As
filed with the Securities and Exchange Commission on April 26,
2010
Registration
No. 333-162038
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
Post
Effective Amendment No. 1 to
FORM
S-1
REGISTRATION
STATEMENT UNDER
THE
SECURITIES ACT OF 1933
CHINANET
ONLINE HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
Nevada
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20-4672080
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7310
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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(IRS
Employer Identification No.)
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(Primary
Standard Industrial
Classification
Code
Number)
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No.3 Min
Zhuang Road, Building 6
Yu Quan
Hui Gu Tuspark, Haidian District,
Beijing,
PRC 100195
86-10-5160-0828
(Address,
including zip code, and Telephone Number, including area code, of Registrant’s
Principal Executive Offices)
Loeb
& Loeb LLP
345 Park
Avenue
New York,
New York 10154
(212)
407-4000
(Name,
Address, including zip code, and Telephone Number, including area code, of Agent
for Service)
With a
copy to:
Mitchell
S. Nussbaum, Esq.
Loeb
& Loeb LLP
345 Park
Avenue
New York,
New York 10154
(212)
407-4159
Approximate date of commencement of
proposed sale to the public
: From time to time after this
registration statement becomes effective.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the
following box.
x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
¨
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
¨
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Accelerated filer
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Non-accelerated filer
¨
(Do not check if smaller
reporting company)
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Smaller reporting company
þ
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The
Registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
Explanatory
Note
On
December 31, 2009, ChinaNet Online Holdings, Inc’s (the “Company”)
Registration Statement on Form S-1 (No. 333-162038) (the “Form S-1”) relating
to the resale of 120,000 shares of its common stock, par value
$.001 per
share (the "Common Stock"), 4,121,600 shares of Common Stock issuable upon the
conversion of shares of the Company's 10% Series A Convertible Preferred Stock,
par value $.001 per share, and 4,121,600 shares of Common Stock issuable upon
the exercise of warrants to purchase the Company's Common Stock was declared
effective.
The
purpose of this post-effective amendment no.1 to the Form S-1 is to update
the financial statements and other information and to eliminate or modify
information regarding certain selling stockholders listed in the registration
statement. All filing fees payable in connection with the
registration of these securities were previously paid in connection
with the filing of the initial registration statement.
THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE SELLING
STOCKHOLDERS MAY NOT SELL THESE SECURITIES PUBLICLY UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
Prospectus
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Subject
to Completion, Dated April 26, 2010
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CHINANET
ONLINE HOLDINGS, INC.
8,363,200
SHARES OF COMMON STOCK
This prospectus
relates to the resale of 120,000 shares (the “Issued Shares”) of our common
stock, par value $.001 per share (the “Common Stock”), 4,121,600 shares of
Common Stock (the “Conversion Shares”) issuable upon the conversion of shares of
our 10% Series A Convertible Preferred Stock, par value $.001 per share (the
“Series A Preferred Stock”), and 4,121,600 shares of Common Stock (the “Warrant
Shares”) issuable upon exercise of warrants to purchase our Common Stock (the
“Warrants”). The Issued Shares, the Conversion Shares and the Warrant
Shares (collectively, the “Shares”) are being offered by the selling
stockholders (the “Selling Stockholders”) identified in this prospectus.
As
of the date of this prospectus, the Shares being registered in the registration
statement, of which this prospectus forms a part, represent
approximately 50.0% of the shares of the Company’s currently issued and
outstanding shares of Common Stock and represent approximately 89.9% of the
issued and outstanding shares of Common Stock held by non-affiliates. As of
April 23, 2010 we have 16,741,320 shares of Common Stock issued and
outstanding,
of
which 9,305,480 shares are owned by
non-affiliates.
We will
not receive any of the proceeds from the sale of the Issued Shares or the
Conversion Shares by the Selling Stockholders. However, we will receive the
proceeds from any cash exercise of Warrants to purchase the Warrant Shares to be
sold hereunder. See “Use of Proceeds.” The Selling Stockholders may sell their
shares of Common Stock on any stock exchange, market or trading facility on
which the shares are traded or quoted or in private transactions. These sales
may be at fixed prices, at prevailing market prices at the time of sale, at
prices related to the prevailing market price, at varying prices determined at
the time of sale, or at negotiated prices. See “Plan of
Distribution”
We have
agreed to pay certain expenses in connection with the registration of the
Shares.
Our Common Stock is traded on the NYSE Amex
(“NYSE Amex”) under the trading symbol “CNET”. The closing price for our Common
Stock on the NYSE Amex on April 23, 2010 was $
4.30
per share.
As of April 23, 2010
, the total dollar
value of the Conversion Shares was $
17,722,880
, and the total dollar value
of the warrant shares was $
17,722,880.
You are urged to
obtain current market quotations of our Common Stock before purchasing any of
the Shares being offered for sale pursuant to this prospectus.
The
Selling Stockholders, and any broker-dealer executing sell orders on behalf of
the Selling Stockholders, may be deemed to be “underwriters” within the meaning
of the Securities Act of 1933, as amended. Commissions received by
any broker-dealer may be deemed underwriting commissions under the Securities
Act of 1933, as amended.
Investing
in our Common Stock involves risk. You should carefully consider the risk
factors beginning on page 7 of this prospectus before purchasing shares of
our Common Stock.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES, OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The
date of this prospectus
is ,
2010
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Page
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SUMMARY
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1
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NOTE
REGARDING FORWARD-LOOKING STATEMENTS
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4
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THE
OFFERING
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5
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RISK
FACTORS
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7
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USE
OF PROCEEDS
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21
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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22
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DESCRIPTION
OF THE BUSINESS
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44
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DIRECTORS
AND EXECUTIVE OFFICERS
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65
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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70
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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73
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SELLING
STOCKHOLDERS
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75
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PLAN
OF DISTRIBUTION
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84
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DESCRIPTION
OF SECURITIES
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87
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MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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90
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DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
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92
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LEGAL
MATTERS
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93
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EXPERTS
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WHERE YOU CAN FIND MORE INFORMATION
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FINANCIAL
STATEMENTS
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94
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SUMMARY
This
summary highlights material information about us that is described more fully
elsewhere in this prospectus. It may not contain all of the information that you
find important. You should carefully read this entire document, including the
“Risk Factors” section beginning on page 7 of this prospectus and the
financial statements and related notes to those statements appearing elsewhere
in this prospectus before making a decision to invest in our Common
Stock.
Unless
otherwise indicated in this prospectus or the context otherwise requires, all
references to ‘we,’’ ‘‘us,’’ ‘‘our’’ and “the Company” , “China Net Companies”
or “China Net” refers collectively to ChinaNet Online Holdings, Inc. (the
“Company”), China Net Online Media Group Limited, a company organized under the
laws of British Virgin Islands (“ChinaNet BVI”), 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 People's Republic of
China (“Rise King WFOE”), Business Opportunity Online (Beijing) Network
Technology Co., Ltd. a PRC company (“Business Opportunity Online”), Beijing CNET
Online Advertising Co., Ltd., a PRC company (“Beijing CNET Online”), and
Shanghai Borongdingsi Computer Technology Co., Ltd. a PRC company (“Shanghai
Borongdingsi”).
OUR
COMPANY
The Company is a holding
company that conducts its primary businesses through its subsidiaries and
operating companies, Business Opportunity Online, Beijing CNET Online and
Shanghai B
orongdongsi. We
are one of China
’
s leading full-service media
development and advertising platforms for the small and medium enterprise (the
“
SME
”
) market. We are a
service oriented business that leverages proprietary advertising technology to
prepare an
d
publish rich media enabled advertising campaigns for clients on the Internet and
on television.
Our goal is to strengthen our position as the leading
diversified media advertising provider in China
. Our
multi-platform advertising network consists of the
website www.28.com
(“
28.com
”
), our Internet advertising
portal, ChinaNet TV, our TV production and advertising unit, and our bank kiosk
advertising unit, which is primarily used as an advertising platform for clients
in the financial servic
es
industry.
Through the high traffic
internet portal 28.com, operated through Beijing Opportunity Online, companies
and entrepreneurs advertise their products, services and business
opportunities. Through our ChinaNet TV division, operated through
Beij
ing CNET
Online, we create and distribute television shows similar to
infomercials. Through our new bank kiosk division, operated through
Shanghai Borongdongsi, we place kiosks in branches of banks in strategic
cooperation with banking institutions, and
s
ell advertising time on those
kiosks to our clients.
We derive our revenue
principally by:
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charging
our clients fixed monthly fees to advertise on
28.com;
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charging
production fees for television and web video
spots;
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selling
advertising time slots on our television shows and bank
kiosks;
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reselling
Internet space and television space at a discount to the direct cost of
any individual space or time slot, but at a mark-up to our cost due to
purchase of these items in bulk;
and
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collecting fees associated with
lead generation
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The
five largest industries in terms of revenue in which our advertising clients
operate are (1) food and beverage, (2) women accessories, (3) footwear, apparel
and garments, (4) home goods and construction materials, and (5) environmental
protection equipment. Advertisers from these industries together
accounted for approximately 87% of our revenue in 2009.
ChinaNet
Organizational Structure
Prior to
July 14, 2009, our company name was Emazing Interactive, Inc. On June
26, 2009, the Company, which formerly focused on web server access and company
branding in hosting web-based e-games, entered into a share exchange agreement
with the shareholders of ChinaNet BVI, which controlled Business Opportunity
Online, Beijing CNET Online and Shanghai Borongdongsi. Pursuant to
that agreement, the ChinaNet BVI Shareholders transferred to the Company all of
the ChinaNet BVI Shares in exchange for the issuance of shares of Common Stock
(the “Share Exchange”). As a result of the Share Exchange, ChinaNet
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 PRC, is engaged in providing advertising, marketing and
communication services to SMEs in China.
For the sole purpose of changing its
name, on July 14, 2009, the Company merged into a newly-formed, wholly owned
subsidiary incorporated under the laws of Nevada called ChinaNet Online
Holdings, Inc. As a result of the merger, our corporate name was
changed to ChinaNet Online Holdings, Inc.
Executive
Offices
Our
principal executive offices are located at No.3 Min Zhuang Road, Building 6, Yu
Quan Hui Gu Tuspark, Haidian District, Beijing, PRC, 100195. Our
telephone number at that address is 86-10-5160-0828.
NOTE
REGARDING FORWARD-LOOKING STATEMENTS
The
statements contained in this Form S-1 that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act, and Section 21E of the Securities Exchange Act of 1934 (the “
Exchange Act
”). These
include statements about the Company’s expectations, beliefs, intentions or
strategies for the future, which are indicated by words or phrases such as
“anticipate,” “expect,” “intend,” “plan,” “will,” “the Company believes,”
“management believes” and similar words or phrases. The forward-looking
statements are based on the Company’s current expectations and are subject to
certain risks, uncertainties and assumptions. The Company’s actual results could
differ materially from results anticipated in these forward-looking statements.
All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward-looking
statements.
THE
OFFERING
Common
Stock being offered by Selling Stockholders
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Up
to 8,363,200 shares (1)
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Common
Stock outstanding
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16,741,320 shares
as of the date of this Prospectus
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Common
Stock outstanding after the Offering
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24,191,520
(2)
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Use
of Proceeds
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We
will not receive any proceeds from the sale of shares by the Selling
Stockholders. We will receive proceeds from any cash exercise of
warrants.
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NYSE
Amex Symbol
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CNET
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Risk
Factors
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The
securities offered by this prospectus are speculative and involve a high
degree of risk and investors purchasing securities should not purchase the
securities unless they can afford the loss of their entire investment. See
“Risk Factors” beginning on
page 7.
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(1)
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This
prospectus relates to the resale by the Selling Stockholders of up
to 8,363,200 shares of our Common Stock, par value $.001 per share,
including 120,000 shares of our Common Stock that are currently
issued and outstanding, 4,121,600 shares of our Common Stock (the
“Conversion Shares”) issuable upon the conversion of our Series A
Preferred Stock, and 4,121,600 shares of our Common Stock (the “Warrant
Shares”) issuable upon exercise of Warrants. The Warrant
Shares are comprised of 4,121,600 shares of Common Stock issuable upon
exercise of Series A-1 Warrants and Series A-2 Warrants to purchase our
Common Stock, in the aggregate.
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(2)
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Assumes
issuance of all Conversion Shares and exercise of all
Warrants.
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RECENT
DEVELOPMENT
On
March 29, 2010, we entered into an agreement to amend certain provisions of the
Series A-1, Series A-2 and the placement agent Warrants with the holders of
those Warrants originally issued on August 21, 2009. The amendment to
the Warrants removes certain anti-dilution protection rights that were
applicable if the Company were to issue new shares of common stock or common
stock equivalents at a price per share less than the exercise prices of the
Series A-1, Series A-2 and the placement agent Warrants, which are currently
$3.00, $3.75 and $2.5 to $3.75, respectively. In addition, the
amendment to the Warrants added a provision to grant the holders of the Warrants
an approval right until December 31, 2010, over any new issuance of shares of
common stock or common stock equivalents at a price per share less than the
exercise prices of the Warrants then in effect or without
consideration. The parties agreed that the amendments to the Warrants
would be retroactive from and including, August 21, 2009. Except as
set forth above, the other terms and provisions of the Warrants remain in full
force and effect.
RISK
FACTORS
An
investment in our Common Stock is speculative and involves a high degree of risk
and uncertainty. You should carefully consider the risks described below,
together with the other information contained in this prospectus, including the
consolidated financial statements and notes thereto, before deciding to invest
in our Common Stock. Additional risks not presently known to us or that we
presently consider immaterial may also adversely affect our Company. If any of
the following risks occur, our business, financial condition and results of
operations and the value of our Common Stock could be materially and adversely
affected.
Risks
Related to Our Business
The
recent global economic and financial market crisis has had and may continue to
have a negative effect on the market price of our business, and could have a
material adverse effect on our business, financial condition, results of
operations and cash flow.
The
recent global economic and financial market crisis has caused, among other
things, a general tightening in the credit markets, lower levels of liquidity,
increases in the rates of default and bankruptcy, lower consumer and business
spending, and lower consumer net worth, in the United States, China and other
parts of the world. This global economic and financial market crisis has had,
and may continue to have, a negative effect on the market price of our business,
the volatility of which has increased as a result of the disruptions in the
financial markets. It may also impair our ability to borrow funds or enter into
other financial arrangements if and when additional founds become necessary for
our operations. We believe many of our advertisers have also been affected by
the current economic turmoil. Current or potential advertisers may no longer be
in business, may be unable to fund advertising purchases or determine to reduce
purchases, all of which would lead to reduced demand for our advertising
services, reduced gross margins, and increased delays of payments of accounts
receivable or defaults of payments. We are also limited in our ability to reduce
costs to offset the results of a prolonged or severe economic downturn given our
fixed costs associated with our operations. Therefore, the global economic and
financial market crisis could have a material adverse effect on our business,
financial condition, results of operations and cash flow. In addition, the
timing and nature of any recovery in the credit and financial markets remains
uncertain, and there can be no assurance that market conditions will improve in
the near future or that our results will not continue to be materially and
adversely affected.
We
have a limited operating history, which may make it difficult to evaluate our
business and prospects.
We
began our Internet advertising service via 28.com in 2003, and entered into the
TV production and advertising with China Net TV in May 2008. Both the Internet
and TV advertising platforms are targeting SME customers. The SME market in
China is still in its early stages. In addition, we started our bank kiosk
advertising service through Shanghai Borongdingsi for financial sector customers
in 2008. Accordingly, our limited operating history and the early stage of
development of the markets in which we operate makes it difficult to evaluate
the viability and sustainability of our business and its acceptance by
advertisers and consumers. Although our revenues have grown rapidly, we cannot
assure you that we will maintain our profitability or that we will not incur net
losses in the future. We expect that our operating expenses will increase as we
expand. Any significant failure to realize anticipated revenue growth could
result in operating losses.
We
may be subject to, and may expend significant resources in defending against,
government actions and civil suits based on the content and services we provide
through our Internet, TV and bank kiosk advertising platforms.
PRC
advertising laws and regulations require advertisers, advertising operators and
advertising distributors, including businesses such as ours, to ensure that the
content of the advertisements they prepare or distribute is fair, accurate and
in full compliance with applicable laws, rules and regulations. Although we
comply with the requirements by reviewing the business licenses and the profiles
of our clients, clients may post advertisements about business opportunities
that are not legitimate over which we have no control. Violation of these laws,
rules or regulations may result in penalties, including fines, confiscation of
advertising fees, orders to cease dissemination of the advertisements and orders
to publish an advertisement correcting the misleading information. In
circumstances involving serious violations, the PRC government may revoke a
violator’s license for its advertising business operations.
In
April 2009, CCTV reported a story that a franchised store advertised on 28.com
turned out to be a scam, and the fraud victim asserted she joined the store
because she trusted the website. Pursuant to the PRC advertising law,
Business Opportunity Online as the publisher of advertisement has the obligation
to check relevant documents and verify the content of the
advertisement. For commercial franchise business in China, a
franchiser needs to file an application with the MOC or its local branches
through the website http://txjy.syggs.mofcom.gov.cn/. When a
franchiser issues an advertisement through Business Opportunity Online, Business
Opportunity Online checks the business license, the franchiser’s registration
form, the trade mark certificate and other relevant documents to verify the
content of the advertisement. The Internet information services
regulations and the anti unfair competition regulations have similar
requirements for Internet advertisement publishers. Based on the laws
and regulations above, it is our view that there is neither any mandatory
requirement that Business Opportunity Online bear any responsibility for the
franchiser’s business activities, nor any valid action or investigation that can
be brought by the consumer or the government against Business Opportunity Online
based on the franchiser’s business activities. Nevertheless, the
possibility remains that Business Opportunity Online may be required to assume
civil and administrative responsibilities subject to further investigation or
enforcement by competent authorities.
If
advertisers or the viewing public do not accept, or lose interest in, our
advertising platforms, our revenues may be negatively affected and our business
may not expand or be successful.
The
Internet and bank kiosk advertising platforms in China are relatively new and
their potential is uncertain. We compete for advertising revenues with many
forms of more established advertising media. Our success depends on the
acceptance of our advertising platforms by advertisers and their continuing
interest in these media as part of their advertising strategies. Our success
also depends on the viewing public’s continued receptiveness towards our
advertising models. Advertisers may elect not to use our services if they
believe that viewers are not receptive to our platforms or that our platforms do
not provide sufficient value as an effective advertising medium. If a
substantial number of advertisers lose interest in advertising on our platforms,
we will be unable to generate sufficient revenues and cash flows to operate our
business, and our financial condition and results of operations would be
materially and adversely affected.
We
operate in the advertising industry, which is particularly sensitive to changes
in economic conditions and advertising trends.
Demand
for advertising resulting advertising spending by our clients, is particularly
sensitive to changes in general economic conditions. For example, advertising
expenditures typically decrease during periods of economic downturn. Advertisers
may reduce the money they spend to advertise on our advertising platforms for a
number of reasons, including:
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a
general decline in economic
conditions;
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a
decline in economic conditions in the particular cities where we conduct
business;
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a
decision to shift advertising expenditures to other available less
expensive advertising media;
and
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a
decline in advertising spending in
general.
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A
decrease in demand for advertising media in general, and for our advertising
services in particular, would materially and adversely affect our ability to
generate revenues, and have a material and adverse effect on our financial
condition and results of operations.
If
the Internet and, in particular, Internet marketing are not broadly adopted in
China, our ability to generate revenue and sustain profitability from the
website 28.com could be materially and adversely affected.
Our
future revenues and profits from our online advertising agency business that we
operate through 28.com are dependent in part upon advertisers in China
increasingly accepting the use of the Internet as a marketing channel, which is
at an early stage in China. Penetration rates for personal computers, the
Internet and broadband in China are all relatively low compared to those in more
developed countries. Furthermore, many Chinese Internet users are not accustomed
to using the Internet for e-commerce or as a medium for other transactions. Many
of our current and potential SME clients have limited experience with the
Internet as a marketing channel, and have not historically devoted a significant
portion of their marketing budgets to the Internet marketing and promotion. As a
result, they may not consider the Internet as effective in promoting their
products and services as traditional print and broadcast media.
We
face significant competition, and if we do not compete successfully against new
and existing competitors, we may lose our market share, and our profitability
may be adversely affected.
Increased
competition could reduce our profitability and result in a loss of market share.
Some of our existing and potential competitors may have competitive advantages,
such as significantly greater financial, marketing or other resources, and may
successfully mimic and adopt our business models. Moreover, increased
competition will provide advertisers with a wider range of media and advertising
service alternatives, which could lead to lower prices and decreased revenues,
gross margins and profits. We cannot assure you that we will be able to
successfully compete against new or existing competitors.
Failure
to manage our growth could strain our management, operational and other
resources, which could materially and adversely affect our business and
prospects.
We
have been expanding our operations and plan to continue to expand rapidly in
China. To meet the demand of advertisers for a broader coverage, we must
continue to expand our platforms by showing our TV productions and
advertisements on more television stations, and expanding the bank kiosk
platforms in terms of numbers and locations. The continued growth of our
business has resulted in, and will continue to result in, substantial demand on
our management, operational and other resources. In particular, the management
of our growth will require, among other things:
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increased
sales and sales support
activities;
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improved
administrative and operational
systems;
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enhancements
to our information technology
system;
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stringent
cost controls and sufficient working
capital;
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strengthening
of financial and management controls;
and
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hiring
and training of new personnel.
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As we
continue this effort, we may incur substantial costs and expend substantial
resources. We may not be able to manage our current or future operations
effectively and efficiently or compete effectively in new markets we enter. If
we are not able to manage our growth successfully, our business and prospects
would be materially and adversely affected.
Key
employees are essential to growing our business.
Handong
Cheng, our chief executive officer and president, Zhige Zhang, our chief
financial officer and Xuanfu Liu, our chief operating officer are essential to
our ability to continue to grow our business. They have established
relationships within the industries in which we operate. If they were to leave
us, our growth strategy might be hindered, which could limit our ability to
increase revenue. However, the Company currently has no employment agreements
with key employees.
In
addition, we face competition for attracting skilled personnel. If we fail to
attract and retain qualified personnel to meet current and future needs, this
could slow our ability to grow our business, which could result in a decrease in
market share.
We
may need additional capital and we may not be able to obtain it at acceptable
terms, or at all, which could adversely affect our liquidity and financial
position.
We may
need additional cash resources due to changed business conditions or other
future developments. If these sources are insufficient to satisfy our cash
requirements, we may seek to sell additional equity or debt securities or obtain
a credit facility. The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financing covenants that
would restrict our operations and liquidity.
Our
ability to obtain additional capital on acceptable terms is subject to a variety
of uncertainties, including:
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investors’
perception of, and demand for, securities of alternative advertising media
companies;
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conditions
of the U.S. and other capital markets in which we may seek to raise
funds;
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our
future results of operations, financial condition and cash
flow;
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PRC
governmental regulation of foreign investment in advertising service
companies in China;
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economic,
political and other conditions in China;
and
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PRC
governmental policies relating to foreign currency
borrowings.
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Our
failure to protect our intellectual property rights could have a negative impact
on our business.
We
believe our brand, trade name, copyrights, domain name and other intellectual
property are critical to our success. The success of our business depends in
part upon our continued ability to use our brand, trade names and copyrights to
further develop and increase brand awareness. The infringement of our trade
names and copyrights could diminish the value of our brand and its market
acceptance, competitive advantages or goodwill. In addition, our information and
operational systems, which have not been patented or otherwise registered as our
property, are a key component of our competitive advantage and our growth
strategy.
Monitoring
and preventing the unauthorized use of our intellectual property is difficult.
The measures we take to protect our brand, trade names, copyrights, domain name
and other intellectual property rights may not be adequate to prevent their
unauthorized use by third parties. Furthermore, application of laws governing
intellectual property rights in China and abroad is uncertain and evolving, and
could involve substantial risks to us. If we are unable to adequately protect
our brand, trade names, copyrights, domain name and other intellectual property
rights, we may lose these rights and our business may suffer materially.
Further, unauthorized use of our brand, domain name or trade names could cause
brand confusion among advertisers and harm our reputation. If our brand
recognition decreases, we may lose advertisers and fail in our expansion
strategies, and our business, results of operations, financial condition and
prospects could be materially and adversely affected.
We
rely on computer software and hardware systems in managing our operations, the
failure of which could adversely affect our business, financial condition and
results of operations.
We are
dependent upon our computer software and hardware systems in supporting our
network and managing and monitoring programs on the network. In addition, we
rely on our computer hardware for the storage, delivery and transmission of the
data on our network. Any system failure that interrupts the input, retrieval and
transmission of data or increases the service time could disrupt our normal
operation. Any failure in our computer software or hardware systems could
decrease our revenues and harm our relationships with advertisers and consumers,
which in turn could have a material adverse effect on our business, financial
condition and results of operations.
We
have limited insurance coverage.
The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited insurance products. We have determined that the
risks of disruption or liability from our business, the loss or damage to our
property, including our facilities, equipment and office furniture, the cost of
insuring for these risks, and the difficulties associated with acquiring such
insurance on commercially reasonable terms make it impractical for us to have
such insurance. As a result, we do not have any business liability, disruption,
litigation or property insurance coverage for our operations in China except for
insurance on some company owned vehicles. Any uninsured occurrence of loss or
damage to property, or litigation or business disruption may result in the
incurrence of substantial costs and the diversion of resources, which could have
an adverse effect on our operating results.
If
we are unable to establish appropriate internal financial reporting controls and
procedures, it could cause us to fail to meet our reporting obligations, result
in the restatement of our financial statements, harm our operating results,
subject us to regulatory scrutiny and sanction, cause investors to lose
confidence in our reported financial information and have a negative effect on
the market price for shares of our Common Stock.
Effective
internal controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. We maintain a system of internal control over
financial reporting, which is defined as a process designed by, or under the
supervision of, our principal executive officer and principal financial officer,
or persons performing similar functions, and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.
As a
public company, we will have significant additional requirements for enhanced
financial reporting and internal controls. We are required to
document and test our internal control procedures in order to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires
annual management assessments of the effectiveness of our internal controls over
financial reporting and a report by our independent registered public accounting
firm addressing these assessments. However, recent changes to the
rules of the Securities and Exchange Commission have delayed the requirement for
inclusion of such auditor attestation report in our annual report for the year
ended December 31, 2009 until we file our annual report for the 2010 fiscal
year. The process of designing and implementing effective internal
controls is a continuous effort that requires us to anticipate and react to
changes in our business and the economic and regulatory environments and to
expend significant resources to maintain a system of internal controls that is
adequate to satisfy our reporting obligations as a public
company.
We cannot
assure you that we will not, in the future, identify areas requiring improvement
in our internal control over financial reporting. We cannot assure
you that the measures we will take to remediate any areas in need of improvement
will be successful or that we will implement and maintain adequate controls over
our financial processes and reporting in the future as we continue our
growth. If we are unable to establish appropriate internal financial
reporting controls and procedures, it could cause us to fail to meet our
reporting obligations, result in the restatement of our financial statements,
harm our operating results, subject us to regulatory scrutiny and sanction,
cause investors to lose confidence in our reported financial information and
have a negative effect on the market price for shares of our Common
Stock.
Lack
of experience as officers of publicly traded companies of our management team
may hinder our ability to comply with Sarbanes-Oxley Act.
It may
be time consuming, difficult and costly for us to develop and implement the
internal controls and reporting procedures required by the Sarbanes-Oxley
Act. We may need to hire additional financial reporting, internal
controls and other finance staff or consultants in order to develop and
implement appropriate internal controls and reporting procedures. If
we are unable to comply with the Sarbanes-Oxley Act’s internal controls
requirements, we may not be able to obtain the independent auditor
certifications that Sarbanes-Oxley Act requires publicly traded companies to
obtain.
We
will incur increased costs as a result of being a public
company.
As a
public company, we incur significant legal, accounting and other expenses that
we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as
well as new rules subsequently implemented by the SEC, has required changes in
corporate governance practices of public companies. We expect these new rules
and regulations to increase our legal, accounting and financial compliance costs
and to make certain corporate activities more time-consuming and costly. In
addition, we will incur additional costs associated with our public company
reporting requirements. We are currently evaluating and monitoring developments
with respect to these new rules, and we cannot predict or estimate the amount of
additional costs we may incur or the timing of such costs.
Risks
Relating to Regulation of Our Business and to Our Structure
If
the PRC government finds that the agreements that establish the structure for
operating our China business do not comply with PRC governmental restrictions on
foreign investment in the advertising industry, we could be subject to severe
penalties.
All of
our operations are conducted through the PRC Operating Entities (as defined
below), and through our contractual agreements (as defined below) with each of
our PRC Operating Subsidiaries (as defined below) in China. PRC regulations
require any foreign entities that invest in the advertising services industry to
have at least two years of direct operations in the advertising industry outside
of China. Since December 10, 2005, foreign investors have been allowed to own
directly 100% of PRC companies operating an advertising business if the foreign
entity has at least three years of direct operations in the advertising business
outside of China or less than 100% if the foreign investor has at least two
years of direct operations in the advertising industry outside of China. We do
not currently directly operate an advertising business outside of China and
cannot qualify under PRC regulations any earlier than two or three years after
we commence any such operations outside of China or until we acquire a company
that has directly operated an advertising business outside of China for the
required period of time. Our PRC Operating Subsidiaries hold the
requisite licenses to provide advertising services in China. Our PRC Operating
Subsidiaries directly operate our advertising network. We have been and are
expected to continue to be dependent on these PRC Operating Subsidiaries to
operate our advertising business for the foreseeable future. We have entered
into Contractual Agreements with the PRC Operating Subsidiaries, pursuant to
which we, through Rise King WFOE, provide technical support and consulting
services to the PRC Operating Subsidiaries. In addition, we have entered into
agreements with our PRC Operating Subsidiaries and each of their shareholders
which provide us with the substantial ability to control these
affiliates.
If we,
our existing or future PRC Operating Subsidiaries or the PRC Operating Entities
are found to be in violation of any existing or future PRC laws or regulations
or fail to obtain or maintain any of the required permits or approvals, the
relevant PRC regulatory authorities, including the State Administration for
Industry and Commerce, or SAIC, which regulates advertising companies, would
have broad discretion in dealing with such violations,
including:
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revoking
the business and operating licenses of Rise King WFOE and/or the PRC
Operating Subsidiaries;
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discontinuing
or restricting the operations of Rise King WFOE and/or the PRC Operating
Subsidiaries;
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imposing
conditions or requirements with which we, Rise King WFOE and/or our PRC
Operating Subsidiaries may not be able to
comply;
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requiring
us or Rise King WFOE and/or PRC Operating Subsidiaries to restructure the
relevant ownership structure or operations;
or
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restricting
or prohibiting our use of the proceeds of this offering to finance our
business and operations in
China.
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The
imposition of any of these penalties would result in a material and adverse
effect on our ability to conduct our business.
We
rely on contractual arrangements with the PRC Operating Subsidiaries and their
shareholders for our China operations, which may not be as effective in
providing operational control as direct ownership.
We
rely on contractual arrangements with our PRC Operating Subsidiaries and their
shareholders to operate our advertising business. These contractual arrangements
may not be as effective in providing us with control over the PRC Operating
Subsidiaries as direct ownership. If we had direct ownership of the PRC
Operating Subsidiaries, we would be able to exercise our rights as a shareholder
to effect changes in the board of directors of those companies, which in turn
could effect changes, subject to any applicable fiduciary obligations, at the
management level. However, under the current contractual arrangements, as a
legal matter, if the PRC Operating Subsidiaries or any of their subsidiaries and
shareholders fail to perform its or their respective obligations under these
contractual arrangements, we may have to incur substantial costs and resources
to enforce such arrangements, and rely on legal remedies under PRC laws,
including seeking specific performance or injunctive relief, and claiming
damages, which we cannot assure you to be effective. Accordingly, it may be
difficult for us to change our corporate structure or to bring claims against
the PRC Operating Subsidiaries if they do not perform their obligations under
its contracts with us or if any of the PRC citizens who hold the equity interest
in the PRC Operating Subsidiaries do not cooperate with any such
actions.
Many
of these contractual arrangements are governed by PRC laws and provide for the
resolution of disputes through either arbitration or litigation in the PRC.
Accordingly, these contracts would be interpreted in accordance with PRC laws
and any disputes would be resolved in accordance with PRC legal procedures. The
legal environment in the PRC is not as developed as in other jurisdictions, such
as the United States. As a result, uncertainties in the PRC legal system could
limit our ability to enforce these contractual arrangements. In the event we are
unable to enforce these contractual arrangements, we may not be able to exert
effective control over our operating entities, and our ability to conduct our
business may be negatively affected.
Contractual
arrangements we have entered into among the PRC Operating Subsidiaries may be
subject to scrutiny by the PRC tax authorities and a finding that we owe
additional taxes or are ineligible for our tax exemption, or both, could
substantially increase our taxes owed, and reduce our net income and the value
of your investment.
Under
PRC law, arrangements and transactions among related parties may be subject to
audit or challenge by the PRC tax authorities. If any of the transactions we
have entered into among our subsidiaries and affiliated entities are found not
to be on an arm’s-length basis, or to result in an unreasonable reduction in tax
under PRC law, the PRC tax authorities have the authority to disallow our tax
savings, adjust the profits and losses of our respective PRC entities and assess
late payment interest and penalties.
If any
of our PRC Operating Subsidiaries incurs debt on its own behalf in the future,
the instruments governing the debt may restrict their ability to pay dividends
or make other distributions to us. In addition, the PRC tax authorities may
require us to adjust our taxable income under the contractual arrangements with
the PRC Operating Entities we currently have in place in a manner that would
materially and adversely affect the PRC Operating Entities’ ability to pay
dividends and other distributions to us. Furthermore, relevant PRC laws and
regulations permit payments of dividends by the PRC Operating Entities only out
of their retained earnings, if any, determined in accordance with PRC accounting
standards and regulations. Under PRC laws and regulations, each of the PRC
Operating Entities is also required to set aside a portion of its net income
each year to fund specific reserve funds. These reserves are not distributable
as cash dividends. In addition, subject to certain cumulative limits, the
statutory general reserve fund requires annual appropriations of 10% of
after-tax income to be set aside prior to payment of dividends. As a result of
these PRC laws and regulations, the PRC Operating Entities are restricted in
their ability to transfer a portion of their net assets to us whether in the
form of dividends, loans or advances. Any limitation on the ability of the PRC
Operating Entities to pay dividends to us could materially and adversely limit
our ability to grow, make investments or acquisitions that could be beneficial
to our businesses, pay dividends, or otherwise fund and conduct our
business.
Risks
Associated With Doing Business In China
There
are substantial risks associated with doing business in China, as set forth in
the following risk factors.
Our
operations and assets in China are subject to significant political and economic
uncertainties.
Changes
in PRC laws and regulations, or their interpretation, or the imposition of
confiscatory taxation, restrictions on currency conversion, imports and sources
of supply, devaluations of currency or the nationalization or other
expropriation of private enterprises could have a material adverse effect on our
business, results of operations and financial condition. Under its current
leadership, the Chinese government has been pursuing economic reform policies
that encourage private economic activity and greater economic decentralization.
There is no assurance, however, that the Chinese government will continue to
pursue these policies, or that it will not significantly alter these policies
from time to time without notice.
We
derive a substantial portion of ours sales from China.
Substantially
all of our sales are generated from China. We anticipate that sales of our
products in China will continue to represent a substantial proportion of our
total sales in the near future. Any significant decline in the condition of the
PRC economy could adversely affect consumer demand of our products, among other
things, which in turn would have a material adverse effect on our business and
financial condition.
Currency
fluctuations and restrictions on currency exchange may adversely affect our
business, including limiting our ability to convert Chinese Renminbi into
foreign currencies and, if Chinese Renminbi were to decline in value, reducing
our revenue in U.S. dollar terms.
Our
reporting currency is the U.S. dollar and our operations in China use their
local currency as their functional currencies. Substantially all of our revenue
and expenses are in Chinese Renminbi. We are subject to the effects of exchange
rate fluctuations with respect to any of these currencies. For example, the
value of the Renminbi depends to a large extent on Chinese government policies
and China’s domestic and international economic and political developments, as
well as supply and demand in the local market. Since 1994, the official exchange
rate for the conversion of Renminbi to the U.S. dollar had generally been stable
and the Renminbi had appreciated slightly against the U.S. dollar. However, on
July 21, 2005, the Chinese government changed its policy of pegging the value of
Chinese Renminbi to the U.S. dollar. Under the new policy, Chinese Renminbi may
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. As a result of this policy change, Chinese Renminbi appreciated
approximately 2.5% against the U.S. dollar in 2005 and 3.3% in 2006. It is
possible that the Chinese government could adopt a more flexible currency
policy, which could result in more significant fluctuation of Chinese Renminbi
against the U.S. dollar. We can offer no assurance that Chinese Renminbi will be
stable against the U.S. dollar or any other foreign currency.
The
income statements of our operations are translated into U.S. dollars at the
average exchange rates in each applicable period. To the extent the U.S. dollar
strengthens against foreign currencies, the translation of these foreign
currencies denominated transactions results in reduced revenue, operating
expenses and net income for our international operations. Similarly, to the
extent the U.S. dollar weakens against foreign currencies, the translation of
these foreign currency denominated transactions results in increased revenue,
operating expenses and net income for our international operations. We are also
exposed to foreign exchange rate fluctuations as we convert the financial
statements of our foreign subsidiaries into U.S. dollars in consolidation. If
there is a change in foreign currency exchange rates, the conversion of the
foreign subsidiaries’ financial statements into U.S. dollars will lead to a
translation gain or loss which is recorded as a component of other comprehensive
income. In addition, we have certain assets and liabilities that are denominated
in currencies other than the relevant entity’s functional currency. Changes in
the functional currency value of these assets and liabilities create
fluctuations that will lead to a transaction gain or loss. We have
not entered into agreements or purchased instruments to hedge our exchange rate
risks, although we may do so in the future. The availability and effectiveness
of any hedging transaction may be limited and we may not be able to successfully
hedge our exchange rate risks.
Although
Chinese governmental policies were introduced in 1996 to 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
the State Administration of Foreign Exchange, or 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. We cannot be sure
that we will be able to obtain all required conversion approvals for our
operations or that Chinese regulatory authorities will not impose greater
restrictions on the convertibility of Chinese Renminbi in the future. Because a
significant amount of our future revenue may be in the form of Chinese Renminbi,
our inability to obtain the requisite approvals or any future restrictions on
currency exchanges could limit our ability to utilize revenue generated in
Chinese Renminbi to fund our business activities outside of China, or to repay
foreign currency obligations, including our debt obligations, which would have a
material adverse effect on our financial condition and results of
operations
We
may have limited legal recourse under PRC laws if disputes arise under our
contracts with third parties.
The
Chinese government has enacted laws and regulations dealing with matters such as
corporate organization and governance, foreign investment, commerce, taxation
and trade. However, their experience in implementing, interpreting and enforcing
these laws and regulations is limited, and our ability to enforce commercial
claims or to resolve commercial disputes is unpredictable. If our new business
ventures are unsuccessful, or other adverse circumstances arise from these
transactions, we face the risk that the parties to these ventures may seek ways
to terminate the transactions, or, may hinder or prevent us from accessing
important information regarding the financial and business operations of these
acquired companies. The resolution of these matters may be subject to the
exercise of considerable discretion by agencies of the Chinese government, and
forces unrelated to the legal merits of a particular matter or dispute may
influence their determination. Any rights we may have to specific performance,
or to seek an injunction under PRC law, in either of these cases, are severely
limited, and without a means of recourse by virtue of the Chinese legal system,
we may be unable to prevent these situations from occurring. The occurrence of
any such events could have a material adverse effect on our business, financial
condition and results of operations.
We
must comply with the Foreign Corrupt Practices Act.
We are
required to comply with the United States Foreign Corrupt Practices Act, which
prohibits U.S. companies from engaging in bribery or other prohibited payments
to foreign officials for the purpose of obtaining or retaining business. Foreign
companies, including some of our competitors, are not subject to these
prohibitions. Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices occur from time-to-time in mainland China. If our
competitors engage in these practices, they may receive preferential treatment
from personnel of some companies, giving our competitors an advantage in
securing business or from government officials who might give them priority in
obtaining new licenses, which would put us at a disadvantage. Although we inform
our personnel that such practices are illegal, we can not assure you that our
employees or other agents will not engage in such conduct for which we might be
held responsible. If our employees or other agents are found to have engaged in
such practices, we could suffer severe penalties.
Changes
in foreign exchange regulations in the PRC may affect our ability to pay
dividends in foreign currency or conduct other foreign exchange
business.
The
Renminbi is not a freely convertible currency currently, and the restrictions on
currency exchanges may limit our ability to use revenues generated in Renminbi
to fund our business activities outside the PRC or to make dividends or other
payments in United States dollars. The PRC government strictly regulates
conversion of Renminbi into foreign currencies. Over the years, foreign exchange
regulations in the PRC have significantly reduced the government’s control over
routine foreign exchange transactions under current accounts. In the
PRC, the State Administration for Foreign Exchange, or the SAFE, regulates the
conversion of the Renminbi into foreign currencies. Pursuant to applicable PRC
laws and regulations, foreign invested enterprises incorporated in the PRC are
required to apply for “Foreign Exchange Registration
Certificates.” Currently, conversion within the scope of the “current
account” (e.g. remittance of foreign currencies for payment of dividends, etc.)
can be effected without requiring the approval of SAFE. However,
conversion of currency in the “capital account” (e.g. for capital items such as
direct investments, loans, securities, etc.) still requires the approval of
SAFE.
Recent
PRC regulations relating to mergers and acquisitions of domestic enterprises by
foreign investors may increase the administrative burden we face and create
regulatory uncertainties.
On
August 8, 2006, the Ministry of Commerce (the “MOC”), joined by the China
Securities Regulatory Commission (the “CSRC”), State-owned Assets Supervision
and Administration Commission of the State Council (the “SASAC”), the State
Administration of Taxation (the “SAT”), the State Administration of Industry and
Commerce (the “SAIC”), and SAFE, jointly promulgated a rule entitled the
Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors (the “M&A Rules”), which took effect as of September 8,
2006. This new regulation, among other things, has certain provisions
that require SPVs formed for the purpose of acquiring PRC domestic companies and
controlled by PRC individuals, to obtain the approval of the CSRC prior to
publicly listing their securities on an overseas stock market. However, the new
regulation does not expressly provide that approval from the CSRC is required
for the offshore listing of a Special Purpose Vehicle or the SPV which acquires,
directly or indirectly, equity interest or shares of domestic PRC entities held
by domestic companies or individuals by cash payment, nor does it expressly
provide that approval from CSRC is not required for the offshore listing of a
SPV which has fully completed its acquisition of equity interest of domestic PRC
equity prior to September 8, 2006. On September 21, 2006, the CSRC published on
its official website a notice specifying the documents and materials that are
required to be submitted for obtaining CSRC approval.
It is
not clear whether the provisions in the new regulation regarding the offshore
listing and trading of the securities of a SPV applies to an offshore company
such as us which owns controlling contractual interest in the PRC Operating
Entities. We believe that the M&A Rules and the CSRC approval are not
required in the context of the share exchange under our transaction because (i)
such share exchange is a purely foreign related transaction governed by foreign
laws, not subject to the jurisdiction of PRC laws and regulations; (ii) we are
not a SPV formed or controlled by PRC companies or PRC individuals; and (iii) we
are owned or substantively controlled by foreigners. However, we
cannot be certain that the relevant PRC government agencies, including the CSRC,
would reach the same conclusion, and we still cannot rule out the possibility
that CSRC may deem that the transactions effected by the share exchange
circumvented the new M&A rules, the PRC Securities Law and other rules and
notices.
If the
CSRC or another PRC regulatory agency subsequently determines that the CSRC’s
approval is required for the transaction, we may face sanctions by the CSRC or
another PRC regulatory agency. If this happens, these regulatory agencies may
impose fines and penalties on our operations in the PRC, limit our operating
privileges in the PRC, delay or restrict the repatriation of the proceeds from
this offering into the PRC, restrict or prohibit payment or remittance of
dividends to us or take other actions that could have a material adverse effect
on our business, financial condition, results of operations, reputation and
prospects, as well as the trading price of our shares. The CSRC or other PRC
regulatory agencies may also take actions requiring us, or making it advisable
for us, to delay or cancel the transaction.
The
M&A Rules, along with foreign exchange regulations discussed in the above
subsection, will be interpreted or implemented by the relevant government
authorities in connection with our future offshore financings or acquisitions,
and we cannot predict how they will affect our acquisition strategy. For
example, our operating companies’ ability to remit dividends to us, or to engage
in foreign-currency-denominated borrowings, may be conditioned upon compliance
with the SAFE registration requirements by such Chinese domestic residents, over
whom we may have no control. In addition, such Chinese domestic residents may be
unable to complete the necessary approval and registration procedures required
by the SAFE regulations. Such uncertainties may restrict our ability to
implement our acquisition strategy and adversely affect our business and
prospects.
The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities.
China
only recently has permitted provincial and local economic autonomy and private
economic activities, and, as a result, we are dependent on our relationship with
the local government in the province in which we operate our
business. Chinese government has exercised and continues to exercise
substantial control over virtually every sector of the Chinese economy through
regulation and state ownership. Our ability to operate in China may
be harmed by changes in its laws and regulations, including those relating to
taxation, environmental regulations, land use rights, property and other
matters. We believe that our operations in China are in material
compliance with all applicable legal and regulatory
requirements. However, the central or local governments of these
jurisdictions may impose new, stricter regulations or interpretations of
existing regulations that would require additional expenditures and efforts on
our part to ensure our compliance with such regulations or
interpretations. Accordingly, government actions in the future,
including any decision not to continue to support recent economic reforms and to
return to a more centrally planned economy or regional or local variations in
the implementation of economic policies, could have a significant effect on
economic conditions in China or particular regions thereof, and could require us
to divest ourselves of any interest we then hold in Chinese
properties.
Future
inflation in China may inhibit our activity to conduct business in
China.
In
recent years, the Chinese economy has experienced periods of rapid expansion and
high rates of inflation. These factors have led to the adoption by
Chinese government, from time to time, of various corrective measures designed
to restrict the availability of credit or regulate growth and contain
inflation. High inflation may in the future cause Chinese government
to impose controls on credit and/or prices, or to take other action, which could
inhibit economic activity in China, and thereby harm the market for our
products.
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
We may
have difficulty in hiring and retaining a sufficient number of qualified
employees to work in the PRC. As a result of these factors, we may
experience difficulty in establishing management, legal and financial controls,
collecting financial data and preparing financial statements, books of account
and corporate records and instituting business practices that meet Western
standards. We may have difficulty establishing adequate management, legal and
financial controls in the PRC.
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us and our management.
We
conduct substantially all of our operations in China and substantially all of
our assets are located in China. In addition, some of our directors and
executive officers reside within China. As a result, it may not be possible to
effect service of process within the United States or elsewhere outside China
upon some of our directors and senior executive officers, including with respect
to matters arising under U.S. federal securities laws or applicable state
securities laws. It would also be difficult for investors to bring an original
lawsuit against us or our directors or executive officers before a Chinese court
based on U.S. federal securities laws or otherwise. Moreover, China does not
have treaties with the United States or many other countries providing for the
reciprocal recognition and enforcement of judgment of courts.
New
PRC enterprise income tax law could adversely affect our business and our net
income.
On
March 16, 2007, the National People’s Congress of the PRC passed the new
Enterprise Income Tax Law (or EIT Law), which took effect on of January 1, 2008.
The new EIT Law imposes a unified income tax rate of 25.0% on all companies
established in China. Under the EIT Law, an enterprise established outside of
the PRC with “de facto management bodies” within the PRC is considered as a
resident enterprise and will normally be subject to the enterprise income tax at
the rate of 25.0% on its global income. The new EIT Law, however, does not
define the term “de facto management bodies.” If the PRC tax authorities
subsequently determine that we should be classified as a resident enterprise,
then our global income will be subject to PRC income tax at a tax rate of
25.0%.
With
the introduction of the EIT Law, China has resumed imposition of a withholding
tax (10.0% in the absence of a bilateral tax treaty or new domestic regulation
reducing such withholding tax rate to a lower rate). Per the Double
Tax Avoidance Arrangement between Hong Kong and Mainland China, a Hong Kong
company as the investor, which is considered a “non-resident enterprise” under
the EIT Law, may enjoy the reduced withholding tax rate of 5% if it holds more
than 25% equity interest in its PRC subsidiary. As China Net HK is
the sole shareholder of Rise King WFOE, substantially all of our income will
derive from dividends we receive from Rise King WFOE through China Net
HK. When we declare dividends from the income in the PRC, we can not
assure whether such dividends may be taxed at a reduced withholding tax rate of
5% per the Double Tax Avoidance Arrangement between Hong Kong and Mainland China
as the PRC tax authorities may regard our China Net HK as a shell company formed
only for tax purposes and still deem Rise King WFOE in the PRC as the subsidiary
directly owned by us. Based on the Notice on Certain Issues with respect to the
Enforcement of Dividend Provisions in Tax Treaties, issued on February 20, 2009
by the State Administration of Taxation, if the relevant PRC tax authorities
determine, in their discretion, that a company benefits from such reduced income
tax rate due to a structure or arrangement that is primarily tax-driven, such
PRC tax authorities may adjust the preferential tax treatment.
Investors
should note that the new EIT Law provides only a framework of the enterprise tax
provisions, leaving many details on the definitions of numerous terms as well as
the interpretation and specific applications of various provisions unclear and
unspecified. Any increase in our tax rate in the future could have a
material adverse effect on our financial conditions and results of
operations.
Under
the new EIT Law, we may be classified as a “resident enterprise” of China. Such
classification will likely result in unfavorable tax consequences to us and
holders of our securities.
Under
the new EIT Law, an enterprise established outside of China with its “de facto
management body” in China is considered a “resident enterprise,” meaning that it
can be treated the same as a Chinese enterprise for enterprise income tax
purposes. The implementing rules of the new EIT Law defines “de facto management
body” as an organization that exercises “substantial and overall management and
control over the production and operations, personnel, accounting, and
properties” of an enterprise. Currently no interpretation or application of the
new EIT Law and its implementing rules is available, therefore it is unclear how
tax authorities will determine tax residency based on the facts of each
case.
If the
PRC tax authorities determine that China Net is a “resident enterprise” for PRC
enterprise income tax purposes, a number of unfavorable PRC tax consequences
could follow. First, we will be subject to enterprise income tax at a rate of
25% on our worldwide income as well as PRC enterprise income tax reporting
obligations. This would mean that income such as interest on offering proceeds
and other non-China source income would be subject to PRC enterprise income tax
at a rate of 25%. Second, although under the new EIT Law and its implementing
rules dividends paid to us by our PRC subsidiaries would qualify as “tax-exempt
income,” we cannot guarantee that such dividends will not be subject to a 10%
withholding tax, as the PRC foreign exchange control authorities, which enforce
the withholding tax, have not yet issued guidance with respect to the processing
of outbound remittances to entities that are treated as resident enterprises for
PRC enterprise income tax purposes. Finally, a 10% withholding tax will be
imposed on dividends we pay to our non-PRC shareholders.
Our
Chinese operating companies are obligated to withhold and pay PRC individual
income tax in respect of the salaries and other income received by their
employees who are subject to PRC individual income tax. If they fail to withhold
or pay such individual income tax in accordance with applicable PRC regulations,
they may be subject to certain sanctions and other penalties, which could have a
material adverse impact on our business.
Under
PRC laws, Rise King WFOE and the PRC Operating Subsidiaries will be obligated to
withhold and pay individual income tax in respect of the salaries and other
income received by their employees who are subject to PRC individual income tax.
Such companies may be subject to certain sanctions and other liabilities under
PRC laws in case of failure to withhold and pay individual income taxes for its
employees in accordance with the applicable laws.
In
addition, the SAT has issued several circulars concerning employee stock
options. Under these circulars, employees working in the PRC (which could
include both PRC employees and expatriate employees subject to PRC individual
income tax) are required to pay PRC individual income tax in respect of their
income derived from exercising or otherwise disposing of their stock options.
Our PRC entities will be obligated to file documents related to employee stock
options with relevant tax authorities and withhold and pay individual income
taxes for those employees who exercise their stock options. While tax
authorities may advise us that our policy is compliant, they may change their
policy, and we could be subject to sanctions.
Because
Chinese laws will govern almost all of our business’ material agreements, we may
not be able to enforce our rights within the PRC or elsewhere, which could
result in a significant loss of business, business opportunities or
capital.
The
Chinese legal system is similar to a civil law system based on written statutes.
Unlike common law systems, it is a system in which decided legal cases have
little precedential value. Although legislation in the PRC over the past 25
years has significantly improved the protection afforded to various forms of
foreign investment and contractual arrangements in the PRC, these laws,
regulations and legal requirements are relatively new. Due to the limited volume
of published judicial decisions, their non-binding nature, the short history
since their enactments, the discrete understanding of the judges or government
agencies of the same legal provision, inconsistent professional abilities of the
judicators, and the inclination to protect local interest in the court rooms,
interpretation and enforcement of PRC laws and regulations involve
uncertainties, which could limit the legal protection available to us, and
foreign investors, including you. The inability to enforce or obtain a remedy
under any of our future agreements could result in a significant loss of
business, business opportunities or capital and could have a material adverse
impact on our business, prospects, financial condition, and results of
operations. In addition, the PRC legal system is based in part on government
policies and internal rules (some of which are not published on a timely basis
or at all) that may have a retroactive effect. As a result, we may not be aware
of our violation of these policies and rules until some time after the
violation. In addition, any litigation in the PRC, regardless of outcome, may be
protracted and result in substantial costs and diversion of resources and
management attention.
Risks
Related to our Securities
Insiders
have substantial control over us, and they could delay or prevent a change in
our corporate control even if our other stockholders wanted it to
occur.
Our
executive officers, directors, and principal stockholders hold approximately
80
%
of our outstanding Common Stock. Accordingly, these stockholders are
able to control all matters requiring stockholder approval, including the
election of directors and approval of significant corporate
transactions. This could delay or prevent an outside party from
acquiring or merging with us even if our other stockholders wanted it to
occur.
There
may not be sufficient liquidity in the market for our securities in order for
investors to sell their securities.
There
is currently only a limited public market for our Common Stock and there can be
no assurance that a trading market will develop further or be maintained in the
future. As of April 23, 2010, the closing trade price
of our Common Stock was $4.30 per share. As of April 23, 2010,
we had approximately 598 shareholders of record of our Common
Stock, not including shares held in street name. In addition, during
the past two years our Common Stock has had a trading range with a low price of
$0.75 per share and a high price of $6.00 per share.
The market
price of our Common Stock may be volatile.
The
market price of our Common Stock has been and will likely continue to be highly
volatile, as is the stock market in general. Some of the factors that may
materially affect the market price of our Common Stock are beyond our control,
such as changes in financial estimates by industry and securities analysts,
conditions or trends in the industry in which we operate or sales of our common
stock. These factors may materially adversely affect the market price of our
Common Stock, regardless of our performance. In addition, the public stock
markets have experienced extreme price and trading volume volatility. This
volatility has significantly affected the market prices of securities of many
companies for reasons frequently unrelated to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of our Common Stock.
Because
the Company became public by means of a reverse merger, it may not be able to
attract the attention of major brokerage firms.
Additional
risks may exist since the Company became public through a “reverse
merger.” Securities analysts of major brokerage firms may not provide
coverage of the Company since there is little incentive to brokerage firms to
recommend the purchase of its Common Stock. No assurance can be given
that brokerage firms will want to conduct any secondary offerings on behalf of
the Company in the future.
The
outstanding warrants may adversely affect us in the future and cause dilution to
existing stockholders.
We
currently have warrants outstanding to purchase up to 4,781,056 shares of our
Common Stock. These warrants have a term ranging from three years to five years
and exercise price ranges from $2.50 to $3.75 per share, subject to adjustment
in certain circumstances. Exercise of the warrants may cause dilution in the
interests of other stockholders as a result of the additional Common Stock that
would be issued upon exercise. In addition, sales of the shares of our Common
Stock issuable upon exercise of the warrants could have a depressive effect on
the price of our stock, particularly if there is not a coinciding increase in
demand by purchasers of our Common Stock. Further, the terms on which we may
obtain additional financing during the period any of the warrants remain
outstanding may be adversely affected by the existence of these warrants as
well.
We
may need additional capital and may sell additional securities or other equity
securities or incur indebtedness, which could result in additional dilution to
our shareholders or increase our debt service obligations.
We may require additional cash
resources due to changed business conditions or other future developments,
including any investments or acquisitions we may decide to pursue. If our cash
resources are insufficient to satisfy our cash requirements, we may seek to sell
additional equity or debt securities or obtain a credit facility. The sale of
additional equity securities or equity-linked debt securities could result in
additional dilution to our shareholders. The incurrence of indebtedness would
result in increased debt service obligations and could result in operating and
financing covenants that would restrict our operations. We cannot assure you
that financing will be available in amounts or on terms acceptable to us, if at
all.
We
have not paid dividends in the past and do not expect to pay dividends in the
future, and any return on investment may be limited to the value of our
stock.
We
have never paid any cash dividends on our Common Stock and do not anticipate
paying any cash dividends on our common stock in the foreseeable future and any
return on investment may be limited to the value of our stock. We
plan to retain any future earning to finance growth.
The
NYSE Amex may delist our securities from quotation on its exchange which could
limit investors’ ability to make transactions in our securities and subject us
to additional trading restrictions.
Our Common Stock is traded on the
NYSE Amex, a national securities exchange. We cannot assure you that our
securities will meet the continued listing requirements be listed on the NYSE
Amex in the future.
If the
NYSE Amex delists our Common Stock from trading on its exchange, we could face
significant material adverse consequences including:
·
|
a
limited availability of market quotations for our
securities;
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·
|
a
determination that our Common Stock is a “penny stock” which will require
brokers trading in our Common Stock to adhere to more stringent rules and
possibly resulting in a reduced level of trading activity in the secondary
trading market for our Common
Stock;
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·
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a
limited amount of news and analyst coverage for our company;
and
|
·
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a
decreased ability to issue additional securities or obtain additional
financing in the future.
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Our
Common Stock is considered “penny stock.”
The SEC has adopted regulations
which generally define “penny stock” to be an equity security that has a market
price of less than $5.00 per share, subject to specific
exemptions. The market price of our Common Stock is currently less
than $5.00 per share and therefore may be a “penny stock.” Brokers
and dealers effecting transactions in “penny stock” must disclose certain
information concerning the transaction, obtain a written agreement from the
purchaser and determine that the purchaser is reasonably suitable to purchase
the securities. These rules may restrict the ability of brokers or
dealers to sell the Common Stock and may affect your ability to sell
shares.
USE
OF PROCEEDS
We
will not receive any of the proceeds from the sale of the Shares being
offered by the Selling Stockholders, although we may receive
additional proceeds of up to $13,910,400
if all of the Warrants
are exercised for cash. We will not receive any additional proceeds to the
extent that the Warrants are exercised by cashless exercise. The Selling
Stockholders may exercise the Warrants by a cashless exercise commencing on
August 21, 2011, only if the market value of one share of Common Stock is
greater than the exercise price of the applicable Warrant and the registration
statement, of which this prospectus forms a part, is not effective. We expect to
use the proceeds received from the exercise of the Warrants, if any, for general
working capital purposes.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except
for the historical information contained herein, the matters discussed in this
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and elsewhere in this prospectus are forward-looking statements
that involve risks and uncertainties. The factors listed in the section
captioned “Risk Factors,” as well as any cautionary language in this prospectus,
provide examples of risks, uncertainties and events that may cause our actual
results to differ materially from those projected. Except as may be required by
law, we undertake no obligation to update any forward-looking statement to
reflect events after the date of this prospectus.
Overview
Our
company (formerly known as Emazing Interactive, Inc.) was incorporated in the
State of Texas in April 2006 and re-domiciled to become a Nevada corporation in
October 2006. From the date of our company’s incorporation until June 26, 2009,
when our company consummated the Share Exchange (as defined below), our
company’s activities were primarily concentrated in web server access and
company branding in hosting web based e-games.
On June
26, 2009, our company entered into a Share Exchange Agreement (the “Exchange
Agreement”), with (i) China Net Online Media Group Limited, a company organized
under the laws of British Virgin Islands (“China Net BVI”), (ii) China Net BVI’s
shareholders, Allglad Limited, a British Virgin Islands company (“Allglad”),
Growgain Limited, a British Virgin Islands company ("Growgain"), Rise King
Investments Limited, a British Virgin Islands company (“Rise King BVI”), Star
(China) Holdings Limited, a British Virgin Islands company (“Star”), Surplus
Elegant Investment Limited, a British Virgin Islands company (“Surplus”), Clear
Jolly Holdings Limited, a British Virgin Islands company (“Clear” and together
with Allglad, Growgain, Rise King BVI, Star and Surplus, the “China Net BVI
Shareholders”), who together owned shares constituting 100% of the issued and
outstanding ordinary shares of China Net BVI (the “China Net BVI Shares”) and
(iii) G. Edward Hancock, our principal stockholder at such time. Pursuant
to the terms of the Exchange Agreement, the China Net BVI Shareholders
transferred to us all of the China Net BVI Shares in exchange for the
issuance of 13,790,800 shares (the “Exchange Shares”) of our common stock (the
“Share Exchange”). As a result of the Share Exchange, China Net BVI became our
wholly owned subsidiary and we are now a holding company which, through certain
contractual arrangements with operating companies in the People’s Republic of
China (the “PRC”), is engaged in providing advertising, marketing and
communication services to small and medium companies in
China.
Our
wholly owned subsidiary, China Net BVI, was incorporated in the British Virgin
Islands on August 13, 2007. In April 11, 2008, China Net BVI became the parent
holding company of a group of companies comprised of CNET Online Technology
Limited, a Hong Kong company (“China Net HK”), which established and is the
parent company of Rise King Century Technology Development (Beijing) Co., Ltd.,
a wholly foreign-owned enterprise (“WFOE”) established in the PRC (“Rise King
WFOE”). We refer to the transactions that resulted in China Net BVI becoming an
indirect parent company of Rise King WFOE as the “Offshore Restructuring.”
Through a series of contractual agreements, we operate our business in China
primarily through Business Opportunity Online (Beijing) Network Technology Co.,
Ltd. (“Business Opportunity Online”), Beijing CNET Online Advertising Co., Ltd.
(“Beijing CNET Online”). Beijing CNET Online owns 51% of Shanghai Borongdingsi
Computer Technology Co., Ltd. (“Shanghai Borongdingsi”). Business Opportunity
Online, Beijing CNET Online and Shanghai Borongdingsi, were incorporated on
December 8, 2004, January 27, 2003 and August 3, 2005, respectively. From time
to time, we refer to them collectively as the “PRC Operating
Entities.”
Through
our PRC Operating Entities, we are now one of China’s leading full-service media
development and advertising platform for the small and medium enterprise (the
“SME”) market. We are a service oriented business that leverages
proprietary advertising technology to prepare and publish rich media enabled
advertising campaigns for clients on the internet and on television. Our goal is
to strengthen our position as the leading diversified media advertising provider
in China. Our multi-platform advertising network consists of
www.28.com, our internet advertising portal; our TV production and advertising
unit, and our newly launched bank kiosk advertising unit, which is primarily
used as an advertising platform for clients in the financial services
industry. Using proprietary technology, we provide additional
services as a lead generator. We are also a re-seller of internet and
television advertising space that we purchase in large volumes from other
well-known internet portals. We launched a new service in August 2009, which is
known as “Internet Information Management” service. This product is an
intelligence software that is based on our proprietary search engine
optimization technology which helps our clients gain an early warning in order
to identify and respond to potential negative exposure on the
internet.
Basis
of presentation, critical accounting policies and management
estimates
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Change
of reporting entity and basis of
presentation
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As a
result of the Share Exchange on June 26, 2009, the former China Net BVI
shareholders own a majority of our common stock. The transaction was
regarded as a reverse merger whereby China Net BVI was considered to be the
accounting acquirer as its shareholders retained control of our company after
the Share Exchange, although we are the legal parent company. The share
exchange was treated as a recapitalization of our company. As such, China
Net BVI (and its historical financial statements) is the continuing entity for
financial reporting purposes. Pursuant to the terms of the Share Exchange,
Emazing Interactive, Inc. was delivered with zero assets and zero liabilities at
time of closing. Following the Share Exchange, we changed our name from Emazing
Interactive, Inc. to ChinaNet Online Holdings, Inc. Our financial statements
have been prepared as if China Net BVI had always been the reporting company and
then on the share exchange date, had changed its name and reorganized its
capital stock.
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Critical
accounting policies and management
estimates
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The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) and include the accounts of the Company, and its subsidiaries and
Variable Interest Entities (“VIEs”). We prepare our financial
statements in conformity with US GAAP, which requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities on the date of the financial
statements and the reported amounts of revenues and expenses during the
financial reporting period. We continually evaluate these estimates and
assumptions based on the most recently available information, our own historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. Since the use of estimates is an integral component of
the financial reporting process, actual results could differ from those
estimates. Some of our accounting policies require higher degrees of judgment
than others in their application. We consider the policies discussed below to be
critical to an understanding of our financial statements.
FASB
Establishes Accounting Standards Codification ™
In
June 2009, the FASB issued Accounting Standards Update No. 2009-01,
“Generally Accepted Accounting Principles” (ASC Topic 105) which establishes the
FASB Accounting Standards Codification (“the Codification” or “ASC”) as the
official single source of authoritative U.S. generally accepted accounting
principles (“GAAP”). All existing accounting standards are superseded. All other
accounting guidance not included in the Codification will be considered
non-authoritative. The Codification also includes all relevant Securities and
Exchange Commission (“SEC”) guidance organized using the same topical structure
in separate sections within the Codification.
Following
the Codification, the Financial Accounting Standards Board will not issue new
standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards Updates
(“ASU”) which will serve to update the Codification, provide background
information about the guidance and provide the basis for conclusions on the
changes to the Codification.
The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification or ASC is effective for interim and
annual periods ending after September 15, 2009. The principal impact
on our financial statements for adopting the Codification is limited to
disclosures as all future references to authoritative accounting literature will
be referenced in accordance with the Codification. In order to ease
the transition to the Codification, we are providing the standards issued and
adopted prior to the adoption of the Codification cross-reference alongside
references to the Codification.
Foreign
currency translation
Our
functional currency is United States dollars (“US$”), and the functional
currency of China Net HK is Hong Kong dollars (“HK$”). The functional
currency of our PRC operating entities is Renminbi (“RMB’), and PRC is the
primary economic environment in which we operate.
For
financial reporting purposes, the financial statements of our PRC operating
entities, which are prepared using the RMB, are translated into our reporting
currency, the United States Dollar (“U.S. dollar”). Assets and liabilities are
translated using the exchange rate at each balance sheet
date. Revenue and expenses are translated using average rates
prevailing during each reporting period, and shareholders' equity is translated
at historical exchange rates. Adjustments resulting from the translation are
recorded as a separate component of accumulated other comprehensive income in
shareholders’ equity.
Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transactions. The resulting exchange differences are included in the
determination of net income of the consolidated financial statements for the
respective periods.
The
exchange rates used to translate amounts in RMB into US$ for the purposes of
preparing the consolidated financial statements are as follows:
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2009
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2008
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Balance
sheet items, except for equity accounts
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6.8372
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6.8542
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Items
in the statements of income and comprehensive
income,
and statements cash flows
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6.8409
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6.9623
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(a)
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No representation is made
that the RMB amounts could have been, or could be converted into US$ at
the above rates.
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Revenue
recognition
Our
revenue recognition policies are in compliance with ASC Topic 605 (Staff
Accounting Bulletin No. 104, “Revenue Recognition”). In accordance with ASC
Topic 605, revenues are recognized when the four of the following criteria are
met: (i) persuasive evidence of an arrangement exists, (ii) the
service has been rendered, (iii) the fees are fixed or determinable, and
(iv) collectability is reasonably assured.
Sales
Sales
include revenues from reselling of advertising time purchased from TV stations
and internet advertising, reselling of internet advertising spaces and other
advertisement related resources. No revenue from advertising-for-advertising
barter transactions was recognized because the transactions did not meet the
criteria for recognition in ASC Topic 605, subtopic 20 (formerly Emerging Issues
Task Force (“EITF”) abstract issue No. 99-17”). Advertising contracts
establish the fixed price and advertising services to be
provided. Pursuant to advertising contracts, we provides
advertisement placements in different formats, including but not limited to
banners, links, logos, buttons, rich media and content integration. Revenue is
recognized ratably over the period the advertising is provided and, as such, we
consider the services to have been delivered. We treat all elements
of advertising contracts as a single unit of accounting for revenue recognition
purposes. Based upon our credit assessments of its customers prior to
entering into contracts, we determine if collectability is reasonably
assured. In situations where collectability is not deemed to be
reasonably assured, we recognizes revenue upon receipt of cash from customers,
only after services have been provided and all other criteria for revenue
recognition have been met.
Taxation
We
adopt ASC Topic 740 (formerly SFAS No. 109, “Accounting for income taxes”) and
uses liability method to accounts for income taxes. Under this
method, deferred tax assets and liabilities are determined based on the
difference between of the financial reporting and tax bases of assets and
liabilities using enacted tax rates that will be in effect in the period in
which the differences are expected to reverse. We record a valuation allowance
to offset deferred tax assets if based on the weight of available evidence; it
is more-likely-than-not that some portion, or all, of the deferred tax assets
will not be realized. The effect on deferred taxes of a change in tax rates is
recognized in income statement in the period that includes the enactment date.
We had no deferred tax assets and liabilities recognized for the year ended
December 31, 2009 and 2008.
We
adopt ASC Topic 740-10-25-5 through 740-10-25-7 and 740-10-25-13, (formerly
FASB Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in
Income Taxes”), which prescribes a more likely than not threshold for financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. This Interpretation also provides guidance on recognition
of income tax assets and liabilities, classification of current and deferred
income tax assets and liabilities, accounting for interest and penalties
associated with tax positions, accounting for income taxes in interim periods,
and income tax disclosures. For the year ended December 31, 2009 and 2008,
we did not have any interest and penalties associated with tax positions and did
not have any significant unrecognized uncertain tax positions.
i). We
are incorporated in the State of Nevada. Under the current law of
Nevada we are not subject to state corporate income tax. We became a
holding company and do not conduct any substantial operations of our own after
the Share Exchange. No provision for federal corporate income tax has been made
in our financial statements as no assessable profits for the year ended December
31, 2009 or prior periods.
ii).
China Net BVI was incorporated in the British Virgin Islands
(“BVI”). Under the current law of the BVI, we are not subject to tax
on income or capital gains. Additionally, upon payments of dividends
by China Net BVI to us, no BVI withholding tax will be imposed.
iii).
China Net HK was incorporated in Hong Kong and does not conduct any substantial
operations of its own. No provision for Hong Kong profits tax have been made in
our financial statements as no assessable profits for the year ended December
31, 2009. Additionally, upon payments of dividends by China Net HK to its sole
shareholder, China Net BVI, no Hong Kong withholding tax will be
imposed.
iv). Our
PRC operating entities, being incorporated in the PRC, are governed by the
income tax law of the PRC and are subject to PRC enterprise income tax
(“EIT”). Effective from January 1, 2008, the EIT rate of PRC was
changed from 33% of to 25%, and applies to both domestic and foreign invested
enterprises.
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Rise
King WFOE is a software company qualified by the related PRC governmental
authorities and was entitled to a two-year EIT exemption from its first
profitable year and a 50% reduction of its applicable EIT rate, which is
25% of its taxable income for the exceeding three years. Rise
King WFOE had a net loss for the year ended December 31, 2008 and its
first profitable year is fiscal year 2009 which has been verified by the
local tax bureau by accepting the application filed by
us. Therefore, it was entitled to a two-year EIT exemption for
fiscal year 2009 through fiscal year 2010 and a 50% reduction of its
applicable EIT rate which is 25% for fiscal year 2011 through fiscal year
2013.
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Business
Opportunity Online was qualified as a High and New Technology Enterprise
in Beijing High-Tech Zone in 2005 and was entitled to a three-year EIT
exemption for fiscal year 2005 through fiscal year 2007 and a 50%
reduction of its applicable EIT rate for the exceeding three years for
fiscal year 2008 through fiscal year 2010. However, in March
2007, a new enterprise income tax law (the “New EIT”) in the PRC was
enacted which was effective on January 1, 2008. Subsequently, on
April 14, 2008, relevant governmental regulatory authorities released
new qualification criteria, application procedures and assessment
processes for “High and New Technology Enterprise” status under the New
EIT which would entitle the re-qualified and approved entities to a
favorable statutory tax rate of 15%. Business Opportunity
Online did not obtained the approval of its reassessment of the
qualification as a “High and New Technology Enterprise” under the New EIT
law as of December 31, 2008, therefore, its income tax was computed using
the income tax rate of 25% for the year ended December 31,
2008.
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With
an effective date of September 4, 2009, Business Opportunity Online obtained the
approval of its reassessment of the qualification as a “High and New Technology
Enterprise” under the New EIT law and was entitled to a favorable statutory tax
rate of 15%. Under the previous EIT laws and regulations, High and
New Technology Enterprises enjoyed a favorable tax rate of 15% and were exempted
from income tax for three years beginning with their first year of operations,
and were entitled to a 50% tax reduction to 7.5% for the subsequent three years
and 15% thereafter. The current EIT Law provides grandfathering treatment for
enterprises that were (1) qualified as High and New Technology Enterprises
under the previous EIT laws, and (2) established before March 16,
2007, if they continue to meet the criteria for High and New Technology
Enterprises under the current EIT Law. The grandfathering provision allows
Business Opportunity Online to continue enjoying their unexpired tax holidays
provided by the previous EIT laws and regulations. Therefore, its income tax was
computed using a tax rate of 7.5% for the year ended December 31, 2009 due to
its unexpired tax holidays for fiscal year 2009 through fiscal year
2010.
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The
applicable income tax rate for Beijing CNET Online was 25% for the year
ended December 31, 2009 and
2008.
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The
New EIT also imposed a 10% withholding income tax for dividends
distributed by a foreign invested enterprise to its immediate holding
company outside China, which were exempted under the previous enterprise
income tax law and rules. A lower withholding tax rate will be
applied if there is a tax treaty arrangement between mainland China and
the jurisdiction of the foreign holding company. Holding companies in Hong
Kong, for example, will be subject to a 5% rate. Rise King WFOE
is owned by an intermediate holding company in Hong Kong and will be
entitled to the 5% preferential withholding tax rate upon distribution of
the dividends to this intermediate holding
company.
|
2.
|
Business
tax and relevant surcharges
|
Revenue
of advertisement services are subject to 5.5% business tax and 3% cultural
industry development surcharge of the net service income after deducting amount
paid to ending media promulgators. Revenue of internet technical support
services is subjected to 5.5% business tax. Business tax charged was
included in cost of sales.
As a
small-scale value added tax payer, revenue from sales of self-development
software of Rise King WFOE is subject to 3% value added tax.
Warrant
liabilities
On
August 21, 2009 (the “Closing Date”), we entered into a securities purchase
agreement (the “Purchase Agreement”), with several investors, including
institutional, accredited and non-US persons and entities (the “Investors”),
pursuant to which we sold units, comprised of 10% Series A Convertible Preferred
Stock, par value US$0.001 per share (the “Series A preferred stock”), and two
series of warrants, for a purchase price of US$2.50 per unit (the “August 2009
Financing”). We sold 4,121,600 units in the aggregate, which included
(i) 4,121,600 shares of Series A preferred stock, (ii) Series A-1 Warrants to
purchase 2,060,800 shares of common stock at an exercise price of US$3.00 per
share with a three-year term, and (iii) Series A-2 Warrants to purchase
2,060,800 shares of common stock at an exercise price of US$3.75 with a
five-year term. Net proceeds were approximately US$9,162,000, net of
issuance costs of approximately US$1,142,000. TriPoint Global
Equities, LLC acted as placement agent and received (i) a placement fee in the
amount equal to 8% of the gross proceeds and (ii) warrants to purchase up to
329,728 shares of common stock at an exercise price of US$2.50, 164,864 shares
at an exercise price of US$3.00 and 164,864 shares at an exercise price of
US$3.75 respectively, with a five-year term (“Placement Agent Warrants” and
together with the Series A-1 Warrants and Series A-2 Warrants, the
“Warrants”).
The
Warrants have an initial exercise price which is subject to adjustments in
certain circumstances for stock splits, combinations, dividends and
distributions, reclassification, exchange or substitution, reorganization,
merger, consolidation or sales of assets, issuance of additional shares of
common stock or equivalents. The Warrants may not be exercised if it
would result in the holder beneficially owning more than 9.99% of our
outstanding common shares. That limitation may be waived by the holders of the
warrants by sending a written notice to us not less than 61 days prior to the
date that they would like to waive the limitation.
Accounting for
warrants
We
analyzed the Warrants in accordance to ASC Topic 815 “Derivatives and Hedging”
(formerly SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities”) to determine whether the Warrants meet the definition of a
derivative under ASC Topic 815 and if so, whether the Warrants meet the scope
exception of ASC Topic 815, which is that contracts issued or held by the
reporting entity that are both (1) indexed to its own stock and (2) classified
in stockholders’ equity shall not be considered to be derivative instruments for
purposes of ASC Topic 815. We adopted the provisions of ASC Topic 815
subtopic 40 (formerly Emerging Issues Task Force (“EITF”) Issue No. 07-5,
“Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock”), which applies to any freestanding financial instruments or
embedded features that have the characteristics of a derivative, as defined by
ASC Topic 815 and to any freestanding financial instruments that are potentially
settled in an entity’s own common stock. As a result of adopting ASC
Topic 815 subtopic 40, we concluded that the Warrants issued in the August 2009
financing should be treated as a derivative liability, because the Warrants are
entitled to a price adjustment provision to allow the exercise price to be
reduced, in the event we will issue or sell any additional shares of common
stock at a price per share less than the then-applicable exercise price or
without consideration, which is typically referred to as a “Down-round
protection” or “anti-dilution” provision. According to ASC Topic 815
subtopic 40, the “Down-round protection” provision is not considered to be an
input to the fair value of a fixed-for-fixed option on equity shares which leads
the Warrants fail to be qualified as indexed to our own stock and then to fail
to meet the scope exceptions of ASC Topic 815. Therefore, we accounted for the
Warrants as derivative liabilities under ASC Topic 815. Pursuant to
ASC Topic 815, derivatives should be measured at fair value and re-measured at
fair value with changes in fair value recorded in earnings at each reporting
period.
Fair value of the
warrants
Fair
value is generally based on independent sources such as quoted market prices or
dealer price quotations. To the extent certain financial instruments trade
infrequently or are non-marketable securities, they may not have readily
determinable fair values. We estimated the fair value of the Warrants and Series
A preferred stock using various pricing models and available information that we
deems most relevant. Among the factors considered in determining the fair value
of financial instruments are discounted anticipated cash flows, the cost, terms
and liquidity of the instrument, the financial condition, operating results and
credit ratings of the issuer or underlying company, the quoted market price of
similar traded securities, and other factors generally pertinent to the
valuation of financial instruments.
Placement agent
warrants
In
accordance with Staff Accounting Bulletin Topic 5.A: “Miscellaneous
Accounting-Expenses of Offering” (“ASC Topic 340 subtopic 10 section
S99-1”), “specific incremental costs directly attributable to a
proposed or actual offering of securities may properly be deferred and charged
against the gross proceeds of the offering.” In accordance with the
SEC accounting and reporting manual “cost of issuing equity securities are
charged directly to equity as deduction of the fair value assigned to share
issued.” Accordingly, we concluded that the warrants issued to the
placement agents are directly attributable to the August 2009
financing. If we had not issued the warrants to the placement agent,
we would have had to pay the same amount of cash as the fair
value. Therefore, we deducted the total fair value of the Placement
agent warrants as of the Commitment Date as a deduction of the fair value
assigned to the Series A preferred stock.
Since
they contain the same terms as the Series A-1 and Series A-2 Warrants, the
Placement Agent Warrants are also entitled to the benefit of the “Down-round
protection” provision, which means that the Placement Agent Warrant will also
need to be accounted for as a derivative under SFAS 133 (“ASC Topic 815”) with
changes in fair value recorded in earnings at each reporting
period.
Series
A preferred stock
Key
terms of the Series A preferred stock sold by us in the August 2009 financing
are summarized as follows:
Dividends
Dividends
on the Series A preferred stock shall accrue and be cumulative from and after
the issuance date. For each outstanding share of Series A preferred
stock, dividends are payable at the per annum rate of 10% of the Liquidation
Preference Amount of the Series A preferred stock. Dividends are
payable quarterly within thirty (30) days following the last Business Day of
each August, November, February and May of each year (each, a “Dividend Payment
Date”), and continuing until such stock is fully converted. We shall have the
right, at its sole and exclusive option, to pay all or any portion of each and
every quarterly dividend that is payable on each Dividend Payment Date, either
(i) in cash, or (ii) by issuing to the holder of Series A preferred stock such
number of additional Conversion Shares which, when multiplied by US$2.5 would
equal the amount of such quarterly dividend not paid in cash.
Voting
Rights
The
Series A preferred stock holders are entitled to vote separately as a class on
matters affecting the Series A Preferred Stock and with regard to certain
corporate matters set forth in the Series A Certificate of Designation, so long
as any shares of the Series A preferred stock remain outstanding. Holders of the
Series A Preferred Stock are not, however, entitled to vote on general matters
along with holders of common stock.
Liquidation
Preference
In the
event of the liquidation, dissolution or winding up of the affairs of us,
whether voluntary or involuntary (each, a “Liquidation”), the holders of the
Series A preferred stock then outstanding shall be entitled to receive, out of
the assets of us available for distribution to its stockholders, an amount equal
to US$2.5 per share of the Series A preferred stock, plus any accrued but unpaid
dividends thereon, whether or not declared, together with any other dividends
declared but unpaid thereon, as of the date of Liquidation (collectively, the
“Series A Liquidation Preference Amount”) before any payment shall be made or
any assets distributed to the holders of the common stock or any other junior
stock. If upon the occurrence of Liquidation, the assets thus distributed among
the holders of the Series A shares shall be insufficient to permit the payment
to such holders of the full Series A Preference Amount, then the entire assets
of us legally available for distribution shall be distributed ratably among the
holders of the Series A preferred stock.
Conversion
Rights
Voluntary
Conversion:
At any
time on or after the date of the initial issuance of the Series A preferred
stock, the holder of any such shares of Series A preferred stock may, at such
holder’s option, subject to the limitations described below in
“Conversion Restriction”
,
elect to convert all or portion of the shares of Series A preferred stock held
by such person into a number of fully paid and non-assessable shares of common
stock equal to the quotient of Liquidation preference amount of the Series A
preferred stock divided by the initial conversion price of US$2.5. The initial
conversion price may be adjusted for stock splits and combinations, dividend and
distributions, reclassification, exchange or substitution, reorganization,
merger, consolidation or sales of assets, issuance of additional shares of
common stock or equivalents with lower price or without considerations etc, as
stimulated in the Certification of Designation.
Mandatory
Conversion:
All
outstanding shares of the Series A preferred stock shall automatically convert
into shares of Common Stock, subject to the limitations described below in
“Conversion Restriction”
, at
the earlier to occur of (i) twenty-four month anniversary of the Closing Date,
and (ii) at such time that the Volume Weighted Average Price of our common stock
is no less than US$5.00 for a period of ten (10) consecutive trading days with
the daily volume of the common stock of at least 50,000 shares per
day.
Conversion
Restriction
Holders
of the Series A preferred stock may not convert the preferred stock to shares of
common stock if the conversion would result in the holder beneficially owning
more than 9.99% of our outstanding shares of common stock. That limitation may
be waived by a holder of the Series A preferred stock by sending a written
notice to us on not less than 61 days prior to the date that they would like to
waive the limitation.
Registration Rights
Agreement
In
connection with the Financing, we entered into a registration rights agreement
(the “RRA”) with the Investors in which we agreed to file a registration
statement (the “Registration Statement”) with the Securities and Exchange
Commission (the “SEC”) to register the shares of common stock underlying the
Series A preferred stock (the “Conversion Shares”) and the Warrants (the
“Warrant Shares”), thirty (30) days after the closing of the
Financing. We have agreed to use its best efforts to have the
Registration Statement declared effective within 150 calendar days after filing,
or 180 calendar days after filing in the event the Registration Statement is
subject to a “full review” by the SEC.
We are
required to keep the Registration Statement continuously effective under the
Securities Act until such date as is the earlier of the date when all of the
securities covered by that registration statement have been sold or the date on
which such securities may be sold without any restriction pursuant to Rule 144
(the “Financing Effectiveness Period”). We will pay liquidated
damages of 2% of each holder’s initial investment in the Units sold in the
Financing per month, payable in cash, up to a maximum of 10%, if the
Registration Statement is not filed or declared effective within the foregoing
time periods or ceases to be effective prior to the expiration of the Financing
Effectiveness Period. However, no liquidated damages shall be paid
with respect to any securities being registered that we are not permitted to
include in the Financing Registration Statement due to the SEC’s application of
Rule 415.
We
evaluated the
contingent obligation related to the RRA liquidated damages in accordance to
“ASC Topic 825 “Financial Instruments” subtopic 20” (formerly Financial
Accounting Standards Board Staff Position No. EITF 00-19-2 “Accounting for
Registration Payment Arrangements”), which required the contingent obligation to
make future payments or otherwise transfer consideration under a registration
payment arrangement, whether issued as a separate agreement or included as a
provision of a financial instrument or other agreement be separately recognized
and measured in accordance with “ASC Topic 450” “Contingencies” (formerly SFAS
No. 5, “Accounting for Contingencies”). The shares of common stock underlying
the Series A preferred stock (the “Conversion Shares”) and the Warrants (the
“Warrant Shares”) have been successfully registered. Therefore, we
concluded that such obligation was not probable to incur and no contingent
obligation related to the RRA liquidated damages needs to be recognized for the
year ended December 31, 2009.
Security Escrow
Agreement
We
entered into a securities escrow agreement with the Investors (the “Escrow
Agreement”), pursuant to which Rise King Investment Limited, a British Virgin
Islands company (the “Principal Stockholder”), initially placed 2,558,160 shares
of our common stock (the “Escrow Shares”) into an escrow account. Of
the Escrow Shares, 1,279,080 shares (equivalent to 50% of the Escrow Shares) are
being held as security for the achievement of audited net income equal to or
greater than $7.7 million for the fiscal year 2009 (the “2009 Performance
Threshold”) and the remaining 1,279,080 of the Escrow Shares are being held as
security for the achievement of audited net income equal to or greater than $14
million for the fiscal year 2010 (the “2010 Performance
Threshold”).
If we
achieve at least 95% of the applicable Performance Threshold, all of the Escrow
Shares for the corresponding fiscal year shall be returned to the Principal
Stockholder. If we achieve less than 95% of the applicable Performance
Threshold, the Investors shall receive in the aggregate, on a pro rata basis
(based upon the number of shares of Series A preferred stock or conversion
shares owned by each such Investor as of the date of distribution of the Escrow
Shares), 63,954 shares of the Escrow Shares for each percentage by which the
applicable Performance Threshold was not achieved up to the total number of
Escrow Shares for the applicable fiscal year. Any Escrow Shares not
delivered to any investor because such investor no longer holds shares of Series
A preferred stock or conversion shares shall be returned to the Principal
Stockholder.
For
the purposes of the Escrow Agreement, net income is defined in accordance with
US GAAP and reported by us in its audited financial statements for each of the
fiscal years ended 2009 and 2010; provided, however, that net income for each of
fiscal years ended 2009 and 2010 shall be increased by any non-cash charges
incurred (i) as a result of the Financing , including without limitation, as a
result of the issuance and/or conversion of the Series A preferred stock, and
the issuance and/or exercise of the Warrants, (ii) as a result of the release of
the Escrow Shares to the Principal Stockholder and/or the investors, as
applicable, pursuant to the terms of the Escrow Agreement, (iii) as a result of
the issuance of ordinary shares of the Principal Stockholder to Messrs. Handong
Cheng and Xuanfu Liu and Ms. Li Sun (the “PRC Shareholders”), upon the exercise
of options granted to the PRC Shareholders by the Principal Stockholder, (iv) as
a result of the issuance of warrants to any placement agent and its designees in
connection with the Financing, (v) the exercise of any warrants to purchase
common stock outstanding and (vi) the issuance under any performance
based equity incentive plan that we adopts.
In
accordance to ASC Topic 718 and ASU No. 2010-05—Compensation—Stock Compensation:
Escrowed Share Arrangements and the Presumption of Compensation. We
evaluated the substance of this arrangement and whether the presumption of
compensation has been overcome. According to the Security Escrow Agreement
signed with our investors, the release of these escrow shares to our Principal
Stockholder will not regard to continue employment, and this arrangement is in
substance an inducement made to facilitate the financing transaction, rather
than as compensatory. Therefore, we concluded that this arrangement
should be recognized and measured according to its nature and reflects as a
deduction of the proceeds allocated to the newly issued securities with no
compensation expenses recorded in earnings.
Fair Value of the Series A
preferred stock:
Fair
value is generally based on independent sources such as quoted market prices or
dealer price quotations. To the extent certain financial instruments trade
infrequently or are non-marketable securities, they may not have readily
determinable fair values. We estimated the fair value of the Warrants and Series
A preferred stock using various pricing models and available information that
management deems most relevant. Among the factors considered in determining the
fair value of financial instruments are discounted anticipated cash flows, the
cost, terms and liquidity of the instrument, the financial condition, operating
results and credit ratings of the issuer or underlying company, the quoted
market price of similar traded securities, and other factors generally pertinent
to the valuation of financial instruments.
Accounting for the Series A
preferred stock
The
Series A preferred stock has been classified as permanent equity as there was no
redemption provision at the option of the holders that is not within the control
of us on or after an agreed upon date. We evaluated the embedded conversion
feature in its Series A preferred stock to determine if there was an embedded
derivative requiring bifurcation. We concluded that the embedded
conversion feature of the Series A preferred stock does not required to be
bifurcated because the conversion feature is clearly and closely related to the
host instrument.
Allocation of the proceeds at
commitment date and calculation of beneficial conversion
feature
The
following table summarized the allocation of proceeds to the Series A preferred
stock and the Warrants:
|
|
Gross
proceeds
Allocated
|
|
|
Number
of
instruments
|
|
|
Allocated
value per instrument
|
|
|
|
US$(’000)
|
|
|
|
|
|
US$
|
|
Series
A-1 Warrant
|
|
|
2,236
|
|
|
|
2,060,800
|
|
|
|
1.08
|
|
Series
A-2 Warrant
|
|
|
2,170
|
|
|
|
2,060,800
|
|
|
|
1.05
|
|
Series
A preferred stock
|
|
|
5,898
|
|
|
|
4,121,600
|
|
|
|
1.43
|
|
Total
|
|
|
10,304
|
|
|
|
|
|
|
|
|
|
In
accordance to the schedule above, the unit price is
:
1.08*50%+1.05*50%+1.43
= US$2.5 per unit.
We
then evaluated whether a beneficial conversion feature exists by comparing the
operable conversion price of Series A preferred stock with the fair value of the
common stock at the commitment date. We concluded that the fair value
of common stock was greater than the operable conversion price of Series A
preferred stock at the commitment date and the intrinsic value of the beneficial
conversion feature is greater than the proceeds allocated to the Series A
preferred stock. In accordance to ASC Topic 470 subtopic 20, if the
intrinsic value of beneficial conversion feature is greater than the proceeds
allocated to the Series A preferred stock, the amount of the discount assigned
to the beneficial conversion feature is limited to the amount of the proceeds
allocated to the Series A preferred stock. Accordingly, the total
proceeds allocated to Series A preferred stock were allocated to the beneficial
conversion feature with a credit to Additional paid-in capital upon the issuance
of the Series A preferred stock. Since the Series A preferred stock
may convert to tour common stock at any time on or after the initial
issue date, all discount was immediately recognized as a deemed dividend and a
reduction to net income attributable to common shareholders.
According
to Staff Accounting Bulletin Topic 5.A: “Miscellaneous Accounting-Expenses of
offering” (“ASC Topic 340 subtopic 10 section S99-1”), “specific incremental
costs directly attributable to a proposed or actual offering of securities may
properly be deferred and charged against the gross proceeds of the
offering”. And in accordance with the SEC accounting and reporting
manual “cost of issuing equity securities are charged directly to equity as
deduction of the fair value assigned to share issued”. Accordingly,
we deducted the direct issuing cost paid in cash from the assigned fair value to
the Series A preferred stock.
Share-based
Compensation
We
accounted for share-based compensation in accordance with ASC Topic 718,
(formerly SFAS No. 123R “Share-based Payment”) which requires that
share-based payment transactions be measured based on the grant-date fair value
of the equity instrument issued and recognized as compensation expense over the
requisite service period, or vesting period.
Reverse
merger and common stock (reclassification of the stockholders’
equity)
In a
reverse acquisition the historical shareholder’s equity of the accounting
acquirer prior to the merger is retroactively reclassified (a recapitalization)
for the equivalent number of shares received in the merger after giving effect
to any difference in par value of the registrant’s and the accounting acquirer’s
stock by an offset in paid in capital.”
Pursuant
to the terms of Share Exchange Agreement, the China Net BVI shareholders
transferred to us all of the China Net BVI shares in exchange for the issuance
of 13,790,800 shares of our common stock. Accordingly, we reclassified our
common stock and additional paid-in-capital accounts for the year ended December
31, 2008 accordingly.
Recent
Development
On
March 29, 2010, we entered into an agreement to amend certain provisions of the
Series A-1, Series A-2 and the placement agent Warrants with the holders of
those Warrants originally issued on August 21, 2009. The amendment to
the Warrants removes certain anti-dilution protection rights that were
applicable if the Company were to issue new shares of common stock or common
stock equivalents at a price per share less than the exercise prices of the
Series A-1, Series A-2 and the placement agent Warrants, which are currently
$3.00, $3.75 and $2.5 to $3.75, respectively. In addition, the
amendment to the Warrants added a provision to grant the holders of the Warrants
an approval right until December 31, 2010, over any new issuance of shares of
common stock or common stock equivalents at a price per share less than the
exercise prices of the Warrants then in effect or without
consideration. The parties agreed that the amendments to the Warrants
would be retroactive from and including, August 21, 2009. Except as
set forth above, the other terms and provisions of the Warrants remain in full
force and effect.
A.
|
RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2009 AND
2008
|
The
following table sets forth a summary, for the periods indicated, of our
consolidated results of operations. Our historical results presented below are
not necessarily indicative of the results that may be expected for any future
period. All amounts, except number of shares and per share data, in thousands of
US dollars.
|
|
For
the year ended
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(US
$)
|
|
|
(US
$)
|
|
Sales
|
|
|
|
|
|
|
From
unrelated parties
|
|
$
|
35,354
|
|
|
$
|
20,061
|
|
From
related parties
|
|
|
2,370
|
|
|
|
1,447
|
|
|
|
|
37,724
|
|
|
|
21,508
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
21,233
|
|
|
|
13,786
|
|
Gross
margin
|
|
|
16,491
|
|
|
|
7,722
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
4,198
|
|
|
|
2,705
|
|
General
and administrative expenses
|
|
|
2,404
|
|
|
|
1,041
|
|
Research
and development expenses
|
|
|
480
|
|
|
|
202
|
|
|
|
|
7,082
|
|
|
|
3,948
|
|
|
|
|
|
|
|
|
|
|
Income from
operations
|
|
|
9,409
|
|
|
|
3,774
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
Changes
in fair value of warrants
|
|
|
(4,425
|
)
|
|
|
-
|
|
Interest
income
|
|
|
14
|
|
|
|
8
|
|
Other
expenses
|
|
|
(99
|
)
|
|
|
(20
|
)
|
|
|
|
(4,510
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
Income
before income tax expense
|
|
|
4,899
|
|
|
|
3,762
|
|
Income tax expense
|
|
|
880
|
|
|
|
962
|
|
Net
income
|
|
|
4,019
|
|
|
|
2,800
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain
|
|
|
14
|
|
|
|
71
|
|
Comprehensive
income
|
|
$
|
4,033
|
|
|
$
|
2,871
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,019
|
|
|
$
|
2,800
|
|
|
|
|
|
|
|
|
|
|
Beneficial
conversion feature of Series A convertible preferred
stock
|
|
|
(5,898
|
)
|
|
|
-
|
|
Dividend
of Series A convertible preferred stock
|
|
|
(373
|
)
|
|
|
-
|
|
Net
income (loss) attributable to common shareholders
|
|
$
|
(2,252
|
)
|
|
$
|
2,800
|
|
|
|
|
|
|
|
|
|
|
Earnings
/(loss) per share
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.15
|
)
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
14,825,125
|
|
|
|
13,790,800
|
|
NON-GAAP
MEASURES
To
supplement the audited consolidated statement of income and comprehensive income
presented in accordance with Accounting Principles Generally Accepted in the
United States of America ("GAAP"), we also provided non-GAAP measures of income
from operations, income before income tax expenses, net income and basic and
diluted earnings per share for the year ended December 31, 2009 and 2008, which
are adjusted from results based on GAAP to exclude the non-cash charges
recorded, which related to the issuing of Series A preferred stock and warrants
in August 2009 financing. The non-GAAP financial measures are
provided to enhance the investors' overall understanding of our current
performance in on-going core operations as well as prospects for the future.
These measures should be considered in addition to results prepared and
presented in accordance with GAAP, but should not be considered a substitute for
or superior to GAAP results. We use both GAAP and non-GAAP information in
evaluating and operating business internally and therefore deems it important to
provide all of this information to investors.
The
following table presented reconciliations of our non-GAAP financial measures to
the audited consolidated statements of income and comprehensive income for the
year ended December 31, 2009 and 2008 (all amounts in thousands of US
dollars):
|
|
For
the year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
GAAP
|
|
|
NON
GAAP
|
|
|
GAAP
|
|
|
NON
GAAP
|
|
Income
from operations
|
|
$
|
9,409
|
|
|
$
|
9,409
|
|
|
$
|
3,774
|
|
|
$
|
3,774
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in fair value of warrants
|
|
|
(4,425
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest
income
|
|
|
14
|
|
|
|
14
|
|
|
|
8
|
|
|
|
8
|
|
Other
expenses
|
|
|
(99
|
)
|
|
|
(99
|
)
|
|
|
(20
|
)
|
|
|
(20
|
)
|
|
|
|
(4,510
|
)
|
|
|
(85
|
)
|
|
|
(12
|
)
|
|
|
(12
|
)
|
Income
before income tax expense
|
|
|
4,899
|
|
|
|
9,324
|
|
|
|
3,762
|
|
|
|
3,762
|
|
Income
tax expense
|
|
|
880
|
|
|
|
880
|
|
|
|
962
|
|
|
|
962
|
|
Net
income
|
|
|
4,019
|
|
|
|
8,444
|
|
|
|
2,800
|
|
|
|
2,800
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain
|
|
|
14
|
|
|
|
14
|
|
|
|
71
|
|
|
|
71
|
|
Comprehensive
income
|
|
$
|
4,033
|
|
|
$
|
8,458
|
|
|
$
|
2,871
|
|
|
$
|
2,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,019
|
|
|
$
|
8,444
|
|
|
$
|
2,800
|
|
|
$
|
2,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
conversion feature of series A convertible preferred
stock
|
|
|
(5,898
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Dividend
for series A convertible preferred stock
|
|
|
(373
|
)
|
|
|
(373
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common shareholders
|
|
$
|
(2,252
|
)
|
|
$
|
8,071
|
|
|
$
|
2,800
|
|
|
$
|
2,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share-Basic
|
|
$
|
(0.15
|
)
|
|
$
|
0.54
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share-Diluted
|
|
$
|
(0.15
|
)
|
|
$
|
0.50
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,825,125
|
|
|
|
14,825,125
|
|
|
|
13,790,800
|
|
|
|
13,790,800
|
|
Diluted
|
|
|
14,825,125
|
|
|
|
16,725,442
|
|
|
|
13,790,800
|
|
|
|
13,790,800
|
|
REVENUE
The
following tables set forth a breakdown of our total revenue, divided into five
segments for the periods indicated, with inter-segment transactions
eliminated:
Revenue
type
|
|
For
the year ended December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Amounts
expressed in thousands of US dollars, except
percentages)
|
|
Internet
advertisement
|
|
|
17,722
|
|
|
|
47.0
|
%
|
|
|
11,292
|
|
|
|
52.5
|
%
|
TV
advertisement
|
|
|
18,600
|
|
|
|
49.3
|
%
|
|
|
7,007
|
|
|
|
32.6
|
%
|
Internet
Ad. resources resell
|
|
|
1,134
|
|
|
|
3.0
|
%
|
|
|
3,081
|
|
|
|
14.3
|
%
|
Bank
kiosks
|
|
|
152
|
|
|
|
0.4
|
%
|
|
|
128
|
|
|
|
0.6
|
%
|
Internet
information management
|
|
|
116
|
|
|
|
0.3
|
%
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
37,724
|
|
|
|
100
|
%
|
|
|
21,508
|
|
|
|
100
|
%
|
Revenue
type
|
|
For
the year ended December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Amounts
expressed in thousands of US dollars, except
percentages)
|
|
Internet
advertisement
|
|
|
17,722
|
|
|
|
100
|
%
|
|
|
11,292
|
|
|
|
100
|
%
|
--From
unrelated parties
|
|
|
16,332
|
|
|
|
92
|
%
|
|
|
10,740
|
|
|
|
95
|
%
|
--From
related parties
|
|
|
1,390
|
|
|
|
8
|
%
|
|
|
552
|
|
|
|
5
|
%
|
TV
advertisement
|
|
|
18,600
|
|
|
|
100
|
%
|
|
|
7,007
|
|
|
|
100
|
%
|
--From
unrelated parties
|
|
|
17,620
|
|
|
|
95
|
%
|
|
|
6,112
|
|
|
|
87
|
%
|
--From
related parties
|
|
|
980
|
|
|
|
5
|
%
|
|
|
895
|
|
|
|
13
|
%
|
Internet
Ad. resources resell
|
|
|
1,134
|
|
|
|
100
|
%
|
|
|
3,081
|
|
|
|
100
|
%
|
--From
unrelated parties
|
|
|
1,134
|
|
|
|
100
|
%
|
|
|
3,081
|
|
|
|
100
|
%
|
--From
related parties
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Bank
kiosks
|
|
|
152
|
|
|
|
100
|
%
|
|
|
128
|
|
|
|
100
|
%
|
--From
unrelated parties
|
|
|
152
|
|
|
|
100
|
%
|
|
|
128
|
|
|
|
100
|
%
|
--From
related parties
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Internet
information management
|
|
|
116
|
|
|
|
100
|
%
|
|
|
-
|
|
|
|
-
|
|
--From
unrelated parties
|
|
|
116
|
|
|
|
100
|
%
|
|
|
-
|
|
|
|
-
|
|
--From
related parties
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
37,724
|
|
|
|
100
|
%
|
|
|
21,508
|
|
|
|
100
|
%
|
--From
unrelated parties
|
|
|
35,354
|
|
|
|
94
|
%
|
|
|
20,061
|
|
|
|
93
|
%
|
--From
related parties
|
|
|
2,370
|
|
|
|
6
|
%
|
|
|
1,447
|
|
|
|
7
|
%
|
Total
Revenues
: Our total revenues increased significantly to US$ 37.7 million
for the year ended December 31, 2009 from US$ 21.5 million for the same
period of 2008.
We
derive the majority of our advertising service revenues from the sale of
advertising space and provision of the related technical support on our portal
website
www.28.com
; and from
the sale of advertising time purchased from different TV programs to unrelated
third parties and to some of our related parties. We report our advertising
revenue between related and unrelated parties because historically about 5%-10%
of our advertising service revenues came from clients related to some of the
shareholders of our PRC operating entities. 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 on an arm’s-length basis. We
expect that our internet advertising service revenue and TV advertising service
revenue will continue to be the primary source and constitute the substantial
majority of our revenues for the foreseeable future.
Our
advertising service revenues are recorded net of any sales discounts. These
discounts include volume discounts and other customary incentives offered to our
advertising clients, including additional advertising time for their
advertisements if we have unused places available in our website and represent
the difference between our official list price and the amount we charge our
advertising clients.
We
typically sign advertising contracts with our advertising clients that require
us to place the advertisements on our portal website for specified places and
specified periods; and/or place the advertisements during our purchased
advisement time in specific TV programs for specified periods. We recognize
revenues as the advertisement airs over the contractual term based on the
schedule agreed upon with our clients.
|
We
achieved a significant increase (about 57%) in internet advertising
revenues to US$ 17.7 million for the year ended December 31, 2009 from US$
11.3 million for the same period of 2008. This is primarily as
a result of (1) the successful brand building effort for
www.28.com
we
made in 2007 and 2008 both on TV and in other well-known portal websites
in China; (2) more mature client service technologies; and (3) a more
experienced sales team.
|
|
We
also achieved a significant revenue increase (about 165%) in TV
advertising, a business that we started in May 2008, to US$ 18.6 million
for the year ended December 31, 2009 from US$ 7.0 million for the same
period in 2008. We generated this US$ 18.6 million of TV
advertising revenue by selling about 23,210 minutes of advertising time
that we purchased from about ten provincial TV
stations.
|
|
Our
resale of internet advertising resources is also a segment that we
launched in May 2008. This business is mainly comprised of our resale of a
portion of the internet resources that we purchase from other portal
websites to our existing internet advertising clients, in order to promote
our existing clients’ businesses through sponsored search, search engine
traffic generation techniques and portal resources of other well-known
portal websites. We achieved US$ 1.1 million of this revenue
for the year ended December 31, 2009 and US$ 3.1 million for the same
period of 2008. We do not consider this segment to be a core business and
revenue source, because it does not promote the
www.28.com
brand and generates low to even negative margin due to the high purchase
cost of internet resources from other well-known portal websites. Because
of these reasons relating to the segment, we allocated less of our revenue
generating capacity to this segment in 2009 to optimize our strategic
focus and to better control our cost of
revenue.
|
|
As
of December 31, 2009 the bank kiosks advertising business is still in the
test-run stage. We will spend more resources to expand this
business in the future through further clients and central control system
development.
|
|
Internet
information management is a new business segment that we launched in
August 2009, which offers our clients an artificial intelligence software
product based on our proprietary search engine optimization
technology. The main objective of the product is to help our
clients gain an early warning of potential negative exposure on the
internet so that when necessary they can formulate an appropriate
response. We charge a monthly fee to clients using this
service. For the year ended December 31, 2009, we generated US$
0.12 million revenue from this new business segment. We plan to build our
efforts to offer this service to our existing clients in the
future.
|
Cost
of revenues
Our
cost of revenues consists of costs directly related to the offering of our
advertising services. The following table sets forth our cost of
revenues, divided into five segments, by amount and gross profit ratio for the
periods indicated, with inter-segment transactions eliminated:
|
|
For
the year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Amounts
expressed in thousands of US dollars, except
percentages)
|
|
|
|
Revenue
|
|
|
Cost
|
|
|
GP
ratio
|
|
|
Revenue
|
|
|
Cost
|
|
|
GP
ratio
|
|
Internet
advertisement
|
|
|
17,722
|
|
|
|
4,456
|
|
|
|
75
|
%
|
|
|
11,292
|
|
|
|
4,671
|
|
|
|
59
|
%
|
TV
advertisement
|
|
|
18,600
|
|
|
|
15,637
|
|
|
|
16
|
%
|
|
|
7,007
|
|
|
|
5,939
|
|
|
|
15
|
%
|
Internet
Ad. resources resell
|
|
|
1,134
|
|
|
|
1,085
|
|
|
|
4
|
%
|
|
|
3,081
|
|
|
|
3,154
|
|
|
|
(2
|
%)
|
Bank
kiosk
|
|
|
152
|
|
|
|
13
|
|
|
|
91
|
%
|
|
|
128
|
|
|
|
22
|
|
|
|
83
|
%
|
Internet
information management
|
|
|
116
|
|
|
|
7
|
|
|
|
94
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Others
|
|
|
-
|
|
|
|
35
|
|
|
|
N/A
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
37,724
|
|
|
|
21,233
|
|
|
|
44
|
%
|
|
|
21,508
|
|
|
|
13,786
|
|
|
|
36
|
%
|
Cost of revenues:
Our total cost of revenues increased significantly to US$ 21.2 million
for the year ended December 31, 2009 from US$ 13.8 million for the same period
of 2008. These increases in costs were in line with the significant
increase of our total revenues for the above periods.
Our
cost of revenues related to the offering of our advertising services mainly
consists of internet resources purchased from other portal websites, technical
services related to lead generation, sponsored search resources purchased, TV
advertisement time costs purchased from TV stations, and business taxes and
surcharges.
|
Internet
resources cost is the largest component of our cost of revenue for
internet advertisement revenue. We purchased these resources from other
well-known portal websites in China, such as: Baidu, Tengxun (QQ), Google,
and sogou, to help our internet advertisement clients to get better
exposure and to generate more visits from their advertisements placed on
our portal website. We accomplish these objectives though
sponsored search, advanced tracking, advanced traffic generation
technologies, and search engine optimization technologies in
connection with the well-known portal websites indicated above. Our
internet resources cost for internet advertising revenue was US$ 4.5
million and US$ 4.7 million for the year ended 2009 and 2008,
respectively. Our average gross profit ratio for internet advertising
services is about 70%-80%. We had a relatively lower gross
profit ratio, which is 59% for the year ended December 31, 2008, mainly as
a result of the fact that we had not yet generated a stable client base in
the first half of fiscal year 2008. With relatively limited
revenue generated, the cost spent in the first half of fiscal year 2008
was not yet offset by an internet advertising business that had achieved
the economy of scale that we had in the fiscal year 2009. However, this
situation has been improved significantly since the third quarter of 2008,
the gross profit ratio for the six months ended December 31, 2008
increased to 64%, which led an increase of gross profit ratio for the year
ended December 31, 2008 to 59% from 50% for the six months ended June 30,
2008. For the year ended December 31, 2009, the gross profit
ratio for this segment improved to
75%.
|
|
TV
advertisement time cost is the largest component of our cost of revenue
for TV advertisement revenue. We purchase TV advertisement time from about
ten different provincial TV stations and resell it to our TV advertisement
clients through infomercials produced by us. Our TV advertisement time
cost was US$ 15.6 million and US$ 6.0 million for the year ended 2009 and
2008, respectively, which were in line with the increase of our TV
advertising revenue for the above mentioned periods. Our average gross
profit ratio for TV advertising business is about
15%.
|
|
Our
resale of internet advertising resources is also a segment that we
launched in May 2008. We purchase advertising resources
from
Baidu
in large volumes, allowing us to enjoy a more favorable discount on
rates. We normally purchase these internet resources for providing
value-added services to our internet advertising clients on our own portal
website
www.28.com
.
However, besides placing advertisements on www.28.com, some of our
advertising clients also want to use other direct channels for their
promotions, so they purchase internet resources from us because, through
us, they have access to lower rates as compared to the market price. The
gross profit ratio for this business is relatively low (about 3%-5%)
compared with our other segments. In 2008, with less experience
in running an internet advertising business on
www.28.com
, we
over purchased internet resources and could not use the resources to
generate sufficient revenue to cover our costs due to our lack of a stable
client base at that time. That is the main reason for the negative gross
margin we had in this business sector for the year ended December 31,
2008. However, this situation improved significantly in the
second half year of 2008, because we successfully increased our client
base in the second half of 2008, and brought more revenue into this
business sector accordingly. For the year ended December 31,
2009, the gross profit ratio for this segment improved to
4%.
|
Gross
Profit
As a
result of the foregoing, our gross profit was US$ 16.5 million for the year
ended December 31, 2009 compared to US$ 7.7 million for the same period of
2008. According to our past experience, the comprehensive gross
margin of our business is about 35%-45%. We achieved a much higher
comprehensive gross margin for the year ended December 31, 2009 mainly due to
the following reasons: (1) we have achieved a relatively stable client base in
fiscal year 2009 which brought us more internet advertising revenue in fiscal
year 2009 compared with that in fiscal year 2008, (2) the higher recognition of
our website
ww
w.28.com
by our
current and potential customers allowed us to scale back on the use of traffic
generation technologies with respect to 28.com and their associated costs and
(3) our enhancements to our production services for our TV infomercials allowed
us to provide, and generate fees for, higher margin services in our TV
advertisement segment.
Operating
Expenses and Net Income
Our
operating expenses consist of selling expenses, general and administrative
expenses and research and development expenses. The following tables
set forth our operating expenses, divided into their major categories by amount
and as a percentage of our total revenues for the periods
indicated.
|
|
For
the year ended December 31,
|
|
|
2009
|
|
|
2008
|
|
|
(Amounts
expressed in thousands of US dollars, except
percentages)
|
|
|
Amount
|
|
|
%
of total revenue
|
Amount
|
|
|
|
|
|
Total
Revenue
|
|
|
37,724
|
|
|
|
100
|
%
|
|
|
21,508
|
|
|
|
100
|
%
|
Gross
Profit
|
|
|
16,491
|
|
|
|
44
|
%
|
|
|
7,722
|
|
|
|
36
|
%
|
Selling
expenses
|
|
|
4,198
|
|
|
|
11
|
%
|
|
|
2,705
|
|
|
|
13
|
%
|
General
and administrative expenses
|
|
|
2,404
|
|
|
|
7
|
%
|
|
|
1,041
|
|
|
|
5
|
%
|
Research
and development expenses
|
|
|
480
|
|
|
|
1
|
%
|
|
|
202
|
|
|
|
1
|
%
|
Total
operating expenses
|
|
|
7,082
|
|
|
|
19
|
%
|
|
|
3,948
|
|
|
|
19
|
%
|
Operating
Expenses:
Our operating expenses increased significantly to
US$ 7.1 million for the year ended December 31, 2009 from US$ 3.9 million
for the same period of 2008.
|
Selling
expenses: Selling expenses increased to US$ 4.2 million for the year ended
December 31, 2009 from US$ 2.7 million for the same period of 2008. The
increase in our selling expenses was mainly due to (1) increase in brand
development expenses for www.28.com; (2) increase in staff performance
bonuses due to increase of our revenue; (3) increase in traveling expenses
and other marketing expenses due to the expansion of our revenue; and (4)
increase in staff salary and benefits due to expansion of our sales
force.
|
Our
selling expenses primarily consist of brand development advertising expenses we
pay to TV stations for the television promotion of
www.28.com
, other
advertising and promotional expenses, staff salaries, benefit and performance
bonuses, website server hosting and broadband leasing expenses, and travel and
communication expenses. Among the selling expenses, our website brand
development expenses on television accounted for approximately 70% of the total
selling expenses for the year ended December 31, 2009 and 2008,
respectively. As we continue to expand our client base, we will
increase our sales force accordingly, which will result in an increase in
selling expenses. In general, we expect selling expenses to remain relatively
stable as a percentage of total revenues.
·
General
and administrative expenses: general and administrative expenses increased to
US$ 2.4 million for the year ended December 31, 2009 from US$ 1.0 million for
the same period of 2008. The increase in our general and
administrative expenses was mainly due to (1) the increase in staff salaries and
benefits due to expansion of the business; (2) the increase in office expenses,
entertainment expenses, and travel expenses due to expansion of the business.
(3) the increase in professional services charges related to reverse merger
transaction and financing transaction, and (4) the increase in share-based
compensation expenses recognized for of the issuance of our common stock in
exchange for professional services.
Our
general and administrative expenses primarily consist of salaries and benefits
for management, accounting and administrative personnel, office rentals,
depreciation of office equipment, professional service fees, maintenance,
utilities and other office expenses. We expect that our general and
administrative expenses will increase in future periods as we hire additional
personnel and incur additional costs in connection with the expansion of our
business and incur increased professional services costs in connection with
disclosure requirements under applicable securities laws, and our efforts to
continuing to improve our internal control systems in-line with the expansion of
our business.
|
Research and development
expenses:
Research and development expenses increased to US$ 0.5
million for the year ended December 31, 2009 from US$ 0.2 million for the
same period of 2008. These changes are mainly due to the increase of
development cost to our client services based internet technology in
2009.
|
Our
research and development expenses primarily consist of salaries and benefits for
the research and development staff, equipment depreciation expenses, and office
utilities and supplies allocated to our research and development department. We
expect that our research and development expenses will increase in future
periods as we will expand and optimize
our portal website and
upgrade our advertising management software. In general, we expect research and
development expenses to remain relatively stable as a percentage of total
revenues.
Operating Profit:
As a result of the foregoing, our operating profit increased
significantly to US$ 9.4 million for the year ended December 31, 2009 from
US$ 3.8 million for the same period of 2008.
Changes in Fair
Value of Warrants:
We accounted our warrants issued to investors and
placement agent in August 2009 financing as derivative liabilities under ASC
Topic 815 “Derivatives and Hedging” (formerly SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities”). Pursuant to ASC Topic 815, a
derivative liability should be measured at fair value at the commitment date,
and re-measured at fair value with changes in fair value recorded in earnings at
each reporting period. With the assistance of an independent appraisal firm, we
gauged the total fair value of the warrants we issued in August 2009 financing
to be approximately US$ 5.1 million as of August 21, 2009 (the Commitment Date)
and re-measured to be approximately US$ 9.6 million as of December 31, 2009.
Therefore, approximately US$ 4.5 million was recorded as changes in fair value
of warrants as a deduction of the operating profit for the year ended December
31, 2009.
Interest Income:
Our interest income increased to US$ 0.014 million for the year ended
December 31, 2009 from US$ 0.008 million for the same period of 2008,
primarily as a result of higher cash and cash equivalent balances generated from
our operating and financing activities.
Other Income and
Other Expenses:
Other income and other expenses represent miscellaneous
non-operating related income and expenses occurred. The increase of the other
expenses for the year ended December 31, 2009 was due to our donation of about
US$ 0.08 million to China Communist Youth League Qinghai Committee to support
young people starting their own business with the help of infomercials provided
by www.28.com.
Income Tax:
We recognized an income tax expense of US$ 0.88 million for the year
ended December 31, 2009 and US$ 0.96 million for the same period of
2008.
With
an effective date of September 4, 2009, one of our PRC operating entities,
Business Opportunity Online obtained the approval of its reassessment of the
qualification as a “High and New Technology Enterprise” under the New EIT law
and was entitled to a favorable statutory tax rate of 15%. Under the
previous EIT laws and regulations, High and New Technology Enterprises enjoyed a
favorable tax rate of 15% and were exempted from income tax for three years
beginning with their first year of operations, and were entitled to a 50% tax
reduction to 7.5% for the subsequent three years and 15% thereafter. The current
EIT Law provides grandfathering treatment for enterprises that were
(1) qualified as High and New Technology Enterprises under the previous EIT
laws, and (2) established before March 16, 2007, if they continue to
meet the criteria for High and New Technology Enterprises under the current EIT
Law. The grandfathering provision allows Business Opportunity Online to continue
enjoying their unexpired tax holidays provided by the previous EIT laws and
regulations. Business Opportunity Online was eligible to enjoy the
grandfathering treatment, because it was established before March 16, 2007 and
was qualified as a “High and New Technology Enterprise” under the previous EIT
laws, which was granted with a three-year EIT exemption from fiscal year 2005
through 2007 and an 50% EIT deduction to 7.5% from fiscal year 2008 through
fiscal year 2010. Therefore, its income tax was computed using a tax rate of
7.5% for the year ended December 31, 2009 due to its unexpired tax holidays for
fiscal year 2009 through fiscal year 2010. However, for fiscal year 2008, its
income tax was computed using an effective tax rate of 25% due to not obtaining
the reassessment of the qualification as a “High and New Technology Enterprise”
under the New EIT law as of December 31, 2008.
The
applicable income tax rate for Beijing CNET Online was 25% for the year ended
December 31, 2009 and 2008. Rise King WFOE as a software company had a net loss
for the year ended December 31, 2008 and was granted a two-year EIT exemption
for fiscal year 2009 (its first profitable year) through fiscal year 2010 and a
50% reduction of its applicable EIT rate which is 25% for fiscal year 2011
through fiscal year 2013. Therefore, no income tax expense was accrued for Rise
King WFOE for the year ended December 31, 2009 and 2008.
Net Income:
As a result of the foregoing, our net income amounted to US$ 4.0 million
for the year ended December 31, 2009 as compared to US$ 2.8 million for the
same period of 2008. Excluding the non-cash charges recorded as changes in fair
value of warrants for the year ended December 31, 2009, which was approximately
US$ 4.4 million, we achieved net income amounted to US$ 8.4 million and US$ 2.8
million for the year ended December 31, 2009 and 2008,
respectively.
Beneficial
conversion feature of Series A convertible preferred stock:
We evaluated
whether a beneficial conversion feature exists by comparing the operable
conversion price of Series A preferred stock with the fair value of the common
stock at the commitment date. We concluded that the fair value of
common stock was greater than the operable conversion price of Series A
preferred stock at the commitment date and the intrinsic value of the beneficial
conversion feature is greater than the proceeds allocated to the Series A
preferred stock. In accordance to ASC Topic 470 subtopic 20, if the
intrinsic value of beneficial conversion feature is greater than the proceeds
allocated to the Series A preferred stock, the amount of the discount assigned
to the beneficial conversion feature is limited to the amount of the proceeds
allocated to the Series A preferred stock, which is approximately US$5.9
million. Accordingly, the total proceeds allocated to Series A
preferred stock were allocated to the beneficial conversion feature with a
credit to Additional paid-in capital upon the issuance of the Series A preferred
stock. Since the Series A preferred stock may convert to our common
stock at any time on or after the initial issuing date, all discount was
immediately recognized as a deemed dividend and a reduction to net income
attributable to common shareholders.
Dividend for
Series A
convertible preferred stock:
Dividend to Series A convertible stock
holders was calculated at the per annum rate of 10% of the liquidation
preference amount of the Series A preferred stock which was US$10,304,000 for
the year ended December 31, 2009 commencing from the dividend commencement date
which is August 21, 2009.
B.
|
LIQUIDITY
AND CAPITAL RESOURCES
|
Cash
and cash equivalents represent cash on hand and deposits held at call with
banks. We consider all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents.
As of December 31, 2009, we had cash and cash equivalents of
US$ 13.9 million.
Our
liquidity needs include (i) net cash used in operating activities that
consists of (a) cash required to fund the initial build-out and continued
expansion of our network and (b) our working capital needs, which include
advanced payment for advertising time purchased from TV stations and for
internet resources providers, payment of our operating expenses and financing of
our accounts receivable; and (ii) net cash used in investing activities
that consists of the investments in computers and other office equipment. To
date, we have financed our liquidity need primarily through proceeds from our
operating activities.
The
following table provides detailed information about our net cash flow for the
periods indicated
|
|
For
the year ended December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
Amounts
in thousands of US dollars
|
|
Net
cash provided by operating activities
|
|
|
4,617
|
|
|
|
821
|
|
Net
cash used in investing activities
|
|
|
(930
|
)
|
|
|
(497
|
)
|
Net
cash provided by financing actives
|
|
|
7,544
|
|
|
|
1,981
|
|
Effect
of foreign currency exchange rate changes on cash
|
|
|
7
|
|
|
|
57
|
|
Net
increase in cash and cash equivalents
|
|
|
11,238
|
|
|
|
2,362
|
|
Net cash provided by operating
activates:
Our net cash provided by operating activities increased to US$
4.6 million for the year ended December 31, 2009 from US$ 0.8 million for the
same period of 2008. This is mainly resulting from the increase in our net
profit.
Net cash used in investing
activities:
Our net cash used in investing activities increased to US$
0.9 million for the year ended December 31, 2009 from US$ 0.5 million for the
same period of 2008. This is because, during 2009, our company purchased more
vehicle, computers and office equipment as a result of the expansion of our
business and increase in our staff.
Net cash provided by financing
activities:
Our net cash provided by financing activities increased to
US$ 7.5 million for the year ended December 31, 2009 from US$ 2.0 million for
the same period of 2008. This is mainly because we completed our
August 2009 financing and received net proceeds of US$ 9.2 million from this
financing. We also used approximately US$ 1.3 million to pay off the third party
loans during fiscal year 2009 and US$ 0.3 million to cancel and retire 4,400,000
shares of our common stock immediately prior to the reverse merger transaction.
Net cash provided by financing activities for the year ended December 31, 2008
was mainly sourced from short-term loans we borrowed from third parties and our
directors in that period.
Our
accounts receivable balance as of December 31, 2009 increased to approximately
US$3.2 million as compared to US$1.0 million as of December 31,
2008. This increase resulted from our adoption of a more
aggressive policy of extending credit to our customers in 2009 , allowing our
customers to pay their fees after we provided advertising services to
them. In connection with these extensions of credit, we in turn
granted credit discounts to our customers as incentives for them to pay in
advance. Our main goal in adopting this strategy was to increase
market share and revenue. In contract, in 2008, we normally required
all customers to pay for the advertising services that we provide in
advance. Approximately US$2.2 million in receivables accrued in 2009
have been collected after year end. We will continue to strengthen our efforts
to manage proactively the collections of our accounts receivable, and to
restrict our credit policy accordingly if we determine that there is any
significant risk of a material increase in bad debts.
Our
other receivables balance as of December 31, 2009 increased to approximately US$
2.6 million, including approximately US$2.3 million that we remitted to third
party as an advanced deposit to participate in a bidding process for 2010 TV
advertisement time on several TV stations. In January 2010, we have
collected approximately US$1.6 million of our other receivables accrued in 2009.
The remaining balance of our other receivables is comprised of staff advances
paid for normal business purposes. We believe the likelihood of our
collection of the remaining balance is high due to the nature of these
receivables.
Our
ability to pay dividends is primarily dependent on receiving distributions of
funds from our PRC operating entities. Relevant PRC statutory laws and
regulations permit payments of dividends by our PRC operating entities only out
of their retained earnings, if any, as determined in accordance with PRC
accounting standards and regulations. The results of operations reflected in the
financial statements prepared in accordance with U.S. GAAP differ from
those reflected in the statutory financial statements of our PRC operating
entities.
In
accordance with the Regulations on Enterprises with Foreign Investment of China
and their articles of association, a foreign invested enterprise established in
the PRC is required to provide certain statutory reserves, namely general
reserve fund, the enterprise expansion fund and staff welfare and bonus fund
which are appropriated from net profit as reported in the enterprise’s PRC
statutory accounts. A wholly-owned foreign invested enterprise is required to
allocate at least 10% of its annual after-tax profit to the general reserve
until such reserve has reached 50% of its respective registered capital based on
the enterprise’s PRC statutory accounts. Appropriations to the enterprise
expansion fund and staff welfare and bonus fund are at the discretion of the
board of directors for all foreign invested enterprises. The aforementioned
reserves can only be used for specific purposes and are not distributable as
cash dividends. Rising King WFOE was established as a wholly-owned foreign
invested enterprise and therefore is subject to the above mandated restrictions
on distributable profits.
Additionally,
in accordance with the Company Law of the PRC, a domestic enterprise is required
to provide statutory common reserve at least 10% of its annual after-tax profit
until such reserve has reached 50% of its respective registered capital based on
the enterprise’s PRC statutory accounts. A domestic enterprise is also required
to provide for discretionary surplus reserve, at the discretion of the board of
directors, from the profits determined in accordance with the enterprise’s PRC
statutory accounts. The aforementioned reserves can only be used for specific
purposes and are not distributable as cash dividends. China Net Beijing and
Business Opportunity Online were established as a domestic invested enterprise
and therefore are subject to the above mandated restrictions on distributable
profits.
As a
result of these PRC laws and regulations that require annual appropriations of
10% of after-tax income to be set aside prior to payment of dividends as general
reserve fund, our PRC operating entities are restricted in their
ability to transfer a portion of their net assets to us. Amounts
restricted include paid-in capital and statutory reserve funds of our PRC
operating entities as determined pursuant to PRC generally accepted accounting
principles, totaling approximately US$1.1 million as of December 31,
2009.
In
addition, we entered contractual arrangements with our PRC Operating Entities
including engaging Rise King WOFE as the exclusive services provider to provide
comprehensive technical support, business support and related consulting
services to our PRC Operating entities which allow Rise King WFOE to receive
service fee accordingly. Under PRC law, arrangements and transactions among
related parties may be subject to audit or challenge by the PRC tax authorities.
If any of the transactions we have entered into among our subsidiaries and
affiliated entities are found not to be on an arm’s-length basis, or to result
in an unreasonable reduction in tax under PRC law, the PRC tax authorities have
the authority to disallow our tax savings, adjust the profits and losses of our
respective PRC entities and assess late payment interest and
penalties. The PRC tax authorities may require us to adjust our
taxable income under the contractual arrangements with the PRC Operating
Entities we currently have in place in a manner that would materially and
adversely affect the PRC Operating Entities’ ability to pay dividends and other
distributions to us.
C.
|
Off-Balance
Sheet Arrangements
|
None
.
D.
|
Tabular
Disclosure of Contractual
Obligations
|
The
following table sets forth our company’s contractual obligations as of December
31, 2009:
|
|
|
|
|
Server
hosting and board-band lease payments
|
|
|
TV
advertisement
purchase
payments
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
-2010
|
|
|
261
|
|
|
|
84
|
|
|
|
31,752
|
|
|
|
32,097
|
|
-2011
|
|
|
261
|
|
|
|
-
|
|
|
|
-
|
|
|
|
261
|
|
-Thereafter
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
522
|
|
|
|
84
|
|
|
|
31,752
|
|
|
|
32,358
|
|
DESCRIPTION
OF THE BUSINESS
Business
Overview
The Company is a holding
company that conducts
its primary businesses
through its subsidiaries and operating companies, Business Opportunity Online,
Beijing CNET Online, and Shanghai Borongdongsi. We are one of China
’
s leading full-service media
development and advertising platforms for the small and
medium enterprise (the
“
SME
”
) market. We are a
service oriented business that leverages proprietary advertising technology to
prepare and publish rich media enabled advertising campaigns for clients on the
Internet and on television.
Our goal is to strengthen our position as the
leading diversified media advertising provider in China
. Our
multi-platform advertising network consists of the website www.28.com
(“
28.com
”
), our Internet advertising
portal, ChinaNet TV, our TV production and advertising unit, a
nd our newly launched bank
kiosk advertising unit, which is primarily used as an advertising platform for
clients in the financial services industry. Using proprietary
technology, we provide additional services as a lead generator. We
also have pursued
a
strategy as a re-seller of
Internet and television advertising space that we purchase in
bulk.
We have provided advertising
and lead generation services to over 500 clients in a variety of consumer
focused industries. Our media campaign service combines
both Internet and television
advertising, thereby maximizing advertising exposure for our
clients. Through the high traffic internet portal 28.com, operated
through Business Opportunity Online, companies and entrepreneurs advertise their
products, servic
e
s and business
opportunities. 28.com offers campaign management tools for our
clients including
lead generation and capture, advanced tracking, search
engine optimization, resource scheduling, and content
management. Through the 28.com site our customers can
build sales channels and
develop relationships directly with sales agents, distributors, resellers and/or
franchisees. It also functions as a one-stop destination for
end-users seeking new business opportunities. Through our ChinaNet TV
division, op
erated through Beijing CNET
Online, we have in-house television productions and distribution
capabilities. We create and distribute television shows that are
typically 10 or 20 minutes in length and broadcast on local television
stations. Airtime is pur
c
hased in 40 minute blocks
which air two to four segments each. The television shows are
comprised of advertisements, similar to infomercials, but include promotions for
several clients during the allotted time. We have also commenced
production, on a le
s
ser scale, of web video
advertisements for clients to be placed on 28.com.
In May 2008, we launched our
new bank kiosk division, operated through Shanghai Borongdongsi, which provides
interactive LCD ad displays targeting banking customers. In
cooperation
with
the China Construction Bank, we placed 200 interactive kiosks in its branches
throughout Henan Province. Each kiosk has an LCD advertising display
panel, which provides advertising aimed at bank customers. The kiosk also
provides Internet access on
a separate screen so that
customers can perform basic non-cash banking functions such as transferring
money, purchasing annuities and/or insurance, and paying
bills.
We derive our revenue
principally by:
|
·
|
charging
our clients fixed monthly fees to advertise on
28.com;
|
|
·
|
charging
productions fees for television and web video
spots;
|
|
·
|
selling
advertising time slots on our television shows and bank
kiosks;
|
|
·
|
reselling
Internet space and television space at a discount to the direct cost of
any individual space or time slot, but at a mark-up to our cost due to
purchase of these items in bulk;
and
|
|
·
|
collecting fees associated with
lead generation
.
|
The
five largest industries in terms of revenue in which our advertising clients
operate are (1) food and beverage, (2) women accessories, (3) footwear, apparel
and garments, (4) home goods and construction materials, and (5) environmental
protection equipment. Advertisers from these industries together
accounted for approximately 87% of our revenue in 2009.
Since
we commenced our current business operations in 2003, we have experienced
significant growth in our network and in our financial results. We
generated total revenues of $37.7 million in 2009 compared to $21.5 million in
2008 and net income of $4.0 million in 2009 compared to a net income of
$2.8 million in 2008.
When our
net income of $4.0 million in 2009 is adjusted to exclude non-cash charges
related to our issuance of Series A preferred stock and warrants in our August
2009 financing, we generated net income of $8.4 million in 2009.
When
our net income is presented as required by US GAAP to recognize a deemed
dividend in 2009 arising from the intrinsic value of the beneficial conversion
feature of our Series A preferred stock, we experienced a net loss attributable
to common shareholders of $2.3 million.
On
December
22
,
200
9, we entered into a co-operation agreement with China’s Social
Welfare & Education Foundation to fund public service programs in support of
the government’s social goal of raising employment rates among college graduates
in China. According to the agreement, we will donate approximately
$1.5 million per year for the next three years starting in 2010 to China’s
Social Welfare & Education Foundation. These funds will help to support the
Venture Resources Program (“Program”). Through the Program, college graduates
will apply for grants that will help offset the costs associated with starting a
new business. Important information regarding the Program will be accessible
through ChinaNet’s www.28.com portal which will serve as the official website
for the Program. College graduates lacking real world experience will also
benefit from guidance provided by well-known entrepreneurs and venture experts.
These experts will teach business knowledge, help students establish
self-awareness, inspire and support students to develop their own businesses,
and to improve their prospects for employment.
Our
Corporate History and Background
We were
incorporated in the State of Texas in April 2006 and re-domiciled to become a
Nevada corporation in October 2006. From the date of our incorporation until
June 26, 2009, when we consummated the Share Exchange (as defined below), our
business development activities were primarily concentrated in web server access
and company branding in hosting web based e-games.
Our
wholly owned subsidiary, China Net Online Media Limited was incorporated in the
British Virgin Islands on August 13, 2007 (“China Net”). In April 11,
2008, China Net became the parent holding company of a group of companies
comprised of CNET Online Technology Limited, a Hong Kong company (“China Net
HK”), which established and is the parent company of Rise King Century
Technology Development (Beijing) Co., Ltd., a wholly foreign-owned enterprise
(“WFOE”) established in the People's Republic of China (“Rise King
WFOE”). We refer to the transactions that resulted in China Net
becoming an indirect parent company of Rise King WFOE as the “Offshore
Restructuring.” We operate our business in China primarily through Business
Opportunity Online (Beijing) Network Technology Co., Ltd. (“Business Opportunity
Online”), Beijing CNET Online Advertising Co., Ltd. (“
Beijing
CNET
Online
”), and Shanghai Borongdingsi Computer Technology Co.,
Ltd. (“Shanghai Borongdingsi”). Business Opportunity Online, Beijing
CNET Online and Shanghai Borongdingsi, were incorporated on December 8, 2004,
January 27, 2003 and August 3, 2005, respectively. From time to time,
we refer to them collectively as the “
PRC Operating
Entities
”.
Shanghai
Borongdingsi is owned 51% by Beijing CNET Online. Beijing CNET Online
and Shanghai Borongdingsi entered into a cooperation agreement in June 2008,
followed up with a supplementary agreement in December 2008, to conduct
e-banking advertisement business. The business is based on an e-banking
cooperation agreement between Shanghai Borongdingsi and Henan provincial branch
of China Construction Bank which allows Shanghai Borongdingsi or its designated
party to conduct in-door advertisement business within the business outlets
throughout Henan Province. The e-banking cooperation agreement has a term of
eight years starting August 2008. However, Shanghai Borongdingsi was not able to
conduct the advertisement as a stand-alone business due to the lack of an
advertisement business license and supporting financial resources. Pursuant to
the aforementioned cooperation agreements, Beijing CNET Online committed to
purchase equipment, and to provide working capital, technical and other related
support to Shanghai Borongdingsi. Beijing CNET Online owns the
equipment used in the kiosk business, is entitled to sign contracts in its name
on behalf of the business, and holds the right to collect the advertisement
revenue generated from the kiosk business exclusively until the recovery of the
cost of purchase of the equipment. Thereafter, Beijing CNET Online has agreed to
distribute 49% of the succeeding net profit generated from the e-banking
advertising business, if any, to the minority shareholders of Shanghai
Borongdingsi.
Restructuring
In
October 2008, a restructuring plan was developed (the
“Restructuring”). The Restructuring was accomplished in two
steps. The first step was for Rise King WFOE to acquire control over
Business Opportunity Online and Beijing CNET Online (collectively the “PRC
Operating Subsidiaries”) by entering into a series of contracts (the
“Contractual Agreements”), which enabled Rise King WFOE to operate the business
and manage the affairs of the PRC Operating Subsidiaries. Both of the PRC
Operating Subsidiaries at that time and currently are owned by Messrs. Handong
Cheng, Xuanfu Liu and Ms. Li Sun (the “PRC Shareholders”). Messrs. Cheng and
Liu, are now our Chief Executive Officer and Chief Operating Officer,
respectively. After the PRC Restructuring was consummated, the second
step was for China Net to enter into and complete a transaction with a U.S.
public reporting company, whereby that company would acquire China Net, China
Net HK and Rise King WFOE, and control the PRC Operating Subsidiaries (the
“China Net Companies”).
Legal
Structure of the PRC Restructuring
The
PRC Restructuring was consummated in a manner so as not to violate PRC laws
relating to restrictions on foreign ownership of businesses in certain
industries in the PRC and the PRC M&A regulations.
The
Foreign Investment Industrial Guidance Catalogue jointly issued by the Ministry
of Commerce (“MOFCOM”) and the National Development and Reform Commission in
2007 classified various industries/business into three different categories: (i)
encouraged for foreign investment, (ii) restricted to foreign investment, and
(iii) prohibited from foreign investment. For any industry/business
not covered by any of these three categories, they will be deemed
industries/business permitted to have foreign investment. Except for
those expressly provided restrictions, encouraged and permitted
industries/business are usually open to foreign investment and
ownership. With regard to those industries/business restricted to or
prohibited from foreign investment, there is always a limitation on foreign
investment and ownership.
The
business of the PRC Operating Subsidiaries falls under the class of a business
that provides Internet content or information services, a type of value added
telecommunication services, for which restrictions upon foreign ownership apply,
which means Rise King WFOE is not allowed to do the business the PRC
Operating Subsidiaries companies are currently pursuing. Advertising
business is open to foreign investment but one of the requirements is that the
foreign investors of a WFOE shall have been carrying out advertising business
for over three years pursuant to the Foreign Investment Advertising Measures as
amended by MOFCOM and the State Administration of Industry and Commerce (“
SAIC
”) on August 22,
2008. Rise King WFOE is not allowed to engage in the advertising
business because its shareholder, China Net HK, does not meet such
requirements. In order to control the business and operations of the
PRC Operating Subsidiaries, and consolidate the financial results of the two
companies in a manner that does not violate current PRC laws, Rise King WFOE
executed the Contractual Agreements with the PRC Shareholders and each of the
PRC Operating Subsidiaries. The Contractual Agreements allow us through Rise
King WFOE to, among other things, secure significant rights to influence the two
companies’ business operations, policies and management, approve all matters
requiring shareholder approval, and the right to receive 100% of the income
earned by the PRC Operating Subsidiaries. In return, Rise King WFOE
provides consulting services to the PRC Operating Subsidiaries. In
addition, to ensure that the PRC Operating Subsidiaries and the PRC Shareholders
perform their obligations under the Contractual Arrangements, the PRC
Shareholders have pledged to Rise King WFOE all of their equity interests in the
PRC Operating Subsidiaries. They have also entered into an option
agreement with Rise King WFOE which provides that at such time that current
restrictions under PRC law on foreign ownership of Chinese companies engaging in
the Internet content or information services in China are lifted, Rise King WFOE
may exercise its option to purchase the equity interests in the PRC Operating
Subsidiaries directly.
Each of
the PRC Shareholders entered into a share transfer agreement (the “Share
Transfer Agreement”) with Mr. Yang Li, the sole shareholder of Rise King BVI,
which is a 55% shareholder of China Net. The PRC Shareholders have been granted
the incentive options for the contributions that they have made and will
continue to make to Rise King BVI. Under the Share Transfer Agreements Mr. Li
granted to each of the PRC Shareholders an option to acquire, in the aggregate
10,000 shares of Rise King BVI, representing 100% of the issued and outstanding
shares of Rise King BVI, provided that certain financial performance thresholds
were met by the China Net. The Share Transfer Agreement was
formalized and entered into on April 28, 2009. Subject to registering
with the State Administration of Foreign Exchange (“SAFE”) prior to the exercise
and issuance of the Option Shares under the Share Transfer Agreements, which is
an administrative task, there is no prohibition under PRC laws for
the PRC Shareholders to earn an interest in Rise King BVI after the PRC
Restructuring is consummated in compliance with PRC law.
Pursuant
to the Share Transfer Agreement, the Option Shares vest and become exercisable
in one-third increments upon the China Net Companies attaining consolidated
gross revenue performance targets for fiscal 2009, the six month period ended
June 30, 2010 and the six month period ended December 31, 2010 of RMB 100
million, RMB 60 million and RMB 60 million. If the China Net Companies achieve
the performance targets the exercise price will be $1.00 per
share. If the targets are not met, the exercise price shall increase
to $2.00 per shares. Therefore, as of February 14, 2011, 100% of the Option
Shares will be exercisable.
Accounting
Treatment of the Restructuring
The
Restructuring is accounted for as a transaction between entities under common
control in a manner similar to pooling of interests, with no adjustment to the
historical basis of the assets and liabilities of the PRC Operating
Subsidiaries. The operations of the Entities are consolidated as if
the current corporate structure had been in existence throughout the period
presented in the audited financial statements. The Restructuring is accounted
for in this manner because pursuant to an Entrustment Agreement dated June
5, 2009 (the “Entrustment Agreement”) between Rise King BVI and the
PRC Shareholders, Rise King BVI granted to the PRC Shareholders, on a
collective basis, managerial control over each of the China Net Companies by
delegating to the PRC Shareholders its shareholder rights, including the right
to vote, and its rights to designate management of the China Net
Company. The Entrustment Agreement, together with the Contractual
Arrangements demonstrate the ability of the PRC Shareholders to continue to
control Business Opportunity Online and Beijing CNET Online, which are under our
common control.
Below is
a summary of the material terms of the Contractual Agreements.
Exclusive
Business Cooperation Agreements
Pursuant
to Exclusive Business Cooperation Agreements entered into by and between Rise
King WFOE and each of the PRC Operating Subsidiaries in October 2008, Rise King
WFOE has the exclusive right to provide to the PRC Operating Subsidiaries
complete technical support, business support and related consulting services,
which include, among other things, technical services, business consultations,
equipment or property leasing, marketing consultancy and product research. Each
PRC Operating Subsidiary has agreed to pay an annual service fee to Rise King
WFOE equal to 100% of its audited total amount of operational income each
year. Each PRC Operating Subsidiary has also agreed to pay a monthly
service fee to Rise King WFOE equal to 100% of the net income generated on a
monthly basis. The payment and terms of payment are fixed to ensure that Rise
King WFOE obtains 100% of the net income for that month, although adjustments
may be made upon approval by Rise King WFOE to provide for operational needs. If
at year end, after an audit of the financial statements of any PRC Operating
Subsidiary, there is determined to be any shortfall in the payment of 100% of
the annual net income, such PRC Operating Subsidiary must pay such shortfall to
Rise King WFOE. Each agreement has a ten-year term, subject to renewal and early
termination in accordance with the terms therein.
Exclusive
Option Agreements
Under
Exclusive Option Agreements entered into by and among Rise King WFOE, each of
the PRC Shareholders, dated as of October 8, 2008, each of the PRC Shareholders
irrevocably granted to Rise King WFOE or its designated person an exclusive
option to purchase, to the extent permitted by PRC law, a portion or all of
their respective equity interest in any PRC Operating Subsidiary for a purchase
price of RMB 10 or a purchase price to be adjusted to be in compliance with
applicable PRC laws and regulations. Rise King WFOE or its designated person has
the sole discretion to decide when to exercise the option, whether in part or in
full. Each of these agreements has a ten-year term, subject to renewal at the
election of Rise King WFOE.
Equity
Pledge Agreements
Under the
Equity Pledge Agreements entered into by and among Rise King WFOE, the PRC
Operating Subsidiaries and each of the PRC Shareholders, dated as of October 8,
2008, the PRC Shareholders pledge, all of their equity interests
in PRC Operating Subsidiaries to guarantee Beijing CNET Online’s
performance of its obligations under the Exclusive Business Cooperation
Agreement. If Beijing CNET Online or any of the PRC Shareholders breaches
his/her respective contractual obligations under this agreement, or upon the
occurrence of one of the events regarded as an event of default under each such
agreement, Rise King WFOE, as pledgee, will be entitled to certain rights,
including the right to dispose of the pledged equity interests. The PRC
Shareholders of the PRC Operating Subsidiaries agree not to dispose of the
pledged equity interests or take any actions that would prejudice Rise King
WFOE's interest, and to notify Rise King WFOE of any events or upon receipt of
any notices which may affect Rise King WFOE's interest in the pledge. Each of
the equity pledge agreements will be valid until all the payments due under the
Exclusive Business Cooperation Agreement have been fulfilled.
Irrevocable
Powers of Attorney
The PRC
Shareholders have each executed an irrevocable power of attorney, dated as of
October 8, 2008, to appoint Rise King WFOE as their exclusive attorneys-in-fact
to vote on their behalf on all PRC Operating Subsidiary matters requiring
shareholder approval. The term of each power of attorney is valid so
long as such shareholder is a shareholder of the respective PRC Operating
Subsidiary.
Share
Exchange
On June
26, 2009, the Company entered into a Share Exchange Agreement (the “Exchange
Agreement”), with (i) ChinaNet BVI, (ii) ChinaNet BVI’s shareholders, Allglad
Limited, a British Virgin Islands company (“Allglad”), Growgain Limited, a
British Virgin Islands company ("Growgain"), Rise King Investments Limited, a
British Virgin Islands company (“Rise King BVI”), Star (China) Holdings Limited,
a British Virgin Islands company (“Star”), Surplus Elegant Investment Limited, a
British Virgin Islands company (“Surplus”), Clear Jolly Holdings Limited, a
British Virgin Islands company (“
Clear
” and together
with Allglad, Growgain, Rise King BVI, Star and Surplus, the “ChinaNet BVI
Shareholders”), who together own shares constituting 100% of the issued and
outstanding ordinary shares of ChinaNet BVI (the “ChinaNet BVI Shares”), and
(iii) G. Edward Hancock, the former principal stockholder of the Company.
Pursuant to the terms of the Exchange Agreement, the ChinaNet BVI Shareholders
transferred to the Company all of the ChinaNet BVI Shares in exchange for the
issuance of 13,790,800 (the “Exchange Shares”
)
shares of Common Stock (the
“Share Exchange”). As a result of the Share Exchange, ChinaNet 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 PRC, is engaged in providing advertising, marketing and communication
services to small and medium companies in China.
Immediately
prior to the Share Exchange, we cancelled and retired 4,400,000 shares of our
issued and outstanding Common Stock (the “Cancelled Shares”) (reducing our
issued and outstanding shares to 1,383,500), and issued 600,000 shares of our
Common Stock in the aggregate to certain third parties in consideration for
services rendered (resulting in 1,983,500 shares of issued and outstanding
Common Stock immediately prior to the Share Exchange). A cash amount
of $300,000, previously deposited by us into an escrow account was paid to G.
Edward Hancock, our former majority shareholder and owner of the Cancelled
Shares, as consideration for cancelling the Cancelled Shares in connection with
the Share Exchange. As a result of the cancellation of the Cancelled
Shares, the share issuance described above, and the Share Exchange, we had
15,774,300 shares issued and outstanding immediately following the Share
Exchange.
In
connection with the Share Exchange, we entered into a Registration Rights
Agreement dated June 26, 2009 with certain of our stockholders signatory
thereto. Pursuant to the Registration Rights Agreement, we agreed to
provide those stockholders signatory thereto, for a 90-day period from the
date of signing, piggyback registration rights under the Securities Act on a
portion of their shares. In the event that we do not file such
registration statement within the 90-day period, the stockholders holding a
majority of the securities registrable under the Registration Rights Agreement
will have a demand registration right. There are no other penalties or
liquidated damages (in securities of the Company, cash or otherwise) as a result
of the Company not successfully filing a registration statement within the
90-day period or pursuant to the terms of the demand.
Name
Change
Prior to
July 14, 2009, our company name was Emazing Interactive, Inc. On July
14, 2009, the Company caused to be formed a corporation under the laws of the
State of Nevada called ChinaNet Online Holdings, Inc. (the "Merger Sub") and
acquired one hundred shares of its common stock for cash. As such, Merger Sub
was merged with and into the Company. As a result of the merger, the
separate existence of the Merger Sub ceased. As a further result of
the merger, our corporate name was changed to “ChinaNet Online Holdings,
Inc.” We are the surviving corporation in the merger and, except for
the name change provided for in the Agreement and Plan of Merger, there was no
change in our directors, officers, capital structure or business.
2009
Financing
On
August 21, 2009 (the “Closing Date”), we entered into a securities purchase
agreement (the “Purchase Agreement”), with several investors, including
institutional, accredited and non-US persons and entities (the “
Investors
”), pursuant to
which we sold units, comprised of 10% Series A Convertible Preferred Stock, par
value $.001 per share (the “Series A Preferred Stock”), and two series of
warrants, for a purchase price of $2.50 per unit and gross proceeds of
approximately $10.3 million (the “Financing”). Net proceeds from the
Financing were approximately $9.5 million. We sold 4,121,600 units in
the aggregate, which included (i) 4,121,600 shares of our Series A Preferred
Stock, (ii) Series A-1 Warrants to purchase 2,060,800 shares of Common Stock at
an exercise price of $3.00 per share with a three-year term, and (iii) Series
A-2 Warrants to purchase 2,060,800 shares of Common Stock at an exercise price
of $3.75 with a five-year term. In connection with the Financing, we
issued to TriPoint Global Equities, LLC warrants to purchase 329,728 shares of
our Common Stock at an exercise price of $2.50 per share, 164,864 at
an exercise price of $3.00 and 164,864 at an exercise price of $3.75. The
warrants expire on August 20, 2014 .
In
connection with the Financing, we entered into a registration rights agreement
(the “Registration Rights Agreement”) with the Investors in which we agreed to
file a registration statement (the “Registration Statement”) with the Securities
and Exchange Commission (the “SEC”) to register the Common Stock underlying the
Series A Preferred Stock, the Series A-1 Warrants and the Series A-2 Warrants,
thirty (30) days after the closing of the Financing. We have agreed
to use our best efforts to have the Registration Statement declared effective
within 150 calendar days after filing, or 180 calendar days after filing in the
event the Registration Statement is subject to a “full review” by the
SEC.
We are
required to keep the Registration Statement continuously effective under the
Securities Act until such date as is the earlier of the date when all of the
securities covered by that registration statement have been sold or the date on
which such securities may be sold without any restriction pursuant to Rule 144
(the “Financing Effectiveness Period”). We will pay liquidated
damages of 2% of each holder’s initial investment in the units sold in the
Financing per month, payable in cash, up to a maximum of 10%, if the
Registration Statement is not filed or declared effective within the foregoing
time periods or ceases to be effective prior to the expiration of the Financing
Effectiveness Period. However, no liquidated damages shall be paid
with respect to any securities being registered that we are not permitted to
include in the Registration Statement due to the SEC’s application of Rule
415.
In
connection with the Financing, we entered into a securities escrow
agreement with the Investors (the “Escrow Agreement”), pursuant to which Rise
King Investment Limited, a British Virgin Islands company (the “Principal
Stockholder”), initially placed 2,558,160 shares of Common Stock (the “Escrow
Shares”) into an escrow account. Of the Escrow Shares, 1,279,080
shares (equivalent to 50% of the Escrow Shares) are being held as security for
the achievement of audited net income equal to or greater than $7.7 million for
the fiscal year 2009 (the “2009 Performance Threshold”) and the remaining
1,279,080 of the Esrow Shares are being held as security for the achievement of
audited net income equal to or greater than $14 million for the fiscal year 2010
(the “2010 Performance Threshold”).
If we
achieve at least 95% of the applicable Performance Threshold, all of the Escrow
Shares for the corresponding fiscal year shall be returned to the Principal
Stockholder. If we achieve less than 95% of the applicable Performance
Threshold, the Investors shall receive in the aggregate, on a pro rata basis
(based upon the number of shares of Series A Preferred Stock or Conversion
Shares owned by each such Investor as of the date of distribution of the Escrow
Shares), 63,954 shares of the Escrow Shares for each percentage by which the
applicable Performance Threshold was not achieved up to the total number of
Escrow Shares for the applicable fiscal year. Any Escrow Shares not
delivered to any Investor because such Investor no longer holds shares of Series
A Preferred Stock or Conversion Shares shall be returned to the Principal
Stockholder.
For the
purposes of the Escrow Agreement, net income is defined in accordance with US
GAAP and reported by us in our audited financial statements for each of the
fiscal years ended 2009 and 2010; provided, however, that net income for each of
fiscal years ended 2009 and 2010 shall be increased by any non-cash charges
incurred (i) as a result of the Financing , including without limitation, as a
result of the issuance and/or conversion of the Series A Preferred Stock, and
the issuance and/or exercise of the Warrants, (ii) as a result of the release of
the Escrow Shares to the Principal Stockholder and/or the Investors, as
applicable, pursuant to the terms of the Escrow Agreement, (iii) as a result of
the issuance of ordinary shares of the Principal Stockholder to Messrs. Handong
Cheng and Xuanfu Liu and Ms. Li Sun (the “PRC Shareholders”), upon the exercise
of options granted to the PRC Shareholders by the Principal Stockholder, (iv) as
a result of the issuance of warrants to any placement agent and its designees in
connection with the Financing, (v) the exercise of any warrants to purchase
Common Stock outstanding and (vi) the issuance under any performance
based equity incentive plan that we adopt.
In
addition, we are a party to a Lock-Up Agreement with each of our executive
officers and directors (the “Affiliates”), under which the Affiliates have
agreed with not to offer, sell, contract to sell, assign, transfer, hypothecate
gift, pledge or grant a securitiy interest in, or other wise dispose
of any shares of our common stock that such Affiliates presently own
or may acquire after the Closing Date during the period commencing on the
Closing Date and expiring on the date that is six months following the
effective date of the Registration Statement (the “Lock-up
Period”). Each Affiliate further agreed that during the 12-month
period following the Lock-up Period, such Affiliate shall not transfer more than
one-twelfth (1/12) of such Affiliate’s holding of Common Stock during any one
calendar month.
Industry
and Market Overview
Overview
of the Advertising Market in China
China has
the largest advertising market in Asia, excluding Japan. According to
ZenithOptimedia in 2007, China’s advertising market was the fifth largest in the
world by media expenditure, which was approximately $15.4 billion, accounting
for 15.6% of the total advertising spending in the Asia-Pacific
region. ZenithOptimedia also projected that the advertising market in
China will be one of the fastest growing advertising markets in the world, at a
CAGR of 12.8% from 2007 to 2011. By 2011, China is projected to account for
19.6% of the total advertising spending in the Asia-Pacific region.
The
growth of China’s advertising market is driven by a number of factors, including
the rapid and sustained economic growth and increases in disposable income and
consumption in China. According to ZenithOptimedia, China was the third largest
economy in the world in 2007 in terms of GDP, which amounted to US$3.1 trillion.
According to the National Bureau of Statistics of China, the annual disposable
income per capita in urban households increased from RMB 13,786 in 2007 to RMB
15,781 in 2008 and to RMB 17,175 in 2009, representing an increase of 14.5%
and 8.8%, respectively.
We
believe the advertising market in China has significant potential for future
growth due to relatively low levels of advertising spending per capita and as a
percentage of GDP compared to more developed countries or regions. The following
table sets forth the advertising spending per capita and as a percentage of GDP
in 2007 in China compared to more developed countries or regions:
Advertising
Spending in 2007
|
|
|
|
Per
Capita
(US$)
|
|
|
As
a % of GDP
|
|
|
|
|
|
|
|
|
China
|
|
$
|
11.62
|
|
|
|
0.5
|
%
|
Hong
Kong
|
|
|
438.63
|
|
|
|
1.5
|
%
|
South
Korea
|
|
|
206.71
|
|
|
|
1.0
|
%
|
Japan
|
|
|
320.76
|
|
|
|
0.9
|
%
|
Asia
Pacific (weighted average)
|
|
|
29.98
|
|
|
|
0.8
|
%
|
United
States
|
|
|
586.11
|
|
|
|
1.3
|
%
|
United
Kingdom
|
|
|
419.79
|
|
|
|
0.9
|
%
|
Source:
ZenithOptimedia (December, 2008)
According
to ZenithOptimedia’s latest research, China will become the second largest
economy and the fourth largest advertisement market in the world, the percentage
of the expected increase of advertising spending in China for 2010 compares to
2009 will rebound to 10.5%. The following table sets forth the
percentage of advertising spending increase compares with previous year in China
compared to more developed countries or regions from 2004 through
2010:
Advertising
spending growth rate 2004-2010
|
|
Year
05
vs.04
|
|
|
Year
06
vs.05
|
|
|
Year
07
vs.06
|
|
|
Year
08
vs.07
|
|
|
Year
09
vs.08
|
|
|
Year
10
vs.09
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
%
|
|
China
|
|
|
16.5
|
|
|
|
20.2
|
|
|
|
14.1
|
|
|
|
13.5
|
|
|
|
7.4
|
|
|
|
10.5
|
|
Global
|
|
|
6.1
|
|
|
|
6.9
|
|
|
|
6.3
|
|
|
|
1.0
|
|
|
|
-10.2
|
|
|
|
3.9
|
|
United
States
|
|
|
3.1
|
|
|
|
4.5
|
|
|
|
2.6
|
|
|
|
-3.7
|
|
|
|
-12.7
|
|
|
|
-2.4
|
|
Europe
|
|
|
4.7
|
|
|
|
5.8
|
|
|
|
4.2
|
|
|
|
-1.5
|
|
|
|
-11.8
|
|
|
|
-0.5
|
|
Asia
Pacific
|
|
|
9.1
|
|
|
|
5.9
|
|
|
|
6.3
|
|
|
|
2.3
|
|
|
|
-3.1
|
|
|
|
5.3
|
|
Japan
|
|
|
8.5
|
|
|
|
1.1
|
|
|
|
0.7
|
|
|
|
-3.9
|
|
|
|
-8.4
|
|
|
|
0.0
|
|
Source: ZenithOptimedia
(December, 2009)
Overview
of the Internet Advertising Industry
According to ZenithOptimedia, the
Internet is the only advertising medium that is expected to experience an
increase in expenditures in 2009. This growth is expected to stem
primarily from the use of search engine, rich media, video and game embedded
advertisements. The growth of Internet advertising is expected to be 11.3% in
2010 and 15.3% in 2011, and according to the iResearch China Merchant Website
Research Report, is expected to reach $5.8 billion in 2012.
The
diagram below depicts annual size & growth of Chinese Internet advertising
market from 2001 to 2012:
High
Demand for the Internet Advertising in China
We believe that the Internet
advertising market in China also has significant potential for future growth due
to high demand from the rapid development of franchise and chain store business
and the SMEs. According to the 2008 China Franchise Development Report by China
Chain Store & Franchise Development Report, there were approximately 3,000
franchise enterprises and 260,000 chain stores in China by the end of 2007, and
the number of franchise enterprises and chain stores is expected to increase to
4,000 and 320,000, respectively by 2010.
The
development of the SME market is still in its early stages and since their sales
channels and distribution networks are still underdeveloped, they are driven to
search for new participants by utilizing Internet advertising. The
SMEs tend to be smaller, less-developed brands primarily focused on restaurants,
garments, building materials, home appliances, and entertainment with low
start-up costs within a range of $1,000-$15,000. The Chinese government has
promulgated a series of laws and regulations to protect and promote the
development of SMEs which appeals to entrepreneurs looking to benefit from the
central government’s support of increased domestic demand. SMEs are
now responsible for about 60% of China's industrial output and employment of
about 75% of urban Chinese workforce. SMEs are creating the most new urban jobs,
and they are the main destination for workers laid-off from state-owned
enterprises (SOEs) that re-enter the workforce.
Our
Principal Products and Services
Our products and services
include:
|
·
|
Bundled
advertising campaign services, comprised of 28.com, our Internet
advertising portal, and our television and web advertisement
services;
|
|
·
|
Agency
services,
whereby
we re-sell to our customers web advertising space on third-party Internet
sites and
television advertising space
;
and
|
|
·
|
Resale
of Internet Advertising resources;
and
|
|
·
|
In-bank
advertising services conducted through our network of kiosks located in
bank branches.
|
Internet
Advertising
We founded 28.com in 2003.
28.com is a leading Inter
net site for information
about small business opportunities in China. It was one of the
earliest entrants in this sector, allowing it to currently hold a 30% market
share in China. Our revenue from 28.com is twice as big as our closest
competitor, u88.cn
.
We have provided more than
500 long-term clients advertising business opportunities on the
site. The platform provides advertisers with the tools to build sales
channels and develop relationships directly with sales agents, distributors,
resellers and/o
r
franchisees. 28.com has the
following features which enable it to be an attractive platform for the
advertisers:
|
·
|
Allows entrepreneurs
interested in inexpensive franchise and business opportunities to find
in-depth details about these opportunities in
various
industries;
|
|
·
|
Provides one-stop
shopping for SMEs and entrepreneurs by providing customized services such
as design, website setup, and advertisement placement through
promoting;
|
|
·
|
Bundles with 28.com
video production, advanced traffic generation
techniques and
search-engine optimization.
|
28.com charges its clients
fixed monthly fees for ad placements on its homepage at an average monthly price
of $3,000. The site has more than 500 long term clients and the total revenue
per month reaches approxi
mately $1.5 million in
2008. This segment accounted for 47% of our revenue in 2009 and 53%
of our revenue in 2008 .
Television
Advertising
As part of our media campaign
services, we produce and distribute televis
ion shows that are comprised
of advertisements similar to infomercials, but include promotions for several
clients during the allotted time. Our clients pay us for editorial
coverage and advertising spots. We are one of the larger producers of
television
shows of this nature in
China, with a total show time that reached 23,210 minutes in 2009
and an estimated 35,000 minutes in 2010. The shows produced by our TV
unit are distributed during airtime purchased on the biggest national satellite
tel
e
vision stations including
CCTV, Hunan TV, Jiangxi TV, Shandong TV, Guangdong TV, Fujian TV, Guangxi TV,
Mongolia TV, Yunnan TV, Tianjin TV and Heilongjiang TV. The brand of shows
produced by us are entitled “
Gold List,”
“
Online Business
Opportunities,”
“
T
h
e Charm of
Wealth,”
“
Venture Express,”
“
Start”
and “
Run
’
s Road to
Wealth.”
This segment
accounted for 49% of our revenue in 2009 and 33% of our revenue in
2008.
Resale of
Internet Advertising Resources
We resell to
our clients sponsored search resources from Baidu
. This
segment accounted for 3.0% of our revenue in 2009.
Bank
Kiosks
We operate
our bank kiosk advertising network, launched in 2008, through Shanghai
Borongdingsi. We place our kiosk machines, which include a large, LCD
advertising display, in
bank branches
to target banking patrons. We market our LCD display network to advertisers in
the financial services and insurance industries. As of December 31, 2009, we had
approximately 200 flat-panel displays placed in branches of China Construction
Bank in
Henan
Province. The kiosks are useful to the banks because, in addition to the LCD
advertising display, they provide bank customers with free Internet access to
on-line banking se
r
vices,
thereby potentially shortening wait times in branches for teller
services. We believe bank kiosks are a cost effective solution for
advertisers because the interactive client interface captures information for
follow up and also due to the ability
to update
content remotely. We originally planned to place 2,000 kiosks by the end of
2009. However, we noted that our target clients in this segment who
are mostly financial and insurance service institutions had not been fully
recovered from the negative effect of the global financial crisis, and we also
noted that our potential competitors who are also engaged in the outdoor
advertising business encountered a decrease of revenue in the
year. Therefore, we decided to suspend our further expansion in this
segment in 2009. Along with the improvement of the global economy and
the recovery of the financial industry, we plan to proceed with our expansion in
this segment by increase approximately 1,300 kiosks and to enhance the
corresponding central control system and the client service system in
2010.
Our
target client base for bank kiosk advertising includes: large telecommunication
companies, large banks, well-known insurance and financial institutions and auto
companies. Such as: China Telecom, China Mobile, China Unicom, China
Construction Bank, Ping An of China, China International Fund Management Co.,
Ltd., Toyota, PICC, Guangzhou Honda and Audi. As of December 31, 2009, we
generated US$ 0.15 million revenue from this business segment from Henan
Standard Life.
Our
Competitive Strengths
Over our six
year history, we believe that we have built a strong track record of significant
competitive strengths such as:
Innovative
Operations
|
·
|
Client-based innovation.
Our services, which bundle for a set fee Internet ads, television
shows and other services, including lead generation, simplifies the
targeting process for our clients by allowing them to use one vendor for
their Internet and television ad
buys.
|
|
·
|
Target market innovation and
expansion of audience base
.
We
believe that by offering multiple advertising media platforms, we enable
advertisers to reach a wide range of consumers with complementary and
mutually reinforcing advertising campaigns. We are better able to attract
advertisers who want to reach targe
t
ed
consumer groups through a number of different advertising media in
different venues and at different times of the
day.
|
Strong
Technological Advantages
|
·
|
Award winning R&D
team
. We have a R&D team with extensive experience in China’s
advertising and marketing industry. Bin Zhang, Vice President of China Net
TV, has been actively engaged in technology research and development in
this area since 1998. We appointed our Chief Technology Officer Mr. Hongli
Xu in September 2009. Mr. Xu has about 20 years experience in
the internet and software development industry in various sectors, we
believe Mr. Xu will provide critical leadership in our R&D team, as we
continue to elevate ChinaNet's position in the Chinese media and
advertising markets.
|
|
·
|
Advanced campaign tracking
& monitoring tools
. We have deployed advanced tracking, search
engine optimization, resource scheduling, content management and ad
campaign management tools so as to achieve effective and efficient
advertising effects.
|
|
·
|
Valuable intellectual
property
. We have three copyright certificates and property rights
for three software products in connection with the Internet advertising
business which were developed by our research and development
team.
|
|
·
|
Experienced management
team
. We have an experienced management team. In particular,
Handong Cheng, our founder, chairman and chief executive officer has over
ten years’ experience in management. He demonstrated his entrepreneurship
and business leadership by starting up our business and he has
successfully grown our business to become a pioneer in online media
marketing and advertising services. He also secured our status as the sole
strategic alliance partner of China Construction Bank with respect to bank
kiosk advertising. Zhige Zhang, our chief financial officer has over six
years’ experience in software development and Internet ad
technology.
|
First Mover
Advantages
|
·
|
Early Market Entrant as a
vertically integrated ad portal and Internet agency.
We
have over 4 years of operations as a vertically integrated ad portal and
ad agency. We have 6 years of experience as an Internet advertising
agency. We commenced our Internet advertising services business in
2003 and was among the first companies in China to create a site and a
business focused on Internet advertising. We rapidly established a
sizeable nationwide network, secured a significant market share and
enhanced awareness of our brand. Our early entry into the market has also
enabled us to accumulate a significant amount of knowledge and experience
in this nascent segment of the advertising
industry.
|
|
·
|
Early mover advantage in bank
kiosk.
We are one of earlier advertising agents to have
established an in-bank advertising network. We believe that the
establishment of our in-bank kiosk gives us a competitive edge over
competing networks as well as over many other forms of traditional
advertising.
|
|
·
|
Exclusive
Strategic Partnership with Top Chinese banks.
In 2008,
we entered into an eight-year strategic partnership with China
Construction Bank to be its strategic partner in the establishment of a
nationwide network of bank kiosks displaying our clients’ advertising on
large LCD screens and providing bank customers with free internet access
to on-line banking services. We pay for the kiosks and then provide them
to China Construction Bank for free in exchange for the exclusive right to
display advertising on the kiosks. We have already placed
200
kiosks at branches in Henan Province. We also have been negotiating
similar potential deals with Bank of Communications and Agricultural Bank
of China., but, as of December 31, 2009, we have not yet signed any new
strategic partnership agreement with another bank due to our decision not
to expand further in this segment in 2009. However, we have been
maintained active communications with these banks, and we will continue
our negotiations with them in 2010 as part of our plan to further grow the
kiosk business in fiscal year 2010. We believe exclusivity with the top
Chinese banks will create higher barriers to entry for potential
competitors.
|
Growth
Strategy
Our objectives are to strengthen our
position as the leading Internet advertising and marketing services and
diversified media advertising network in China and continue to achieve rapid
growth. We intend to achieve these objectives by implementing the following
strategies:
Nationally
Expand Our Bank Kiosk Platform
We intend to ag
gressively expand our bank
kiosk platform in order to appeal to our financial industry advertisers and
increase our revenues in this business line. To achieve this goal, we intend to
increase the number of bank kiosks. We intend to aggressively enter
into
new strategic partnerships
with other banks to achieve this result.
Continue
to Expand Internet Advertising through Adding New Modules into Our 28.com
Network
We
intend to add new modules into the 28.com site, such as customer relationship
management (CRM), supply chain management and enterprise resources planning
(ERP) systems in order to enhance the functionality of our Internet advertising
network. We have launched a new module which was Internet information Management
in August 2009. This product is an artificial intelligence software that is
based on our proprietary search engine optimization technology which helps our
clients gain an early warning in order to identify and respond to potential
negative exposure on the internet. We charged monthly fee to these
clients. Although this segment is not consider as our primary source
of revenue, we will continue to promote this service to our clients as a
value-added service to help us achieve more revenue with limited increase of our
cost of revenue.
Leverage our
integrated platform to increase operational and cross-selling
synergies
We plan to maximize opportunities for
our business to increase both revenue and cost synergies. We intend to increase
cross-selling by developing additional flexible, bundled advertising packages
that allow advertisers to reach consumers by complementary and reinforcing
media. At the same time, we intend to further leverage the existing elements of
our integrated media platform to enhance the platform’s attractiveness to
advertisers. Advertisers can launch a coordinated campaign across multiple media
while enjoying cost savings from our bundling and volume
discounts.
Promote
Our Brand Name and Augment Our Service Offerings to Attract a Wider Client Base
and Increase Revenues
Enhancing our brand name in
the industry will allow us to solidify and broaden our client b
ase by growing market
awareness of our services and our ability to target discrete consumer groups
more effectively than mass media. We believe the low cost of reaching consumers
with higher-than-average disposable incomes through our network and our
deve
l
opment of additional
advertising media platforms and channels within our network can enable our
customers to reach that goal. As we increase our advertising client base and
increase sales, demand for and sale of time slots and frame space on our network
will
grow.
Our
Advertising Clients; Sales and Marketing
Our
Advertising Clients
|
·
|
The quality
and coverage of our network has attracted a broad base of advertising
clients. As of December 31, 2009, more than 500 long term customers have
purchased advertising time slots on our 28.com portal, China Net TV
and our bank kiosks. We derive all of our revenues from; charging our
clients fixed monthly fees to advertise on
28.com;
|
|
·
|
charging
productions fees for television and web video
spots;
|
|
·
|
selling
advertising time slots on our television shows and bank
kiosks;
|
|
·
|
reselling
Internet space and television space at a discount to the direct cost of
any individual space or time slot, but at a mark-up to our cost due to
purchase of these items in bulk;
and
|
|
·
|
collecting
fees associated with lead
generation.
|
For
the year ended December 31, 2009, we derived 47% of our revenues from our
Internet advertising and 49% from our TV advertising.
The
following table sets forth a breakdown of our revenue from Internet advertising
by industry for the year ended December 31, 2009:
Industry
|
|
Percentage of total revenue
|
|
Food
and beverage
|
|
|
22.0
|
%
|
Women
Accessories
|
|
|
11.0
|
%
|
Footwear,
apparel and garments
|
|
|
23.0
|
%
|
Home
Goods and Construction Materials
|
|
|
13.0
|
%
|
Environmental
Protection Equipment
|
|
|
11.0
|
%
|
Cosmetic
and Health Care
|
|
|
5.0
|
%
|
Education
Network
|
|
|
11.0
|
%
|
Others
|
|
|
4.0
|
%
|
Total
|
|
|
100.0
|
%
|
Sales and
Marketing
Sales
and Marketing.
We employ an
experienced advertising sales force. We provide in-house education and training
to our sales for
ce to ensure
they provide our current and prospective clients with comprehensive information
about our services, the advantages of using our advertising networks as
marketing channels, and relevant information regarding the advertising
industry. We also
m
arket our
advertising services from time to time by placing advertisements on television,
and acting as sponsor to third-party programming as well as to our
shows.
Market
Research.
We believe
our advertising clients derive substantial value from our abil
ity to
provide advertising services targeted at specific segments of consumer markets.
Market research is an important part of evaluating the effectiveness and value
of our business to advertisers. We conduct market research, consumer surveys,
demographic
analysis and
other advertising industry research for internal use to evaluate new and
existing advertising channels. We also purchase or commission studies containing
relevant market study data from reputable third-party market research firms,
iResearch C
o
nsulting Co.,
Ltd. We typically consult such studies to assist us in evaluating the
effectiveness of our network to our advertisers. A number of these studies
contain research on the numbers and socio-economic and demographic profiles of
the people who vi
s
it our
network.
Suppliers
The primary hardware required for the
operation of our business consists of servers and other firmware with which we
operate 28.com, video production and editing equipment for our television
programming, and components for our bank kiosks, including the LCD
displays. We also develop and install software in our displays to
assist us with the configuration, editing and operation of our advertising
content cycles. Maintaining a steady supply of these kiosks and their
proprietary LCD displays is important to our operations and the growth of our
advertising network. We purchase our television displays from third party
manufacturers who build these components according to our specifications. We
select component suppliers based on price and quality. As there are several
other qualified alternative suppliers for our equipment, our obligation to our
current suppliers is not exclusive. We have never experienced any material delay
or interruption in the supply of our digital television displays.
We deploy advanced traffic generation
techniques, search-engine optimization and other technologies that
assist advertisers,
advertising agencies and web publishers in creating and delivering Internet ads,
monitoring and analyzing website traff
ic, tracking the performance
of advertising campaigns and implementing direct marketing.
Research and
Development
We intend to
continue to optimize our
Standard Operating Environment (the “
SOE
”
) technology
in order to
reduce cost and time to deploy, configure, maintain, support
and manage computer servers and system
. Whether or
not we deploy newer technology will depend upon cost and network security. We
also continue to develop proprietary software and systems in connection with the
operation of and pr
ovision of
services through 28.com to enhance ease of use. In addition, we focus on
enhancing related software systems enabling us to track and monitor advertiser
demands.
Intellectual
Property
We
have three software copyright certificates issued by the State Copyright Office
of the PRC (“
SCO
”) as
below:
Name of Softwares
|
Registration Number
|
基于互联网广告效果投放综合监测及管理平台软件
V1.0
Software
V1.0 of General Monitoring and Management Platform on Internet Advertising
Effect
|
2008SRBJ4073
|
基于效果的搜索引擎服务平台软件
V1.0
Software
V1.0 of Effect-based Search Engine Service Platform
|
2008SRBJ4084
|
基于互联网广告留言综合分析及管理平台软件
V1.0
Software
V1.0 of General Analysis and Management Platform on Internet Based
Advertising Message
|
2008SRBJ4084
|
With this
intellectual property, we can facilitate our provision of services that are in
demand by the appropriate customers and can track end users to help our
customers assess and adjust their marketing strategies.
We
started the upgrade process of our Office Automation (OA) system in 2009, to
enhance the accuracy of our client service and efficiency of our
cross-department communication. Our OA system upgrade mainly include
the following modules: Advertising contract management, Accounts receivable
collection management, Customer relationship management.
We
plan to increase the investment of R&D expenditures to enhance the safety of
our hardware and server which we dependent upon in supporting our network and
managing and monitoring programs on the network.
Competition
We compete with other advertising
companies in China including companies that operate Internet advertising portals
or television advertising media networks, such as u88.cn 3158.com 08.cn and
78.cn. We compete for advertising clients primarily on the basis of network size
and coverage, location, price, the range of services that we offer and our brand
name. We also compete for overall advertising spending with other alternative
advertising media companies, such as wireless telecommunications, street
furniture, billboard, frame and public transport advertising companies, and with
traditional advertising media, such as newspapers, magazines and
radio.
Legal
Proceedings
We are
currently not a party to any legal or administrative proceedings and are not
aware of any pending or threatened legal or administrative proceedings against
us in all material aspects. We may from time to time become a party to various
legal or administrative proceedings arising in the ordinary course of our
business.
Government
Regulation
The PRC
government imposes extensive controls and regulations over the media industry,
including on television, radio, newspapers, magazines, advertising, media
content production, and the market research industry. This section summarizes
the principal PRC regulations that are relevant to our lines of
business.
Regulations
on the Advertising Industry in China
Foreign
Investments in Advertising
Under the
Administrative Provision on Foreign Investment in the Advertising Industry,
jointly promulgated by the SAIC and MOFCOM on March 2, 2004, or the 2004
Provision, foreign investors can invest in PRC advertising companies either
through wholly owned enterprises or joint ventures with Chinese parties. Since
December 10, 2005, foreign investors have been allowed to own up to 100% equity
interest in PRC advertising companies. However, the foreign investors must have
at least three years of direct operations outside China in the advertising
industry as their core business. This requirement is reduced to two years if
foreign investment in the advertising company is in the form of a joint venture.
Such requirement is also provided similarly in the newly promulgated regulation
that replaced the 2004 Provision as of October 1, 2008, except that according to
the new regulation, the establishment of wholly foreign-owned advertising
companies must be approved by the SAIC or its authorized provincial counterparts
and provincial MOFCOM instead of the SAIC and MOFCOM only. Foreign-invested
advertising companies can engage in advertising design, production, publishing
and agency, provided that certain conditions are met and necessary approvals are
obtained.
We have
not engaged in direct operations outside China in the advertising industry as
our core business. Therefore, our subsidiary in China, Rise King WFOE, is
ineligible to apply for the required licenses for providing advertising services
in China. Our advertising business is operated by Business Opportunity Online
and Beijing CNET Online in China. We have been, and are expected to
continue to be, dependent on these companies to operate our advertising
business. We do not have any equity interest in our PRC Operating Entities, but
Rise King WFOE, receives the economic benefits of the same through the
Contractual Arrangements.
We have
been advised by our PRC counsel, that each of the Contractual Agreements
complies, and immediately after the completion of the transactions contemplated
herein, will comply with all applicable PRC laws and regulations and does not
violate, breach, contravene or otherwise conflict with any applicable PRC laws,
rules or regulations. However, there exist substantial uncertainties regarding
the application, interpretation and enforcement of current and future PRC laws
and regulations and its potential effect on its corporate structure and
contractual arrangements. The interpretation of these laws and regulations are
subject to the discretion of competent PRC authorities. There can be no
assurance that the PRC regulatory authorities will not take a view different
from the opinions of our PRC counsel and determine that its corporate structure
and contractual arrangements violate PRC laws, rules and regulations. In the
event that the PRC regulatory authorities determine in their discretion that our
corporate structure and contractual arrangements violate applicable PRC laws,
rules and regulations, including restrictions on foreign investment in the
advertising industry in the future, We may be subject to severe penalties,
including an order to cease its business operations.
Business
License for Advertising Companies
On
October 27, 1994, the Tenth Session of the Standing Committee of the Eighth
National People’s Congress adopted the Advertising Law which became effective on
February 1, 1995. According to the currently effective Advertising Law and its
various implementing rules, companies engaging in advertising activities must
obtain from the SAIC or its local branches a business license which specifically
includes within its scope the operation of an advertising business. Companies
conducting advertising activities without such a license may be subject to
penalties, including fines, confiscation of advertising income and orders to
cease advertising operations. The business license of an advertising company is
valid for the duration of its existence, unless the license is suspended or
revoked due to a violation of any relevant law or regulation. We have obtained
such a business license from the local branches of the SAIC as required by
existing PRC regulations. We do not expect to encounter any difficulties in
maintaining the business license. However, if we seriously violate the relevant
advertising laws and regulations, the SAIC or its local branches may revoke our
business licenses.
Outdoors
The
Advertising Law in China stipulates that the exhibition and display of outdoor
advertisements must comply with certain requirements. It provides that the
exhibition and display of outdoors advertisements must not:
·
utilize traffic
safety facilities and traffic signs;
·
impede the use of
public facilities, traffic safety facilities and traffic signs;
·
obstruct commercial
and public activities or create an unpleasant sight in urban areas;
·
be placed in
restrictive areas near government offices, cultural landmarks or historical or
scenic sites; or
·
be placed in areas
prohibited by the local governments from having outdoor
advertisements.
In
addition to the Advertising Law, the SAIC promulgated the Outdoor Advertising
Registration Administrative Regulations on December 8, 1995, as amended on
December 3, 1998 and May 22, 2006, which also governs the outdoor advertising
industry in China. Under these regulations, outdoor advertisements in China must
be registered with the local SAIC before dissemination. The advertising
distributors are required to submit a registration application form and other
supporting documents for registration. After review and examination, if an
application complies with the requirements, the local SAIC will issue an Outdoor
Advertising Registration Certificate for such advertisement. The content,
quantity, format, specifications, periods, distributors’ name, and locations of
dissemination of the outdoor advertisement must be submitted for registration
with the local SAIC. A change of registration with local SAICs must be effected
in the event of a change in the distributor, the location of dissemination, the
periods, the content, the format, or the specifications of the advertisements.
It is unclear whether the SAIC, or any of its local branches in the
municipalities and provinces covered by our network, will deem our business as
outdoor advertising business, and thus require us to obtain the Outdoor
Advertising Registration Certificate. If the PRC government determines that we
were obligated to complete outdoor advertisement registration as an outdoor
advertising network operator, we may be subject to administrative sanctions,
including discontinuation of its business for failure to complete such
registration.”
In
addition, on December 6, 2007, the State Administration of Radio, Film and
Television (“SARFT”) promulgated the December 2007 Notice pursuant to which the
broadcasting of audio and visual programs, including news, drama series, sports,
technology, entertainment and other programs, through radio and television
networks, the Internet and other information systems affixed to vehicles and
buildings and in airports, bus and railway stations, shopping malls, banks,
hospitals and other outdoor public media would be subject to approval by the
SARFT. The December 2007 Notice required the local branches of SARFT to
investigate and record any organization or company engaging in the activities
described in the December 2007 Notice without permission, to send written
notices to such organizations or companies demanding their compliance with the
December 2007 Notice, and to report the results of such investigations to SARFT
by January 15, 2008. We have not yet received any notice from the SARFT or any
of its local branches demanding compliance with the December 2007
Notice. We may, however, be required to obtain an approval from SARFT
under the December 2007 Notice, or may be required to remove entertainment
programs from its advertising network.
Advertising
Content
PRC
advertising laws, rules and regulations set forth certain content requirements
for advertisements in China including, among other things, prohibitions on false
or misleading content, superlative wording, socially destabilizing content or
content involving obscenities, superstition, violence, discrimination or
infringement of the public interest. Advertisements for anesthetic,
psychotropic, toxic or radioactive drugs are prohibited. There are also specific
restrictions and requirements regarding advertisements that relate to matters
such as patented products or processes, pharmaceutical products, medical
procedures, alcohol, tobacco, and cosmetics. In addition, all advertisements
relating to pharmaceuticals, medical instruments, agrochemicals and veterinary
pharmaceuticals, together with any other advertisements which are subject to
censorship by administrative authorities according to relevant laws or
regulations, must be submitted to relevant authorities for content approval
prior to dissemination.
Advertisers,
advertising operators, including advertising agencies, and advertising
distributors are required by PRC advertising laws and regulations to ensure that
the content of the advertisements they prepare or distribute is true and in full
compliance with applicable laws. In providing advertising services, advertising
operators and advertising distributors must review the supporting documents
provided by advertisers for advertisements and verify that the content of the
advertisements complies with applicable PRC laws, rules and regulations. Prior
to distributing advertisements that are subject to government censorship and
approval, advertising distributors are obligated to verify that such censorship
has been performed and approval has been obtained. Violation of these
regulations may result in penalties, including fines, confiscation of
advertising income, orders to cease dissemination of the advertisements and
orders to publish an advertisement correcting the misleading information. In
circumstances involving serious violations, the SAIC or its local branches may
revoke violators’ licenses or permits for their advertising business operations.
Furthermore, advertisers, advertising operators or advertising distributors may
be subject to civil liability if they infringe on the legal rights and interests
of third parties in the course of their advertising business.
We do not
believe that advertisements containing content subject to restriction or
censorship comprise a material portion of the advertisements displayed on our
media network. However, there can be no assurance that each advertisement
displayed on our network complies with relevant PRC advertising laws and
regulations. Failure to comply with PRC laws and regulations relating to
advertisement content restrictions governing the advertising industry in China
may result in severe penalties.
Regulation
on Intellectual Property
Regulation
on Trademark
The
Trademark Law of the PRC was adopted at the 24th meeting of the Standing
Committee of the Fifth National People’s Congress on August 23, 1982 and amended
on February 22, 1993 and October 27, 2001. The Trademark Law sets out the
guidelines on administration of trademarks and protection of the exclusive
rights of trademark owners. In order to enjoy an exclusive right to use a
trademark, one must register the trademark with the Trademark Bureau of the SAIC
and obtain a registration certificate.
Regulation
on Patents
The
Patent Law of the PRC was adopted at the 4th Meeting of the Standing Committee
of the Sixth National People’s Congress on March 12, 1984 and subsequently
amended in 1992 and 2000. The Patent Law extends protection to three kinds of
patents: invention patents, utility patents and design patents. According to the
Implementing Regulations of the Patent Law, promulgated by the State Council of
the PRC on December 28, 2002 and effective on February 1, 2003, an invention
patent refers to a new technical solution relating to a product, a process or
improvement. When compared to existing technology, an invention patent has
prominent substantive features and represents notable progress. A utility patent
refers to any new technical solution relating to the shape, the structure, or
their combination, of a product. Utility patents are granted for products only,
not processes. A design patent (or industrial design) refers to any new design
of the shape, pattern or color of a product or their combinations, that create
an aesthetic feeling and are suitable for industrial application. Inventors or
designers must register with the State Intellectual Property Office to obtain
patent protection. The term of protection is twenty years for invention patents
and ten years for utility patents and design patents. Unauthorized use of patent
constitutes an infringement and the patent holders are entitled to claims of
damages, including royalties, to the extent reasonable, and lost
profits.
Regulation
on Copyright
The
Copyright Law of the PRC was adopted at the 15th Meeting of the Standing
Committee of the Seventh National People’s Congress on September 7, 1990 and
amended on October 27, 2001. Unlike patent and trademark protection, copyrighted
works do not require registration for protection in China. However, copyright
owners may wish to voluntarily register with China’s National Copyright
Administration to establish evidence of ownership in the event enforcement
actions become necessary. Consent from the copyright owners and payment of
royalties are required for the use of copyrighted works. Copyrights of movies or
other audio or video works usually expire fifty years after their first
publication. We believe that we are in compliance with the PRC regulations on
copyright.
Regulations
on Foreign Currency Exchange
Foreign
Currency Exchange
Pursuant
to the Foreign Currency Administration Rules promulgated on August 25, 2008 and
various regulations issued by SAFE and other relevant PRC government
authorities, the Renminbi is freely convertible only to the extent of current
account items, such as trade-related receipts and payments, interest and
dividends. Capital account items, such as direct equity investments, loans and
repatriation of investment, require the prior approval from SAFE or its local
branch for conversion of the Renminbi into a foreign currency, such as U.S.
dollars, and remittance of the foreign currency outside the PRC. Payments for
transactions that take place within the PRC must be made in Renminbi. Domestic
companies or individuals can repatriate foreign currency payments received from
abroad or deposit these payments abroad subject to applicable regulations that
expressly require repatriation within certain period. Foreign-invested
enterprises may retain foreign exchange in accounts with designated foreign
exchange banks subject to a cap set by SAFE or its local branch. Foreign
currencies received under current account items can be either retained or sold
to financial institutions engaged in the foreign exchange settlement or sales
business without prior approval from SAFE by complying with relevant
regulations. Foreign exchange income under capital account can be retained or
sold to financial institutions engaged in foreign exchange settlement and sales
business, with prior approval from SAFE unless otherwise provided.
Our
business operations, which are subject to the foreign currency exchange
regulations, have all been in accordance with these regulations. We will take
steps to ensure that our future operations are in compliance with these
regulations.
Foreign
Exchange Registration of Offshore Investment by PRC Residents
Pursuant
to SAFE’s Notice on Relevant Issues Concerning Foreign Exchange Administration
for PRC Residents to Engage in Financing and Inbound Investment via Overseas
Special Purpose Vehicles, or Circular No. 75, issued on October 21, 2005 and
effective on November 1, 2005, (i) a PRC resident, including a PRC resident
natural person or a PRC company, shall register with the local branch of SAFE
before it establishes or controls an overseas SPV for the purpose of overseas
equity financing (including convertible debt financing); (ii) when a PRC
resident contributes the assets of or its equity interests in a domestic
enterprise to an SPV, or engages in overseas financing after contributing assets
or equity interests to an SPV, such PRC resident shall register his or her
interest in the SPV and the change thereof with the local SAFE branch; and (iii)
when the SPV undergoes a material event outside China, such as a change in share
capital, or merger or acquisition, the PRC resident shall, within 30 days of the
occurrence of such event, register such change with the local branch of SAFE.
PRC residents who are shareholders of SPVs established before November 1, 2005
were required to register with the local SAFE branch before March 31,
2006. Such deadline has been further extended by the Circular
106.
Under
Circular No. 75, failure to comply with the registration procedures set forth
above may result in penalties, including restrictions on a PRC subsidiary’s
foreign exchange activities in capital accounts and its ability to distribute
dividends to the SPV. On May 29, 2007, SAFE issued Circular 106 as the
implementing rules of Circular 75, which provides more detailed provisions and
requirements for the registration procedures.
On
December 25, 2006, the People’s Bank of China promulgated the “Measures for the
Administration of Individual Foreign Exchange,” and on January 5, 2007, SAFE
promulgated the implementation rules on those measures. These regulations became
effective on February 1, 2007. Pursuant to these regulations, PRC citizens who
are granted shares or share options by an overseas listed company according to
its employee share option or share option plan are required, through a qualified
PRC agent which may be the PRC subsidiary of such overseas listed company, to
register with the SAFE and complete certain other procedures related to the
share option or share option plan. Foreign exchange income received from the
sale of shares or dividends distributed by the overseas listed company must be
remitted into a foreign currency account of such PRC citizen or be exchanged
into Renminbi. In addition, Circular 106 requires a PRC resident to make the SPV
filing together with the employee stock option filing. Moreover, the PRC
resident is required to make an amendment to the previous filings when he or she
exercises his or her employee stock options.
Dividend
Distribution
The
principal laws, rules and regulations governing dividends paid by PRC operating
subsidiaries include the Company Law of the PRC (1993), as amended in 2006, the
Wholly Foreign Owned Enterprise Law (1986), as amended in 2000, and the Wholly
Foreign Owned Enterprise Law Implementation Rules (1990), as amended in 2001.
Under these laws and regulations, PRC subsidiaries, including wholly owned
foreign enterprises, or WFOEs, and domestic companies in China, may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, its PRC
significant subsidiaries, including WFOEs and domestic companies, are required
to set aside at least 10% of their after-tax profit based on PRC accounting
standards each year to their statutory capital reserve fund until the cumulative
amount of such reserve reaches 50% of their respective registered capital. These
reserves are not distributable as cash dividends.
Tax
On March
16, 2007, the Fifth Session of the Tenth National People’s Congress of PRC
passed the Enterprise Income Tax Law of the People’s Republic of China, or EIT
Law, which became effective on January 1, 2008. On November 28, 2007, the State
Council at the 197th Executive Meeting passed the Regulation on the
Implementation of the Income Tax Law of the People’s Republic of China, which
became effective on January 1, 2008. The EIT Law adopted a uniform
tax rate of 25% for all enterprises (including foreign-invested enterprises) and
revoked the existing tax exemption, reduction and preferential treatments
applicable to foreign-invested enterprises. However, there is a transition
period for enterprises, whether foreign-invested or domestic, that received
preferential tax treatments granted by relevant tax authorities prior to the
effectiveness of the EIT Law. Enterprises that were subject to an enterprise
income tax rate lower than 25% may continue to enjoy the lower rate and
gradually transit to the new tax rate within five years after the effective date
of the EIT Law.
Under the
EIT Law, enterprises are classified as either “resident enterprises” or
“non-resident enterprises.” Pursuant to the EIT Law and the Implementation
Rules, enterprises established under PRC laws, or enterprises established
outside China whose “de facto management bodies” are located in China, are
considered “resident enterprises” and subject to the uniform 25% enterprise
income tax rate for their global income. According to the Implementation Rules,
“de facto management body” refers to a managing body that in practice exercises
overall management and control over the production and business, personnel,
accounting and assets of an enterprise. Our management is currently based in
China and is expected to remain in China in the future. In addition, although
the EIT Law provides that “dividends, bonuses and other equity investment
proceeds between qualified resident enterprises” is exempted income, and the
Implementation Rules refer to “dividends, bonuses and other equity investment
proceeds between qualified resident enterprises” as the investment proceeds
obtained by a resident enterprise from its direct investment in another resident
enterprise, however, it is unclear whether our circumstance is eligible for
exemption.
Furthermore,
the EIT Law and Implementation Rules provide that the “non-resident enterprises”
are subject to the enterprise income tax rate of 10% on their income sourced
from China, if such “non-resident enterprises” (i) do not have establishments or
premises of business in China or (ii) have establishments or premises of
business in China, but the relevant income does not have actual connection with
their establishments or premises of business in China. Such income tax may be
exempted or reduced by the State Council of the PRC or pursuant to a tax treaty
between China and the jurisdictions in which its non-PRC shareholders reside.
Under the Double Tax Avoidance Arrangement between Hong Kong and Mainland China,
if the Hong Kong resident enterprise owns more than 25% of the equity interest
in a company in China, the 10% withholding tax on the dividends the Hong Kong
resident enterprise received from such company in China is reduced to 5%. If
China Net HK is considered to be a Hong Kong resident enterprise under the
Double Tax Avoidance Arrangement and is considered to be a “non-resident
enterprise” under the EIT Law, the dividends paid to us by Rise King WFOE may be
subject to the reduced income tax rate of 5% under the Double Tax Avoidance
Arrangement. However, based on the Notice on Certain Issues with Respect to the
Enforcement of Dividend Provisions in Tax Treaties, issued on February 20, 2009
by the State Administration of Taxation, if the relevant PRC tax authorities
determine, in their discretion, that a company benefits from such reduced income
tax rate due to a structure or arrangement that is primarily tax-driven, such
PRC tax authorities may adjust the preferential tax treatment.
We are in
the process of evaluating the impact of the EIT Law on our results of
operations. Any significant income tax expenses may have a material adverse
effect on our net income in 2008 and beyond. Reduction or elimination of the
financial subsidies or preferential tax treatments we currently enjoy or
imposition of additional taxes on us or our subsidiary in China may
significantly increase our income tax expense and materially reduce our net
income.
Provisions
Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors
On August
8, 2006, six PRC regulatory agencies, including CSRC, MOC, SAT, SASAC, SAIC and
SAFE, jointly promulgated the M&A Rules, which became effective on September
8, 2006, to regulate foreign investment in PRC domestic enterprises. The M&A
Rules provide that the MOC must be notified in advance of any change-of-control
transaction in which a foreign investor takes control of a PRC domestic
enterprise and any of the following situations exist: (i) the transaction
involves an important industry in China; (ii) the transaction may affect
national “economic security”; or (iii) the PRC domestic enterprise has a
well-known trademark or historical Chinese trade name in China. The M&A
Rules also contain a provision requiring offshore SPVs formed for the purpose of
the overseas listing of equity interests in PRC companies and controlled
directly or indirectly by PRC companies or individuals, to obtain the approval
of the CSRC prior to publicly listing their securities on an overseas stock
exchange. On September 21, 2006, the CSRC issued a clarification that sets forth
the criteria and procedures for obtaining any required approval from the
CSRC.
To date,
the application of the M&A Rules is unclear. Our PRC counsel, has advised us
that:
|
•
|
the CSRC approval requirement
applies to SPVs that acquire equity interests in PRC companies through
share exchanges and cash, and seek overseas listings;
and
|
|
•
|
based on their understanding of
the current PRC laws, rules and regulations and the M&A Rules, unless
there are new PRC laws and regulations or clear requirements from the CSRC
in any form that require the prior approval of the CSRC for the listing
and trading of any overseas SPV’s securities on an overseas stock
exchange, the M&A Rules do not require that we obtain prior CSRC
approval because: (i) the Share Exchange is a purely foreign
related transaction governed by foreign laws, not subject to the
jurisdiction of PRC laws and regulations; (ii) we are not a special
purpose vehicle formed or controlled by PRC companies or PRC individuals;
and (iii) we are owned or substantively controlled by
foreigners.
|
However,
the interpretation and application of the M&A Rules remain unclear, and the
PRC government authorities have the sole discretion to determine whether the
transaction is subject to the approval of the CSRC, especially when taking into
consideration of the performance-based incentive option arrangement by way of
the Share Transfer Agreements. If the CSRC or another PRC regulatory agency
subsequently determines that CSRC approval is required for the transaction, we
cannot predict how long it would take to obtain the approval. In addition, we
may need to apply for a remedial approval from the CSRC and may be subject to
certain administrative or other sanctions from these regulatory
agencies.
Further,
new rules and regulations or relevant interpretations may be issued from time to
time that may require us to obtain retroactive approval from the CSRC in
connection with the business combination. If this were to occur, our failure to
obtain or delay in obtaining the CSRC approval for the business combination
would subject us to sanctions imposed by the CSRC and other PRC regulatory
agencies. These sanctions could include fines and penalties on our operations in
China, restrictions or limitations on our ability to pay dividends outside of
China, and other forms of sanctions that may materially and adversely affect our
business, results of operations and financial condition.
If the
CSRC or another PRC regulatory agency subsequently determines that CSRC approval
is required for the business combination, we may need to apply for a remedial
approval from the CSRC and may be subject to certain administrative punishments
or other sanctions from these regulatory agencies. New rules and regulations or
relevant interpretations may require that we retroactively obtain approval from
the CSRC in connection with the business combination. If this were to occur, our
failure to obtain or delay in obtaining the CSRC approval for the transaction
would subject us to sanctions imposed by the CSRC and other PRC regulatory
agencies. These sanctions could include fines and penalties on our operations in
China, restrictions or limitations on our ability to pay dividends outside of
China, and other forms of sanctions that may materially and adversely affect our
business, results of operations and financial condition.
The
M&A Rules also established additional procedures and requirements expected
to make merger and acquisition activities in China by foreign investors more
time-consuming and complex, including requirements in some instances that the
MOC be notified in advance of any change-of-control transaction in which a
foreign investor takes control of a PRC domestic enterprise. These rules may
also require the approval from the MOC where overseas companies established or
controlled by PRC enterprises or residents acquire affiliated domestic
companies. Complying with the requirements of the new regulations to complete
such transactions could be time-consuming, and any required approval processes,
including MOC approval, may delay or inhibit our ability to complete such
transactions, which could affect our ability to expand our
business.
Property
The
following table summaries the location of real property we lease. We
do not own any real property.
Item
|
|
Address
|
|
Leased/Owned
|
|
|
|
|
|
1
|
|
No.
3 Min, Zhuang Road, Building 6, Yu Quan Hui Gu Tusparh, Haidan District,
Beijing, PRC, 1
st
Floor
|
|
Leased
|
|
|
|
|
|
2
|
|
No.
3 Min, Zhuang Road, Building 6, Yu Quan Hui Gu Tusparh, Haidan District,
Beijing, PRC, 2
nd
Floor
|
|
Leased
|
|
|
|
|
|
3
|
|
No.
3 Min, Zhuang Road, Building 6, Yu Quan Hui Gu Tusparh, Haidan District,
Beijing, PRC, Basement
|
|
Leased
|
Employees
As of December 31, 2009, we
had 224 full-time employees, 91 of which are in sales and
marketing, 53 in operations and support, 23 in management and
administration and 57 in technology and R & D.
We are
compliant with local prevailing wage, contractor licensing and insurance
regulations, and have good relations with our employees.
As required
by PRC regulations, we participate in various employee benefit plans that are
organized by municipal and provincial governments, including pension,
work-related injury benefits, maternity insurance, medical and unem
ployment
benefit plans. We are required under PRC laws to make contributions to the
employee benefit plans at specified percentages of the salaries, bonuses and
certain allowances of our employees, up to a maximum amount specified by the
local government
f
rom time to
time. Members of the retirement plan are entitled to a pension equal to a fixed
proportion of the salary prevailing at the member
’
s retirement
date.
Generally we enter into a standard
employment contract with our officers and managers for a set period of years and
a standard employment contract with other employees for a set period of
years. According to these contracts, all of our employees are
prohibited from engaging in any activities that compete with our business during
the period of their employment with us. Furthermore, the employment
contracts with officers or managers include a covenant that prohibits officers
or managers from engaging in any activities that compete with our business for
two years after the period of employment.
Corporation
Information
Our principal executive offices are
located at
No. 3 Min Zhuang Road,
Building 6, Yu Quan Hui Gu Tuspark,
Haidian District, Beijing,
PRC. Our telephone number at this address is (86 10)
51600828
and our fax number is
(86 10)
51600
328
. For more
information, see www.chinanet-online.com.
DIRECTORS
AND EXECUTIVE OFFICERS
Executive
Officers and Directors
The following discussion sets forth
information regarding the executive officers and directors of the Company as of
the date of this prospectus. The board of directors is comprised of
only one class. All of the directors will serve until the next annual meeting of
shareholders and until their successors are elected and qualified, or until
their earlier death, retirement, resignation or removal. To date we have not had
an annual meeting. Provided below is a brief description of our
executive officers’ and directors’ business experience during the past five
years.
Name
|
|
Age
|
|
Position
|
Handong
Cheng
|
|
38
|
|
Chairman
of the Board, Chief Executive Officer and President
|
Zhige
Zhang
|
|
35
|
|
Chief
Financial Officer, Treasurer and Director
|
Xuanfu
Liu
|
|
43
|
|
Chief
Operating Officer and Secretary
|
Hai
Cui
|
|
39
|
|
Vice
President, Head of Bank Kiosk Unit
|
Wen
Hu
|
|
40
|
|
Vice
President, Head of Television Operations
|
Li
Wang
|
|
45
|
|
Vice
President, Head of Human Resources
|
Bing
Zhang
|
|
39
|
|
Vice
President, Head of Business Development and Administration
|
Min
Wu
|
|
36
|
|
Finance
Director
|
Xinwei
Liu
|
|
33
|
|
Vice
General Manager, Head of 28.com
|
Hongli
Xu
|
|
40
|
|
Chief
Technology Officer
|
Zhiqing
Chen
|
|
36
|
|
Director
|
Watanabe
Mototake
|
|
67
|
|
Director
|
Douglas
MacLellan
|
|
54
|
|
Director
|
Handong
Cheng, Chief Executive Office, President and Director
Mr. Cheng has served as Chief Executive
Officer of China Net since September 2007. Prior to that role, from
October 2003 to September 2007, Mr. Cheng acted as President of China Net Online
Advertising Limited. Mr. Cheng holds and EMBA from Guanghua School of
Management in Beijing, and a degree in economic law from the College of Law of
Wuhan University.
Zhige
Zhang, Chief Financial Officer, Treasurer and Director
Mr. Zhang has served as Chief Financial
Officer of China Net since January 2009. Prior to that role, from
January 2008 to January 2009, Mr. Zhang served as Executive Director of China
Net. From January 2007 to December 2007, Mr. Zhang was Director and
Vice President of Fu Jian Rong Ji Software Limited. From August 2002
to December 2006, Mr. Zhang acted as Chief Operating Officer of Beijing HSHZ
Information System Engineering Company. Mr. Zhang holds a degree in
industry design from Guilin University of Electronic Technology.
Xuanfu
Liu, Chief Operating Officer and Secretary
Mr. Liu joined Business Opportunity
Online as a Vice President in January 2004, and has served as Chief Operating
Officer of China Net since September 2007. Prior to joining Business
Opportunity Online, Mr. Liu acted as a human resources officer at Chang Jiang
Wired Electricity Factory in Wuhan, China. Mr. Liu is the brother of
Xinwei Liu.
Hai
Cui, Vice President
Mr. Cui, has served as a Vice President
and Head of the Bank Kiosk Unit since 2008. Prior to serving in that
role, from 2005 to 2007, Mr. Cui served as a director and General Manager of
Shanghai Borongdingsi. From 2001 to 2005, Mr. Cui was General Manager of Guang
Zhou Hui Gang Technology Co., Limited. Mr. Cui holds a M.S. in
Computer Engineering from the College of Information Engineering, University of
Zhengzhou.
Wen
Hu, Vice President
Mr. Hu has served as a Vice President
and Head of Television Operations since October 2007. Prior to
serving as a Vice President of China Net, from October 2005 to September 2007,
Mr. Hu acted as Vice General Manager of China Net. Prior to joining
China Net, from March 1999 to February 2004, Mr. Hu was Vice General Manager of
Beijing Te Li Jie Tidy Technology Limited. Mr. Hu graduated in 1991
from Hu Bei Xiao Gan City Radio and Television University.
Li
Wang, Vice President
Ms. Wang has served as a Vice President
and Head of Human Resources since September 2007. Prior to serving in
that role, from August 2005 to August 2007, Ms. Wang acted as Senior Financial
Director of China Net Online Advertising Limited. From November 2001
to July 2005, Ms. Wang acted as Financial Director for Tidynet Cleaning
Technology Limited, Beijing. Ms. Wang holds a degree in accounting
from Hu Bei Xiao Gan District Business School (now Xiao Gan Professional
Technology College).
Bing
Zhang, Vice President
Mr. Zhang, has served as a Vice
President and Head of Business Development and Administration since
2008. Prior to serving in that role, from 2004 to 2007, Mr. Zhang
acted as a Senior Consultant to China Net Online Advertising Limited. From 2001
to 2003, Mr. Zhang acted as General Manager for Shanghai JOINNS
Company. Mr. Zhang holds a M.S. in Chemical Engineering Technology
from School of Chemical Engineering, University of Zhengzhou.
Min
Wu, Finance Director
Ms. Wu has served as Finance Director
and principal accounting officer of China Net since February
2009. Prior to serving in that role, from May 2005 to December 2007,
Ms. Wu acted as Financial Manager of Neotel Telecom Engineering Co.,
Limited. From February 2001 to May 2003, Ms. Wu was an accountant
with Shenzhen Branch of Shanghai Pudong Development Bank. Ms. Wu
holds a degree in business management from South Central University of Finance
and Law, and a MBA from University of Science and Technology,
Beijing.
Hongli
Xu, Chief Technology Officer
Mr. Xu served as Project Manager at
ThinkingPower Technology Co., Ltd., from 2004 to 2006, an e-government software
company focused on the broadcasting and television industry, where Mr. Xu
oversaw the development and management of a full suite of software products
designed to improve government interactions with citizens and businesses. From
2001 to 2004, Mr. Xu was Product Manager at Acer Digital Services (China)
Company, the world's third largest PC manufacturer, where he was in charge of
internet product development for several of the Company's subsidiaries. From
1998 to 2000, Mr. Xu served as Project Manager at Colored Ribbons Information
System Co., Ltd, a software development company focused on the electron
industry, where he was directly responsible for analyzing, designing, and
testing business application solutions and software products. Mr. Xu created the
first B2B website in China, "CCEC.com." Mr. Xu holds a Bachelor Degree in
Software from Dalian University of Technology.
Xinwei
Liu, Vice General Manager
Mr. Liu has served as Vice General
Manager and Head of 28.com since 2005.
Prior
to becoming Vice General Manager of China Net, from 2003 to 2005, Mr. Liu acted
as Managing Director of the China Net Advertising Department. Mr. Liu is the
brother of Mr. Xuanfu Liu.
Zhiqing
Chen, Director
Mr. Chen
is a partner of Jin Mao P.R.C. Lawyers in Shanghai, specializing in corporate
law, including foreign investments and mergers and acquisitions. Mr. Chen’s
clients include local PRC enterprises as well as international corporations.
Prior to joining the Company, Mr. Chen served as a non-management director for
Shanghai Fumai Investment Management Co., Ltd., Shanghai Zhijinwu Investment
Management Co., Ltd, and Shanghai Merciful Groups Co., Ltd. Mr. Chen
received a law degree in international economics from East China University, a
master’s degree in economic philosophy from Fudan University, and an EMBA degree
from Beijing University.
Watanabe
Mototake, Director
Mr.
Watanabe serves as a corporate advisor to SJI, Inc. (Jasdaq Market), a provider
of computer and computer peripheral equipment and software merchant wholesaler,
and has served in several capacities there since 2005, including operating
officer, manager of the president’s office and corporate auditor. From 2000 to
2005, Mr. Watanabe served as the executive director for TCC Inc., a power
conversion company specializing in high quality connectors and adapters for the
RF connector industry. Mr. Watanabe graduated in 1966 from Chuo University
Faculty of Commerce in Japan.
Douglas
MacLellan, Director
Mr.
MacLellan currently serves as chairman and chief executive officer at Radient
Pharmaceuticals, Inc. (AMEX: RPC), a vertically integrated specialty
pharmaceutical company, and also serves as chairman and chief executive officer
for the MacLellan Group, an international financial advisory firm established in
1992, where he advises clients on strategic planning, operational activities,
corporate finance, economic policy, asset allocation and mergers &
acquisitions. From 2005 to 2009, Mr. MacLellan was co-founder and vice chairman
at Ocean Smart, Inc. (OTCBB: OCSM), a Canadian based aquaculture company. From
2002 to 2006, Mr. MacLellan served as chairman and co-founder at Broadband
Access MarketSpace, Ltd., a China based IT advisory firm, and was also
co-founder at Datalex Corp., a software and IT company specializing in mainframe
applications, from 1997 to 2002. Mr. MacLellan has a MA and BA from the
University of Southern California in economic and international relations.
Family
Relationships
There are
no family relationships between any of our directors or executive officers
except that Mr. Xinwei Liu is the brother of Mr. Xuanfu Liu.
Code
of Ethics
We
adopted a Code of Ethics on December 21, 2009. The Code of Ethics is designed to
deter wrongdoing and to promote ethical conduct and full, fair, accurate, timely
and understandable reports that the Company files or submits to the Securities
and Exchange Commission and others. A printed copy of the Code of
Ethics may be obtained free of charge by writing to us at our headquarters
located at No. 3 Min Zhuang Road, Building 6, Yu Quan Hui Gu Tuspark, Haidian
District, Beijing, PRC 100195.
Board
Composition
The Board
of Directors is currently composed of five members. All actions of the
Board of Directors require the approval of a majority of the directors in
attendance at a meeting at which a quorum is present. A quorum is a majority of
the Board of Directors.
Board
Committees
Our board
of directors has an audit committee, a nominating and corporate governance
committee and a compensation committee, each of which was formed on November 30,
2009. Zhiqing Chen, Watanabe Mototake and Douglas MacLellan, all of the
Independent Directors, serve on each committee. Douglas MacLellan is
the Chairman of the Audit Committee and Compensation Committee and Chiqing Chen
is the Chairman of the Nominating and Corporate Governance Committee.
Audit
Committee
Our board
of directors has determined that each of our Audit Committee members is
“independent” as defined by Section 803A of the NYSE Amex Company Guide.
Our board
of directors has determined that we have at least one “audit committee financial
expert,” as defined by the rules and regulations of the SEC, serving on our
audit committee, and that Douglas MacLellan is the “audit committee financial
expert.”
Policy
Regarding Board Attendance
Our
directors are expected to attend board meetings as frequently as necessary to
properly discharge their responsibilities and to spend the time needed to
prepare for each such meeting. Our directors are expected to attend annual
meetings of stockholders, but we do not have a formal policy requiring them to
do so.
Shareholder
Communications
The
Company has a process for shareholders who wish to communicate with the board of
directors. Shareholders who wish to communicate with the Board may write to it
at the Company’s address given above. These communications will be reviewed by
one or more employees of the Company designated by the Board, who will determine
whether they should be presented to the Board. The purpose of this screening is
to allow the Board to avoid having to consider irrelevant or inappropriate
communications.
Background
and Compensation Philosophy
Our Board
of Directors has not adopted or established a formal policy or procedure for
determining the amount of compensation paid to our executive officers. No
pre-established, objective performance goals or metrics have been used by the
Board of Directors in determining the compensation of our executive
officers.
Elements
of Compensation
Some of
our executive officers receive a base salary to compensate them for services
rendered during the year. Our policy of compensating our certain executives with
a cash salary has served the Company well. Because of our history of attracting
and retaining executive talent, we do not believe it is necessary at this time
to provide our executives equity incentives, or other benefits for the Company
to continue to be successful.
Base Salary and Bonus
. The
value of base salary and bonus for each our executive reflects his skill set and
the market value of that skill set in the sole discretion of the Board of
Director.
Equity Incentives
. The
Company and its subsidiaries have not established an equity based incentive
program and have not granted stock based awards as a component of compensation.
In the future, we may make awards under an equity incentive plan pursuant to
which awards may be granted if our Compensation Committee determines that it is
in the best interest of the Company and its stockholders to do
so.
Retirement Benefits
. Our
executive officers are not presently entitled to company-sponsored retirement
benefits.
Perquisites
. We have not
provided our executive officers with any material perquisites and other personal
benefits and, therefore, we do not view perquisites as a significant or
necessary element of our executive’s compensation.
Deferred Compensation
. We do
not provide our executives the opportunity to defer receipt of annual
compensation.
Summary
Compensation Table
The
following table sets forth all cash compensation paid by the Company, as well as
certain other compensation paid or accrued, for each of the last two fiscal
years of our company to each named executive officer.
Summary
Compensation of Named Executive Officers
Name and Principal Position
|
|
Fiscal
Year
|
|
|
Salary
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total ($)
|
|
|
|
|
|
|
|
|
G.
Edward Hancock*
Former
President
|
|
|
2009
2008
|
|
|
|
1,250
6,300
|
|
|
|
-
-
|
|
|
|
1,250
6,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Handong
Cheng,
Chairman
of the Board,
President
and Chief Executive Officer
|
|
|
2009
2008
|
|
|
|
26,577
12,009
|
|
|
|
-
-
|
|
|
|
26,577
12,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhige
Zhang,
Chief
Financial Officer, Treasurer and Secretary
|
|
|
2009
2008
|
|
|
|
19,142
-
|
|
|
|
-
-
|
|
|
|
19,142
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xuanfu
Liu
Chief
Operating Officer
|
|
|
2009
2008
|
|
|
|
19,108
-
|
|
|
|
-
-
|
|
|
|
19,108
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hai
Cui
Vice
President, Head of Bank Kiosk Unit
|
|
|
2009
2008
|
|
|
|
8,951
-
|
|
|
|
365
-
|
|
|
|
9,316
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wen
Hu
Vice
President, Head of Television Operations
|
|
|
2009
2008
|
|
|
|
18,632
7,531
|
|
|
|
365
-
|
|
|
|
18,997
7,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Li
Wang
Vice
President, Head of Human Resources
|
|
|
2009
2008
|
|
|
|
17,658
8,999
|
|
|
|
365
-
|
|
|
|
18,023
8,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bing
Zhang
Vice
President, Head of Business Development and
Administration
|
|
|
2009
2008
|
|
|
|
17,892
-
|
|
|
|
365
-
|
|
|
|
18,257
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xinwei
Liu
Vice
General Manager, 28.com
|
|
|
2009
2008
|
|
|
|
19,523
9,729
|
|
|
|
365
-
|
|
|
|
19,888
9,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hongli
Xu
Chief
Technology Officer
|
|
|
2009
2008
|
|
|
|
5,967
-
|
|
|
|
-
-
|
|
|
|
5,967
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Min
Wu
Finance
Director
|
|
|
2009
2008
|
|
|
|
15,131
-
|
|
|
|
365
-
|
|
|
|
15,496
-
|
|
* Mr
.Hancock resigned as President on June 26, 2009, in connection with the Share
Exchange.
Other
compensation represents the aggregate grant date fair value of the restricted
shares granted to each named executive officer for financial reporting purpose
pursuant to FASB ASC Topic 718 during fiscal year 2009.
Employment
Agreements
We
entered into a standard employment contract with our executive officers from
fiscal year 2009 for a set period of years. According to these contracts, these
executive officers will devote substantially all of his time to the service of
the Company and may not compete directly or indirectly with
us. Before that, we didn’t have any employment agreements with any of
our executive officers.
We
entered into a standard employment contract with other employees for a set
period of years. According to these contracts, all of our employees
are prohibited from engaging in any activities that compete with our business
during the period of their employment with us.
The
Company does not have change-in-control agreements with any of its directors or
executive officers, and the Company is not obligated to pay severance or other
enhanced benefits to executive officers upon termination of their
employment.
Outstanding
Equity Awards at Fiscal Year-End
Option
Awards
|
|
Name
|
|
Grant
Date
|
|
Number
of securities underlying Unexercised Options (#)
Exercisable
|
|
|
Number
of securities underlying Unexercised Options (#)
Unexercisable
|
|
|
Option
Exercise Price ($)
|
|
Option
Expiration Date
|
|
Market
Value of Unexercised Options ($)
|
|
Douglas
MacLelllan
|
|
11/30/2009
|
|
|
-
|
|
|
|
44,000
|
|
|
|
5
|
|
11/29/2014
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhiqing
Chen
|
|
11/30/2009
|
|
|
-
|
|
|
|
5,000
|
|
|
|
5
|
|
11/29/2014
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mototaka
Watanabe
|
|
11/30/2009
|
|
|
-
|
|
|
|
5,000
|
|
|
|
5
|
|
11/29/2014
|
|
|
-
|
|
Vesting
Schedule for unexercisable options
|
|
|
|
Vesting
Schedule
|
|
Name
|
|
Grant
Date
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Douglas
MacLelllan
|
|
11/30/2009
|
|
|
22,000
|
|
|
|
22,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhiqing
Chen
|
|
11/30/2009
|
|
|
2,500
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Mototaka
Watanabe
|
|
11/30/2009
|
|
|
2,500
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
27,000
|
|
|
|
27,000
|
|
Director
Compensation for the fiscal year 2009
Name
|
|
Fees
Earned or Paid in Cash
|
|
|
Stock
Awards
|
|
|
Option
Awards
|
|
|
Non-equity
incentive plan compensation
|
|
|
Non-qualified
deferred compensation earnings
|
|
|
All
Other Compensation
|
|
|
Total
|
|
Douglas
MacLellan
|
|
$
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
5,000
|
|
Zhiqing
Chen
|
|
$
|
500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
500
|
|
Mototaka
Watanabe
|
|
$
|
500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
500
|
|
Pursuant to one year agreements with
the Company each of Messrs. Chen and Watanabe will receive a fee of $300 per
month for the term of the agreement, as well $200 per month as long as each
serves on the Audit Committee, while Mr. MacLellan will receive a monthly fee of
$3,000 for the term of the agreement, as well as $2,000 a month so long as he
serves as the Audit Committee Chairman. Upon execution of their agreements,
Messrs. Chen and Watanabe were each awarded a 5-year option to purchase up to
5,000 shares of common stock of the Company at $5.00 per share, such options
vesting in quarterly installments annually over 24 months, so long as each is,
respectively, a member of the board of directors. Upon execution of his
agreement, Mr. MacLellan was awarded (i) one 5-year option to purchase up to
24,000 shares of common stock of the Company at $5.00 per share, such options
vesting in quarterly installments annually over 24 months, so long as he is a
member of the board of directors and (ii) one 5-year option to purchase up to
20,000 shares of common stock of the Company at $5.00 per share, such options
vesting in quarterly installments over 24 months, so long as he is Chairman of
the Audit Committee. The Company will also reimburse each Independent Director
for expenses related to his or her attending meetings of the board, meetings of
committees of the board, executive sessions and shareholder
meetings.
Bonuses
and Deferred Compensation
We do not
have any bonus, deferred compensation or retirement plan.
All decisions regarding
compensation are determined by our Board of Directors.
Options
and Stock Appreciation Rights
We do not
currently have a stock option or other equity incentive plan. We may adopt one
or more such programs in the future.
Payment
of Post-Termination Compensation
The
Company does not have change-in-control agreements with any of its directors or
executive officers, and the Company is not obligated to pay severance or other
enhanced benefits to executive officers upon termination of their
employment.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information regarding beneficial ownership of
our Common Stock as of April 23, 2010 by (i) each person (or group of
affiliated persons) who is known by us to own more than five percent of the
outstanding shares of our common stock, (ii) each director and executive
officer, and (iii) all of our directors and executive officers and director
nominees as a group. As of April 23, 2010, we had 16,741,320 shares of
Common Stock issued and outstanding.
Beneficial ownership is determined in
accordance with SEC rules and generally includes voting or investment power with
respect to securities. Unless otherwise noted, the principal address of each of
the stockholders, directors and officers listed below is No. 3 Min Zhuang Road,
Building 6, Yu Quan Hui Gu Tuspark, Haidian District, Beijing, PRC
100195.
All share ownership figures include
shares of our Common Stock issuable upon securities convertible or exchangeable
into shares of our Common Stock within sixty (60) days of April 23, 2010,
which are deemed outstanding and beneficially owned by such person for purposes
of computing his or her percentage ownership, but not for purposes of computing
the percentage ownership of any other person.
Name and Address of Beneficial Owner
|
|
Amount
and
Nature of
Beneficial
Ownership
|
|
|
Percentage
of
Outstanding
Shares of
Common
Stock
|
|
|
|
|
|
|
|
|
Rise
King Investments Limited (1) (4)
|
|
|
7,434,940
|
|
|
|
44.41
|
%
|
|
|
|
|
|
|
|
|
|
Star
(China) Holdings Limited (2)
|
|
|
1,279,080
|
|
|
|
7.64
|
|
|
|
|
|
|
|
|
|
|
Clear
Jolly Holdings Limited (3)
|
|
|
1,279,080
|
|
|
|
7.64
|
|
|
|
|
|
|
|
|
|
|
Li
Sun (4)
|
|
|
7,434,940
|
|
|
|
44.41
|
|
|
|
|
|
|
|
|
|
|
Handong
Cheng (4)
|
|
|
7,434,940
|
|
|
|
44.41
|
|
|
|
|
|
|
|
|
|
|
Xuanfu
Liu (4)
|
|
|
7,434,940
|
|
|
|
44.41
|
|
|
|
|
|
|
|
|
|
|
Sansar
Capital Management (5)
|
|
|
1,640,989
|
|
|
|
9.80
|
|
|
|
|
|
|
|
|
|
|
Taylor
International Fund, Ltd. (6)
|
|
|
1,100,000
|
|
|
|
6.57
|
|
|
|
|
|
|
|
|
|
|
Zhige
Zhang
|
|
|
-
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Hai
Cui
|
|
|
150
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Wen
Hu
|
|
|
150
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Li
Wang
|
|
|
150
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Bing
Zhang
|
|
|
150
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Min
Wu
|
|
|
150
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Xinwei
Liu
|
|
|
150
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Hongli
Xu
|
|
|
-
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Douglas
McLellan
|
|
|
-
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Mototaka
Watanabe
|
|
|
-
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Zhiqing
Chen
|
|
|
-
|
|
|
|
*
|
|
All
Directors and Executive Officers, as a group (13)
|
|
|
7,435,840
|
|
|
|
|
|
|
(1)
|
The
business address of Rise King Investments Limited is P.O. Box 957,
Offshore Incorporations Center, Road Town, Tortola, British Virgin
Islands.
|
|
(2)
|
The
business address of Star (China) Holdings Limited is P.O. Box 957,
Offshore Incorporations, Center, Road Town, Tortola, British Virgin
Islands.
|
|
|
|
|
(3)
|
The
business address of Clear Jolly Holdings Limited is P.O. Box 957, Offshore
Incorporations Center, Road Town, Tortola, British Virgin
Islands.
|
|
|
|
|
(4)
|
In
accordance with an Entrustment Agreement, dated June 5, 2009, by and
between Rise King Investments Limited (“Rise King”) and Handong Cheng,
Xuanfu Liu and Li Sun (collectively, the “Grantees”), Rise King
collectively delegated to the Grantees its direct or indirect rights as a
stockholder of China Net Online Media Group Limited, CNET Online
Technology Limited, Rise King Century Technology Development (Beijing)
Co., Ltd., or any subsidiaries of such companies (collectively, the
“Covered Companies”), including the direct or indirect right to vote any
equity interest in the Covered Companies, or to designate the management
of such companies. As a result of the delegation of authority under the
Entrustment Agreement, Mr. Cheng, Mr. Liu and Ms. Sun may be deemed to be
beneficial owners of the shares of our common stock held by Rise King.
Each of Mr. Cheng, Mr. Liu and Ms. Sun disclaim such beneficial ownership,
and this prospectus shall not be deemed to be an admission that Mr. Cheng,
Mr. Liu or Ms. Sun is the beneficial owner of any such shares for any
purpose.
|
|
|
|
|
(5)
|
Consists
of 1,000,000 shares underlying Series A
Preferred
Stock and Series A-1 and Series A-2 Warrants to purchase up to 1,000,000
shares of our Common Stock, subject to a 9.99% limitation on beneficial
ownership of our Common Stock as more fully described in note 3 to
the Selling Stockholder table be
l
ow. Mr.
Sanjay Motwani, portfolio manager has voting and dispositive power over
the shares held by Sansar Capital Management. Mr. Motwani
may be deemed to beneficially own the shares of Common Stock held by
Sansar Capital Management. Mr. Motwani disclai
m
s
beneficial ownership of such shares. The address for
Sansar Capital Management is 135 E 57th Street 23rd Floor, New York, NY
10022, U. S.
A.
|
|
(6)
|
Consists
of 100,000 shares of Common Stock, 500,000 shares underlying Series A
Preferred Stock and Series A-1 and Series A-2 Warrants to purchase up to
500,000 shares of our Common Stock, subject to a 9.99% limitation on
beneficial ownership of our Common Stock as more fully described in
note 3 to the Selling Stockholder table below. Stephen S.
Taylor, portfolio manager has voting and dispositive power over
the shares held by Taylor International Fund Ltd. Mr. Taylor
may be deemed to beneficially own the shares of Common Stock held by
Taylor International Fund, Ltd. Mr. Taylor disclaims beneficial ownership
of such shares. The address for Taylor International
Fund, Ltd. is 714 South Dearborn Street,2nd floor, Chicago, IL
60605.
|
Changes
in Control
There are
no arrangements known to us, including any pledge by any person of our
securities, the operation of which may at a subsequent date result in a change
in control of the Company.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
PRC law
currently limits foreign equity ownership of companies that provide value-added
telecommunication services and advertisement services (in case the parent
company is not qualified). To comply with these foreign ownership
restrictions, we operate our business in China through a series of contractual
arrangements with the PRC Operating Subsidiaries and its
shareholders. Some of the shareholders of the PRC Operating
Subsidiaries are also our directors and executive officers. These agreements
are summarized as follows:
Exclusive
Business Cooperation Agreements
Pursuant
to Exclusive Business Cooperation Agreements entered into by and between Rise
King WFOE and each of the PRC Operating Subsidiaries in October 2008, Rise King
WFOE has the exclusive right to provide to the PRC Operating Subsidiaries
complete technical support, business support and related consulting services,
which include, among other things, technical services, business consultations,
equipment or property leasing, marketing consultancy and product research. Each
PRC Operating Subsidiary has agreed to pay an annual service fee to Rise King
WFOE equal to 100% of its audited total amount of operational income each
year. Each PRC Operating Subsidiary has also agreed to pay a monthly
service fee to Rise King WFOE equal to 100% of the net income generated on a
monthly basis. The payment and terms of payment are fixed to ensure that Rise
King WFOE obtains 100% of the net income for that month, although adjustments
may be made upon approval by Rise King WFOE to provide for operational needs. If
at year end, after an audit of the financial statements of any PRC Operating
Subsidiary, there is determined to be any shortfall in the payment of 100% of
the annual net income, such PRC Operating Subsidiary must pay such shortfall to
Rise King WFOE. Each agreement has a ten-year term, subject to renewal and early
termination in accordance with the terms therein.
Exclusive
Option Agreements
Under
Exclusive Option Agreements entered into by and among Rise King WFOE, each of
the PRC Shareholders, dated as of October 8, 2008, each of the PRC Shareholders
irrevocably granted to Rise King WFOE or its designated person an exclusive
option to purchase, to the extent permitted by PRC law, a portion or all of
their respective equity interest in any PRC Operating Subsidiary for a purchase
price of RMB 10 or a purchase price to be adjusted to be in compliance with
applicable PRC laws and regulations. Rise King WFOE or its designated person has
the sole discretion to decide when to exercise the option, whether in part or in
full. Each of these agreements has a ten-year term, subject to renewal at the
election of Rise King WFOE.
Equity
Pledge Agreements
Under the
Equity Pledge Agreements entered into by and among Rise King WFOE, the PRC
Operating Subsidiaries and each of the PRC Shareholders, dated as of October 8,
2008, the PRC Shareholders pledge, all of their equity interests
in PRC Operating Subsidiaries to guarantee Beijing CNET Online’s
performance of its obligations under the Exclusive Business Cooperation
Agreement. If Beijing CNET Online or any of the PRC Shareholders breaches
his/her respective contractual obligations under this agreement, or upon the
occurrence of one of the events regarded as an event of default under each such
agreement, Rise King WFOE, as pledgee, will be entitled to certain rights,
including the right to dispose of the pledged equity interests. The PRC
Shareholders of the PRC Operating Subsidiaries agree not to dispose of the
pledged equity interests or take any actions that would prejudice Rise King
WFOE's interest, and to notify Rise King WFOE of any events or upon receipt of
any notices which may affect Rise King WFOE's interest in the pledge. Each of
the equity pledge agreements will be valid until all the payments due under the
Exclusive Business Cooperation Agreement have been fulfilled.
Irrevocable
Powers of Attorney
The PRC
Shareholders have each executed an irrevocable powers of attorney, dated as of
October 8, 2008, to appoint Rise King WFOE as their exclusive attorneys-in-fact
to vote on their behalf on all PRC Operating Subsidiary matters requiring
shareholder approval. The term of each power of attorney is valid so
long as such shareholder is a shareholder of the respective PRC Operating
Subsidiary.
Entrustment
Agreement
In
accordance with an Entrustment Agreement, dated June 5, 2009, by and between
Rise King Investments Limited (“Rise King”) and Handong Cheng, Xuanfu Liu, and
Li Sun (collectively, the “Grantees”), Rise King collectively delegated to the
Grantees its direct or indirect rights as a stockholder of China Net Online
Media Group Limited, CNET Online Technology Limited, Rise King Century
Technology Development (Beijing) Co., Ltd., or any subsidiaries of such
companies (collectively, the “Covered Companies”), including the direct or
indirect right to vote any equity interest in the Covered Companies, or to
designate the management of such companies. As a result of the delegation of
authority under the Entrustment Agreement, Mr. Cheng, Mr. Liu and Ms. Sun may be
deemed to be beneficial owners of the shares of our common stock held by Rise
King. Each of Mr. Cheng, Mr. Liu and Ms. Sun disclaim such beneficial ownership,
and this Current Report shall not be deemed to be an admission that Mr. Cheng,
Mr. Liu, or Ms. Sun is the beneficial owner of any such shares for any
purpose.
Share
Transfer Agreement
Each of
the PRC Shareholders entered into a share transfer agreement (the “Share
Transfer Agreements”) with Mr. Yang Li, the sole shareholder of Rise King BVI,
which is a 55% shareholder of China Net for purpose of granting incentive
options to the PRC Shareholders for the contributions that they have made and
will continue to make to Rise King BVI. Under the Share Transfer Agreements, Mr.
Li granted to each of the PRC Shareholders an option to acquire, in the
aggregate 10,000 shares of Rise King BVI (4,600 by Mr. Handong Cheng, 3,600 by
Mr. Xuanfu Liu and 1,800 by Ms. Li Sun), representing 100% of the issued and
outstanding shares of Rise King BVI, at a purchase price of $1 per share (the
par value of Rise King BVI’s common stock), provided that certain financial
performance thresholds are met by the China Net Companies.
Under the
terms of each Share Transfer Agreement, the PRC Shareholders will have the right
to purchase the aggregate 10,000 shares of Rise King BVI as follows: (1)
one-third of the shares at $1 per share if the China Net Companies generate at
least RMB 100,000,000 of gross revenue for the twelve-month period from January
1, 2009 to December 31, 2009; (2) one-third of the shares at $1 per share when
the China Net Companies generate at least RMB 60,000,000 of gross revenue for
the six-month period from January 1, 2010 to June 30, 2010; and (3) one-third of
the shares at $1 per share when the China Net Companies generate at least RMB
60,000,000 of gross revenue for the six-month period from July 1, 2010 to
December 31, 2010. In the event that the China Net Companies do not
achieve any of the performance targets specified above, the PRC Shareholders may
exercise the applicable option at the alternative exercise price of $2 per
share. If the PRC Shareholders purchase all shares eligible for purchase under
the Share Transfer Agreement, the PRC Shareholders will become China Net’s
controlling shareholders through their beneficial ownership of Rise King
BVI.
The Share
Transfer Agreements were entered into on April 28, 2009. Subject to registering
with the State Administration of Foreign Exchange (SAFE) prior to the exercise
and issuance of the option shares under the Share Transfer Agreements, which is
an administrative task, there is no prohibition under PRC laws for the PRC
Shareholders to earn an interest in Rise King BVI after the PRC Restructuring is
consummated in compliance with PRC law.
Policies
and Procedures for Review, Approval or Ratification of Transactions with Related
Persons
It is the
Company’s policy that the Company will not enter into transactions required to
be disclosed under item 404 of the SEC’s Regulation S-K unless the Board of
Directors first reviews and approves the transactions.
Promoters
and Certain Control Persons
The Company has not had a promoter at
any time during the past five years. Other than shares of the Company received
as part of the Share Exchange or compensation or reimbursement of expenses in
connection with job responsibilities at the Company, as the case may be, none of
the persons or entities that may be deemed to have acquired control of the
Company as a result of the Share Exchange have received anything of value from
the Company during the past five years. Other than the shares of
China Net BVI received in the Share Exchange, the Company has not received any
assets from such persons during the past five years.
SELLING
STOCKHOLDERS
We are
registering for resale shares of our Common Stock that are issued and
outstanding, and shares of Common Stock underlying our Preferred Stock and
Warrants held by the Selling Stockholders identified below. We are registering
the shares to permit the Selling Stockholders and their pledgees, donees,
transferees and other successors-in-interest that receive their shares from a
Selling Stockholder as a gift, partnership distribution or other non-sale
related transfer after the date of this prospectus to resell the shares when and
as they deem appropriate in the manner described in the “Plan of
Distribution”. As of the date of this prospectus there are 16,741,320
shares of common stock issued and outstanding.
The
following table sets forth:
|
·
|
the
name of the Selling Stockholders,
|
|
·
|
the
number of shares of our Common Stock that the Selling Stockholders
beneficially owned prior to the offering for resale of the shares under
this prospectus,
|
|
·
|
the
maximum number of shares of our Common Stock that may be offered for
resale for the account of the Selling Stockholders under this prospectus,
and
|
|
·
|
the
number and percentage of shares of our Common Stock to be beneficially
owned by the Selling Stockholders after the offering of the shares
(assuming all of the offered shares are sold by the Selling
Stockholders).
|
Material Relationships with
the Company
J and M Group, LLC and Chesapeake Group are engaged as our investor
and public relations firms.
Securities
Issued in the Financing Transaction
The
Selling Stockholders listed under the heading “Holders of Common Stock
Underlying 10% Series A Convertible Preferred Stock and Series A-1 and Series
A-2 Warrants,” are registering the shares of Common Stock underlying the
Preferred Stock and Warrants issued in the Financing consummated on August
21, 2009, which is more fully described in the section “Description of the
Business - 2009 Financing” on page 49.
Immediately
prior to the issuance of the shares in the Placement, there were 15,774,300
shares of common stock issued and outstanding, of which 7,060,280 shares were
held by persons other than selling shareholders, affiliates of ours, or
affiliates of the selling shareholders. On August 20, 2009, the
trading day immediately prior to the consummation of the Placement, the closing
price per share of our common stock was $3.60, and as of April 23,
2010, the closing price per share of our common stock was
$4.30.
The
following table provides information with respect to the transactions in which
certain of the Selling Stockholders who are listed under the heading “Holders of
Common Stock” received their shares, prior to the Share Exchange
Transaction.
|
Date
of
Transaction
|
|
#
shares
issued
|
|
|
#
shares
outstanding
prior
to
issuance
|
|
|
#
of shares
outstanding prior to
issuance
held by
persons other
than
selling
shareholders, affiliates
of
the Company
or affiliates
of
the
selling shareholders
|
|
|
Percentage
of
total
issued
and
outstanding
securities
that
were issued
or
issuable in
the transaction
|
|
|
Market
Price
per Share
of
Common Stock
immediately
prior
to
the transaction
|
|
|
Current
Market
Price
per Share
of
Common Stock
as
of
April
23, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J
and M Group LLC
|
|
|
|
120,000
|
|
|
|
1,383,500
|
|
|
|
1,353,500
|
*
|
|
|
0.089
|
%
|
|
$
|
1.00
|
|
|
$
|
4.30
|
|
__________
*
Reflects the number of shares of Common Stock issued and outstanding after the
cancellation of 4,400,000 shares on June 25, 2009.
Immediately
prior to the consummation of the Placement, there were 15,774,300 shares of
common stock issued and outstanding, of which 7,060,280 shares were held by
persons other than selling shareholders, affiliates of ours, or affiliates of
the selling shareholders. On August 20, 2009, the trading day
immediately prior to the consummation of the Placement, the closing price per
share of our common stock was $3.60, and as of April 23, 2010, the closing price
per share of our common stock was $4.30.
Paul
Hickey and Greg Freihofner, who are identified as Selling Stockholders,
are affiliates of a broker-dealer.
They each have advised us
that the securities were acquired in the ordinary course of business and,
at the time, they had no agreements or understandings, directly or indirectly,
with any person to distribute the shares. None of the other Selling Stockholders
has any agreement or understanding to distribute any of the shares being
registered.
Each
Selling Stockholder may offer for sale all or part of the shares from time to
time. The table below assumes that the Selling Stockholders will sell all of the
shares offered for sale. A Selling Stockholder is under no obligation, however,
to sell any shares pursuant to this prospectus.
Name
of Selling Stockholder
|
|
Shares of
Common Stock
Beneficially
Owned Prior to
Offering
(1)
|
|
|
Percentage
Ownership
Prior to
Offering
|
|
|
Maximum
Number of Shares of
Common Stock to be
Sold
(2)
|
|
|
Number of
Shares of Common Stock
Owned After
Offering
|
|
|
Percentage
Ownership
After
Offering
(3)
|
|
Holders
of Common Stock Underlying 10% Series A Convertible Preferred
Stock and Series A-1 and Series A-2 Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blue
Earth Fund, LP. (4)
|
|
|
800,000
|
|
|
|
4.56
|
|
|
|
800,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Taylor
International Fund, Ltd. (5)
|
|
|
1,000,000
|
|
|
|
5.64
|
|
|
|
1,000,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Silver
Rock II, Ltd.(6)
|
|
|
100,000
|
|
|
|
*
|
|
|
|
100,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Ancora
Greater China Fund, LP (7)
|
|
|
224,000
|
|
|
|
1.32
|
|
|
|
224,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Eric
E. Shear (8)
|
|
|
40,000
|
|
|
|
*
|
|
|
|
40,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Bruice
A. Shear (9)
|
|
|
40,000
|
|
|
|
*
|
|
|
|
40,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Charles
M. Ognar (10)
|
|
|
160,000
|
|
|
|
*
|
|
|
|
160,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Dynacap
Global Capital Fund II LP (11)
|
|
|
78,000
|
|
|
|
*
|
|
|
|
78,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Michael
Cohen (12)
|
|
|
150,000
|
|
|
|
*
|
|
|
|
150,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Trillion
Growth China LP (13)
|
|
|
168,000
|
|
|
|
*
|
|
|
|
168,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
BBS
Capital Fund, LP (14)
|
|
|
400,000
|
|
|
|
2.33
|
|
|
|
400,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Sansar
Capital Management (15)
|
|
|
2,000,000
|
|
|
|
10.67
|
|
|
|
2,000,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Richard
D. Squires (16)
|
|
|
160,000
|
|
|
|
*
|
|
|
|
160,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Paul
Hickey (17)
|
|
|
160,000
|
|
|
|
*
|
|
|
|
160,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Kevin
M. Goldstein (18)
|
|
|
8,000
|
|
|
|
*
|
|
|
|
8,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Daybreak
Special Situations Master Fund, Ltd. (19)
|
|
|
50,000
|
|
|
|
*
|
|
|
|
50,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Kinder
Investments L.P. (20)
|
|
|
215,000
|
|
|
|
1.27
|
|
|
|
215,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
SPI
Hawaii Investments, LP (21)
|
|
|
120,000
|
|
|
|
*
|
|
|
|
120,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Alpha
Capital (22)
|
|
|
120,000
|
|
|
|
*
|
|
|
|
120,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Greg
Freihofner (23)
|
|
|
40,000
|
|
|
|
*
|
|
|
|
40,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
The
USX China Fund (24)
|
|
|
151,500
|
|
|
|
*
|
|
|
|
80,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Ferghan
O'Regan (25)
|
|
|
120,000
|
|
|
|
*
|
|
|
|
120,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Herbert
Verse (26)
|
|
|
20,000
|
|
|
|
*
|
|
|
|
20,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Jesper
Kronborg (27)
|
|
|
20,000
|
|
|
|
*
|
|
|
|
20,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Peter
Nordin Aps (28)
|
|
|
20,000
|
|
|
|
*
|
|
|
|
20,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Henrick
Gumaelius (29)
|
|
|
40,000
|
|
|
|
*
|
|
|
|
40,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
PK
Solutions AB (30)
|
|
|
28,000
|
|
|
|
*
|
|
|
|
28,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Enebybergs
Revisionsbyra AB (31)
|
|
|
40,000
|
|
|
|
*
|
|
|
|
40,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
PJ
Levay Lawrence (32)
|
|
|
60,000
|
|
|
|
*
|
|
|
|
60,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Peter
Gustafsson (33)
|
|
|
28,000
|
|
|
|
*
|
|
|
|
28,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Robin
Whaite (34)
|
|
|
119,200
|
|
|
|
*
|
|
|
|
119,200
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Garolf
AB (35)
|
|
|
80,000
|
|
|
|
*
|
|
|
|
80,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Olive
or Twist Limited (36)
|
|
|
40,000
|
|
|
|
*
|
|
|
|
40,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Allan
C. Lichtenberg (37)
|
|
|
40,000
|
|
|
|
*
|
|
|
|
40,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
SPI
Dallas Investments, LP (38)
|
|
|
80,000
|
|
|
|
*
|
|
|
|
80,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Hua-Mei
21st Century Partners (39)
|
|
|
160,000
|
|
|
|
*
|
|
|
|
160,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Guerrilla Partners
(40)
|
|
|
80,000
|
|
|
|
*
|
|
|
|
80,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Lenox
Capital Partners, L.P. (41)
|
|
|
160,000
|
|
|
|
*
|
|
|
|
160,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holders
of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J
and M Group, LLC (42)
|
|
|
55,000
|
|
|
|
*
|
|
|
|
55,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Chesapeake
Group (43)
|
|
|
65,000
|
|
|
|
*
|
|
|
|
65,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Tangiers
Investors LP (44)
|
|
|
10,000
|
|
|
|
*
|
|
|
|
10,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
(1)
|
Beneficial
ownership is determined in accordance with the rules and regulations of
the SEC. In computing the number of shares beneficially owned by a person
and the percentage ownership of that person, securities that are currently
convertible or exercisable into shares of our Common Stock, or convertible
or exercisable into shares of our Common Stock within 60 days of the date
hereof are deemed outstanding. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage ownership of any
other person. Except as indicated in the footnotes to the following table,
each stockholder named in the table has sole voting and investment power
with respect to the shares set forth opposite such stockholder’s name. The
percentage of beneficial ownership is based on 16,741,320 shares of
Common Stock outstanding as of April 23,
2009.
|
|
(2)
|
Includes
the total number of shares of Common Stock that each Selling Stockholder
intends to sell, regardless of the 9.99% beneficial ownership limitation,
more fully explained in footnote
3.
|
|
(3)
|
Pursuant
to the terms of the Warrants and the Certificate of Designation for the
10% Series A Convertible Preferred Stock (the “Series A Preferred Stock”),
at no time may a purchaser of Series A Preferred Stock convert such
purchaser’s shares into shares of our Common Stock if the conversion would
result in such purchaser beneficially owning (as determined in accordance
with Section 13(d) of the Exchange Act and the rules thereunder) more than
9.99% of our then issued and outstanding shares of Common Stock; provided,
however, that upon a purchaser providing us with sixty-one days’ notice
that such purchaser wishes to waive the cap, then the cap will be of no
force or effect with regard to all or a portion of the Series A Preferred
Stock referenced in the waiver notice. Similarly under the terms of the
Warrants, at no time may a holder exercise such holder’s Warrant if the
exercise would result in such holder beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules
thereunder) more than 9.99% of our then issued and outstanding shares of
Common Stock; provided, however, that upon a purchaser providing us with
sixty-one days’ notice that such purchaser wishes to waive the cap, then
the cap will be of no force or effect with regard to all or a portion of
the shares referenced in the waiver notice. The 9.99% beneficial ownership
limitation does not prevent a stockholder from selling some of its
holdings and then receiving additional shares. Accordingly, each
stockholder could exercise and sell more than 9.99% of our Common Stock
without ever at any one time holding more than this
limit.
|
|
(4)
|
Consists
of 400,000 shares underlying Series A Preferred
Stock and Series A-1 and Series A-2 Warrants to purchase up to 400,000
shares of our Common Stock, subject to a 9.99% limitation on beneficial
ownership of our Common Stock as more fully described in note 3
above. Brett Conrad, Managing Member, General Partner has
voting and dispositive power over the shares held by Blue Earth Fund,
LP. Mr. Conrad may be deemed to beneficially own the shares of
Common Stock held by Blue Earth Fund, LP. Mr. Conrad disclaims beneficial
ownership of such shares. The address for Blue Earth Fund
LP is 1312 Cedar Street, Santa Monica, CA 90405.
|
|
(5)
|
Consists
of 500,000 shares underlying Series A Preferred Stock and
Series A-1 and Series A-2 Warrants to purchase up to 500,000 shares of our
Common Stock, subject to a 9.99% limitation on beneficial ownership of our
Common Stock as more fully described in note 3 above.
Includes
100,000 shares of Common Stock owned by Stephen S. Taylor, a portfolio
manager for Taylor International Fund.
Stephen S. Taylor has
voting and dispositive power over the shares held by Taylor International
Fund Ltd. Mr. Taylor may be deemed to beneficially own the
shares of Common Stock held by Taylor International Fund, Ltd. Mr. Taylor
disclaims beneficial ownership of such shares. The
address for Taylor International Fund, Ltd. is 714 South
Dearborn Street 2nd floor, Chicago, IL 60605.
|
|
(6)
|
Consists
of 100,000 shares underlying Series A Preferred Stock, subject
to a 9.99% limitation on beneficial ownership of our Common Stock as more
fully described in note 3 above. Rima Salam, Director has voting and
dispositive power over the shares held by Silver Rock II,
Ltd. Mr. Salam may be deemed to beneficially own the
shares of Common Stock held by Silver Rock II, Ltd. Mr. Salam
disclaims beneficial ownership of such shares. The
address for Silver Rock II, Ltd. is P.O. Box 213
999, Dubai UAE.
|
|
(7)
|
Consists
of 24,000 shares of our Common Stock, 100,000 shares
underlying Series A Preferred Stock and Series A-1 and Series
A-2 Warrants to purchase up to 100,000 shares of our Common Stock, subject
to a 9.99% limitation on beneficial ownership of our Common Stock as more
fully described in note 3 above. John P. Micklitsch, the
managing partner has voting and dispositive power over the shares held by
Ancora Greater China Fund, LP. Mr. Micklitsch may be deemed to
beneficially own the shares of Common Stock held by Ancora Greater China
Fund, LP . Mr. Micklitsch disclaims beneficial ownership of such shares.
The address for Ancora Greater China Fund, LP is 2000
Auburn Dr. Suite 300, Cleveland,OH 44122.
|
|
(8)
|
Consists
of 20,000 shares underlying Series A Preferred Stock
and Series A-1 and Series A-2 Warrants to purchase up to 20,000 shares of
our Common Stock, subject to a 9.99% limitation on beneficial ownership of
our Common Stock as more fully described in note 3 above.
|
|
(9)
|
Consists
of 20,000 shares underlying Series A Preferred Stock
and Series A-1 and Series A-2 Warrants to purchase up to 20,000 shares of
our Common Stock, subject to a 9.99% limitation on beneficial ownership of
our Common Stock as more fully described in note 3 above.
|
|
(10)
|
Consists
of 80,000 shares underlying Series A Preferred Stock
and Series A-1 and Series A-2 Warrants to purchase up to 80,000 shares of
our Common Stock, subject to a 9.99% limitation on beneficial ownership of
our Common Stock as more fully described in note 3 above.
|
|
(11)
|
Consists
of 30,000 shares of our Common Stock, 16,000 shares
underlying Series A Preferred Stock and Series A-1 and Series
A-2 Warrants to purchase up to 32,000 shares of our Common Stock, subject
to a 9.99% limitation on beneficial ownership of our Common Stock as more
fully described in note 3 above. Mr. Charles Smith, Director
has voting and dispositive power over the shares held by Dynacap Global
Capital Fund II LP . Mr. Smith may be deemed to
beneficially own the shares of Common Stock held by Dynacap Global Capital
Fund II LP. Mr. Smith disclaims beneficial ownership of such
shares. The address for Dynacap Global Capital Fund II LP
is 1541 E Interstate 30 #140, Rockwall TX 75087.
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(12)
|
Consists
of 50,000 shares underlying Series A Preferred Stock
and Series A-1 and Series A-2 Warrants to purchase up to 100,000 shares of
our Common Stock, subject to a 9.99% limitation on beneficial ownership of
our Common Stock as more fully described in note 3 above.
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(13)
|
Consists
of 84,000 shares underlying Series A Preferred Stock and Series
A-1 and Series A-2 Warrants to purchase up to 84,000 shares of our Common
Stock, subject to a 9.99% limitation on beneficial ownership of our Common
Stock as more fully described in note 3 above. Mr. Corey
Mitchell, the managing partner has voting and dispositive power over the
shares held by Trillion Growth China LP. Mr. Mitchell may be
deemed to beneficially own the shares of Common Stock held by Trillion
Growth China LP. Mr. Mitchell disclaims beneficial ownership of such
shares. The address for Trillion Growth China LP is 155
Wellington St. W-2nd floor, Toronto, ON, MSV3l3,Canada.
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(14)
|
Consists
of 200,000 shares underlying Series A Preferred Stock and
Series A-1 and Series A-2 Warrants to purchase up to 200,000 shares of our
Common Stock, subject to a 9.99% limitation on beneficial ownership of our
Common Stock as more fully described in note 3 above. Mr. Berke
Bakay, the principle of BBS Capital Fund, LP has voting and dispositive
power over the shares held by BBS Capital Fund, LP . Mr. Bakay
may be deemed to beneficially own the shares of Common Stock held by BBS
Capital Fund, LP. Mr. Bakay disclaims beneficial ownership of such shares.
The address for BBS Capital Fund, LP is 4975 Preston Park
Blvd. Suite # 775W, Plano, TX 75093.
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(15)
|
Consists
of 1,000,000 shares underlying Series A Preferred Stock and
Series A-1 and Series A-2 Warrants to purchase up to 1,000,000 shares of
our Common Stock, subject to a 9.99% limitation on beneficial ownership of
our Common Stock as more fully described in note 3 above. Mr.
Sanjay Motwani, portfolio manager has voting and dispositive
power over the shares held by Sansar Capital
Management. Mr. Motwani may be deemed to beneficially own
the shares of Common Stock held by Sansar Capital Management.
Mr. Motwani disclaims beneficial ownership of such shares. The
address for Sansar Capital Management is 135 E 57th
Street 23rd Floor, New York, NY 10022, U. S. A.
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(16)
|
Consists
of 80,000 shares underlying Series A Preferred Stock
and Series A-1 and Series A-2 Warrants to purchase up to 80,000 shares of
our Common Stock, subject to a 9.99% limitation on beneficial ownership of
our Common Stock as more fully described in note 3 above.
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(17)
|
Consists
of 80,000 shares underlying Series A Preferred Stock
and Series A-1 and Series A-2 Warrants to purchase up to 80,000 shares of
our Common Stock, subject to a 9.99% limitation on beneficial ownership of
our Common Stock as more fully described in note 3 above.
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(18)
|
Consists
of 4,000 shares underlying Series A Preferred Stock
and Series A-1 and Series A-2 Warrants to purchase up to 4,000 shares of
our Common Stock, subject to a 9.99% limitation on beneficial ownership of
our Common Stock as more fully described in note 3 above.
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(19)
|
Consists
of 60,000 shares underlying Series A Preferred Stock and Series
A-1 and Series A-2 Warrants to purchase up to 60,000 shares of our Common
Stock, subject to a 9.99% limitation on beneficial ownership of our Common
Stock as more fully described in note 3 above. Mr. Lawrence J.
Butz, has voting and dispositive power over the shares held by Daybreak
Special Situations Master Fund, Ltd. Mr. Butz may be deemed to
beneficially own the shares of Common Stock held by Daybreak Special
Situations Master Fund, Ltd. Mr. Butz disclaims beneficial ownership of
such shares. The address for Daybreak Special Situations
Master Fund, Ltd. is 100 East Cook Avenue, Suite 100, Libertyville IL
60048.
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(20)
|
Consists
of 5,000 shares of our Common Stock, 70,000 shares
underlying Series A Preferred Stock and Series A-1 and Series
A-2 Warrants to purchase up to 140,000 shares of our Common Stock, subject
to a 9.99% limitation on beneficial ownership of our Common Stock as more
fully described in note 3 above. Mr. Don Perl, the managing
member has voting and dispositive power over the shares held by Kinder
Investments L.P. Mr. Perl may be deemed to beneficially own the
shares of Common Stock held by Kinder Investments, LP. Mr. Perl disclaims
beneficial ownership of such shares. The
address for Kinder Investments, L.P. is P.O. Box 339
Lawrence NY 11559.
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(21)
|
Consists
of 120,000 shares underlying Series A Preferred Stock, subject
to a 9.99% limitation on beneficial ownership of our Common Stock as more
fully described in note 3 above. Mr. Dennis J.
Wong, General Partner has voting and dispositive power over the
shares held by SPI Hawaii Investments, LP. Mr. Wong may be
deemed to beneficially own the shares of Common Stock held by SPI Hawaii
Investments, LP. Mr. Wong disclaims beneficial ownership of such shares.
The address for SPI Hawaii Investments, LP is 650 California St.
Suite 1288, San Francisco CA 94108.
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(22)
|
Consists
of 60,000 shares underlying Series A Preferred Stock and Series
A-1 and Series A-2 Warrants to purchase up to 60,000 shares of our Common
Stock, subject to a 9.99% limitation on beneficial ownership of our Common
Stock as more fully described in note 3 above. Mr. Konrad
Ackerman, Director has voting and dispositive power over the shares
held by Alpha Capital. Mr. Ackerman may be deemed to
beneficially own the shares of Common Stock held by Alpha Capital. Mr.
Ackerman disclaims beneficial ownership of such shares. The
address for Alpha Capital is Pradafont 7 Furstentoms 9490 Vaduz,
Liechtenstein.
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(23)
|
Consists
of 20,000 shares underlying Series A Preferred Stock
and Series A-1 and Series A-2 Warrants to purchase up to 20,000 shares of
our Common Stock, subject to a 9.99% limitation on beneficial ownership of
our Common Stock as more fully described in note 3 above.
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(24)
|
Consists
of 71,500 shares of our Common Stock, 40,000 shares
underlying Series A Preferred Stock and Series A-1 and Series
A-2 Warrants to purchase up to 40,000 shares of our Common Stock, subject
to a 9.99% limitation on beneficial ownership of our Common Stock as more
fully described in note 3 above. Mr. Stephen L.
Parr, President has voting and dispositive power over the shares held
by The USX China Fund. Mr. Parr may be deemed to beneficially
own the shares of Common Stock held by The USX China Fund. Mr. Parr
disclaims beneficial ownership of such shares. The
address for The USX China Fund is 5100 Poplar Ave. Ste 3117,
Memphis, TN 38137.
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(25)
|
Consists
of 60,000 shares underlying Series A Preferred Stock
and Series A-1 and Series A-2 Warrants to purchase up to 60,000 shares of
our Common Stock, subject to a 9.99% limitation on beneficial ownership of
our Common Stock as more fully described in note 3 above.
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(26)
|
Consists
of 10,000 shares underlying Series A Preferred Stock
and Series A-1 and Series A-2 Warrants to purchase up to 10,000 shares of
our Common Stock, subject to a 9.99% limitation on beneficial ownership of
our Common Stock as more fully described in note 3 above.
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(27)
|
Consists
of 10,000 shares underlying Series A Preferred Stock
and Series A-1 and Series A-2 Warrants to purchase up to 10,000 shares of
our Common Stock, subject to a 9.99% limitation on beneficial ownership of
our Common Stock as more fully described in note 3 above.
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(28)
|
Consists
of 10,000 shares underlying Series A Preferred Stock
and Series A-1 and Series A-2 Warrants to purchase up to 10,000 shares of
our Common Stock, subject to a 9.99% limitation on beneficial ownership of
our Common Stock as more fully described in note 3 above.
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(29)
|
Consists
of 20,000 shares underlying Series A Preferred Stock
and Series A-1 and Series A-2 Warrants to purchase up to 20,000 shares of
our Common Stock, subject to a 9.99% limitation on beneficial ownership of
our Common Stock as more fully described in note 3 above.
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(30)
|
Consists
of 14,000 shares underlying Series A Preferred Stock and Series
A-1 and Series A-2 Warrants to purchase up to 14,000 shares of our Common
Stock, subject to a 9.99% limitation on beneficial ownership of our Common
Stock as more fully described in note 3 above. Mr. Peter
Gustafsson, Director has voting and dispositive power over the shares held
by PK Solutions AB. Mr. Gustafsson may be deemed to
beneficially own the shares of Common Stock held by PK Solutions AB.
Mr. Gustafsson disclaims beneficial ownership of such shares. The
address for PK Solutions AB is Rehnsgatan 11 Stockholm, Sweden
11379.
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(31)
|
Consists
of 20,000 shares underlying Series A Preferred Stock and Series
A-1 and Series A-2 Warrants to purchase up to 20,000 shares of our Common
Stock, subject to a 9.99% limitation on beneficial ownership of our Common
Stock as more fully described in note 3 above. Mr. Lars
Svantemark, Director has voting and dispositive power over the shares held
by Enebybergs Revisionsbyra AB. Mr. Svantemark may be
deemed to beneficially own the shares of Common Stock held by Enebybergs
Revisionsbyra AB. Mr. Svantemark disclaims beneficial ownership of
such shares. The address for Enebybergs Revisionsbyra AB is
Senapsgrand 19 Enebyberg, Sweden 18245.
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(32)
|
Consists
of 30,000 shares underlying Series A Preferred Stock
and Series A-1 and Series A-2 Warrants to purchase up to 30,000 shares of
our Common Stock, subject to a 9.99% limitation on beneficial ownership of
our Common Stock as more fully described in note 3 above.
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(33)
|
Consists
of 14,000 shares underlying Series A Preferred Stock
and Series A-1 and Series A-2 Warrants to purchase up to 14,000 shares of
our Common Stock, subject to a 9.99% limitation on beneficial ownership of
our Common Stock as more fully described in note 3 above.
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(34)
|
Consists
of 59,600 shares underlying Series A Preferred Stock
and Series A-1 and Series A-2 Warrants to purchase up to 59,600 shares of
our Common Stock, subject to a 9.99% limitation on beneficial ownership of
our Common Stock as more fully described in note 3 above.
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(35)
|
Consists
of 40,000 shares underlying Series A Preferred Stock and Series
A-1 and Series A-2 Warrants to purchase up to 40,000 shares of our Common
Stock, subject to a 9.99% limitation on beneficial ownership of our Common
Stock as more fully described in note 3 above. Mr. Tommy
Maartensson, Director has voting and dispositive power over the shares
held by Garolf AB. Mr. Maartensson may be deemed to
beneficially own the shares of Common Stock held by Garolf AB. Mr.
Maartensson disclaims beneficial ownership of such shares. The
address for Garolf AB is Floragatan 12 Stockholm, Sweden 11431.
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(36)
|
Consists
of 20,000 shares underlying Series A Preferred Stock and Series
A-1 and Series A-2 Warrants to purchase up to 20,000 shares of our Common
Stock, subject to a 9.99% limitation on beneficial ownership of our Common
Stock as more fully described in note 3 above. Mr. Joel
Wahlstrom, President has voting and dispositive power over the shares
held by Olive or Twist Limited. Mr. Wahlstrom may be deemed to
beneficially own the shares of Common Stock held by Olive or Twist
Limited. Mr. Wahlstrom disclaims beneficial ownership of such shares. The
address for Olive or Twist Limited is 68 Hing Man Street Room
717/f Marina House Shaukerwan, Hong Kong.
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(37)
|
Consists
of 20,000 shares underlying Series A Preferred Stock
and Series A-1 and Series A-2 Warrants to purchase up to 20,000 shares of
our Common Stock, subject to a 9.99% limitation on beneficial ownership of
our Common Stock as more fully described in note 3 above.
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(38)
|
Consists
of 40,000 shares of our Common Stock and Series A-1 and Series
A-2 Warrants to purchase up to 40,000 shares of our Common Stock, subject
to a 9.99% limitation on beneficial ownership of our Common Stock as more
fully described in note 3 above. Mr. Richard Squires, General
Partner has voting and dispositive power over the shares held by SPI
Dallas Investments LP. Mr. Squires may be deemed to
beneficially own the shares of Common Stock held by SPI Dallas Investments
LP. Mr. Squires disclaims beneficial ownership of such shares. The
address for SPI Dallas Investments LP is 2101 Cedar Springs
Road, Suite 1230, Dallas, TX 75201.
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(39)
|
Consists
of 80,000 shares underlying Series A Preferred Stock and Series
A-1 and Series A-2 Warrants to purchase up to 80,000 shares of our Common
Stock, subject to a 9.99% limitation on beneficial ownership of our Common
Stock as more fully described in note 3 above. Messrs. Peter
Siris and Leigh S. Curry, Managing Director share voting
and dispositive power over the shares held by Hua-Mei 21
st
Century Partners. Messrs. Siris and Curry may be deemed to
beneficially own the shares of Common Stock held by Hua-Mei 21
st
Century Partners. Messrs. Siris and Curry disclaim beneficial
ownership of such shares. Peter Siris is the managing director of Hua-Mei
21
st
Century Partners. The address for Hua-Mei 21
st
Century Partners is 237 Park Avenue 9th Floor New York, NY 10017.
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(40)
|
Consists
of 40,000 shares underlying Series A Preferred Stock and Series
A-1 and Series A-2 Warrants to purchase up to 40,000 shares of our Common
Stock, subject to a 9.99% limitation on beneficial ownership of our Common
Stock as more fully described in note 3 above. Messrs. Peter
Siris and Leigh S. Curry, Managing Director share voting and
dispositive power over the shares held by Guerrilla
Partners. Messrs. Siris and Curry may be deemed to beneficially
own the shares of Common Stock held by Guerrilla
Partners. Messrs. Siris and Curry disclaim beneficial ownership
of such shares. The address for Guerrilla Partners is 237 Park
Avenue 9th Floor New York, NY 10017.
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(41)
|
Consists
of 80,000 shares of our Common Stock and Series A-1 and Series A-2
Warrants to purchase up to 80,000 shares of our Common Stock, subject to a
9.99% limitation on beneficial ownership of our Common Stock as more fully
described in note 3 above. Mr. Richard Squires, General Partner
has voting and dispositive power over the shares held by Lennox Capital
Partners, LP.
Mr.
Squires may be deemed to beneficially own the shares of Common Stock held
by Lennox Capital Partners, LP. Mr. Squires disclaims beneficial ownership
of such shares. The address for Lennox Capital Partners, LP is 2101 Cedar
Springs Rd, Suit 1230, Dallas, TX
75201
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(42)
|
Reflects 55,000
shares of our Common Stock beneficially owned by the
stockholder. Joeseph Pettinelli has voting and dispositive
power over the shares held by J and M Group, LLC. Mr. Pettinelli may
be deemed to beneficially own the shares of common stock held by J and M
Group, LLC. The address for J and M Group LLC is 518 Virginia Ave.,
Suite 301, Towson, MD 21286.
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(43)
|
Reflects
65,000 shares of Common Stock beneficially owned by the stockholder. Kevin
Holmes has voting and dispositive power over the shares held by Chesapeake
Group. Mr. Holmes may be deemed to beneficially own the shares of Common
Stock held by Chesapeake Group. The address for Chesapeake Group is 17 W.
Pennsylvania Avenue, Towson, MD 21024.
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(44)
|
Consists
of 10,000 shares of our Common Stock. Mr. Michael
Sobeck has voting and dispositive power over the shares held by
Tangiers Investors, LP. Mr. Michael Sobeck may be deemed to
beneficially own the shares of Common Stock held by Tangiers Investors,
LP. Mr. Michael Sobeck disclaims beneficial ownership of such shares.
Mr. Michael Sobeck is Managing Member of Tangiers Capital and
General Partner of Tangiers Investors. The
address for Tangiers Investors, LP is 402 W. Broadway Ste
400, San Diego, CA 92101.
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PLAN
OF DISTRIBUTION
The
Selling Stockholders and any of their pledgees, donees, transferees, assignees
and successors-in-interest may, from time to time, sell any or all of their
Shares on any stock exchange, market or trading facility on which the Shares are
traded or quoted or in private transactions. These sales may be at fixed prices,
at prevailing market prices at the time of sale, at prices related to the
prevailing market price, at varying prices determined at the time of sale, or at
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling Shares:
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ordinary
brokerage transactions and transactions in which the broker-dealer
solicits investors;
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·
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block
trades in which the broker-dealer will attempt to sell the Shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
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·
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purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
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·
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an
exchange distribution in accordance with the rules of the applicable
exchange;
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privately
negotiated transactions;
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·
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to
cover short sales made after the date that this registration statement is
declared effective by the SEC;
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·
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broker-dealers
may agree with the Selling Stockholders to sell a specified number of such
Shares at a stipulated price per
share;
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·
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through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or
otherwise;
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·
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a
combination of any such methods of sale;
and
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any
other method permitted pursuant to applicable
law.
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The
Selling Stockholders may also sell Shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
In
connection with the sale of the common stock or interests therein, the Selling
Stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the Common
Stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of the Common Stock short and deliver these
securities to close out their short positions, or loan or pledge the Common
Stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of Shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
Broker-dealers
engaged by the Selling Stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the Selling Stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
Selling Stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
The
Selling Stockholders may from time to time pledge or grant a security interest
in some or all of the Shares owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell shares of Common Stock from time to time under this prospectus,
or under an amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act of 1933 amending the list of Selling
Stockholders to include the pledgee, transferee or other successors in interest
as Selling Stockholders under this prospectus.
The
Selling Stockholders also may transfer the shares of Common Stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this
prospectus.
The
Selling Stockholders and any broker-dealers or agents that are involved in
selling the Shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
Shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Discounts, concessions, commissions and
similar selling expenses, if any, that can be attributed to the sale of
Securities will be paid by the Selling Stockholder and/or the purchasers. Each
Selling Stockholder has represented and warranted to the Company that it
acquired the securities subject to this registration statement in the ordinary
course of such Selling Stockholder’s business and, at the time of its purchase
of such securities such Selling Stockholder had no agreements or understandings,
directly or indirectly, with any person to distribute any such
securities.
TriPoint
Global Equities, LLC is a registered broker dealer and FINRA member firm.
TriPoint Global Equities, LLC served as placement agent for our Financing, which
was completed on August 21, 2009. TriPoint Global Equities, LLC
received a (i) a cash fee in the amount of $721,280, equal to 7% of the gross
proceeds of the Financing; (ii) a management fee in the amount of $51,520, equal
to 0.5% of the gross proceeds of the Financing; and (iii) warrants to purchase
up to 659,456 shares of Common Stock at an exercise price of $2.50, $3.00
or $3.75 per share, equal to 8% of the aggregate number of units sold in the
Financing. The warrants granted to TriPoint Global Equities, LLC expire on
August 20, 2014. The 659,456 shares of Common Stock issuable upon
conversion of placement agent warrants received by TriPoint Global Equities, LLC
are transferable within TriPoint or to its assigns or designees, at the
discretion of TriPoint Global Equities, LLC.
In
connection with the Share Exchange, Tripoint Capital Advisors, an affiliate of
TriPoint Global Equities, LLC received 300,000 shares of our Common Stock in
June 2009.
TriPoint
Global Equities, LLC does not have an underwriting agreement with us and/or the
Selling Stockholders and no Selling Stockholders are required to execute
transactions through TriPoint Global Equities, LLC. Further, other than any
existing brokerage relationship as customers with TriPoint Global Equities, LLC,
no Selling Stockholders has any pre-arranged agreement, written or otherwise,
with TriPoint Global Equities, LLC to sell their securities through TriPoint
Global Equities, LLC.
FINRA
Rule 5110 requires FINRA member firms (unless an exemption applies) to satisfy
the filing requirements of Rule 5110 in connection with the resale, on behalf of
Selling Stockholders, of the securities on a principal or agency basis. NASD
Notice to Members 88-101 states that in the event a Selling Stockholder intends
to sell any of the shares registered for resale in this prospectus through a
member of FINRA participating in a distribution of our securities, such member
is responsible for insuring that a timely filing, if required, is first made
with the Corporate Finance Department of FINRA and disclosing to FINRA the
following:
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it
intends to take possession of the registered securities or to facilitate
the transfer of such certificates;
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·
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the
complete details of how the selling shareholders’ shares are and will be
held, including location of the particular
accounts;
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·
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whether
the member firm or any direct or indirect affiliates thereof have entered
into, will facilitate or otherwise participate in any type of payment
transaction with the selling shareholders, including details regarding any
such transactions; and
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·
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in
the event any of the securities offered by the selling shareholders are
sold, transferred, assigned or hypothecated by any selling shareholder in
a transaction that directly or indirectly involves a member firm of FINRA
or any affiliates thereof, that prior to or at the time of said
transaction the member firm will timely file all relevant documents with
respect to such transaction(s) with the Corporate Finance Department of
FINRA for review.
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No FINRA
member firm may receive compensation in excess of that allowable under FINRA
rules, including Rule 2710, in connection with the resale of the securities by
the selling shareholders, which total compensation may not exceed
8%.
We have
advised each Selling Stockholder that it may not use Shares registered on this
registration statement to cover short sales of Common Stock made prior to the
date on which this registration statement shall have been declared effective by
the Commission. If a Selling Stockholder uses this prospectus for any sale of
the Common Stock, it will be subject to the prospectus delivery requirements of
the Securities Act. The Selling Stockholders will be responsible to comply with
the applicable provisions of the Securities Act and Exchange Act, and the rules
and regulations thereunder promulgated, including, without limitation,
Regulation M, as applicable to such Selling Stockholders in connection with
resales of their respective Shares under this registration
statement.
We are
required to pay all fees and expenses incident to the registration of the
Shares, but the Company will not receive any proceeds from the sale of the
Common Stock. The Company has agreed to indemnify the Selling Stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
DESCRIPTION
OF SECURITIES
General
Our
authorized capital stock consists of 70,000,000 shares, consisting of 50,000,000
shares of common stock par value $.001 per share, and 20,000,000 shares of
preferred stock, par value $.001 per share of which 8,000,000 shares have been
designated as 10% Series A Preferred Stock.
Common
Stock
We
have 50,000,000 authorized shares of common stock, $.001 par value per share, of
which 16,741,320 shares of common stock are issued and outstanding as of
April 23, 2010. Each holder of shares of common stock is entitled to one vote
per share at stockholders’ meetings. Our Articles of Incorporation do not
provide for cumulative voting for the election of directors. Holders of shares
of common stock are entitled to receive, pro rata, such dividends as may be
declared by the Board of Directors out of funds legally available therefor, and
are also entitled to share, pro rata, in any other distributions to the
stockholders. Upon any liquidation, dissolution or winding-up, holders of shares
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities. Holders of shares of common stock do not have any
preemptive rights or other rights to subscribe for additional shares. The
outstanding shares of common stock are paid for, fully paid and
non-assessable.
Preferred
Stock
We
have 20,000,000 authorized shares of preferred stock par value $.001 per share,
of which 8,000,000 shares are designated as 10% Series A Preferred Stock,
of which 3,208,600 shares are issued and outstanding as of the date of this
prospectus.
Voting
Rights
The
holders of Series A Preferred Stock have class voting rights with respect to
actions that may materially and adversely affect the rights of the holders,
including (i) authorizing, creating, issuing or increasing the authorized or
issued amount of any class or series of preferred stock, ranking pari passu or
senior to the Series A Preferred Stock, with respect to the distribution of
assets on liquidation, (ii) amending, altering or repealing the provisions of
the Series A Preferred Stock, (iii) issuing any shares of Series A Preferred
Stock, (iv) repurchasing, redeeming or paying dividends on, shares of Common
Stock or shares of equity securities that do not rank pari passu or senior to
the Series A Preferred Stock, or “Junior Stock”, (v) amending the articles of
incorporation or by-laws, (vi) effecting a distribution with respect to the
Junior Stock, (vii) reclassifying outstanding securities, (viii) voluntarily
filing for bankruptcy, liquidating assets or making an assignment for the
benefit of creditors, or (ix) materially changing the nature of our
business. Without the affirmative vote or consent of the holder of a
majority of the shares of the Series A Preferred Stock outstanding at
the time, given in person or by proxy, either in writing or at a meeting, in
which the holders of the series A preferred stock vote separately as
a class, such actions are prohibited. Except with respect to transactions upon
which the Series A Preferred Stock shall be entitled to vote separately as a
class and as otherwise required by Nevada law, each of the holders of the Series
A Preferred Stock shall be entitled to cast the number of votes equal to the
number of whole shares of Common Stock into which the shares of Series A
Preferred Stock held by such holder are convertible, up to such number of shares
of Common Stock beneficially owned by such holder and its affiliates at such
time, when aggregated with all other shares of Common Stock beneficially owned
by such holder and its affiliates at such time, result in such holder
beneficially owning no more than of 9.99% of the then issued and outstanding
shares of Common Stock as of the record date for determining stockholders
entitled to vote on such matter. Except as provided in this
Certificate of Designation or as otherwise required by Nevada law, holders of
Series A Preferred Stock shall vote together with the holders of Common Stock as
a single class. The shares of common stock into which the Series A
Preferred Stock are convertible will, upon issuance, have all of the same voting
rights as other issued and outstanding shares of common stock and none of the
rights of the Series A Preferred Stock.
Dividends
Rights
The
holders of the Series A Preferred Stock are entitled to dividends payable
quarterly at the rate of 10% per annum within 30 days following the last
business day of each August, November, February and May of each
year.
Conversion
of Series A Preferred Stock
At any
time on or after the issuance date, the holder of any such shares of Series A
Preferred Stock may, at the holder’s option, elect to convert all or any portion
of the shares of Series A Preferred Stock held by such person into a number of
fully paid and nonassessable shares of common stock equal to the quotient of (i)
the series A liquidation preference amount ($2.50) of the shares of Series A
Preferred Stock being converted divided by (ii) the conversion price, which
initially is $2.50 per share, subject to certain adjustments, such as in the
event of (i) combination, stock split, or reclassification of the common stock;
(ii) distribution of dividends; (iii) reclassification, exchange or
substitution, (iv) reorganization, merger, consolidation or sales of assets or
(iv) the issuance or sale of additional shares of common stock or common stock
equivalents. Pursuant to the terms of the Certificate of Designation when in
effect, at no time may a holder of shares of Series A Preferred Stock convert
into shares of common stock if the number of shares of common stock to be issued
pursuant to such conversion would cause the number of shares of common stock
beneficially owned by such holder and its affiliates at such time, when
aggregated with all other shares of common stock owned by such holder and its
affiliates at such time, result in such holder and its affiliates beneficially
owning in excess of 9.99% of the then issued and outstanding shares of common
stock at such time. However, a holder of Series A Preferred Stock is entitled to
waive this cap upon a 61-day notice to us.
Failure
to Timely Convert
If within
three business days, with respect to our Common Stock being issued upon
conversion, and within five business days in the event a new preferred stock
certificate is being issued, of our receipt of an executed copy of a conversion
notice the transfer agent fails to issue and deliver to a holder the number of
shares of common stock to which such holder is entitled upon such holder’s
conversion of the Series A Preferred Stock or within five trading days fails to
issue a new preferred stock certificate representing the number of Series A
Preferred Stock to which such holder is entitled, we will pay additional damages
to such holder on each trading day after such third or fifth trading day, as the
case may be, that such conversion is not timely effected in an amount equal to
0.5% of the product of (A) the sum of the number of shares of common stock not
issued to the holder on a timely basis and to which such holder is entitled and,
in the event we failed to deliver a preferred stock certificate to the holder on
a timely basis, the number of shares of common stock issuable upon conversion of
the shares of Series A Preferred Stock represented by such certificate, as of
the last possible date which we could have issued such certificate to such
holder timely and (B) the closing bid price of our Common Stock on the last
possible date which we could have issued such Common Stock and such preferred
stock certificate, as the case may be, to such holder timely. If we fail to pay
those additional damages within five trading days of the date incurred, then
such payment will bear interest at the rate of 2.0% per month (prorated for
partial months) until such payments are made.
For the
purposes of this provision with respect to our common stock, the term “closing
bid price” shall mean, for any security as of any date, the last closing bid
price of such security on the NASDAQ or other principal exchange on which such
security is traded as reported by Bloomberg, or, if no closing bid price is
reported for such security by Bloomberg, the last closing trade price of such
security as reported by Bloomberg, or, if no last closing trade price is
reported for such security by Bloomberg, the average of the bid prices of any
market makers for such security as reported in the “pink sheets” by Pink OTC
Markets, Inc. If the closing bid price cannot be calculated for such security on
such date on any of the foregoing bases, the closing bid price of such security
on such date shall be the fair market value as mutually determined by the
Company and the holders of a majority of the outstanding shares of Series A
Preferred Stock, as applicable.
Liquidation
Preference of Series A Preferred Stock
In the
event of the liquidation, dissolution or winding up of our affairs, whether
voluntary or involuntary, the holders of shares of Series A Preferred Stock then
outstanding are entitled to receive, out of our assets available for
distribution to stockholders, a liquidation preference amount of $2.50 per share
for the Series A Preferred Stock, before any payment is made or any assets are
distributed to the holders of the common stock or any other junior
stock. If our assets are not sufficient to pay in full the
liquidation preference amount payable to the holders of outstanding shares of
the Series A Preferred Stock preferred stock or any other class of stock ranking
pari passu, as to rights on liquidation, dissolution or winding up, then all of
said assets will be distributed among the holders of the Series A Preferred
Stock and the other classes of stock ranking pari passu with the Series A
Preferred Stock, if any, ratably in accordance with the respective amounts that
would be payable on such shares if all amounts payable thereon were paid in
full. All payments pursuant thereto are to be in cash, property (valued at its
fair market value as determined by an independent appraiser chosen by us and
reasonably acceptable to the holders of a majority of the Series A Preferred
Stock) or a combination thereof; provided, however, that no cash is to be paid
to holders of junior stock unless each holder of the outstanding shares of
Series A Preferred Stock have been paid in cash the full liquidation preference
amount to which such holder is entitled as provided herein.
Series
A-1 and A-2 Warrants
Pursuant
to the financing we completed on August 21, 2009, we issued a Series A-1 Warrant
to purchase 2,060,800 shares of our common stock at an exercise price of $3.00
and a Series A-2 Warrant to purchase 2,060,800 shares of our common stock at an
exercise price of $3.75 (collectively, the “
Series A Warrants
”).
The Series A-1 Warrants and the Series A-2 Warrants have three-year and
five-year terms, respectively, from issuance date. As of the date of this
prospectus, none of the Series A Warrants have been exercised.
Commencing
24 months following the closing of the financing, if the market value of one
share of Common Stock is greater than the applicable Series A Warrant Price and
the registration statement of which this prospectus forms a part is not in
effect as required under the Registration Rights Agreement, in lieu of
exercising a warrant by payment of cash, a holder of a Series A Warrant may
exercise the warrant by a cashless exercise, in which event we will issue to the
holder a number of shares of our Common Stock computed using the following
formula:
X = Y –
(A)(Y)
B
Where
|
X
=
|
the
number of shares of Common Stock to be issued to the warrant
holder.
|
|
Y
=
|
the
number of shares of Common Stock purchasable upon exercise of all of the
warrant or, if only a portion of the warrant is being exercised, the
portion of the warrant being
exercised.
|
|
B
=
|
the
per share market value of one share of Common
Stock.
|
In addition, if at any time after the
effective date of the Registration Statement, the Registration
Statement ceases to be effective, then, subject to certain
exceptions, a holder of a Series A Warrant may exercise the warrant by cashless
exercise.
The
exercise price and number of shares of our Common Stock issuable upon exercise
of the Series A Warrants may be adjusted in certain circumstances, including in
the event of a stock dividend, recapitalization, reorganization, merger or
consolidation and the issuance of rights to purchase additional shares of our
Common Stock or to receive other securities convertible into additional shares
of Common Stock.
No
fractional shares will be issued upon exercise of the Series A Warrants. If,
upon exercise of a warrant, a holder would be entitled to receive a fractional
interest in a share, we will pay to the holder cash equal to such fraction
multiplied by the then fair market value of one full share. Pursuant to the
terms of the Series A Warrants, we will not effect the exercise of any warrants,
and no person who is a holder of any warrant has the right to exercise his/her
warrant, if after giving effect to such exercise, such person would beneficially
own in excess of 9.99% of the then outstanding shares of our Common Stock.
However, a holder of Series A Warrants is entitled to waive this cap upon a
61-day notice to us.
Indemnification
of Directors and Officers
Our officers and directors are
indemnified as provided by the Nevada Revised Statutes (“NRS”) and our bylaws
and articles of incorporation.
Under the
NRS, director immunity from liability to a company or its shareholders for
monetary liabilities applies automatically unless it is specifically limited by
a company’s articles of incorporation that is not the case with our articles of
incorporation. Excepted from that immunity are:
|
(1)
|
a
willful failure to deal fairly with the company or its shareholders in
connection with a matter in which the director has a material conflict of
interest;
|
|
(2)
|
a
violation of criminal law (unless the director had reasonable cause to
believe that his or her conduct was lawful or no reasonable cause to
believe that his or her conduct was
unlawful);
|
|
(3)
|
a
transaction from which the director derived an improper personal profit;
and
|
Our
bylaws and articles of incorporation provide that we will indemnify our
directors, officers, employees, and agents, to the fullest extent to the extent
required by the NRS and shall indemnify such individuals to the extent permitted
by the NRS. We may purchase and maintain liability insurance, or make
other arrangements for such obligations or otherwise, to the extent permitted by
the NRS.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
Common Stock has been listed on the NYSE Amex under the trading
symbol “CNET”
since
March 4, 2010. Prior to that time, our common stock was quoted on the
OTC Bulletin Board (“OTCB”) under the trading symbol “EMZG,” until August 14,
2009, when our ticker symbol was changed to “CHNT.”
The
following table shows by each fiscal quarter and partial period, where
applicable, the range of high and low bid quotations reported by the OTCBB in
each fiscal quarter from January 1, 2008 to December 31, 2009, the first
quarter of 2010 and the second quarter of 2010 through April 23. There were no
reported bids for our common stock during 2007. The OTCBB quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
Year
|
|
Period
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
First
Quarter
|
|
$
|
1.00
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
First
Quarter
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter
|
|
$
|
2.00
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
$
|
4.40
|
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
5.30
|
|
|
$
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
First
Quarter
|
|
$
|
6.00
|
|
|
$
|
2.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter (through April 23
)
|
|
$
|
4.43
|
|
|
$
|
4.23
|
|
Holders
As
of April 23, 2010, there were approximately 598 record holders of our
common stock.
Dividends
We have
never paid any dividends and we plan to retain earnings, if any, for use in the
development of the business. Payment of future dividends, if any, will be at the
discretion of the board of directors after taking into account various factors,
including current financial condition, operating results and current and
anticipated cash needs. If we ever determine to pay a dividend, we may
experience difficulties in completing the administrative procedures necessary to
obtain and remit foreign currency from China for the payment of such dividends
from the profits of the PRC Operating Subsidiaries. We have not paid any cash
dividends on shares of our common stock and do not plan to do so in the near
future. We currently plan to retain future earnings to fund the development and
growth of our business. Any future determination related to our dividend policy
will be made at the discretion of our board of directors.
Securities
Authorized for Issuance Under Equity Compensation Plans
Our 2009
Omnibus Securities and Incentive Plan (the “Plan”) provides for the granting of
distribution equivalent rights, incentive stock options, non-qualified stock
options, performance share awards, performance unit awards, restricted stock
awards, restricted stock unit awards, stock appreciation rights, tandem stock
appreciation rights, unrestricted stock awards or any combination of the
foregoing, as may be best suited to the circumstances of the particular
employee, director or consultant as provided herein (the “Awards”). Certain
Awards are intended to qualify as “incentive stock options” within the meaning
of our Internal Revenue Code (the “Code”). The Plan was approved by our Board on
October 30, 2009, but has not yet been approved by our
stockholders.
The total
number of shares of our common stock that may be issued under the Plan may not
exceed 5,000,000. In connection with the Financing, we agreed that during a
period ending on August 20, 2012, such issuances shall not exceed ten percent
(10%) of the issued and outstanding shares of Common Stock of the Company in the
aggregate.
Equity
Repurchases
In
connection with the Share Exchange, we repurchased and cancelled 4,400,000
shares of our Common Stock from our then stockholder G. Edward Hancock in June
2009.
DISCLOSURE
OF COMMISSION POSITION
ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The
following is a summary of the relevant provisions in our articles of
incorporation, bylaws and Nevada law with regard to limitation of liability and
indemnification of our officers, directors and employees. The full provisions
are contained in the Nevada Revised Statutes and such documents.
Indemnification.
Our
directors and officers are indemnified as provided by our articles of
incorporation, our bylaws and the Nevada Revised Statutes. Our bylaws and
articles of incorporation provide that we will indemnify our directors,
officers, employees, and agents, to the fullest extent to the extent required by
the Nevada Revised Statutes and shall indemnify such individuals to the extent
permitted by the Nevada Revised Statutes. We may purchase and
maintain liability insurance, or make other arrangements for such obligations or
otherwise, to the extent permitted by the Nevada Revised Statutes. Our bylaws
and Nevada laws permit us to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he or she is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses, including attorneys’ fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him or her in connection with the action, suit or proceeding if he has
exercised his powers in good faith and with a view to the interests of the
corporation; or acted in good faith and in a manner which he or she reasonably
believed to be in or not opposed to the best interest of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
We will
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he or
she is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including amounts paid in settlement and
attorneys’ fees actually and reasonably incurred by him or her in connection
with the defense or settlement of such action or suit if he or she acted in good
faith and in a manner which he or she reasonably believed to be in or not
opposed to the best interests of the corporation. Indemnification may not be
made for any claim, issue or matter as to which such person has been adjudged by
a court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to the corporation or for amount paid in settlement to the
corporation, unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction determines upon
application that, in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper.
Limitation of Liability.
Our
articles of incorporation limit the liability of our directors and officers
under certain circumstances. Our articles of incorporation provide that the
liability of directors or officers for monetary damages are eliminated to the
fullest extent permitted by Nevada law.
In the
event that a claim for indemnification against these types of liabilities, other
than the payment by us of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit or proceeding,
is asserted by a director, officer or controlling person in connection with the
securities being registered, we will (unless in the opinion of our counsel, the
matter has been settled by controlling precedent) submit to a court of
appropriate jurisdiction, the question whether indemnification by us is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue. The legal process relating to this matter if
it were to occur is likely to be very costly and may result in us receiving
negative publicity, both of which are likely to materially reduce the market and
price for our shares.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933, as
amended, may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, we have been advised that, in the opinion
of the SEC, such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable.
LEGAL
MATTERS
The
validity of the shares of our Common Stock offered hereby has been passed upon
for us by Lewis and Roca LLP, Las Vegas, Nevada.
EXPERTS
The
audited financial statements as of and for the years ended December 31, 2009 and
December 31, 2008 have been included in this prospectus in reliance upon the
report of Bernstein & Pinchuk LLP, an independent registered public
accounting firm and their authority as experts in accounting and
auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We are a
public company and file annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any document we file
at the SEC’s public reference room at 100 F Street, NE, Washington, D.C. 20549.
You can request copies of these documents by writing to the SEC and paying a fee
for the copying cost. Please call the SEC at 1-800-SEC-0330 for more information
about the operation of the public reference room. Our SEC filings are also
available, at no charge, to the public at the SEC’s web site at
http://www.sec.gov
.
CHINANET
ONLINE HOLDINGS, INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
Page
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-1
|
|
|
|
Consolidated
Balance Sheets
|
|
F-2
- F-3
|
|
|
|
Consolidated
Statements of Income and Comprehensive Income
|
|
F-4
- F-5
|
|
|
|
Consolidated
Statements of Stockholders’ Equity
|
|
F-8
- F-9
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
F-6
- F-7
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-10
- F-39
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
ChinaNet
Online Holdings, Inc.
We have
audited the accompanying consolidated balance sheets of ChinaNet Online
Holdings, Inc. (“the Company”) as of December 31, 2009 and 2008, and the related
consolidated statements of income and comprehensive income, stockholders’ equity
and cash flows for each of the years in the two-year period then ended. The
Company’s management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2009
and 2008, and the results of its operations and its cash flows for each of the
years in the two-year period then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/
Bernstein & Pinchuk LLP
March 31,
2010
New York,
NY
CHINANET
ONLINE HOLDINGS, INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands)
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(US
$)
|
|
|
(US
$)
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
13,917
|
|
|
$
|
2,679
|
|
Accounts
receivable, net
|
|
|
3,173
|
|
|
|
978
|
|
Other
receivables
|
|
|
2,636
|
|
|
|
-
|
|
Prepayments
and deposit to suppliers
|
|
|
4,111
|
|
|
|
4,072
|
|
Due
from related parties
|
|
|
492
|
|
|
|
109
|
|
Due
from Control Group
(see
note 8)
|
|
|
-
|
|
|
|
243
|
|
Inventories
|
|
|
2
|
|
|
|
1
|
|
Other
current assets
|
|
|
30
|
|
|
|
46
|
|
Total
current assets
|
|
|
24,361
|
|
|
|
8,128
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1,355
|
|
|
|
678
|
|
Other
long-term assets
|
|
|
48
|
|
|
|
7
|
|
|
|
$
|
25,764
|
|
|
$
|
8,813
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
290
|
|
|
$
|
37
|
|
Advances
from customers
|
|
|
914
|
|
|
|
608
|
|
Other
payables
|
|
|
27
|
|
|
|
1,333
|
|
Accrued
payroll and other accruals
|
|
|
191
|
|
|
|
66
|
|
Due
to related parties
|
|
|
24
|
|
|
|
346
|
|
Due
to Control Group
|
|
|
1,142
|
|
|
|
1,149
|
|
Due
to director
|
|
|
-
|
|
|
|
10
|
|
Taxes
payable
|
|
|
1,978
|
|
|
|
1,746
|
|
Dividend
payable
|
|
|
373
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
4,939
|
|
|
|
5,295
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Long-term
borrowing from director
|
|
|
128
|
|
|
|
128
|
|
Warrant
liabilities
(see note
16
)
|
|
|
9,564
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies
(see note 2
2
)
|
|
|
-
|
|
|
|
-
|
|
CHINANET
ONLINE HOLDINGS, INC.
CONSOLIDATED
BALANCE SHEETS (CONTINUED)
(In
thousands, except for number of shares and per share data)
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(US
$)
|
|
|
(US
$)
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
Series
A convertible preferred stock, US$0.001 par value;
authorized-8,000,000 shares; issued and outstanding-4,121,600
and nil shares at December 31, 2009 and 2008
respectively (Liquidation preference $10,304)
|
|
|
4
|
|
|
|
-
|
|
Common
stock (US$0.001 par value;
authorized-50,000,000 shares;
issued and outstanding 15,828,320 shares and 13,790,800 shares at
December 31, 2009 and 2008 respectively)
|
|
|
16
|
|
|
|
14
|
|
Additional
paid-in capital
|
|
|
10,574
|
|
|
|
599
|
|
Statutory
reserves
|
|
|
372
|
|
|
|
304
|
|
Retained
earnings
|
|
|
50
|
|
|
|
2,370
|
|
Accumulated
other comprehensive income
|
|
|
117
|
|
|
|
103
|
|
Total
stockholders’ equity
|
|
|
11,133
|
|
|
|
3,390
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,764
|
|
|
$
|
8,813
|
|
See notes
to the consolidated financial statements
CHINANET
ONLINE HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In
thousands)
|
|
Year
ended December 31,
|
|
|
2009
|
|
|
2008
|
|
|
|
(US
$)
|
|
|
(US
$)
|
|
Sales
|
|
|
|
|
|
|
From
unrelated parties
|
|
$
|
35,354
|
|
|
$
|
20,061
|
|
From
related parties
|
|
|
2,370
|
|
|
|
1,447
|
|
|
|
|
37,724
|
|
|
|
21,508
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
21,233
|
|
|
|
13,786
|
|
Gross
margin
|
|
|
16,491
|
|
|
|
7,722
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
4,198
|
|
|
|
2,705
|
|
General and administrative expenses
|
|
|
2,404
|
|
|
|
1,041
|
|
Research
and development expenses
|
|
|
480
|
|
|
|
202
|
|
|
|
|
7,082
|
|
|
|
3,948
|
|
|
|
|
|
|
|
|
|
|
Income from
operations
|
|
|
9,409
|
|
|
|
3,774
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
Changes
in fair value of warrants
(see note
16)
|
|
|
(4,425
|
)
|
|
|
-
|
|
Interest
income
|
|
|
14
|
|
|
|
8
|
|
Other
expenses
|
|
|
(99
|
)
|
|
|
(20
|
)
|
|
|
|
(4,510
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
Income
before income tax expense
|
|
|
4,899
|
|
|
|
3,762
|
|
Income
tax expense
|
|
|
880
|
|
|
|
962
|
|
Net
income
|
|
|
4,019
|
|
|
|
2,800
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain
|
|
|
14
|
|
|
|
71
|
|
Comprehensive
income
|
|
$
|
4,033
|
|
|
$
|
2,871
|
|
CHINANET
ONLINE HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF INCOME AND
COMPREHENSIVE
INCOME
(
CONTINUED
)
(In
thousands, except for number of shares and per share data)
|
|
Year
ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(US
$)
|
|
|
(US
$)
|
|
Net
income
|
|
$
|
4,019
|
|
|
$
|
2,800
|
|
|
|
|
|
|
|
|
|
|
Beneficial
conversion feature of Series A convertible preferred stock
(see note
17)
|
|
|
(5,898
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Dividend
of Series A convertible preferred stock
|
|
|
(373
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common shareholders
|
|
$
|
(2,252
|
)
|
|
$
|
2,800
|
|
|
|
|
|
|
|
|
|
|
Earnings
/(loss) per share
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.15
|
)
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
14,825,125
|
|
|
|
13,790,800
|
|
See notes
to the consolidated financial statements
CHINANET
ONLINE HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Year
ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(US
$)
|
|
|
(US
$)
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net income
|
|
$
|
4,019
|
|
|
$
|
2,800
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
207
|
|
|
|
77
|
|
Other
|
|
|
8
|
|
|
|
6
|
|
Share-based
compensation expenses
(see
note 2
5
)
|
|
|
360
|
|
|
|
-
|
|
Changes
in fair value of warrants
(see note 16
)
|
|
|
4,425
|
|
|
|
-
|
|
Allowances for
doubtful debts
|
|
|
71
|
|
|
|
-
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(2,262
|
)
|
|
|
(741
|
)
|
Other
receivables
|
|
|
(2,634
|
)
|
|
|
200
|
|
Prepayment
and deposit to suppliers
|
|
|
(29
|
)
|
|
|
(3,570
|
)
|
Due
from related parties
|
|
|
(382
|
)
|
|
|
(107
|
)
|
Due
from/to Control Group
|
|
|
235
|
|
|
|
749
|
|
Other
current assets
|
|
|
14
|
|
|
|
(33
|
)
|
Accounts
payable
|
|
|
253
|
|
|
|
(281
|
)
|
Advances
from customers
|
|
|
303
|
|
|
|
471
|
|
Accrued
payroll and other accruals
|
|
|
124
|
|
|
|
21
|
|
Due
to related parties
|
|
|
(322
|
)
|
|
|
317
|
|
Taxes
payable
|
|
|
227
|
|
|
|
912
|
|
Net
cash provided by operating activities
|
|
|
4,617
|
|
|
|
821
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases
of vehicles and office equipment
|
|
|
(890
|
)
|
|
|
(490
|
)
|
Purchases
of other long-term assets
|
|
|
(40
|
)
|
|
|
(7
|
)
|
Net
cash used in investing activities
|
|
|
(930
|
)
|
|
|
(497
|
)
|
CHINANET
ONLINE HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
(In
thousands)
|
|
Year
ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(US
$)
|
|
|
(US
$)
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
Increase of long-term borrowing from director
|
|
|
-
|
|
|
|
126
|
|
Increase/(decrease) of due to director
|
|
|
(10
|
)
|
|
|
548
|
|
Increase/(decrease)
of other payables
|
|
|
(1,308
|
)
|
|
|
1,307
|
|
Cancellation
and retirement of common stock
(see
note 18
)
|
|
|
(300
|
)
|
|
|
-
|
|
Proceeds
from issuance of Series A convertible preferred stock and warrants (net of
issuance cost of US$ 1,142)
|
|
|
9,162
|
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
7,544
|
|
|
|
1,981
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate fluctuation on cash and cash equivalents
|
|
|
7
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
11,238
|
|
|
|
2,362
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
2,679
|
|
|
|
317
|
|
Cash
and cash equivalents at end of year
|
|
$
|
13,917
|
|
|
$
|
2,679
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
-
|
|
|
$
|
-
|
|
Income
taxes paid
|
|
$
|
1,129
|
|
|
$
|
673
|
|
See notes
to the consolidated financial statements
CHINANET
ONLINE HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In
thousands, except for number of shares)
|
|
Series
A convertible
preferred stock
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Accumulated
other
|
|
|
|
|
|
|
Number
of shares
|
|
|
Amount
|
|
|
Number
of shares
|
|
|
Amount
|
|
|
paid-in
capital
|
|
|
|
|
|
Retained
earnings
|
|
|
comprehensive
income
|
|
|
|
|
|
|
|
|
|
(US
$)
|
|
|
|
|
|
(US
$)
|
|
|
(US
$)
|
|
|
(US
$)
|
|
|
(US
$)
|
|
|
(US
$)
|
|
|
(US
$)
|
|
Balance,
January 1, 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
13,790,800
|
|
|
|
14
|
|
|
|
511
|
|
|
|
67
|
|
|
|
(193
|
)
|
|
|
32
|
|
|
|
431
|
|
Assets
donated by Control Group
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
88
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
88
|
|
Net
income for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,800
|
|
|
|
-
|
|
|
|
2,800
|
|
Appropriation
of statutory reserves
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
237
|
|
|
|
(237
|
)
|
|
|
-
|
|
|
|
-
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
71
|
|
|
|
71
|
|
Balance,
December 31, 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
13,790,800
|
|
|
|
14
|
|
|
|
599
|
|
|
|
304
|
|
|
|
2,370
|
|
|
|
103
|
|
|
|
3,390
|
|
Effect
of reverse acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
1,383,500
|
|
|
|
1
|
|
|
|
(301
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(300
|
)
|
Issuance
of Series A convertible preferred shares
|
|
|
4,121,600
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,894
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,898
|
|
Recognition
of beneficial conversion feature upon issuance of Series A
convertible preferred shares as deemed dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,898
|
|
|
|
-
|
|
|
|
(5,898
|
)
|
|
|
-
|
|
|
|
-
|
|
Deduction
of issuing cost
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,142
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,142
|
)
|
CHINANET
ONLINE HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (CONTINUED)
(In
thousands, except for number of shares)
|
|
Series
A convertible
preferred
stock
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Accumulated
other
|
|
|
|
|
|
|
Number
of shares
|
|
|
Amount
|
|
|
Number
of shares
|
|
|
Amount
|
|
|
paid-in
capital
|
|
|
|
|
|
Retained
earnings
|
|
|
comprehensive
income
|
|
|
Total
|
|
|
|
|
|
|
(US
$)
|
|
|
|
|
|
(US
$)
|
|
|
(US
$)
|
|
|
(US
$)
|
|
|
(US
$)
|
|
|
(US
$)
|
|
|
(US
$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduction
of grant date fair value of placement agent warrants as issuing
cost
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(733
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(733
|
)
|
Series
A convertible preferred stock dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(373
|
)
|
|
|
-
|
|
|
|
(373
|
)
|
Shares
issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
600,000
|
|
|
|
1
|
|
|
|
149
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
150
|
|
Share
based compensation related to service
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
Issuance
of restricted shares
|
|
|
-
|
|
|
|
-
|
|
|
|
54,020
|
|
|
|
-
|
|
|
|
131
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
131
|
|
Net
income for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,019
|
|
|
|
-
|
|
|
|
4,019
|
|
Appropriation
of statutory reserves
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
68
|
|
|
|
(68
|
)
|
|
|
-
|
|
|
|
-
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
14
|
|
Balance,
December 31, 2009
|
|
|
4,121,600
|
|
|
|
4
|
|
|
|
15,828,320
|
|
|
|
16
|
|
|
|
10,574
|
|
|
|
372
|
|
|
|
50
|
|
|
|
117
|
|
|
|
11,133
|
|
|
See
notes to the consolidated financial
statements
|
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Organization
and nature of operations
|
ChinaNet
Online Holdings, Inc. (formerly known as Emazing Interactive, Inc.), (the
“Company”), was incorporated in the State of Texas in April 2006 and
re-domiciled to become a Nevada corporation in October 2006. From the date of
the Company’s incorporation until June 26, 2009, when the Company consummated
the Share Exchange, the Company’s activities were primarily concentrated in web
server access and company branding in hosting web based e-games.
On June
26, 2009, the Company entered into a Share Exchange Agreement (the “Exchange
Agreement”), with (i) China Net Online Media Group Limited, a company organized
under the laws of British Virgin Islands (“China Net BVI”), (ii) China Net BVI’s
shareholders, Allglad Limited, a British Virgin Islands company (“Allglad”),
Growgain Limited, a British Virgin Islands company ("Growgain"), Rise King
Investments Limited, a British Virgin Islands company (“Rise King BVI”), Star
(China) Holdings Limited, a British Virgin Islands company (“Star”), Surplus
Elegant Investment Limited, a British Virgin Islands company (“Surplus”), Clear
Jolly Holdings Limited, a British Virgin Islands company (“Clear” and together
with Allglad, Growgain, Rise King BVI, Star and Surplus, the “China Net BVI
Shareholders”), who together owned shares constituting 100% of the issued and
outstanding ordinary shares of China Net BVI (the “China Net BVI Shares”) and
(iii) G. Edward Hancock, the principal stockholder of the Company at that time.
Pursuant to the terms of the Exchange Agreement, the China Net BVI Shareholders
transferred to the Company all of the China Net BVI Shares in exchange for the
issuance of 13,790,800 shares (the “Exchange Shares”) of the
Company’s common stock (the “Share Exchange”). As a result of the Share
Exchange, China Net BVI became a wholly owned subsidiary of the Company and the
Company is now a holding company, which through certain contractual arrangements
with operating companies in the People’s Republic of China (the “PRC”), which
engages in providing advertising, marketing and communication services to small
and medium companies in China through
www.28.com
(the
portal website of the Company’s PRC Variable Interest Entity), TV media and bank
kiosks.
The
Company’s wholly owned subsidiary, China Net BVI was incorporated in the British
Virgin Islands on August 13, 2007. In April 11, 2008, China Net BVI became the
parent holding company of a group of companies comprised of CNET Online
Technology Limited, a Hong Kong company (“China Net HK”), which established and
is the parent company of Rise King Century Technology Development (Beijing) Co.,
Ltd., a wholly foreign-owned enterprise (“WFOE”) established in the PRC (“Rise
King WFOE”). The Company refers to the transactions that resulted in China Net
BVI becoming an indirect parent company of Rise King WFOE as the “Offshore
Restructuring.” Through a series of contractual agreements, the Company operates
its business in China primarily through Business Opportunity Online (Beijing)
Network Technology Co., Ltd. (“Business Opportunity Online”), Beijing CNET
Online Advertising Co., Ltd. (“Beijing CNET Online”). Beijing CNET Online owns
51% of Shanghai Borongdingsi Computer Technology Co., Ltd. (“Shanghai
Borongdingsi”). Business Opportunity Online, Beijing CNET Online and Shanghai
Borongdingsi, were incorporated on December 8, 2004, January 27, 2003 and August
3, 2005, respectively. From time to time, we refer to them collectively as the
“PRC Operating Entities.”
Shanghai
Borongdingsi is owned 51% by Beijing CNET Online. Beijing CNET Online and
Shanghai Borongdingsi entered into a cooperation agreement in June 2008,
followed up with a supplementary agreement in December 2008, to conduct bank
kiosk advertisement business. The business is based on a bank kiosk cooperation
agreement between Shanghai Borongdingsi and Henan provincial branch of China
Construction Bank which allows Shanghai Borongdingsi or its designated party to
conduct in-door advertisement business within the business outlets throughout
Henan Province. The bank kiosk cooperation agreement has a term of eight years
starting August 2008. However, Shanghai Borongdingsi was not able to conduct the
advertisement as a stand-alone business due to the lack of an advertisement
business license and supporting financial resources. Pursuant to the
aforementioned cooperation agreements, Beijing CNET Online committed to purchase
equipment, and to provide working capital, technical and other related support
to Shanghai Borongdingsi. Beijing CNET Online owns the equipment used in the
kiosk business, is entitled to sign contracts in its name on behalf of the
business, and holds the right to collect the advertisement revenue generated
from the bank kiosk business exclusively until the recovery of the cost of
purchase of the equipment. Thereafter, Beijing CNET Online has agreed to
distribute 49% of the succeeding net profit generated from the bank kiosk
advertising business, if any, to the minority shareholders of Shanghai
Borongdingsi.
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary
of significant accounting policies
|
a)
|
Change
of reporting entity and basis of
presentation
|
As a
result of the Share Exchange on June 26, 2009, the former China Net BVI
shareholders owned a majority of the common stock of the Company. The
transaction was regarded as a reverse acquisition whereby China Net BVI was
considered to be the accounting acquirer as its shareholders retained control of
the Company after the Share Exchange, although the Company is the legal parent
company. The share exchange was treated as a recapitalization of the
Company. As such, China Net BVI (and its historical financial statements)
is the continuing entity for financial reporting purposes. Pursuant to the terms
of the Share Exchange, Emazing Interactive, Inc. was delivered with zero assets
and zero liabilities at time of closing. Following the Share Exchange, the
company changed its name from Emazing Interactive, Inc. to ChinaNet Online
Holdings, Inc. The financial statements have been prepared as if China Net BVI
had always been the reporting company and then on the share exchange date, had
changed its name and reorganized its capital stock.
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) and include the accounts of the Company, its subsidiaries and
Variable Interest Entities (“VIEs”), China Net BVI, China Net HK, Rise King
WFOE, Beijing CNET Online and Business Opportunity Online. According
to the agreements between Beijing CNET Online and Shanghai Borongdingsi,
although Beijing CNET Online legally owns 51% of Shanghai Borongdingsi’s
interests, Beijing CNET Online only controls the assets and liabilities related
to the bank kiosk business, which has been all included in the financial
statements of Beijing CNET Online, but does not controls other asset of Shanghai
Borongdingsi, thus, Shanghai Borongdingsi’s financial statements were not
consolidated by the Company.
b)
|
FASB
Establishes Accounting Standards Codification
™
|
In June
2009, the FASB issued Accounting Standards Update No. 2009-01, “Generally
Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB
Accounting Standards Codification (“the Codification” or “ASC”) as the official
single source of authoritative U.S. generally accepted accounting principles
(“GAAP”). All existing accounting standards are superseded. All other accounting
guidance not included in the Codification will be considered non-authoritative.
The Codification also includes all relevant Securities and Exchange Commission
(“SEC”) guidance organized using the same topical structure in separate sections
within the Codification.
Following
the Codification, the Financial Accounting Standards Board will not issue new
standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards Updates
(“ASU”) which will serve to update the Codification, provide background
information about the guidance and provide the basis for conclusions on the
changes to the Codification.
The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification or ASC is effective for interim and
annual periods ending after September 15, 2009. The principal impact
on the Company’s financial statements for adopting the Codification is limited
to disclosures as all future references to authoritative accounting literature
will be referenced in accordance with the Codification. In order to
ease the transition to the Codification, the Company is providing the standards
issued and adopted prior to the adoption of the Codification cross-reference
alongside references to the Codification.
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
c)
|
Principles
of Consolidation
|
The
consolidated financial statements include the financial statements of all the
subsidiaries and VIEs of the Company. All transactions and balances between the
Company and its subsidiaries and VIEs have been eliminated upon
consolidation.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and 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. Management bases these
estimates on historical experiences and the best information available at the
time the estimates are made; however actual results could differ from those
estimates. US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
contingencies and results of operations. While management has based their
assumptions and estimates on the facts and circumstances existing as of December
31, 2009, final amounts may differ from these estimates.
e)
|
Foreign
currency translation and
transactions
|
The
functional currency of the Company is United States dollars (“US$”), and the
functional currency of China Net HK is Hong Kong dollars (“HK$”). The
functional currency of the Company’s PRC operating entities is Renminbi (“RMB’),
and PRC is the primary economic environment in which the Company
operates.
For
financial reporting purposes, the financial statements of the Company’s PRC
operating entities, which are prepared using the RMB, are translated into the
Company’s reporting currency, the United States Dollar (“U.S. dollar”). Assets
and liabilities are translated using the exchange rate at each balance sheet
date. Revenue and expenses are translated using average rates
prevailing during each reporting period, and stockholders’ equity is translated
at historical exchange rates. Adjustments resulting from the translation are
recorded as a separate component of accumulated other comprehensive income in
stockholders’ equity.
Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transactions. The resulting exchange differences are included in the
determination of net income of the consolidated financial statements for the
respective periods.
The
exchange rates used to translate amounts in RMB into US$ for the purposes of
preparing the consolidated financial statements are as follows:
|
|
2009
|
|
|
2008
|
|
Balance
sheet items, except for equity accounts
|
|
|
6.8372
|
|
|
|
6.8542
|
|
|
|
|
|
|
|
|
|
|
Items
in the statements of income and comprehensive
income,
and statements cash flows
|
|
|
6.8409
|
|
|
|
6.9623
|
|
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
No
representation is made that the RMB amounts could have been, or could be
converted into US$ at the above rates.
f)
|
Cash
and cash equivalents
|
Cash and
cash equivalents consist of cash on hand and bank deposits, which are
unrestricted as to withdrawal and use. The Company considers all
highly liquid investments with original maturities of three months or less at
the time of purchase to be cash equivalents.
g)
|
Accounts
receivable, net
|
Accounts
receivable are recorded at net realizable value consisting of the carrying
amount less an allowance for uncollectible accounts as needed. The allowance for
doubtful accounts is the Company’s best estimate of the amount of probable
credit losses in the Company’s existing accounts receivable. The Company
determines the allowance based on aging data, historical collection experience,
customer specific facts and economic conditions. Account balances are charged
off against the allowance after all means of collection have been exhausted and
the potential for recovery is considered remote. The Company did not
have any off-balance-sheet credit exposure relating to its customers, suppliers
or others. As of December 31, 2009 and 2008, the Company has determined that
approximately US$71,000 and US$ nil allowance for doubtful debts is
required.
Inventories,
consisting mainly of low value consumable articles are stated at the lower of
cost or market value. Inventories are charged to expense when being
withdrawn.
i)
|
Property
and equipment, net
|
Property
and equipment are recorded at cost less accumulated depreciation. Depreciation
is calculated on the straight-line method after taking into account their
respective estimated residual values over the following estimated useful
lives:
Vehicles
|
|
5
years
|
Office
equipment
|
|
3-5
years
|
Electronic
devices
|
|
5
years
|
Depreciation
expenses are included in selling expenses, general and administrative expenses
and research and development expenses.
When
property and equipment are retired or otherwise disposed of, resulting gain or
loss is included in net income or loss in the year of disposition for the
difference between the net book value and proceeds received
thereon. Maintenance and repairs which do not improve or extend the
expected useful lives of the assets are charged to expenses as
incurred.
j)
|
Impairment
of long-lived assets
|
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of long-lived assets to be held and used
is measured by a comparison of the carrying amount of the asset to the estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future undiscounted cash flows, an impairment loss is recognized for the
difference between the carrying amount of the asset and its fair value. There
were no impairment losses incurred for the years ended December 31, 2009 and
2008.
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Accounting
Standard Codification ™ (“ASC”) Topic 820 (formerly Statement of
Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurement and
Disclosures”, defines fair value as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. This topic also establishes
a fair value hierarchy which requires classification based on observable and
unobservable inputs when measuring fair value. There are three levels of inputs
that may be used to measure fair value:
Level 1
-
Quoted
prices in active markets for identical assets or liabilities.
Level 2
- Observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3
-
Unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates its hierarchy disclosures each
quarter.
The
carrying values of cash and cash equivalents, trade and other receivables,
prepayments, payables and other liabilities approximate fair values due to their
short maturities.
Assets
and liabilities measured at fair value on a recurring basis are summarized
as follows:
|
|
Fair
value measurement
using
inputs
|
|
|
Carrying
amount as of December 31,
|
|
Financial
instruments
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
2009
|
|
|
2008
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
Warrant
liabilities
|
|
|
-
|
|
|
|
9,564
|
|
|
|
-
|
|
|
|
9,564
|
|
|
|
-
|
|
Due to
lack of the liquidity of the Company’s underlying stock and other factors, such
as registration status, the Company estimated the fair value of the warrant
liabilities based upon observable inputs such as quoted prices for similar
securities, quoted price in markets that are not active or other inputs that are
observable to determine the fair value of the warrant liabilities.
There was
no asset or liability measured at fair value on a non-recurring basis as of
December 31, 2009 and 2008, except warrant liabilities as of December 31,
2009.
The
Company's revenue recognition policies are in compliance with ASC Topic 605
(Staff Accounting Bulletin No. 104, “Revenue Recognition”). In accordance with
ASC Topic 605, revenues are recognized when the four of the following criteria
are met: (i) persuasive evidence of an arrangement exists, (ii) the
service has been rendered, (iii) the fees are fixed or determinable, and
(iv) collectability is reasonably assured.
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Sales
Sales
include revenues from reselling of advertising time purchased from TV stations
and internet advertising, reselling of internet advertising spaces and other
advertisement related resources. No revenue from advertising-for-advertising
barter transactions was recognized because the transactions did not meet the
criteria for recognition in ASC Topic 605, subtopic 20 (formerly Emerging Issues
Task Force (“EITF”) abstract issue No. 99-17”). Advertising contracts
establish the fixed price and advertising services to be
provided. Pursuant to advertising contracts, the Company provides
advertisement placements in different formats, including but not limited to
banners, links, logos, buttons, rich media and content integration. Revenue is
recognized ratably over the period the advertising is provided and, as such, the
Company considers the services to have been delivered. The Company treats all
elements of advertising contracts as a single unit of accounting for revenue
recognition purposes. Based upon the Company’s credit assessments of
its customers prior to entering into contracts, the Company determines if
collectability is reasonably assured. In situations where
collectability is not deemed to be reasonably assured, the Company recognizes
revenue upon receipt of cash from customers, only after services have been
provided and all other criteria for revenue recognition have been
met.
Cost of
sales primarily includes the cost of media advertising time, internet
advertisement related resources and other technical services purchased from
third parties, labor cost and benefits and PRC business tax.
Advertising
costs for the Company’s own brand building are not includable in cost of sales,
they are expensed when incurred and are included in “selling expenses” in the
statement of income and comprehensive income. For the year ended December 31,
2009 and 2008, advertising expenses for the Company’s own brand building were
approximately US$3,063,000 and US$1,937,000, respectively.
o)
|
Research
and development expenses
|
Research
and development costs are charged to expense when incurred. Expenses for
research and development for the years ended December 31, 2009 and 2008 were
approximately US$ 480,000 and US$202,000 respectively.
The
Company adopts ASC Topic 740 (formerly SFAS No. 109, “Accounting for income
taxes”) and uses liability method to accounts for income taxes. Under
this method, deferred tax assets and liabilities are determined based on the
difference between of the financial reporting and tax bases of assets and
liabilities using enacted tax rates that will be in effect in the period in
which the differences are expected to reverse. The Company records a valuation
allowance to offset deferred tax assets if based on the weight of available
evidence, it is more-likely-than-not that some portion, or all, of the deferred
tax assets will not be realized. The effect on deferred taxes of a change in tax
rates is recognized in income statement in the period that includes the
enactment date. The Company had no deferred tax assets and liabilities
recognized for the year ended December 31, 2009 and 2008.
q)
|
Uncertain
tax positions
|
The
Company adopts ASC Topic 740-10-25-5 through 740-10-25-7 and
740-10-25-13, (formerly FASB Interpretation No. 48 (“FIN 48”)
“Accounting for Uncertainty in Income Taxes”), which prescribes a more likely
than not threshold for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This Interpretation also
provides guidance on recognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, accounting
for income taxes in interim periods, and income tax disclosures. For the
year ended December 31, 2009 and 2008, the Company did not have any interest and
penalties associated with tax positions and did not have any significant
unrecognized uncertain tax positions.
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
r)
|
Share-based
Compensation
|
The
Company accounted for share-based compensation in accordance with ASC Topic 718,
(formerly SFAS No. 123R “Share-based Payment”) which requires that
share-based payment transactions be measured based on the grant-date fair value
of the equity instrument issued and recognized as compensation expense over the
requisite service period, or vesting period.
The
Company accounts for comprehensive income in accordance with ASC Topic 220,
Comprehensive Income (formerly SFAS 130 “Reporting Comprehensive Income”), which
establishes standards for reporting and displaying comprehensive income and its
components in the consolidated financial statements. Comprehensive income is
defined as the change in equity of a company during a period from transactions
and other events and circumstances excluding transactions resulting from
investments from owners and distributions to owners. Accumulated other
comprehensive income, as presented on the accompanying consolidated balance
sheets are the cumulative foreign currency translation adjustments.
t)
|
Earnings
/ (loss) per share
|
Earnings
/ (loss) per share are calculated in accordance with ASC Topic 260,
“Earnings Per Share” (formerly SFAS No. 128 “Earning Per Share”). Basic
earnings per share is computed by dividing income attributable to common
stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share reflect the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. Common shares issuable upon the
conversion of the convertible preferred shares are included in the computation
of diluted earnings per share on an “if-converted” basis when the impact is
dilutive. The dilutive effect of outstanding common stock warrants is reflected
in the diluted earnings per share by application of the treasury stock method
when the impact is dilutive.
u)
|
Commitments
and contingencies
|
The
Company has adopted ASC 450 subtopic 20, Loss Contingencies (formerly
SFAS 5 “Accounting for Contingencies”) in determining its accruals and
disclosures with respect to loss contingencies. Accordingly, estimated losses
from loss contingencies are accrued by a charge to income when information
available prior to issuance of the financial statements indicates that it is
probable that a liability have been incurred and the amount of the loss can be
reasonably estimated. Legal expenses associated with the contingency are
expensed as incurred. If a loss contingency is not probable or reasonably
estimable, disclosure of the loss contingency is made in the financial
statements when it is at least reasonably possible that a material loss could be
incurred.
v)
|
Recent
accounting pronouncements
|
Upon
initial adoption of SFAS 157 on April 1, 2008, the Company adopted FASB ASC
820-10 (formerly FSP FAS 157-2, “Effective Date of FASB Statement
157”), which deferred the provisions of previously issued fair value guidance
for nonfinancial assets and liabilities to the first fiscal period
beginning after November 15, 2008. Deferred nonfinancial assets and liabilities
include items such as goodwill and other non-amortizable intangibles. Effective
January 1, 2009, the Company adopted the fair value guidance for nonfinancial
assets and liabilities. The adoption of this ASC did not have a material impact
on the Company’s Consolidated Financial Statements.
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Effective
January 1, 2009, the Company adopted FASB ASC 805-10, (formerly SFAS No.
141R, “Business Combinations”), which establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling
interest in an acquiree and the goodwill acquired. In addition, the
provisions in this ASC require that any additional reversal of deferred tax
asset valuation allowance established in connection with fresh start
reporting on January 7, 1998 be recorded as a component of income tax
expense rather than as a reduction to the goodwill established in
connection with the fresh start reporting. The Company will apply ASC
805-10 to any business combinations subsequent to adoption.
Effective
January 1, 2009, the Company adopted FASB ASC 805-20 (formerly FSP FAS
141R-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies”), which amends ASC 805-10 to require
that an acquirer recognize at fair value, at the acquisition date, an asset
acquired or a liability assumed in a business combination that arises from a
contingency if the acquisition-date fair value of that asset or liability can be
determined during the measurement period. If the acquisition-date fair value of
such an asset acquired or liability assumed cannot be determined, the acquirer
should apply the provisions of ASC Topic 450, Contingences, to determine whether
the contingency should be recognized at the acquisition date or after such date.
The adoption of ASC 805-20 did not
have a material impact on the Company’s Consolidated Financial
Statements.
Effective
January 1, 2009, the Company adopted FASB ASC 810-10-65 (formerly SFAS No. 160,
Non-controlling Interests in Consolidated Financial Statements — an amendment of
ARB No. 51), which amends previously issued guidance to establish accounting and
reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a non-controlling interest in
a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as equity.
Among other requirements, this Statement requires that the consolidated net
income attributable to the parent and the non-controlling interest be clearly
identified and presented on the face of the consolidated income
statement. The adoption of the provisions in this ASC did not have a
material impact on the Company’s Consolidated Financial Statements.
Effective
January 1, 2009, the Company adopted FASB ASC 815-10-65 (formerly SFAS No.
161, “Disclosures about Derivative Instruments and Hedging Activities”), which
amends and expands previously existing guidance on derivative instruments to
require tabular disclosure of the fair value of derivative instruments and their
gains and losses. This ASC also requires disclosure regarding the credit-risk
related contingent features in derivative agreements, counterparty credit risk,
and strategies and objectives for using derivative instruments. The adoption of
this ASC did not have a material impact on the Company’s Consolidated Financial
Statements.
Effective
January 1, 2009, the Company adopted FASB ASC 350-30 and ASC 275-10-50 (formerly
FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets:), which
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill and Other Intangible Assets”. The Company will
apply ASC 350-30 and ASC 275-10-50 prospectively to intangible assets acquired
subsequent to the adoption date. The adoption of these revised provisions did
not have a material impact on the Company’s Consolidated Financial
Statements.
Effective
July 1, 2009, the Company adopted FASB ASC 825-10-65 (formerly FSP FAS 107-1 and
Accounting Principles Board 28-1, Interim Disclosures about Fair Value of
Financial Instruments), which amends previous guidance to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. The
adoption of FASB ASC 825-10-65 did not have a material impact on the Company’s
Consolidated Financial Statements.
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Effective
July 1, 2009, the Company adopted FASB ASC 320-10-65 (formerly FSP FAS 115-2 and
FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments).
Under ASC 320-10-65, an other-than-temporary impairment must be recognized
if the Company has the intent to sell the debt security or the Company is more
likely than not will be required to sell the debt security before its
anticipated recovery. In addition, ASC 320-10-65 requires impairments related to
credit loss, which is the difference between the present value of the cash flows
expected to be collected and the amortized cost basis for each security, to be
recognized in earnings while impairments related to all other factors to be
recognized in other comprehensive income. The adoption of ASC 320-10-65 did not
have a material impact on the Company’s Consolidated Financial
Statements.
Effective
July 1, 2009, the Company adopted FASB ASC 820-10-65 (formerly FSP FAS
157-4, Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly), which provides guidance on how to determine the fair
value of assets and liabilities when the volume and level of activity for the
asset or liability has significantly decreased when compared with normal market
activity for the asset or liability as well as guidance on identifying
circumstances that indicate a transaction is not orderly. The adoption of ASC
820-10-65 did not have a material impact on the Company’s Consolidated Financial
Statements.
Effective
July 1, 2009, the Company adopted FASB ASC 855-10 (formerly SFAS No. 165,
“Subsequent Events”), which establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date, but before
financial statements are issued or are available to be issued. Adoption of ASC
855-10 did not have a material impact on the Company’s Consolidated Financial
Statements.
In
December 2008, the FASB issued ASC 715, Compensation – Retirement Benefits
(formerly FASB FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement
Benefit Plan Assets”), which expands the disclosure requirements about plan
assets for defined benefit pension plans and postretirement plans. The adoption
of these disclosure requirements did not have any material effect on the
Company’s Consolidated Financial Statements.
In
August, 2009, the FASB issued ASC Update No. 2009-05 to provide guidance on
measuring the fair value of liabilities under FASB ASC 820 (formerly SFAS No.
157, “Fair Value Measurements”). The adoption of this Update did not
have any material effect on the Company’s Consolidated Financial
Statements.
w)
|
New
accounting pronouncement to be
adopted
|
In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial
Assets – an amendment of FASB Statement No. 140, (codified by ASU No.
2009-16 issued in December 2009). SFAS No. 166 limits the circumstances in
which a financial asset should be derecognized
when the
transferor has not transferred the entire financial asset by taking into
consideration the transferor’s continuing involvement. The standard requires
that a transferor recognize and initially measure at fair value all assets
obtained (including a transferor’s beneficial interest) and liabilities incurred
as a result of a transfer of financial assets accounted for as a sale. The
concept of a qualifying special-purpose entity is removed from SFAS
No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities,” along with the exception from applying FIN
46(R), Consolidation of Variable Interest Entities. The standard is effective
for the first annual reporting period that begins after November 15, 2009
(i.e. the Company’s fiscal ending December 31, 2010). Earlier application is
prohibited. It is expected the adoption of this Statement will have no material
effect on the Company’s Consolidated Financial Statements.
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R), (codified by ASU No. 2009-17 issued in December 2009). The
standard amends FIN No. 46(R) to require a company to analyze whether its
interest in a variable interest entity (“VIE”) gives it a controlling financial
interest. A company must assess whether it has an implicit financial
responsibility to ensure that the VIE operates as designed when determining
whether it has the power to direct the activities of the VIE that significantly
impact its economic performance. Ongoing reassessments of whether a company is
the primary beneficiary are also required by the standard. SFAS No. 167
amends the criteria to qualify as a primary beneficiary as well as how to
determine the existence of a VIE. The standard also eliminates certain
exceptions that were available under FIN No. 46(R). This Statement will be
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009 (i.e. the Company’s fiscal
ending December 31, 2010). Earlier application is prohibited. Comparative
disclosures will be required for periods after the effective date. It is
expected the adoption of this Statement will have no material effect on the
Company’s Consolidated Financial Statements.
In
October 2009, the FASB concurrently issued the following ASC Updates
(ASU):
ASU No.
2009-13—Revenue Recognition (ASC Topic 605): Multiple-Deliverable Revenue
Arrangements (formerly EITF Issue No. 08-1). ASU No. 2009-13 modifies
the revenue recognition guidance for arrangements that involve the delivery of
multiple elements, such as product, software, services or support, to a customer
at different times as part of a single revenue generating
transaction. This standard provides principles and application
guidance to determine whether multiple deliverables exist, how the individual
deliverables should be separated and how to allocate the revenue in the
arrangement among those separate deliverables. The standard also expands the
disclosure requirements for multiple deliverable revenue
arrangements.
ASU No.
2009-14—Software (ASC Topic 985): Certain Revenue Arrangements That Include
Software Elements (formerly EITF Issue No. 09-3). ASU No. 2009-14 removes
tangible products from the scope of software revenue recognition guidance and
also provides guidance on determining whether software deliverables in an
arrangement that includes a tangible product, such as embedded software, are
within the scope of the software revenue guidance.
ASU No.
2009-13 and ASU No. 2009-14 should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010, with earlier application permitted. Alternatively, an
entity can elect to adopt these standards on a retrospective basis, but both
these standards must be adopted in the same period using the same transition
method. The Company expects to apply these ASU Updates on a prospective basis
for revenue arrangements entered into or materially modified beginning January
1, 2011. The Company is currently evaluating the potential impact
these ASC Updates may have on its financial position and results of
operations.
In
October 2009, the FASB also issued ASU No. 2009-15—Accounting for Own-Share
Lending Arrangements in Contemplation of Convertible Debt Issuance or Other
Financing. ASU 2009-15 amends ASC 470-20, Debt with Conversion and Other
Options, to provide accounting and reporting guidance for own-share lending
arrangements issued in contemplation of convertible debt issuance. ASU 2009-15
is effective for fiscal years beginning on or after December 15, 2009 with
retrospective application required.
In
January 2010, the FASB issued the following ASC Updates:
ASU No.
2010-01—Equity (Topic 505): Accounting for Distributions to Shareholders with
Components of Stock and Cash. This Update clarifies that the stock portion of a
distribution to shareholders that allows them to elect to receive cash or stock
with a potential limitation on the total amount of cash that all shareholders
can elect to receive in the aggregate is considered a share issuance that is
reflected in EPS prospectively and is not a stock dividend for purposes of
applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in
this Update are effective for interim and annual periods ending on or after
December 15, 2009 with retrospective application.
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
ASU No.
2010-02—Consolidation (Topic 810): Accounting and Reporting for Decreases in
Ownership of a Subsidiary. This Update amends ASC 810 subtopic 10 and related
guidance to clarify that the scope of the decrease in ownership provisions of
the Subtopic and related guidance applies to (i) a subsidiary or group of assets
that is a business or nonprofit activity; (ii) a subsidiary that is a business
or nonprofit activity that is transferred to an equity method investee or joint
venture; and (iii) an exchange of a group of assets that constitutes a business
or nonprofit activity for a non-controlling interest in an entity, but does not
apply to: (i) sales of in substance real estate; and (ii) conveyances of
petroleum and gas mineral rights. The amendments in this Update are effective
beginning in the period that an entity adopts FAS 160 (now included in ASC 810
subtopic 10).
ASU No.
2010-05—Compensation—Stock Compensation (Topic 718): Escrowed Share Arrangements
and the Presumption of Compensation. This Update simply codifies EITF Topic
D-110, “Escrowed Share Arrangements and the Presumption of Compensation and does
not change any existing accounting standards.
ASU No.
2010-06—Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements. This Update amends ASC 820
subtopic 10 that requires new disclosures about transfers in and out of Levels 1
and 2 and activity in Level 3 fair value measurements. This Update also amends
ASC 820 subtopic 10 to clarify certain existing disclosures. The new disclosures
and clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements, which are effective for fiscal
years beginning after December 15, 2010.
The
Company expects that the adoption of the above Updates issued in January 2010
will not have any significant impact on its 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.
3.
|
Cash
and cash equivalents
|
|
|
|
|
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
Cash
|
|
|
616
|
|
|
|
131
|
|
Deposits
with short-term maturities
|
|
|
13,301
|
|
|
|
2,548
|
|
|
|
|
13,917
|
|
|
|
2,679
|
|
The
Company received a net proceeds of approximately US$9,162,000 in its August 2009
financing for continuing business expansion and development in PRC. The
Company’s operations in PRC use RMB as its functional currency. The company is
subject to the effects of exchange rate fluctuation with respect to any of these
currencies. Among approximately US$25,764,000 total assets of the
Company, cash and cash equivalents increased to approximately US$13,917,000 as
of December 31, 2009.
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
Accounts
receivable
|
|
|
3,244
|
|
|
|
978
|
|
Less:
Allowance for doubtful debts
|
|
|
71
|
|
|
|
-
|
|
Accounts
receivable,net
|
|
|
3,173
|
|
|
|
978
|
|
All of
the accounts receivable are non-interest bearing.
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
Advance
deposits for TV advertisement bidding
|
|
|
2, 261
|
|
|
|
-
|
|
Staff
advances for normal business purpose
|
|
|
375
|
|
|
|
-
|
|
|
|
|
2,636
|
|
|
|
-
|
|
Advance
deposits for TV advertisement bidding were deposits made by the Company to
participate in the biddings for TV advertisement time of 2010 in several TV
stations, and approximately US$1,550,000 has been collected in January 2010.
Management believes no allowance for doubtful accounts is required for these
other receivables for the year ended December 31, 2009.
6.
|
Prepayments
and deposit to suppliers
|
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
Contract
execution guarantees to TV advertisement and internet resources
providers
|
|
|
3,086
|
|
|
|
2,268
|
|
Prepayments
to TV advertisement and internet resources providers
|
|
|
991
|
|
|
|
1,784
|
|
Other
deposits and prepayments
|
|
|
34
|
|
|
|
20
|
|
|
|
|
4,111
|
|
|
|
4,072
|
|
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Contract
execution guarantee to TV advertisement and internet resources providers are
paid as a contractual deposit to the Company’s service
providers. These amounts will be used to offset the service fee needs
to be paid to the service providers in the last month of each contract
period.
According
to the contracts signed between the Company and its suppliers, the Company is
normally required to pay the contract amount in advance. These
prepayments will be transferred to cost of sales when the related services are
provided.
Management
believes that there will not be any collectability issue about these deposits
and prepayments, and no allowance for doubtful accounts is required for the year
ended December 31, 2009 and 2008.
7.
|
Due
from related parties
|
|
|
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
Beijing
Hongfujiali Information Technology Co., Ltd.
|
|
|
439
|
|
|
|
-
|
|
Beijing
Saimeiwei Food Equipment Technology Co., Ltd.
|
|
|
53
|
|
|
|
49
|
|
Beijing
Zujianwu Technology Co., Ltd.
|
|
|
-
|
|
|
|
15
|
|
Beijing
Xiyue Technology Co., Ltd.
|
|
|
-
|
|
|
|
7
|
|
Beijing
Fengshangyinli Technology Co., Ltd
|
|
|
-
|
|
|
|
15
|
|
Soyilianmei
Advertising Co., Ltd.
|
|
|
-
|
|
|
|
23
|
|
|
|
|
492
|
|
|
|
109
|
|
These
related parties are directly or indirectly owned by the Control Group (see note
8) or the management of the Company. Amount due from Beijing
Hongfujiali Information Technology Co., Ltd. which amounting approximately
US$439,000 was advanced deposit for participating in year 2010 advertising
resources bidding which has been collected in January 2010. The rest
of the related party balances were outstanding payments for advertising services
the Company provided to these related parties.
8.
|
Due
from Control Group
|
|
|
|
As
of December 31,
|
|
2009
|
|
2008
|
|
US$(’000)
|
|
US$(’000)
|
Due
from Control Group
|
-
|
|
243
|
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Mr.
Handong CHENG, Mr. Xuanfu, LIU and Ms. Li SUN, the owners of the Company’s PRC
VIEs, Business Opportunities Online, and Beijing CNET Online before the Offshore
Restructuring, are collectively referred to as the “Control Group”.
Due from
Control Group were short-term, non-interest bearing loans borrowed by the
Control Group individuals.
9.
|
Property
and equipment
|
Property
and equipment consist of the following:
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
Vehicles
|
|
|
423
|
|
|
|
90
|
|
Office
equipment
|
|
|
816
|
|
|
|
286
|
|
Electronic
devices
|
|
|
438
|
|
|
|
437
|
|
Total
property and equipment
|
|
|
1,677
|
|
|
|
813
|
|
Less:
accumulated depreciation
|
|
|
322
|
|
|
|
135
|
|
|
|
|
1,355
|
|
|
|
678
|
|
Depreciation
expenses in aggregate for the years ended December 31, 2009 and 2008 were
approximately US$207,000 and $77,000 respectively.
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
Due
to third parties
|
|
|
-
|
|
|
|
1,255
|
|
Others
|
|
|
27
|
|
|
|
78
|
|
|
|
|
27
|
|
|
|
1,333
|
|
Due to
third parties as of December 31, 2008 represents non-interest bearing, working
capital loans borrowed by the Company from third parties, which have been paid
off as of December 31, 2009.
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
11.
|
Due
to related parties
|
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
Beijing
Rongde Information Technology Co., Ltd.
|
|
|
-
|
|
|
|
292
|
|
Beijing
Saimeiwei Food Equipments Technology Co., Ltd
|
|
|
14
|
|
|
|
54
|
|
Beijing
Telijie Century Environmental Technology Co., Ltd.
|
|
|
10
|
|
|
|
-
|
|
|
|
|
24
|
|
|
|
346
|
|
The
related parties listed above are directly or indirectly owned by the Control
Group, the Company provided advertising services to them. The advance payments
listed above are received from these parties for advertising services will be
provided in the future periods.
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
Due
to Control Group
|
|
|
1,142
|
|
|
|
1,149
|
|
Due to
Control Group were amounts paid by Control Group individuals on behalf of the
Company which mainly included staff salary, performance bonus, cost of resources
purchased and other administrative expenses.
1)Income
tax
i). The
Company is incorporated in the state of Nevada. Under the current law
of Nevada, the company is not subject to state corporate income
tax. The Company become a holding company and does not conduct any
substantial operations of its own after the Share Exchange. No provision for
federal corporate income tax have been made in the financial statements as the
Company has no assessable profits for the year ended December 31, 2009 or prior
periods.
ii).
China Net BVI was incorporated in the British Virgin Islands
(“BVI”). Under the current law of the BVI, the Company is not subject
to tax on income or capital gains. Additionally, upon payments of
dividends by China Net to its shareholders, no BVI withholding tax will be
imposed.
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
iii).
China Net HK was incorporated in Hong Kong and does not conduct any substantial
operations of its own. No provision for Hong Kong profits tax have been made in
the financial statements as China Net HK has no assessable profits for the year
ended December 31, 2009 or 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 entities, being incorporated in the PRC, are governed by
the income tax law of the PRC and is subject to PRC enterprise income tax
(“EIT”). Effective from January 1, 2008, the EIT rate of PRC was
changed from 33% of to 25%, and applies to both domestic and foreign invested
enterprises.
l
|
Rise
King WFOE is a software company qualified by the related PRC governmental
authorities and was entitled to a two-year EIT exemption from its first
profitable year and a 50% reduction of its applicable EIT rate, which is
25% of its taxable income for the exceeding three years. Rise
King WFOE had a net loss for the year ended December 31, 2008 and its
first profitable year is fiscal year 2009 which has been verified by the
local tax bureau by accepting the application filed by the
Company. Therefore, it was entitled to a two-year EIT exemption
for fiscal year 2009 through fiscal year 2010 and a 50% reduction of its
applicable EIT rate which is 25% for fiscal year 2011 through fiscal year
2013.
|
l
|
Business
Opportunity Online was qualified as a High and New Technology Enterprise
in Beijing High-Tech Zone in 2005 and was entitled to a three-year EIT
exemption for fiscal year 2005 through fiscal year 2007 and a 50%
reduction of its applicable EIT rate for the exceeding three years for
fiscal year 2008 through fiscal year 2010. However, in March
2007, a new enterprise income tax law (the “New EIT”) in the PRC was
enacted which was effective on January 1, 2008. Subsequently, on
April 14, 2008, relevant governmental regulatory authorities released
new qualification criteria, application procedures and assessment
processes for “High and New Technology Enterprise” status under the New
EIT which would entitle the re-qualified and approved entities to a
favorable statutory tax rate of 15%. Business Opportunity
Online did not obtain the approval of its reassessment of the
qualification as a “High and New Technology Enterprise” under the New EIT
law as of December 31, 2008, therefore, its income tax was computed using
the income tax rate of 25% for the year ended December 31,
2008.
|
With an
effective date of September 4, 2009, Business Opportunity Online obtained the
approval of its reassessment of the qualification as a “High and New Technology
Enterprise” under the New EIT law and was entitled to a favorable statutory tax
rate of 15%. Under the previous EIT laws and regulations, High and
New Technology Enterprises enjoyed a favorable tax rate of 15% and were exempted
from income tax for three years beginning with their first year of operations,
and were entitled to a 50% tax reduction to 7.5% for the subsequent three years
and 15% thereafter. The current EIT Law provides grandfathering treatment for
enterprises that were (1) qualified as High and New Technology Enterprises
under the previous EIT laws, and (2) established before March 16,
2007, if they continue to meet the criteria for High and New Technology
Enterprises under the current EIT Law. The grandfathering provision allows
Business Opportunity Online to continue enjoying their unexpired tax holidays
provided by the previous EIT laws and regulations. Therefore, its income tax was
computed using a tax rate of 7.5% for the year ended December 31, 2009 due to
its unexpired tax holidays for fiscal year 2009 through fiscal year
2010.
l
|
The
applicable income tax rate for Beijing CNET Online was 25% for the year
ended December 31, 2009 and 2008.
|
l
|
The
New EIT also imposed a 10% withholding income tax for dividends
distributed by a foreign invested enterprise to its immediate holding
company outside China, which were exempted under the previous enterprise
income tax law and rules. A lower withholding tax rate will be
applied if there is a tax treaty arrangement between mainland China and
the jurisdiction of the foreign holding company. Holding companies in Hong
Kong, for example, will be subject to a 5% rate. Rise King WFOE
is invested by immediate holding company in Hong Kong and will be entitled
to the 5% preferential withholding tax rate upon distribution of the
dividends to its immediate holding
company.
|
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
2)
Business tax and relevant surcharges
Revenue
of advertisement services are subject to 5.5% business tax and 3% cultural
industry development surcharge of the net service income after deducting amount
paid to ending media promulgators. Revenue of internet technical support
services is subjected to 5.5% business tax. Business tax charged was
included in cost of sales.
3)
Value added tax
As a
small-scale value added tax payer, revenue from sales of self-developmented
software of Rise King WFOE is subjected to 3% value added tax.
As of
December 31, 2009 and 2008, taxes payable consist of:
|
|
|
|
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
Business
tax payable
|
|
|
1,003
|
|
|
|
556
|
|
Culture
industry development surcharge payable
|
|
|
27
|
|
|
|
4
|
|
Value
added tax payable
|
|
|
8
|
|
|
|
-
|
|
Enterprise
income tax payable
|
|
|
886
|
|
|
|
1,132
|
|
Individual
income tax payable
|
|
|
54
|
|
|
|
54
|
|
|
|
|
1,978
|
|
|
|
1,746
|
|
A
reconciliation of the provision for income taxes determined at the US federal
corporate income tax rate to the Company’s effective income tax rate is as
follows:
|
|
Year
ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
Pre-tax
income
|
|
|
4,899
|
|
|
|
3,762
|
|
US
federal rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
Income
tax expense computed at U.S. federal rate
|
|
|
1,715
|
|
|
|
1,317
|
|
Reconciling
items:
|
|
|
|
|
|
|
|
|
Rate
differential for domestic earnings
|
|
|
(1,912
|
)
|
|
|
(376
|
)
|
Tax
holiday effects
|
|
|
(692
|
)
|
|
|
-
|
|
Non-deductible
expenses
|
|
|
1,769
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
Effective
tax expense
|
|
|
880
|
|
|
|
962
|
|
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2009 and 2008, the Company did not have any significant temporary
differences and carryforwards that may result in deferred
tax.
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
Dividend
payable to Series A convertible stock holders
|
|
|
373
|
|
|
|
-
|
|
Dividend
to Series A convertible stock holders was calculated at the per annum rate of
10% of the liquidation preference amount of the Series A preferred stock which
was US$10,304,000 for the year ended December 31, 2009 commencing from the
dividend commencement date which is August 21, 2009.
15.
|
Long-term
borrowing from director
|
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
Long-term
borrowing from director
|
|
|
128
|
|
|
|
128
|
|
Long-term
borrowing from director was a non-interest bearing loan from a director of the
Company relating to the long-term investment in the Company’s wholly-owned
subsidiary Rise King WFOE.
On August
21, 2009 (the “Closing Date”), the Company entered into a securities purchase
agreement (the “Purchase Agreement”), with several investors, including
institutional, accredited and non-US persons and entities (the “Investors”),
pursuant to which the Company sold units, comprised of 10% Series A Convertible
Preferred Stock, par value US$0.001 per share (the “Series A preferred stock”),
and two series of warrants, for a purchase price of US$2.50 per unit (the
“August 2009 Financing”). The Company sold 4,121,600 units in the
aggregate, which included (i) 4,121,600 shares of Series A preferred stock, (ii)
Series A-1 Warrant to purchase 2,060,800 shares of common stock at an exercise
price of US$3.00 per share with a three-year term, and (iii) Series A-2 Warrants
to purchase 2,060,800 shares of common stock at an exercise price of US$3.75
with a five-year term. Net proceeds were approximately US$9,162,000,
net of issuance costs of approximately US$1,142,000. TriPoint Global
Equities, LLC acted as placement agent and received (i) a placement fee in the
amount equal to 8% of the gross proceeds and (ii) warrants to purchase up to
329,728 shares of common stock at an exercise price of US$2.50, 164,864 shares
at an exercise price of US$3.00 and 164,864 shares at an exercise price of
US$3.75 respectively, with a five-year term (“Placement agent warrants” and
together with the Series A-1 Warrant and Series A-2 Warrant, the
“Warrants”).
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
The
Warrants have an initial exercise price which is subject to adjustments in
certain circumstances for stock splits, combinations, dividends and
distributions, reclassification, exchange or substitution, reorganization,
merger, consolidation or sales of assets, issuance of additional shares of
common stock or equivalents. The Warrants may not be exercised if it
would result in the holder beneficially owning more than 9.99% of the Company’s
outstanding common shares. That limitation may be waived by the holders of the
warrants by sending a written notice to the Company not less than 61 days prior
to the date that they would like to waive the limitation.
Accounting for
warrants
The
Company analyzed the Warrants in accordance to ASC Topic 815 “Derivatives and
Hedging” (formerly SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities”) to determine whether the Warrants meet the definition of a
derivative under ASC Topic 815 and if so, whether the Warrants meet the scope
exception of ASC Topic 815, which is that contracts issued or held by the
reporting entity that are both (1) indexed to its own stock and (2) classified
in stockholders’ equity shall not be considered to be derivative instruments for
purposes of ASC Topic 815. The Company adopted the provisions of ASC
Topic 815 subtopic 40 (formerly Emerging Issues Task Force (“EITF”) Issue No.
07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock”), which applies to any freestanding financial instruments or
embedded features that have the characteristics of a derivative, as defined by
ASC Topic 815 and to any freestanding financial instruments that are potentially
settled in an entity’s own common stock. As a result of adopting ASC
Topic 815 subtopic 40, the Company concluded that the Warrants issued in the
August 2009 financing should be treated as a derivative liability, because the
Warrants are entitled to a price adjustment provision to allow the exercise
price to be reduced, in the event the Company issues or sells any additional
shares of common stock at a price per share less than the then-applicable
exercise price or without consideration, which is typically referred to as a
“Down-round protection” or “anti-dilution” provision. According to
ASC Topic 815 subtopic 40, the “Down-round protection” provision is not
considered to be an input to the fair value of a fixed-for-fixed option on
equity shares which leads the Warrants fail to be qualified as indexed to the
Company’s own stock and then to fail to meet the scope exceptions of ASC Topic
815. Therefore, the Company accounted for the Warrants as derivative liabilities
under ASC Topic 815. Pursuant to ASC Topic 815, derivatives should be
measured at fair value and re-measured at fair value with changes in fair value
recorded in earnings at each reporting period.
Fair value of the
warrants
Fair
value is generally based on independent sources such as quoted market prices or
dealer price quotations. To the extent certain financial instruments trade
infrequently or are non-marketable securities, they may not have readily
determinable fair values. The Company estimated the fair value of the Warrants
and Series A preferred stock using various pricing models and available
information that management deems most relevant. Among the factors considered in
determining the fair value of financial instruments are discounted anticipated
cash flows, the cost, terms and liquidity of the instrument, the financial
condition, operating results and credit ratings of the issuer or underlying
company, the quoted market price of similar traded securities, and other factors
generally pertinent to the valuation of financial instruments.
Allocation of the proceeds
at commitment date and re-measurement as of December 31,
2009
As
described in Note 17 below, the total proceeds allocated to the Series A-1
warrants and Series A-2 warrants were approximately US$4,406,000 as of August
21, 2009, and the re-measured fair value of the warrants as of December 31, 2009
was approximately US$8,532,000. The changes in fair value of the Series A-1
warrant and Series A-2 warrant which are approximately US$4,126,000 were
recorded in earnings for the year ended December 31, 2009.
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Placement
a
gent
w
arrant
s
In
accordance with ASC Topic 340 subtopic 10 section S99-1 (formerly Staff
Accounting Bulletin Topic 5.A: “Miscellaneous Accounting-Expenses of
Offering”), “specific incremental costs directly attributable
to a proposed or actual offering of securities may properly be deferred and
charged against the gross proceeds of the offering.” In accordance
with the SEC accounting and reporting manual “cost of issuing equity securities
are charged directly to equity as deduction of the fair value assigned to share
issued.” Accordingly, the Company concluded that the warrants issued
to the placement agents are directly attributable to the August 2009
financing. If the Company had not issued the warrants to the
placement agent, the Company would have had to pay the same amount of cash as
the fair value. Therefore, the Company deducted the total fair value
of the Placement agent warrants as of the Commitment Date which was
approximately US$733,000 as a deduction of the fair value assigned to the Series
A preferred stock.
Since
they contain the same terms as the Series A-1 and Series A-2 Warrants, the
Placement Agent Warrants are also entitled to the benefits of the “Down-round
protection” provision, which means that the Placement Agent Warrants will also
need to be accounted for as a derivative under ASC Topic 815 with changes in
fair value recorded in earnings at each reporting period. As of December 31,
2009, the total fair value of the Placement agent warrants were approximately
US$1,032,000, therefore, the changes of the total fair value of the Placement
agent warrants which were approximately US$299,000 were recorded in earnings for
the year ended December 31, 2009.
The
following table summarized the above transactions:
|
|
As
of
December
31, 2009
|
|
|
As
of
August
21,
2009
|
|
|
Changes
in
Fair
Value
|
|
|
|
US$’000
|
|
|
US$’000
|
|
|
US$’000
|
|
Fair
value of the Warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A-1 warrant
|
|
|
4,513
|
|
|
|
2,236
|
|
|
|
2,277
|
|
Series
A-2 warrant
|
|
|
4,019
|
|
|
|
2,170
|
|
|
|
1,849
|
|
Placement
agent warrants
|
|
|
1,032
|
|
|
|
733
|
|
|
|
299
|
|
|
|
|
9,564
|
|
|
|
5,139
|
|
|
|
4,425
|
|
17.
|
Series
A convertible preferred shares
|
Key terms
of the Series A preferred stock sold by the Company in the August 2009 financing
are summarized as follows:
Dividends
Dividends
on the Series A preferred stock shall accrue and be cumulative from and after
the issuance date. For each outstanding share of Series A preferred
stock, dividends are payable at the per annum rate of 10% of the Liquidation
Preference Amount of the Series A preferred stock. Dividends are
payable quarterly within thirty (30) days following the last Business Day of
each August, November, February and May of each year (each, a “Dividend Payment
Date”), and continuing until such stock is fully converted. The Company shall
have the right, at its sole and exclusive option, to pay all or any portion of
each and every quarterly dividend that is payable on each Dividend Payment Date,
either (i) in cash, or (ii) by issuing to the holder of Series A preferred stock
such number of additional Conversion Shares which, when multiplied by US$2.5
would equal the amount of such quarterly dividend not paid in cash.
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Voting
Rights
The
Series A preferred stock holders are entitled to vote separately as a class on
matters affecting the Series A Preferred Stock and with regard to certain
corporate matters set forth in the Series A Certificate of Designation, so long
as any shares of the Series A preferred stock remain outstanding. Holders of the
Series A Preferred Stock are not, however, entitled to vote on general matters
along with holders of common stock.
Liquidation
Preference
In the
event of the liquidation, dissolution or winding up of the affairs of the
Company, whether voluntary or involuntary (each, a “Liquidation”), the holders
of the Series A preferred stock then outstanding shall be entitled to receive,
out of the assets of the Company available for distribution to its stockholders,
an amount equal to US$2.5 per share of the Series A preferred stock, plus any
accrued but unpaid dividends thereon, whether or not declared, together with any
other dividends declared but unpaid thereon, as of the date of Liquidation
(collectively, the “Series A Liquidation Preference Amount”) before any payment
shall be made or any assets distributed to the holders of the common stock or
any other junior stock. If upon the occurrence of Liquidation, the assets thus
distributed among the holders of the Series A shares shall be insufficient to
permit the payment to such holders of the full Series A Preference Amount, then
the entire assets of the Company legally available for distribution shall be
distributed ratably among the holders of the Series A preferred
stock.
Conversion
Rights
Voluntary
Conversion:
At any
time on or after the date of the initial issuance of the Series A preferred
stock, the holder of any such shares of Series A preferred stock may, at such
holder’s option, subject to the limitations described below in
“Conversion Restriction”
,
elect to convert all or portion of the shares of Series A preferred stock held
by such person into a number of fully paid and non-assessable shares of common
stock equal to the quotient of Liquidation preference amount of the Series A
preferred stock divided by the initial conversion price of US$2.5. The initial
conversion price may be adjusted for stock splits and combinations, dividend and
distributions, reclassification, exchange or substitution, reorganization,
merger, consolidation or sales of assets, issuance of additional shares of
common stock or equivalents with lower price or without considerations etc, as
stimulated in the Certification of Designation.
Mandatory
Conversion:
All
outstanding shares of the Series A preferred stock shall automatically convert
into shares of Common Stock, subject to the limitations described below in
“Conversion Restriction”
, at
the earlier to occur of (i) twenty-four month anniversary of the Closing Date,
and (ii) at such time that the Volume Weighted Average Price of the Company’s
common stock is no less than US$5.00 for a period of ten (10) consecutive
trading days with the daily volume of the common stock of at least 50,000 shares
per day.
Conversion
Restriction
Holders
of the Series A preferred stock may not convert the preferred stock to shares of
common stock if the conversion would result in the holder beneficially owning
more than 9.99% of the Company’s outstanding shares of common stock. That
limitation may be waived by a holder of the Series A preferred stock by sending
a written notice to the Company on not less than 61 days prior to the date that
they would like to waive the limitation.
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Registration Rights
Agreement
In
connection with the Financing, the Company entered into a registration rights
agreement (the “RRA”) with the Investors in which the Company agreed to file a
registration statement (the “Registration Statement”) with the Securities and
Exchange Commission to register the shares of common stock underlying the Series
A preferred stock (the “Conversion Shares”) and the Warrants (the “Warrant
Shares”), thirty (30) days after the closing of the Financing. The
Company has agreed to use its best efforts to have the Registration Statement
declared effective within 150 calendar days after filing, or 180 calendar days
after filing in the event the Registration Statement is subject to a “full
review” by the SEC.
The
Company is required to keep the Registration Statement continuously effective
under the Securities Act until such date as is the earlier of the date when all
of the securities covered by that registration statement have been sold or the
date on which such securities may be sold without any restriction pursuant to
Rule 144 (the “Financing Effectiveness Period”). The Company will pay
liquidated damages of 2% of each holder’s initial investment in the Units sold
in the Financing per month, payable in cash, up to a maximum of 10%, if the
Registration Statement is not filed or declared effective within the foregoing
time periods or ceases to be effective prior to the expiration of the Financing
Effectiveness Period. However, no liquidated damages shall be paid
with respect to any securities being registered that the Company are not
permitted to include in the Financing Registration Statement due to the SEC’s
application of Rule 415.
The
Company evaluated the contingent obligation related to the RRA liquidated
damages in accordance to “ASC Topic 825 “Financial Instruments” subtopic 20”
(formerly Financial Accounting Standards Board Staff Position No. EITF 00-19-2
“Accounting for Registration Payment Arrangements”), which required the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement be separately recognized and measured in accordance with “ASC Topic
450” “Contingencies” (formerly SFAS No. 5, “Accounting for Contingencies”). The
shares of common stock underlying the Series A preferred stock (the “Conversion
Shares”) and the Warrants (the “Warrant Shares”) have been successfully
registered by the Company. Therefore, the Company concluded that such
obligation was not probable to incur and no contingent obligation related to the
RRA liquidated damages needs to be recognized for the year ended December 31,
2009.
Security Escrow
Agreement
The
Company entered into a securities escrow agreement with the Investors (the
“Escrow Agreement”), pursuant to which Rise King Investment Limited, a British
Virgin Islands company (the “Principal Stockholder”), initially placed 2,558,160
shares of Common Stock (the “Escrow Shares”) into an escrow
account. Of the Escrow Shares, 1,279,080 shares (equivalent to 50% of
the Escrow Shares) are being held as security for the achievement of audited net
income equal to or greater than $7.7 million for the fiscal year 2009 (the “2009
Performance Threshold”) and the remaining 1,279,080 of the Escrow Shares are
being held as security for the achievement of audited net income equal to or
greater than $14 million for the fiscal year 2010 (the “2010 Performance
Threshold”).
If the
Company achieves at least 95% of the applicable Performance Threshold, all of
the Escrow Shares for the corresponding fiscal year shall be returned to the
Principal Stockholder. If the Company achieves less than 95% of the applicable
Performance Threshold, the Investors shall receive in the aggregate, on a pro
rata basis (based upon the number of shares of Series A preferred stock or
conversion shares owned by each such Investor as of the date of distribution of
the Escrow Shares), 63,954 shares of the Escrow Shares for each percentage by
which the applicable Performance Threshold was not achieved up to the total
number of Escrow Shares for the applicable fiscal year. Any Escrow
Shares not delivered to any investor because such investor no longer holds
shares of Series A preferred stock or conversion shares shall be returned to the
Principal Stockholder.
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the
purposes of the Escrow Agreement, net income is defined in accordance with US
GAAP and reported by the Company in its audited financial statements for each of
the fiscal years ended 2009 and 2010; provided, however, that net income for
each of fiscal years ended 2009 and 2010 shall be increased by any non-cash
charges incurred (i) as a result of the Financing , including without
limitation, as a result of the issuance and/or conversion of the Series A
Preferred Stock, and the issuance and/or exercise of the Warrants, (ii) as a
result of the release of the Escrow Shares to the Principal Stockholder and/or
the investors, as applicable, pursuant to the terms of the Escrow Agreement,
(iii) as a result of the issuance of ordinary shares of the Principal
Stockholder to Messrs. Handong Cheng and Xuanfu Liu and Ms. Li Sun (the “PRC
Shareholders”), upon the exercise of options granted to the PRC Shareholders by
the Principal Stockholder, (iv) as a result of the issuance of warrants to any
placement agent and its designees in connection with the Financing, (v) the
exercise of any warrants to purchase common stock outstanding and
(vi) the issuance under any performance based equity incentive plan that the
Company adopts.
In
accordance to ASC Topic 718 and ASU No. 2010-05—Compensation—Stock Compensation:
Escrowed Share Arrangements and the Presumption of Compensation. The
Company evaluated the substance of this arrangement and whether the presumption
of compensation has been overcome. According to the Security Escrow Agreement
signed between the Company and its investors, the release of these escrow shares
to the Principal Stockholder will not regard to continue employment, and this
arrangement is in substance an inducement made to facilitate the financing
transaction on behalf of the Company, rather than as
compensatory. Therefore, the Company concluded that this arrangement
should be recognized and measured according to its nature and reflects as a
deduction of the proceeds allocated to the newly issued securities with no
compensation expenses recorded in earnings.
Fair Value of the Series A
preferred stock:
Fair
value is generally based on independent sources such as quoted market prices or
dealer price quotations. To the extent certain financial instruments trade
infrequently or are non-marketable securities, they may not have readily
determinable fair values. The Company estimated the fair value of the Warrants
and Series A preferred stock using various pricing models and available
information that management deems most relevant. Among the factors considered in
determining the fair value of financial instruments are discounted anticipated
cash flows, the cost, terms and liquidity of the instrument, the financial
condition, operating results and credit ratings of the issuer or underlying
company, the quoted market price of similar traded securities, and other factors
generally pertinent to the valuation of financial instruments.
Accounting for the Series A
preferred stock
The
Series A preferred stock has been classified as permanent equity as there was no
redemption provision at the option of the holders that is not within the control
the Company on or after an agreed upon date. The Company evaluated the embedded
conversion feature in its Series A preferred stock to determine if there was an
embedded derivative requiring bifurcation. The Company concluded that
the embedded conversion feature of the Series A preferred stock does not
required to be bifurcated because the conversion feature is clearly and closely
related to the host instrument.
Allocation of the proceeds
at commitment date and calculation of beneficial conversion
feature
The
following table summarized the allocation of proceeds to the Series A preferred
stock and the Warrants:
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
Gross
proceeds
Allocated
|
|
|
Number
of
Instruments
|
|
|
Allocated
value per instrument
|
|
|
|
US$ (’000)
|
|
|
|
|
|
US$
|
|
Series
A-1 Warrant
|
|
|
2,236
|
|
|
|
2,060,800
|
|
|
|
1.08
|
|
Series
A-2 Warrant
|
|
|
2,170
|
|
|
|
2,060,800
|
|
|
|
1.05
|
|
Series
A preferred stock
|
|
|
5,898
|
|
|
|
4,121,600
|
|
|
|
1.43
|
|
Total
|
|
|
10,304
|
|
|
|
|
|
|
|
|
|
In
accordance to the schedule above, the unit price is: [1.08*50%+1.05*50%+1.43] =
US$2.5 per unit.
The
Company then evaluated whether a beneficial conversion feature exists by
comparing the operable conversion price of Series A preferred stock with the
fair value of the common stock at the commitment date. The Company
concluded that the fair value of common stock was greater than the operable
conversion price of Series A preferred stock at the commitment date and the
intrinsic value of the beneficial conversion feature is greater than the
proceeds allocated to the Series A preferred stock. In accordance to
ASC Topic 470 subtopic 20, if the intrinsic value of beneficial conversion
feature is greater than the proceeds allocated to the Series A preferred stock,
the amount of the discount assigned to the beneficial conversion feature is
limited to the amount of the proceeds allocated to the Series A preferred
stock. Accordingly, the total proceeds allocated to Series A
preferred stock were allocated to the beneficial conversion feature with a
credit to Additional paid-in capital upon the issuance of the Series A preferred
stock. Since the Series A preferred stock may convert to the
Company’s common stock at any time on or after the initial issue date, all
discount was immediately recognized as a deemed dividend and a reduction to
net income attributable to common shareholders.
According
to ASC Topic 340 subtopic 10 section S99-1 (formerly Staff Accounting Bulletin
Topic 5.A: “Miscellaneous Accounting-Expenses of
offering”), “specific incremental costs directly attributable
to a proposed or actual offering of securities may properly be deferred and
charged against the gross proceeds of the offering”. And in
accordance with the SEC accounting and reporting manual “cost of issuing equity
securities are charged directly to equity as deduction of the fair value
assigned to share issued”. Accordingly, the Company deducted the
direct issuing cost paid in cash which were approximately US$1,142,000 from the
assigned fair value to the Series A preferred stock.
18.
|
Reverse
acquisition and common stock (reclassification of the
stockholders’ equity)
|
In a
reverse acquisition the historical shareholder’s equity of the accounting
acquirer prior to the merger is retroactively reclassified (a recapitalization)
for the equivalent number of shares received in the merger after giving effect
to any difference in par value of the registrant’s and the accounting acquirer’s
stock by an offset in paid in capital.”
Pursuant
to the terms of Share Exchange Agreement, the China Net BVI shareholders
transferred to the Company all of the China Net BVI shares in exchange for the
issuance of 13,790,800 shares of the Company’s common stock. Therefore, the
Company reclassified its common stock and additional paid-in-capital accounts
for the year ended December 31, 2008 accordingly.
Immediately
prior to the Share Exchange, 4,400,000 shares of the Company’s outstanding
common stock were cancelled and retired. China Net BVI also deposited
$300,000 into an escrow account, which amount was paid to Emazing principal
stockholder, who owned the 4,400,000 shares, as a result of the Share Exchange
have been consummated.
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
19.
|
Related
party transactions
|
|
Year
ended December 31,
|
|
|
2009
|
|
|
2008
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
Advertising
revenue from related parties:
|
|
|
|
|
|
-Beijing
Saimeiwei Food Equipment Technology Co., Ltd,
|
|
1,548
|
|
|
|
423
|
|
-Beijing
Zujianwu Technology Co., Ltd.
|
|
-
|
|
|
|
34
|
|
-Beijing
Fengshangyinli Technology Co., Ltd.
|
|
79
|
|
|
|
159
|
|
-Soyilianmei
Advertising Co., Ltd.
|
|
539
|
|
|
|
449
|
|
-Beijing
Telijie Cleaning Technology Co., Ltd.
|
|
-
|
|
|
|
53
|
|
-Beijing
Telijie Century Environmental Technology Co., Ltd.
|
|
204
|
|
|
|
53
|
|
-Beijing
Rongde Information Technology Co., Ltd.
|
|
-
|
|
|
|
276
|
|
|
|
2,370
|
|
|
|
1,447
|
|
20.
|
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 Company has no legal obligation for the benefits
beyond the contributions made. The total amounts for such employee benefits,
which were expensed as incurred, were approximately US$148,000 and US$ 106,000
for the year ended December 31, 2009 and 2008, respectively.
21.
|
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, and prepayments and other current assets. As of December 31, 2009
and 2008 substantially all of the Company’s cash and cash equivalents were held
by major financial institutions located in the PRC and Hong Kong, 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.
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 to transfer its net assets, which to the
Company through loans, advances or cash dividends.
The
following table sets forth the Company’s contractual obligations as of December
31, 2009:
|
|
|
Rental
payments
|
|
|
Server
hosting and board-band lease payments
|
|
|
TV
advertisement purchase payments
|
|
|
Total
|
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
Year
ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-2010
|
|
|
|
261
|
|
|
|
84
|
|
|
|
31,752
|
|
|
|
32,097
|
|
|
-2011
|
|
|
|
261
|
|
|
|
-
|
|
|
|
-
|
|
|
|
261
|
|
-Thereafter
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
|
522
|
|
|
|
84
|
|
|
|
31,752
|
|
|
|
32,358
|
|
Based on
the criteria established by ASC Topic 280 “Segment report” (formerly
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related
Information”), as of December 31, 2009, the Company mainly operated in five
principal segments: TV advertising, internet advertising, bank kiosk
advertising, internet advertising resources resell and internet information
management. Internet information management is a new product and business
segment of the Company, which was officially launched in August 2009. It is an
intelligence software that is based on our proprietary search engine
optimization technology which helps our clients gain an early warning in order
to identify and respond to potential negative exposure on the
internet. The following tables present summarized information by
segments.
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
Year
ended December 31, 2009
|
|
|
|
Internet
Ad.
|
|
|
TV
Ad.
|
|
|
Bank
kiosk
|
|
|
Internet
Ad.
resources
resell
|
|
|
IIM
|
|
|
Others
|
|
|
Inter-
segment and reconciling item
|
|
|
Total
|
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
Revenue
|
|
|
17,722
|
|
|
|
19,298
|
|
|
|
152
|
|
|
|
1,178
|
|
|
|
116
|
|
|
|
966
|
|
|
|
(1,708
|
)
|
|
|
37,724
|
|
Cost
of sales
|
|
|
4,456
|
|
|
|
16,335
|
|
|
|
13
|
|
|
|
1,086
|
|
|
|
6
|
|
|
|
35
|
|
|
|
(698
|
)
|
|
|
21,233
|
|
Total
operating expenses
|
|
|
5,794
|
|
|
|
688
|
|
|
|
120
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,490
|
*
|
|
|
(1,010
|
)
|
|
|
7,082
|
|
Including:
Depreciation and amortization expense
|
|
|
53
|
|
|
|
58
|
|
|
|
83
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
|
|
207
|
|
Operating
income(loss)
|
|
|
7,472
|
|
|
|
2,275
|
|
|
|
19
|
|
|
|
92
|
|
|
|
110
|
|
|
|
(559
|
)
|
|
|
-
|
|
|
|
9,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in fair value of warrants
(See note 16
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,425
|
|
|
|
-
|
|
|
|
4,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure
for long-term assets
|
|
|
432
|
|
|
|
221
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
277
|
|
|
|
-
|
|
|
|
930
|
|
Net
income (loss)
|
|
|
6,705
|
|
|
|
2,079
|
|
|
|
19
|
|
|
|
92
|
|
|
|
110
|
|
|
|
(4,986
|
)
|
|
|
-
|
|
|
|
4,019
|
|
Total
assets
|
|
|
12,249
|
|
|
|
7,703
|
|
|
|
438
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,484
|
|
|
|
(4,110
|
)
|
|
|
25,764
|
|
*Including
US$360,000 share-based compensation expenses
(
See note 2
5
)
.
|
|
Year
ended December 31, 2008
|
|
|
|
Internet
Ad.
|
|
|
TV
Ad.
|
|
|
Bank
kiosk
|
|
|
Internet
Ad.
resources
resell
|
|
|
IIM
|
|
|
Others
|
|
|
Inter-
segment and reconciling item
|
|
|
Total
|
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
|
US$
(‘000)
|
|
Revenue
|
|
|
11,292
|
|
|
|
7,007
|
|
|
|
128
|
|
|
|
3,081
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,508
|
|
Cost
of sales
|
|
|
4,671
|
|
|
|
5,939
|
|
|
|
22
|
|
|
|
3,154
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,786
|
|
Total
operating expenses
|
|
|
2,923
|
|
|
|
1,006
|
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
3,948
|
|
Including:
Depreciation and amortization expense
|
|
|
21
|
|
|
|
34
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
77
|
|
Operating
income(loss)
|
|
|
3,698
|
|
|
|
62
|
|
|
|
97
|
|
|
|
(73
|
)
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
3,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure
for long-term assets
|
|
|
41
|
|
|
|
23
|
|
|
|
431
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
497
|
|
Net
income (loss)
|
|
|
2,068
|
|
|
|
669
|
|
|
|
73
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
2,800
|
|
Total
assets
|
|
|
6,794
|
|
|
|
5,037
|
|
|
|
414
|
|
|
|
-
|
|
|
|
-
|
|
|
|
128
|
|
|
|
(3,560
|
)
|
|
|
8,813
|
|
24.
|
Earnings
(Loss) per share
|
Basic and
diluted earnings (loss) per share for each of the periods presented are
calculated as follows:
|
|
Year
ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US$(’000)
|
|
|
US$(’000)
|
|
|
|
(Amount
in thousands except for
the
number of shares and per share data)
|
|
Numerator:
|
|
|
|
|
|
|
Net
income (loss) attributable to common shareholders-basic and
diluted
|
|
$
|
(2,252
|
)
|
|
$
|
2,800
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding-basic and
diluted
|
|
|
14,825,125
|
|
|
|
13,790,800
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings (loss) per share
|
|
$
|
(0.15
|
)
|
|
$
|
0.20
|
|
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
All share
and per share data have been retroactively adjusted to reflect the reverse
acquisition on June 26, 2009 whereby the 13,790,800 shares of common stock
issued by the Company (nominal acquirer) to the shareholders of China Net BVI
(nominal acquiree) are deemed to be the number of shares outstanding for the
period prior to the reverse acquisition. For the period after the
reverse acquisition, the number of shares considered to be outstanding is the
actual number of shares outstanding during that period.
As of
December 31, 2009, a total of 4,121,600 convertible preferred shares and a total
of 4,781,056 outstanding warrants have not been included in the calculation of
diluted earnings (loss) per share in order to avoid any anti-dilutive
effect.
25.
|
Share-based
compensation expenses
|
On June
26, 2009, the Company issued 300,000 shares of common stock to TriPoint Capital
Advisors, LLC and 300,000 shares of common stock to Richever Limited,
respectively, that the Company’s board of directors previously approved for the
financial consulting and corporate development services that they
provided. The shares were issued in accordance with the exemption
from the registration provisions of the Securities Act of 1933, as amended,
provided by Section 4(2) of such Act for issuances not involving any public
offering. The 600,000 shares issued were valued at $0.25 per share,
the closing bid of the Company’s common stock on the date of
issue. Therefore, total aggregate value of the transaction that we
recognized was US$150,000, which was recorded in general and administrative
expenses as share-based compensation expenses.
On June
17, 2009, the Company engaged J and M Group, LLC (“J&M”) to provide investor
relations services. The initial term of the agreement is for one
year. As additional compensation, the Company agreed to issue J&M
120,000 shares of the Company’s common stock that vest 10,000 shares every 30
days. The shares were issued in accordance with the exemption from the
registration provisions of the Securities Act of 1933, as amended, provided by
Section 4(2) of such Act for issuances not involving any public
offering. The 120,000 shares issued on June 17, 2009 were valued at
$0.15 per share, the closing bid of the Company’s common stock on the date of
issue. Therefore, total aggregate number of shares granted to J&M
vested as of December 31, 2009 was 60,000 shares. Total aggregate
value of the transaction that the Company recognized in the year ended
December 31, 2009 were US$9,000, which were recorded in general and
administrative expenses as share-based compensation expenses. Going forward the
cost of these shares will be expensed as they vest.
On July
1, 2009, the Company engaged Hayden Communications International, Inc. (“HC”) to
provide investor relations services. The initial term of the agreement is for
one year. As additional compensation, the Company agreed to issue HC
80,000 shares of the Company’s common stock that vest on a straight line basis
over the contract period. The shares were issued in accordance with the
exemption from the registration provisions of the Securities Act of 1933, as
amended, provided by Section 4(2) of such Act for issuances not involving any
public offering. The 80,000 shares issued on July 1, 2009 were valued
at $1.75 per share, the closing bid of the Company’s common stock on the date of
issue. Therefore, total aggregated number of shares granted to HC vested as
of December 31, 2009 was 40,000 shares. Total aggregate value of the
transaction that the Company recognized in the year ended December 31, 2009
were US$70,000, which were recorded in general and administrative expenses as
share-based compensation expenses. Going forward the cost of these shares will
be expensed as they vest.
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
On
November 13, 2009, the Company issued 54,020 restricted shares to its employees
and consultants which were fully vested upon issuance. These shares were valued
at US$2.43 per share which represents the grant date fair value of these
shares. Total aggregate value of the transaction that the Company
recognized in the year ended December 31, 2009 were approximately US$131,000
which were recorded in general and administrative expenses as share-based
compensation expenses.
On
November 30, 2009, the Company granted one 5-year options to each of its three
independent directors, Mr.
Douglas MacLel
lan
, Mr.
Mototaka Watanabe and
Mr.
Zhiqing Chen
, to purchase in the
aggregate 54,000 shares of the Company’s common stock at an exercise price
of US$5.00 per share, in consideration of their services to the Company. These
options vest quarterly at the end of each 3-month period, in equal installments
over the 24-month period from the date of grant. However, upon a
change of control, the option shall automatically become fully vested and
exercisable as of the date of such changes of control. These options
were valued at US$2.64 per share which represents the grant datefair value
of these options. The related compensation expenses will be
recognized over its vesting period. The Company didn’t recognize the
compensation expenses for these options for the year ended December 31, 2009,
due to the amount is immaterial.
The
Company estimates the fair value of these options using the Black-Scholes option
pricing model based on the following assumptions:
Underlying
stock price
|
|
$
|
3.43
|
|
Expected
term
|
|
|
3
|
|
Risk-free
interest rate
|
|
|
1.10
|
%
|
Dividend
yield
|
|
|
-
|
|
Expected
Volatility
|
|
|
150
|
%
|
Exercise
price of the option
|
|
$
|
5
|
|
Underlying
stock price is a discounted stock price based upon the regression on actual
discount obtained from an appropriate index due to lack of liquidity of the
Company’s underlying stock and other factors. As the three
individuals receiving options are non-employee executive directors, the Company
believes that forfeitures are highly unlikely, and termination is not
applicable. As such, the Company developed a weighted-average expected
term at 3 years based on analysis of the vesting schedule and exercise
assumptions. The risk-free interest rate is based on the 3 year U.S.
Treasury rate. The dividend yield is calculated based on management’s estimate
of dividends to be paid on the underlying stock. The expected volatility is
calculated using historical data obtained from an appropriate index due to lack
of liquidity of the Company’s underlying stock. Exercise price of the
option is the contractual exercise price of the option.
Options
issued and outstanding at December 31, 2009 and their movements during the
period are as follows:
CHINANET
ONLINE HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
Option
Outstanding
|
|
|
Option
Exercisable
|
|
|
Number
of underlying shares
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of underlying shares
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2009
|
|
|
-
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
Granted/Vested
|
|
|
54,000
|
|
|
|
5
|
|
|
$
|
5.00
|
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
Balance,
December 31, 2009
|
|
|
54,000
|
|
|
|
4.92
|
|
|
$
|
5.00
|
|
|
|
-
|
|
|
|
|
The
company has evaluated events subsequent to the balance sheet date through March
31, 2010, which represents the date these financial statements were available to
be issued.
In
January and March 2010, there were 500,000 and 98,000 shares of Series A
convertible preferred stock which were converted into the Company’s common
stock, respectively.
In
February 2010, the Company paid approximately US$285,000 in cash to the Series A
convertible preferred stock holders which represent the dividend from August 21,
2009 (“the Dividend Commence Date”) to November 30, 2009 (“the Dividend Payment
Date).
On March
4, 2010 the Company’s common stock was listed on the American Stock Exchange
under the under the symbol “CNET”, before this the Company’s common stock was
trade on the Over the Counter Bulletin Board (“OTCBB”) under the symbol
“
CHNT.
”
The
investor and placement agent warrants that were issued as a result of our August
2009 Financing contained a Down-round protection provision” whereby for a period
of twelve (12) months following December 31, 2009 (the effective date of the
Registration Statement) in the event the Company issued any additional shares of
Common Stock or securities exercisable, convertible or exchangeable for Common
Stock at a price per share less than the exercise price then in effect or
without consideration. As described in Note 16 and according to ASC
Topic 815 subtopic 40, the “Down-round protection” provision is not considered
to be an input to the fair value of a fixed-for-fixed option on equity shares
which lead to the Warrants to fail to be qualified as indexed to the Company’s
own stock and then fail to meet the scope exceptions of ASC Topic 815.
Therefore, the Company accounted for the Warrants as derivative liabilities
under ASC Topic 815. Pursuant to ASC Topic 815, derivative should be
measured at fair value and re-measured at fair value with changes in fair value
recorded in earnings at each reporting period.
On March
29, 2010, the Company and the holders of the Warrants entered into agreements to
amend certain provisions of the Warrants. The amendment, which is retroactive
from and including, August 21, 2009, to the investor and placement agent
warrants removes the “Down-round protection” rights that were applicable if the
Company were to issue new shares of common stock or common stock equivalents at
a price per share less than the exercise price of the Warrants. In
addition, the amendment to the warrants added a provision to grant the holders
of a majority of the warrants an approval right until December 31, 2010, over
any new issuance of shares of common stock or common stock equivalents at a
price per share less than the exercise price of the warrants. An estimate of the
financial effect cannot be made at this time.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION
The
estimated expenses payable by the Registrant in connection with the issuance and
distribution of the securities being registered are as follows:
SEC
Registration Fee
|
|
$
|
2,133.93
|
|
Legal
Fees and Expenses
|
|
$
|
195,000
|
|
Accounting
Fees and Expenses
|
|
$
|
32,500
|
|
Miscellaneous
|
|
$
|
15,000
|
|
|
|
$
|
244,633.93
|
|
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Indemnification.
Our
directors and officers are indemnified as provided by our articles of
incorporation, our bylaws and the Nevada Revised Statutes. Our bylaws and
articles of incorporation provide that we will indemnify our directors,
officers, employees, and agents, to the fullest extent to the extent required by
the Nevada Revised Statutes and shall indemnify such individuals to the extent
permitted by the Nevada Revised Statutes. We may purchase and
maintain liability insurance, or make other arrangements for such obligations or
otherwise, to the extent permitted by the Nevada Revised Statutes. Our bylaws
and Nevada laws permit us to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he or she is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses, including attorneys’ fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him or her in connection with the action, suit or proceeding if he has
exercised his powers in good faith and with a view to the interests of the
corporation; or acted in good faith and in a manner which he or she reasonably
believed to be in or not opposed to the best interest of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
We will
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he or
she is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including amounts paid in settlement and
attorneys’ fees actually and reasonably incurred by him or her in connection
with the defense or settlement of such action or suit if he or she acted in good
faith and in a manner which he or she reasonably believed to be in or not
opposed to the best interests of the corporation. Indemnification may not be
made for any claim, issue or matter as to which such person has been adjudged by
a court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to the corporation or for amount paid in settlement to the
corporation, unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction determines upon
application that, in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper.
Limitation of Liability.
Our
articles of incorporation limit the liability of our directors and officers
under certain circumstances. Our articles of incorporation provide that the
liability of directors or officers for monetary damages are eliminated to the
fullest extent permitted by Nevada law.
In the
event that a claim for indemnification against these types of liabilities, other
than the payment by us of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit or proceeding,
is asserted by a director, officer or controlling person in connection with the
securities being registered, we will (unless in the opinion of our counsel, the
matter has been settled by controlling precedent) submit to a court of
appropriate jurisdiction, the question whether indemnification by us is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue. The legal process relating to this matter if
it were to occur is likely to be very costly and may result in us receiving
negative publicity, both of which are likely to materially reduce the market and
price for our shares.
RECENT
SALES OF UNREGISTERED SECURITIES
On August
21, 2009, we consummated a private placement of units to several investors,
including institutional, accredited and non-US persons and
entities. We sold 4,121,600 units in the aggregate, which included
(i) 4,121,600 shares of our Series A Preferred Stock, (ii) a Series A-1 Warrant
to purchase 2,060,800 shares of our Common Stock at an exercise price of $3.00
per share with a three-year term, and (ii) a Series A-2 Warrant to purchase
2,060,800 shares of Common Stock at an exercise price of $3.75 with a five-year
term. The units were sold for $2.50 per share. Gross
proceeds from the Financing were approximately $10.3 million. Net
proceeds from the Financing were approximately $9.5 million.
The
holders of the Series A Preferred Stock have a beneficial ownership limitation
on conversion, such that no holder may convert its shares of Series A Preferred
Stock if after such conversion the holder would beneficially own, together with
its affiliates, more than 9.99% of the then issued and outstanding shares of or
Common Stock (the “
Maximum
Amount
”). Each share of Series A Preferred Stock is
convertible into such number of fully paid and nonassessable shares of our
Common Stock equal to the quotient of the liquidation preference amount per
share of Series A Preferred Stock (equal to $2.50, plus any accrued but unpaid
dividends thereon, whether or not declared, together with any other dividends
declared but unpaid thereon) divided by the conversion price, which initially is
$2.50 per share, subject to adjustments for stock splits and combinations,
issuance of additional shares of Common Stock and other events as set forth in
the terms therein (the “
Conversion
Price
”). The Series A Preferred Stock automatically converts
into shares of Common Stock up to the Maximum Amount, upon the earlier to occur
of (x) the 24-month anniversary after the Closing Date, and (y) such time that
the volume weighted average price of the Common Stock is no less than $5.00 for
a period of ten consecutive trading days with the daily volume of at least
50,000 shares per day.
TriPoint
Global Equities, LLC acted as placement agent in the Financing and received a
(i) a cash fee in the amount of $721,280, equal to 7% of the gross proceeds of
the Financing; (ii) a management fee in the amount of $51,520, equal to 0.5% of
the gross proceeds of the Financing; and (iii) warrants to purchase up to
659,456 shares of Common Stock, equal to 8% of the aggregate number of units
sold in the Financing.
The
issuance of the units was exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933, as amended (the “
Securities Act
”), and
Regulation D or Regulation S promulgated thereunder. We have relied
on the status of the Investors as (i) accredited investors under Regulation D,
or (ii) non-US persons under Regulation S, in claiming the exemption from
registration of the units, and the securities underlying the units sold in the
Financing.
EXHIBITS
Exhibit
No.
|
|
Description
|
|
|
|
2.1
|
|
Share
Exchange Agreement, dated as of June 26, 2009, by and among Emazing
Interactive, Inc., G. Edward Hancock, China Net Online Media Group
Limited, and the shareholders of China Net Online Media Group
Limited.(1)
|
|
|
|
2.2
|
|
Escrow
Agreement, dated as of June 8, 2009, by and between Emazing Interactive,
Inc., China Net Online Media Group Limited, Edward Hancock and Leser,
Hunter, Taubman & Taubman. (1)
|
|
|
|
2.3
|
|
Agreement
and Plan of Merger (2)
|
|
|
|
3.1
|
|
Articles
of Incorporation of Emazing Interactive, Inc., as amended
(1)
|
|
|
|
3.2
|
|
Articles
of Merger. (2)
|
|
|
|
3.3
|
|
Certificate
of Designation. (3)
|
|
|
|
3.4
|
|
By-laws.
(4)
|
|
|
|
4.1
|
|
Registration
Rights Agreement, dated as of June 26, 2009, by and among Emazing
Interactive, Inc. and certain stockholders listed therein.
(1)
|
|
|
|
4.2
|
|
Form
of Series A-1 Warrant. (3)
|
|
|
|
4.3
|
|
Form
of Series A-2 Warrant. (3)
|
|
|
|
4.4
|
|
Registration
Rights Agreement, dated as of August 21, 2009. (3)
|
|
|
|
4.5*
|
|
2009
Omnibus Securities and Incentive Plan
|
|
|
|
5.1+
|
|
Opinion
of Lewis & Roca LLP
|
|
|
|
10.1
|
|
Exclusive
Business Cooperation Agreement, dated October 8, 2008, by and between Rise
King Century Technology Development (Beijing) Co., Ltd. and Beijing CNET
Online Advertising Co., Ltd. (1)
|
|
|
|
10.2
|
|
Exclusive
Option Agreement, dated as of October 8, 2008, by and among Rise King
Century Technology Development (Beijing) Co., Ltd., Beijing CNET Online
Advertising Co., Ltd. and Handong Cheng with respect to Mr. Cheng’s equity
interest in Beijing CNET Online Advertising Co., Ltd.
(1)
|
|
|
|
10.3
|
|
Exclusive
Option Agreement, dated as of October 8, 2008, by and among Rise King
Century Technology Development (Beijing) Co., Ltd., Beijing CNET Online
Advertising Co., Ltd. and Xuanfu Liu with respect to Mr. Liu’s equity
interest in Beijing CNET Online Advertising Co., Ltd.
(1)
|
|
|
|
10.4
|
|
Exclusive
Option Agreement, dated as of October 8, 2008, by and among Rise King
Century Technology Development (Beijing) Co., Ltd., Beijing CNET Online
Advertising Co., Ltd. and Li Sun with respect to Ms. Sun’s equity interest
in Beijing CNET Online Advertising Co., Ltd. (1)
|
|
|
|
10.5
|
|
Equity
Interest Pledge Agreement, dated as of October 8, 2008, by and among Rise
King Century Technology Development (Beijing) Co., Ltd., Beijing CNET
Online Advertising Co., Ltd. and Handong Cheng with respect to Mr. Cheng’s
equity interest in Beijing CNET Online Advertising Co., Ltd.
(1)
|
10.6
|
|
Equity
Interest Pledge Agreement, dated as of October 8, 2008, by and among Rise
King Century Technology Development (Beijing) Co., Ltd., Beijing CNET
Online Advertising Co., Ltd. and Xuanfu Liu with respect to Mr. Liu’s
equity interest in Beijing CNET Online Advertising Co., Ltd.
(1)
|
|
|
|
10.7
|
|
Equity
Interest Pledge Agreement, dated as of October 8, 2008, by and among Rise
King Century Technology Development (Beijing) Co., Ltd., Beijing CNET
Online Advertising Co., Ltd. and Li Sun with respect to Ms. Sun’s equity
interest in Beijing CNET Online Advertising Co., Ltd.
(1)
|
|
|
|
10.8
|
|
Power
of Attorney of Handong Cheng, dated as of October 8, 2008, appointing Rise
King Century Technology Development (Beijing) Co., Ltd. as his agent and
attorney in connection with his equity interest in Beijing CNET Online
Advertising Co., Ltd. (1)
|
|
|
|
10.9
|
|
Power
of Attorney of Xuanfu Liu, dated as of October 8, 2008, appointing Rise
King Century Technology Development (Beijing) Co., Ltd. as his agent and
attorney in connection with his equity interest in Beijing CNET Online
Advertising Co., Ltd. (1)
|
|
|
|
10.10
|
|
Power
of Attorney of Li Sun, dated as of October 8, 2008, appointing Rise King
Century Technology Development (Beijing) Co., Ltd. as her agent and
attorney in connection with her equity interest in Beijing CNET Online
Advertising Co., Ltd. (1)
|
|
|
|
10.11
|
|
Exclusive
Business Cooperation Agreement, dated October 8, 2008, by and between Rise
King Century Technology Development (Beijing) Co., Ltd. and Business
Opportunity Online (Beijing) Network Technology Co., Ltd.
(1)
|
|
|
|
10.12
|
|
Exclusive
Option Agreement, dated as of October 8, 2008, by and among Rise King
Century Technology Development (Beijing) Co., Ltd., Business Opportunity
Online (Beijing) Network Technology Co., Ltd. and Handong Cheng with
respect to Mr. Cheng’s equity interest in Business Opportunity Online
(Beijing) Network Technology Co., Ltd. (1)
|
|
|
|
10.13
|
|
Exclusive
Option Agreement, dated as of October 8, 2008, by and among Rise King
Century Technology Development (Beijing) Co., Ltd., Business Opportunity
Online (Beijing) Network Technology Co., Ltd. and Xuanfu Liu with respect
to Mr. Liu’s equity interest in Business Opportunity Online (Beijing)
Network Technology Co., Ltd. (1)
|
|
|
|
10.14
|
|
Exclusive
Option Agreement, dated as of October 8, 2008, by and among Rise King
Century Technology Development (Beijing) Co., Ltd., Business Opportunity
Online (Beijing) Network Technology Co., Ltd. and Li Sun with respect to
Ms. Sun’s equity interest in Business Opportunity Online (Beijing) Network
Technology Co., Ltd. (1)
|
|
|
|
10.15
|
|
Equity
Interest Pledge Agreement, dated as of October 8, 2008, by and among Rise
King Century Technology Development (Beijing) Co., Ltd., Business
Opportunity Online (Beijing) Network Technology Co., Ltd. and Handong
Cheng with respect to Mr. Cheng’s equity interest in Business Opportunity
Online (Beijing) Network Technology Co., Ltd. (1)
|
|
|
|
10.16
|
|
Equity
Interest Pledge Agreement, dated as of October 8, 2008, by and among Rise
King Century Technology Development (Beijing) Co., Ltd., Business
Opportunity Online (Beijing) Network Technology Co., Ltd. and Xuanfu Liu
with respect to Mr. Liu’s equity interest in Business Opportunity Online
(Beijing) Network Technology Co., Ltd. (1)
|
|
|
|
10.17
|
|
Equity
Interest Pledge Agreement, dated as of October 8, 2008, by and among Rise
King Century Technology Development (Beijing) Co., Ltd., Business
Opportunity Online (Beijing) Network Technology Co., Ltd. and Li Sun with
respect to Ms. Sun’s equity interest in Business Opportunity Online
(Beijing) Network Technology Co., Ltd.
(1)
|
10.18
|
|
Power
of Attorney of Handong Cheng, dated as of October 8, 2008, appointing Rise
King Century Technology Development (Beijing) Co., Ltd. as his agent and
attorney in connection with his equity interest in Business Opportunity
Online (Beijing) Network Technology Co., Ltd. (1)
|
|
|
|
10.19
|
|
Power
of Attorney of Xuanfu Liu, dated as of October 8, 2008, appointing Rise
King Century Technology Development (Beijing) Co., Ltd. as his agent and
attorney in connection with his equity interest in Business Opportunity
Online (Beijing) Network Technology Co., Ltd. (1)
|
|
|
|
10.20
|
|
Power
of Attorney of Li Sun, dated as of October 8, 2008, appointing Rise King
Century Technology Development (Beijing) Co., Ltd. as her agent and
attorney in connection with her equity interest in Business Opportunity
Online (Beijing) Network Technology Co., Ltd. (1)
|
|
|
|
10.21
|
|
Entrustment
Agreement, dated June 5, 2009, by and between Rise King Investments
Limited and Handong Cheng, Xuanfu Liu and Li Sun. (1)
|
|
|
|
10.22
|
|
Share
Transfer Agreement, dated April 28, 2009, by and between Yang Li and
Handong Cheng (1)
|
|
|
|
10.23
|
|
Share
Transfer Agreement, dated April 28, 2009, by and between Yang Li and
Xuanfu Liu (1)
|
|
|
|
10.24
|
|
Share
Transfer Agreement, dated April 28, 2009, by and between Yang Li and Li
Sun (1)
|
|
|
|
10.25
|
|
Internet
Banking Experiencing All-in-One Engine Strategic Cooperation Agreement,
dated August 7, 2008, by and between Henan Branch of China Construction
Bank and Shanghai Borong Dingsi Computer Technology Co., Ltd.
(1)
|
|
|
|
10.26
|
|
Cooperation
Agreement, dated July 8, 2008, by and between Beijing CNET Online
Advertising Co., Ltd. and Shanghai Borongdingsi Computer Technology Co.,
Ltd. (1)
|
|
|
|
10.27
|
|
Supplemental
Agreement to the Cooperation Agreement, dated December 10, 2008, by and
between Beijing CNET Online Advertising Co., Ltd. and Shanghai
Borongdingsi Computer Technology Co., Ltd. (1)
|
|
|
|
10.28
|
|
Office
Lease Agreement, dated January 1, 2009, by and between Beijing
YuQuanHuiGu Realty Management Ltd. Co. and Business Opportunity
Online (Beijing) Network Technology Ltd. Co. (1)
|
|
|
|
10.29
|
|
Office
Lease Agreement, dated January 1, 2009, by and between Beijing
YuQuanHuiGu Realty Management Ltd. Co. and Beijing CNET Online
Advertising Co., Ltd. (1)
|
|
|
|
10.30
|
|
Office
Lease Agreement, dated January 1, 2009, by and between Beijing
YuQuanHuiGu Realty Management Ltd. Co. and Rise King Century
Technology Development (Beijing) Co., Ltd. (1)
|
|
|
|
10.31
|
|
Securities
Purchase Agreement, dated as of August 21, 2009. (3)
|
|
|
|
10.32
|
|
Securities
Escrow Agreement, dated as of August 21, 2009. (3)
|
|
|
|
10.33
|
|
Form
of Lock-up Agreement. (3)
|
|
|
|
10.34
|
|
Independent
Director Agreement effective as of November 30, 2009 by and between the
Company and Douglas MacLellan. (5)
|
|
|
|
10.35
|
|
Independent
Director Agreement effective as of November 30, 2009 by and between the
Company and Mototake Watanabe. (5)
|
|
|
|
10.36
|
|
Independent
Director Agreement effective as of November 30, 2009 by and between the
Company and Zhiqing Chen. (5)
|
|
|
|
10.37
|
|
Warrant Amendment
Agreement(6)
|
|
|
|
21.1*
|
|
Subsidiaries
of the Registrant
|
|
|
|
23.1+
|
|
Consent
of Bernstein & Pinchuk LLP, an independent registered accounting
firm.
|
|
|
|
23.2+
|
|
Consent
of Lewis & Roca LLP (included in its opinion filed as Exhibit 5.1).
|
|
|
|
24.1*
|
|
Power
of Attorney (contained in the signature page to this registration
statement).
|
+
Filed herewith
++ To
be filed by amendment.
*
Filed Previously
(1) Incorporated
by reference herein to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission July 2, 2009.
(2) Incorporated
by reference herein to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 24, 2009.
(3) Incorporated
by reference herein to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 27, 2009.
(4) Incorporated
by reference herein to the Company’s Registration Statement on Form
SB-1 filed with the Securities and Exchange Commission on October 20,
2006.
(5) Incorporated
by reference herein to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 2, 2009.
(6) Incorporated
by reference herein to the Company’s Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 31, 2010.
UNDERTAKINGS.
Undertaking
Required by Item 512 of Regulation S-K.
(a) The
undersigned registrant will:
(1) File,
during any period in which it offers or sells securities, a post-effective
amendment to this registration statement to:
(i)
include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) reflect
in the prospectus any facts or events arising after the effective date of this
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information in the registration statement; and notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
“Calculation of Registration Fee”table in the effective registration statement;
and
(iii) include
any additional or changed material information on the plan of
distribution.
(2) For
determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide
offering.
(3) File
a post-effective amendment to remove from registration any of the securities
that remain unsold at the end of the offering.
(b) For
determining liability of the registrant under the Securities Act to any
purchaser in the initial distribution of the securities, the registrant
undertakes that in a primary offering of securities of the registrant pursuant
to this registration statement, regardless of the underwriting method used to
sell the securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the registrant
will be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any
preliminary prospectus or prospectus of the registrant relating to the offering
required to be filed pursuant to Rule 424;
(ii) Any
free writing prospectus relating to the offering prepared by or on behalf of the
registrant or used or referred to by the registrant;
(iii) The
portion of any other free writing prospectus relating to the offering containing
material information about the registrant or its securities provided by or on
behalf of the registrant; and
(iv) Any
other communication that is an offer in the offering made by the registrant to
the purchaser.
(c) Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(d) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser:
(i) Each
prospectus filed by the registrant pursuant to 424(b)(3) shall be deemed to be
part of the registration statement as of the date the filed prospectus was
deemed part of and included in the registration statement; and
(ii) Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as
part of a registration statement in reliance on Rule 430B relating to an
offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of
providing the information required by section 10(a) of the Securities Act of
1933 shall be deemed to be part of and included in the registration statement as
of the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in the
offering described in the prospectus. As provided in Rule 430B, for liability
purposes of the issuer and any person that is at that date an underwriter, such
date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of contract of sale
prior to such effective date, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such effective
date.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this post-effective Amendment No. 1 to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized in Beijing, PRC on April 26, 2010.
CHINANET
ONLINE HOLDINGS, INC.
|
|
By:
|
/s/
Handong Cheng
|
Name:
|
Handong
Cheng
|
Title:
|
Chief
Executive Officer (Principal Executive
Officer)
|
Pursuant
to the requirements of the Securities Act of 1933, as amended, this registration
statement has been signed by the following persons and in the capacities and on
the dates indicated.
April
26, 2010
|
By:
|
/s/ Handong Cheng
|
|
Name:
|
Handong
Cheng
|
|
Title:
|
Chairman,
Chief Executive Officer and President (Principal Executive Officer);
Director
|
|
|
|
|
By:
|
*
|
|
Name:
|
Zhige
Zhang
|
|
Title:
|
Chief Financial
Officer, Treasurer and Director (Principal Financial and Accounting
Officer); Director
|
|
By:
|
*
|
|
Name:
|
|
|
Title:
|
Director
|
|
|
|
|
By:
|
*
|
|
Name:
|
|
|
Title:
|
Director
|
|
|
|
|
By:
|
*
|
|
Name:
|
|
|
Title:
|
Director
|
Chinanet Online Holdings, Inc. (AMEX:CNET)
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