UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019March 31, 2020
or
☐ 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) |
No. 39 South Min Zhuang Road, Building 6,
Yu Quan Hui Gu Tuspark, Haidian District, Beijing, PRC 100195
(Address(Address of principal executive offices) (Zip Code)
+86-10-6084-6616
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.001 | CNET | Nasdaq Capital Market |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☒ | Smaller reporting company ☒ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
As of August 19, 2019,June 26, 2020, the registrant had 16,412,54321,691,926 shares of common stock outstanding.
EXPLANATORY NOTE
ChinaNet Online Holdings, Inc. (the “Company”) is relying on the SEC Order under Section 36 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), providing conditional relief to public companies that are unable to timely comply with their filing obligations as a result of the outbreak of COVID-19, as set forth in SEC Release No. 34-883465, dated on March 25, 2020 (the “Order”) to file its Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (the “10-Q”) after the May 15, 2020 (the “Original Due Date”). The 10-Q is hereby filed on the extended due date permitted under the Order, i.e., 45 days after the Original Due Date, or June 29, 2020.
As disclosed in the Company’s Current Report on Form 8-K filed with the SEC on May 15, 2020 (the “8-K”), which was filed as a condition to seeking relief provided by the Order, the reasons that the Company could not file the 10-Q on a timely basis are summarized as follows:
The Company conducts its business operations in China, primarily in two cities, Beijing and Xiaogan City, Hubei Province. Xiaogan City is located approximately 70 kilometers from WuHan, the provincial capital of Hubei Province which was the critical epicenter of the COVID-19 outbreak. In accordance with the epidemic control measures imposed by the local governments, since February 2020, the Company, along with most other business entities in Xiaogan City and Beijing remained closed after the Chinese New Year holiday (January 24-February 2, 2020) and were unable to reopen until mid-March or early-April in 2020. As a result, the Company’s accounting and other staff, who are instrumental in the daily accounting work and periodical closing (annual and quarterly) and audit/review process, had been unable to come to work during the office shutdown.
Normally, the Company commences its annual closing and audit preparation work in January, and prepares its annual report on Form 10-K and cooperates with the auditors to complete the annual audit procedures during the first fiscal quarter, in order to ensure a timely filing of its annual report on Form 10-K every year. However, the outbreak of COVID-19 in China during the first fiscal quarter of 2020 has posed a significant impact on the Company’s ability to file on a timely basis its annual report on Form 10-K for the year ended December 31, 2019 (the “10-K”), which includes, among other things, delayed audit preparation and cooperation procedures due to business shutdown until Mid-March or early-April; delayed audit confirmation response and delivery from commercial banks, suppliers and customers, resulted from business shutdown and other epidemic control measures put in place by the local government of different cities in China during the outbreak, and slow recovery of operations afterwards; and delayed on-site audit arrangements in the Company’s operational offices, resulted from travel restriction and mandatory quarantine policies imposed by the local governments.
The Company had not filed the 10-K with the SEC within the 45 days after March 30, 2020 due to the fact that the Company was unable to finalize its financial results as well as the disclosure requirements of the 10-K without unreasonable expense or effort, which resulted from circumstances related to the COVID-19 outbreak described above. Furthermore, the Form 10-Q for the quarter ended March 31, 2020 cannot be filed after the Form 10-K for the year ended December 31, 2019 has been filed.
On May 27, 2020, the Company filed the Form 10-K. On June 10, 2020, the Company filed an amendment to Form 10-K to supplement the disclosure in connection with the Company’s reliance on the Order. As a result, the Company’s quarterly closing and the preparation of the 10-Q was postponed accordingly, which adversely impacted the Company’s ability to file the 10-Q on a timely basis.
The Company is herein filing the Form 10-Q after the Form 10-K had been filed and all the required procedures and process were completed.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. | Interim Financial Statements |
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for number of shares and per share data)
June 30, 2019 | December 31, 2018 | |||||||
(US $) | (US $) | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,379 | $ | 3,717 | ||||
Term deposit, restricted | 25 | 25 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $1,373 and $3,393, respectively | 6,749 | 6,359 | ||||||
Prepayment and deposit to suppliers, net | 2,049 | 2,154 | ||||||
Due from related parties, net | - | 226 | ||||||
Other current assets, net | 8 | 19 | ||||||
Total current assets | 10,210 | 12,500 | ||||||
Long-term investments | 36 | - | ||||||
Property and equipment, net | 99 | 142 | ||||||
Intangible assets, net | 36 | 45 | ||||||
Operating lease right-of-use assets | 17 | - | ||||||
Blockchain application platform development costs | 3,724 | 3,725 | ||||||
Deferred tax assets, net | 549 | 556 | ||||||
Total Assets | $ | 14,671 | $ | 16,968 | ||||
Liabilities and Equity | ||||||||
Current liabilities: | ||||||||
Short-term bank loan * | $ | 873 | $ | 874 | ||||
Accounts payable * | 742 | 2,869 | ||||||
Advance from customers * | 2,768 | 1,061 | ||||||
Advance from a customer, related * | 53 | - | ||||||
Accrued payroll and other accruals * | 289 | 521 | ||||||
Taxes payable * | 3,082 | 2,997 | ||||||
Lease payment liability related to a short-term lease * | 118 | - | ||||||
Other current liabilities * | 162 | 118 | ||||||
Warrant liabilities | 135 | 606 | ||||||
Total current liabilities | 8,222 | 9,046 |
March 31, 2020 | December 31, 2019 | |||||||
(US $) | (US $) | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,555 | $ | 1,603 | ||||
Accounts receivable, net of allowance for doubtful accounts of $3,504 and $3,148, respectively | 3,070 | 3,260 | ||||||
Prepayment and deposit to suppliers | 4,946 | 6,980 | ||||||
Due from related parties, net | 51 | 81 | ||||||
Other current assets, net | 831 | 11 | ||||||
Total current assets | 10,453 | 11,935 | ||||||
Long-term investments | 34 | 35 | ||||||
Operating lease right-of-use assets | 9 | 12 | ||||||
Property and equipment, net | 75 | 78 | ||||||
Intangible assets, net | 1,698 | 1,899 | ||||||
Blockchain platform applications development costs | 4,175 | 3,879 | ||||||
Long-term prepayments | 1,344 | - | ||||||
Deferred tax assets, net | 706 | 713 | ||||||
Total Assets | $ | 18,494 | $ | 18,551 | ||||
Liabilities and Equity | ||||||||
Current liabilities: | ||||||||
Short-term bank loan * | $ | - | $ | 430 | ||||
Accounts payable * | 257 | 408 | ||||||
Advances from customers * | 2,104 | 2,006 | ||||||
Accrued payroll and other accruals * | 524 | 491 | ||||||
Taxes payable * | 3,261 | 3,214 | ||||||
Lease payment liabilities related to short-term leases * | 170 | 136 | ||||||
Other current liabilities * | 442 | 221 | ||||||
Warrant liabilities | 61 | 107 | ||||||
Total current liabilities | 6,819 | 7,013 |
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except for number of shares and per share data)
June 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
(US $) | (US $) | (US $) | (US $) | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Long-term liabilities: | ||||||||||||||||
Long-term borrowing from a director | 127 | 128 | 124 | 125 | ||||||||||||
Total Liabilities | 8,349 | 9,174 | 6,943 | 7,138 | ||||||||||||
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 16,412,543 shares and 16,382,543 shares at June 30, 2019 and December 31, 2018, respectively) | 16 | 16 | ||||||||||||||
Common stock (US$0.001 par value; authorized 50,000,000 shares; issued and outstanding 21,691,926 shares and 19,629,403 shares at March 31, 2020 and December 31, 2019, respectively) | 22 | 20 | ||||||||||||||
Additional paid-in capital | 38,301 | 38,275 | 45,485 | 43,111 | ||||||||||||
Statutory reserves | 2,607 | 2,607 | 2,607 | 2,607 | ||||||||||||
Accumulated deficit | (36,029 | ) | (34,512 | ) | (38,083 | ) | (35,773 | ) | ||||||||
Accumulated other comprehensive income | 1,481 | 1,457 | 1,576 | 1,505 | ||||||||||||
Total ChinaNet Online Holdings, Inc.’s stockholders’ equity | 6,376 | 7,843 | 11,607 | 11,470 | ||||||||||||
Noncontrolling interests | (54 | ) | (49 | ) | (56 | ) | (57 | ) | ||||||||
Total equity | 6,322 | 7,794 | 11,551 | 11,413 | ||||||||||||
Total Liabilities and Equity | $ | 14,671 | $ | 16,968 | $ | 18,494 | $ | 18,551 |
*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 unaudited condensed consolidated financial statements
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except for number of shares and per share data)
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
(US $) | (US $) | |||||||
(Unaudited) | (Unaudited) | |||||||
Revenues | ||||||||
From unrelated parties | $ | 4,371 | $ | 8,560 | ||||
From related parities | 13 | 7 | ||||||
Total revenues | 4,384 | 8,567 | ||||||
Cost of revenues | 3,485 | 8,125 | ||||||
Gross profit | 899 | 442 | ||||||
Operating expenses | ||||||||
Sales and marketing expenses | 165 | 169 | ||||||
General and administrative expenses | 2,796 | 810 | ||||||
Research and development expenses | 214 | 201 | ||||||
Total operating expenses | 3,175 | 1,180 | ||||||
Loss from operations | (2,276 | ) | (738 | ) | ||||
Other income/(expenses) | ||||||||
Interest expense, net | (1 | ) | (11 | ) | ||||
Other expenses | (1 | ) | (2 | ) | ||||
Change in fair value of warrant liabilities | 46 | (350 | ) | |||||
Total other income/(expenses) | 44 | (363 | ) | |||||
Loss before income tax expense and noncontrolling interests | (2,232 | ) | (1,101 | ) | ||||
Income tax expense | (78 | ) | (39 | ) | ||||
Net loss | (2,310 | ) | (1,140 | ) | ||||
Net loss attributable to noncontrolling interests | - | 2 | ||||||
Net loss attributable to ChinaNet Online Holdings, Inc. | $ | (2,310 | ) | $ | (1,138 | ) |
Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(US $) | (US $) | (US $) | (US $) | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Revenues | ||||||||||||||||
From unrelated parties | $ | 23,912 | $ | 30,780 | $ | 15,352 | $ | 22,520 | ||||||||
From a related party | 108 | - | 101 | - | ||||||||||||
Total revenues | 24,020 | 30,780 | 15,453 | 22,520 | ||||||||||||
Cost of revenues | 23,212 | 29,211 | 15,087 | 21,552 | ||||||||||||
Gross profit | 808 | 1,569 | 366 | 968 | ||||||||||||
Operating expenses | ||||||||||||||||
Sales and marketing expenses | 350 | 844 | 181 | 280 | ||||||||||||
General and administrative expenses | 2,058 | 2,842 | 1,248 | 1,478 | ||||||||||||
Research and development expenses | 360 | 458 | 159 | 240 | ||||||||||||
Impairment on intangible assets | - | 1,878 | - | 1,878 | ||||||||||||
Impairment on goodwill | - | 5,412 | - | 5,412 | ||||||||||||
Total operating expenses | 2,768 | 11,434 | 1,588 | 9,288 | ||||||||||||
Loss from operations | (1,960 | ) | (9,865 | ) | (1,222 | ) | (8,320 | ) | ||||||||
Other income (expenses) | ||||||||||||||||
Impairment on long-term investments | - | (471 | ) | - | - | |||||||||||
Interest expense, net | (23 | ) | (19 | ) | (12 | ) | (9 | ) | ||||||||
Other expenses | (4 | ) | (28 | ) | (2 | ) | (6 | ) | ||||||||
Change in fair value of warrant liabilities | 471 | 948 | 821 | (526 | ) | |||||||||||
Total other income/(expenses) | 444 | 430 | 807 | (541 | ) | |||||||||||
Loss before income tax (expense)/benefit and noncontrolling interests | (1,516 | ) | (9,435 | ) | (415 | ) | (8,861 | ) | ||||||||
Income tax (expense)/benefit | (6 | ) | (689 | ) | 33 | (693 | ) | |||||||||
Net loss | (1,522 | ) | (10,124 | ) | (382 | ) | (9,554 | ) | ||||||||
Net loss attributable to noncontrolling interests | 5 | 55 | 3 | 50 | ||||||||||||
Net loss attributable to ChinaNet Online Holdings, Inc. | $ | (1,517 | ) | $ | (10,069 | ) | $ | (379 | ) | $ | (9,504 | ) |
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (CONTINUED)
(In thousands, except for number of shares and per share data)
Six Months Ended June 30, | Three Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
(US $) | (US $) | (US $) | (US $) | (US $) | (US $) | |||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||
Net loss | $ | (1,522 | ) | $ | (10,124 | ) | $ | (382 | ) | $ | (9,554 | ) | $ | (2,310 | ) | $ | (1,140 | ) | ||||||
Foreign currency translation gain/(loss) | 24 | 194 | 60 | (280 | ) | 72 | (36 | ) | ||||||||||||||||
Comprehensive loss | $ | (1,498 | ) | $ | (9,930 | ) | $ | (322 | ) | $ | (9,834 | ) | (2,238 | ) | (1,176 | ) | ||||||||
Comprehensive loss attributable to noncontrolling interests | 5 | 49 | 2 | 52 | ||||||||||||||||||||
Comprehensive (income)/loss attributable to noncontrolling interests | (1 | ) | 3 | |||||||||||||||||||||
Comprehensive loss attributable to ChinaNet Online Holdings, Inc. | $ | (1,493 | ) | $ | (9,881 | ) | $ | (320 | ) | $ | (9,782 | ) | $ | (2,239 | ) | $ | (1,173 | ) | ||||||
Loss per share | ||||||||||||||||||||||||
Loss per common share | ||||||||||||||||||||||||
Basic and diluted | $ | (0.09 | ) | $ | (0.64 | ) | $ | (0.02 | ) | $ | (0.60 | ) | $ | (0.11 | ) | $ | (0.07 | ) | ||||||
Weighted average number of common shares outstanding: | ||||||||||||||||||||||||
Basic and diluted | 16,411,548 | 15,676,249 | 16,412,543 | 15,866,305 | 20,397,406 | 16,410,543 |
See notes to unaudited condensed consolidated financial statements
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
(US $) | (US $) | (US $) | (US $) | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net loss | $ | (1,522 | ) | $ | (10,124 | ) | $ | (2,310 | ) | $ | (1,140 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities | ||||||||||||||||
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities | ||||||||||||||||
Depreciation and amortization | 52 | 427 | 207 | 38 | ||||||||||||
Amortization of operating lease right-of-use assets | 87 | - | 3 | 84 | ||||||||||||
Share-based compensation expenses | 203 | 151 | 1,919 | 101 | ||||||||||||
Provision for allowances for doubtful accounts | 460 | 794 | 410 | 192 | ||||||||||||
Impairment on intangible assets | - | 1,878 | ||||||||||||||
Impairment on goodwill | - | 5,412 | ||||||||||||||
Impairment on long-term investments | - | 471 | ||||||||||||||
Deferred taxes | 6 | 689 | (5 | ) | 39 | |||||||||||
Change in fair value of warrant liabilities | (471 | ) | (948 | ) | (46 | ) | 350 | |||||||||
Changes in operating assets and liabilities | ||||||||||||||||
Accounts receivable | (866 | ) | (257 | ) | (255 | ) | (547 | ) | ||||||||
Prepayment and deposit to suppliers | (76 | ) | 1,504 | 2,236 | 22 | |||||||||||
Due from related parties | 227 | 23 | 29 | 27 | ||||||||||||
Other current assets | 11 | (16 | ) | (5 | ) | 10 | ||||||||||
Long-term prepayments | (1,125 | ) | - | |||||||||||||
Accounts payable | (2,153 | ) | (1,402 | ) | (147 | ) | (1,833 | ) | ||||||||
Advance from customers | 1,733 | (2,197 | ) | |||||||||||||
Advance from a customer, related | 54 | - | ||||||||||||||
Advances from customers | 123 | 562 | ||||||||||||||
Accrued payroll and other accruals | (232 | ) | (154 | ) | 34 | (114 | ) | |||||||||
Lease payment liability related to a short-term lease | 120 | - | ||||||||||||||
Other current liabilities | (39 | ) | (495 | ) | 319 | (115 | ) | |||||||||
Taxes payable | 91 | (77 | ) | 94 | 65 | |||||||||||
Lease payment liability related to short-term leases | 37 | - | ||||||||||||||
Prepaid lease payment | (10 | ) | - | - | (11 | ) | ||||||||||
Net cash used in operating activities | (2,325 | ) | (4,321 | ) | ||||||||||||
Net cash provided by/(used in) operating activities | 1,518 | (2,270 | ) | |||||||||||||
Cash flows from investing activities | ||||||||||||||||
Payment for purchase of office equipment | - | (6 | ) | |||||||||||||
Investment to an investee | (36 | ) | - | |||||||||||||
Investment to an ownership investee company | - | (36 | ) | |||||||||||||
Short-term loan to an unrelated party | - | (2,111 | ) | (815 | ) | - | ||||||||||
Collection of short-term loan from an unrelated party | - | 4,668 | ||||||||||||||
Payment for acquisition of noncontrolling interest | - | (1,177 | ) | |||||||||||||
Payment for blockchain application platform development costs | - | (3,752 | ) | |||||||||||||
Purchase of software technology | - | (447 | ) | |||||||||||||
Payment for blockchain platform applications development costs | (302 | ) | - | |||||||||||||
Net cash used in investing activities | (36 | ) | (2,825 | ) | (1,117 | ) | (36 | ) |
5
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Six Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
(US $) | (US $) | (US $) | (US $) | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Cash flows from financing activities | ||||||||||||||||
Proceeds from issuance of common stock and warrant (net of cash offering cost of US$809) | - | 10,263 | ||||||||||||||
Repayment to investors related to terminated security purchase agreements | - | (957 | ) | |||||||||||||
Proceeds from short-term bank loan | 442 | - | - | 445 | ||||||||||||
Repayment of short-term bank loan | (442 | ) | - | (430 | ) | (445 | ) | |||||||||
Net cash provided by financing activities | - | 9,306 | ||||||||||||||
Net cash used in financing activities | (430 | ) | - | |||||||||||||
Effect of exchange rate fluctuation on cash and cash equivalents | 23 | (26 | ) | (19 | ) | 47 | ||||||||||
Net (decrease)/increase in cash, cash equivalents, and restricted cash | (2,338 | ) | 2,134 | |||||||||||||
Net decrease in cash and cash equivalents | (48 | ) | (2,259 | ) | ||||||||||||
Cash, cash equivalents, and restricted cash at beginning of the period | 3,742 | 2,952 | ||||||||||||||
Cash, cash equivalents, and restricted cash at end of the period | $ | 1,404 | $ | 5,086 | ||||||||||||
Cash and cash equivalents at beginning of the period | 1,603 | 3,742 | ||||||||||||||
Cash and cash equivalents at end of the period | $ | 1,555 | $ | 1,483 | ||||||||||||
Supplemental disclosure of cash flow information | ||||||||||||||||
Income taxes paid | $ | - | $ | - | $ | - | $ | - | ||||||||
Interest expense paid | $ | 25 | $ | 130 | $ | 2 | $ | 13 |
See notes to unaudited condensed consolidated financial statements
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2019(In thousands, except for number of shares)
Common stock | Additional paid-in capital | Statutory reserves | Accumulated deficit | Accumulated other comprehensive income | Noncontrolling interests | Total equity | ||||||||||||||||||||||||||
Number of shares | Amount | |||||||||||||||||||||||||||||||
(US $) | (US $) | (US $) | (US $) | (US $) | (US $) | (US $) | ||||||||||||||||||||||||||
Balance, January 1, 2019 | 16,382,543 | $ | 16 | $ | 38,275 | $ | 2,607 | $ | (34,512 | ) | $ | 1,457 | $ | (49 | ) | $ | 7,794 | |||||||||||||||
Share-based compensation | 30,000 | - | 13 | - | - | - | - | 13 | ||||||||||||||||||||||||
Net loss for the period | - | - | - | - | (1,138 | ) | - | (2 | ) | (1,140 | ) | |||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | (35 | ) | (1 | ) | (36 | ) | |||||||||||||||||||||
Balance, March 31, 2019 (unaudited) | 16,412,543 | 16 | 38,288 | 2,607 | (35,650 | ) | 1,422 | (52 | ) | 6,631 | ||||||||||||||||||||||
Share-based compensation | - | - | 13 | - | - | - | - | 13 | ||||||||||||||||||||||||
Net loss for the period | - | - | - | - | (379 | ) | - | (3 | ) | (382 | ) | |||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | 59 | 1 | 60 | ||||||||||||||||||||||||
Balance, June 30, 2019 (Unaudited) | 16,412,543 | $ | 16 | $ | 38,301 | $ | 2,607 | $ | (36,029 | ) | $ | 1,481 | $ | (54 | ) | $ | 6,322 |
See notes to unaudited condensed consolidated financial statements
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2018
(In thousands, except for number of shares)
Common stock | Additional paid-in capital | Statutory reserves | Accumulated deficit | Accumulated other comprehensive income (loss) | Noncontrolling interests | Total equity | ||||||||||||||||||||||||||
Number of shares | Amount | |||||||||||||||||||||||||||||||
(US $) | (US $) | (US $) | (US $) | (US $) | (US $) | (US $) | ||||||||||||||||||||||||||
Balance, January 1, 2020 | 19,629,403 | $ | 20 | $ | 43,111 | $ | 2,607 | $ | (35,773 | ) | $ | 1,505 | $ | (57 | ) | $ | 11,413 | |||||||||||||||
Share-based compensation in exchange for services from nonemployees | 430,000 | - | 477 | - | - | - | - | 477 | ||||||||||||||||||||||||
Share-based compensation in exchange for services from employees and directors | 1,632,523 | 2 | 1,897 | - | - | - | - | 1,899 | ||||||||||||||||||||||||
Net loss for the period | - | - | - | - | (2,310 | ) | - | - | (2,310 | ) | ||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | 71 | 1 | 72 | ||||||||||||||||||||||||
Balance, March 31, 2020 (unaudited) | 21,691,926 | $ | 22 | $ | 45,485 | $ | 2,607 | $ | (38,083 | ) | $ | 1,576 | $ | (56 | ) | $ | 11,551 |
Common stock | Additional paid-in capital | Statutory reserves | Accumulated deficit | Accumulated other comprehensive income | Noncontrolling interests | Total equity | Common stock | Additional paid-in capital | Statutory reserves | Accumulated deficit | Accumulated other comprehensive income (loss) | Noncontrolling interests | Total equity | |||||||||||||||||||||||||||||||||||||||||||||||||||
Number of shares | Amount | Number of shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(US $) | (US $) | (US $) | (US $) | (US $) | (US $) | (US $) | (US $) | (US $) | (US $) | (US $) | (US $) | (US $) | (US $) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2018 | 13,982,542 | $ | 14 | $ | 31,554 | $ | 2,607 | $ | (20,487 | ) | $ | 1,598 | $ | 177 | $ | 15,463 | ||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for private placement, net of $1.89 million proceeds allocated to investor warrants labilities and $1.20 million direct offering costs (including $0.39 million proceeds allocated to placement agent warrants liabilities), respectively | 2,150,001 | 2 | 7,986 | - | - | - | - | 7,988 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2019 | 16,382,543 | $ | 16 | $ | 38,275 | $ | 2,607 | $ | (34,512 | ) | $ | 1,457 | $ | (49 | ) | $ | 7,794 | |||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation | - | - | 75 | - | - | - | - | 75 | 30,000 | - | 13 | - | - | - | - | 13 | ||||||||||||||||||||||||||||||||||||||||||||||||
Net loss for the period | - | - | - | - | (565 | ) | - | (5 | ) | (570 | ) | - | - | - | - | (1,138 | ) | - | (2 | ) | (1,140 | ) | ||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | 466 | 8 | 474 | - | - | - | - | - | (35 | ) | (1 | ) | (36 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2018 (Unaudited) | 16,132,543 | $ | 16 | $ | 39,615 | $ | 2,607 | $ | (21,052 | ) | $ | 2,064 | $ | 180 | $ | 23,430 | ||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation | - | - | 76 | - | - | - | - | 76 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase noncontrolling interest in a Variable Interest Entity | - | - | (1,838 | ) | - | - | - | (130 | ) | (1,968 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss for the period | - | - | - | - | (9,504 | ) | - | (50 | ) | (9,554 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | (278 | ) | (2 | ) | (280 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2018 (Unaudited) | 16,132,543 | $ | 16 | $ | 37,853 | $ | 2,607 | $ | (30,556 | ) | $ | 1,786 | (2 | ) | $ | 11,704 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2019 (unaudited) | 16,412,543 | $ | 16 | $ | 38,288 | $ | 2,607 | $ | (35,650 | ) | $ | 1,422 | $ | (52 | ) | $ | 6,631 |
See notes to unaudited condensed consolidated financial statements
7
1. | Organization and nature of operations |
ChinaNet Online Holdings, Inc. (the “Company”) was incorporated in the State of Texas in April 2006 and re-domiciled to become a Nevada corporation in October 2006. On June 26, 2009, the Company consummated a share exchange transaction with China Net Online Media Group Limited (the “Share Exchange”), a company organized under the laws of British Virgin Islands (“China Net BVI”). As a result of the Share Exchange, China Net BVI became a wholly owned subsidiary of the Company and the Company is now a holding company, which, through certain contractual arrangements with operating companies in the People’s Republic of China (the “PRC”), is engaged in providing advertising, precision marketing, online to offline (O2O) sales channel expansion and the related data and technical services to small and medium enterprises in the PRC, through distribution of the right to use search engine marketing servicePRC. In early 2018, the Company purchased from key search engines, online advertising placements oncommenced to expand its business into the Company’s advertising portals, salesblockchain industry and the related technology. As of effective sales lead information and provisionMarch 31, 2020, the Company was in the process of TV advertising service.developing its blockchain-powered platform applications (See Note 11).
2. | Variable interest entities |
Summarized below is the information related to the VIEs’ assets and liabilities reported in the Company’s condensed consolidated balance sheets as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively:
June 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 660 | $ | 2,303 | $ | 1,301 | $ | 699 | ||||||||
Term deposit, restricted | 25 | 25 | ||||||||||||||
Accounts receivable, net | 6,749 | 6,359 | 2,384 | 2,876 | ||||||||||||
Prepayment and deposit to suppliers, net | 1,773 | 1,724 | ||||||||||||||
Prepayment and deposit to suppliers | 2,302 | 3,998 | ||||||||||||||
Due from related parties, net | - | 26 | 51 | 81 | ||||||||||||
Other current assets, net | 3 | 11 | 9 | 6 | ||||||||||||
Total current assets | 9,210 | 10,448 | 6,047 | 7,660 | ||||||||||||
Long-term investments | 36 | - | 34 | 35 | ||||||||||||
Operating lease right-of-use assets | 9 | 12 | ||||||||||||||
Property and equipment, net | 58 | 84 | 39 | 40 | ||||||||||||
Intangible assets, net | 34 | 42 | 20 | 25 | ||||||||||||
Operating lease right-of-use assets | 17 | - | ||||||||||||||
Deferred tax assets, net | 549 | 556 | 706 | 713 | ||||||||||||
Total Assets | $ | 9,904 | $ | 11,130 | $ | 6,855 | $ | 8,485 | ||||||||
Liabilities | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Short-term bank loan | $ | 873 | $ | 874 | $ | - | $ | 430 | ||||||||
Accounts payable | 740 | 2,868 | 257 | 408 | ||||||||||||
Advance from customers | 2,766 | 1,059 | ||||||||||||||
Advance from a customer, related | 53 | - | ||||||||||||||
Advances from customers | 1,601 | 2,006 | ||||||||||||||
Accrued payroll and other accruals | 152 | 155 | 86 | 132 | ||||||||||||
Taxes payable | 2,648 | 2,562 | 2,539 | 2,568 | ||||||||||||
Lease payment liability related to a short-term lease | 48 | - | ||||||||||||||
Lease payment liabilities related to short-term leases | 39 | 19 | ||||||||||||||
Other current liabilities | 75 | 55 | 112 | 84 | ||||||||||||
Total current liabilities | 7,355 | 7,573 | 4,634 | 5,647 | ||||||||||||
Total Liabilities | $ | 7,355 | $ | 7,573 | $ | 4,634 | $ | 5,647 |
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. See additional discussion related to restrictions on foreign currency exchange in the PRC in Note 18 and Note 20.
8
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Summarized below is the information related to the financial performance of the VIEs reported in the Company’s condensed consolidated statements of operations and comprehensive loss for the six and three months ended June 30,March 31, 2020 and 2019, and 2018, respectively:
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Six Months Ended June 30, | Three Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||
Revenues | $ | 24,020 | $ | 30,773 | $ | 15,453 | $ | 22,520 | $ | 2,936 | $ | 8,567 | ||||||||||||
Cost of revenues | (23,212 | ) | (29,211 | ) | (15,087 | ) | (21,552 | ) | (2,845 | ) | (8,125 | ) | ||||||||||||
Total operating expenses | (1,862 | ) | (10,025 | ) | (1,151 | ) | (8,763 | ) | (744 | ) | (711 | ) | ||||||||||||
Net loss before allocation to noncontrolling interests | (1,086 | ) | (8,861 | ) | (764 | ) | (8,183 | ) | (651 | ) | (322 | ) |
3. | Summary of significant accounting policies |
a) | Basis of presentation |
The unaudited condensed consolidated interim financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The unaudited condensed consolidated interim financial information as of June 30, 2019March 31, 2020 and for the six and three months ended June 30,March 31, 2020 and 2019 and 2018 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally included in complete consolidated financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited condensed consolidated interim financial information should be read in conjunction with the financial statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2019, previously filed with the SEC (the “2018“2019 Form 10-K”) on April 15, 2019.May 27, 2020.
In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s condensed consolidated financial position as of June 30, 2019,March 31, 2020, its condensed consolidated results of operations for the six and three months ended June 30,March 31, 2020 and 2019, and 2018, and its condensed consolidated cash flows for the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.
b) |
The Company incurred operating losses and had negative operating cash flows and may continue to incur operating losses, and as a result, to generate negative cash flows as the Company implements its future business plan. The Company’s net loss attributable to stockholders for the six and three months ended June 30, 2019March 31, 2020 was approximately US$1.522.31 million, and US$0.38 million, respectively, compared with approximately US$10.07 million and US$9.501.14 million for the six and three months ended June 30, 2018, respectively.March 31, 2019. As of June 30, 2019,March 31, 2020, the Company had cash and cash equivalents of approximately US$1.401.56 million, and net cash used in operating activities during the six months ended June 30, 2019 wascompared with approximately US$2.33 million.1.60 million as of December 31, 2019.
On August 7, 2019,The Company does not currently have sufficient cash or commitments for financing to sustain its operation for the twelve months from the issuance date of these financial statements. The Company plans to optimize its internet resources cost investment strategy to improve the gross profit margin of its core business and to further strengthen the accounts receivables collection management and negotiate with vendors for more favorable payment terms, all of which will help to substantially increase the cashflows from operations. However, the COVID-19 outbreak incurred in the first fiscal quarter of 2020 in the PRC has had and may continue to have an adverse effect on the Company’s business operations and cashflows. If the Company entered intofails to achieve these goals, the Company may need additional financing to execute its business plan. If additional financing is required, the Company cannot predict whether this additional financing will be in the form of equity, debt, or another form, and the Company may not be able to obtain the necessary additional capital on a Securities Purchase Agreement (the “Securities Purchase Agreement”) with selected investors (the “Investors”) relatedtimely basis, on acceptable terms, or at all. In the event that financing sources are not available, or that the Company is unsuccessful in increasing its gross profit margin and reducing operating losses, the Company may be unable to the purchase and saleimplement its current plans for expansion, repay debt obligations or respond to competitive pressures, any of which would have a material adverse effect on the Company’s common stock (the “Shares”). The Company has agreedbusiness, prospects, financial condition and results of operations. These factors raise substantial doubt about the Company's ability to issue an aggregate of 3,216,860 Shares in consideration for approximately $4.8 million. Each Share was sold to the Investors at $1.4927 per Share. The private placement was conducted pursuant to Section 4(2) of the Securities Act of 1933,continue as amended, and Regulation S promulgated thereunder (the “PIPE transaction”). Although the PIPE transaction has not been closed as ofa going concern within one year after the date hereof, the Company determined it is probable that the PIPE transaction will be closed within the assessment period.
financial statements are issued.
9
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The unaudited condensed consolidated financial statements as of March 31, 2020 have been prepared under the assumption that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable period of time. The Company's ability to continue as a going concern is dependent upon its uncertain ability to increase gross profit margin and reduce operating loss from its core business and/or obtain additional equity and/or debt financing. The accompanying financial statements as of March 31, 2020 do not include any adjustments that might result from the outcome of these uncertainties. If the Company is unable to continue as a going concern, it may have to liquidate its assets and may receive less than the value at which those assets are carried on the financial statements.
c) | Principles of consolidation |
The unaudited condensed consolidated interim financial statements include the accounts 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.
d) | Use of estimates |
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of these consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. The Company continually evaluates these estimates and assumptions based on the most recently available information, historical experience and various other assumptions that the Company believes to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.
e) | Foreign currency translation |
The exchange rates used to translate amounts in RMB into US$ for the purposes of preparing the condensed consolidated financial statements are as follows:
June 30, 2019 | December 31, 2018 | |||||||
Balance sheet items, except for equity accounts | 6.8747 | 6.8632 |
March 31, 2020 | December 31, 2019 | |||||||
Balance sheet items, except for equity accounts | 7.0851 | 6.9762 |
Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Items in the statements of operations and comprehensive loss, and statements of cash flows | 6.7808 | 6.3711 |
Three Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Items in the statements of operations and comprehensive loss | 6.8137 | 6.3789 |
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Items in the statements of operations and comprehensive loss | 6.9790 | 6.7468 |
No representation is made that the RMB amounts could have been, or could be converted into US$ at the above rates.
10
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
f) | Fair value measurement |
Liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of June 30, 2019March 31, 2020 and December 31, 20182019 are as follows:
Fair value measurement at reporting date using | ||||||||||||||
As of June 30, 2019 | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||
(Unaudited) | ||||||||||||||
Warrant liabilities (Note 17) | 135 | - | - | 135 |
Fair value measurement at reporting date using | ||||||||||||||
| As of March 31, 2020 |
| Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||
(Unaudited) | ||||||||||||||
Warrant liabilities (Note 17) | 61 | - | - | 61 |
Fair value measurement at reporting date using | ||||||||||||||
As of December 31, 2018 | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||
Warrant liabilities (Note 17) | 606 | - | - | 606 |
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Fair value measurement at reporting date using | ||||||||||||||
| As of December 31, 2019 |
| Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||
Warrant liabilities (Note 17) | 107 | - | - | 107 |
g) | Revenue recognition |
All of the Company’s revenues are generated from the PRC. The following tables present the Company’s revenues disaggregated by products and services and timing of revenue recognition:
Six Months Ended June 30, | Three Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||
Internet advertising and data service | ||||||||||||||||||||||||
Internet advertising and related services | ||||||||||||||||||||||||
--distribution of the right to use search engine marketing service | 18,580 | 25,848 | 11,855 | 19,405 | 1,988 | 6,725 | ||||||||||||||||||
--online advertising placements | 5,406 | 4,551 | 3,575 | 2,954 | 948 | 1,831 | ||||||||||||||||||
--sales of effective sales lead information | 29 | 283 | 23 | 161 | - | 6 | ||||||||||||||||||
TV advertising service | - | 91 | - | - | ||||||||||||||||||||
Others | 5 | 7 | - | - | ||||||||||||||||||||
--data and technical services | 300 | 5 | ||||||||||||||||||||||
Ecommerce O2O advertising and marketing services | 503 | - | ||||||||||||||||||||||
Technical solution services | 645 | - | ||||||||||||||||||||||
Total revenues | $ | 24,020 | $ | 30,780 | $ | 15,453 | $ | 22,520 | 4,384 | 8,567 |
Six Months Ended June 30, | Three Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||
Revenue recognized over time | 23,991 | 30,497 | 15,430 | 22,359 | 3,739 | 8,561 | ||||||||||||||||||
Revenue recognized at a point in time | 29 | 283 | 23 | 161 | 645 | 6 | ||||||||||||||||||
Total revenues | $ | 24,020 | $ | 30,780 | $ | 15,453 | $ | 22,520 | 4,384 | 8,567 |
Contract costs
For the six and three months ended June 30,March 31, 2020 and 2019, and 2018, the Company did not have any significant incremental costs of obtaining contracts with customers incurred and/or costs incurred in fulfilling contracts with customers, that shall be recognized as an asset and amortized to expenses in a pattern that matches the timing of the revenue recognition of the related contract.
11
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Contract liabilitiesbalances
The table below summarized the movement of the Company’s contract liabilities (advance from customers) for the sixthree months ended June 30, 2019:March 31, 2020:
Contract liabilities | ||||
US$(’000) | ||||
Balance as of January 1, | ||||
Exchange translation adjustment | ( | ) | ||
Revenue recognized from beginning contract liability | ( | ) | ||
Advances received from customers related to unsatisfied performance obligations | ||||
Balance as of | ||||
Advance from customers related to unsatisfied performance obligations are generally refundable. Refund of advance from customers were insignificant for both the six and three months ended June 30, 2019March 31, 2020 and 2018.2019.
For the six and three months ended June 30,March 31, 2020 and 2019, and 2018, there is no revenue recognized from performance obligations that were satisfied in prior periods.
Transaction price allocated to remaining performance obligation
The Company has elected to apply the practical expedient in paragraph ASC Topic 606-10-50-14 and did not disclose the information related to transaction price allocated to the performance obligations that are unsatisfied or partially unsatisfied as of June 30, 2019, because all performance obligations of the Company’s contracts with customers have an original expected duration of one year or less.
h) |
Advertising costs for the Company’s own brand building are expensed when incurred and are included in “sales and marketing expenses” in the statements of operations and comprehensive loss. No advertising expenses for the Company’s own brand building was incurred for the six or three months ended June 30, 2019. For the six and three months ended June 30, 2018, advertising expenses for the Company’s own brand building were approximately US$0.41 million and US$0.02 million, respectively.
Research and development expenses |
The Company accounts for expenses for the enhancement, maintenance and technical support to the Company’s Internet platforms and intellectual properties that are used in its daily operations in research and development expenses. Research and development costs are charged to expense when incurred. Expenses for research and development for the six months ended June 30, 2019 and 2018 were approximately US$0.36 million and US$0.46 million, respectively. Expenses for research and development for the three months ended June 30,March 31, 2020 and 2019 and 2018 were approximately US$0.160.21 million and US$0.240.20 million, respectively.
Lease |
On January 1, 2019,As of March 31, 2020, operating lease right-of-use assets recognized by the Company adopted ASC Topic 842, “Lease”, applyingwas approximately US$0.01 million, operating lease liabilities recognized was approximately US$0.01 million, which was included in the optional transition method in accordance with ASU No. 2018-11, which permitted the Company to change its date of initial applicationCompany’s other current liabilities and was fully paid to the beginning of the period of adoption of ASC Topic 842 (i.e. January 1, 2019) and recognize the effects of applying ASC Topic 842 as a cumulative-effect adjustment to retained earnings as of January 1, 2019, and remain applying ASC Topic 840lessor in the comparative periods. The adoption of ASC Topic 842 didn’t result in a material adjustment to the Company’s accumulated deficit as of January 1, 2019.April 2020.
For the three months ended March 31, 2020 and 2019, total operating lease cost recognized was approximately US$0.05 million (including approximately US$0.04 million short-term leases cost) and US$0.09 million, respectively.
Supplemental information related to operating leases (All amounts are presented in thousands of U.S. dollars):
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Operating cash flows used for operating leases | - | 93 | ||||||
Right-of-use assets obtained in exchange for new lease liabilities | - | 10 | ||||||
Weighted-average discount rate | 6 | % | 6 | % |
As of March 31, | ||||||||
2020 | 2019 | |||||||
Weighted-average remaining lease term (years) | 0.96 | 1.96 |
12
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company leases two offices in the PRC from unrelated third parties during its normal course of business, of which one office is used as the Company’s principle executive office in Beijing, the other is used as the Company’s office in Hubei. Other than these, the Company does not have any other contract that is or contains a lease under ASC Topic 842.
The Company’s lease contracts do not contain any option for the Company to extend or terminate the lease, and do not contain the option for the Company to purchase the underlying assets. Based on the noncancelable lease period in the contract, the Company considers contract-based, asset-based, market-based and entity-based factors to determine the term over which it is reasonably certain to extend the lease, and then determine the lease term of each contract, which is 2-3 years.
The Company’s lease contracts only contain fixed lease payments and do not contain any residual value guarantee. The lease payments of the Company’s Beijing office are required to be paid on a quarterly basis, and the lease payments of its Hubei office are required to be paid on an annual basis.
The Company’s office lease contracts do not contain any nonlease component and are classified as operating leases in accordance with ASC Topic 842-10-25-3.
As the implicit rates of the Company leases cannot be readily determined, in accordance with ASC Topic 842-20-30-3, the Company uses its incremental borrowing rate as the discount rate to determine the present value of the lease payments for each lease contract. The discount rate used by the Company is 6%, which is determined based on the interest rate commonly used by the commercial banks in the PRC for the 1-5 years long-term loan lent to business entities on a collateralized basis.
The Company’s lease agreement of its previous executive office in Beijing expired on March 31, 2019. In mid-August 2019, the Company relocated to a new Beijing office leased from another unrelated third party. From April 1, 2019 through the date of the relocation, the Company continued staying in its previous executive office in Beijing on a separately negotiated fixed daily rate as agreed by the Company and the lessor. Because the duration of this lease was less than twelve months, it met the definition of a short-term lease under ASC 842. As a result, in accordance with ASC 842-20-25-2, as an accounting policy, the Company elected not to apply the recognition requirements in this Subtopic (i.e. not to recognize right-of-use asset and related lease liability) to this short-term lease. Instead, the Company recognized the lease payments of this short-term lease in its consolidated statements of operations and comprehensive loss on a straight-line basis over the lease term. For the three months ended June 30, 2019, short-term lease cost recognized under ASC 842-20-25-2 was approximately US$0.13 million. As of June 30, 2019, unpaid lease payments related to this short-term lease was approximately US$0.12 million.
As of June 30, 2019, operating lease right-of-use assets recognized by the Company was approximately US$17 thousand, operating lease liabilities recognized was approximately US$10 thousand, which was included in the Company’s other current liabilities.
For the six and three months ended June 30, 2019, total operating lease cost recognized under ASC Topic 842 was approximately US$88 thousand and US$3 thousand, respectively. For the six and three months ended June 30, 2018, operating lease cost recognized under ASC Topic 840 was approximately US$0.18 million and US$0.09 million, respectively.
As of June 30, 2019, the Company’s total undiscounted lease payments of approximately US$10 thousand approximate its total operating lease liabilities recognized due to their short maturities. The Company’s lease payments as of June 30, 2019 will mature for the year ending December 31, 2020.
Supplemental information related to operating leases:
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendments in this ASU require the measurement and recognition of expected credit losses for financial assets held at amortized cost. The amendments in this ASU replace the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”, which among other things, clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. For public entities, the amendments in these ASUs are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact on its consolidated financial position and results of operations upon adopting these amendments.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”. The amendments in this ASU eliminate, add and modify certain disclosure requirements for fair value measurements. The amendments in this ASU, among other things, require public companies to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. The Company does not expect the adoption of these amendments to have a material impact on its consolidated financial position and results of operations.
4. | Accounts receivable, net |
June 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Accounts receivable | 8,122 | 9,752 | 6,574 | 6,408 | ||||||||||||
Allowance for doubtful accounts | (1,373 | ) | (3,393 | ) | (3,504 | ) | (3,148 | ) | ||||||||
Accounts receivable, net | 6,749 | 6,359 | 3,070 | 3,260 |
All of the accounts receivable are non-interest bearing. Based on the assessment of the collectability of the accounts receivable as of June 30, 2019March 31, 2020 and December 31, 20182019, the Company provided approximately US$1.43.50 million and US$3.43.15 million allowance for doubtful accounts, respectively, which were primarily related to the accounts receivable of the Company’s internetInternet advertising and TV advertising businessrelated services segment with an aging over six months. The Company evaluates its accounts receivable with an aging over six months and determines the allowance based on aging data, historical collection experience, customer specific facts and economic conditions. For the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, approximately US$0.460.41 million and US$0.800.19 million allowance for doubtful accounts was provided, respectively. For the three months ended June 30, 2019 and 2018, approximately US$0.27 million and US$0.31 million allowance for doubtful accounts was provided, respectively. As of June 30, 2019, the Company also charged off approximately US$2.5 million account receivable balances against the allowance, as all means of collection have been exhausted and the potential for recovery is considered remote.
5. | Prepayments and deposit to suppliers |
June 30, 2019 | December 31, 2018 | |||||||
US$(’000) | US$(’000) | |||||||
(Unaudited) | ||||||||
Deposits to internet resources providers | 656 | 963 | ||||||
Prepayments to internet resources providers | 1,081 | 727 | ||||||
Other deposits and prepayments | 312 | 464 | ||||||
2,049 | 2,154 |
March 31, 2020 | December 31, 2019 | |||||||
US$(’000) | US$(’000) | |||||||
(Unaudited) | ||||||||
Deposits to advertising resources providers | 1,311 | 1,315 | ||||||
Prepayments to advertising resources providers | 2,329 | 4,361 | ||||||
Prepayment of license fee | 796 | 1,062 | ||||||
Other deposits and prepayments | 510 | 242 | ||||||
4,946 | 6,980 |
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. | Due from related parties, net |
June 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
An officer of the Company | - | 200 | ||||||||||||||
Guohua Shiji (Beijing) Communication Co., Ltd. | 175 | 201 | ||||||||||||||
Zhongwang Xiyue Technology (Beijing) Co., Ltd. (“Zhongwang Xiyue”) | 51 | 81 | ||||||||||||||
Guohua Shiji (Beijing) Communication Co., Ltd. (“Guohua Shiji”) | 169 | 172 | ||||||||||||||
175 | 401 | 220 | 253 | |||||||||||||
Allowance for doubtful accounts | (175 | ) | (175 | ) | (169 | ) | (172 | ) | ||||||||
Due from related parties, net | - | 226 | 51 | 81 |
Related parties of the Company represented the Company’s direct or indirect unconsolidated investee companies and entities that the Company’s officers or directors can exercise significant influence, as well as an officer of the Company.
Due from an officer of the Company as of December 31, 2018 represented a US$0.20 million fund advanced to one of the Company’s officers during the third fiscal quarter of 2018 for the purpose of setting up and providing finance to a proposed business entity in Taiwan. The Company intended to set up and expand its business in Taiwan through establishing the VIE arrangements with this Taiwan entity. This Taiwan entity was incorporated in September 2017 and is wholly-owned by the officer referred above, and has no fund and business activities since incorporation. Based on the fact that there are still legal obstacles to establish the VIE agreements between an entity that is ultimately controlled by the PRC citizens with an entity duly organized under the law of Taiwan, the Company terminated the plan, and the US$0.2 million fund advanced was fully returned to the Company in April 2019.influence.
As of June 30, 2019March 31, 2020 and December 31, 2018,2019, due from Zhongwang Xiyue represented the outstanding receivable for the advertising and marketing service that the Company provided to this related party in its normal course of business, which is on the same terms as those provided to its unrelated clients.
13
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of March 31, 2020 and December 31, 2019, due from related parties also included a short-term working capital loan to Guohua Shiji (Beijing) Communication Co., Ltd. (“Guohua Shiji”).Shiji. As of March 31, 2020 and December 31, 2018, the outstanding amount of the loan was RMB1.38 million (approximately US$0.20 million), of which RMB0.18 million (approximately US$0.03 million) was collected by the Company during the first fiscal quarter of 2019, and the Company had provided full allowance to against the remaining amount of this loan, as of June 30, 2019 and December 31, 2018, as the business activities of Guohua Shiji had significantly declined in recent years.become dormant and recovery was considered remote.
7. | Other current assets, net |
March 31, 2020 | December 31,2019 | |||||||||||||||||||||||
Gross | Allowance for doubtful accounts | Net | Gross | Allowance for doubtful accounts | Net | |||||||||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||||||||||
Staff advances for business operations | 16 | - | 16 | 11 | - | 11 | ||||||||||||||||||
Short-term loan to an unrelated party | 815 | - | 815 | - | - | - | ||||||||||||||||||
Overdue deposits | 706 | (706 | ) | - | 717 | (717 | ) | - | ||||||||||||||||
Total | 1,537 | (706 | ) | 831 | 728 | (717 | ) | 11 |
As of June 30, 2019 and DecemberMarch 31, 2018,2020, other current assets primarily includedinclude a short-termtemporary working capital loan that the Company lent to an unrelated party during the first fiscal quarter of RMB1.02020. This loan is unsecured, interest free and payment on demand.
As of March 31, 2020 and December 31, 2019, other current assets also included an approximately RMB5 million (approximately US$0.15 million) lent to a former unconsolidated investee of the Company, and an approximately RMB11 million (approximately US$1.610.7 million) overdue contractual deposits in the aggregate, which weredeposit related to an advertising resources purchase contractscontract that had been completed with no further cooperation. Based on the assessment of the collectability of thesethis overdue depositsdeposit as of March 31, 2020 and short-term working capital loan,December 31, 2019, the Company had provided full allowance to against thesethis doubtful accounts as of June 30, 2019 and December 31, 2018. As of June 30, 2019, the Company charged off the approximately US$0.15 million short-term working capital loan and US$0.85 million overdue deposits receivable against the allowance, respectively, because for this portion of debts, all means of collection have been exhausted and the potential for recovery is considered remote.
As of June 30, 2019 and December 31, 2018, the remaining balances of other current assets represented small amounts of staff advances for business operations.account.
8. | Long-term investments |
As of June 30,March 31, 2020 and December 31, 2019, long-term investment of approximately RMB0.25 million (approximately US$0.040.03 million) represented the Company’s contribution of its pro-rata share of cash investment to one of its equity ownership investee entities, Local Chain Xi’an Information Technology Co., Ltd. (“Local Chain Xi’an) in January 2019. Local Chain Xi’an was incorporated in October 2018, which is preliminarily engaged in providing technical supports to online advertising and precision marketing.. The Company beneficially owns a 4.9% equity interest in this entity.Local Chain Xi’an.
The Company measures this investment which do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the Company.
9. | Property and equipment, net |
March 31, 2020 | December 31, 2019 | |||||||
US$(’000) | US$(’000) | |||||||
(Unaudited) | ||||||||
Vehicles | 747 | 758 | ||||||
Office equipment | 1,310 | 1,331 | ||||||
Electronic devices | 923 | 937 | ||||||
Property and equipment, cost | 2,980 | 3,026 | ||||||
Less: accumulated depreciation | (2,905 | ) | (2,948 | ) | ||||
Property and equipment, net | 75 | 78 |
Depreciation expenses for the three months ended March 31, 2020 and 2019 were approximately US$2,000 and US$33,000, respectively.
14
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2019 | December 31, 2018 | |||||||
US$(’000) | US$(’000) | |||||||
(Unaudited) | ||||||||
Leasehold improvement | 320 | 321 | ||||||
Vehicles | 769 | 771 | ||||||
Office equipment | 1,351 | 1,353 | ||||||
Electronic devices | 951 | 952 | ||||||
Property and equipment, cost | 3,391 | 3,397 | ||||||
Less: accumulated depreciation | (3,292 | ) | (3,255 | ) | ||||
Property and equipment, net | 99 | 142 |
Depreciation expenses for the six months ended June 30, 2019 and 2018 were approximately US$43,000 and US$91,000, respectively. Depreciation expenses for the three months ended June 30, 2019 and 2018 were approximately US$10,000 and US$43,000, respectively.
10. | Intangible assets, net |
As of June 30, 2019 (Unaudited) | As of March 31, 2020 (Unaudited) | |||||||||||||||||||||||||||||||
Items | Gross Carrying Value | Accumulated Amortization | Impairment | Net Carrying Value | Gross Carrying Value | Accumulated Amortization | Impairment | Net Carrying Value | ||||||||||||||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||||||||||||||
Intangible assets not subject to amortization: | ||||||||||||||||||||||||||||||||
Domain name | 1,405 | - | (1,405 | ) | - | 1,363 | - | (1,363 | ) | - | ||||||||||||||||||||||
Intangible assets subject to amortization: | ||||||||||||||||||||||||||||||||
Customer relationship | 1,938 | (1,938 | ) | - | - | 1,880 | (1,880 | ) | - | - | ||||||||||||||||||||||
Non-compete agreements | 1,066 | (579 | ) | (487 | ) | - | 1,035 | (563 | ) | (472 | ) | - | ||||||||||||||||||||
Software technologies | 298 | (298 | ) | - | - | 289 | (289 | ) | - | - | ||||||||||||||||||||||
Cloud compute software technology | 1,350 | (903 | ) | (414 | ) | 33 | ||||||||||||||||||||||||||
Intelligent marketing data service platform | 4,697 | (1,903 | ) | (2,794 | ) | - | 4,557 | (1,846 | ) | (2,711 | ) | - | ||||||||||||||||||||
Internet safety, information exchange security and data encryption software | 1,891 | (425 | ) | (1,466 | ) | - | 1,835 | (413 | ) | (1,422 | ) | - | ||||||||||||||||||||
Cloud video management system | 1,382 | (343 | ) | (1,039 | ) | - | 1,341 | (333 | ) | (1,008 | ) | - | ||||||||||||||||||||
Cloud compute software technology | 1,310 | (888 | ) | (402 | ) | 20 | ||||||||||||||||||||||||||
Licensed products use right | 1,207 | (45 | ) | - | 1,162 | |||||||||||||||||||||||||||
Other computer software | 114 | (111 | ) | - | 3 | 871 | (355 | ) | - | 516 | ||||||||||||||||||||||
Total | $ | 14,141 | $ | (6,500 | ) | $ | (7,605 | ) | $ | 36 | $ | 15,688 | $ | (6,612 | ) | $ | (7,378 | ) | $ | 1,698 |
As of December 31, 2018 | As of December 31, 2019 | |||||||||||||||||||||||||||||||
Items | Gross Carrying Value | Accumulated Amortization | Impairment | Net Carrying Value | Gross Carrying Value | Accumulated Amortization | Impairment | Net Carrying Value | ||||||||||||||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||||||||||||||
Intangible assets not subject to amortization: | ||||||||||||||||||||||||||||||||
Domain name | 1,408 | - | (1,408 | ) | - | 1,385 | - | (1,385 | ) | - | ||||||||||||||||||||||
Intangible assets subject to amortization: | ||||||||||||||||||||||||||||||||
Customer relationship | 1,941 | (1,941 | ) | - | - | 1,909 | (1,909 | ) | - | - | ||||||||||||||||||||||
Non-compete agreements | 1,068 | (580 | ) | (488 | ) | - | 1,051 | (571 | ) | (480 | ) | - | ||||||||||||||||||||
Software technologies | 299 | (299 | ) | - | - | 294 | (294 | ) | - | - | ||||||||||||||||||||||
Cloud compute software technology | 1,353 | (896 | ) | (415 | ) | 42 | ||||||||||||||||||||||||||
Intelligent marketing data service platform | 4,705 | (1,906 | ) | (2,799 | ) | - | 4,629 | (1,876 | ) | (2,753 | ) | - | ||||||||||||||||||||
Internet safety, information exchange security and data encryption software | 1,894 | (426 | ) | (1,468 | ) | - | 1,863 | (419 | ) | (1,444 | ) | - | ||||||||||||||||||||
Cloud video management system | 1,383 | (343 | ) | (1,040 | ) | - | 1,362 | (338 | ) | (1,024 | ) | - | ||||||||||||||||||||
Cloud compute software technology | 1,331 | (898 | ) | (408 | ) | 25 | ||||||||||||||||||||||||||
Licensed products use right | 1,202 | (15 | ) | - | 1,187 | |||||||||||||||||||||||||||
Other computer software | 114 | (111 | ) | - | 3 | 872 | (185 | ) | - | 687 | ||||||||||||||||||||||
Total | $ | 14,165 | $ | (6,502 | ) | $ | (7,618 | ) | $ | 45 | $ | 15,898 | $ | (6,505 | ) | $ | (7,494 | ) | $ | 1,899 |
15
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amortization expenses for the six months ended June 30, 2019 and 2018 were approximately US$9,000 and US$336,000, respectively. Amortization expenses for the three months ended June 30,March 31, 2020 and 2019 and 2018 were approximately US$4,000205,000 and US$168,000,5,000, respectively.
Based on the adjusted carrying value of the finite-lived intangible assets after the deduction of the impairment losses, which has a weighted average remaining useful life of 1.986.27 years as of June 30, 2019,March 31, 2020, and assuming no further subsequent impairment of the underlying intangible assets, the estimated future amortization expenses is approximately US$9,000 for the year ending December 31, 2019, approximately US$18,0000.62 million for the year ending December 31, 2020, and approximately US$9,0000.13 million for the year ending December 31, 2021.2021, and approximately US$0.12 million each year for the year ending December 31, 2022 through 2024.
11. | Blockchain software application platform development costs |
In early 2018, the Company announced its expansion into the blockchain industry and the related technology. In February 2018, the Company entered into a technical development contract with an unrelated entity to develop certaina blockchain technology-based softwareplatform application platform for internal use.use by the Company. Total amount of the contract was US$4.5 million. In March 2018, the Company entered into a RMB3.0 million (approximately US$0.440.42 million) social network-based software application development contract with another unrelated entity, which software application the Company had further decided to be combined into the current under developing blockchain technology-based application platform, as discussed above.platform. These two blockchain technology-based applications are named OMG and Bo!News, respectively. As of June 30,March 31, 2020 and December 31, 2019, in accordance with ASC 350-40 “Intangibles-Goodwill and Other-Internal-Use Software”, the Company had capitalized approximately US$3.724.18 million softwareand US$3.88 million development costs in the aggregate forunder these two contracts. In August 2019, after the preliminary testingcontracts, respectively. As of the beta modules and discussion with potential cooperators,date hereof, the Company decidedis in the process of further developing and adjusting its blockchain-powered applications on the blockchain infrastructure platform to tune and upgrade some functions of the backstage applications ofmake the platform which are withina better synergism with the service scopecurrent business and client base. The Company had originally scheduled to complete the adjustments and upgrades of Bo!News, to launch the development contracts signed. The complete combined beta version of the upgraded platform is expected to be readyOMG for trial by the end of 2019.May 2020, and to complete the integration of BO!News and OMG for commercial release by the end of 2020. However, due to the COVID-19 outbreak in China during the first fiscal quarter of 2020, the Company currently anticipates that the commercial releasing schedule will likely be postponed for 1 to 2 months.
According to the development contracts the Company signed with the counter parties, the Company will not bear any development risk related loss unless the counter party has no fault during the development and the causes for failure is considered reasonable as consentedagreed by both parties. In the latter case, the related development loss will be shared by both parties based on further negotiation.negotiations. As of the date hereof, the Company doeshas not been aware of any technical risks or other factors that may lead to any failure or partial failure of these development projects.
12. | Long-term prepayments |
As of March 31, 2020, long-term prepayments represented a portion of the Company’s prepayments, of which approximately US$1.12 million was paid to one of its advertising resource suppliers and the remaining approximately US$0.22 million was paid to one of its professional service suppliers. The Company recorded these amounts as long-term prepayments because they were not expected to be consumed within one year of March 31, 2020.
13. | Short-term bank loan and credit facility |
As of June 30,December 31, 2019, the Company had a revolving credit facility of RMB5.0 million (approximately US$0.7 million) for short-term working capital loans granted by a major financial institution in China, which currently is available to the Company untilexpired in January 2020.
As of June 30,December 31, 2019, under the revolving credit facility, the Company borrowed RMB3.0 million (approximately US$0.440.43 million) short-term bank loan, which will mature in January 2020.
As of June 30, 2019, the Company borrowed another RMB3.0 million (approximately US$0.44 million) short-term working capital loan from the same financial institution, of which RMB1.5 million (approximately US$0.22 million) matured and was repaid on July 29, 2019 and the remaining RMB1.5 million (approximately US$0.22 million) will mature in September 2019.January 2020.
Collateral for the above discussed revolving credit facility and short-term bank loans included an unlimited guarantee from Mr. Handong Cheng (Chairman and Chief Executive Officer of the Company) and his spouse and an approximately US$0.03 million term deposit, which will mature on September 21, 2019.
14. | Accrued payroll and other accruals |
March 31, 2020 | December 31, 2019 | |||||||
US$(’000) | US$(’000) | |||||||
(Unaudited) | ||||||||
Accrued payroll and staff welfare | 128 | 173 | ||||||
Accrued operating expenses | 396 | 318 | ||||||
524 | 491 |
16
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Interest rate of the current outstanding short-term working capital loans was 5.655% per annum, which is 30% over the benchmark rate of the People’s Bank of China (the “PBOC”).
As of June 30, 2019, advance from a customer, related represented advance payments received from a customer that one of the Company’s executive officer and director can exercise significant influence, which was related to unsatisfied performance obligations for the use of the Company’s distribution of the right to use search engine marketing service.
June 30, 2019 | December 31, 2018 | |||||||
US$(’000) | US$(’000) | |||||||
(Unaudited) | ||||||||
Accrued payroll and staff welfare | 185 | 208 | ||||||
Accrued operating expenses | 104 | 313 | ||||||
289 | 521 |
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. Effective from January 1, 2018, the Company is subject to the new GILTI tax rules. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of controlled foreign corporations (“CFCs”), subject to the possible use of foreign tax credits and a deduction equal to 50 percent to offset the income tax liability, subject to some limitations. Under U.S. GAAP, the Company has made an accounting policy choice of treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred. For the six and three months ended June 30, 2019 and 2018, no provision for federal corporate income tax has been made in the financial statements as the Company has no aggregated positive tested income.
ii). China Net BVI and ChinaNet Investment BVI were incorporated in the British Virgin Islands (“BVI”). Under the current law of the BVI, these BVI companies are not subject to tax on income or capital gains. Additionally, upon payments of dividends by these BVI companies to its respective 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. Effective from April 1, 2018, a two-tier corporate income tax system was officially implemented in Hong Kong. The applicable income tax rate is 8.25% for the first HK$2.0 million profits, and the subsequent profits are taxed at 16.5%. No provision for Hong Kong income tax has been made in the financial statements as China Net HK has no assessable profits for the six and three months ended June 30, 2019 or any prior periods. Additionally, upon payments of dividends by China Net HK to its shareholders, no Hong Kong withholding tax will be imposed.
iv). The Company’s PRC operating subsidiaries and VIEs, being incorporated in the PRC, are governed by the income tax law of the PRC and is subject to PRC enterprise income tax (“EIT”). The EIT rate of PRC is 25%, which applies to both domestic and foreign invested enterprises.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Service revenues provided by the Company’s PRC operating subsidiaries and VIEs were subject to Value Added Tax (“VAT”). VAT rate for provision of modern services (other than lease of corporeal movables) is 6%, and for small scale taxpayer, 3%. Therefore, for the six and three months ended June 30, 2019 and 2018, the Company’s service revenues are subject to VAT at a rate of 6%, after deducting the VAT paid for the services purchased from suppliers, or at a rate of 3% without any deduction of VAT paid for the services purchased from suppliers. The surcharges of the VAT in the aggregate is 12% to 14% of the VAT, depending on which tax jurisdiction the Company’s PRC operating subsidiaries and VIE operate in.
As of June 30, 2019March 31, 2020 and December 31, 2018,2019, taxes payable consists of:
June 30, 2019 | December 31, 2018 | |||||||
US$(’000) | US$(’000) | |||||||
(Unaudited) | ||||||||
PRC turnover tax and surcharge payable | 1,303 | 1,215 | ||||||
PRC enterprise income tax payable | 1,779 | 1,782 | ||||||
Total taxes payable | 3,082 | 2,997 |
March 31, 2020 | December 31, 2019 | |||||||
US$(’000) | US$(’000) | |||||||
(Unaudited) | ||||||||
Turnover tax and surcharge payable | 1,234 | 1,244 | ||||||
Enterprise income tax payable | 2,027 | 1,970 | ||||||
Total taxes payable | 3,261 | 3,214 |
For the six and three months ended June 30,March 31, 2020 and 2019, and 2018, the Company’s income tax (expense)/benefitexpense consisted of:
Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Current-PRC | - | - | - | - | ||||||||||||
Deferred-PRC | (6 | ) | (689 | ) | 33 | (693 | ) | |||||||||
Income tax (expense)/benefit | (6 | ) | (689 | ) | 33 | (693 | ) |
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
US$(’000) | US$(’000) | |||||||
(Unaudited) | (Unaudited) | |||||||
Current | (83 | ) | - | |||||
Deferred | 5 | (39 | ) | |||||
Income tax expense | (78 | ) | (39 | ) |
The Company’s deferred tax assets as of June 30, 2019March 31, 2020 and December 31, 20182019 were as follows:
June 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Tax effect of net operating losses carried forward | 9,601 | 9,243 | 9,578 | 9,160 | ||||||||||||
Bad debts provision | 499 | 1,188 | 794 | 743 | ||||||||||||
Valuation allowance | (9,551 | ) | (9,875 | ) | (9,666 | ) | (9,190 | ) | ||||||||
Deferred tax assets, net | 549 | 556 | 706 | 713 |
The U.S. holding company has incurred aggregate NOLs of approximately US$19.7US22.3 million and US$19.220.3 million as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. The NOLs carryforwards incurred prior toas of December 31, 2017 gradually expire over time, the last of which expires in 2037. NOLs incurred after December 31, 2017 will no longer be available to carry back but can be carried forward indefinitely, subject to an annual limit of 80% on the amount of taxable income that can be offset by NOLs arising in tax years ending after December 31, 2017. The Company maintains a full valuation allowance against its net U.S. deferred tax assets, since due to uncertainties surrounding future utilization, the Company estimates there will not be sufficient future earnings to utilize its U.S. deferred tax assets.
The NOLs carried forward incurred by the Company’s PRC subsidiaries and VIEs were approximately US$26.323.9 million and US$25.223.6 million as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. The losses carryforwards gradually expire over time, the last of which expires in 20292030 due to certain subsidiary enjoys the High and New Technology Enterprise’s privileged NOLs carryforward policy. The related deferred tax assets were calculated based on the respective NOLs incurred by each of the PRC subsidiaries and VIEs and the respective corresponding enacted tax rate that will be in effect in the period in which the losses are expected to be utilized.
17
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company recorded approximately US$9.69.7 million and US$9.99.2 million valuation allowance as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively, because it is considered more likely than not that a portion of the deferred tax assets will not be realized through sufficient future earnings of the entities to which the operating losses related.
For the six and three months ended June 30,March 31, 2020 and 2019, the Company recorded approximately US$0.450.55 million and US$0.26 million deferred tax valuation allowance, respectively. For the six and three months ended June 30, 2018, the Company recorded approximately US$1.17 million and US$0.760.19 million deferred tax valuation allowance, respectively.
16. | Long-term borrowing from a director |
Long-term borrowing from a director is a non-interest bearing loan from a director of the Company relating to the original paid-in capital contribution in the Company’s wholly-owned subsidiary Rise King WFOE, which is not expected to be repaid within one year.
17. | Warrant liabilities |
On January 17, 2018, theThe Company consummated a registered directdirector offering of 2,150,001 shares of the Company’s common stock to certain institutional investors at a purchase price of $5.15 per share (“thein January 2018 (the “2018 Financing”). As, as part of the transaction, the Company also issued to the investors and the placement agent warrants for theto purchase of up to 645,000 and 129,000 shares of the Company’s common stock at an exercise price of $6.60 per share, respectively.
The Company accounted for thethese warrants issuing in the Financing as derivative liabilities, as the strike price of the warrants is dominated in a currency (U.S. dollar) other than the functional currency of the Company (Renminbi or Yuan) and is not considered index to the Company’s own stock.liabilities. As a result, these warrants were remeasured at fair value as of each reporting date with changes in fair value be recorded in earnings in each reporting period.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Fair value of the warrants
The Company used Binomial model to determine the fair value of the Warrants based on the assumptions summarized as below:
Investors warrants | Placement agent warrants | |||||||||||||||||||||||
December 31, 2018 | March 31, 2019 | June 30, 2019 | December 31, 2018 | March 31, 2019 | June 30, 2019 | |||||||||||||||||||
Stock price | $ | 1.34 | $ | 1.95 | $ | 1.35 | $ | 1.34 | $ | 1.95 | $ | 1.35 | ||||||||||||
Years to maturity | 1.55 | 1.30 | 1.10 | 2.05 | 1.80 | 1.55 | ||||||||||||||||||
Risk-free interest rate | 2.50 | % | 2.27 | % | 1.73 | % | 2.50 | % | 2.27 | % | 1.73 | % | ||||||||||||
Dividend yield | - | - | - | - | - | - | ||||||||||||||||||
Expected volatility | 199 | % | 216 | % | 90 | % | 176 | % | 187 | % | 202 | % | ||||||||||||
Exercise Price | $ | 6.60 | $ | 6.60 | $ | 6.60 | $ | 6.60 | $ | 6.60 | $ | 6.60 | ||||||||||||
Fair value of the warrant | $ | 0.78 | $ | 1.23 | $ | 0.05 | $ | 0.80 | $ | 1.26 | $ | 0.80 |
Investors warrants | Placement agent warrants | |||||||||||||||||||||||
January 17, 2018 | March 31, 2018 | June 30, 2018 | January 17, 2018 | March 31, 2018 | June 30, 2018 | |||||||||||||||||||
Stock price | $ | 3.98 | $ | 1.67 | $ | 2.52 | $ | 3.98 | $ | 1.67 | $ | 2.52 | ||||||||||||
Years to maturity | 2.50 | 2.30 | 2.10 | 3.00 | 2.80 | 2.55 | ||||||||||||||||||
Risk-free interest rate | 2.22 | % | 2.35 | % | 2.53 | % | 2.39 | % | 2.50 | % | 2.56 | % | ||||||||||||
Dividend yield | - | - | - | - | - | - | ||||||||||||||||||
Expected volatility | 158 | % | 164 | % | 174 | % | 147 | % | 152 | % | 159 | % | ||||||||||||
Exercise Price | $ | 6.60 | $ | 6.60 | $ | 6.60 | $ | 6.60 | $ | 6.60 | $ | 6.60 | ||||||||||||
Fair value of the warrant | $ | 2.93 | $ | 1.03 | $ | 1.71 | $ | 2.99 | $ | 1.06 | $ | 1.74 |
Changes in fair value of warrant liabilities
Six and Three Months Ended June 30, 2019 (Unaudited)
As of | As of | As of | Change in Fair Value (gain)/loss | |||||||||||||||||
June 30, 2019 | March 31, 2019 | December 31, 2018 | Six Months Ended June 30, 2019 | Three Months Ended June 30, 2019 | ||||||||||||||||
Fair value of the Warrants: | ||||||||||||||||||||
Investor warrants | 32 | 793 | 503 | (471 | ) | (761 | ) | |||||||||||||
Placement agent warrants | 103 | 163 | 103 | - | (60 | ) | ||||||||||||||
Warrant liabilities | 135 | 956 | 606 | (471 | ) | (821 | ) |
Six and Three Months Ended June 30, 2018 (Unaudited)
As of | As of | As of | Change in Fair Value (gain)/loss | |||||||||||||||||
June 30, 2018 | March 31, 2018 | January 17, 2018 | Six Months Ended June 30, 2018 | Three Months Ended June 30, 2018 | ||||||||||||||||
Fair value of the Warrants: | ||||||||||||||||||||
Investor warrants | 1,103 | 664 | 1,890 | (787 | ) | 439 | ||||||||||||||
Placement agent warrants | 224 | 137 | 385 | (161 | ) | 87 | ||||||||||||||
Warrant liabilities | 1,327 | 801 | 2,275 | (948 | ) | 526 |
Investors warrants | Placement agent warrants | |||||||||||||||
As of December 31, 2019 | As of March 31, 2020 | As of December 31, 2019 | As of March 31, 2020 | |||||||||||||
Stock price | $ | 1.17 | $ | 0.95 | $ | 1.17 | $ | 0.95 | ||||||||
Years to maturity | 0.55 | 0.30 | 1.05 | 0.80 | ||||||||||||
Risk-free interest rate | 1.58 | % | 0.10 | % | 1.57 | % | 0.13 | % | ||||||||
Dividend yield | - | - | - | - | ||||||||||||
Expected volatility | 60 | % | 99 | % | 80 | % | 78 | % | ||||||||
Exercise Price * | $ | 1.4927 | $ | 1.4927 | $ | 1.4927 | $ | 1.4927 | ||||||||
Fair value of the warrant | $ | 0.11 | $ | 0.07 | $ | 0.28 | $ | 0.12 | ||||||||
Warrant Liabilities (US$’000) | $ | 71 | $ | 45 | $ | 36 | $ | 16 |
Investors warrants | Placement agent warrants | |||||||||||||||
As of December 31, 2018 | As of March 31, 2019 | As of December 31, 2018 | As of March 31, 2019 | |||||||||||||
Stock price | $ | 1.34 | $ | 1.95 | $ | 1.34 | $ | 1.95 | ||||||||
Years to maturity | 1.55 | 1.30 | 2.05 | 1.80 | ||||||||||||
Risk-free interest rate | 2.50 | % | 2.27 | % | 2.50 | % | 2.27 | % | ||||||||
Dividend yield | - | - | - | - | ||||||||||||
Expected volatility | 199 | % | 216 | % | 176 | % | 187 | % | ||||||||
Exercise Price * | $ | 6.60 | $ | 6.60 | $ | 6.60 | $ | 6.60 | ||||||||
Fair value of the warrant | $ | 0.78 | $ | 1.23 | $ | 0.80 | $ | 1.26 | ||||||||
Warrant Liabilities (US$’000) | $ | 503 | $ | 793 | $ | 103 | $ | 163 |
* On September 25, 2019, as a result of the close on the first half of a private placement with a selected group of investors, the exercise price of the warrants issued in the 2018 Financing that contain the “full ratchet” price protection in the event of subsequent issuances below the applicable exercise price (the “Down round feature”) was adjusted to $1.4927.
18
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Changes in fair value of warrant liabilities
Three Months Ended March 31, 2020 (Unaudited)
| As of March 31, 2020 |
|
| As of December 31, 2019 |
|
| Change in Fair Value (gain)/loss |
| ||||
US$’000 | US$’000 | US$’000 | ||||||||||
Fair value of the Warrants: | ||||||||||||
Investor warrants | 45 | 71 | (26 | ) | ||||||||
Placement agent warrants | 16 | 36 | (20 | ) | ||||||||
Warrant liabilities | 61 | 107 | (46 | ) |
Three Months Ended March 31, 2019 (Unaudited)
| As of March 31, 2019 |
|
| As of December 31, 2018 |
|
| Change in Fair Value (gain)/loss |
| ||||
US$’000 | US$’000 | US$’000 | ||||||||||
Fair value of the Warrants: | ||||||||||||
Investor warrants | 793 | 503 | 290 | |||||||||
Placement agent warrants | 163 | 103 | 60 | |||||||||
Warrant liabilities | 956 | 606 | 350 |
Warrants issued and outstanding as of June 30, 2019March 31, 2020 and their movements during the sixthree months then ended are as follows:
Warrant Outstanding | Warrant Exercisable | Warrant Outstanding | Warrant 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 | Number of underlying shares | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number of underlying shares | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | |||||||||||||||||||||||||||||||||||||
Balance, January 1, 2019 | 774,000 | 1.63 | $ | 6.60 | 774,000 | 1.63 | $ | 6.60 | ||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2020 | 774,000 | 0.63 | $ | 1.4927 | 774,000 | 0.63 | $ | 1.4927 | ||||||||||||||||||||||||||||||||||||||||
Granted/Vested | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
Forfeited | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
Exercised | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2019 (Unaudited) | 774,000 | 1.13 | $ | 6.60 | 774,000 | 1.13 | $ | 6.60 | ||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2020 (Unaudited) | 774,000 | 0.38 | $ | 1.4927 | 774,000 | 0.38 | $ | 1.4927 |
18. | Restricted net assets |
As substantially all of the Company’s operations are conducted through its PRC subsidiaries and VIEs, the Company’s ability to pay dividends is primarily dependent on receiving distributions of funds from its PRC subsidiaries and VIEs. Relevant PRC statutory laws and regulations permit payments of dividends by its PRC subsidiaries and VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations and after it has met the PRC requirements for appropriation to statutory reserves. Paid in capital of the PRC subsidiaries and VIEs included in the Company’s consolidated net assets are also non-distributable for dividend purposes.
19
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In accordance with the PRC regulations on Enterprises with Foreign Investment, a WFOE established in the PRC is required to provide certain statutory reserves, namely general reserve fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A WFOE is required to allocate at least 10% of its annual after-tax profit to the general reserve until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. Rise King WFOE is subject to the above mandated restrictions on distributable profits. Additionally, in accordance with the Company Law of the PRC, a domestic enterprise is required to provide a statutory common reserve of at least 10% of its annual after-tax profit until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to provide for a discretionary surplus reserve, at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. All of the Company’s other PRC subsidiaries and PRC VIEs are subject to the above mandated restrictions on distributable profits.
As a result ofIn accordance with these PRC laws and regulations, the Company’s PRC subsidiaries and VIEs are restricted in their ability to transfer a portion of their net assets to the Company. As of June 30, 2019March 31, 2020 and December 31, 2018,2019, net assets restricted in the aggregate, which include paid-in capital and statutory reserve funds of the Company’s PRC subsidiaries and VIEs that are included in the Company’s consolidated net assets, were both approximately US$12.0 million.
The current PRC Enterprise Income Tax (“EIT”) Law also imposedimposes 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, subject to approval from the related PRC tax authorities.
The ability of the Company’s PRC subsidiaries and VIEs to make dividends and other payments to the Company may also be restricted by changes in applicable foreign exchange and other laws and regulations.
Foreign currency exchange regulation in China is primarily governed by the following rules:
l | Foreign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules; |
l | Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules. |
Currently, under the Administration Rules, Renminbi is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of China, unless the prior approval of the State Administration of Foreign Exchange (the “SAFE”) is obtained and prior registration with the SAFE is made. Foreign-invested enterprises like Rise King WFOE that need foreign exchange for the distribution of profits to its shareholders may effect payment from their foreign exchange accounts or purchase and pay foreign exchange rates at the designated foreign exchange banks to their foreign shareholders by producing board resolutions for such profit distribution. Based on their needs, foreign-invested enterprises are permitted to open foreign exchange settlement accounts for current account receipts and payments of foreign exchange along with specialized accounts for capital account receipts and payments of foreign exchange at certain designated foreign exchange banks.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Although the current Exchange Rules allow the convertibilityconverting 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.
20
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
19. | 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$0.170.04 million and US$0.18 million for the six months ended June 30, 2019 and 2018, respectively. The total amounts for such employee benefits were approximately US$0.08 million and US$0.100.09 million for the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively.
20. | 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 and accounts receivable. As of June 30, 2019, 50%Mach 31, 2020, 99% of the Company’s cash and cash equivalents were held by major financial institutions located in Mainland and Hong Kong, China, the remaining 50%1% was held by a financial institution located in the United States of America. The Company believes that these financial institutions located in Mainland China and the United States of America are of high credit quality. For accounts receivable, the Company extends credit based on an evaluation of the customer’s financial condition, generally without requiring collateral or other security. In order to minimize the credit risk, the Company delegated a team responsible for credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. Further, the Company reviews the recoverable amount of each individual receivable at each balance sheet date to ensure that adequate allowances are made for doubtful accounts. In this regard, the Company considers that the Company’s credit risk for accounts receivable and other receivables is significantly reduced.
Risk arising from operations in foreign countries
All of the Company’s operations are conducted within the PRC. The Company’s operations in the PRC are subject to various political, economic, and other risks and uncertainties inherent in the PRC. Among other risks, the Company’s operations in the PRC are subject to the risks of restrictions on transfer of funds, changing taxation policies, foreign exchange restrictions; and political conditions and governmental regulations.
Currency convertibility risk
Significant part of the Company’s businesses is transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts. These exchange control measures imposed by the PRC government authorities may restrict the ability of the Company’s PRC subsidiaries and VIEs to transfer its net assets, which to the Company through loans, advances or cash dividends.
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Concentration of customers
The following tables summarized the information about the Company’s concentration of customers for the six and three months ended June 30,March 31, 2020 and 2019, and 2018, respectively:
Customer A | Customer B | Customer C | Customer A | Customer B | Customer C | Customer D | Customer E | Customer F | ||||||||||||||||||||||||||||
Six Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2020 | ||||||||||||||||||||||||||||||||||||
Revenues, customer concentration risk | 13 | % | - | * | * | * | * | * | 15 | % | 11 | % | ||||||||||||||||||||||||
Three Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2019 | ||||||||||||||||||||||||||||||||||||
Revenues, customer concentration risk | 11 | % | - | - | 17 | % | * | - | - | - | - | |||||||||||||||||||||||||
Six Months Ended June 30, 2018 | ||||||||||||||||||||||||||||||||||||
Revenues, customer concentration risk | 14 | % | 14 | % | * | |||||||||||||||||||||||||||||||
Three Months Ended June 30, 2018 | ||||||||||||||||||||||||||||||||||||
Revenues, customer concentration risk | 19 | % | * | 11 | % | |||||||||||||||||||||||||||||||
As of June 30, 2019 | ||||||||||||||||||||||||||||||||||||
As of March 31, 2020 | ||||||||||||||||||||||||||||||||||||
Accounts receivable, customer concentration risk | 66 | % | - | * | 27 | % | 12 | % | 24 | % | 11 | % | - | - | ||||||||||||||||||||||
As of December 31, 2018 | ||||||||||||||||||||||||||||||||||||
As of December 31, 2019 | ||||||||||||||||||||||||||||||||||||
Accounts receivable, customer concentration risk | 74 | % | - | 12 | % | 57 | % | 13 | % | 12 | % | - | - | - |
* Less than 10%.
- No transaction incurred for the reporting period/no balance existed as of the reporting date.
Concentration of suppliers
The following tables summarized the information about the Company’s concentration of suppliers for the six and three months ended June 30,March 31, 2020 and 2019, and 2018, respectively:
Supplier A | Supplier B | Supplier A | Supplier B | |||||||||||||
Six Months Ended June 30, 2019 | ||||||||||||||||
Three Months Ended March 31, 2020 | ||||||||||||||||
Cost of revenues, supplier concentration risk | 90 | % | * | 71 | % | 11 | % | |||||||||
Three Months Ended June 30, 2019 | ||||||||||||||||
Three Months Ended March 31, 2019 | ||||||||||||||||
Cost of revenues, supplier concentration risk | 91 | % | * | 89 | % | - | ||||||||||
Six Months Ended June 30, 2018 | ||||||||||||||||
Cost of revenues, supplier concentration risk | 83 | % | 13 | % | ||||||||||||
Three Months Ended June 30, 2018 | ||||||||||||||||
Cost of revenues, supplier concentration risk | 87 | % | 10 | % |
* Less than 10%.
- No transaction incurred for the reporting period/no balance existed as of the reporting date.
21
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
21. | Commitments and contingencies |
In 2018, the Company entered into contracts with two unrelated third parties in relation to the development of the Company’s blockchain-powered marketing and advertising application platform.blockchain technology-powered platform applications. Total contract amount of these two contracts was approximately US$4.944.92 million. As of June 30, 2019,March 31, 2020, the Company had paid approximately US$3.724.18 million in the aggerate, and the remaining unpaid contract amount is expected to be paid during the year ending December 31, 2019.2020.
The Company is currently not a party to any legal or administrative proceedings and are not aware of any pending or threatened legal or administrative proceedings against us in all material aspects. The Company may from time to time become a party to various legal or administrative proceedings arising in its ordinary course of business.
22. | Segment reporting |
The Company follows ASC Topic 280 “Segment Reporting”, which requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and evaluating their performance. Reportable operating segments include components of an entity about which separate financial information is available and which operating results are regularly reviewed by the chief operating decision maker (“CODM”), the Company’s Chief Executive Officer, to make decisions about resources to be allocated to the segment and assess each operating segment’s performance.
Six
Previously, the Company had four reportable segments, which were Internet advertising and related services, TV advertising service, Blockchain technology and Corporate. From fiscal 2020, the Company has a new reportable segment, which is Ecommerce O2O advertising and marketing services segment. In additional, due to the Company’s TV advertising business gradually became dormant since fiscal 2019, and the remaining general operating expenses, net loss and total assets amounts of the Company’s TV advertising segment were and are expected to continue be immaterial, the Company combines the results of operations of its TV advertising segment and other disclosure information with its new Ecommerce O2O advertising and marketing services segment in fiscal 2020. As a result, the related disclosures for the respective corresponding periods in fiscal 2019 have been reclassified in comfort with the disclosures in fiscal 2020.
Three Months Ended June 30, 2019March 31, 2020 (Unaudited)
Internet Ad. and data service | TV Ad. | Blockchain technology | Corporate | Inter- segment and reconciling item | Total | Internet Ad and related services | Ecommerce O2O Ad and marketing services | Blockchain technology | Corporate | Inter- segment and reconciling item | Total | |||||||||||||||||||||||||||||||||||||
US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$(‘000) | US$(‘000) | US$(‘000) | US$(‘000) | US$(‘000) | US$(‘000) | |||||||||||||||||||||||||||||||||||||
Revenues | 24,020 | - | - | - | - | 24,020 | 3,236 | 503 | - | 645 | - | 4,384 | ||||||||||||||||||||||||||||||||||||
Cost of revenues | 23,212 | - | - | - | - | 23,212 | 3,110 | 375 | - | - | - | 3,485 | ||||||||||||||||||||||||||||||||||||
Total operating expenses | 1,850 | 36 | 11 | 871 | (1) | - | 2,768 | 1,022 | 4 | 1 | 2,148 | (1) | - | 3,175 | ||||||||||||||||||||||||||||||||||
Depreciation and amortization expense included in total operating expenses | 35 | - | 1 | 16 | - | 52 | 206 | - | - | 1 | - | 207 | ||||||||||||||||||||||||||||||||||||
Operating loss | (1,042 | ) | (36 | ) | (11 | ) | (871 | ) | - | (1,960 | ) | |||||||||||||||||||||||||||||||||||||
Operating (loss)/income | (896 | ) | 124 | (1 | ) | (1,503 | ) | - | (2,276 | ) | ||||||||||||||||||||||||||||||||||||||
Change in fair value of warrant liabilities | - | - | - | 471 | - | 471 | - | - | - | 46 | - | 46 | ||||||||||||||||||||||||||||||||||||
Net loss | (1,075 | ) | (36 | ) | (11 | ) | (400 | ) | - | (1,522 | ) | |||||||||||||||||||||||||||||||||||||
Net (loss)/income | (893 | ) | 103 | (1 | ) | (1,519 | ) | - | (2,310 | ) | ||||||||||||||||||||||||||||||||||||||
Total assets-June 30, 2019 | 11,550 | 229 | 3,389 | 16,143 | (16,640 | ) | 14,671 | |||||||||||||||||||||||||||||||||||||||||
Total assets-December 31, 2018 | 12,756 | 207 | 3,396 | 17,155 | (16,546 | ) | 16,968 | |||||||||||||||||||||||||||||||||||||||||
Expenditure for long-term assets | - | - | 302 | - | - | 302 | ||||||||||||||||||||||||||||||||||||||||||
Total assets-March 31, 2020 | 11,521 | 2,844 | 4,180 | 21,940 | (21,991 | ) | 18,494 | |||||||||||||||||||||||||||||||||||||||||
Total assets-December 31, 2019 | 13,332 | 2,075 | 3,885 | 21,338 | (22,079 | ) | 18,551 |
(1) Including approximately US$203,000 share-based compensation expenses.
(1) | Including approximately US$1,919 thousands share-based compensation expenses. |
22
CHINANET ONLINE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three Months Ended June 30,March 31, 2019 (Unaudited)
Internet Ad. and data service | TV Ad. | Blockchain technology | Corporate | Inter- segment and reconciling item | Total | Internet Ad. and related services | Ecommerce O2O Ad and marketing services | Blockchain technology | Corporate | Inter- segment and reconciling item | Total | |||||||||||||||||||||||||||||||||||||
US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | |||||||||||||||||||||||||||||||||||||
Revenues | 15,453 | - | - | - | - | 15,453 | 8,567 | - | - | - | - | 8,567 | ||||||||||||||||||||||||||||||||||||
Cost of revenues | 15,087 | - | - | - | - | 15,087 | 8,125 | - | - | - | - | 8,125 | ||||||||||||||||||||||||||||||||||||
Total operating expenses | 1,145 | 18 | 6 | 419 | (1) | - | 1,588 | 705 | 18 | 5 | 452 | (1) | - | 1,180 | ||||||||||||||||||||||||||||||||||
Depreciation and amortization expense included in total operating expenses | 12 | - | 1 | 1 | - | 14 | 23 | - | - | 15 | - | 38 | ||||||||||||||||||||||||||||||||||||
Operating loss | (779 | ) | (18 | ) | (6 | ) | (419 | ) | - | (1,222 | ) | (263 | ) | (18 | ) | (5 | ) | (452 | ) | - | (738 | ) | ||||||||||||||||||||||||||
Change in fair value of warrant liabilities | - | - | - | 821 | - | 821 | - | - | - | (350 | ) | - | (350 | ) | ||||||||||||||||||||||||||||||||||
Net (loss)/income | (760 | ) | (17 | ) | (6 | ) | 401 | - | (382 | ) | ||||||||||||||||||||||||||||||||||||||
Net loss | (315 | ) | (19 | ) | (5 | ) | (801 | ) | - | (1,140 | ) |
(1) Including approximately US$102,000
(1) | Including approximately US$101 thousands share-based compensation expenses.
Basic and diluted loss per share for each of the periods presented are calculated as follows (All amounts, except number of shares and per share data, are presented in thousands of U.S. dollars):
23 CHINANET ONLINE HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the three months ended March 31, 2020, the diluted loss per share calculation did not include warrants and options to purchase up to 774,000 and 755,216 shares of the Company’s common stock, respectively, because their effect was anti-dilutive, as the Company incurred a loss for the period.
For the
In In March 2020, under its 2015 Omnibus Securities and Incentive Plan, the Company granted and issued 0.03 million fully-vested shares of the Company’s restricted common stock to one of its independent directors in exchange for his services
In
The aggregate unrecognized share-based compensation expenses as of
year ending December 31, 2022. 24 CHINANET ONLINE HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In May 2020, one of the Company’s consolidated VIEs, Business Opportunity Online Hubei incorporated a new wholly-owned subsidiary, ChinaNet Online (Guangdong) Technology Co., Ltd. (“ChinaNet Online Guangdong”). ChinaNet Online Guangdong was established for the Company to expand its corporate business and technology headquarters to Southern China. ChinaNet Online Guangdong is currently in its setup period. The Company
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this interim report. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” “believe,” or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31,
Our company
Through our PRC operating subsidiaries and VIEs, we primarily operate a one-stop services for our clients on our Omni-channel advertising, precision marketing and data analysis management system. We offer a variety channels of advertising and marketing services through this system, which primarily include distribution of the right to use search engine marketing services we purchased from key search engines, provision of online advertising placements on our web portals, sales of effective sale lead information as well as To enhance the reliability of our future blockchain services and optimize location for client proximity, we incorporated a new wholly-owned subsidiary, ChinaNet Online (Guangdong) Technology Co., Ltd. (“ChinaNet Online Guangdong”) in May 2020 as we are in the process of expanding our corporate business and technology headquarters to the city of Guangzhou in Southern China. We expect to officially open our new Guangzhou headquarters in July 2020.
Basis of presentation, management estimates and critical accounting policies
Our unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and include the accounts of our company, and all of our subsidiaries and VIEs. We prepare financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses during the financial reporting period. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. In order to understand the significant accounting policies that we adopted for the preparation of our condensed consolidated interim financial statements, readers should refer to the information set forth in Note 3 “Summary of significant accounting policies” to our audited financial statements in our A. RESULTS OF OPERATIONS FOR THE
The following table sets forth a summary, for the periods indicated, of our consolidated results of operations. Our historical results presented below are not necessarily indicative of the results that may be expected for any future period. All amounts, except number of shares and per share data, are presented in thousands of U.S. dollars.
The following tables set forth a breakdown of our total revenues, disaggregated by type of services for the periods indicated, with inter-company transactions eliminated:
Total Revenues: Our total revenues decreased to US$
Cost of revenues
Our cost of revenues consisted of costs directly related to the offering of our online advertising, precision marketing and related data and technical services, and cost related to our
Cost of revenues: our total cost of revenues decreased to US$
Gross Profit
As a result of the foregoing, our gross profit was approximately US$
Operating Expenses
Our operating expenses consist of sales and marketing expenses, general and administrative expenses and research and development expenses. The following tables set forth our operating expenses, divided into their major categories by amount and as a percentage of our total revenues for the periods indicated.
Operating Expenses: Our total operating expenses was approximately US$
Loss from operations: As a result of the foregoing, we incurred a loss from operations of approximately US$
Change in fair value of warrant liabilities: we issued warrants in our Financing consummated in January 2018, which we determined that should be accounted for as derivative liabilities, as the warrants are dominated in a currency (U.S. dollar) other than our functional currency (Renminbi or Yuan). As a result, a gain of change in fair value of these warrant liabilities of approximately US$ Loss before income tax
Income Tax
Net loss: As a result of the foregoing, for the
Net loss attributable to noncontrolling interest:
Net loss attributable to ChinaNet Online Holdings, Inc.: Total net loss as adjusted by net loss attributable to the noncontrolling interest shareholders as discussed above yields the net loss attributable to ChinaNet Online Holdings, Inc. Net loss attributable to ChinaNet Online Holdings, Inc. was US$ B. LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents represent cash on hand and deposits held at call with banks. We consider all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. As of
Our liquidity needs include (i) net cash used in operating activities that consists of (a) cash required to fund the initial build-out, continued expansion of our network and new services and (b) our working capital needs, which include deposits and advance payments
As discussed in Note 3(b) to our unaudited condensed consolidated financial statements,
The following table provides detailed information about our net cash flow for the periods indicated:
Net cash provided by/(used
For the
For the three months ended March 31, 2019, our net cash used in operating activities of approximately US$2.27 million were primarily attributable to:
Net cash used in investing activities
For the For the three months ended March 31, 2019, we contributed our pro-rata share of cash investment of approximately US$0.04 million to an ownership investee company incorporated in October 2018, which transaction was recorded as a cash outflow from investing activities during the period.
Net cash
For the For the three months ended March 31, 2019, we repaid approximately US$
Restricted Net Assets
As substantially all of our operations are conducted through our PRC subsidiaries and VIEs, our ability to pay dividends is primarily dependent on receiving distributions of funds from our PRC subsidiaries and VIEs. Relevant PRC statutory laws and regulations permit payments of dividends by our PRC subsidiaries and VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations and after it has met the PRC requirements for appropriation to statutory reserves. Paid in capital of the PRC subsidiaries and VIEs included in our consolidated net assets are also not distributable for dividend purposes.
In accordance with the PRC regulations on Enterprises with Foreign Investment, a WFOE established in the PRC is required to provide certain statutory reserves, namely general reserve fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A WFOE is required to allocate at least 10% of its annual after-tax profit to the general reserve until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. Rise King WFOE is subject to the above mandated restrictions on distributable profits. Additionally, in accordance with the Company Law of the PRC, a domestic enterprise is required to provide a statutory common reserve of at least 10% of its annual after-tax profit until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to provide for a discretionary surplus reserve, at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. All of our other PRC subsidiaries and PRC VIEs are subject to the above mandated restrictions on distributable profits.
The current PRC Enterprise Income Tax (“EIT”) Law also
The ability of our PRC subsidiaries to make dividends and other payments to us may also be restricted by changes in applicable foreign exchange and other laws and regulations.
Foreign currency exchange regulation in China is primarily governed by the following rules:
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
C. OFF-BALANCE SHEET ARRANGEMENTS
None.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable to smaller reporting companies.
Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal accounting and financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended
Changes in Internal Control over Financial Reporting
We are currently not a party to any legal or administrative proceedings and are not aware of any pending or threatened legal or administrative proceedings against us in all material aspects. We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.
This information has been omitted based on the Company’s status as a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None. Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
The exhibits listed on the Exhibit Index below are provided as part of this report.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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