subscription business, individual research tool subscription business, advertisement business, and securities, commodities as
well as futures trading business. In addition, we launched a new business line of online peer-to-peer lending.
In
addition, the Company offers basic financial software, information services and securities investment advisory services to retail
investors in China. Through its subsidiary, Shenzhen Genius Information Technology Co., Ltd., the Company provides financial database
and analytics to institutional customers including domestic financial, research, academic and regulatory institutions. China Finance
Online also provides brokerage services in Hong Kong.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES - continued
|
Details
of China Finance Online's significant subsidiaries, VIEs and VIEs' subsidiaries as of December 31, 2016 were as follows:
Company
name
|
|
Place
of
incorporation or
establishment
|
|
Date
of
incorporation or
acquisition
|
|
legal
ownership
interest
|
|
Principal
activity
|
Subsidiaries:
|
|
|
|
|
|
|
|
|
China
Finance Online (Beijing) Co., Ltd. (“CFO Beijing”)
|
|
Beijing,
PRC
|
|
Jul.
9, 1998
|
|
100%
|
|
N/A
|
Fortune
Software (Beijing) Co., Ltd. (“CFO Software”)
|
|
Beijing, PRC
|
|
Dec. 7, 2004
|
|
100%
|
|
N/A
|
Shenzhen
Genius Information Technology Co., Ltd. (“CFO Genius”)
|
|
Shenzhen, PRC
|
|
Sep. 21, 2006
|
|
100%
|
|
Subscription service
|
Zhengyong
Information & Technology (Shanghai) Co., Ltd. (“CFO Zhengyong”)
|
|
Shanghai, PRC
|
|
Aug. 17, 2008
|
|
100%
|
|
N/A
|
Zhengtong
Information Technology (Shanghai) Co., Ltd (“CFO Zhengtong”)
|
|
Shanghai, PRC
|
|
Jun. 24, 2008
|
|
100%
|
|
N/A
|
Rifa
Financial Holdings Limited (“Rifa Financial Holdings”) (Formerly known as “iSTAR Financial Holdings Limited”)
|
|
BVI
|
|
Jul. 16, 2007
|
|
85%
|
|
Investment holdings
|
Rifa
Securities Limited (“Rifa Securities”) (Formerly known as “iSTAR International Securities Co. Limited”)
|
|
Hong Kong, PRC
|
|
Nov. 23, 2007
|
|
85%
|
|
Brokerage service
|
Rifa
Futures Limited (“Rifa Futures”) (Formerly known as “iSTAR International Futures Co. Limited”)
|
|
Hong Kong, PRC
|
|
Apr. 16, 2008
|
|
85%
|
|
Brokerage service
|
Rifa
Credit Limited (“Rifa Credit”) (Formerly known as “iSTAR International Credit Co. Limited”)
|
|
Hong Kong, PRC
|
|
Feb. 10, 2012
|
|
85%
|
|
N/A
|
Rifa
Wealth Management Co. Limited (“Rifa Wealth Management”)
|
|
Hong
Kong, PRC
|
|
Sep.
13, 2016
|
|
85%
|
|
Insurance brokerage
service
|
|
|
|
|
|
|
|
|
|
Variable
interest entities:
|
|
|
|
|
|
|
|
|
Beijing
Fuhua Innovation Technology Development Co., Ltd. (“CFO Fuhua”)
|
|
Beijing, PRC
|
|
Dec. 31, 2000
|
|
Nil
|
|
Web portal and
advertising service
|
Fortune
(Beijing) Qicheng Technology Co., Ltd. (“CFO Qicheng”)
|
|
Beijing, PRC
|
|
Dec. 18, 2009
|
|
Nil
|
|
N/A
|
Shenzhen
Newrand Securities Advisory and Investment Co., Ltd. (“CFO Newrand”)
|
|
Shenzhen, PRC
|
|
Oct. 17, 2008
|
|
Nil
|
|
Securities investment
advising
|
Shanghai
Stockstar Wealth Management Co., Ltd. (“Stockstar Wealth Management”)
|
|
Shanghai, PRC
|
|
Apr. 12, 2011
|
|
Nil
|
|
N/A
|
Beijing
Chuangying Advisory and Investment Co., Ltd. (“CFO Chuangying”)
|
|
Beijing, PRC
|
|
Jan. 9, 2009
|
|
Nil
|
|
P2P lending service
|
Beijing
Huizhi Fortune Technology Co., Ltd. (“CFO Huizhi”)
|
|
Beijing, PRC
|
|
Jun. 14, 2012
|
|
Nil
|
|
N/A
|
Zhongheng Xintai (Beijing) Asset Management Co., Ltd.
(“CFO
Zhonghen Xintai”)
|
|
Beijing, PRC
|
|
Jun. 8, 2016
|
|
Nil
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Subsidiaries
of variable interest entities:
|
|
|
|
|
|
|
|
|
Shenzhen
Newrand Securities Training Center (“CFO Newrand Training”)
|
|
Shenzhen, PRC
|
|
Oct. 17, 2008
|
|
Nil
|
|
Securities investment
training
|
Fortune
(Beijing) Huiying Investment Consulting Co., Ltd. (“CFO Huiying”)
|
|
Beijing, PRC
|
|
Dec. 18, 2009
|
|
Nil
|
|
N/A
|
Shenzhen
Tahoe Investment and Development Co., Ltd (“CFO Tahoe”)
|
|
Shenzhen, PRC
|
|
Sep. 30, 2013
|
|
Nil
|
|
N/A
|
Shenzhen
Shangtong Software Co., Ltd. (“CFO Shenzhen Shangtong”)
|
|
Shenzhen, PRC
|
|
Sep. 23, 2009
|
|
Nil
|
|
N/A
|
Zhengjin
(Tianjin) Precious Metals Investment Co., Ltd. (“CFO Zhengjin Tianjin”)
|
|
Tianjin, PRC
|
|
Jul. 23, 2013
|
|
Nil
|
|
Commodities brokerage
|
Zhengjin
(Beijing) Wisdom Petroleum and Chemical Investment Management Co., Ltd. (“CFO Zhengjin Beijing”)
|
|
Beijing, PRC
|
|
Jan. 13, 2014
|
|
Nil
|
|
Commodities brokerage
|
Yinglibao
(Beijing) Technology Co., Ltd. (“CFO Yinglibao”)
|
|
Beijing, PRC
|
|
Jan. 15, 2014
|
|
Nil
|
|
Internet-based
financial platform
|
Zhengjin
(Qingdao) Wisdom Trading Co., Ltd. (“CFO Zhengjin Qingdao”)
|
|
Qingdao, PRC
|
|
Sep. 4, 2014
|
|
Nil
|
|
Commodities brokerage
|
Zhengjin
(Jiangsu) Precious Metals Co., Ltd. (“CFO Zhengjin Jiangsu”)
|
|
Nanjing, PRC
|
|
Nov. 19, 2014
|
|
Nil
|
|
Commodities brokerage
|
Zhengjin
(Fujian) Precious Metals Co., Ltd. (“CFO Zhengjin Fujian”)
|
|
Fujian, PRC
|
|
Jan. 6, 2013
|
|
Nil
|
|
Commodities brokerage
|
Qingdao
Zhengjin Zhida Trading Co., Ltd. (“CFO Qingdao Zhida”)
|
|
Qingdao, PRC
|
|
Dec. 21, 2015
|
|
Nil
|
|
Commodities brokerage
|
Tibet
Zhisheng Gold Industry Co., Ltd. (“CFO Tibet Zhisheng”)
|
|
Tibet, PRC
|
|
Mar. 18, 2016
|
|
Nil
|
|
Commodities brokerage
|
Qingdao
Zhengjin Taiji Trading Co., Ltd. (“CFO Qingdao Taiji”)
|
|
Qingdao, PRC
|
|
Mar. 23, 2016
|
|
Nil
|
|
Commodities brokerage
|
iTougu
(Beijing) Network Technology Co., Ltd. (“CFO iTougu”)
|
|
Beijing, PRC
|
|
Dec. 8, 2014
|
|
Nil
|
|
Investment advisory
service platform
|
Tibet
Fortune Jinyuan Network Technology Co., Ltd. (“CFO Tibet”)
|
|
Tibet, PRC
|
|
Aug. 22, 2015
|
|
Nil
|
|
N/A
|
Beijing
Zhongjun Sunshine Investment and Management Co., Ltd (“CFO Zhongjun Sunshine”)
|
|
Beijing, PRC
|
|
Sep. 30, 2013
|
|
Nil
|
|
Financial service
|
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES - continued
|
The
consolidated financial statements of the Group include the financial statements of the Company and its controlled operating entities
including the subsidiaries and the variable interest entities for which the Company is the primary beneficiary. A variable interest
entity is the entity in which the Company, through contractual arrangements as the primary beneficiary, bears the risks of, and
enjoys the rewards normally associated with ownership of the entity.
People's
Republic of China ("PRC") regulations prohibit or restrict direct foreign ownership of business entities providing certain
services in PRC, such as internet content service and securities investment advisory service. In order to comply with these regulations,
China Finance Online, through its subsidiaries, entered into contractual arrangements with the Company's VIEs and their equity
owners who are PRC citizens.
The
Group made loans to the shareholders of the VIEs solely for the purposes of capitalizing the VIEs. Pursuant to the loan agreements,
these loans can only be repaid by transferring all of their interests in the VIEs to the Group or a third party designated by
the Group. The Group has entered into proxy agreements or power of attorney and exclusive equity purchase option agreements with
the VIEs and nominee shareholders of the VIEs through the Company's wholly owned significant subsidiaries including CFO Beijing,
CFO Software, CFO Zhengyong and CFO Zhengtong (collectively, the “
WFOEs
” and each a “
WFOE
"). The
foregoing agreements provide the WFOEs the right to direct the activities that most significantly affect the economic performance
of the VIEs and to acquire the equity interests in the VIEs when permitted by the PRC laws, respectively. Certain exclusive agreements
have been entered into with the VIEs through the WFOEs, which obligate the WFOEs to absorb the majority of the risk of loss from
the VIEs' activities and entitle the WFOEs to receive the majority of their residual returns. In addition, the Group has entered
into share pledge agreements for the equity interests in the VIEs held by the shareholders of the VIEs.
Despite
the lack of technical majority ownership, the agreements with the VIEs provide the WFOEs with effective control over and the ability
to receive substantially all of the economic benefits of its VIEs, resembling a parent-subsidiary relationship between the WFOEs
and the VIEs. The shareholders of the VIEs effectively assigned all of their voting rights underlying their equity interest in
the VIEs to the WFOEs. In addition, through the other exclusive agreements, which consist of strategic consulting services agreement,
technical support services agreement and operating support services agreement, the WFOEs demonstrate their ability and intention
to continue to exercise the ability to absorb substantially all of the profits and all of the expected losses of the VIEs. The
VIEs are subject to operating risks, which determine the variability of the Company's interest in those entities. Based on these
contractual arrangements, the Company consolidates the VIEs as required by SEC Regulation SX-3A-02 and Accounting Standards Codification
("ASC") Topic 810 ("ASC 810") because the Company holds all the variable interests of the VIEs through the
WFOEs.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES - continued
|
The
principal terms of the agreements entered into amongst the VIEs, their respective shareholders and the WFOEs are further described
below.
Exclusive
technology consulting and management service agreement
Pursuant
to a series of technology support and service agreements, the WOFEs retain exclusive right to provide the VIEs and their subsidiaries
technology support and consulting services and exclusive management consulting service. As a result of these services, the WOFEs
are entitled to charge the VIEs and their subsidiaries annual service fees. The terms of the strategic consulting services agreement,
the technical support services agreement and the operating support services agreement are twenty, ten and ten years, respectively,
and these agreements will be automatically renewed on applicable expiration dates, unless the contracting WOFE informs the corresponding
VIE its intention to terminate such contract one month prior to the applicable expiration date. Notwithstanding the foregoing,
none of the parties has a right to terminate the service contracts. The principal services agreements that the WOFEs have entered
into with VIEs include:
|
●
|
strategic
consulting services agreement, pursuant to which the amount of the fee to be charged
is 30% of each VIE's income before tax;
|
|
●
|
technical
support services agreement, pursuant to which the amount of the fee to be charged is
30% of each VIE's income before tax; and
|
|
●
|
operating
support services agreement, pursuant to which the amount of the fee to be charged is
40% of each VIE's income before tax.
|
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES - continued
|
Exclusive
purchase right agreement on the equity interest of the VIEs
Pursuant
to the purchase option agreement, the WOFEs have the unconditional right to purchase the entire equity interest in, or all the
assets of the VIEs at a price equal to the total principal amount of the loan lent by the WOFEs to the shareholders of the VIEs
when and if such purchase is permitted by the PRC law or the current shareholders of the VIEs cease to be directors or employees
of the VIEs. The term of the exclusive purchase right agreement is perpetual and can be terminated at the discretion of the WOFEs.
Power
of attorney
Pursuant
to the power of attorney, each of the shareholders of the VIEs have executed an irrevocable power of attorney assigning the WOFEs
or individuals designated by the WOFEs as their attorney-in-fact to vote on their behalf on all matters of the VIEs requiring
shareholder approval under PRC laws and regulations and the articles of association of VIEs.
The
Articles of Incorporation of the VIE state that the major rights of the shareholders include the right to appoint directors, the
general manager and other senior management. Therefore, through the irrevocable power of attorney arrangement, the WOFEs have
the ability to exercise effective control over the VIEs through shareholder votes and, through such votes, to also control the
composition of the board of directors. In addition, the senior management team of the VIEs is the same as that of the WOFEs. The
term of the power of attorney is twenty years and will be automatically renewed on the expiration date. The contract can be terminated
at the discretion of the WOFEs.
Pledge
agreement
Pursuant
to the equity pledge agreement between the WOFEs and the shareholders of the VIEs, the shareholders of the VIEs pledged all of
their equity interests in the VIEs to the WOFEs to guarantee the VIEs' performance of its obligations under the exclusive technology
consulting and service agreement. If the VIEs breach their contractual obligations under that agreement, the WOFEs, as the pledge,
will be entitled to certain rights, including the rights to sell the pledged equity interests. The shareholders of the VIEs agree
that, without prior written consent of the WOFEs, they will not transfer, sell, and dispose of or create any encumbrance on their
equity interest in the VIEs. The term of the pledge agreement is twenty years and will be automatically renewed on the expiration
date, unless the WOFEs inform the VIEs of their intention to terminate the agreement one month prior to the expiration date.
Through
these contractual agreements, the WOFEs have the ability to effectively control the VIEs and are also able to receive substantially
all the economic benefits of the VIEs.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES - continued
|
Details
of significant VIEs and their counterparts which substantially control the VIEs as of December 31, 2016 were as follows:
|
VIE
name
|
|
Contractual
arrangement
|
|
Date
counterpart
|
|
|
|
|
|
|
|
CFO Fuhua
|
|
May 27, 2004
|
|
CFO Beijing
|
|
CFO Newrand
|
|
October 17, 2008
|
|
CFO Zhengyong
|
|
CFO Qicheng
|
|
November 20, 2009
|
|
CFO Chuangying
|
|
CFO Chuangying
|
|
January 9, 2009
|
|
CFO Software
|
|
Stockstar Wealth Management
|
|
April 12, 2011
|
|
CFO Zhengtong
|
|
CFO Zhongheng Xintai
|
|
June 8, 2016
|
|
CFO Glory
|
Risks
in relation to the VIE structure
The
Company's ability to control the VIEs also depends on the power of attorney the WOFEs have to vote on all matters requiring shareholder
approval in the VIEs. As noted above, the Company believes this power of attorney is legally enforceable but may not be as effective
as direct equity ownership.
In
addition, if the legal structure and contractual arrangements were found to be in violation of any existing PRC laws and regulations,
the regulatory authorities may exercise their discretion and
|
●
|
revoke
the business and operating licenses of our PRC subsidiaries or VIEs;
|
|
●
|
restrict
the rights to collect revenues from any of our PRC subsidiaries;
|
|
●
|
discontinue
or restrict the operations of any related-party transactions among our PRC subsidiaries
or VIEs;
|
|
●
|
require
our PRC subsidiaries or VIEs to restructure the relevant ownership structure or operations;
|
|
●
|
take
other regulatory or enforcement actions, including levying fines that could be harmful
to our business; or
|
|
●
|
impose
additional conditions or requirements with which we may not be able to comply.
|
The
imposition of any of these penalties may result in a material adverse effect on the Company's ability to conduct its business.
In addition, if the imposition of any of these penalties causes the Company to lose the rights to direct the activities of the
VIEs and their subsidiaries or the right to receive their economic benefits, the Company would no longer be able to consolidate
the VIEs. The Company does not believe that any penalties imposed or actions taken by the PRC Government would result in the liquidation
of the Company, its subsidiaries, or the VIEs.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES - continued
|
The
Company has consolidated its VIEs because it was the primary beneficiary of those entities. Through the contractual agreements
discussed above, the Company, through its wholly owned subsidiaries, has (1) the power to direct the activities of the VIEs that
most significantly affect the entities' economic performance and (2) the right to receive benefits from the VIEs, therefore it
consolidates the VIEs.
The
consolidated VIEs operate securities investment advisory business and commodities brokerage business. The following table presents
the most important revenue-producing assets to operate commodities brokerage business, which was recognized in the Company's consolidated
financial statements.
|
|
|
December
31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Commodities brokerage business:
|
|
|
|
|
|
|
|
Commodities trading
right
|
|
$
|
966,222
|
|
|
$
|
288,309
|
|
|
Customer
relationship
|
|
|
573,312
|
|
|
|
-
|
|
|
|
|
$
|
1,539,534
|
|
|
$
|
288,309
|
|
The
VIEs also hold important unrecognized revenue-producing assets, such as our domain names and Internet Content Provider Licenses
with respect to
www.jrj.com
and certain value-added technologies, which were also considered revenue-producing assets.
However, none of such assets were recorded on the Company's consolidated balance sheets as such assets were all acquired or internally
developed with insignificant costs and expenses incurred.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES - continued
|
The
following financial statement amounts and balances of the VIEs for which the Company is the primary beneficiary and their subsidiaries
were before intercompany elimination as of and for the years ended:
|
|
|
December
31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
47,788,398
|
|
|
$
|
41,551,367
|
|
|
Restricted cash
|
|
|
-
|
|
|
|
2,483,557
|
|
|
Accounts receivable
– others, net
|
|
|
45,278,278
|
|
|
|
7,031,380
|
|
|
Short-term investment
|
|
|
-
|
|
|
|
16,443,831
|
|
|
Others
|
|
|
3,971,332
|
|
|
|
9,013,619
|
|
|
Total current
assets
|
|
|
97,038,008
|
|
|
|
76,523,754
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and
equipment, net
|
|
|
4,311,095
|
|
|
|
5,103,126
|
|
|
Acquired intangible
assets, net
|
|
|
1,539,534
|
|
|
|
288,309
|
|
|
Cost method investment
|
|
|
554,392
|
|
|
|
1,542,454
|
|
|
Equity method
investment, net
|
|
|
1,228,269
|
|
|
|
1,019,009
|
|
|
Rental deposits
|
|
|
989,383
|
|
|
|
972,252
|
|
|
Guarantee fund deposits
|
|
|
5,850,623
|
|
|
|
5,760,309
|
|
|
Investment in
subsidiaries
|
|
|
43,553,986
|
|
|
|
39,026,188
|
|
|
Deferred
tax assets, non-current
|
|
|
4,982
|
|
|
|
2,230
|
|
|
Total assets
|
|
$
|
155,070,272
|
|
|
$
|
130,237,631
|
|
|
Third-party liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accrued expenses
and other current liabilities
|
|
$
|
20,425,274
|
|
|
$
|
38,761,329
|
|
|
Accounts
payable
|
|
|
3,387,125
|
|
|
|
2,151,134
|
|
|
Total current
liabilities
|
|
|
23,812,399
|
|
|
|
40,912,463
|
|
|
Non-current
liabilities
|
|
|
571,924
|
|
|
|
149,679
|
|
|
Total third-party
liabilities
|
|
$
|
24,384,323
|
|
|
$
|
41,062,142
|
|
|
Inter-company
liabilities
|
|
$
|
44,591,484
|
|
|
$
|
3,397,736
|
|
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES - continued
|
|
|
|
Year
ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
98,207,958
|
|
|
$
|
136,412,062
|
|
|
$
|
71,559,226
|
|
|
Net income (loss)
|
|
$
|
12,305,855
|
|
|
$
|
49,300,399
|
|
|
$
|
(1,815,389
|
)
|
|
|
|
Year
ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities
|
|
$
|
3,204,749
|
|
|
$
|
(835,965
|
)
|
|
$
|
(8,473,669
|
)
|
|
Net cash (used in) provided by investing
activities
|
|
|
(5,685,885
|
)
|
|
|
38,523,306
|
|
|
|
(4,211,878
|
)
|
|
Net cash provided by (used in) financing
activities
|
|
|
1,430,739
|
|
|
|
(6,061,473
|
)
|
|
|
9,559,794
|
|
|
Effect of
exchange rate changes
|
|
$
|
(95,269
|
)
|
|
$
|
(1,452,505
|
)
|
|
$
|
(3,111,278
|
)
|
There
are no consolidated VIE's assets that are collateral for the VIE's obligations and can only be used to settle the VIE's obligations.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of presentation
The
consolidated financial statements of the Group have been prepared in accordance with accounting principles generally accepted
in the United States of America ("U.S. GAAP").
Basis
of consolidation
The
consolidated financial statements include the financial statements of China Finance Online, its subsidiaries, VIEs for which the
Company is the primary beneficiary and those VIEs' subsidiaries. All inter-company transactions and balances have been eliminated
upon consolidation.
Cash
and cash equivalents
Cash
and cash equivalents consist of cash on hand and highly liquid investments which are unrestricted as to withdrawal or use, and
which have original maturities of three months or less when purchased.
Restricted
cash
Restricted
cash is the deposit in bank accounts for providing guarantee to perform the contract obligation related to “Yinglibao”,
a mobile-based financial platform that integrates cash management solutions and mutual fund distribution.
Fair
value measurement
Fair
value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When determining the fair value measurements for assets and liabilities required
or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact
and it considers assumptions that market participants would use when pricing the asset or liability.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
Fair
value measurement
- continued
Authoritative
literature provides a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the
lowest level of input that is significant to the fair value measurement as follows:
Level
1-inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
Level
2-inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments
in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the
market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level
3-inputs are generally unobservable and typically reflect management's estimates of assumptions that market participants would
use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option
pricing models, discounted cash flow models, and similar techniques.
Financial
instruments include cash and cash equivalents, restricted cash, accounts receivable, short-term investment, cost method investment,
equity method investment and accounts payable.
The
carrying values of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their fair
value due to their short-term maturities.
The Group’s short-term
investment includes trading securities, held-to-maturity securities, and available-for-sale securities. See Note 7 and Note 8
for further discussion.
The carrying value of the cost
method investment was $554,392 and $1,542,454 as of December 31, 2015 and 2016, which approximate the fair value of the investment
based on the valuation performed by the Company. See Note 8 and Note 9 for further discussion.
The carrying value of the equity
method investment was $1,228,269 and $1,019,009 as of December 31, 2015 and 2016, which approximate the fair value of the investments
at the acquired date and subsequently adjusted as the net assets of the investee change through the earning of income. See Note
8 and Note 10 for further discussion.
The Group measures certain assets,
including intangible assets and goodwill at fair value on a nonrecurring basis when they are deemed to be impaired. The fair values
of goodwill and intangible assets are determined based on valuation techniques using the best information available, and may include
management judgments, future performance projections, See Note 8 for further discussion. The Group measured the fair value for
the assets acquired, with the assistance of an independent valuation firm, using discounted cash flow techniques, and these assets
were valued using Level 3 inputs, because the Group used unobservable inputs to value them, reflecting the Group's assessment
of the assumptions market participants would use in valuing these purchased intangible assets. The Group does not use derivative
instruments to manage risks.
Trust bank balances held on
behalf of customers
Trust bank balances held on behalf
of customers consist two parts: i) Rifa Securities and Rifa Futures receive fund from customers for purpose of buying or selling
securities and futures on behalf of its customers and deposits the fund in its interest-bearing bank account; ii) The funds received
by CFO Newrand from customers who purchase mutual funds and other wealth management products which are deposited in a trust bank
account.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
Use
of estimates
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 revenue and expenses in the financial statements and accompanying notes. Significant
accounting estimates reflected in the Group's financial statements include account receivable, cost method investment, equity
method investment, impairment of goodwill and long-lived assets, income taxes, share-based compensation and purchase price allocation.
Actual results could differ from those estimates.
Short-term
investments
Short-term
investments comprise marketable debt and equity securities, which are classified as trading, held-to-maturity or available-for-sale.
Trading securities are securities that are bought and held principally for the purpose of selling them in the near term and are
reported at fair value, with unrealized gains and losses recognized in earnings. Short-term investments are classified as held-to-maturity
when the Company has the positive intent and ability to hold the securities to maturity. All of the Company's held-to-maturity
securities are classified as short-term investments on the consolidated balance sheets based on their contractual maturity dates
which are less than one year and are stated at their amortized costs. Short-term investments classified as available for sale
are carried at their fair values and the unrealized gains or losses from the changes in fair values are included in accumulated
other comprehensive income. Available for sale securities are classified as current assets on the accompanying consolidated balance
sheets because they are available for immediate sale.
The
Group reviews its short-term investments for other-than-temporary impairment based on the specific identification method. The
Company considers available quantitative and qualitative evidence in evaluating potential impairment of its short-term investments.
If the cost of an investment exceeds the investment's fair value, the Group considers, among other factors, general market conditions,
government economic plans, the duration and the extent to which the fair value of the investment is less than the cost, and the
Group's intent and ability to hold the investment, in determining if impairment is needed.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
Property
and equipment, net
Property
and equipment, net are carried at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over
the following estimated useful lives:
|
Technology
infrastructure
|
5
years
|
|
Computer
equipment
|
5
years
|
|
Furniture,
fixtures and equipment
|
5
years
|
|
Motor
vehicle
|
5
years
|
|
Leasehold
improvements
|
Shorter
of the lease term or 5 years
|
Acquired
intangible assets, net
Acquired
intangible assets are estimated by management based on the fair value of assets acquired. Identifiable intangible assets are carried
at cost less accumulated amortization. Amortization of definite-lived intangible assets is computed using the straight-line method
over the estimated average useful lives, which are as follows:
|
License
and related trademarks
|
10-15
years
|
|
Completed
technology
|
5
years
|
|
Customer
relationship
|
4-5
years
|
Certain
trademarks resulting from the acquisitions of business and certain trading rights bought by the Group are determined to have indefinite
lives. If an intangible asset is determined to have an indefinite life, it is not amortized until its useful life is determined
to be no longer indefinite.
Guarantee
fund deposits
Guarantee
fund deposits consist of i) the funds deposited with Hong Kong Exchange and Clearing Limited by Rifa Futures, to guarantee its
customers' settlement obligations; ii) the funds deposited with the commodities exchanges as a result of its customers' trading.
The Group needs to deposit certain percentage of its customers' trading margins with the commodities exchanges.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
Impairment
of long-lived assets with definite lives
The
Group reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may no longer be recoverable. When these events occur, the Group compares the carrying value of the long-lived assets
to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition.
If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Group would recognize an
impairment loss based on the fair value of the assets. There were $1,802,125, nil and $491,284 impairment losses in relation to
the long-lived assets with definite lives for the years ended December 31, 2014, 2015 and 2016.
Business
combinations
Business
combinations are recorded using the acquisition method of accounting. The assets acquired, the liabilities assumed, and any noncontrolling
interest of the acquiree at the acquisition date, if any, are measured at their fair values as of that date. Goodwill is recognized
and measured as the excess of the total consideration transferred plus the fair value of any noncontrolling interest of the acquiree,
if any, at the acquisition date over the fair values of the identifiable net assets acquired. Common forms of the consideration
made in acquisitions include cash and common equity instruments. Consideration transferred in a business acquisition is measured
at the fair value as at the date of acquisition.
Where
the consideration in an acquisition includes contingent consideration the payment of which depends on the achievement of certain
specified conditions post-acquisition, the contingent consideration is recognized and measured at its fair value at the acquisition
date and if recorded as a liability it is subsequently carried at fair value with changes in fair value reflected in earnings.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
Impairment
of goodwill and indefinite-lived intangible assets
The
Group performs a qualitative analysis that includes reviewing the carrying value of intangible assets not subject to amortization,
including goodwill, to determine whether impairment may exist, whenever events or changes in circumstances indicate that the carrying
amount of an asset may no longer be recoverable at least annually.
The
excess of the purchase price over the fair value of net assets acquired is recorded on the consolidated balance sheet as goodwill.
After a qualitative analysis indicates an impairment test is needed, the Company completes a two-step goodwill impairment test.
The first step is to compare the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value
of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be
required. If the carrying amount of a reporting unit exceeds its fair value, the second step is to compare the implied fair value
of goodwill to the carrying value of a reporting unit's goodwill. The implied fair value of goodwill is determined in a manner
similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to
the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned
to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying
value of goodwill over the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques,
with the primary technique being a discounted cash flow.
The
impairment test for other intangible assets not subject to amortization consists of a comparison of the fair value of the intangible
asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized
in an amount equal to that excess. The estimates of fair values of intangible assets not subject to amortization are determined
using various discounted cash flow valuation methodologies. Significant assumptions are inherent in this process, including estimates
of discount rates. Discount rate assumptions are based on an assessment of the risk inherent in the respective intangible assets.
The
Group performed the annual impairment tests on December 31 of each year. Based on the Group's assessment, the Group recorded $8,149,525,
nil and $6,659,691goodwill impairment losses during the years ended December 31, 2014, 2015 and 2016, respectively. In addition,
the Group recorded nil, $250,360 and $619,865 impairment loss in relation to intangible assets with indefinite life during the
years ended December 31, 2014, 2015 and 2016.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
Revenue
recognition
Commodities
brokerage business
The
Group derives commission income, carrying charges and trading revenues from its commodities brokerage services.
Commission
income is recognized on a trade basis based on their customers' trading volumes. The commission earned is fixed no matter how
the client's open positions are ultimately settled. Additionally, the Group charges carrying charges to its customers. The commissions
and carrying charges are presented in net revenues in the statement of comprehensive income.
Amounts
are settled with the Exchange by both the Group and the customers and the exchange then settles with any counterparty. The exchange
offsets the Group's gains and losses and amounts receivable and amounts payable from the exchange are presented net on the statement
of financial position as the Group and the exchange settle net.
Trading
gains, net include brokerage fees and margins generated from derivative trades executed with customers and other counterparties
and are recognized when trades are executed. Trading gains, net also include activities where the Group acts as market maker in
the purchase and sale of commodities derivative instruments with customers. These transactions may be offset simultaneously with
another customer or counterparty, offset with similar but not identical positions on an exchange, made from inventory, or may
be aggregated with other purchases to provide liquidity intraday, for a number of days, or in some cases, particularly the commodities
brokerage business, even longer periods (during which fair value may fluctuate). Therefore, trading gains, net includes activities
from the Group's operations of a proprietary commodity trades. Net trading gains are recognized on a trade-date basis and include
realized gains or losses and changes in unrealized gains or losses on investments at fair value.
Unrealized
gains/losses on open positions will be marked to market at each period end and may present trading gains and losses which comprise
both realized and unrealized gains and losses, on a net basis in the statement of comprehensive income. The open transactions
may lead to receivables and/or payables for open transaction which are recorded on the Statement of Financial Position.
Revenue
generally is recognized net of any taxes collected from customers and subsequently remitted to governmental authorities. The following
table presents the totally recognized net revenue from commodities trading business, consisted of:
|
|
|
Years
ended
December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Commodities trading gains
|
|
$
|
53,776,323
|
|
|
$
|
44,841,125
|
|
|
Commission income
|
|
|
22,913,704
|
|
|
|
13,283,933
|
|
|
Carrying charges
|
|
|
3,012,627
|
|
|
|
1,851,659
|
|
|
|
|
$
|
79,702,654
|
|
|
$
|
59,976,717
|
|
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
Revenue
recognition
- continued
Hong
Kong Brokerage services
The
Group also derives commission from its brokerage services provided by the subsidiaries, Rifa Securities and Rifa Futures which
buy or sell securities and future contracts on their customers' behalf. The Group acts as an agent with their customers for these
transactions. The commission income is recognized on a trade date basis as transactions occur.
Financial
information and advisory services
The
Group derives revenue from subscription fees from subscribers to their financial data, information services and investment advisory.
The Group recognizes revenues when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2)
delivery has occurred, (3) the fee is fixed or determinable and (4) collectability is probable. Upon receipt of the upfront cash
payments from the subscriber, the Group will activate the subscriber's account and provide the subscriber the access code. This
will commence a certain subscription period according to the customer demand and the full payment will be deferred and recognized
ratably over the subscription period. The Group recognizes revenue ratably over the life of the arrangement. Estimated refund
of subscription fees is recorded as deduction of revenue and deferred revenue.
The
Group also derives revenue from providing services as information intermediary in online P2P lending business. We procure borrowing
and lending information from independent third parties, and our professional team evaluates and selects the information provided
by third parties, from the perspective of risks. Eventually we display the selected information on the platform of Yinglibao,
which is our online consumer finance marketplace. We charge borrowers interests for facilitating loan transactions, and the revenues
are recognized upon completion of the services.
Advertising
revenue
The
Group derives its advertising fees from advertising sales on their website for a fixed period of time, generally less than one
year. Revenues from advertising arrangements are recognized ratably over the period the advertising is displayed.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
Business
taxes and value added taxes
Starting
from January 1, 2012, the PRC Ministry of Finance and the State Administration of Taxation launched a Business Tax to value added
tax ("VAT") Transformation Pilot Program(the "Pilot Program"), for certain industries in Shanghai. On September
1, 2012, the PRC Ministry of Finance and the State Administration of Taxation extended the Pilot Program to certain industries
in other eight regions, including Beijing and Shenzhen. With the adoption of Pilot Program, our advertising-related revenues and
certain subscription revenues were subject to VAT tax at a rate of 6%. Our advertising- related revenues, certain subscription
revenues and certain commodities brokerage revenues were recognized after deducting VAT and other related surcharges.
Revenue
is recorded net of business taxes when incurred. The Group is subject to business taxes of 3%-5% on taxable services provided
to its customers. During the years ended December 31, 2014, 2015, and 2016, business taxes and related surcharges totaled $1,425,835,
$1,663,869 and $678,594, respectively.
The
Group's certain PRC subsidiaries, VIEs and VIEs' subsidiaries are subject to VAT at a rate of 17% on subscription-based revenue.
VAT payable on subscription-based revenue is computed net of VAT paid on purchases. In respect of subscription-based revenue,
however, if the net amount of VAT payable exceeds 3% of subscription-based revenue, the excess portion of value added tax can
be refunded immediately.
The
Group therefore is subject to an effective net VAT burden of 3% from subscription-based revenue and records VAT on a net basis.
Net amount of value added tax is recorded either in the line item of other current liabilities or prepaid expenses and other current
assets on the face of consolidated balance sheet.
Subscription-based
revenue includes the benefit of the rebate of value added taxes on sale of the downloadable software received from the Chinese
tax authorities as part of the PRC government policy of encouraging software development in the PRC. In 2014, 2015 and 2016, the
Group recognized $425,908, $328,817 and $271,885, respectively, in VAT refunds.
Government
subsidies
The
Group records government subsidies when granted by local government authority and are not subject to future return. The government
subsidies include research & development subsidy, business tax refund, innovation fund and high-tech company subsidy.
Deferred
revenue
Payments
received in advance of for our financial information and advisory service, advertising service are recorded as deferred revenue
until earned and when the relevant revenue recognition requirements have been met.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
Cost
method investment
For
investments in an investee over which the Group does not have significant influence, the Group carries the investment at cost
and recognizes income as any dividends declared from distribution of investee's earnings. The Group reviews the cost method investments
for impairment whenever events or changes in circumstances indicate that the carrying value may no longer be recoverable. An impairment
loss is recognized in earnings equal to the difference between the investment's cost and its fair value at the balance sheet date
of the reporting period for which the assessment is made. The fair value of the investment would then become the new cost basis
of the investment.
Equity
method investment
Under
the equity method, the Group initially records its investment at cost. The Group subsequently adjusts the carrying amount of the
investment to recognize the Company's proportionate share of each equity investee's net income or loss. The Group will discontinue
applying equity method if an investment (and additional financial supports to the investee, if any) has been reduced to zero.
When the equity-method investment in ordinary shares is reduced to zero and further investments are made that have a higher liquidation
preference than ordinary shares, the Group would recognize the loss based on its percentage of the investment with the same liquidation
preference, and the loss would be applied to those investments of a lower liquidation preference first before being further applied
to the investments of a higher liquidation preference. An impairment loss on the equity method investments is recognized in the
consolidated statements of comprehensive income when the decline in value is determined to be other than-temporary.
Foreign
currency translation
The
functional and reporting currency of the Company is the United States dollar ("U.S. dollar"). The financial records
of the Group's subsidiaries, VIEs and VIEs' subsidiaries located in the PRC, Hong Kong and British Virgin Islands are maintained
in their local currencies, the Renminbi ("RMB"), Hong Kong Dollars ("HK$"), and U.S. Dollars ("US$"),
respectively, which are also the functional currencies of these entities.
Monetary
assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency
at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the functional currency during
the year are converted into functional currency at the applicable rates of exchange prevailing when the transactions occurred.
Transaction gains and losses are recognized in the statements of operations.
The
Group's entities with functional currency of RMB and HK$ translate their operating results and financial position into the US$,
the Group's reporting currency. Assets and liabilities are translated using the exchange rates in effect on the balance sheet
date. Revenues, expenses, gains and losses are translated using the average rate for the year. Translation adjustments are report
as cumulative translation adjustments and are shown as a separate component of other comprehensive income.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
Foreign
currency risk
The
RMB is not a freely convertible currency. The State Administration for Foreign Exchange, under the authority of the People's Bank
of China, controls the conversion of Renminbi into foreign currencies. The value of the RMB is subject to changes in central government
policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading
System market. Cash and cash equivalents of the Group included aggregate amounts of $19,726,992, $79,461,280 and $46,295,841 at
December 31, 2014, 2015 and 2016 which were denominated in RMB.
Product
development expenses
Costs
of product development, including investment in data capability, are expensed as incurred until technological feasibility has
been established, at which time any additional costs would be capitalized. The Group essentially completed its development concurrently
with the establishment of technological feasibility, and, accordingly, no costs have been capitalized.
Advertising
costs
The
Group expenses advertising costs as incurred. Total advertising expenses were $7,505,506, $4,908,593 and $5,192,126 for the years
ended December 31, 2014, 2015 and 2016, respectively, and have been included as part of sales and marketing expenses in the accompanying
consolidated statements of operations.
Commissions
paid
Commissions paid are the commission
rebates of our Hong Kong brokerage business and the commissions paid to the sales agents of our commodities brokerage business.
Total commissions paid were $11,546,126, $5,049,661 and $8,903,424 for the years ended December 31, 2014, 2015 and 2016.
Income
taxes
Current
income taxes are provided for in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized
for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements,
net operating loss carry forwards and credits by applying enacted statutory tax rates applicable to future years. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
The
impact of an uncertain income tax position on the income tax return is recognized at the largest amount that is more-likely-than
not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Interest and penalties on income taxes will be classified as a component of the
provisions for income taxes.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
Comprehensive
income (loss)
Comprehensive
income (loss) includes net income (loss), unrealized gain (loss) on short-term investments and foreign currency translation adjustments.
Beginning in January 1, 2012, the Group presents the components of net income, the components of other comprehensive income and
total comprehensive income a single continuous consolidated statement of comprehensive income.
Share-based
compensation
Share-based
compensation with employees is measured based on the grant date fair value of the equity instrument. The Group recognizes the
compensation costs net of an estimated forfeiture rate using the straight-line method for performance based awards or graded vesting
attribution method for service based awards, over the requisite service period of the award, which is generally the vesting period
of the award. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures
differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative
catch-up adjustment in the period of change and will also impact the amount of share-based compensation expense to be recognized
in future periods.
Share
awards issued to nonemployees are measured at fair value at the earlier of the commitment date or the date the services is completed
and recognized over the period the service is provided or as goods is received.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
Net
income (loss) per share
Basic
net income (loss) per share attributable to China Finance Online Co. Limited is computed by dividing net income (loss) attributable
to China Finance Online Co. Limited by the weighted average number of ordinary shares outstanding during the period. Diluted net
income per ordinary share attributable to China Finance Online Co. Limited reflects the potential dilution that could occur if
securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares. The dilutive effect of
the stock options and nonvested shares is computed using treasury stock method.
Concentrations
of credit risk
Financial
instruments that potentially expose the Group to concentrations of credit risk consist principally of cash and cash equivalents,
restricted cash, short-term investments, loan receivable and accounts receivable. The Group places its cash and cash equivalents,
restricted cash, short-term investments in major financial institutions located in PRC and Hong Kong, which management considers
to be of high credit quality.
The
Group conducts ongoing credit evaluations of its customers and generally does not require collateral or other security from its
customers except for the accounts receivable-margin clients which represents the margin loan to customers for securities purchase.
The accounts receivable-margin client was collateralized by the securities the margin client purchased. The Group manages its
credit risk by collecting up-front fee from its customers and billing at regular intervals during the contract period. The Group
assesses the adequacy of allowance for doubtful accounts primarily based upon the age of the receivables and factors surrounding
the credit risk of specific customers.
Details
of clients accounting for 10% or more of accounts receivable are as follows:
|
|
|
Year
ended December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
$
|
4,245,971
|
|
|
|
25.9
|
|
|
$
|
*
|
|
|
|
*
|
|
|
B
|
|
|
*
|
|
|
|
*
|
|
|
$
|
4,010,897
|
|
|
|
18.3
|
|
|
*
|
Represented
less than 10% of consolidated account receivable balance.
|
There
were no customers with 10% or more of the Group's revenues during 2014, 2015, or 2016.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
Recently
accounting pronouncements
In
January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in an effort to clarify the definition
of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted
for as acquisitions (or disposals) of assets or businesses. The amendments of this ASU are effective for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance is not expected to have
a material impact on the Company’s consolidated financial statements.
In
November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU
2016-18”), which requires that a statement of cash flows explain the change during the period in the total of cash, cash
equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described
as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period
and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU do not provide a definition of
restricted cash or restricted cash equivalents. The amendments in this ASU are effective for public business entities for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including
adoption in an interim period. We are currently evaluating the impact of the adoption of ASU 2016-18 on our consolidated financial
statements.
In
August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments” (“ASU 2016-15”), which addresses the following eight specific cash flow issues: debt prepayment
or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates
that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after
a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life
insurance policies (including bank-owned life insurance policies; distributions received from equity method investees; beneficial
interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and
interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently
evaluating the impact of the adoption of ASU 2016-15 on our consolidated financial statements.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
Recently
accounting pronouncements
- continued
In
June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments” (“ASU 2016-13”). Financial Instruments—Credit Losses (Topic 326) amends
guideline on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. For assets
held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires
an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account
that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For
available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will
require that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects entities holding financial
assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans,
debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and
any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this
ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.
In
April 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting” (“ASU 2016-09”), which simplifies several aspects of the accounting for employee
share-based payment transactions. The areas for simplification in ASU 2016-09 include the income tax consequences, classification
of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU will
be effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption
is permitted. We are currently evaluating the impact of the adoption of ASU 2016-09 on our consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02, “Leases (Subtopic 842).” The new guidance requires lessees to recognize
assets and liabilities arising from leases as well as extensive quantitative and qualitative disclosures. A lessee will need to
recognize on its balance sheet a right-of-use asset and a lease liability for the majority of its leases (other than leases that
meet the definition of a short-term lease). The lease liabilities will be equal to the present value of lease payments. The right-of-use
asset will be measured at the lease liability amount, adjusted for lease prepayment, lease incentives received and the lessee’s
initial direct costs. The standard is effective for fiscal years beginning after December 15, 2018, and interim periods within
those fiscal years. Early adoption is permitted. ASU 2016-02 is required to be applied using the modified retrospective approach
for all leases existing as of the effective date and provides for certain practical expedients. The Company is currently evaluating
the impact of adopting ASU 2016-02 on its consolidated financial statements.
In
May 2014, the FASB issued ASU 2014-09 Revenues from Contracts with Customers (Topic 606). The standard’s core principle
is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects
the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies
will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance
obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating
the transaction price to each separate performance obligation. In August 2015, the FASB deferred the effective date of this standard
by one year, which will be for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company
has begun its process of assessing the impact of the guidance. To date the Company's assessment efforts include the identification
of various revenue streams within the scope of the guidance and the evaluation of certain revenue contracts with residents. The
Company continues to evaluate the standard (and related clarifying guidance issued by the FASB) and the allowable methods of adoption.
ASU 2014-09 may be applied retrospectively to each prior period (full retrospective) or retrospectively with the cumulative effect
recognized as of the date of initial application (modified retrospective). The Company is currently evaluating the potential impact
of adopting this new accounting standard.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
Acquisition
of Rifa Wealth Management
On
September 13, 2016, Rifa Finance Limited ("Rifa Finance", formerly known as iSTAR Finance limited), a BVI company of
the Company, acquired 100% of equity interest of Rifa Wealth Management Limited ("Rifa Wealth Management", formerly
named as Financial Solutions Wealth Management Limited), which is an insurance broker registered with the Professional Insurance
Brokers Association ("PIBA") in Hong Kong and is engaged in provision of insurance brokerage. The Company expects to
develop the insurance brokerage business in the future. With the assistance of a third party appraiser, the Company allocated
the purchase price to assets acquired and liabilities assumed as of the acquisition date as follows and goodwill was allocated
to the insurance brokerage business. The net revenue and net loss of Rifa Wealth Management in the amount of $5,305 and $(34,388),
respectively, have been included in the consolidated statement of comprehensive income for the year ended December 31, 2016.
|
|
|
|
|
|
Useful
life
|
|
Purchase price allocation:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
11,170
|
|
|
|
|
Prepaid expenses
and current assets
|
|
|
5,499
|
|
|
|
|
Accounts receivable
|
|
|
1,062
|
|
|
|
|
Property and
equipment, net
|
|
|
219
|
|
|
|
|
Rental deposit
|
|
|
5,130
|
|
|
|
|
Acquired intangible assets:
|
|
|
|
|
|
|
|
PIBA
license
|
|
|
112,144
|
|
|
10 years
|
|
Total assets acquired
|
|
|
135,224
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current
liabilities
|
|
|
(135
|
)
|
|
|
|
Accounts payable
|
|
|
(2,627
|
)
|
|
|
|
Deferred tax
liabilities, non-current
|
|
|
(18,504
|
)
|
|
|
|
Total net assets
|
|
|
113,958
|
|
|
|
|
Goodwill
|
|
|
108,831
|
|
|
|
|
Total purchase price
|
|
$
|
222,789
|
|
|
|
There
were no pro forma results of operations presented since Rifa Wealth Management was incorporated in Hong Kong on March 12, 2015
and has a limited substantial operating history.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
3.
|
ACQUISITIONS
- continued
|
Acquisition
30% of Beijing Zhongjun Sunshine Investment Management Co., Ltd. ("CFO Zhongjun Yangguang
"
)
In
the Second quarter of 2016, Beijing Huizhi Wealth Management Co., Ltd. ("CFO Huizhi"), an affiliate of the Company,
acquired 30% of equity interest of CFO Zhongjun Sunshine), which was previously held 70% of equity interest by CFO Huizhi. Total
cash consideration was $201,816.
Acquisition
of CFO Guiwo
On
April 1, 2015, Fortune Zhengjin Co., Ltd. ("Fortune Zhengjin", formerly known as Huifu Jinyuan Co., Ltd.), an affiliate
of the Company, acquired 100% of equity interest of Shanghai Guiwo Information Technology Co., Ltd. ("CFO Guiwo"), which
was not a significant acquisition. Total cash consideration was $16,278. The Company recognized $19,906 goodwill at the acquisition
date. The results of CFO Guiwo's operations have been included in the consolidated statement of comprehensive income for the year
ended December 31, 2015.
Neither
the results of operations since the acquisition date nor the pro forma results of operations of CFO Guiwo were presented because
of the effects of this acquisition was not significant to the Company's consolidated statement of comprehensive income.
If
comparative financial statements are presented, the pro forma results as though the business combination that occurred during
the current year had occurred as of the beginning of the comparable prior annual reporting period The pro forma results are prepared
for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted,
nor is it indicative of future operating results. There were no pro forma results presented during the years ended December 31,
2015 and 2016.
Fair
value of acquired assets
The
Group measured the fair value for the assets acquired, with the assistance of an independent valuation firm, using discounted
cash flow techniques, and these assets were valued using Level 3 inputs, because the Group used unobservable inputs to value them,
reflecting the Group's assessment of the assumptions market participants would use in valuing these purchased intangible assets.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
On
June 1, 2014, the Group signed a series of contractual arrangements for the business restructure. Pursuant to the arrangements,
the Group disposed (i) its entire 100% equity interest of several VIEs and subsidiaries of VIEs designated under the contract,
(ii) the workforce and assets from the acquisition of Champion Connection's business related to the institutional subscription
services to CFO GB and CFO MF's noncontrolling shareholders. In addition, the Group also should pay 20% net income of three subsidiaries
of VIEs related to the commodities brokerage services designated under the contract, and a cash consideration of $1,620,877, to
get (i) 20% equity interest of CFO Tahoe, and (ii) 40% equity interest of CFO GB and 30% CFO MF. The Group recognized a gain from
the disposal with an amount of $90,666 in the consolidated statement of comprehensive income for the year ended December 31, 2014.
|
|
|
December
31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable-margin clients
|
|
$
|
4,367,417
|
|
|
$
|
7,556,557
|
|
|
Less: Allowance
for doubtful accounts
|
|
|
-
|
|
|
|
-
|
|
|
Accounts receivable-
margin clients, net
|
|
$
|
4,367,417
|
|
|
$
|
7,556,557
|
|
|
Accounts receivable-others
|
|
|
12,048,306
|
|
|
|
14,414,318
|
|
|
Less: Allowance
for doubtful accounts
|
|
|
(40,592
|
)
|
|
|
(3,371
|
)
|
|
Accounts receivable-others,
net
|
|
$
|
12,007,714
|
|
|
$
|
14,410,947
|
|
Accounts
receivable- margin clients represent the receivables derived in the Hong Kong brokerage service in Rifa Securities, which is pledged
by the customer's purchased securities.
Accounts
receivable-others represent the receivables derived in commodities brokerage business and other ordinary business without any
collateral or other security from its customers.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
6.
|
PREPAID
EXPENSES AND OTHER CURRENT ASSETS
|
Prepaid
expenses and other current assets consist of the following:
|
|
|
December
31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Prepayment
of advertising fees
|
|
$
|
209,778
|
|
|
$
|
492,672
|
|
|
Advertising deposit
|
|
|
196,290
|
|
|
|
172,985
|
|
|
Advances
to suppliers
|
|
|
1,272,519
|
|
|
|
701,033
|
|
|
VAT refund receivable
|
|
|
68,429
|
|
|
|
174,542
|
|
|
Interest
receivable (i)
|
|
|
65
|
|
|
|
237,013
|
|
|
Prepayment of office rental
|
|
|
170,536
|
|
|
|
524,805
|
|
|
Advances
to
Yinglibao
|
|
|
-
|
|
|
|
582,440
|
|
|
Advances to employees
|
|
|
331,095
|
|
|
|
747,000
|
|
|
Amounts
due from equity method investee
|
|
|
212,904
|
|
|
|
-
|
|
|
Advances to consulting service fees
|
|
|
-
|
|
|
|
171,052
|
|
|
Insurance
receivable (Note 23)
|
|
|
-
|
|
|
|
3,000,000
|
|
|
Consideration receivable
|
|
|
-
|
|
|
|
166,907
|
|
|
Other current
assets
|
|
|
1,027,031
|
|
|
|
1,270,593
|
|
|
|
|
$
|
3,488,647
|
|
|
$
|
8,241,042
|
|
|
(i)
|
The
Group launched Qiribao, which is a new product on the wealth management platform (Yinglibao), in July 2016. Once an investor
commits funds through the platform of Yinglibao to invest Qiribao, his funds are reinvested by the Group to purchase the held-to-maturity
securities. Interest receivable derived from the held-to-maturity securities purchased by the Group. Due to the compliance
requirement and our strategy, the Group will terminate the purchase of Qiribao starting on April 10, 2017, and all the held-to-maturity
securities will be redeemed by the end of June 30, 2017.
|
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
7.
|
SHORT-TERM
INVESTMENTS
|
As
of December 2016, the Group's short-term investment consisted of held-to-maturity securities and available-for-sale securities
with maturities of one year or less.
The
Group measured the trading securities at fair value based on quoted market prices in an active market. As a result the Group has
determined the valuation of its trading securities falls within Level 1 of the fair value hierarchy. As of December 31, 2015 and
2016, the Group did not hold any trading securities. For the year ended December 31, 2014, 2015 and 2016, the Group recognized
a loss from the trading securities of $47,941, $18,396 and $549,538 as short-term investment income in the consolidated statement
of comprehensive income, respectively.
The Group measured the held-to-maturity
securities at amortized cost basis, which the Group believes a Level 2 valuation. The amount at which an investment is acquired,
adjusted for accretion, amortization, collection of cash, etc. As of December 31, 2016, the Group's held-to-maturity securities
consisted of trust fund and financial product issued by some third party financial service companies carried at amortized cost
of $14,837,949. The Group launched
Qiribao
, which is a new product on the wealth management platform (
Yinglibao
),
in July 2016. Once an investor commits funds through the platform of
Yinglibao
to invest
Qiribao
, his funds are
reinvested by the Group to purchase the held-to-maturity securities. The Group recognized a net gain from the held-to-maturity
securities of $57,941 in the consolidated statement of comprehensive income for the year ended December 31, 2016. Due to the compliance
requirement and our strategy, the Group will terminate the purchase of
Qiribao
starting on April 10, 2017, and all the
held-to-maturity securities will be redeemed by the end of June 30, 2017.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
7.
|
SHORT-TERM
INVESTMENTS - continued
|
The
Group measured the available-for-sale securities at the fair value shown by the financial institution which the Group believes
a Level 2 valuation.
The
following table presents changes in level 2 available-for-sale securities measured on a recurring basis for the twelve-month period
ended December 31, 2015 and 2016, respectively:
|
|
|
December
31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Purchases
|
|
|
105,334,483
|
|
|
|
192,785,066
|
|
|
Redemption
|
|
|
(105,560,595
|
)
|
|
|
(192,022,189
|
)
|
|
Realized gain
|
|
|
234,421
|
|
|
|
870,200
|
|
|
Exchange difference
|
|
|
(8,309
|
)
|
|
|
(27,195
|
)
|
|
Ending balance
|
|
$
|
-
|
|
|
$
|
1,605,882
|
|
The
following table provides additional information on the realized gains of the sale of available-for-sale securities as of December
31, 2015 and 2016, respectively. For purposes of determining gross realized gains, the cost of securities sold is based on specific
identification.
|
|
|
Year
ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange
|
|
|
|
|
Proceeds
|
|
|
Costs
|
|
|
Gains
|
|
|
difference
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
(192,022,189
|
)
|
|
$
|
192,785,066
|
|
|
$
|
870,200
|
|
|
$
|
(27,195
|
)
|
|
Total
|
|
$
|
(192,022,189
|
)
|
|
$
|
192,785,066
|
|
|
$
|
870,200
|
|
|
$
|
(27,195
|
)
|
|
|
|
Year
ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange
|
|
|
|
|
Proceeds
|
|
|
Costs
|
|
|
Gains
|
|
|
difference
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
105,560,595
|
|
|
$
|
105,334,483
|
|
|
$
|
234,421
|
|
|
$
|
(8,309
|
)
|
|
Total
|
|
$
|
105,560,595
|
|
|
$
|
105,334,483
|
|
|
$
|
234,421
|
|
|
$
|
(8,309
|
)
|
The
fair values of trading securities and available-for-sale securities as measured, and held-to-maturity securities as disclosed
are further discussed in Note 8.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
8.
|
FAIR
VALUE MEASUREMENT
|
Fair
value disclosed or measured on a recurring basis
The fair values of the Group's
available-for-sale securities as measured as disclosed are determined based on the discounted cash flow method. The following
table summarizes the Group’s financial assets measured or disclosed at fair value on a recurring basis.
|
|
|
|
|
|
Fair value disclosure
or measurement at
|
|
|
|
|
|
|
|
December
31, 2016 using
|
|
|
|
|
Fair
value at
December 31, 2016
|
|
|
Quoted prices in
active markets for identical assets
(Level
1)
|
|
|
Significant
other observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value disclosure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
66,151,439
|
|
|
$
|
66,151,439
|
|
|
|
-
|
|
|
|
-
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
securities
|
|
|
14,837,949
|
|
|
|
-
|
|
|
|
14,837,949
|
|
|
|
-
|
|
|
Fair
value measurement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
|
1,605,882
|
|
|
|
-
|
|
|
|
1,605,882
|
|
|
|
-
|
|
|
Total assets
measured at fair value
|
|
$
|
1,605,882
|
|
|
|
-
|
|
|
$
|
1,605,882
|
|
|
|
-
|
|
|
|
|
|
|
|
Fair value disclosure
or measurement at
|
|
|
|
|
|
|
|
December
31, 2015 using
|
|
|
|
|
Fair
value at
December 31, 2015
|
|
|
Quoted prices in
active markets for identical assets
(Level
1)
|
|
|
Significant
other observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value disclosure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
85,734,048
|
|
|
$
|
85,734,048
|
|
|
|
-
|
|
|
|
-
|
|
|
Fair
value measurement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
measured at fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
8.
|
FAIR
VALUE MEASUREMENT - continued
|
Fair
value disclosed or measured on a recurring basis
- continued
The
following table presents changes in level 2 available-for-sale securities measured on a recurring basis for the twelve-month period
ended December 31, 2015 and 2016, respectively:
|
|
|
December
31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Purchases
|
|
|
105,334,483
|
|
|
|
192,785,066
|
|
|
Redemption
|
|
|
(105,560,595
|
)
|
|
|
(192,022,189
|
)
|
|
Realized gain
|
|
|
234,421
|
|
|
|
870,200
|
|
|
Exchange difference
|
|
|
(8,309
|
)
|
|
|
(27,195
|
)
|
|
Ending balance
|
|
$
|
-
|
|
|
$
|
1,605,882
|
|
Fair
value disclosed or measured on a non-recurring basis
The
Group measured the fair value for the assets acquired, with the assistance of an independent valuation firm, using discounted
cash flow techniques, and these assets were valued using Level 3 inputs, because the Group used unobservable inputs to value them,
reflecting the Group's assessment of the assumptions market participants would use in valuing these purchased intangible assets.
The
Group measures certain financial assets, including equity method investments and cost method investments, at fair value on a nonrecurring
basis only if an impairment charge were to be recognized. The Group's non-financial assets, such as intangible assets, goodwill
and fixed assets, would be measured at fair value only if they were determined to be impaired on an other-than-temporary basis.
|
|
|
Fair
value at
December 31, 2015
|
|
|
Total
losses
in the year ended
December 31,
2015
|
|
|
Fair
value at
December 31, 2016
|
|
|
Total
losses
in the year ended
December 31,
2016
|
|
|
Non-Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
6,699,620
|
|
|
|
-
|
|
|
|
108,871
|
|
|
|
(6,659,691
|
)
|
|
Intangible Assets
|
|
|
1,539,534
|
|
|
|
(250,360
|
)
|
|
|
396,753
|
|
|
|
(1,111,149
|
)
|
As
of December 31, 2015 and 2016, certain goodwill (Note 14) and intangible assets (Note 13) were written off from their carrying
value to fair value, which was measured using significant unobservable inputs (Level 3), with impairment loss incurred and recorded
in the in the consolidated statement of comprehensive income for the year ended December 31, 2015 and 2016.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
9.
|
COST
METHOD INVESTMENT
|
In
2014, the Group made a cost method investment of $81,064. Furthermore, the Group sold its equity interests in Ocean Butterflies
Holdings Inc. to a third party, which was fully impaired as of December 31, 2011. Gains from the sale of cost method investment
recognized in the consolidated statement of comprehensive income for the year ended December 31, 2014 was $4,337,736, of which
$2,168,868 was remained receivable as of December 31, 2014. In April, 2015, the Group collected $2,168,868, the remaining consideration
related to the sale of Ocean Butterflies Holdings Inc.
In
May 2015, the Group sold a cost method investment to third parties, which was acquired during 2012 and 2013, and recognized a
gain from the sale of cost method investment of $4,648,302 in the consolidated statement of comprehensive income for the year
ended December 31, 2015.
In
December 2015, the Group entered a series of arrangements to dispose its 90% equity interests in CFO Securities Consulting with
third parties. With the assistance of a third party appraiser, the fair value of the 10% retained noncontrolling investment of
$477,393 was recognized in the consolidated balance sheets. (Note 11)
In
April 2016, the Group completed the disposal of its 90% equity interests in Shanghai Meining Computer Software Co., Ltd (''CFO
Meining'') to third parties, based on the arrangements signed in December 2015. With the assistance of a third party appraiser,
the fair value of the 10% retained noncontrolling investment of $807,265 was recognized in the consolidated balance sheets. (Note
11)
In
December 2016, the Group made a cost method investment of $216,232.
As
a result, the carrying balance of cost method investment was $554,392 and $1,542,454 as of December 31, 2015 and 2016, respectively.
The
following table presents changes in cost method investment for the twelve-month period ended December 31, 2015 and 2016, respectively:
|
|
|
December
31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,217,617
|
|
|
$
|
554,392
|
|
|
Acquisitions
|
|
|
-
|
|
|
|
216,232
|
|
|
Consideration of disposal
|
|
|
(5,790,369
|
)
|
|
|
-
|
|
|
Gain from sale of cost method investment
|
|
|
4,648,302
|
|
|
|
-
|
|
|
Fair value adjustment of retained
noncontrolling investment
|
|
|
477,393
|
|
|
|
807,265
|
|
|
Exchange difference
|
|
|
1,449
|
|
|
|
(35,435
|
)
|
|
Ending balance
|
|
$
|
554,392
|
|
|
$
|
1,542,454
|
|
These
investments are recorded as cost method investments, as the Group did not have a significant influence to the investee. There
was no impairment of the Group's cost method investment for the year ended December 31, 2015 and 2016.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
10.
|
EQUITY
METHOD INVESTMENT
|
In
June 2015, the Group paid $307,996 to acquire 20% of an investee's the equity interest. In December 2015, the Group entered a
contractual arrangement with a third party to transfer its 15% equity interests in Aishang (Beijing) Fortune Technology Co., Ltd.
("CFO Aishang"), which was previously owned 55% equity interests by the Group. The remaining 40% equity interests in
CFO Aishang was recorded as equity method investment at the disposal date, as the Group lost control over CFO Aishang. The fair
value of the retained noncontrolling investment of $985,586 was recognized in the consolidated balance sheets, based on the valuation
performed by a third party. (Note 11)
The
Group recognized a loss from equity method investment of $66,970 and $138,124 in the consolidated statement of comprehensive income
for the year ended December 31, 2015 and 2016, respectively. The carrying balance of equity method investment was $1,228,269 and
$1,019,009 as of December 31, 2015 and 2016, respectively.
The
following table presents changes in equity method investment for the twelve-month period ended December 31, 2015 and 2016, respectively:
|
|
|
December
31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
-
|
|
|
$
|
1,228,269
|
|
|
Acquisitions
|
|
|
307,996
|
|
|
|
-
|
|
|
Equity method investment losses
|
|
|
(66,970
|
)
|
|
|
(138,124
|
)
|
|
Fair value adjustment of retained
noncontrolling investment
|
|
|
985,586
|
|
|
|
-
|
|
|
Exchange difference
|
|
|
1,657
|
|
|
|
(71,136
|
)
|
|
Ending balance
|
|
$
|
1,228,269
|
|
|
$
|
1,019,009
|
|
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
In
December, 2015, the Group entered a series of arrangements to dispose its 100% equity interests in Zhongcheng Futong Co., Ltd.
("CFO Zhongcheng") who hold 90% equity interests in CFO Securities Consulting with third parties. Pursuant to the arrangements,
the cash consideration was $9,322,850. With the assistance of a third party appraiser, the fair value of the 10% retained noncontrolling
investment of $477,393 was recognized as a cost method investment in the consolidated balance sheets (Note 9), as the Group did
not have any significant influence over CFO Securities Consulting. The Group recorded a gain on the interest sold and the retained
noncontrolling investment of $9,161,948 in the consolidated statement of comprehensive income for the year ended December 31,
2015.
In April 2016, the Group completed
the disposal of its 100% equity interests in Shanghai Fenxin Information Technology Co., Ltd. ("CFO Fenxin")
who hold 90% equity interests in CFO Meining to third parties, based on the aforementioned a series of arrangements. Pursuant
to the arrangements, the cash consideration was $21,675,518 and completely received in 2016. With the assistance of a third party
appraiser, the fair value of the 10% retained noncontrolling investment of $807,265 was recognized as a cost method investment
in the consolidated balance sheets (Note 9), as the Group did not have any significant influence over CFO Meining. The Group recorded
a gain on the interest sold and the retained noncontrolling investment of $22,445,303 in the consolidated statement of comprehensive
income for the year ended December 31, 2016.
In
December, 2015, the Company entered a contractual arrangement with third parties to transfer its 15% equity interests in CFO Aishang,
which was previously owned 55% equity interests by the Group. Pursuant to the arrangements, the cash consideration was $3,861.
With the assistance of a third party appraiser, the fair value of the 40% retained noncontrolling investment of $985,586 was recognized
as an equity method investment in the consolidated balance sheets (Note 10). The Group recorded a gain on the interest sold and
the retained noncontrolling investment of $837,853 in the consolidated statement of comprehensive income for the year ended December
31, 2015.
In
the second quarter of 2016, the Company fully disposed Henghui (Tianjin) Precious Metals Investment Co., Ltd. ("CFO Henghui")
and Shanghai Yongfu Enterprises Management Consulting Co., Ltd. ("CFO Yongfu") to third parties, respectively. Both
entities were previously owned 57.07% equity interests by the Company. Pursuant to the arrangement, the total cash consideration
was $710,659 and $3,800, respectively, and all the consideration was received in 2016. The Group recorded a loss on the interest
sold and the retained noncontrolling investment of $3,921,387 and $202,363 in the consolidated statement of comprehensive income
for the year ended December 31, 2016, respectively.
Furthermore,
the Company deregistered two insignificant affiliates in the second quarter of 2016, which were both previously owned 70.25% equity
interest by the Group. The Group recorded a gain on the interest sold and the retained noncontrolling investment of $319 in the
consolidated statement of comprehensive income for the year ended December 31, 2016.
In
September, 2016, the Company fully disposed iSTAR International Wealth Management Co., Ltd. ("iSTAR Wealth Management"),
which was previously owned 85% equity interests by the Company to a third party of Tianfeng Securities Co., Ltd.. Pursuant to
the arrangement, the total cash consideration was $3,002,628, of which $2,835,782 was received in 2016. The Group recorded a gain
on the interest sold and the retained noncontrolling investment of $2,245,827 in the consolidated statement of comprehensive income
for the year ended December 31, 2016.
The
gain on the interest sold and the retained noncontrolling investment was calculated as the difference between the aggregate of
(i) the fair value of the consideration transferred, (ii) the fair value of any retained noncontrolling investment in the former
affiliated company on the date the affiliated company was deconsolidated, if any, (iii) the carrying amount of any noncontrolling
interest in the former subsidiary (including any accumulated other comprehensive income or loss attributable to the noncontrolling
interests) on the date the subsidiary is deconsolidated, and (iv) the carrying amount of any noncontrolling interest in the former
affiliated company on the date the affiliated company was deconsolidated, if applicable; and the carrying amount of the former
affiliated company's net assets.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
12.
|
PROPERTY
AND EQUIPMENT, NET
|
Property
and equipment, net consisted of:
|
|
|
December
31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Technology infrastructure
|
|
$
|
10,638,276
|
|
|
$
|
10,344,659
|
|
|
Computer equipment
|
|
|
2,163,506
|
|
|
|
2,123,332
|
|
|
Furniture, fixtures and equipment
|
|
|
3,800,591
|
|
|
|
3,799,154
|
|
|
Motor vehicle
|
|
|
875,729
|
|
|
|
1,040,999
|
|
|
Leasehold
improvements
|
|
|
4,931,813
|
|
|
|
4,751,864
|
|
|
|
|
|
22,409,915
|
|
|
|
22,060,008
|
|
|
Less: accumulated
depreciation
|
|
|
(16,620,381
|
)
|
|
|
(14,661,875
|
)
|
|
|
|
$
|
5,789,534
|
|
|
$
|
7,398,133
|
|
Depreciation
expense for the years ended December 31, 2014, 2015 and 2016 were $1,524,655, $1,364,048 and $1,922,818, respectively.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
|
13.
|
ACQUIRED
INTANGIBLE ASSETS, NET
|
Intangible
assets as of December 31, 2015 and 2016 were as follows:
|
|
|
December,
31
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
Gross
carrying amount
|
|
|
Accumulated
amortization
|
|
|
Impairment
|
|
|
Net
carrying amount
|
|
|
Gross
carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Impairment
|
|
|
Net
carrying amount
|
|
|
Intangible
assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodities
trading right
|
|
$
|
1,216,582
|
|
|
|
-
|
|
|
$
|
(250,360
|
)
|
|
$
|
966,222
|
|
|
$
|
908,174
|
|
|
|
-
|
|
|
$
|
(619,865
|
)
|
|
$
|
288,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationship
|
|
|
1,184,243
|
|
|
|
(610,931
|
)
|
|
|
-
|
|
|
|
573,312
|
|
|
|
1,108,548
|
|
|
|
(617,264
|
)
|
|
|
(491,284
|
)
|
|
|
-
|
|
|
PIBA
license
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
112,183
|
|
|
|
(3,739
|
)
|
|
|
-
|
|
|
|
108,444
|
|
|
|
|
$
|
2,400,825
|
|
|
$
|
(610,931
|
)
|
|
$
|
(250,360
|
)
|
|
$
|
1,539,534
|
|
|
$
|
2,128,905
|
|
|
$
|
(621,003
|
)
|
|
$
|
(1,111,149
|
)
|
|
$
|
396,753
|
|
Amortization
expenses for the years ended December 31, 2014, 2015 and 2016 were $448,768, $285,088 and $116,973, respectively. Future amortization
expenses of acquired intangible assets with determinable lives are $11,214, $11,214, $112,214, $11,214 and $63,566 for 2017, 2018,
2019, 2020, 2021 and thereafter, respectively.
For
the year ended December 31, 2014, the Group recorded an impairment loss on its intangible assets in the amount of $1,802,125 associated
with the acquired completed technology and securities consulting license and related trademarks due to management's estimation
of the expected future cash flows associated with these assets were insufficient to recover their carrying values. During 2014,
the Group disposed its intangible assets in the amount of $3,149,842 associated with the acquired commodities trading right and
securities consulting license and the related trademarks due to the business restructure. For the year ended December 31, 2015,
the Group recorded an impairment loss of $250,360 related to commodities trading right. During 2016, the Group recorded an impairment
loss on its intangible assets in the amount of $1,111,149 associated with the acquired commodities trading right and customer
relationships due to management's estimation of the expected future cash flows associated with these assets were insufficient
to recover their carrying values.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
Changes
in goodwill for the years ended December 31, 2014, 2015 and 2016 were as follows:
|
|
|
Commodities
brokerage
|
|
|
Investment
advisory services
|
|
|
Institution
subscription services
|
|
|
Hong
Kong brokerage services
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as
of January 1, 2014
|
|
$
|
7,115,479
|
|
|
$
|
8,182,468
|
|
|
$
|
1,676,490
|
|
|
$
|
-
|
|
|
$
|
16,974,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
of CFO East Win
|
|
|
-
|
|
|
|
(3,112,365
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,112,365
|
)
|
|
Impairment
of Champion Connection's business
|
|
|
-
|
|
|
|
(4,867,660
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,867,660
|
)
|
|
Disposal
of Champion Connection's business (Note 4)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,676,490
|
)
|
|
|
-
|
|
|
|
(1,676,490
|
)
|
|
Impairment
of CFO Netinfo
|
|
|
-
|
|
|
|
(169,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(169,500
|
)
|
|
Exchange
difference
|
|
|
(25,699
|
)
|
|
|
(32,943
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(58,642
|
)
|
|
Balance
as of December 31, 2014
|
|
$
|
7,089,780
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
7,089,780
|
|
|
Acquisition
of CFO Guiwo (Note 3)
|
|
|
19,906
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,906
|
|
|
Exchange
difference
|
|
|
(410,066
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(410,066
|
)
|
|
Balance
as of December 31, 2015
|
|
$
|
6,699,620
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
6,699,620
|
|
|
Acquisition
of Rifa Wealth Management (Note 3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
108,831
|
|
|
|
108,831
|
|
|
Impairment
of CFO Guiwo
|
|
|
(17,873
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(17,873
|
)
|
|
Impairment
of CFO Henghui
|
|
|
(6,641,818
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,641,818
|
)
|
|
Exchange
difference
|
|
|
(39,929
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
|
|
(39,889
|
)
|
|
Balance
as of December 31, 2016
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
108,871
|
|
|
$
|
108,871
|
|
In
the second quarter of 2014, the Group was expected to suffer reduced cash flow in its investment advisory reporting unit. With
the assistance of a third party appraiser, the Group recognized an impairment loss of $8,149,525 related to the investment advisory
services reporting unit. On June 1, 2014, the Group disposed all of goodwill related to the institutional reporting unit of $1,676,490
as a result of the business restructure (Note 4). The Group also performed a goodwill impairment test related to commodities trading
business as of December 31, 2014 and no impairment loss was recorded.
The
goodwill related to the acquisition of CFO Guiwo was allocated to commodities brokerage reporting unit, which was acquired in
the second quarter of 2015. The Group performed a goodwill impairment test as of December 31, 2015 and no impairment loss was
recorded.
In
2016, the Group concluded that goodwill allocated to the commodities brokerage reporting unit was fully impaired because the estimated
growth rates and profit margins for future periods were expected lower than that of prior years based on that assessment. The
Group recognized an impairment loss of $6,659,691 related to the commodities brokerage reporting unit for the year ended December
31, 2016.
The
goodwill related to the acquisition of Rifa Wealth Management was allocated to HongKong brokerage services reporting unit, which
was acquired on September 13, 2016. The Company expects to develop the insurance brokerage business in the future and believes
there was no goodwill impairment related to the insurance brokerage services reporting unit.
In
the goodwill impairment test, the Group used the income approach, which it believed to be more reliable than the market approach
in determining the fair value of the Group's reporting units. Accordingly, it adopted a discounted cash flow ("DCF")
method under the income approach, which considers a number of factors that include expected future cash flows, growth rates, discount
rates, and comparable multiples from publicly traded companies in the industry and requires the Group to make certain assumptions
and estimates regarding industry economic factors and future profitability of its business unit. The assumptions are inherently
uncertain and subjective.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
Accounts
payable consist of:
|
|
|
December
31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Amount due to customers of Hong Kong brokerage
business
|
|
$
|
2,388,638
|
|
|
$
|
6,591,131
|
|
|
Amount due to sales agents
|
|
|
1,722,827
|
|
|
|
1,659,702
|
|
|
Amount due to noncontrolling shareholders
|
|
|
910,864
|
|
|
|
400,389
|
|
|
Others
|
|
|
471,399
|
|
|
|
94,646
|
|
|
|
|
$
|
5,493,728
|
|
|
$
|
8,745,868
|
|
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
16.
|
ACCRUED
EXPENSES AND OTHER CURRENT LIABILITIES
|
Accrued
expenses and other current liabilities consist of:
|
|
|
December
31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Accrued bonus
|
|
$
|
4,825,633
|
|
|
$
|
5,217,065
|
|
|
Accrued professional service fees
|
|
|
416,676
|
|
|
|
592,797
|
|
|
Withholding individual income tax-option
exercise
|
|
|
61,683
|
|
|
|
36,696
|
|
|
Value added taxes and other taxes
payable
|
|
|
2,219,300
|
|
|
|
123,264
|
|
|
Accrued raw data cost
|
|
|
1,285,418
|
|
|
|
380,237
|
|
|
Accrued bandwidth cost
|
|
|
38,527
|
|
|
|
27,587
|
|
|
Accrued welfare benefits
|
|
|
61,594
|
|
|
|
56,887
|
|
|
Deposit payable (i)
|
|
|
153,998
|
|
|
|
2,374,144
|
|
|
Amount due to related to disposal
of subsidiaries (ii)
|
|
|
5,081,927
|
|
|
|
-
|
|
|
Interest payable (iii)
|
|
|
-
|
|
|
|
265,692
|
|
|
Amount due to Yinglibao
|
|
|
-
|
|
|
|
865,036
|
|
|
Amount due to Yinglibao clients (iv)
|
|
|
-
|
|
|
|
18,573,735
|
|
|
Accrued sales service fees
|
|
|
578,910
|
|
|
|
114,055
|
|
|
Others
|
|
|
931,759
|
|
|
|
992,754
|
|
|
|
|
$
|
15,655,425
|
|
|
$
|
29,619,949
|
|
|
(i)
|
Deposit
payable is the deposit in bank accounts for providing guarantee to perform the contract obligation related to "Yinglibao",
an internet-based financial platform that integrates cash management solutions and mutual fund distribution.
|
|
(ii)
|
On
March 30, 2015, the Group signed a sale & purchase agreement with a third party, to transfer the 100% ordinary shares
of Rifa Futures and iSTAR Wealth Management (the
"
Transaction
"
).
In April 2015, the Group collected partial consideration of approximately $5.1 million. Due to the Transaction was not completed
as of December 31, 2015, the agreement was expired automatically. The Group refunded the $5.1 million and entered into a new
agreement in April 2016.
|
|
(iii)
|
The
Group launched Qiribao, which is a new product on the wealth management platform (Yinglibao), in July 2016. Once an investor
commits funds through the platform of Yinglibao to invest Qiribao, his funds are reinvested by the Group to purchase the held-to-maturity
securities. Interest payable represented the interest expense that has been incurred but has not been paid to the Qiribao
investors as of the date of the balance sheet. Due to the compliance requirement and our strategy, the Group will terminate
the purchase of Qiribao starting on April 10, 2017, and all the held-to-maturity securities will be redeemed by the end of
June 30, 2017.
|
|
(iv)
|
The
Group launched Qiribao, which is a new product on the wealth management platform (Yinglibao), in July 2016. Once an investor
commits funds through the platform of Yinglibao to invest Qiribao, his funds are reinvested by the Group to purchase the held-to-maturity
securities. The Group recognized the funds committed by the investors through the Yinglibao platform of $18,573,735 in the
consolidated balance sheet at December 31, 2016.
|
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
17.
|
STOCK
OPTIONS AND NONVESTED SHARES
|
As
of December 31, 2016, the Company and its subsidiaries have five share-based compensation plans, which are described below. The
compensation expenses that had been charged against income for those plans were $4,698,953, $6,056,033 and $5,575,877 for 2014,
2015, and 2016, respectively.
2004
Stock incentive plan
In
January 2004, the Company adopted the 2004 stock incentive plan (the "2004 Plan") which allows the Company to offer
a variety of incentive awards to employees, directors, officers and other eligible persons in the Group, and consultants and advisors
outside the Group. We amended the 2004 Plan in September 2004, August 2006, June 2009 and June 2010. The total number of ordinary
shares authorized under the 2004 Plan was 30,688,488, and all of these authorized ordinary shares were granted to directors, officers,
employees and non-employees as of December 31, 2014.
Summary
of stock options to employees and non-employees
A
summary of the stock option activity is as follows:
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number
|
|
|
average
|
|
|
Number
|
|
|
average
|
|
|
Number
|
|
|
average
|
|
|
|
|
of
options
|
|
|
exercise
price
|
|
|
of
options
|
|
|
exercise
price
|
|
|
of
options
|
|
|
exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of year
|
|
|
24,505,348
|
|
|
$
|
0.54
|
|
|
|
21,326,160
|
|
|
$
|
0.57
|
|
|
|
17,332,760
|
|
|
$
|
0.55
|
|
|
Exercised
|
|
|
(1,164,300
|
)
|
|
|
0.54
|
|
|
|
(2,205,600
|
)
|
|
|
0.22
|
|
|
|
(417,900
|
)
|
|
|
0.25
|
|
|
Forfeited
|
|
|
(2,014,888
|
)
|
|
|
0.27
|
|
|
|
(1,787,800
|
)
|
|
|
1.18
|
|
|
|
(734,600
|
)
|
|
|
1.08
|
|
|
Outstanding
at end of year
|
|
|
21,326,160
|
|
|
$
|
0.57
|
|
|
|
17,332,760
|
|
|
$
|
0.55
|
|
|
|
16,180,260
|
|
|
$
|
0.53
|
|
|
Shares
exercisable at end of year
|
|
|
14,070,240
|
|
|
$
|
0.73
|
|
|
|
14,513,528
|
|
|
$
|
0.61
|
|
|
|
16,180,260
|
|
|
$
|
0.53
|
|
The
following table summarizes information with respect to stock options outstanding at December 31, 2016:
|
|
|
Options outstanding
|
|
|
Option exercisable
|
|
Stock option with exercise price of:
|
|
|
Number outstanding
|
|
|
Weighted
average
remaining
contractual life
|
|
Weighted average exercise price
|
|
|
Aggregate intrinsic value as of December 31,
2016
|
|
|
Number exercisable
|
|
|
Weighted average exercise price
|
|
|
Aggregate intrinsic value as of December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.96
|
|
|
|
2,268,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,268,000
|
|
|
|
|
|
|
|
|
|
$
|
1.318
|
|
|
|
53,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,600
|
|
|
|
|
|
|
|
|
|
$
|
1.26
|
|
|
|
413,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
413,360
|
|
|
|
|
|
|
|
|
|
$
|
1.648
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
$
|
1.426
|
|
|
|
2,058,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,058,000
|
|
|
|
|
|
|
|
|
|
$
|
1.43
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
$
|
0.25
|
|
|
|
11,327,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,327,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,180,260
|
|
|
5.05 years
|
|
$
|
0.53
|
|
|
$
|
5,369,140
|
|
|
|
16,180,260
|
|
|
$
|
0.53
|
|
|
$
|
5,369,140
|
|
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
17.
|
STOCK
OPTIONS AND NONVESTED SHARES - continued
|
2004
Stock incentive plan
-
continued
Summary
of stock options to employees and non-employees
- continued
The
total intrinsic value of options exercised during the years ended December 31, 2014, 2015 and 2016 was $647,701, $1,881,129, and
$198,084, respectively. The total fair value of shares vested during the year ended December 31, 2014, 2015 and 2016 were $3,080,628,
$2,067,037 and $1,500,901, respectively.
The
Company recognized share-based compensation expenses of $2,664,317, $546,465 and $51,593 for stock option in the years ended December
31, 2014, 2015 and 2016, respectively. As of December 31, 2016, all share-based compensation expenses relating to the stock options
under the 2004 Plan were recognized.
Restricted
shares to employees
On
January 2, 2014, the Company granted remaining 1,100,240 ordinary shares, which were in the form of restricted shares, to employees
under 2004 Plan. The vesting of the restricted shares is subject to rendering service to the Company for three years. Based on
the Company's requisite service period stated in the 2004 Plan, all the granted restricted shares were vested as of January 2,
2017, of which 330,085 shares were issued to employees as of December 31, 2016. The fair value of restricted shares is $1.106,
which equal to the fair market value of the Company's shares at the date of grant. The Company recognized share-based compensation
expenses of $762,568, $324,496 and $129,801 for the years ended December 31, 2014, 2015 and 2016. As of December 31, 2016, all
the share-based compensation expenses relating to the restricted shares under the 2004 Plan were recognized.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
17.
|
STOCK
OPTIONS AND NONVESTED SHARES - continued
|
2007
Equity incentive plan
In
July 2007, the Company adopted the 2007 Equity incentive plan (the "2007 Plan") and granted nonvested shares covering
10,558,493 ordinary shares of the Company to the employees who were eligible for the 2007 Plan. The vesting of the nonvested shares
are subject to achieving certain operating performance targets and rendering service to the Company for the requisite service
period stated in the 2007 Plan. Based on the Company's operating performance, 8,658,048 shares were vested as of December 31,
2010.
In
June 2014, the Annual General Meeting approved the amendment to the 2007 Plan and the Restricted Stock Issuance and Allocation
Agreement of 2007 Plan. Pursuant to such agreement, together with the remaining 1,900,445 ordinary shares which were not vested
due to the operating performance targets under 2007 Plan not being achieved, 3,000,000 ordinary shares were collectively granted
to the employees who were eligible. The fair value of a nonvested share on the grant date was measured at the quoted market price
of the Company's equity shares. The nonvested shares shall become activated and vest during the period commencing from the grant
date and ending on December 31, 2016 based on the Company's achievement of the performance targets.
As
of December 31, 2014, there was no nonvested shares become activated and vested due to the performance targets were not achieved,
and nil share-based compensation expenses relating to the nonvested shares was recognized.
As
of December 31, 2015, the granted shares were activated and vested based on the Group's achievement of performance target. The
fair value of granted share is $0.82, which equal to the fair market value of the Company's shares at the date of grant. The Company
recognized share-based compensation expenses of $1,476,000 and $984,000 for the years ended December 31, 2015 and 2016, respectively.
As of December 31, 2016, all the share-based compensation expenses relating to the restricted shares under the 2007 Plan were
recognized.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
17.
|
STOCK
OPTIONS AND NONVESTED SHARES - continued
|
2010
Equity incentive plan of Rifa Financial Holdings
In
November 2010, Rifa Financial Holdings, a subsidiary of the Company, implemented the "2010 equity incentive plan" (the
"2010 Plan") under which the Company transferred 1,500 nonvested shares which representing 15% of total Rifa Financial
Holdings' equity interest to its management group as a share incentive. If the grantees left the Company before the third anniversary
of the grant date when the nonvested shares become vested, they should transfer the shares to the Company at no consideration.
Therefore, the total share based compensation expenses are recognized ratably over the three years of vesting period. In addition,
as the grantees are entitled to all the shareholder's rights, including the dividend rights since the date of grant, the 15% share
of the earnings of Rifa Financial Holdings is recognized as noncontrolling interest on the Company's consolidated financial statements
since November 1, 2010, the date of grant.
The
fair value of the share incentive was determined to be $1,188 per share. The Group recognized $495,848 share based compensation
cost in 2013. As of December 31, 2013, all compensation cost relating to nonvested shares was recognized.
2014
Stock incentive plan
In
July 2014, the Company adopted the 2014 stock incentive plan (the "2014 Plan") which allows the Company to offer a variety
of incentive awards to employees, directors, officers and other eligible persons in the Group, and consultants and advisors outside
the Group. The maximum number of ordinary Shares that may be delivered pursuant to awards granted to eligible persons under 2014
Plan during calendar year 2014 is equal to 5,000,000 ordinary shares; provided, that, as of January 1 of each calendar year thereafter
during the term of 2014 plan, the maximum number of ordinary shares that may be delivered pursuant to awards granted to eligible
persons under 2014 Plan shall be increased by 3,000,000 Ordinary Shares. As of result, the total number of ordinary shares authorized
under the 2014 Plan was 11,000,000 as of December 31, 2016. As of December 31, 2016, 4,332,100 shares were available for future
grant of awards.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
17.
|
STOCK
OPTIONS AND NONVESTED SHARES - continued
|
2014
Stock incentive plan – continued
Options
to employees
During
2014 and 2015, the Company granted totaling 1,930,000 and 120,000 stock options to employees at an exercise price that equaled
the trading price of the stock upon the stock option grant, respectively. These options vest over 3 years.
The
fair value of employee options was estimated on the basis of the Black-Scholes Option Price model with the following assumptions:
|
|
|
Years
ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Weighted average risk free rate of return
|
|
|
1.39% - 1.62
|
%
|
|
|
1.32
|
%
|
|
Weighted average expected option life
|
|
|
6.82 - 6.87 years
|
|
|
|
6.86 years
|
|
|
Expected volatility rate
|
|
|
77.74% - 79.37
|
`%
|
|
|
77.81
|
%
|
|
Dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
(1)
|
Expected
volatility
|
|
|
|
|
|
The
volatility of the underlying ordinary shares during the life of the options was estimated
based on the historical stock price volatility of the Company over the past years.
|
|
(2)
|
Risk-free
interest rate
|
|
|
|
|
|
Risk-free
interest rate was estimated based on the yield to maturity of treasury bonds of the United
States with a maturity period close to the expected term of the options.
|
|
(3)
|
Expected
option life
|
|
|
|
|
|
The
expected life was estimated based on historical information.
|
|
(4)
|
Dividend
yield
|
|
|
|
|
|
The
dividend yield was estimated by the Company based on its expected dividend policy over
the expected term of the options.
|
|
(5)
|
Exercise
price
|
|
|
|
|
|
Options
are generally granted at an exercise price equal to the fair market value of the Company's
shares at the date of grant.
|
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
17.
|
STOCK
OPTIONS AND NONVESTED SHARES - continued
|
2014
Stock incentive plan – continued
Options
to non-employees
During
2014, the Company granted 30,000 options under the 2014 Plan to a consultant. The fair value of non-employee options is estimated
using the Black-Scholes Option Pricing model as such method provided a more accurate estimate of the fair value of services provided
by the consultants and strategic advisers. The fair value of the stock options is remeasured as of the end of each reporting period
until the services of these non-employees are complete under the service contracts. These options vest over 3 years.
Summary
of stock options to employees and non-employees
A
summary of the stock option activity is as follows:
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number
|
|
|
average
|
|
|
Number
|
|
|
average
|
|
|
Number
|
|
|
average
|
|
|
|
|
of
options
|
|
|
exercise price
|
|
|
of options
|
|
|
exercise price
|
|
|
of
options
|
|
|
exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of year
|
|
|
-
|
|
|
$
|
-
|
|
|
|
1,860,000
|
|
|
$
|
0.89
|
|
|
|
1,235,000
|
|
|
$
|
0.88
|
|
|
Granted
|
|
|
1,960,000
|
|
|
|
0.90
|
|
|
|
120,000
|
|
|
|
0.87
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,600
|
)
|
|
|
0.92
|
|
|
|
(14,800
|
)
|
|
|
0.89
|
|
|
Forfeited
|
|
|
(100,000
|
)
|
|
|
0.88
|
|
|
|
(741,400
|
)
|
|
|
0.89
|
|
|
|
(115,200
|
)
|
|
|
0.90
|
|
|
Outstanding
at end of year
|
|
|
1,860,000
|
|
|
$
|
0.89
|
|
|
|
1,235,000
|
|
|
$
|
0.88
|
|
|
|
1,105,000
|
|
|
$
|
0.87
|
|
|
Shares
exercisable at end of year
|
|
|
-
|
|
|
|
-
|
|
|
|
480,200
|
|
|
$
|
0.89
|
|
|
|
805,400
|
|
|
$
|
0.88
|
|
The
following table summarizes information with respect to stock options outstanding at December 31, 2016:
|
|
|
Options outstanding
|
|
|
Option exercisable
|
|
Stock option with exercise price of:
|
|
|
Number outstanding
|
|
|
Weighted
average
remaining contractual life
|
|
Weighted average exercise price
|
|
|
Aggregate intrinsic value as of December 31,
2016
|
|
|
Number exercisable
|
|
|
Weighted average exercise price
|
|
|
Aggregate intrinsic value as of December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.878
|
|
|
|
915,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
695,400
|
|
|
|
|
|
|
|
|
|
$
|
0.92
|
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,600
|
|
|
|
|
|
|
|
|
|
$
|
1.032
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
$
|
1.038
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
$
|
0.87
|
|
|
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,105,000
|
|
|
7.69 years
|
|
$
|
0.87
|
|
|
|
-
|
|
|
|
805,400
|
|
|
$
|
0.88
|
|
|
|
-
|
|
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
17.
|
STOCK
OPTIONS AND NONVESTED SHARES - continued
|
2014
Stock incentive plan – continued
Summary
of stock options to employees and non-employees
- continued
The
weighted-average grant-date fair value of options granted during the years 2014 and 2015 was $0.63 and $0.61, respectively. The
total intrinsic value of options exercised during the years ended December 31, 2014, 2015 and 2016 was nil, $1,159 and nil, respectively.
The total fair value of shares vested during the year ended December 31, 2014, 2015 and was nil, $496,560 and $260,944, respectively.
The
Company recognized share-based compensation expenses of $148,451, $(187,485) and $174,672 for stock option under 2014 Plan in
the years ended December 31, 2014, 2015 and 2016, respectively.
As of December 31, 2016, there
were $82,524 unrecognized share-based compensation expenses relating to the stock options under 2014 Plan, which are expected
to be recognized over a weighted average period of two year.
Restricted
shares to employees
During
2014, the Company granted 1,780,000 restricted shares under the 2014 Plan to directors and employees. The vesting of the restricted
shares is subject to rendering service to the Company for two years. Based on the Company's requisite service period stated in
the 2014 Plan, all the 1,780,000 shares were vested, of which 200,885 shares were issued as of December 31, 2016. The fair value
of restricted shares was $0.878, which was the fair market value of the Company's shares at the date of grant.
On
November 16, 2015, the Company granted 3,800,000 restricted shares under the 2014 Plan to selected directors and employees. Subject
to the agreement, the awards shall become activated and vest during the period commencing on the grant date and ending on November
16, 2018 (the "Vesting Term"), provided that the participant has achieved all the performance targets. The fair value
of restricted shares was $0.742, which was the fair market value of the Company's shares at the date of grant. As of December
31, 2016, 2,414,500 granted shares were activated, of which 869,220 shares were vested based on the participant's achievement
of performance target and the Company's requisite service period stated. Furthermore, there was no share was issued as of December
31, 2016.
On
November 8, 2016, the Company granted 200,000 restricted shares under the 2014 Plan to a selected employee. The vesting of the
restricted shares is subject to rendering service to the Company for two years.
The
Company recognized share-based compensation expenses of $310,888, $898,903 and $1,091,923 relating to the restricted shares granted
to employees in 2014, 2015 and 2016, respectively. As of December 31, 2016, there were $1,204,685 unrecognized share-based compensation
expenses relating to the restricted shares granted to employees, which are expected to be recognized over a weighted average period
of 1.4 year.
Restricted
shares to non-employees
During
2014, the Company granted 1,150,000 restricted shares under the 2014 Plan to consultants. The fair value of the stock options
is remeasured as of the end of each reporting period until the services of these non-employees are completed under the service
contracts. These options vest over two years except 50,000 restricted shares granted to one consultant which vest over three years.
The Company recognized share-based compensation expenses of $245,958, $754,354 and $(49,055) relating to the restricted shares
granted to non-employees in 2014, 2015 and 2016, respectively. As of December 31, 2016, there were $2,343 unrecognized share-based
compensation expenses relating to the restricted shares granted to non-employees, which are expected to be recognized over a weighted
average period of half year.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
17.
|
STOCK
OPTIONS AND NONVESTED SHARES - continued
|
Restricted
shares of Shanghai Shangtong Co., Ltd. ("CFO Shangtong"), Fortune Zhengjin and CFO Tahoe
On
July 1, 2014, CFO Shangtong and Fortune Zhengjin, two affiliates of the Company, entered into a series of contractual arrangement
with selected employees of the Group. Pursuant to the agreement, these employees were granted 10% restricted shares of CFO Shangtong
and Fortune Zhengjin. The vesting of the restricted shares is subject to rendering service to the Company for five years. The
fair value of restricted shares is $28,965 and $2,464,455, which equal to the fair value of the CFO Shangtong and Fortune Zhengjin's
10% net assets at the effective date of the agreement, respectively.
On
July 1, 2015, Fortune Zhengjin entered into an additional arrangement with selected employees of the Group. Pursuant to the agreement,
these employees were granted 8% restricted shares of Fortune Zhengjin. The vesting of the restricted shares is subject to rendering
service to the Company for five years. The fair value of restricted shares is $4,681,533, which equal to the fair value of Fortune
Zhengjin's 8% net assets at the effective date of the agreement. CFO Tahoe also entered an arrangement with selected employees
of the Group. Pursuant to the agreement, these employees were granted 1.95% restricted shares of CFO Tahoe. The fair value of
restricted shares is subject to rendering service to the Company for five years. The fair value of restricted shares is $1,141,124,
which equal to the fair value of CFO Tahoe's 1.95% net assets at the effective date of the agreement.
On
May 31, 2016, Fortune Zhengjin entered into another arrangement with selected employees of the Group. Pursuant to the agreement,
these employees were granted 5.35% restricted shares of Fortune Zhengjin. The vesting of the restricted shares is subject to rendering
service to the Company for five years. The fair value of restricted shares is $2,460,213, which equal to the fair value of Fortune
Zhengjin's 5.35% net assets at the effective date of the agreement.
The Company recognized share-based
compensation expenses of $6,584 and $560,187 in 2014 relating to CFO Shangtong, Fortune Zhengjin, respectively. There were $10,200,
$1,965,535 and $267,565 share-based compensation expenses recorded in 2015 relating to CFO Shangtong, Fortune Zhengjin and CFO
Tahoe, respectively. There were $5,541, $2,787,475 and $399,927 share-based compensation expenses recorded in 2016 relating
to CFO Shangtong, Fortune Zhengjin and CFO Tahoe, respectively.
As of December 31, 2016, there
were $3,227 and $3,703,164 and $400,693 unrecognized share-based compensation expenses relating to CFO Shangtong, Fortune Zhengjin
and CFO Tahoe, respectively, which are expected to be recognized over a weighted average period of 3.5 years.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
Hong
Kong
China
Finance Online, Rifa Securities, Rifa Futures, Rifa Credit, Rifa Wealth Management and other nine subsidiaries were established
in Hong Kong. These companies were subject to Hong Kong profit tax at 16.5%. In addition, companies who incorporated outside of
Hong Kong and carried on a trade, profession or business in Hong Kong were also subject to Hong Kong profit tax in respect of
their profits arising in or derived from Hong Kong.
British
Virgin Islands
Companies
that were incorporated in the BVI are not subject to taxation in their country of incorporation. Subsidiaries incorporated in
the BVI include Rifa Financial Holdings and other eleven subsidiaries.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
|
18.
|
INCOME
TAXES - continued
|
PRC
The
Group's PRC entities are subject to 25% PRC Enterprise Income Tax ("EIT") on the taxable income in accordance with the
relevant PRC income tax laws, except for certain entities that enjoy preferential tax rates, which are lower than the statutory
rates, as described below.
Under
the EIT Law and its implementing rules, an enterprise which qualifies as a "high and new technology enterprise" ("the
HNTE") is entitled to a tax rate of 15%.
Under
the EIT law and its implementing rules, enterprises that obtain status of "Software Enterprises" are entitled to be
exempted from EIT tax for the first two profit-making years and enjoy a preferential 12.5% tax rate, which is half of the standard
EIT rate of 25% for the three years thereafter.
A
summary of the main PRC entities that subject to tax preferential policies for the year ended December 31, 2016 is as follows:
|
PRC
entities
|
|
Chinese
EIT rate
|
|
Qualification
for preferential tax rate
|
|
CFO
Qicheng
|
|
Preferential
tax rate of 12.5% in 2013 and 2014.
|
|
Software
Enterprises
|
|
CFO
Shenzhen Shangtong
|
|
Preferential
tax rate of 12.5% in 2013 and 2014.
|
|
Software
Enterprises
|
|
CFO
Meining
(deconsolidated
in 2016)
|
|
Preferential
tax rate of 15% from 2013 to 2015.
|
|
HNTE
|
|
CFO
Genius
|
|
Preferential
tax rate of 15% from 2014 to 2015.
|
|
HNTE
|
|
CFO
Fuhua
|
|
Preferential
tax rate of 12.5% in 2016 and 2018.
|
|
HNTE
|
|
CFO
Tibet
|
|
Preferential
tax rate of 9% from
2015
to 2017 and
15%
thereafter
|
|
Preferential
tax rate for enterprises in Tibet, China
|
|
CFO
Tibet Zhisheng
|
|
Preferential
tax rate of 9% from 2017 and thereafter
|
|
Preferential
tax rate for enterprises in Tibet, China
|
Under
the EIT Law, the HNTE status is valid for three years and qualifying entities can then apply to renew for an additional three
years provided their business operations continue to qualify for the HNTE status. CFO Meining obtained its HNTE status in 2008
and obtained the renewal successfully in 2011 and 2014. In 2012, CFO Genius also obtained the HNTE status and successfully renewed
it in 2015. In 2016, CFO Fuhua obtained the HNTE status and enjoyed the preferential tax rate of 15% from 2016 to 2018.
In
2013 and 2014, CFO Chongzhi and CFO Shangtong filed their EIT by adopting the "deemed-profit method". In 2014, Shanghai
Yongfu Enterprises Management Consulting Co., Ltd. adopted this method. In 2015, Zhengjin (Jiangsu) Precious Metals Co., Ltd.
also adopted this method .In 2016, CFO Qingdao Zhida and our other four affiliates adopted this method. Under this method, the
qualifying entities filed their income tax by calculating as 2.5% of the gross revenues. This method is subject to be reevaluated
by the local tax authority in the future.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
|
18.
|
INCOME
TAXES - continued
|
PRC
-
continued
The
EIT Law includes a provision specifying that legal entities organized outside of the PRC will be considered residents for PRC
Income tax purposes if the place of effective management or control is within the PRC. The implementation rules to the EIT Law
provide that non-resident legal entities will be considered PRC residents if substantial and overall management and control over
the manufacturing and business operations, personnel, accounting, properties, etc., occurs within the PRC. Despite the present
uncertainties resulting from the limited PRC tax guidance on the issue, the Group does not believe that currently the legal entities
organized outside of the PRC within the Group should be treated as residents for EIT law purposes. If the PRC tax authorities
subsequently determine that the Company and its subsidiaries registered outside the PRC should be deemed a resident enterprise,
the Company and its subsidiaries registered outside the PRC will be subject to the PRC income tax at a rate of 25%.
If
the Company were to be non-resident for PRC tax purpose, dividends paid to it out of profits earned after January 1, 2008 would
be subject to a withholding tax. In the case of dividends paid by PRC subsidiaries the withholding tax would be 10% not considering
the arrangements for the Avoidance of Double Taxation on income and Prevention of Fiscal Evasion with respect to Taxes on Income
between mainland and Hong Kong.
Aggregate
deficits of the Company's subsidiaries located in the PRC were approximately $17.7 million at December 31, 2016. And accordingly,
no provision has been made for the Chinese dividend withholding taxes.
Aggregate undistributed earnings
of the Company's VIEs and its VIEs' subsidiaries located in the PRC that is available for distribution to the Company of approximately
$38.3 million at December 31, 2016. A deferred tax liability should be recorded for taxable temporary differences attributable
to the excess of financial reporting amounts over tax basis amounts, including those differences attributable to a more than 50%
interest in a domestic subsidiary. However, recognition is not required in situations where the tax law provides a means by which
the reported amount of that investment can be recovered tax-free and the enterprise expects that it will ultimately use that means.
The Company has not recorded any such deferred tax liability attributable to the undistributed earnings of its financial interest
in VIEs because it believes such excess earnings can be distributed in a manner that would not be subject to income tax.
Income tax expense was as
follows:
|
|
|
December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(558,696
|
)
|
|
$
|
(2,071,154
|
)
|
|
$
|
(4,723,267
|
)
|
|
Deferred
|
|
|
44,782
|
|
|
|
686,892
|
|
|
|
562,664
|
|
|
Total
|
|
$
|
(513,914
|
)
|
|
$
|
(1,384,262
|
)
|
|
$
|
(4,160,603
|
)
|
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
|
18.
|
INCOME
TAXES - continued
|
PRC
- continued
The
principal components of deferred income taxes were as follows:
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
Deferred revenue - current
|
|
$
|
445,314
|
|
|
$
|
934,210
|
|
|
Accrued expenses and other liabilities
|
|
|
612,161
|
|
|
|
465,538
|
|
|
Net operating loss carrying forwards
|
|
|
4,718,396
|
|
|
|
5,752,794
|
|
|
|
|
|
5,775,871
|
|
|
|
7,152,542
|
|
|
Less: valuation allowance
|
|
|
(4,806,407
|
)
|
|
|
(5,782,750
|
)
|
|
Total current deferred tax assets
|
|
|
969,464
|
|
|
|
1,369,792
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Deferred revenue - non-current
|
|
$
|
121,133
|
|
|
$
|
114,977
|
|
|
Net operating loss carrying forwards
|
|
|
10,984,475
|
|
|
|
8,633,421
|
|
|
|
|
|
11,105,608
|
|
|
|
8,748,398
|
|
|
Less: valuation allowance
|
|
|
(11,085,358
|
)
|
|
|
(8,715,747
|
)
|
|
Total non-current deferred tax assets
|
|
$
|
20,250
|
|
|
$
|
32,651
|
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Account receivable and other assets
|
|
|
(15,132
|
)
|
|
|
(235,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total current deferred tax liabilities
|
|
$
|
(15,132
|
)
|
|
$
|
(235,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(384,883
|
)
|
|
|
(89,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current deferred tax liabilities
|
|
$
|
(384,883
|
)
|
|
$
|
(89,970
|
)
|
A valuation allowance of $15,891,765
and $14,498,497 was established as of December 31, 2015 and 2016, respectively, for the entities that have incurred losses because
the Group believes that it is more likely than not that the related deferred tax assets will not be realized in the future. At
December 31, 2016, operating loss carry forwards includes approximately $45.0 million which will expire by 2021, and $21.7 million
which will carry forward indefinitely.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
|
18.
|
INCOME
TAXES - continued
|
PRC
- continued
Reconciliation between total income
tax expense and the amount computed by applying the PRC EIT statutory rate to income before income taxes is as follows:
|
|
|
Years ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before tax
|
|
$
|
(10,116,814
|
)
|
|
$
|
28,201,950
|
|
|
$
|
(6,805,575
|
)
|
|
Income tax (benefits) expenses calculated at 25%
|
|
|
(2,529,204
|
)
|
|
|
7,050,488
|
|
|
|
(1,701,394
|
)
|
|
Effect of tax holiday
|
|
|
(4,125,912
|
)
|
|
|
(8,139,429
|
)
|
|
|
(4,431,103
|
)
|
|
Effect of income tax rate difference in other jurisdictions
|
|
|
1,789,762
|
|
|
|
645,873
|
|
|
|
236,759
|
|
|
Non-deductible expenses
|
|
|
1,425,655
|
|
|
|
2,559,649
|
|
|
|
3,645,741
|
|
|
Non-taxable income
|
|
|
(549,315
|
)
|
|
|
(893,950
|
)
|
|
|
(113,170
|
)
|
|
Change in valuation allowance
|
|
|
4,502,928
|
|
|
|
161,631
|
|
|
|
6,523,770
|
|
|
Income tax expense
|
|
$
|
513,914
|
|
|
$
|
1,384,262
|
|
|
$
|
4,160,603
|
|
During the years ended December
31, 2014, 2015 and 2016, if the Company's subsidiaries, VIEs and VIEs' subsidiaries in the PRC were neither in the tax holiday
period nor had they been specifically allowed special tax concessions, they would have recorded additional income tax expense
of $20,851, $1,102,399 and $209,418, respectively. The impact of the tax holidays on basic net loss per ordinary share was an
increase of $0.00 and $0.00 for the year ended December 31, 2014 and 2016, respectively, and net income per ordinary
share was decrease of $0.01, for the years ended December 31, 2015.
The
Group did not identify significant unrecognized tax benefits for the years ended December 31, 2014, 2015 and 2016. The Group did
not incur any interest and penalties related to potential underpaid income tax expenses and also believed that the adoption of
pronouncement issued by FASB regarding accounting for uncertainty in income taxes did not have a significant impact on the unrecognized
tax benefits within 12 months from December 31, 2016.
In
accordance with relevant PRC tax administration laws, tax years from 2011 to 2016 of the Group's PRC subsidiaries and VIEs remain
subject to tax audits as of December 31, 2016, at the tax authority's discretion.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
|
19.
|
AMERICAN
DEPOSITARY SHARES ("ADS") PLAN
|
In
September 2015, the Group issued 4,000,000 ordinary shares to its American Depositary Receipt bank and in exchange received
800,000 ADSs under the 2004 Plan and 2014 Plan. As of December 31, 2016, 2,615,215 shares were available for future exercise
of options and vesting of granted shares.
|
20.
|
NET
INCOME (LOSS) PER SHARE
|
The
following table sets forth the computation of basic and diluted income (loss) per share for the years indicated:
|
|
|
Years ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to China Finance Online Co. Limited
|
|
$
|
(7,167,849
|
)
|
|
$
|
22,482,416
|
|
|
$
|
(1,678,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding used in computing basic net income (loss) per share
|
|
|
109,385,712
|
|
|
|
110,997,871
|
|
|
|
113,213,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: Incremental shares from assumed conversions of stock options, restricted shares and nonvested shares
|
|
|
-
|
|
|
|
14,131,892
|
|
|
|
-
|
|
|
Weighted average ordinary shares outstanding used in computing diluted net income (loss) per share
|
|
|
109,385,712
|
|
|
|
125,129,763
|
|
|
|
113,213,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to China Finance Online Co. Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- basic
|
|
$
|
(0.07
|
)
|
|
$
|
0.20
|
|
|
$
|
(0.01
|
)
|
|
- diluted
|
|
$
|
(0.07
|
)
|
|
$
|
0.18
|
|
|
$
|
(0.01
|
)
|
For the year ended December 31,
2014, 23,186,160 options, 4,030,240 restricted shares and 3,000,000 nonvested shares, were anti-dilutive, respectively, because
the Group was in the loss position. For the year ended December 31, 2016, 8,498,868 options, 2,843,252 restricted shares and
3,000,000 nonvested shares, were anti- dilutive, respectively, because the Group was in the loss position.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
|
21.
|
MAINLAND
CHINA CONTRIBUTION PLAN AND PROFIT APPROPRIATION
|
Full
time employees of the Group in the PRC participate in a government-mandated defined contribution plan pursuant to which certain
pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees.
Chinese labor regulations require the Group to accrue for these benefits based on certain percentages of the employees' salaries.
The total provisions for such employee benefits were $3,685,654, $4,353,944 and $5,255,982 for the years ended December 31, 2014,
2015 and 2016, respectively.
|
22.
|
NONCONTROLLING
INTERESTS
|
|
|
|
Commodities
brokerage
Services
|
|
|
Investment
Advisory
services
|
|
|
Institution
Subscription
services
|
|
|
Rifa
Financial
Holdings
Brokerage
services
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2014
|
|
$
|
11,970,580
|
|
|
$
|
2,906,331
|
|
|
$
|
(194,944
|
)
|
|
$
|
(35,615
|
)
|
|
|
-
|
|
|
$
|
14,646,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business restructure
|
|
|
(2,569,160
|
)
|
|
|
2,384,519
|
|
|
|
786,355
|
|
|
|
-
|
|
|
|
12,201
|
|
|
|
613,915
|
|
|
Dividends paid to noncontrolling shareholders
|
|
|
(1,030,012
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,030,012
|
)
|
|
Share-based compensation (Note17)
|
|
|
158,696
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
158,696
|
|
|
Net income (loss)
|
|
|
2,463,956
|
|
|
|
(5,290,850
|
)
|
|
|
(591,411
|
)
|
|
|
3,936
|
|
|
|
(48,510
|
)
|
|
|
(3,462,879
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2014
|
|
$
|
10,994,060
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(31,679
|
)
|
|
$
|
(36,309
|
)
|
|
$
|
10,926,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid to noncontrolling shareholders
|
|
|
(6,509,680
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,509,680
|
)
|
|
Changes in controlling ownership interest
|
|
|
1,393,508
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
320,956
|
|
|
|
1,714,464
|
|
|
Paid-in capital from noncontrolling shareholders
|
|
|
641
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
641
|
|
|
Share-based compensation (Note17)
|
|
|
724,285
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
724,285
|
|
|
Net income (loss)
|
|
|
4,815,506
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(195,587
|
)
|
|
|
(284,647
|
)
|
|
|
4,335,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
$
|
11,418,320
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(227,266
|
)
|
|
|
-
|
|
|
$
|
11,191,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid to noncontrolling shareholders
|
|
|
(10,117,946
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,117,946
|
)
|
|
Changes in controlling ownership interest
|
|
|
171,542
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
171,542
|
|
|
Deconsolidation
|
|
|
2,404,822
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105,953
|
|
|
|
-
|
|
|
|
2,510,775
|
|
|
Share-based compensation (Note17)
|
|
|
1,162,066
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,162,066
|
|
|
Net income (loss)
|
|
|
(9,563,735
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
276,370
|
|
|
|
-
|
|
|
|
(9,287,365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
(4,524,931
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
155,057
|
|
|
|
-
|
|
|
$
|
(4,369,874
|
)
|
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
|
23.
|
COMMITMENTS
AND CONTINGENCIES
|
Commitments
The
Group leases certain office premises and purchases data under non-cancelable leases. Rent expenses under operating leases for
2014, 2015 and 2016 were $7,013,985, $6,044,119 and $5,555,144, respectively.
Future
minimum payments under non-cancelable operating leases and data purchase agreements were as follows:
|
Year ending
|
|
|
|
|
2016
|
|
|
6,335,960
|
|
|
2017
|
|
|
3,536,672
|
|
|
2018
|
|
|
2,102,089
|
|
|
Total
|
|
$
|
11,974,721
|
|
Securities
Litigation
The Company was named as a defendant
in a putative securities class action, Wang, et al., v. China Finance Online Co. Limited, 1:15-cv-07894-RMB. The original complaint
was filed on June 5, 2015 in the Central District of California. The case was subsequently consolidated with several other similar
actions and transferred to the Southern District of New York, where an amended consolidated complaint was filed in December 2015.
The amended consolidated complaint alleged that the Company violated Exchange Act Section 10(b) and Rule 10b-5 by failing to disclose
certain of its transactions involving Langfang Shengshi Real Estate Development Co. Limited as related party transactions. The
amended consolidated complaint also made claims under Exchange Act Section 10(b) and Rule 10b-5 against certain of the Company’s
current officers and its current and former auditors and under Exchange Act Section 20(a) against certain of its current officers
and former directors. Lead plaintiffs subsequently voluntarily dismissed (without prejudice) all defendants other than the Company
from the action. The Company filed a motion to dismiss the complaint on April 8, 2016, to which Plaintiffs filed an opposition
on May 6, 2016 and the Company filed a reply on May 13, 2016.
During a mediation session in
May 2016, the parties agreed to settle the action for $3.0 million. The same amount as specified in the settlement term sheet,
which was fully covered under its existing insurance policies. The settlement was preliminarily approved on November 18, 2016
and notice of the settlement was provided to putative class members. No class members objected to the settlement and none requested
exclusion. The settlement includes a release of all claims asserted in the Complaint (or any of the previous versions of the complaint)
or all claims that could have been asserted based on the same operative facts at issue in the Complaint. This release applies
not only as to the Company, but also as to individuals and entities included within the definition of “Releasees,”
which definition includes, among others, current and former officers and directors of the Company. In the light of ASC450, the
contingent losses were probable and reasonably estimable in the Company's judgment. There is no P&L impact because the full
amount of the loss is covered under insurance. Therefore, the accrual amount of $3 million and the expected insurance recovery
of $3.0 million should be reflected in the Company's balance sheet as of December 31, 2016.
Following a March 21, 2017 fairness
hearing, an order was entered on March 24, 2017 approving the settlement. The order reflects that a judgment in the action will
be entered after Lead Plaintiffs file their motion for final distribution of the settlement amount, which is due on or before
June 19, 2017. Assuming the Court enters the judgment as anticipated by the settlement approval order and there are no appeals,
the approval of the settlement will become final (and no longer subject to appeal) 30 days after the judgment is entered.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
|
23.
|
COMMITMENTS
AND CONTINGENCIES - continued
|
Litigation
The Group was involved in certain
cases pending in some PRC courts as of December 31, 2015. These cases include a copyright infringement case, among others. In
the copyright infringement dispute, we are claimed for a public apology for the violation, and compensated a damage of $7.7 million
(RMB50 million, equivalently). Through a series of litigation proceedings, among other things, cross-examination, China International
Capital Corporation Limited (“CICC”) currently has lower the claim to RMB10 million. The case was still pending as
of December 31, 2016. Adverse results in these lawsuits may include awards of damages and may also result in a loss of revenue
or otherwise harm the business of the Group.
For
these proceedings, the Company is currently unable to estimate the reasonably possible loss or a range of reasonably possible
losses as the proceedings are in the early stages, and/or there is a lack of clear or consistent interpretation of laws specific
to the industry-specific complaints among different jurisdictions. As a result, there is considerable uncertainty regarding the
timing or ultimate resolution of such matters, which includes eventual loss, fine, penalty or business impact, if any, and therefore,
an estimate for the reasonably possible loss or a range of reasonably possible losses cannot be made. However, the Company believes
that such matters, individually and in the aggregate, when finally resolved, are not reasonably likely to have a material adverse
effect on the Company’s consolidated results of operations, financial position and cash flows.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
|
24.
|
SEGMENT
AND GEOGRAPHIC INFORMATION
|
The
Group has three operating segments (1) commodities brokerage services, (2) online financial information and advisory service,
and other related services in PRC, (3) Hong Kong brokerage services. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated regularly by the chief operating decision-makers in
deciding how to allocate resources and in assessing performance. The Group's chief executive officer has been identified as the
chief operating decision makers. The Group's chief operating decision maker directs the allocation of resources to operating segments
based on the profitability and cash flows of each respective segment.
The
Group evaluates performance based on several factors, including net revenue, cost of revenue, operating expenses, income from
operation. The following tables show the operations of the Group's operating segments:
For
the year ended December 31, 2016
|
|
|
|
|
|
Subscription
|
|
|
|
|
|
|
|
|
|
|
Commodities
|
|
|
services
and other
|
|
|
Hong
Kong
|
|
|
|
|
|
|
|
brokerage
services
|
|
|
related
services
|
|
|
brokerage
services
|
|
|
Consolidated
|
|
|
Net revenues
|
|
$
|
69,980,296
|
|
|
$
|
16,654,534
|
|
|
$
|
8,956,501
|
|
|
$
|
95,591,331
|
|
|
Less: intersegment
sales
|
|
|
(10,003,579
|
)
|
|
|
(2,529,856
|
)
|
|
|
-
|
|
|
|
(12,533,435
|
)
|
|
Net revenues
from external customer
|
|
|
59,976,717
|
|
|
|
14,124,678
|
|
|
|
8,956,501
|
|
|
|
83,057,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
revenues
|
|
|
5,729,464
|
|
|
|
10,392,343
|
|
|
|
4,258,451
|
|
|
|
20,380,258
|
|
|
Less: intersegment
cost of revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cost of
revenues after elimination
|
|
|
5,729,464
|
|
|
|
10,392,343
|
|
|
|
4,258,451
|
|
|
|
20,380,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
6,026,102
|
|
|
|
10,090,294
|
|
|
|
3,992,953
|
|
|
|
20,109,349
|
|
|
Product
development
|
|
|
3,374,144
|
|
|
|
12,995,022
|
|
|
|
-
|
|
|
|
16,369,166
|
|
|
Sales and marketing
|
|
|
46,648,934
|
|
|
|
13,029,524
|
|
|
|
1,054,695
|
|
|
|
60,733,153
|
|
|
Loss from
impairment of intangible assets
|
|
|
1,111,149
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,111,149
|
|
|
Loss from impairment of goodwill
|
|
|
6,659,691
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,659,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segments operating expenses
|
|
|
63,820,020
|
|
|
|
36,114,840
|
|
|
|
5,047,648
|
|
|
|
104,982,508
|
|
|
Less:
intersegment operating expenses
|
|
|
(10,003,579
|
)
|
|
|
(2,524,975
|
)
|
|
|
(277,731
|
)
|
|
|
(12,806,285
|
)
|
|
Total operating expenses
|
|
|
53,816,441
|
|
|
|
33,589,865
|
|
|
|
4,769,917
|
|
|
|
92,176,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government subsidies
|
|
|
1,194,775
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,194,775
|
|
|
Income
(loss) from operations
|
|
$
|
1,625,587
|
|
|
$
|
(29,857,530
|
)
|
|
$
|
(71,867
|
)
|
|
$
|
(28,303,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segments
assets
|
|
|
42,343,571
|
|
|
|
197,412,591
|
|
|
|
77,656,701
|
|
|
|
317,412,863
|
|
|
Less: intersegment
balances
|
|
|
(13,508,587
|
)
|
|
|
(116,348,234
|
)
|
|
|
(19,932,216
|
)
|
|
|
(149,789,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
28,834,984
|
|
|
$
|
81,064,357
|
|
|
$
|
57,724,485
|
|
|
$
|
167,623,826
|
|
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
24.
|
SEGMENT AND GEOGRAPHIC INFORMATION - continued
|
For
the year ended December 31, 2015
|
|
|
|
|
|
Subscription
|
|
|
|
|
|
|
|
|
|
|
Commodities
|
|
|
services and other
|
|
|
Hong Kong
|
|
|
|
|
|
|
|
brokerage services
|
|
|
related services
|
|
|
brokerage
services
|
|
|
Consolidated
|
|
|
Net revenues
|
|
$
|
113,720,922
|
|
|
$
|
27,236,753
|
|
|
$
|
3,149,063
|
|
|
$
|
144,106,738
|
|
|
Less: intersegment sales
|
|
|
(34,018,268
|
)
|
|
|
(2,683,704
|
)
|
|
|
-
|
|
|
|
(36,701,972
|
)
|
|
Net revenues from external customer
|
|
|
79,702,654
|
|
|
|
24,553,049
|
|
|
|
3,149,063
|
|
|
|
107,404,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
4,975,361
|
|
|
|
14,321,339
|
|
|
|
1,181,538
|
|
|
|
20,478,238
|
|
|
Less: intersegment cost of revenues
|
|
|
-
|
|
|
|
(739,501
|
)
|
|
|
-
|
|
|
|
(739,501
|
)
|
|
Cost of revenues after elimination
|
|
|
4,975,361
|
|
|
|
13,581,838
|
|
|
|
1,181,538
|
|
|
|
19,738,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
4,026,984
|
|
|
|
11,148,924
|
|
|
|
2,978,161
|
|
|
|
18,154,069
|
|
|
Product development
|
|
|
2,549,731
|
|
|
|
8,188,718
|
|
|
|
-
|
|
|
|
10,738,449
|
|
|
Sales and marketing
|
|
|
69,674,657
|
|
|
|
12,139,100
|
|
|
|
566,396
|
|
|
|
82,380,153
|
|
|
Loss from impairment of intangible assets
|
|
|
250,360
|
|
|
|
-
|
|
|
|
-
|
|
|
|
250,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segments operating expenses
|
|
|
76,501,732
|
|
|
|
31,476,742
|
|
|
|
3,544,557
|
|
|
|
111,523,031
|
|
|
Less: intersegment operating expenses
|
|
|
(35,907,706
|
)
|
|
|
(47,620
|
)
|
|
|
(110,721
|
)
|
|
|
(36,066,047
|
)
|
|
Total operating expenses
|
|
|
40,594,026
|
|
|
|
31,429,122
|
|
|
|
3,433,836
|
|
|
|
75,456,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government subsidies
|
|
|
251,828
|
|
|
|
-
|
|
|
|
-
|
|
|
|
251,828
|
|
|
Income (loss) from operations
|
|
$
|
34,385,095
|
|
|
$
|
(20,457,911
|
)
|
|
$
|
(1,466,311
|
)
|
|
$
|
12,460,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segments assets
|
|
|
109,286,634
|
|
|
|
179,706,230
|
|
|
|
47,011,111
|
|
|
|
336,003,975
|
|
|
Less: intersegment balances
|
|
|
(51,101,320
|
)
|
|
|
(122,077,495
|
)
|
|
|
(18,760,003
|
)
|
|
|
(191,938,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
58,185,314
|
|
|
$
|
57,628,735
|
|
|
$
|
28,251,108
|
|
|
$
|
144,065,157
|
|
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
|
24.
|
SEGMENT
AND GEOGRAPHIC INFORMATION - continued
|
For
the year ended December 31, 2014
|
|
|
|
|
|
Subscription
services
|
|
|
|
|
|
|
|
|
|
|
Commodities
|
|
|
and other
|
|
|
Hong Kong
|
|
|
|
|
|
|
|
brokerage services
|
|
|
related services
|
|
|
brokerage
services
|
|
|
Consolidated
|
|
|
Net revenues
|
|
$
|
80,943,201
|
|
|
$
|
25,250,486
|
|
|
$
|
4,610,516
|
|
|
$
|
110,804,203
|
|
|
Less: intersegment sales
|
|
|
(20,852,084
|
)
|
|
|
(6,256,234
|
)
|
|
|
-
|
|
|
|
(27,108,318
|
)
|
|
Net revenues from external customer
|
|
|
60,091,117
|
|
|
|
18,994,252
|
|
|
|
4,610,516
|
|
|
|
83,695,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
10,526,980
|
|
|
|
8,091,595
|
|
|
|
1,731,651
|
|
|
|
20,350,226
|
|
|
Less: intersegment cost of revenues
|
|
|
-
|
|
|
|
2,503
|
|
|
|
-
|
|
|
|
2,503
|
|
|
Cost of revenues after elimination
|
|
|
10,526,980
|
|
|
|
8,094,098
|
|
|
|
1,731,651
|
|
|
|
20,352,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
8,320,540
|
|
|
|
19,544,999
|
|
|
|
2,655,925
|
|
|
|
30,521,464
|
|
|
Product development
|
|
|
2,460,048
|
|
|
|
13,567,759
|
|
|
|
-
|
|
|
|
16,027,807
|
|
|
Sales and marketing
|
|
|
52,371,135
|
|
|
|
12,845,724
|
|
|
|
586,015
|
|
|
|
65,802,874
|
|
|
Loss from impairment of intangible assets
|
|
|
-
|
|
|
|
1,802,125
|
|
|
|
-
|
|
|
|
1,802,125
|
|
|
Loss from impairment of goodwill
|
|
|
-
|
|
|
|
8,149,525
|
|
|
|
-
|
|
|
|
8,149,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segments operating expenses
|
|
|
63,151,723
|
|
|
|
55,910,132
|
|
|
|
3,241,940
|
|
|
|
122,303,795
|
|
|
Less: intersegment operating expenses
|
|
|
(24,533,694
|
)
|
|
|
(15,199,246
|
)
|
|
|
(117,740
|
)
|
|
|
(39,850,680
|
)
|
|
Total operating expenses
|
|
|
38,618,029
|
|
|
|
40,710,886
|
|
|
|
3,124,200
|
|
|
|
82,453,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government subsidies
|
|
|
655,437
|
|
|
|
3,980
|
|
|
|
-
|
|
|
|
659,417
|
|
|
Income (loss) from operations
|
|
$
|
11,601,545
|
|
|
$
|
(29,806,752
|
)
|
|
$
|
(245,335
|
)
|
|
$
|
(18,450,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segments assets
|
|
|
62,272,231
|
|
|
|
171,870,606
|
|
|
|
52,776,273
|
|
|
|
286,919,110
|
|
|
Less: intersegment balances
|
|
|
(26,824,659
|
)
|
|
|
(127,444,636
|
)
|
|
|
(18,746,458
|
)
|
|
|
(173,015,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
35,447,572
|
|
|
$
|
44,425,970
|
|
|
$
|
34,029,815
|
|
|
$
|
113,903,358
|
|
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
|
24.
|
SEGMENT
AND GEOGRAPHIC INFORMATION - continued
|
Enterprise
wide disclose
The
Group derives revenue from external customers for each of the following services during the years presented:
|
|
|
Years ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
Commodities brokerage services revenues
|
|
$
|
60,091,117
|
|
|
$
|
79,702,654
|
|
|
$
|
59,976,717
|
|
|
Financial information and advisory services revenues
|
|
|
10,355,732
|
|
|
|
17,205,459
|
|
|
|
10,696,523
|
|
|
Advertising revenues
|
|
|
8,160,310
|
|
|
|
7,023,399
|
|
|
|
2,893,707
|
|
|
Hong Kong brokerage services revenues
|
|
|
4,610,516
|
|
|
|
3,149,063
|
|
|
|
8,956,501
|
|
|
Others
|
|
|
478,210
|
|
|
|
324,191
|
|
|
|
534,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from external customers
|
|
$
|
83,695,885
|
|
|
$
|
107,404,766
|
|
|
$
|
83,057,896
|
|
Substantially
all of the Company's revenues for the years ended December 31, 2014, 2015 and 2016 were generated from the PRC and Hong Kong.
As
of December 31, 2014, 2015 and 2016, respectively, substantially all of long-lived assets of the Group are located in the PRC
and Hong Kong.
CHINA
FINANCE ONLINE CO. LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016
(In
U.S. dollars)
|
25.
|
STATUTORY
RESERVES AND RESTRICTED NET ASSETS
|
PRC
legal restrictions permit payments of dividends by the Group's PRC entities only out of their retained earnings, if any, determined
in accordance with PRC regulations. Prior to payment of dividends, pursuant to the laws applicable to the PRC Domestic Enterprises
and PRC Foreign Investment Enterprises, the PRC entities must make appropriations from after-tax profit to non-distributable statutory
reserve funds as determined by the Board of Directors of the Group. These reserve funds include the (1) general reserve, (2) enterprise
expansion fund and (3) staff bonus and welfare fund. Subject to certain cumulative limits, the general reserve fund requires annual
appropriations of not less than 10% of after-tax profit (as determined under accounting principles and financial regulations applicable
to PRC enterprises at each year-end); the other two funds are to be made at the discretion of the board of directors of each of
the Group's subsidiaries.
These
reserve funds can only be used for specific purposes and are not distributable as cash dividends.
The
appropriation to these reserves by the Group's PRC subsidiaries was $679,927, $1,820,080 and $353,069 in 2014, 2015 and 2016.
The
balance of the statutory reserves was $8,640,521 and $8,993,590 as of December 31 2015 and 2016. Such reserves have been included
in the retained earnings of the Company's consolidated balance sheet.
As a result of these PRC laws and
regulations and the requirement that distributions by PRC entities can only be paid out of distributable profits computed in accordance
with PRC GAAP, the PRC entities are restricted from transferring a portion of their net assets to the Group. Amounts restricted
include paid-in capital and the statutory reserves of the Company's PRC subsidiaries and VIEs. As of December 31, 2016, the aggregate
amounts restricted which represented the amount of net assets of the relevant subsidiaries and VIEs in the Group not available
for distribution was $70,986,132. As a result of the above restrictions, parent-only financials are presented on financial
statement Schedule I.
iSTAR International Futures Co.
Limited (now known as Rifa Futures Limited (“Rifa Futures”)), a subsidiary of the Company, resolved a disciplinary
action with the Securities and Futures Commission of the Hong Kong SAR (the “SFC”) on April 12, 2017. The disciplinary
action was instituted against Rifa Futures by the SFC under section 194 of the Securities and Futures Ordinance with respect to
Rifa Future’s internal control deficiencies during the period between January 1, 2014 and July 31, 2014 (the “Relevant
Period”). The SFC found that during the Relevant Period, Rifa Futures failed to take sufficient steps to mitigate the risk
of unlawful money remittance when handling third party deposits and transfers to be in compliance with the applicable regulatory
requirements. The SFC issued a press release on April 12, 2017 reprimanding Rifa Future and announcing a fine against Rifa Futures
in the amount of HK$3 million. In the press release, the SFC also acknowledged that (i) Rifa Futures has taken steps to remediate
its internal control deficiencies; (ii) Rifa Futures cooperated with the SFC in resolving the disciplinary proceeding; (iii) Rifa
Futures agreed to engage an independent reviewer to conduct a review of its internal controls; and (iv) Rifa Futures has an otherwise
clean disciplinary record.
All the responsible officers
and other key staff responsible for the internal control deficiencies that are the subject of the disciplinary action have ceased
to be employed by Rifa Futures. The HK$3 million fine has been reflected in the financial results in 2016.
CHINA
FINANCE ONLINE CO. LIMITED
Additional
Information - Financial Statement Schedule I
Financial
information of Parent Company
Balance
sheets
(In
U.S. dollars, except share-related data)
|
|
December 31,
|
|
|
|
2015
|
|
|
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
971,500
|
|
|
$
|
9,427,287
|
|
Amounts due from subsidiaries, VIEs and VIE's subsidiaries
|
|
|
7,350,974
|
|
|
|
9,874,248
|
|
Prepaid expenses and other current assets
|
|
|
290,603
|
|
|
|
3,224,614
|
|
Dividends receivable
|
|
|
16,529,639
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
25,142,716
|
|
|
|
22,526,149
|
|
|
|
|
|
|
|
|
|
|
Investments in subsidiaries, VIEs and VIE's subsidiaries
|
|
|
76,682,094
|
|
|
|
77,036,485
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
101,824,810
|
|
|
$
|
99,562,634
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
|
279,801
|
|
|
|
301,076
|
|
Contingent liability
|
|
|
-
|
|
|
|
3,000,000
|
|
Amounts due to subsidiaries, VIEs and VIE's subsidiaries
|
|
|
13,506,638
|
|
|
|
10,096,874
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
$
|
13,786,439
|
|
|
$
|
13,397,950
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
|
|
|
|
|
|
Ordinary shares (118,098,018 and 118,098,018 shares issued and outstanding as of December 31, 2015 and 2016, respectively)
|
|
|
56,856,000
|
|
|
|
56,973,632
|
|
Additional paid-in capital
|
|
|
28,145,846
|
|
|
|
32,176,992
|
|
Accumulated other comprehensive income
|
|
|
8,597,295
|
|
|
|
4,253,643
|
|
Retained deficits
|
|
|
(5,560,770
|
)
|
|
|
(7,239,583
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
88,038,371
|
|
|
|
86,164,684
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
101,824,810
|
|
|
$
|
99,562,634
|
|
CHINA
FINANCE ONLINE CO. LIMITED
Financial
information of Parent Company
Statements
of Comprehensive Income
(In
U.S. dollars)
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
34,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
-
|
|
|
|
-
|
|
|
|
(34,740
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1,418,198
|
|
|
|
1,226,800
|
|
|
|
2,150,680
|
|
Product development
|
|
|
50,859
|
|
|
|
-
|
|
|
|
-
|
|
Sales and marketing
|
|
|
108,384
|
|
|
|
-
|
|
|
|
-
|
|
Share-based compensation
|
|
|
4,132,182
|
|
|
|
3,812,733
|
|
|
|
2,382,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,709,623
|
|
|
|
5,039,533
|
|
|
|
4,533,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
30
|
|
|
|
47
|
|
|
|
-
|
|
Equity in earnings (deficits) of subsidiaries, VIEs and VIE's subsidiaries
|
|
|
(6,394,055
|
)
|
|
|
28,643,095
|
|
|
|
3,049,831
|
|
Exchange loss, net
|
|
|
(76,351
|
)
|
|
|
(1,011,509
|
)
|
|
|
(159,868
|
)
|
Other income (loss), net
|
|
|
674,414
|
|
|
|
(109,684
|
)
|
|
|
(422
|
)
|
Gain from sales of cost method investment
|
|
|
4,337,736
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(7,167,849
|
)
|
|
$
|
22,482,416
|
|
|
$
|
(1,678,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in foreign currency translation adjustment
|
|
|
(221,070
|
)
|
|
|
(3,467,043
|
)
|
|
|
(4,343,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax
|
|
|
(221,070
|
)
|
|
|
(3,467,043
|
)
|
|
|
(4,343,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(7,388,919
|
)
|
|
$
|
19,015,373
|
|
|
$
|
(6,022,465
|
)
|
CHINA
FINANCE ONLINE CO. LIMITED
Financial
Information of Parent Company
Statement
of Shareholders' Equity
(In
U.S. dollars, except share data)
|
|
|
|
|
|
|
|
Additional
|
|
|
Accumulated other
|
|
|
Retained
|
|
|
Total
|
|
|
|
Ordinary
shares
|
|
|
paid-in
|
|
|
comprehensive
|
|
|
earnings
|
|
|
shareholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
income
(loss)
|
|
|
(deficits)
|
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2014
|
|
|
111,145,633
|
|
|
$
|
14,353
|
|
|
$
|
84,346,266
|
|
|
$
|
12,285,615
|
|
|
$
|
(20,875,337
|
)
|
|
$
|
75,770,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
share premium to share capital
|
|
|
-
|
|
|
|
55,718,184
|
|
|
|
(55,718,184
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercise
of share options by employees
|
|
|
1,164,300
|
|
|
|
654,055
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
654,055
|
|
Restricted
shares issued
|
|
|
108,000
|
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
4,132,182
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,132,182
|
|
Equity
pick up from compensation of VIE's subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
408,075
|
|
|
|
-
|
|
|
|
-
|
|
|
|
408,075
|
|
Business
restructure
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,960,940
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,960,940
|
)
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
207
|
|
|
|
(221,277
|
)
|
|
|
-
|
|
|
|
(221,070
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,167,849
|
)
|
|
|
(7,167,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2014
|
|
|
112,417,933
|
|
|
$
|
56,386,606
|
|
|
$
|
24,207,606
|
|
|
$
|
12,064,338
|
|
|
$
|
(28,043,186
|
)
|
|
$
|
64,615,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of ordinary shares for stock options and restricted shares
|
|
|
4,000,000
|
|
|
|
520
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
520
|
|
Exercise
of share options by employees
|
|
|
435,000
|
|
|
|
293,654
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
293,654
|
|
Exercise
of share options by nonemployees
|
|
|
1,095,000
|
|
|
|
175,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
175,200
|
|
Restricted
shares issued
|
|
|
150,085
|
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
3,812,733
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,812,733
|
|
Equity
pick up from compensation of VIE's subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
1,519,015
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,519,015
|
|
Changes
in controlling ownership interest
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,393,508
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,393,508
|
)
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,467,043
|
)
|
|
|
-
|
|
|
|
(3,467,043
|
)
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,482,416
|
|
|
|
22,482,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2015
|
|
|
118,098,018
|
|
|
$
|
56,856,000
|
|
|
$
|
28,145,846
|
|
|
$
|
8,597,295
|
|
|
$
|
(5,560,770
|
)
|
|
$
|
88,038,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of share options by employees
|
|
|
-
|
|
|
|
117,632
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
117,632
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
2,382,934
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,382,934
|
|
Equity
pick up from compensation of VIE's subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
2,030,877
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,030,877
|
|
Changes
in controlling ownership interest
|
|
|
-
|
|
|
|
-
|
|
|
|
(382,665
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(382,665
|
)
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,343,652
|
)
|
|
|
-
|
|
|
|
(4,343,652
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,678,813
|
)
|
|
|
(1,678,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2016
|
|
|
118,098,018
|
|
|
$
|
56,973,632
|
|
|
$
|
32,176,992
|
|
|
$
|
4,253,643
|
|
|
$
|
(7,239,583
|
)
|
|
$
|
86,164,684
|
|
CHINA
FINANCE ONLINE CO. LIMITED
Financial
information of Parent Company
Statements
of cash flows
(In
U.S. dollars, except share-related data)
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(7,167,849
|
)
|
|
$
|
22,482,416
|
|
|
$
|
(1,678,813
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
4,132,182
|
|
|
|
3,812,733
|
|
|
|
2,382,934
|
|
Gain from sales of cost method investment
|
|
|
(4,337,736
|
)
|
|
|
-
|
|
|
|
-
|
|
Equity in deficits (earnings) of subsidiaries, VIEs and VIE's subsidiaries
|
|
|
6,394,055
|
|
|
|
(28,643,095
|
)
|
|
|
(3,049,831
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(143,380
|
)
|
|
|
20,339
|
|
|
|
65,990
|
|
Amounts due from subsidiaries, VIEs and VIE's subsidiaries
|
|
|
983,297
|
|
|
|
142,303
|
|
|
|
(2,523,274
|
)
|
Rental deposits
|
|
|
-
|
|
|
|
66,893
|
|
|
|
-
|
|
Accrued expenses and other current liabilities
|
|
|
10,825
|
|
|
|
(8,035
|
)
|
|
|
(3,712
|
)
|
Amounts due to subsidiaries, VIEs and VIE's subsidiaries
|
|
|
1,535,073
|
|
|
|
1,065,088
|
|
|
|
(3,409,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
1,406,467
|
|
|
|
(1,061,358
|
)
|
|
|
(8,216,470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend received from subsidiaries
|
|
|
1,375,727
|
|
|
|
1,011,931
|
|
|
|
16,529,639
|
|
Capital paid to subsidiaries
|
|
|
(2,774,315
|
)
|
|
|
(3,000,000
|
)
|
|
|
-
|
|
Proceeds from sales of cost method investment
|
|
|
-
|
|
|
|
2,168,868
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(1,398,588
|
)
|
|
|
180,799
|
|
|
|
16,529,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock options exercised by employees
|
|
|
654,055
|
|
|
|
293,654
|
|
|
|
142,618
|
|
Proceeds from stock options exercised by nonemployees
|
|
|
-
|
|
|
|
175,200
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
654,055
|
|
|
|
468,854
|
|
|
|
142,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
661,934
|
|
|
|
(411,705
|
)
|
|
|
8,455,787
|
|
Cash and cash equivalents, beginning of the year
|
|
|
721,271
|
|
|
|
1,383,205
|
|
|
|
971,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the year
|
|
$
|
1,383,205
|
|
|
$
|
971,500
|
|
|
$
|
9,427,287
|
|
Note:
Basis
for preparation
The
parent-company Financial Information of China Finance Online has been prepared using the same accounting policies as set out in
the Group's consolidated financial statements except that China Finance Online has used equity method to account for its investments
in its subsidiaries and variable interest entities.
F-71