f10q_071514.htm
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, 2014

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)

+86-10-5160-0828
(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 July 17, 2014 the registrant had 22,376,540 shares of common stock outstanding.
 
 
 
 

 

 
 

 
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
PAGE
     
 
     
 
     
 
     
 
     
 
     
   
   
     
PART II. OTHER INFORMATION
 
     
     
   
     
   
     
     
     
 
 
 
 

 
PART I.  FINANCIAL INFORMATION

Item 1.  Interim Financial Statements

CHINANET ONLINE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
   
March 31,
2014
   
December 31,
2013
 
   
(US $)
   
(US $)
 
   
(Unaudited)
       
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 1,660     $ 3,442  
Term deposit
    3,439       3,467  
Accounts receivable, net
    7,094       7,673  
Other receivables, net
    3,870       4,299  
Prepayment and deposit to suppliers
    16,647       14,692  
Due from related parties
    381       502  
Other current assets
    104       27  
Deferred tax assets-current
    155       153  
Total current assets
    33,350       34,255  
                 
Investment in and advance to equity investment affiliates
    824       845  
Property and equipment, net
    965       1,057  
Intangible assets, net
    5,703       6,015  
Deposit and prepayment for purchasing of software technology
    3,277       2,453  
Goodwill
    11,356       11,450  
Deferred tax assets-non current
    825       759  
Total Assets
  $ 56,300     $ 56,834  
                 
Liabilities and Equity
               
Current liabilities:
               
Short-term bank loan *
  $ 811     $ 818  
Accounts payable *
    584       421  
Advances from customers *
    1,120       995  
Accrued payroll and other accruals *
    637       676  
Due to noncontrolling interest of VIE *
    195       -  
Taxes payable *
    7,123       7,029  
Other payables *
    322       288  
Total current liabilities
    10,792       10,227  
 
 
F-1

 
CHINANET ONLINE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except for number of shares and per share data)

   
March 31,
2014
   
December 31,
2013
 
   
(US $)
   
(US $)
 
   
(Unaudited)
       
Long-term liabilities:
           
Deferred tax liability-non current *
    1,371       1,439  
Long-term borrowing from director
    142       143  
Total Liabilities
    12,305       11,809  
                 
Commitments and contingencies
               
                 
Equity:
               
ChinaNet Online Holdings, Inc.’s stockholders’ equity
               
Common stock (US$0.001 par value; authorized 50,000,000 shares; issued and outstanding 22,376,540 shares at March 31, 2014 and December 31, 2013)
    22       22  
Additional paid-in capital
    19,878       19,870  
Statutory reserves
    2,602       2,602  
Retained earnings
    18,297       18,965  
Accumulated other comprehensive income
    3,364       3,689  
Total ChinaNet Online Holdings, Inc.’s stockholders’ equity
    44,163       45,148  
                 
   Noncontrolling interests
    (168 )     (123 )
Total equity
    43,995       45,025  
                 
Total Liabilities and Equity
  $ 56,300     $ 56,834  
 
*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 consolidated financial statements
 
 
F-2

 
CHINANET ONLINE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)/INCOME
(In thousands)
 
   
Three Months Ended March 31,
 
   
2014
   
2013
 
   
(US $)
   
(US $)
 
   
(Unaudited)
   
(Unaudited)
 
Sales
           
From unrelated parties
  $ 5,182     $ 6,990  
From related parties
    1       59  
      5,183       7,049  
Cost of sales
    3,822       4,467  
Gross margin
    1,361       2,582  
                 
Operating expenses
               
Selling expenses
    589       788  
General and administrative expenses
    987       1,402  
Research and development expenses
    450       449  
      2,026       2,639  
                 
Loss from operations
    (665 )     (57 )
                 
Other income (expenses)
               
Interest income
    31       32  
Interest expense
    (16 )     -  
Other expenses
    (1 )     (1 )
      14       31  
Loss before income tax expense, equity method investments and noncontrolling interests
    (651 )     (26 )
Income tax (expense)/benefit
    (48 )     86  
 (Loss)/income before equity method investments and noncontrolling interests
    (699 )     60  
Share of losses in equity investment affiliates
    (15 )     (71 )
Net loss
    (714 )     (11 )
Net loss attributable to noncontrolling interests
    46       41  
Net (loss)/income attributable to ChinaNet Online Holdings, Inc.
    (668 )     30  
 
 
F-3

 
CHINANET ONLINE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)/INCOMECONTINUED
(In thousands, except for number of shares and per share data)
 
   
Three Months Ended March 31,
 
   
2014
   
2013
 
   
(US $)
   
(US $)
 
   
(Unaudited)
   
(Unaudited)
 
             
Net loss
    (714 )     (11 )
Foreign currency translation (loss)/gain
    (324 )     215  
Comprehensive (loss)/income
  $ (1,038 )   $ 204  
Comprehensive loss attributable to noncontrolling interests
    45       38  
Comprehensive (loss)/income attributable to ChinaNet Online Holdings, Inc.
  $ (993 )   $ 242  
 
               
(Loss)/earnings per share
               
(Loss)/earnings per common share
               
Basic
  $ (0.03 )   $ 0.00  
Diluted
  $ (0.03 )   $ 0.00  
                 
Weighted average number of common shares outstanding:
               
 Basic
    22,376,540       22,186,540  
 Diluted
    22,376,540       22,186,540  
 
See notes to consolidated financial statements
 
 
F-4

 
CHINANET ONLINE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
   
Three Months Ended March 31,
 
   
2014
   
2013
 
   
(US $)
   
(US $)
 
   
(Unaudited)
   
(Unaudited)
 
Cash flows from operating activities
           
Net loss
  $ (714 )   $ (11 )
Adjustments to reconcile net loss to net cash used in operating activities
               
Depreciation and amortization
    360       418  
Share-based compensation expenses
    8       11  
Allowances for doubtful debts
    -       260  
Share of losses in equity investment affiliates
    15       71  
Deferred taxes
    (132 )     (185 )
Changes in operating assets and liabilities
               
Accounts receivable
    520       (1,297 )
Other receivables
    152       (8 )
Prepayment and deposit to suppliers
    (2,089 )     (406 )
Due from related parties
    118       (49 )
Other current assets
    (78 )     (2 )
Accounts payable
    168       105  
Advances from customers
    134       564  
Accrued payroll and other accruals
    (36 )     (29 )
Other payables
    71       -  
Taxes payable
    152       127  
Net cash used in operating activities
    (1,351 )     (431 )
                 
Cash flows from investing activities
               
Purchases of vehicles and office equipment
    (13 )     (11 )
Payment for acquisition of VIEs
    -       (1,272 )
Repayment of short-term loan from unrelated entities
    250       -  
Prepayment for purchasing of software technology
    (850 )     -  
Net cash used in investing activities
    (613 )     (1,283 )
 
 
F-5

 
CHINANET ONLINE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
 
   
Three Months Ended March 31,
 
   
2014
   
2013
 
   
(US $)
   
(US $)
 
   
(Unaudited)
   
(Unaudited)
 
Cash flows from financing activities
           
Short-term loan from noncontrolling interest of VIE
    197       -  
Net cash provided by financing activities
    197       -  
                 
Effect of exchange rate fluctuation on cash and cash equivalents
    (15 )     23  
                 
Net decrease in cash and cash equivalents
    (1,782 )     (1,691 )
                 
Cash and cash equivalents at beginning of the period
    3,442       5,483  
Cash and cash equivalents at end of the period
  $ 1,660     $ 3,792  
                 
Supplemental disclosure of cash flow information
               
                 
Income taxes paid
  $ 1     $ 4  
Interest expense paid
  $ 16     $ -  
                 
Non-cash transactions:
               
Restricted stock and options granted for future service
  $ 25     $ 32  
 
See notes to consolidated financial statements

 
F-6

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
1.
Organization and nature of operations

ChinaNet Online Holdings, Inc. (the “Company”) was incorporated in the State of Texas in April 2006 and re-domiciled to become a Nevada corporation in October 2006. On June 26, 2009, the Company consummated a share exchange transaction with China Net Online Media Group Limited (the “Share Exchange”), a company organized under the laws of British Virgin Islands (“China Net BVI”). As a result of the Share Exchange, China Net BVI became a wholly owned subsidiary of the Company and the Company is now a holding company, which, through certain contractual arrangements with operating companies in the People’s Republic of China (the “PRC”), is engaged in providing advertising, marketing, communication and brand management and sales channel building services to small and medium companies (“SMEs”) in China.

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

To satisfy PRC laws and regulations, the Company conducts certain business in the PRC through its Variable Interest Entities (“VIEs”). Through a series of contractual agreements between Rise King WFOE and Business Opportunity Online (Beijing) Network Technology Co., Ltd. (“Business Opportunity Online”), Beijing CNET Online Advertising Co., Ltd. (“Beijing CNET Online”) and Rise King (Shanghai) Advertisement Media Co., Ltd. (“Shanghai Jing Yang”), the Company, through the WFOE, secures significant rights to influence the three companies’ business operations, policies and management, approve all matters requiring shareholder approval, and the right to receive 100% of the income earned by the three companies.

The Company’s VIE, Business Opportunity Online is a 51% shareholder of Beijing Chuang Fu Tian Xia Network Technology Co., Ltd. (“Beijing Chuang Fu Tian Xia”), the sole shareholder of Business Opportunity Online (Hubei) Network Technology Co., Ltd. (“Business Opportunity Online Hubei”), the sole shareholder of Quanzhou City Zhilang Network Technology Co., Ltd (“Quanzhou Zhi Lang”), and a 23.18% shareholder of Shenzhen City Mingshan Network Technology Co., Ltd. (“Shenzhen Mingshan”). Business Opportunity Online Hubei is the sole shareholder of Hubei CNET Advertising Media Co., Ltd. (“Hubei CNET”), the sole shareholder of Sheng Tian Network Technology (Hubei) Co., Ltd. (“Sheng Tian Hubei”), the sole shareholder of Sou Yi Lian Mei Network Technology (Beijing) Co., Ltd. (“Sou Yi Lian Mei”), and a 25.5% shareholder of Zhao Shang Ke Network Technology (Hubei) Co., Ltd. (“Zhao Shang Ke Hubei”). Sou Yi Lian Mei is the sole shareholder of Jin Du Ya He (Beijing) Network Technology Co., Ltd. (“Jin Du Ya He”).
 
2.
Variable interest entities

Summarized below is the information related to the consolidated VIEs’ assets and liabilities as of March 31, 2014 and December 31, 2013, respectively:

   
March 31,
2014
   
December 31,
2013
 
   
US$(’000)
   
US$(’000)
 
   
(Unaudited)
       
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 1,499     $ 3,326  
Term deposit
    3,439       3,467  
Accounts receivable, net
    7,015       7,637  
Other receivables, net
    3,252       3,416  
Prepayment and deposit to suppliers
    16,645       14,690  
Due from related parties
    172       174  
Other current assets
    80       27  
Deferred tax assets-current
    120       118  
Total current assets
    32,222       32,855  
                 
Investment in and advance to equity investment affiliates
    780       801  
Property and equipment, net
    837       918  
Intangible assets, net
    5,703       6,013  
Deposit and prepayment for purchasing of software technology
    3,277       2,453  
Goodwill
    11,356       11,450  
Deferred tax assets-non current
    550       482  
Total Assets
  $ 54,725     $ 54,972  
                 
Liabilities
               
Current liabilities:
               
Short-term bank loan
  $ 811     $ 818  
Accounts payable
    584       421  
Advances from customers
    1,120       995  
Accrued payroll and other accruals
    368       279  
Due to Control Group
    11       11  
Due to noncontrolling interest of VIE
    195       -  
Taxes payable
    6,638       6,542  
Other payables
    230       142  
Total current liabilities
    9,957       9,208  
                 
Deferred tax Liabilities-non current
    1,371       1,439  
Total Liabilities
  $ 11,328     $ 10,647  

 
F-7

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
All of the VIEs' assets can be used to settle obligations of their primary beneficiary. Liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets.

For the three months ended March 31, 2014, the financial performance of the VIEs reported in the Company’s consolidated statements of operations and comprehensive loss includes sales of approximately US$5,099,000, cost of sales of approximately US$3,822,000, operating expenses of approximately US$1,612,000 and net loss before allocation to noncontrolling interests of approximately US$385,000.

For the three months ended March 31, 2013, the financial performance of the VIEs reported in the Company’s consolidated statements of operations and comprehensive income includes sales of approximately US$6,950,000, cost of sales of approximately US$4,467,000, operating expenses of approximately US$2,090,000 and net income before allocation to noncontrolling interests of approximately US$400,000.
 
3.
Summary of significant accounting policies
 
 
a)
Basis of presentation
 
The interim consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
 
The interim consolidated financial information as of March 31, 2014 and for the three months ended March 31, 2014 and 2013 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 interim consolidated financial information should be read in conjunction with the financial statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, previously filed with the SEC (the “2013 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, 2014, its consolidated results of operations for the three months ended March 31, 2014 and 2013, and its consolidated cash flows for the three months ended March 31, 2014 and 2013, 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.
 
 
F-8

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 
b)
Principles of consolidation
 
The interim 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 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 consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. The Company continually evaluates these estimates and assumptions based on the most recently available information, historical experience and various other assumptions that the Company believes to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.
 
 
d)
Foreign currency translation
 
The exchange rates used to translate amounts in RMB into US$ for the purposes of preparing the consolidated financial statements are as follows:

   
March 31, 2014
   
December 31, 2013
 
             
Balance sheet items, except for equity accounts
    6.1644       6.1140  
 
   
Three Months Ended March 31,
 
      2014       2013  
Items in the statements of income and comprehensive income, and statements of cash flows
    6.1199       6.2858  
 
No representation is made that the RMB amounts could have been, or could be converted into US$ at the above rates.
 
 
e)
Advertising costs
 
Advertising costs for the Company’s own brand building are not includable in cost of sales, they are expensed when incurred or amortized over the estimated beneficial period and are included in “selling expenses” in the statement of operations and comprehensive (loss)/income. For the three months ended March 31, 2014 and 2013, advertising expenses for the Company’s own brand building were approximately US$31,000 and US$24,000, respectively.
 
 
f)
Research and development expenses
 
The Company accounts for the cost of developing and upgrading technologies and platforms and intellectual property that are used in its daily operations in research and development cost. Research and development costs are charged to expense when incurred. Expenses for research and development for the three months ended March 31, 2014 and 2013 were approximately US$450,000 and US$449,000, respectively.
 
 
g)
Recent accounting standards
 
In April 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This ASU changes the threshold for reporting discontinued operations and adds new disclosures. The new guidance defines a discontinued operation as a disposal that “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position or results of operations.
 
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU supercedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605-Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. For all other entities (nonpublic entities), the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. A nonpublic entity may elect to apply this guidance earlier, however, only as prescribed in this ASU. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
 
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.
 
 
F-9

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
4.
Term deposit

Term deposit as of March 31, 2014 and December 31, 2013 represented the amount of cash placed as a term deposit by one of the Company’s operating VIEs in a major financial institution of China, which management believes is of high credit quality. The interest rate of the term deposit is 3.3% per annual and the term deposit matured on July 5, 2014 and was extended to July 7, 2015.
 
5.
Accounts receivable, net

   
March 31,
2014
   
December 31,
2013
 
   
US$(’000)
   
US$(’000)
 
   
(Unaudited)
       
             
Accounts receivable
    12,733       13,358  
Allowance for doubtful accounts
    (5,639 )     (5,685 )
Accounts receivable, net
    7,094       7,673  

All of the accounts receivable are non-interest bearing. Based on the assessment of the collectability of the accounts receivable as of March 31, 2014, the Company provided approximately US$5,639,000 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, 2014, no additional allowance for doubtful debts was provided.
 
6.
Other receivables, net

   
March 31,
2014
   
December 31,
2013
 
   
US$(’000)
   
US$(’000)
 
   
(Unaudited)
       
             
Short-term loan made for marketing campaign
    1,460       1,636  
Receivables on disposal of subsidiaries
    1,598       1,611  
Short-term loans to unrelated entities
    540       790  
Term deposit interest receivable
    85       57  
Receivable on disposal of fixed assets
    97       98  
Staff advances for normal business purpose
    90       107  
Overdue deposits
    960       968  
Allowance for doubtful debts
    (960 )     (968 )
Other receivables, net
    3,870       4,299  
 
 
F-10

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Short-term loan made for marketing campaign: for one of the major marketing campaigns, the Company made a marketing-related loan of RMB25,000,000 (approximately US$4,056,000) to a TV series of 36 episodes, called “Xiao Zhang Feng Yun.” By participating in this TV series, the Company’s logo is shown during the credits at the end of each episode and also shown as a separate card during the closing before the credit screen. In accordance with an agreement between the Company and the borrower, the Company extended the term of this loan from December 31, 2013 to December 31, 2014. For the three months ended March 31, 2014 and the subsequent period through the date that the financial statements are issued, the borrower repaid RMB1,000,000 (approximately US$162,000) and RMB4,710,000 (approximately US$764,000) of this debt, respectively. The Company will continue to assess the collectability of this loan. If an event occurs or circumstances change that could indicate that the collectability of this loan is remote, a full allowance of bad debts provision will be provided for the remaining outstanding balance of this loan.
 
Receivables on disposal of subsidiaries represent the cash consideration to be received from the successors of shareholders of the Company’s two former VIEs, which were disposed in November 2013. In accordance with the agreements entered into between the Company and the counterparties, the Company has subsequently collected RMB2,550,000 (approximately US$414,000) of this receivable in the aggregate in April 2014, and the remaining balance will be collected within fiscal 2014.

Short-term loans to unrelated entities represented temporary loans advanced to unrelated entities, which were unsecured, non-interest bearing and repayable on demand.

For advertising resources purchase contracts signed by the Company with its resource 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, 2014 and December 31, 2013, full allowance for doubtful debts was provided against these balances, which was related to the deposits of its internet advertising and TV advertising business segment.
 
7.
Prepayments and deposit to suppliers

   
March 31,
2014
   
December 31,
2013
 
   
US$(’000)
   
US$(’000)
 
   
(Unaudited)
       
             
Deposits to TV advertisement and internet resources providers
    8,977       8,907  
Prepayments to TV advertisement and internet resources providers
    7,264       5,292  
Other deposits and prepayments
    406       493  
      16,647       14,692  

In order to provide advertising and marketing services, the Company partners with provincial satellite TV stations or its agents to obtain time slots for resale through broadcast advertisements to advertise brands, business information, products and services of its customers. The Company also purchases internet resources from large internet search engines to attract more internet traffic to its advertising portals and provide value-added services to its customers.

In October 2013, the State Administration of Press, Publication, Radio, Film and Television of the People’s Republic of China (the “SARFT”) issued a notice to enhance the management of TV shopping infomercials broadcasted in provincial satellite television stations, which further restricts the contents, air time and duration of these infomercials (the “Restriction Notice”).

Deposits to TV advertisement and internet resources providers are paid as contractual deposits to the Company’s resources and services suppliers.

 
F-11

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
As of March 31, 2014, the deposits to suppliers primarily consisted of deposit to an agent of one of the provincial satellite TV stations partnered with the Company. The Company has partnered with this TV station to broadcast its advertisements for over three years. According to the contract signed between the Company and this agent for the time slots to be resold in fiscal 2014, the deposit will be either applied to the contract amounts of time slots cost that are needed to be paid with the consent of the counterparty or transferred as contractual deposit for fiscal 2015 upon renewal of the purchase contact. Although the Restriction Notice has had and may continue to have a negative impact on the Company’s TV advertising business with this TV station, the Company believes that the cooperation with this TV station will continue and expand with the efforts of development of new form of TV advertising programs and non-TV shopping advertising customers. All deposits are refundable to the Company upon expiration of cooperation with suppliers.

According to the contracts signed between the Company and its suppliers, the Company is normally required to pay the contract amounts in advance. These prepayments will be transferred to cost of sales when the related services are provided.
 
As of March 31, 2014, the Company also had advanced payment carried forward from prior years paid to another TV station which has been partnered with the Company for over five years, which amount the Company originally expected to be utilized in fiscal 2013. However, the Company became aware of that since the second half year of 2013, this TV station had decreased its broadcasting of TV shopping infomercials and adjusted their broadcasting schedule due to the adoption of the Restriction Notice. In response to the restrictions on TV advertisement set forth in the Restriction Notice, the Company discussed with the TV station possible alternatives of applying the balance of the advanced payment, as the amount was unlikely to be refunded to the Company, due to internal administrative policies of the TV station. The TV station and the Company agreed that the unconsumed advanced payment balance can be consumed by any third parties designated by the Company and approved by the TV station, who will broadcast advertisements or other similar TV programs using the balance of available time slots, and the Company will directly collect the amounts from the third parties for the time slots they utilized. The Company expects that the advanced payment balance will be utilized within fiscal 2014. As of the date hereof, the Company has utilized RMB4.2 million (approximately US$0.68 million) of this advanced payment through an unrelated third party.

For the purchasing of internet resources and TV advertising slots from its suppliers, as of March 31, 2014, the increase of the prepayments primarily consisted of an approximately US$1.1 million prepayment to one of the Company’s major internet resources suppliers and an approximately US$0.6 million prepayment to one of the TV stations that provides TV advertising slots to the Company, as compared to that as of December 31, 2013.
 
8.
Due from related parties

   
March 31,
2014
   
December 31,
2013
 
   
US$(’000)
   
US$(’000)
 
   
(Unaudited)
       
             
Beijing Fengshangyinli Technology Co., Ltd.
    -       36  
Beijing Saimeiwei Food Equipment Technology Co., Ltd.
    212       295  
Beijing Telijie Century Environmental Technology Co., Ltd.
    169       171  
      381       502  

These related parties are directly or indirectly owned by Mr. Handong Cheng, Mr. Xuanfu Liu or Ms. Li Sun (acting as nominee for Mr. Zhige Zhang), the owners of the Company’s PRC VIEs, Business Opportunities Online and Beijing CNET Online before the Offshore Restructuring. The Company provides advertising services to these related parties in its normal course of business on the same terms as those provided to its unrelated advertising clients. Due from related parties represented the outstanding receivables for the advertising services that the Company provided to these related parties as of each reporting date.
 
 
F-12

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
9.
Investment in and advance to equity investment affiliates

   
March 31,
2014
   
December 31,
2013
 
   
US$(’000)
   
US$(’000)
 
   
(Unaudited)
       
             
Investment in equity investment affiliates
    740       760  
Advance to equity investment affiliates
    84       85  
      824       845  
 
The following table summarizes the movement of the investment in and advance to equity investment affiliates for the three months ended March 31, 2014:
 
   
Shenzhen Mingshan
   
Zhao Shang Ke Hubei
   
Total
 
   
US$(’000)
   
US$(’000)
   
US$(’000)
 
                   
Balance as of December 31, 2013 (audited)
    466       379       845  
Share of losses in equity investment affiliates
    (2 )     (13 )     (15 )
Exchange translation adjustment
    (3 )     (3 )     (6 )
Balance as of March 31, 2014 (unaudited)
    461       363       824  
 
For the three months ended March 31, 2014 and 2013, the Company recognized its pro-rata shares of losses in Shenzhen Mingshan of approximately US$2,000 and US$26,000, respectively.
 
For the three months ended March 31, 2014 and 2013, the Company recognized its pro-rata share of losses in Zhao Shang Ke Hubei of approximately US$13,000 and US$45,000, respectively.
 
10.
Property and equipment, net

   
March 31,
2014
   
December 31,
2013
 
   
US$(’000)
   
US$(’000)
 
   
(Unaudited)
       
             
Vehicles
    858       865  
Office equipment
    1,434       1,433  
Electronic devices
    1,234       1,245  
Property and equipment, cost
    3,526       3,543  
Less: accumulated depreciation
    (2,561 )     (2,486 )
Property and equipment, net
    965       1,057  
 
Depreciation expenses in the aggregate for the three months ended March 31, 2014 and 2013 were approximately US$96,000 and $155,000, respectively.
 
 
F-13

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
11.
Intangible assets, net
 
   
March 31,
2014
   
December 31,
2013
 
   
US$(’000)
   
US$(’000)
 
   
(Unaudited)
       
Intangible assets not subject to amortization:
           
Domain name
    1,567       1,580  
Intangible assets subject to amortization:
               
Contract backlog
    201       203  
Customer relationship
    3,519       3,548  
Non-compete agreements
    1,392       1,403  
Software technologies
    332       335  
Cloud-computing based software platforms
    1,506       1,518  
Other computer software
    77       78  
Intangible assets, cost
    8,594       8,665  
Less: accumulated amortization
    (2,891 )     (2,650 )
Intangible assets, net
    5,703       6,015  
 
Amortization expenses in aggregate for the three months ended March 31, 2014 and 2013 were approximately US$264,000 and US$263,000, respectively.
 
Based on the carrying value of the finite-lived intangible assets recorded as of March 31, 2014, and assuming no subsequent impairment of the underlying intangible assets, the estimated future amortization expenses is approximately US$785,000 for the nine months ended December 31, 2014, approximately US$1,047,000 for the year ended December 31, 2015, approximately US$1,006,000 for the year ended December 31, 2016, approximately US$508,000 for the year ended December 31, 2017 and approximately US$310,000 for the year ended December 31, 2018.
 
12.
Deposit and prepayment for purchasing of software technology
 
For further development of comprehensive value-added services to its customers, which are mostly SMEs, the Company made a deposit to an unrelated technical consulting entity of RMB15 million (approximately US$2.43 million) for the purchasing of software technology related to operation management applications for SMEs. As of the date hereof, the Company is trial testing these software applications, and is in the process of negotiations and determination of the transaction details. The Company expects to consummate the transaction in 2014.
 
In October 2013, the Company entered into a contract to engage an unrelated third party to develop several software systems related to internet environment monitoring and system optimization to enhance the overall safety and efficiency of the Company’s network system. The total contract amount was RMB13 million (approximately US$2.11 million). The Company paid the first installment of RMB5.2 million (approximately US$0.84 million) during the three months ended March 31, 2014. The transaction as contemplated under the contract is expected to be consummated in 2014.
 
13.
Goodwill

   
Amount
 
   
US$(’000)
 
       
Balance as of December 31, 2013 (audited)
    11,450  
Exchange translation adjustment
    (94 )
Balance as of March 31, 2014 (unaudited)
    11,356  
 
 
F-14

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
14.
Short-term bank loan

Short-term bank loan as of March 31, 2014 and December 31, 2013 represented a short-term bank loan of approximately RMB5.0 million (approximately US$0.8 million) borrowed by one of the Company’s VIEs from a major financial institution of China to supplement its short-term working capital needs. The interest rate of the short-term bank loan is a floating lending rate, which is 30% over the benchmark rate of the People’s Bank of China (the “PBOC”). As of March 31, 2014 and December 31, 2013, the interest rate of the short-term loan was both 7.8%. The short-term bank loan will mature on July 31, 2014.
 
15.
Accrued payroll and other accruals

   
March 31,
2014
   
December 31,
2013
 
   
US$(’000)
   
US$(’000)
 
   
(Unaudited)
       
             
Accrued payroll and staff welfare
    468       382  
Accrued operating expenses
    169       294  
      637       676  
 
16.
Due to noncontrolling interest of VIE

As of March 31, 2014, due to noncontrolling interest of VIE represented a short-term loan borrowed by one of the Company’s VIEs from its noncontrolling interest to supplement the short-term working capital needs of this VIE. The short-term loan is unsecured, interest free and is payable on demand.
 
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, 2014, 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, 2014 or any prior periods. Additionally, upon payments of dividends by China Net HK to its shareholders, no Hong Kong withholding tax will be imposed.
 
iv).  The Company’s PRC operating subsidiary and VIEs, being incorporated in the PRC, are governed by the income tax law of the PRC and is subject to PRC enterprise income tax (“EIT”). The EIT rate of PRC is 25%, which applies to both domestic and foreign invested enterprises.
 
 
F-15

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 
l
Rise King WFOE was a software company qualified by the related PRC governmental authorities and was approved by the local tax authorities of Beijing, the PRC, to be entitled to a two-year EIT exemption for fiscal 2009 and 2010, and a 50% reduction of its applicable EIT rate, which was 25% to 12.5% of its taxable income for the succeeding three years through fiscal 2013. The applicable income tax rate for Rise King WFOE is 25% after fiscal 2013. Therefore, for the three months ended March 31, 2014 and 2013, the applicable income tax rate for Rise King WFOE was 25% and 12.5%, respectively.
 
 
l
In July 2012, Business Opportunity Online was approved by the related PRC governmental authorities as a High and New Technology Enterprise under the current EIT law, and was approved by the local tax authorities of Beijing, the PRC, to be entitled to a favorable statutory tax rate of 15% until December 31, 2014.  Therefore, for the three months ended March 31, 2014 and 2013, the applicable income tax rate of Business Opportunity Online was both 15%. After fiscal year 2014, the applicable income tax rate for Business Opportunity Online will be 25% under the current EIT law of PRC unless the entity regains the qualification as a High and New Technology Enterprise in fiscal 2015. The Company believes that more likely than not Business Opportunity Online will be able to regain its qualification as a High and New Technology Enterprise and continue to enjoy the favorable statutory tax rate of 15% after fiscal 2014.
 
 
l
Business Opportunity Online Hubei was approved by the related PRC governmental authorities to be qualified as a software company and was approved by the local tax authorities of Xiaogan City, Hubei province, the PRC, to be entitled to a EIT exemption for fiscal 2012, as its first profitable year was determined as fiscal 2011 instead of fiscal 2012 in August 2013 by the local tax authorities of Xiaogan City, Hubei province, and a 50% reduction of its applicable EIT rate which is 25% to 12.5% of its taxable income for the succeeding three years through fiscal 2015. Therefore, the applicable income tax rate for Business Opportunity Online Hubei was 12.5% for the three months ended March 31, 2014. For the three months ended March 31, 2013, the applicable income tax rate of Business Opportunity Online Hubei was nil%, which was subsequently adjusted to 12.5% in the second fiscal quarter of 2013 upon the determination of the first profitable year as fiscal 2011 in August 2013 by the local tax authorities of Xiaogan City, Hubei province. After fiscal 2015, the applicable income tax rate for Business Opportunity Online Hubei will be 25% under the current EIT law of PRC.
 
 
l
The applicable income tax rate for other PRC operating entities of the Company was 25% for the three months ended March 31, 2014 and 2013.
 
 
l
The current EIT law also imposed a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside China. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Holding companies in Hong Kong, for example, will be subject to a 5% withholding tax rate. 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.
 
For the three months ended March 31, 2014 and 2013, all of the preferential income tax treatments enjoyed by the Company’s PRC subsidiary 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 subsidiary and VIEs operate in. Business Opportunity Online, Business Opportunity Online Hubei and Rise King WFOE were most affected by these preferential income tax treatments within the structure of the Company. The preferential income tax treatments are subject to change in accordance with the PRC government economic development policies and regulations. These preferential income tax treatments are primarily determined by the regulation and policies of the PRC government in the context of the overall economic policy and strategy. As a result, the uncertainty of theses preferential income tax treatments are subject to, but not limited to, the PRC government policy on supporting any specific industry’s development under the outlook and strategy of overall macroeconomic development.
 
 
2)
Turnover taxes and the relevant surcharges
 
Service revenues provided by the Company’s PRC operating subsidiary and VIEs were subject to Value Added Tax (“VAT”). VAT rate for provision of modern services (other than lease of corporeal movables) is 6% and for small scale taxpayer, 3%. Therefore, for the three months ended March 31, 2014 and 2013, the Company’s service revenues are subject to VAT at a rate of 6%, after deducting the VAT paid for the services purchased from suppliers, or at a rate of 3% without any deduction of VAT paid for the services purchased from suppliers. The surcharges of the VAT is 12%-14% of the VAT, depending on which tax jurisdiction the Company’s PRC operating subsidiary and VIE operate in.
 
 
F-16

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
As of March 31, 2014 and December 31, 2013, taxes payable consists of:
 
   
March 31,
2014
   
December 31,
2013
 
   
US$(’000)
   
US$(’000)
 
   
(Unaudited)
       
             
Turnover tax and surcharge payable
    2,297       2,343  
Enterprise income tax payable
    4,826       4,686  
      7,123       7,029  
 
For the three months ended March 31, 2014 and 2013, the Company’s income tax (expense)/benefit consisted of:

   
Three Months Ended March 31,
 
   
2014
   
2013
 
   
US$(’000)
   
US$(’000)
 
   
(Unaudited)
   
(Unaudited)
 
             
Current-PRC
    (180 )     (99 )
Deferred-PRC
    132       185  
      (48 )     86  
 
The Company’s deferred tax liabilities at March 31, 2014 and changes for the three months then ended were as follows:
 
   
Amount
 
   
US$(’000)
 
       
Balance as of December 31, 2013 (audited)
    1,439  
Reversal during the period
    (56 )
Exchange  translation adjustment
    (12 )
Balance as of March 31, 2014 (unaudited)
    1,371  
 
Deferred tax liabilities arose on the recognition of the identifiable intangible assets acquired from acquisition transactions and deconsolidation of subsidiaries consummated in 2011. Reversal for the three months ended March 31, 2014 of approximately US$56,000 was due to amortization of the acquired intangible assets.
 
The Company’s deferred tax assets at March 31, 2014 and December 31, 2013 were as follows:

   
March 31,
2014
   
December 31,
2013
 
   
US$(’000)
   
US$(’000)
 
   
(Unaudited)
       
             
Tax effect of net operating losses carried forward
    4,210       3,899  
Bad debts provision
    1,581       1,594  
Valuation allowance
    (4,811 )     (4,581 )
      980       912  
 
 
F-17

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
   
March 31,
2014
   
December 31,
2013
 
   
US$(’000)
   
US$(’000)
 
   
(Unaudited)
       
             
Deferred tax assets reclassified as current asset
    155       153  
Deferred tax assets reclassified as non-current asset
    825       759  
      980       912  

The net operating losses carried forward incurred by the Company (excluding its PRC operating subsidiary and VIEs) were approximately US$6,871,000 and US$6,840,000 at March 31, 2014 and December 31, 2013, respectively, which loss carry forwards gradually expire over time, the last of which expires in 2034. 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$8,936,000 and US$7,253,000 at March 31, 2014 and December 31, 2013, respectively, which loss carry forwards gradually expire over time, the last of which expires in 2019. The related deferred tax assets was calculated based on the respective net operating losses incurred by each of the PRC subsidiary and VIEs and the respective corresponding enacted tax rate that will be in effect in the period in which the losses are expected to be utilized. The Company recorded approximately US$239,000 and US$nil valuation allowance for the three months ended March 31, 2014 and 2013, respectively, because it is considered more likely than not that this portion of the deferred tax assets will not be realized through sufficient future earnings of the entities to which the operating losses relate.

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

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

The tax authority of the PRC government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those enterprises had completed their relevant tax filings, hence the Company’s tax filings may not be finalized. It is therefore uncertain as to whether the PRC tax authority may take different views about the Company’s tax filings which may lead to additional tax liabilities.
 
18.
Long-term borrowing from director

   
March 31,
2014
   
December 31,
2013
 
   
US$(’000)
   
US$(’000)
 
   
(Unaudited)
       
             
Long-term borrowing from director
    142       143  
 
 
F-18

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Long-term borrowing from director is a non-interest bearing loan from a director of the Company relating to the original paid-in capital contribution in the Company’s wholly-owned subsidiary Rise King WFOE, which is not expected to be repaid within one year.
 
19.
Warrants
 
The Company issued warrants in its August 2009 Financing. Warrants issued and outstanding at March 31, 2014 and changes during the three months then ended are as follows:


   
Warrants Outstanding
   
Warrants Exercisable
 
 
 
Number of
underlying
shares
   
Weighted
Average
Exercise
Price
   
Average
Remaining
Contractual
Life (years)
   
Number of
underlying
shares
   
Weighted
Average
Exercise
Price
   
Average
Remaining
Contractual
Life (years)
 
Balance, December 31, 2013 (audited)
    2,363,456     $ 3.52       0.63       2,363,456     $ 3.52       0.63  
Granted / Vested
    -                       -                  
Forfeited
    -                       -                  
Exercised
    -                       -                  
Balance, March 31, 2014 (unaudited)
    2,363,456     $ 3.52       0.39       2,363,456     $ 3.52       0.39  
 
All unexpired warrants are exercisable and will expire on August 20, 2014.
 
20.
Restricted net assets

As most of the Company’s operations are conducted through its PRC subsidiary and VIEs, the Company’s ability to pay dividends is primarily dependent on receiving distributions of funds from its PRC subsidiary and VIEs. Relevant PRC statutory laws and regulations permit payments of dividends by its PRC subsidiary and VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations and after it has met the PRC requirements for appropriation to statutory reserves. Paid in capital of the PRC subsidiary and VIEs included in the Company’s consolidated net assets are also non-distributable for dividend purposes.

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

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, 2014 and December 31, 2013, 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 both approximately US$7.3 million.

The current PRC Enterprise Income Tax (“EIT”) Law also imposed a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside China. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Holding companies in Hong Kong, for example, will be subject to a 5% rate. 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.
 
 
F-19

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
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:

 
l
Foreign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules;
 
l
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.

Currently, under the Administration Rules, Renminbi is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of China, unless the prior approval of the State Administration of Foreign Exchange (the “SAFE”) is obtained and prior registration with the SAFE is made. Foreign-invested enterprises like Rise King WFOE that need foreign exchange for the distribution of profits to its shareholders may effect payment from their foreign exchange accounts or purchase and pay foreign exchange rates at the designated foreign exchange banks to their foreign shareholders by producing board resolutions for such profit distribution. Based on their needs, foreign-invested enterprises are permitted to open foreign exchange settlement accounts for current account receipts and payments of foreign exchange along with specialized accounts for capital account receipts and payments of foreign exchange at certain designated foreign exchange banks.

Although the current Exchange Rules allow the convertibility of Chinese Renminbi into foreign currency for current account items, conversion of Chinese Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of SAFE, which is under the authority of the People’s Bank of China. These approvals, however, do not guarantee the availability of foreign currency conversion. The Company cannot be sure that it will be able to obtain all required conversion approvals for its operations or the Chinese regulatory authorities will not impose greater restrictions on the convertibility of Chinese Renminbi in the future. Currently, most of the Company’s retained earnings are generated in Renminbi. Any future restrictions on currency exchanges may limit the Company’s ability to use its retained earnings generated in Renminbi to make dividends or other payments in U.S. dollars or fund possible business activities outside China.

As of March 31, 2014 and December 31, 2013, there was approximately US$38.3 million and US$39.3 million retained earnings in the aggregate, respectively, which was generated by the Company’s PRC subsidiary and VIEs in Renminbi included in the Company’s consolidated net assets, aside from US$2.8 million statutory reserve funds as of March 31, 2014 and December 31, 2013, that may be affected by increased restrictions on currency exchanges in the future and accordingly may further limit the Company’s PRC subsidiary’s and VIEs’ ability to make dividends or other payments in U.S. dollars to the Company, in addition to the approximately US$7.3 million restricted net assets as of March 31, 2014 and December 31, 2013, as discussed above.
 
21.
Related party transactions
 
Revenue from related parties:
 
   
Three Months Ended March 31,
 
   
2014
   
2013
 
   
US$(’000)
   
US$(’000)
 
   
(Unaudited)
   
(Unaudited)
 
             
-Beijing Saimeiwei Food Equipment Technology Co., Ltd.
    -       44  
-Beijing Fengshangyinli Technology Co., Ltd.
    1       2  
-Beijing Telijie Century Environmental Technology Co., Ltd.
    -       13  
      1       59  
 
 
F-20

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
22.
Employee defined contribution plan
 
Full time employees of the Company in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the PRC subsidiaries of the Company make contributions to the government for these benefits based on certain percentages of the employees’ salaries. The employee benefits were expensed as incurred. The Company has no legal obligation for the benefits beyond the contributions made. The total amounts for such employee benefits were approximately US$129,000 and US$120,000 for the three months ended March 31, 2014 and 2013, respectively.
 
23.
Concentration of risk
 
Credit risk
 
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, other receivables and prepayments and deposits to suppliers. As of March 31, 2014 and December 31, 2013, 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.
 
Concentration of customers
 
For the three months ended March 31, 2014, one customer accounted for 23% of the Company’s sales. For the three months ended March 31, 2013, one customer accounted for 10% of the Company’s sales. Except for the afore-mentioned, there was no other single customer who accounted for more than 10% of the Company’s sales for the three months ended March 31, 2014 and 2013, respectively.
 
As of March 31, 2014, three customers accounted for 13%, 13% and 11% of the Company’s accounts receivables, individually. As of December 31, 2013, the same three customers individually accounted for 13%, 12% and 10% 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, 2014 and December 31, 2013, respectively.
 
Concentration of suppliers
 
For the three months ended March 31, 2014, two suppliers individually accounted for 47% and 29% of the Company’s cost of sales, respectively. For the three months ended March 31, 2013, two suppliers individually accounted for 47% and 24% of the Company’s cost of sales, respectively. Except for the afore-mentioned, there was no other single supplier who accounted for more than 10% of the Company’s cost of sales for the three months ended March 31, 2014 and 2013, respectively.
 
24.
Commitments and contingencies
 
The following table sets forth the Company’s operating lease commitment as of March 31, 2014:
 
 
F-21

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

 
   
Office Rental
 
   
US$(’000)
 
   
(Unaudited)
 
Nine months ending December 31,
     
-2014
    311  
Year ending December 31,
       
-2015
    343  
-2016
    83  
Total
    737  
 
For the three months ended March 31, 2014 and 2013, rental expenses under operating leases were approximately US$144,000 and US$137,000, respectively.
 
In October 2013, the Company entered into a contract to engage an unrelated third party to develop several software systems related to internet environment monitoring and system optimization to enhance the overall safety and efficiency of the Company’s network system. The total contract amount was RMB13 million (approximately US$2.11 million) and the first installment of RMB5.2 million (approximately US$0.84 million) was paid in the first fiscal quarter of 2014. The transaction as contemplated under the contract is expected to be consummated in 2014 and the remaining unpaid contract amount is expected to be paid in 2014.
 
Legal Proceedings
 
Business Opportunity Online, Handong Cheng, Chairman and CEO of the Company, and Jinbo Yao, Legal Representative of Beijing 58 Information Technology Co., Ltd. (the “Beijing 58”) have been named as defendants in a civil lawsuit filed in the PRC. The action was filed by Xuanfu Liu, an approximate 34% shareholder of the Company, on October 19, 2013, in the Xiaogan City Xiaonan District People’s Court in Hubei Province, China. The complaint alleges that Mr. Cheng abused operation and management rights and that Mr. Cheng’s disposition of equity interests that Business Opportunity Online held in Beijing 58 (the “Equity Interests”), without the consent of the plaintiff, was an act of infringement and in violation of the articles of association of Business Opportunity Online and Chinese corporate law. The complaint seeks a court order to declare the contract allegedly entered into by and between Mr. Cheng, on behalf of Business Opportunity Online, and Mr. Yao, null and void. The Company denied all of the allegations against the Company and intends to defend vigorously against the lawsuit. During the course of the civil litigation, Jinbo Yao, the defendant, filed an objection to remove this case from the Xiaogan City Xiaonan District People’s Court to a Beijing court.  Xiaogan City Xiaonan District People’s Court denied the defendant’s objection to remove the case.  Jinbo Yao then filed an appeal of that decision to the Intermediate People’s Court of Xiaogan.  On March 10, 2014, the Intermediate People’s Court of Xiaogan rendered a final ruling holding that the dispute shall be transferred and heard by the Haidian District People’s Court of Beijing. Business Opportunity Online is awaiting a hearing date from the Haidian District People’s Court of Beijing. The Company currently cannot estimate the amount or range of possible losses from this litigation.
 
Rise King WFOE, Handong Cheng, Zhige Zhang, CFO of the Company and Xuanfu Liu, have been named as defendants in a civil lawsuit filed in the PRC. The action was filed by Shanghai Pan Gu Investment Management Co., Ltd. (the “Shanghai Pan Gu”), on December 17, 2013, in the Haidian District People’s Court of Beijing, China. The complaint alleges that the defendants breached a consulting agreement entered into on April 22, 2011 by and among Shanghai Pan Gu and the defendants. The complaint seeks a court order for liquidated damages in the amount of RMB0.56 million (equal to approximately US$92,100) under the consulting agreement. The Company denies all of the allegations against it and intends to defend vigorously against the lawsuit. The Company currently cannot estimate the amount or range of possible losses from this litigation.
 
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”) to make decisions about resources to be allocated to the segment and assess each operating segment’s performance.
 
 
F-22

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Three Months Ended March 31, 2014 (Unaudited)

   
 
 
Internet
Ad.
   
 
 
TV
Ad.
   
 
 
Bank
kiosk
   
Brand
management
and sales
channel
building
   
 
 
 
Others
   
Inter- segment and reconciling item
   
 
 
 
Total
 
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
 
                                           
Revenue
    3,580       1,182       71       350       -       -       5,183  
Cost of sales
    2,542       1,095       -       185       -       -       3,822  
Total operating expenses
    1,525       94       31       140       236 *     -       2,026  
Depreciation and amortization expense included in total operating expenses
      247         11         31         50         21         -         360  
Operating income (loss)
    (487 )     (7 )     40       25       (236 )     -       (665 )
                                                         
Share of  losses  in equity investment affiliates
    -       -       -       (13 )     (2 )     -       (15 )
Expenditure for long-term assets
    850       -       -       1       12       -       863  
Net income (loss)
    (499 )     (22 )     40       5       (238 )     -       (714 )
                                                         
Total assets – March 31, 2014
    51,045       16,945       386       4,582       6,724       (23,382 )     56,300  
Total assets – December 31, 2013
    51,324       17,022       420       4,524       7,065       (23,521 )     56,834  

*Including approximate US$8,400 share-based compensation expenses.
 
Three Months Ended March 31, 2013 (Unaudited)

   
 
 
Internet
Ad.
   
 
 
TV
Ad.
   
 
 
Bank
kiosk
   
Brand
management
and sales
channel
building
   
 
 
 
Others
   
Inter- segment and reconciling item
   
 
 
 
Total
 
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
   
US$
(‘000)
 
                                           
Revenue
    3,811       2,638       69       531       -       -       7,049  
Cost of sales
    1,644       2,500       -       323       -       -       4,467  
Total operating expenses
    1,583       382       53       244       377 *     -       2,639  
Depreciation and amortization expense included in total operating expenses
      257         12         53         54         42         -         418  
Operating income (loss)
    584       (244 )     16       (36 )     (377 )     -       (57 )
                                                         
Share of losses in equity investment affiliates
    -       -       -       (45 )     (26 )     -       (71 )
Expenditure for long-term assets
    6       -       -       -       5       -       11  
Net income (loss)
    665       (259 )     16       (72 )     (361 )     -       (11 )

*Including approximate US$11,000 share-based compensation expenses.
 
26.
Earnings per share
 
Basic and diluted earnings 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):
 
 
F-23

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
   
Three months ended March 31,
 
   
2014
   
2013
 
   
US$(’000)
   
US$(’000)
 
   
(Unaudited)
   
(Unaudited)
 
Net (loss)/income attributable to ChinaNet Online Holdings, Inc. (numerator for basic and diluted earnings per share)
  $ (668 )   $  30  
                 
Weighted average number of common shares outstanding - Basic
    22,376,540       22,186,540  
 Effect of diluted securities:
               
   Warrants and options
    -       -  
Weighted average number of common shares outstanding -Diluted
    22,376,540       22,186,540  
                 
(Loss)/earnings per share-Basic
  $ (0.03 )   $ 0.00  
(Loss)/earnings per share-Diluted
  $ (0.03 )   $ 0.00  
 
For the three months ended March 31, 2014, the diluted earnings per share calculation did not include the warrants and options to purchase up to 2,363,456 and 939,440 shares of common stock, respectively, because their effect was anti-dilutive, as the Company incurred a loss during the period.
 
For the three months ended March 31, 2013, the diluted earnings per share calculation did not include the warrants and options to purchase up to 2,363,456 and 939,440 shares of common stock, respectively, because these warrants and options were out-of-the-money, that if included would be anti-dilutive.
 
27.
Share-based compensation expenses

The Company renewed its engagement with MZHCI, LLP (“MZ-HCI”) to provide investor relations services for a twelve-month period commencing on January 1, 2014. As additional compensation, the Company granted 40,000 restricted shares of the Company’s common stock to MZ-HCI. 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 related compensation expenses were amortized over the requisite service period. Total compensation expenses recognized for the services provided by MZ-HCI was US$8,400 and US$11,000 for the three months ended March 31, 2014 and 2013, respectively.

On November 30, 2011, under the Company’s 2011 Omnibus Securities and Incentive Plan, the Company issued its management, employees and directors in the aggregate of 885,440 options to purchase up the same number of the company’s common stock at an exercise price of US$1.20 per share. These options were fully vested and exercisable upon issuance and subject to forfeiture upon an employee's cessation of employment at the discretion of the Company. Unexercised options will expire on November 29, 2021.

On November 30, 2009, the Company granted 5-year options to each of its three independent directors, Mr. Douglas MacLellan, Mr. Mototaka Watanabe and Mr. Zhiqing Chen, to purchase in the aggregate 54,000 shares of the Company’s common stock at an exercise price of US$5.00 per share, in consideration of their services to the Company. These options vest quarterly at the end of each 3-month period, in equal installments over the 24-month period from the date of grant. Unexercised options will expire on November 29, 2014.

Options issued and outstanding at March 31, 2014 and their movements during the three months then ended are as follows:
 
 
F-24

 
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
   
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, 2013 (audited)
    939,440       7.51     $ 1.42       939,440       7.51     $ 1.42  
Granted/Vested
    -                       -                  
Forfeited
    -                       -                  
Exercised
    -                       -                  
Balance, March 31, 2014 (unaudited)
    939,440       7.26     $ 1.42       939,440       7.26     $ 1.42  
 
The aggregate unrecognized share-based compensation expenses as of March 31, 2014 and 2013 is approximately US$25,000 and US$32,000, respectively.
 
28.
Subsequent event
 
The Company entered into a resources purchase framework agreement with one of its major internet resources suppliers, pursuant to which the Company agreed to purchase internet resources from this supplier of RMB180 million (approximately US$29.2 million) for a one-year period commencing on April 1, 2014. The Company made an approximately RMB10 million (approximately US$1.6 million) deposit under the agreement in April 2014.
 
In mid-April 2014, the Company incorporated two majority-owned entities, Beijing Chuang Shi Xin Qi Advertising Media Co., Ltd. (“Beijing Chuang Shi Xin Qi”) and Beijing Hong Da Shi Xing Network Technology Co., Ltd. (“Beijing Hong Da Shi Xing”), with two individuals who were not affiliated with the Company, respectively. In mid-May 2014, the Company acquired the noncontrolling interests in these two entities and, as such, became the sole shareholder of these subsidiaries. In May 2014, the Company incorporated a wholly-owned subsidiary, Beijing Shi Ji Cheng Yuan Advertising Media Co., Ltd. (“Beijing Shi Ji Cheng Yuan”). Beijing Chuang Shi Xin Qi, Beijing Hong Da Shi Xing and Beijing Shi Ji Cheng Yuan are all dormant since incorporation.
 
Business Opportunity Online has been named as a defendant in another civil lawsuit filed in the PRC. The action was filed by Haifeng Wang in the Haidian District People’s Court, Beijing, PRC, on April 29, 2014. The complaint alleges that the plaintiff neither attended any shareholders meeting in respect of the transfer of the plaintiff’s investment in Business Opportunity Online to another party, nor executed any written shareholders resolutions approving such transfer. The complaint seeks a court order to declare such shareholders resolutions null and void. The Company denies all of the allegations against it and intends to defend vigorously against the lawsuit. The Company currently cannot estimate the amount or range of possible losses from this litigation.

 
 
F-25

 
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, 2013. 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 and brand management and sales channel building services to SMEs in China.
 
Through our PRC operating subsidiary and VIEs, we primarily operate an one-stop services for our clients on four major service platforms, including social networking service information platform, multi-channel advertising and promotion platform, brand management and sales channel building platform and management tools platform. Our social networking service information platform primarily consists of www. chuangye.com, an information and service portal for entrepreneurs or any individual who plans to start their own business. Our multi-channel advertising and promotion platform primarily consists of internet advertising and marketing portals, including www.28.com (“28.com”), www.liansuo.com (“liansuo.com”) and www.sooe.cn (“sooe.cn”), ChinaNet TV as our TV production and advertising unit and the bank kiosk advertising unit. We provide varieties of marketing campaigns through this platform by the combination of the Internet, mobile, television, bank kiosks and printed-medias to maximize market exposure and effectiveness for our clients. Our band management and sales channel expansion platform consists of our brand consulting and management service and offline sales channel expansion service, which is to physically help small businesses to recruit dealers, wholesalers, partners or franchisees based on their business needs. Management tools platform consists of a mobile-based sales and administrative management tools specifically designed for small business in China to match their simplicity.
 
Basis of presentation, management estimates and critical accounting policies
 
Our unaudited interim consolidated 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 interim consolidated 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  2013 Form 10-K.
 
 
26

 
Recent Accounting Standards
 
In April 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This ASU changes the threshold for reporting discontinued operations and adds new disclosures. The new guidance defines a discontinued operation as a disposal that “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The adoption of this standard is not expected to have a material impact on our consolidated financial position or results of operations.
 
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU supercedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605-Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. For all other entities (nonpublic entities), the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. A nonpublic entity may elect to apply this guidance earlier, however, only as prescribed in this ASU. The adoption of this standard is not expected to have a material impact on our consolidated financial position and results of operations.
 
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
 
A.       RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
 
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 US dollars.
 
   
Three Months Ended March 31,
 
   
2014
   
2013
 
   
US$
   
US$
 
   
(Unaudited)
   
(Unaudited)
 
             
Sales
           
From unrelated parties
  $ 5,182     $ 6,990  
From related parties
    1       59  
      5,183       7,049  
Cost of sales
    3,822       4,467  
Gross margin
    1,361       2,582  
                 
Operating expenses
               
Selling expenses
    589       788  
General and administrative expenses
    987       1,402  
Research and development expenses
    450       449  
      2,026       2,639  
                 
Loss from operations
    (665 )     (57 )
                 
Other income (expenses)
               
Interest income
    31       32  
Interest expense
    (16 )     -  
Other expenses
    (1 )     (1 )
      14       31  
Loss before income tax expense, equity method investments and noncontrolling interests
    (651 )     (26 )
Income tax (expense)/benefit
    (48 )     86  
(Loss)/income before equity method investments and noncontrolling interests
    (699 )     60  
Share of losses in equity investment affiliates
    (15 )     (71 )
Net loss
    (714 )     (11 )
Net loss attributable to noncontrolling interests
    46       41  
Net (loss)/income attributable to ChinaNet Online Holdings, Inc.
    (668 )     30  
                 
(Loss)/earnings per share
               
(Loss)/earnings per common share
               
Basic
  $ (0.03 )   $ 0.00  
Diluted
  $ (0.03 )   $ 0.00  
                 
Weighted average number of common shares outstanding:
               
Basic
    22,376,540       22,186,540  
Diluted
    22,376,540       22,186,540  
 
 
27

 
Revenue
 
The following tables set forth a breakdown of our total revenue, divided into five segments for the periods indicated, with inter-segment transactions eliminated:
 
   
Three Months Ended March 31,
 
   
2014
   
2013
 
Revenue type
 
(Amounts expressed in thousands of US dollars, except percentages)
 
                         
Internet advertisement
  $ 3,496       67.4 %   $ 3,711       52.7 %
Technical services
    84       1.6 %     100       1.4 %
TV advertisement
    1,182       22.8 %     2,638       37.4 %
Bank kiosks
    71       1.4 %     69       1.0 %
Brand management and sales channel building
    350       6.8 %     531       7.5 %
Total
  $ 5,183       100 %   $ 7,049       100 %
 
Total Revenues: Our total revenues decreased to US$5.18 million for the three months ended March 31, 2014 from US$7.05 million for the three months ended March 31, 2013, representing a 26% decrease. This decrease is primarily due to the decrease in internet advertising and related technical service revenue and TV advertising revenue of approximately 6% and 55%, respectively, during the three months ended March 31, 2014 as compared to the same period of last year.
 
We derive the majority of our advertising service revenues from the sale of advertising space on our internet portals and from providing the related technical support and services, internet marketing service and content management services to unrelated third parties and to certain related parties. We also derive revenue from the sale of advertising time purchased from different TV programs. Our advertising services to related parties were provided in the ordinary course of business on the same terms as those provided to our unrelated advertising clients. For the three months ended March 31, 2014 and 2013, our service revenue from related parties in the aggregate was less than 1% of the total revenue we achieved for each respective reporting period.
 
Our advertising service revenues are recorded net of any sales discounts. Sales discounts include volume discounts and other customary incentives offered to our small and medium-sized franchise and merchant clients, including providing them with additional advertising time for their advertisements if we have unused space available on our websites and represent the difference between our official list price and the amount we actually charge our clients. We typically sign service contracts with our small and medium-sized franchisor and other clients that require us to place the advertisements on our portal websites in specified locations on the sites and for agreed periods; and/or place the advertisements onto our purchased advertisement time during specific TV programs for agreed periods. We recognize revenues as the advertisement airs over the contractual term based on the schedule agreed upon with our clients.
 
The tables below summarize the revenues, cost of sales, gross margin and net income/(loss) generated from each of our VIEs and subsidiaries for the three months ended March 31, 2014 and 2013, respectively.
 
 
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For the three months ended March 31, 2014:
 
Name of subsidiary or VIE
 
Revenue from unrelated parties
   
Revenue from related parties
   
Revenue from inter-
company
   
Total
 
    ($’000)     ($’000)     ($’000)     ($’000)  
                                 
Rise King WFOE
    84       -       -       84  
Business Opportunity Online and subsidiaries
    5,027       1       -       5,028  
Beijing CNET Online and subsidiaries