Edgar Filing: ChinaNet Online Holdings, Inc.

f10q_081914.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2014

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

For the transition period from ____ to _____

Commission File Number: 001-34647

ChinaNet Online Holdings, Inc.

(Exact name of registrant as specified in its charter)

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

No. 3 Min Zhuang Road, Building 6,

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

(Address of principal executive offices) (Zip Code)

+86-10-5160-0828

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

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

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

As of August 19, 2014 the registrant had 22,416,540 shares of common stock outstanding.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION		PAGE

Item 1. Interim Financial Statements

	Consolidated Balance Sheets as of June 30, 2014 (Unaudited) and December 31, 2013	F1-F2

	Consolidated Statements of Operations and Comprehensive (Loss)/Income for the Six and Three Months Ended June 30, 2014 and 2013 (Unaudited)	F3-F4

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (Unaudited)	F5-F6

	Notes to Consolidated Financial Statements (Unaudited)	F7-F27

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		28-42

Item 3. Quantitative and Qualitative Disclosures About Market Risk		42

Item 4. Controls and Procedures		42

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		43

Item 1A. Risk Factors		43

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		43

Item 3. Defaults Upon Senior Securities		43

Item 4. Mine Safety Disclosures		43

Item 5. Other Information		44

Item 6. Exhibits		44

Signatures		45

PART I. FINANCIAL INFORMATION

Item 1. Interim Financial Statements

CHINANET ONLINE HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

	June 30, 2014		December 31, 2013
	(US $)		(US $)
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	2,723	$	3,442
Term deposit		3,443		3,467
Accounts receivable, net		5,169		7,673
Other receivables, net		2,603		4,299
Prepayment and deposit to suppliers		18,041		14,692
Due from related parties		412		502
Other current assets		88		27
Deferred tax assets-current		168		153
Total current assets		32,647		34,255

Investment in and advance to equity investment affiliates		781		845
Property and equipment, net		875		1,057
Intangible assets, net		5,447		6,015
Deposit and prepayment for purchasing of software technology		3,281		2,453
Goodwill		11,368		11,450
Deferred tax assets-non current		881		759
Total Assets	$	55,280	$	56,834

Liabilities and Equity
Current liabilities:
Short term bank loan *	$	812	$	818
Accounts payable *		412		421
Advances from customers *		1,012		995
Accrued payroll and other accruals *		523		676
Due to noncontrolling interest of VIE *		715		-
Taxes payable *		7,152		7,029
Other payables *		526		288
Total current liabilities		11,152		10,227

F-1

CHINANET ONLINE HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS (CONTINUED)

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

	June 30, 2014			December 31, 2013
	(US $)			(US $)
	(Unaudited)
Long-term liabilities:
Deferred tax liability-non current *		1,317			1,439
Long-term borrowing from director		142			143
Total Liabilities		12,611			11,809

Commitments and contingencies

Equity:
ChinaNet Online Holdings, Inc.’s stockholders’ equity
Common stock (US$0.001 par value; authorized 50,000,000 shares; issued and outstanding 22,376,540 shares at June 30, 2014 and December 31, 2013)		22			22
Additional paid-in capital		19,887			19,870
Statutory reserves		2,602			2,602
Retained earnings		16,966			18,965
Accumulated other comprehensive income		3,407			3,689
Total ChinaNet Online Holdings, Inc.’s stockholders’ equity		42,884			45,148

Noncontrolling interests		(215	)		(123	)
Total equity		42,669			45,025

Total Liabilities and Equity	$	55,280		$	56,834

*All of the VIEs' assets can be used to settle obligations of their primary beneficiary. Liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets (Note 2).

See notes to consolidated financial statements

F-2

CHINANET ONLINE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)/INCOME

(In thousands)

	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

F-3

CHINANET ONLINE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)/INCOME (CONTINUED)

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

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

Net (loss)/income		(2,092	)		405		(1,378	)		416
Foreign currency translation (loss)/gain		(281	)		828		43			613
Comprehensive (Loss)/income	$	(2,373	)	$	1,233	$	(1,335	)	$	1,029
Comprehensive loss attributable to noncontrolling interests		92			47		47			9
Comprehensive (loss)/income attributable to ChinaNet Online Holdings, Inc.	$	(2,281	)	$	1,280	$	(1,288	)	$	1,038

(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

See notes to consolidated financial statements

F-4

CHINANET ONLINE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Six Months Ended June 30,
	2014			2013
	(US $)			(US $)
	(Unaudited)			(Unaudited)
Cash flows from operating activities
Net (loss)/income	$	(2,092	)	$	405
Adjustments to reconcile net (loss)/income to net cash used in operating activities
Depreciation and amortization		715			840
Share-based compensation expenses		17			21
Allowances for doubtful accounts		(30	)		787
Share of losses in equity investment affiliates		58			125
Deferred taxes		(257	)		(437	)
Changes in operating assets and liabilities
Accounts receivable		2,484			(1,781	)
Other receivables		1,285			(701	)
Prepayment and deposit to suppliers		(3,460	)		258
Due from related parties		86			(160	)
Other current assets		(62	)		32
Accounts payable		(6	)		142
Advances from customers		24			(274	)
Accrued payroll and other accruals		(151	)		32
Other payables		271			(45	)
Taxes payable		174			736
Net cash used in operating activities		(944	)		(20	)

Cash flows from investing activities
Purchases of vehicles and office equipment		(15	)		(60	)
Prepayment/deposit for purchasing of software technology		(846	)		(800	)
Repayment of short-term loan from unrelated entities		390			-
Payment for acquisition of VIEs		-			(1,280	)
Net cash used in investing activities		(471	)		(2,140	)

F-5

CHINANET ONLINE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(In thousands)

	Six Months Ended June 30,
	2014			2013
	(US $)			(US $)
	(Unaudited)			(Unaudited)
Cash flows from financing activities
Short-term loan from noncontrolling interest of VIE		717			-
Net cash provided by financing activities		717			-

Effect of exchange rate fluctuation on cash and cash equivalents		(21	)		69

Net decrease in cash and cash equivalents		(719	)		(2,091	)

Cash and cash equivalents at beginning of the period		3,442			5,483
Cash and cash equivalents at end of the period	$	2,723		$	3,392

Supplemental disclosure of cash flow information

Income taxes paid	$	204		$	39
Interest expense paid	$	32		$	-

Non-cash transactions:

Restricted stock and options granted for future service	$	17		$	21

See notes to consolidated financial statements

F-6

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.	Organization and nature of operations

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

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

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

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

2.	Variable Interest Entities

Summarized below is the information related to the consolidated VIEs’ assets and liabilities as of June 30, 2014 and December 31, 2013, respectively:

	June 30, 2014		December 31, 2013
	US$(’000)		US$(’000)
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	2,585	$	3,326
Term deposit		3,443		3,467
Accounts receivable, net		5,046		7,637
Other receivables, net		2,138		3,416
Prepayment and deposit to suppliers		18,039		14,690
Due from related parties		260		174
Other current assets		72		27
Deferred tax assets-current		134		118
Total current assets		31,717		32,855

Investment in and advance to equity investment affiliates		737		801
Property and equipment, net		766		918
Intangible assets, net		5,447		6,013
Deposit and prepayment for purchasing of software technology		3,281		2,453
Goodwill		11,368		11,450
Deferred tax assets-non current		606		482
Total Assets	$	53,922	$	54,972

Liabilities
Current liabilities:
Short-term bank loan	$	812	$	818
Accounts payable		412		421
Advances from customers		1,012		995
Accrued payroll and other accruals		373		279
Due to Control Group		11		11
Due to noncontrolling interest of VIE		715		-
Taxes payable		6,668		6,542
Other payables		415		142
Total current liabilities		10,418		9,208

Deferred tax Liabilities-non current		1,317		1,439
Total Liabilities	$	11,735	$	10,647

F-7

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

All of the VIEs' assets can be used to settle obligations of their primary beneficiary. Liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets.

For the six months ended June 30, 2014, the financial performance of the VIEs reported in the Company’s consolidated statements of operations and comprehensive loss includes sales of approximately US$15,307,000, cost of sales of approximately US$12,486,000, operating expenses of approximately US$4,337,000 and net loss before allocation to noncontrolling interests of approximately US$1,668,000.

For the three months ended June 30, 2014, the financial performance of the VIEs reported in the Company’s consolidated statements of operations and comprehensive loss includes sales of approximately US$10,208,000, cost of sales of approximately US$8,664,000, operating expenses of approximately US$2,725,000 and net loss before allocation to noncontrolling interests of approximately US$1,283,000.

For the six months ended June 30, 2013, the financial performance of the VIEs reported in the Company’s consolidated statements of income and comprehensive income includes sales of approximately US$15,740,000, cost of sales of approximately US$9,756,000, operating expenses of approximately US$4,322,000 and net income before allocation to noncontrolling interests of approximately US$1,245,000.

For the three months ended June 30, 2013, the financial performance of the VIEs reported in the Company’s consolidated statements of income and comprehensive income includes sales of approximately US$8,790,000, cost of sales of approximately US$5,289,000, operating expenses of approximately US$2,232,000 and net income before allocation to noncontrolling interests of approximately US$845,000.

3.	Summary of significant accounting policies

Basis of presentation

The interim consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

F-8

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The interim consolidated financial information as of June 30, 2014 and for the six and three months ended June 30, 2014 and 2013 have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The interim consolidated financial information should be read in conjunction with the financial statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, previously filed with the SEC (the “2013 Form 10-K”).

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial position as of June 30, 2014, its consolidated results of operations for the six and three months ended June 30, 2014 and 2013, and its consolidated cash flows for the six months ended June 30, 2014 and 2013, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Principles of consolidation

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

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.

Foreign currency translation

The exchange rates used to translate amounts in RMB into US$ for the purposes of preparing the consolidated financial statements are as follows:

	June 30, 2014		December 31, 2013

Balance sheet items, except for equity accounts		6.1577		6.1140

	Six Months Ended June 30,
		2014	2013
Items in the statements of income and comprehensive income, and statements of cash flows		6.1441	6.2479

	Three Months Ended June 30,
		2014	2013
Items in the statements of income and comprehensive income, and statements of cash flows		6.1681	6.2105

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

Advertising costs

Advertising costs for the Company’s own brand building are not includable in cost of sales, they are expensed when incurred or amortized over the estimated beneficial period and are included in “selling expenses” in the statement of operations and comprehensive (loss)/income. For the six months ended June 30, 2014 and 2013, advertising expenses for the Company’s own brand building were approximately US$973,000 and US$144,000, respectively. For the three months ended June 30, 2014 and 2013, advertising expenses for the Company’s own brand building were approximately US$942,000 and US$120,000, respectively.

F-9

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Research and development expenses

The Company accounts for the cost of developing and upgrading technologies and platforms and intellectual property that are used in its daily operations in research and development cost. Research and development costs are charged to expense when incurred. Expenses for research and development for the six months ended June 30, 2014 and 2013 were approximately US$892,000 and US$912,000, respectively. Expenses for research and development for the three months ended June 30, 2014 and 2013 were approximately US$442,000 and US$463,000, respectively.

Recent accounting standards

In April 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This ASU changes the threshold for reporting discontinued operations and adds new disclosures. The new guidance defines a discontinued operation as a disposal that “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

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

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

4.	Term deposit

Term deposit as of June 30, 2014 and December 31, 2013 represented the amount of cash placed as a term deposit by one of the Company’s operating VIEs in a major financial institution of China, which management believes is of high credit quality. The interest rate of the term deposit is 3.3% per annual. The term deposit matured on July 5, 2014 and was extended to July 7, 2015.

5.	Accounts receivable, net

	June 30, 2014			December 31, 2013
	US$(’000)			US$(’000)
	(Unaudited)

Accounts receivable		10,784			13,358
Allowance for doubtful accounts		(5,615	)		(5,685	)
Accounts receivable, net		5,169			7,673

All of the accounts receivable are non-interest bearing. Based on the assessment of the collectability of the accounts receivable as of June 30, 2014, the Company provided approximately US$5,615,000 allowance for doubtful accounts, which were related to the accounts receivable of the Company’s internet advertising and TV advertising business segment with an aging over six months. For the six and three months ended June 30, 2014, the Company reversed approximately US$30,000 of allowance for doubtful accounts.

F-10

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

6.	Other receivables, net

	June 30, 2014			December 31, 2013
	US$(’000)			US$(’000)
	(Unaudited)

Short-term loan made for marketing campaign		697			1,636
Short-term loans to unrelated entities		400			790
Term deposit interest receivable		114			57
Receivable on disposal of fixed assets		97			98
Receivable on disposal of subsidiaries		1,186			1,611
Staff advances for normal business purpose		109			107
Overdue deposits		961			968
Allowance for doubtful accounts		(961	)		(968	)
Other receivables, net		2,603			4,299

Short-term loan made for marketing campaign: for one of the major marketing campaigns, the Company made a marketing-related loan of RMB25,000,000 (approximately US$4,060,000) to a TV series of 36 episodes, called “Xiao Zhang Feng Yun.” By participating in this TV series, the Company’s logo is shown during the credits at the end of each episode and also shown as a separate card during the closing before the credit screen. In accordance with an agreement between the Company and the borrower, the Company extended the term of this loan from December 31, 2013 to December 31, 2014. For the six months ended June 30, 2014, the borrower repaid RMB5,710,000 (approximately US$927,000) of this debt. The Company will continue to assess the collectability of this loan. If an event occurs or circumstances change that could indicate that the collectability of this loan is remote, a full allowance of bad debts provision will be provided for the remaining outstanding balance of this loan.

Receivables on disposal of subsidiaries represented the cash consideration to be received from the successors of shareholders of the Company’s two former VIEs, which were disposed in November 2013. As of the date hereof, the Company has collected RMB4,550,000 (approximately US$739,000) of this receivable in the aggregate, the remaining balance will be collected within fiscal 2014.

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

For advertising resources purchase contracts signed by the Company with its resource providers, the Company was required to make deposits, which were either applied to the contract amounts that were needed to be paid with the consent of the counterparty or to be refunded to the Company of the remaining balance upon expiration of the cooperation. Overdue deposits represented the portion of the contractual deposits, which related advertising resources purchase contracts had been completed as of each of the reporting dates with no further cooperation. Based on the assessment of the collectability of these overdue deposits as of June 30, 2014 and December 31, 2013, full allowance for doubtful accounts was provided against these balances, which was related to the deposits of its internet advertising and TV advertising business segment.

F-11

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

7.	Prepayments and deposit to suppliers

	June 30, 2014		December 31, 2013
	US$(’000)		US$(’000)
	(Unaudited)

Deposits to TV advertisement and internet resources providers		10,367		8,907
Prepayments to TV advertisement and internet resources providers		7,268		5,292
Other deposits and prepayments		406		493
		18,041		14,692

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

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

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

As of June 30, 2014, the deposits to suppliers primarily consisted of deposit to an agent of one of the provincial satellite TV stations partnered with the Company. The Company has partnered with this TV station to broadcast its advertisements for over three years. According to the contract signed between the Company and this agent for the time slots to be resold in fiscal 2014, the deposit will be either applied to the contract amounts of time slots cost that are needed to be paid with the consent of the counterparty or transferred as contractual deposit for fiscal 2015 upon renewal of the purchase contact. Although the Restriction Notice has had and may continue to have a negative impact on the Company’s TV advertising business with this TV station, the Company believes that the cooperation with this TV station will continue and expand with the efforts of development of new form of TV advertising programs and non-TV shopping advertising customers. All deposits are refundable to the Company upon expiration of cooperation with suppliers.

According to the contracts signed between the Company and its suppliers, the Company is normally required to pay the contract amounts in advance. These prepayments will be transferred to cost of sales when the related services are provided.

As of June 30, 2014, the Company also had advanced payment carried forward from prior years paid to another TV station which has been partnered with the Company for over five years, which amount the Company originally expected to be utilized in fiscal 2013. However, the Company became aware of that since the second half year of 2013, this TV station had decreased its broadcasting of TV shopping infomercials and adjusted their broadcasting schedule due to the adoption of the Restriction Notice. In response to the restrictions on TV advertisement set forth in the Restriction Notice, the Company discussed with the TV station possible alternatives of applying the balance of the advanced payment, as the amount was unlikely to be refunded to the Company, due to internal administrative policies of the TV station. The TV station and the Company agreed that the unconsumed advanced payment balance can be consumed by any third parties designated by the Company and approved by the TV station, who will broadcast advertisements or other similar TV programs using the balance of available time slots, and the Company will directly collect the amounts from the third parties for the time slots they utilized. The Company expects that the advanced payment balance will be utilized within fiscal 2014. As of the date hereof, the Company has utilized RMB4.2 million (approximately US$0.68 million) of this advanced payment through an unrelated third party.

F-12

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of June 30, 2014, the increase in deposit to resources suppliers primarily consisted of an approximately US$1.4 million contractual deposit to the Company’s largest internet resources supplier, as compared to that as of December 31, 2013.

As of June 30, 2014, the increase in the prepayments primarily consisted of an approximately US$1.4 million prepayment to three of the Company’s major internet resources suppliers and an approximately US$0.6 million prepayment to one of the TV stations that provides TV advertising slots to the Company, as compared to that as of December 31, 2013.

8.	Due from related parties

	June 30, 2014		December 31, 2013
	US$(’000)		US$(’000)
	(Unaudited)

Beijing Fengshangyinli Technology Co., Ltd.		-		36
Beijing Saimeiwei Food Equipment Technology Co., Ltd.		267		295
Beijing Telijie Century Environmental Technology Co., Ltd.		145		171
		412		502

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

9.	Investment in and advance to equity investment affiliates

	June 30, 2014		December 31, 2013
	US$(’000)		US$(’000)
	(Unaudited)

Investment in equity investment affiliates		696		760
Advance to equity investment affiliates		85		85
		781		845

The following table summarizes the movement of the investment in and advance to equity investment affiliates for the six months ended June 30, 2014:

	Shenzhen Mingshan			Zhao Shang Ke Hubei			Total
	US$(’000)			US$(’000)			US$(’000)

Balance as of December 31, 2013 (audited)		466			379			845
Share of losses in equity investment affiliates		(2	)		(56	)		(58	)
Exchange translation adjustment		(3	)		(3	)		(6	)
Balance as of June 30, 2014 (unaudited)		461			320			781

F-13

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the six months ended June 30, 2014 and 2013, the Company recognized its pro-rata shares of losses in Shenzhen Mingshan of approximately US$2,000 and US$35,000, respectively. For the three months ended June 30, 2014 and 2013, the Company recognized its pro-rata shares of losses in Shenzhen Mingshan of approximately US$nil and US$9,000, respectively.

For the six months ended June 30, 2014 and 2013, the Company recognized its pro-rata share of losses in Zhao Shang Ke Hubei of approximately US$56,000 and US$90,000, respectively. For the three months ended June 30, 2014 and 2013, the Company recognized its pro-rata share of losses in Zhao Shang Ke Hubei of approximately US$43,000 and US$45,000, respectively.

10.	Property and equipment, net

	June 30, 2014			December 31, 2013
	US$(’000)			US$(’000)
	(Unaudited)

Vehicles		859			865
Office equipment		1,437			1,433
Electronic devices		1,236			1,245
Property and equipment, cost		3,532			3,543
Less: accumulated depreciation		(2,657	)		(2,486	)
Property and equipment, net		875			1,057

Depreciation expenses in the aggregate for the six months ended June 30, 2014 and 2013 were approximately US$189,000 and $311,000, respectively.

Depreciation expenses in the aggregate for the three months ended June 30, 2014 and 2013 were approximately US$93,000 and $156,000, respectively.

11.	Intangible assets, net

	June 30, 2014			December 31, 2013
	US$(’000)			US$(’000)
	(Unaudited)
Intangible assets not subject to amortization:
Domain name		1,569			1,580
Intangible assets subject to amortization:
Contract backlog		201			203
Customer relationship		3,522			3,548
Non-compete agreements		1,393			1,403
Software technologies		333			335
Cloud-computing based software platforms		1,507			1,518
Other computer software		78			78
Intangible assets, cost		8,603			8,665
Less: accumulated amortization		(3,156	)		(2,650	)
Intangible assets, net		5,447			6,015

F-14

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Amortization expenses in aggregate for the six months ended June 30, 2014 and 2013 were approximately US$526,000 and US$529,000, respectively.

Amortization expenses in aggregate for the three months ended June 30, 2014 and 2013 were approximately US$262,000 and US$266,000, respectively.

Based on the carrying value of the finite-lived intangible assets recorded as of June 30, 2014, and assuming no subsequent impairment of the underlying intangible assets, the estimated future amortization expenses is approximately US$524,000 for the six months ended December 31, 2014, approximately US$1,048,000 for the year ended December 31, 2015, approximately US$1,008,000 for the year ended December 31, 2016, approximately US$508,000 for the year ended December 31, 2017 and approximately US$310,000 for the year ended December 31, 2018.

12.	Deposit for purchasing of software technology

For further development of comprehensive value-added services to its customers, which are mostly SMEs, the Company made a deposit to an unrelated technical consulting entity of RMB15 million (approximately US$2.44 million) for the purchasing of software technology related to operation management applications for SMEs. As of the date hereof, the Company is trial testing these software applications, and is in the process of negotiations and determination of the transaction details. The Company expects to consummate the transaction in 2014.

In October 2013, the Company entered into a contract to engage an unrelated third party to develop several software systems related to internet environment monitoring and system optimization to enhance the overall safety and efficiency of the Company’s network system. The total contract amount was RMB13 million (approximately US$2.11 million). The Company has paid the first installment of RMB5.2 million (approximately US$0.84 million). The transaction as contemplated under the contract is expected to be consummated in 2014.

13.

Goodwill

	Amount
	US$(’000)

Balance as of December 31, 2013 (audited)		11,450
Exchange translation adjustment		(82	)
Balance as of June 30, 2014 (unaudited)		11,368

14.	Short-term bank loan

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

15.	Accrued payroll and other accruals

	June 30, 2014		December 31, 2013
	US$(’000)		US$(’000)
	(Unaudited)

Accrued payroll and staff welfare		450		382
Accrued operating expenses		73		294
		523		676

F-15

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

16.	Due to noncontrolling interest of VIE

As of June 30, 2014, due to noncontrolling interest of VIE represented a short-term loan borrowed by one of the Company’s VIEs from its noncontrolling interest to supplement the short-term working capital needs of this VIE. The short-term loan is unsecured, interest free and is payable on demand.

17.

Taxation

Income tax

The entities within the Company file separate tax returns in the respective tax jurisdictions in which they operate.

i). The Company is incorporated in the state of Nevada. Under the current law of Nevada, the Company is not subject to state corporate income tax. Following the Share Exchange, the Company became a holding company and does not conduct any substantial operations of its own. No provision for federal corporate income tax has been made in the financial statements as the Company has no assessable profits for the six and three months ended June 30, 2014, or any prior periods. The Company does not provide for U.S. taxes or foreign withholding taxes on undistributed earnings from its non-U.S. subsidiaries because such earnings are intended to be reinvested indefinitely. If undistributed earnings were distributed, foreign tax credits could become available under current law to reduce the resulting U.S. income tax liability.

ii). China Net BVI was incorporated in the British Virgin Islands (“BVI”). Under the current law of the BVI, China Net BVI is not subject to tax on income or capital gains. Additionally, upon payments of dividends by China Net BVI to its shareholders, no BVI withholding tax will be imposed.

iii). China Net HK was incorporated in Hong Kong and does not conduct any substantial operations of its own. No provision for Hong Kong profits tax has been made in the financial statements as China Net HK has no assessable profits for the six and three months ended June 30, 2014 or any prior periods. Additionally, upon payments of dividends by China Net HK to its shareholders, no Hong Kong withholding tax will be imposed.

iv). The Company’s PRC operating subsidiary and VIEs, being incorporated in the PRC, are governed by the income tax law of the PRC and is subject to PRC enterprise income tax (“EIT”). The EIT rate of PRC is 25%, which applies to both domestic and foreign invested enterprises.

Rise King WFOE was a software company qualified by the related PRC governmental authorities and was approved by the local tax authorities of Beijing, the PRC, to be entitled to a two-year EIT exemption for fiscal 2009 and 2010, and a 50% reduction of its applicable EIT rate, which was 25% to 12.5% of its taxable income for the succeeding three years through fiscal 2013. The applicable income tax rate for Rise King WFOE is 25% after fiscal 2013. Therefore, for the six and three months ended June 30, 2014, the applicable income tax rate for Rise King WFOE was 25%, for the six and three months ended June 30, 2013, the applicable income tax rate for Rise King WFOE was 12.5%.

In July 2012, Business Opportunity Online was approved by the related PRC governmental authorities as a High and New Technology Enterprise under the current EIT law, and was approved by the local tax authorities of Beijing, the PRC, to be entitled to a favorable statutory tax rate of 15% until December 31, 2014. Therefore, the applicable income tax rate of Business Opportunity Online was 15% for the six and three months ended June 30, 2014 and 2013. After fiscal year 2014, the applicable income tax rate for Business Opportunity Online will be 25% under the current EIT law of PRC unless the entity regains the qualification as a High and New Technology Enterprise in fiscal 2015. The Company believes that more likely than not Business Opportunity Online will be able to regain its qualification as a High and New Technology Enterprise and continue to enjoy the favorable statutory tax rate of 15% after fiscal 2014.

F-16

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Business Opportunity Online Hubei was approved by the related PRC governmental authorities to be qualified as a software company and was approved by the local tax authorities of Xiaogan City, Hubei province, the PRC, to be entitled to a EIT exemption for fiscal 2012, as its first profitable year was determined as fiscal 2011 instead of fiscal 2012 in August 2013 by the local tax authorities of Xiaogan City, Hubei province, and a 50% reduction of its applicable EIT rate which is 25% to 12.5% of its taxable income for the succeeding three years through fiscal 2015. Therefore, the applicable income tax rate for Business Opportunity Online Hubei was 12.5% for the six and three months ended June 30, 2014 and 2013. For the three months ended June 30, 2013, the Company recorded an adjustment of approximately US$131,000 income tax expense upon the determination of its first profitable year as fiscal 2011 instead of fiscal 2012 in August 2013 by the local tax authorities of Xiaogan City, Hubei province. After fiscal 2015, the applicable income tax rate for Business Opportunity Online Hubei will be 25% under the current EIT law of PRC.

The applicable income tax rate for other PRC operating entities of the Company was 25% for the six and three months ended June 30, 2014 and 2013.

The current EIT law also imposed a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside China. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Holding companies in Hong Kong, for example, will be subject to a 5% withholding tax rate. Rise King WFOE is invested by immediate holding company in Hong Kong and will be entitled to the 5% preferential withholding tax rate upon distribution of the dividends to its immediate holding company.

For the six and three months ended June 30, 2014 and 2013, all of the preferential income tax treatments enjoyed by the Company’s PRC subsidiary and VIEs were based on the current applicable laws and regulations of the PRC and approved by the related government regulatory authorities and local tax authorities where the Company’s respective PRC subsidiary and VIEs operate in. Rise King WFOE, Business Opportunity Online and Business Opportunity Online Hubei were most affected by these preferential income tax treatments within the structure of the Company. The preferential income tax treatments are subject to change in accordance with the PRC government economic development policies and regulations. These preferential income tax treatments are primarily determined by the regulation and policies of the PRC government in the context of the overall economic policy and strategy. As a result, the uncertainty of theses preferential income tax treatments are subject to, but not limited to, the PRC government policy on supporting any specific industry’s development under the outlook and strategy of overall macroeconomic development.

2) Turnover taxes and the relevant surcharges

Service revenues provided by the Company’s PRC operating subsidiary and VIEs were subject to Value Added Tax (“VAT”). VAT rate for provision of modern services (other than lease of corporeal movables) is 6% and for small scale taxpayer, 3%. Therefore, for the six and three months ended June 30, 2014 and 2013, the Company’s service revenues are subject to VAT at a rate of 6%, after deducting the VAT paid for the services purchased from suppliers, or at a rate of 3% without any deduction of VAT paid for the services purchased from suppliers. The surcharges of the VAT is 12%-14% of the VAT, depending on which tax jurisdiction the Company’s PRC operating subsidiary and VIE operate in.

As of June 30, 2014 and December 31, 2013, taxes payable consists of:

	June 30, 2014		December 31, 2013
	US$(’000)		US$(’000)
	(Unaudited)

Turnover tax and surcharge payable		2,327		2,343
Enterprise income tax payable		4,825		4,686
		7,152		7,029

F-17

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the six and three months ended June 30, 2014 and 2013, the Company’s income tax (expense)/benefit consisted of:

	Six Months Ended June 30,						Three Months Ended June 30,
	2014			2013			2014			2013
	US$(’000)			US$(’000)			US$(’000)			US$(’000)
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

Current-PRC		(377	)		(705	)		(197	)		(475	)
Current-PRC-adjustment due to new tax rate enactment		-			-			-			(131	)
Deferred-PRC		257			437			125			252
		(120	)		(268	)		(72	)		(354	)

The Company’s deferred tax liabilities at June 30, 2014 and changes for the six months then ended were as follows:

	Amount
	US$(’000)

Balance as of December 31, 2013 (audited)		1,439
Reversal during the period		(112	)
Exchange translation adjustment		(10	)
Balance as of June 30, 2014 (unaudited)		1,317

Deferred tax liabilities arose on the recognition of the identifiable intangible assets acquired from acquisition transactions and deconsolidation of subsidiaries consummated in 2011. Reversal for the six and three months ended June 30, 2014 of approximately US$112,000 and US$56,000, respectively, was due to amortization of the acquired intangible assets.

The Company’s deferred tax assets at June 30, 2014 and December 31, 2013 were as follows:

	June 30, 2014			December 31, 2013
	US$(’000)			US$(’000)
	(Unaudited)

Tax effect of net operating losses carried forward		4,650			3,899
Bad debts provision		1,616			1,594
Valuation allowance		(5,217	)		(4,581	)
		1,049			912

F-18

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	June 30, 2014		December 31, 2013
	US$(’000)		US$(’000)
	(Unaudited)

Deferred tax assets reclassified as current asset		168		153
Deferred tax assets reclassified as non-current asset		881		759
		1,049		912

The net operating losses carried forward incurred by the Company (excluding its PRC operating subsidiary and VIEs) were approximately US$6,973,000 and US$6,840,000 at June 30, 2014 and December 31, 2013, respectively, which loss carry forwards gradually expire over time, the last of which expires in 2034. A full valuation allowance has been recorded because it is considered more likely than not that the deferred tax assets will not be realized through sufficient future earnings of the entity to which the operating losses relate.

The net operating losses carried forward (excluding bad debts provision, amortization of intangible assets acquired from business combinations and non-deductible expenses) incurred by the Company’s PRC subsidiary and VIEs were approximately US$11,268,000 and US$7,253,000 at June 30, 2014 and December 31, 2013, respectively, which loss carry forwards gradually expire over time, the last of which expires in 2019. The related deferred tax assets was calculated based on the respective net operating losses incurred by each of the PRC subsidiary and VIEs and the respective corresponding enacted tax rate that will be in effect in the period in which the losses are expected to be utilized. The Company recorded approximately US$572,000 and US$333,000 valuation allowance for the six and three months ended June 30, 2014, respectively, because it is considered more likely than not that this portion of the deferred tax assets will not be realized through sufficient future earnings of the entities to which the operating losses relate.

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

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

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

18.	Long-term borrowing from director

	June 30, 2014		December 31, 2013
	US$(’000)		US$(’000)
	(Unaudited)

Long-term borrowing from director		142		143

F-19

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Long-term borrowing from director is a non-interest bearing loan from a director of the Company relating to the original paid-in capital contribution in the Company’s wholly-owned subsidiary Rise King WFOE, which is not expected to be repaid within one year.

19.

Warrants

The Company issued warrants in its August 2009 Financing. Warrants issued and outstanding at June 30, 2014 and changes during the six months then ended are as follows:

	Warrants Outstanding						Warrants Exercisable
	Number of underlying shares		Weighted Average Exercise Price		Average Remaining Contractual Life (years)		Number of underlying shares		Weighted Average Exercise Price		Average Remaining Contractual Life (years)
Balance, December 31, 2013 (audited)		2,363,456	$	3.52		0.63		2,363,456	$	3.52		0.63
Granted / Vested		-						-
Forfeited		-						-
Exercised		-						-
Balance, June 30, 2014 (unaudited)		2,363,456	$	3.52		0.14		2,363,456	$	3.52		0.14

All unexpired warrants are exercisable and will expire on August 20, 2014.

20.	Restricted Net Assets

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

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

As a result of these PRC laws and regulations, the Company’s PRC subsidiary and VIEs are restricted in their ability to transfer a portion of their net assets to the Company. As of June 30, 2014 and December 31, 2013, net assets restricted in the aggregate, which include paid-in capital and statutory reserve funds of the Company’s PRC subsidiary and VIEs that are included in the Company’s consolidated net assets, was both approximately US$7.3 million, respectively.

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

F-20

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

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

Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.

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

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

As of June 30, 2014 and December 31, 2013, there was approximately US$37.2 million and US$39.3 million retained earnings in the aggregate, respectively, which was generated by the Company’s PRC subsidiary and VIEs in Renminbi included in the Company’s consolidated net assets, aside from US$2.8 million statutory reserve funds as of June 30, 2014 and December 31, 2013, that may be affected by increased restrictions on currency exchanges in the future and accordingly may further limit the Company’s PRC subsidiary’s and VIEs’ ability to make dividends or other payments in U.S. dollars to the Company, in addition to the approximately US$7.3 million restricted net assets as of June 30, 2014 and December 31, 2013, as discussed above.

21.	Related party transactions

Revenue from related parties:

	Six Months Ended June 30,
	2014		2013
	US$(’000)		US$(’000)
	(Unaudited)		(Unaudited)

-Beijing Saimeiwei Food Equipment Technology Co., Ltd.		182		122
-Beijing Fengshangyinli Technology Co., Ltd.		1		6
-Beijing Telijie Century Environmental Technology Co., Ltd.		-		46
		183		174

	Three Months Ended June 30,
	2014		2013
	US$(’000)		US$(’000)
	(Unaudited)		(Unaudited)

-Beijing Saimeiwei Food Equipment Technology Co., Ltd.		182		78
-Beijing Fengshangyinli Technology Co., Ltd.		-		4
-Beijing Telijie Century Environmental Technology Co., Ltd.		-		33
		182		115

F-21

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

22.	Employee defined contribution plan

Full time employees of the Company in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the PRC subsidiaries of the Company make contributions to the government for these benefits based on certain percentages of the employees’ salaries. The employee benefits were expensed as incurred. The Company has no legal obligation for the benefits beyond the contributions made. The total amounts for such employee benefits were both approximately US$265,000 and US$231,000 for the six months ended June 30, 2014 and 2013, respectively. The total amounts for such employee benefits were approximately US$136,000 and US$111,000 for the three months ended June 30, 2014 and 2013, respectively.

23.	Concentration of risk

Credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, other receivables and prepayments and deposits to suppliers. As of June 30, 2014 and December 31, 2013, substantially all of the Company’s cash and cash equivalents were held by major financial institutions located in Mainland China and Hong Kong Special Administrative Region of the PRC, which management believes are of high credit quality.

Risk arising from operations in foreign countries

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

Currency convertibility risk

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

Concentration of customers

For the six months ended June 30, 2014, two customers individually accounted for 20% and 19% of the Company’s sales, respectively. Except for the aforementioned customers, there was no other single customer who accounted for more than 10% of the Company’s sales for the six months ended June 30, 2014 and 2013, respectively.

F-22

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended June 30, 2014, the same two customers individually accounted for 30% and 17% of the Company’s sales, respectively. Except for the aforementioned customer, there was no other single customer who accounted for more than 10% of the Company’s sales for the three months ended June 30, 2014 and 2013, respectively.

As of June 30, 2014, two customers individually accounted for 16% and 12% of the Company’s accounts receivables, respectively. As of December 31, 2013, three customers individually accounted for 13%, 12% and 10% of the Company’s accounts receivables, respectively. Except for the afore-mentioned, there was no other single customer who accounted for more than 10% of the Company’s accounts receivable as of June 30, 2014 and December 31, 2013, respectively.

Concentration of suppliers

For the six months ended June 30, 2014, two suppliers individually accounted for 64% and 22% of the Company’s cost of sales, respectively. For the three months ended June 30, 2014, the same two suppliers individually accounted for 71% and 19% of the Company’s cost of sales, respectively. Except for the afore-mentioned, there was no other single supplier who accounted for more than 10% of the Company’s cost of sales for the six and three months ended June 30, 2014, respectively.

For the six months ended June 30, 2013, three suppliers individually accounted for 34%, 29% and 14% of the Company’s cost of sales, respectively. For the three months ended June 30, 2013, the same three suppliers individually accounted for 34%, 23% and 19% of the Company’s cost of sales, respectively. Except for the afore-mentioned, there was no other single supplier who accounted for more than 10% of the Company’s cost of sales for the six and three months ended June 30, 2013, respectively.

24.	Commitments

The following table sets forth the Company’s operating lease commitment as of June 30, 2014:

	Office Rental
	US$(’000)
	(Unaudited)
Six months ending December 31,
-2014		196
Year ending December 31,
-2015		343
-2016		83
Total		622

For the six months ended June 30, 2014 and 2013, rental expenses under operating leases were approximately US$261,000 and US$249,000, respectively. For the three months ended June 30, 2014 and 2013, rental expenses under operating leases were approximately US$117,000 and US$112,000, respectively.

In October 2013, the Company entered into a contract to engage an unrelated third party to develop several software systems related to internet environment monitoring and system optimization to enhance the overall safety and efficiency of the Company’s network system. The total contract amount was RMB13 million (approximately US$2.11 million) and the first installment of RMB5.2 million (approximately US$0.84 million) was paid in the first fiscal quarter of 2014. The transaction as contemplated under the contract is expected to be consummated in 2014 and the remaining unpaid contract amount is expected to be paid in 2014.

Legal Proceedings

Business Opportunity Online, Handong Cheng, Chairman and CEO of the Company, and Jinbo Yao, Legal Representative of Beijing 58 Information Technology Co., Ltd. (the “Beijing 58”) have been named as defendants in a civil lawsuit filed in the PRC. The action was filed by Xuanfu Liu, an approximate 34% shareholder of the Company, on October 19, 2013, in the Xiaogan City Xiaonan District People’s Court in Hubei Province, China. The complaint alleges that Mr. Cheng abused operation and management rights and that Mr. Cheng’s disposition of equity interests that Business Opportunity Online held in Beijing 58 (the “Equity Interests”), without the consent of the plaintiff, was an act of infringement and in violation of the articles of association of Business Opportunity Online and Chinese corporate law. The complaint seeks a court order to declare the contract allegedly entered into by and between Mr. Cheng, on behalf of Business Opportunity Online, and Mr. Yao, null and void. The Company denied all of the allegations against the Company and intends to defend vigorously against the lawsuit. During the course of the civil litigation, Jinbo Yao, the defendant, filed an objection to remove this case from the Xiaogan City Xiaonan District People’s Court to a Beijing court. Xiaogan City Xiaonan District People’s Court denied the defendant’s objection to remove the case. Jinbo Yao then filed an appeal of that decision to the Intermediate People’s Court of Xiaogan. On March 10, 2014, the Intermediate People’s Court of Xiaogan rendered a final ruling holding that the dispute shall be transferred and heard by the Haidian District People’s Court of Beijing. Business Opportunity Online is awaiting a hearing date from the Haidian District People’s Court of Beijing.

F-23

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Rise King WFOE, Handong Cheng, Zhige Zhang, CFO of the Company and Xuanfu Liu, have been named as defendants in a civil lawsuit filed in the PRC. The action was filed by Shanghai Pan Gu Investment Management Co., Ltd. (the “Shanghai Pan Gu”), on December 17, 2013, in the Haidian District People’s Court of Beijing, China. The complaint alleges that the defendants breached a consulting agreement entered into on April 22, 2011 by and among Shanghai Pan Gu and the defendants. The complaint seeks a court order for liquidated damages in the amount of RMB0.56 million (equal to approximately US$92,100) under the consulting agreement. The Company denies all of the allegations against it and intends to defend vigorously against the lawsuit.

Business Opportunity Online has been named as a defendant in another civil lawsuit filed in the PRC. The action was filed by Haifeng Wang in the Haidian District People’s Court, Beijing, PRC, on April 29, 2014. The complaint alleges that the plaintiff neither attended any shareholders meeting in respect of the transfer of the plaintiff’s investment in Business Opportunity Online to another party, nor executed any written shareholders resolutions approving such transfer. The complaint seeks a court order to declare such shareholders resolutions null and void. The Company denies all of the allegations against it and intends to defend vigorously against the lawsuit.

The Company currently cannot estimate the amount or range of possible losses from the litigations described above.

25.	Segment reporting

The Company follows ASC Topic 280 “Segment Reporting”, which requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and evaluating their performance. Reportable operating segments include components of an entity about which separate financial information is available and which operating results are regularly reviewed by the chief operating decision maker (“CODM”) to make decisions about resources to be allocated to the segment and assess each operating segment’s performance.

Six Months Ended June 30, 2014 (Unaudited)

	Internet Ad.			TV Ad.			Bank kiosk		Brand management and sales channel building			Others			Inter- segment and reconciling item			Total
	US$ (‘000)			US$ (‘000)			US$ (‘000)		US$ (‘000)			US$ (‘000)			US$ (‘000)			US$ (‘000)

Revenue		11,808			2,994			138		604			-			-			15,544
Cost of sales		9,395			2,772			5		315			-			-			12,487
Total operating expenses		3,850			222			63		283			578	*		-			4,996
Depreciation and amortization expense included in total operating expenses		489			22			63		100			41			-			715
Operating income (loss)		(1,437	)		-			70		6			(578	)		-			(1,939	)

Share of losses in equity investment affiliates		-			-			-		(56	)		(2	)		-			(58	)
Expenditure for long-term assets		850			-			-		1			12			-			863
Net income (loss)		(1,493	)		(32	)		70		(57	)		(580	)		-			(2,092	)
Total assets – June 30, 2014		50,301			16,486			355		4,482			6,465			(22,809	)		55,280
Total assets – December 31, 2013		51,324			17,022			420		4,524			7,065			(23,521	)		56,834

*Including approximately US$17,000 share-based compensation expenses.

F-24

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Three Months Ended June 30, 2014 (Unaudited)

	Internet Ad.			TV Ad.			Bank kiosk		Brand management and sales channel building			Others			Inter- segment and reconciling item		Total
	US$ (‘000)			US$ (‘000)			US$ (‘000)		US$ (‘000)			US$ (‘000)			US$ (‘000)		US$ (‘000)

Revenue		8,228			1,812			67		254			-			-		10,361
Cost of sales		6,853			1,677			5		130			-			-		8,665
Total operating expenses		2,325			128			32		143			342	*		-		2,970
Depreciation and amortization expense included in total operating expenses		242			11			32		50			20			-		355
Operating income (loss)		(950	)		7			30		(19	)		(342	)		-		(1,274	)

Share of losses in equity investment affiliates		-			-			-		(43	)		-			-		(43	)
Expenditure for long-term assets		-			-			-		-			-			-		-
Net income (loss)		(994	)		(10	)		30		(62	)		(342	)		-		(1,378	)

*Including approximately US$9,000 share-based compensation expenses.

Six Months Ended June 30, 2013 (Unaudited)

	Internet Ad.		TV Ad.			Bank kiosk		Brand management and sales channel building			Others			Inter- segment and reconciling item		Total
	US$ (‘000)		US$ (‘000)			US$ (‘000)		US$ (‘000)			US$ (‘000)			US$ (‘000)		US$ (‘000)

Revenue		9,247		5,127			140		1,427			-			-		15,941
Cost of sales		4,264		4,743			-		750			-			-		9,757
Total operating expenses		3,274		755			105		551			763	*		-		5,448
Depreciation and amortization expense included in total operating expenses		516		25			105		109			85			-		840
Operating income (loss)		1,709		(371	)		35		126			(763	)		-		736

Share of losses in equity investment affiliates		-		-			-		(90	)		(35	)		-		(125	)
Expenditure for long-term assets		853		-			-		-			7			-		860
Net income (loss)		1,510		(431	)		35		5			(714	)		-		405

*Including approximately US$21,000 share-based compensation expenses.

F-25

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Three Months Ended June 30, 2013 (Unaudited)

	Internet Ad.		TV Ad.			Bank kiosk		Brand management and sales channel building			Others			Inter- segment and reconciling item		Total
	US$ (‘000)		US$ (‘000)			US$ (‘000)		US$ (‘000)			US$ (‘000)			US$ (‘000)		US$ (‘000)

Revenue		5,436		2,489			71		896			-			-		8,892
Cost of sales		2,620		2,243			-		427			-			-		5,290
Total operating expenses		1,691		373			52		307			386	*		-		2,809
Depreciation and amortization expense included in total operating expenses		259		13			52		55			43			-		422
Operating income (loss)		1,125		(127	)		19		162			(386	)		-		793

Share of losses in equity investment affiliates		-		-			-		(45	)		(9	)		-		(54	)
Expenditure for long-term assets		847		-			-		-			2			-		849
Net income (loss)		845		(172	)		19		77			(353	)		-		416

*Including approximately US$11,000 share-based compensation expenses.

26.	Earnings per share

Basic and diluted earnings per share for each of the periods presented are calculated as follows (All amounts, except number of shares and per share data, are presented in thousands of US dollars):

	Six Months Ended June 30,					Three Months Ended June 30,
	2014			2013		2014			2013
	US$(’000)			US$(’000)		US$(’000)			US$('000)
	(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)

Net (loss)/income attributable to ChinaNet Online Holdings, Inc. (numerator for basic and diluted earnings per share)	$	(1,999	)	$	464	$	(1,331	)	$	434

Weighted average number of common shares outstanding - Basic		22,376,540			22,193,391		22,376,540			22,200,166
Effect of diluted securities:
Warrants and options		-			-		-			-
Weighted average number of common shares outstanding -Diluted		22,376,540			22,193,391		22,376,540			22,200,166

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

For the six and three months ended June 30, 2014, the diluted earnings per share calculation both did not include the warrants and options to purchase up to 2,363,456 and 939,440 shares of common stock, respectively, because their effect was anti-dilutive, as the Company incurred a loss during the periods.

F-26

CHINANET ONLINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the six and three months ended June 30, 2013, the diluted earnings per share calculation both did not include the warrants and options to purchase up to 2,363,456 and 939,440 shares of common stock, respectively, because these warrants and options were out-of-the-money, that if included would be anti-dilutive.

27.	Share-based compensation expenses

The Company renewed its engagement with MZHCI, LLP (“MZ-HCI”) to provide investor relations services for a twelve-month period commencing on January 1, 2014. As additional compensation, the Company granted 40,000 restricted s