UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
or
o TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to _____
Commission File Number: 001-34647
ChinaNet Online Holdings, Inc.
(Exact name of registrant as specified in its charter)
Nevada |
20-4672080 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
No. 3 Min Zhuang Road, Building 6,
Yu Quan Hui Gu Tuspark, Haidian District, Beijing, PRC 100195
(Address of principal
executive offices) (Zip Code)
+86-10-6900-5520
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o
Non-accelerated filer (Do not check if a smaller reporting company) o Smaller reporting
company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes o No x
As of November 16, 2015, the registrant had 29,580,130 shares of common stock outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
| |
September 30, 2015 | |
December 31,
2014 |
| |
| (US $) | | |
| (US $) | |
| |
| (Unaudited) | | |
| | |
Assets | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 1,941 | | |
$ | 5,037 | |
Term deposit | |
| 3,333 | | |
| 3,465 | |
Accounts receivable, net | |
| 4,084 | | |
| 2,407 | |
Other receivables, net | |
| 6,819 | | |
| 8,392 | |
Prepayment and deposit to suppliers | |
| 5,747 | | |
| 8,092 | |
Due from related parties | |
| 80 | | |
| 51 | |
Other current assets | |
| 89 | | |
| 61 | |
Deferred tax assets-current | |
| 306 | | |
| 176 | |
Total current assets | |
| 22,399 | | |
| 27,681 | |
| |
| | | |
| | |
Long-term investments | |
| 1,052 | | |
| 909 | |
Property and equipment, net | |
| 957 | | |
| 943 | |
Intangible assets, net | |
| 7,855 | | |
| 9,238 | |
Deposit and prepayment for purchasing of software technology | |
| 1,046 | | |
| 850 | |
Goodwill | |
| 6,514 | | |
| 6,772 | |
Deferred tax assets-non current | |
| 1,452 | | |
| 1,037 | |
Total Assets | |
$ | 41,275 | | |
$ | 47,430 | |
| |
| | | |
| | |
Liabilities and Equity | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Short-term bank loan * | |
$ | - | | |
$ | 817 | |
Accounts payable * | |
| 701 | | |
| 782 | |
Advances from customers * | |
| 2,200 | | |
| 832 | |
Accrued payroll and other accruals * | |
| 650 | | |
| 585 | |
Due to noncontrolling interest of VIE * | |
| 227 | | |
| 638 | |
Payable for purchasing of software technology * | |
| - | | |
| 2,826 | |
Guarantee payment and prepayment from new investors | |
| 963 | | |
| - | |
Taxes payable * | |
| 3,181 | | |
| 3,332 | |
Other payables * | |
| 563 | | |
| 602 | |
Total current liabilities | |
| 8,485 | | |
| 10,414 | |
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except for number of shares and per share data)
| |
September 30, 2015 | |
December 31,
2014 |
| |
(US $) | |
(US $) |
| |
(Unaudited) | |
|
Long-term liabilities: | |
| | | |
| | |
Deferred tax liability-non current * | |
| 816 | | |
| 964 | |
Long-term borrowing from director | |
| 138 | | |
| 143 | |
Total Liabilities | |
| 9,439 | | |
| 11,521 | |
| |
| | | |
| | |
Commitments and contingencies | |
| 407 | | |
| - | |
| |
| | | |
| | |
Equity: | |
| | | |
| | |
ChinaNet Online Holdings, Inc.’s stockholders’ equity | |
| | | |
| | |
Common stock (US$0.001 par value; authorized 50,000,000 shares; issued and outstanding 29,580,130 shares and 29,030,130 shares at September 30, 2015 and December 31, 2014, respectively) | |
| 30 | | |
| 29 | |
Additional paid-in capital | |
| 26,339 | | |
| 24,703 | |
Statutory reserves | |
| 2,607 | | |
| 2,607 | |
Retained earnings | |
| 144 | | |
| 5,222 | |
Accumulated other comprehensive income | |
| 2,492 | | |
| 3,625 | |
Total ChinaNet Online Holdings, Inc.’s stockholders’ equity | |
| 31,612 | | |
| 36,186 | |
| |
| | | |
| | |
Noncontrolling interests | |
| (183 | ) | |
| (277 | ) |
Total equity | |
| 31,429 | | |
| 35,909 | |
| |
| | | |
| | |
Total Liabilities and Equity | |
$ | 41,275 | | |
$ | 47,430 | |
*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 condensed consolidated financial statements
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
(In thousands)
| |
Nine
Months Ended September 30, | |
Three
Months Ended September 30, |
| |
2015 | |
2014 | |
2015 | |
2014 |
| |
(US $) (Unaudited) | |
(US $) (Unaudited) | |
(US $) (Unaudited) | |
(US $) (Unaudited) |
Sales | |
| | | |
| | | |
| | | |
| | |
From unrelated
parties | |
$ | 23,325 | | |
$ | 27,371 | | |
$ | 8,323 | | |
$ | 12,010 | |
From related
parties | |
| 687 | | |
| 240 | | |
| 219 | | |
| 57 | |
Total sales | |
| 24,012 | | |
| 27,611 | | |
| 8,542 | | |
| 12,067 | |
Cost
of sales | |
| 19,357 | | |
| 22,483 | | |
| 7,066 | | |
| 9,996 | |
Gross
profit | |
| 4,655 | | |
| 5,128 | | |
| 1,476 | | |
| 2,071 | |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Sales and marketing expenses | |
| 3,459 | | |
| 4,092 | | |
| 1,209 | | |
| 1,997 | |
General and administrative
expenses | |
| 5,637 | | |
| 3,023 | | |
| 2,330 | | |
| 1,014 | |
Research and development expenses | |
| 1,658 | | |
| 1,417 | | |
| 595 | | |
| 525 | |
Gain on disposal of VIE | |
| - | | |
| (266 | ) | |
| - | | |
| (266 | ) |
Total operating expenses | |
| 10,754 | | |
| 8,266 | | |
| 4,134 | | |
| 3,270 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from operations | |
| (6,099 | ) | |
| (3,138 | ) | |
| (2,658 | ) | |
| (1,199 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income (expenses) | |
| | | |
| | | |
| | | |
| | |
Interest income | |
| 91 | | |
| 91 | | |
| 28 | | |
| 31 | |
Interest expense | |
| (46 | ) | |
| (38 | ) | |
| (12 | ) | |
| (6 | ) |
Other income/(expenses) | |
| 26 | | |
| (12 | ) | |
| (5 | ) | |
| (9 | ) |
Total other income | |
| 71 | | |
| 41 | | |
| 11 | | |
| 16 | |
| |
| | | |
| | | |
| | | |
| | |
Loss
before income tax expense, equity method investments and noncontrolling interests | |
| (6,028 | ) | |
| (3,097 | ) | |
| (2,647 | ) | |
| (1,183 | ) |
Income tax benefit | |
| 720 | | |
| 39 | | |
| 396 | | |
| 159 | |
Loss
before equity method investments and noncontrolling interests | |
| (5,308 | ) | |
| (3,058 | ) | |
| (2,251 | ) | |
| (1,024 | ) |
Share of (losses)/income in
equity investment affiliates | |
| (2 | ) | |
| 49 | | |
| (4 | ) | |
| 107 | |
Net loss | |
| (5,310 | ) | |
| (3,009 | ) | |
| (2,255 | ) | |
| (917 | ) |
Net loss attributable to noncontrolling
interests | |
| 232 | | |
| 103 | | |
| 174 | | |
| 10 | |
Net
loss attributable to ChinaNet Online Holdings, Inc. | |
$ | (5,078 | ) | |
$ | (2,906 | ) | |
$ | (2,081 | ) | |
$ | (907 | ) |
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
(CONTINUED)
(In thousands, except for number of shares and per share data)
| |
Nine Months Ended September 30, | |
Three Months Ended September 30, |
| |
2015 | |
2014 | |
2015 | |
2014 |
|
|
(US $)
(Unaudited) |
|
(US $)
(Unaudited) |
|
(US $)
(Unaudited) |
|
(US $)
(Unaudited) |
| |
| |
| |
| |
|
Net loss | |
| (5,310 | ) | |
| (3,009 | ) | |
| (2,255 | ) | |
| (917 | ) |
Foreign currency translation (loss)/gain | |
| (1,127 | ) | |
| (271 | ) | |
| (1,150 | ) | |
| 10 | |
Comprehensive Loss | |
$ | (6,437 | ) | |
$ | (3,280 | ) | |
$ | (3,405 | ) | |
$ | (907 | ) |
Comprehensive loss attributable to noncontrolling interests | |
| 226 | | |
| 102 | | |
| 168 | | |
| 10 | |
Comprehensive loss attributable to ChinaNet Online Holdings, Inc. | |
$ | (6,211 | ) | |
$ | (3,178 | ) | |
$ | (3,237 | ) | |
$ | (897 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss per share | |
| | | |
| | | |
| | | |
| | |
Loss per common share | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
$ | (0.19 | ) | |
$ | (0.13 | ) | |
$ | (0.08 | ) | |
$ | (0.04 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average number of common shares outstanding: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
| 26,687,639 | | |
| 22,385,478 | | |
| 26,913,463 | | |
| 22,403,062 | |
See notes to condensed consolidated financial statements
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
Nine Months Ended September 30, |
| |
2015 | |
2014 |
|
|
(US $)
(Unaudited) |
|
(US $)
(Unaudited) |
Cash flows from operating activities | |
| | | |
| | |
Net loss | |
$ | (5,310 | ) | |
$ | (3,009 | ) |
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities | |
| | | |
| | |
Depreciation and amortization | |
| 1,321 | | |
| 1,079 | |
Share-based compensation expenses | |
| 1,637 | | |
| 25 | |
Provision for/(reverse of) allowances for doubtful accounts | |
| 106 | | |
| (120 | ) |
Disposal of other long-term assets | |
| 63 | | |
| - | |
Share of losses/(income) in equity investment affiliates | |
| 2 | | |
| (49 | ) |
Gain on disposal of VIE | |
| - | | |
| (266 | ) |
Deferred taxes | |
| (723 | ) | |
| (419 | ) |
Changes in operating assets and liabilities | |
| | | |
| | |
Accounts receivable | |
| (1,766 | ) | |
| 4,095 | |
Other receivables | |
| 1,908 | | |
| 1,842 | |
Prepayment and deposit to suppliers | |
| 2,099 | | |
| (5,246 | ) |
Due from related parties | |
| (33 | ) | |
| 395 | |
Other current assets | |
| (32 | ) | |
| (57 | ) |
Accounts payable | |
| (53 | ) | |
| 45 | |
Advances from customers | |
| 1,439 | | |
| 458 | |
Accrued payroll and other accruals | |
| 81 | | |
| (192 | ) |
Other payables | |
| 140 | | |
| 347 | |
Taxes payable | |
| (25 | ) | |
| 114 | |
Commitment and contingencies | |
| 419 | | |
| - | |
Net cash provided by/(used in) operating activities | |
| 1,273 | | |
| (958 | ) |
| |
| | | |
| | |
Cash flows from investing activities | |
| | | |
| | |
Purchases of vehicles and office equipment | |
| (310 | ) | |
| (242 | ) |
Payment for purchasing of software technologies | |
| (3,878 | ) | |
| (845 | ) |
Repayment of short-term loan from unrelated entities | |
| - | | |
| 670 | |
Cash effect on deconsolidation of VIE | |
| - | | |
| (358 | ) |
Long-term investment in cost/equity method investees | |
| (185 | ) | |
| - | |
Net cash used in investing activities | |
| (4,373 | ) | |
| (775 | ) |
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
| |
Nine Months Ended September 30, |
| |
2015 | |
2014 |
|
|
(US $)
(Unaudited) |
|
(US $)
(Unaudited) |
Cash flows from financing activities | |
| | | |
| | |
Repayment of short-term bank loan | |
| (810 | ) | |
| (813 | ) |
Proceeds from short-term bank loan | |
| - | | |
| 813 | |
Short-term loan from noncontrolling interest of VIE | |
| - | | |
| 716 | |
Repayment of short-term loan to noncontrolling interest of VIE | |
| (81 | ) | |
| (16 | ) |
Repayment to former VIE | |
| - | | |
| (488 | ) |
Guarantee payment and prepayment from new investors | |
| 993 | | |
| - | |
Net cash provided by financing activities | |
| 102 | | |
| 212 | |
| |
| | | |
| | |
Effect of exchange rate fluctuation on cash and cash equivalents | |
| (98 | ) | |
| (23 | ) |
| |
| | | |
| | |
Net decrease in cash and cash equivalents | |
| (3,096 | ) | |
| (1,544 | ) |
| |
| | | |
| | |
Cash and cash equivalents at beginning of the period | |
| 5,037 | | |
| 3,442 | |
Cash and cash equivalents at end of the period | |
$ | 1,941 | | |
$ | 1,898 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information | |
| | | |
| | |
| |
| | | |
| | |
Income taxes paid | |
$ | 133 | | |
$ | 204 | |
Interest expense paid | |
$ | 46 | | |
$ | 38 | |
| |
| | | |
| | |
Non-cash transaction | |
| | | |
| | |
| |
| | | |
| | |
Due to noncontrolling interest of VIE converted to paid-in capital of the VIE | |
$ | 317 | | |
$ | - | |
See notes to condensed consolidated financial statements
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| 1. | Organization and nature of operations |
ChinaNet Online Holdings, Inc. (the “Company”)
was incorporated in the State of Texas in April 2006 and re-domiciled to become a Nevada corporation in October 2006. On June 26,
2009, the Company consummated a share exchange transaction with China Net Online Media Group Limited (the “Share Exchange”),
a company organized under the laws of British Virgin Islands (“China Net BVI”). As a result of the Share Exchange,
China Net BVI became a wholly owned subsidiary of the Company and the Company is now a holding company, which, through certain
contractual arrangements with operating companies in the People’s Republic of China (the “PRC”), is engaged in
providing advertising, marketing, brand management and online-to-offline (O2O) sales channel building services for small and medium-sized
enterprises (SMEs) and entrepreneurial management and networking services for entrepreneurs in the PRC.
The Company’s wholly owned subsidiary, China Net BVI
was incorporated in the British Virgin Islands. China Net BVI is the parent holding company of CNET Online Technology Limited,
a Hong Kong company (“China Net HK”), which established and is the parent company of Rise King Century Technology Development
(Beijing) Co., Ltd., a wholly foreign-owned enterprise (“WFOE”) established in the PRC (“Rise King WFOE”).
To satisfy PRC laws and regulations, the Company conducts
certain business in the PRC through its Variable Interest Entities (“VIEs”). Through a series of contractual agreements
between Rise King WFOE and Business Opportunity Online (Beijing) Network Technology Co., Ltd. (“Business Opportunity Online”),
Beijing CNET Online Advertising Co., Ltd. (“Beijing CNET Online”) and Rise King (Shanghai) Advertisement Media Co.,
Ltd. (“Shanghai Jing Yang”) (collectively the “PRC Operating Entities” or the “VIEs”), the
Company, through the WFOE, secures significant rights to influence the PRC Operating Entities’ business operations, policies
and management, approve all matters requiring shareholder approval, and the right to receive 100% of the income earned by the VIEs.
Pursuant to the contractual agreements, all of the equity owners' rights and obligations of the VIEs were assigned to Rise King
WFOE, which resulted in the equity owners lacking the ability to make decisions that have a significant effect on the VIEs, Rise
King WFOE's ability to extract the profits from the operation of the VIEs and assume the residual benefits of the VIEs. Due to
the fact that Rise King WFOE and its indirect parent are the sole interest holders of the VIEs, the Company included the assets,
liabilities, revenues and expenses of the VIEs in its consolidated financial statements, which is consistent with the provisions
of FASB Accounting Standards Codification ("ASC") Topic 810 “Consolidation”, subtopic 10.
Beijing CNET Online is a 51% shareholder of Shanghai Borongdingsi
Computer Technology Co., Ltd. (“Shanghai Borongdingsi”) and a 10% shareholder of Beijing Saturday Education Technology
Co., Ltd. (“Beijing Saturday”). Business Opportunity Online is a 51% shareholder of Beijing Chuang Fu Tian Xia Network
Technology Co., Ltd. (“Beijing Chuang Fu Tian Xia”), the sole shareholder of Business Opportunity Online (Hubei) Network
Technology Co., Ltd. (“Business Opportunity Online Hubei”), the sole shareholder of Quanzhou City Zhilang Network
Technology Co., Ltd. (“Quanzhou Zhi Lang”), the sole shareholder of Beijing Chuang Shi Xin Qi Advertising Media Co.,
Ltd. (“Beijing Chuang Shi Xin Qi”), the sole shareholder of Beijing Hong Da Shi Xing Network Technology Co., Ltd.
(“Beijing Hong Da Shi Xing”), the sole shareholder of Beijing Shi Ji Cheng Yuan Advertising Media Co., Ltd. (“Beijing
Shi Ji Cheng Yuan”) and a 23.18% shareholder of Shenzhen City Mingshan Network Technology Co., Ltd. (“Shenzhen Mingshan”).
Business Opportunity Online Hubei is the sole shareholder of Hubei CNET Advertising Media Co., Ltd. (“Hubei CNET”),
the sole shareholder of Sheng Tian Network Technology (Hubei) Co., Ltd. (“Sheng Tian Hubei”) and a 25.5% shareholder
of Zhao Shang Ke Network Technology (Hubei) Co., Ltd. (“Zhao Shang Ke Hubei”).
In January 2015, the Company through its wholly-owned subsidiary,
China Net BVI incorporated a new wholly-owned BVI company named ChinaNet Investment Holding Ltd. (“ChinaNet Investment BVI”).
In March 2015, ChinaNet Investment BVI together with three individuals who were not affiliated with the Company, established ChinaNet
Online Holdings Korea (“ChinaNet Korea”), an entity incorporated in the Republic of Korea. ChinaNet Investment BVI
invested US$20,000 cash and beneficially own 40% of the equity interest in ChinaNet Korea.
In January 2015, the Company through one of its VIEs, Beijing
CNET Online made an investment of RMB1,000,000 (approximately US$0.16 million) to Chuangshi Meiwei Food and Beverage Investment
Management (Beijing) Co., Ltd. (“Chuangshi Meiwei” or “O'Yummy”). The Company beneficially owns 10% of
the equity interest in Chuangshi Meiwei.
In April 2015, the Company made an investment of RMB0.02
million (approximately US$0.003 million) to Guohua Shiji (Beijing) Communication Co., Ltd. (“Guohua Shiji”) and obtained
19% equity interest in Guohua Shiji.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company operated its business primarily in China through
its PRC subsidiary and PRC operating entities, or VIEs as discussed above.
| 2. | Variable Interest Entities |
Summarized below is the information related to the consolidated
VIEs’ assets and liabilities as of September 30, 2015 and December 31, 2014, respectively:
| |
September 30, 2015 | |
December 31,
2014 |
| |
US$(’000) | |
US$(’000) |
| |
(Unaudited) | |
|
Assets | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 1,269 | | |
$ | 4,239 | |
Term deposit | |
| 3,333 | | |
| 3,465 | |
Accounts receivable, net | |
| 3,892 | | |
| 2,407 | |
Other receivables, net | |
| 6,804 | | |
| 8,349 | |
Prepayment and deposit to suppliers | |
| 5,745 | | |
| 8,091 | |
Due from related parties | |
| 32 | | |
| - | |
Other current assets | |
| 35 | | |
| 58 | |
Deferred tax assets-current | |
| 239 | | |
| 107 | |
Total current assets | |
| 21,349 | | |
| 26,716 | |
| |
| | | |
| | |
Long-term investments | |
| 990 | | |
| 865 | |
Property and equipment, net | |
| 768 | | |
| 869 | |
Intangible assets, net | |
| 7,855 | | |
| 9,238 | |
Deposit and prepayment for purchasing of software technology | |
| 1,046 | | |
| 850 | |
Goodwill | |
| 6,514 | | |
| 6,772 | |
Deferred tax assets-non current | |
| 1,218 | | |
| 795 | |
Total Assets | |
| 39,740 | | |
$ | 46,105 | |
| |
| | | |
| | |
Liabilities | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Short-term bank loan | |
$ | - | | |
$ | 817 | |
Accounts payable | |
| 701 | | |
| 782 | |
Advances from customers | |
| 2,079 | | |
| 832 | |
Accrued payroll and other accruals | |
| 394 | | |
| 357 | |
Due to Control Group | |
| 227 | | |
| 11 | |
Due to noncontrolling interest of VIE | |
| 11 | | |
| 638 | |
Payable for purchasing of software technology | |
| - | | |
| 2,826 | |
Taxes payable | |
| 2,719 | | |
| 2,846 | |
Other payables | |
| 523 | | |
| 580 | |
Total current liabilities | |
| 6,654 | | |
| 9,689 | |
| |
| | | |
| | |
Deferred tax Liabilities-non current | |
| 816 | | |
| 964 | |
Total Liabilities | |
$ | 7,470 | | |
$ | 10,653 | |
| |
| | | |
| | |
Commitments and contingencies | |
| 407 | | |
| - | |
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.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended September 30,
2015, the financial performance of the VIEs reported in the Company’s consolidated statements of operations and comprehensive
loss includes sales of approximately US$23,711,000, cost of sales of approximately US$19,357,000, operating expenses of approximately
US$8,134,000 and net loss before allocation to noncontrolling interests of approximately US$2,993,000.
For the three months ended September 30,
2015, the financial performance of the VIEs reported in the Company’s consolidated statements of operations and comprehensive
loss includes sales of approximately US$8,467,000, cost of sales of approximately US$7,066,000, operating expenses of approximately
US$3,085,000 and net loss before allocation to noncontrolling interests of approximately US$1,283,000.
For the nine months ended September 30,
2014, the financial performance of the VIEs reported in the Company’s consolidated statements of operations and comprehensive
loss includes sales of approximately US$27,049,000, cost of sales of approximately US$22,481,000, operating expenses of approximately
US$7,294,000 and net loss before allocation to noncontrolling interests of approximately US$2,331,000.
For the three months ended September 30,
2014, the financial performance of the VIEs reported in the Company’s consolidated statements of operations and comprehensive
loss includes sales of approximately US$11,742,000, cost of sales of approximately US$9,995,000, operating expenses of approximately
US$2,957,000 and net loss before allocation to noncontrolling interests of approximately US$663,000.
| 3. | Summary of significant accounting policies |
The condensed consolidated interim
financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States
of America (“U.S. GAAP”).
The condensed consolidated interim
financial information as of September 30, 2015 and for the nine and three months ended September 30, 2015 and 2014 have been prepared
without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain
information and footnote disclosures, which are normally included in annual consolidated financial statements prepared in accordance
with U.S. GAAP, have been omitted pursuant to those rules and regulations. The condensed consolidated interim financial information
should be read in conjunction with the financial statements and the notes thereto, included in the Company’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2014, previously filed with the SEC (the “2014 Form 10-K”).
In the opinion of management, all adjustments
(which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial
position as of September 30, 2015, its consolidated results of operations for the nine and three months ended September 30, 2015
and 2014, and its consolidated cash flows for the nine months ended September 30, 2015 and 2014, as applicable, have been made.
The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future
periods.
| b) | Principles of consolidation |
The condensed consolidated interim
financial statements include the financial statements of all the subsidiaries and VIEs of the Company. All transactions and balances
between the Company and its subsidiaries and VIEs have been eliminated upon consolidation.
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the related disclosure of contingent assets and liabilities at the date of these condensed consolidated financial
statements, and the reported amounts of revenue and expenses during the reporting period. The Company continually evaluates these
estimates and assumptions based on the most recently available information, historical experience and various other assumptions
that the Company believes to be reasonable under the circumstances. Since the use of estimates is an integral component of the
financial reporting process, actual results could differ from those estimates.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| d) | Foreign currency translation |
The exchange rates used to translate
amounts in RMB into US$ for the purposes of preparing the condensed consolidated financial statements are as follows:
| |
September 30, 2015 | |
December 31, 2014 |
| |
| | | |
| | |
Balance sheet items, except for equity accounts | |
| 6.3613 | | |
| 6.1190 | |
| |
Nine Months Ended September 30, |
| |
2015 | |
2014 |
Items in the statements of income and comprehensive income, and statements of cash flows | |
| 6.1738 | | |
| 6.1502 | |
| |
Three Months Ended September 30, |
| |
2015 | |
2014 |
Items in the statements of income and comprehensive income, and statements of cash flows | |
| 6.2576 | | |
| 6.1623 | |
No representation is made that the
RMB amounts could have been, or could be converted into US$ at the above rates.
Advertising costs for the Company’s
own brand building are not includable in cost of sales, they are expensed when incurred and are included in “sales and marketing expenses” in the statements of operations and comprehensive loss. For
the nine months ended September 30, 2015 and 2014, advertising expenses for the Company’s own brand building were approximately
US$1,740,000 and US$2,412,000, respectively. For the three months ended September 30, 2015 and 2014, advertising expenses for the
Company’s own brand building were approximately US$520,000 and US$1,439,000, respectively.
| f) | Research and development expenses |
The Company accounts for the cost of
developing and upgrading technologies and platforms and intellectual property that are used in its daily operations in research
and development cost. Research and development costs are charged to expense when incurred. Expenses for research and development
for the nine months ended September 30, 2015 and 2014 were approximately US$1,658,000 and US$1,417,000, respectively. Expenses
for research and development for the three months ended September 30, 2015 and 2014 were approximately US$595,000 and US$525,000,
respectively.
| g) | Recent accounting standards |
In August 2015, the FASB issued Accounting
Standards Update (“ASU”) No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective
Date”. The amendments in this ASU defer the effective date of ASU No. 2014-09 for all entities by one year. Public business
entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in this ASU to annual reporting
periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application
is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within
that reporting period. All other entities should apply the guidance in this ASU to annual reporting periods beginning after December
15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may
apply the guidance in this ASU earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting
periods within that reporting period. All other entities also may apply the guidance in this ASU earlier as of an annual reporting
period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after
the annual reporting period in which the entity first applies the guidance in this ASU. The adoption of this standard is not expected
to have a material impact on the Company’s consolidated financial position and results of operations.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In September 2015, the FASB issued
ASU No. 2015-16, “Business Combination (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”.
The amendments in this ASU require that an acquirer recognize adjustments to provisional amounts that are identified during the
measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this ASU require that
the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization,
or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been
completed at the acquisition date, i.e., to simplify the accounting for adjustments made to provisional amounts recognized in a
business combination, the amendments in this ASU eliminate the requirement to retrospectively account for those adjustments. The
amendments in this ASU require an entity to present separately on the face of the income statement or disclose in the notes the
portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods
if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the
amendments in this ASU are effective for fiscal years beginning after December 15, 2015, including interim periods within those
fiscal years. The amendments in this ASU should be applied prospectively to adjustments to provisional amounts that occur after
the effective date of ASU with earlier application permitted for financial statements that have not been issued. For all other
entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within
fiscal years beginning after December 15, 2017. The amendments in this ASU should be applied prospectively to adjustments to provisional
amounts that occur after the effective date of this Update with earlier application permitted for financial statements that have
not yet been made available for issuance. The Board decided that the only disclosures required at transition should be the nature
of and reason for the change in accounting principle. An entity should disclose that information in the first annual period of
adoption and in the interim periods within the first annual period if there is a measurement-period adjustment during the first
annual period in which the changes are effective. The adoption of this standard is not expected to have a material impact on the
Company’s consolidated financial position and results of operations.
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.
Term deposit as of September 30, 2015 and December 31, 2014 represented the amount
of cash placed as a term deposit by one of the Company’s operating VIEs in a major financial institution in China, which
management believes is of high credit quality. The term deposit matured on July 7, 2015 and was extended to July 7, 2016 with an
interest rate of 2.925% per annual.
| 5. | Accounts receivable, net |
| |
September 30, 2015 | |
December 31, 2014 |
| |
US$(’000) | |
US$(’000) |
| |
(Unaudited) | |
|
| |
| |
|
Accounts receivable | |
| 6,936 | | |
| 5,429 | |
Allowance for doubtful accounts | |
| (2,852 | ) | |
| (3,022 | ) |
Accounts receivable, net | |
| 4,084 | | |
| 2,407 | |
All of the accounts receivable are non-interest bearing.
Based on the assessment of the collectability of the accounts receivable as of September 30, 2015 and December 31, 2014, the Company
provided approximately US$2,852,000 and US$3,022,000 allowance for doubtful accounts, which were primarily related to the accounts
receivable of the Company’s internet advertising and TV advertising business segment with an aging over six months. For the
nine months ended September 30, 2015, the Company reversed approximately US$56,000 allowance for doubtful accounts. For the three
months ended September 30, 2015, the Company provided approximately US$21,000 allowance for doubtful accounts. For the nine and
three months ended September 30, 2014, the Company reversed approximately US$120,000 and US$90,000 of allowance for doubtful accounts,
respectively.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
September 30, 2015 | |
December 31, 2014 |
| |
US$(’000) | |
US$(’000) |
| |
(Unaudited) | |
|
| |
| |
|
Short-term loan made for marketing campaign | |
| - | | |
| 65 | |
Term deposit interest receivable | |
| 23 | | |
| 56 | |
Staff advances for normal business purpose | |
| 73 | | |
| 73 | |
TV advertisement deposit and prepayment receivable | |
| 5,967 | | |
| 8,034 | |
Refundable software contract amount | |
| 756 | | |
| - | |
Overdue deposits | |
| 980 | | |
| 1,020 | |
Allowance for doubtful accounts | |
| (980 | ) | |
| (856 | ) |
Other receivables, net | |
| 6,819 | | |
| 8,392 | |
TV advertisement deposit and prepayment receivable represented
deposit and prepayment made to an agent of one of the provincial satellite TV stations partnered with the Company. The Company
had decided to terminate its cooperation with this TV station and its agent upon expiration of the 2014 contract on December 31,
2014. As of the date hereof, the Company has collected in the aggregate of RMB13.2 million (approximately US$2.1 million) of this
amount. The Company expects that the remaining balance will be collected within the next 12 months.
Refundable software contract amount represented the refundable
amount prepaid by the Company to its software development service provider in previous periods, which contract has been terminated
in early November 2015.
For advertising resources purchase contracts signed by the
Company and its resources providers, the Company was required to make deposits, which were either applied to the contract amounts
that were needed to be paid with the consent of the counterparty or to be refunded to the Company of the remaining balance upon
expiration of the cooperation. Overdue deposits represented the portion of the contractual deposits, which related advertising
resources purchase contracts had been completed as of each of the reporting dates with no further cooperation. Based on the assessment
of the collectability of these overdue deposits as of September 30, 2015 and December 31, 2014, the Company provided approximately
US$980,000 and US$856,000 allowance for doubtful accounts, respectively, which was related to the deposits of its internet advertising
and TV advertising business segment. For the nine and three months ended September 30, 2015, approximately US$162,000 allowance
for doubtful accounts was provided. For the nine and three months ended September 30, 2014, no allowance for doubtful accounts
was provided or reversed.
| 7. | Prepayments and deposit to suppliers |
| |
September 30, 2015 | |
December 31, 2014 |
| |
US$(’000) | |
US$(’000) |
| |
(Unaudited) | |
|
| |
| |
|
Deposits to TV advertisement and internet resources providers | |
| 1,365 | | |
| 3,575 | |
Prepayments to TV advertisement and internet resources providers | |
| 4,326 | | |
| 4,451 | |
Other deposits and prepayments | |
| 56 | | |
| 66 | |
| |
| 5,747 | | |
| 8,092 | |
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In order to provide advertising and marketing services, the
Company partners with TV stations or its agents to obtain time slots for resale through broadcast advertisements to advertise brands,
business information, products and services of its clients. The Company also purchases internet resources from large internet search
engines to attract more internet traffic to its advertising portals and provide value-added services to its clients.
Deposits to TV advertisement and internet resources providers
are paid as contractual deposits to the Company’s resources and services suppliers.
As of September 30, 2015, deposit to suppliers primarily
consisted of the contractual deposits of approximately US$0.64 million to two of the Company’s largest internet resources
suppliers and the contractual deposits of approximately US$0.73 million for the purchasing of TV advertising time slots.
According to the contracts signed between the Company and
its suppliers, the Company is normally required to pay the contract amounts in advance. These prepayments will be transferred
to cost of sales when the related services are provided.
As of September 30, 2015, prepayment to suppliers primarily
consisted of approximately US$2.92 million prepayments to the Company’s internet resources suppliers and approximately US$1.41
million prepayment for the purchasing of TV advertising time slots. This US$1.41 million advanced payment was carried forward from
previous years and was paid to a TV station which had been partnered with the Company for over five years. In response to the restrictions
on TV shopping infomercial implemented by the related government authorities, which resulted in the decrease in the Company’s
TV advertisement revenue, the Company discussed with the TV station possible alternatives of applying the balance of the advanced
payment, as the amount was unlikely to be refunded to the Company, due to internal administrative policies of the TV station. The
TV station and the Company agreed that the unconsumed advanced payment balance can be consumed by any third parties designated
by the Company and approved by the TV station, who will broadcast advertisements or other similar TV programs using the balance
of available time slots, and the Company will directly collect the amounts from the third parties for the time slots they utilized.
In November 2015, the Company collected an additional US$0.78 million of this amount. The Company expects that
the remaining advanced payment balance will be fully utilized within 2015.
| 8. | Due from related parties |
| |
September 30, 2015 | |
December 31, 2014 |
| |
US$(’000) | |
US$(’000) |
| |
(Unaudited) | |
|
| |
| |
|
Beijing Saimeiwei Food Equipment Technology Co., Ltd. | |
| 52 | | |
| 51 | |
Chuangshi Meiwei Food and Beverage Investment Management (Beijing) Co., Ltd. | |
| 28 | | |
| - | |
| |
| 80 | | |
| 51 | |
Related parties of the Company represented direct or indirect
unconsolidated investees of the Company or entities that are directly or indirectly owned by Mr. Handong Cheng or Mr. Xuanfu Liu,
the owners of the Company’s PRC VIEs, Business Opportunities Online and Beijing CNET Online before the Offshore Restructuring.
The Company provides advertising and marketing services to these related parties in its normal course of business on the same terms
as those provided to its unrelated clients. Due from related parties represented the outstanding receivables for the advertising
and marketing services that the Company provided to these related parties as of each reporting date.
| |
September 30, 2015 | |
December 31, 2014 |
| |
US$(’000) | |
US$(’000) |
| |
(Unaudited) | |
|
Equity method investments: | |
| |
|
Investment in equity method investees | |
| 793 | | |
| 806 | |
Advance to equity method investees | |
| 82 | | |
| 85 | |
Total equity method investments | |
| 875 | | |
| 891 | |
Cost method investments: | |
| | | |
| | |
Investment in cost method investees | |
| 177 | | |
| 18 | |
Total long-term investments | |
| 1,052 | | |
| 909 | |
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of September 30, 2015, the Company beneficially owned
40%, 23.18% and 25.5% equity interest in ChinaNet Korea, Shenzhen Mingshan and Zhao Shang Ke Hubei, respectively. The Company accounts
for its investments in these entities under equity method of accounting. The following table summarizes the movement of the investment
in and advance to equity investment affiliates for the nine months ended September 30, 2015:
| |
ChinaNet
Korea | |
Shenzhen
Mingshan | |
Zhao Shang Ke Hubei | |
Total |
| |
US$(’000) | |
US$(’000) | |
US$(’000) | |
US$(’000) |
| |
| |
| |
| |
|
Balance as of December 31, 2014 (audited) | |
| - | | |
| 461 | | |
| 430 | | |
| 891 | |
Share of losses in equity investment affiliates | |
| - | | |
| (2 | ) | |
| - | | |
| (2 | ) |
Investment in equity investment affiliates | |
| 20 | | |
| - | | |
| - | | |
| 20 | |
Exchange translation adjustment | |
| - | | |
| (18 | ) | |
| (16 | ) | |
| (34 | ) |
Balance as of September 30, 2015 (unaudited) | |
| 20 | | |
| 441 | | |
| 414 | | |
| 875 | |
ChinaNet Korea is a new entity incorporated in March 2015
by ChinaNet Investment BVI and three other unaffiliated individuals in the Republic of Korea. The Company made an investment of
US$20,000 and obtained 40% of the equity interest in ChinaNet Korea. As of the date hereof, ChinaNet Korea has not started its
operations.
For the nine and three months ended September 30, 2015,
the Company recognized its pro-rata shares of loss in Shenzhen Mingshan of approximately US$2,000 and US$4,000, respectively. For
the nine and three months ended September 30, 2014, the Company recognized its pro-rata shares of loss in Shenzhen Mingshan of
approximately US$2,000 and US$nil, respectively. For the nine and three months ended September 30, 2015, the Company did not recognized
any of its pro-rata shares of loss in Zhao Shang Ke Hubei, as the amounts were immaterial. For the nine and three months ended
September 30, 2014, the Company recognized its pro-rata shares of income in Zhao Shang Ke Hubei of approximately US$51,000 and
US$107,000, respectively.
In January 2015, the Company through one of its VIEs, Beijing
CNET Online made an investment of RMB1,000,000 (approximately US$0.16 million) to Chuangshi Meiwei and obtained 10% equity interest
in Chuangshi Meiwei. In April 2015, the Company made an investment of RMB0.02 million (approximately US$0.003 million) to Guohua
Shiji (Beijing) Communication Co., Ltd. (“Guohua Shiji”) and obtained 19% equity interest in Guohua Shiji.
As of September 30, 2015, the Company beneficially owns
19%, 10% and 10% equity interest in Guohua Shijie, Chuangshi Meiwei and Beijing Saturday. The Company accounts for these investments
under cost method. For the nine and three months ended September 30, 2015, the Company did not receive any distribution of earnings
from these entities.
| 10. | Property and equipment, net |
| |
September 30, 2015 | |
December 31, 2014 |
| |
US$(’000) | |
US$(’000) |
| |
(Unaudited) | |
|
| |
| |
|
Leasehold improvement | |
| 420 | | |
| 180 | |
Vehicles | |
| 856 | | |
| 890 | |
Office equipment | |
| 1,417 | | |
| 1,415 | |
Electronic devices | |
| 1,195 | | |
| 1,244 | |
Property and equipment, cost | |
| 3,888 | | |
| 3,729 | |
Less: accumulated depreciation | |
| (2,931 | ) | |
| (2,786 | ) |
Property and equipment, net | |
| 957 | | |
| 943 | |
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Depreciation expenses in the aggregate for the nine months
ended September 30, 2015 and 2014 were approximately US$258,000 and $291,000, respectively.
Depreciation expenses in the aggregate for the three months
ended September 30, 2015 and 2014 were approximately US$84,000 and $102,000, respectively.
| 11. | Intangible assets, net |
| |
September 30, 2015 | |
December 31, 2014 |
| |
US$(’000) | |
US$(’000) |
| |
(Unaudited) | |
|
Intangible assets not subject to amortization: | |
| |
|
Domain name | |
| 1,518 | | |
| 1,579 | |
Intangible assets subject to amortization: | |
| | | |
| | |
Contract backlog | |
| 195 | | |
| 202 | |
Customer relationship | |
| 3,410 | | |
| 3,545 | |
Non-compete agreements | |
| 1,349 | | |
| 1,402 | |
Software technologies | |
| 322 | | |
| 335 | |
SMEs operation management applications | |
| 5,076 | | |
| 5,277 | |
Cloud-computing based software platforms | |
| 1,459 | | |
| 1,517 | |
Other computer software | |
| 75 | | |
| 78 | |
Intangible assets, cost | |
| 13,404 | | |
| 13,935 | |
Less: accumulated amortization | |
| (4,594 | ) | |
| (3,704 | ) |
Less: accumulated impairment losses | |
| (955 | ) | |
| (993 | ) |
Intangible assets, net | |
| 7,855 | | |
| 9,238 | |
Amortization expenses in aggregate for the nine months
ended September 30, 2015 and 2014 were approximately US$1,063,000 and US$788,000, respectively.
Amortization expenses in aggregate for the three months
September 30, 2015 and 2014 were approximately US$349,000 and US$262,000, respectively.
Based on the carrying value of the finite-lived intangible
assets recorded as of September 30, 2015, and assuming no subsequent impairment of the underlying intangible assets, the estimated
future amortization expenses is approximately US$344,000 for the three months ended December 31, 2015, approximately US$1,369,000
for the year ended December 31, 2016, approximately US$886,000 for the year ended December 31, 2017, approximately US$836,000 for
the year ended December 31, 2018 and approximately US$780,000 for the year ended December 31, 2019.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| 12. | Deposit and prepayment for purchasing of software technology |
The Company entered into a contract to purchase software
products related to cloud video management system from an unrelated third party with a total contract amount of RMB9.5 million
(approximately US$1.5 million). The Company has paid in the aggregate of RMB6.65 million (approximately US$1.05 million) in accordance
with the payment schedule set forth in the contract. As of the date hereof, the Company is trial testing these software applications.
The transaction as contemplated under the contract is expected to be consummated in mid 2016.
The amount of US$0.85 million as of December 31, 2014
was related to a software development contract which has been terminated in early November 2015. In accordance with the agreement
between the Company and the counter party, the Company agreed to compensate the counter party RMB0.39 million (approximately US$0.06
million), and the remaining balance of the prepayment, which has been transferred to other receivable account, will be refunded
to the Company.
| |
Amount |
| |
US$(’000) |
| |
|
Balance as of December 31, 2014 (audited) | |
| 6,772 | |
Exchange translation adjustment | |
| (258 | ) |
Balance as of September 30, 2015 (unaudited) | |
| 6,514 | |
Short-term bank loan as of December 31, 2014 represented
a short-term bank loan of approximately RMB5.0 million (approximately US$0.8 million) borrowed by one of the Company’s VIEs
from a major financial institution in China to supplement its short-term working capital needs, which matured on September 29,
2015. The Company repaid this loan in full at maturity with no future extension.
| 15. | Accrued payroll and other accruals |
| |
September 30, 2015 | |
December 31, 2014 |
| |
US$(’000) | |
US$(’000) |
| |
(Unaudited) | |
|
| |
| |
|
Accrued payroll and staff welfare | |
| 430 | | |
| 388 | |
Accrued operating expenses | |
| 220 | | |
| 197 | |
| |
| 650 | | |
| 585 | |
| 16. | Due to noncontrolling interest of VIE |
As of September 30, 2015 and December 31, 2014, due to noncontrolling
interest of VIE represented the outstanding balance of the short-term loan borrowed by one of the Company’s VIEs, Chuang
Fu Tian Xia, from its noncontrolling interest to supplement the short-term working capital needs of Chuang Fu Tian Xia. The short-term
loan is unsecured, interest free and is payable on demand.
In July 2015, as approved by the shareholders of Chuang Fu
Tian Xia, the majority interest shareholder and noncontrolling interest shareholder, on a pro-rata basis, converted RMB2.04 million
(approximately US$0.32 million) and RMB1.96 million (approximately US$0.31 million) of its amount due from Chuang Fu Tian Xia into
the registered and paid-in capital of Chuang Fu Tian Xia, respectively. Accordingly, the registered and paid-in capital of Chuang
Fu Tian Xia increased from RMB1 million (approximately US$0.16 million) to RMB5 million (approximately US$0.79 million).
The Company expects to repay the remaining balance of the
amount due to noncontrolling interest of Chuang Fu Tian Xia of approximately US$0.23 million within fiscal 2015.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| 17. | Payable for purchasing of software technology |
Payable for purchasing of software technology as of December
31, 2014 represented the outstanding payment balance for purchasing of the SMEs operation management applications, which transaction
consummated in December 2014. As of September 30, 2015, the Company has fully settled the balance with the counter party.
| 18. | Guarantee payment and prepayment from new investors |
On May 5, 2015, the Company entered into a Securities Purchase
Agreement with Beijing Jinrun Fangzhou Science & Technology Co, Ltd. (“Jinrun Fangzhou”), a public company listed
on the National Equities Exchange and Quotations of the PRC (the”NEEQ”), pursuant to which Jinrun Fangzhou agreed to
purchase 2,800,000 shares of common stock of the Company for an aggregate purchase price of US$3,500,000. On May 26, 2015, the
Company entered into another Securities Purchase Agreement with Dongsys Innovation (Beijing) Technology Development Co., Ltd. (“Dongsys
Innovation”), a public company listed on the NEEQ, pursuant to which Dongsys Innovation agreed to purchase 1,000,000 shares
of common stock of the Company for an aggregate purchase price of US$1,250,000.
In accordance with the Securities Purchase Agreements described
above, Jinrun Fangzhou and Dongsys Innovation were required to pay 10% of its respective total purchase price as guarantee payments,
which was US$350,000 and US$125,000, respectively, within five days of the date the agreements were signed, and pay an additional
15% of its respective total purchase price, which was US$525,000 and US$187,500, respectively, within thirty days of the date of
the agreements were signed.
As of September 30, 2015, the Company has received the 10%
guarantee payment and 15% prepayment in an aggregate amount equal to US$841,000 from Jinrun Fangzhou, and the 10% guarantee payment
in an amount equal to US$122,000 from Dongsys Innovation, respectively.
In accordance with the Securities Purchase Agreements, Jinrun
Fangzhou and Dongsys Innovation shall pay the remaining 75% of its respective purchase price at the closing which shall take place
on the date mutually agreed to by the parties.
The entities within the Company file separate tax returns
in the respective tax jurisdictions in which they operate.
i). The Company is incorporated in the state of Nevada.
Under the current law of Nevada, the Company is not subject to state corporate income tax. Following the Share Exchange, the Company
became a holding company and does not conduct any substantial operations of its own. No provision for federal corporate income
tax has been made in the financial statements as the Company has no assessable profits for the nine and three months ended September
30, 2015, or any prior periods. The Company does not provide for U.S. taxes or foreign withholding taxes on undistributed earnings
from its non-U.S. subsidiaries because such earnings are intended to be reinvested indefinitely. If undistributed earnings were
distributed, foreign tax credits could become available under current law to reduce the resulting U.S. income tax liability.
ii). China Net BVI was incorporated in the British Virgin
Islands (“BVI”). Under the current law of the BVI, China Net BVI is not subject to tax on income or capital gains.
Additionally, upon payments of dividends by China Net BVI to its shareholders, no BVI withholding tax will be imposed.
iii). China Net HK was incorporated in Hong Kong and
does not conduct any substantial operations of its own. No provision for Hong Kong profits tax has been made in the financial statements
as China Net HK has no assessable profits for the nine and three months ended September 30, 2015 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”). The EIT rate of PRC is 25%, which applies to both domestic and foreign invested enterprises.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| l | In July 2012, Business Opportunity Online was approved by the related PRC governmental authorities
as a High and New Technology Enterprise under the current EIT law, and was approved by the local tax authorities of Beijing, the
PRC, to be entitled to a favorable statutory tax rate of 15% until December 31, 2014. After fiscal year 2014, the applicable income
tax rate for Business Opportunity Online will be 25% under the current EIT law of PRC unless the entity regains the qualification
as a High and New Technology Enterprise in fiscal 2015. The Company has passed the qualification evaluation process in August 2015,
and is currently going through its public notification period. The Company estimates that it will receive the formal certificate
as a renewed High and New Technology Enterprise by the end of 2015, which will enable the entity to continue to enjoy the favorable
statutory tax rate of 15% in 2015 and thereafter. Therefore, for the nine and three months ended September 30, 2015 and 2014, the
Company used 15% as the applicable income tax rate for Business Opportunity Online. |
| l | Business Opportunity Online Hubei was approved by the related PRC governmental authorities to be
qualified as a software company and was approved by the local tax authorities of Xiaogan City, Hubei province, the PRC, to be entitled
to a EIT exemption for fiscal 2012, as its first profitable year was determined as fiscal 2011 instead of fiscal 2012 in August
2013 by the local tax authorities of Xiaogan City, Hubei province, and a 50% reduction of its applicable EIT rate which is 25%
to 12.5% of its taxable income for the succeeding three years through fiscal 2015. Therefore, the applicable income tax rate for
Business Opportunity Online Hubei was both 12.5% for the nine and three months ended September 30, 2015 and 2014. After fiscal
2015, the applicable income tax rate for Business Opportunity Online Hubei will be 25% under the current EIT law of PRC. |
| l | The applicable income tax rate for other PRC operating entities of the Company was 25% for the
nine and three months ended September 30, 2015 and 2014. |
| l | The current EIT law also imposed a 10% withholding income tax for dividends distributed by a foreign
invested enterprise to its immediate holding company outside China. A lower withholding tax rate will be applied if there is a
tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Holding companies in Hong Kong,
for example, will be subject to a 5% withholding tax rate. |
For the nine and three months ended September 30, 2015
and 2014, all of the preferential income tax treatments enjoyed by the Company’s PRC 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 VIEs operate in. Business Opportunity Online and Business Opportunity Online Hubei were most affected
by these preferential income tax treatments within the structure of the Company. The preferential income tax treatments are subject
to change in accordance with the PRC government economic development policies and regulations. These preferential income tax treatments
are primarily determined by the regulation and policies of the PRC government in the context of the overall economic policy and
strategy. As a result, the uncertainty of theses preferential income tax treatments are subject to, but not limited to, the PRC
government policy on supporting any specific industry’s development under the outlook and strategy of overall macroeconomic
development.
2) Turnover taxes
and the relevant surcharges
Service revenues provided by the Company’s PRC
operating subsidiary and VIEs were subject to Value Added Tax (“VAT”). VAT rate for provision of modern services (other
than lease of corporeal movables) is 6% and for small scale taxpayer, 3%. Therefore, for the nine and three months ended September
30, 2015 and 2014, the Company’s service revenues are subject to VAT at a rate of 6%, after deducting the VAT paid for the
services purchased from suppliers, or at a rate of 3% without any deduction of VAT paid for the services purchased from suppliers.
The surcharges of the VAT is 12%-14% of the VAT, depending on which tax jurisdiction the Company’s PRC operating subsidiary
and VIE operate in.
As of September 30, 2015 and December 31, 2014, taxes
payable consists of:
| |
September 30, 2015 | |
December 31, 2014 |
| |
US$(’000) | |
US$(’000) |
| |
(Unaudited) | |
|
| |
| |
|
Turnover tax and surcharge payable | |
| 1,105 | | |
| 1,173 | |
Enterprise income tax payable | |
| 2,076 | | |
| 2,159 | |
| |
| 3,181 | | |
| 3,332 | |
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine and three months ended September 30, 2015
and 2014, the Company’s income tax benefit/(expense) consisted of:
| |
Nine Months Ended September 30, | |
Three Months Ended September 30, |
| |
2015 | |
2014 | |
2015 | |
2014 |
| |
US$(’000) | |
US$(’000) | |
US$(’000) | |
US$(’000) |
| |
(Unaudited) | |
(Unaudited) | |
(Unaudited) | |
(Unaudited) |
| |
| |
| |
| |
|
Current-PRC | |
| (2 | ) | |
| (380 | ) | |
| 2 | | |
| (3 | ) |
Deferred-PRC | |
| 722 | | |
| 419 | | |
| 394 | | |
| 162 | |
Income tax benefit | |
| 720 | | |
| 39 | | |
| 396 | | |
| 159 | |
The Company’s deferred tax liabilities at September
30, 2015 and changes for the nine months then ended were as follows:
| |
Amount |
| |
US$(’000) |
| |
|
Balance as of December 31, 2014 (audited) | |
| 964 | |
Reversal during the period | |
| (111 | ) |
Exchange translation adjustment | |
| (37 | ) |
Balance as of September 30, 2015 (unaudited) | |
| 816 | |
Deferred tax liabilities arose on the recognition of
the identifiable intangible assets acquired from acquisition transactions and deconsolidation of VIEs consummated in previous years.
Reversal for the nine months ended September 30, 2015 of approximately US$111,000 was due to amortization of the acquired intangible
assets.
The Company’s deferred tax assets at September
30, 2015 and December 31, 2014 were as follows:
| |
September 30, 2015 | |
December 31, 2014 |
| |
US$(’000) | |
US$(’000) |
| |
(Unaudited) | |
|
| |
| |
|
Tax effect of net operating losses carried forward | |
| 7,975 | | |
| 6,655 | |
Bad debts provision | |
| 930 | | |
| 943 | |
Valuation allowance | |
| (7,147 | ) | |
| (6,385 | ) |
Total deferred tax assets | |
| 1,758 | | |
| 1,213 | |
| |
September 30, 2015 | |
December 31, 2014 |
| |
US$(’000) | |
US$(’000) |
| |
(Unaudited) | |
|
| |
| |
|
Deferred tax assets reclassified as current asset | |
| 306 | | |
| 176 | |
Deferred tax assets reclassified as non-current asset | |
| 1,452 | | |
| 1,037 | |
Total deferred tax assets | |
| 1,758 | | |
| 1,213 | |
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The net operating losses carried forward incurred by the
Company (excluding its PRC operating subsidiary and VIEs) were approximately US$14,097,000 and US$12,161,000 at September 30,
2015 and December 31, 2014, respectively, which loss carry forwards gradually expire over time, the last of which expires in 2035.
A full valuation allowance has been recorded because it is considered more likely than not that the deferred tax assets will not
be realized through sufficient future earnings of the entity to which the operating losses relate.
The net operating losses carried forward (excluding bad debts
provision, amortization of intangible assets acquired from business combinations and non-deductible expenses) incurred by the
Company’s PRC subsidiary and VIEs were approximately US$15,786,000 and US$12,401,000 at September 30, 2015 and December
31, 2014, respectively, which loss carry forwards gradually expire over time, the last of which expires in 2020. 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 losses are expected to be utilized.
The Company recorded approximately US$148,000 and US$697,000 valuation allowance for the nine months ended September 30, 2015
and 2014, respectively, and recorded approximately US$52,000 and US$125,000 valuation allowance for the three months ended September
30, 2015 and 2014, respectively because it is considered more likely than not that this portion of the deferred tax assets will
not be realized through sufficient future earnings of the entities to which the operating losses relate.
Full valuation allowance to bad debts provision related deferred
tax assets were recorded because it is considered more likely than not that this portion of deferred tax assets will not be realized
through bad debts verification by the local tax authorities where the PRC subsidiary and VIEs operate in.
The Company’s 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.
| 20. | Long-term borrowing from director |
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, which is not expected to be repaid within one year.
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.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As a result of these PRC laws and regulations, the Company’s
PRC subsidiary and VIEs are restricted in their ability to transfer a portion of their net assets to the Company. As of September
30, 2015 and December 31, 2014, 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$7.7 million and US$7.3 million, respectively.
The current PRC Enterprise Income Tax (“EIT”)
Law also imposed a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding
company outside China. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China
and the jurisdiction of the foreign holding company. Holding companies in Hong Kong, for example, will be subject to a 5% rate.
The ability of the Company’s PRC subsidiary and VIEs
to make dividends and other payments to the Company may also be restricted by changes in applicable foreign exchange and other
laws and regulations.
Foreign currency exchange regulation in China is primarily
governed by the following rules:
|
● |
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 Foreign Exchange (the “SAFE”)
is obtained and prior registration with the SAFE is made. Foreign-invested enterprises like Rise King WFOE that need foreign exchange
for the distribution of profits to its shareholders may effect payment from their foreign exchange accounts or purchase and pay
foreign exchange rates at the designated foreign exchange banks to their foreign shareholders by producing board resolutions for
such profit distribution. Based on their needs, foreign-invested enterprises are permitted to open foreign exchange settlement
accounts for current account receipts and payments of foreign exchange along with specialized accounts for capital account receipts
and payments of foreign exchange at certain designated foreign exchange banks.
Although the current Exchange Rules allow the convertibility
of Chinese Renminbi into foreign currency for current account items, conversion of Chinese Renminbi into foreign exchange for capital
items, such as foreign direct investment, loans or securities, requires the approval of SAFE, which is under the authority of the
People’s Bank of China. These approvals, however, do not guarantee the availability of foreign currency conversion. The Company
cannot be sure that it will be able to obtain all required conversion approvals for its operations or the Chinese regulatory authorities
will not impose greater restrictions on the convertibility of Chinese Renminbi in the future. Currently, most of the Company’s
retained earnings are generated in Renminbi. Any future restrictions on currency exchanges may limit the Company’s ability
to use its retained earnings generated in Renminbi to make dividends or other payments in U.S. dollars or fund possible business
activities outside China.
As of September 30, 2015 and December 31, 2014, there was
approximately US$26.6 million and US$30.8 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$2.8
million statutory reserve funds as of September 30, 2015 and December 31, 2014, that may be affected by increased restrictions
on currency exchanges in the future and accordingly may further limit the Company’s PRC subsidiary’s and VIEs’
ability to make dividends or other payments in U.S. dollars to the Company, in addition to the approximately US$7.7 million and
US$7.3 million restricted net assets as of September 30, 2015 and December 31, 2014, respectively, as discussed above.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| 22. | Related party transactions |
Revenue from related parties:
| |
Nine Months Ended September 30, |
| |
2015 | |
2014 |
| |
US$(’000) | |
US$(’000) |
| |
(Unaudited) | |
(Unaudited) |
| |
| |
|
-Chuangshi Meiwei Food and Beverage Investment Management (Beijing) Co., Ltd. | |
| 351 | | |
| - | |
-Beijing Saimeiwei Food Equipment Technology Co., Ltd, | |
| 85 | | |
| 239 | |
-Beijing Fengshangyinli Technology Co., Ltd. | |
| - | | |
| 1 | |
-Beijing Saturday Education Technology Co., Ltd. | |
| 251 | | |
| - | |
| |
| 687 | | |
| 240 | |
| |
Three Months Ended September 30, |
| |
2015 | |
2014 |
| |
US$(’000) | |
US$(’000) |
| |
(Unaudited) | |
(Unaudited) |
| |
| |
|
-Chuangshi Meiwei Food and Beverage Investment Management (Beijing) Co., Ltd. | |
| 2 | | |
| - | |
-Beijing Saimeiwei Food Equipment Technology Co., Ltd. | |
| 27 | | |
| 57 | |
-Beijing Saturday Education Technology Co., Ltd. | |
| 190 | | |
| - | |
| |
| 219 | | |
| 57 | |
| 23. | 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$467,000 and US$424,000 for the nine months ended September 30, 2015 and
2014, respectively. The total amounts for such employee benefits were approximately US$188,000 and US$159,000 for the three months
ended September 30, 2015 and 2014, respectively.
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 September 30, 2015 and December 31, 2014, substantially all of the Company’s
cash and cash equivalents were held by major financial institutions located in Mainland China, which management believes are of
high credit quality.
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.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 nine months ended September 30, 2015, two customers
individually accounted for 15% and 13% of the Company’s sales, respectively. For the three months ended September 30, 2015,
one of the two customers individually accounted for 11% of the Company’s sales. Except for the aforementioned customers,
there was no other single customer who accounted for more than 10% of the Company’s sales for the nine or three months ended
September 30, 2015.
For the nine months ended September 30, 2014, two customers
individually accounted for 29% and 17% of the Company’s sales, respectively. For the three months ended September 30, 2014,
the same two customers individually accounted for 42% and 15% of the Company’s sales, respectively. Except for the aforementioned
customer, there was no other single customer who accounted for more than 10% of the Company’s sales for the nine or three
months ended September 30, 2014.
As of September 30, 2015, two customers individually accounted
for 20% and 17% of the Company’s accounts receivable, respectively. As of December 31, 2014, two customers individually accounted
for 19% and 18% of the Company’s accounts receivable, respectively. Except for the afore-mentioned, there was no other single
customer who accounted for more than 10% of the Company’s accounts receivable as of September 30, 2015 or December 31, 2014.
Concentration of suppliers
For the nine months ended September 30, 2015, two suppliers
individually accounted for 43% and 39% of the Company’s cost of sales, respectively. For the three months ended September
30, 2015, the same two suppliers individually accounted for 31% and 50% of the Company’s cost of 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 nine or three months ended September 30, 2015.
For the nine months ended September 30, 2014, two suppliers
individually accounted for 69% and 20% of the Company’s cost of sales, respectively. For the three months ended September
30, 2014, the same two suppliers individually accounted for 75% and 17% 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 nine or three months ended September 30, 2014.
| 25. | Commitments and contingencies |
The following table sets forth the Company’s operating
lease commitment as of September 30, 2015:
| |
Office Rental |
| |
US$(’000) |
| |
(Unaudited) |
Three months ending December 31, | |
|
-2015 | |
| 100 | |
Year ending December 31, | |
| | |
-2016 | |
| 130 | |
Total | |
| 230 | |
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended September 30, 2015 and
2014, rental expenses under operating leases were approximately US$337,000 and US$393,000, respectively. For the three months
ended September 30, 2015 and 2014, rental expenses under operating leases were approximately US$115,000 and US$132,000, respectively.
The Company entered into a contract to purchase software
products related to cloud video management system from an unrelated third party with a total contract amount of RMB9.5 million
(approximately US$1.5 million). The Company has paid in the aggregate of RMB6.65 million (approximately US$1.05 million) in accordance
with the payment schedule set forth in the contract. As of the date hereof, the Company is trial testing these software applications.
The transaction as contemplated under the contract is expected to be consummated in mid 2016 and the remaining unpaid contract
amount is expected to be paid before mid 2016.
In accordance with the contract entered into between the
Company and its largest internet resources supplier, the Company agreed to purchase in the aggregate of RMB100 million (“the
minimum consumption amount”) (approximately US$15.7 million) from this supplier for a one-year period commencing on June
13, 2015. In accordance with this contract, if the Company fails to meet the minimum consumption amount, the supplier is allowed
to require the Company to retroactively compensate the supplier in cash the difference between the granted discount rate set forth
based on the minimum consumption amount and any revised discount rate set forth based on further negotiation between the two parties,
if the Company is able to achieve 50% of the minimum consumption amount. If the Company fails to achieve 50% of the minimum consumption
amount, the Company is not eligible to enjoy any discount.
The Company evaluated the consumption amount that most
probably will be achieved during the contract period, based on the most recently available information, its own historical experience
and various other assumptions that the Company believed to be reasonable under the circumstances and concluded that more likely
than not the Company will be able to achieve 50% of the minimum consumption amount but may not be able to achieve the minimum consumption
amount. As a result, the Company calculated a most probable amount of cash compensation attributable to the nine and three months
ended September 30, 2015 that may be charged by the supplier of approximately RMB 2.59 million (approximately US$0.41 million),
based on a decreased discount rate that the Company believes reasonable under the circumstances.
The Company follows ASC Topic 280 “Segment Reporting”,
which requires that companies disclose segment data based on how management makes decisions about allocating resources to segments
and evaluating their performance. Reportable operating segments include components of an entity about which separate financial
information is available and which operating results are regularly reviewed by the chief operating decision maker (“CODM”),
the Company’s Chief Executive Officer, to make decisions about resources to be allocated to the segment and assess each operating
segment’s performance.
Nine Months Ended September 30, 2015 (Unaudited)
| |
Internet Ad. | |
TV Ad. | |
Bank kiosk | |
Brand management
and sales channel building | |
Others | |
Inter- segment and reconciling item | |
Total |
| |
US$ (‘000) | |
US$ (‘000) | |
US$ (‘000) | |
US$ (‘000) | |
US$ (‘000) | |
US$ (‘000) | |
US$ (‘000) |
| |
| |
| |
| |
| |
| |
| |
|
Revenue | |
| 22,540 | | |
| 1,100 | | |
| 160 | | |
| 212 | | |
| - | | |
| - | | |
| 24,012 | |
Cost of sales | |
| 18,171 | | |
| 1,058 | | |
| 6 | | |
| 122 | | |
| - | | |
| - | | |
| 19,357 | |
Total operating expenses | |
| 7,570 | | |
| 231 | | |
| 90 | | |
| 314 | | |
| 2,549 | * | |
| - | | |
| 10,754 | |
Depreciation and amortization expense included in total operating expenses | |
| 1,152 | | |
| 2 | | |
| 90 | | |
| 48 | | |
| 29 | | |
| - | | |
| 1,321 | |
Operating income (loss) | |
| (3,201 | ) | |
| (189 | ) | |
| 64 | | |
| (224 | ) | |
| (2,549 | ) | |
| - | | |
| (6,099 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Share of loss in equity investment affiliates | |
| - | | |
| - | | |
| - | | |
| - | | |
| (2 | ) | |
| - | | |
| (2 | ) |
Expenditure for long-term assets | |
| 4,036 | | |
| - | | |
| - | | |
| - | | |
| 152 | | |
| - | | |
| 4,188 | |
Net income (loss) | |
| (2,458 | ) | |
| (162 | ) | |
| 64 | | |
| (204 | ) | |
| (2,550 | ) | |
| - | | |
| (5,310 | ) |
Total assets – September 30, 2015 | |
| 38,053 | | |
| 10,381 | | |
| 197 | | |
| 2,612 | | |
| 6,529 | | |
| (16,497 | ) | |
| 41,275 | |
Total assets – December 31, 2014 | |
| 43,851 | | |
| 13,228 | | |
| 296 | | |
| 2,989 | | |
| 6,558 | | |
| (19,492 | ) | |
| 47,430 | |
*Including approximately US$1,637,000 share-based compensation expenses.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three Months Ended September 30, 2015 (Unaudited)
| |
Internet Ad. | |
TV Ad. | |
Bank kiosk | |
Brand management
and sales channel building | |
Others | |
Inter- segment and reconciling item | |
Total |
| |
US$ (‘000) | |
US$ (‘000) | |
US$ (‘000) | |
US$ (‘000) | |
US$ (‘000) | |
US$ (‘000) | |
US$ (‘000) |
| |
| |
| |
| |
| |
| |
| |
|
Revenue | |
| 8,456 | | |
| 19 | | |
| 22 | | |
| 45 | | |
| - | | |
| - | | |
| 8,542 | |
Cost of sales | |
| 7,030 | | |
| 17 | | |
| 1 | | |
| 18 | | |
| - | | |
| - | | |
| 7,066 | |
Total operating expenses | |
| 2,938 | | |
| 11 | | |
| 29 | | |
| 126 | | |
| 1,030 | * | |
| - | | |
| 4,134 | |
Depreciation and amortization expense included in total operating expenses | |
| 375 | | |
| - | | |
| 29 | | |
| 16 | | |
| 13 | | |
| - | | |
| 433 | |
Operating loss | |
| (1,512 | ) | |
| (9 | ) | |
| (8 | ) | |
| (99 | ) | |
| (1,030 | ) | |
| - | | |
| (2,658 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Share of loss in equity investment affiliates | |
| - | | |
| - | | |
| - | | |
| - | | |
| (4 | ) | |
| - | | |
| (4 | ) |
Expenditure for long-term assets | |
| 2,072 | | |
| - | | |
| - | | |
| - | | |
| 138 | | |
| - | | |
| 2,210 | |
Net income (loss) | |
| (1,127 | ) | |
| 9 | | |
| (8 | ) | |
| (95 | ) | |
| (1,034 | ) | |
| - | | |
| (2,255 | ) |
*Including approximately US$681,000 share-based compensation expenses.
Nine Months Ended September 30, 2014 (Unaudited)
| |
Internet Ad. | |
TV Ad. | |
Bank kiosk | |
Brand management
and sales channel building | |
Others | |
Inter- segment and reconciling item | |
Total |
| |
US$ (‘000) | |
US$ (‘000) | |
US$ (‘000) | |
US$ (‘000) | |
US$ (‘000) | |
US$ (‘000) | |
US$ (‘000) |
| |
| |
| |
| |
| |
| |
| |
|
Revenue | |
| 21,777 | | |
| 4,806 | | |
| 207 | | |
| 821 | | |
| - | | |
| - | | |
| 27,611 | |
Cost of sales | |
| 17,562 | | |
| 4,467 | | |
| 8 | | |
| 446 | | |
| - | | |
| - | | |
| 22,483 | |
Total operating expenses | |
| 6,478 | | |
| 345 | | |
| 93 | | |
| 442 | | |
| 908 | * | |
| - | | |
| 8,266 | |
Gain on disposal of VIE included in total operating expenses
| |
| (266
| ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (266 | ) |
Depreciation and amortization expense included in total operating expenses | |
| 743 | | |
| 31 | | |
| 93 | | |
| 151 | | |
| 61 | | |
| - | | |
| 1,079 | |
Operating income (loss) | |
| (2,263 | ) | |
| (6 | ) | |
| 106 | | |
| (67 | ) | |
| (908 | ) | |
| - | | |
| (3,138 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Share of losses in equity investment affiliates | |
| - | | |
| - | | |
| - | | |
| 51 | | |
| (2 | ) | |
| - | | |
| 49 | |
Expenditure for long-term assets | |
| 1,072 | | |
| - | | |
| - | | |
| 3 | | |
| 12 | | |
| - | | |
| 1,087 | |
Net income (loss) | |
| (2,133 | ) | |
| (57 | ) | |
| 106 | | |
| (15 | ) | |
| (910 | ) | |
| - | | |
| (3,009 | ) |
*Including approximately US$25,000 share-based compensation expenses.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three Months Ended September 30, 2014 (Unaudited)
| |
Internet Ad. | |
TV Ad. | |
Bank kiosk | |
Brand management
and sales channel building | |
Others | |
Inter- segment and reconciling item | |
Total |
| |
US$ (‘000) | |
US$ (‘000) | |
US$ (‘000) | |
US$ (‘000) | |
US$ (‘000) | |
US$ (‘000) | |
US$ (‘000) |
| |
| |
| |
| |
| |
| |
| |
|
Revenue | |
| 9,969 | | |
| 1,812 | | |
| 69 | | |
| 217 | | |
| - | | |
| - | | |
| 12,067 | |
Cost of sales | |
| 8,167 | | |
| 1,695 | | |
| 3 | | |
| 131 | | |
| - | | |
| - | | |
| 9,996 | |
Total operating expenses | |
| 2,628 | | |
| 123 | | |
| 30 | | |
| 159 | | |
| 330 | * | |
| - | | |
| 3,270 | |
Gain on disposal of VIE included in total operating expenses
| |
| (266
| ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (266
| ) |
Depreciation and amortization expense included in total operating expenses | |
| 254 | | |
| 9 | | |
| 30 | | |
| 51 | | |
| 20 | | |
| - | | |
| 364 | |
Operating income (loss) | |
| (826 | ) | |
| (6 | ) | |
| 36 | | |
| (73 | ) | |
| (330 | ) | |
| - | | |
| (1,199 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Share of losses in equity investment affiliates | |
| - | | |
| - | | |
| - | | |
| 107 | | |
| - | | |
| - | | |
| 107 | |
Expenditure for long-term assets | |
| 222 | | |
| - | | |
| - | | |
| 2 | | |
| - | | |
| - | | |
| 224 | |
Net income (loss) | |
| (640 | ) | |
| (25 | ) | |
| 36 | | |
| 42 | | |
| (330 | ) | |
| - | | |
| (917 | ) |
*Including approximately US$8,000 share-based compensation expenses.
Basic and diluted loss per share for each of the periods
presented are calculated as follows (All amounts, except number of shares and per share data, are presented in thousands of U.S.
dollars):
| |
Nine Months Ended September 30, | |
Three Months Ended September 30, |
| |
2015 | |
2014 | |
2015 | |
2014 |
| |
US$(’000) | |
US$(’000) | |
US$(’000) | |
US$(’000) |
| |
(Unaudited) | |
(Unaudited) | |
(Unaudited) | |
(Unaudited) |
| |
| |
| |
| |
|
Net loss attributable to
ChinaNet Online Holdings, Inc. (numerator for basic and diluted earnings per share) | |
$ | (5,078 | ) | |
$ | (2,906 | ) | |
$ | (2,081 | ) | |
$ | (907 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average number of common shares outstanding - Basic | |
| 26,687,639 | | |
| 22,385,478 | | |
| 26,913,463 | | |
| 22,403,062 | |
Effect of diluted securities: | |
| | | |
| | | |
| | | |
| | |
Unvested restricted common stocks | |
| - | | |
| - | | |
| - | | |
| - | |
Common stock purchase options | |
| - | | |
| - | | |
| - | | |
| - | |
Weighted average number of common shares outstanding -Diluted | |
| 26,687,639 | | |
| 22,385,478 | | |
| 26,913,463 | | |
| 22,403,062 | |
| |
| | | |
| | | |
| | | |
| | |
Loss per share-Basic and diluted | |
$ | (0.19 | ) | |
$ | (0.13 | ) | |
$ | (0.08 | ) | |
$ | (0.04 | ) |
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine and three months ended September 30, 2015,
the diluted earnings per share calculation did not include the 2,666,667 shares of unvested restricted common stock and exercisable
common stock purchase options to purchase up to 1,292,640 shares of the Company’s common stock, respectively, because their
effect was anti-dilutive, as the Company incurred losses during the periods.
For the nine and three months ended September 30, 2014,
the diluted earnings per share calculation both did not include the warrants and options to purchase up to 2,363,456 and 939,440
shares of common stock, respectively, because their effect was anti-dilutive, as the Company incurred a loss during the periods.
| 28. | Share-based compensation expenses |
The Company granted 50,000 shares and 40,000 shares of the
Company’s restricted common stock to its investor relations services provider, in exchange for its services to the Company
for the years ended December 31, 2015 and 2014, respectively. These shares were valued at US$1.20 per share and US$0.84 per share,
the closing bid price of the Company’s common stock on the date of grant, respectively. Total compensation expense recognized
for the services was US$45,000 and US$25,200 for the nine months ended September 30, 2015 and 2014, respectively. Total compensation
expense recognized for the services was US$15,000 and US$8,400 for the three months ended September 30, 2015 and 2014, respectively.
The Company granted 300,000 shares of the Company’s
restricted common stock to a technical service provider in exchange for its services to the Company for a 12-month period commencing
on August 1, 2014, of which 150,000 restricted shares was vested on August 1, 2014, and 150,000 restricted shares were vested
on February 1, 2015. These shares were valued at US$0.67 per share, the closing bid price of the Company’s common stock
on the date of grant. Total compensation expense recognized for the nine and three months ended September 30, 2015 was US$117,250
and US$16,750, respectively.
The Company granted 350,000 shares of the Company restricted
common stock to a management consulting service provider in exchange for its services to the Company for a 24-month period commencing
on May 1, 2015. These shares were valued at US$1.57 per share, the closing bid price of the Company’s common stock on the
date of grant. Total compensation expense recognized for the nine and three months ended September 30, 2015 was both approximately
US$114,500 and US$68,700.
On December 30, 2014, the Company granted 4,200,000 shares
of the Company’s restricted common stock to its executive officers, of which 1,533,333 restricted shares was vested upon
issuance, 1,333,333 restricted shares will be vested on December 30, 2015 and the remaining 1,333,334 restricted shares will be
vested on December 30, 2016. The restricted stock was valued at $1.17 per share, the closing bid price of the Company’s common
stock on the date of grant. Total compensation cost recognized for the nine and three months ended September 30, 2015 was US$1,170,000
and US$390,000, respectively.
On September 14, 2015, under its 2015 Omnibus Securities
and Incentive Plan, the Company granted its employees and directors in the aggregate of 665,592 shares of the Company’s restricted
common stock, which will be vested on the third anniversary of the date of the grant. These shares were valued at $0.84 per share,
the closing bid price of the Company’s common stock on the date of grant. The Company adopted a 5% forfeiture rate for recognition
of the related compensation expenses of these unvested shares, total compensation cost recognized for the nine and three months
ended September 30, 2015 was approximately US$8,200.
On September 14, 2015, under its 2015 Omnibus Securities
and Incentive Plan, the Company also granted 5-year common stock purchase options to its employees and directors, in the aggregate,
to purchase up to 1,193,100 shares of the Company’s restricted common stock at an exercise price of US$0.84 per share, of
which 397,700 options was vested upon the date of grant, 397,700 options will be vested on September 14, 2016 and the remaining
397,700 options will be vested on September 14, 2017. The Company adopted a 5% forfeiture rate for recognition of the related compensation
expenses of the unvested part of options, total compensation expenses recognized for these options for the nine and three months
ended September 30, 2015 was approximately US$182,500.
The Company estimated the fair value of these options using
the Binomial option-pricing model based on the following assumptions:
Applicable stock price | |
| $0.84 | |
Exercise multiple | |
2 | - | 2.5 |
Tenor (years) | |
| 5.00 | |
Risk-free interest rate | |
| 1.563% | |
Dividend yield | |
| - | |
Expected volatility | |
| 98.63% | |
Exercise price of the option | |
| $0.84 | |
Value per option | |
$0.41 | - | $0.56 |
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company granted common stock purchase options to its
management, employees and directors under its 2011 and 2015’s Omnibus Securities and Incentive Plan. Options issued and
outstanding at September 30, 2015 and their movements during the nine months then ended are as follows:
| |
Option Outstanding | |
Option Exercisable |
| |
Number of
underlying
shares | |
Weighted Average Remaining Contractual Life (Years) | |
Weighted Average Exercise Price | |
Number of
underlying
shares | |
Weighted Average Remaining Contractual Life (Years) | |
Weighted Average Exercise Price |
| |
| |
| |
| |
| |
| |
|
Balance, December 31, 2014 (audited) | |
| 894,940 | | |
| 6.48 | | |
$ | 1.21 | | |
| 894,940 | | |
| 6.48 | | |
$ | 1.21 | |
Granted/Vested | |
| 1,193,100 | | |
| 5.00 | | |
$ | 0.84 | | |
| 397,700 | | |
| 5.00 | | |
$ | 0.84 | |
Forfeited | |
| - | | |
| | | |
| | | |
| - | | |
| | | |
| | |
Exercised | |
| - | | |
| | | |
| | | |
| - | | |
| | | |
| | |
Balance, September 30, 2015 (unaudited) | |
| 2,088,040 | | |
| 5.29 | | |
$ | 1.00 | | |
| 1,292,640 | | |
| 5.49 | | |
$ | 1.09 | |
The aggregate unrecognized share-based compensation expenses
as of September 30, 2015 and 2014 was approximately US$3,306,000 and US$9,000, respectively.
The Company has performed an evaluation of subsequent events through the date
the financial statements were issued.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
You should read the following discussion and analysis
of our financial condition and results of operations in conjunction with our consolidated financial statements and the related
notes included elsewhere in this interim report. Our consolidated financial statements have been prepared in accordance with U.S.
GAAP. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations,
beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,”
“believe,” or similar language. All forward-looking statements included in this document are based on information available
to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our business and financial
performance are subject to substantial risks and uncertainties. Actual results could differ materially from those projected in
the forward-looking statements. In evaluating our business, you should carefully consider the information set forth under the heading
“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. Readers are cautioned
not to place undue reliance on these forward-looking statements.
Overview
We were incorporated in the State of Texas in April 2006
and re-domiciled to become a Nevada corporation in October 2006. On June 26, 2009, we consummated a share exchange transaction
with China Net Online Media Group Limited (the “Share Exchange”), a company organized under the laws of British Virgin
Islands (“China Net BVI”). As a result of the Share Exchange, China Net BVI became a wholly owned subsidiary of us
and we are now a holding company, which, through certain contractual arrangements with operating entities in the PRC, is engaged
in providing advertising, marketing, brand management and online-to-offline (O2O) sales channel building services for SMEs and
entrepreneurial management and networking services for entrepreneurs in the PRC.
Through our PRC operating subsidiary and VIEs, we primarily
operate a one-stop services for our clients through our integrated service platforms, including multi-channel advertising and promotion
platform, brand management and sales channel building platform and management tools platform. Our multi-channel advertising and
promotion platform primarily consists of internet advertising and marketing portals, including www.28.com (“28.com”),
www.liansuo.com (“liansuo.com”) and www.sooe.cn (“sooe.cn”), ChinaNet TV as our TV production and advertising
unit and the bank kiosk advertising unit. We provide varieties of marketing campaigns through this platform by the combination
of the Internet, mobile, television, bank kiosks and printed-medias to maximize market exposure and effectiveness for our clients.
Our band management and sales channel building platform consists of our brand consulting and management service and offline sales
channel expansion service, which is to physically help small businesses to recruit dealers, wholesalers, partners or franchisees
based on their business needs. Management tools platform consists of a mobile-based sales and administrative management tools specifically
designed for small business in China to match their simplicity.
Basis of presentation, management
estimates and critical accounting policies
Our unaudited condensed consolidated interim financial
statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X, as promulgated by the SEC, and include the accounts of our Company, and all of our subsidiaries
and VIEs. We prepare financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial
statements and the reported amounts of revenues and expenses during the financial reporting period. We continually evaluate these
estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions
that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial
reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of
judgment than others in their application. In order to understand the significant accounting policies that we adopted for the preparation
of our condensed consolidated interim financial statements, you should refer to the information set forth in Note 3 “Summary
of significant accounting policies” to our audited financial statements in our 2014 Form 10-K.
A. RESULTS OF OPERATIONS FOR THE NINE AND THREE MONTHS
ENDED SEPTEMBER 30, 2015 AND 2014
The following table sets forth a summary, for the periods
indicated, of our consolidated results of operations. Our historical results presented below are not necessarily indicative of
the results that may be expected for any future period. All amounts, except number of shares and per share data, are presented
in thousands of U.S. dollars.
| |
Nine Months Ended
September 30, | |
Three Months Ended
September 30, |
| |
2015 | |
2014 | |
2015 | |
2014 |
| |
US$ | |
US$ | |
US$ | |
US$ |
| |
(Unaudited) | |
(Unaudited) | |
(Unaudited) | |
(Unaudited) |
| |
| |
| |
| |
|
Sales | |
| | | |
| | | |
| | | |
| | |
From unrelated parties | |
$ | 23,325 | | |
$ | 27,371 | | |
$ | 8,323 | | |
$ | 12,010 | |
From related parties | |
| 687 | | |
| 240 | | |
| 219 | | |
| 57 | |
| |
| 24,012 | | |
| 27,611 | | |
| 8,542 | | |
| 12,067 | |
Cost of sales | |
| 19,357 | | |
| 22,483 | | |
| 7,066 | | |
| 9,996 | |
Gross profit | |
| 4,655 | | |
| 5,128 | | |
| 1,476 | | |
| 2,071 | |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Sales and marketing expenses | |
| 3,459 | | |
| 4,092 | | |
| 1,209 | | |
| 1,997 | |
General and administrative expenses | |
| 5,637 | | |
| 3,023 | | |
| 2,330 | | |
| 1,014 | |
Research and development expenses | |
| 1,658 | | |
| 1,417 | | |
| 595 | | |
| 525 | |
Gain on disposal of VIE | |
| - | | |
| (266 | ) | |
| - | | |
| (266 | ) |
| |
| 10,754 | | |
| 8,266 | | |
| 4,134 | | |
| 3,270 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from operations | |
| (6,099 | ) | |
| (3,138 | ) | |
| (2,658 | ) | |
| (1,199 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income (expenses) | |
| | | |
| | | |
| | | |
| | |
Interest income | |
| 91 | | |
| 91 | | |
| 28 | | |
| 31 | |
Interest expense | |
| (46 | ) | |
| (38 | ) | |
| (12 | ) | |
| (6 | ) |
Other income/(expenses) | |
| 26 | | |
| (12 | ) | |
| (5 | ) | |
| (9 | ) |
| |
| 71 | | |
| 41 | | |
| 11 | | |
| 16 | |
Loss before income tax expense, equity method investments and noncontrolling interests | |
| (6,028 | ) | |
| (3,097 | ) | |
| (2,647 | ) | |
| (1,183 | ) |
Income tax benefit | |
| 720 | | |
| 39 | | |
| 396 | | |
| 159 | |
Loss before equity method investments and noncontrolling interests | |
| (5,308 | ) | |
| (3,058 | ) | |
| (2,251 | ) | |
| (1,024 | ) |
Share of (losses)/income in equity investment affiliates | |
| (2 | ) | |
| 49 | | |
| (4 | ) | |
| 107 | |
Net loss | |
| (5,310 | ) | |
| (3,009 | ) | |
| (2,255 | ) | |
| (917 | ) |
Net loss attributable to noncontrolling interests | |
| 232 | | |
| 103 | | |
| 174 | | |
| 10 | |
Net loss attributable to ChinaNet Online Holdings, Inc. | |
$ | (5,078 | ) | |
$ | (2,906 | ) | |
$ | (2,081 | ) | |
$ | (907 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss per share | |
| | | |
| | | |
| | | |
| | |
Loss per common share Basic and diluted | |
$ | (0.19 | ) | |
$ | (0.13 | ) | |
$ | (0.08 | ) | |
$ | (0.04 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average number of common shares outstanding: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
| 26,687,639 | | |
| 22,385,478 | | |
| 26,913,463 | | |
| 22,403,062 | |
Revenue
The following tables set forth a breakdown of our total
revenue, divided into six segments for the periods indicated, with inter-segment transactions eliminated:
| |
Nine Months Ended September 30, |
| |
2015 | |
2014 |
Revenue type | |
(Amounts expressed in thousands of US dollars, except percentages) |
| |
| |
| |
| |
|
-Internet advertisement | |
$ | 13,706 | | |
| 57.1 | % | |
$ | 13,073 | | |
| 47.3 | % |
-Technical services | |
| 301 | | |
| 1.3 | % | |
| 562 | | |
| 2.1 | % |
-Search engine marketing service | |
| 8,533 | | |
| 35.5 | % | |
| 8,142 | | |
| 29.5 | % |
Internet advertisement and related services | |
| 22,540 | | |
| 93.9 | % | |
| 21,777 | | |
| 78.9 | % |
TV advertisement | |
| 1,100 | | |
| 4.6 | % | |
| 4,806 | | |
| 17.4 | % |
Bank kiosk | |
| 160 | | |
| 0.7 | % | |
| 207 | | |
| 0.7 | % |
Brand management and sales channel building | |
| 212 | | |
| 0.8 | % | |
| 821 | | |
| 3.0 | % |
Total | |
$ | 24,012 | | |
| 100 | % | |
$ | 27,611 | | |
| 100 | % |
| |
Three Months Ended September 30, |
| |
2015 | |
2014 |
Revenue type | |
(Amounts expressed in thousands of US dollars, except percentages) |
| |
| |
| |
| |
|
-Internet advertisement | |
$ | 5,491 | | |
| 64.3 | % | |
$ | 4,619 | | |
| 38.3 | % |
-Technical services | |
| 75 | | |
| 0.9 | % | |
| 325 | | |
| 2.7 | % |
-Search engine marketing service | |
| 2,890 | | |
| 33.8 | % | |
| 5,025 | | |
| 41.6 | % |
Internet advertisement and related services | |
| 8,456 | | |
| 99.0 | % | |
| 9,969 | | |
| 82.6 | % |
TV advertisement | |
| 19 | | |
| 0.2 | % | |
| 1,812 | | |
| 15.0 | % |
Bank kiosks | |
| 22 | | |
| 0.3 | % | |
| 69 | | |
| 0.6 | % |
Brand management and sales channel building | |
| 45 | | |
| 0.5 | % | |
| 217 | | |
| 1.8 | % |
Total | |
$ | 8,542 | | |
| 100 | % | |
$ | 12,067 | | |
| 100 | % |
Total Revenues: For the nine months ended September 30, 2015,
our total revenues decreased to US$24.0 million from US$27.6 million for the same period of last year. For the three months ended
September 30, 2015, our total revenues decreased to US$8.5 million from US$12.1 million for the same period of last year. The decrease
in our total revenues for the nine months ended September 30, 2015 was primarily due to the decrease in our TV advertising revenues,
as compared to the same period of last year and the decrease in our total revenues for the three months ended September 30, 2015
was primarily due to the decrease in our TV advertising revenues and the revenues from search engine marketing service.
We derive the majority of our advertising service revenues
from the sale of advertising space on our internet portals and from providing the related value-added technical support and services,
internet marketing service and content management services to unrelated third parties and to certain related parties. Beginning
in the second fiscal quarter of 2014, we elaborated an existing stream of internet marketing service by providing enhanced third-party
search engine marketing (“SEM”) services to the SMEs as a strategic supplement to the internet advertising services
provided to our clients. We also derive revenue from the sale of advertising time purchased from different provincial satellite
TV stations. Our advertising and marketing services to related parties were provided in the ordinary course of business on the
same terms as those provided to our unrelated clients. For the nine and three months ended September 30, 2015 and 2014, our service
revenue from related parties in the aggregate was less than 3% of the total revenue for each respective reporting period.
Our advertising service revenues are recorded net of
any sales discounts. Sales discounts include volume discounts and other customary incentives offered to our small and medium-sized
franchise and merchant clients, including providing them with additional advertising time for their advertisements if we have unused
space available on our websites and represent the difference between our official list price and the amount we actually charge
our clients. For advertising services, we typically sign service contracts with our small and medium-sized franchisor and other
clients that require us to place the advertisements on our portal websites in specified locations on the sites and for agreed periods;
and/or place the advertisements onto our purchased advertisement time during specific TV programs for agreed periods. We recognize
revenues as the advertisement airs over the contractual term based on the schedule agreed upon with our clients. Revenue from SEM
services is recognized on a monthly basis based on the direct cost consumed through search engines for providing such services
with a premium. We recognize this revenue on a gross basic, as we believe that we act as the primary obligor of this transaction,
which is considered the most important factor for a gross revenue recognition in accordance with ASC Topic 605, subtopic 45. We
also sell effective sales lead information to our clients, which is recognized based on fixed price per sales lead when information
is delivered and accepted by clients.
The tables below summarize the revenues, cost of sales,
gross margin and net loss generated from each of our VIEs and subsidiaries for the nine and three months ended September 30, 2015
and 2014, respectively, with inter-company transactions eliminated:
For the nine months ended September 30, 2015:
Name of subsidiary or VIE | |
Revenue from unrelated parties | |
Revenue from related parties | |
Total |
| |
($’000) | |
($’000) | |
($’000) |
Rise King WFOE | |
| 301 | | |
| - | | |
| 301 | |
Business Opportunity Online and subsidiaries | |
| 22,864 | | |
| 687 | | |
| 23,551 | |
Beijing CNET Online and subsidiaries | |
| 160 | | |
| - | | |
| 160 | |
Total revenue | |
| 23,325 | | |
| 687 | | |
| 24,012 | |
For the three months ended September 30, 2015:
Name of subsidiary or VIE | |
Revenue from unrelated parties | |
Revenue from related parties | |
Total |
| |
($’000) | |
($’000) | |
($’000) |
Rise King WFOE | |
| 75 | | |
| - | | |
| 75 | |
Business Opportunity Online and subsidiaries | |
| 8,227 | | |
| 219 | | |
| 8,446 | |
Beijing CNET Online and subsidiaries | |
| 21 | | |
| - | | |
| 21 | |
Total revenue | |
| 8,323 | | |
| 219 | | |
| 8,542 | |
For the nine months ended September 30, 2015:
Name of subsidiary or VIE | |
Cost of Sales | |
Gross Margin |
| |
($’000) | |
($’000) |
Rise King WFOE | |
| - | | |
| 301 | |
Business Opportunity Online and subsidiaries | |
| 19,351 | | |
| 4,200 | |
Beijing CNET Online and subsidiaries | |
| 6 | | |
| 154 | |
Total | |
| 19,357 | | |
| 4,655 | |
For the three months ended September 30, 2015:
Name of subsidiary or VIE | |
Cost of Sales | |
Gross Margin |
| |
($’000) | |
($’000) |
Rise King WFOE | |
| - | | |
| 75 | |
Business Opportunity Online and subsidiaries | |
| 7,065 | | |
| 1,381 | |
Beijing CNET Online and subsidiaries | |
| 1 | | |
| 20 | |
Total | |
| 7,066 | | |
| 1,476 | |
For the nine months ended September 30, 2015:
Name of subsidiary or VIE | |
Net Loss |
| |
($’000) |
Rise King WFOE | |
| (381 | ) |
Business Opportunity Online and subsidiaries | |
| (2,977 | ) |
Beijing CNET Online and subsidiaries | |
| (15 | ) |
Shanghai Jing Yang | |
| (1 | ) |
ChinaNet Online Holdings, Inc. | |
| (1,936 | ) |
Total net loss before allocation to the noncontrolling interest | |
| (5,310 | ) |
For the three months ended September 30, 2015:
Name of subsidiary or VIE | |
Net (Loss)/Income |
| |
($’000) |
Rise King WFOE | |
| (184 | ) |
Business Opportunity Online and subsidiaries | |
| (1,319 | ) |
Beijing CNET Online and subsidiaries | |
| 36 | |
Shanghai Jing Yang | |
| - | |
ChinaNet Online Holdings, Inc. | |
| (788 | ) |
Total net loss before allocation to the noncontrolling interest | |
| (2,255 | ) |
For the nine months ended September 30, 2014:
Name of subsidiary or VIE | |
Revenue from unrelated parties | |
Revenue from related parties | |
Total |
| |
($’000) | |
($’000) | |
($’000) |
Rise King WFOE | |
| 562 | | |
| - | | |
| 562 | |
Business Opportunity Online and subsidiaries | |
| 26,602 | | |
| 240 | | |
| 26,842 | |
Beijing CNET Online and subsidiaries | |
| 207 | | |
| - | | |
| 207 | |
Total revenue | |
| 27,371 | | |
| 240 | | |
| 27,611 | |
For the three months ended September 30, 2014:
Name of subsidiary or VIE | |
Revenue from unrelated parties | |
Revenue from related parties | |
Total |
| |
($’000) | |
($’000) | |
($’000) |
Rise King WFOE | |
| 325 | | |
| - | | |
| 325 | |
Business Opportunity Online and subsidiaries | |
| 11,616 | | |
| 57 | | |
| 11,673 | |
Beijing CNET Online and subsidiaries | |
| 69 | | |
| - | | |
| 69 | |
Total revenue | |
| 12,010 | | |
| 57 | | |
| 12,067 | |
For the nine months ended September 30, 2014:
Name of subsidiary or VIE | |
Cost of Sales | |
Gross Margin |
| |
($’000) | |
($’000) |
Rise King WFOE | |
| 2 | | |
| 560 | |
Business Opportunity Online and subsidiaries | |
| 22,473 | | |
| 4,369 | |
Beijing CNET Online and subsidiaries | |
| 8 | | |
| 199 | |
Total | |
| 22,483 | | |
| 5,128 | |
For the three months ended September 30, 2014:
Name of subsidiary or VIE | |
Cost of Sales | |
Gross Margin |
| |
($’000) | |
($’000) |
Rise King WFOE | |
| 1 | | |
| 324 | |
Business Opportunity Online and subsidiaries | |
| 9,992 | | |
| 1,681 | |
Beijing CNET Online and subsidiaries | |
| 3 | | |
| 66 | |
Total | |
| 9,996 | | |
| 2,071 | |
For the nine months ended September 30, 2014:
Name of subsidiary or VIE | |
Net Loss |
| |
($’000) |
Rise King WFOE | |
| (423 | ) |
Business Opportunity Online and subsidiaries | |
| (2,215 | ) |
Beijing CNET Online and subsidiaries | |
| (81 | ) |
Shanghai Jing Yang | |
| (35 | ) |
ChinaNet Online Holdings, Inc. | |
| (255 | ) |
Total net loss before allocation to the noncontrolling interest | |
| (3,009 | ) |
For the three months ended September 30, 2014:
Name of subsidiary or VIE | |
Net Loss |
| |
($’000) |
| |
|
Rise King WFOE | |
| (132 | ) |
Business Opportunity Online and subsidiaries | |
| (616 | ) |
Beijing CNET Online and subsidiaries | |
| (31 | ) |
Shanghai Jing Yang | |
| (16 | ) |
ChinaNet Online Holdings, Inc. | |
| (122 | ) |
Total net loss before allocation to the noncontrolling interest | |
| (917 | ) |
Management considers revenues generated from internet
advertising, SEM services and other related technical services as one aggregate business operation and relies upon the consolidated
results of all the operations in this business unit to make decisions about allocating resources and evaluating performance.
| l | Internet advertising revenues for the nine months ended September 30, 2015 were approximately US$13.7
million compared to approximately US$13.1 million for the same period in 2014, representing a 5% increase. For the three months
ended September 30, 2015, internet advertising revenue was approximately US$5.49 million compared to US$4.62 million for the same
period in 2014, representing a 19% increase. During 2015, we continued to place persistent effort in integrating and upgrading
our internet advertising and marketing services to our SME clients. As a result, starting from the second fiscal quarter of 2015,
the performance of our internet advertising segment was improved, along with eliminating smaller clients, the number of larger
customers served by us continued to increase, and our client’s average consumption amount for our internet advertising services
was also increased as compare with that in the same period of last year. We also continue to invest in developing new service modules
for our clients, and we believe that launch of new services in future periods will help to increase our market penetration in the
SME segment, thereby increasing our recurring revenues in the future. |
| l | Revenues generated from technical services offered by Rise King WFOE were US$0.30 million and US$0.08
million for the nine and three months ended September 30, 2015, compared to US$0.56 million and US$0.33 million for the same periods
in 2014, respectively. |
| l | Search engine marketing services were introduced to our clients in the second fiscal quarter of
2014. Revenue generated from search engine marketing services for the nine and three months ended September 30, 2015 was approximately
US$8.53 million and US$2.89 million, respectively, compared to US$8.14 million and US$5.03 million for the same periods of last
year respectively. This enhanced third-party search engine marketing service is designed to help our clients select the most effective
key words and to prioritize the ranking of the anticipated search engine results on selected key words in order to increase the
sales lead conversion rate for our clients’ business promotion on both mobile and PC searches. Management believes this service
is an effective supplement to the internet advertising services provided to our clients, and will help increase the overall satisfaction
on our services. However, due to the relative low margin and the potential barrier may be set by the key search engine for this
services, management is shifting efforts to combine this services with other value added services to encourage the SMEs clients
to use our comprehensive internal advertising services as discussed above. As a result, the search engine marketing services revenues
decreased for the three months ended September 30, 2015 as compared to that for the same period last year. |
| l | Our TV advertising revenue decreased to US$1.10 million and US$0.02 million for the nine and three
months ended September 30, 2015, respectively, compared to US$4.81 million and US$1.81 million for the same periods in 2014, respectively. The
decrease in our TV advertising revenue for the nine and three months ended September 30, 2015 was primarily due to the adoption
of a restriction notice to TV shopping infomercials broadcasted in provincial satellite television station, issued by the SARFT
in October 2013, which further restricts the content, air time and duration of these infomercials, as a result, the demand of TV
advertising service from our clients decreased accordingly. We will continue to monitor our clients’ needs of the TV advertising
services, work with our clients to develop non-TV shopping infomercials programs and improve the profitability of this business
segment in future periods. |
| l | For the nine months ended September 30, 2015 and 2014, we earned approximately US$0.16 million
and US$0.21 million of revenue from the bank kiosk business segment, respectively. For the three months ended September 30, 2015
and 2014, we earned approximately US$0.02 million and US$0.07 million of revenue from the bank kiosk business segment, respectively.
The bank kiosk advertising business is not intended to expand at the moment as management’s primary focus is expanding our
internet business. It was not a significant contributor to revenue for the nine and three months ended September 30, 2015 or 2014.
Management currently maintains this business without any expansion plans. Some of the technology used in this business unit will
need to be fully integrated into the overall advertising and marketing platform. |
| l | For the nine and three months ended September 30, 2015, we generated approximately US$0.21 million
and US$0.05 million service revenue from our brand management and sales channel building segment, respectively, compared to US$0.82
million and US$0.22 million service revenue generated in the same periods of 2014, respectively. The decrease in revenue from this
business segment was primarily due to the hesitation of our client’s investment in offline marketing expending due to the
overall economic decline and uncertainty in China. Due to the slow recovery of economy and tightening of our clients’ advertising
budget, we do not expect prompt recovery in this business segment in 2015. In order to improve the business performance in future
periods, management is further enhancing the cross selling efforts of this business segment with our online advertising business
segment to launch O2O business solutions in connection with brand management and developing solution. |
Cost of revenues
Our cost of revenue consisted of costs directly related
to the offering of our advertising services, technical services, marketing services and brand management and sales channel building
services. The following table sets forth our cost of revenues, divided into six segments, by amount and gross profit ratio for
the periods indicated, with inter-segment transactions eliminated:
| |
Nine Months Ended September 30, |
| |
2015 | |
2014 |
| |
(Amounts expressed in thousands of US dollars, except percentages) |
| |
Revenue | |
Cost | |
GP ratio | |
Revenue | |
Cost | |
GP ratio |
| |
| |
| |
| |
| |
| |
|
-Internet advertisement | |
$ | 13,706 | | |
$ | 9,468 | | |
| 31 | % | |
$ | 13,073 | | |
$ | 9,655 | | |
| 26 | % |
-Contingent internet resources cost accrued | |
| - | | |
| 419 | | |
| | | |
| - | | |
| - | | |
| - | |
-Technical services | |
| 301 | | |
| - | | |
| 100 | % | |
| 562 | | |
| 2 | | |
| 100 | % |
-Search engine marketing service | |
| 8,533 | | |
| 8,284 | | |
| 3 | % | |
| 8,142 | | |
| 7,905 | | |
| 3 | % |
Internet advertisement and related services | |
$ | 22,540 | | |
$ | 18,171 | | |
| 19 | % | |
$ | 21,777 | | |
$ | 17,562 | | |
| 19 | % |
TV advertisement | |
| 1,100 | | |
| 1,058 | | |
| 4 | % | |
| 4,806 | | |
| 4,467 | | |
| 7 | % |
Bank kiosk | |
| 160 | | |
| 6 | | |
| 96 | % | |
| 207 | | |
| 8 | | |
| 96 | % |
Brand management and sales channel building | |
| 212 | | |
| 122 | | |
| 42 | % | |
| 821 | | |
| 446 | | |
| 46 | % |
Total | |
$ | 24,012 | | |
$ | 19,357 | | |
| 19 | % | |
$ | 27,611 | | |
$ | 22,483 | | |
| 19 | % |
| |
Three Months Ended September 30, |
| |
2015 | |
2014 |
| |
(Amounts expressed in thousands of US dollars, except percentages) |
| |
Revenue | |
Cost | |
GP ratio | |
Revenue | |
Cost | |
GP ratio |
| |
| |
| |
| |
| |
| |
|
-Internet advertisement | |
$ | 5,491 | | |
$ | 3,806 | | |
| 31 | % | |
$ | 4,619 | | |
$ | 3,287 | | |
| 29 | % |
-Contingent internet resources cost accrued | |
| - | | |
| 419 | | |
| | | |
| - | | |
| - | | |
| - | |
-Technical services | |
| 75 | | |
| - | | |
| 100 | % | |
| 325 | | |
| 1 | | |
| 100 | % |
-Search engine marketing service | |
| 2,890 | | |
| 2,805 | | |
| 3 | % | |
| 5,025 | | |
| 4,879 | | |
| 3 | % |
Internet advertisement and related services | |
$ | 8,456 | | |
$ | 7,030 | | |
| 17 | % | |
$ | 9,969 | | |
$ | 8,167 | | |
| 18 | % |
TV advertisement | |
| 19 | | |
| 17 | | |
| 11 | % | |
| 1,812 | | |
| 1,695 | | |
| 6 | % |
Bank kiosk | |
| 22 | | |
| 1 | | |
| 95 | % | |
| 69 | | |
| 3 | | |
| 96 | % |
Brand management and sales channel building | |
| 45 | | |
| 18 | | |
| 60 | % | |
| 217 | | |
| 131 | | |
| 40 | % |
Total | |
$ | 8,542 | | |
$ | 7,066 | | |
| 17 | % | |
$ | 12,067 | | |
$ | 9,996 | | |
| 17 | % |
Cost of revenues: Our total cost of revenues decreased to US$19.36
million for the nine months ended September 30, 2015 from US$22.48 million for the same period in 2014. For the three months ended
September 30, 2015, our total cost of revenues decreased to US$7.07 million from US$10.0 million for the same period in 2014. Our
cost of revenues related to advertising and marketing services we provided primarily consists of internet resources purchased from
key search engines and technical services providers related to lead generation, sponsored search, TV advertisement time costs purchased
from TV stations and direct labor cost associated with providing services. The decrease in our cost of revenues was in line with
the decrease in our total revenues.
| l | For internet advertisement, cost associated with obtaining internet resources was the largest component
of our cost of revenue, accounting for over 80% of our total internet advertisement cost of sales. We purchased these internet
resources from other well-known search engines and portal websites in China, such as: Baidu, Qihu 360 and Sohu (Sogou). The purchase
of these internet resources in large volumes allowed us to negotiate discounts with our suppliers. For the nine months ended September
30, 2015 and 2014, our total cost of sales for internet advertising was US$9.47 million and US$9.66 million, respectively. For
the three months ended September 30, 2015 and 2014, our total cost of sales for internet advertising was US$3.81 million and US$3.29
million, respectively. For the nine and three months ended September 30, 2015, we also accrued an approximately US$0.41 million
contingent additional internet resources cost that might be charged by our supplier due to the fact that more likely than not we
may not able to meet the minimum consumption amount requirement set forth in the purchase contract. For the nine and three months
ended September 30, 2015, excluding the contingent additional cost accrued, the gross margin for our internet advertising revenue
was both 31%, compared to 26% and 29% for the same periods of last year, respectively. Under the circumstance that the contingent
additional cost were actually charged by the suppliers as estimated in future period, the gross margin of our internet advertising
revenue would decrease to 28% and 23% for the nine and three months ended September 30, 2015, respectively. Management is currently
making great efforts to reduce the contingent additional cost through effective negotiation with the supplier and internal incentives
to stimulate the sales growth. |
| l | Costs for search engine marketing services were direct internet resource costs consumed for search
engine marketing services provided to clients as described above. We normally charge our clients service fees for this service
as a certain percentage of the related direct cost consumed. Gross margin of this service for the nine and three months ended September
30, 2015 and 2014 was approximately 3%. |
| l | TV advertisement time cost is the largest component of cost of revenue for TV advertisement revenue.
We purchase TV advertisement time from provincial satellite TV stations in China and resell it to our TV advertisement clients.
Our TV advertisement time cost was approximately US$1.06 million and US$4.47 million for the nine months ended September 30, 2015
and 2014, respectively. For the three months ended September 30, 2015 and 2014, our TV advertisement time cost was approximately
US$0.02 million and US$1.70 million, respectively. The fluctuations of our total TV advertisement time cost were consistent with
the fluctuations of our TV advertising revenue for the nine and three months ended September 30, 2015, compared to the same periods
of 2014, respectively, as discussed above. Gross margin of this business segment was 4% and 11% for the nine and three months ended
September 30, 2015, respectively, compared to 7% and 6% for the nine and three months ended September 30, 2014, respectively. |
| l | Cost recognized for brand management and sales channel building business segment primarily consisted
of director labor cost for providing these services to our clients and other related direct cost. |
Gross Profit
As a result of the foregoing, our gross profit was US$4.66
million and US$5.13 million for the nine months ended September 30, 2015 and 2014, respectively. For the three months ended
September 30, 2015 and 2014, our gross profit was US$1.48 million and US$2.07 million, respectively. Our overall gross margin was
both 19% for the nine months ended September 30, 2015 and 2014, and was both 17% for the three months ended September 30, 2015
and 2014.
Operating Expenses and Net Loss
Our operating expenses consist of sales and marketing
expenses, general and administrative expenses and research and development expenses. The following tables set forth our operating
expenses, divided into their major categories by amount and as a percentage of our total revenues for the periods indicated.
| |
Nine Months Ended September 30, |
| |
2015 | |
2014 |
| |
(Amounts expressed in thousands of US dollars, except percentages) |
| |
Amount | |
% of total revenue | |
Amount | |
% of total revenue |
| |
| |
| |
| |
|
Total Revenue | |
$ | 24,012 | | |
| 100 | % | |
$ | 27,611 | | |
| 100 | % |
Gross Profit | |
| 4,655 | | |
| 19 | % | |
| 5,128 | | |
| 19 | % |
Sales and marketing expenses | |
| 3,459 | | |
| 15 | % | |
| 4,092 | | |
| 15 | % |
General and administrative expenses | |
| 5,637 | | |
| 23 | % | |
| 3,023 | | |
| 11 | % |
Research and development expenses | |
| 1,658 | | |
| 7 | % | |
| 1,417 | | |
| 5 | % |
Total operating expenses excluding gain on disposal of VIE | |
$ | 10,754 | | |
| 45 | % | |
$ | 8,532 | | |
| 31 | % |
| |
Three Months Ended September 30, |
| |
2015 | |
2014 |
| |
(Amounts expressed in thousands of US dollars, except percentages) |
| |
Amount | |
% of total revenue | |
Amount | |
% of total revenue |
| |
| |
| |
| |
|
Total Revenue | |
$ | 8,542 | | |
| 100 | % | |
$ | 12,067 | | |
| 100 | % |
Gross Profit | |
| 1,476 | | |
| 17 | % | |
| 2,071 | | |
| 17 | % |
Sales and marketing expenses | |
| 1,209 | | |
| 14 | % | |
| 1,997 | | |
| 17 | % |
General and administrative expenses | |
| 2,330 | | |
| 27 | % | |
| 1,014 | | |
| 8 | % |
Research and development expenses | |
| 595 | | |
| 7 | % | |
| 525 | | |
| 4 | % |
Total operating expenses excluding gain on disposal of VIE | |
$ | 4,134 | | |
| 48 | % | |
$ | 3,536 | | |
| 29 | % |
Operating Expenses: Our operating expenses (excluding
gain on disposal of VIE) increased to US$10.75 million for the nine months ended September 30, 2015 from US$8.53 million for
the same period of 2014. For the three months ended September 30, 2015, our operating expenses (excluding gain on disposal of VIE)
increased to US$4.13 million from US$3.54 million for the same period of 2014.
| l | Sales and marketing expenses: Sales and marketing expenses decreased to US$3.46 million for the
nine months ended September 30, 2015 from US$4.09 million for the same period of 2014. For the three months ended September
30, 2015, sales and marketing expense decreased to US$1.21 million, compared to US$2.0 million for the same period last year. Our
sales and marketing expenses primarily consist of advertising expenses for brand development that we pay to different media outlets
for the promotion and marketing of our advertising web portals, other advertising and promotional expenses, website server hosting
and broadband leasing expenses, staff salaries, staff benefits, performance bonuses, travelling expenses, communication expenses
and other general office expenses of our sales department. For the nine months ended September 30, 2015, the change in our selling
expenses was primarily due to the following reasons: (1) the decrease in staff salary, bonus, employee related benefit expenses
and other general selling expenses, such as travelling expenses, business and entertainment expenses and communication expenses
of approximately US$0.24 million, due to decrease in number of sales staff and sales performance as compared with the same period
last year; (2) the increase in website server hosting, broadband leasing and website performance analysis expense of approximately
US$0.28 million; and (3) the decrease in brand marketing expenses of approximately US$0.67 million. For the three months ended
September 30, 2015, the decrease in our sales and marketing expenses were primarily due to the decrease in brand marketing expenses
of approximately US$0.92 million as compared to the same period last year. |
| l | General and administrative expenses: General and administrative expenses increased to US$5.64 million
for the nine months ended September 30, 2015 from US$3.02 million for the same period of 2014. For the three months ended
September 30, 2015, our general and administrative expenses increased to US$2.33 million from US$1.01 million for the same period
last year. Our general and administrative expenses primarily consist of salaries and benefits for management, accounting and administrative
personnel, office rentals, depreciation of office equipment, professional service fees, maintenance, utilities and other office
expenses. For the nine months ended September 30, 2015, the change in our general and administrative expenses was primarily due
to the following reasons: (1) the increase in general administrative expenses, such as: professional service expenses, staff salary
and benefit expenses and office expenses of approximately US$0.78 million; (2) allowance for doubtful accounts increased US$0.23
million, and (3) the increase in share-based compensation expense of approximately US$1.61 million, which was related to the restricted
common stock and common stock purchase options awarded to executive officers, employees and director in December 2014 and September
2015. For the three months ended September 30, 2015, the reasons for the increase in our general and administrative expenses were
similar to those discussed for the nine months ended September 30, 2014. |
| l | Research and development expenses: Research and development expenses were US$1.66 million and US$1.42
million for the nine months ended September 30, 2015 and 2014, respectively. For the three months ended September 30, 2015 and
2014, research and development expenses were US$0.59 million and US$0.53 million, respectively. Our research and development expenses
primarily consist of salaries and benefits for the research and development staff, equipment depreciation expenses, and office
utilities and supplies allocated to our research and development department. |
Gain on disposal of VIE:
For the nine and three months ended September 30, 2014, we recognized a gain of approximately US$0.27 million related to disposal
of a former consolidated VIE during the period.
Loss from operations:
As a result of the foregoing, for the nine months ended September 30, 2015 and 2014, our loss from operations was approximately
US$6.10 million and US$3.14 million, respectively. For the three months ended September 30, 2015 and 2014, our loss from operations
was approximately US$2.66 million and US$1.20 million, respectively.
Interest income: For the
nine and three months ended September 30, 2015 and 2014, interest income we earned was primarily contributed from the term deposit
we placed in one of the major financial institutions in the PRC.
Interest expense: For
the nine and three months ended September 30, 2015 and 2014, interest expenses we paid were primarily related to the short-term
bank loan we borrowed from a major financial institution in the PRC to supplement our short-term working capital needs, which expired
on September 29, 2015.
Loss before income tax expense,
equity method investments and noncontrolling interests: As a result of the foregoing, for the nine months ended September
30, 2015 and 2014, our loss before income tax expense, equity method investments and noncontrolling interests was approximately
US$6.03 million and US$3.10 million respectively. Our loss before income tax expense, equity method investments and noncontrolling
interests was approximately US$2.65 million and US$1.18 million for the three months ended September 30, 2015 and 2014, respectively.
Income Tax benefit: We
recognized a net income tax benefit of approximately US$0.72 million and US$0.40 million for the nine and three months ended September
30, 2015, respectively. For the nine months ended September 30, 2015, current income tax expense was approximately US$0.002 million.
For the three months ended September 30, 2015, we reversed approximately US$0.002 million current income tax expenses accrued in
previous quarter due to decrease in pre-tax income during the period. For the nine months ended September 30, 2015, our deferred
income tax benefit was approximately US$0.72 million, of which approximately US$0.11 million was in relation to the amortization
expenses of the intangible assets identified in the acquisition transactions consummated in previous years, and approximately US$0.61
million was in relation to the net operating loss incurred by our PRC operating VIEs for the period, which we consider likely to
be able to be utilized with respect to future earnings of the entities to which the operating losses relate. For the three months
ended September 30, 2015, our deferred income tax benefit was approximately US$0.40 million, of which approximately US$0.04 million
was in relation to the amortization expenses of the intangible assets identified in the acquisition transactions consummated in
previous years, and approximately US$0.36 million was in relation to the net operating loss incurred by our PRC operating VIEs
for the period, which we consider likely to be able to be utilized with respect to future earnings of the entities to which the
operating losses relate.
We recognized a net income tax benefit
of approximately US$0.04 million and US$0.16 million for the nine and three months ended September 30, 2014, respectively. For
the nine and three months ended September 30, 2014, current income tax expense was approximately US$0.38 million and US$0.003 million,
respectively. For the nine months ended September 30, 2014, our net income tax benefit included an approximately US$0.42 million
deferred income tax benefit, of which approximately US$0.17 million was in relation to the amortization expenses of the intangible
assets identified in the acquisition transactions consummated in previous years and approximately US$0.25 million was in relation
to the net operating loss incurred by our PRC operating VIEs for the period, which we consider likely to be able to be utilized
with respect to future earnings of the entities to which the operating losses relate. For the three months ended September 30,
2014, our net income tax benefit also included an approximately US$0.16 million deferred income tax benefit, of which approximately
US$0.06 million was in relation to the amortization expenses of the intangible assets identified in the acquisition transactions
consummated in previous years and approximately US$0.10 million was in relation to the net operating loss incurred by our PRC operating
VIEs, which we consider likely to be able to be utilized with respect to future earnings of the entities to which the operating
losses relate.
Loss before equity method investments
and noncontrolling interests: As a result of the foregoing, our loss before equity method investments and noncontrolling
interests was approximately US$5.31 million and US$3.06 million for the nine months ended September 30, 2015 and 2014, respectively.
Our loss before equity method investments and noncontrolling interests was approximately US$2.25 million US$1.02 million for the
three months ended September 30, 2015 and 2014, respectively.
Share of (losses)/income in equity
investment affiliates: For the nine and three months ended September 30, 2015 and 2014, we beneficially own 23.18% and
25.5% equity interest in Shenzhen Mingshan and Zhao Shang Ke Hubei, respectively. Accordingly, for the nine and three months ended
September 30, 2015, we recognized our pro-rata shares of losses in Shenzhen Mingshan of approximately US$0.002 million and US$0.004
million, respectively. We did not recognize any of our pro-rata shares of loss in Zhao Shang Ke Hubei, because the amounts were
immaterial. For the nine and three months ended September 30, 2014, we recognized our pro-rata share of income in Zhao Shang Ke
Hubei of approximately US$0.05 million and US$0.11 million, respectively, and recognized our pro-rata share of loss in Shenzhen
Mingshan of approximately US$0.002 and US$nil, respectively. Given the foregoing, net amount of income in equity investment affiliates
recognized was US$0.05 million and US$0.11 million for the nine and three months ended September 30, 2014, respectively.
Net loss: As a result
of the foregoing, our net loss incurred for the nine months ended September 30, 2015 and 2014 was approximately US$5.31 million
and US$3.01 million, respectively. Our net loss incurred for the three months ended September 30, 2015 and 2014 was approximately
US$2.26 million and US$0.92 million, respectively.
Net loss attributable to noncontrolling
interests: Beijing Chuang Fu Tian Xia was 51% owned by Business Opportunity Online upon incorporation. For the nine months
ended September 30, 2015 and 2014, net loss allocated to the noncontrolling interest of Beijing Chuang Fu Tian Xia was approximately
US$0.23 million and US$0.10 million, respectively. For the three months ended September 30, 2015 and 2014, net loss allocated to
the noncontrolling interests of Beijing Chuang Fu Tian Xia was approximately US$0.17 million and US$0.01 million, respectively.
Net loss attributable to ChinaNet
Online Holdings, Inc.: Total net loss as adjusted by the net loss attributable to the noncontrolling interest shareholders
as discussed above yields the net loss attributable to ChinaNet Online Holdings, Inc. Net loss attributable to ChinaNet Online
Holdings, Inc. was approximately US$5.08 million and US$2.91 million for the nine months ended September 30, 2015 and 2014, respectively.
Net loss attributable to ChinaNet Online Holdings, Inc. was approximately US$2.08 million and US$0.91 million for the three months
ended September 30, 2015 and 2014, respectively.
B. LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents represent cash on hand and
deposits held at call with banks. We consider all highly liquid investments with original maturities of three months or less at
the time of purchase to be cash equivalents. As of September 30, 2015, we had cash and cash equivalents of approximately US$1.3
million. We also had approximately US$3.3 million of term deposit placed in one of the major financial institutions in China which
will mature in July 2016.
Our liquidity needs include (i) net cash used in operating
activities that consists of (a) cash required to fund the initial build-out and continued expansion of our network and (b) our
working capital needs, which include deposits and advance payments to TV advertising slots and internet resource providers, payment
of our operating expenses and financing of our accounts receivable; and (ii) net cash used in investing activities that consist
of the payment for acquisitions to further expand our business and client base, investment in software technologies to enhance
the functionality of the management tools provided by our advertising portals and our general network securities, and investment
in other general office equipment. To date, we have financed our liquidity need primarily through proceeds from operating activities
we generated. Our existing cash is adequate to fund operations for the next 12 months.
The following table provides detailed information about
our net cash flow for the periods indicated:
| |
Nine Months Ended September 30, |
| |
2015 | |
2014 |
| |
Amounts in thousands of US dollars |
| |
| |
|
Net cash provided by/(used in) operating activities | |
| 1,273 | | |
| (958 | ) |
Net cash used in investing activities | |
| (4,373 | ) | |
| (775 | ) |
Net cash provided by financing activities | |
| 102 | | |
| 212 | |
Effect of foreign currency exchange rate changes on cash | |
| (98 | ) | |
| (23 | ) |
Net decrease in cash and cash equivalents | |
| (3,096 | ) | |
| (1,544 | ) |
Net cash provided by/(used in) operating
activities:
For the nine months ended September 30, 2015, our net
cash provided by operating activities of approximately US$1.27 million were primarily attributable to:
| (1) | net loss of US$5.31 million, adjusted by excluding an approximately
US$0.72 million net deferred income tax benefit, a US$1.31 million non-cash expenses of depreciation, amortization, a US$1.64 million
share-based compensation expenses and a US$0.17 million allowance for doubtful accounts and written-off other long-term assets,
yielded the non-cash items excluded net loss of approximately US$2.91 million; |
| (2) | the receipt of cash from operations from changes in operating assets
and liabilities such as: |
| - | other receivable decreased by approximately US$1.91 million, primarily
due to the partial collection of the TV advertisement deposit and prepayment receivable related to a contract expired on December
31, 2014; |
| - | prepayment and deposit to suppliers decreased by approximately
US$2.10 million, primarily due to decrease in contractual deposit amount paid to internet resources providers in 2015 as compared
to that in 2014; |
| - | advance from customers increased by approximately US$1.44 million; |
| - | accruals and other payables increased by approximately US$0.22
million and |
| - | we recognized an approximately US$0.42 million contingent liabilities
related to possible additional internet resources cost that might be charged by the supplier due to the fact that more likely than
not we may not able to meet the minimum consumption amount requirement set forth in the purchase contract. |
| (3) | offset by the use from operations from changes in operating assets
and liabilities such as: |
| - | accounts receivable and due from related parties for advertising
services provided increased by approximately US$1.80 million; |
| - | accounts payable decreased by approximately US$0.05 million, |
| - | taxes payable decreased by approximately US$0.03 million and |
| - | other current assets increased by approximately US$0.03 million. |
For the nine months ended September 30, 2014, our net
cash used in operating activities of approximately US$0.96 million were primarily attributable to:
| (1) | net loss of US$3.01 million, adjusted by excluding an approximately
US$0.42 million net deferred income tax benefit, a US$1.06 million non-cash expenses of depreciation, amortizations, share-based
compensation and our share of gain in equity investment affiliates, a US$0.27 million gain on disposal of VIE and a reversal of
approximately US$0.12 million allowance for doubtful accounts, yielded the non-cash items excluded net loss of approximately US$2.76
million; |
| (2) | the receipt of cash from operations from changes in operating assets
and liabilities such as: |
| - | accounts receivable and due from related parties for the advertising
services provided decreased by approximately US$4.49 million; |
| - | other receivable decreased by approximately US$1.84 million, primarily
due to the partial collection of the marketing-related loan made for the production of the TV series “Xiao Zhan Feng Yun”,
loan to unrelated entities and receivables on disposal of VIEs; |
| - | accounts payable and other payables increased by approximately
US$0.39 million; |
| - | advance from customers increased by approximately US$0.46 million
and |
| - | taxes payable increased by approximately US$0.11 million. |
| (3) | offset by the use from operations from changes in operating assets
and liabilities such as: |
| - | deposit and prepayment to suppliers increased by approximately
US$5.25 million for the purchasing of internet resources and TV advertising slots; |
| - | accruals decreased by approximately US$0.19 million, and |
| - | other current assets increased by approximately US$0.06 million. |
Net cash used in investing activities:
For the nine months ended September 30, 2015, our cash
used in investing activities included the following transactions: (1) we spent approximately US$0.31 million for the purchase of
general office equipment and expenditures on leasehold improvements; (2) we paid approximately US$2.80 million to settle the remaining
balance related to the purchasing of software technology, which transaction consummated in December 2014 and US$1.08 million for
purchasing of software products related to cloud video management system; and (3) we made investments of approximately US$0.19
million in the aggregate to our cost/equity method investees during the period. In the aggregate, these transactions resulted in
a net cash outflow from investing activities of approximately US$4.37 million for the nine months ended September 30, 2015.
For the nine months ended September 30, 2014, our cash
used in investing activities included the following transactions: (1) we spent approximately US$0.24 million for purchase of general
office equipment and decoration of a new established office; (2) we prepaid approximately US$0.85 million for the development of
software systems related to internet environment monitoring and system optimization, of which US$0.78 million will be refunded
due to termination of the contract in early November 2015; (3) we collected approximately US$0.67 million of short-term loan that
we lent to an unrelated entity in last year; and (4) the cash effect of deconsolidation of a VIE in late August 2014 of approximately
US$0.36 million. In the aggregate, these transactions resulted in a net cash outflow from investing activities of approximately
US$0.78 million for the nine months ended September 30, 2014.
Net cash provided by financing activities:
For the nine months ended September 30, 2015, our cash
provided by financing activities included the following transactions: (1) we repaid our short-term bank loan of approximately US$0.81
million that matured on September 29, 2015; (2) we received approximately US$0.99 million guarantee payment and prepayment from
two of our new investors in relation to the security purchase agreements we entered into with them in May 2015; and (3) we repaid
approximately US$0.08 million to the noncontrolling interest of one of our VIEs in relation to the working capital loan we borrow
from the noncontrolling interest in previous year. In the aggregate, these transactions resulted in a net cash inflow from financing
activities of approximately US$0.10 million for the nine months ended September 30, 2015.
For the nine months ended September 30, 2014, our cash
provided by financing activities included the following transactions: (1) we repaid our short-term bank loan of approximately US$0.81
million that matured on July 31, 2014; (2) we renewed the short-term bank loan of approximately US$0.81 million on September 30,
2014, which would expire on September 29, 2015; (3) we borrowed approximately US$0.72 million from the noncontrolling interest
of one of our VIEs to supplement the short-term working capital needs of this VIE; (4) we repaid approximately US$0.02 million
during the period to this noncontrolling interest of our VIE; and (5) we repaid approximately US$0.49 million to our former VIE,
which was disposed in late August 2014. In the aggregate, these transactions resulted in a net cash inflow from financing activities
of approximately US$0.21 million for the nine months ended September 30, 2014.
Restricted Net Assets
As most of our operations are conducted through our PRC
subsidiary and VIEs, our ability to pay dividends is primarily dependent on receiving distributions of funds from our PRC subsidiary
and VIEs. Relevant PRC statutory laws and regulations permit payments of dividends by our PRC subsidiary and VIEs only out of their
retained earnings, if any, as determined in accordance with PRC accounting standards and regulations and after it has met the PRC
requirements for appropriation to statutory reserves. Paid in capital of the PRC subsidiary and VIEs included in our consolidated
net assets are also not distributable for dividend purposes.
In accordance with the PRC regulations on Enterprises
with Foreign Investment, a WFOE established in the PRC is required to provide certain statutory reserves, namely general reserve
fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the
enterprise’s PRC statutory accounts. A WFOE is required to allocate at least 10% of its annual after-tax profit to the general
reserve until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. Appropriations
to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors. The aforementioned
reserves can only be used for specific purposes and are not distributable as cash dividends. Rise King WFOE is subject to the above
mandated restrictions on distributable profits. Additionally, in accordance with the Company Law of the PRC, a domestic enterprise
is required to provide a statutory common reserve of at least 10% of its annual after-tax profit until such reserve has reached
50% of its registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to
provide for a discretionary surplus reserve, at the discretion of the board of directors. The aforementioned reserves can only
be used for specific purposes and are not distributable as cash dividends. All of our PRC VIEs are subject to the above mandated
restrictions on distributable profits.
As a result of these PRC laws and regulations, our PRC
subsidiary and VIEs are restricted in their ability to transfer a portion of their net assets to us. As of September 30, 2015 and
December 31, 2014, net assets restricted in the aggregate, which includes paid-in capital and statutory reserve funds of our PRC
subsidiary and VIEs that are included in our consolidated net assets, was approximately US$7.7 million and US$7.3 million, respectively.
The current PRC Enterprise Income Tax (“EIT”)
Law also imposed a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding
company outside China. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China
and the jurisdiction of the foreign holding company. Holding companies in Hong Kong, for example, will be subject to a 5% rate.
The ability of our PRC subsidiaries to make dividends
and other payments to us may also be restricted by changes in applicable foreign exchange and other laws and regulations.
Foreign currency exchange regulation in China is primarily
governed by the following rules:
| l | Foreign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules; |
| l | Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules. |
Currently, under the Administration Rules, Renminbi is
freely convertible for current account items, including the distribution of dividends, interest payments, trade and service related
foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments
and investments in securities outside of China, unless the prior approval of the State Administration of Foreign Exchange (the
“SAFE”) is obtained and prior registration with the SAFE is made. Foreign-invested enterprises like Rise King WFOE
that need foreign exchange for the distribution of profits to its shareholders may effect payment from their foreign exchange accounts
or purchase and pay foreign exchange rates at the designated foreign exchange banks to their foreign shareholders by producing
board resolutions for such profit distribution. Based on their needs, foreign-invested enterprises are permitted to open foreign
exchange settlement accounts for current account receipts and payments of foreign exchange along with specialized accounts for
capital account receipts and payments of foreign exchange at certain designated foreign exchange banks.
Although the current Exchange Rules allow the convertibility
of Chinese Renminbi into foreign currency for current account items, conversion of Chinese Renminbi into foreign exchange for capital
items, such as foreign direct investment, loans or securities, requires the approval of SAFE, which is under the authority of the
People’s Bank of China. These approvals, however, do not guarantee the availability of foreign currency conversion. We cannot
be sure that it will be able to obtain all required conversion approvals for our operations or the Chinese regulatory authorities
will not impose greater restrictions on the convertibility of Chinese Renminbi in the future. Currently, most of our retained earnings
are generated in Renminbi. Any future restrictions on currency exchanges may limit our ability to use retained earnings generated
in Renminbi to make dividends or other payments in U.S. dollars or fund possible business activities outside China.
As of September 30, 2015 and December 31, 2014, there
were approximately US$26.6 million and US$30.8 million retained earnings in the aggregate, respectively, which were generated by
our PRC subsidiary and VIEs in Renminbi included in our consolidated net assets, aside from US$2.8 million statutory reserve funds
as of September 30, 2015 and December 31, 2014, that may be affected by increased restrictions on currency exchanges in the future
and accordingly may further limit our PRC subsidiary’s or VIEs’ ability to make dividends or other payments in U.S.
dollars to us, in addition to the approximately US$7.7 million and US$7.3 million restricted net assets as of September 30, 2015
and December 31, 2014, respectively, as discussed above.
C. OFF-BALANCE SHEET ARRANGEMENTS
None.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
Not applicable to smaller reporting companies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our
management, including our principal executive officer and principal accounting and financial officer, we conducted an evaluation
of the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended September 30, 2015, as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our principal executive
officer and principal financial officer have concluded that during the period covered by this report, the Company’s disclosure
controls and procedures were effective as of such date to ensure that information required to be disclosed by us in our Exchange
Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms,
and that such information is accumulated and communicated to our management, including our principal executive officer and principal
financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial
reporting that occurred during the third fiscal quarter of 2015 covered by this Quarterly Report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 26, 2015, Business Opportunity Online, one
of our indirect wholly owned VIEs, filed a civil action against Beijing 58 Information Technology Co., Ltd. (“Beijing 58”)
in the Chaoyang District People’s Court of Beijing, the PRC. Business Opportunity Online is seeking a court order to establish
that it owns a 17.5% equity interest in Beijing 58, one of the VIEs owned by 58.com Inc. The lawsuit is still at the preliminary
stage. We believe that it is still too early and uncertain to assess the potential outcome of this lawsuit.
Item 1A. Risk Factors
This information has been omitted based on the Company’s
status as a smaller reporting company.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits listed on the
Exhibit Index below are provided as part of this report.
Exhibit No. |
|
Document Description |
|
|
|
31.1 |
|
Certification of the Principal Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2 |
|
Certification of the Principal Accounting and Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1 |
|
Certification of the Principal Executive Officer and of the Principal Accounting and Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002). |
|
|
|
101 |
|
Interactive Data Files |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
CHINANET ONLINE HOLDINGS, INC. |
|
|
|
Date: November 16, 2015 |
By: |
/s/ Handong Cheng |
|
Name: Handong Cheng |
|
Title: Chief Executive Officer
(Principal Executive Officer) |
|
|
|
By: |
/s/ Zhige Zhang |
|
Name: Zhige Zhang |
|
Title: Chief Financial Officer
(Principal Accounting and Financial Officer) |
46
Exhibit 31.1
CERTIFICATION
I, Handong Cheng, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of ChinaNet Online Holdings,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control
over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee
of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant’s internal control over financial reporting.
November 16, 2015
/s/ Handong Cheng
Handong Cheng
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION
I, Zhige Zhang certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of ChinaNet Online Holdings,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control
over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee
of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant’s internal control over financial reporting.
November 16, 2015
/s/ Zhige Zhang
Zhige Zhang
Chief Financial Officer
(Principal Accounting and Financial Officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned hereby certifies, in his capacity as an officer of ChinaNet
Online Holdings, Inc. (the “Company”), for the purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
(1) The Quarterly Report of the Company on Form 10-Q for the quarter ended September
30, 2015 fully complies with the requirements of Section 13a-14(b) or 15d-14(b) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
November 16, 2015
/s/ Handong Cheng
Handong Cheng
Chief Executive Officer
(Principal Executive Officer)
/s/ Zhige Zhang
Zhige Zhang
Chief Financial Officer
(Principal Accounting and Financial Officer)
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