UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2016

 

or

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____ to _____

 

Commission File Number:  001-34647

 

ChinaNet Online Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 Nevada  20-4672080
(State or other jurisdiction of incorporation or
organization)
 (I.R.S. Employer Identification No.)

 

 

No. 3 Min Zhuang Road, Building 6,

Yu Quan Hui Gu Tuspark, Haidian District, Beijing, PRC 100195

 (Address of principal executive offices) (Zip Code)

 

+86-10-6900-5520

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x   No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o    Accelerated filer o    Non-accelerated filer (Do not check if a smaller reporting company) o    Smaller reporting company x

 

 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

 

As of May 16, 2016, the registrant had 30,355,722 shares of common stock outstanding.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION   PAGE
       
Item 1. Interim Financial Statements    
       
  Condensed Consolidated Balance Sheets as of March 31, 2016 (Unaudited) and December 31, 2015   F1-F2
       
  Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2016 and 2015 (Unaudited)   F3-F4
       
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (Unaudited)   F5-F6
       
  Notes to Condensed Consolidated Financial Statements (Unaudited)   F7-F26
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   27-37
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   37
       
Item 4. Controls and Procedures   37
       
PART II. OTHER INFORMATION    
       
Item 1. Legal Proceedings   38
       
Item 1A. Risk Factors   38
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   38
       
Item 3. Defaults Upon Senior Securities   38
       
Item 4. Mine Safety Disclosures   38
       
Item 5. Other Information   38
       
Item 6. Exhibits    39
       
Signatures   40

 

 

 
 

PART I. FINANCIAL INFORMATION

 

Item 1. Interim Financial Statements

 

CHINANET ONLINE HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

   March 31,
2016
  December 31,
2015
   (US $)  (US $)
   (Unaudited)   
Assets          
Current assets:          
Cash and cash equivalents  $3,744   $5,503 
Term deposit   3,281    3,265 
Accounts receivable, net   3,030    2,549 
Other receivables, net   436    1,910 
Prepayment and deposit to suppliers   6,013    5,843 
Due from related parties   323    41 
Other current assets   16    45 
Assets classified as held for sale   1,958    1,882 
Total current assets   18,801    21,038 
           
Long-term investments   1,576    1,133 
Property and equipment, net   711    681 
Intangible assets, net   5,351    5,638 
Deposit and prepayment for purchasing of software technology   2,438    1,024 
Goodwill   4,418    4,396 
Deferred tax assets-non current   1,556    1,550 
Total Assets  $34,851   $35,460 
           
Liabilities and Equity          
Current liabilities:          
Accounts payable *  $217   $95 
Advances from customers *   1,379    1,313 
Accrued payroll and other accruals *   615    685 
Guarantee payment and prepayment from new investors   949    944 
Taxes payable *   3,255    3,186 
Other payables *   145    234 
Liabilities classified as held for sale *   964    913 
Total current liabilities   7,524    7,370 

 

 F-1 
 

CHINANET ONLINE HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands, except for number of shares and per share data)

 

 

   March 31,
2016
  December 31,
2015
   (US $)  (US $)
   (Unaudited)   
Long-term liabilities:          
Deferred tax liability-non current *   89    118 
Long-term borrowing from a director   135    135 
Total Liabilities   7,748    7,623 
           
Commitments and contingencies   130    129 
           
Equity:          
ChinaNet Online Holdings, Inc.’s stockholders’ equity          
Common stock (US$0.001 par value; authorized 50,000,000 shares; issued and outstanding 30,355,722 shares and 29,640,130 shares at March 31, 2016 and December 31, 2015, respectively)   30    30 
Additional paid-in capital   27,074    26,510 
Statutory reserves   2,607    2,607 
Retained deficit   (5,281)   (3,870)
Accumulated other comprehensive income   2,185    2,056 
Total ChinaNet Online Holdings, Inc.’s stockholders’ equity   26,615    27,333 
           
Noncontrolling interests   358    375 
Total equity   26,973    27,708 
           
Total Liabilities and Equity  $34,851   $35,460 

 

  

*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

 

 F-2 
 

CHINANET ONLINE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands)

 

 

   Three Months Ended March 31,
   2016  2015
   (US $)  (US $)
   (Unaudited)  (Unaudited)
Revenues          
From unrelated parties  $5,012   $5,661 
From related parties   48    63 
Total revenues   5,060    5,724 
Cost of revenues   3,456    4,868 
Gross profit   1,604    856 
           
Operating expenses          
Sales and marketing expenses   880    1,185 
General and administrative expenses   1,706    1,245 
Research and development expenses   426    490 
Total operating expenses   3,012    2,920 
           
Loss from operations   (1,408)   (2,064)
           
Other income (expenses)          
Interest income   27    29 
Interest expense   -    (17)
Other (expenses)/income   (12)   32 
Total other income   15    44 
Loss before income tax expense, equity method investments, noncontrolling interests and discontinued operation   (1,393)   (2,020)
Income tax benefit   28    222 
Loss before equity method investments, noncontrolling interests and discontinued operation   (1,365)   (1,798)
Share of income in equity investment affiliates   -    1 
Loss from continuing operations   (1,365)   (1,797)
Loss from discontinued operation, net of income tax   (46)   (25)
Net loss   (1,411)   (1,822)
Net loss attributable to noncontrolling interests from continuing operations   -    34 
Net loss attributable to ChinaNet Online Holdings, Inc.   (1,411)   (1,788)

 

 F-3 
 

CHINANET ONLINE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (CONTINUED)
(In thousands, except for number of shares and per share data)

 

 

   Three Months Ended March 31,
   2016  2015
   (US $)  (US $)
   (Unaudited)  (Unaudited)
       
Net loss   (1,411)   (1,822)
Foreign currency translation gain/(loss)   112    (120)
Comprehensive loss   (1,299)   (1,942)
Comprehensive loss attributable to noncontrolling interests   17    33 
Comprehensive loss attributable to ChinaNet Online Holdings, Inc.   (1,282)   (1,909)
           
Loss per share          
Loss from continuing operations per common share          
Basic and diluted  $(0.05)  $(0.07)
Loss from discontinued operations per common share          
Basic and diluted  $-   $- 
           
Weighted average number of common shares outstanding:          
 Basic and diluted   28,356,797    26,366,797 

 

 

 

 

See notes to condensed consolidated financial statements

 

 F-4 
 

CHINANET ONLINE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

   Three Months Ended March 31,
   2016  2015
   (US $)  (US $)
   (Unaudited)  (Unaudited)
Cash flows from operating activities          
Net loss  $(1,411)  $(1,822)
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities          
Depreciation and amortization   384    444 
Share-based compensation expenses   564    455 
Loss on disposal of fixed assets   21    - 
Reverse of allowances for doubtful accounts   -    (220)
Share of income in equity investment affiliates   -    (1)
Deferred taxes   (28)   (226)
Changes in operating assets and liabilities          
Accounts receivable   (507)   (42)
Other receivables   1,464    200 
Prepayment and deposit to suppliers   (152)   (2,175)
Due from related parties   (19)   (8)
Other current assets   29    (119)
Accounts payable   190    (38)
Advances from customers   64    1,279 
Accrued payroll and other accruals   (89)   (72)
Other payables   (114)   42 
Taxes payable   47    (25)
Net cash provided by/(used in) operating activities   443    (2,328)
           
Cash flows from investing activities          
Payment for office equipment and leasehold improvement   (117)   - 
Long-term investment in and advance to cost/equity method investees   (693)   (183)
Payment for purchasing of software technology   (1,394)   (326)
Net cash used in investing activities   (2,204)   (509)

 

 

 F-5 
 

CHINANET ONLINE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(In thousands)

 

 

   Three Months Ended March 31,
   2016  2015
   (US $)  (US $)
   (Unaudited)  (Unaudited)
Cash flows from financing activities          
           
Net cash provided by/(used in) financing activities   -    - 
           
Changes in cash and cash equivalents included in assets held for sale   (6)   - 
           
Effect of exchange rate fluctuation on cash and cash equivalents   8    (16)
           
Net decrease in cash and cash equivalents   (1,759)   (2,853)
           
Cash and cash equivalents at beginning of the period   5,503    5,037 
Cash and cash equivalents at end of the period  $3,744   $2,184 
           
Supplemental disclosure of cash flow information          
           
Interest expense paid  $-   $17 

 

 

See notes to condensed consolidated financial statements

 

 F-6 

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.

 

The Company’s wholly owned subsidiary, China Net BVI was incorporated in the British Virgin Islands. China Net BVI is the parent holding company of CNET Online Technology Limited, a Hong Kong company (“China Net HK”), which established and is the parent company of Rise King Century Technology Development (Beijing) Co., Ltd., a wholly foreign-owned enterprise (“WFOE”) established in the PRC (“Rise King WFOE”).

 

To satisfy PRC laws and regulations, the Company conducts certain business in the PRC through its Variable Interest Entities (“VIEs”). Through a series of contractual agreements between Rise King WFOE and Business Opportunity Online (Beijing) Network Technology Co., Ltd. (“Business Opportunity Online”) and Beijing CNET Online Advertising Co., Ltd. (“Beijing CNET Online”) (collectively the “PRC Operating Entities” or the “VIEs”), the Company, through the WFOE, secures significant rights to influence the PRC Operating Entities’ business operations, policies and management, approve all matters requiring shareholder approval, and the right to receive 100% of the income earned by the VIEs. Pursuant to the contractual agreements, all of the equity owners' rights and obligations of the VIEs were assigned to Rise King WFOE, which resulted in the equity owners lacking the ability to make decisions that have a significant effect on the VIEs, Rise King WFOE's ability to extract the profits from the operation of the VIEs and assume the residual benefits of the VIEs. Due to the fact that Rise King WFOE and its indirect parent are the sole interest holders of the VIEs, the Company included the assets, liabilities, revenues and expenses of the VIEs in its consolidated financial statements, which is consistent with the provisions of FASB Accounting Standards Codification ("ASC") Topic 810 “Consolidation”, subtopic 10.

 

As of March 31, 2016, the Company operated its business primarily in China through its PRC subsidiaries and PRC operating entities, or VIEs as discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, previously filed with the Securities and Exchange Commission (the “2015 Form 10-K”).

 F-7 

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

2.Variable interest entities

 

Summarized below is the information related to the consolidated VIEs’ assets and liabilities as of March 31, 2016 and December 31, 2015, respectively:

 

   March 31,
2016
  December 31,
2015
   US$(’000)  US$(’000)
   (Unaudited)   
Assets          
Current assets:          
Cash and cash equivalents  $3,329   $4,942 
Term deposit   3,281    3,265 
Accounts receivable, net   2,950    2,492 
Other receivables, net   352    1,712 
Prepayment and deposit to suppliers   5,760    5,841 
Due from related parties   306    24 
Other current assets   16    27 
Assets classified as held for sale   1,958    1,882 
Total current assets   17,952    20,185 
           
Long-term investments   175    1,113 
Property and equipment, net   456    503 
Intangible assets, net   5,344    5,630 
Deposit and prepayment for purchasing of software technology   1,029    1,024 
Goodwill   4,418    4,396 
Deferred tax assets-non current   1,221    1,249 
Total Assets  $30,595   $34,100 
           
Liabilities          
Current liabilities:          
Accounts payable  $65   $88 
Advances from customers   1,317    1,304 
Accrued payroll and other accruals   253    309 
Due to Control Group   11    11 
Taxes payable   2,790    2,733 
Other payables   14    67 
Liabilities classified as held for sale   964    913 
Total current liabilities   5,414    5,425 
           
Deferred tax Liabilities-non current   89    118 
Total Liabilities   5,503   $5,543 
           
Commitments and contingencies   130    129 

 

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 consolidated statements of operations and comprehensive loss for the three months ended March 31, 2016 and 2015, respectively:

 

   Three Months Ended March 31,
   2016  2015
   US$(’000)  US$(’000)
       
Revenues  $5,039   $5,620 
Cost of revenues   3,455    4,868 
Total operating expenses   1,883    2,203 
Loss from discontinued operations   46    25 
Net loss before allocation to noncontrolling interests   335    1,208 

 

 F-8 

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

3.Summary of significant accounting policies

 

a)Basis of presentation

 

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 March 31, 2016 and for the three months ended March 31, 2016 and 2015 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 2015 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 March 31, 2016, its consolidated results of operations for the three months ended March 31, 2016 and 2015, and its consolidated cash flows for the three months ended March 31, 2016 and 2015, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

 

b)Principles of consolidation

 

The condensed consolidated interim financial statements include the financial statements of all the subsidiaries and VIEs of the Company. All transactions and balances between the Company and its subsidiaries and VIEs have been eliminated upon consolidation.

 

c)Comparability due to discontinued operation

 

In the fourth fiscal quarter of 2015, the Company exited its brand management and sales channel building business segment, which qualified for presentation as a discontinued operation in accordance with ASC Topic 205. As a result, the results of operations of this business was reported in discontinued operation as a separate component in the Company’s condensed consolidated statements of operations and comprehensive loss for all periods presented. Certain accounts in the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2015 and related notes have been retrospectively adjusted to reflect the effect of reclassification of results of operations reported in discontinued operation as a separate component.

 

d)Use of estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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.

 

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:

 

   March 31, 2016  December 31, 2015
           
Balance sheet items, except for equity accounts   6.4612    6.4936 

 

   Three Months Ended March 31,
   2016  2015
Items in the statements of operations and comprehensive loss, and statements of cash flows   6.5288    6.1380 

 

No representation is made that the RMB amounts could have been, or could be converted into US$ at the above rates.

 

 F-9 

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

f)Advertising costs

 

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 three months ended March 31, 2016 and 2015, advertising expenses for the Company’s own brand building were approximately US$423,000 and US$648,000, respectively.

 

g)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 three months ended March 31, 2016 and 2015 were approximately US$426,000 and US$490,000, respectively.

 

h)Recent accounting standards

 

In August 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”. The amendments in this ASU defer the effective date of ASU No. 2014-09 for all entities by one year. ASU No. 2014-09, issued in May 2014, 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. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in this ASU to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact on its consolidated financial position and results of operations upon adopting these amendments.

 

In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”. The amendments in this ASU do not change the core principle of the guidance. The amendments clarify the implementation guidance on principal versus agent considerations. When another party is involved in providing goods or services to a customer, an entity is required to determine whether the nature of its promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for that good or service to be provided by the other party (that is, the entity is an agent). When (or as) an entity that is a principal satisfies a performance obligation, the entity recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred to the customer. When (or as) an entity that is an agent satisfies a performance obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified good or service to be provided by the other party. An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer. The amendments in this ASU affect the guidance in ASU No. 2014-09, which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition requirements of ASU No. 2014-09, which is deferred by ASU No. 2015-14 by one year. The Company is currently evaluating the impact on its consolidated financial position and results of operations upon adopting these amendments.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The amendments in this ASU affected all entities that issue share-based payment awards to their employees. The areas for simplification in this ASU involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. For public business entities, the amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. The Company is currently evaluating the impact on its consolidated financial position and results of operations upon adopting these amendments.

 

In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”. The amendments in this ASU do not change the core principle of the guidance in Topic 606. Rather, the amendments in this ASU clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The amendments in this ASU affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14 defers the effective date of ASU 2014-09 by one year. The Company is currently evaluating the impact on its consolidated financial position and results of operations upon adopting these amendments.

 

 F-10 

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

  

In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”. The amendments in this ASU do not change the core principle of the guidance in Topic 606. Rather, the amendments in this ASU affect only the narrow aspects of Topic 606, which include (1) Assessing the Collectibility Criterion and Accounting for Contracts That Do Not Meet the Criteria for Step 1; (2) Presentation of Sales Taxes and Other Similar Taxes Collected from Customers; (3) Noncash Consideration; (4) Contract Modifications at Transition Completed Contracts at Transition; (5); and (6) Technical Correction. The amendments in this ASU affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14 defers the effective date of ASU 2014-09 by one year. The Company is currently evaluating the impact on its consolidated financial position and results of operations upon adopting these amendments.

 

4.Term deposit

 

Term deposit as of March 31, 2016 and December 31, 2015 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 will mature on July 7, 2016. The interest rate of the term deposit is 2.925% per annual.

 

5.Accounts receivable, net

 

   March 31,
2016
  December 31,
 2015
   US$(’000)  US$(’000)
   (Unaudited)   
       
Accounts receivable   6,116    5,619 
Allowance for doubtful accounts   (3,086)   (3,070)
Accounts receivable, net   3,030    2,549 

 

All of the accounts receivable are non-interest bearing. Based on the assessment of the collectability of the accounts receivable as of March 31, 2016 and December 31, 2015, the Company provided approximately US$3,086,000 and US$3,070,000 allowance for doubtful accounts, which were related to the accounts receivable of the Company’s internet advertising and TV advertising business segment with an aging over six months. For the three months ended March 31, 2016, no allowance for doubtful accounts was provided or reversed. For the three months ended March 31, 2015, approximately US$220,000 allowance for doubtful accounts was reversed.

 

6.Other receivables, net

 

   March 31,
2016
  December 31,
2015
   US$(’000)  US$(’000)
   (Unaudited)   
       
Term deposit interest receivable   72    48 
Staff advances for normal business purpose   54    243 
TV advertisement deposit and prepayment receivable   -    1,157 
Overdue deposits   981    1,130 
Allowance for doubtful debts   (671)   (668)
Other receivables, net   436    1,910 

 

TV advertisement deposit and prepayment receivable as of December 31, 2015 represented the uncollected portion of the deposit and prepayment made to an agent of one of the provincial satellite TV stations partnered with the Company. The Company terminated its cooperation with this TV station and its agent upon expiration of the 2014 contract on December 31, 2014. The remaining balance of this deposit and prepayment as of December 31, 2015 was collected in January 2016.

 

For advertising resources purchase contracts signed by the Company with its resources providers, the Company was required to make deposits, which were either applied to the contract amounts that were needed to be paid with the consent of the counterparty or to be refunded to the Company of the remaining balance upon expiration of the cooperation. Overdue deposits represented the portion of the contractual deposits, which related advertising resources purchase contracts had been completed as of each of the reporting dates with no further cooperation. Based on the assessment of the collectability of these overdue deposits as of March 31, 2016 and December 31, 2015, the Company provided approximately US$671,000 and US$668,000 allowance for doubtful accounts, respectively, which was related to the deposits of its internet advertising and TV advertising business segment. For the three months ended March 31, 2016 and 2015, no allowance for doubtful accounts was provided or reversed.

 F-11 

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

7.Prepayments and deposit to suppliers

 

   March 31,
2016
  December 31,
2015
   US$(’000)  US$(’000)
   (Unaudited)   
       
Deposits to internet resources providers   1,477    622 
Prepayments to internet resources providers   2,860    3,623 
Deposits to other services providers   1,548    1,540 
Other deposits and prepayments   128    58 
    6,013    5,843 

 

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.

 

Deposits to internet resources providers are paid as contractual deposits to the Company’s resources and services suppliers. As of March 31, 2016 and December 31, 2015, deposit to internet resources providers primarily consisted of the contractual deposits paid for purchasing internet resources from two of the Company’s largest internet resources suppliers. The increase in deposits to internet resources providers was primarily due to contractual deposits paid during the first fiscal quarter of 2016 for the internet resources purchase contracts signed for fiscal 2016. The deposits for fiscal 2015 purchase contracts is expected to be refunded before June 2016.

 

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.

 

Deposits to other service providers consisted of an approximately US$0.77 million deposit to an intermediary service provider, which the Company engaged to facilitate the Company to find, select and negotiate with its internet, TV or other media resource suppliers, and another approximately US$0.77 million deposit for an advisory contract related to finding buyers for liansuo.com and new investors for the Company. The contract with the intermediary service provider expired on April 30, 2016, and the deposit is expected to be refunded during the second fiscal quarter of 2016.

 

8.Due from related parties

 

   March 31,
2016
  December 31,
2015
   US$(’000)  US$(’000)
   (Unaudited)   
       
Beijing Saimeiwei Food Equipment Technology Co., Ltd.   34    35 
Chuangshi Meiwei (Beijing) International Investment Management Co., Ltd.   181    4 
Guohua Shiji (Beijing) Communication Co., Ltd.   108    - 
Beijing Saturday Education Technology Co., Ltd.   -    2 
    323    41 

 

Related parties of the Company represented direct or indirect unconsolidated investees of the Company or entities that are directly or indirectly owned by Mr. Handong Cheng or Mr. Xuanfu Liu, the owners of the Company’s PRC VIEs, Business Opportunities Online and Beijing CNET Online before the Offshore Restructuring. The Company provides advertising and marketing services to these related parties in its normal course of business on the same terms as those provided to its unrelated clients. Due from related parties represented the outstanding receivables for the advertising and marketing services that the Company provided to these related parties as of each reporting date. As of March 31, 2016, due from related parties also included short-term working capital loans of RMB1.0 million (approximately US$0.15 million) and RMB0.7 million (approximately US$0.11 million) to Chuangshi Meiwei and Guohua Shiji, respectively. The working capital loans are non-interest bearing and needs to be repaid to the Company within one year.

 F-12 

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

9.Assets and liabilities classified as held for sale

 

In the fourth fiscal quarter of 2015, the Company committed to a plan to sell one of its internet advertising operating VIEs, Beijing Chuang Fu Tian Xia, also known as liansuo.com., which did not qualify for presentation as a discontinued operation, as it was not considered a significant portion of the Company’s internet advertising and data service business segment. The Company expects to consummate the transaction before the end of fiscal 2016 and does not expect to have any continued involvement with the entity after the disposal date.

 

The Company classified the assets and liabilities of the disposal group as held for sale as of each reporting date and presented separately in the asset and liability section, respectively. The assets and liabilities held by the disposal group are as follows:

 

   March 31,
2016
  December 31,
2015
   US$(’000)  US$(’000)
   (Unaudited)   
Assets classified as held for sale          
Cash and cash equivalents   188    181 
Accounts receivable, net   98    53 
Other receivables, net   101    95 
Advance to suppliers   381    366 
Property and equipment, net   39    43 
Deferred tax assets   300    298 
Goodwill allocated to the disposal group(1)   919    914 
Inter-co balances elimination(2)   (68)   (68)
Total assets classified as held for sale   1,958    1,882 
           
Liabilities classified as held for sale          
Accounts payable   225    154 
Advance from customers   595    588 
Accrued payroll and other accruals   33    50 
Taxes payable   4    9 
Other payables   380    364 
Inter-co balances elimination(2)   (273)   (252)
Total liabilities classified as held for sale   964    913 

 

(1)Liansuo.com (the disposal group) is a portion of the Company’s internet advertising and data service reporting unit that constitutes a business. Goodwill allocated to the disposal group is calculated based on the relative fair value of liansuo.com and the remaining portion of the reporting unit that will be retained.

 

(2)Inter-company balances are part of the disposal group’s assets or liabilities, but were eliminated in deriving the consolidated financial statements.

 

 F-13 

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

10.Long-term investments

 

   March 31,
2016
  December 31,
2015
   US$(’000)  US$(’000)
   (Unaudited)   
       
Equity method investments:          
Investment in equity method investees   761    778 
Advance to equity method investees   81    80 
Impairment on equity method investments   (842)   (838)
Total equity method investments   -    20 
           
Cost method investments:          
Investment in cost method investees   1,576    1,113 
           
Total long-term investments   1,576    1,133 

 

Equity method investments

 

As of December 31, 2015, the Company beneficially owned 23.18% and 25.5% equity interest in Shenzhen Mingshan and Zhao Shang Ke Hubei, respectively. Based on the facts of the significant decline in level of business activities during 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 December 31, 2015.

 

In 2015, the Company co-incorporated ChinaNet Korea with three unaffiliated individuals and obtained 40% of the equity interest in ChinaNet Korea. During the first fiscal quarter of 2016, the Company and other investors of ChinaNet Korea deregistered the entity and re-incorporated it with new investors involved. The Company invested US$7,500 and obtained 15% of the equity interest in ChinaNet Korea through the re-incorporation. ChinaNet Korea has not conduct any business activities.

 

Cost method investments

 

As of March 31, 2016, the Company beneficially owned a 19% equity interest in ChinaNet Chuang Tou and Guohua Shiji, respectively, a 15% equity interest in ChinaNet Korea and a 10% equity interest in Chuangshi Meiwei and Beijing Saturday, respectively. The Company accounts for these investments under cost method of accounting. The following table summarizes the movement of the investments in cost method investees for the three months ended March 31, 2016:

 

   ChinaNet Korea  Beijing Saturday  Chuangshi Meiwei  Guohua Shiji  ChinaNet Chuang Tou  Total
   US$(’000)  US$(’000)  US$(’000)  US$(’000)  US$(’000)  US$(’000)
                   
Balance as of December 31, 2015 (audited)   -    17    154    3    939    1,113 
Investments during the year   8    -    -    -    449    457 
Exchange translation adjustment   -    -    1    -    5    6 
Balance as of March 31, 2016 (Unaudited)   8    17    155    3    1,393    1,576 

 

 F-14 

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

11.Property and equipment, net

 

   March 31,
2016
  December 31,
2015
   US$(’000)  US$(’000)
   (Unaudited)   
       
Leasehold improvement   384    382 
Vehicles   819    839 
Office equipment   1,501    1,376 
Electronic devices   1,177    1,171 
Property and equipment, cost   3,881    3,768 
Less: accumulated depreciation   (3,004)   (2,922)
Less: impairment loss on abandoned fixed assets   (166)   (165)
Property and equipment, net   711    681 

 

Depreciation expenses in the aggregate for the three months ended March 31, 2016 and 2015 were approximately US$73,000 and US$87,000, respectively.

 

12.Intangible assets, net

 

   March 31,
2016
  December 31,
2015
   US$(’000)  US$(’000)
   (Unaudited)   
Intangible assets not subject to amortization:          
Domain name   1,495    1,488 
Intangible assets subject to amortization:          
Contract backlog   192    191 
Customer relationship   3,357    3,340 
Non-compete agreements   1,328    1,321 
Software technologies   317    316 
Cloud compute software technology   1,437    1,429 
SMEs intelligent operation and marketing data service applications   4,997    4,973 
Other computer software   109    108 
Intangible assets, cost   13,232    13,166 
Less: accumulated amortization   (5,184)   (4,845)
Less: accumulated impairment losses   (2,697)   (2,683)
Intangible assets, net   5,351    5,638 

 

Amortization expenses in aggregate for the three months ended March 31, 2016 and 2015 were approximately US$311,000 and US$357,000, respectively.

 

Based on the current carrying value of the finite-lived intangible assets recorded, which weighted average remaining useful life was 6.12 years as of March 31, 2016, and assuming no further subsequent impairment of the underlying intangible assets, the estimated future amortization expenses is approximately US$945,000 for the nine months ended December 31, 2016, approximately US$776,000 for the year ended December 31, 2017 and approximately US$770,000 each year for the year ended December 31, 2018 through 2020.

 

13.Deposit and prepayment for purchasing of software technology

 

In May 2015, the Company entered into a contract to purchase software products related to cloud video management system from an unrelated third party with a total contract amount of RMB9.5 million (approximately US$1.5 million). As of March 31, 2016, the Company had paid in the aggregate of RMB6.65 million (approximately US$1.03 million) in accordance with the payment schedule set forth in the contract. The Company is currently in test trials for this system. The transaction as contemplated under the contract is expected to be consummated in 2016.

 F-15 

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

In November 2015, the Company entered into a contract to engage an unrelated third party to develop software systems related to Internet operation safety, information exchange security and data encryption and management with a total contract amount of RMB13 million (approximately US$2 million). As of March 31, 2016, the Company had paid approximately RMB9.1 million (approximately US$1.41 million) for the software systems and was in test trials for the systems. As of the date hereof, the Company has finished the installation and test trials of the systems and has settled the remaining purchase price with the counter party.

 

14.Goodwill

 

   Amount
   US$(’000)
      
Balance as of December 31, 2015 (audited)   4,396 
Exchange translation adjustment   22 
Balance as of March 31, 2016 (unaudited)   4,418 

 

15.Accrued payroll and other accruals

 

   March 31,
2016
  December 31,
2015
   US$(’000)  US$(’000)
   (Unaudited)   
       
Accrued payroll and staff welfare   304    345 
Accrued operating expenses   311    340 
    615    685 

 

16.Guarantee payment and prepayment from new investors

 

On May 5, 2015, the Company entered into a Securities Purchase Agreement with Beijing Jinrun Fangzhou Science & Technology Co, Ltd. (“Jinrun Fangzhou”), a public company listed on the National Equities Exchange and Quotations of the PRC (the “NEEQ”), pursuant to which Jinrun Fangzhou agreed to purchase 2,800,000 shares of common stock of the Company for an aggregate purchase price of US$3,500,000. On May 26, 2015, the Company entered into another Securities Purchase Agreement with Dongsys Innovation (Beijing) Technology Development Co., Ltd. (“Dongsys Innovation”), a public company listed on the NEEQ, pursuant to which Dongsys Innovation agreed to purchase 1,000,000 shares of common stock of the Company for an aggregate purchase price of US$1,250,000.

 

In accordance with the Securities Purchase Agreements described above, Jinrun Fangzhou and Dongsys Innovation were required to pay 10% of its respective total purchase price as guarantee payments within five days of the date the agreements were signed, and pay an additional 15% of its respective total purchase price within thirty days of the date of the agreements were signed, and pay the remaining 75% of its respective purchase price at the closing which shall take place on the date mutually agreed to by the parties.

 

As of March 31, 2016, the Company has received the 10% guarantee payment and 15% prepayment in an aggregate amount equal to US$829,000 from Jinrun Fangzhou, and the 10% guarantee payment in an amount equal to US$120,000 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 agreement with the two investors, respectively. The Company expects to refund the guarantee payment and prepayment to the investors before December 31, 2016. As agreed by the parties, if the Company fails to fully refund the amounts before December 31, 2016, 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.

 

 F-16 

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

17.Taxation

 

1)Income tax

 

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 three months ended March 31, 2016, 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 three months ended March 31, 2016 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.

 

lIn July 2012, Business Opportunity Online was approved by the related PRC governmental authorities as a High and New Technology Enterprise under the current EIT law, and was approved by the local tax authorities of Beijing, the PRC, to be entitled to a favorable statutory tax rate of 15% until December 31, 2014. During 2015, Business Opportunity Online reapplied for the qualification as a High and New Technology Enterprise. In November 2015, Business Opportunity Online received the formal certificate as a High and New Technology Enterprise, which enabled the entity to continue to enjoy the favorable statutory tax rate of 15% until November 2018. Therefore, for the three months ended March 31, 2016 and 2015, the applicable income tax rate of Business Opportunity Online was both 15%.

 

lBusiness Opportunity Online Hubei was approved by the related PRC governmental authorities to be qualified as a software company and was approved by the local tax authorities of Xiaogan City, Hubei province, the PRC, to be entitled to a EIT exemption for fiscal 2012 and a 50% reduction of its applicable EIT rate which is 25% to 12.5% of its taxable income for the succeeding three years through fiscal 2015, as its first profitable year was determined as fiscal 2011 instead of fiscal 2012 in August 2013 by the local tax authorities of Xiaogan City, Hubei province. Therefore, the applicable income tax rate for Business Opportunity Online Hubei was 25% and 12.5% for the three months ended March 31, 2016 and 2015, respectively.

 

lThe applicable income tax rate for other PRC operating entities of the Company was 25% for both the three months ended March 31, 2016 and 2015.

 

lThe 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 three months ended March 31, 2016 and 2015, all of the preferential income tax treatments enjoyed by the Company’s PRC subsidiaries and VIEs were based on the current applicable laws and regulations of the PRC and approved by the related government regulatory authorities and local tax authorities where the Company’s respective PRC subsidiaries and VIEs operate in. Business Opportunity Online and Business Opportunity Online Hubei were most affected by these preferential income tax treatments within the structure of the Company. The preferential income tax treatments are subject to change in accordance with the PRC government economic development policies and regulations. These preferential income tax treatments are primarily determined by the regulation and policies of the PRC government in the context of the overall economic policy and strategy. As a result, the uncertainty of theses preferential income tax treatments are subject to, but not limited to, the PRC government policy on supporting any specific industry’s development under the outlook and strategy of overall macroeconomic development.

 F-17 

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

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 three months ended March 31, 2016 and 2015, 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 March 31, 2016 and December 31, 2015, taxes payable consists of:

 

   March 31,
2016
  December 31,
2015
   US$(’000)  US$(’000)
   (Unaudited)   
       
Turnover tax and surcharge payable   1,333    1,272 
Enterprise income tax payable   1,922    1,914 
    3,255    3,186 

 

For the three months ended March 31, 2016 and 2015, the Company’s income tax benefit consisted of:

 

   Three Months Ended March 31,
   2016  2015
   US$(’000)  US$(’000)
   (Unaudited)  (Unaudited)
       
Current-PRC   -    - 
Deferred-PRC   28    222 
Income tax benefit   28    222 

 

The Company’s deferred tax liabilities at March 31, 2016 and changes for the three months then ended were as follows:

 

   Amount
   US$(’000)
    
Balance as of December 31, 2015 (audited)   118 
Reversal during the period   (30)
Exchange  translation adjustment   1 
Balance as of March 31, 2016 (unaudited)   89 

 

Deferred tax liabilities arose on the recognition of the identifiable intangible assets acquired from acquisition transactions in previous years. Reversal for the three months ended March 31, 2016 of approximately US$30,000 was due to amortization of the acquired intangible assets.

 F-18 

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

The Company’s deferred tax assets at March 31, 2016 and December 31, 2015 were as follows:

 

   March 31,
2016
  December 31,
2015
   US$(’000)  US$(’000)
   (Unaudited)   
       
Tax effect of net operating losses carried forward   8,300    7,921 
Bad debts provision   937    932 
Valuation allowance   (7,681)   (7,303)
Total deferred tax assets   1,556    1,550 

 

The net operating losses carried forward incurred by the Company (excluding its PRC operating subsidiary and VIEs) were approximately US$15,488,000 and US$14,903,000 at March 31, 2016 and December 31, 2015, respectively, which loss carry forwards gradually expire over time, the last of which expires in 2036. A full valuation allowance has been recorded because it is considered more likely than not that the deferred tax assets will not be realized through sufficient future earnings of the entity to which the operating losses relate.

 

The net operating losses carried forward (excluding bad debts provision, amortization of intangible assets acquired from business combinations and non-deductible expenses) incurred by the Company’s PRC subsidiary and VIEs were approximately US$16,455,000 and US$15,657,000 at March 31, 2016 and December 31, 2015, respectively, which loss carry forwards gradually expire over time, the last of which expires in 2021. The related deferred tax asset was 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$160,000 and US$80,000 valuation allowance for the three months ended March 31, 2016 and 2015, 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$35,000 deferred tax assets for the three months ended March 31, 2016.

 

Full valuation allowance to bad debts provision related deferred tax assets were recorded because it is considered more likely than not that this portion of deferred tax assets will not be realized through bad debts verification by the local tax authorities where the PRC subsidiary and VIEs operate in.

 

The Company’s non-current portion of deferred tax assets and deferred tax liabilities were attributable to different tax-paying components of the entity, which were under different tax jurisdictions. Therefore, in accordance with ASC Topic 740 “Income taxes”, the non-current portion of deferred tax assets and deferred tax liabilities were presented separately in the Company’s balance sheets.

 

The tax authority of the PRC government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those enterprises had completed their relevant tax filings, hence the Company’s tax filings may not be finalized. It is therefore uncertain as to whether the PRC tax authority may take different views about the Company’s tax filings which may lead to additional tax liabilities.

 

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.

 

 F-19 

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

In accordance with the PRC regulations on Enterprises with Foreign Investment, a WFOE established in the PRC is required to provide certain statutory reserves, namely general reserve fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A WFOE is required to allocate at least 10% of its annual after-tax profit to the general reserve until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. Rise King WFOE is subject to the above mandated restrictions on distributable profits. Additionally, in accordance with the Company Law of the PRC, a domestic enterprise is required to provide a statutory common reserve of at least 10% of its annual after-tax profit until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to provide for a discretionary surplus reserve, at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. All of the Company’s PRC VIEs are subject to the above mandated restrictions on distributable profits.

 

As a result of these PRC laws and regulations, the Company’s PRC subsidiary and VIEs are restricted in their ability to transfer a portion of their net assets to the Company. As of March 31, 2016 and December 31, 2015, 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$8.5 million and US$6.7 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. Rise King WFOE is invested by its immediate holding company in Hong Kong and will be entitled to the 5% preferential withholding tax rate upon distribution of the dividends to its immediate holding company.

 

The ability of the Company’s PRC subsidiary and VIEs to make dividends and other payments to the Company may also be restricted by changes in applicable foreign exchange and other laws and regulations.

 

Foreign currency exchange regulation in China is primarily governed by the following rules:

 

lForeign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules;

lAdministration 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.

 

 F-20 

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

As of March 31, 2016 and December 31, 2015, there was approximately US$22.2 million and US$22.9 million retained earnings in the aggregate, respectively, which was generated by the Company’s PRC subsidiary and VIEs in Renminbi included in the Company’s consolidated net assets, aside from US$2.8 million of statutory reserve funds as of March 31, 2016 and December 31, 2015, 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$8.5 million and US$6.7 million of restricted net assets as of March 31, 2016 and December 31, 2015, as discussed above.

 

20.Related party transactions

 

Revenue from related parties:

 

   Three Months Ended March 31,
   2016  2015
   US$(’000)  US$(’000)
   (Unaudited)  (Unaudited)
       
Beijing Saimeiwei Food Equipment Technology Co., Ltd,   1    37 
Chuangshi Meiwei (Beijing) International Investment Management Co., Ltd.   24    - 
Beijing Saturday Education Technology Co., Ltd.   23    26 
    48    63 

 

21.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$154,000 and US$144,000 for the three months ended March 31, 2016 and 2015, respectively.

 

22.Concentration of risk

 

Credit risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, other receivables and prepayments and deposits to suppliers. As of March 31, 2016 and December 31, 2015, substantially all of the Company’s cash and cash equivalents were held by major financial institutions located in Mainland China, which management believes are of high credit quality.

 

Risk arising from operations in foreign countries

 

All of the Company’s operations are conducted within the PRC. The Company’s operations in the PRC are subject to various political, economic, and other risks and uncertainties inherent in the PRC. Among other risks, the Company’s operations in the PRC are subject to the risks of restrictions on transfer of funds, changing taxation policies, foreign exchange restrictions; and political conditions and governmental regulations.

 

Currency convertibility risk

 

Significant part of the Company’s businesses is transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts. These exchange control measures imposed by the PRC government authorities may restrict the ability of the Company’s PRC subsidiary and VIEs to transfer its net assets, which to the Company through loans, advances or cash dividends.

 F-21 

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

Concentration of customers

 

For the three months ended March 31, 2016, one customer accounted for 10% of the Company’s revenues. For the three months ended March 31, 2015, two customers individually accounted for 27% and 26% of the Company’s revenues, respectively. Except for the afore-mentioned, there was no other single customer who accounted for more than 10% of the Company’s revenues for the three months ended March 31, 2016 or 2015.

 

As of March 31, 2016, two customers individually accounted for 23% and 22% of the Company’s accounts receivables, respectively. As of December 31, 2015, the same two customers individually accounted for 24% and 17% of the Company’s accounts receivables, respectively. Except for the afore-mentioned, there was no other single customer who accounted for more than 10% of the Company’s accounts receivable as of March 31, 2016 or December 31, 2015.

 

Concentration of suppliers

 

For the three months ended March 31, 2016, two suppliers individually accounted for 59% and 16% of the Company’s cost of revenues, respectively. For the three months ended March 31, 2015, one supplier accounted for 85% 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 three months ended March 31, 2016 or 2015.

 

23.Commitments and contingencies

 

The following table sets forth the Company’s operating lease commitment as of March 31, 2016:

 

   Office Rental
   US$(’000)
   (Unaudited)
    
Nine months ending December 31,     
-2016   84 
Year ending December 31,     
-2017   111 
-2018   110 
Total   305 

 

Excluding rental expenses included in discontinued operation, for the three months ended March 31, 2016 and 2015, rental expenses under operating leases were approximately US$170,000 and US$105,000, respectively.

 

In May 2015, the Company entered into a contract to purchase software products related to cloud video management system from an unrelated third party with a total contract amount of RMB9.5 million (approximately US$1.5 million). As of March 31, 2016, the Company had paid in the aggregate of RMB6.65 million (approximately US$1.03 million) in accordance with the payment schedule set forth in the contract. The transaction as contemplated under the contract is expected to be consummated in 2016 and the remaining unpaid contract amount is expected to be paid in 2016.

 

In accordance with the contract entered into between the Company and its largest internet resources supplier, the Company agreed to purchase in the aggregate of RMB100 million (“the minimum consumption amount”) (approximately US$15.5 million) from this supplier for a one-year period commencing on June 13, 2015. In accordance with this contract, if the Company fails to meet the minimum consumption amount, the supplier is allowed to require the Company to retroactively compensate the supplier in cash the difference between the granted discount rate set forth based on the minimum consumption amount and any revised discount rate set forth based on further negotiation between the two parties, if the Company is able to achieve 50% of the minimum consumption amount. If the Company fails to achieve 50% of the minimum consumption amount, the Company is not eligible to enjoy any discount. The Company believed that it could not achieve the minimum consumption amount. After several rounds of negotiation between the Company and this supplier, the supplier has agreed to significantly reduce the minimum consumption amount, and the Company is currently negotiating with this supplier for a more favorite discount rate. Based on the above discussed positive progress achieved, the Company concluded that more likely than not the Company would only be charged for approximately US$0.13 million as compensation for not achieving the original minimum consumption amount, which equaled to the deposit currently withheld by this supplier upon entering into the original contract in June 2015.

 

Legal Proceedings

 

On October 26, 2015, Business Opportunity Online, one of the Company’s indirect wholly owned VIEs, filed a civil action against Beijing 58 Information Technology Co., Ltd. (“Beijing 58”) in the Chaoyang District People’s Court of Beijing. Business Opportunity Online is seeking a court order to establish that it owns a 17.5% equity interest in Beijing 58, one of the VIEs owned by 58.com Inc. On January 20, 2016, the Chaoyang District People’s Court of Beijing rendered its ruling that Business Opportunity Online did not own 17.5% equity interest in Beijing 58. On February 15, 2016, Business Opportunity Online appealed the decision in the Beijing Third Intermediate People’s Court. The Company believes that it is too early and uncertain to assess the potential outcome of this lawsuit.

 F-22 

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

24.Discontinued operation

 

The Company exited its brand management and sales channel building business segment in the fourth fiscal quarter of 2015, which qualified for presentation as a discontinued operation. Major classes of line items constituting pre-tax net loss and net loss of the discontinued operation for the three months ended March 31, 2016 and 2015, respectively, are as follows:

 

   Three Months Ended March 31,
   2016  2015
   US$(’000)  US$(’000)
   (Unaudited)  (Unaudited)
       
Revenues   -    123 
Cost of revenues   -    79 
Total operating expenses   46    74 
Not loss before income tax benefit   (46)   (30)
Income tax benefit   -    5 
Net loss   (46)   (25)

 

For the three months ended March 31, 2016 and 2015, depreciation and amortization expenses included in operating expenses of the discontinued operation were immaterial. There were no significant capital expenditures, operating or investing noncash items incurred in the discontinued operation for the three months ended March 31, 2016 or 2015.

 

25.Segment reporting

 

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.

 F-23 

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

Three Months Ended March 31, 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   5,060    -    -    -    5,060 
Cost of revenues   3,456    -    -    -    3,456 
Total operating expenses   1,905    48    1,059(1)   -    3,012 
Depreciation and amortization expense included in total operating expenses   358    -    26    -    384 
Operating loss   (301)   (48)   (1,059)   -    (1,408)
                          
Expenditure for long-term assets   1,409    -    102    -    1,511 
                          
Net loss from continuing operations   (292)   (48)   (1,025)   -    (1,365)
                          
Total assets – March 31, 2016   30,336    2,147    17,268(2)   (14,900)   34,851 
Total assets – December 31, 2015   33,727    3,148    17,362(3)   (18,777)   35,460 

 

(1)Including approximately US$564,000 share-based compensation expenses.

 

(2)Including approximately US$148,000 total assets held by brand management and sale channel building segment and US$1,958,000 assets classified as held for sale.

 

(3)Including approximately US$182,000 total assets held by brand management and sale channel building segment and US$1,882,000 assets classified as held for sale.

 

Three Months Ended March 31, 2015 (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   5,598    126    -    -    5,724 
Cost of revenues   4,755    113    -    -    4,868 
Total operating expenses   2,097    127    696(1)   -    2,920 
Depreciation and amortization expense included in total operating expenses   388    31    9    -    428 
Operating loss   (1,254)   (114)   (696)   -    (2,064)
                          
Expenditure for long-term assets   326    -    -    -    326 
                          
Net loss from continuing operations   (988)   (114)   (695)   -    (1,797)

 

(1)Including approximately US$455,000 share-based compensation expenses.

 

 F-24 

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

26.Loss per share

 

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):

 

   Three Months Ended March 31,
   2016  2015
   US$(’000)  US$(’000)
   (Unaudited)  (Unaudited)
Net loss attributable to ChinaNet Online Holdings, Inc. from continuing operations (numerator for basic and diluted loss per share from continuing operations)  $(1,365)  $(1,763)
           
Net loss attributable to ChinaNet Online Holdings, Inc. from discontinued operation (numerator for basic and diluted loss per share from discontinued operation)  $(46)  $(25)
           
Weighted average number of common shares outstanding - Basic   28,356,797    26,366,797 
 Effect of diluted securities:          
Unvested restricted common stocks   -    - 
    Common stock purchase options   -    - 
Weighted average number of common shares outstanding -Diluted   28,356,797    26,366,797 
           
Loss per share-Basic and diluted from continuing operations  $(0.05)  $(0.07)
Loss per share-Basic and diluted from discontinued operations  $-   $- 

 

For the three months ended March 31, 2016, the diluted loss per share calculation for continuing and discontinued operations did not include options to purchase up to 2,088,040 shares of the Company’s common stock, because they were out of the money, and did not include 1,998,926 shares of unvested restricted common stock, because their effect was anti-dilutive, as the Company incurred a loss for the period for both continuing and discontinued operations.

 

For the three months ended March 31, 2015, the diluted loss per share calculation for continuing and discontinued operations did not include 2,666,667 shares of unvested restricted common stock and exercisable in-the-money options to purchase up to 894,940 shares of the Company’s common stock, because their effect was anti-dilutive, as the Company incurred a loss for the period for both continuing and discontinued operations.

 

27.Share-based compensation expenses

 

The Company granted 50,000 shares of the Company’s restricted common stock each year to its investor relations services provider, in exchange for its services to the Company for the years ended December 31, 2016 and 2015, respectively. These shares were valued at US$1.20 per share, the closing bid price of the Company’s common stock on the date of grant. Total compensation expense recognized for the services was both US$15,000 for the three months ended March 31, 2016 and 2015.

 

The Company granted 350,000 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$1.57 per share, the closing bid price of the Company’s common stock on the date of grant. Total compensation expense recognized for the three months ended March 31, 2016 and 2015 was approximately US$69,000 and US$nil, respectively.

 

The Company granted 300,000 shares of the Company’s restricted common stock to a technical service provider in exchange for its services to the Company for a 12-month period commencing on August 1, 2014. These shares were valued at US$0.67 per share, the closing bid price of the Company’s common stock on the date of grant. Total compensation expense recognized for the three months ended March 31, 2016 and 2015 was approximately US$nil and US$50,000, respectively.

 

On December 30, 2014, the Company issued 4,200,000 shares of the Company’s restricted common stock to its executive officers, of which 1,533,333 restricted shares were vested upon issuance, 1,333,333 restricted shares were vested on December 30, 2015 and the remaining 1,333,334 restricted shares will be vested on December 30, 2016. The restricted stock was valued at $1.17 per share, the closing bid price of the Company’s common stock on the date of grant. Total compensation expenses recognized for the three months ended March 31, 2016 and 2015 was both US$390,000.

 F-25 

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 665,592 shares of the Company’s restricted common stock, which will be vested on the third anniversary of the date of the grant. These shares were valued at $0.84 per share, the closing bid price of the Company’s common stock on the date of grant. The Company adopted a 5% forfeiture rate for recognition of the related compensation expenses of these unvested shares, total compensation expenses recognized for the three months ended March 31, 2016 and 2015 was approximately US$44,000 and US$nil, 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 1,193,100 shares of the Company’s restricted common stock at an exercise price of US$0.84 per share, of which 397,700 options was vested upon the date of grant, 397,700 options will be vested on September 14, 2016 and the remaining 397,700 options will be vested on September 14, 2017. The Company adopted a 5% forfeiture rate for recognition of the related compensation expenses of the unvested part of options, total compensation expenses recognized for these options for the three months ended March 31, 2016 and 2015 was approximately US$46,000 and US$nil, respectively.

 

Options issued and outstanding at March 31, 2016 and their movements during the three 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, 2015 (audited)   2,088,040    5.04   $1.00    1,292,640    5.24   $1.09 
Granted/Vested   -              -           
Forfeited   -              -           
Exercised   -              -           
Balance, March 31, 2016 (unaudited)   2,088,040    4.79   $1.00    1,292,640    4.99   $1.09 

 

The aggregate unrecognized share-based compensation expenses as of March 31, 2016 and 2015 is approximately US$2,237,000 and US$2,842,000, respectively.

 

28.Subsequent event

 

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, except as disclosed below.

 

On May 12, 2016, the Company entered into termination agreement with Jinrun Fangzhou and Dongsys Innovation, respectively, to terminate the securities purchase agreement entered into with these two entities on May 5, 2015 and May 26, 2015, respectively (See Note 16). In accordance with the termination agreement, due to certain restriction stipulated in the “Measures for Overseas Investment Management” issued by the MOFCOM of the PRC, the Company and its investors anticipated that more likely than not, the securities purchase agreement could not be consummated. As a result, the counterparties agreed to terminate the securities purchase agreements and the Company agreed to fully refund the guarantee payments and prepayment to Jinrun Fangzhou and Dongsys Innovation, respectively.

 F-26 
 

 

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, 2015. Readers are cautioned not to place undue reliance on these forward-looking statements.

 

Overview

 

We were incorporated in the State of Texas in April 2006 and re-domiciled to become a Nevada corporation in October 2006. On June 26, 2009, we consummated a share exchange transaction with China Net Online Media Group Limited (the “Share Exchange”), a company organized under the laws of British Virgin Islands (“China Net BVI”). As a result of the Share Exchange, China Net BVI became a wholly owned subsidiary of us and we are now a holding company, which, through certain contractual arrangements with operating entities in the PRC, is engaged in providing advertising, marketing, communication, online-to-offline (O2O) sales channel expansion and the related data services to SMEs in China 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 platforms, primarily including multi-channel advertising and promotion platform and social networking and services distribution platform. Our multi-channel advertising and promotion platform primarily consists of internet advertising and marketing portals and our TV production and advertising unit. We provide varieties of marketing campaigns through this platform by the combination of the Internet, mobile and TV, we also generate effective sales leads and provide search engine marketing services through this platform to maximize market exposure and effectiveness for our clients. Our social networking and services distribution platform is an information and service portal for entrepreneurs or any individual who plans to start their own business. It is built to serve the community of entrepreneurs to assist them with developing their business, as well as sharing their resources. We also use this platform to develop the distribution channels for our online to offline (O2O) sales channel expansion services in different cities in the PRC. During the past two years, we developed our SMEs intelligent operation and marketing data service applications, which consists of several online cloud technology based sales, client membership management and other administrative operational management tools specifically designed for small business in China to match their simplicity. We intend to use these applications to create community-based consumption ecosystem, deploy our Big Data technologies and analyze offline businesses’ operational data and customers’ consumption data to help the SMEs improve the conversion rate of the purchase from their clients and provide them with related data services.

 

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 2015 Form 10-K.

 27 

 

 

A. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 

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.

 

   Three Months Ended March 31,
   2016  2015
   US$  US$
   (Unaudited)  (Unaudited)
       
Revenues          
From unrelated parties  $5,012   $5,661 
From related parties   48    63 
Total revenues   5,060    5,724 
Cost of revenues   3,456    4,868 
Gross profit   1,604    856 
           
Operating expenses          
Sales and marketing expenses   880    1,185 
General and administrative expenses   1,706    1,245 
Research and development expenses   426    490 
    3,012    2,920 
           
Loss from operations   (1,408)   (2,064)
           
Other income (expenses)          
Interest income   27    29 
Interest expense   -    (17)
Other (expenses)/income   (12)   32 
    15    44 
Loss before income tax expense, equity method investments, noncontrolling interests and discontinued operation   (1,393)   (2,020)
Income tax benefit   28    222 
Loss before equity method investments, noncontrolling interests and discontinued operation   (1,365)   (1,798)
Share of income in equity investment affiliates   -    1 
Loss from continuing operations   (1,365)   (1,797)
Loss from discontinued operation, net of income tax   (46)   (25)
Net loss   (1,411)   (1,822)
Net loss attributable to noncontrolling interests from continuing operations   -    34 
Net loss attributable to ChinaNet Online Holdings, Inc.   (1,411)   (1,788)
           
Loss per share          
Loss from continuing operations per common share          
Basic and diluted  $(0.05)  $(0.07)
Loss from discontinued operations per common share          
Basic and diluted  $-   $- 
           
Weighted average number of common shares outstanding:          
Basic and diluted   28,356,797    26,366,797 

 

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Revenues

 

The following tables set forth a breakdown of our total revenues, divided into five segments for the periods indicated, with inter-segment transactions eliminated:

 

   Three Months Ended March 31,
   2016  2015
Revenue type  (Amounts expressed in thousands of US dollars, except percentages)
             
-Internet advertisement and data service   3,627    71.7%  $2,447    42.8%
-Technical services   21    0.4%   104    1.8%
-Search engine marketing service   1,412    27.9%   3,047    53.2%
Internet advertisement and related services  $5,060    100%  $5,598    97.8%
TV and Bank kiosk advertisement   -    -    126    2.2%
Total  $5,060    100%  $5,724    100%

 

Total Revenues: Our total revenues decreased to US$5.06 million for the three months ended March 31, 2016 from US$5.72 million for the three months ended March 31, 2015. The decrease was primarily due to decrease in revenues from search engine marketing service during the period.

 

We derive the majority of our service revenues from the sale of advertising space on our internet portals and providing the related data service, sales of effective sales lead information, providing search engine marketing (“SEM”) service and other related value added technical support and services and content management services to unrelated third parties and to certain related parties. Our advertising and marketing services to related parties were provided in the ordinary course of business on the same terms as those provided to our unrelated customers. For the three months ended March 31, 2016 and 2015, our service revenues from related parties in the aggregate was less than 1.2% 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 three months ended March 31, 2016 and 2015, respectively, with inter-company transactions eliminated:

 

For the three months ended March 31, 2016:

 

Name of subsidiary or VIE  Revenue from
unrelated parties
  Revenue from
related parties
  Total
   ($’000)  ($’000)  ($’000)
                
Rise King WFOE and subsidiaries   21    -    21 
Business Opportunity Online and subsidiaries   4,991    48    5,039 
Beijing CNET Online and subsidiaries   -    -    - 
Total revenues   5,012    48    5,060 

 

For the three months ended March 31, 2016:

 

Name of subsidiary or VIE  Cost of Revenues  Gross Profit
   ($’000)  ($’000)
       
Rise King WFOE and subsidiaries   1    20 
Business Opportunity Online and subsidiaries   3,455    1,584 
Beijing CNET Online and subsidiaries   -    - 
Total   3,456    1,604 

 

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For the three months ended March 31, 2016:

 

Name of subsidiary or VIE  Net Loss
   ($’000)
    
Rise King WFOE and subsidiaries   (491)
Business Opportunity Online and subsidiaries   (246)
Beijing CNET Online and subsidiaries   (43)
ChinaNet Online Holdings, Inc.   (585)
Total net loss from continuing operations before allocation to the noncontrolling interest   (1,365)
Loss from discontinued operations   (46)
Total net loss before allocation to the noncontrolling interest   (1,411)

 

For the three months ended March 31, 2015:

 

Name of subsidiary or VIE  Revenue from
unrelated parties
  Revenue from
related parties
  Total
   ($’000)  ($’000)  ($’000)
                
Rise King WFOE and subsidiaries   104    -    104 
Business Opportunity Online and subsidiaries   5,488    63    5,551 
Beijing CNET Online and subsidiaries   69    -    69 
Total revenues   5,661    63    5,724 

 

For the three months ended March 31, 2015:

 

Name of subsidiary or VIE  Cost of Revenues  Gross Margin
   ($’000)  ($’000)
       
Rise King WFOE and subsidiaries   -    104 
Business Opportunity Online and subsidiaries   4,865    686 
Beijing CNET Online and subsidiaries   3    66 
Total   4,868    856 

 

For the three months ended March 31, 2015:

 

Name of subsidiary or VIE  Net Loss
   ($’000)
    
Rise King WFOE and subsidiaries   (85)
Business Opportunity Online and subsidiaries   (1,159)
Beijing CNET Online and subsidiaries   (24)
ChinaNet Online Holdings, Inc.   (529)
Total net loss from continuing operations before allocation to the noncontrolling interest   (1,797)
Loss from discontinued operations   (25)
Total net loss before allocation to the noncontrolling interest   (1,822)

 

Management considers revenues generated from internet advertising and data service, SEM services and other related technical services as one aggregate business operation and relies upon the consolidated results of all the operations in this business unit to make decisions about allocating resources and evaluating performance.

 

lInternet advertising and data service revenues for the three months ended March 31, 2016 increased to approximately US$3.63 million compared to US$2.45 million for the same period in 2015, representing a 48% increase. During 2015, we continued to place persistent effort in integrating and upgrading our internet advertising, marketing and data services to our SME clients. We optimized our online promotion tactics by conglomerating different products of a single large customer and relatively increasing input on segment and industry level online promotions to improve cost efficiency, which helped the Company and our clients achieve more accurate promotion and placement effects with acceptable costs, thereby increasing sales lead conversion rate and overall client satisfaction with our services. We also optimized our online promotion analysis and cost control system to provide more data and feedback to our users, which is especially helpful to our larger clients, and helpful to the Company to achieve a dynamic control on its internet resources costs. As a result, along with eliminating smaller and non-profitable clients, the number of larger customers served by us continued to increase, and our client’s average consumption amount for our internet advertising and data service also increased compared with the same period last year, which led the increase in revenues from this business for the three months ended March 31, 2016. We will continue to invest in developing new service modules for our clients. We believe that launch of new services in future periods will help increase our market penetration in the SME segment, thereby continuing to increase our recurring revenues in the future.

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lRevenues generated from technical services offered by Rise King WFOE were US$0.02 million for the three months ended March 31, 2016 compared to US$0.10 million for the same period in 2015.

 

lRevenue generated from search engine marketing services for the three months ended March 31, 2016 and 2015 was approximately US$1.41 million and US$3.05 million, respectively. This enhanced third-party search engine marketing service is designed to help our clients select the most effective key words and to prioritize the ranking of the anticipated search engine results on selected key words in order to increase the sales lead conversion rate for our clients’ business promotion on both mobile and PC searches. The decrease in this revenues for the three months ended March 31, 2016 was primarily due to the delay of finalizing the 2016 framework purchase contract with our key search engine suppliers in the first quarter of 2016, which temporarily limited the supply of this service during the period. Management believes this service will be an effective supplement to the internet advertising and data service provided to our clients, and will help increase the overall satisfaction with our services, thereby increasing recurring revenues and the number of clients in the future. Due to the relative low gross margin of this service as compares to the internet advertising and data service, management does not expect further expansion of this service in the future.

 

lAs discussed in our 2015 Form 10-K, we exited our bank kiosk advertisement business segment in the fourth fiscal quarter of 2015. We did not generate any TV advertisement revenues for the three months ended March 31, 2016, since we did not finalize any TV advertisement resources contracts with suppliers during the period. For the three months ended March 31, 2015, our total revenues generated from TV and bank kiosk advertisement was approximately US$0.13 million, of which approximately US$0.06 million was generated form TV advertisement and US$0.07 million was generated from bank kiosk advertisement.

 

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 five segments, by amount and gross profit ratio for the periods indicated, with inter-segment transactions eliminated:

 

   Three Months Ended March 31,
   2016  2015
   (Amounts expressed in thousands of US dollars, except percentages)
   Revenue  Cost  GP ratio  Revenue  Cost  GP ratio
                   
-Internet advertisement and data service  $3,627   $2,085    43%  $2,447   $1,798    27%
-Technical services   21    1    95%   104    -    100%
-Search engine marketing service   1,412    1,370    3%   3,047    2,957    3%
Internet advertisement and related services  $5,060   $3,456    32%  $5,598   $4,755    15%
TV and Bank kiosks advertisement   -    -    -    126    113    10%
Total  $5,060   $3,456    32%  $5,724   $4,868    15%

 

Cost of revenues: Our total cost of revenues decreased to US$3.46 million for the three months ended March 31, 2016 from US$4.87 million for the same period in 2015. This was primarily due to the decrease in costs associated with our search engine marketing service, which was in line with the decrease 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.

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lFor 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 and portal websites in China, such as: Baidu, Qihu 360 and Sohu (Sogou). The purchase of these internet resources in large volumes allowed us to negotiate discounts with our suppliers. For the three months ended March 31, 2016 and 2015, our total cost of revenues for internet advertising and data service was approximately US$2.09 million and US$1.80 million, respectively. The gross margin for our internet advertising and data service revenues increased to 43% for the three months ended March 31, 2016, compared to 27% for the three months ended March 31, 2015, which was primarily due to the measures we took to increase the cost efficiency and enhance the cost control, as discussed above.

 

lCosts for search engine marketing services were direct internet resource costs consumed for search engine marketing services provided to clients as described above. We normally charge our clients service fees for this service as a certain percentage of the related direct cost consumed. Gross margin of this service for the three months ended March 31, 2016 and 2015 was both approximately 3%.

 

Gross Profit

 

As a result of the foregoing, our gross profit was US$1.60 million for the three months ended March 31, 2016 compared to US$0.86 million for the same period in 2015. Our overall gross margin increased to 32% for the three months ended March 31, 2016, compared to 15% for the same period in 2015. The increase in our gross profit and gross margin for the three months ended March 31, 2016 was primarily due to (1) the improvement in gross margin of our internet advertising and data service business, which was 43% and 27% for the three months ended March 31, 2016 and 2015, respectively, and (2) the decrease in lower margin revenues from search engine marketing service, which constituted 28% and 53% of our total revenues for the three months ended March 31, 2016 and 2015, 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.

 

We exited our brand management and sales channel building business segment in the fourth fiscal quarter of 2015, which qualified for presentation as a discontinued operation. The results of operation of this business was reported in discontinued operation as a separate component in the consolidated statements of operations and comprehensive loss for all periods presented. As a result, operating expenses amounts in the consolidated statements of operations and comprehensive loss for the three months ended March 31, 2015 have been retrospectively adjusted to reflect the effect of reclassification of results of operations reported in discontinued operation as a separate component.

 

   Three Months Ended March 31,
   2016  2015
   (Amounts expressed in thousands of US dollars, except percentages)
   Amount  % of total revenue  Amount  % of total revenue
             
Total Revenues  $5,060    100%  $5,724    100%
Gross Profit   1,604    32%   856    15%
Sales and marketing expenses   880    17%   1,185    21%
General and administrative expenses   1,706    34%   1,245    22%
Research and development expenses   426    8%   490    9%
Total operating expenses  $3,012    59%  $2,920    51%

 

Operating Expenses:   Our operating expenses increased slightly to US$3.01 million for the three months ended March 31, 2016 from US$2.92 million for the same period of 2015.

 

lSales and marketing expenses: Sales and marketing expenses decreased to US$0.88 million for the three months ended March 31, 2016 from US$1.19 million for the same period of 2015. 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 three months ended March 31, 2016, the decrease in our sales and marketing expenses was primarily due to the decrease in our brand marketing expenses of approximately US$0.23 million, which we spent through key search engines to promote our brand, websites and services.

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lGeneral and administrative expenses: General and administrative expenses increased to US$1.71 million for the three months ended March 31, 2016 from US$1.25 million for the same period in 2015. 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 three months ended March 31, 2016, the change in our general and administrative expenses was primarily due to the following reasons: (1) the increase in general administrative expenses, such as: professional service expenses, salary and benefit expenses, office rental and other general office expenses of approximately US$0.12 million; (2) the net effect of increase in allowances for doubtful accounts, due to reversal of allowance for doubtful accounts of approximately US$0.22 million during the first quarter of 2015; and (3) the increase in share-based compensation expense of approximately US$0.12 million.

 

lResearch and development expenses: Research and development expenses were US$0.43 million and US$0.49 million for the three months ended March 31, 2016 and 2015, 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.

 

Loss from operations: As a result of the foregoing, we incurred a loss from operations of approximately US$1.41 million and US$2.06 million for the three months ended March 31, 2016 and 2015, respectively.

 

Interest income: For the three months ended March 31, 2016 and 2015, interest income we earned was primarily contributed from the approximately US$3.3 million of term deposit we placed in one of the major financial institutions in the PRC.

 

Interest expense: For the three months ended March 31, 2015, interest expense we paid were primarily related to the approximately US$0.8 million of short-term bank loan we borrowed from a major financial institution in the PRC to supplement our short-term working capital needs, which was matured in July 2015 with no further extension.

 

Loss before income tax benefit, equity method investments, noncontrolling interests and discontinued operation: As a result of the foregoing, our loss before income tax benefit, equity method investment, noncontrolling interest and discontinued operation was approximately US$1.39 million and US$2.02 million for the three months ended March 31, 2016 and 2015, respectively.

 

Income Tax benefit: We recognized a net income tax benefit of approximately US$0.03 million and US$0.22 million for the three months ended March 31, 2016 and 2015, respectively. For the three months ended March 31, 2016, approximately US$0.029 million of our income tax benefit was in relation to the amortization of the intangible assets identified in the acquisition transactions consummated in previous years; approximately US$0.034 million of our income tax benefit was in relation to the net operating loss incurred by our PRC operating VIEs for the period, which we consider likely to be able to utilized with respect to future earnings of the entities to which the operating losses relate; and we also incurred approximately US$0.035 million income tax expenses by utilizing deferred tax assets recognized in previous years due to earnings generated during the period. For the three months ended March 31, 2015, approximately US$0.04 million of our income tax benefit was in relation to the amortization of the intangible assets identified in the acquisition transactions consummated in previous years and approximately US$0.19 million was in relation to the net operating loss incurred by our PRC operating VIEs for the period, which we consider likely to be able to utilized with respect to future earnings of the entities to which the operating losses relate.

 

Loss before equity method investments, noncontrolling interests and discontinued operation: As a result of the foregoing, our loss before equity method investment, noncontrolling interest and discontinued operation was approximately US$1.37 million and US$1.80 million for the three months ended March 31, 2016 and 2015, respectively.

 

Share of income in equity investment affiliates: For the three months ended March 31, 2016 and 2015, we beneficially owned 23.18% and 25.5% equity interest in Shenzhen Mingshan and Zhao Shang Ke Hubei, respectively. Accordingly, for the three months ended March 31, 2015, we recognized our pro-rata share of income in Shenzhen Mingshan and Zhao Shang Ke Hubei of approximately US$0.001 million and US$nil, respectively. For the three months ended March 31, 2016, we did not recognize any pro-rata share of loss in these equity investment affiliates, since the amount was immaterial.

 

Loss from continuing operations: As a result of the foregoing, we incurred a net loss from continuing operations of US$1.37 million and US$1.80 million for the three months ended March 31, 2016 and 2015, respectively.

 

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Loss from discontinued operation, net of income tax: Since we exited our brand management and sales channel building business segment in the fourth fiscal quarter of 2015, which qualified for presentation as a discontinued operation, the results of operations of this segment was reported as loss from discontinued operations as a separate component in our statements of operations and comprehensive loss for the three months ended March 31, 2016 and 2015, respectively. Major line items constituting pre-tax net loss and net loss of the discontinued operation are as follows:

 

   Three Months Ended March 31,
   2016  2015
   US$(’000)  US$(’000)
   (Unaudited)  (Unaudited)
       
Revenues   -    123 
Cost of revenues   -    79 
Total operating expenses   46    74 
Not loss before income tax benefit   (46)   (30)
Income tax benefit   -    5 
Net loss   (46)   (25)

 

Net loss: As a result of the foregoing, for the three months ended March 31, 2016 and 2015, we incurred a total net loss from continuing and discontinued operations of approximately US$1.41 million and US$1.82 million, respectively.

 

Net loss attributable to noncontrolling interest from continuing operations: Beijing Chuang Fu Tian Xia was 51% owned by Business Opportunity Online upon incorporation. For the three months ended March 31, 2016 and 2015, net loss allocated to the noncontrolling interests of Beijing Chuang Fu Tian Xia was approximately US$nil million and US$0.03 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$1.41 million and US$1.79 million for the three months ended March 31, 2016 and 2015, 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 March 31, 2016, we had cash and cash equivalents of approximately US$3.7 million. We also had approximately US$3.3 million of term deposit placed in one of the major financial institutions in China which will mature in July 2016.

 

Our liquidity needs include (i) net cash used in operating activities that consists of (a) cash required to fund the initial build-out, 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:

 

   Three Months Ended March 31,
   2016  2015
   Amounts in thousands of US dollars
       
Net cash provided by/(used in) operating activities  $443   $(2,328)
Net cash used in investing activities   (2,204)   (509)
Net cash provided by/(used in) financing activities   -    - 
Changes in cash and cash equivalents included in assets held for sale   (6)   - 
Effect of foreign currency exchange rate changes on cash   8    (16)
Net decrease in cash and cash equivalents  $(1,759)  $(2,853)

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Net cash provided by/(used in) operating activities

 

For the three months ended March 31, 2016, our net cash provided by operating activities of approximately US$0.44 million were primarily attributable to:

 

(1)net loss excluding approximately US$0.38 million of non-cash expenses of depreciation and amortizations; approximately US$0.56 million share-based compensation; approximately US$0.02 million of loss on disposal of fixed assets and approximately US$0.03 million of net deferred income tax benefit of approximately US$0.47 million;

 

(2)the receipt of cash from operations from changes in operating assets and liabilities such as:

 

-other receivable decreased by approximately US$1.46 million, primarily due to subsequent collection of TV advertisement deposit and prepayment receivable related to a contract expired on December 31, 2014;

 

-accounts payable increased by approximately US$0.19 million;

 

-advance from customers increased by approximately US$0.06 million;

 

-other current assets decreased by approximately US$0.03 million;

 

-taxes payable increased by approximately US$0.05 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$0.53 million;

 

-prepayment to suppliers increased by approximately US$0.15 million;

 

-accruals and other payables decreased by approximately US$0.2 million.

 

For the three months ended March 31, 2015, our net cash used in operating activities of approximately US$2.33 million were primarily attributable to:

 

(1)net loss of US$1.82 million, adjusted by excluding an approximately US$0.23 million net deferred income tax benefit, an US$0.90 million non-cash expenses of depreciation, amortization, and share-based compensation and an US$0.22 million of reversal of bad debts provisions, yielded the non-cash items excluded net loss of approximately US$1.37 million;

 

(2)the receipt of cash from operations from changes in operating assets and liabilities such as:

 

-other receivable decreased by approximately US$0.20 million, primarily due to the partial collection of the TV advertisement deposit and prepayment receivable related to a contract expired on December 31, 2014;

 

-advances from customers increased by approximately US$1.3 million; and

 

-other payable increased by approximately US$0.04 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 the advertising services provided increased by approximately US$0.05 million;

 

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-deposit and prepayment to suppliers increased by approximately US$2.2 million for the purchasing of internet resources and TV advertising slots; and

 

-aggregate of increase in other current assets and decrease in accounts payable and other current liabilities of approximately US$0.25 million.

 

Net cash used in investing activities

 

For the three months ended March 31, 2016, our cash used in investing activities included the following transactions: (1) we spent approximately US$0.12 million for the purchase of general office equipment and expenditures on leasehold improvements; (2) we paid approximately US$1.39 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$0.26 million of short-term working capital loans during the period; and (4) we made additional investments to an investee of the Company of approximately US$0.43 million during the period. In the aggregate, these transactions resulted in a net cash outflow from investing activities of approximately US$2.2 million for the three months ended March 31, 2016.

 

For the three months ended March 31, 2015, our cash used in investing activities included the following transactions: (1) we paid approximately US$0.33 million to settle the remaining balance related to the purchasing of software technology, which was consummated in December 2014; and (2) we made investments of approximately US$0.18 million in the aggregate to our cost/equity method investees during the period. In the aggregate, these transactions resulted in a net cash outflow from investing activities of approximately US$0.51 million for the three months ended March 31, 2015.

 

Net cash provided by/(used in) financing activities

 

For the three months ended March 31, 2016 and 2015, there was no cash provided by or used in financing activities.

 

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 March 31, 2016 and December 31, 2015, 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 both approximately US$8.5 and US$6.7 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.

 

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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:

 

lForeign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules;

 

lAdministration 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 March 31, 2016 and December 31, 2015, there were approximately US$22.2 million and US$22.9 million retained earnings in the aggregate, respectively, which were generated by our PRC subsidiary and VIEs in Renminbi included in our consolidated net assets, aside from US$2.8 million of statutory reserve funds as of March 31, 2016 and December 31, 2015, 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$8.5 million and US$6.7 million of restricted net assets as of March 31, 2016 and December 31, 2015, as discussed above.

 

C. OFF-BALANCE SHEET ARRANGEMENTS

 

None.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable to smaller reporting companies.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal accounting and financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended March 31, 2016, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer have concluded that during the period covered by this report, the Company’s disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

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Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the first fiscal quarter of 2016 covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.  OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

On October 26, 2015, Business Opportunity Online, one of our indirect wholly owned VIEs, filed a civil action against Beijing 58 Information Technology Co., Ltd. (“Beijing 58”) in the Chaoyang District People’s Court of Beijing. Business Opportunity Online is seeking a court order to establish that it owns a 17.5% equity interest in Beijing 58, one of the VIEs owned by 58.com Inc. On January 20, 2016, the Chaoyang District People’s Court of Beijing rendered its ruling that Business Opportunity Online did not own 17.5% equity interest in Beijing 58. On February 15, 2016, Business Opportunity Online appealed the decision in the Beijing Third Intermediate People’s Court. We believe that it is too early and uncertain to assess the potential outcome of this lawsuit.

 

Item 1A. Risk Factors

 

This information has been omitted based on the Company’s status as a smaller reporting company.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  Mine Safety Disclosures

 

None.

 

Item 5.  Other Information

 

None.

 

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Item 6.  Exhibits

 

The exhibits listed on the Exhibit Index below are provided as part of this report.

 

Exhibit No.   Document Description
31.1   Certification of the Principal Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of the Principal Accounting and Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of the Principal Executive Officer and of the Principal Accounting and Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
     
101   Interactive Data Files

 

 

 

 

 

 

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  CHINANET ONLINE HOLDINGS, INC.  
       
Date: May 16, 2016 By: /s/ Handong Cheng  
    Name: Handong Cheng  
    Title: Chief Executive Officer  
    (Principal Executive Officer)  
       
  By: /s/ Zhige Zhang  
    Name: Zhige Zhang  
    Title: Chief Financial Officer  
    (Principal Accounting and Financial Officer)  

 

 

 

 

 

 

 

 

 

 

 

 

 

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