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CNET > SEC Filings for CNET > Form 10-Q on 19-Aug-2014All Recent SEC Filings

Show all filings for CHINANET ONLINE HOLDINGS, INC.

Form 10-Q for CHINANET ONLINE HOLDINGS, INC.


19-Aug-2014

Quarterly Report


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, 2013. Readers are cautioned not to place undue reliance on these forward-looking statements.

Overview

We were incorporated in the State of Texas in April 2006 and re-domiciled to become a Nevada corporation in October 2006. On June 26, 2009, we consummated a share exchange transaction with China Net Online Media Group Limited (the "Share Exchange"), a company organized under the laws of British Virgin Islands ("China Net BVI"). As a result of the Share Exchange, China Net BVI became a wholly owned subsidiary of us and we are now a holding company, which, through certain contractual arrangements with operating entities in the PRC, is engaged in providing advertising, marketing, communication and brand management and sales channel building services to SMEs in China.

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

Basis of presentation, management estimates and critical accounting policies

Our unaudited interim consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, as promulgated by the SEC, and include the accounts of our Company, and all of our subsidiaries and VIEs. We prepare financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses during the financial reporting period. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. In order to understand the significant accounting policies that we adopted for the preparation of our interim consolidated financial statements, you should refer to the information set forth in Note 3 "Summary of significant accounting policies" to our audited financial statements in our 2013 Form 10-K.


Recent Accounting Standards

In April 2014, the Financial Accounting Standard Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." This ASU changes the threshold for reporting discontinued operations and adds new disclosures. The new guidance defines a discontinued operation as a disposal that "represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results." The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The adoption of this standard is not expected to have a material impact on our consolidated financial position or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)". This ASU supercedes the revenue recognition requirements in Accounting Standards Codification ("ASC") 605-Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. For all other entities (nonpublic entities), the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. A nonpublic entity may elect to apply this guidance earlier, however, only as prescribed in this ASU. The adoption of this standard is not expected to have a material impact on our consolidated financial position and results of operations.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.

A. RESULTS OF OPERATIONS FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2014 AND 2013

The following table sets forth a summary, for the periods indicated, of our consolidated results of operations. Our historical results presented below are not necessarily indicative of the results that may be expected for any future period. All amounts, except number of shares and per share data, are presented in thousands of US dollars.

                                                     Six Months Ended June 30,          Three Months Ended June 30,
                                                       2014              2013              2014               2013
                                                        US$              US$                US$               US$
                                                    (Unaudited)      (Unaudited)        (Unaudited)       (Unaudited)

Sales
From unrelated parties                             $      15,361     $     15,767     $        10,179     $      8,777
From related parties                                         183              174                 182              115
                                                          15,544           15,941              10,361            8,892
Cost of sales                                             12,487            9,757               8,665            5,290
Gross margin                                               3,057            6,184               1,696            3,602

Operating expenses
Selling expenses                                           2,095            1,390               1,506              602
General and administrative expenses                        2,009            3,146               1,022            1,744
Research and development expenses                            892              912                 442              463
                                                           4,996            5,448               2,970            2,809

(Loss)/income from operations                             (1,939 )            736              (1,274 )            793

Other income (expenses)
Interest income                                               60               64                  29               32
Interest expense                                             (32 )              -                 (16 )              -
Other expenses                                                (3 )             (2 )                (2 )             (1 )
                                                              25               62                  11               31
(Loss)/income before income tax expense, equity
method investments and noncontrolling interests           (1,914 )            798              (1,263 )            824
Income tax expense                                          (120 )           (268 )               (72 )           (354 )
(Loss)/income before equity method investments
and noncontrolling interests                              (2,034 )            530              (1,335 )            470
Share of losses in equity investment affiliates              (58 )           (125 )               (43 )            (54 )
Net (loss)/income                                         (2,092 )            405              (1,378 )            416
Net loss attributable to noncontrolling
interests                                                     93               59                  47               18
Net (loss)/income attributable to ChinaNet
Online Holdings, Inc.                                     (1,999 )            464              (1,331 )            434

(Loss)/earnings per share
(Loss)/earnings per common share
Basic                                              $       (0.09 )   $       0.02     $         (0.06 )   $       0.02
Diluted                                            $       (0.09 )   $       0.02     $         (0.06 )   $       0.02

Weighted average number of common shares
outstanding:
Basic                                                 22,376,540       22,193,391          22,376,540       22,200,166
Diluted                                               22,376,540       22,193,391          22,376,540       22,200,166


Revenue

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

                                                                                Six Months Ended June 30,
                                                                      2014                                         2013
Revenue type                                               (Amounts expressed in thousands of US dollars, except percentages)

Internet advertisement and related services         $           11,808                  75.9 %       $            9,247          57.9 %
-Internet advertisement                                          8,454                  54.4 %                    9,046          56.7 %
-Technical services                                                237                   1.5 %                      201           1.2 %
-Search engine marketing service                                 3,117                    20 %                        -             -
TV advertisement                                                 2,994                  19.3 %                    5,127          32.2 %
Bank kiosks                                                        138                   0.9 %                      140           0.9 %
Brand management and sales channel building                        604                   3.9 %                    1,427           9.0 %
Total                                               $           15,544                   100 %       $           15,941           100 %



                                                                             Three Months Ended June 30,
                                                                     2014                                         2013
Revenue type                                              (Amounts expressed in thousands of US dollars, except percentages)

Internet advertisement and related services        $            8,228                   79.4 %       $          5,436          61.1 %
-Internet advertisement                                         4,958                   47.9 %                  5,335          60.0 %
-Technical services                                               153                    1.5 %                    101           1.1 %
-Search engine marketing service                                3,117                   30.0 %                      -             -
TV advertisement                                                1,812                   17.5 %                  2,489          28.0 %
Bank kiosks                                                        67                    0.6 %                     71           0.8 %
Brand management and sales channel building                       254                    2.5 %                    896          10.1 %
Total                                              $           10,361                    100 %       $          8,892           100 %


Total Revenues: Our total revenues were US$15.54 million and US$15.94 million for the six months ended June 30, 2014 and 2013, respectively. For the three months ended June 30, 2014, our total revenues increased to US$10.36 million from US$8.89 million for the three months ended June 30, 2013. The increase in our total revenues for the three months ended June 30, 2014 was primarily due to the increase in our search engine marketing service revenue during the period, which is discussed in detail in our revenue analysis section below.

We derive the majority of our advertising service revenues from the sale of advertising space on our internet portals and from providing the related value-added technical support and services, internet marketing service and content management services to unrelated third parties and to certain related parties. Beginning in the second fiscal quarter of 2014, we elaborated an existing stream of internet marketing service by providing enhanced third-party search engine marketing ("SEM") services to the SMEs as an effective supplement to the internet advertising services we provide to our customers. We also derive revenue from the sale of advertising time purchased from different TV programs. Our advertising services to related parties were provided in the ordinary course of business on the same terms as those provided to our unrelated advertising clients. For the six and three months ended June 30, 2014 and 2013, our service revenue from related parties in the aggregate was less than 1.5% of the total revenue we achieved for each respective reporting period.

Our advertising service revenues are recorded net of any sales discounts. Sales discounts include volume discounts and other customary incentives offered to our small and medium-sized franchise and merchant clients, including providing them with additional advertising time for their advertisements if we have unused space available on our websites and represent the difference between our official list price and the amount we actually charge our clients. For advertising services, we typically sign service contracts with our small and medium-sized franchisor and other clients that require us to place the advertisements on our portal websites in specified locations on the sites and for agreed periods; and/or place the advertisements onto our purchased advertisement time during specific TV programs for agreed periods. We recognize revenues as the advertisement airs over the contractual term based on the schedule agreed upon with our clients. For SEM services, we charge certain percentage of service fees to our customers based on the internet resources cost consumed for their SEM services.

The tables below summarize the revenues, cost of sales, gross margin and net
(loss)/income generated from each of our VIEs and subsidiaries for the six and three months ended June 30, 2014 and 2013, respectively.

For the six months ended June 30, 2014:

                                                    Revenue from         Revenue           Revenue
                                                     unrelated        from related       from inter-
Name of subsidiary or VIE                             parties            parties           company         Total
                                                      ($'000)            ($'000)           ($'000)        ($'000)

Rise King WFOE                                                237                 -                 -          237
Business Opportunity Online and subsidiaries               14,986               183                 -       15,169
Beijing CNET Online and subsidiaries                          138                 -                 -          138
Total revenue                                              15,361               183                 -       15,544

For the three months ended June 30, 2014:

                                                    Revenue from         Revenue           Revenue
                                                     unrelated        from related       from inter-
Name of subsidiary or VIE                             parties            parties           company         Total
                                                      ($'000)            ($'000)           ($'000)        ($'000)

Rise King WFOE                                                153                 -                 -          153
Business Opportunity Online and subsidiaries                9,959               182                 -       10,141
Beijing CNET Online and subsidiaries                           67                 -                 -           67
Total revenue                                              10,179               182                 -       10,361


For the six months ended June 30, 2014:

Name of subsidiary or VIE                       Cost of Sales      Gross Margin
                                                   ($'000)            ($'000)

Rise King WFOE                                               1               236
Business Opportunity Online and subsidiaries            12,481             2,688
Beijing CNET Online and subsidiaries                         5               133
Total                                                   12,487             3,057

For the three months ended June 30, 2014:

Name of subsidiary or VIE                       Cost of Sales      Gross Margin
                                                   ($'000)            ($'000)

Rise King WFOE                                               1               152
Business Opportunity Online and subsidiaries             8,659             1,482
Beijing CNET Online and subsidiaries                         5                62
Total                                                    8,665             1,696

For the six months ended June 30, 2014:

Name of subsidiary or VIE                                         Net Loss
                                                                   ($'000)

Rise King WFOE                                                         (291 )
Business Opportunity Online and subsidiaries                         (1,599 )
Beijing CNET Online and subsidiaries                                    (50 )
Shanghai Jing Yang                                                      (19 )
ChinaNet Online Holdings, Inc.                                         (133 )
Total net loss before allocation to the noncontrolling interest      (2,092 )

For the three months ended June 30, 2014:

Name of subsidiary or VIE                                                   Net Income/(loss)
                                                                                 ($'000)

Rise King WFOE                                                                               7
Business Opportunity Online and subsidiaries                                            (1,226 )
Beijing CNET Online and subsidiaries                                                       (40 )
Shanghai Jing Yang                                                                         (17 )
ChinaNet Online Holdings, Inc.                                                            (102 )
Total net loss before allocation to the noncontrolling interest                         (1,378 )

For the six months ended June 30, 2013:

                                                    Revenue from         Revenue           Revenue
                                                     unrelated        from related       from inter-
Name of subsidiary or VIE                             parties            parties           company         Total
                                                      ($'000)            ($'000)           ($'000)        ($'000)

Rise King WFOE                                                106                95                 -          201
Business Opportunity Online and subsidiaries               10,540                79                 -       10,619
Beijing CNET Online and subsidiaries                        5,121                 -                 -        5,121
Total revenue                                              15,767               174                 -       15,941


For the three months ended June 30, 2013:

                                                   Revenue from         Revenue           Revenue
                                                     unrelated       from related       from inter-
Name of subsidiary or VIE                             parties           parties           company         Total
                                                      ($'000)           ($'000)           ($'000)        ($'000)

Rise King WFOE                                                53                48                 -          101
Business Opportunity Online and subsidiaries               6,413                67                          6,480
Beijing CNET Online and subsidiaries                       2,311                 -                 -        2,311
Total revenue                                              8,777               115                 -        8,892

For the six months ended June 30, 2013:

Name of subsidiary or VIE                       Cost of Sales      Gross Margin
                                                   ($'000)            ($'000)

Rise King WFOE                                               -               201
Business Opportunity Online and subsidiaries             5,642             4,977
Beijing CNET Online and subsidiaries                     4,115             1,006
Total                                                    9,757             6,184

For the three months ended June 30, 2013:

Name of subsidiary or VIE                       Cost of Sales      Gross Margin
                                                   ($'000)            ($'000)

Rise King WFOE                                               -               101
Business Opportunity Online and subsidiaries             3,616             2,864
Beijing CNET Online and subsidiaries                     1,674               637
Total                                                    5,290             3,602

For the six months ended June 30, 2013:

Name of subsidiary or VIE                                                   Net (Loss)/Income
                                                                                 ($'000)

Rise King WFOE                                                                            (593 )
Business Opportunity Online and subsidiaries                                             1,341
Beijing CNET Online and subsidiaries                                                       (93 )
Shanghai Jing Yang                                                                          (2 )
ChinaNet Online Holdings, Inc.                                                            (248 )
Total net income before allocation to the noncontrolling interest                          405

For the three months ended June 30, 2013:

Name of subsidiary or VIE                                                   Net (Loss)/Income
                                                                                 ($'000)

Rise King WFOE                                                                            (318 )
Business Opportunity Online and subsidiaries                                               678
Beijing CNET Online and subsidiaries                                                       169
Shanghai Jing Yang                                                                          (1 )
ChinaNet Online Holdings, Inc.                                                            (112 )
Total net income before allocation to the noncontrolling interest                          416

. . .

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