*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).
3.
|
Summary of significant accounting policies
|
The unaudited 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 unaudited condensed
consolidated interim financial information as of September 30, 2018 and for the nine and three months ended September 30,
2018 and 2017 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the
“SEC”). Certain information and footnote disclosures, which are normally included in complete consolidated
financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and
regulations. The unaudited condensed consolidated interim financial information should be read in conjunction with the
financial statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2017, previously filed with the Securities and Exchange Commission (the “2017 Form 10-K”) on
April 16, 2018.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
In the opinion of management, all
adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s condensed
consolidated financial position as of September 30, 2018, its condensed consolidated results of operations for the nine and three
months ended September 30, 2018 and 2017, and its condensed consolidated cash flows for the nine months ended September 30, 2018
and 2017, 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.
The Company incurred operating losses and had negative operating cash flows and may continue to incur operating
losses and generate negative cash flows as the Company implements its future business plan. The Company’s net loss attributable
to stockholders for the nine and three months ended September 30, 2018 was approximately US$12.9 million and US$3.0 million, respectively,
compared with approximately US$4.0 million and US$2.1 million for the nine and three months ended September 30, 2017, respectively.
As of September 30, 2018, the Company has cash and cash equivalents of approximately US$5.9 million and net cash used in operating
activities during the nine months ended September 30, 2018 was approximately US$3.7 million.
The Company does not currently have sufficient cash
or commitments for financing to sustain its operation for the twelve months from the issuance date of these financial statements.
The Company plans to optimize its internet resources cost investment strategy to improve the gross profit margin of its core business
and to further strengthen the accounts receivables collection management and negotiate with vendors for more favorable payment
terms, all of which will help to substantially increase the cashflows from operations. If the Company fails to achieve these goals,
the Company may need additional financing to execute its business plan. If additional financing is required, the Company cannot
predict whether this additional financing will be in the form of equity, debt, or another form, and the Company may not be able
to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In the event that financing sources
are not available, or that the Company is unsuccessful in increasing its gross profit margin and operating profits, the Company
may be unable to implement its current plans for expansion, repay debt obligations or respond to competitive pressures, any of
which would have a material adverse effect on the Company’s business, prospects, financial condition and results of operations.
These factors raise substantial doubt about the Company's ability to continue as a going concern within one year after the date
that the financial statements are issued.
The unaudited condensed consolidated financial statements
as of September 30, 2018 have been prepared under the assumption that the Company will continue as a going concern, which contemplates,
among other things, the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable
period of time. The Company's ability to continue as a going concern is dependent upon its uncertain ability to increase gross
profit margin and operating profits from its core business and/or obtain additional equity and/or debt financing. The accompanying
financial statements as of September 30, 2018 do not include any adjustments that might result from the outcome of these uncertainties.
If the Company is unable to continue as a going concern, it may have to liquidate its assets and may receive less than the value
at which those assets are carried on the financial statements.
|
c)
|
Principles of consolidation
|
The condensed consolidated interim financial statements
include the financial statements of all the subsidiaries and VIEs of the Company. All transactions and balances between the Company
and its subsidiaries and VIEs have been eliminated upon consolidation.
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the related disclosure of contingent assets and liabilities at the date of these condensed consolidated financial
statements, and the reported amounts of revenue and expenses during the reporting period. The Company continually evaluates these
estimates and assumptions based on the most recently available information, historical experience and various other assumptions
that the Company believes to be reasonable under the circumstances. Since the use of estimates is an integral component of the
financial reporting process, actual results could differ from those estimates.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
e)
|
Foreign currency translation
|
The exchange rates used to translate
amounts in RMB into US$ for the purposes of preparing the condensed consolidated financial statements are as follows:
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
Balance sheet items, except for equity accounts
|
|
|
6.8792
|
|
|
|
6.5342
|
|
|
|
Nine
Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Items
in the statements of operations and comprehensive loss, and statements of cash flows
|
|
|
6.5196
|
|
|
|
6.7983
|
|
|
|
Three Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Items in the statements of operations and comprehensive loss, and statements of cash flows
|
|
|
6.7956
|
|
|
|
6.6676
|
|
No representation
is made that the RMB amounts could have been, or could be converted into US$ at the above rates.
On January 1, 2018, the Company adopted
ASC Topic 606, “Revenue from Contracts with Customers”, applying the modified retrospective method. The adoption didn’t
result in a material adjustment to the accumulated deficit as of January 1, 2018.
In accordance with ASC Topic 606,
revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount
that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. In determining when
and how much revenue is recognized from contracts with customers, the Company performs the following five-step analysis: (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.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
The Company’s contracts with
customers do not include multiple performance obligations, significant financing component, variable consideration, nor any clause
concerning with returns, refunds or other similar obligations.
The Company does not believe that
significant management judgements are involved in revenue recognition, but the amount and timing of the Company’s revenues
could be different for any period if management made different judgments or utilized different estimates. Generally, the Company
recognizes revenue under ASC Topic 606 for each type of its performance obligation either over time (generally, the transfer of
a service) or at a point in time (generally, the transfer of a good (information)) as follows:
Online advertising placement
service/TV advertising service
For online advertising placement service
contracts and TV advertising service contracts that are established based on a fixed price scheme with the related advertisement
placements obligation, the Company provides advertisement placements in specified locations on the Company’s advertising
portals for agreed periods and/or place the advertisements onto the Company’s purchased advertisement time during specific
TV programs for agreed periods. Revenue is recognized ratably over the period the advertising is provided and, as such, the Company
considers the services to have been delivered (“over time”).
Sales of effective sales lead information
For advertising contracts related
to purchase of effective sales lead information, revenue is recognized based on a fixed price per sales lead and the quantity of
effective sales lead, when information is delivered and accepted by customers (“point in time”).
Search engine marketing and data service
Revenue from search engine marketing
and data services is recognized on a monthly basis based on the direct cost consumed through search engines for providing such
services with a premium (“over time”). The Company recognizes the revenue on a gross basis, because the Company determines
that it is a principle in the transaction who control the goods or services before they are transferred to the customers.
All of the Company’s revenues
are generated from the PRC. The following tables present the Company’s revenues disaggregated by products and services and
timing of revenue recognition:
|
|
Nine Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Internet advertising and data service
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
--online advertising placement
|
|
|
6,897
|
|
|
|
5,920
|
|
|
|
2,346
|
|
|
|
1,987
|
|
--sales of effective sales lead information
|
|
|
444
|
|
|
|
1,058
|
|
|
|
161
|
|
|
|
245
|
|
Search engine marketing and data service
|
|
|
40,380
|
|
|
|
24,253
|
|
|
|
14,532
|
|
|
|
11,266
|
|
TV advertising service
|
|
|
91
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Others
|
|
|
10
|
|
|
|
56
|
|
|
|
3
|
|
|
|
25
|
|
Total revenues
|
|
|
47,822
|
|
|
|
31,287
|
|
|
|
17,042
|
|
|
|
13,523
|
|
|
|
Nine Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Revenue recognized over time
|
|
|
47,378
|
|
|
|
30,229
|
|
|
|
16,881
|
|
|
|
13,278
|
|
Revenue recognized at a point in time
|
|
|
444
|
|
|
|
1,058
|
|
|
|
161
|
|
|
|
245
|
|
Total revenues
|
|
|
47,822
|
|
|
|
31,287
|
|
|
|
17,042
|
|
|
|
13,523
|
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Contract costs
For the nine and three months ended
September 30, 2018, the Company did not have any significant incremental costs of obtaining contracts with customers incurred and/or
costs incurred in fulfilling contracts with customers within the scope of ASC Topic 606, that shall be recognized as an asset and
amortized to expenses in a pattern that matches the timing of the revenue recognition of the related contract.
Contract balances
The Company evaluates overall economic
conditions, its working capital status and customer specific credit and negotiates the payment terms of a contract with individual
customer on a case by case basis in its normal course of business.
Advances received from customers related
to unsatisfied performance obligations are recoded as contract liabilities (advance from customers), which will be realized as
revenues upon the satisfaction of performance obligations through the transfer of related promised goods and services to customers.
For contracts without a full or any
advance payments required, the Company bills the customers any unpaid contract price immediately upon satisfaction of the related
performance obligations when revenue is recognized, and the Company normally receives payment from customers within 90 days after
a bill is issued.
The Company does not have any contract
assets (unbilled receivables) since revenue is recognized when control of the promised goods or services is transferred and the
payment from customers is not contingent on a future event.
The Company’s contract liabilities consist of advance from customers related to unsatisfied performance
obligations in relation to internet adverting service, search engine marketing service, as well as TV advertising service. All
contract liabilities are expected to be recognized as revenue within one year. The table below summarized the movement of the Company’s
contract liabilities for the
nine months ended September
30, 2018:
|
|
Advance from
customers
|
|
|
US$(’000)
|
|
|
|
Balance as of January 1, 2018
|
|
|
3,559
|
|
Exchange translation adjustment
|
|
|
(178
|
)
|
Revenue recognized from beginning contract liability balance
|
|
|
(3,281
|
)
|
Advances received from customers related to unsatisfied performance obligations
|
|
|
1,932
|
|
Balance as of September 30, 2018 (Unaudited)
|
|
|
2,032
|
|
For the nine and three months ended
September 30, 2018, there is no revenue recognized from performance obligations that were satisfied in prior periods.
Transaction price allocated to remaining performance
obligation
The Company has elected to apply the practical expedient
in paragraph ASC Topic 606-10-50-14 and did not disclose the information related to transaction price allocated to the performance
obligations that are unsatisfied or partially unsatisfied as of September 30, 2018, because all performance obligations of the
Company’s contracts with customers have an original expected duration of one year or less.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
g)
|
Fair value measurement
|
Liabilities measured at fair value on a recurring basis
by level within the fair value hierarchy as of September 30, 2018 is as follows:
|
|
|
|
Fair value measurement at reporting date using
|
|
|
As of
September 30, 2018
|
|
Quoted Prices
in Active Markets
for Identical
Assets/Liabilities
(Level 1)
|
|
Significant
Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (Note 20)
|
|
|
826
|
|
|
|
-
|
|
|
|
-
|
|
|
|
826
|
|
Assets measured at fair value on a nonrecurring basis
by level within the fair value hierarchy as of September 30, 2018 is as follows:
|
|
|
|
Fair value measurement at reporting date using
|
|
|
As of
September 30, 2018
|
|
Quoted Prices
in Active Markets
for Identical
Assets/Liabilities
(Level 1)
|
|
Significant
Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets (Note 10)
|
|
|
50
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50
|
|
The Company performed impairment test on its intangible
assets and goodwill as of September 30, 2018 and June 30, 2018 and recognized in the aggregate of approximately US$8.7 million
and US$1.5 million impairment loss of intangible assets and goodwill for the nine and three months ended September 30, 2018, respectively.
The Company determined the fair value of intangible asset using Multi-period Excess Earning Method and the fair value of goodwill
using income approach. The following table summarizes the quantitative information about the Company’s Level 3 significant
unobservable internally-developed inputs used in determining the fair value of its intangible assets and goodwill, respectively:
|
|
Valuation technique(s)
|
|
Unobservable inputs
|
|
Value of inputs
|
|
|
|
|
|
|
|
|
|
|
|
Remaining useful life (years)
|
|
|
7.75
|
|
Intangible assets
|
|
Multi-period Excess Earning
|
|
Discount rate
|
|
|
24%
|
|
|
|
|
|
Contributory asset charge
|
|
8.9%
|
-
|
20%
|
|
|
|
|
|
|
|
|
|
|
|
Base projection period (years)
|
|
|
5
|
|
Goodwill
|
|
Discounted Cash Flow
|
|
Discount rate
|
|
|
20%
|
|
|
|
|
|
Terminal growth rate
|
|
|
3.5%
|
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
h)
|
Recently issued accounting standards
|
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The amendments in this
ASU requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in
the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing
its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to
make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition,
lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified
retrospective approach. For public business entities, the amendments in this ASU are effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in this ASU is permitted
for all entities. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842) – Targeted Improvements ”,
which provides entities with an additional (and optional) transition method to adopt the new leases standard and provide lessors
with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component
and, instead, to account for those components as a single component if the nonlease components otherwise would be accounted for
under the new revenue guidance (Topic 606). The Company will adopt the amendments in these ASUs on January 1, 2019 and is currently
evaluating the impact on its consolidated financial position and results of operations upon adopting these amendments. The Company
expects to complete its assessment by the end of 2018.
In February 2018, the FASB issued
ASU 2018-02: “Income Statement—Reporting Comprehensive Income (Topic 220)-Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income”. The amendments in this ASU allow a reclassification from accumulated other comprehensive
income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Act”). Consequently,
the amendments eliminate the stranded tax effects resulting from the Act and will improve the usefulness of information reported
to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of
the Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing
operations is not affected. The amendments in this ASU also require certain disclosures about stranded tax effects. The amendments
in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early
adoption is permitted. The Company is currently evaluating the impact on its consolidated financial position and results of operations
upon adopting these amendments.
In June 2018, the FASB issued ASU
2018-07: “Compensation—Stock Compensation (Topic 718)-Improvements to Nonemployee Share-Based Payment Accounting”.
The Board is issuing this ASU as part of its Simplification Initiative. The amendments in this ASU expand the scope of Topic 718
to include share based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements
of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost
(that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period).
The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services
to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that
Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted
in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts
with Customers. The amendments in this ASU are effective for public business entities for fiscal years beginning after December
15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years
beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is
permitted, but no earlier than an entity’s adoption date of Topic 606. An entity should only remeasure liability-classified
awards that have not been settled by the date of adoption and equity-classified awards for which a measurement date has not been
established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Upon
transition, the entity is required to measure these nonemployee awards at fair value as of the adoption date. The entity must not
remeasure assets that are completed. Disclosures required at transition include the nature of and reason for the change in accounting
principle and, if applicable, quantitative information about the cumulative effect of the change on retained earnings or other
components of equity. The Company is currently evaluating the impact on its consolidated financial position and results of operations
upon adopting these amendments.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
4.
|
Accounts receivable, net
|
|
|
September 30,
2018
|
|
December 31,
2017
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
10,895
|
|
|
|
10,008
|
|
Allowance for doubtful accounts
|
|
|
(3,376
|
)
|
|
|
(2,793
|
)
|
Accounts receivable, net
|
|
|
7,519
|
|
|
|
7,215
|
|
All of the accounts receivable are non-interest bearing.
Based on the assessment of the collectability of the accounts receivable as of September 30, 2018 and December 31, 2017, the Company
provided approximately US$3,376,000 and US$2,793,000 allowance for doubtful accounts, respectively, which were primarily related
to the accounts receivable of the Company’s internet advertising and TV advertising business segment with an aging over six
months. The Company evaluates its accounts receivable 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 months ended September 30,
2018, approximately US$0.76 million allowance for doubtful accounts was provided. For the three months ended September 30, 2018,
approximately US$0.04 million allowance for doubtful accounts was reversed due to subsequent collection. For the nine and three
months ended September 30, 2017, approximately US$1.3 million allowance for doubtful accounts was provided.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
5.
|
Other receivables, net
|
Other receivables as of September 30, 2018 primarily
represented a US$0.20 million fund advanced to one of the Company’s management during the third fiscal quarter of 2018 for
the purpose of setting up and providing finance to a proposed business entity in Taiwan. The Company intends to set up and expand
its business in Taiwan through establishing the VIE arrangements with this Taiwan entity. This Taiwan entity was incorporated
in September 2017 and is wholly-owned by the management referred above, as of September 30, 2018, this entity has no fund and
business activities. As of September 30, 2018, the Company is still discussing with its Taiwan legal counsels, the details of
the VIE agreements to be entered between the Company and the Taiwan entity.
Other receivables as of December 31, 2017 primarily represented
the remaining balance of a short-term working capital loan to an unrelated entity, which was fully repaid during the first fiscal
quarter of 2018.
As of September 30, 2018 and December 31, 2017, other
receivables also included approximately RMB10.8 million (approximately US$1.6 million) and RMB5.8 million (US$0.9 million) overdue
contractual deposits, respectively, 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, 2018 and December
31, 2017, the Company had provided full allowance against these doubtful accounts.
For the nine and three months ended September 30, 2018,
approximately US$0.77 million allowance for doubtful accounts was provided to against the Company’s other receivables. For
the nine months ended September 30, 2017, approximately US$0.03 million allowance for doubtful accounts related to the Company’s
other receivables was reversed due to subsequent collection. For the three months ended September 30, 2017, no allowance for doubtful
accounts related to the Company’s other receivables was provided or reversed.
|
6.
|
Prepayments and deposit to suppliers
|
|
|
September 30,
2018
|
|
December 31,
2017
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Deposits to internet and TV resources providers
|
|
|
792
|
|
|
|
1,870
|
|
Prepayments to internet and TV resources providers
|
|
|
1,214
|
|
|
|
1,331
|
|
Deposits to other services providers
|
|
|
-
|
|
|
|
765
|
|
Other deposits and prepayments
|
|
|
177
|
|
|
|
107
|
|
|
|
|
2,183
|
|
|
|
4,073
|
|
7.
|
Due from related parties, net
|
|
|
September 30,
2018
|
|
December 31,
2017
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Chuangshi Meiwei (Beijing) International Investment Management Co., Ltd.
|
|
|
145
|
|
|
|
156
|
|
Guohua Shiji (Beijing) Communication Co., Ltd.
|
|
|
201
|
|
|
|
184
|
|
Beijing Saimeiwei Food Equipment Technology Co., Ltd.
|
|
|
-
|
|
|
|
33
|
|
ChinaNet Chuang Tou (Shenzhen) Co., Ltd.
|
|
|
-
|
|
|
|
14
|
|
|
|
|
346
|
|
|
|
387
|
|
Allowance for doubtful accounts
|
|
|
(346
|
)
|
|
|
(373
|
)
|
Due from related parties, net
|
|
|
-
|
|
|
|
14
|
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
The above related parties of the Company represented
the Company’s direct or indirect unconsolidated investee companies. As of September 30, 2018 and December 31, 2017, due from
related parties primarily included a total amount of short-term working capital loans of RMB2.38 million (approximately US$0.35
million) and RMB2.2 million (approximately US$0.34 million) to Chuangshi Meiwei and Guohua Shiji, respectively. The working capital
loans are advanced 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.
As of December 31, 2017, based on the assessment of the collectability of these related party balances, the
Company provided full allowance for doubtful accounts against its service fee receivables due from Beijing Saimeiwei, Chuangshi
Meiwei and Guohua Shiji and its short-term working capital loans advanced to Guohua Shiji and Chuangshi Meiwei.
For the nine months ended September 30, 2018, the Company reversed approximately US$0.01 million allowance
for doubtful accounts against the Company’s balances due from related parties, because of subsequent collection of service
fee receivables
.
|
|
September 30,
2018
|
|
December 31,
2017
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
Cost method investments:
|
|
|
|
|
|
|
|
|
Investment in cost method investees
|
|
|
632
|
|
|
|
1,125
|
|
Impairment on cost method investments
|
|
|
(632
|
)
|
|
|
(207
|
)
|
Total cost method investments
|
|
|
-
|
|
|
|
918
|
|
Cost method investments
As of September 30, 2018 and December 31, 2017, the Company
beneficially owned a 19% equity interest in both ChinaNet Chuang Tou and Guohua Shiji, a 10% equity interest in both Chuangshi
Meiwei and Beijing Saturday, and a 15% equity interest in ChinaNet Korea. The Company accounts for its investments in these companies
under cost method of accounting. The Company adopted ASU 2016-01 and chose to measure its cost method investments which do not
have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes
in orderly transactions for the identical or a similar investment of the Company.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
As of December 31, 2017, the Company had reduced the
carrying value of its investments in ChinaNet Korea, Chuangshi Meiwei, Guohua Shiji and Beijing Saturday to zero, due to the business
activities of these companies had become dormant. The following table summarizes the movement of the Company’s investment
in ChinaNet Chuang Tou for the nine months ended September 30, 2018:
|
|
ChinaNet
Chuang Tou
|
|
|
US$(’000)
|
|
|
|
Balance as of January 1, 2018
|
|
|
918
|
|
Impairment on cost method investments
|
|
|
(436
|
)
|
Cash investment returned during the year
|
|
|
(436
|
)
|
Exchange translation adjustment
|
|
|
(46
|
)
|
Balance as of September 30, 2018 (Unaudited)
|
|
|
-
|
|
The shareholders of ChinaNet Chuang Tou have decided
to terminate the operation of this entity within 2018. The Company received a RMB3.0 million (approximately US$0.46 million) cash
returned from ChinaNet Chuang Tou in early August 2018 and recognized an approximately US$0.46 million of other-than temporary
impairment loss for the nine months ended September 30, 2018, representing the amount of investment expected not recoverable. ChinaNet
Chuang Tou is currently dormant.
|
9.
|
Property and equipment, net
|
|
|
September 30,
2018
|
|
December 31,
2017
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Leasehold improvement
|
|
|
320
|
|
|
|
337
|
|
Vehicles
|
|
|
769
|
|
|
|
810
|
|
Office equipment
|
|
|
1,350
|
|
|
|
1,410
|
|
Electronic devices
|
|
|
950
|
|
|
|
1,000
|
|
Property and equipment, cost
|
|
|
3,389
|
|
|
|
3,557
|
|
Less: accumulated depreciation
|
|
|
(3,213
|
)
|
|
|
(3,258
|
)
|
Property and equipment, net
|
|
|
176
|
|
|
|
299
|
|
Depreciation expenses
in the aggregate for the nine months ended September 30, 2018 and 2017 were approximately US$125,000 and US$149,000, respectively.
Depreciation expenses in the aggregate for the three months ended September 30, 2018 and 2017 were approximately US$34,000 and
US$49,000, respectively.
10.
|
Intangible assets, net
|
|
|
As of September 30, 2018 (Unaudited)
|
Items
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Impairment
|
|
Net
Carrying
Value
|
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domain name
|
|
|
1,404
|
|
|
|
-
|
|
|
|
(1,404
|
)
|
|
|
-
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationship
|
|
|
1,936
|
|
|
|
(1,936
|
)
|
|
|
-
|
|
|
|
-
|
|
Non-compete agreements
|
|
|
1,066
|
|
|
|
(579
|
)
|
|
|
(487
|
)
|
|
|
-
|
|
Software technologies
|
|
|
298
|
|
|
|
(298
|
)
|
|
|
-
|
|
|
|
-
|
|
Cloud compute software technology
|
|
|
1,349
|
|
|
|
(890
|
)
|
|
|
(414
|
)
|
|
|
45
|
|
Intelligent marketing data service platform
|
|
|
4,694
|
|
|
|
(1,902
|
)
|
|
|
(2,792
|
)
|
|
|
-
|
|
Internet safety, information exchange security and data encryption software
|
|
|
1,890
|
|
|
|
(425
|
)
|
|
|
(1,465
|
)
|
|
|
-
|
|
Cloud video management system
|
|
|
1,381
|
|
|
|
(343
|
)
|
|
|
(1,038
|
)
|
|
|
-
|
|
Other computer software
|
|
|
114
|
|
|
|
(109
|
)
|
|
|
-
|
|
|
|
5
|
|
Total
|
|
$
|
14,132
|
|
|
$
|
(6,482
|
)
|
|
$
|
(7,600
|
)
|
|
$
|
50
|
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
As of December 31, 2017
|
Items
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Impairment
|
|
Net
Carrying
Value
|
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domain name
|
|
|
1,478
|
|
|
|
-
|
|
|
|
(1,478
|
)
|
|
|
-
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationship
|
|
|
2,038
|
|
|
|
(2,038
|
)
|
|
|
-
|
|
|
|
-
|
|
Non-compete agreements
|
|
|
1,122
|
|
|
|
(610
|
)
|
|
|
(512
|
)
|
|
|
-
|
|
Software technologies
|
|
|
314
|
|
|
|
(314
|
)
|
|
|
-
|
|
|
|
-
|
|
Cloud compute software technology
|
|
|
1,420
|
|
|
|
(923
|
)
|
|
|
(435
|
)
|
|
|
62
|
|
Intelligent marketing data service platform
|
|
|
4,942
|
|
|
|
(1,853
|
)
|
|
|
(1,600
|
)
|
|
|
1,489
|
|
Internet safety, information exchange security and data encryption software
|
|
|
1,990
|
|
|
|
(299
|
)
|
|
|
-
|
|
|
|
1,691
|
|
Cloud video management system
|
|
|
1,454
|
|
|
|
(291
|
)
|
|
|
(602
|
)
|
|
|
561
|
|
Other computer software
|
|
|
120
|
|
|
|
(115
|
)
|
|
|
-
|
|
|
|
5
|
|
Total
|
|
$
|
14,878
|
|
|
$
|
(6,443
|
)
|
|
$
|
(4,627
|
)
|
|
$
|
3,808
|
|
Amortization expenses
in aggregate for the nine months ended September 30, 2018 and 2017 were approximately US$383,000 and US$917,000, respectively.
Amortization expenses in aggregate for the three months ended September 30, 2018 and 2017 were approximately US$47,000 and US$310,000,
respectively.
Due to shifting business development strategy focus
to blockchain related technology and applications, for the nine months ended September 30, 2018, the Company provided impairment
loss of approximately US$1.84 million against the remaining carrying value of its intangible assets of intelligent marketing data
service platform and cloud video management system related to providing management tools services for data collection and analysis,
as these assets are not expected to be able to generate economic benefit for the Company in future periods. The Company also recognized
an approximately US$1.5 million impairment loss related to its Internet safety, information exchange security and data
encryption software for the nine and three months ended September 30, 2018, as its carrying value was not expected recoverable
and exceeded its fair value (See Note 3 (g) for significant unobservable internally-developed inputs used in the fair value measurement).
Based
on the
adjusted carrying value of the finite-lived intangible assets after the deduction of the impairment losses, which has a weighted
average remaining useful life of 2.73 years as of September 30, 2018, and assuming no further subsequent impairment of the underlying
intangible assets, the estimated future amortization expenses is approximately US$5,000 for the three months ending December 31,
2018, approximately US$18,000 each year for the year ending December 31, 2019 and 2020, and approximately US$9,000 for the year
ending December 31, 2021.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
11.
|
Blockchain software applications development costs and
prepayment for software applications development
|
In February 2018, the Company entered into a contract
with an unrelated entity to develop certain blockchain technology based software applications for internal use. Total amount of
the contract was US$4.5 million. As of September 30, 2018, the Company had capitalized approximately US$3.38 million software development
costs under ASC 350-40 “Intangibles-Goodwill and Other-Internal-Use Software”. The complete beta version of the applications
will be ready for trial test by the end of December 2018, and the development project is expected to be completed before June 2019.
In March 2018, the Company entered into a contract with
another unrelated entity to develop a social network (WeChat) based marketing campaign application for internal use. Total amount
of the contract was RMB3.0 million (approximately US$0.44 million). As of September 30, 2018, in accordance with the payment schedule
set forth in the contract, the Company prepaid the counter party RMB2.4 million (approximately US$0.35 million) upon entering
the contract. The Company is currently trial testing the preliminary version of this application, and the development project
is expected to be completed by December 2018.
According to the development contracts the Company signed
with the counter parties, the Company will not bear any development risk related loss unless the counter party has no fault during
the development and the causes for failure is considered reasonable as consented by both parties. In the latter case, the related
development loss will be shared by both parties based on further negotiation. As of the date hereof, the Company does not aware
of any technical risks or other factors that may lead to failure or partial failure of these development projects.
|
|
Amount
|
|
|
US$(’000)
|
|
|
|
Balance as of January 1, 2018
|
|
|
5,277
|
|
Impairment on goodwill
|
|
|
(5,012
|
)
|
Exchange translation adjustment
|
|
|
(265
|
)
|
Balance as of September 30, 2018 (unaudited)
|
|
|
-
|
|
The Company’s goodwill was attributable to its
internet advertising and data service reporting unit. The Company performed goodwill impairment test as of June 30, 2018 and determined
the fair value of the reporting unit using income approach by a discounted cash flow analysis (See Note 3 (g) for significant unobservable
internally-developed inputs used in the fair value measurement). In accordance with ASU 2017-04, which the Company has adopted
on January 1, 2018, by comparing the fair value of the reporting unit with its carrying amount, the Company recorded approximately
US$5.29 million impairment loss on its goodwill for the nine months ended September 30, 2018.
13.
|
Short-term bank loan and credit facility
|
As of December 31, 2017, the
Company had a revolving credit facility of RMB5.0 million (approximately US$0.73 million) for short-term working capital loans
granted by a major financial institution in China, which was originally available to the Company for one year until August 15,
2018 and was extended to January 12, 2019. Under the revolving credit facility, the Company borrowed RMB3.0 million (approximately
US$0.44 million), which will mature on January 12, 2019 and RMB2.0 million (approximately US$0.29 million), which was repaid on
October 19, 2018.
On September 30, 2018, the Company
borrowed another RMB3.0 million (approximately US$0.44 million) short-term working capital loan from the same financial institution,
of which RMB1.5 million (approximately US$0.22 million) will mature on July 29, 2019 and the remaining RMB1.5 million (approximately
US$0.22 million) will mature on September 29, 2019.
Collateral for the above discussed
revolving credit facility and short-term bank loans was an unlimited guarantee from Mr. Handong Cheng (Chairman and Chief Executive
Officer of the Company) and his spouse.
The interest rate of these short-term bank loans was
5.655% per annum as of September 30, 2018 and December 31, 2017, which is 30% over the benchmark rate of the People’s Bank
of China (the “PBOC”).
14.
|
Accrued payroll and other accruals
|
|
|
September 30,
2018
|
|
December 31,
2017
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Accrued payroll and staff welfare
|
|
|
250
|
|
|
|
203
|
|
Accrued operating expenses
|
|
|
146
|
|
|
|
356
|
|
|
|
|
396
|
|
|
|
559
|
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
15.
|
Payable for acquisition of noncontrolling interest
|
In March 2018, the Company entered into an agreement
with the noncontrolling interest holder of Chuang Fu Tian Xia to purchase the remaining 49% equity interest of Chuang Fu Tian Xia
for a total consideration of RMB15 million (approximately US$2.2 million), of which 50% of the total consideration need to be paid
in cash and the remaining 50% of the total consideration would be paid in form of the Company’s common stock.
In May 2018, the purchase of the 49% equity interest
in Chuang Fu Tian Xia was registered with the local branch of the State Administration of Industry and Commerce, which represented
the official transfer of the 49% equity interest from the noncontrolling interest to the Company. The Company paid the cash part
of the consideration, i.e. RMB7.5 million (approximately US$1.1 million), to the noncontrolling interest holder of Chuang Fu Tian
Xia before June 30, 2018.
In early July 2018, the Company and the noncontrolling
interest holder of Chuang Fu Tian Xia entered into an amendment agreement related to this transaction, pursuant to which, the two
parties agreed to change the total consideration from RMB15 million to RMB12.5 million, and agreed to amend the form of settlement
of the unpaid consideration of RMB5.0 million (approximately US$0.73 million) from the Company’s Common Stock to cash. The
Company paid RMB3.5 million (approximately US$0.51 million) on July 31, 2018 and the remaining RMB1.5 million (approximately US$0.22
million) on October 24, 2018.
The Company accounted for this transaction as an equity transaction with no gain or loss to be recognized
in its consolidated statement of operations.
16.
|
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. As of December 31, 2017, the Company had received the 10% guarantee
payment and 15% prepayment in an aggregate amount equal to US$819,000 from Jinrun Fangzhou, and the 10% guarantee payment in an
amount equal to US$119,000 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 these two investors, respectively. The Company did not make
any repayment to these investors afterwards during 2016 and 2017. As agreed by the parties, beginning on January 1, 2017, the outstanding
balances bear a 12% annualized interest rate and shall be refunded to the investors no later than December 31, 2017.
As of September 30, 2018, the Company had fully repaid
Jinrun Fangzhou and Dongsys Innovation their principal and the related interest through December 31, 2017. Both Dongsys Innovation
and Jinrun Fangzhou agreed not to charge additional interest in fiscal 2018.
17.
|
Payable for purchasing of software technology
|
As of December 31, 2017, payable for purchasing of software
technology presented 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 paid the
outstanding amount to the counterparty in March 2018.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
The entities within the Company file separate tax returns
in the respective tax jurisdictions in which they operate.
i). a. On December 22, 2017, the U.S. enacted the Tax
Cuts and Jobs Act (“TCJA” or the “Act”) (which is commonly referred to as “U.S. tax reform”).
The Act significantly changes U.S. corporate income tax laws including but not limited to reducing the U.S. corporate income tax
rate from 35% to 21% beginning in 2018, imposing a one-time transition tax on previously deferred foreign earnings and imposing
a new tax on global intangible low-taxed income (“GILTI”) effective for tax years of non-U.S. corporations beginning
after December 31, 2017.
i). b. 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 ended September 30,
2018, or any prior periods. Before enactment of the Act, the Company did 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. Please see additional discussion regarding the assessment of the income tax effect of the Act in item i). d. below.
i). c. On December 22, 2017, the Securities and Exchange
Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the
tax effects of the Act. SAB 118 provides a measurement period that should not extend beyond one year from the Act enactment date
for companies to complete the accounting under ASC 740 “Income Taxes”. In accordance with SAB 118, a company must reflect
the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s
accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record
a provisional estimate in the financial statements.
i). d. The Company has completed its assessment of the
one-time transition tax on its previously deferred foreign earnings during the third fiscal quarter of 2018, based on which, the
Company concluded that no incremental income tax expense of the one-time mandatory tax on its previously deferred foreign earnings
would be charged for the year ended December 31, 2017, as the Company had sufficient U.S. net operating losses carryforwards to
offset the resulting incremental taxable income related to the deferred foreign earnings, which assessment was consistent with
that disclosed in the Company’s 2017 Form 10-K. Based on the final assessment, the Company recognized an adjustment of approximately
US$0.46 million for the nine and three months ended September 30, 2018, to revise the provisional estimated amount of net operating
loss utilized through toll charge income it recognized for the year ended December 31, 2017, from approximately US$1.40 million
to approximately US$1.86 million.
i). e. Effective January 1, 2018, the Company is subject
to the new GILTI tax rules. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets
of specified foreign corporations (“SFCs”), subject to the possible use of foreign tax credits and a deduction equal
to 50 percent to offset the income tax liability, subject to some limitations. Under U.S. GAAP, the Company is allowed to
make an accounting policy choice of either treating taxes due on future U.S. inclusions in taxable income related to GILTI as a
current period expense when incurred (the “period cost method”) or factoring such amounts into the Company’s
measurement of its deferred taxes (the “deferred method”). According to the Company’s preliminary assessment
based on its SFCs’ quarterly financial results, there was no taxable income related to GILTI for the nine and three months
ended September 30, 2018. However, the Company has not elected an accounting policy for the treatment of the taxes related to GILTI,
which will be finalized no later than the fourth quarter of 2018.
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, 2018 or any prior periods. Additionally,
upon payments of dividends by China Net HK to its shareholders, no Hong Kong withholding tax will be imposed.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
iv). The Company’s PRC operating subsidiaries
and VIEs, being incorporated in the PRC, are governed by the income tax law of the PRC and is subject to PRC enterprise income
tax (“EIT”). The EIT rate of PRC is 25%, which applies to both domestic and foreign invested enterprises.
|
l
|
In 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 preferential income tax rate of 15% until November 2018. Therefore, for the nine and three months ended
September 30, 2018 and 2017, the applicable income tax rate of Business Opportunity Online was 15%. The Company believes that Business
Opportunity Online is qualified for being re-approved as a High and New technology Enterprise and has submitted the application
to the related PRC governmental authorities in October 2018 and the result is expected to be announced by the end of 2018.
|
|
l
|
The applicable income tax rate for other PRC operating entities of the Company was 25% for the
nine and three months ended September 30, 2018 and 2017.
|
|
l
|
The current EIT law also imposed a 10% withholding income tax for dividends distributed by a foreign
invested enterprise to its immediate holding company outside China. A lower withholding tax rate will be applied if there is a
tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Holding companies in Hong Kong,
for example, will be subject to a 5% withholding tax rate.
|
For the nine and three months ended September 30, 2018
and 2017, 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, 2018 and 2017, 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% to 14% of the VAT, depending on which tax jurisdiction the Company’s PRC operating
subsidiaries and VIE operate in.
As of September 30, 2018 and December 31, 2017, taxes
payable consists of:
|
|
September 30,
2018
|
|
December 31,
2017
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Turnover tax and surcharge payable
|
|
|
1,177
|
|
|
|
1,295
|
|
Enterprise income tax payable
|
|
|
1,778
|
|
|
|
1,873
|
|
Total taxes payable
|
|
|
2,955
|
|
|
|
3,168
|
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
For the nine and three months ended September 30, 2018
and 2017, the Company’s income tax expense consisted of:
|
|
Nine Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Current-PRC
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Deferred-PRC
|
|
|
(805
|
)
|
|
|
(115
|
)
|
|
|
(116
|
)
|
|
|
(2
|
)
|
Income tax expense
|
|
|
(805
|
)
|
|
|
(115
|
)
|
|
|
(116
|
)
|
|
|
(2
|
)
|
The Company’s deferred tax assets at September
30, 2018 and December 31, 2017 were as follows:
|
|
September 30,
2018
|
|
December 31,
2017
|
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Tax effect of net operating losses carried forward
|
|
|
9,306
|
|
|
|
7,657
|
|
Bad debts provision
|
|
|
1,182
|
|
|
|
879
|
|
Valuation allowance
|
|
|
(9,961
|
)
|
|
|
(7,178
|
)
|
Total deferred tax assets, net
|
|
|
527
|
|
|
|
1,358
|
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
The U.S. holding company has incurred aggregate net operating
losses (“NOLs”) of approximately US$18.9 million and US$13.3 million at September 30, 2018 and December 31, 2017, respectively.
The NOLs carryforwards as of December 31, 2017 gradually expire over time, the last of which expires in 2037. NOLs incurred after
December 31, 2017 will no longer be available to carry back, but will carry forward indefinitely. Furthermore, the Act imposes
an annual limit of 80% on the amount of taxable income that can be offset by NOLs arising in tax years ending after December 31,
2017. The Company maintains a full valuation allowance against its net U.S. deferred tax assets, since due to uncertainties surrounding
future utilization, the Company estimates there will not be sufficient future earnings to utilize its U.S. deferred tax assets.
The NOLs carried forward incurred by the Company’s PRC subsidiaries and VIEs were approximately US$25.5
million and US$24.0 million at September 30, 2018 and December 31, 2017, respectively. The losses carryforwards gradually expire
over time, the last of which expires in 2023. 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$10.0 million and US$7.2 million valuation allowance as of September
30, 2018 and December 31, 2017, 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 related.
For the nine months ended September 30, 2018 and 2017, the Company recorded approximately US$3.1 million and
US$1.1 million deferred tax valuation allowance, respectively. For the three months ended September 30, 2018 and 2017, the Company
recorded approximately US$1.9 million and US$0.4 million deferred tax valuation allowance, respectively.
19.
|
Long-term borrowing from a director
|
Long-term borrowing from a director is a non-interest
bearing loan from a director of the Company relating to the original paid-in capital contribution in the Company’s wholly-owned
subsidiary Rise King WFOE, which is not expected to be repaid within one year.
20.
|
The Financing and warrant liabilities
|
On January 17, 2018 (the “Closing Date”),
the Company consummated a registered direct offering of 2,150,001 shares of the Company’s common stock to certain institutional
investors at a purchase price of $5.15 per share (“the Financing”). As part of the transaction, the Company also issued
to the investors warrants (the “Investor warrants”) for the purchase of up to 645,000 shares of the Company’s
common stock at an exercise price of $6.60 per share. The Investors warrants have a term of 30 months from the date of issuance.
The Company received gross proceeds of approximately $11.1 million.
The placement agent of the Financing received (i) a placement
fee in the amount equal to 6% of the gross proceeds and (ii) warrants to purchase up to 129,000 shares of common stock at an exercise
price of US$6.60 per share, with a three-year term (“Placement agent warrants” and together with the Investor warrants,
the “Warrants”). The Placement agent warrants is not exercisable for a period of six months and one day after the Closing
Date.
The Warrants have an initial exercise price of USS6.60
per share, which is subject to anti-dilution provisions that require adjustment of the number of shares of common stock that may
be acquired upon exercise of the warrant, or to the exercise price of such shares, or both, to reflect stock dividends and splits,
subsequent rights offerings, pro-rata distributions, and certain fundamental transactions. The Warrants also contain “full
ratchet” price protection in the event of subsequent issuances below the applicable exercise price (the “Down round
feature”).
The Warrants may not be exercised if it would result
in the holder beneficially owning more than 4.99% of the Company’s outstanding common shares (the “Beneficial Ownership
Limitation”). The holder of the Warrants, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation,
provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the Company’s outstanding common shares. Any
increase in the Beneficial Ownership Limitation will not be effective until the 61
st
day after such notice is delivered
to the Company.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Accounting for securities issued in the Financing
The Company determined that common stock issued in the
Financing should be classified as permanent equity as there was no redemption provision at the option of the holders that is not
within the control the Company on or after an agreed upon date.
The Company analyzed the Warrants issued in the Financing
in accordance with ASC Topic 815 “Derivatives and Hedging”. In accordance with ASC Topic 815, the Company determined
that the Warrants should not be considered index to its own stock, as the strike price of the Warrants is dominated in a currency
(U.S. dollar) other than the functional currency of the Company (Renminbi or Yuan). As a result, the Warrants does not meet the
scope exception of ASC Topic 815, therefore, should be accounted for as derivative liabilities and measure at fair value with changes
in fair value be recorded in earnings in each reporting period.
Fair value of the warrants
The Company used Binomial model to determine the fair
value of the Warrants based on the assumptions summarized as below:
|
|
Investors warrants
|
|
Placement agent warrants
|
|
|
January 17,
2018
|
|
June 30,
2018
|
|
September 30,
2018
|
|
January 17,
2018
|
|
June 30,
2018
|
|
September 30,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price
|
|
$
|
3.98
|
|
|
$
|
2.52
|
|
|
$
|
1.73
|
|
|
$
|
3.98
|
|
|
$
|
2.52
|
|
|
$
|
1.73
|
|
Years to maturity
|
|
|
2.5
|
|
|
|
2.1
|
|
|
|
1.8
|
|
|
|
3.0
|
|
|
|
2.55
|
|
|
|
2.3
|
|
Risk-free interest rate
|
|
|
2.22
|
%
|
|
|
2.53
|
%
|
|
|
2.80
|
%
|
|
|
2.39
|
%
|
|
|
2.56
|
%
|
|
|
2.82
|
%
|
Dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expected volatility
|
|
|
158
|
%
|
|
|
174
|
%
|
|
|
183
|
%
|
|
|
147
|
%
|
|
|
159
|
%
|
|
|
166
|
%
|
Exercise Price
|
|
$
|
6.60
|
|
|
$
|
6.60
|
|
|
$
|
6.60
|
|
|
$
|
6.60
|
|
|
$
|
6.60
|
|
|
$
|
6.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of the warrant
|
|
$
|
2.93
|
|
|
$
|
1.71
|
|
|
$
|
1.06
|
|
|
$
|
2.99
|
|
|
$
|
1.74
|
|
|
$
|
1.10
|
|
Stock price is the closing bid price of the Company’s
common stock at the respective valuation date. Years to maturity is the respective remaining contract life of the warrants. Yield-to-maturities
in continuous compounding of the United States Government Bonds with the time-to-maturities same as the respective warrant are
adopted as the risk-free rate. Annualized historical stock price volatility of the Company at the respective valuation date is
deemed to be appropriate to serve as the expected volatility of the stock price of the Company. The dividend yield is calculated
based on management’s estimate of dividends to be paid on the underlying stock. Exercise price of the Warrants is the contractual
exercise price of the Warrants.
Allocation of gross proceeds from the Financing
The Company allocated the total proceeds from the Financing
as summarized below:
|
|
Initial measurement
|
|
|
(USD’000)
|
|
|
|
Investor warrants
|
|
|
1,890
|
|
Common Stock (par value and additional paid in capital)
|
|
|
9,183
|
|
Total proceeds from the Financing
|
|
|
11,073
|
|
Investor warrants issued in the Financing was initially
measurement at fair value. The residual amount, representing difference between the total proceeds and the fair value of the Investor
warrants as of the Closing Date was assigned as the carrying value of the common stock issued in the Financing.
Offering costs
Offering costs in the amount of approximately US$1.2
million consisting of cash payment of approximately US$0.66 million placement fee, approximately US$0.15 million legal expense
and fair value of placement agent warrants of approximately US$0.39 million, which were charged to additional paid-in-capital.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Warrant Liabilities
The Company accounted for the Warrants issuing in the
Financing as derivative liabilities which were measured at fair value with changes in fair value be recorded in earnings in each
reporting period.
|
|
|
|
|
|
|
|
Change in Fair Value (gain)/loss
|
|
|
As of
September 30, 2018
|
|
As of
June 30, 2018
|
|
As of
January 17, 2018
|
|
Nine Months Ended
September 30, 2018
|
|
Three Months Ended
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of the Warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investor warrants
|
|
|
684
|
|
|
|
1,103
|
|
|
|
1,890
|
|
|
|
(1,206
|
)
|
|
|
(419
|
)
|
Placement agent warrants
|
|
|
142
|
|
|
|
224
|
|
|
|
385
|
|
|
|
(243
|
)
|
|
|
(82
|
)
|
Warrant liabilities
|
|
|
826
|
|
|
|
1,327
|
|
|
|
2,275
|
|
|
|
(1,449
|
)
|
|
|
(501
|
)
|
Warrants issued and outstanding at September 30, 2018
and their movements during the nine months then ended are as follows:
|
|
Warrants Outstanding
|
|
Warrants Exercisable
|
|
|
Number of
underlying
shares
|
|
Weighted
Average
Exercise
Price
|
|
Average
Remaining
Contractual
Life (years)
|
|
Number of
underlying
shares
|
|
Weighted
Average
Exercise
Price
|
|
Average
Remaining
Contractual
Life (years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2018
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Granted/Vested
|
|
|
774,000
|
|
|
$
|
6.60
|
|
|
|
2.58
|
|
|
|
774,000
|
|
|
$
|
6.60
|
|
|
|
2.58
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2018 (Unaudited)
|
|
|
774,000
|
|
|
$
|
6.60
|
|
|
|
1.88
|
|
|
|
774,000
|
|
|
$
|
6.60
|
|
|
|
1.88
|
|
21.
|
Restricted net assets
|
As most of the Company’s operations are conducted
through its PRC subsidiaries and VIEs, the Company’s ability to pay dividends is primarily dependent on receiving distributions
of funds from its PRC subsidiaries and VIEs. Relevant PRC statutory laws and regulations permit payments of dividends by its PRC
subsidiaries 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 subsidiaries
and VIEs included in the Company’s consolidated net assets are also non-distributable for dividend purposes.
In accordance with the PRC regulations on Enterprises
with Foreign Investment, a WFOE established in the PRC is required to provide certain statutory reserves, namely general reserve
fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the
enterprise’s PRC statutory accounts. A WFOE is required to allocate at least 10% of its annual after-tax profit to the general
reserve until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. Appropriations
to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors. The aforementioned
reserves can only be used for specific purposes and are not distributable as cash dividends. Rise King WFOE is subject to the above
mandated restrictions on distributable profits. Additionally, in accordance with the Company Law of the PRC, a domestic enterprise
is required to provide a statutory common reserve of at least 10% of its annual after-tax profit until such reserve has reached
50% of its registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to
provide for a discretionary surplus reserve, at the discretion of the board of directors. The aforementioned reserves can only
be used for specific purposes and are not distributable as cash dividends. All of the Company’s PRC VIEs are subject to the
above mandated restrictions on distributable profits.
As a result of these PRC laws and regulations, the Company’s
PRC subsidiaries and VIEs are restricted in their ability to transfer a portion of their net assets to the Company. As of September
30, 2018 and December 31, 2017, net assets restricted in the aggregate, which include paid-in capital and statutory reserve funds
of the Company’s PRC subsidiaries and VIEs that are included in the Company’s consolidated net assets, was approximately
US$12.0 million and US$8.3 million, respectively.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
The current PRC Enterprise Income Tax (“EIT”)
Law also imposed a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding
company outside China. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China
and the jurisdiction of the foreign holding company. Holding companies in Hong Kong, for example, will be subject to a 5% withholding
tax rate.
The ability of the Company’s PRC subsidiaries and
VIEs to make dividends and other payments to the Company may also be restricted by changes in applicable foreign exchange and other
laws and regulations.
Foreign currency exchange regulation in China is primarily
governed by the following rules:
|
l
|
Foreign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules;
|
|
l
|
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration
Rules.
|
Currently, under the Administration Rules, Renminbi is
freely convertible for current account items, including the distribution of dividends, interest payments, trade and service related
foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments
and investments in securities outside of China, unless the prior approval of the State Administration of Foreign Exchange (the
“SAFE”) is obtained and prior registration with the SAFE is made. Foreign-invested enterprises like Rise King WFOE
that need foreign exchange for the distribution of profits to its shareholders may effect payment from their foreign exchange accounts
or purchase and pay foreign exchange rates at the designated foreign exchange banks to their foreign shareholders by producing
board resolutions for such profit distribution. Based on their needs, foreign-invested enterprises are permitted to open foreign
exchange settlement accounts for current account receipts and payments of foreign exchange along with specialized accounts for
capital account receipts and payments of foreign exchange at certain designated foreign exchange banks.
Although the current Exchange Rules allow the convertibility
of Renminbi into foreign currency for current account items, conversion of Renminbi into foreign exchange for capital items, such
as foreign direct investment, loans or 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 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, 2018 and December 31, 2017, there
was approximately US$nil and US$9.2 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 of statutory
reserve funds as of September 30, 2018 and December 31, 2017, 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$12.0 million and US$8.3 million of restricted
net assets as of September 30, 2018 and December 31, 2017, as discussed above.
|
22.
|
Employee defined contribution plan
|
Full time employees of the Company in the PRC participate
in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing
fund and other welfare benefits are provided to employees. Chinese labor regulations require that the PRC subsidiaries of the Company
make contributions to the government for these benefits based on certain percentages of the employees’ salaries. The employee
benefits were expensed as incurred. The Company has no legal obligation for the benefits beyond the contributions made. The total
amounts for such employee benefits were approximately US$278,000 and US$318,000 for the nine months ended September 30, 2018 and
2017, respectively. The total amounts for such employee benefits were approximately US$95,000 and US$92,000 for the three months
ended September 30, 2018 and 2017, respectively.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
23.
|
Concentration of risk
|
Credit risk
Financial instruments that potentially subject the Company
to significant concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable and other receivables.
As of September 30, 2018, 74% of the Company’s cash and cash equivalents were held by major financial institutions located
in Mainland China, the remaining 26% was held by a financial institution located in the United States of America. The Company believes
that these financial institutions located in Mainland China and the United States of America are of high credit quality. For accounts
receivable and other receivables, the Company extends credit based on an evaluation of the customer’s or other third parties’
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 receivable 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 receivable and other 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 Renminbi, 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, 2018, one customer
individually accounted for 17% of the Company’s revenues. For the three months ended September 30, 2018, the same one customer
individually accounted for 22% of the Company’s revenues.
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 24% and 16% of the Company’s revenues.
As of September 30, 2018, one customers individually
accounted for 66% of the Company’s accounts receivable. As of December 31, 2017, the same one customer individually accounted
for 30% of the Company’s accounts receivable, and another two customers individually accounted for 20% and 16% of the Company’s
accounts receivable, respectively.
Concentration of suppliers
For the nine months ended September 30, 2018, two suppliers
individually accounted for 84% and 12% of the Company’s cost of revenues. For the three months ended September 30, 2018,
the same two suppliers individually accounted for 86% and 10% of the Company’s cost of revenues.
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.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
24.
|
Commitments and contingencies
|
The following table sets forth the Company’s operating
lease commitment as of September 30, 2018:
|
|
Office Rental
|
|
|
US$(’000)
|
|
|
(Unaudited)
|
Three months ending December 31,
|
|
|
|
|
-2018
|
|
|
85
|
|
Year ending December 31,
|
|
|
|
|
-2019
|
|
|
84
|
|
Total
|
|
$
|
169
|
|
For the nine months ended September 30, 2018 and 2017,
rental expenses under operating leases were approximately US$302,000 and US$304,000, respectively. For the three months ended September
30, 2018 and 2017, rental expenses under operating leases were approximately US$96,000 and US$113,000, respectively.
In February 2018, the Company
entered into a contract with an unrelated third party to development certain blockchain technology based applications with a total
contract amount of US$4.5 million. As of September 30, 2018, the Company had paid US$3.38 million and the remaining unpaid contract
amount is expected to be paid before June 2019.
In March 2018, the Company entered
into a contract with another unrelated entity to develop a social network (WeChat) based marketing campaign application with a
total contract amount of RMB3.0 million (approximately US$0.44 million). As of September 30, 2018, the Company had paid RMB2.4
million (approximately US$0.35 million) and the remaining unpaid contract amount is expected to be paid in December 2018.
The Company is currently not a party to any legal or
administrative proceedings and are not aware of any pending or threatened legal or administrative proceedings against us in all
material aspects. The Company may from time to time become a party to various legal or administrative proceedings arising in the
ordinary course of our business.
The Company follows ASC Topic 280 “Segment Reporting”,
which requires that companies disclose segment data based on how management makes decisions about allocating resources to segments
and evaluating their performance. Reportable operating segments include components of an entity about which separate financial
information is available and which operating results are regularly reviewed by the chief operating decision maker (“CODM”),
the Company’s Chief Executive Officer, to make decisions about resources to be allocated to the segment and assess each operating
segment’s performance.
Nine Months Ended September 30, 2018 (Unaudited)
|
|
Internet Ad.
and data
service
|
|
TV Ad.
|
|
Blockchain
technology
|
|
Corporate
|
|
Inter-
segment and
reconciling
item
|
|
Total
|
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
47,731
|
|
|
|
91
|
|
|
|
-
|
|
|
|
362
|
|
|
|
(362
|
)
|
|
|
47,822
|
|
Cost of revenues
|
|
|
45,822
|
|
|
|
38
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45,860
|
|
Total operating expenses
|
|
|
13,440
|
|
|
|
75
|
|
|
|
47
|
|
|
|
1,854
|
(1)
|
|
|
(362
|
)
|
|
|
15,054
|
|
Depreciation and amortization expense included in total operating expenses
|
|
|
452
|
|
|
|
1
|
|
|
|
-
|
|
|
|
55
|
|
|
|
-
|
|
|
|
508
|
|
Impairment on goodwill included in total operating expenses
|
|
|
5,289
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,289
|
|
Impairment on intangible assets included in total operating expenses
|
|
|
3,380
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,380
|
|
Operating loss
|
|
|
(11,531
|
)
|
|
|
(22
|
)
|
|
|
(47
|
)
|
|
|
(1,492
|
)
|
|
|
-
|
|
|
|
(13,092
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrant liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,449
|
|
|
|
-
|
|
|
|
1,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment on long-term investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
460
|
|
|
|
-
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(11,995
|
)
|
|
|
(22
|
)
|
|
|
(47
|
)
|
|
|
(899
|
)
|
|
|
-
|
|
|
|
(12,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure for long-term assets
|
|
|
437
|
|
|
|
-
|
|
|
|
3,383
|
|
|
|
371
|
|
|
|
-
|
|
|
|
4,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets – September 30, 2018
|
|
|
15,286
|
|
|
|
296
|
|
|
|
3,420
|
|
|
|
17,182
|
|
|
|
(15,839
|
)
|
|
|
20,345
|
|
Total assets – December 31, 2017
|
|
|
28,524
|
|
|
|
402
|
|
|
|
-
|
|
|
|
11,013
|
|
|
|
(11,379
|
)
|
|
|
28,560
|
|
|
(1)
|
Including
approximately US$215,000 share-based compensation expenses.
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Three Months Ended September 30, 2018 (Unaudited)
|
|
Internet Ad.
and data
service
|
|
TV Ad.
|
|
Blockchain
technology
|
|
Corporate
|
|
Inter-
segment and
reconciling
item
|
|
Total
|
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
US$
(‘000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
17,042
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
9
|
|
|
|
17,042
|
|
Cost of revenues
|
|
|
16,649
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,649
|
|
Total operating expenses
|
|
|
3,175
|
|
|
|
28
|
|
|
|
43
|
|
|
|
488
|
(1)
|
|
|
9
|
|
|
|
3,743
|
|
Depreciation and amortization expense included in total operating expenses
|
|
|
63
|
|
|
|
1
|
|
|
|
-
|
|
|
|
17
|
|
|
|
-
|
|
|
|
81
|
|
Impairment on intangible assets included in total operating expenses
|
|
|
1,502
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,502
|
|
Operating loss
|
|
|
(2,782
|
)
|
|
|
(28
|
)
|
|
|
(43
|
)
|
|
|
(497
|
)
|
|
|
-
|
|
|
|
(3,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrant liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
501
|
|
|
|
-
|
|
|
|
501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,847
|
)
|
|
|
(28
|
)
|
|
|
(43
|
)
|
|
|
(55
|
)
|
|
|
-
|
|
|
|
(2,973
|
)
|
|
(1)
|
Including
approximately US$64,000 share-based compensation expenses.
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Nine Months Ended September 30, 2017 (Unaudited)
|
|
Internet Ad.
and data
service
|
|
TV Ad.
|
|
Corporate
|
|
Inter-
segment and
reconciling
item
|
|
Total
|
|
|
US$
(‘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
|
|
|
(1,887
|
)
|
|
|
(47
|
)
|
|
|
(1,940
|
)
|
|
|
-
|
|
|
|
(3,874
|
)
|
(1)
|
Including approximately US$484,000
share-based compensation expenses.
|
Three Months Ended September 30, 2017 (Unaudited)
|
|
Internet Ad.
and data
service
|
|
TV Ad.
|
|
Corporate
|
|
Inter-
segment and
reconciling
item
|
|
Total
|
|
|
US$
(‘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 (loss)/income
|
|
|
(1,286
|
)
|
|
|
9
|
|
|
|
(733
|
)
|
|
|
-
|
|
|
|
(2,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure for long-term assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
|
(1,324
|
)
|
|
|
9
|
|
|
|
(733
|
)
|
|
|
-
|
|
|
|
(2,048
|
)
|
(1)
|
Including approximately US$136,000
share-based compensation expenses.
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
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,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ChinaNet Online Holdings, Inc. (numerator for basic and diluted loss per share)
|
|
$
|
(12,888
|
)
|
|
$
|
(3,963
|
)
|
|
$
|
(2,953
|
)
|
|
$
|
(2,087
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding -Basic and diluted
|
|
|
15,756,876
|
|
|
|
12,019,040
|
|
|
|
15,915,501
|
|
|
|
12,074,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share-Basic and diluted
|
|
$
|
(0.82
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.17
|
)
|
For the nine and three months ended September 30, 2018,
the diluted loss per share calculation did not include warrants and options to purchase up to 774,000 and 835,216 shares of the
Company’s common stock, respectively, because they were out of the money, and did not include 266,238 shares of unvested
restricted common stock before they were vested during the third quarter of 2018, because their effect was anti-dilutive, as the
Company incurred a loss for the periods.
For the nine and three months ended September 30, 2017,
the diluted loss per share calculation 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.
27.
|
Share-based compensation expenses
|
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$1.67 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, 2018 was approximately US$62,600 and US$nil, respectively.
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
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 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. Total compensation expenses recognized for the nine and three months ended September 30, 2018 was approximately
US$152,000 and US$64,300, respectively.
Options issued and outstanding at September 30, 2018
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, January 1, 2018
|
|
|
835,216
|
|
|
|
3.04
|
|
|
$
|
2.49
|
|
|
|
835,216
|
|
|
|
3.04
|
|
|
$
|
2.49
|
|
Granted/Vested
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2018 (unaudited)
|
|
|
835,216
|
|
|
|
2.29
|
|
|
$
|
2.49
|
|
|
|
835,216
|
|
|
|
2.29
|
|
|
$
|
2.49
|
|
CHINANET ONLINE HOLDINGS, INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
The table below summarized share-based compensation expenses recorded for
the nine and three months ended September 30, 2018 and 2017, respectively:
|
|
Nine Months Ended September 30,
|
|
Three Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
US$(’000)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses
|
|
|
47
|
|
|
|
72
|
|
|
|
20
|
|
|
|
22
|
|
General and administrative expenses
|
|
|
131
|
|
|
|
357
|
|
|
|
29
|
|
|
|
95
|
|
Research and development expenses
|
|
|
37
|
|
|
|
55
|
|
|
|
15
|
|
|
|
19
|
|
Total
|
|
|
215
|
|
|
|
484
|
|
|
|
64
|
|
|
|
136
|
|
The aggregate unrecognized share-based compensation expenses as of September
30, 2018 and 2017 is approximately US$nil and US$233,000 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 other events that are material
to the financial statements except for those have discussed in Note 15.