REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the Board of Directors and Stockholders of
ChinaNet Online Holdings, Inc.
We have audited the accompanying consolidated balance sheets of ChinaNet Online Holdings, Inc. and Subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income and comprehensive income, changes in equity and cash flows for each of the years in the two-year period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company, as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.
/s/ Marcum Bernstein & Pinchuk LLP
Marcum Bernstein & Pinchuk LLP
New York, New York
April 15, 2013
CHINANET ONLINE HOLDINGS, INC.
(In thousands)
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(US $)
|
|
|
(US $)
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,483
|
|
|
$
|
10,695
|
|
Term deposit
|
|
|
3,357
|
|
|
|
-
|
|
Accounts receivable, net
|
|
|
8,486
|
|
|
|
4,444
|
|
Other receivables, net
|
|
|
3,103
|
|
|
|
3,631
|
|
Prepayment and deposit to suppliers
|
|
|
14,596
|
|
|
|
15,360
|
|
Due from related parties
|
|
|
210
|
|
|
|
324
|
|
Contingent consideration receivables
|
|
|
-
|
|
|
|
159
|
|
Other current assets
|
|
|
136
|
|
|
|
129
|
|
Deferred tax assets-current
|
|
|
50
|
|
|
|
-
|
|
Total current assets
|
|
|
35,421
|
|
|
|
34,742
|
|
|
|
|
|
|
|
|
|
|
Investment in and advance to equity investment affiliates
|
|
|
959
|
|
|
|
1,396
|
|
Property and equipment, net
|
|
|
1,636
|
|
|
|
1,902
|
|
Intangible assets, net
|
|
|
7,167
|
|
|
|
8,151
|
|
Goodwill
|
|
|
11,083
|
|
|
|
10,999
|
|
Deferred tax assets-non current
|
|
|
652
|
|
|
|
92
|
|
Total Assets
|
|
$
|
56,918
|
|
|
$
|
57,282
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable *
|
|
$
|
110
|
|
|
$
|
268
|
|
Advances from customers *
|
|
|
1,065
|
|
|
|
724
|
|
Accrued payroll and other accruals *
|
|
|
904
|
|
|
|
616
|
|
Due to equity investment affiliate *
|
|
|
-
|
|
|
|
220
|
|
Due to related parties *
|
|
|
-
|
|
|
|
161
|
|
Payable for acquisition *
|
|
|
1,266
|
|
|
|
550
|
|
Taxes payable *
|
|
|
6,683
|
|
|
|
5,040
|
|
Other payables *
|
|
|
217
|
|
|
|
114
|
|
Dividend payable
|
|
|
-
|
|
|
|
5
|
|
Total current liabilities
|
|
|
10,245
|
|
|
|
7,698
|
|
CHINANET ONLINE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except for number of shares)
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(US $)
|
|
|
(US $)
|
|
Long-term liabilities:
|
|
|
|
|
|
|
Deferred tax liability-non current *
|
|
|
1,689
|
|
|
|
1,893
|
|
Long-term borrowing from director
|
|
|
139
|
|
|
|
137
|
|
Total Liabilities
|
|
|
12,073
|
|
|
|
9,728
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
ChinaNet Online Holdings, Inc.’s stockholders’ equity
|
|
|
|
|
|
|
|
|
Common stock (US$0.001 par value; authorized 50,000,000 shares; issued and outstanding 22,186,540 shares and 22,146,540 shares at December 31, 2012 and 2011, respectively
|
|
|
22
|
|
|
|
22
|
|
Additional paid-in capital
|
|
|
20,008
|
|
|
|
20,747
|
|
Statutory reserves
|
|
|
2,296
|
|
|
|
2,117
|
|
Retained earnings
|
|
|
19,505
|
|
|
|
16,688
|
|
Accumulated other comprehensive income
|
|
|
2,393
|
|
|
|
2,132
|
|
Total ChinaNet Online Holdings, Inc.’s stockholders’ equity
|
|
|
44,224
|
|
|
|
41,706
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests
|
|
|
621
|
|
|
|
5,848
|
|
Total equity
|
|
|
44,845
|
|
|
|
47,554
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
56,918
|
|
|
$
|
57,282
|
|
*All of the VIEs' assets can be used to settle obligations of their primary beneficiary. Liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets (Note 2).
See notes to consolidated financial statements
CHINANET ONLINE HOLDINGS, INC.
(In thousands)
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(US $)
|
|
|
(US $)
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
From unrelated parties
|
|
$
|
46,403
|
|
|
$
|
28,105
|
|
From related parties
|
|
|
197
|
|
|
|
626
|
|
|
|
|
46,600
|
|
|
|
28,731
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
31,558
|
|
|
|
12,027
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
15,042
|
|
|
|
16,704
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
2,683
|
|
|
|
3,506
|
|
General and administrative expenses
|
|
|
6,030
|
|
|
|
7,904
|
|
Research and development expenses
|
|
|
1,819
|
|
|
|
2,132
|
|
|
|
|
10,532
|
|
|
|
13,542
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
4,510
|
|
|
|
3,162
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
Changes in fair value of contingent consideration receivables
|
|
|
(160
|
)
|
|
|
(70
|
)
|
Interest income
|
|
|
186
|
|
|
|
13
|
|
Gain on deconsolidation of subsidiaries
|
|
|
-
|
|
|
|
925
|
|
Other (expenses)/income
|
|
|
(150
|
)
|
|
|
5
|
|
|
|
|
(124
|
)
|
|
|
873
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense, equity method investments and noncontrolling interests
|
|
|
4,386
|
|
|
|
4,035
|
|
Income tax expense
|
|
|
529
|
|
|
|
1,035
|
|
Income before equity method investments and noncontrolling interests
|
|
|
3,857
|
|
|
|
3,000
|
|
Share of losses in equity investment affiliates
|
|
|
(449
|
)
|
|
|
(219
|
)
|
Net income
|
|
|
3,408
|
|
|
|
2,781
|
|
Net (income) / losses attributable to noncontrolling interests
|
|
|
(412
|
)
|
|
|
214
|
|
Net income attributable to ChinaNet Online Holdings, Inc.
|
|
|
2,996
|
|
|
|
2,995
|
|
CHINANET ONLINE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (CONTINUED)
(In thousands, except for number of shares and per share data)
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(US $)
|
|
|
(US $)
|
|
|
|
|
|
|
|
|
Net income attributable to ChinaNet Online Holdings, Inc.
|
|
$
|
2,996
|
|
|
$
|
2,995
|
|
Dividend of Series A convertible preferred stock
|
|
|
-
|
|
|
|
(407
|
)
|
Net income attributable to common stockholders of ChinaNet Online Holdings, Inc.
|
|
$
|
2,996
|
|
|
$
|
2,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
3,408
|
|
|
|
2,781
|
|
Foreign currency translation gain
|
|
|
267
|
|
|
|
1,254
|
|
Comprehensive Income
|
|
$
|
3,675
|
|
|
$
|
4,035
|
|
Comprehensive (income) / losses attributable to noncontrolling interests
|
|
|
(418
|
)
|
|
|
162
|
|
Comprehensive income attributable to ChinaNet Online Holdings, Inc.
|
|
$
|
3,257
|
|
|
$
|
4,197
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
Diluted
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,185,556
|
|
|
|
18,545,609
|
|
Diluted
|
|
|
22,185,556
|
|
|
|
18,759,240
|
|
See notes to consolidated financial statements
CHINANET ONLINE HOLDINGS, INC.
(In thousands)
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(US $)
|
|
|
(US $)
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
|
$
|
3,408
|
|
|
$
|
2,781
|
|
Adjustments to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,637
|
|
|
|
1,012
|
|
Share-based compensation expenses
|
|
|
48
|
|
|
|
2,900
|
|
Changes in fair value of contingent consideration receivables
|
|
|
160
|
|
|
|
70
|
|
Allowances for doubtful debts
|
|
|
1,141
|
|
|
|
2,583
|
|
Share of losses in equity investment affiliates
|
|
|
449
|
|
|
|
219
|
|
Gain on deconsolidation of subsidiaries
|
|
|
-
|
|
|
|
(925
|
)
|
Loss / (gain) on disposal of property and equipment
|
|
|
2
|
|
|
|
(3
|
)
|
Deferred taxes
|
|
|
(828
|
)
|
|
|
27
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(5,516
|
)
|
|
|
(2,100
|
)
|
Other receivables
|
|
|
1,400
|
|
|
|
5,276
|
|
Prepayment and deposit to suppliers
|
|
|
882
|
|
|
|
(11,247
|
)
|
Due from related parties
|
|
|
117
|
|
|
|
(130
|
)
|
Other current assets
|
|
|
(5
|
)
|
|
|
(197
|
)
|
Accounts payable
|
|
|
(158
|
)
|
|
|
27
|
|
Advances from customers
|
|
|
335
|
|
|
|
(1,575
|
)
|
Accrued payroll and other accruals
|
|
|
285
|
|
|
|
166
|
|
Due to director
|
|
|
-
|
|
|
|
(559
|
)
|
Due to Control Group
|
|
|
-
|
|
|
|
(82
|
)
|
Due to related parties
|
|
|
(4
|
)
|
|
|
(139
|
)
|
Other payables
|
|
|
72
|
|
|
|
490
|
|
Taxes payable
|
|
|
1,603
|
|
|
|
803
|
|
Net cash provided by (used in) operating activities
|
|
|
5,028
|
|
|
|
(603
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of vehicles and office equipment
|
|
|
(314
|
)
|
|
|
(741
|
)
|
Purchase of intangible assets
|
|
|
-
|
|
|
|
(1,445
|
)
|
Short-term loan to unrelated entities
|
|
|
(475
|
)
|
|
|
-
|
|
Project development deposit to a third party
|
|
|
(2,453
|
)
|
|
|
-
|
|
Refund of project development deposit from a third party
|
|
|
2,453
|
|
|
|
-
|
|
Cash from acquisition of VIEs
|
|
|
-
|
|
|
|
330
|
|
Cash effect on deconsolidation of VIEs
|
|
|
-
|
|
|
|
(1,670
|
)
|
Long-term investment in and advance to equity investment affiliates
|
|
|
-
|
|
|
|
(1,712
|
)
|
Disposal of investment in and loan repayment from equity investment affiliate
|
|
|
-
|
|
|
|
8,885
|
|
Payment for acquisition of VIEs
|
|
|
(5,775
|
)
|
|
|
(9,731
|
)
|
Placement of term deposit
|
|
|
(3,355
|
)
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(9,919
|
)
|
|
|
(6,084
|
)
|
CHINANET ONLINE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(US $)
|
|
|
(US $)
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Cash investment contributed by noncontrolling interests
|
|
|
-
|
|
|
|
378
|
|
Dividend paid to convertible preferred stockholders
|
|
|
(5
|
)
|
|
|
(657
|
)
|
Short-term loan borrowed from an equity investment affiliate
|
|
|
316
|
|
|
|
216
|
|
Short-term loan repaid to an equity investment affiliate
|
|
|
(538
|
)
|
|
|
-
|
|
Repayment to legal (nominal) shareholders of Shanghai Jing Yang
|
|
|
(158
|
)
|
|
|
-
|
|
Capital contributions received in advance from new shareholders of Zhao Shang Ke Hubei before deconsolidation
|
|
|
-
|
|
|
|
1,545
|
|
Net cash (used in) provided by financing activities
|
|
|
(385
|
)
|
|
|
1,482
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuation on cash and cash equivalents
|
|
|
64
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(5,212
|
)
|
|
|
(4,895
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of the year
|
|
|
10,695
|
|
|
|
15,590
|
|
Cash and cash equivalents at end of the year
|
|
$
|
5,483
|
|
|
$
|
10,695
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
75
|
|
|
$
|
319
|
|
|
|
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock and options granted for future service
|
|
$
|
42
|
|
|
$
|
6
|
|
Payment for acquisition of Sou Yi Lian Mei
(1)
|
|
$
|
1,266
|
|
|
$
|
550
|
|
See notes to consolidated financial statements
CHINANET ONLINE HOLDINGS, INC.
(In thousands, except for number of shares)
|
|
Total equity
|
|
|
|
|
|
|
|
|
|
Series A convertible
preferred stock
|
|
|
Common Stock
|
|
|
Additional
paid-in
capital
|
|
|
Statutory
reserves
|
|
|
Retained
earnings
|
|
|
Accumulated
other
comprehensive
income
|
|
|
Non-
Controlling
Interests
|
|
|
Total
Equity
|
|
|
|
Number of
shares
|
|
|
Amount
|
|
|
Number of
shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(US $)
|
|
|
|
|
|
(US $)
|
|
|
(US $)
|
|
|
(US $)
|
|
|
(US $)
|
|
|
(US $)
|
|
|
(US $)
|
|
|
(US $)
|
|
Balance, January 1, 2011
|
|
|
2,877,600
|
|
|
|
3
|
|
|
|
17,102,320
|
|
|
|
17
|
|
|
|
18,614
|
|
|
|
1,587
|
|
|
|
14,630
|
|
|
|
930
|
|
|
|
(70
|
)
|
|
|
35,711
|
|
Preferred stock converted into common stock
|
|
|
(2,877,600
|
)
|
|
|
(3
|
)
|
|
|
2,877,600
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Share based compensation related to services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
141
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
141
|
|
Restricted shares issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
60,000
|
|
|
|
-
|
|
|
|
152
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
152
|
|
Restricted stock and options issued to management, employees and directors on November 30, 2011
|
|
|
-
|
|
|
|
-
|
|
|
|
2,000,000
|
|
|
|
2
|
|
|
|
2,605
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,607
|
|
Share issued under the Warrant Tender Offer on December 30, 2011
|
|
|
-
|
|
|
|
-
|
|
|
|
106,620
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Noncontrolling equity interests in acquired VIEs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,054
|
|
|
|
6,054
|
|
Noncontrolling equity interests in newly formed VIEs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(703
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,079
|
|
|
|
376
|
|
Deconsolidation of VIEs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
(20
|
)
|
Purchased of noncontrolling interests in a VIE
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(62
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,033
|
)
|
|
|
(1,095
|
)
|
Net income for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,995
|
|
|
|
-
|
|
|
|
(214
|
)
|
|
|
2,781
|
|
Appropriation of statutory reserves
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
530
|
|
|
|
(530
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Preferred stock dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(407
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(407
|
)
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,202
|
|
|
|
52
|
|
|
|
1,254
|
|
Balance, December 31, 2011
|
|
|
-
|
|
|
|
-
|
|
|
|
22,146,540
|
|
|
|
22
|
|
|
|
20,747
|
|
|
|
2,117
|
|
|
|
16,688
|
|
|
|
2,132
|
|
|
|
5,848
|
|
|
|
47,554
|
|
CHINANET ONLINE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED)
(In thousands, except for number of shares)
|
|
Total equity (Continued)
|
|
|
|
|
|
|
|
|
|
Series A convertible
preferred stock
|
|
|
Common Stock
|
|
|
Additional
paid-in
capital
|
|
|
Statutory
reserves
|
|
|
Retained
earnings
|
|
|
Accumulated
other
comprehensive
income
|
|
|
Non-
Controlling
Interests
|
|
|
Total
Equity
|
|
|
|
Number of
shares
|
|
|
Amount
|
|
|
Number of
shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(US $)
|
|
|
|
|
|
(US $)
|
|
|
(US $)
|
|
|
(US $)
|
|
|
(US $)
|
|
|
(US $)
|
|
|
|
|
|
(US $)
|
|
Restricted shares issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
40,000
|
|
|
|
-
|
|
|
|
42
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
42
|
|
Share based compensation related to services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
Purchased of noncontrolling interests in a VIE
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(787
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,645
|
)
|
|
|
(6,432
|
)
|
Appropriation of statutory reserves
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
179
|
|
|
|
(179
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,996
|
|
|
|
-
|
|
|
|
412
|
|
|
|
3,408
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
261
|
|
|
|
6
|
|
|
|
267
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,186,540
|
|
|
|
22
|
|
|
|
20,008
|
|
|
|
2,296
|
|
|
|
19,505
|
|
|
|
2,393
|
|
|
|
621
|
|
|
|
44,845
|
|
See notes to consolidated financial statements
CHINANET ONLINE HOLDINGS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Organization and nature of operations
|
ChinaNet Online Holdings, Inc. (formerly known as Emazing Interactive, Inc.) (the “Company”) was incorporated in the State of Texas in April 2006 and re-domiciled to become a Nevada corporation in October 2006. From the date of the Company’s incorporation until June 26, 2009, when the Company consummated the Share Exchange (discussed below), the Company’s activities were primarily concentrated in web server access and company branding in hosting web based e-games.
On June 26, 2009, the Company entered into a Share Exchange Agreement (the “Exchange Agreement”), with (i) China Net Online Media Group Limited, a company organized under the laws of British Virgin Islands (“China Net BVI”), (ii) China Net BVI’s shareholders, Allglad Limited, a British Virgin Islands company (“Allglad”), Growgain Limited, a British Virgin Islands company ("Growgain"), Rise King Investments Limited, a British Virgin Islands company (“Rise King BVI”), Star (China) Holdings Limited, a British Virgin Islands company (“Star”), Surplus Elegant Investment Limited, a British Virgin Islands company (“Surplus”), Clear Jolly Holdings Limited, a British Virgin Islands company (“Clear” and together with Allglad, Growgain, Rise King BVI, Star and Surplus, the “China Net BVI Shareholders”), who together owned shares constituting 100% of the issued and outstanding ordinary shares of China Net BVI (the “China Net BVI Shares”) and (iii) G. Edward Hancock, the principal stockholder of the Company at that time. Pursuant to the terms of the Exchange Agreement, the China Net BVI Shareholders transferred to the Company all of the China Net BVI Shares in exchange for the issuance of 13,790,800 shares (the “Exchange Shares”) in the aggregate of the Company’s common stock (the “Share Exchange”). As a result of the Share Exchange, China Net BVI became a wholly owned subsidiary of the Company and the Company is now a holding company, which, through certain contractual arrangements with operating companies in the People’s Republic of China (the “PRC”), is engaged in providing advertising, marketing, communication and brand management and sales channel building services to small and medium companies in China.
The Company’s wholly owned subsidiary, China Net BVI was incorporated in the British Virgin Islands on August 13, 2007. On April 11, 2008, China Net BVI became the parent holding company of a group of companies comprised of CNET Online Technology Limited, a Hong Kong company (“China Net HK”), which established and is the parent company of Rise King Century Technology Development (Beijing) Co., Ltd., a wholly foreign-owned enterprise (“WFOE”) established in the PRC (“Rise King WFOE”). The Company refers to the transactions that resulted in China Net BVI becoming an indirect parent company of Rise King WFOE as the “Offshore Restructuring.”
PRC regulations prohibit direct foreign ownership of business entities providing internet content, or ICP services in the PRC, and restrict foreign ownership of business entities engaging in the advertising business. In October 2008, a series of contractual arrangements (the “Contractual Agreements” or “VIE Agreements”) were entered into among Rise King WFOE and Business Opportunity Online (Beijing) Network Technology Co., Ltd. (“Business Opportunity Online”), Beijing CNET Online Advertising Co., Ltd. (“Beijing CNET Online”) (collectively the “PRC Operating Entities”) and its common individual owners (the “PRC Shareholders” or the “Control Group”). The Contractual Agreements allowed China Net BVI, through Rise King WFOE, to, among other things, secure significant rights to influence the PRC Operating Entities’ business operations, policies and management, approve all matters requiring shareholder approval, and receive 100% of the income earned by the PRC Operating Entities. In return, Rise King WFOE provides consulting services to the PRC Operating Entities. In addition, to ensure that the PRC Operating Entities and the PRC Shareholders perform their obligations under the Contractual Arrangements, the PRC Shareholders have pledged all of their equity interests in the PRC Operating Entities to Rise King WFOE. They also entered into an option agreement with Rise King WFOE which provides that at such time as when the current restrictions under PRC law on foreign ownership of Chinese companies engaging in the Internet content, information services or advertising business in China are lifted, Rise King WFOE may exercise its option to purchase the equity interests in the PRC Operating Entities, directly (See Note 2 for significant terms of these Contractual Arrangements).
Pursuant to the Contractual Agreements, all of the equity owners' rights and obligations of the VIEs were assigned to Rise King WFOE, which resulted in the equity owners lacking the ability to make decisions that have a significant effect on the VIEs, Rise King WFOE's ability to extract the profits from the operation of the VIEs and assume the residual benefits of the VIEs. Due to the fact that Rise King WFOE and its indirect parent are the sole interest holders of the VIEs, the Company included the assets, liabilities, revenues and expenses of the VIEs in its consolidated financial statements, which is consistent with the provisions of FASB Accounting Standards Codification ("ASC") Topic 810 “Consolidation”, subtopic 10.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of the date of the Share Exchange, through the Contractual Agreements, the Company operates its business in China primarily through Business Opportunity Online and Beijing CNET Online. Beijing CNET Online owns 51% of Shanghai Borongdingsi Computer Technology Co., Ltd. (“Shanghai Borongdingsi”). Business Opportunity Online, Beijing CNET Online and Shanghai Borongdingsi, were incorporated on December 8, 2004, January 27, 2003 and August 3, 2005, respectively.
Shanghai Borongdingsi is 51% owned by Beijing CNET Online. Beijing CNET Online and Shanghai Borongdingsi entered into a cooperation agreement in June 2008, followed up with a supplementary agreement in December 2008, to conduct a bank kiosk advertisement business. The business is based on a bank kiosk cooperation agreement between Shanghai Borongdingsi and Henan provincial branch of China Construction Bank which allows Shanghai Borongdingsi or its designated party to conduct in-door advertisement business within the business outlets throughout Henan Province. The bank kiosk cooperation agreement has a term of eight years beginning in August 2008. However, Shanghai Borongdingsi was not able to conduct the advertisement business as a stand-alone business due to the lack of an advertisement business license and supporting financial resources. Pursuant to the aforementioned cooperation agreements, Beijing CNET Online committed to purchase equipment and to provide working capital, technical and other related support to Shanghai Borongdingsi. Beijing CNET Online owns the equipment used in the kiosk business, is entitled to sign contracts in its name on behalf of the business, and holds the right to collect the advertisement revenue generated from the bank kiosk business exclusively until it recovers the cost of purchasing the equipment. Thereafter, Beijing CNET Online has agreed to distribute 49% of the net profit generated from the bank kiosk advertising business, if any, to the minority shareholders of Shanghai Borongdingsi.
On June 24, 2010, one of the Company’s VIEs, Business Opportunity Online, together with three other individuals, who were not affiliated with the Company, formed a new company, Shenzhen City Mingshan Network Technology Co., Ltd. (“Shenzhen Mingshan”). Shenzhen Mingshan is 51% owned by Business Opportunity Online and 49% owned collectively by the other three individuals. Shenzhen Mingshan is primarily engaged in developing and designing internet based software, online games and the related operating websites and providing related internet and information technology services necessary to operate such games and websites. On January 6, 2011, as approved by the shareholders of Shenzhen Mingshan, an unaffiliated third party invested RMB15,000,000 (approximately US$2,374,883) into Shenzhen Mingshan in exchange for a 60% equity interest in Shenzhen Mingshan. Therefore, beginning on January 6, 2011, the new investor became the majority shareholder of Shenzhen Mingshan. The Company’s share of the equity interest in Shenzhen Mingshan decreased from 51% to 20.4% and the Company ceased to have a controlling financial interest in Shenzhen Mingshan, but still retains an investment in, and significant influence over, Shenzhen Mingshan. On December 19, 2012, as approved by the shareholders of Shenzhen Mingshan, Shenzhen Mingshan reduced its registered and paid-in capital from RMB25,000,000 (approximately US$3,958,139) to RMB22,000,000 (approximately US$3,483,162), resulted from a decrease in paid-in capital from three other noncontrolling shareholders, except Business Opportunity Online. As a result, the Company’s share of the equity interest in Shenzhen Mingshan increased from 20.4% to 23.18% and the Company continued to retain significant influence over Shenzhen Mingshan.
On December 6, 2010, Rise King WFOE entered into a series of exclusive contractual arrangements, which were similar to the Contractual Agreements discussed above, with Rise King (Shanghai) Advertisement Media Co., Ltd. (“Shanghai Jing Yang”), a company incorporated under the PRC laws in December 2009 and primarily engaged in the advertising business, pursuant to which the Company, through its wholly owned subsidiary, Rise King WFOE obtained all of the equity owners' rights and obligations of Shanghai Jing Yang, and the ability to extract the profits from the operation and assume the residual benefits of Shanghai Jing Yang, and hence became the sole interest holder of Shanghai Jing Yang. As of the date these contractual agreements were entered into, Shanghai Jing Yang did not have the resources necessary to conduct any business activities by itself and the carrying amount of the net assets of Shanghai Jing Yang which was all cash and cash equivalents approximate its fair values due to their short maturities. Therefore, Shanghai Jing Yang’s accounts were included in the Company’s consolidated financial statements with no goodwill recognized in accordance with ASC Topic 810 “Consolidation”.
On December 8, 2010, the Company, through one of its VIEs, Shanghai Jing Yang acquired a 49% equity interest in a newly established company, Beijing Yang Guang Media Investment Co., Ltd. (“Beijing Yang Guang”). In August 2011, Shanghai Jing Yang sold back its 49% equity interest in Beijing Yang Guang to the majority shareholder of Beijing Yang Guang.
The Company, through one of its VIEs, Beijing CNET Online, acquired a 100% equity interest in Quanzhou Zhi Yuan Marketing Planning Co., Ltd. (“Quanzhou Zhi Yuan”) and a 51% equity interest in Quanzhou Tian Xi Shun He Advertisement Co., Ltd. (“Quanzhou Tian Xi Shun He”) on January 4, 2011 and February 23, 2011, respectively. Quanzhou Zhi Yuan and Quanzhou Tian Xi Shun He are both independent advertising companies based in Fujian province of the PRC, which provide comprehensive branding and marketing services to over fifty small to medium sized companies focused primarily in the sportswear and clothing industry. In June 2011, Beijing CNET Online acquired the remaining 49% equity interest in Quanzhou Tian Xi Shun He. Quanzhou Tian Xi Shun He became a wholly owned subsidiary of Beijing CNET Online accordingly.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 28, 2011, one of the Company’s VIEs, Business Opportunity Online, formed a new wholly owned subsidiary, Business Opportunity Online (Hubei) Network Technology Co., Ltd. (“Business Opportunity Online Hubei”). Business Opportunity Online Hubei is primarily engaged in internet advertisement design, production and promulgation.
On March 1, 2011, one of the Company’s VIEs, Business Opportunity Online, together with an individual, who was not affiliated with the Company, formed a new company, Beijing Chuang Fu Tian Xia Network Technology Co., Ltd. (“Beijing Chuang Fu Tian Xia”). Beijing Chuang Fu Tian Xia is 51% owned by Business Opportunity Online and 49% owned by the co-founding individual. In addition to capital investment, the co-founding individual is required to provide the controlled domain names,
www.liansuo.com
and
www.chuangye.com
to be registered under the established company. Beijing Chuang Fu Tian Xia is primarily engaged in providing and operating internet advertising, marketing and communication services to small and medium companies through the websites associated the above mentioned domain names.
On April 18, 2011, the Company, through one of its VIEs, Business Opportunity Online Hubei formed a new wholly owned company, Hubei CNET Advertising Media Co., Ltd. (“Hubei CNET”). Hubei CNET is primarily engaged in advertisement design, production, promulgation and providing the related advertising and marketing consultancy services.
On April 18, 2011, one of the Company’s VIEs, Business Opportunity Online Hubei, together with an individual, who was not affiliated with the Company, formed a new company, Zhao Shang Ke Network Technology (Hubei) Co., Ltd. (“Zhao Shang Ke Hubei”). Zhao Shang Ke Hubei is 51% owned by Business Opportunity Online Hubei and 49% owned by the co-founding individual. Zhao Shang Ke Hubei is primarily engaged in providing advertisement design, production, promulgation and sales channels building services. On December 29, 2011, as approved by the shareholders of Zhao Shang Ke Hubei, two unaffiliated third party investors invested RMB10,000,000 (approximately US$1,583,255) into Zhao Shang Ke Hubei in exchange for an aggregate 50% equity interest in Zhao Shang Ke Hubei. Therefore, beginning on December 29, 2011, the Company’s share of the equity interest in Zhao Shang Ke Hubei decreased from 51% to 25.5% and ceased to have a controlling financial interest in Zhao Shang Ke Hubei, but still retained an investment in, and significant influence over, Zhao Shang Ke Hubei.
On July 1, 2011, one of the Company’s VIEs, Quanzhou Zhi Yuan, formed a new wholly owned company, Xin Qi Yuan Advertisement Planning (Hubei) Co., Ltd. (“Xin Qi Yuan Hubei”). Xin Qi Yuan Hubei is primarily engaged in advertisement design, production, promulgation and providing the related advertising and marketing consultancy services.
On July 1, 2011, one of the Company’s VIEs, Quanzhou Tian Xi Shun He, formed a new wholly owned company, Mu Lin Sen Advertisement (Hubei) Co., Ltd. (“Mu Lin Sen Hubei”). Mu Lin Sen Hubei is primarily engaged in advertisement design, production, promulgation and providing the related advertising and marketing consultancy services.
On July 1, 2011, one of the Company’s VIEs, Business Opportunity Online Hubei, together with an individual who is not affiliated with the Company, formed a new company, Sheng Tian Network Technology (Hubei) Co., Ltd. (“Sheng Tian Hubei”). Sheng Tian Hubei is 51% owned by Business Opportunity Online Hubei and 49% owned by the co-founding individual. Sheng Tian Hubei is primarily engaged in computer system design, development and promotion, software development and promotion, and providing the related technical consultancy services.
On September 5, 2011, one of the Company’s VIEs, Business Opportunity Online Hubei, formed a new wholly owned company, Chongqing Business Opportunity Online Technology Co., Ltd. (“Business Opportunity Online Chongqing”). Business Opportunity Online Chongqing is primarily engaged in internet advertisement design, production and promulgation. In September 2012, the Company sold all of its equity interest in Business Opportunity Online Chongqing to two unaffiliated parties. Business Opportunity Online Chongqing was dormant from the time of its incorporation through the date the Company disposed of its equity interest to two unaffiliated parties. No gain or loss was incurred in connection with this transaction, as the Company recovered all of its net assets, which are all cash and cash equivalents from the buyers.
On December 20, 2011, one of the Company’s VIEs, Business Opportunity Online Hubei acquired a 51% equity interest in Sou Yi Lian Mei Network Technology (Beijing) Co. Ltd., (“Sou Yi Lian Mei”). In September 2012, Business Opportunity Online Hubei acquired the remaining 49% equity interest in Sou Yi Lian Mei. Sou Yi Lian Mei became a wholly owned subsidiary of Business Opportunity Online Hubei accordingly. Sou Yi Lian Mei is primary engaged in providing online advertising and marketing services and operates its business primarily through its wholly-owned subsidiary, Jin Du Ya He (Beijing) Network Technology Co., Ltd (“Jin Du Ya He”).
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2012, the Company operated its business primarily in China through its PRC subsidiary and PRC operating entities, or VIEs as described above.
2.
|
Variable Interest Entities
|
To satisfy PRC laws and regulations, the Company conducts certain business in the PRC through its Variable Interest Entities (“VIEs”).
The significant terms of the VIE Agreements are summarized below:
Exclusive Business Cooperation Agreements:
Pursuant to the Exclusive Business Cooperation Agreements entered into by and between Rise King WFOE and each of the PRC Operating Entities, Rise King WFOE has the exclusive right to provide to the PRC Operating Entities complete technical support, business support and related consulting services during the term of these agreements, which includes but is not limited to technical services, business consultations, equipment or property leasing, marketing consultancy system integration, product research and development, and system maintenance. In exchange for such services, each PRC Operating Entity has agreed to pay a service fee to Rise King WFOE equal to 100% of the net income of each PRC Operating Entity. Adjustments may be made upon approval by Rise King WFOE based on services rendered by Rise King WFOE and operational needs of the PRC Operating Entities. The payment shall be made on a monthly basis, if at year end, after an audit of the financial statements of any PRC Operating Entities, there is determined to be any shortfall in the payment of 100% of the annual net income, such PRC Operating Entity shall pay such shortfall to Rise King WFOE. Each agreement has a ten-year term. The term of these agreements may be extended if confirmed in writing by Rise King WFOE, prior to the expiration of the term. The extended term shall be determined by Rise King WFOE, and the PRC Operating Entities shall accept such extended term unconditionally.
Exclusive Option Agreements:
Under the Exclusive Option Agreements entered into by and among Rise King WFOE, each of the PRC Shareholders irrevocably granted to Rise King WFOE or its designated person an exclusive option to purchase, to the extent permitted by PRC law, a portion or all of their respective equity interest in any PRC Operating Entities for a purchase price of RMB 10, or a purchase price to be adjusted to be in compliance with applicable PRC laws and regulations. Rise King WFOE, or its designated person, has the sole discretion to decide when to exercise the option, whether in part or in full. Each of these agreements has a ten-year term, subject to renewal at the election of Rise King WFOE.
Equity Pledge Agreements:
Under the Equity Pledge Agreements entered into by and among Rise King WFOE, the PRC Operating Entities and each of the PRC Shareholders, the PRC Shareholders pledged all of their equity interests in the PRC Operating Entities to guarantee the PRC Operating Entities’ performance of its obligations under the Exclusive Business Cooperation Agreements. If the PRC Operating Entities or any of the PRC Shareholders breaches its/his/her respective contractual obligations under these agreements, or upon the occurrence of one of the events regarded as an event of default under each such agreement, Rise King WFOE, as pledgee, will be entitled to certain rights, including the right to dispose of the pledged equity interests. The PRC Shareholders of the PRC Operating Entities agreed not to dispose of the pledged equity interests or take any actions that would prejudice Rise King WFOE's interest, and to notify Rise King WFOE of any events or upon receipt of any notices which may affect Rise King WFOE's interest in the pledge. Each of the equity pledge agreements will be valid until all the payments related to the services provided by Rise King WFOE to the PRC Operating Entities due under the Exclusive Business Cooperation Agreements have been fulfilled. Therefore, the equity pledge agreements shall only be terminated when the payments related to the ten-year Exclusive Business Cooperation Agreement are paid in full and the WFOE does not intend to extend the term of the Exclusive Business Cooperation Agreement.
Irrevocable Powers of Attorney:
The PRC Shareholders have each executed an irrevocable power of attorney to appoint Rise King WFOE as their exclusive attorneys-in-fact to vote on their behalf on all PRC Operating Entities matters requiring shareholder approval. The term of each power of attorney is valid so long as such shareholder is a shareholder of the respective PRC Operating Entity.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of these VIE Agreements, the Company through its wholly-owned subsidiary, Rise King WFOE, was granted with unconstrained decision making rights and power over key strategic and operational functions that would significantly impact the PRC Operating Entities or the VIEs’ economic performance, which includes, but is not limited to, the development and execution of the overall business strategy; important and material decision making; decision making for merger and acquisition targets and execution of merger and acquisition plans; business partnership strategy development and execution; government liaison; operation management and review; and human resources recruitment and compensation and incentive strategy development and execution. Rise King WFOE also provides comprehensive services to the VIEs for their daily operations, such as operational technical support, OA technical support, accounting support, general administration support and technical support for products and services. As a result of the Exclusive Business Cooperation Agreements, the Equity Pledge Agreements and the Exclusive Option Agreements, the Company will bear all of the VIEs’ operating costs in exchange for 100% of the net income of the VIEs. Under these agreements, the Company has the absolute and exclusive right to enjoy economic benefits similar to equity ownership through the VIE Agreements with our PRC Operating Entities and their shareholders.
These contractual arrangements may not be as effective in providing the Company with control over the VIEs as direct ownership. Due to its VIE structure, the Company has to rely on contractual rights to effect control and management of the VIEs, which exposes it to the risk of potential breach of contract by the shareholders of the VIEs for a number of reasons. For example, their interests as shareholders of the VIEs and the interests of the Company may conflict and the Company may fail to resolve such conflicts; the shareholders may believe that breaching the contracts will lead to greater economic benefit for them; or the shareholders may otherwise act in bad faith. If any of the foregoing were to happen, the Company may have to rely on legal or arbitral proceedings to enforce its contractual rights, including specific performance or injunctive relief, and claiming damages. Such arbitral and legal proceedings may cost substantial financial and other resources, and result in a disruption of its business, and the Company cannot assure that the outcome will be in its favor. Apart from the above risks, there are no significant judgments or assumptions regarding enforceability of the contracts.
In addition, as all of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could further limit the Company’s ability to enforce these contractual arrangements. Furthermore, these contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event the Company is unable to enforce these contractual arrangements, it may not be able to exert effective control over the VIEs, and its ability to conduct its business may be materially and adversely affected.
Summarized below is the information related to the consolidated VIEs’ assets and liabilities as of December 31, 2012 and 2011, respectively:
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,275
|
|
|
$
|
8,322
|
|
Term deposit
|
|
|
3,357
|
|
|
|
-
|
|
Accounts receivable, net
|
|
|
8,392
|
|
|
|
3,705
|
|
Other receivables, net
|
|
|
2,921
|
|
|
|
3,619
|
|
Prepayment and deposit to suppliers
|
|
|
14,587
|
|
|
|
15,360
|
|
Due from related parties
|
|
|
49
|
|
|
|
192
|
|
Contingent consideration receivables
|
|
|
-
|
|
|
|
159
|
|
Other current assets
|
|
|
35
|
|
|
|
23
|
|
Deferred tax assets-current
|
|
|
50
|
|
|
|
-
|
|
Total current assets
|
|
|
33,666
|
|
|
|
31,380
|
|
|
|
|
|
|
|
|
|
|
Investment in and advance to equity investment affiliates
|
|
|
916
|
|
|
|
1,354
|
|
Property and equipment, net
|
|
|
1,389
|
|
|
|
1,507
|
|
Intangible assets, net
|
|
|
7,152
|
|
|
|
8,111
|
|
Goodwill
|
|
|
11,083
|
|
|
|
10,999
|
|
Deferred tax assets-non current
|
|
|
511
|
|
|
|
92
|
|
Total Assets
|
|
$
|
54,717
|
|
|
$
|
53,443
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
110
|
|
|
$
|
268
|
|
Advances from customers
|
|
|
1,065
|
|
|
|
724
|
|
Accrued payroll and other accruals
|
|
|
455
|
|
|
|
251
|
|
Due to equity investment affiliate
|
|
|
-
|
|
|
|
220
|
|
Due to related parties
|
|
|
-
|
|
|
|
161
|
|
Due to Control Group
|
|
|
11
|
|
|
|
11
|
|
Payable for acquisition
|
|
|
1,266
|
|
|
|
550
|
|
Taxes payable
|
|
|
6,136
|
|
|
|
4,409
|
|
Other payables
|
|
|
196
|
|
|
|
107
|
|
Total current liabilities
|
|
|
9,239
|
|
|
|
6,701
|
|
|
|
|
|
|
|
|
|
|
Deferred tax Liabilities-non current
|
|
|
1,689
|
|
|
|
1,893
|
|
Total Liabilities
|
|
$
|
10,928
|
|
|
$
|
8,594
|
|
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All of the VIEs' assets can be used to settle obligations of their primary beneficiary. Liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets.
For the year ended December 31, 2012, the financial performance of the VIEs reported in the Company’s consolidated statements of income and comprehensive income includes sales of approximately US$46,355,000, cost of sales of approximately US$31,550,000, operating expenses of approximately US$7,655,000 and net income before allocation to noncontrolling interests of approximately US$5,910,000.
For the year ended December 31, 2011, the financial performance of the VIEs reported in the Company’s consolidated statements of income and comprehensive income includes sales of approximately US$24,109,000, cost of sales of approximately US$11,772,000, operating expenses of approximately US$6,424,000 and net income before allocation to noncontrolling interests of approximately US$5,849,000.
3.
|
Summary of significant accounting policies
|
The consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
b)
|
Principles of consolidation
|
The consolidated financial statements include the financial statements of all the subsidiaries and VIEs of the Company. All transactions and balances between the Company and its subsidiaries and VIEs have been eliminated upon consolidation. According to the agreements between Beijing CNET Online and Shanghai Borongdingsi, although Beijing CNET Online legally owns 51% of Shanghai Borongdingsi’s interests, Beijing CNET Online only controls the assets and liabilities related to the bank kiosks business, which has been included in the financial statements of Beijing CNET Online, but does not control other assets of Shanghai Borongdingsi, thus, Shanghai Borongdingsi’s financial statements were not consolidated by the Company.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of these consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. The Company continually evaluates these estimates and assumptions based on the most recently available information, historical experience and various other assumptions that the Company believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
d)
|
Foreign currency translation and transactions
|
The functional currency of the Company is United States dollars (“US$”), and the functional currency of China Net HK is Hong Kong dollars (“HK$”). The functional currency of the Company’s PRC operating subsidiary and VIEs is Renminbi (“RMB”), and PRC is the primary economic environment in which the Company operates.
For financial reporting purposes, the financial statements of the Company’s PRC operating subsidiary and VIEs, which are prepared using the RMB, are translated into the Company’s reporting currency, the United States Dollar (“U.S. dollar”). Assets and liabilities are translated using the exchange rate at each balance sheet date. Revenue and expenses are translated using average rates prevailing during each reporting period, and stockholders’ equity is translated at historical exchange rates. Adjustments resulting from the translation are recorded as a separate component of accumulated other comprehensive income in stockholders’ equity.
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. The resulting exchange differences are included in the determination of net income of the consolidated statements of income and comprehensive income for the respective periods.
The exchange rates used to translate amounts in RMB into US$ for the purposes of preparing the consolidated financial statements are as follows:
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Balance sheet items, except for equity accounts
|
|
|
6.3161
|
|
|
|
6.3647
|
|
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Items in the statements of income and comprehensive
income, and statements of cash flows
|
|
|
6.3198
|
|
|
|
6.4735
|
|
No representation is made that the RMB amounts could have been, or could be converted into US$ at the above rates.
e)
|
Cash and cash equivalents
|
Cash and cash equivalents consist of cash on hand and bank deposits, which are unrestricted as to withdrawal and use. The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.
Term deposits consist of bank deposits with an original maturity of between three to twelve months.
g)
|
Accounts receivable, net
|
Accounts receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts as needed. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on aging data, historical collection experience, customer specific facts and economic conditions. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company did not have any off-balance-sheet credit exposure relating to its customers, suppliers or others.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
h)
|
Investment in equity method affiliates
|
Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting in accordance to ASC Topic 323 “Equity Method and Joint Ventures”. Whether or not the Company exercises significant influence with respect to an investee depends on an evaluation of several factors including, among others, representation on the investee companies’ board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the investee companies. Under the equity method of accounting, an investee company’s accounts are not reflected within the Company’s consolidated balance sheets and statements of income and comprehensive income; however, the Company’s share of the earnings or losses of the investee company is reflected in the caption “Share of earnings (losses) in equity investment affiliates” in the consolidated statements of income and comprehensive income. The Company’s carrying value (including advance to the investee) in equity method investee companies is reflected in the caption “Investment in and advance to equity investment affiliates” in the Company’s consolidated balance sheets.
When the Company’s carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company’s consolidated financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.
i)
|
Property and equipment, net
|
Property and equipment are recorded at cost less accumulated depreciation. Depreciation is calculated on the straight-line method after taking into account their respective estimated residual values over the following estimated useful lives:
Vehicles
|
5 years
|
Office equipment
|
3-5 years
|
Electronic devices
|
5 years
|
Depreciation expenses are included in selling expenses, general and administrative expenses and research and development expenses.
When property and equipment are retired or otherwise disposed of, resulting gain or loss is included in net income or loss in the year of disposition for the difference between the net book value and proceeds received thereon. Maintenance and repairs which do not improve or extend the expected useful lives of the assets are charged to expenses as incurred.
j)
|
Intangible assets, net
|
Purchased software and software platform is initially recorded at cost and amortized on a straight-line basis over the estimated useful economic life.
Intangible assets other than goodwill acquired through various acquisitions are amortized on a straight-line basis over their expected useful economic lives.
If an acquired intangible asset is determined to have an indefinite useful life, it should not be amortized until its useful life is determined to be no longer indefinite. The Company reviews intangible assets' remaining useful lives in each reporting period. If such an asset is later determined to have a finite useful life, the asset will be tested for impairment. That asset will then be amortized prospectively over its estimated remaining useful life and accounted for in the same way as intangible assets subject to amortization.
The Company accounted for website development costs in accordance with ASC Topic 350-50, which requires that certain costs related to the development or purchase of internal-use software and systems as well as the costs incurred in the application development stage related to its website be capitalized and amortized over the estimated useful life of the software or system. ASC Topic 350-50 also require that costs related to the preliminary project stage, data conversion and post implementation/operation stage of an internal-use software development project be expensed as incurred.
In accordance with ASC Topic 350-50, the Company analyzed its website development cost which is subject to capitalization, incurred during the years ended December 31, 2012 and 2011 for the development of www.liansuo.com and www.chuangye.com, the Company did not capitalize such cost, as the amount was considered immaterial, which was primarily the labor cost of its staff in the research and development department.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
k)
|
Impairment of long-lived assets
|
Long-lived assets, which include tangible long-lived assets and intangible long-lived assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recognized for the difference between the carrying amount of the asset and its fair value.
For the years ended December 31, 2012 and 2011, the Company did not record any impairment losses associated with long-lived assets.
Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of the Company's acquisitions of interests in its consolidated VIEs.
Goodwill is not depreciated or amortized but is tested for impairment at the reporting unit level at least on an annual basis, and between annual tests when an event occurs or circumstances change that could indicate that the asset might be impaired. The test consists of two steps. First, identify potential impairment by comparing the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value of the reporting unit is greater than its carrying amount, goodwill is not considered impaired. Second, if there is impairment identified in the first step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with Topic 805 “Business Combinations.”
Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. The judgment in estimating the fair value of reporting units includes estimating future cash flows, determining appropriate discount rates and making other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit.
For the years ended December 31, 2012 and 2011, the Company did not record any impairment losses associated with Goodwill.
The Company accounts for deconsolidation of subsidiaries in accordance with ASC Topic 810 “Consolidation”.
In accordance with ASC Topic 810-10-40-5, the parent shall account for the
deconsolidation of a subsidiary by recognizing a gain or loss in net income attributable to the parent, measured as the difference between:
a. The aggregate of all of the following:
1. The fair value of any consideration received;
2.
The fair value of any retained noncontrolling investment in the former subsidiary at the date the subsidiary is deconsolidated;
3. The carrying amount of any noncontrolling interest in the former subsidiary (including any accumulated other comprehensive income attributable to the noncontrolling interest) at the date the subsidiary is deconsolidated.
b. The carrying amount of the former subsidiary’s assets and liabilities.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
n)
|
Changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary
|
The Company accounted for changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary in accordance with ASC Topic 810 “Consolidation”, subtopic 10, which requires the transaction be accounted for as equity transactions (investments by owners and distributions to owners acting in their capacity as owners). Therefore, no gain or loss shall be recognized in consolidated net income or comprehensive income. The carrying amount of the noncontrolling interest shall be adjusted to reflect the change in its ownership interest in the subsidiary. Any difference between the fair value of the consideration received or paid and the amount by which the noncontrolling interest is adjusted shall be recognized in equity attributable to the parent and reallocated the subsidiary’s accumulated comprehensive income, if any, among the parent and the noncontrolling interest through an adjustment to the parent’s equity.
The Company’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, other receivables, prepayment and deposits
,
accounts payable, advances from customers, accruals and other payables. The carrying values of these financial instruments approximate fair values due to their short maturities.
ASC Topic 820 "Fair Value Measurement and Disclosures," defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter.
The Company's revenue recognition policies are in compliance with ASC Topic 605 “Revenue Recognition”. In accordance with ASC Topic 605, revenues are recognized when the four of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the service has been rendered, (iii) the fees are fixed or determinable, and (iv) collectability is reasonably assured.
Sales include revenues from reselling of advertising time purchased from TV stations and, internet advertising and providing related value added technical services, reselling of internet advertising spaces and other advertisement related resources. No revenue from advertising-for-advertising barter transactions was recognized because the transactions did not meet the criteria for recognition in ASC Topic 605, subtopic 20. Advertising contracts establish the fixed price and advertising services to be provided. Pursuant to advertising contracts, the Company provides advertisement placements in different formats, including but not limited to banners, links, logos, buttons, rich media and content integration. Revenue is recognized ratably over the period the advertising is provided and, as such, the Company considers the services to have been delivered. The Company treats all elements of advertising contracts as a single unit of accounting for revenue recognition purposes. Value added technical services are provided based on two types of contracts: (i) fixed price and (ii) fixed price with minimum performance threshold. For contracts with fixed price terms, revenue is recognized on a pro-rata basis over the engaged service period. For fixed price contracts with minimum performance threshold, revenue is recognized when the specified performance criteria is met. Based upon the Company’s credit assessments of its customers prior to entering into contracts, the Company determines if collectability is reasonably assured. In situations where collectability is not deemed to be reasonably assured, the Company recognizes revenue upon receipt of cash from customers, only after services have been provided and all other criteria for revenue recognition have been met.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cost of sales primarily includes the cost of media advertising time, internet advertisement related resources and other technical services purchased from third parties, direct labor cost and benefits and PRC business tax.
Advertising costs for the Company’s own brand building are not includable in cost of sales, they are expensed when incurred or amortized over the estimated beneficial period and are included in “selling expenses” in the statement of income and comprehensive income. For the years ended December 31, 2012 and 2011, advertising expenses for the Company’s own brand building were approximately US$289,000 and US$1,357,000, respectively.
s)
|
Research and development expenses
|
The Company accounts for the cost of developing and upgrading technologies and platforms and intellectual property that are used in its daily operations in research and development cost. Research and development costs are charged to expense when incurred. Expenses for research and development for the years ended December 31, 2012 and 2011 were approximately US$1,819,000 and US$2,132,000, respectively.
The Company adopts ASC Topic 740 “Income taxes” and uses liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets, if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in statement of income and comprehensive income in the period that includes the enactment date.
u)
|
Uncertain tax positions
|
The Company follows the guidance of ASC Topic 740-10-25-5 through 740-10-25-7 and 740-10-25-13, which prescribes a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.
The Company recognizes interest on non-payment of income taxes under requirement by tax law and penalties associated with tax positions when a tax position does not meet the minimum statutory threshold to avoid payment of penalties. According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years under special circumstances, where the underpayment of taxes is more than RMB100,000. In the case of transfer pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. The tax returns of the Company’s PRC VIEs and subsidiaries are subject to examination by the relevant tax authorities. The Company did not have any material interest or penalties associated with tax positions and did not have any significant unrecognized uncertain tax positions as of December 31, 2012 and 2011, respectively.
v)
|
Share-based Compensation
|
The Company accounted for share-based compensation to employees in accordance with ASC Topic 718 “Compensation-Stock Compensation” which requires that share-based payment transactions be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period, or vesting period.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
w)
|
Noncontrolling interest
|
The Company accounts for noncontrolling interest in accordance with ASC Topic 810-10-45, which requires the Company to present noncontrolling interests (previously referred to as minority interests) as a separate component of total shareholders’ equity on the consolidated balance sheet and the consolidated net income attributable to the parent and the noncontrolling interest be clearly identified and presented on the face of the consolidated income and comprehensive income statement. ASC Topic 810-10-45 also requires that losses attributable to the parent and the noncontrolling interest in a subsidiary be attributed to those interests even if it results in a deficit noncontrolling interest balance.
The Company accounts for comprehensive income in accordance with ASC Topic 220 “Comprehensive Income”, which establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. Accumulated other comprehensive income, as presented in the Company’s consolidated balance sheets are the cumulative foreign currency translation adjustments.
Earnings per share are calculated in accordance with ASC Topic 260, “Earnings Per Share”. Basic earnings per share is computed by dividing income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Common shares issuable upon the conversion of the convertible preferred shares are included in the computation of diluted earnings per share on an “if-converted” basis when the impact is dilutive. The dilutive effect of outstanding common stock warrants and options are reflected in the diluted earnings per share by application of the treasury stock method when the impact is dilutive.
z)
|
Commitments and contingencies
|
The Company has adopted ASC 450 “Contingencies” subtopic 20, in determining its accruals and disclosures with respect to loss contingencies. Accordingly, estimated losses from loss contingencies are accrued by a charge to income when information available prior to issuance of the financial statements indicates that it is probable that a liability have been incurred and the amount of the loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably possible that a material loss could be incurred.
aa)
|
Recent accounting standards
|
In July 2012, the FASB issued ASU 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment." This ASU simplifies how entities test indefinite-lived intangible assets for impairment which improve consistency in impairment testing requirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in the previously issued standards. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012; early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position or results of operations.
In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”, The ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, this ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The guidance is effective prospectively for reporting periods beginning after December 15, 2012 for public entities. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position or results of operations.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.
For the year ended December 31, 2011, in order to further diversify the channels of the Company’s advertising and marketing campaign services, achieve an entry into Fujian province, a base of fast growing small to medium enterprises, and expand the Company’s market opportunities from these enterprises, which are looking to domestically expand their businesses through franchises, dealerships and merchants in China, the Company acquired a 100% equity interest and a 51% equity interest in Quanzhou Zhi Yuan and Quanzhou Tian Xi Shun He, respectively. In order to establish the distinct brands in each of the Company’s targeted customer segment and achieved more diversified operational synergies of the Company’s internet advertising and marketing business, the Company acquired a 51% equity interest in Sou Yi Lian Mei, an established internet advertising and marketing services provider for merchant and franchise enterprises and organizations primarily involved in small office/home office ("SOHO") and emerging business, through its web portal,
www.sooe.cn
.
Each acquisition was accounted for using the acquisition method of accounting in accordance with ASC Topic 805 “Business Combinations”, and accordingly the acquired assets and liabilities were recorded at their fair values on the dates of acquisitions and the results of their operations have been included in the Company’s results of operations since the dates of their acquisitions.
The income approach is applied for identifiable intangible assets (except software technologies) and noncontrolling interests’ valuation, based on a five-year financial projection and using the discounted cash flow method to calculate the present value of the future economic benefits. Key inputs used for such valuation include: weighted average cost of capital (“WPCC”), discount rate, and terminal growth rate. The income approach explicitly recognizes that the current value of an asset is premised upon the expected receipt of future economic benefits focusing on the income producing capability of a business or an asset. It measures the current value of a business or asset by calculating the present value of its future economic benefits such as earnings, cost savings, tax deduction, and proceeds from disposition. Indications of value are developed by discounting these benefits to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation, and risk associated with the particular investment which reflects both current return requirements of the market and specific investment. The discount rate selected is generally based on rates of return available from alternative investments of similar type and quality as of each assessment date. The Cost approach is applied for software technologies valuation based on the estimated replacement cost of the software technologies. The Monte Carlo simulation is applied for the valuation of contingent consideration receivables. Contingent consideration receivables arose from certain “make good” provisions stipulated in the acquisition agreements with the sellers, which were that if audited pretax profit or after tax profit for the required further years increases by less than certain amount or percentage while compared to audited pretax profit or after tax profit of the prior year, the sellers need to compensate the Company in cash for the difference between target pretax profit or after tax profit and actual result achieved then.
Goodwill recognized from these transactions mainly represented the expected operational synergies upon acquisition of these subsidiaries and intangibles not qualifying for separate recognition. Goodwill is nondeductible for income tax purpose in the tax jurisdiction of these acquisition transactions incurred.
Acquisition of Quanzhou Zhi Yuan
The following table summarizes the assignment of fair value to identifiable assets and liabilities assumed as of January 4, 2011 (the acquisition date of Quanzhou Zhi Yuan):
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Fair Value
|
|
Amortization
Period
|
|
|
US$(’000)
|
|
(Years)
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11
|
|
|
Accounts receivables
|
|
|
17
|
|
|
Property and equipment, net
|
|
|
57
|
|
|
Other current liabilities
|
|
|
(13
|
)
|
|
Deferred tax liabilities
|
|
|
(196
|
)
|
|
Acquired intangible assets:
|
|
|
|
|
|
Trade Name
|
|
|
113
|
|
Indefinite
|
Contract Backlog
|
|
|
18
|
|
0.7
|
Customer Relationship
|
|
|
547
|
|
8
|
Non-Compete Agreement
|
|
|
106
|
|
5
|
Goodwill:
|
|
|
|
|
|
Assembled Workforce
|
|
|
20
|
|
|
Other unidentifiable intangibles
|
|
|
708
|
|
|
|
|
|
728
|
|
|
|
|
|
|
|
|
Total Value
|
|
$
|
1,388
|
|
|
|
|
|
|
|
|
Purchase price
|
|
$
|
1,440
|
|
|
Contingent consideration receivable
|
|
|
(52
|
)
|
|
Total amount to be allocated
|
|
$
|
1,388
|
|
|
Acquisition of Quanzhou Tian Xi Shun He
The following table summarized the assignment of fair value to identifiable assets and liabilities assumed as of February 23, 2011 (the acquisition date of Quanzhou Tian Xi Shun He):
|
|
Fair Value
|
|
Amortization
Period
|
|
|
US$(’000)
|
|
(Years)
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12
|
|
|
Accounts receivables
|
|
|
55
|
|
|
Property and equipment, net
|
|
|
41
|
|
|
Other current liabilities
|
|
|
(34
|
)
|
|
Deferred tax liabilities
|
|
|
(289
|
)
|
|
Acquired intangible assets:
|
|
|
|
|
|
Trade Name
|
|
|
182
|
|
Indefinite
|
Contract Backlog
|
|
|
170
|
|
0.6
|
Customer Relationship
|
|
|
722
|
|
9
|
Non-Compete Agreement
|
|
|
83
|
|
5
|
Goodwill:
|
|
|
|
|
|
Assembled Workforce
|
|
|
23
|
|
|
Other unidentifiable intangibles
|
|
|
1,143
|
|
|
|
|
|
1,166
|
|
|
|
|
|
|
|
|
Total Value
|
|
$
|
2,108
|
|
|
|
|
|
|
|
|
Purchase price
|
|
|
1,138
|
|
|
Fair value of noncontrolling interest
|
|
|
1,034
|
|
|
Contingent consideration receivable
|
|
|
(64
|
)
|
|
Total amount to be allocated
|
|
$
|
2,108
|
|
|
Acquisition of Sou Yi Lian Mei
The following table summarized the assignment of fair value to identifiable assets and liabilities assumed as of December 20, 2011 (the acquisition date of Sou Yi Lian Mei):
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Fair Value
|
|
Amortization
Period
|
|
|
US$(’000)
|
|
(Years)
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
310
|
|
|
Accounts receivables
|
|
|
1,957
|
|
|
Property and equipment, net
|
|
|
23
|
|
|
Other current liabilities
|
|
|
33
|
|
|
Deferred tax liabilities
|
|
|
(2,140
|
)
|
|
Acquired intangible assets:
|
|
|
(1,266
|
)
|
|
Domain Name
|
|
|
1,512
|
|
Indefinite
|
Customer Relationship
|
|
|
2,085
|
|
5
|
Non-Compete Agreement
|
|
|
1,148
|
|
6
|
Software technologies
|
|
|
321
|
|
5
|
Goodwill:
|
|
|
|
|
|
Assembled Workforce
|
|
|
42
|
|
|
Other unidentifiable intangibles
|
|
|
8,963
|
|
|
|
|
|
9,005
|
|
|
|
|
|
|
|
|
Total Value
|
|
$
|
12,988
|
|
|
|
|
|
|
|
|
Purchase price
|
|
|
8,078
|
|
|
Fair value of noncontrolling interest
|
|
|
5,021
|
|
|
Contingent consideration receivable
|
|
|
(111
|
)
|
|
Total amount to be allocated
|
|
$
|
12,988
|
|
|
The operating results of these acquirees are only included from the date of their respective acquisition dates. For the year ended December 31, 2011, the financial performance of the acquirees reported in the Company’s consolidated statements of income and comprehensive income includes sales of approximately US$1,474,000 and net income before allocation to noncontrolling interests of approximately US$441,000.
The following unaudited pro-forma financial results for the year ended December 31, 2011, combines the historical operating results of the Company with those of Quanzhou Zhi Yuan, Quanzhou Tian Xi Shun He and Sou Yi Lian Mei in the aggregate, as if these acquisitions had been completed as of the beginning of the reporting periods, and also includes the adjustments for the business combination effect of the amortization charges from acquired intangible assets and the related tax effects. (Amounts in thousands, except for per share data):
|
|
Year ended
December 31, 2011
|
|
|
|
|
|
Revenue
|
|
$
|
35,659
|
|
Net income before allocation to the noncontrolling interests
|
|
$
|
4,508
|
|
Earnings per share-Basic
|
|
$
|
0.19
|
|
Earnings per share-Diluted
|
|
$
|
0.19
|
|
Subsequently, the Company acquired the remaining 49% equity interest in Quanzhou Tian Xi Shun He and Sou Yi Lian Mei in June 2011 and September 2012, respectively. The Company accounted for changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary in accordance with ASC Topic 810 “Consolidation”
,
which requires the transaction be accounted for as equity transactions with no gain or loss recognized in earnings for these transactions for the years ended December 31, 2012 and 2011.
The difference between the cash consideration paid and the amount by which the noncontrolling interest was adjusted
to reflect the change in its ownership interest in the subsidiary was approximately US$787,000 for the 49% equity interest acquisition in Sou Yi Lian Mei and approximately US$62,000 for the 49% equity interest acquisition in Quanzhou Tian Xi Shun He was recognized in equity attributable to the Company for the years ended December 31, 2012 and 2011, respectively.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5.
|
Cash and cash equivalent
|
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
Cash
|
|
|
893
|
|
|
|
181
|
|
Bank deposit
|
|
|
4,590
|
|
|
|
10,514
|
|
|
|
|
5,483
|
|
|
|
10,695
|
|
Term deposit as of December 31, 2012 represented the amount of cash placed as a term deposit by one of the Company’s operating VIEs in a major financial institution of China, which management believes is of high credit quality. The interest rate of the term deposit is 3.5% per annual and the term deposit will mature on July 5, 2013.
7.
|
Accounts receivable, net
|
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
12,116
|
|
|
|
6,546
|
|
Allowance for doubtful debts
|
|
|
(3,630
|
)
|
|
|
(2,102
|
)
|
Accounts receivable, net
|
|
|
8,486
|
|
|
|
4,444
|
|
All of the accounts receivable are non-interest bearing. Based on the assessment of the collectability of the accounts receivable, the Company provided approximately US$3,630,000 and US$2,102,000 allowance for doubtful debts for the years ended December 31, 2012 and 2011, respectively, which were related to the accounts receivable of the Company’s internet advertising and TV advertising business segment with an aging over six months. For the year ended December 31, 2012, approximately US$1,510,000 allowance for doubtful debts was provided.
8.
|
Other receivables, net
|
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
Short-term loan for marketing campaign
|
|
|
2,375
|
|
|
|
2,985
|
|
Short-term loans to unrelated entities
|
|
|
475
|
|
|
|
-
|
|
Term deposit interest receivable
|
|
|
59
|
|
|
|
-
|
|
Staff advances for normal business purpose
|
|
|
194
|
|
|
|
279
|
|
Overdue contract guarantee deposits
|
|
|
158
|
|
|
|
891
|
|
Allowance for doubtful debts
|
|
|
(158
|
)
|
|
|
(524
|
)
|
Other receivables, net
|
|
|
3,103
|
|
|
|
3,631
|
|
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Short-term loan for marketing campaign: for one of the major marketing campaigns, the Company made a marketing-related loan of RMB25,000,000 (approximately US$3,958,139) to a TV series of 36 episodes, called “Xiao Zhang Feng Yun.” This TV series was produced in commemoration of “The Republican Revolution of 1911” (the Chinese bourgeois democratic revolution led by Dr. Sun Yat-sen which overthrew the Qing Dynasty). By participating in this TV series, the Company’s logo will be shown during the credits at the end of each episode and also shown as a separate card during the closing before the credit screen. This TV series has been broadcasted on CCTV 8 and
www.sina.com.cn
since September 2011 and continues to sell its broadcasting rights to other provincial TV channels for additional exposure. For the years ended December 31, 2012 and 2011, the Company has collected an aggregate of RMB10,000,000 (approximately US$1,583,255) from the borrower. In accordance with the communication between the Company and the borrower, the Company has extended the term of this loan from December 31, 2012 to December 31, 2013, as this TV series is still selling broadcasting rights to TV stations and other media and the Company has agreed a repayment schedule with the borrower, which is within one year. The Company will continue to assess the collectability of this loan and if an event occurs or circumstances change that could indicate that the collectability of this loan is remote, a full allowance of bad debts provision will be provided for the remaining outstanding balance of this loan.
For all advertising resources purchasing contracts signed by the Company with its resource providers, the Company is required to make contract guarantee deposits, which are either used to pay the actual contract amount of resources used in the last month of each contract period or to be refunded to the Company of the remaining balance upon expiration of the contract. Overdue contract guarantee deposits represented the portion of the contract guarantee deposits, which related advertising resources purchasing contracts had been completed as of each of the reporting dates. Based on the assessment of the collectability of these overdue contract guarantee deposits as of December 31, 2012 and 2011, the Company provided approximately US$158,000 and US$524,000 allowance for doubtful debts, respectively, which was related to the contract guarantee deposits of its TV advertising business segment. For the year ended December 31, 2012, approximately US$370,000 allowance for doubtful debts was reversed due to subsequent collection of these overdue deposits in 2012.
9.
|
Prepayments and deposit to suppliers
|
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
Contract execution guarantees to TV advertisement and internet resources providers
|
|
|
9,463
|
|
|
|
10,050
|
|
Prepayments to TV advertisement and internet resources providers
|
|
|
5,069
|
|
|
|
5,285
|
|
Other deposits and prepayments
|
|
|
64
|
|
|
|
25
|
|
|
|
|
14,596
|
|
|
|
15,360
|
|
Contract execution guarantees to TV advertisement and internet resource providers are paid as contractual deposits to the Company’s resources and services providers. These amounts will be used to offset the contact amount and service fee needed to be paid for the resources and services provided in the last month of each contract period or refunded to the Company upon expiration of the purchase contracts.
According to the contracts signed between the Company and its suppliers, the Company is normally required to pay the contract amount in advance. These prepayments will be transferred to cost of sales when the related services are provided.
10.
|
Due from related parties
|
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
Beijing Fengshangyinli Technology Co., Ltd.
|
|
|
53
|
|
|
|
113
|
|
Beijing Saimeiwei Food Equipment Technology Co., Ltd.
|
|
|
87
|
|
|
|
74
|
|
Beijing Telijie Century Environmental Technology Co., Ltd.
|
|
|
70
|
|
|
|
137
|
|
|
|
|
210
|
|
|
|
324
|
|
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These related parties are directly or indirectly owned by the Control Group of the Company. The Control Group refers to Mr. Handong Cheng, Mr. Xuanfu Liu and Ms. Li Sun (acting as nominee for Mr. Zhige, Zhang), the owners of the Company’s PRC VIEs, Business Opportunities Online and Beijing CNET Online before the Offshore Restructuring. The Company provides advertising services to these related parties in its normal course of business on the same terms as those provided to its unrelated advertising clients. Due from related parties represented the outstanding receivables for the advertising services that the Company provided to these related parties as of each of the reporting date.
11.
|
Contingent consideration receivables
|
|
|
Amount
|
|
|
|
US$(’000)
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
|
159
|
|
Changes in fair value of contingent consideration receivables recognized
|
|
|
(160
|
)
|
Exchange translation adjustment
|
|
|
1
|
|
Balance as of December 31, 2012
|
|
|
-
|
|
Contingent consideration receivables arose from certain “make good” provisions entered into by and between the Company and former stockholders of the VIEs upon the acquisition of the Company’s consolidated VIEs. These “make good” provisions provide that if the acquired VIEs’ audited pretax profit or after tax profit for the year ended December 31, 2012 increases by less than a certain amount or percentage as compared to that of the prior year, then the former VIE stockholders will be required to compensate the Company in cash for the difference between target pretax profit or after tax profit and the actual pretax profit or after tax profit, as applicable.
The related VIEs acquired in 2011 which subject to the “make good” provisions discussed above have all achieved its respective target pre-tax or after tax profit for the year ended December 31, 2012 and the former stockholders of these VIEs will not compensate the Company any cash in accordance with the acquisition agreement. Therefore, any remaining balance of contingent consideration receivables was charged against earnings as charge in fair value of contingent consideration receivables in the Company’s consolidated statements of income and comprehensive income for the year ended December 31, 2012.
12.
|
Investment in and advance to equity investment affiliates
|
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
Investment in equity investment affiliates
|
|
|
916
|
|
|
|
1,354
|
|
Advance to equity investment affiliates
|
|
|
43
|
|
|
|
42
|
|
|
|
|
959
|
|
|
|
1,396
|
|
The following table summarizes the movement of the investment in and advance to equity investment affiliates for the year ended December 31, 2012:
|
|
Shenzhen
Mingshan
|
|
|
Zhao Shang
Ke Hubei
|
|
|
Total
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
|
595
|
|
|
|
801
|
|
|
|
1,396
|
|
Share of losses in equity investment affiliates
|
|
|
(109
|
)
|
|
|
(340
|
)
|
|
|
(449
|
)
|
Exchange translation adjustment
|
|
|
6
|
|
|
|
6
|
|
|
|
12
|
|
Balance as of December 31, 2012
|
|
|
492
|
|
|
|
467
|
|
|
|
959
|
|
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shenzhen Mingshan:
Shenzhen Mingshan was incorporated on June 24, 2010 by one of the Company’s VIEs, Business Opportunities Online and three other individuals who were not affiliated with the Company. Shenzhen Mingshan was 51% owned by the Company and was a consolidated VIE of the Company from the date of incorporation through January 6, 2011. On January 6, 2011, an unaffiliated third party invested RMB15,000,000 (approximately US$2,374,883) into Shenzhen Mingshan in exchange for a 60% equity interest in Shenzhen Mingshan. The Company’s share of equity interest decreased from 51% to 20.4% accordingly. On December 19, 2012, as approved by the shareholders of Shenzhen Mingshan, Shenzhen Mingshan reduced its registered and paid-in capital from RMB25,000,000 (approximately US$3,958,139) to RMB22,000,000 (approximately US$3,483,162), resulted from a decrease of paid-in capital from three other noncontrolling shareholders, except Business Opportunity Online. As a result, the Company’s share of the equity interest in Shenzhen Mingshan increased from 20.4% to 23.18% and the Company continued to retain significant influence over Shenzhen Mingshan.
The deconsolidation of Shenzhen Mingshan occurred in January 2011 was accounted for in accordance with ASC Topic 810 “Consolidation”. For the year ended December 31, 2011, the Company recognized a gain of approximately US$232,000 upon deconsolidation of Shenzhen Mingshan, which has been recorded as a gain on deconsolidation of subsidiaries in the Company’s consolidated statements of income and comprehensive income with a corresponding increase in the carrying value of the investment in Shenzhen Mingshan in the Company’s consolidated balance sheet. This gain represents the excess of the fair value of the Company’s retained equity interest over its carrying value as of the date of deconsolidation.
For the years ended December 31, 2012 and 2011, the Company recognized its pro-rata shares of losses in Shenzhen Mingshan of approximately US$109,000 and US$249,000, respectively. These losses recognized were reflected in the caption of “Share of losses in equity investment affiliates” in the Company’s consolidated statements of income and comprehensive income with a corresponding decrease to the carrying value of the investment in Shenzhen Mingshan in the Company’s consolidated balance sheet.
Zhao Shang Ke Hubei:
Zhao Shang Ke Hubei was incorporated on April 18, 2011 by one of the Company’s VIEs, Business Opportunities Online Hubei and a co-founding individual who was not affiliated with the Company. Zhao Shang Ke Hubei was 51% owned by the Company and was a consolidated VIE of the Company from the date of incorporation through December 29, 2011. On December 29, 2011, two unaffiliated third party investors invested RMB10,000,000 (approximately US$1,583,255) into Zhao Shang Ke Hubei in exchange for an aggregate 50% equity interest in Zhao Shang Ke Hubei. The Company’s share of equity interest decreased from 51% to 25.5% accordingly.
The deconsolidation of Zhao Shang Ke Hubei occurred in December 2011 was accounted for in accordance with ASC Topic 810 “Consolidation”. For the year ended December 31, 2011, the Company recognized a gain of approximately US$693,000 upon deconsolidation of Zhao Shang Ke Hubei, which has been recorded as a gain on deconsolidation of subsidiaries in the Company’s consolidated statements of income and comprehensive income with a corresponding increase in the carrying value of the investment in Zhao Shang Ke Hubei in the Company’s consolidated balance sheet. This gain represents the excess of the fair value of the Company’s retained equity interest over its carrying value as of the date of deconsolidation.
The Company applied the equity method of accounting prospectively from the date immediately after the deconsolidation. For the year ended December 31, 2012, the Company recognized its pro-rata share of losses in Zhao Shang Ke Hubei of approximately US$340,000, which was reflected in the caption of “Share of losses in equity investment affiliates” in the Company’s consolidated statements of income and comprehensive income with a corresponding decrease to the carrying value of the investment in Zhao Shang Ke Hubei in the Company’s consolidated balance sheet. For the year ended December 31, 2011, the Company did not recognize its pro-rata share of losses in Zhao Shang Ke Hubei as the amount is immaterial.
13.
|
Property and equipment, net
|
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
Vehicles
|
|
|
925
|
|
|
|
683
|
|
Office equipment
|
|
|
1,481
|
|
|
|
1,399
|
|
Electronic devices
|
|
|
1,205
|
|
|
|
1,196
|
|
Property and equipment, cost
|
|
|
3,611
|
|
|
|
3,278
|
|
Less: accumulated depreciation
|
|
|
(1,975
|
)
|
|
|
(1,376
|
)
|
Property and equipment, net
|
|
|
1,636
|
|
|
|
1,902
|
|
Depreciation expenses in aggregate for the years ended December 31, 2012 and 2011 were approximately US$591,000 and US$551,000, respectively.
14.
|
Intangible assets, net
|
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
Trade name
|
|
|
309
|
|
|
|
306
|
|
Domain name
|
|
|
1,529
|
|
|
|
1,518
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
Contract backlog
|
|
|
196
|
|
|
|
195
|
|
Customer relationship
|
|
|
3,434
|
|
|
|
3,408
|
|
Non-compete agreements
|
|
|
1,358
|
|
|
|
1,348
|
|
Software technologies
|
|
|
325
|
|
|
|
322
|
|
Cloud-computing based software platforms
|
|
|
1,470
|
|
|
|
1,458
|
|
Other computer software
|
|
|
76
|
|
|
|
75
|
|
Intangible assets, cost
|
|
|
8,697
|
|
|
|
8,630
|
|
Less: accumulated amortization
|
|
|
(1,530
|
)
|
|
|
(479
|
)
|
Intangible assets, net
|
|
|
7,167
|
|
|
|
8,151
|
|
Amortization expenses in aggregate for the years ended December 31, 2012 and 2011 were approximately US$1,046,000 and US$461,000, respectively.
Based on the carrying value of the finite-lived intangible assets recorded as of December 31, 2012, and assuming no subsequent impairment of the underlying intangible assets, the estimated future amortization expenses is approximately US$1,022,000 per year through December 31, 2015, approximately US$982,000 for the year ended December 31, 2016 and approximately US$496,000 for the year ended December 31, 2017.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Amount
|
|
|
|
US$(’000)
|
|
|
|
|
|
Balance as of January 1, 2011
|
|
|
-
|
|
Acquisitions: (Note 4)
|
|
|
|
|
--Quanzhou Zhi Yuan
|
|
|
728
|
|
--Quanzhou Tian Xi Shun He
|
|
|
1,166
|
|
--Sou Yi Lian Mei
|
|
|
9,005
|
|
Exchange translation adjustment
|
|
|
100
|
|
Balance as of December 31, 2011
|
|
|
10,999
|
|
Exchange translation adjustment
|
|
|
84
|
|
Balance as of December 31, 2012
|
|
|
11,083
|
|
16.
|
Accrued payroll and other accruals
|
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
Accrued payroll and staff welfare
|
|
|
538
|
|
|
|
344
|
|
Accrued operating expenses
|
|
|
366
|
|
|
|
272
|
|
|
|
|
904
|
|
|
|
616
|
|
17.
|
Due to equity investment affiliate
|
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
Zhao Shang Ke Hubei
|
|
|
-
|
|
|
|
220
|
|
Zhao Shang Ke Hubei is an equity investment affiliate of the Company. Amounts due to Zhao Shang Ke Hubei as of December 31, 2011 represented a temporary non-interest bearing working capital loans borrowed by one of the Company’s VIEs from Zhao Shang Ke Hubei, which was repaid during the year ended December 31, 2012.
18.
|
Due to related parties
|
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
Beijing Saimeiwei Food Equipments Technology Co., Ltd
|
|
|
-
|
|
|
|
4
|
|
Due to legal (nominal) shareholders of Shanghai Jing Yang
|
|
|
-
|
|
|
|
157
|
|
|
|
|
-
|
|
|
|
161
|
|
Shanghai Jing Yang was incorporated in December 2009 by the Company’s senior management, prior to entering into the Contractual Agreements with the Company (see Note 1), the legal shareholders contributed RMB1,000,000 (approximately US$157,000) as the original paid-in capital of Shanghai Jing Yang upon incorporation, which was returned to the legal shareholders of Shanghai Jing Yang during the year ended December 31, 2012.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19.
|
Payable for acquisition
|
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
Sou Yi Lian Mei
|
|
|
1,266
|
|
|
|
550
|
|
Payable for acquisition as of December 31, 2012 and 2011 represented the outstanding payment of approximately RMB8.0 million and RMB3.5 million for the acquisition of the 49% equity interest and the 51% equity interest of Sou Yi Lian Mei consummated in September 2012 and December 2011, respectively.
The entities within the Company file separate tax returns in the respective tax jurisdictions in which they operate.
i). The Company is incorporated in the state of Nevada. Under the current law of Nevada, the company is not subject to state corporate income tax. Following the Share Exchange, the Company became a holding company and does not conduct any substantial operations of its own. No provision for federal corporate income tax has been made in the financial statements as the Company has no assessable profits for the years ended December 31, 2012 and 2011, or any prior periods.
The Company does not provide for U.S. taxes or foreign withholding taxes on undistributed earnings from its non-U.S. subsidiaries because such earnings are intended to be reinvested indefinitely. If undistributed earnings were distributed, foreign tax credits could become available under current law to reduce the resulting U.S. income tax liability.
ii). China Net BVI was incorporated in the British Virgin Islands (“BVI”). Under the current law of the BVI, China Net BVI is not subject to tax on income or capital gains. Additionally, upon payments of dividends by China Net BVI to its shareholders, no BVI withholding tax will be imposed.
iii). China Net HK was incorporated in Hong Kong and does not conduct any substantial operations of its own. No provision for Hong Kong profits tax has been made in the financial statements as China Net HK has no assessable profits for the years ended December 31, 2012 and 2011, or any prior periods. Additionally, upon payments of dividends by China Net HK to its shareholders, no Hong Kong withholding tax will be imposed.
iv). The Company’s PRC operating subsidiary and VIEs, being incorporated in the PRC, are governed by the income tax law of the PRC and is subject to PRC enterprise income tax (“EIT”). Effective from January 1, 2008, the EIT rate of PRC was changed from 33% to 25%, and applies to both domestic and foreign invested enterprises.
|
Rise King WFOE is a software company qualified by the related PRC governmental authorities and was approved by the local tax authorities of Beijing, the PRC, to be entitled to a two-year EIT exemption from its first profitable year and a 50% reduction of its applicable EIT rate, which is 25% to 12.5% of its taxable income for the succeeding three years. Rise King WFOE had a net loss for the year ended December 31, 2008 and its first profitable year was fiscal year 2009 which has been verified by the local tax bureau by accepting the application filed by us. Therefore, it was approved to be entitled to a two-year EIT exemption for fiscal year 2009 through fiscal year 2010 and a 50% reduction of its applicable EIT rate which is 25% to 12.5% for fiscal year 2011 through fiscal year 2013. Therefore, for the years ended December 31, 2012 and 2011, the applicable income tax rate for Rise King WFOE was both 12.5%. After fiscal year 2013, the applicable income tax rate of Rise King WFOE will be 25% under the current EIT law of PRC.
|
|
Business Opportunity Online was approved by the related PRC governmental authorities as a High and New Technology Enterprise under the New EIT law effective September 4, 2009, and was approved by the local tax authorities of Beijing, the PRC, to be entitled to a favorable statutory tax rate of 15%. Business Opportunity Online’s High and New Technology Enterprise certificate would expire on September 4, 2012. On July 9, 2012, Business Opportunity Online passed the administrative review conducted by the related PRC governmental authorities for obtaining the renewed certificate, which enabled it to continue to enjoy the 15% preferential income tax rate as a High and New Technology Enterprise. Therefore, for the years ended December 31, 2012 and 2011, the applicable income tax rate of Business Opportunity Online was both 15%.
|
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Business Opportunity Online Hubei was incorporated in Xiaotian Industrial Park of Xiaogan Economic Development Zone in Xiaogan City, Hubei province of the PRC in 2011. It was approved by the related local government authorities to apply the deemed income tax method for its computation of income tax expense for the year ended December 31, 2011. Under the deemed income tax method, the deemed profit is calculated based on 10% of the total revenue and the applicable income tax rate is 25%. Therefore, for the year ended December 31, 2011, Business Opportunity Online Hubei calculated its income tax expenses based on 2.5% of the total revenue recognized for the reporting period. Starting from January 1, 2012, the local tax authorities cancelled the deemed income tax method for computation of income tax expenses for the entity. As such, the applicable income tax rate for the entity increased to 25%. On June 15, 2012, Business Opportunity Online Hubei was approved by the related PRC governmental authorities to be qualified as a software company and was approved by the local tax authorities of Xiaogan City, Hubei province, the PRC, to be entitled to a two-year EIT exemption for fiscal years 2012 and 2013, and a 50% reduction of its applicable EIT rate which is 25% to 12.5% of its taxable income for the succeeding three years until December 31, 2016. Therefore, for the year ended December 31, 2012, the applicable income tax rate of Business Opportunity Online Hubei is nil%.
|
|
Hubei CNET was incorporated in Xiaotian Industrial Park of Xiaogan Economic Development Zone in Xiaogan City, Hubei province of the PRC in 2011. It was approved by the related local government authorities to apply the deemed income tax method for its computation of income tax expense for the year ended December 31, 2011. Under the deemed income tax method, the deemed profit is calculated based on 10% of the total revenue and the applicable income tax rate is 25%. Therefore, for the year ended December 31, 2011, Hubei CNET calculated its income tax expenses based on 2.5% of the total revenue recognized for the reporting period. Starting from January 1, 2012, the local tax authorities cancelled the deemed income tax method for computation of income tax expenses for the entity and the applicable income tax rate for the entity increased to 25%. Therefore, for the year ended December 31, 2012, the applicable income tax rate for Hubei CNET is 25%.
|
|
The applicable income tax rate for other PRC operating entities of the Company is 25% for the years ended December 31, 2012 and 2011.
|
|
The New EIT also imposed a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside China, which were exempted under the previous enterprise income tax law and rules. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Holding companies in Hong Kong, for example, will be subject to a 5% rate. Rise King WFOE is invested by immediate holding company in Hong Kong and will be entitled to the 5% preferential withholding tax rate upon distribution of the dividends to its immediate holding company.
|
For the years ended December 31, 2012 and 2011, all of the preferential income tax treatments enjoyed by the Company’s PRC subsidiary and VIEs were based on the current applicable laws and regulations of the PRC and approved by the related government regulatory authorities and local tax authorities where the Company’s respective PRC subsidiary and VIEs operate. Rise King WFOE, Business Opportunity Online, Business Opportunity Online Hubei and Hubei CNET were most affected by these preferential income tax treatments within the structure of the Company. The preferential income tax treatments are subject to change in accordance with the PRC government economic development policies and regulations. These preferential income tax treatments are mainly determined by the regulation and policies of the PRC government in the context of the overall economic policy and strategy. As a result, the uncertainty of theses preferential income tax treatments are subject to, but not limited to, the PRC government policy on supporting any specific industry’s development under the outlook and strategy of overall macroeconomic development.
2) Turnover taxes and the relevant surcharges
For fiscal 2011, revenue from advertisement services is subject to 5.5% business tax (including surcharges) and 3% cultural industry development surcharge of the net service income after deducting amount paid to ending media promulgators. Revenue from internet technical services is subjected to 5.5% business tax (including surcharges).
Beginning on January 1, 2012, PRC tax authorities increased the local business tax rate by 0.1%-0.2%. Therefore, from January 1, 2012 through August 31, 2012 (for the Company’s PRC operating entities incorporated in Beijing) or October 31, 2012 (for the Company’s PRC operating entities incorporated in Fujian province) or November 30, 2012 (for the Company’s PRC operating entities incorporated in Hubei province), revenue from advertisement services is subject to 5.6%-5.7% business tax (including surcharges), depending on which tax jurisdiction the Company’s PRC operating subsidiary and VIE operate in, and 3% cultural industry development surcharge of the net service income after deducting amount paid to ending media promulgators. Revenue from internet technical services was subjected to 5.6%-5.7% business tax (including surcharges), depending on which tax jurisdiction the Company’s PRC operating subsidiary and VIE operate in.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 31, 2012, the Ministry of Finance (the “MOF”) and the State Administration of Taxation (the “SAT”) of the PRC jointly promulgated a “Circular on Launching the Pilot Collection of Value Added Tax in lieu of Business Tax in Transportation and Certain Areas of Modern Services Industries in Eight Provinces and Municipalities Including Beijing” (“Circular Cai Shui [2012] No. 71”), pursuant to which a business tax to value added tax (the “VAT”) transformation pilot program was launched. The implementation date for Beijing is September 1, 2012, for Fujian province, November 1, 2012, and for Hubei province, December 1, 2012. Other circulars such as “Circular on Carrying out the Pilot Collection of Value Added Tax in Lieu of Business Tax to be imposed on Transportation Industry and Part of Modern Services Industry in Shanghai” (“Circular Cai Shui [2011] No. 111”) jointly promulgated by the MOF and the SAT on November 16, 2011 which contains detailed implementation measures for such VAT pilot program apply to the locations including Beijing, Fujian province and Hubei province. In accordance with the Circular Cai Shui [2011] No. 111, the VAT rate for provision of modern services (other than lease of corporeal movables) is 6% and for small scale taxpayer, 3%. Therefore, beginning on September 1, 2012, for the Company’s PRC operating subsidiary and VIEs incorporated in Beijing, November 1, 2012, for the Company’s PRC operating VIEs incorporated in Fujian province, December 1, 2012, for the Company’s PRC operating VIEs incorporated in Hubei province, service revenues are subject to VAT at a rate of 6%, after deducting the VAT paid for the services purchased from suppliers, or at a rate of 3% without any deduction of VAT paid for the services purchased from suppliers. The surcharges of the VAT is 12%-14% of the VAT, depending on which tax jurisdiction the Company’s PRC operating subsidiary and VIE operate in.
Business tax is a price including tax in the PRC turnover tax system, which is calculated based on the revenue inclusive of turnover tax. Therefore, revenues achieved by the Company which are subject to business tax are presented on a gross basis inclusive of business tax, and on the other hand, business tax was included in cost of revenues upon recognition of services revenues. Contrastively, VAT is a price excluding tax in the PRC turnover tax system, which is calculated based on the revenue exclusive of turnover tax. Therefore, revenues achieved by the Company which are subject to VAT is presented on a net basis exclusive of VAT.
As of December 31, 2012 and 2011, taxes payable consists of:
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
Turnover tax and surcharge payable
|
|
|
2,609
|
|
|
|
2,212
|
|
Enterprise income tax payable
|
|
|
4,074
|
|
|
|
2,770
|
|
Individual income tax payable
|
|
|
-
|
|
|
|
58
|
|
|
|
|
6,683
|
|
|
|
5,040
|
|
A reconciliation of the provision for income taxes determined at the US federal corporate income tax rate to the Company’s effective income tax rate is as follows:
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
|
4,386
|
|
|
|
4,035
|
|
US federal rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
Income tax expense computed at U.S. federal rate
|
|
|
1,535
|
|
|
|
1,412
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
Rate differential for domestic earnings
|
|
|
(537
|
)
|
|
|
(770
|
)
|
Preferential tax treatments and tax holiday effects
|
|
|
(1,039
|
)
|
|
|
(1,552
|
)
|
Valuation allowance on deferred tax assets
|
|
|
512
|
|
|
|
1,921
|
|
Loss not recognized as deferred tax assets
|
|
|
3
|
|
|
|
-
|
|
Non-deductible expenses and non-taxable income
|
|
|
55
|
|
|
|
24
|
|
Effective income tax expense
|
|
|
529
|
|
|
|
1,035
|
|
For the years ended December 31, 2012 and 2011, the Company’s income tax expense consisted of:
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
Current-PRC
|
|
|
1,357
|
|
|
|
1,008
|
|
Deferred-PRC
|
|
|
(828
|
)
|
|
|
27
|
|
|
|
|
529
|
|
|
|
1,035
|
|
The Company’s deferred tax liabilities at December 31, 2012 and changes for the year then ended were as follows:
|
|
|
|
|
|
Amount
|
|
|
|
US$(’000)
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
|
1,893
|
|
Reversal during the period
|
|
|
(219
|
)
|
Exchange translation adjustment
|
|
|
15
|
|
Balance as of December 31, 2012
|
|
|
1,689
|
|
Deferred tax liabilities arose on the recognition of the identifiable intangible assets acquired from acquisition transactions and deconsolidation of subsidiaries consummated in 2011. Reversal for the year ended December 31, 2012 of approximately US$219,000 was due to amortization of the acquired intangible assets.
The Company’s deferred tax assets at December 31, 2012 and 2011 were as follows:
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
Tax effect of net operating losses carried forward
|
|
|
2,929
|
|
|
|
1,975
|
|
Bad debts provision
|
|
|
824
|
|
|
|
651
|
|
Valuation allowance
|
|
|
(3,051
|
)
|
|
|
(2,534
|
)
|
|
|
|
702
|
|
|
|
92
|
|
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
Deferred tax assets reclassified as current asset
|
|
|
50
|
|
|
|
-
|
|
Deferred tax assets reclassified as non-current asset
|
|
|
652
|
|
|
|
92
|
|
|
|
|
702
|
|
|
|
92
|
|
The net operating losses carried forward incurred by the Company (excluding its PRC operating subsidiary and VIEs) were approximately US$6,363,000 and US$5,381,000 at December 31, 2012 and 2011, respectively, which loss carry forwards gradually expire over time, the last of which expires in 2032. A full valuation allowance has been recorded because it is considered more likely than not that the deferred tax assets will not be realized through sufficient future earnings of the entity to which the operating losses relate.
The net operating losses carried forward (excluding bad debts provision and non-deductible expenses) incurred by the Company’s PRC subsidiary and VIEs were approximately US$4,093,000 and US$361,000 at December 31, 2012 and 2011, respectively, which loss carry forwards gradually expire over time, the last of which expires in 2017. The related deferred tax assets was calculated based on the respective net operating losses incurred by each of the PRC subsidiary and VIEs and the respective corresponding enacted tax rate that will be in effect in the period in which the differences are expected to reverse. No valuation allowance has been recorded because it is considered more likely than not that the deferred tax assets will be realized through sufficient future earnings of the entities to which the operating losses relate.
As of December 31, 2012, the bad debts provision recorded by the Company’s PRC subsidiary and VIEs were approximately US$3,788,000. A full valuation allowance has been recorded because it is considered more likely than not that the deferred tax assets will not be realized through bad debts verification by the local tax authorities where the PRC subsidiary and VIEs operate.
The Company’s non-current portion of deferred tax assets and deferred tax liabilities were attributable to different tax-paying components of the entity, which were under different tax jurisdictions. Therefore, in accordance with ASC Topic 740 “Income taxes”, the non-current portion of deferred tax assets and deferred tax liabilities were presented separately in the Company’s balance sheets.
The tax authority of the PRC government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those enterprises had completed their relevant tax filings, hence the Company’s tax filings may not be finalized. It is therefore uncertain as to whether the PRC tax authority may take different views about the Company’s tax filings which may lead to additional tax liabilities.
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
Dividend payable to Series A convertible stock holders
|
|
|
-
|
|
|
|
5
|
|
Dividend to Series A convertible preferred stockholders was accrued at the per annum rate of 10% and calculated based on US$2.5 per share liquidation preference and the actual number of days of each share of the Series A convertible preferred stock outstanding for each of the reporting periods. On August 21, 2011, all of the Company’s outstanding Series A convertible preferred stock, which had not been voluntarily converted into the Company’s common shares, were fully converted into the Company’s common shares under the mandatory conversion clause entered into by and between the Company and its Series A convertible preferred stockholders. For the years ended December 31, 2012 and 2011, the Company paid dividends of approximately US$5,000 and US$657,000 to its Series A convertible preferred stockholders, respectively.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22.
|
Long-term borrowing from director
|
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
Long-term borrowing from director
|
|
|
139
|
|
|
|
137
|
|
Long-term borrowing from director is a non-interest bearing loan from a director of the Company relating to the original paid-in capital contribution in the Company’s wholly-owned subsidiary Rise King WFOE.
In the Company’s August 2009 Financing, the Company issued to its investors (i) Series A-1 Warrant to purchase 2,060,800 shares of common stock at an exercise price of US$3.00 per share with a three-year term, and (ii) Series A-2 Warrants to purchase 2,060,800 shares of common stock at an exercise price of US$3.75 with a five-year term. The Company also issued to its placement agent warrants to purchase up to 329,728 shares of common stock at an exercise price of US$2.50, 164,864 shares at an exercise price of US$3.00 and 164,864 shares at an exercise price of US$3.75 respectively, with a five-year term (“Placement agent warrants” and together with the Series A-1 Warrant and Series A-2 Warrant, the “Warrants”).
On December 1, 2011, the Company initiated an exchange offer (the “Offer”) pursuant to which holders of certain of the Company’s outstanding warrants (the “Warrants”) to purchase an aggregate of 4,121,600 shares of the Company’s common stock had the opportunity to acquire shares of the Company’s common stock (the “Shares”) through a warrant for share exchange. The Company issued the Shares in exchange for the Warrants in accordance with the following exchange ratios: (A) with respect to any Series A-1 Warrant, one (1) Share in exchange for every twenty (20) Shares for which such Series A-1 Warrant was exercisable, and (B) with respect to any Series A-2 Warrant, one (1) Share in exchange for every ten (10) Shares for which such Series A-2 Warrant was exercisable; provided that each holder must have exchanged all its Series A-1 Warrants and/or all its Series A-2 Warrants pursuant to the terms and conditions thereof. The Offer continued for a period of twenty (20) business days from December 1, 2011 and expired on December 30, 2011, at 5:00 p.m., Eastern Time. Based on information provided by Empire Stock Transfer Inc., the Company’s stock transfer agent, and pursuant to the terms of the Offer, 1,418,800 Series A-1 Warrants were tendered in exchange for approximately 70,940 Shares and 356,800 Series A-2 Warrants were tendered in exchange for approximately 35,680 Shares, for a total of 1,775,600 Warrants exchanged for approximately 106,620 Shares. The Company had accepted for exchange all of the Warrants validly tendered and not withdrawn.
On August 20, 2012, Series A-1 warrants to purchase up to 642,000 share of the Company’s common stock issued on August 21, 2009 expired. The remaining Series A-2 warrants to purchase up to 1,704,000 shares of the Company’s common stock and placement agent warrants to purchase up to 659,456 shares of the Company’s common stock will expire on August 20, 2014.
Warrants issued and outstanding at December 31, 2012 and 2011, and changes during the two-year period ended December 31, 2012 are as follows:
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
|
Number of
underlying
shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Average
Remaining
Contractual
Life (years)
|
|
|
Number of
underlying
shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Average
Remaining
Contractual
Life (years)
|
|
Balance, January 1, 2011
|
|
|
4,781,056
|
|
|
|
$3.31
|
|
|
|
2.77
|
|
|
|
4,781,056
|
|
|
|
$3.31
|
|
|
|
2.77
|
|
Granted / Vested
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exchanged in the Offer
|
|
|
(1,775,600
|
)
|
|
|
$3.15
|
|
|
|
|
|
|
|
(1,775,600
|
)
|
|
|
$3.15
|
|
|
|
|
|
Balance, December 31, 2011
|
|
|
3,005,456
|
|
|
|
$3.41
|
|
|
|
2.21
|
|
|
|
3,005,456
|
|
|
|
$3.41
|
|
|
|
2.21
|
|
Granted / Vested
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(642,000
|
)
|
|
|
$3.00
|
|
|
|
|
|
|
|
(642,000
|
)
|
|
|
$3.00
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
2,363,456
|
|
|
|
$3.52
|
|
|
|
1.63
|
|
|
|
2,363,456
|
|
|
|
$3.52
|
|
|
|
1.63
|
|
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24.
|
Restricted net assets
|
As most of the Company’s operations are conducted through its PRC subsidiary and VIEs, the Company’s ability to pay dividends is primarily dependent on receiving distributions of funds from its PRC subsidiary and VIEs. Relevant PRC statutory laws and regulations permit payments of dividends by its PRC subsidiary and VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations and after it has met the PRC requirements for appropriation to statutory reserves. Paid in capital of the PRC subsidiary and VIEs included in the Company’s consolidated net assets are also non-distributable for dividend purposes.
In accordance with the PRC regulations on Enterprises with Foreign Investment, a WFOE established in the PRC is required to provide certain statutory reserves, namely general reserve fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A WFOE is required to allocate at least 10% of its annual after-tax profit to the general reserve until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. Rise King WFOE is subject to the above mandated restrictions on distributable profits. Additionally, in accordance with the Company Law of the PRC, a domestic enterprise is required to provide a statutory common reserve of at least 10% of its annual after-tax profit until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to provide for a discretionary surplus reserve, at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. All of the Company’s PRC VIEs are subject to the above mandated restrictions on distributable profits.
As a result of these PRC laws and regulations, the Company’s PRC subsidiary and VIEs are restricted in their ability to transfer a portion of their net assets to the Company. As of December 31, 2012 and 2011, net assets restricted in the aggregate, which include paid-in capital and statutory reserve funds of the Company’s PRC subsidiary and VIEs that are included in the Company’s consolidated net assets, was approximately US$5.5 million and US$4.7 million, respectively.
The New PRC Enterprise Income Tax (“EIT”) Law, which was effected on January 1, 2008, also imposed a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside China, which were exempted under the previous EIT law. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Holding companies in Hong Kong, for example, will be subject to a 5% rate. Rise King WFOE is invested by its immediate holding company in Hong Kong and will be entitled to the 5% preferential withholding tax rate upon distribution of the dividends to its immediate holding company.
The ability of the Company’s PRC subsidiary and VIEs to make dividends and other payments to the Company may also be restricted by changes in applicable foreign exchange and other laws and regulations.
Foreign currency exchange regulation in China is primarily governed by the following rules:
|
Foreign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules;
|
|
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.
|
Currently, under the Administration Rules, Renminbi is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of China, unless the prior approval of the State Administration of Foerign Exchange (the “SAFE”) is obtained and prior registration with the SAFE is made. Foreign-invested enterprises like Rise King WFOE that need foreign exchange for the distribution of profits to its shareholders may effect payment from their foreign exchange accounts or purchase and pay foreign exchange rates at the designated foreign exchange banks to their foreign shareholders by producing board resolutions for such profit distribution. Based on their needs, foreign-invested enterprises are permitted to open foreign exchange settlement accounts for current account receipts and payments of foreign exchange along with specialized accounts for capital account receipts and payments of foreign exchange at certain designated foreign exchange banks.
Although the current Exchange Rules allow the convertibility of Chinese Renminbi into foreign currency for current account items, conversion of Chinese Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of SAFE, which is under the authority of the People’s Bank of China. These approvals, however, do not guarantee the availability of foreign currency conversion. The Company cannot be sure that it will be able to obtain all required conversion approvals for its operations or the Chinese regulatory authorities will not impose greater restrictions on the convertibility of Chinese Renminbi in the future. Currently, most of the Company’s retained earnings are generated in Renminbi. Any future restrictions on currency exchanges may limit the Company’s ability to use its retained earnings generated in Renminbi to make dividends or other payments in U.S. dollars or fund possible business activities outside China.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2012 and 2011, there was approximately US$38.1 million and US$34.0 million retained earnings in the aggregate, respectively, which was generated by the Company’s PRC subsidiary and VIEs in Renminbi included in the Company’s consolidated net assets, aside from US$2.4 million and US$2.2 million statutory reserve funds as of December 31, 2012 and 2011, respectively, that may be affected by increased restrictions on currency exchanges in the future and accordingly may further limit the Company’s PRC subsidiary’ and VIEs’ ability to make dividends or other payments in U.S. dollars to the Company, in addition to the approximately US$5.5 million and US$4.7 million restricted net assets as of December 31, 2012 and 2011, respectively, as discussed above.
25.
|
Related party transactions
|
Revenue from related parties:
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
-Beijing Saimeiwei Food Equipment Technology Co., Ltd,
|
|
|
123
|
|
|
|
85
|
|
-Beijing Fengshangyinli Technology Co., Ltd.
|
|
|
2
|
|
|
|
307
|
|
-Beijing Telijie Century Environmental Technology Co., Ltd.
|
|
|
72
|
|
|
|
234
|
|
|
|
|
197
|
|
|
|
626
|
|
Sales of fixed assets to an equity investment affiliate:
For the year ended December 31, 2011, Rise King WFOE sold some spared computer servers to Shenzhen Mingshan, the Company’s equity investment affiliates for approximately US$36,000, the profit from this transaction which was included in the Company’s consolidated earnings was approximately US$3,000.
26.
|
Employee defined contribution plan
|
Full time employees of the Company in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the PRC subsidiaries of the Company make contributions to the government for these benefits based on certain percentages of the employees’ salaries. The employee benefits were expensed as incurred. The Company has no legal obligation for the benefits beyond the contributions made. The total amounts for such employee benefits were approximately US$451,000 and US$381,000 for the years ended December 31, 2012 and 2011, respectively.
27.
|
Concentration of risk
|
Credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, other receivables and prepayments and deposits to suppliers. As of December 31, 2012 and 2011, substantially all of the Company’s cash and cash equivalents were held by major financial institutions located in Mainland China and Hong Kong Special Administrative Region of the PRC, which management believes are of high credit quality.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Risk arising from operations in foreign countries
All of the Company’s operations are conducted within the PRC. The Company’s operations in the PRC are subject to various political, economic, and other risks and uncertainties inherent in the PRC. Among other risks, the Company’s operations in the PRC are subject to the risks of restrictions on transfer of funds, changing taxation policies, foreign exchange restrictions; and political conditions and governmental regulations.
Currency convertibility risk
Significant part of the Company’s businesses is transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts. These exchange control measures imposed by the PRC government authorities may restrict the ability of the Company’s PRC subsidiary and VIEs to transfer its net assets, which to the Company through loans, advances or cash dividends.
Concentration of customers
For the year ended December 31, 2011, one customer accounted for 12% of the Company’s sales. Except for the aforementioned customer, there was no other single customer who accounted for more than 10% of the Company’s sales for the years ended December 31, 2012 and 2011, respectively.
As of December 31, 2012, one customer accounted for 10% of the Company’s accounts receivables. As of December 31, 2011, one customer accounted for 21% of the Company’s accounts receivables. Except for the aforementioned customer, there was no other single customer who accounted for more than 10% of the Company’s accounts receivable as of December 31, 2012 and 2011, respectively.
Concentration of suppliers
For the year ended December 31, 2012, three suppliers individually accounted for 52%, 15% and 11% of the Company’s cost of sales, respectively. For the year ended December 31, 2011, two suppliers individually accounted for 36% and 24% of the Company’s cost of sales, respectively. Except for the afore-mentioned, there was no other single supplier who accounted for more than 10% of the Company’s cost of sales for the years ended December 31, 2012 and 2011, respectively.
The following table sets forth the Company’s contractual obligations as of December 31, 2012:
|
|
Office Rental
|
|
|
Server hosting
and board-band Leasing
|
|
|
Total
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
|
|
|
Year ending December 31,
|
|
|
|
|
|
|
|
|
|
-2013
|
|
|
367
|
|
|
|
69
|
|
|
|
436
|
|
-2014
|
|
|
293
|
|
|
|
-
|
|
|
|
293
|
|
-2015
|
|
|
293
|
|
|
|
-
|
|
|
|
293
|
|
-2016
|
|
|
73
|
|
|
|
-
|
|
|
|
73
|
|
Total
|
|
|
1,026
|
|
|
|
69
|
|
|
|
1,095
|
|
The Company follows ASC Topic 280 “Segment Reporting”, which requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and evaluating their performance. Reportable operating segments include components of an entity about which separate financial information is available and which operating results are regularly reviewed by the chief operating decision maker (“CODM”) to make decisions about resources to be allocated to the segment and assess each operating segment’s performance.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 2012
|
|
Internet
Ad.
|
|
|
TV
Ad.
|
|
|
Bank
kiosk
|
|
|
Brand
management
and sales
channel
building
|
|
|
Others
|
|
|
Inter-
segment
and
reconciling
item
|
|
|
Total
|
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
21,366
|
|
|
|
20,682
|
|
|
|
282
|
|
|
|
4,498
|
|
|
|
40
|
|
|
|
(268
|
)
|
|
|
46,600
|
|
Cost of sales
|
|
|
9,790
|
|
|
|
20,450
|
|
|
|
18
|
|
|
|
1,528
|
|
|
|
-
|
|
|
|
(228
|
)
|
|
|
31,558
|
|
Total operating expenses
|
|
|
7,005
|
|
|
|
338
|
|
|
|
210
|
|
|
|
1,205
|
|
|
|
1,774
|
*
|
|
|
-
|
|
|
|
10,532
|
|
Depreciation and amortization expense included in total operating expenses
|
|
|
1,053
|
|
|
|
60
|
|
|
|
210
|
|
|
|
215
|
|
|
|
99
|
|
|
|
-
|
|
|
|
1,637
|
|
Operating income (loss)
|
|
|
4,571
|
|
|
|
(106
|
)
|
|
|
54
|
|
|
|
1,765
|
|
|
|
(1,734
|
)
|
|
|
(40
|
)
|
|
|
4,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value of contingent consideration receivables
|
|
|
(160
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(160
|
)
|
Share of losses in equity investment affiliates
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(340
|
)
|
|
|
(109
|
)
|
|
|
-
|
|
|
|
(449
|
)
|
Expenditure for long-term assets
|
|
|
306
|
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
314
|
|
Net income (loss)
|
|
|
4,181
|
|
|
|
(64
|
)
|
|
|
54
|
|
|
|
982
|
|
|
|
(1,705
|
)
|
|
|
(40
|
)
|
|
|
3,408
|
|
Total assets – December 31, 2012
|
|
|
38,215
|
|
|
|
16,628
|
|
|
|
596
|
|
|
|
8,965
|
|
|
|
15,338
|
|
|
|
(22,824
|
)
|
|
|
56,918
|
|
*Including approximate US$48,000 share-based compensation expenses.
Year Ended December 31, 2011
|
|
Internet
Ad.
|
|
|
TV
Ad.
|
|
|
Bank
kiosk
|
|
|
Brand
management
and sales
channel
building
|
|
|
Others
|
|
|
Inter-
segment and
reconciling item
|
|
|
Total
|
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
19,981
|
|
|
|
6,448
|
|
|
|
487
|
|
|
|
1,829
|
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
28,731
|
|
Cost of sales
|
|
|
6,287
|
|
|
|
5,247
|
|
|
|
42
|
|
|
|
465
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
12,027
|
|
Total operating expenses
|
|
|
6,834
|
|
|
|
1,002
|
|
|
|
226
|
|
|
|
889
|
|
|
|
4,591
|
*
|
|
|
-
|
|
|
|
13,542
|
|
Depreciation and amortization expense included in total operating expenses
|
|
|
263
|
|
|
|
76
|
|
|
|
191
|
|
|
|
387
|
|
|
|
95
|
|
|
|
-
|
|
|
|
1,012
|
|
Operating income (loss)
|
|
|
6,860
|
|
|
|
199
|
|
|
|
219
|
|
|
|
475
|
|
|
|
(4,591
|
)
|
|
|
-
|
|
|
|
3,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value of contingent consideration receivables
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(70
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(70
|
)
|
Gain on deconsolidation of subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
693
|
|
|
|
232
|
|
|
|
-
|
|
|
|
925
|
|
Share of earnings (losses) in equity investment affiliates
|
|
|
-
|
|
|
|
26
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(245
|
)
|
|
|
-
|
|
|
|
(219
|
)
|
Expenditure for long-term assets
|
|
|
1,564
|
|
|
|
4
|
|
|
|
186
|
|
|
|
417
|
|
|
|
15
|
|
|
|
-
|
|
|
|
2,186
|
|
Net income (loss)
|
|
|
6,247
|
|
|
|
179
|
|
|
|
219
|
|
|
|
769
|
|
|
|
(4,633
|
)
|
|
|
-
|
|
|
|
2,781
|
|
Total assets – December 31, 2011
|
|
|
61,741
|
|
|
|
15,954
|
|
|
|
800
|
|
|
|
6,369
|
|
|
|
16,305
|
|
|
|
(43,887
|
)
|
|
|
57,282
|
|
*Including approximate US$2,900,000 share-based compensation expenses.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basic and diluted earnings per share for each of the periods presented are calculated as follows (All amounts, except number of shares and per share data, are presented in thousands of US dollars):
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
(Amount in thousands except for the
number of shares and per share data)
|
|
|
|
|
|
|
|
|
Net income attributable to ChinaNet Online Holdings, Inc.
|
|
$
|
2,996
|
|
|
$
|
2,995
|
|
Less: Dividend for Series A convertible preferred stock
|
|
|
-
|
|
|
|
407
|
|
Net income attributable to common shareholders of ChinaNet Online Holdings, Inc. (numerator for basic earnings per share)
|
|
|
2,996
|
|
|
|
2,588
|
|
Add: Dividend for Series A convertible preferred stock
|
|
|
-
|
|
|
|
-
|
|
Net income attributable to common shareholders of ChinaNet Online Holdings, Inc. (numerator for diluted earnings per share)
|
|
$
|
2,996
|
|
|
$
|
2,588
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - Basic
|
|
|
22,185,556
|
|
|
|
18,545,609
|
|
Effect of diluted securities:
|
|
|
|
|
|
|
|
|
Series A Convertible preferred stock
|
|
|
-
|
|
|
|
-
|
|
Warrants
|
|
|
-
|
|
|
|
213,631
|
|
Weighted average number of common shares outstanding -Diluted
|
|
|
22,185,556
|
|
|
|
18,759,240
|
|
|
|
|
|
|
|
|
|
|
Earnings per share-Basic
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
Earnings per share-Diluted
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
For the year ended December 31, 2012, the diluted earnings per share calculation did not include the warrants and options to purchase up to 2,772,161 and 939,440 shares of common stock, respectively, because their effect was anti-dilutive.
For the year ended December 31, 2011, the diluted earnings per share calculation did not include the effect of the 1,625,526 incremental shares resulted from assumed conversion of the convertible preferred stock, because their effect were anti-dilutive. For the year ended December 31, 2011, the diluted earnings per share calculation also did not include the warrants and options to purchase up to 3,072,411 and 129,202 shares of common stock, respectively, because their effect was anti-dilutive.
31.
|
Share-based compensation expenses
|
On July 12, 2010, the Company renewed its investor relations service contract with Hayden Communications International, Inc. (“HCI”) for an18-month period commencing on July 12, 2010. As additional compensation, the Company issued HCI 60,000 restricted shares of the Company’s common stock. These shares were valued at $3.80 per share, the closing bid price of the Company’s common stock on the date of grant. The related compensation expenses were amortized over the 18-month service period. Total compensation expenses recognized for the years ended December 31, 2012 and 2011 was U$$6,333 and US$152,000 respectively.
As a result of the merger of HCI and MZ Group, the Company terminated the service contract with HCI and engaged MZHCI, LLP (“MZ-HCI”) to provide investor relations services for a 24-month period commencing on January 1, 2012. As additional compensation, the Company granted 80,000 restricted shares of the Company’s common stock. These shares were valued at $1.05 per share, the closing bid price of the Company’s common stock on the date of grant. The related compensation expenses were amortized over the requisite service period. Total compensation expenses recognized for the years ended December 31, 2012 and 2011 was US$42,000 and US$nil, respectively.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 30, 2009, the Company granted 5-year options to each of its three independent directors, Mr. Douglas MacLellan, Mr. Mototaka Watanabe and Mr. Zhiqing Chen, to purchase in the aggregate 54,000 shares of the Company’s common stock at an exercise price of US$5.00 per share, in consideration of their services to the Company. These options vest quarterly at the end of each 3-month period, in equal installments over the 24-month period from the date of grant. The company utilized Black-Scholes option pricing model to gauge the grant date fair value of these options of US$4.05 per option. The related compensation expenses were amortized over its vesting period. Total compensation expenses recognized for these options for the year ended December 31, 2011 was US$141,480.
The Company estimated the fair value of these common stock options granted on November 30, 2009 using the Black-Scholes option pricing model based on the following assumptions:
Underlying stock price
|
|
$
|
5.00
|
|
Expected term (years)
|
|
|
3.00
|
|
Risk-free interest rate
|
|
|
1.10
|
%
|
Dividend yield
|
|
|
-
|
|
Expected Volatility
|
|
|
150
|
%
|
Exercise price of the option
|
|
$
|
5.00
|
|
Value per option
|
|
$
|
4.05
|
|
Underlying stock price is the closing bid price of the Company’s common stock on the date of grant. As the three individuals receiving options are non-employee executive directors, the Company believes that forfeitures are highly unlikely, and termination is not applicable. As such, the Company developed a weighted-average expected term at 3 years based on analysis of the vesting schedule and exercise assumptions. The risk-free interest rate is based on the 3 year U.S. Treasury rate. The dividend yield is calculated based on management’s estimate of dividends to be paid on the underlying stock. The expected volatility is calculated using historical data obtained from an appropriate index due to lack of liquidity of the Company’s underlying stock. Exercise price of the option is the contractual exercise price of the option.
On November 30, 2011, under the Company’s 2011 Omnibus Securities and Incentive Plan, adopted by the stockholders of the Company at its annual meeting held on June 15, 2011, the Company issued its management, employees and directors in the aggregate of 2,000,000 restricted shares of the Company’s common stock for the services they provided to the Company. The restricted stock is subject to a strict lock-up for an initial six-month period. Following the initial six-month period, the restricted stock will continue to be locked up until the earlier of (i) the date upon which the closing price of the Company's common stock equals or exceeds $2.50 for five consecutive trading days, and (ii) November 30, 2013. In addition, the restricted stock is subject to forfeiture upon an employee's cessation of employment at the discretion of the Company. The restricted stock was fully vested upon issuance and was valued at $1.14 per share, the closing bid price of the Company’s common stock on the date of grant. Total compensation cost recognized for the year ended December 31, 2011 was US$2,280,000.
On November 30, 2011, under the Company’s 2011 Omnibus Securities and Incentive Plan, the Company also issued its management, employees and directors in the aggregate of 885,440 options to purchase up the same number of the company’s common stock at an exercise price of US$1.20 per share. These options were fully vested and exercisable upon issuance and subject to forfeiture upon an employee's cessation of employment at the discretion of the Company. Total compensation expenses recognized for these options for the year ended December 31, 2011 was US$328,000.
The Company estimated the fair value of these options granted on November 30, 2011 using the Black-Scholes option pricing model based on the following assumptions:
Adjusted underlying stock price
|
|
$
|
1.037
|
|
Expected term (years)
|
|
|
5.00
|
|
Risk-free interest rate
|
|
|
0.95
|
%
|
Dividend yield
|
|
|
-
|
|
Expected Volatility
|
|
|
46.73
|
%
|
Exercise price of the option
|
|
$
|
1.20
|
|
Value per option
|
|
$
|
0.37
|
|
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Adjusted underlying stock price is based on the closing bid price of the Company common stock on the grant date, after adjustment for the 2,000,000 restricted shares award issued on November 30, 2011. Expected tenor are used when estimates of the expected lives of the options, based on vesting schedule and exercise assumptions, which has taken into account of early exercise behavior of the option holders. Yield-to-maturities in continuous compounding of the United States Government Bonds with the time-to-maturities same as the expected tenor of the options of 5 year are adopted as the risk-free rate. Average/median of industry annualized historical stock price volatility from an appropriate index as at the grant date is deemed to be appropriate to serve as the expected volatility of the stock price of the Company. The dividend yield is calculated based on management’s estimate of dividends to be paid on the underlying stock. Exercise price of the option is the contractual exercise price of the option.
Options issued and outstanding at December 31, 2012 and 2011, and changes during the two-year period ended December 31, 2012 are as follows:
|
|
Option Outstanding
|
|
|
Option Exercisable
|
|
|
|
Number of
underlying
shares
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
underlying
shares
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2011
|
|
|
54,000
|
|
|
|
3.92
|
|
|
$
|
5.00
|
|
|
|
27,000
|
|
|
|
3.92
|
|
|
$
|
5.00
|
|
Granted/Vested
|
|
|
885,440
|
|
|
|
10.00
|
|
|
$
|
1.20
|
|
|
|
912,440
|
|
|
|
9.80
|
|
|
$
|
1.31
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
|
939,440
|
|
|
|
9.51
|
|
|
$
|
1.42
|
|
|
|
939,440
|
|
|
|
9.51
|
|
|
$
|
1.42
|
|
Granted/Vested
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
939,440
|
|
|
|
8.51
|
|
|
$
|
1.42
|
|
|
|
939,440
|
|
|
|
8.51
|
|
|
$
|
1.42
|
|
The aggregate unrecognized share-based compensation expenses as of December 31, 2012 and 2011 is approximately US$42,000 and US$6,000, respectively.
The Company has evaluated subsequent events from the balance sheet date through the date that the financial statements are issued and no material subsequent event found.
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