Unassociated Document
 
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     June 30, 2009

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:  333-138111

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)

+86-10-51600828
(Registrant’s telephone number, including area code)
______________________________________________________________________
(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 o 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 August 13, 2009 the registrant had 15,774,300 shares of common stock outstanding.
 

 
 TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
 PAGE
     
Item 1. Financial Statements
 
     
 
Consolidated Balance Sheets
F-1
     
 
Consolidated Statements of Income and Comprehensive Income
F-2
     
 
Consolidated Statements of Cash Flows
F-3
     
 
Notes to Consolidated Financial Statements
F-4
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
  2
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
13
     
Item 4T. Controls and Procedures
14
   
 
PART II. OTHER INFORMATION
 
     
Item 1. Legal Proceedings
15
     
Item 1A. Risk Factors
  15
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  15
     
Item 3. Defaults Upon Senior Securities
  15
   
Item 4. Submission of Matters to a Vote of Security Holders
  15
     
Item 5. Other Information
  15
     
Item 6. Exhibits
  15
     
Signatures
  16
 

 
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
 
CHINANET ONLINE HOLDINGS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands, except for number of shares and per share data)
 
   
June 30,
   
December 31
 
   
2009
   
2008
 
   
(US $)
   
(US $)
 
Assets
 
(Unaudited)
   
(Audited)
 
Current assets:
           
  Cash and cash equivalents
  $ 3,502     $ 2,679  
  Accounts receivable
    2,124       978  
  Other receivables
    324       -  
  Prepayment and deposit to suppliers
    3,347       4,072  
  Due from related parties
    129       109  
  Due from directors
    81       -  
  Due from Control Group (see note 8)
    248       243  
  Inventories
    2       1  
  Other current assets
    22       46  
Total current assets
    9,779       8,128  
                 
Property and equipment, net
    658       678  
Other long-term assets
    44       7  
    $ 10,481     $ 8,813  
                 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
  Accounts payable
  $ 160     $ 37  
  Advances from customers
    580       608  
  Other payables
    166       1,333  
  Accrued Payroll and other accruals
    189       66  
  Due to related parties
    72       346  
  Due to Control Group
    1,187       1,149  
Due to director
    -       10  
Taxes payable
    2,169       1,746  
Total current liabilities
  $ 4,523     $ 5,295  
                 
Long-term borrowing from director
    128       128  
                 
Stockholders’ equity:
               
                 
Common stock ($0.001 par value; authorized-50,000,000 shares; issued and outstanding-15,774,300 shares and 13,790,800 shares at June 30, 2009 and December 31, 2008 respectively)
    16       14  
  Additional paid-in capital
    447       599  
  Appropriated retained earnings
    304       304  
  Unappropriated retained earnings
    4,954       2,370  
  Accumulated other comprehensive income
    109       103  
Total stockholders’ equity
  $ 5,830     $ 3,390  
                 
    $ 10,481     $   8,813  
 
See notes to the consolidated financial statements
 
F-1

 
CHINANET ONLINE HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
(In thousands, except for number of shares and per share data)
 
   
For the six months
ended June 30,
   
For the three months
ended June 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(US $)
   
(US $)
   
(US $)
   
(US $)
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                         
Sales
  $ 19,178     $ 6,703     $ 9,381     $ 5,241  
Cost of sales
    11,889       4,988       5,611       3,643  
Gross margin
    7,289       1,715       3,770       1,598  
                                 
Operating expenses
                               
  Selling expenses
    2,629       582       1,166       388  
General and administrative expenses
    916       356       568       220  
  Research and development expenses
    214       64       164       34  
      3,759       1,002       1,898       642  
  Income from operations
    3,530       713       1,872       956  
                                 
Other income (expenses):
                               
  Interest income
    5       2       2       1  
  Other income
    6       -       2       -  
  Other expenses
    -       (15 )     -       (15 )
      11       (13 )     4       (14 )
Income before income tax expense
    3,541       700       1,876       942  
  Income tax expense
    957       233       571       202  
                                 
Net income
    2,584       467       1,305       740  
                                 
Other comprehensive income
                               
  Foreign currency translation gain
    6       40       -       14  
Comprehensive income
    2,590       507       1,305       754  
Earnings per share
                               
Earnings per common stock
                               
Basic and diluted
  $ 0.19     $ 0.03     $ 0.09     $ 0.05  
                                 
Weighted average number of common shares outstanding:
                               
   Basic and diluted shares
    13,845,593       13,790,800       13,899,784       13,790,800  
 
See notes to the consolidated financial statements
 
F-2

 
CHINANET ONLINE HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(In thousands)
 
   
For the six months ended June 30,
 
   
2009
   
2008
 
   
(US $)
   
(US $)
 
   
(Unaudited)
   
(Unaudited)
 
Cash flows from operating activities
           
Net income
  $ 2,584     $ 467  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
               
  Depreciation and Amortization
    85       22  
  Share-based compensation expenses (see note 22)
    150       -  
Changes in operating assets and liabilities
               
  Accounts receivable
    (1,145 )     (1,122 )
  Other receivables
    (89 )     197  
  Prepayment and deposit to suppliers
    731       (172 )
  Due from related parties
    (22 )     (161 )
  Due from/to Control Group
    32       372  
Other current assets
    22       (87 )
  Accounts payable
    123       146  
  Advances from customers
    (29 )     386  
  Accrued payroll and other accruals
    123       10  
  Due to related parties
    (274 )     325  
  Taxes payable
    420       130  
Net cash provided by operating activities
    2,711       513  
                 
Cash flows from investing activities
               
Purchases of vehicles and office equipment
    (64 )     (26 )
Purchases of Intangible and other long-term assets
    (37 )     -  
Net cash used in investing activities
    (101 )     (26 )
                 
Cash flows from financing activities
               
Increase of long-term borrowing from director
    -       124  
Increase of short-term loan to third parties
    (235 )     -  
Increase/(decrease) in due to director
    (90 )     269  
  Increase/(decrease) in other payables
    (1,169 )     964  
  Cancellation and retirement of common stock (see note 15)
    (300 )     -  
Net cash provided by (used in) financing activities
    (1,794 )     1,357  
                 
Effect of exchange rate fluctuation on cash and cash equivalents
    7       73  
                 
Net increase in cash and cash equivalents
    823       1,917  
                 
  Cash and cash equivalents at beginning of year
    2,679       317  
  Cash and cash equivalents at end of year
  $ 3,502     $ 2,234  
                 
Supplemental disclosure of cash flow information
               
                 
  Interest paid
  $ -     $ -  
  Income taxes paid
  $ 831     $ 68  
 
See notes to the consolidated financial statements
 
F-3

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
1.  
Organization and principal activities

ChinaNet Online Holdings, Inc. (formerly known as Emazing Interactive, Inc.), (the “Company”), was incorporated in the State of Texas in April 2006 and re-domiciled to become a Nevada corporation in October 2006. From the date of the Company’s incorporation until June 26, 2009, when the Company consummated the Share Exchange, the Company’s activities were primarily concentrated in web server access and company branding in hosting web based e-games.

On June 26, 2009, the Company entered into a Share Exchange Agreement (the “Exchange Agreement”), with (i) China Net Online Media Group Limited, a company organized under the laws of British Virgin Islands (“China Net BVI”), (ii) China Net BVI’s shareholders, Allglad Limited, a British Virgin Islands company (“Allglad”), Growgain Limited, a British Virgin Islands company ("Growgain"), Rise King Investments Limited, a British Virgin Islands company (“Rise King BVI”), Star (China) Holdings Limited, a British Virgin Islands company (“Star”), Surplus Elegant Investment Limited, a British Virgin Islands company (“Surplus”), Clear Jolly Holdings Limited, a British Virgin Islands company (“Clear” and together with Allglad, Growgain, Rise King BVI, Star and Surplus, the “China Net BVI Shareholders”), who together owned shares constituting 100% of the issued and outstanding ordinary shares of China Net BVI (the “China Net BVI Shares”) and (iii) G. Edward Hancock, the principal stockholder of the Company at that time. Pursuant to the terms of the Exchange Agreement, the China Net BVI Shareholders transferred to the Company all of the China Net BVI Shares in exchange for the issuance of 13,790,800  shares (the “Exchange Shares”) of the Company’s common stock (the “Share Exchange”). As a result of the Share Exchange, China Net BVI became a wholly owned subsidiary of the Company and the Company is now a holding company, which through certain contractual arrangements with operating companies in the People’s Republic of China (the “PRC”), is engaged in providing advertising, marketing and communication services to small and medium companies in China through www.28.com (the portal website of the Company’s PRC Variable Interest Entity), TV medias and bank kiosks.

The Company’s wholly owned subsidiary, China Net BVI was incorporated in the British Virgin Islands on August 13, 2007. In April 11, 2008, China Net BVI became the parent holding company of a group of companies comprised of CNET Online Technology Limited, a Hong Kong company (“China Net HK”), which established and is the parent company of Rise King Century Technology Development (Beijing) Co., Ltd., a wholly foreign-owned enterprise (“WFOE”) established in the PRC (“Rise King WFOE”). The Company refers to the transactions that resulted in China Net BVI becoming an indirect parent company of Rise King WFOE as the “Offshore Restructuring.” Through a series of contractual agreements, we operate our business in China primarily through Business Opportunity Online (Beijing) Network Technology Co., Ltd. (“Business Opportunity Online”) and Beijing CNET Online Advertising Co., Ltd. (“Beijing CNET Online”).  Beijing CNET Online owns 51% of Shanghai Borongdingsi Computer Technology Co., Ltd. (“Shanghai Borongdingsi”). Business Opportunity Online, Beijing CNET Online and Shanghai Borongdingsi, were incorporated on December 8, 2004, January 27, 2003 and August 3, 2005, respectively. From time to time, we refer to them collectively as the “PRC Operating Entities.”

Shanghai Borongdingsi is owned 51% by Beijing CNET Online. Beijing CNET Online and Shanghai Borongdingsi entered into a cooperation agreement in June 2008, followed up with a supplementary agreement in December 2008, to conduct e-banking advertisement business. The business is based on an e-banking cooperation agreement between Shanghai Borongdingsi and Henan provincial branch of China Construction Bank which allows Shanghai Borongdingsi or its designated party to conduct in-door advertisement business within the business outlets throughout Henan Province. The e-banking cooperation agreement has a term of eight years starting August 2008. However, Shanghai Borongdingsi was not able to conduct the advertisement as a stand-alone business due to the lack of an advertisement business license and supporting financial resources. Pursuant to the aforementioned cooperation agreements, Beijing CNET Online committed to purchase equipment, and to provide working capital, technical and other related support to Shanghai Borongdingsi. Beijing CNET Online owns the equipment used in the kiosk business, is entitled to sign contracts in its name on behalf of the business, and holds the right to collect the advertisement revenue generated from the kiosk business exclusively until the recovery of the cost of purchase of the equipment. Thereafter, Beijing CNET Online has agreed to distribute 49% of the succeeding net profit generated from the e-banking advertising business, if any, to the minority shareholders of Shanghai Borongdingsi.
 
F-4


CHINANET ONLINE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
2.  
Summary of significant accounting policies
 
a)  
 Change of reporting entity and basis of presentation

As a result of the Share Exchange on June 26, 2009, the former China Net BVI shareholders owned a majority of the common stock of the Company.  The transaction was regarded as a reverse merger whereby China Net BVI was considered to be the accounting acquirer as its shareholders retained control of the Company after the Share Exchange, although the Company is the legal parent company.  The share exchange was treated as a recapitalization of the Company.  As such, China Net BVI (and its historical financial statements) is the continuing entity for financial reporting purposes. Pursuant to the terms of the Share Exchange, Emazing Interactive, Inc. was delivered with zero assets and zero liabilities at time of closing. Following the Share Exchange, the company changed its name from Emazing Interactive, Inc. to ChinaNet Online Holdings, Inc. The Financial Statements have been prepared as if China Net BVI had always been the reporting company and then on the share exchange date, had changed its name and reorganized its capital stock.
 
The accompanying unaudited interim consolidated financial statements include the accounts of the Company, and its subsidiaries and Variable Interest Entities (“VIEs”), China Net BVI, China Net HK, Rise King WFOE, Beijing CNET Online and Business Opportunity Online.  According to the agreements between Beijing CNET Online and Shanghai Borongdingsi, although Beijing CNET Online legally owns 51% of Shanghai Borongdingsi’s interests, Beijing CNET Online only controls the assets and liabilities related to the bank kiosks business, which has been all included in the financial statements of Beijing CNET Online, but not controls other assets of Shanghai Borongdingsi, thus, Shanghai Borongdingsi’s financial statements were not consolidated by the Company.  The Company and its subsidiaries and VIEs are collectively referred to as the “Group”.
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, as promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes required by US GAAP for completing annual financial statements. However, management believes that the disclosures are adequate to ensure the information presented is not misleading.
 
In the opinion of the management, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results for the interim periods presented. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in China Net BVI’s audited financial statements on Form 8-K for the fiscal year ended December 31, 2008. The results of operations for the interim periods presented are not indicative of the operating results to be expected for any subsequent interim period or for the Company’s fiscal year ending December 31, 2009.
 
b)  
Principles of Consolidation
 
The consolidated financial statements include the financial statements of all the subsidiaries and VIEs of the Company. All transactions and balances between the Company and its subsidiaries and VIEs have been eliminated upon consolidation.
 
c)  
Use of estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ from those estimates. US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, contingencies and results of operations. While management has based their assumptions and estimates on the facts and circumstances existing as of June 30, 2009, final amounts may differ from these estimates.
 
F-5

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
d)  
Foreign currency translation
 
The functional currency of the Company is United States dollars (“US$”), and the functional currency of China Net HK is Hong Kong dollars (“HK$”).  The functional currency of the Company’s PRC operating entities is Renminbi (“RMB’), and PRC is the primary economic environment in which the Company operates.
 
For financial reporting purposes, the financial statements of the Company’s PRC operating entities, which are prepared using the RMB, are translated into the Company’s reporting currency, the United States Dollar (“U.S. dollar”). Assets and liabilities are translated using the exchange rate at each balance sheet date.  Revenue and expenses are translated using average rates prevailing during each reporting period, and shareholders' equity is translated at historical exchange rates. Adjustments resulting from the translation are recorded as a separate component of accumulated other comprehensive income in shareholders’ equity.
 
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transactions.  The resulting exchange differences are included in the determination of net income of the consolidated financial statements for the respective periods.
 
e)  
Revenue recognition
 
The Group's revenue recognition policies are in compliance with Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”). In accordance with SAB 104, revenues are recognized when the four of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the service has been rendered, (iii) the fees are fixed or determinable, and (iv) collectability is reasonably assured.
 
Advertising Revenue
 
Advertising revenues include revenues from reselling of advertising time purchased from TV stations and internet advertising, reselling of internet advertising spaces and other advertisement related resources. No revenue from advertising-for-advertising barter transactions was recognized because the transactions did not meet the criteria for recognition in EITF abstract issue No. 99-17.  Advertising contracts establish the fixed price and advertising services to be provided.  Pursuant to advertising contracts, the Group provides advertisement placements in different formats, including but not limited to banners, links, logos, buttons, rich media and content integration. Revenue is recognized ratably over the period the advertising is provided and, as such, the Group considers the services to have been delivered. The Group treats all elements of advertising contracts as a single unit of accounting for revenue recognition purposes.  Based upon the Group’s credit assessments of its customers prior to entering into contracts, the Group determines if collectability is reasonably assured.  In situations where collectability is not deemed to be reasonably assured, the Group recognizes revenue upon receipt of cash from customers, only after services have been provided and all other criteria for revenue recognition have been met.
 
f)  
Cost of revenue
 
Cost of sales primarily includes media advertising time, internet advertisement related resources and other technical services purchased from third parties, labor cost and benefits and PRC business tax.
 
g)  
Advertising expenditure
 
Advertising costs are expensed when incurred and are included in “selling expenses” in the statement of operations and comprehensive income. For the six months ended June 30, 2009 and 2008, advertising expenses were approximately US$ 1,977,000 and US$ 352,000, respectively.
 
F-6

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
h)  
Income taxes
 
The Group follows the liability method of accounting for income taxes.  Under this method, deferred tax assets and liabilities are determined based on the difference between of the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Group records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income statement in the period that includes the enactment date. The Group had no deferred tax assets and liabilities recognized for the six months ended June 30, 2009 and 2008, and for the year ended December 31, 2008.
 
i)  
Uncertain tax positions
 
The Group adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 prescribes a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. For the six month ended June 30, 2009 and 2008, and for the year ended December 31, 2008, the Group did not have any interest and penalties associated with tax positions and did not have any significant unrecognized uncertain tax positions.
 
j)  
Share-based Compensation

The Company account for stock-based compensation arrangements using the fair value method in accordance with the provisions of the FASB issued Statement of Financial Accounting Standards No, 123 (revised 2004) (Share-Based Payment) (“SFAS 123R”). SFAS 123R is a revision of SFAS 123 (Accounting for Stock-Based Compensation), and supersedes Accounting Principles Beard (“APB”) Opinion No. 25 (Accounting for Stock Issued to Employees). SFAS 123R requires that the fair value of share awards issued, modified, repurchased or cancelled after implementation, under share-based payment arrangements, be measured as of the date the award is issued, modified, repurchased or cancelled. The resulting cost is then recognized in the statement of operations and comprehensive income over the service period.

The Company periodically issue common stock for acquisitions and services rendered.  Common stock issued in these circumstances is valued at the estimated fair market value, as determined by the management and board of directors.  Management and the board of directors consider market price quotations, recent stock offering prices and other factors in determining fair market value for purposes of valuing the common stock.
 
k)  
Earnings per share
 
Earnings per share are calculated in accordance with SFAS No. 128, “Earnings Per Share”. Basic earnings per share is computed by dividing income attributable to holders of common stock by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

F-7


CHINANET ONLINE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
3.  
Cash and cash equivalents
       
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
US$(’000)
   
US$(’000)
 
             
Cash
    1,452       131  
Deposits with short-term maturities
    2,050       2,548  
Total
    3,502       2,679  

 
4.  
Accounts receivable
 
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
US$(’000)
   
US$(’000)
 
             
Accounts receivable
    2,124       978  
 
All of the accounts receivable are non-interest bearing.  Based on the Group’s assessment of collectability, there has been no allowance for doubtful accounts recognized in the six months ended June 30, 2009 and the year ended December 31, 2008.

 
5.  
Other receivables
 
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
US$(’000)
   
US$(’000)
 
             
Short-term loan to third parties
    235       -  
Staff advances
    89       -  
      324       -  
 
Short-term loan to third parties is non-interest bearing loan and will be repaid by the end of the year.
 
6.  
Prepayment and deposit to suppliers
 
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
US$(’000)
   
US$(’000)
 
             
Contract execution guarantee to TV advertisement  and internet resources providers
    2,060       2,268  
Prepayment to TV advertisement and internet resources providers
    1,182       1,784  
Other deposits and prepayments
    105       20  
      3,347       4,072  
 
F-8


CHINANET ONLINE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
Contract execution guarantee to TV advertisement and internet resources providers are paid as a contractual deposit to the Group’s service providers.  These amounts will be used to offset the service fee need to be paid to the service providers in the last month of each contract period.
 
According to the contracts signed between the Group and its suppliers, the Group is normally required to pay the contract amount in advance.  These prepayments will be transferred to cost of sales when the related services are provided.
 
Therefore, management believes that there will not be any collectability issue about these deposits and prepayments, and no allowance for doubtful accounts is required.
 
7.  
Due from related parties
       
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
US$(’000)
   
US$(’000)
 
             
Beijing Saimeiwei Food Equipment Technology Co., Ltd.
    108       49  
Beijing Zujianwu Technology Co., Ltd.
    14       15  
Beijing Xiyue Technology Co., Ltd.
    -       7  
Beijing Fengshangyinli Technology Co., Ltd
    -       15  
Beijing Telijie Century Environmental Technology Co., Ltd.
    1       -  
Soyilianmei Advertising Co., Ltd.
    6       23  
      129       109  
 
These related parties are directly or indirectly owned by the Control Group (see note 8), The Company provided advertising services to these parties. Due from these parties were outstanding payments for advertising services provided.
 
8.  
Due from Control Group
 
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
US$(’000)
   
US$(’000)
 
             
Due from Control Group
    248       243  
 
Mr. Handong Cheng, Mr. Xuanfu Liu and Ms. Li Sun, the owners of the Companys PRC VIEs, Business Opportunity Online and Beijing CNET Online, are collectively referred to as the “Control Group.”
 
F-9

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
Due from Control Group were short-term, non-interest bearing loan borrowed by the Control Group individuals.
 
9.  
Property and equipment
 
        Property and equipment consist of the following:
 
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
US$(’000)
   
US$(’000)
 
             
Vehicles
    90       90  
Office equipment
    350       286  
Electronic devices
    438       437  
Total property and equipment
    878       813  
Less: accumulated depreciation
    220       135  
Total property and equipment, net
    658       678  


 
10.  
Other payables
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
US$(’000)
   
US$(’000)
 
             
Due to third parties
    161       1,255  
Others
    5       78  
      166       1,333  

Due to third parties as of June 30, 2009 and December 31, 2008 represents non-interest bearing, working capital loans borrowed by the Group from third parties, which will be paid off in 2009.
 
11.  
Due to related parties
 
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
US$(’000)
   
US$(’000)
 
             
Beijing Rongde Information Technology Co., Ltd.
    58       292  
Beijing Saimeiwei Food Equipments Technology Co., Ltd
    14       54  
      72       346  
 
These related parties are directly or indirectly owned by the Control Group, The Group provided advertising services to these parties, and due to these parties were advance payments received from these parties for advertising services will be provided in the future.
 
F-10

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
12.  
Due to Control Group
 
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
US$(’000)
   
US$(’000)
 
             
Due to Control Group
    1,187       1,149  
 
Due to Control Group were amount paid by Control Group individuals on behalf of the Group which mainly included staff salary, performance bonus and cost of resources purchased.
 
13.  
Taxation
 
1)    Income tax
 
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.  The Company become a holding company and does not conduct any substantial operations of its own after the Share Exchange. No provision for federal corporate income tax have been made in the financial statements as the Company has no assessable profits for the six month ended June 30, 2009.
 
ii). China Net BVI was incorporated in the British Virgin Islands (“BVI”).  Under the current law of the BVI, the Company is not subject to tax on income or capital gains.  Additionally, upon payments of dividends by China Net 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 have been made in the financial statements as China Net HK has no assessable profits for the six month ended June 30, 2009. 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 entities, being incorporated in the PRC, are governed by the income tax law of the PRC and is subject to PRC enterprise income tax (“EIT”).  Effective from January 1, 2008, the EIT rate of PRC was changed from 33% of to 25%, and applies to both domestic and foreign invested enterprises.
 
l  
Rise King WFOE is a software company qualified by the related PRC governmental authorities and was entitled to a two-year EIT exemption from its first profitable year and a 50% reduction of its applicable EIT rate, which is 25% of its taxable income for the exceeding three years, which subjects to an application filling by the Company. Rise King WFOE had a cumulative operating loss for the year ended December 31, 2008. Rise King will file the application for an income tax exemption, if it achieves an operating profit for the year ended December 31, 2009.
 
l  
Business Opportunity Online was qualified as a High and New Technology Enterprise in Beijing High-Tech Zone in 2005.  In March 2007, a new enterprise income tax law (the “New EIT”) in the PRC was enacted which was effective on January 1, 2008. The New EIT applies a uniform 25% EIT rate to both foreign invested enterprises and domestic enterprises. On April 14, 2008, relevant governmental regulatory authorities released qualification criteria, application procedures and assessment processes for “High and New Technology Enterprise” status under the New EIT which would entitle qualified and approved entities to a favorable statutory tax rate of 15%.  Business Opportunity Online has not obtained the approval of its reassessment of the qualification as a “High and New Technology Enterprise” under the New EIT as of June 30, 2009.  Accordingly, Business Opportunity Online accounted for its current income tax using a tax rate of 25% for the six months ended June 30, 2009 and 2008, and year ended December 31, 2008.  If Business Opportunity Online is able to be re-qualified as a “High and New Technology Enterprise”, it will be entitled to the preferential tax rate of 15%.  Business Opportunity Online will file the application for tax refund to the tax authorities for the fiscal year 2009 after it obtains the approval for its High and New Technology Enterprise qualification.
 
F-11

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
l  
The applicable income tax rate for CNET Online Beijing was 25% for the six months ended June 30, 2009 and 2008, and the year ended December 31, 2008.
 
l  
The New EIT also imposed a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside China, which were exempted under the previous enterprise income tax law and rules.  A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Holding companies in Hong Kong, for example, will be subject to a 5% rate.  Rise King WFOE is invested by immediate holding company in Hong Kong and will be entitled to the 5% preferential withholding tax rate upon distribution of the dividends to its immediate holding company.
 
2)    Business tax and relevant surcharges
 
Revenue of advertisement services are subject to 5.5% business tax and 3% cultural industry development surcharge of the gross service income, revenue from reselling of TV advertisement time is subject to 5.5% business tax and 3% cultural industry development surcharge of the net service income after deducting amount paid to ending media promulgators. Revenue of internet technical support services is subjected to 5.5% business tax.  Business tax charged was included in cost of sales.
 
As of June 30, 3009 and December 31, 2008, taxes payable consist of:
       
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
US$(’000)
   
US$(’000)
 
             
Business tax payable
    680       556  
Culture industry development surcharge payable
    180       4  
Enterprise Income tax payable
    1,260       1,132  
Individual Income tax payable
    49       54  
      2,169       1,746  
 
14.  
Long-term borrowing from director
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
US$(’000)
   
US$(’000)
 
             
Long-term borrowing from director
    128       128  
 
Long-term borrowing from director was non-interest bearing loan borrowed from director of the Group in relating to the long-term investment to the Company’s wholly-owned subsidiary Rise King WFOE.

F-12

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
15.  
Reverse merger and common stock (restatement of the stockholders’ equity)

Pursuant to SEC Manual Item 2.6.5.4 Reverse acquisitions, which requires that “in a reverse acquisition the historical shareholder’s equity of the accounting acquirer prior to the merger is retroactively reclassified (a recapitalization) for the equivalent number of shares received in the merger after giving effect to any difference in par value of the registrant’s and the accounting acquirer’s stock by an offset in paid in capital.” 

Pursuant to the terms of Share Exchange Agreement, the China Net BVI shareholders transferred to the Company all of the China Net BVI shares in exchange for the issuance of 13,790,800 shares of the Company’s common stock. Therefore, the Company reclassified its common stock and additional paid-in-capital accounts for the year ended December 31, 2008 accordingly.

Immediately prior to the Share Exchange, 4,400,000 shares of the Company’s outstanding common stock were cancelled and retired.  China Net BVI also deposited $300,000 into an escrow account, which amount was paid to Emazing principal stockholder, who owned the 4,400,000 shares, as a result of the Share Exchange have been consummated.
 
16.  
Restricted net assets
 
The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its PRC operating entities. Relevant PRC statutory laws and regulations permit payments of dividends by the Group’s PRC operating entities only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Company’s PRC operating entities.
 
In accordance with the Regulations on Enterprises with Foreign Investment of China and their articles of association, a foreign invested enterprise 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 wholly-owned foreign invested enterprise 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 respective 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 for all foreign invested enterprises. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. Rising King WFOE was established as a wholly-owned foreign invested enterprise and therefore 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 statutory common reserve at least 10% of its annual after-tax profit until such reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to provide for discretionary surplus reserve, at the discretion of the board of directors, from the profits determined in accordance with the enterprise’s PRC statutory accounts. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. China Net Beijing and Business Opportunity Online were established as a domestic invested enterprise and therefore are subject to the above mandated restrictions on distributable profits.
 
As a result of these PRC laws and regulations that require annual appropriations of 10% of after-tax income to be set aside prior to payment of dividends as general reserve fund, the Company’s PRC operating entities  are restricted in their ability to transfer a portion of their net assets to the Company.
 
Amounts restricted include paid-in capital and statutory reserve funds of the Company’s PRC operating entities as determined pursuant to PRC generally accepted accounting principles, totaling approximately US$ 907,000 as of June 30, 2009.
 
F-13

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
17.  
Related party transactions
 
       
   
Six months ended June 30,
 
   
2009
   
2008
 
   
US$(’000)
   
US$(’000)
 
             
Advertising revenue from related parties:
           
 -Beijing Saimeiwei Food Equipment Technology Co., Ltd,
    887       82  
-Beijing Zujianwu Technology Co., Ltd.
    -       22  
-Beijing Fengshangyinli Technology Co., Ltd.
    61       48  
-Soyilianmei Advertising Co., Ltd.
    428       125  
-Shiji Huigu Technology Investment Co., Ltd
    -       1  
- Beijing Telijie Cleaning Technology Co., Ltd.
    15       32  
-Beijing Telijie Century Environmental Technology Co., Ltd.
    72       9  
-Beijing Rongde Information Technology Co., Ltd.
    -       71  
      1,463       390  
 
   
Three months ended June 30,
 
   
2009
   
2008
 
   
US$(’000)
   
US$(’000)
 
             
Advertising revenue from related parties:
           
 -Beijing Saimeiwei Food Equipment Technology Co., Ltd,
    604       82  
-Beijing Zujianwu Technology Co., Ltd.
    -       22  
-Beijing Fengshangyinli Technology Co., Ltd.
    30       48  
-Soyilianmei Advertising Co., Ltd.
    263       125  
-Shiji Huigu Technology Investment Co., Ltd
    -       1  
- Beijing Telijie Cleaning Technology Co., Ltd.
    -       32  
-Beijing Telijie Century Environmental Technology Co., Ltd.
    72       9  
-Beijing Rongde Information Technology Co., Ltd.
    -       71  
      969       390  
 
18.  
Employee defined contribution plan
 
Full time employees of the Group 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 Group make contributions to the government for these benefits based on certain percentages of the employees’ salaries. The Group has no legal obligation for the benefits beyond the contributions made. The total amounts for such employee benefits, which were expensed as incurred, were approximately US$ 74,000 and US$ 50,000 for the six months ended June 30, 2009 and 2008, respectively.
 
F-14

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
19.  
Commitments
 
The following table sets forth the Group’s contractual obligations as of June 30, 2009:
 
     
Rental
payments
   
Server hosting and board-band lease payments
   
Internet resources and TV advertisement purchase payments
   
 
Total
 
     
US$(’000)
   
US$(’000)
   
US$(’000)
   
US$(’000)
 
                           
Six months ended December 31,
                         
 
-2009
      65       85       5,808       5,958  
Year ended December 31,
                                 
 
-2010
      260       -       1,702       1,962  
 
-2011
      260       -       1,459       1,719  
Total
      585       85       8,969       9,639  
 
20.  
Segment reporting
 
Based on the criteria established by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, the Group mainly operated in four principal segments: TV advertising, internet advertising, internet advertising resources resell and bank kiosk advertising. The following tables present summarized information by segments.

   
Six months ended June 30, 2009
 
   
 
 
Internet
Ad.
   
 
 
TV
Ad.
   
 
 
Bank
kiosk
   
Internet
Ad.
resources
resell
   
Others
   
Inter- segment and reconciling item
   
Total
 
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
 
                                           
Revenue
    7,871       11,184       19       846       292       (1,034 )     19,178  
Cost of sales
    2,155       9,684       1       775       16       (742 )     11,889  
Total operating expenses
    3,112       308       78       -       553 *     (292 )     3,759  
Including: Depreciation and amortization expense
    19       23       42       -       1       - -       85  
Operating income(loss)
    2,604       1,192       (60 )     71       (277 )     -       3,530  
                                                         
Expenditure for long-term assests
    36       17       -       -       48       -       101  
Net income (loss)
    1,679       1,171       (60 )     71       (277 )     -       2,584  
Total assets
    7,879       5,603       374       -       1,097       (4,472 )     10,481  

* Including US$150,000 share-based compensation expenses (See note 22).
 
F-15

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
   
Three months ended June 30, 2009
 
   
 
Internet
Ad.
   
 
TV
Ad.
   
Bank
kiosk
   
Internet
Ad.
resources
resell
   
Others
   
Inter- segment and reconciling item
   
Total
 
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
 
                                           
Revenue
    4,187       5,442       19       475       292       (1,034 )     9,381  
Cost of sales
    1,297       4,643       1       411       1       (742 )     5,611  
Total operating expenses
    1,546       133       57       -       454 *     (292 )     1,898  
Including: Depreciation and amortization expense
    10       11       21       -       1       -       43  
Operating income(loss)
    1,344       666       (39 )     64       (163 )     -       1,872  
                                                         
Expenditure for long-term assests
    28       1       -       -       38       -       67  
Net income (loss)
    825       618       (39 )     64       (163 )     -       1,305  
Total assets
    7,879       5,603       374       -       1,097       (4,472 )     10,481  
 
*Including US$150,000 share-based compensation expenses (See note 22).

   
Six months ended June 30, 2008
 
   
 
Internet
Ad.
   
 
TV
Ad.
   
Bank
kiosk
   
Internet
Ad.
resources
resell
   
 
Others
   
Inter- segment and reconciling item
   
Total
 
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
 
                                           
Revenue
    4,370       1,687       -       646       -       -       6,703  
Cost of sales
    2,186       1,434       -       1,368       -       -       4,988  
Total operating expenses
    595       407       -       -       -       -       1,002  
Including: Depreciation and amortization expense
    11       11       -       -       -       -       22  
Operating income(loss)
    1,589       (154 )     -       (722 )     -       -       713  
                                                         
Expenditure for long-term assests
    22       4       -       -       -       -       26  
Net income (loss)
    1,343       (154 )     -       (722 )     -       -       467  
Total assets
    3,454       1,927       -       -       127       (366 )     5,142  

F-16

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

   
Three months ended June 30, 2008
 
   
 
Internet
Ad.
   
TV
Ad.
   
Bank
kiosk
   
Internet
Ad.
resources
resell
   
 
Others
   
Inter- segment and reconciling item
   
Total
 
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
 
                                           
Revenue
    2,874       1,712       -       655       -       -       5,241  
Cost of sales
    799       1,456       -       1,388       -       -       3,643  
Total operating expenses
    228       414       -       -       -       -       642  
Including: Depreciation and amortization expense
    -       11       -       -       -       -       11  
Operating income(loss)
    1,847       (158 )     -       (733 )     -       -       956  
                                                         
Expenditure for long-term assests
    -       3       -       -       -       -       3  
Net income (loss)
    1,631       (158 )             (733 )     -       -       740  
Total assets
    3,454       1,927       -       -       127       (366 )     5,142  


*
Due to the exchange rates used to convert RMB to US dollar for the six months and the three months ended June 30, are the respective average exchange rates prevailing during each reporting period which are differ from each other, the converted US dollar amount in the above tables contains exchange rate effects for each reporting period.
 
21.  
Earnings per share
 
   
Six months ended June 30,
   
Three months ended June 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
US$(’000)
   
US$(’000)
   
US$(’000)
   
US$(’000)
 
   
(Unaudited)
   
(Unaudited)
 
   
(Amount in thousands except for the number of shares and per share data)
   
(Amount in thousands except for the number of shares and per share data)
 
Numerator:
                       
    Net Income attributable to common shareholders
    2,584       467       1,305       740  
                                 
Denominator:
                               
     Weighted average number of common shares outstanding
    13,845,593       13,790,800       13,899,784       13,790,800  
                                 
Basic and diluted earnings per share
    0.19       0.03       0.09       0.05  
 
All share and per share data have been retroactively adjusted to reflect the recapitalization of the Company after the share exchange agreement.
 
22.  
Share-based compensation expenses

On June 26, 2009, the Company issued 300,000 shares of common stock to TriPoint Capital Advisors, LLC. (“Tripoint), and 300,000 shares of common stock to Richever Limited (“Richever) respectively, that the Company’s board of directors previously approved for the financial consulting and corporate development services that they provided to us.  The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering.  The 600,000 shares issued were valued at $0.25 per share, the closing bid of the Company’s common stock on the date of issue.  Therefore, total aggregate value of the transaction that we recognized was US$150,000, which was recorded in general and administrative expenses as share-based compensation expenses.
 
F-17

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

On June 17, 2009, the Company engaged J and M Group, LLC (“J&M”) to provide investor relations services. The initial term of the agreement is for one year.   As additional compensation, the Company agreed to issue J&M 120,000 shares of the Company’s common stock that vest 10,000 shares every 30 days. The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering.  The 120,000 shares issued on June 17, 2009 will be valued at $0.15 per share, the closing bid of the Company’s common stock on the date of issue.  Therefore, total aggregate value of the transaction that we will recognize is US$18,000. Going forward the cost of these shares will be expensed as they vest.
 
23.  
Subsequent Events

On July 1, 2009, the Company engaged Hayden Communications International, Inc. (“HC”) to provide investor relations services. The initial term of the agreement is for one year.   As additional compensation, the Company agreed to issue HC 80,000 shares of the Company’s common stock that vest 10,000 shares every 30 days. The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering.  The 80,000 shares issued on July 1, 2009 will be valued at $1.75 per share, the closing bid of the Company’s common stock on the date of issue.  Therefore, total aggregate value of the transaction that we will recognize is US$140,000. Going forward the cost of these shares will be expensed as they vest.

F-18

 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
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. In addition, our consolidated financial statements and the financial data included in this interim report reflect our reorganization and have been prepared as if our current corporate structure had been in place throughout the relevant periods. 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 Current Report on Form 8-K filed with SEC on July 2, 2009 and “Quantitative and Qualitative Disclosure about Market Risks” in this report. Readers are cautioned not to place undue reliance on these forward-looking statements.

Overview
 
Our company (formerly known as Emazing Interactive, Inc.) was incorporated in the State of Texas in April 2006 and re-domiciled to become a Nevada corporation in October 2006. From the date of our company’s incorporation until June 26, 2009, when our company consummated the Share Exchange (as defined below), our company’s activities were primarily concentrated in web server access and company branding in hosting web based e-games.

 
On June 26, 2009, our company entered into a Share Exchange Agreement (the “Exchange Agreement”), with (i) China Net Online Media Group Limited, a company organized under the laws of British Virgin Islands (“China Net BVI”), (ii) China Net BVI’s shareholders, Allglad Limited, a British Virgin Islands company (“Allglad”), Growgain Limited, a British Virgin Islands company ("Growgain"), Rise King Investments Limited, a British Virgin Islands company (“Rise King BVI”), Star (China) Holdings Limited, a British Virgin Islands company (“Star”), Surplus Elegant Investment Limited, a British Virgin Islands company (“Surplus”), Clear Jolly Holdings Limited, a British Virgin Islands company (“Clear” and together with Allglad, Growgain, Rise King BVI, Star and Surplus, the “China Net BVI Shareholders”), who together owned shares constituting 100% of the issued and outstanding ordinary shares of China Net BVI (the “China Net BVI Shares”) and (iii) G. Edward Hancock, our principal stockholder at such time. Pursuant to the terms of the Exchange Agreement, the China Net BVI Shareholders transferred to us  all of the China Net BVI Shares in exchange for the issuance of 13,790,800 shares (the “Exchange Shares”) of our common stock (the “Share Exchange”). As a result of the Share Exchange, China Net BVI became our wholly owned subsidiary and we are now a holding company which, through certain contractual arrangements with operating companies in the People’s Republic of China (the “PRC”), is engaged in providing advertising, marketing and communication services to small and medium companies in China.
 
Our wholly owned subsidiary, China Net BVI, was incorporated in the British Virgin Islands on August 13, 2007. In April 11, 2008, China Net BVI became the parent holding company of a group of companies comprised of CNET Online Technology Limited, a Hong Kong company (“China Net HK”), which established and is the parent company of Rise King Century Technology Development (Beijing) Co., Ltd., a wholly foreign-owned enterprise (“WFOE”) established in the PRC (“Rise King WFOE”). We refer to the transactions that resulted in China Net BVI becoming an indirect parent company of Rise King WFOE as the “Offshore Restructuring.” Through a series of contractual agreements, we operate our business in China primarily through Business Opportunity Online (Beijing) Network Technology Co., Ltd. (“Business Opportunity Online”) and Beijing CNET Online Advertising Co., Ltd. (“Beijing CNET Online”).  Beijing CNET Online owns 51% of Shanghai Borongdingsi Computer Technology Co., Ltd. (“Shanghai Borongdingsi”). Business Opportunity Online, Beijing CNET Online and Shanghai Borongdingsi, were incorporated on December 8, 2004, January 27, 2003 and August 3, 2005, respectively. From time to time, we refer to them collectively as the “PRC Operating Entities.”
 
Through our PRC Operating Entities, we are now one of China’s leading full-service media development and advertising platform for the small and medium enterprise (the “SME”) market.  We are a service oriented business that leverages proprietary advertising technology to prepare and publish rich media enabled advertising campaigns for clients on the internet and on television. Our goal is to strengthen our position as the leading diversified media advertising provider in China.  Our multi-platform advertising network consists of www.28.com, our internet advertising portal; our TV production and advertising unit, and our newly launched bank kiosk advertising unit, which is primarily used as an advertising platform for clients in the financial services industry.  Using proprietary technology, we provide additional services as a lead generator.  We are also a re-seller of internet and television advertising space that we purchase in large volumes from other well-known internet portals.
 
2

 

Basis of presentation, critical accounting policies and management estimates
 
l  
Change of reporting entity and basis of presentation
 
As a result of the Share Exchange on June 26, 2009, the former China Net BVI shareholders own a majority of our common stock.  The transaction was regarded as a reverse merger whereby China Net BVI was considered to be the accounting acquirer as its shareholders retained control of our company after the Share Exchange, although we are the legal parent company.  The share exchange was treated as a recapitalization of our company.  As such, China Net BVI (and its historical financial statements) is the continuing entity for financial reporting purposes. Pursuant to the terms of the Share Exchange, Emazing Interactive, Inc. was delivered with zero assets and zero liabilities at time of closing. Following the Share Exchange, we changed our name from Emazing Interactive, Inc. to ChinaNet Online Holdings, Inc. Our financial statements have been prepared as if China Net BVI had always been the reporting company and then on the share exchange date, had changed its name and reorganized its capital stock.
 
l  
Critical accounting policies and management estimates
 
Our unaudited interim consolidated financial statements include the accounts of our company, and its subsidiaries and Variable Interest Entities (“VIEs”). All transactions and balances between us, our subsidiaries and VIEs have been eliminated upon consolidation.  We prepared our interim consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, as promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes required by US GAAP for completing annual financial statements. However, management believes that the disclosures are adequate to ensure the information presented is not misleading. We prepare our financial statements in conformity with US 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 on 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. We consider the policies discussed below to be critical to an understanding of our financial statements.

Foreign currency translation

Our functional currency is United States dollars (“US$”), and the functional currency of our Hong Kong subsidiary is Hong Kong dollars (“HK$”).  The functional currency of our PRC operating entities is the Renminbi (“RMB’), and PRC is the primary economic environment in which our businesses operate.

For financial reporting purposes, the financial statements of our PRC operating entities, which are prepared using the RMB, are translated into our reporting currency, the U.S. dollar. Assets and liabilities are translated using the exchange rate at each balance sheet date.  Revenue and expenses are translated using average rates prevailing during each reporting period, and shareholders' equity is translated at historical exchange rates. Adjustments resulting from the translation are recorded as a separate component of accumulated other comprehensive income in shareholders’ equity.

Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transactions.  The resulting exchange differences are included in the determination of net income of the consolidated financial statements for the respective periods.

Revenue recognition

Our revenue recognition policies are in compliance with Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”). In accordance with SAB 104, revenues are recognized when the four of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the service has been rendered, (iii) the fees are fixed or determinable, and (iv) collectability is reasonably assured.
 
Advertising Revenue

Advertising revenues include revenues from reselling of advertising time purchased from TV stations and internet advertising, reselling of internet advertising spaces and other advertisement related resources. No revenue from advertising-for-advertising barter transactions was recognized because the transactions did not meet the criteria for recognition in EITF abstract issue no 99-17.  Advertising contracts establish the fixed price and advertising services to be provided.  Pursuant to advertising contracts, our company provides advertisement placements in different formats, including but not limited to banners, links, logos, buttons, rich media and content integration. Revenue is recognized ratably over the period the advertising is provided and, as such, our company considers the services to have been delivered. We treat all elements of advertising contracts as a single unit of accounting for revenue recognition purposes.  Based upon our credit assessments of customers prior to entering into contracts, we determine if collectability is reasonably assured.  In situations where collectability is not deemed to be reasonably assured, we recognize revenue upon receipt of cash from customers, only after services have been provided and all other criteria for revenue recognition have been met.
 
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Taxation

1.  
Income tax
 
We follow the liability method of accounting for income taxes.  Under this method, deferred tax assets and liabilities are determined based on the difference between of the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. We record a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income statement in the period that includes the enactment date. We had no deferred tax assets and liabilities recognized for the six months ended June 30, 2009 and 2008, and for the year ended December 31, 2008.
 
We adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 prescribes a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. For the six month ended June 30, 2009 and 2008, and for the year ended December 31, 2008, we did not have any interest and penalties associated with tax positions and did not have any significant unrecognized uncertain tax positions.
 
i) We are incorporated in the State of Nevada.  Under the current law of Nevada we are not subject to state corporate income tax.  We became a holding company and do not conduct any substantial operations of our own after the Share Exchange. No provision for federal corporate income tax has been made in our financial statements as have assessable profits for the six month ended June 30, 2009.
 
ii) China Net BVI was incorporated in the British Virgin Islands (“BVI”).  Under the current law of the BVI, we are not subject to tax on income or capital gains.  Additionally, upon payments of dividends by China Net BVI to us, 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 have been made in our financial statements as China Net HK has no assessable profits for the six month ended June 30, 2009. Additionally, upon payments of dividends by China Net HK to its sole shareholder, China Net BVI, no Hong Kong withholding tax will be imposed.
 
iv) Our PRC operating entities, being incorporated in the PRC, are governed by the income tax law of the PRC and are subject to PRC enterprise income tax (“EIT”).  Effective from January 1, 2008, the EIT rate of PRC was changed from 33% of to 25%, and applies to both domestic and foreign invested enterprises.
 
·  
Rise King WFOE is a software company qualified by the related PRC governmental authorities and was entitled to a two-year EIT exemption from its first profitable year and a 50% reduction of its applicable EIT rate, which is 25% of its taxable income for the exceeding three years, which subjects to an application filing by the Company. Rise King WFOE had a cumulative operating loss for the year ended December 31, 2008. Rise King will file the application for an income tax exemption, if it achieves an operating profit for the year ended December 31, 2009.
 
·  
Business Opportunity Online was qualified as a High and New Technology Enterprise in Beijing High-Tech Zone in 2005.  In March 2007, a new enterprise income tax law (the “New EIT”) in the PRC was enacted which was effective on January 1, 2008. The New EIT applies a uniform 25% EIT rate to both foreign invested enterprises and domestic enterprises. On April 14, 2008, relevant governmental regulatory authorities released qualification criteria, application procedures and assessment processes for “High and New Technology Enterprise” status under the New EIT which would entitle qualified and approved entities to a favorable statutory tax rate of 15%.  Business Opportunity Online has not obtained the approval of its reassessment of the qualification as a “High and New Technology Enterprise” under the New EIT as of June 30, 2009.  Accordingly, Business Opportunity Online accounted for its current income tax using a tax rate of 25% for the six months ended June 30, 2009 and 2008, and the year ended December 31, 2008.  If Business Opportunity Online is able to re-qualify as a “High and New Technology Enterprise”, it will be entitled to the preferential tax rate of 15%.  Business Opportunity Online will file the application for tax refund to the tax authorities for the fiscal year 2009 after it obtains the approval for its High and New Technology Enterprise qualification.
 
4

 
·  
The applicable income tax rate for CNET Online Beijing was 25% for the six months ended June 30, 2009 and 2008, and the year ended December 31, 2008.
 
·  
The New EIT also imposed a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside China, which were exempted under the previous enterprise income tax law and rules.  A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Holding companies in Hong Kong, for example, will be subject to a 5% rate.  Rise King WFOE is owned by an intermediate holding company in Hong Kong and will be entitled to the 5% preferential withholding tax rate upon distribution of the dividends to this intermediate holding company.

2.  
Business tax and relevant surcharges
 
Revenue generated from our advertisement services are subject to 5.5% business tax and 3% cultural industry development surcharge of the gross service income.  Revenue generated from our TV advertisement segment is subject to 5.5% business tax and 3% cultural industry development surcharge of the net service income after deducting amount paid to ending media promulgators. Revenue generated from our internet technical support services is subjected to 5.5% business tax.  Business tax charged was included in cost of sales.

Share-based Compensation

We account for stock-based compensation arrangements using the fair value method in accordance with the provisions of the FASB issued Statement of Financial Accounting Standards No, 123 (revised 2004) (Share-Based Payment) (“SFAS 123R”). SFAS 123R is a revision of SFAS 123 (Accounting for Stock-Based Compensation), and supersedes Accounting Principles Beard (“APB”) Opinion No. 25 (Accounting for Stock Issued to Employees). SFAS 123R requires that the fair value of share awards issued, modified, repurchased or cancelled after implementation, under share-based payment arrangements, be measured as of the date the award is issued, modified, repurchased or cancelled. The resulting cost is then recognized in the statement of operations and comprehensive income over the service period.

We periodically issue common stock for acquisitions and services rendered.  Common stock issued in these circumstances is valued at the estimated fair market value, as determined by the management and board of directors.  Our management and the board of directors consider market price quotations, recent stock offering prices and other factors in determining fair market value for purposes of valuing the common stock.

Reverse merger and common stock (restatement of the stockholders’ equity)
 
Pursuant to SEC Manual Item 2.6.5.4 Reverse acquisitions, which requires that “in a reverse acquisition the historical shareholder’s equity of the accounting acquirer prior to the merger is retroactively restated (a recapitalization) for the equivalent number of shares received in the merger after giving effect to any difference in par value of the registrant’s and the accounting acquirer’s stock by an offset in paid in capital.”
 
Pursuant to the terms of Share Exchange Agreement, the China Net BVI shareholders transferred to us all of the China Net BVI shares in exchange for the issuance of 13,790,800 shares of our common stock. Accordingly, we reclassified our common stock and additional paid-in-capital accounts for the year ended December 31, 2008 accordingly.
 

A.  
RESULTS OF OPERATIONS FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2009 AND 2008

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 percentages, in thousands of US dollars.
 
5

 
   
 For the six months
   
 For the three months
 
   
ended June 30,
   
ended June 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(US $)
   
(US $)
   
(US $)
   
(US $)
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                         
Sales
  $ 19,178     $ 6,703     $ 9,381     $ 5,241  
Cost of sales
    11,889       4,988       5,611       3,643  
Gross margin
    7,289       1,715       3,770       1,598  
                                 
Operating expenses
                               
  Selling expenses
    2,629       582       1,166       388  
General and administrative expenses
    916       356       568       220  
  Research and development expenses
    214       64       164       34  
      3,759       1,002       1,898       642  
  Income from operations
    3,530       713       1,872       956  
                                 
Other income (expenses):
                               
  Interest income
    5       2       2       1  
  Other income
    6       -       2       -  
  Other expenses
    -       (15 )     -       (15 )
      11       (13 )     4       (14 )
Income before income tax expense
    3,541       700       1,876       942  
  Income tax expense
    957       233       571       202  
                                 
Net income
    2,584       467       1,305       740  
                                 
Other comprehensive income
                               
  Foreign currency translation gain
    6       40       -       14  
Comprehensive income
    2,590       507       1,305       754  
Earnings (loss) per share
                               
Earnings per common stock
                               
Basic and diluted
  $ 0.19     $ 0.03     $ 0.09     $ 0.05  
                                 
Weighted average number of common shares outstanding:
                               
   Basic and diluted shares
    13,845,593       13,790,800       13,899,784       13,790,800  
 
REVENUE

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

Revenue type
 
For the six months ended June 30,
 
   
2009
   
2008
 
   
(Unaudited)
   
(Unaudited)
 
   
(Amount expressed in thousands of US dollars, except percentages)
 
                         
Internet advertisement
    7,871       41.04 %     4,370       65.19 %
TV advertisement
    10,486