Item 1.
Interim Financial Statements
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
(US $)
|
|
(US $)
|
|
|
(Unaudited)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,234
|
|
|
$
|
3,035
|
|
Term deposit
|
|
|
-
|
|
|
|
3,056
|
|
Accounts receivable, net
|
|
|
4,653
|
|
|
|
3,322
|
|
Other receivables, net
|
|
|
2,863
|
|
|
|
-
|
|
Prepayment and deposit to suppliers
|
|
|
5,450
|
|
|
|
4,754
|
|
Due from related parties, net
|
|
|
234
|
|
|
|
213
|
|
Other current assets
|
|
|
95
|
|
|
|
95
|
|
Total current assets
|
|
|
14,529
|
|
|
|
14,475
|
|
|
|
|
|
|
|
|
|
|
Long-term investments
|
|
|
949
|
|
|
|
1,340
|
|
Property and equipment, net
|
|
|
341
|
|
|
|
471
|
|
Intangible assets, net
|
|
|
6,653
|
|
|
|
7,264
|
|
Goodwill
|
|
|
5,195
|
|
|
|
4,970
|
|
Deferred tax assets
|
|
|
1,473
|
|
|
|
1,522
|
|
Total Assets
|
|
$
|
29,140
|
|
|
$
|
30,042
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term bank loan *
|
|
$
|
753
|
|
|
$
|
721
|
|
Accounts payable *
|
|
|
625
|
|
|
|
102
|
|
Advances from customers *
|
|
|
2,267
|
|
|
|
1,420
|
|
Accrued payroll and other accruals *
|
|
|
529
|
|
|
|
685
|
|
Due to new investors related to terminated security purchase agreements
|
|
|
923
|
|
|
|
884
|
|
Payable for purchasing of software technology *
|
|
|
429
|
|
|
|
411
|
|
Taxes payable *
|
|
|
3,089
|
|
|
|
2,910
|
|
Other payables *
|
|
|
715
|
|
|
|
487
|
|
Total current liabilities
|
|
|
9,330
|
|
|
|
7,620
|
|
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
(In thousands, except for number of shares
and per share data)
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
(US $)
|
|
(US $)
|
|
|
(Unaudited)
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Long-term borrowing from a director
|
|
|
132
|
|
|
|
126
|
|
Total Liabilities
|
|
|
9,462
|
|
|
|
7,746
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
ChinaNet Online Holdings, Inc.’s stockholders’ equity
|
|
|
|
|
|
|
|
|
Common stock (US$0.001 par value; authorized 50,000,000 shares; issued and outstanding 12,340,542 shares and 12,158,542 shares at September 30, 2017 and December 31, 2016, respectively)
|
|
|
12
|
|
|
|
12
|
|
Additional paid-in capital
|
|
|
29,769
|
|
|
|
29,285
|
|
Statutory reserves
|
|
|
2,607
|
|
|
|
2,607
|
|
Accumulated deficit
|
|
|
(14,325
|
)
|
|
|
(10,362
|
)
|
Accumulated other comprehensive income
|
|
|
1,504
|
|
|
|
700
|
|
Total ChinaNet Online Holdings, Inc.’s stockholders’ equity
|
|
|
19,567
|
|
|
|
22,242
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests
|
|
|
111
|
|
|
|
54
|
|
Total equity
|
|
|
19,678
|
|
|
|
22,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
29,140
|
|
|
$
|
30,042
|
|
*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,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(US $)
|
|
(US $)
|
|
(US $)
|
|
(US $)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From unrelated parties
|
|
$
|
31,171
|
|
|
$
|
25,017
|
|
|
$
|
13,509
|
|
|
$
|
11,741
|
|
From related parties
|
|
|
116
|
|
|
|
381
|
|
|
|
14
|
|
|
|
161
|
|
Total revenues
|
|
|
31,287
|
|
|
|
25,398
|
|
|
|
13,523
|
|
|
|
11,902
|
|
Cost of revenues
|
|
|
26,955
|
|
|
|
19,269
|
|
|
|
12,163
|
|
|
|
9,874
|
|
Gross profit
|
|
|
4,332
|
|
|
|
6,129
|
|
|
|
1,360
|
|
|
|
2,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses
|
|
|
2,399
|
|
|
|
3,069
|
|
|
|
740
|
|
|
|
1,126
|
|
General and administrative expenses
|
|
|
4,402
|
|
|
|
5,290
|
|
|
|
2,318
|
|
|
|
1,752
|
|
Research and development expenses
|
|
|
1,012
|
|
|
|
1,530
|
|
|
|
312
|
|
|
|
514
|
|
Total operating expenses
|
|
|
7,813
|
|
|
|
9,889
|
|
|
|
3,370
|
|
|
|
3,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,481
|
)
|
|
|
(3,760
|
)
|
|
|
(2,010
|
)
|
|
|
(1,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
39
|
|
|
|
72
|
|
|
|
2
|
|
|
|
19
|
|
Interest expense
|
|
|
(109
|
)
|
|
|
(4
|
)
|
|
|
(36
|
)
|
|
|
(4
|
)
|
Other expenses
|
|
|
(208
|
)
|
|
|
(112
|
)
|
|
|
(2
|
)
|
|
|
(99
|
)
|
Total other expenses
|
|
|
(278
|
)
|
|
|
(44
|
)
|
|
|
(36
|
)
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense, noncontrolling interests and discontinued operation
|
|
|
(3,759
|
)
|
|
|
(3,804
|
)
|
|
|
(2,046
|
)
|
|
|
(1,448
|
)
|
Income tax expense
|
|
|
(115
|
)
|
|
|
(155
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Loss from continuing operations
|
|
|
(3,874
|
)
|
|
|
(3,959
|
)
|
|
|
(2,048
|
)
|
|
|
(1,451
|
)
|
Loss from and on disposal of discontinued operation, net of income tax
|
|
|
-
|
|
|
|
(60
|
)
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
|
(3,874
|
)
|
|
|
(4,019
|
)
|
|
|
(2,048
|
)
|
|
|
(1,451
|
)
|
Net income attributable to noncontrolling interests from continuing operations
|
|
|
(89
|
)
|
|
|
(144
|
)
|
|
|
(39
|
)
|
|
|
(21
|
)
|
Net loss attributable to ChinaNet Online Holdings, Inc.
|
|
$
|
(3,963
|
)
|
|
$
|
(4,163
|
)
|
|
$
|
(2,087
|
)
|
|
$
|
(1,472
|
)
|
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,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(US $)
|
|
(US $)
|
|
(US $)
|
|
(US $)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,874
|
)
|
|
$
|
(4,019
|
)
|
|
$
|
(2,048
|
)
|
|
$
|
(1,451
|
)
|
Foreign currency translation gain/(loss)
|
|
|
772
|
|
|
|
(630
|
)
|
|
|
340
|
|
|
|
(152
|
)
|
Comprehensive loss
|
|
$
|
(3,102
|
)
|
|
$
|
(4,649
|
)
|
|
$
|
(1,708
|
)
|
|
$
|
(1,603
|
)
|
Comprehensive income attributable to noncontrolling interests
|
|
|
(57
|
)
|
|
|
(113
|
)
|
|
|
(42
|
)
|
|
|
(19
|
)
|
Comprehensive loss attributable to ChinaNet Online Holdings, Inc.
|
|
$
|
(3,159
|
)
|
|
$
|
(4,762
|
)
|
|
$
|
(1,750
|
)
|
|
$
|
(1,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.33
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.13
|
)
|
Loss from discontinued operations per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
-
|
|
|
$
|
(0.01
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
12,019,040
|
|
|
|
11,353,657
|
|
|
|
12,074,304
|
|
|
|
11,358,971
|
|
See notes to condensed consolidated financial
statements
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(In thousands)
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
|
(US $)
|
|
(US $)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,874
|
)
|
|
$
|
(4,019
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,067
|
|
|
|
1,170
|
|
Share-based compensation expenses
|
|
|
484
|
|
|
|
1,718
|
|
Loss on disposal of fixed assets/other long-term assets
|
|
|
-
|
|
|
|
117
|
|
Provision for allowances for doubtful accounts
|
|
|
1,254
|
|
|
|
-
|
|
Loss on deconsolidation of VIEs
|
|
|
-
|
|
|
|
9
|
|
Deferred taxes
|
|
|
115
|
|
|
|
155
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,436
|
)
|
|
|
(1,196
|
)
|
Other receivables
|
|
|
67
|
|
|
|
1,416
|
|
Prepayment and deposit to suppliers
|
|
|
(470
|
)
|
|
|
(1,172
|
)
|
Due from related parties
|
|
|
(11
|
)
|
|
|
(24
|
)
|
Other current assets
|
|
|
(33
|
)
|
|
|
16
|
|
Accounts payable
|
|
|
506
|
|
|
|
(129
|
)
|
Advances from customers
|
|
|
764
|
|
|
|
(109
|
)
|
Accrued payroll and other accruals
|
|
|
(169
|
)
|
|
|
(146
|
)
|
Other payables
|
|
|
36
|
|
|
|
403
|
|
Taxes payable
|
|
|
46
|
|
|
|
66
|
|
Commitment and contingencies
|
|
|
-
|
|
|
|
(128
|
)
|
Net cash used in operating activities
|
|
|
(2,654
|
)
|
|
|
(1,853
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Payment for office equipment and leasehold improvement
|
|
|
(2
|
)
|
|
|
(150
|
)
|
Payment for purchasing of software technology
|
|
|
-
|
|
|
|
(1,977
|
)
|
Term-deposit matured during the period
|
|
|
3,118
|
|
|
|
-
|
|
Long-term investment in and advance to cost/equity method investees
|
|
|
-
|
|
|
|
(787
|
)
|
Withdraw long-term investment in cost/equity method investees
|
|
|
441
|
|
|
|
-
|
|
Short-term loan to an unrelated party
|
|
|
(2,795
|
)
|
|
|
-
|
|
Proceeds from disposal of VIEs
|
|
|
-
|
|
|
|
28
|
|
Cash effect on deconsolidation of VIEs
|
|
|
-
|
|
|
|
(18
|
)
|
Net cash provided by/(used in) investing activities
|
|
|
762
|
|
|
|
(2,904
|
)
|
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (CONTINUED)
(In thousands)
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
|
(US $)
|
|
(US $)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from short-term bank loan
|
|
|
441
|
|
|
|
456
|
|
Repayment of short-term bank loan
|
|
|
(441
|
)
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
456
|
|
|
|
|
|
|
|
|
|
|
Changes in cash and cash equivalents included in assets classified as held for sale
|
|
|
-
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuation on cash and cash equivalents
|
|
|
91
|
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(1,801
|
)
|
|
|
(4,257
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of the period
|
|
|
3,035
|
|
|
|
5,503
|
|
Cash and cash equivalents at end of the period
|
|
$
|
1,234
|
|
|
$
|
1,246
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax paid
|
|
$
|
-
|
|
|
$
|
2
|
|
Interest expense paid
|
|
$
|
28
|
|
|
$
|
4
|
|
See notes to condensed consolidated financial
statements
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
1.
|
Organization and nature of operations
|
ChinaNet Online Holdings, Inc.
(the “Company”) was incorporated in the State of Texas in April 2006 and re-domiciled to become a Nevada corporation
in October 2006. On June 26, 2009, the Company consummated a share exchange transaction with China Net Online Media Group Limited
(the “Share Exchange”), a company organized under the laws of British Virgin Islands (“China Net BVI”).
As a result of the Share Exchange, China Net BVI became a wholly owned subsidiary of the Company and the Company is now a holding
company, which, through certain contractual arrangements with operating companies in the People’s Republic of China (the
“PRC”), is engaged in providing advertising, precision marketing, online to offline (O2O) sales channel expansion and
the related data services to small and medium enterprises (“SMEs”) and entrepreneurial management and networking services
for entrepreneurs in the PRC.
As of September 30, 2017, the
Company operated its business primarily in China through its PRC subsidiaries and operating entities, or Variable Interest Entities
(“VIEs”) as discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016,
previously filed with the Securities and Exchange Commission (the “2016 Form 10-K”).
2.
|
Variable interest entities
|
Summarized below is the information
related to the VIEs’ assets and liabilities reported in the Company’s condensed consolidated balance sheets as of September
30, 2017 and December 31, 2016, respectively:
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
|
US$(’000)
|
|
|
|
US$(’000)
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,217
|
|
|
$
|
2,915
|
|
Term deposit
|
|
|
-
|
|
|
|
3,056
|
|
Accounts receivable, net
|
|
|
4,653
|
|
|
|
3,315
|
|
Other receivables, net
|
|
|
2,863
|
|
|
|
-
|
|
Prepayment and deposit to suppliers
|
|
|
5,382
|
|
|
|
4,710
|
|
Due from related parties, net
|
|
|
217
|
|
|
|
197
|
|
Other current assets
|
|
|
41
|
|
|
|
71
|
|
Total current assets
|
|
|
14,373
|
|
|
|
14,264
|
|
|
|
|
|
|
|
|
|
|
Long-term investments
|
|
|
45
|
|
|
|
43
|
|
Property and equipment, net
|
|
|
201
|
|
|
|
286
|
|
Intangible assets, net
|
|
|
4,934
|
|
|
|
5,468
|
|
Goodwill
|
|
|
5,195
|
|
|
|
4,970
|
|
Deferred tax assets
|
|
|
1,180
|
|
|
|
1,241
|
|
Total Assets
|
|
$
|
25,928
|
|
|
$
|
26,272
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term bank loan
|
|
$
|
753
|
|
|
$
|
721
|
|
Accounts payable
|
|
|
612
|
|
|
|
83
|
|
Advances from customers
|
|
|
2,267
|
|
|
|
1,388
|
|
Accrued payroll and other accruals
|
|
|
195
|
|
|
|
256
|
|
Due to Control Group
|
|
|
11
|
|
|
|
10
|
|
Payable for purchasing of software technology
|
|
|
429
|
|
|
|
411
|
|
Taxes payable
|
|
|
2,639
|
|
|
|
2,480
|
|
Other payables
|
|
|
214
|
|
|
|
162
|
|
Total current liabilities
|
|
|
7,120
|
|
|
|
5,511
|
|
|
|
|
|
|
|
|
|
|
Deferred tax Liabilities
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
7,120
|
|
|
$
|
5,511
|
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
All of the
VIEs' assets can be used to settle obligations of their primary beneficiary. Liabilities recognized as a result of consolidating
these VIEs do not represent additional claims on the Company’s general assets.
Summarized
below is the information related to the financial performance of the VIEs reported in the Company’s condensed consolidated
statements of operations and comprehensive loss for the nine and three months ended September 30, 2017 and 2016, respectively:
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
|
|
|
Revenues
|
|
|
31,231
|
|
|
|
25,289
|
|
Cost of revenues
|
|
|
(26,954
|
)
|
|
|
(19,186
|
)
|
Total operating expenses
|
|
|
(5,895
|
)
|
|
|
(6,384
|
)
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
(60
|
)
|
Net loss before allocation to noncontrolling interests
|
|
|
(1,928
|
)
|
|
|
(603
|
)
|
|
|
Three Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
|
|
|
Revenues
|
|
|
13,498
|
|
|
|
11,902
|
|
Cost of revenues
|
|
|
(12,162
|
)
|
|
|
(9,872
|
)
|
Total operating expenses
|
|
|
(2,736
|
)
|
|
|
(2,290
|
)
|
Net loss before allocation to noncontrolling interests
|
|
|
(1,412
|
)
|
|
|
(343
|
)
|
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, 2017 and for the nine and three months ended September 30, 2017
and 2016 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 2016 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, 2017, its consolidated results of operations for the nine and three months
ended September 30, 2017 and 2016, and its consolidated cash flows for the nine months ended September 30, 2017 and 2016, 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.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
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.
|
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, 2017
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Balance sheet items, except for equity accounts
|
|
|
6.6369
|
|
|
|
6.9370
|
|
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Items in the statements of operations and comprehensive loss, and statements of cash flows
|
|
|
6.7983
|
|
|
|
6.5771
|
|
|
|
Three Months Ended September 30,
|
|
|
2017
|
|
2016
|
Items in the statements of operations and comprehensive loss, and statements of cash flows
|
|
|
6.6676
|
|
|
|
6.6648
|
|
No
representation is made that the RMB amounts could have been, or could be converted into US$ at the above rates.
Advertising
costs for the Company’s own brand building are not includable in cost of revenues, they are expensed when incurred or amortized
over the estimated beneficial period and are included in “sales and marketing expenses” in the statements of operations
and comprehensive loss. For the nine months ended September 30, 2017 and 2016, advertising expenses for the Company’s own
brand building were approximately US$1,583,000 and US$1,684,000, respectively. For the three months ended September 30, 2017 and
2016, advertising expenses for the Company’s own brand building were approximately US$480,000 and US$724,000, 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, 2017 and 2016 were approximately US$1,012,000 and US$1,530,000,
respectively. Expenses for research and development for the three months ended September 30, 2017 and 2016 were approximately US$312,000
and US$514,000, respectively.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
g)
|
Impact of recently issued accounting standards
|
In May 2014,
the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)” (as further amended or clarified by other related ASUs issued subsequently
in 2015, 2016 and 2017). ASU No. 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard
for U.S. GAAP and IFRS. Simultaneously, this ASU supersedes the revenue recognition requirements in ASC Topic 605-Revenue Recognition
and most industry-specific guidance throughout the Industry Topics of the Codification. The core principle of this ASU requires
an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle,
an entity should apply the five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in
the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract;
(5) recognize revenue when (or as) the entity satisfies a performance obligation. For public business entities, certain not-for-profit
entities, and certain employee benefit plans, the amendments in ASU No. 2014-09 and the amendments in other related ASUs that affected
the guidance in ASU 2014-09 should be applied 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. The Company did not early adopt this
ASU in fiscal 2017, and will apply the new revenue standard beginning January 1, 2018. Based on the Company’s preliminary
evaluation, the Company does not currently expect the adoption of these amendments to have a material impact on its consolidated
financial position and results of operations. However, adopting the new revenue standard will significantly increase the disclosure
requirements of the sufficient information (qualitatively and quantitatively) to enable users of financial statements to understand
the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company plans
to continue the evaluation and analysis of its adoption of ASU 2014-09 (including those subsequently issued updates that clarify
or amend ASU 2014-09’s provisions) throughout 2017 as the Company works towards the implementation and finalizes its determination
of the impact that the adoption will have on its consolidated financial statements.
Term deposit as of December
31, 2016 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, 2017. The interest
rate of the term deposit was 2.25% per annum.
|
5.
|
Accounts receivable, net
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
8,802
|
|
|
|
6,034
|
|
Allowance for doubtful accounts
|
|
|
(4,149
|
)
|
|
|
(2,712
|
)
|
Accounts receivable, net
|
|
|
4,653
|
|
|
|
3,322
|
|
All
of the accounts receivable are non-interest bearing. Based on the assessment of the collectability of the accounts receivable as
of September 30, 2017 and December 31, 2016, the Company provided approximately US$4,149,000 and US$2,712,000 allowance for doubtful
accounts, which were primarily related to the accounts receivable of the Company’s internet advertising and TV advertising
business segment. The Company evaluates its accounts receivables with an aging over six months and determines the allowance based
on aging data, historical collection experience, customer specific facts and economic conditions. For the nine and three months
ended September 30, 2017, approximately US$1,254,000 and US$1,283,000 allowance for doubtful accounts was provided. For the nine
and three months ended September 30, 2016, no allowance for doubtful accounts was provided or reversed.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
6.
|
Other receivables, net
|
Other receivables as of September
30, 2017 represented a short-term working capital loan to an unrelated third party, which will expire on June 30, 2018. The loan
is unsecured and non-interest bearing. The Company expects to fully collect this loan by the end of 2017. As of September 30, 2017 and December 31, 2016, other receivables also included approximately RMB6.0 (US$0.9 million) overdue
contractual deposits, which were related to advertising resources purchase contracts that had been completed with no further
cooperation. Based on the assessment of the collectability of these overdue deposits as of September 30, 2017 and December
31, 2016, the Company had provided full allowance against these doubtful accounts.
7.
|
Prepayments and deposit to suppliers
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Deposits to internet resources providers
|
|
|
888
|
|
|
|
1,074
|
|
Prepayments to internet resources providers
|
|
|
3,639
|
|
|
|
2,874
|
|
Deposits to other services providers
|
|
|
753
|
|
|
|
721
|
|
Other deposits and prepayments
|
|
|
170
|
|
|
|
85
|
|
|
|
|
5,450
|
|
|
|
4,754
|
|
The
Company purchases internet resources from large internet search engines and technical services from suppliers to attract more internet
traffic to its advertising portals and provide value-added services to its clients.
According
to the contracts signed between the Company and its suppliers, the Company is normally required to pay the contract amounts in
advance. These prepayments will be transferred to cost of revenues when the related services are provided. As of September 30,
2017 and December 31, 2016, prepayments to internet resources providers primarily consisted of advance payments paid for purchasing
internet resources from two of the Company’s largest internet resources suppliers.
As
of September 30, 2017 and December 31, 2016, deposits to other service provider represented the deposit for an advisory contract
related to finding new investors for the Company, which will expire on December 31, 2017.
|
8.
|
Due from related parties, net
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Beijing Saimeiwei Food Equipment Technology Co., Ltd.
|
|
|
33
|
|
|
|
31
|
|
Chuangshi Meiwei (Beijing) International Investment Management Co., Ltd.
|
|
|
156
|
|
|
|
150
|
|
ChinaNet Chuang Tou (Shenzhen) Co., Ltd.
|
|
|
14
|
|
|
|
-
|
|
Guohua Shiji (Beijing) Communication Co., Ltd.
|
|
|
181
|
|
|
|
175
|
|
Beijing Saturday Education Technology Co., Ltd.
|
|
|
1
|
|
|
|
1
|
|
|
|
|
385
|
|
|
|
357
|
|
Allowance for doubtful accounts
|
|
|
(151
|
)
|
|
|
(144
|
)
|
Due from related parties, net
|
|
|
234
|
|
|
|
213
|
|
Related
parties of the Company represented the Company’s direct or indirect unconsolidated investee companies. As of September 30,
2017 and December 31, 2016, due from related parties primarily included short-term working capital loans of RMB1.0 million (approximately
US$0.15 million) and RMB1.2 million (approximately US$0.18 million) to Chuangshi Meiwei and Guohua Shiji, respectively. The working
capital loans are lent to supplement the short-term operational needs of these related parties to assist certain of their business
developing projects. The working capital loans are non-interest bearing and needs to be repaid to the Company within one year.
Based on the assessment of the collectability, the Company provided approximately US$151,000 and US$144,000 allowance for doubtful
accounts against its amounts due from related parties as of September 30, 2017 and December 31, 2016, respectively, which was related
to the working capital loan lent to Chuangshi Meiwei.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Equity method investments:
|
|
|
|
|
|
|
|
|
Investment in equity method investees
|
|
|
741
|
|
|
|
709
|
|
Advance to equity method investees
|
|
|
78
|
|
|
|
75
|
|
Impairment on equity method investments
|
|
|
(819
|
)
|
|
|
(784
|
)
|
Total equity method investments
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cost method investments:
|
|
|
|
|
|
|
|
|
Investment in cost method investees
|
|
|
1,108
|
|
|
|
1,492
|
|
Impairment on cost method investments
|
|
|
(159
|
)
|
|
|
(152
|
)
|
Total cost method investments
|
|
|
949
|
|
|
|
1,340
|
|
|
|
|
|
|
|
|
|
|
Total long-term investments
|
|
|
949
|
|
|
|
1,340
|
|
Equity
method investments
As
of September 30, 2017, the Company beneficially owned 23.18% and 25.5% equity interest in Shenzhen Mingshan and Zhao Shang Ke Hubei,
respectively. The Company accounts for its investments in these companies under equity method of accounting. Based on the facts
of the significant decline in level of business activities from 2015, insufficient amount of working capital and the lack of commitment
from majority shareholders, these two investment affiliates had become dormant and the possibility of the business recovery is
remote. As a result, the Company reduced the carrying value of these investments to zero as of the end of 2015.
Cost
method investments
As
of September 30, 2017, the Company beneficially owned a 19% equity interest in ChinaNet Chuang Tou and Guohua Shiji, respectively,
a 10% equity interest in Chuangshi Meiwei and Beijing Saturday, respectively, and a 15% equity interest in ChinaNet Korea. The
Company accounts for its investments in these companies under cost method of accounting. As the business plan of ChinaNet Korea
and Chuangshi Meiwei were not implemented smoothly and based on the facts of the significant decline in level of business activities,
insufficient amount of working capital and the lack of commitment from majority shareholders, the possibility of the business recovery
of these two companies is remote. As a result, the Company reduced the carrying value of these investments to zero as of the end
of 2016. The following table summarizes the movement of the investments in cost method investees for the nine months ended September
30, 2017:
|
|
Beijing
Saturday
|
|
Guohua Shiji
|
|
ChinaNet
Chuang Tou
|
|
Total
|
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
|
16
|
|
|
|
27
|
|
|
|
1,297
|
|
|
|
1,340
|
|
Withdraw of cash investment
|
|
|
-
|
|
|
|
-
|
|
|
|
(452
|
)
|
|
|
(452
|
)
|
Exchange translation adjustment
|
|
|
1
|
|
|
|
1
|
|
|
|
59
|
|
|
|
61
|
|
Balance as of September 30, 2017 (Unaudited)
|
|
|
17
|
|
|
|
28
|
|
|
|
904
|
|
|
|
949
|
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
The
Company contributed RMB9,000,000 (approximately US$1.35 million) in cash upon incorporation of ChinaNet Chuang Tou in November
2015. During the three months ended September 30, 2017, as approved by the shareholders of ChinaNet Chuang Tou, the Company withdrew
RMB3,000,000 (approximately US$0.45 million) cash investment from ChinaNet Chuang Tou. This transaction does not have any impact
on the shareholding and other shareholders’ rights of the Company in ChinaNet Chuang Tou.
10.
|
Property and equipment, net
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Leasehold improvement
|
|
|
332
|
|
|
|
317
|
|
Vehicles
|
|
|
797
|
|
|
|
763
|
|
Office equipment
|
|
|
1,434
|
|
|
|
1,371
|
|
Electronic devices
|
|
|
1,146
|
|
|
|
1,096
|
|
Property and equipment, cost
|
|
|
3,709
|
|
|
|
3,547
|
|
Less: accumulated depreciation
|
|
|
(3,207
|
)
|
|
|
(2,922
|
)
|
Less: impairment loss on abandoned fixed assets
|
|
|
(161
|
)
|
|
|
(154
|
)
|
Property and equipment, net
|
|
|
341
|
|
|
|
471
|
|
Depreciation
expenses in the aggregate for the nine months ended September 30, 2017 and 2016 were approximately US$149,000 and US$193,000, respectively.
Depreciation expenses in the aggregate for the three months ended September 30, 2017 and 2016 were approximately US$49,000 and
US$56,000, respectively.
11.
|
Intangible assets, net
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
Domain name
|
|
|
1,455
|
|
|
|
1,393
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
Customer relationship
|
|
|
2,007
|
|
|
|
1,920
|
|
Non-compete agreements
|
|
|
1,104
|
|
|
|
1,057
|
|
Software technologies
|
|
|
310
|
|
|
|
295
|
|
Cloud compute software technology
|
|
|
1,399
|
|
|
|
1,338
|
|
Intelligent marketing data service platform
|
|
|
4,865
|
|
|
|
4,655
|
|
Internet safety, information exchange security and data encryption software
|
|
|
1,959
|
|
|
|
1,874
|
|
Cloud video management system
|
|
|
1,431
|
|
|
|
1,369
|
|
Other computer software
|
|
|
118
|
|
|
|
113
|
|
Intangible assets, cost
|
|
|
14,648
|
|
|
|
14,014
|
|
Less: accumulated amortization
|
|
|
(6,035
|
)
|
|
|
(4,875
|
)
|
Less: accumulated impairment losses
|
|
|
(1,960
|
)
|
|
|
(1,875
|
)
|
Intangible assets, net
|
|
|
6,653
|
|
|
|
7,264
|
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Amortization
expenses in aggregate for the nine months ended September 30, 2017 and 2016 were approximately US$917,000 and US$977,000, respectively.
Amortization expenses in aggregate for the three months ended September 30, 2017 and 2016 were approximately US$310,000 and US$354,000,
respectively.
Based
on the current carrying value of the finite-lived intangible assets recorded, which weighted average remaining useful life was
5.85 years as of September 30, 2017, and assuming no further subsequent impairment of the underlying intangible assets, the estimated
future amortization expenses is approximately US$308,000 for the three months ending December 31, 2017, approximately US$1,232,000
each year for the years ending December 31, 2018 through 2020, and approximately US$1,161,000 for the year ending December 31,
2021.
|
|
Amount
|
|
|
US$(’000)
|
|
|
|
Balance as of December 31, 2016
|
|
|
4,970
|
|
Exchange translation adjustment
|
|
|
225
|
|
Balance as of September 30, 2017 (unaudited)
|
|
|
5,195
|
|
As of December 31, 2016, one
of the Company’s VIEs borrowed two short-term bank loans of RMB5.0 million (approximately US$0.7 million), in the aggregate,
from a major financial institution in China to supplement its short-term working capital needs. The short-term bank loan of RMB3.0
million (approximately US$0.4 million) matured and was repaid on July 18, 2017, and was re-borrowed on August 16, 2017, which will
mature on August 15, 2018. The remaining short-term bank loan of RMB 2.0 million (approximately US$0.3 million) matured and was
repaid on October 18, 2017, and was re-borrowed on October 23, 2017, which will mature on October 22, 2018. The current interest
rate of these short-term bank loan is 5.655% per annum, which is 30% over the benchmark rate of the People’s Bank of China
(the “PBOC”).
14.
|
Accrued payroll and other accruals
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Accrued payroll and staff welfare
|
|
|
241
|
|
|
|
319
|
|
Accrued operating expenses
|
|
|
288
|
|
|
|
366
|
|
|
|
|
529
|
|
|
|
685
|
|
|
15.
|
Due to new investors related to terminated security purchase agreements
|
In May 2015, the Company entered
into securities purchase agreements with Beijing Jinrun Fangzhou Science & Technology Co, Ltd. (“Jinrun Fangzhou”)
and Dongsys Innovation (Beijing) Technology Development Co., Ltd. (“Dongsys Innovation”), public companies listed on
the National Equities Exchange and Quotations of the PRC (the “NEEQ”), respectively, pursuant to which these companies
agreed to purchase a certain number of shares of common stock of the Company. The Company had received the 10% guarantee payment
and 15% prepayment in an aggregate amount equal to US$806,000 from Jinrun Fangzhou, and the 10% guarantee payment in an amount
equal to US$117,000 from Dongsys Innovation, respectively.
Due to certain restriction stipulated
in the “Measures for Overseas Investment Management” issued by the Ministry of Commerce of the PRC (the “MOFCOM”),
the Company and its investors experienced difficulties in obtaining approval for the transactions from the MOFCOM. As a result,
on May 12, 2016, the Company terminated the security purchase agreements with the two investors, respectively. The Company did
not make any repayment to these investors afterwards during 2016 and the first nine months of 2017. As agreed by the parties, beginning
on January 1, 2017, the Company will bear a 12% annualized interest rate for the unpaid amounts and the amounts shall be refunded
to the investors no later than December 31, 2017. The Company expects to settle the balances with the two investors within 2017.
Interest expense for the unpaid amounts accrued for the nine and three months ended September 30, 2017 was approximately US$0.08
million and US$0.03 million, which has been recorded in other payables account.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
16.
|
Payable for purchasing of software technology
|
Payable for purchasing of software
technology as of September 30, 2017 and December 31, 2016 represented the remaining outstanding payment balance of approximately
RMB2.85 million (approximately US$0.4 million) for purchasing of software technology, which transaction consummated in the fourth
fiscal quarter of 2016. The Company expects to settle the balance with the counter party within 2017.
The entities within the Company
file separate tax returns in the respective tax jurisdictions in which they operate.
i). The Company is incorporated
in the state of Nevada. Under the current law of Nevada, the Company is not subject to state corporate income tax. Following the
Share Exchange, the Company became a holding company and does not conduct any substantial operations of its own. No provision for
federal corporate income tax has been made in the financial statements as the Company has no assessable profits for the nine and
three months ended September 30, 2017, 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, 2017 or any
prior periods. Additionally, upon payments of dividends by China Net HK to its shareholders, no Hong Kong withholding tax will
be imposed.
iv). The Company’s PRC
operating subsidiaries and VIEs, being incorporated in the PRC, are governed by the income tax law of the PRC and is subject to
PRC enterprise income tax (“EIT”). The EIT rate of PRC is 25%, which applies to both domestic and foreign invested
enterprises.
|
•
|
In November 2015, Business Opportunity Online was re-approved by the related PRC governmental authorities
as a High and New Technology Enterprise, which enabled the entity, as approved by the local tax authorities of Beijing, the PRC,
to continue enjoying the favorable statutory tax rate of 15% until November 2018. Therefore, for the nine and three months ended
September 30, 2017 and 2016, the applicable income tax rate of Business Opportunity Online was 15%.
|
|
•
|
The applicable income tax rate for other PRC operating entities of the Company was 25% for the
nine and three months ended September 30, 2017 and 2016.
|
|
•
|
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.
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
For the nine and three months
ended September 30, 2017 and 2016, the preferential income tax treatment enjoyed by the Company’s PRC VIE, Business Opportunity
Online was based on the current applicable laws and regulations of the PRC and approved by the related government regulatory authorities
and local tax authorities where Business Opportunity Online operates in. The preferential income tax treatment is subject to change
in accordance with the PRC government economic development policies and regulations. The preferential income tax treatment is 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 the preferential income tax treatment is subject to, but not limited to, the PRC government policy
on supporting any specific industry’s development under the outlook and strategy of overall macroeconomic development.
|
2)
|
Turnover taxes and the relevant surcharges
|
Service revenues provided by
the Company’s PRC operating subsidiaries and VIEs were subject to Value Added Tax (“VAT”). VAT rate for provision
of modern services (other than lease of corporeal movables) is 6% and for small scale taxpayer, 3%. Therefore, for the nine and
three months ended September 30, 2017 and 2016, the Company’s service revenues are subject to VAT at a rate of 6%, after
deducting the VAT paid for the services purchased from suppliers, or at a rate of 3% without any deduction of VAT paid for the
services purchased from suppliers. The surcharges of the VAT is 12%-14% of the VAT, depending on which tax jurisdiction the Company’s
PRC operating subsidiaries and VIE operate in.
As of September 30, 2017 and
December 31, 2016, taxes payable consists of:
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Turnover tax and surcharge payable
|
|
|
1,246
|
|
|
|
1,147
|
|
Enterprise income tax payable
|
|
|
1,843
|
|
|
|
1,763
|
|
Total taxes payable
|
|
|
3,089
|
|
|
|
2,910
|
|
For the nine and three months
ended September 30, 2017 and 2016, the Company’s income tax expense consisted of:
|
|
Nine Months Ended September 30,
|
|
Three Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current-PRC
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Deferred-PRC
|
|
|
(115
|
)
|
|
|
(155
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Income tax expenses
|
|
|
(115
|
)
|
|
|
(155
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
The Company’s deferred
tax assets at September 30, 2017 and December 31, 2016 were as follows:
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Tax effect of net operating losses carried forward
|
|
|
10,252
|
|
|
|
9,345
|
|
Bad debts provision
|
|
|
1,180
|
|
|
|
931
|
|
Valuation allowance
|
|
|
(9,959
|
)
|
|
|
(8,754
|
)
|
Total deferred tax assets
|
|
|
1,473
|
|
|
|
1,522
|
|
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 subsidiaries and VIEs) were approximately US$18,168,000 and US$17,544,000
at September 30, 2017 and December 31, 2016, respectively, which loss is applicable to the Company’s U.S. income tax return
and carry forwards gradually expire over time, the last of which expires in 2037. A full valuation allowance has been recorded
because it is considered more likely than not that the deferred tax assets will not be realized through sufficient future earnings
of the entity to which the operating losses relate.
The net operating losses carried
forward (excluding bad debts provision and non-deductible expenses) incurred by the Company’s PRC subsidiaries and VIEs were
approximately US$19,945,000 and US$17,939,000 at September 30, 2017 and December 31, 2016, respectively, which loss is applicable
to the Company’s PRC income tax return and carry forwards gradually expire over time, the last of which expires in 2022.
The related deferred tax assets were calculated based on the respective net operating losses incurred by each of the PRC subsidiaries
and VIEs and the respective corresponding enacted tax rate that will be in effect in the period in which the losses are expected
to be utilized. The Company recorded approximately US$645,000 and US$446,000 net valuation allowance for the nine months ended
September 30, 2017 and 2016, respectively, and approximately US$142,000 and US$149,000 net valuation allowance for the three months
ended September 30, 2017 and 2016, respectively, because it is considered more likely than not that this portion of the deferred
tax assets will not be realized through sufficient future earnings of the entities to which the operating losses relate. The Company
also utilized approximately US$119,000 and US$267,000 previously recognized deferred tax assets for the nine months ended September
30, 2017 and 2016, respectively, and approximately US$8,000 and US$74,000 previously recognized deferred tax assets for the three
months ended September 30, 2017 and 2016, respectively, due to earnings generated during the respective periods.
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 subsidiaries
and VIEs operate in.
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.
18.
|
Long-term borrowing from a director
|
Long-term borrowing from a director
is a non-interest bearing loan from a director of the Company relating to the original paid-in capital contribution in the Company’s
wholly-owned subsidiary Rise King WFOE, which is not expected to be repaid within one year.
19.
|
Restricted net assets
|
As most of the Company’s
operations are conducted through its PRC subsidiary and VIEs, the Company’s ability to pay dividends is primarily dependent
on receiving distributions of funds from its PRC subsidiary and VIEs. Relevant PRC statutory laws and regulations permit payments
of dividends by its PRC subsidiary and VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting
standards and regulations and after it has met the PRC requirements for appropriation to statutory reserves. Paid in capital of
the PRC subsidiary and VIEs included in the Company’s consolidated net assets are also non-distributable for dividend purposes.
In accordance with the PRC regulations
on Enterprises with Foreign Investment, a WFOE established in the PRC is required to provide certain statutory reserves, namely
general reserve fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as
reported in the enterprise’s PRC statutory accounts. A WFOE is required to allocate at least 10% of its annual after-tax
profit to the general reserve until such reserve has reached 50% of its registered capital based on the enterprise’s PRC
statutory accounts. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the
board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends.
Rise King WFOE is subject to the above mandated restrictions on distributable profits. Additionally, in accordance with the Company
Law of the PRC, a domestic enterprise is required to provide a statutory common reserve of at least 10% of its annual after-tax
profit until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. A domestic
enterprise is also required to provide for a discretionary surplus reserve, at the discretion of the board of directors. The aforementioned
reserves can only be used for specific purposes and are not distributable as cash dividends. All of the Company’s PRC VIEs
are subject to the above mandated restrictions on distributable profits.
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, 2017 and December 31, 2016, net assets restricted in the aggregate, which include paid-in
capital and statutory reserve funds of the Company’s PRC subsidiary and VIEs that are included in the Company’s consolidated
net assets, was approximately US$8.1 million and US$7.8 million, respectively.
The current PRC Enterprise Income
Tax Law also imposed a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding
company outside China. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China
and the jurisdiction of the foreign holding company. Holding companies in Hong Kong, for example, will be subject to a 5% rate.
The ability of the Company’s
PRC subsidiary and VIEs to make dividends and other payments to the Company may also be restricted by changes in applicable foreign
exchange and other laws and regulations.
Foreign currency exchange regulation
in China is primarily governed by the following rules:
|
•
|
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, 2017 and
December 31, 2016, there was approximately US$14.8 million and US$17.6 million retained earnings in the aggregate, respectively,
which was generated by the Company’s PRC subsidiary and VIEs in Renminbi included in the Company’s consolidated net
assets, aside from US$2.6 million and US$2.5 million of statutory reserve funds as of September 30, 2017 and December 31, 2016,
respectively, that may be affected by increased restrictions on currency exchanges in the future, and accordingly, may further
limit the Company’s PRC subsidiary’s and VIEs’ ability to make dividends or other payments in U.S. dollars to
the Company, in addition to the approximately US$8.1 million and US$7.8 million of restricted net assets as of September 30, 2017
and December 31, 2016, as discussed above.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
20.
|
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$318,000 and US$456,000 for the nine months ended September
30, 2017 and 2016, respectively. The total amounts for such employee benefits were approximately US$92,000 and US$158,000 for the
three months ended September 30, 2017 and 2016, respectively.
21.
|
Concentration of risk
|
Credit risk
Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, term deposit and
accounts receivable. As of September 30, 2017 and December 31, 2016, substantially all of the Company’s cash and cash equivalents
and term deposit were held by major financial institutions located in Mainland China, which management believes are of high credit
quality. For accounts receivables, the Company extends credit based on an evaluation of the customer’s financial condition,
generally without requiring collateral or other security. In order to minimize the credit risk, the Company delegated a team responsible
for credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. Further,
the Company reviews the recoverable amount of each individual trade debt at each balance sheet date to ensure that adequate allowances
are made for doubtful accounts. In this regard, the Company considers that the Company’s credit risk for accounts receivables
is significantly reduced.
Risk arising
from operations in foreign countries
All of the Company’s operations
are conducted within the PRC. The Company’s operations in the PRC are subject to various political, economic, and other risks
and uncertainties inherent in the PRC. Among other risks, the Company’s operations in the PRC are subject to the risks of
restrictions on transfer of funds, changing taxation policies, foreign exchange restrictions and political conditions and governmental
regulations.
Currency convertibility
risk
Significant part of the Company’s
businesses is transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take
place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange
rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or
other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed
contracts. These exchange control measures imposed by the PRC government authorities may restrict the ability of the Company’s
PRC subsidiaries 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, 2017, three customers individually accounted for 14%, 11% and 11% of the Company’s revenues. For the three months ended
September 30, 2017, two of the three customers individually accounted for 25% and 16% of the Company’s revenues. Except for
the aforementioned customer, there was no other single customer who accounted for more than 10% of the Company’s revenues
for the nine or three months ended September 30, 2017.
For the three months ended September
30, 2016, two customers individually accounted for 14% and 12% of the Company’s revenues. Except for the aforementioned customers,
there was no other single customer who accounted for more than 10% of the Company’s revenues for the nine or three months
ended September 30, 2016.
As of September 30, 2017, three
customers individually accounted for 15%, 14% and 13% of the Company’s accounts receivable. As of December 31, 2016, two
customers individually accounted for 22% and 14% of the Company’s accounts receivable. Except for the aforementioned, there
was no other single customer who accounted for more than 10% of the Company’s accounts receivable as of September 30, 2017
or December 31, 2016.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Concentration of suppliers
For the nine months ended September
30, 2017, two suppliers individually accounted for 68% and 22% of the Company’s cost of revenues. For the three months ended
September 30, 2017, the same two suppliers individually accounted for 58% and 29% of the Company’s cost of revenues. Except
for the afore-mentioned, there was no other single supplier who accounted for more than 10% of the Company’s cost of revenues
for the nine or three months ended September 30, 2017.
For the nine months ended September
30, 2016, two suppliers individually accounted for 28% and 37% of the Company’s cost of revenues. For the three months ended
September 30, 2016, the same two suppliers individually accounted for 52% and 16% of the Company’s cost of revenues. Except
for the afore-mentioned, there was no other single supplier who accounted for more than 10% of the Company’s cost of revenues
for the nine or three months ended September 30, 2016.
|
22.
|
Commitments and contingencies
|
The following table sets forth
the Company’s operating lease commitment as of September 30, 2017:
|
|
Office Rental
|
|
|
US$(’000)
|
|
|
(Unaudited)
|
Three months ending December 31,
|
|
|
|
|
-2017
|
|
|
111
|
|
Year ending December 31,
|
|
|
|
|
-2018
|
|
|
445
|
|
-2019
|
|
|
111
|
|
Total
|
|
$
|
667
|
|
Excluding rental expenses included
in discontinued operation for the nine months ended September 30, 2016, rental expenses under operating leases for the nine months
ended September 30, 2017 and 2016 were approximately US$304,000 and US$447,000, respectively. For the three months ended September
30, 2017 and 2016, rental expenses under operating leases were approximately US$113,000 and US$137,000, respectively.
The Company follows ASC Topic
280 “Segment Reporting”, which requires that companies disclose segment data based on how management makes decisions
about allocating resources to segments and evaluating their performance. Reportable operating segments include components of an
entity about which separate financial information is available and which operating results are regularly reviewed by the chief
operating decision maker (“CODM”), the Company’s Chief Executive Officer, to make decisions about resources to
be allocated to the segment and assess each operating segment’s performance.
Nine Months Ended September
30, 2017 (Unaudited)
|
|
Internet Ad.
and data service
|
|
TV &
Bank kiosks
Ad.
|
|
Others
|
|
Inter-
segment
and
reconciling
item
|
|
Total
|
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
31,287
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,287
|
|
Cost of revenues
|
|
|
26,955
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,955
|
|
Total operating expenses
|
|
|
5,828
|
|
|
|
47
|
|
|
|
1,938
|
(1)
|
|
|
-
|
|
|
|
7,813
|
|
Depreciation and amortization expense included in total operating expenses
|
|
|
996
|
|
|
|
1
|
|
|
|
70
|
|
|
|
-
|
|
|
|
1,067
|
|
Operating loss
|
|
|
(1,496
|
)
|
|
|
(47
|
)
|
|
|
(1,938
|
)
|
|
|
-
|
|
|
|
(3,481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure for long-term assets
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(1,887
|
)
|
|
|
(47
|
)
|
|
|
(1,940
|
)
|
|
|
-
|
|
|
|
(3,874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets – September 30, 2017
|
|
|
28,982
|
|
|
|
476
|
|
|
|
11,170
|
|
|
|
(11,488
|
)
|
|
|
29,140
|
|
Total assets – December 31, 2016
|
|
|
29,520
|
|
|
|
348
|
|
|
|
11,882
|
|
|
|
(11,708
|
)
|
|
|
30,042
|
|
|
(1)
|
Including approximately US$484,000 share-based compensation expenses.
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Three Months Ended September
30, 2017 (Unaudited)
|
|
Internet Ad.
and data service
|
|
TV &
Bank kiosks
Ad.
|
|
Others
|
|
Inter-
segment
and
reconciling
item
|
|
Total
|
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
13,523
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,523
|
|
Cost of revenues
|
|
|
12,163
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,163
|
|
Total operating expenses
|
|
|
2,646
|
|
|
|
(9
|
)
|
|
|
733
|
(1)
|
|
|
-
|
|
|
|
3,370
|
|
Depreciation and amortization expense included in total operating expenses
|
|
|
338
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
360
|
|
Operating income/(loss)
|
|
|
(1,286
|
)
|
|
|
9
|
|
|
|
(733
|
)
|
|
|
-
|
|
|
|
(2,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure for long-term assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income from continuing operations
|
|
|
(1,324
|
)
|
|
|
9
|
|
|
|
(733
|
)
|
|
|
-
|
|
|
|
(2,048
|
)
|
|
(1)
|
Including approximately US$136,000 share-based compensation expenses.
|
Nine Months Ended September
30, 2016 (Unaudited)
|
|
Internet Ad.
and data service
|
|
TV &
Bank kiosks
Ad.
|
|
Others
|
|
Inter-
segment
and
reconciling
item
|
|
Total
|
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
25,398
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,398
|
|
Cost of revenues
|
|
|
19,269
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,269
|
|
Total operating expenses
|
|
|
6,625
|
|
|
|
106
|
|
|
|
3,158
|
(1)
|
|
|
-
|
|
|
|
9,889
|
|
Depreciation and amortization expense included in total operating expenses
|
|
|
1,079
|
|
|
|
15
|
|
|
|
76
|
|
|
|
-
|
|
|
|
1,170
|
|
Operating loss
|
|
|
(496
|
)
|
|
|
(106
|
)
|
|
|
(3,158
|
)
|
|
|
-
|
|
|
|
(3,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure for long-term assets
|
|
|
2,036
|
|
|
|
-
|
|
|
|
103
|
|
|
|
-
|
|
|
|
2,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(758
|
)
|
|
|
(105
|
)
|
|
|
(3,096
|
)
|
|
|
-
|
|
|
|
(3,959
|
)
|
|
(1)
|
Including approximately US$1,718,000 share-based compensation expenses.
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Three Months Ended September
30, 2016 (Unaudited)
|
|
Internet Ad.
and data service
|
|
TV &
Bank kiosks
Ad.
|
|
Others
|
|
Inter-
segment
and
reconciling
item
|
|
Total
|
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
11,902
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,902
|
|
Cost of revenues
|
|
|
9,874
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,874
|
|
Total operating expenses
|
|
|
2,418
|
|
|
|
30
|
|
|
|
944
|
(1)
|
|
|
-
|
|
|
|
3,392
|
|
Depreciation and amortization expense included in total operating expenses
|
|
|
367
|
|
|
|
14
|
|
|
|
29
|
|
|
|
-
|
|
|
|
410
|
|
Operating loss
|
|
|
(390
|
)
|
|
|
(30
|
)
|
|
|
(944
|
)
|
|
|
-
|
|
|
|
(1,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure for long-term assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(474
|
)
|
|
|
(29
|
)
|
|
|
(948
|
)
|
|
|
-
|
|
|
|
(1,451
|
)
|
|
(1)
|
Including approximately US$583,000 share-based compensation expenses.
|
Basic and diluted loss per share
for each of the periods presented are calculated as follows (All amounts, except number of shares and per share data, are presented
in thousands of U.S. dollars):
|
|
Nine Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ChinaNet Online Holdings, Inc. from continuing operations (numerator for basic and diluted loss per share from continuing operations)
|
|
$
|
(3,963
|
)
|
|
$
|
(4,103
|
)
|
|
$
|
(2,087
|
)
|
|
$
|
(1,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ChinaNet Online Holdings, Inc. from discontinued operation (numerator for basic and diluted loss per share from discontinued operation)
|
|
$
|
-
|
|
|
$
|
(60
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding -Basic and diluted
|
|
|
12,019,040
|
|
|
|
11,353,657
|
|
|
|
12,074,304
|
|
|
|
11,358,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share-Basic and diluted from continuing operations
|
|
$
|
(0.33
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.13
|
)
|
Loss per share-Basic and diluted from discontinued operations
|
|
$
|
-
|
|
|
$
|
(0.01
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
For the nine and three months
ended September 30, 2017, the diluted loss per share calculation for continuing operations did not include options to purchase
up to 835,216 shares of the Company’s common stock, because they were out of the money, and did not include 266,238 shares
of unvested restricted common stock, because their effect was anti-dilutive, as the Company incurred a loss for the periods from
continuing operations.
For the nine and three months
ended September 30, 2016, the diluted loss per share calculation for continuing and discontinued operations did not include options
to purchase up to 835,216 shares of the Company’s common stock, because they were out of the money, and did not include 799,571
shares of unvested restricted common stock, because their effect was anti-dilutive, as the Company incurred a loss for the periods
from both continuing and discontinued operations.
|
25.
|
Share-based compensation expenses
|
The Company granted 75,000 and
20,000 shares of the Company’s restricted common stock to its investor relations services provider, in exchange for its services
to the Company for the year ended December 31, 2017 and 2016, respectively. These shares were valued at US$1.02 and US$3.00 per
share, the closing bid price of the Company’s common stock on the earlier of the performance commitment date or the date
service was completed, respectively. Total compensation expense recognized for the service was US$57,380 and US$19,130 for the
nine and three months ended September 30, 2017, respectively. Total compensation expense recognized for the service was US$45,000
and US$15,000 for the nine and three months ended September 30, 2016, respectively.
In July 2017, the Company issued
75,000 shares of the Company’s restricted common stock to two management consulting service providers in exchange for its
services to the Company for a 12-month period commencing on July 1, 2017. These shares were valued at US$1.00 per share, the closing
bid price of the Company’s common stock on the earlier of the performance commitment date or the date service was completed.
Total compensation expense recognized for the nine and three months ended September 30, 2017 was approximately US$18,750, respectively.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
In February 2017, the Company
granted 20,000 shares of the Company’s restricted common stock to one of its independent directors in exchange for his services
provided to the Company. These shares were valued at US$1.12 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, 2017 was US$22,400
and US$nil, respectively.
On April 1, 2016, the Company
granted 16,000 shares of the Company’s restricted common stock in aggregate to two marketing service providers in exchange
for their services to the Company for a 12-month period commencing on April 1, 2016. These shares were valued at US$1.73 per share,
the closing bid price of the Company’s common stock on the earlier of the performance commitment date or the date service
was completed. Total compensation expense recognized for the nine and three months ended September 30, 2017 was approximately US$6,900
and US$nil, respectively. Total compensation expense recognized for the nine and three months ended September 30, 2016 was approximately
US$13,800 and US$6,900, respectively.
On September 14, 2015, under its 2015 Omnibus Securities
and Incentive Plan, the Company granted its employees in the aggregate of 266,238 shares of the Company’s restricted common
stock, which will be vested on the third anniversary of the date of the grant. These shares were valued at US$2.10 per share, the
closing bid price of the Company’s common stock on the date of grant. The Company adopted a 5% forfeiture rate for recognition
of the related compensation expenses of these unvested shares. Total compensation expenses recognized for the nine and three months
ended September 30, 2017 was approximately US$132,300 and US$44,600 respectively. Total compensation expenses recognized for the
nine and three months ended September 30, 2016 was approximately US$132,790 and US$44,600, respectively.
On September 14, 2015, under its 2015 Omnibus Securities
and Incentive Plan, the Company also granted 5-year common stock purchase options to its employees, in the aggregate, to purchase
up to 477,240 shares of the Company’s restricted common stock at an exercise price of US$2.10 per share, of which 159,080
options vested upon the date of grant, 159,080 options vested on September 14, 2016 and the remaining 159,080 options vested on
September 14, 2017. These options were valuated at US$1.03-US$1.39 per option. Total compensation expenses recognized for these
options for the nine and three months ended September 30, 2017 was approximately US$155,000 and US$53,100, respectively. Total
compensation expenses recognized for these options for the nine and three months ended September 30, 2016 was approximately US$150,000
and US$57,500, respectively.
The Company granted 140,000 shares of the Company’s
restricted common stock to a management consulting service provider in exchange for its services to the Company for a 24-month
period commencing on May 1, 2015. These shares were valued at US$3.93 per share, the closing bid price of the Company’s common
stock on the earlier of the performance commitment date or the date service was completed. Total compensation expense recognized
for the nine and three months ended September 30, 2017 was approximately US$91,580 and US$nil, respectively. Total compensation
expense recognized for the nine and three months ended September 30, 2016 was approximately US$206,100 and US$68,700, respectively.
On December 30, 2014, the Company issued 1,680,000
shares of the Company’s restricted common stock to its executive officers, of which 613,334 restricted shares vested upon
issuance, 533,333 restricted shares vested on December 30, 2015 and the remaining 533,333 restricted shares vested on December
30, 2016. The restricted stock was valued at $2.93 per share, the closing bid price of the Company’s common stock on the
date of grant. Total compensation expenses recognized for the nine and three months ended September 30, 2016 was US$1,170,000 and
US$390,000, respectively.
**The number of restricted common stocks, common
stock purchase options and the related stock price discussed in the above paragraphs, which related transactions occurred before
August 19, 2016, have been retroactively restated to reflect the Company’s 1 for 2.5 reverse stock split, which was effective
on August 19, 2016.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Options issued and outstanding
at September 30, 2017 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, 2016
|
|
|
835,216
|
|
|
|
4.04
|
|
|
$
|
2.49
|
|
|
|
676,136
|
|
|
|
4.11
|
|
|
$
|
2.59
|
|
Granted/Vested
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
159,080
|
|
|
|
2.95
|
|
|
$
|
2.10
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2017 (unaudited)
|
|
|
835,216
|
|
|
|
3.29
|
|
|
$
|
2.49
|
|
|
|
835,216
|
|
|
|
3.29
|
|
|
$
|
2.49
|
|
The aggregate unrecognized share-based compensation
expenses as of September 30, 2017 and 2016 is approximately US$233,000 and US$1,111,000, respectively.
The Company has performed an evaluation of subsequent events through the date the financial statements were issued, and has
determined that there are no such events that are material to the financial statements.
Item 2 Management’s
Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
You
should read the following discussion and analysis of our financial condition and results of operations in conjunction with our
consolidated financial statements and the related notes included elsewhere in this interim report. Our consolidated financial statements
have been prepared in accordance with U.S. GAAP. The following discussion and analysis contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without
limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,”
“anticipate,” “intend,” “believe,” or similar language. All forward-looking statements included
in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking
statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ
materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the
information set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2016. 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, precision marketing, online-to-offline (O2O) sales channel
expansion and the related data services to SMEs in China and entrepreneurial management and networking services for entrepreneurs
in the PRC.
Through
our PRC operating subsidiaries and VIEs, we primarily operate a one-stop services for our clients on our integrated service platform,
primarily including omni-channel precision advertising and marketing system platform, CloudX, and its data analysis management
system. Our omni-channel precision advertising and marketing system platform consists primarily of all major digital advertising
and marketing portals, include internet and mobile, and our other non-digital advertising units, such as TV and paper ads. We provide
and monitor varieties of advertising and marketing campaigns through CloudX and generates effective sales leads through the combination
effects of the Internet, mobile, content and others, including TV and offline medias. We also provide search engine marketing and
data services through CloudX to maximize market exposure and effectiveness for our clients. Our data analysis management system
is an information and data analysis portal for SMEs or entrepreneurs who plans to start their own business, helping them for a
higher survival and faster deal closing rate. It is built based on the cores of CloudX to further expand our service and data-link
to assist our clients in developing their sales both online and offline, which establishes a traceable and looped online to offline
(O2O) ecosystem for our clients in their ground sales expansion throughout the cities in the PRC. During the past few years, we
have been cooperating with third parties to develop our SMEs intelligent operation and marketing data service platform and applications,
which consists of several online cloud technology based tools on digital advertising and marketing, sales lead management, elite
store management, client membership management and other administrative operational management tools. These are specifically designed
for small business in China to match their simplicity. We are intending to utilize these applications to create a social community-based
consumption ecosystem, sustained by our in-process developing Big Data and artificial intelligent technologies, and analyzing data
from operation, prediction and prescription which lead the SMEs improving their marketing efficiency with better return on investment
(ROI) and sales effectiveness with their target customers.
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 2016 Form 10-K.
A. RESULTS
OF OPERATIONS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
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,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
US$
|
|
US$
|
|
US$
|
|
US$
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From unrelated parties
|
|
$
|
31,171
|
|
|
$
|
25,017
|
|
|
$
|
13,509
|
|
|
$
|
11,741
|
|
From related parties
|
|
|
116
|
|
|
|
381
|
|
|
|
14
|
|
|
|
161
|
|
Total revenues
|
|
|
31,287
|
|
|
|
25,398
|
|
|
|
13,523
|
|
|
|
11,902
|
|
Cost of revenues
|
|
|
26,955
|
|
|
|
19,269
|
|
|
|
12,163
|
|
|
|
9,874
|
|
Gross profit
|
|
|
4,332
|
|
|
|
6,129
|
|
|
|
1,360
|
|
|
|
2,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses
|
|
|
2,399
|
|
|
|
3,069
|
|
|
|
740
|
|
|
|
1,126
|
|
General and administrative expenses
|
|
|
4,402
|
|
|
|
5,290
|
|
|
|
2,318
|
|
|
|
1,752
|
|
Research and development expenses
|
|
|
1,012
|
|
|
|
1,530
|
|
|
|
312
|
|
|
|
514
|
|
Total operating expenses
|
|
|
7,813
|
|
|
|
9,889
|
|
|
|
3,370
|
|
|
|
3,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,481
|
)
|
|
|
(3,760
|
)
|
|
|
(2,010
|
)
|
|
|
(1,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
39
|
|
|
|
72
|
|
|
|
2
|
|
|
|
19
|
|
Interest expense
|
|
|
(109
|
)
|
|
|
(4
|
)
|
|
|
(36
|
)
|
|
|
(4
|
)
|
Other expenses
|
|
|
(208
|
)
|
|
|
(112
|
)
|
|
|
(2
|
)
|
|
|
(99
|
)
|
Total other expenses
|
|
|
(278
|
)
|
|
|
(44
|
)
|
|
|
(36
|
)
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense, noncontrolling interests and discontinued operation
|
|
|
(3,759
|
)
|
|
|
(3,804
|
)
|
|
|
(2,046
|
)
|
|
|
(1,448
|
)
|
Income tax expense
|
|
|
(115
|
)
|
|
|
(155
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Loss from continuing operations
|
|
|
(3,874
|
)
|
|
|
(3,959
|
)
|
|
|
(2,048
|
)
|
|
|
(1,451
|
)
|
Loss from and on disposal of discontinued operation, net of income tax
|
|
|
-
|
|
|
|
(60
|
)
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
|
(3,874
|
)
|
|
|
(4,019
|
)
|
|
|
(2,048
|
)
|
|
|
(1,451
|
)
|
Net income attributable to noncontrolling interests from continuing operations
|
|
|
(89
|
)
|
|
|
(144
|
)
|
|
|
(39
|
)
|
|
|
(21
|
)
|
Net loss attributable to ChinaNet Online Holdings, Inc.
|
|
$
|
(3,963
|
)
|
|
$
|
(4,163
|
)
|
|
$
|
(2,087
|
)
|
|
$
|
(1,472
|
)
|
Revenues
The following
tables set forth a breakdown of our total revenues, divided into three segments for the periods indicated, with inter-segment transactions
eliminated:
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
Revenue type
|
|
(Amounts expressed in thousands of US dollars, except percentages)
|
|
|
|
|
|
|
|
|
|
-Internet advertising and data service
|
|
$
|
6,978
|
|
|
|
22.3
|
%
|
|
$
|
13,676
|
|
|
|
53.8
|
%
|
-Search engine marketing and data service
|
|
|
24,253
|
|
|
|
77.5
|
%
|
|
|
11,701
|
|
|
|
46.1
|
%
|
-Technical services
|
|
|
56
|
|
|
|
0.2
|
%
|
|
|
21
|
|
|
|
0.1
|
%
|
Internet advertising and related data services
|
|
$
|
31,287
|
|
|
|
100
|
%
|
|
$
|
25,398
|
|
|
|
100
|
%
|
|
|
Three Months Ended September 30,
|
|
|
2017
|
|
2016
|
Revenue type
|
|
(Amounts expressed in thousands of US dollars, except percentages)
|
|
|
|
|
|
|
|
|
|
-Internet advertising and data service
|
|
$
|
2,232
|
|
|
|
16.5
|
%
|
|
$
|
4,387
|
|
|
|
36.9
|
%
|
-Search engine marketing and data service
|
|
|
11,266
|
|
|
|
83.3
|
%
|
|
|
7,515
|
|
|
|
63.1
|
%
|
-Technical services
|
|
|
25
|
|
|
|
0.2
|
%
|
|
|
-
|
|
|
|
-
|
|
Internet advertising and related data services
|
|
$
|
13,523
|
|
|
|
100
|
%
|
|
$
|
11,902
|
|
|
|
100
|
%
|
Total Revenues:
Our total revenues increased to US$31.3 million and US$13.5 million, respectively, for the nine and three months ended September
30, 2017 from US$25.4 million and US$11.9 million, respectively, for the same period last year, which was primarily due to the
increase in revenues from search engine marketing and data service during the periods.
We derive
the majority of our internet advertising and related data service revenues from the sales of effective sales leads and advertising
space from our internet portals, sales of omni-channel and search engine marketing and data service and other related value added
services, including content management services, to unrelated third parties and to certain related parties. Our internet advertising
and related data services to related parties were provided in the ordinary course of business on the same terms as those provided
to our unrelated customers. For the nine and three months ended September 30, 2017 and 2016, our service revenues from related
parties in the aggregate was less than 1.5% of the total revenues for each respective reporting period.
The tables
below summarize the revenues, cost of revenues, gross profit and net loss generated from each of our VIEs and subsidiaries for
the nine and three months ended September 30, 2017 and 2016, respectively, with inter-company transactions eliminated:
For the nine months ended
September 30, 2017:
Name of subsidiary or VIE
|
|
Revenue from
unrelated parties
|
|
Revenue from
related parties
|
|
Total
|
|
|
($’000)
|
|
($’000)
|
|
($’000)
|
|
|
|
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
56
|
|
|
|
-
|
|
|
|
56
|
|
Business Opportunity Online and subsidiaries
|
|
|
31,115
|
|
|
|
116
|
|
|
|
31,231
|
|
Total revenues
|
|
|
31,171
|
|
|
|
116
|
|
|
|
31,287
|
|
For the three months ended
September 30, 2017:
Name of subsidiary or VIE
|
|
Revenue from
unrelated parties
|
|
Revenue from
related parties
|
|
Total
|
|
|
($’000)
|
|
($’000)
|
|
($’000)
|
|
|
|
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
25
|
|
|
|
-
|
|
|
|
25
|
|
Business Opportunity Online and subsidiaries
|
|
|
13,484
|
|
|
|
14
|
|
|
|
13,498
|
|
Total revenues
|
|
|
13,509
|
|
|
|
14
|
|
|
|
13,523
|
|
For the nine months ended
September 30, 2017:
Name of subsidiary or VIE
|
|
Cost of Revenues
|
|
Gross Profit
|
|
|
($’000)
|
|
($’000)
|
|
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
1
|
|
|
|
55
|
|
Business Opportunity Online and subsidiaries
|
|
|
26,954
|
|
|
|
4,277
|
|
Total
|
|
|
26,955
|
|
|
|
4,332
|
|
For the three months ended
September 30, 2017:
Name of subsidiary or VIE
|
|
Cost of Revenues
|
|
Gross Profit
|
|
|
($’000)
|
|
($’000)
|
|
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
1
|
|
|
|
24
|
|
Business Opportunity Online and subsidiaries
|
|
|
12,162
|
|
|
|
1,336
|
|
Total
|
|
|
12,163
|
|
|
|
1,360
|
|
For the nine months ended
September 30, 2017:
Name of subsidiary or VIE
|
|
Net Loss
|
|
|
($’000)
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
(1,322
|
)
|
Business Opportunity Online and subsidiaries
|
|
|
(1,865
|
)
|
Beijing CNET Online and subsidiaries
|
|
|
(63
|
)
|
ChinaNet Online Holdings, Inc.
|
|
|
(624
|
)
|
Total net loss before allocation to the noncontrolling interest
|
|
|
(3,874
|
)
|
For the three months ended
September 30, 2017:
Name of subsidiary or VIE
|
|
Net Loss
|
|
|
($’000)
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
(373
|
)
|
Business Opportunity Online and subsidiaries
|
|
|
(1,395
|
)
|
Beijing CNET Online and subsidiaries
|
|
|
(17
|
)
|
ChinaNet Online Holdings, Inc.
|
|
|
(263
|
)
|
Total net loss before allocation to the noncontrolling interest
|
|
|
(2,048
|
)
|
For the nine months ended
September 30, 2016:
Name of subsidiary or VIE
|
|
Revenue from
unrelated parties
|
|
Revenue from
related parties
|
|
Total
|
|
|
($’000)
|
|
($’000)
|
|
($’000)
|
|
|
|
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
109
|
|
|
|
-
|
|
|
|
109
|
|
Business Opportunity Online and subsidiaries
|
|
|
24,908
|
|
|
|
381
|
|
|
|
25,289
|
|
Total revenues
|
|
|
25,017
|
|
|
|
381
|
|
|
|
25,398
|
|
For the three months ended
September 30, 2016:
Name of subsidiary or VIE
|
|
Revenue from
unrelated parties
|
|
Revenue from
related parties
|
|
Total
|
|
|
($’000)
|
|
($’000)
|
|
($’000)
|
|
|
|
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Business Opportunity Online and subsidiaries
|
|
|
11,741
|
|
|
|
161
|
|
|
|
11,902
|
|
Total revenues
|
|
|
11,741
|
|
|
|
161
|
|
|
|
11,902
|
|
For the nine months ended
September 30, 2016:
Name of subsidiary or VIE
|
|
Cost of Revenues
|
|
Gross Profit
|
|
|
($’000)
|
|
($’000)
|
|
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
83
|
|
|
|
26
|
|
Business Opportunity Online and subsidiaries
|
|
|
19,186
|
|
|
|
6,103
|
|
Total
|
|
|
19,269
|
|
|
|
6,129
|
|
For the three months ended
September 30, 2016:
Name of subsidiary or VIE
|
|
Cost of Revenues
|
|
Gross Profit/(Loss)
|
|
|
($’000)
|
|
($’000)
|
|
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
2
|
|
|
|
(2
|
)
|
Business Opportunity Online and subsidiaries
|
|
|
9,872
|
|
|
|
2,030
|
|
Total
|
|
|
9,874
|
|
|
|
2,028
|
|
For the nine months ended
September 30, 2016:
Name of subsidiary or VIE
|
|
Net Loss
|
|
|
($’000)
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
(1,595
|
)
|
Business Opportunity Online and subsidiaries
|
|
|
(437
|
)
|
Beijing CNET Online and subsidiaries
|
|
|
(105
|
)
|
ChinaNet Online Holdings, Inc.
|
|
|
(1,822
|
)
|
Total net loss from continuing operations before allocation to the noncontrolling interest
|
|
|
(3,959
|
)
|
Loss from discontinued operations
|
|
|
(60
|
)
|
Total net loss before allocation to the noncontrolling interest
|
|
|
(4,019
|
)
|
For the three months ended
September 30, 2016:
Name of subsidiary or VIE
|
|
Net Loss
|
|
|
($’000)
|
|
|
|
Rise King WFOE and subsidiaries
|
|
|
(444
|
)
|
Business Opportunity Online and subsidiaries
|
|
|
(304
|
)
|
Beijing CNET Online and subsidiaries
|
|
|
(39
|
)
|
ChinaNet Online Holdings, Inc.
|
|
|
(664
|
)
|
Total net loss from continuing operations before allocation to the noncontrolling interest
|
|
|
(1,451
|
)
|
Loss from discontinued operations
|
|
|
-
|
|
Total net loss before allocation to the noncontrolling interest
|
|
|
(1,451
|
)
|
Management
considers revenues generated from internet advertising and data service, search engine marketing and data service 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.
|
•
|
Internet advertising and data service revenues for the nine and three months ended September 30,
2017 decreased to approximately US$6.99 million and US$2.23 million, respectively, compared with US$13.68 million and US$4.39 million
for the same periods in 2016, respectively. The decrease in our internet advertising and data service revenues during the period
responded our strategy to further upgrading our internet advertising, omni-channel marketing and data services to our larger SME
clients and eliminating smaller and non-profitable clients, and due to the overall economy slowdown in China, which resulted in
lower consumer and business spending, our clients continued tightening their advertising and marketing investment budget on omni-channel
advertising and marketing, and focused more on singular ad. cheaper advertising channel, e.g. search engine marketing and data
service. The decrease in our internet advertising and data service revenues is considered temporary during our business transition
and technology development. During the past few years, we have optimized our internet marketing analytics and cost control system
to provide more accurate result and more spontaneous feedback to our clients, which is especially helpful to our larger clients,
we also optimized our online promotion tactics to improve cost efficiency, which lead to the foundation of the framework of CloudX.
The process of developing self-learning mechanism for our internet marketing tactics have helped the Company and our clients achieved
more accurate advertising and marketing results with more acceptable and lower costs, and have led to increasing sales lead conversion
rate. The technical improvement and potential advertising and marketing technology breakthrough will further help increasing our
market penetration in the SME segment and potentially expand our customer segments, thereby continuing to increase our recurring
revenues in future periods.
|
|
•
|
Revenue generated from search engine marketing and data services for the nine and three months
ended September 30, 2017 increased to approximately US$24.25 million and US$11.27 million, respectively, compared with US$11.70
million and US$7.52 million for the same periods in 2016, respectively. This enhanced third-party search engine marketing and data
service is to help our clients select and prioritize effective key words from analyzed keywords database for different search engines,
combinations of key-words or combinations of sentences to achieve higher sales lead conversion rate with CloudX on both mobile
and PC searches. As discussed in the above paragraph, due to the overall economy slowdown in China, our clients also tightened
their advertising and marketing investment budget and turn to choose more economic and singular marketing channel with more direct
feedback and results, e.g. search engine marketing and data service etc. Therefore, there was a significant increase in search
engine market and data service during the nine and three months ended September 30, 2017, compared with the same periods last year.
|
Cost of revenues
Our cost
of revenues consisted of costs directly related to the offering of our advertising, marketing and data services and technical services. The
following table sets forth our cost of revenues, divided into three segments, by amount and gross profit ratio for the periods
indicated, with inter-segment transactions eliminated:
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
|
(Amounts expressed in thousands of US dollars, except percentages)
|
|
|
Revenue
|
|
Cost
|
|
GP ratio
|
|
Revenue
|
|
Cost
|
|
GP ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Internet advertisement and data service
|
|
$
|
6,978
|
|
|
$
|
3,864
|
|
|
|
45
|
%
|
|
$
|
13,676
|
|
|
$
|
7,863
|
|
|
|
43
|
%
|
-Search engine marketing and data service
|
|
|
24,253
|
|
|
|
23,090
|
|
|
|
5
|
%
|
|
|
11,701
|
|
|
|
11,402
|
|
|
|
3
|
%
|
-Technical services
|
|
|
56
|
|
|
|
1
|
|
|
|
98
|
%
|
|
|
21
|
|
|
|
4
|
|
|
|
81
|
%
|
Internet advertising and related data services
|
|
$
|
31,287
|
|
|
$
|
26,955
|
|
|
|
14
|
%
|
|
$
|
25,398
|
|
|
$
|
19,269
|
|
|
|
24
|
%
|
|
|
Three Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
|
(Amounts expressed in thousands of US dollars, except percentages)
|
|
|
Revenue
|
|
Cost
|
|
GP ratio
|
|
Revenue
|
|
Cost
|
|
GP ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Internet advertisement and data service
|
|
$
|
2,232
|
|
|
$
|
1,291
|
|
|
|
42
|
%
|
|
$
|
4,387
|
|
|
$
|
2,534
|
|
|
|
42
|
%
|
-Search engine marketing and data service
|
|
|
11,266
|
|
|
|
10,871
|
|
|
|
4
|
%
|
|
|
7,515
|
|
|
|
7,338
|
|
|
|
2
|
%
|
-Technical services
|
|
|
25
|
|
|
|
1
|
|
|
|
96
|
%
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
Internet advertising and related data services
|
|
$
|
13,523
|
|
|
$
|
12,163
|
|
|
|
10
|
%
|
|
$
|
11,902
|
|
|
$
|
9,874
|
|
|
|
17
|
%
|
Cost of revenues
:
Our total cost of revenues increased to US$26.96 million and US$12.16 million for the nine and three months ended September 30,
2017, respectively, from US$19.27 million and US$9.87 million for the same periods in 2016, respectively, which was primarily due
to the increase in costs associated with search engine marketing and data service and was in line with the increase in the related
revenues as discussed above. Our cost of revenues related to our advertising, marketing and data services primarily consists
of internet resources purchased from key search engines and technical services providers related to lead generation, sponsored
search and other direct cost associated with providing services.
|
•
|
For internet advertising and data service, cost associated with obtaining internet resources was
the largest component of our cost of revenues, accounting for over 80% of our total internet advertising and data service cost
of revenues. We purchased these internet resources from other well-known search engines, internet portals and mobile portals in
China, for example, Baidu, Qihu 360, Sohu (Sogou), WeChat, Toutiao and others. The purchase of these internet resources in large
amounts allowed us to negotiate discounts with our suppliers. For the nine and three months ended September 30, 2017, our total
cost of revenues for internet advertising and data service was US$3.86 million and US$1.29 million, respectively, compared with
US$7.86 million and US$2.53 million for the same periods last year, respectively. The decrease in our total cost of revenues associated
with internet advertising and data service was in line with the decrease in internet advertising and data service revenues as discussed
in the above section. During the past few years, we continued developing our precision advertising and marketing system, CloudX,
which optimized our digital marketing tactics by conglomerating different marketing channel for a single large customer and relatively
increasing our classified segment and industry level marketing scheme with improved cost efficiency. These helped us and our clients
achieve better lead results and effects with more acceptable and lower costs, and better ROI. Despite of temporarily decreasing
in revenue, the gross margin rate for our internet advertising and data service remained at the level of 45% and 42% for the nine
and three months ended September 30, 2017, respectively, compared with 43% and 42% for the nine and three months ended September
30, 2016, respectively.
|
|
•
|
Costs for search engine marketing and data service was direct internet resource costs consumed
for search engine marketing and data service provided to clients as described above. We normally charge our clients a service fee
for this service on the certain percentage of the related direct cost consumed. Due to further implementation of the CloudX system
in this service, which optimized our internet advertising and marketing tactics and improved the cost efficiency in providing search
engine marketing and data service, i.e. less cost consumed for the similar results or ROI achieved. As a result, our gross margin
rate for this service increased to 5% and 4% for the nine and three months ended September 30, 2017, respectively, compared with
3% and 2% for the same periods last year, respectively.
|
Gross
Profit
As a result
of the foregoing, our gross profit was US$4.33 million and US$1.36 million, respectively, for the nine and three months
ended September 30, 2017, compared with US$6.13 million and US$2.03 million, respectively, for the nine and three months ended
September 30, 2016. Our overall gross margin decreased to 14% and 10% for the nine and three months ended September 30, 2017,
respectively, compared with 24% and 17% for the nine and three months ended September 30, 2016. The decrease in our overall gross
margin rate was a direct result of the increase in revenues from the relative lower margin search engine marketing and data service
for the nine and three months ended September 30, 2017, compared with that in the same periods last year, which constituted approximately
77.5% and 83.3% of our total revenues for the nine and three months ended September 30, 2017, respectively, compared with 46.1%
and 63.1% of the total revenues in the same periods last year, respectively.
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,
|
|
|
2017
|
|
2016
|
|
|
(Amounts expressed in thousands of US dollars, except percentages)
|
|
|
Amount
|
|
% of total
revenue
|
|
Amount
|
|
% of total
revenue
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
31,287
|
|
|
|
100
|
%
|
|
$
|
25,398
|
|
|
|
100
|
%
|
Gross Profit
|
|
|
4,332
|
|
|
|
14
|
%
|
|
|
6,129
|
|
|
|
24
|
%
|
Sales and marketing expenses
|
|
|
2,399
|
|
|
|
8
|
%
|
|
|
3,069
|
|
|
|
12
|
%
|
General and administrative expenses
|
|
|
4,402
|
|
|
|
14
|
%
|
|
|
5,290
|
|
|
|
21
|
%
|
Research and development expenses
|
|
|
1,012
|
|
|
|
3
|
%
|
|
|
1,530
|
|
|
|
6
|
%
|
Total operating expenses
|
|
$
|
7,813
|
|
|
|
25
|
%
|
|
$
|
9,889
|
|
|
|
39
|
%
|
|
|
Three Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
|
(Amounts expressed in thousands of US dollars, except percentages)
|
|
|
Amount
|
|
% of total
revenue
|
|
Amount
|
|
% of total
revenue
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
13,523
|
|
|
|
100
|
%
|
|
$
|
11,902
|
|
|
|
100
|
%
|
Gross Profit
|
|
|
1,360
|
|
|
|
10
|
%
|
|
|
2,028
|
|
|
|
17
|
%
|
Sales and marketing expenses
|
|
|
740
|
|
|
|
6
|
%
|
|
|
1,126
|
|
|
|
9
|
%
|
General and administrative expenses
|
|
|
2,318
|
|
|
|
17
|
%
|
|
|
1,752
|
|
|
|
15
|
%
|
Research and development expenses
|
|
|
312
|
|
|
|
2
|
%
|
|
|
514
|
|
|
|
4
|
%
|
Total operating expenses
|
|
$
|
3,370
|
|
|
|
25
|
%
|
|
$
|
3,392
|
|
|
|
28
|
%
|
Operating Expenses:
Our
total operating expenses decreased to US$7.81 million for the nine months ended September 30, 2017 from US$9.89 million for the
same period of 2016. For the three months ended September 30, 2017, our total operating expenses decreased slightly to US$3.37
million from US$3.39 million for the same period of 2016.
|
•
|
Sales and marketing expenses: Sales and marketing expenses decreased to US$2.40 million for the
nine months ended September 30, 2017 from US$3.07 million for the same period of 2016. For the three months ended September
30, 2017, sales and marketing expenses decreased to US$0.74 million from US$1.13 million for the same period of 2016. Our sales
and marketing expenses primarily consist of advertising expenses for brand development that we pay to different media outlets for
the promotion and marketing of our advertising web portals, other advertising and promotional expenses, staff salaries, staff benefits,
performance bonuses, travelling expenses, communication expenses and other general office expenses of our sales department. For
the nine months ended September 30, 2017, the change in our sales and marketing expenses was primarily due to the following reasons:
(1) the decrease in advertising expenses for brand development of approximately US$0.10 million; and (2) the decrease in staff
salaries and benefit and other general expenses of our sales department of approximately US$0.57 million, due to the cost reduction
plan executed by management and decrease in headcount in our sales department. For the three months ended September 30, 2017, the
reasons for the change in our sales and marketing expenses were similar to those for the nine months ended September 30, 2017,
as discussed above.
|
|
•
|
General and administrative expenses: General and administrative expenses decreased to US$4.40 million
for the nine months ended September 30, 2017 from US$5.29 million for the same period in 2016. For the three months ended
September 30, 2017, general and administrative expenses increased to US$2.32 million from US$1.75 million for the same period of
2016. Our general and administrative expenses primarily consist of salaries and benefits for management, accounting and administrative
personnel, office rentals, depreciation and amortization, professional service fees, maintenance, utilities and other office expenses.
For the nine months ended September 30, 2017, the change in our general and administrative expenses was primarily due to the following
reasons: (1) the decrease in general administrative expenses, such as: professional service expenses, salary and benefit expenses
and other general office expenses of approximately US$0.77 million, due to cost reduction plan executed by management; (2) the
decrease in rental expenses of approximately US$0.14 million, due to less office space rented during the nine months ended September
30, 2017, compared with the same period in 2016; (3) the provision of allowance for doubtful accounts for the nine months ended
September 30, 2017 of approximately US$1.25 million; and (4) the decrease in share-based compensation expenses of approximately
US$1.23 million, primarily related to restricted shares awarded to management in 2014, which had been fully vested by the end of
2016. For the three months ended September 30, 2017, the increase in our general and administrative expenses was primarily due
to the provision of allowance for doubtful accounts of approximately US$1.28 million during the period, which was partially offset
by the decrease in general administrative expenses, rental expense, and share-based compensation expense during the period, similar
to those discussed for the nine months ended September 30, 2017.
|
|
•
|
Research and development expenses: Research and development expenses were US$1.01 million and US$0.31
million for the nine and three months ended September 30, 2017, respectively, compared to US$1.53 million and US$0.51 million for
the nine and three months ended September 30, 2016, 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. The decrease in research and development expenses for the nine and three
months ended September 30, 2017, compared with the same periods last year, were primarily due to the decrease in headcount of our
research and development department and the cost reduction plan executed by management.
|
|
•
|
Loss from operations:
As a result of the foregoing, we incurred a loss from operations
of approximately US$3.48 million and US$3.76 million for the nine months ended September 30, 2017 and 2016, respectively. We incurred
a loss from operations of approximately US$2.01 million and US$1.36 million for the three months ended September 30, 2017 and 2016,
respectively.
|
|
•
|
Interest income:
For the nine and three months ended September 30, 2017 and 2016,
interest income we earned was primarily contributed from the approximately US$3 million of term deposit we placed in one of the
major financial institutions in the PRC, which matured in July 2017.
|
|
•
|
Interest expense:
For the nine and three months ended September 30, 2017, interest
expense incurred were primarily related to the short-term bank loan we borrowed from major financial institutions in the PRC to
supplement our short-term working capital needs and amounts due from new investors related to terminated security purchase agreements
as discussed in Note 15. For the nine and three months ended September 30, 2016, interest expense incurred was primarily related
to the short-term bank loan we borrowed from major financial institutions in the PRC during the periods.
|
|
•
|
Loss before income tax expense, noncontrolling interests and discontinued operation:
As
a result of the foregoing, our loss before income tax expense, noncontrolling interest and discontinued operation was approximately
US$3.76 million and US$3.80 million for the nine months ended September 30, 2017 and 2016, respectively. Our loss before income
tax expense, noncontrolling interest and discontinued operation was approximately US$2.05 million and US$1.45 million for the three
months ended September 30, 2017 and 2016, respectively.
|
|
•
|
Income Tax expense:
We recognized a net deferred income tax expense of approximately
US$0.12 million and US$0.002 million for the nine and three months ended September 30, 2017, respectively, which was primarily
related to utilizing deferred tax assets recognized in previous years due to earnings generated during the periods.
|
We recognized
a net deferred income tax expense of approximately US$0.16 million and US$0.003 million for the nine and three months ended September
30, 2016, respectively. For the nine and three months ended September 30, 2016, approximately US$0.09 million and US$0.03 million
of our income tax benefit, respectively, was in relation to the amortization of the intangible assets identified in the acquisition
transactions consummated in previous years; approximately US$0.07 million and US$nil of our income tax benefit was in relation
to the net operating loss incurred by our PRC operating VIEs for the period, respectively, which we consider likely to be able
to utilized with respect to future earnings of the entities to which the operating losses relate; and we also incurred approximately
US$0.31 million and US$0.033 million deferred income tax expense by utilizing deferred tax assets recognized in previous years
due to earnings generated during the periods, respectively.
|
•
|
Loss from continuing operations:
As a result of the foregoing, we incurred a net
loss from continuing operations of approximately US$3.87 million and US$3.96 million for the nine months ended September 30, 2017
and 2016, respectively. We incurred a net loss from continuing operations of approximately US$2.05 million and US$1.45 million
for the three months ended September 30, 2017 and 2016, respectively.
|
|
•
|
Loss from and on disposal of discontinued operation, net of income tax:
We exited
our brand management and sales channel building business segment in the fourth fiscal quarter of 2015, operated by a former VIE
of ours, Quanzhou City Zhilang Network Technology Co., Ltd. (“Quanzhou Zhi Lang”), which qualified for presentation
as a discontinued operation. In June 2016, we disposed Quanzhou Zhi Lang to an unaffiliated third-party. The results of operations
of discontinued operation (including loss on disposal of the discontinued operation) was presented as a separate component in the
condensed consolidated statements of operations and comprehensive loss, which was approximately US$0.06 million for the nine months
ended September 30, 2016.
|
|
•
|
Net loss:
As a result of the foregoing, for the nine months ended September 30, 2017
and 2016, we incurred a total net loss of approximately US$3.87 million and US$4.02 million, respectively. For the three months
ended September 30, 2017 and 2016, we incurred a total net loss of approximately US$2.05 million and US$1.45 million, respectively.
|
|
•
|
Net income attributable to noncontrolling interest from continuing operations:
Beijing
Chuang Fu Tian Xia was 51% owned by Business Opportunity Online upon incorporation. For the nine and three months ended September
30, 2017, net income allocated to the noncontrolling interests of Beijing Chuang Fu Tian Xia was approximately US$0.09 million
and US$0.04 million, respectively. For the nine and three months ended September 30, 2016, net income allocated to the noncontrolling
interests of Beijing Chuang Fu Tian Xia was approximately US$0.14 million and US$0.02 million, respectively.
|
|
•
|
Net loss attributable to ChinaNet Online Holdings, Inc.:
Total net loss as adjusted
by net loss attributable to the noncontrolling interest shareholders as discussed above yields the net loss attributable to ChinaNet
Online Holdings, Inc. Net loss attributable to ChinaNet Online Holdings, Inc. was US$3.96 million and US$4.16 million for the nine
months ended September 30, 2017 and 2016, respectively. Net loss attributable to ChinaNet Online Holdings, Inc. was US$2.09 million
and US$1.47 million for the three months ended September 30, 2017 and 2016, 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, 2017, we had cash and cash
equivalents of approximately US$1.23 million.
Our liquidity
needs include (i) net cash used in operating activities that consists of (a) cash required to fund the initial build-out, continued
expansion of our network and new services and (b) our working capital needs, which include deposits and advance payments to internet
resource and technical services providers, payment of our operating expenses and financing of our accounts receivable; and (ii)
net cash used in investing activities that consist of the payment for acquisitions to further expand our business and client base,
investment in software technologies to enhance the functionality of the management tools for providing our advertising, marketing
and data services and to secure the safety of our general network, and investment in other general office equipment. To date, we
have financed our liquidity need primarily through proceeds from operating activities we generated. Our existing cash is adequate
to fund operations for the next twelve months.
The following
table provides detailed information about our net cash flow for the periods indicated:
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
|
Amounts in thousands of US dollars
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,654
|
)
|
|
|
(1,853
|
)
|
Net cash provided by/(used in) investing activities
|
|
|
762
|
|
|
|
(2,904
|
)
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
456
|
|
Changes in cash and cash equivalents included in assets classified as held for sale
|
|
|
-
|
|
|
|
132
|
|
Effect of foreign currency exchange rate changes on cash
|
|
|
91
|
|
|
|
(88
|
)
|
Net decrease in cash and cash equivalents
|
|
$
|
(1,801
|
)
|
|
$
|
(4,257
|
)
|
Net cash used in operating activities
For the
nine months ended September 30, 2017, our net cash used in operating activities of approximately US$2.65 million were primarily
attributable to:
|
(1)
|
net loss excluding approximately US$1.07 million of non-cash expenses
of depreciation and amortizations; approximately US$0.48 million share-based compensation; approximately US$1.25 million provision
of allowance for doubtful accounts and approximately US$0.12 million deferred income tax expense, yielded the non-cash items excluded
net loss of approximately US$0.95 million;
|
|
(2)
|
the receipt of cash from operations from changes in operating
assets and liabilities such as:
|
|
-
|
advance from customers increased by approximately US$0.76 million,
primarily due to increase in advanced payments received from customers related to search engine marketing and data service;
|
|
-
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accounts payable, other payables and taxes payable in the aggregate
increased by approximately US$0.59 million; and
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|
-
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other current assets decreased by approximately US$0.03 million.
|
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(3)
|
offset by the use from operations from changes in operating assets
and liabilities such as:
|
|
-
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accounts receivable and due from related parties for advertising
services provided increased by approximately US$2.45 million, primarily due to increase in search engine marketing and data service
revenues during the period;
|
|
-
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prepayment to suppliers increased by approximately US$0.47 million;
primarily due to increase in prepayments to search engine marketing and data service resources providers during the period; and
|
|
-
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accruals decreased by approximately US$0.17 million.
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For the
nine months ended September 30, 2016, our net cash used in operating activities of approximately US$1.85 million were primarily
attributable to:
|
(1)
|
net loss excluding approximately US$1.17 million of non-cash expenses of depreciation and amortizations;
approximately US$1.72 million share-based compensation; approximately US$0.12 million of loss on disposal of fixed assets, approximately
US$0.01 million loss on deconsolidation of VIE and approximately US$0.16 million of net deferred income tax expense, yielded the
non-cash items excluded net loss of approximately US$0.85 million;
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|
(2)
|
the receipt of cash from operations from changes in operating assets and liabilities such as:
|
|
-
|
other receivable decreased by approximately US$1.42 million, primarily
due to subsequent collection of TV advertisement deposit and prepayment receivable related to a contract expired on December 31,
2014;
|
|
-
|
other current assets decreased by approximately US$0.02 million;
|
|
-
|
other payables increased by approximately US$0.40 million; and
|
|
-
|
taxes payable increased by approximately US$0.07 million.
|
|
(3)
|
offset by the use from operations from changes in operating assets and liabilities such as:
|
|
-
|
accounts receivable and due from related parties for advertising
services provided increased by approximately US$1.22 million;
|
|
-
|
deposit and prepayment to suppliers increased by approximately
US$1.17 million;
|
|
-
|
advance from customers decreased by approximately US$0.11 million;
|
|
-
|
accounts payable decreased by approximately US$0.13 million;
|
|
-
|
accruals decreased by approximately US$0.15 million; and
|
|
-
|
contingent liability decreased by US$0.13 million.
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Net cash provided by/(used
in) investing activities
For the
nine months ended September 30, 2017, our cash provided by investing activities included the following transactions: (1) we spent
approximately US$0.002 million for the purchase of general office equipment; (2) our term deposit of approximately US$3.12 million
matured in July 2017, which was recorded as a cash inflow from investing activities during the period; (3) we withdrew approximately
US$0.44 million cash investment from one of our cost method investee companies during the period, which was also recorded as a
cash inflow from investing activities during the period; and (4) we lent a short-term working capital loan of approximately US$2.8
million to an unrelated third party during the period. In the aggregate, these transactions resulted in a net cash inflow from
investing activities of approximately US$0.76 million for the nine months ended September 30, 2017.
For the
nine months ended September 30, 2016, our cash used in investing activities included the following transactions: (1) we spent approximately
US$0.15 million for the purchase of general office equipment and expenditures on leasehold improvements; (2) we paid approximately
US$1.98 million to purchase software technology related to Internet operation safety, information exchange security and data encryption
and management; (3) we lent two of our cost method investees an aggregate of approximately US$0.31 million of short-term working
capital loans during the period; (4) we made additional investments to our investee companies of approximately US$0.47 million
in aggregate during the period; (5) cash divested from deconsolidation of VIE of approximately US$0.02 million; and (6) proceeds
from disposal of investee companies of approximately US$0.03 million. In the aggregate, these transactions resulted in a net cash
outflow from investing activities of approximately US$2.90 million for the nine months ended September 30, 2016.
Net cash provided by
financing activities
For the
nine months ended September 30, 2017, we repaid approximately US$0.4 million short-term bank loan matured in July 2017, which was
recorded as a cash outflow from financing activities during the period, and we re-borrowed the loan in August 2017 for one-year
until August 2018, which was recorded as cash provided by financing activities during the period.
For the
nine months ended September 30, 2016, we borrowed approximately US$0.46 million short-term bank loan from one of the major commercial
banks in the PRC, which was recorded as cash provided by financing activities during the period.
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, 2017 and December 31, 2016, net assets restricted in the aggregate, which includes paid-in capital
and statutory reserve funds of our PRC subsidiary and VIEs that are included in our consolidated net assets, was approximately
US$8.1 million and US$7.8 million, respectively.
The current
PRC Enterprise Income Tax Law also imposed a 10% withholding income tax for dividends distributed by a foreign invested enterprise
to its immediate holding company outside China. A lower withholding tax rate will be applied if there is a tax treaty arrangement
between mainland China and the jurisdiction of the foreign holding company. Holding companies in Hong Kong, for example, will be
subject to a 5% rate.
The ability
of our PRC subsidiaries to make dividends and other payments to us may also be restricted by changes in applicable foreign exchange
and other laws and regulations.
Foreign
currency exchange regulation in China is primarily governed by the following rules:
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•
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Foreign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules;
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|
•
|
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, 2017 and December 31, 2016, there were approximately US$14.8 million and US$17.6 million retained earnings in the
aggregate, respectively, which were generated by our PRC subsidiary and VIEs in Renminbi included in our consolidated net assets,
aside from US$2.6 million and US$2.5 million of statutory reserve funds as of September 30, 2017 and December 31, 2016, respectively,
that may be affected by increased restrictions on currency exchanges in the future, and accordingly, may further limit our PRC
subsidiary’s or VIEs’ ability to make dividends or other payments in U.S. dollars to us, in addition to the approximately
US$8.1 million and US$7.8 million of restricted net assets as of September 30, 2017 and December 31, 2016, as discussed above.
C. OFF-BALANCE
SHEET ARRANGEMENTS
None.