ChinaNet Online Holdings, Inc.
Annual Report 2012

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K SANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2012 OR £TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to __________ COMMISSION FILE NO. 001-34647 CHINANET ONLINE HOLDINGS, INC. (Exact name of registrant as specified in its charter)NEVADA 20-4672080(State or other jurisdiction ofincorporation or organization) (I.R.S. Employer Identification No.) No.3 Min Zhuang Road, Building 6,Yu Quan Hui Gu Tuspark, Haidian District, Beijing, PRC(Address of principal executive offices) +86-10-5160-0828(Issuer’s telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act:Title of Each ClassName of Exchange On which Registered $0.001 Common StockNasdaq Global Market Securities Registered Pursuant to Section 12(g) of the Act: None. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes £ No S Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.Yes £ No S  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.Yes S No £ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).Yes S No £ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. Yes £ No S 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 thedefinition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer £ Accelerated Filer £ Non-Accelerated Filer £ Smaller Reporting Company S Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes £ No S The aggregate market value of the 14,324,705 shares of common equity stock held by non-affiliates of the Registrant was approximately $10,027,294 on thelast business day of the Registrant’s most recently completed second fiscal quarter, based on the last sale price of the registrant’s common stock on such dateof $0.70 per share, as reported on the Nasdaq Global Market. The number of shares outstanding of the Registrant’s common stock, $0.001 par value as of April 12, 2013 was 22,186,540. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s Proxy Statement relating to the Registrant’s 2013 Annual Meeting of Stockholders, are incorporated by reference into Part III ofthis Annual Report on Form 10-K where indicated.  TABLE OF CONTENTS PART I 2ITEM 1BUSINESS2ITEM 1A.RISK FACTORS26ITEM 1B.UNRESOLVED STAFF COMMENTS41ITEM 2PROPERTIES41ITEM 3LEGAL PROCEEDINGS42ITEM 4MINE SAFETY DISCLOSURES42PART II. 42ITEM 5MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES42ITEM 6SELECTED FINANCIAL DATA43ITEM 7MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS43ITEM 7B.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK70ITEM 8FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA70ITEM 9CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL DISCLOSURES70ITEM 9A.CONTROLS AND PROCEDURES71ITEM 9B.OTHER INFORMATION72PART III. 72ITEM 10DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE72ITEM 11EXECUTIVE COMPENSATION72ITEM 12SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS73ITEM 13CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE73ITEM 14PRINCIPAL ACCOUNTANT FEE AND SERVICES73PART IV. 73ITEM 15EXHIBITS AND FINANCIAL STATEMENT SCHEDULES73  SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E ofthe Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including “anticipates”, “believes”, “expects”, “can”, “continue”, “could”, “estimates”, “expects”, “intends”, “may”,“plans”, “potential”, “predict”, “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions.Uncertainties and other factors, including the risks outlined under Risk Factors contained in Item 1A of this Form 10-K, may cause our actual results, levels ofactivity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or impliedby these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity,performance or achievements. Our expectations are as of the date this Form 10-K is filed, and we do not intend to update any of the forward-lookingstatements after the filing date to conform these statements to actual results, unless required by law. We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy and information statements and amendments toreports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended. You may read and copy these materials atthe SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the public reference roomby calling the SEC at 1-800-SEC-0330. The SEC also maintains a website (http://www.sec.gov) that contains reports, proxy and information statements andother information regarding us and other companies that file materials with the SEC electronically. You may also obtain copies of reports filed with the SEC,free of charge, via a link included on our website at www.chinanet-online.com.  PART I ITEM 1 BUSINESS We are a holding company that conducts our primary businesses through our PRC subsidiary and PRC operating entities (the “VIEs”). We are one ofChina’s leading business-to-businesses (“B2B”), fully integrated internet service providers for expanding small and medium enterprises’ (“SMEs”) salesnetworks in China. Our services were founded on proprietary internet and advertising technologies that include (i) preparing and publishing rich mediaenabled advertising and marketing campaigns for clients on the Internet, mobile phone, television and other valued added communication channels, (ii)hosting mini-sites with online messaging and consulting functionalities, (iii) generating effective sales leads, (iv) providing online management tools to helpSMEs manage the expansion of their sales networks and (v) providing social networking and information sharing services to SMEs and entrepreneurs throughinteractive integrated social networking portal. Our goal is to strengthen our position as the leading diversified one-stop internet service provider to SMEs fortheir sales network expansion in China. In February 2013, we received the awards of "The Most Leading Enterprise of Chinese EntrepreneurialMerchandising and Franchising Marketing Industry" and "The Most Trustworthy E-Commerce Platform in Entrepreneurial Merchandising and FranchisingIndustry" in China by the China Electronic Commerce Association (CECA). These awards are only awarded to one enterprise in each industry. ChinaNet primarily operates an one-stop services for our clients on four major service platforms, including social networking service informationplatform, multi-channel advertising and promotion platform, brand management and sales channel building platform and management tools platform. Oursocial networking service information platform primarily consists of www. chuangye.com, an information and service portal for entrepreneurs or anyindividual who plans to start their own business. Our multi-channel advertising and promotion platform primarily consists of internet advertising andmarketing portals, including www.28.com (“28.com”), www.liansuo.com (“liansuo.com”) and www.sooe.cn (“sooe.cn”), ChinaNet TV as our TV productionand advertising unit and the bank kiosk advertising unit. We provide varieties of marketing campaigns through this platform by the combination of theInternet, mobile, television, bank kiosks and printed-medias to maximize market exposure and effectiveness for our clients. Our band management and saleschannel expansion platform consists of our brand consulting and management service and offline sales channel expansion service, which is to physicallyhelp small businesses to recruit dealers, wholesalers, partners or franchisees based on their business needs. Management tools platform consists of a mobile-based sales and administrative management tools specifically designed for small business in China to match their simplicity. Chuangye.com, operated through Beijing Chuang Fu Tian Xia Network Technology Co., Ltd., our majority-owned VIE, is built to serve thecommunity of entrepreneurs to assist them with developing their business, as well as sharing their resources in a web2.0 and SNS2.0 driven interaction incombination with popular web/mobile tools and portals, such as Weibo, WeChat, Tianya, Baidu and so forth. 28.com, operated through BusinessOpportunity Online (Beijing) Network Technology Co., Ltd., is our key internet advertising web portal. Through this high traffic internet portal, SMEsadvertise their business information, brands, products and services, as well as other related business opportunities through their mini-sites hosted by28.com. The portal also offers campaign management tools for our clients, including lead generation and management, advanced tracking, search enginemarketing, search engine optimization, resource scheduling and content management. In October 2012, 28.com launched a new value-added service, CleverCloud Optimizer, which is an automated price adjustment service that allows users to optimize their online search advertising campaigns, to manage largeand complex online search accounts and campaign more efficiently, and to analyze customer's search history in order to run more targeted sales promotions.Primarily through 28.com, our customers can potentially build sales channels and develop business relationships directly for franchisees, sales agents,distributors and/or resellers. It also functions as a one-stop destination for the general public seeking new business opportunities or other businessventures. Liansuo.com, operated through Beijing Chuang Fu Tian Xia Network Technology Co., Ltd., our majority-owned VIE, is built to serve larger SMEsthan those served by 28.com. With additions of other internet related services, Liansuo.com is also intended to serve large international and overseas clients.In October 2012, Liansuo.com introduced a new cloud-based software system, Quick Connect, which allows businesses and existing and potential saleschannel partners to communicate with each 2 other directly and simultaneously. Quick Connect also keeps a detailed log of all incoming calls that businesses can port into their customer relationsmanagement ("CRM") database to track every sales lead. Upon acquiring Sou Yi Lian Mei Network Technology (Beijing) Co., Ltd., we obtained anotherestablished online advertising and marketing portal, sooe.cn, which focuses on emerging SMEs. The ChinaNet TV division, operated through Beijing CNETOnline Advertising Co., Ltd., has in-house television productions and distribution capabilities. We produce and distribute television shows that are typically10 or 20 minutes in length and are broadcasted on local television stations. The television shows are comprised of advertisements, similar to infomercials,and also include promotions for several clients. The bank kiosk division, operated through Shanghai Borongdongsi Computer Technology Co., Ltd.,provides interactive LCD advertisement displays and targets banking customers. As of December 31, 2012, in cooperation with Henan provincial branch ofChina Construction Bank and Shanghai Rural Commercial Bank, we placed approximately 610 interactive kiosks in their branches in Henan province andShanghai. Each kiosk has an LCD advertising display panel, which provides advertising aimed at bank customers. Each kiosk also provides Internet accesson a separate screen so that customers can perform basic non-cash banking functions such as transferring money, purchasing annuities and/or insurance, andpaying bills. Upon acquiring Quanzhou Zhi Yuan Marketing Planning Technology Co., Ltd., Quanzhou Tian Xi Shun He Advertisement Co., Ltd. andincorporation of Zhao Shang Ke Network Technology (Hubei) Co., Ltd., we also provide brand consulting and management, and sales channel buildingservices to our SME clients, including brand investigation, brand modulization, brand application, brand promotion, as well as sales channel expansionmodeling, implementation and management. We also have invested in the cloud-computing based software technologies, operated through Sheng TianNetwork Technology (Hubei) Co., Ltd. This technology is intended to help our SME clients manage their sales channels more effectively in China. Thetechnology has been partially implemented into our existing online advertising and marketing platforms in 2012, and other features of the technology arestill under integration and are expected to be incorporated into our another web portal, www.feitengyun.com, in 2013. We derive our revenue principally by:selling of internet advertising space on our website portals;selling of value-added technical services to our clients through the internet advertising management systems and platforms developed andmanaged by us;selling of advertising time slots on our television shows and on our installed bank kiosks; andproviding brand management and sales channel building services to a certain group of clients.The five largest industries in terms of revenue in which our advertising and marketing clients operate are (1) cosmetics and health care, (2) footwear,apparel and garments, (3) food and beverage, (4) environmental protection equipment and (5) women accessories. Advertising revenue from these industriestogether accounted for approximately 77% of our revenue in 2012. For the year ended December 31, 2012, we generated total revenues of US$46.6 million, compared to US$28.7 million in 2011, and net income (afterallocation to the noncontrolling interest shareholders) of US$3.0 million, compared to US$3.0 million in 2011. Excluding the non-cash charge of changes infair value of the contingent consideration receivables of approximately US$0.16 million and US$0.07 million for the year ended December 31, 2012 and2011, respectively, the non-cash gain recognized for deconsolidation of subsidiaries of approximately US$0.93 million, the related deferred income taxexpenses of approximately US$0.21 million, and the non-cash expenses of share-based compensation recognized for the restricted stock and common stockpurchase options issued to our management, directors and employees on November 30, 2011 of approximately US$2.6 million for the year ended December31, 2011, our adjusted Non-GAAP net income (after allocation to the noncontrolling interest shareholders) was US$3.2 million and US$5.0 million for theyear ended December 31, 2012 and 2011, respectively. 3 Our Corporate History, Background, Subsidiaries, Variable Interest Entities (VIEs) and Equity Investment Affiliates As of December 31, 2012, our Corporate Structure is set forth below: 4 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 ourincorporation until June 26, 2009, when we consummated the Share Exchange (as defined below), our business development activities were primarilyconcentrated in web server access and company branding in hosting web based e-games. Our wholly owned subsidiary, China Net Online Media Group Limited, was incorporated in the British Virgin Islands on August 13, 2007 (“ChinaNet BVI”). On 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 People's Republic of China (“Rise King WFOE”). We refer to the transactions that resulted inChina Net BVI becoming an indirect parent company of Rise King WFOE as the “Offshore Restructuring.” Restructuring In October 2008, a restructuring plan was developed (the “Restructuring”). The Restructuring was accomplished in two steps. The first step was forRise King WFOE to acquire control over Business Opportunity Online (Beijing) Network Technology Co., Ltd. (“Business Opportunity Online”) and BeijingCNET Online Advertising Co., Ltd. (“Beijing CNET Online”) (collectively the “PRC Operating Entities” or the “VIEs”) by entering into a series of contracts(the “Contractual Agreements” or the “VIE Agreements”), which enabled Rise King WFOE to operate the business and manage the affairs of the PRCOperating Entities. At the time of the restructuring, Beijing CNET Online owned a 51% equity interest in Shanghai Borongdingsi Computer Technology Co.,Ltd. (“Shanghai Borongdingsi”). Both of the PRC Operating Entities at that time were, and currently are, owned by Messrs. Handong Cheng, Xuanfu Liu andMs. Li Sun (the “PRC Shareholders” or the “Control Group”). Mr. Cheng is now our Chief Executive Officer. After the PRC Restructuring was consummated,the second step was for China Net BVI to enter into and complete a transaction with a U.S. public reporting company, whereby that company would acquireChina Net BVI, China Net HK and Rise King WFOE, and control the PRC Operating Entities (the “China Net BVI Companies”). Business Opportunity Online, Beijing CNET Online and Shanghai Borongdingsi, were incorporated on December 8, 2004, January 27, 2003 andAugust 3, 2005, respectively. Shanghai Borongdingsi is 51% owned by Beijing CNET Online. Beijing CNET Online and Shanghai Borongdingsi enteredinto 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 Bankwhich allows Shanghai Borongdingsi, or its designated party, to conduct in-door advertising business within the business outlets throughout HenanProvince. The e-banking cooperation agreement has a term of eight years, which began in August 2008. However, Shanghai Borongdingsi was not able toconduct the advertising business as a stand-alone business due to the lack of an advertising business license and supporting financial resources. Pursuant tothe aforementioned cooperation agreements, Beijing CNET Online committed to purchase equipment, and to provide working capital, technical and otherrelated support to Shanghai Borongdingsi. Beijing CNET Online owns the equipment used in the kiosk business, is entitled to sign contracts in ShanghaiBorongdingsi’s name on behalf of the business, and holds the right to collect the advertising revenue generated from the kiosk business exclusively until itrecovers of the cost of purchasing the equipment. Thereafter, Beijing CNET Online has agreed to distribute 49% of the net profit generated from the e-banking advertising business, if any, to the minority shareholders of Shanghai Borongdingsi. 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 incertain industries in the PRC and the PRC M&A regulations. 5 The Foreign Investment Industrial Guidance Catalogue jointly issued by the Ministry of Commerce (“MOFCOM”) and the National Developmentand Reform Commission in 2007 classified various industries/business into three different categories: (i) encouraged for foreign investment, (ii) restricted toforeign investment and (iii) prohibited from foreign investment. For any industry/business not covered by any of these three categories, they will be deemedto be industries/business permitted to have foreign investment. Except for those expressly provided restrictions, encouraged and permittedindustries/businesses are usually open to foreign investment and ownership. With regard to those industries/businesses restricted to or prohibited fromforeign investment, there is always a limitation on foreign investment and ownership. The business of the PRC Operating Entities falls under the class of a business that provides Internet content or information services, a type of valueadded telecommunication services, for which restrictions upon foreign ownership apply. As a result, Rise King WFOE is not allowed to do the businessthe PRC Operating Entities companies are currently pursuing. Advertising business is open to foreign investment but one of the requirements is that theforeign investors of a WFOE shall have been carrying out advertising business for over three years pursuant to the Foreign Investment Advertising Measuresas amended by MOFCOM and the State Administration of Industry and Commerce (“SAIC”) on August 22, 2008. Rise King WFOE is not allowed to engagein the advertising business because its shareholder, China Net HK, does not meet such requirements. In order to control the business and operations of thePRC Operating Entities, and consolidate the financial results of the two companies in a manner that does not violate current PRC laws, Rise King WFOEexecuted the Contractual Agreements with the PRC Shareholders and each of the PRC Operating Entities. The Contractual Agreements allow us, throughRise King WFOE, to, among other things, secure significant rights to influence the two companies’ business operations, policies and management, approveall matters requiring shareholder approval, and receive 100% of the income earned by the PRC Operating Entities. In return, Rise King WFOE providesconsulting services to the PRC Operating Entities. In addition, to ensure that the PRC Operating Entities and the PRC Shareholders perform their obligationsunder the Contractual Arrangements, the PRC Shareholders have pledged all of their equity interests in the PRC Operating Entities to Rise King WFOE. They have also entered into an option agreement with Rise King WFOE which provides that at such time as when the current restrictions under PRC law onforeign ownership of Chinese companies engaging in the Internet content or information services in China are lifted, Rise King WFOE may exercise itsoption to purchase the equity interests in the PRC Operating Entities, directly. Each of the PRC Shareholders entered into a share transfer agreement (the “Share Transfer Agreement”) with Mr. Yang Li, the sole shareholder ofRise King Investment Limited, a British Virgin Islands company (“Rise King BVI”), which is a 55% shareholder of China Net BVI. In entering into the ShareTransfer Agreement, Ms. Li Sun was acting as the nominee of Mr. Zhige Zhang, our chief financial officer. Mr. Zhang did not report his indirect ownership ofChinaNet BVI’s common stock by virtue of Ms. Li acting as his nominee on his original Form 3 filed with the SEC. The PRC Shareholders were granted theincentive options for the contributions that they made and continue to make to Rise King BVI. Under the Share Transfer Agreements Mr. Li granted each ofthe 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 RiseKing BVI, provided that certain financial performance thresholds were met by the China Net BVI Companies. The Share Transfer Agreement was formalizedand entered into on April 28, 2009. There is no prohibition under PRC laws for the PRC Shareholders to earn an interest in Rise King BVI after the PRCRestructuring 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 BVICompanies attaining consolidated gross revenue performance targets for fiscal 2009, the six month period ended June 30, 2010 and the six month periodended December 31, 2010 of RMB 100 million, RMB 60 million and RMB 60 million, respectively. If China Net BVI Companies achieve the performancetargets the exercise price will be $1.00 per share. If the targets are not met, the exercise price will be $2.00 per share. As of February 14, 2011, 100% of theOption Shares were exercisable. On March 30, 2011, Ms. Li Sun transferred the Option Shares held by her to Mr. Zhang. On March 30, 2011, pursuant to theterms of the Share Transfer Agreement, each of Mr. Cheng, Mr. Liu and Mr. Zhang exercised their rights to acquire the Option Shares. Due to the fact that theChina Net BVI Companies had achieved the performance targets set forth in the Share Transfer Agreement, each of Mr. Cheng, Mr. Liu and Mr. Zhang paid anexercise price of $1.00 per share to Mr. Yang Li. As a result of this exercise, Mr. Cheng, Mr. Liu and Mr. Zhang became the shareholders of Rise King BVI. Asof April 12, 2013, 6 through Rise King BVI, Mr. Cheng, Mr. Liu and Mr. Zhang collectively hold 34% of issued and outstanding shares of our common stock. Summary of the material terms of the VIE Agreements: Exclusive Business Cooperation Agreements: Pursuant to the Exclusive Business Cooperation Agreements entered into by and between Rise King WFOE and each of the PRC Operating Entities,Rise King WFOE has the exclusive right provide to the PRC Operating Entities complete technical support, business support and related consulting servicesduring the term of these agreements, which includes but is not limited to technical services, business consultations, equipment or property leasing, marketingconsultancy, system integration, product research and development, and system maintenance. In exchange for such services, each PRC Operating Entity hasagreed to pay a service fee to Rise King WFOE equal to 100% of the net income of each PRC Operating Entity. Adjustments may be made upon approval byRise King WFOE based on services rendered by Rise King WFOE and operational needs of the PRC Operating Entities. The payment shall be made on amonthly basis, if at year end, after an audit of the financial statements of any PRC Operating Entities, there is determined to be any shortfall in the payment of100% of the annual net income, such PRC Operating Entity shall pay such shortfall to Rise King WFOE. Each agreement has a ten-year term. The term ofthese agreements may be extended if confirmed in writing by Rise King WFOE, prior to the expiration of the term. The extended term shall be determined byRise King WFOE, and the PRC Operating Entities shall accept such extended term unconditionally. Exclusive Option Agreements: Under the Exclusive Option Agreements entered into by and among Rise King WFOE, each of the PRC Shareholders irrevocably granted to RiseKing 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 interestin any PRC Operating Entities for a purchase price of RMB10, or a purchase price to be adjusted to be in compliance with applicable PRC laws andregulations. 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 theseagreements 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 Entities and each of the PRC Shareholders,the PRC Shareholders pledged all of their equity interests in the PRC Operating Entities to guarantee the PRC Operating Entities’ performance of itsobligations under the Exclusive Business Cooperation Agreements. If the PRC Operating Entities or any of the PRC Shareholders breaches its/his/herrespective contractual obligations under these agreements, or upon the occurrence of one of the events regarded as an event of default under each suchagreement, Rise King WFOE, as pledgee, will be entitled to certain rights, including the right to dispose of the pledged equity interests. The PRCShareholders of the PRC Operating Entities agreed not to dispose of the pledged equity interests or take any actions that would prejudice Rise King WFOE'sinterest, 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 theequity pledge agreements will be valid until all the payments related to the services provided by Rise King WFOE to the PRC Operating Entities due underthe Exclusive Business Cooperation Agreements have been fulfilled. Therefore, the equity pledge agreements shall only be terminated when the paymentsrelated to the ten-year Exclusive Business Cooperation Agreement are paid in full and the WFOE does not intend to extend the term of the ExclusiveBusiness Cooperation Agreement. Irrevocable Powers of Attorney: The PRC Shareholders have each executed an irrevocable power of attorney to appoint Rise King WFOE as their exclusive attorneys-in-fact to voteon their behalf on all PRC Operating Entities matters requiring shareholder 7 approval. The term of each power of attorney is valid so long as such shareholder is a shareholder of the respective PRC Operating Entity. As a result of these VIE Agreements, we through our wholly-owned subsidiary, Rise King WFOE, was granted with unconstrained decision makingrights and power over key strategic and operational functions that would significantly impact the PRC Operating Entities or the VIEs’ economic performance,which includes, but is not limited to, the development and execution of the overall business strategy; important and material decision making; decisionmaking for merger and acquisition targets and execution of merger and acquisition plans; business partnership strategy development and execution;government liaison; operation management and review; and human resources recruitment and compensation and incentive strategy development andexecution. Rise King WFOE also provides comprehensive services to the VIEs for their daily operations, such as operational technical support, OA technicalsupport, accounting support, general administration support and technical support for products and services. As a result of the Exclusive BusinessCooperation Agreements, the Equity Pledge Agreements and the Exclusive Option Agreements, we will bear all of the VIEs’ operating costs in exchange for100% of the net income of the VIEs. Under these agreements, we have the absolute and exclusive right to enjoy economic benefits similar to equityownership through the VIE Agreements with our PRC Operating Entities and their shareholders. 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 noadjustment to the historical basis of the assets and liabilities of the PRC Operating Entities. The operations of the PRC Operating Entities are consolidated asif the current corporate structure had been in existence throughout the period presented in the audited financial statements. The Restructuring is accountedfor in this manner because, pursuant to an Entrustment Agreement dated June 5, 2009 (the “Entrustment Agreement”) between Rise King BVI and the PRCShareholders, Rise King BVI granted to the PRC Shareholders, on a collective basis, managerial control over each of the China Net BVI Companies bydelegating the PRC Shareholders its shareholder rights, including the right to vote, and its rights to designate management of China Net BVI. TheEntrustment Agreement, together with the Contractual Arrangements demonstrates the ability of the PRC Shareholders to continue to control BusinessOpportunity Online and Beijing CNET Online, which are under our common control. On March 30, 2011, in connection with the exercise of the optionspursuant to the Share Transfer Agreement, the Entrustment Agreement was terminated. Share Exchange On June 26, 2009, we entered into a Share Exchange Agreement (the “Exchange Agreement”), with (i) ChinaNet BVI, (ii) ChinaNet BVI’sshareholders, Allglad Limited, a British Virgin Islands company (“Allglad”), Growgain Limited, a British Virgin Islands company ("Growgain"), Rise KingInvestments Limited, a British Virgin Islands company (“Rise King BVI”), Star (China) Holdings Limited, a British Virgin Islands company (“Star”), SurplusElegant Investment Limited, a British Virgin Islands company (“Surplus”), Clear Jolly Holdings Limited, a British Virgin Islands company (“Clear” andtogether with Allglad, Growgain, Rise King BVI, Star and Surplus, the “ChinaNet BVI Shareholders”), who together own shares constituting 100% of theissued and outstanding ordinary shares of ChinaNet BVI (the “ChinaNet BVI Shares”), and (iii) G. Edward Hancock, the former principal stockholder of theCompany. Pursuant to the terms of the Exchange Agreement, the ChinaNet BVI Shareholders transferred to the Company all of the ChinaNet BVI Shares inexchange 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 our company and we are now a holding company, which, through certain contractual arrangements withoperating companies in the PRC, is engaged in providing advertising, marketing and communication services to small and medium companies in China. Name Change Prior to July 14, 2009, our company name was Emazing Interactive, Inc. On July 14, 2009, our company formed a corporation under the laws of theState of Nevada called ChinaNet Online Holdings, Inc. (the "Merger Sub") and acquired one hundred shares of its common stock for cash. As such, MergerSub was merged with and into our 8 company. As a result of the merger, the separate corporate existence of the Merger Sub ceased. As a further result of the merger, our corporate name waschanged to “ChinaNet Online Holdings, Inc.” We are the surviving corporation in the merger and, except for the name change provided for in the Agreementand 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 ConvertiblePreferred 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 proceedsof approximately $10.3 million (the “Financing”). Net proceeds from the Financing were approximately $9.2 million. We sold 4,121,600 units in theaggregate, 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 anexercise 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 ourCommon 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 onAugust 20, 2014. On August 21, 2011, pursuant to the Certificate of Designations, Preferences and Rights of the Series A Convertible Preferred Stock, all outstandingshares of the Series A Convertible Preferred Stock were converted into shares of our common stock. On December 1, 2011, we launched a tender offer pursuant to which we offered all holders of our outstanding Series A-1 Warrants and Series A-2Warrants the opportunity to exchange their warrants in accordance with the following exchange ratios: (A) with respect to any Series A-1 Warrant, one shareof our common stock in exchange for every twenty shares for which such Series A-1 Warrant was exercisable, and (B) with respect to any Series A-2 Warrant,one share of our common stock in exchange for every ten shares for which such Series A-2 Warrant was exercisable. The tender offer expired on December30, 2011 and 1,418,800 Series A-1 Warrants were tendered in exchange for approximately 70,940 shares of our common stock and 356,800 Series A-2Warrants were tendered in exchange for approximately 35,680 shares of our common stock. On August 20, 2012, the remaining Series A-1 warrants to purchase up to 642,000 share of our common stock issued on August 21, 2009 expired.The remaining Series A-2 warrants to purchase up to 1,704,000 shares of our common stock and placement agent warrants to purchase up to 659,456 shares ofour common stock will expire on August 20, 2014. Our VIEs, VIEs’ subsidiaries and equity investment affiliates As discussed above, we beneficially own two VIEs: Business Opportunities Online and Beijing CNET Online. Beijing CNET Online owns a 51%equity interest in Shanghai Borongdingsi. On June 24, 2010, one of our VIEs, Business Opportunity Online, together with three other individuals, who were not affiliated with us, formed anew company, Shenzhen City Mingshan Network Technology Co., Ltd. (“Shenzhen Mingshan”). Shenzhen Mingshan is 51% owned by BusinessOpportunity Online and 49% owned collectively by the other three individuals. Shenzhen Mingshan is primarily engaged in developing and designinginternet based software, online games and the related operating websites and providing related internet and information technology services necessary tooperate such games and websites. On January 6, 2011, as approved by the shareholders of Shenzhen Mingshan, an independent third party investor, who wasnot affiliated with us or any of our affiliates, invested RMB15,000,000 (approximately US$2,374,883) into Shenzhen Mingshan in exchange for a 60%equity interest in Shenzhen Mingshan. As a result of this transaction, our share of the equity interests in Shenzhen Mingshan decreased from 51% to 20.4%and we ceased to have a controlling financial interest in Shenzhen Mingshan, but still retained an investment in, and significant influence over, ShenzhenMingshan. On December 19, 2012, as 9 approved by the shareholders of Shenzhen Mingshan, Shenzhen Mingshan reduced its registered and paid-in capital from RMB25,000,000 (approximatelyUS$3,958,139) to RMB22,000,000 (approximately US$3,483,162), resulted from a decrease of paid-in capital from three other noncontrolling shareholders,except Business Opportunity Online. As a result, our share of the equity interest in Shenzhen Mingshan increased from 20.4% to 23.18% and we continued toretain significant influence over Shenzhen Mingshan. Therefore, as of December 31, 2012, Shenzhen Mingshan was an equity investment affiliate of ours. On December 6, 2010, through our wholly-owned subsidiary, Rise King WFOE, we entered into a series of exclusive contractual arrangements,which were similar to the Contractual Agreements discussed above, with Rise King (Shanghai) Advertisement Media Co., Ltd. (“Shanghai Jing Yang”), acompany incorporated under PRC laws in December 2009. The contractual arrangements that we entered into with Shanghai Jing Yang allow us, throughRise King WFOE, to, among other things, secure significant rights to influence Shanghai Jing Yang’s business operations, policies and management, approveall matters requiring shareholder approval, and receive 100% of the income earned by Shanghai Jing Yang. From the date of incorporation until December 6,2010, Shanghai Jing Yang did not conduct any business activities. On December 8, 2010, Shanghai Jing Yang acquired a 49% equity interest in a newly established company, Beijing Yang Guang Media InvestmentCo., Ltd. (“Beijing Yang Guang”). In August, 2011, Shanghai Jing Yang sold back its 49% equity interest in Beijing Yang Guang to the majority shareholderof Beijing Yang Guang. We, through one of our VIEs, Beijing CNET Online, entered into an equity interest acquisition agreement with the shareholders of Quanzhou ZhiYuan Marketing Planning Co., Ltd. (“Quanzhou Zhi Yuan”) and Quanzhou Tian Xi Shun He Advertisement Co., Ltd. (“Quanzhou Tian Xi Shun He”),(collectively “the acquirees”) on December 18, 2010 and December 22, 2010, to acquire a 100% equity interest in Quanzhou Zhi Yuan and a 51% equityinterest in Quanzhou Tian Xi Shun He, respectively. These acquisitions were subsequently consummated on January 4, 2011 and February 23, 2011,respectively. Quanzhou Zhi Yuan and Quanzhou Tian Xi Shun He are both independent advertising companies based in Fujian province of the PRC, whichprovide comprehensive branding and marketing services to over fifty SMEs focused primarily in the sportswear and clothing industry. In June 2011, BeijingCNET Online entered into an additional agreement with the noncontrolling interest holders of Quanzhou Tian Xi Shun He to purchase the remaining 49%equity interest of Quanzhou Tian Xi Shun He. On June 27, 2011, this transaction was approved by, and registered with, the relevant PRC governmentauthorities of Quanzhou City, Fujian Province of PRC. Quanzhou Tian Xi Shun He became a wholly owned subsidiary of Beijing CNET Online. On January 28, 2011, one of our VIEs, Business Opportunity Online, formed a new wholly owned subsidiary, Business Opportunity Online (Hubei)Network Technology Co., Ltd. (“Business Opportunity Online Hubei”). Business Opportunity Online Hubei is primarily engaged in internet advertisementdesign, production and promulgation. On March 1, 2011, one of our VIEs, Business Opportunity Online, together with an individual, who was not affiliated with us, formed a newcompany, Beijing Chuang Fu Tian Xia Network Technology Co., Ltd. (“Beijing Chuang Fu Tian Xia”). Business Opportunity Online and the co-foundingindividual owned 51% and 49% of the equity interests of Beijing Chuang Fu Tian Xia, respectively. In addition to capital investment, the co-foundingindividual is required to provide the controlled domain names, www.liansuo.com and www.chuangye.com to be registered under the established company.Beijing Chuang Fu Tian Xia is primarily engaged in providing and operating internet advertising, marketing and communication services to SMEs throughthe websites associated the above mentioned domain names. On April 18, 2011, Business Opportunity Online Hubei formed a new wholly owned company, Hubei CNET Advertising Media Co., Ltd. (“HubeiCNET”). Hubei CNET is primarily engaged in advertisement design, production, promulgation and providing the related advertising and marketingconsultancy services. On April 18, 2011, Business Opportunity Online Hubei, together with an individual, who was not affiliated with us, formed a new company, ZhaoShang Ke Network Technology (Hubei) Co., Ltd. (“Zhao Shang Ke Hubei”). Business Opportunity Online Hubei and the co-founding individual owned 51%and 49% of the equity interests 10 of Zhao Shang Ke Hubei, respectively. Zhao Shang Ke Hubei is primarily engaged in providing advertisement design, production, promulgation and saleschannels building services. On December 29, 2011, as approved by the shareholders of Zhao Shang Ke Hubei, two independent third party investors, whowere not affiliated with us or any of our affiliates, invested RMB10,000,000 (approximately US$1,583,255) into Zhao Shang Ke Hubei in exchange for anaggregate 50% equity interest in Zhao Shang Ke Hubei. As a result of this transaction, our share of the equity interests in Zhao Shang Ke Hubei decreasedfrom 51% to 25.5% and we ceased to have a controlling financial interest in Zhao Shang Ke Hubei but still retained an investment in, and significantinfluence over, Zhao Shang Ke Hubei. Therefore, as of December 31, 2012, Zhao Shang Ke Hubei was an equity investment affiliate of ours. On July 1, 2011, Quanzhou Zhi Yuan formed a new wholly owned company, Xin Qi Yuan Advertisement Planning (Hubei) Co., Ltd. (“Xin Qi YuanHubei”). Xin Qi Yuan Hubei is primarily engaged in advertisement design, production, promulgation and providing the related advertising and marketingconsultancy services. On July 1, 2011, Quanzhou Tian Xi Shun He formed a new wholly owned company, Mu Lin Sen Advertisement (Hubei) Co., Ltd. (“Mu Lin SenHubei”). Mu Lin Sen Hubei is primarily engaged in advertisement design, production, promulgation and providing the related advertising and marketingconsultancy services. On July 1, 2011, Business Opportunity Online Hubei, together with an individual who is not affiliated with us, formed a new company, Sheng TianNetwork Technology (Hubei) Co., Ltd. (“Sheng Tian Hubei”). Business Opportunity Online Hubei and the co-founding individual owned 51% and 49% ofthe equity interests of Sheng Tian Hubei, respectively. Sheng Tian Hubei is primarily engaged in computer system design, development and promotion,software development and promotion, and providing the related technical consultancy services. On September 5, 2011, Business Opportunity Online Hubei formed a new wholly owned company, Chongqing Business Opportunity OnlineTechnology Co., Ltd. (“Business Opportunity Online Chongqing”). Business Opportunity Online Chongqing is primarily engaged in internet advertisementdesign, production and promulgation. In September 2012, the Company sold all of its equity interest in Business Opportunity Online Chongqing to twounaffiliated parties. Business Opportunity Online Chongqing was dormant from the time of its incorporation through the date the Company disposed of itsequity interest to two unaffiliated parties. On December 15, 2011, Business Opportunity Online Hubei entered into an equity transfer agreement with Sou Yi Lian Mei Network Technology(Beijing) Co. Ltd. (“Sou Yi Lian Mei”) and its shareholders, to acquire a 51% equity interests in Sou Yi Lian Mei. In September 2012, Business OpportunityOnline Hubei acquired the remaining 49% equity interest in Sou Yi Lian Mei. Sou Yi Lian Mei became a wholly owned subsidiary of Business OpportunityOnline Hubei accordingly. Sou Yi Lian Mei is based in Beijing, China, and is primarily engaged in providing online advertising and marketing services andoperates its business primarily through its wholly-owned subsidiary, Jin Du Ya He (Beijing) Network Technology Co., Ltd (“Jin Du Ya He”). As of December 31, 2012, we operated our business primarily in China through our PRC subsidiary and operating entities, or VIEs, as summarizedabove. 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 2012, China’s advertising market was the third-largest in the world by media expenditure, which was estimated to be approximately US$32.30 billion, accounting for 24.4% of the total advertisingspending in the Asia-Pacific region. ZenithOptimedia also projected that the advertising market in China will be one of the fastest growing advertisingmarkets in the world, at a compound annual growth rate of 10.8% from 2011 to 2014. By 2014, China is projected to account for 28.0% of the totaladvertising spending in the Asia-Pacific region. The growth of China’s advertising market is driven by a number of factors, including the rapid and sustainedeconomic growth and increases in disposable income and consumption in China. China was the second largest economy in the world in 2012 in terms ofgross domestic product, which amounted to US$8.3 trillion. 11 According to the National Bureau of Statistics of China, the annual disposable income per capita in urban households increased from RMB21,810in 2011 to RMB24,565 in 2012, representing an increase of 12.6%. Adjusted by the price factors, the actual increase was 9.6%. According to ZenithOptimedia (October, 2012), China became the third largest advertising market in the world, and by 2014, China will contributeapproximately US$43.94 billion to global advertising spending, following the United States and Japan, which contributes approximately US$173.95 billionand US$52.96 billion to global advertising spending, respectively. Japan, the largest advertising spender in the Asia-Pacific region, is only expected to growits advertising spending by 6% between 2011 and 2014, whereas an emerging market, like China, will grow its advertising spending by 36% in the sameperiod. Overall, the Asia-Pacific region, excluding Japan, is estimated to have one of the highest growth rates on a year-over-year basis from 2011 to 2014,with an average growth rate of 8.9%. China is expected to lead the growth in the region. Overview of the Internet Advertising Industry ZenithOptimedia projected that the global internet advertising market will grow by 52.5% between 2011 and 2014 and reach US$116.8 billion in2014. Within China, the internet advertising market was particularly strong and grew to approximately US$11.6 billion in 2012, according to Enfodesk(February 2013). This growth is expected to stem primarily from a higher internet penetration rate of just 42.1% by the end of 2012 (The Ministry of Industryand Information Technology of China, February 2012), the use of search engine, rich media and video and game embedded advertisements. According to“2012 China Internet Economy Report (Brief Edition)” issued by iResearch Consulting Group, the China Internet Advertising is expected to reachRMB102.4 billion Yuan ( approximately US$16.2 billion) in 2013, representing an approximate 36.0% year-over-year growth. The diagram below depictsthe Market Scale of China Internet Advertising from 2006 to 2016: High Demand for the Internet Advertising from the Franchise and Chain Store Business in China 12 We believe that the Internet advertising market in China also has significant potential for future growth due to high demand from the rapiddevelopment of franchise and chain store businesses and SMEs. According to the 2011 China Franchise Annual Development Report by China Chain Store& Franchise Association, by the end of 2010, there were approximately 4,500 franchise enterprises and 400,000 chain stores in China, which coveredapproximately 70 industries and offered over 5 million direct employment opportunities. The development of the SME market is still in its early stages in China and since their sales channels and distribution networks are stillunderdeveloped, they are driven to search for new participants by utilizing Internet advertising and marketing. The SMEs tend to be smaller, less-developedbrands primarily focused on restaurants, garments, building materials, home appliances, and entertainment with low start-up costs, ranging between US$1,000to US$15,000. The Chinese government has promulgated a series of laws and regulations to protect and promote the development of SMEs which appeals toentrepreneurs looking to benefit from the central government’s support of increased domestic demand. SMEs are now responsible for about 60% of China’sindustrial output and employment of approximately 80% of the urban Chinese workforce. SMEs are creating new urban jobs, and they are the maindestination for new graduates entering the workforce and workers laid-off from state-owned enterprises (SOEs) that re-enter the workforce. Our Principal Products and Services Our products and services include: Internet Advertising Founded in 2003, 28.com is a leading Internet portal for information about small business opportunities in China. It was one of the earliest entrantsin this sector, allowing it to currently hold a market share of over 33% in China. In 2011, we also developed two new advertising web portals, which areliansuo.com and chuangye.com. Liansuo.com is built to serve larger SMEs than 28.com with additions of other internet related services. Liansuo.com is alsointended to serve large international clients. Chuangye.com is built to serve the community of entrepreneurs to assist them developing their business, as wellas sharing their resources in a web2.0 and SNS2.0 driven interaction in combination with popular web social tools. In 2012, we further developed andupgraded the system and tools of these two websites, including customer user interface, additional integrated mobile function and cloud-based search enginemarketing and optimization in preparation for mobile search marketing and mobile search optimization. Upon acquiring Sou Yi Lian Mei NetworkTechnology (Beijing) Co., Ltd., we obtained another established online advertising and marketing portal, sooe.cn, which focuses on the smaller sized andemerging SMEs. Our internet advertising services provide advertisers with tools to build sales channels directly in the form of franchisees, sales agents, distributors,and/or resellers, and have the following features which enable them to be attractive to the advertisers:Allowing potential entrepreneurs interested in inexpensive franchise and other business ventures to find in-depth details about these businesses invarious industries and business categories, with real-time and online assistance through an instant messenger;Providing one-stop integrated internet marketing and advertising services for SMEs by offering customized services such as design, website and mini-site setup, and advertisement placement on various communication channels through intelligent based promotion systems; andBundling with advanced traffic generation techniques, search-engine optimization and marketing and other internet advertising management tools toassist our clients with monitoring, analyzing and managing their advertising on our web portals.We charge our clients a fixed monthly or annual membership fee for the internet advertising services and the related value-added technical servicesthat we provide. As of December 31, 2012, we have approximately 1,300 clients and our total revenue per month reached approximately US$1.78 million in2012, as compared to approximately US$1.67 million in 2011. This segment accounted for 46% of our revenue in 2012 and 70% of our revenue in 2011. 13 Television Advertising As part of our advertising and marketing services, we produce and distribute television shows that are comprised of advertisements similar toinfomercials, but include promotions for several clients during the allotted time. Our clients pay us for advertising spots, production and editorial coverage.The shows produced by our TV unit are distributed during airtime purchased on several provincial satellite television stations including Henan TV, JiangxiTV, and Neimenggu TV. Our total show time reached approximately 18,510 minutes in 2012, as compared to approximately 6,040 minutes in 2011. Thissegment accounted for 44% of our revenue in 2012 and 22% of our revenue in 2011. This increase in TV advertising time selling was due to enhancedcooperation with the TV station responsible for launching the entrepreneurial reality show, which is intended to get the general public to visit our websites,Chuanye.com and create additional traffic on our two advertising portals, 28.com and Liansuo.com, and in return to monetize more branded larger size smalland medium enterprises to use our services while securing our competitive advantage in the TV business segment against our competitors. Bank Kiosks We operate our bank kiosk advertising network, through Shanghai Borongdingsi. We place our kiosk machines, which include a large LCDadvertising display, in bank branches to target banking patrons. We market our LCD display network to advertisers in the financial services and insuranceindustries. As of December 31, 2012, we had a total of 610 flat-panel displays placed in branches of China Construction Bank in Henan province andShanghai Rural Commercial Bank in Shanghai. The kiosks are useful to the banks because, in addition to the LCD advertising display, they provide bankcustomers with free Internet access to on-line banking services, thereby potentially making wait times in branches for teller services more enjoyable for thebank customer. For the year ended December 31, 2012, we generated US$0.28 million revenue from this segment as compared to US$0.49 million revenue forthe year ended December 31, 2011. The bank kiosk advertising business is still in the early stages and many details still need to be further analyzed andfinalized before we allocate more capital into this business unit. It was not a significant contributor to revenue for either the year ended December 31, 2012and 2011. Management currently believes that this business is unlikely to expand in the near future and that some of the technology used in this businessunit will be fully integrated into the overall advertising and marketing platform. Brand management and sales channel building Brand management and sales channel building services, primarily include brand “iMAP” management services (investigation, modulizaiton,application and promotion) and sales channel development services. We started this business in 2011 and continue to oversee its development. With theintegration of two advertising firms in Quanzhou City, Fujian province, the PRC, we are gradually moving our business reach into the southern part of China,where many SMEs are located. Currently, this business unit has 39 clients and generated approximately US$4.5 million revenue in 2012. Our Competitive Strengths Over our eight year operating history, we believe that we have built a strong track record of significant competitive strengths. We believe that thesecompetitive strengths include: Innovative Operations · Client-based innovation. Our advertising and marketing services are intended to be a one-stop shop for advertising and marketing solutions to ourclients. These services are based on the needs of our existing clients. All of our value added services, including lead generation and capture, onlinemessaging and consulting, search engine marketing and optimization, mini-site hosting and, content management, simplify the business process forour clients by allowing them to effectively allocate their resources and budget for various advertising and marketing tools and channels. 14 · Target market innovation and expansion of audience base. We believe that by offering a multichannel communication platform, we enable SMEsto reach a wide range of consumers with complementary and mutually reinforcing advertising and marketing campaigns. We are better able to attractbusiness owners who want to reach targeted consumer groups through a number of different advertising channels in different venues and regions,and at different times of the day. Strong Technological Advantages · Advanced campaign tracking & monitoring tools. We have deployed advanced tracking, search engine optimization, resource scheduling andcontent management and ad campaign management tools to achieve effective and efficient advertising effects. · Valuable intellectual property. We have twenty-six copyright certificates and property rights for twenty-six software products in connection withthe advertising business, all of 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 chiefexecutive officer has over ten years’ experience in management. He demonstrated his entrepreneurship and business leadership by starting ourbusiness and he has successfully grown our business to become a leader in online media marketing and advertising services. He also secured ourstatus as the sole strategic alliance partner of China Construction Bank in Henan province with respect to bank kiosk advertising. George Chu, ourChief Operating Officer, has diversified and international industry experience that will help us to scale to the next level. Zhige Zhang, our ChiefFinancial Officer has over seven years’ experience in software development and Internet ad technology. In June 2012, we appointed Mr. ZhenghongYang as our Chief Technology Officer, who will oversee our information technology infrastructure and development roadmap. With in-depthknowledge of software and cloud computing technology, Mr. Yang will help us to deepen our strategic relationships with search engine partners inChina and to strengthen our brand in the SME space and accelerate the penetration of our target market in China. First Mover AdvantagesWe have over six years of operations as a vertically integrated ad portal and ad agency. We have nine years of experience as an Internet advertisingagency. We commenced our Internet advertising services business in 2003 and were among the first companies in China to create a site and a businessfocused on Internet advertising. We rapidly established a sizeable national 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 theadvertising industry and to be able to maintain a strong market share position. We are also the first company that is providing O2O (online-to-offline) saleschannel expansion services in China to small business. Growth Strategy Our objectives are to strengthen our position as the leading B2B Internet service provider on advertising, marketing, brand and sales channelmanagement solutions for sales channel expansion of SMEs in China and to continue to achieve sustainable and healthy growth on a consistent basis. Weintend to achieve these objectives by implementing the following strategies: Continue expanding the size of our potential client base with advertising solution provided by Liansuo.com and brand and sales channel expansionmanagement and expansion solutions provided by our Brand management and sales channel building segment We have been expanding our target client group to the non-franchised SMEs in 2012 with focusing on enterprises which have been in themanufacturing and exporting business and turned to domestic market in China. These businesses all experienced sharp decline in sales account of sloweconomic recovery and lower consumption demand in Europe and United States. We estimate that there are 4 million businesses that fall into the category of 15 non-franchised SMEs, and we aim to assist them in expanding their business nationally in China. We are continuing to expanding the size of our potentialclient base with advertising solution provided by Liansuo.com and brand and sales channel expansion management and expansion solutions by brand IMAP(investigation, modulizaiton, application and promotion) management service and the offline sales channel expansion service, provided by our operatingVIEs in Quanzhou and Zhao Shang Ke Hubei, our equity investment affiliate. Since 2011, we have increased our engaged client base from 2000 enterprises in2010 to more than 10,000 enterprises in 2012. Monetizing the existing customer base through the addition of cloud-computing based mobile services and management tools We intend to launch integrated cloud-computing based management tools and/or solutions to our existing clients in 2013. These tools include,among other things, elite point of sales (POS), inventory supply chain management, office automation (OA) and customer relationship management (CRM). This service is intended to increase our recurring revenues and enhance the loyalty and service satisfaction of our clients. We will continue to cross-sale theservices that were launched in 2012, including clever cloud optimizer and quick connect. Throughout the next few years, we intend to increase the depth ofthis type of service through partnerships and/or through mergers and acquisitions. Increasing our business opportunity through mergers and acquisitions to boost operational and cross-selling synergies We plan to maximize opportunities for our business with a broader client base to increase recurring revenue with lower cost by merging with, oracquiring, small regional advertising firms. We plan to accomplish cross-selling after expanding our client base through these regional advertising firms tomaterialize the synergies obtained through mergers and acquisitions. As a result, we will be able to provide additional, flexible and bundled advertising andmarketing packages that will allow SMEs to reach consumers through various communication channels. In addition, all other value added servicespreviously discussed will be provided to them, including management tools platform in the future. Building up a competitive barrier by means of technology and strategic partnerships with key internet and mobile players in China or globally Technology and strategic partnerships will allow us to solidify our industry’s leading position and broaden our client base by higher customersatisfaction and growing market awareness of our services. It will also enhance our ability to target discrete consumer groups. These technologies includetechnology area of mobile advertising with location based functionality, advertising tracking and conversion, database mining and management. Strategicpartnerships include partnerships with key mobile search engine in China, key social media as well as other internet directing portals. Sales and Marketing For the year ended December 31, 2012, we derived 46% our revenues from our Internet advertising and provision of the related technical servicesand 44% from our TV advertising, compared to 70% and 22%, respectively, for the year ended December 31, 2011. The following table sets forth a breakdown of our revenue from Internet advertising and the related technical services, by industry, for the year endedDecember 31, 2012:Industry Percentage of total revenue Food and beverage 20%Women Accessories 7%Footwear, apparel and garments 14%Home Goods and Construction Materials 13%Environmental Protection Equipment 12%Cosmetic and Health Care 15%Education Network 12%Others 7%Total 100% 16 For the year ended December 31, 2012, our TV advertising revenues were primarily achieved from cosmetics and health care, women accessories andfood and beverage industries. We employ experienced advertising sales people. We provide in-house education and training to our sales people to ensure that they provide ourcurrent and prospective clients with comprehensive information about our services, the benefits of using our advertising and marketing services and relevantinformation regarding the advertising industry. We also market our advertising services from time to time by placing advertisements on television and otherwell-known portals of China, participating in domestic and international franchise exhibitions in China and other countries and acting as a sponsor to third-party programming, as well as to our own shows. We believe our advertising clients derive substantial value from our ability to provide advertising services targeted at specific segments of consumermarkets. Market research is an important part of evaluating the effectiveness and value of our business to our customers. We conduct market research,consumer surveys, demographic analysis and other advertising industry research for internal use to evaluate new and existing advertising and marketingchannels. We also purchase or commission studies containing relevant market data from reputable third-party market research firms when necessary. Wetypically consult such studies to assist us in evaluating the effectiveness of our network to our advertisers. A number of these studies contain research on thenumbers and socio-economic and demographic profiles of the people who visit our network. Suppliers Our suppliers are major search engines, other internet gateways and regional television stations. Among these suppliers, for the year ended December31, 2012, Baidu counted for approximately 52% of our internet resource cost. For television, we have three regional television stations which supply us withtelevision airtime. Research and Development We intend to continue to optimize our Standard Operating Environment (the “SOE”) technology in order to reduce costs and the time to deploy,configure, maintain, support and manage computer servers and systems. Whether to further deploy newer technology will depend upon cost and networksecurity. We also continue to develop proprietary software and systems in connection with the operation of and provision of services through 28.com,Liansuo.com and Sooe.cn to enhance ease of use by both operators and customers. We focus on enhancing related software systems enabling us to track andmonitor advertiser demands. With the introduction of cloud-computing based technology, we will continue to integrate this technology into our onlinemanagement tools services through self-development and also by entering into alliances, partnerships, and/or mergers and acquisitions. In 2013, we intend tomove our research and development efforts to mobile-based application system and tools more aggressively. Intellectual Property As of December 31, 2012, we had twenty-six software copyright certificates issued by the State Copyright Office of the PRC (“SCO”) as set forthbelow:Name of SoftwareRegistration Number互联网用户监测及网民综合分析评价系统V1.0Software V1.0 of Internet users Monitor and General Analysis and Assess System2008SRBJ4071 17 Name of SoftwareRegistration Number互联网信息内容综合管理平台技术软件V1.0Software V1.0 of General Management Platform on Internet Information Content 2008SRBJ4097互联网广告效果监测数据分析系统软件V1.0Software V1.0 of Internet Advertising Effect Monitor and Data Analysis System 2008SRBJ4083基于互联网广告效果投放综合监测及管理平台软件 V1.0Software V1.0 of General Monitoring and Management Platform on Internet AdvertisingEffect 2008SRBJ4073基于效果的搜索引擎服务平台软件 V1.0Software 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 V1.0Software V1.0 of General Analysis and Management Platform on Internet Based AdvertisingMessage 2008SRBJ4085基于互联网广告留言综合分析及管理平台软件 V2.0Software V2.0 of General Analysis and Management Platform on Internet Based AdvertisingMessage 2010SR038775基于广告管理和OA系统的综合运营技术平台软件V1.0Software V1.0 of General Operation Technology Platform on Advertisement Management andOA System 2010SR039308互联网用户监测及网民综合分析评价系统V3.0Software V3.0 of Internet User Monitor and General Analysis System 2010SR039309互联网信息内容综合管理平台软件 V2.0Software V2.0 of General Management Platform on Internet information contents 2010SR039310基于互联网广告效果投放综合监测及管理平台软件V2.0Software V2.0 of General Analysis and Management Platform on Internet Advertising Effect 2010SR039311基于留言效果的搜索引擎服务平台软件V2.0Software V2.0 of Effect-based Search Engine Service Platform 2010SR039020基于电视媒体广告效果投放效果综合监测及管理平台软件V2.0Software V2.0 of General Analysis and Management Platform on Television AdvertisementEffect 2010SR039548基于用户中心的短信、邮件群发的管理平台软件V1.0Software V1.0 of General Management Platform on Group Mailing and Group SMS2010SR039551 18 Name of SoftwareRegistration Number 基于日志分析的访问热区和浏览轨迹分析系统V1.0Software V1.0 of Analysis System on Log-Based Visit Hotspot and Browsing Trail 2010SR039554基于用户桌面客户端的广告效果管理平台软件V1.0Software V1.0 of Management Platform on Client/Service-Based Advertisement Effect 2010SR039556SOOE 互联网效果营销工具平台软件 V1.0Software V1.0 of SOOE Internet Effect Marketing Tools Platform 2010SR017044SOOE流量统计及网民行为分析软V1.0Software V1.0 of SOOE Internet Traffic Statistic and Internet User Behavior Analysis System 2010SR017040SOOE搜索引擎效果分析软件V1.0Software V1.0 of SOOE Search Engine Effect Analysis System 2010SR017097搜易基于互联网效果营销综合服务平台软件V1.0Software V1.0 of Sou Yi General Service Platform on Internet Effect Marketing 2010SR017042BMtoBM业务综合服务平台软件V1.0Software V1.0 of General Service Platform on BMtoBM Business 2010SRBJ2389连锁加盟店面管理软件V1.0 Software V1.0 of Franchise Chain Store Management System 2010SRBJ2386连锁加盟企业综合管理平台软件V1.0Software V1.0 of General Management Platform on Franchise Chain Enterprise 2010SRBJ2388中小企业渠道管理软件V1.0Software V1.0 of Small to Medium Enterprise Sales Channel Management System 2010SRBJ2365广告效果监测数据分析软件V1.0Software V1.0 of Advertising Effect Monitor Data Analysis System 2010SRBJ7041网络营销效果综合分析及投放管理平台软件V1.0Software V1.0 of Management Platform on Internet Marketing Effect and Placement2010SRBJ7043 With this intellectual property, we can continue providing value-added services that are in demand by our customers and can track end users to helpour customers to assess and adjust their marketing strategies and enhance the 19 effectiveness and efficiency of their advertisements placed through our multi-channel advertising and marketing service platform. We increased, and plan to continue increasing, expenditures to enhance the safety of our hardware and server on which we dependent to support ournetwork and manage and monitor programs on the network. We also increased, and plan to continue increasing, investment in research and development aswe continue to expand, optimize and enhance the technologies of our portal websites, upgrade our advertising and internet management software anddevelop our cloud-computing based management tools. Competition We compete with other internet advertising companies in China, including companies that operate Internet advertising portals, such as u88.cn,3158.com and 78.cn. We compete for clients primarily on the basis of network size and coverage, location, price, the range of services that we offer and ourbrand name. We also compete for overall advertising spending with other alternative advertising media companies, such as wireless telecommunications,street furniture, billboards, frame and public transport advertising companies, and with traditional advertising media, such as newspapers, magazines andradio. 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 linesof 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 withChinese parties. Since December 10, 2005, foreign investors have been allowed to own up to 100% equity interest in PRC advertising companies. However,the foreign investor must have at least three years of direct operations outside China in the advertising industry as its core business. This requirement isreduced to two years if foreign investment in the advertising company is in the form of a joint venture. Such requirement is also included in the newlypromulgated regulation that replaced the 2004 Provision as of October 1, 2008, except that according to the new regulation, the establishment of whollyforeign-owned advertising companies must be approved by the SAIC or its authorized provincial counterparts and provincial MOFCOM, instead of the SAICand MOFCOM only. Foreign-invested advertising companies can engage in advertising design, production, publishing and agency, provided that certainconditions 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, RiseKing WFOE, is ineligible to apply for the required licenses for providing advertising services in China. Our advertising business is operated by BusinessOpportunity Online and Beijing CNET Online in China. We have been, and are expected to continue to be, dependent on these companies to operate ouradvertising business. We do not have any equity interest in our PRC Operating Entities, but Rise King WFOE, receives the economic benefits of the samethrough the Contractual Arrangements. We have been advised by our PRC counsel, that each of the Contractual Agreements complies, and immediately after the completion of thetransactions contemplated herein, will comply with all applicable PRC laws and regulations and does not violate, breach, contravene or otherwise conflictwith any applicable PRC laws, rules or regulations. However, there exist substantial uncertainties regarding the application, interpretation and enforcement ofcurrent and future PRC laws and regulations and their potential effect on corporate structure and contractual arrangements. The interpretation of these lawsand regulations are subject to the discretion of competent PRC 20 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 determinethat its corporate structure and contractual arrangements violate PRC laws, rules and regulations. In the event that the PRC regulatory authorities determinein their discretion that our corporate structure and contractual arrangements violate applicable PRC laws, rules and regulations, including restrictions onforeign 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 whichbecame effective on February 1, 1995. According to the currently effective Advertising Law and its various implementing rules, companies engaging inadvertising activities must obtain from the SAIC or its local branches a business license which specifically includes within its scope the operation of anadvertising business. Companies conducting advertising activities without such a license may be subject to penalties, including fines, confiscation ofadvertising 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 localbranches of the SAIC as required by existing PRC regulations. We do not expect to encounter any difficulties in maintaining the business license. However, ifwe 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. Itprovides 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, outdooradvertisements in China must be registered with the local SAIC before dissemination. The advertising distributors are required to submit a registrationapplication form and other supporting documents for registration. After review and examination, if an application complies with the requirements, the localSAIC 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 localSAICs 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 ofthe advertisements. It is unclear whether the SAIC, or any of its local branches in the municipalities and provinces covered by our network, will deem ourbusiness as an outdoor advertising business, and thus require us to obtain the Outdoor Advertising Registration Certificate. If the PRC governmentdetermines that we are obligated to complete outdoor advertisement registration as an outdoor advertising network operator, we may be subject toadministrative 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 Noticepursuant 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, 21 shopping malls, banks, hospitals and other outdoor public media would be subject to approval by the SARFT. The December 2007 Notice required the localbranches of SARFT to investigate and record any organization or company engaging in the activities described in the December 2007 Notice withoutpermission, to send written notices to such organizations or companies demanding their compliance with the December 2007 Notice, and to report the resultsof such investigations to SARFT by January 15, 2008. We have not yet received any notice from the SARFT or any of its local branches demandingcompliance with the December 2007 Notice. We may, however, be required to obtain an approval from SARFT under the December 2007 Notice, or may berequired 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 alsospecific 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 andveterinary pharmaceuticals, together with any other advertisements which are subject to censorship by administrative authorities according to relevant lawsor 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 regulationsto ensure that the content of the advertisements they prepare or distribute is true and in full compliance with applicable laws. In providing advertisingservices, advertising operators and advertising distributors must review the supporting documents provided by advertisers for advertisements and verify thatthe content of the advertisements complies with applicable PRC laws, rules and regulations. Prior to distributing advertisements that are subject togovernment censorship and approval, advertising distributors are obligated to verify that such censorship has been performed and approval has beenobtained. Violation of these regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of theadvertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the SAIC or itslocal branches may revoke violators’ licenses or permits for their advertising business operations. Furthermore, advertisers, advertising operators oradvertising distributors may be subject to civil liability if they infringe on the legal rights and interests of third parties in the course of their advertisingbusiness. We do not believe that advertisements containing content subject to restriction or censorship comprise a material portion of the advertisementsdisplayed on our media network. However, there can be no assurance that each advertisement displayed on our network complies with relevant PRCadvertising laws and regulations. Failure to comply with PRC laws and regulations relating to advertisement content restrictions governing the advertisingindustry 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 protectionof the exclusive rights of trademark owners. In order to enjoy an exclusive right to use a trademark, one must register the trademark with the TrademarkBureau 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, 1984and subsequently amended in 1992 and 2000. The Patent Law extends 22 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 solutionrelating to a product, a process or improvement. When compared to existing technology, an invention patent has prominent substantive features andrepresents notable progress. A utility patent refers to any new technical solution relating to the shape, the structure, or their combination, of a product. Utilitypatents 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 productor their combinations, which creates an aesthetic feeling and are suitable for industrial application. Inventors or designers must register with the StateIntellectual Property Office to obtain patent protection. The term of protection is twenty years for invention patents and ten years for utility patents anddesign patents. Unauthorized use of patent constitutes an infringement and the patent holders are entitled to claims of damages, including royalties, to theextent 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 onSeptember 7, 1990 and amended on October 27, 2001. Unlike patent and trademark protection, copyrighted works do not require registration for protectionin China. However, copyright owners may wish to voluntarily register with China’s National Copyright Administration to establish evidence of ownership inthe 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 PRCregulations 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 relevantPRC 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 orits 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 currencypayments 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 localbranch. Foreign currencies received under current account items can be either retained or sold to financial institutions engaged in the foreign exchangesettlement or sales business without prior approval from SAFE by complying with relevant regulations. Foreign exchange income under capital account canbe retained or sold to financial institutions engaged in foreign exchange settlement and sales business, with prior approval from SAFE unless otherwiseprovided. Our business operations, which are subject to the foreign currency exchange regulations, have all been implemented in accordance with theseregulations. We will take steps to ensure that our future operations comply 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 andInbound Investment via Overseas Special Purpose Vehicles, or Circular No. 75. Dividend Distribution The principal laws, rules and regulations governing dividends paid by PRC operating subsidiaries and VIEs include the Company Law of the PRC(1993), as amended in 2006, the Wholly Foreign Owned Enterprise Law (1986), 23 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 and VIEs, including wholly owned foreign enterprises, or WFOEs, and domestic companies in China, may pay dividends only out of theiraccumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, its PRC significant subsidiaries and VIEs,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 totheir statutory capital reserve fund until the cumulative amount of such reserve reaches 50% of their respective registered capital. These reserves are notdistributable 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’sRepublic of China, or EIT Law, which became effective on January 1, 2008. On November 28, 2007, the State Council at the 197th Executive Meetingpassed the Regulation on the Implementation of the Income Tax Law of the People’s Republic of China, which became effective on January 1, 2008. TheEIT Law adopted a uniform tax rate of 25% for all enterprises (including foreign-invested enterprises) and revoked the existing tax exemption, reduction andpreferential 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 anenterprise 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 effectivedate 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 theImplementation Rules, enterprises established under PRC laws, or enterprises established outside China whose “de facto management bodies” are located inChina, are considered “resident enterprises” and subject to the uniform 25% enterprise income tax rate for their global income. According to theImplementation Rules, “de facto management body” refers to a managing body that in practice exercises overall management and control over theproduction and business, personnel, accounting and assets of an enterprise. Our management is currently based in China and is expected to remain in Chinain the future. In addition, although the EIT Law provides that “dividends, bonuses and other equity investment proceeds between qualified residententerprises” is exempted income, and the Implementation Rules refer to “dividends, bonuses and other equity investment proceeds between qualified residententerprises” as the investment proceeds obtained by a resident enterprise from its direct investment in another resident enterprise, however, it is unclearwhether 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) haveestablishments or premises of business in China, but the relevant income does not have actual connection with their establishments or premises of business inChina. 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 inwhich its non-PRC shareholders reside. Under the Double Tax Avoidance Arrangement between Hong Kong and Mainland China, if the Hong Kong residententerprise owns more than 25% of the equity interest in a company in China, the 10% withholding tax on the dividends the Hong Kong resident enterprisereceived 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 TaxAvoidance 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 subjectto the reduced income tax rate of 5% under the Double Tax Avoidance Arrangement. However, based on the Notice on Certain Issues with Respect to theEnforcement of Dividend Provisions in Tax Treaties, issued on February 20, 2009 by the State Administration of Taxation, if the relevant PRC tax authoritiesdetermine, in their discretion, that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, suchPRC 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 materialadverse effect on our net income in 2008 and beyond. Reduction or elimination of the financial subsidies or preferential tax treatments we currently enjoy orimposition of additional 24 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 benotified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise and any of the followingsituations exist: (i) the transaction involves an important industry in China; (ii) the transaction may affect national “economic security”; or (iii) the PRCdomestic enterprise has a well-known trademark or historical Chinese trade name in China. The M&A Rules also contain a provision requiring offshore SPVsformed for the purpose of the overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals, toobtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC issued aclarification 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 seekoverseas 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 regulationsor 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’ssecurities on an overseas stock exchange, the M&A Rules do not require that we obtain prior CSRC approval because: (i) the Share Exchange isa purely foreign related transaction governed by foreign laws, not subject to the jurisdiction of PRC laws and regulations; (ii) we are not aspecial purpose vehicle formed or controlled by PRC companies or PRC individuals; and (iii) we are owned or substantively controlled byforeigners. However, the interpretation and application of the M&A Rules remain unclear, and the PRC government authorities have the sole discretion todetermine whether the transaction is subject to the approval of the CSRC, especially when taking into consideration of the performance-based incentiveoption arrangement by way of the Share Transfer Agreements. If the CSRC or another PRC regulatory agency subsequently determines that CSRC approval isrequired 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 fromthe 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 fromthe 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 businesscombination would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies. These sanctions could include fines and penalties onour operations in China, restrictions or limitations on our ability to pay dividends outside of China, and other forms of sanctions that may materially andadversely 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 needto 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 businesscombination. 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 bythe CSRC and other PRC regulatory agencies. These sanctions could include fines and penalties on our operations in China, restrictions or limitations on ourability to pay dividends outside of China, and other forms of sanctions that may materially and adversely affect our business, results of operations andfinancial condition. 25 The M&A Rules also established additional procedures and requirements expected to make merger and acquisition activities in China by foreigninvestors more time-consuming and complex, including requirements in some instances that the MOC be notified in advance of any change-of-controltransaction in which a foreign investor takes control of a PRC domestic enterprise. These rules may also require the approval from the MOC where overseascompanies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. Complying with the requirements of the newregulations to complete such transactions could be time-consuming, and any required approval processes, including MOC approval, may delay or inhibit ourability to complete such transactions, which could affect our ability to expand our business. Employees As of December 31, 2012, we had 462 full-time employees, 116 of whom are in sales and marketing, 145 of whom are in operations and support, 94of whom are in management and administration and 107 of whom are in technology support 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 unemployment benefit plans. We are required under PRC laws to makecontributions to the employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximumamount specified by the local government from time to time. Members of the retirement plan are entitled to a pension equal to a fixed proportion of the salaryprevailing 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 contractwith other employees for a set period of years. According to these contracts, all of our employees are prohibited from engaging in any activities that competewith our business during the period of their employment with us. Furthermore, the employment contracts with officers or managers include a covenant thatprohibits 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. Ourtelephone number at this address is (86 10) 51600828 and our fax number is (86 10) 88857816. For more information, see www.chinanet-online.com. ITEM 1A. RISK FACTORS In addition to the other information in this Form 10-K, readers should carefully consider the following important factors. These factors, amongothers, in some cases have affected, and in the future could affect, our financial condition and results of operations and could cause our future results todiffer materially from those expressed or implied in any forward-looking statements that appear in this on Form 10-K or that we have made or will makeelsewhere . Risks Related to Our Business The decline of global and China’s economy has had, and may continue to have, a negative effect on our business, and could have a material adverseeffect on our business, financial condition, results of operations and cash flow. The China economy is in a slow recovery from the sharp decline incurred in mid 2011 with increasing housing price and inflation, which impact the overallconsumer spending power. With the lower consumption will, small businesses 26 or so-called small and medium enterprises have lower intention to spend more on their advertising and have intention to slow down their expansion. Theglobal and China’s economy has recovered slower than the anticipation, which has caused, among other things, for example, tightening in the credit markets,lower levels of liquidity, higher default and bankruptcy rates in small businesses, lower consumer and business spending, and lower consumer net worth, inChina and other parts of the world. These global economic uncertainties and the slow recovery of China’s economy have had, and may continue to have, anegative 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 alsoimpair our ability to borrow funds or enter into other financial arrangements if and when additional founds become necessary for our operations. We believemany of our advertisers have also been affected by the current economic slowdowns in China. Current or potential advertisers may no longer be in business,may be unable to continue to purchase advertising 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 tooffset the results of a prolonged or severe economic downturn given our fixed costs associated with our operations. Therefore, the global uncertainties and thedownward trend of China’s economy from 2011 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 conditionswill 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. Accordingly, our limitedoperating history and the early stage of development of the markets in which we operate makes it difficult to evaluate the viability and sustainability of ourbusiness and its acceptance by advertisers and consumers. Although we generated profits every year since our incorporation, we cannot assure you that wewill 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. Anysignificant 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 serviceswe 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, toensure 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 businessopportunities that are not legitimate and 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 misleadinginformation. 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 fraud, and the fraud victim asserted she joinedthe store because she trusted the website. Pursuant to the PRC advertising law, Business Opportunity Online, as the publisher of advertisement, has theobligation to check relevant documents and verify the content of the advertisement. For commercial franchise business in China, a franchiser needs to file anapplication with the MOC or its local branches through the website http://txjy.syggs.mofcom.gov.cn/. When a franchiser publishes an advertisement throughBusiness Opportunity Online, Business Opportunity Online checks the business license, the franchiser’s registration form, the trade mark certificate and otherrelevant documents to verify the content of the advertisement. The Internet information services regulations and the unfair competition regulations havesimilar requirements for Internet advertisement publishers. Based on the laws and regulations above, it is our view that there is neither any mandatoryrequirement that Business Opportunity Online bear any responsibility for the 27 franchiser’s business activities, nor any valid action or investigation that can be brought by the consumer or the government against Business OpportunityOnline based on the franchiser’s business activities. Nevertheless, the possibility remains that Business Opportunity Online may be required to assume civiland 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 ourbusiness 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 revenueswith many forms of more established advertising media. Our success depends on the acceptance of our advertising platforms by advertisers and theircontinuing interest in this media as part of their advertising strategies. Our success also depends on the viewing public’s continued receptiveness towards ouradvertising 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 notprovide sufficient value as an effective advertising medium. If a substantial number of advertisers lose interest in advertising on our platforms, we will beunable to generate sufficient revenues and cash flows to operate our business, and our financial condition and results of operations would be materially andadversely affected. We operate in the advertising industry, which is particularly sensitive to changes in economic conditions and advertising trends. Advertising spending by our clients, is particularly sensitive to changes in general economic conditions. For example, advertising expenditurestypically decrease during periods of economic downturn. Advertisers may reduce the amount of money they spend to advertise on our advertising platformsfor a number of reasons, including: · a general decline in economic conditions; · a decline in economic conditions in the particular cities where we conduct business; · a decision to shift advertising expenditures to other available less expensive advertising media; and · a decline in advertising spending in general. A decrease in the demand for advertising media in general, and for our advertising services in particular, would materially and adversely affect ourability to generate revenues, and have a material 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 fromour website portals could be materially and adversely affected. Our future revenues and profits from our online advertising agency business that we operate through our website portals are dependent in part uponadvertisers in China increasingly accepting the use of the Internet as a marketing channel, which is at an early stage in China. Penetration rates for personalcomputers, the Internet and broadband in China are all relatively low compared to those in more developed countries. Furthermore, many Chinese Internetusers 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 havelimited experience with the Internet as a marketing channel, and have not historically devoted a significant portion of their marketing budgets to Internetmarketing and promotion. As a result, they may not consider the Internet as effective in promoting their products and services as traditional print andbroadcast media. We face significant competition, and if we do not compete successfully against new and existing competitors, we may lose our market share, and ourprofitability 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 havecompetitive advantages, such as significantly greater financial, marketing or other 28 resources, and may successfully mimic and adopt our business models. Moreover, increased competition will provide advertisers with a wider range of mediaand advertising service alternatives, which could lead to lower prices and decreased revenues, gross margins and profits. We cannot assure you that we will beable 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 businessand prospects. We have been expanding our operations and plan to continue to expand in China. To meet the demand of advertisers for broader coverage, we mustcontinue to expand our platforms by showing our TV productions and advertisements on more television stations, and expanding the capacity and enhancingthe technology advantages of our internet advertising portals. The continued growth of our business has resulted in, and will continue to result in, substantialdemand on our management, operational and other resources. In particular, the management of our growth will require, among other things: · increased sales and sales support activities; · improved administrative and operational systems; · enhancements to our information technology system; · stringent cost controls and sufficient working capital; · strengthening of financial and management controls; and · hiring and training of new personnel. As we continue this effort, we may incur substantial costs and expend substantial resources. We may not be able to manage our current or futureoperations effectively and efficiently or compete effectively in new markets we enter. If we are not able to manage our growth successfully, our business andprospects 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 George K. Chu, our chief operating officerare essential to our ability to continue to grow our business. They have established relationships within the industries in which we operate. If they were toleave us, our growth strategy might be hindered, which could limit our ability to increase revenue. In addition, we face competition for attracting skilled personnel with increasing labor cost. If we fail to attract and retain qualified personnel to meetcurrent 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 andfinancial position. We may need additional cash resources due to changed business conditions or other future developments. If these sources are insufficient to satisfyour cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The incurrence of indebtedness would result inincreased 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: · investors’ perception of, and demand for, securities of alternative advertising media companies; 29 · conditions of the U.S. and other capital markets in which we may seek to raise funds; · our future results of operations, financial condition and cash flow; · PRC governmental regulation of foreign investment in advertising service companies in China; · economic, political and other conditions in China; and · PRC governmental policies relating to foreign currency borrowings. 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 businessdepends in part upon our continued ability to use our brand, trade names and copyrights to further develop and increase brand awareness. The infringementof our trade names and copyrights could diminish the value of our brand and its market acceptance, competitive advantages or goodwill. In addition, ourinformation and operational systems, which have not been patented or otherwise registered as our property, are a key component of our competitiveadvantage 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 areunable to adequately protect our brand, trade names, copyrights, domain name and other intellectual property rights, we may lose these rights and ourbusiness may suffer materially. Further, unauthorized use of our brand, domain name or trade names could cause brand confusion among advertisers and harmour 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, financialcondition and results of operations. We are dependent upon our computer software and hardware systems in supporting our network and managing and monitoring programs on thenetwork. In addition, we rely on our computer hardware for the storage, delivery and transmission of the data on our network. Any system failure thatinterrupts the input, retrieval and transmission of data or increases the service time could disrupt our normal operation. Any failure in our computer softwareor hardware systems could decrease our revenues and harm our relationships with advertisers and consumers, which in turn could have a material adverseeffect on our business, financial condition and results of operations. We have limited insurance coverage. The insurance industry in China is still in the early stages of development. Insurance companies in China offer limited insurance products. We havedetermined that the risks of disruption or liability from our business, the loss or damage to our property, including our facilities, equipment and officefurniture, the cost of insuring for these risks, and the difficulties associated with acquiring such insurance on commercially reasonable terms make itimpractical for us to have such insurance. As a result, we do not have any business liability, disruption, litigation or property insurance coverage for ouroperations in China except for insurance on some company owned vehicles. Any uninsured occurrence of loss or damage to property, or litigation or businessdisruption 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 maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reportingobligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, causeinvestors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our Common Stock. 30 Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We maintain a system of internalcontrol over financial reporting, which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financialofficer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptedaccounting principles. As a public company, we have significant additional requirements for enhanced financial reporting and internal controls. We are required todocument and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requiresannual management assessments of the effectiveness of our internal controls over financial reporting. The process of designing and implementing effectiveinternal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments andto 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 cannotassure 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 adequatecontrols over our financial processes and reporting in the future as we continue our growth. If we are unable to maintain appropriate internal financialreporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm ouroperating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negativeeffect on the market price for shares of our Common Stock. 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 governmentalrestrictions on foreign investment in the advertising industry, we could be subject to severe penalties. All of our operations are conducted through our PRC subsidiary and PRC Operating Entities, or VIEs, and through our contractual agreements witheach of our PRC Operating Entities in China. PRC regulations require any foreign entities that invest in the advertising services industry to have at least twoyears 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 ofChina 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 currentlydirectly operate an advertising business outside of China and cannot qualify under PRC regulations any earlier than two or three years after we commenceany such operations outside of China or until we acquire a company that has directly operated an advertising business outside of China for the requiredperiod of time. Our PRC Operating Entities hold the requisite licenses to provide advertising services in China. Our PRC Operating Entities directly operateour advertising network. We have been and are expected to continue to be dependent on these PRC Operating Entities to operate our advertising business forthe foreseeable future. We have entered into Contractual Agreements with the PRC Operating Entities, pursuant to which we, through Rise King WFOE,provide technical support and consulting services to the PRC Operating Entities. In addition, we have entered into agreements with our PRC OperatingEntities and each of their shareholders which provide us with the substantial ability to control these affiliates. If we or our existing or future PRC Operating Entities are found to be in violation of any existing or future PRC laws or regulations or fail to obtainor 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: · revoking the business and operating licenses of Rise King WFOE and/or the PRC Operating Entities; · discontinuing or restricting the operations of Rise King WFOE and/or the PRC Operating Entities; 31 · imposing conditions or requirements with which we, Rise King WFOE and/or our PRC Operating Entities may not be able to comply; · requiring us or Rise King WFOE and/or PRC Operating Entities to restructure the relevant ownership structure or operations; or · restricting or prohibiting our use of the proceeds of this offering to finance our business and operations in China. 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 Entities and their shareholders for our China operations, which may not be as effectivein providing operational control as direct ownership. We rely on contractual arrangements with our PRC Operating Entities and their shareholders to operate our advertising business. These contractualarrangements may not be as effective in providing us with control over the PRC Operating Entities as direct ownership. If we had direct ownership of the PRCOperating Entities, 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 couldaffect changes, subject to any applicable fiduciary obligations, at the management level. However, under the current contractual arrangements, as a legalmatter, if the PRC Operating Entities or any of their subsidiaries and shareholders fail to perform its or their respective obligations under these contractualarrangements, we may have to incur substantial costs and resources to enforce such arrangements, and rely on legal remedies under PRC laws, includingseeking specific performance or injunctive relief, and claiming damages, which we cannot assure you to be effective. Accordingly, it may be difficult for us tochange our corporate structure or to bring claims against the PRC Operating Entities if they do not perform their obligations under its contracts with us or ifany of the PRC citizens who hold the equity interest in the PRC Operating Entities 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 litigationin the PRC. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRClegal 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 thePRC legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, wemay 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 Entities may be subject to scrutiny by the PRC tax authorities and a findingthat we owe additional taxes or are ineligible for our tax exemption, or both, could substantially increase our taxes owed, and reduce our net incomeand 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 thetransactions we have entered into among our subsidiary and affiliated entities are found not to be on an arm’s-length basis, or to result in an unreasonablereduction 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 PRCentities and assess late payment interest and penalties. If any of our PRC Operating Entities incurs debt on its own behalf in the future, the instruments governing the debt may restrict their ability to paydividends or make other distributions to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractualarrangements 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 OperatingEntities only out of their retained earnings, if any, determined in accordance with PRC accounting standards and regulations. Under PRC laws andregulations, each of the PRC Operating Entities is 32 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. Inaddition, subject to certain cumulative limits, the statutory general reserve fund requires annual appropriations of 10% of after-tax income to be set asideprior 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 oftheir 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 uscould materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends, orotherwise 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, importsand sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on ourbusiness, results of operations and financial condition. Under its current leadership, the Chinese government has been pursuing economic reform policies thatencourage private economic activity and greater economic decentralization. There is no assurance, however, that the Chinese government will continue topursue 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 in China. We anticipate that sales of our services in China will continue to represent a substantialproportion of our total sales in the near future. Any significant decline in the condition of the PRC economy could adversely affect consumer demand of ourservices, 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 ChineseRenminbi 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 the local currency as their functional currencies. Substantially all of ourrevenue and expenses are in Chinese Renminbi. We are subject to the effects of exchange rate fluctuations with respect to any of these currencies. Forexample, the value of the Renminbi depends to a large extent on Chinese government policies and China’s domestic and international economic andpolitical 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 governmentchanged 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 andmanaged band against a basket of certain foreign currencies. As a result of this policy change, Chinese Renminbi continually appreciated approximately2.6% against the U.S. dollar in 2005, 3.2% in 2006, 6.4% in 2007, 6.3% in 2008, 0.2% in 2009, 3.3% in 2010, 3.7% in 2011 and 0.8% in 2012. It is possiblethat the Chinese government could adopt a more flexible currency policy, which could result in more significant fluctuation of Chinese Renminbi against theU.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 theU.S. dollar strengthens against foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operatingexpenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of theseforeign currency denominated transactions results in increased revenue, operating expenses and net income for our international operations. We are alsoexposed to foreign exchange rate fluctuations as we convert the financial 33 statements of our foreign operating subsidiary and VIEs into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, theconversion of the foreign subsidiary and VIEs’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component ofother comprehensive income. In addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functionalcurrency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a transaction gain or loss. We have notentered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness ofany 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 currentaccount items, conversion of Chinese Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires theapproval 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 ouroperations or those Chinese regulatory authorities will not impose greater restrictions on the convertibility of Chinese Renminbi in the future. Because asignificant amount of our future revenue may be in the form of Chinese Renminbi, our inability to obtain the requisite approvals or any future restrictions oncurrency exchanges could limit our ability to utilize revenue generated in Chinese Renminbi to fund our business activities outside of China, or to repayforeign 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 toenforce commercial claims or to resolve commercial disputes is unpredictable. If our new business ventures are unsuccessful, or other adverse circumstancesarise 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 fromaccessing important information regarding the financial and business operations of these acquired companies. The resolution of these matters may be subjectto the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute mayinfluence their determination. Any rights we may have to specific performance, or to seek an injunction under PRC law, in either of these cases, are severelylimited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrenceof 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 otherprohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some of our competitors, are notsubject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in mainland China. If ourcompetitors engage in these practices, they may receive preferential treatment from personnel of some companies, giving our competitors an advantage insecuring business or from government officials who might give them priority in obtaining new licenses, which would put us at a disadvantage. Although weinform our personnel that such practices are illegal, we cannot assure you that our employees or other agents will not engage in such conduct for which wemight 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 exchangebusiness. The Renminbi is not a freely convertible currency, and the restrictions on currency exchanges may limit our ability to use revenues generated inRenminbi to fund our business activities outside the PRC or to make dividends or 34 other payments in United States dollars. The PRC government strictly regulates conversion of Renminbi into foreign currencies. Over the years, foreignexchange regulations in the PRC have significantly reduced the government’s control over routine foreign exchange transactions under current accounts. Inthe PRC, the State Administration for Foreign Exchange, or the SAFE, regulates the conversion of the Renminbi into foreign currencies. Pursuant toapplicable PRC laws and regulations, foreign invested enterprises incorporated in the PRC are required to apply for “Foreign Exchange RegistrationCertificates.” Currently, conversion within the scope of the “current account” (e.g. remittance of foreign currencies for payment of dividends, etc.) can beeffected 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 weface and create regulatory uncertainties. On August 8, 2006, the Ministry of Commerce (the “MOC”), joined by the China Securities Regulatory Commission (the “CSRC”), State-ownedAssets Supervision and Administration Commission of the State Council (the “SASAC”), the State Administration of Taxation (the “SAT”), the StateAdministration of Industry and Commerce (the “SAIC”), and SAFE, jointly promulgated a rule entitled the Provisions Regarding Mergers and Acquisitions ofDomestic Enterprises by Foreign Investors (the “M&A Rules”), which took effect as of September 8, 2006. This new regulation, among other things, hascertain provisions that require special purpose vehicles, or SPVs, formed for the purpose of acquiring PRC domestic companies and controlled by PRCindividuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock market. However, the new regulation does notexpressly provide that approval from the CSRC is required for the offshore listing of the SPV which acquires, directly or indirectly, equity interest or shares ofdomestic PRC entities held by domestic companies or individuals by cash payment, nor does it expressly provide that approval from CSRC is not requiredfor the offshore listing of a SPV which has fully completed its acquisition of equity interest of domestic PRC equity prior to September 8, 2006. OnSeptember 21, 2006, the CSRC published on its official website a notice specifying the documents and materials that are required to be submitted forobtaining 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 offshorecompany such as us which owns controlling contractual interest in the PRC Operating Entities. We believe that the M&A Rules and the CSRC approval arenot required in the context of the share exchange under our transaction because (i) such share exchange is a purely foreign related transaction governed byforeign 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 theCSRC, would reach the same conclusion, and we still cannot rule out the possibility that CSRC may deem that the transactions effected by the shareexchange 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 facesanctions by the CSRC or another PRC regulatory agency. If this happens, these regulatory agencies may impose fines and penalties on our operations in thePRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC, restrict or prohibit paymentor 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 makingit 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 relevantgovernment 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 uponcompliance with the SAFE registration requirements by such Chinese domestic residents, over whom we may have no control. In addition, such Chinesedomestic residents may be unable to complete the necessary 35 approval and registration procedures required by the SAFE regulations. Such uncertainties may restrict our ability to implement our acquisition strategy andadversely 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 onour relationship with the local government in the province in which we operate our business. Chinese government has exercised and continues to exercisesubstantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may beharmed 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 localgovernments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expendituresand efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including anydecision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in theimplementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us todivest 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 adoptionby Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and containinflation. High inflation may in the future cause Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibiteconomic activity in China, and thereby harm the market for our services. 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 mayexperience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of accountand corporate records and instituting business practices that meet Western standards. We may have difficulty establishing adequate management, legal andfinancial 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 UnitedStates 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 andexecutive 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 uponsome of our directors and senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securitieslaws. 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 reciprocalrecognition 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 ofJanuary 1, 2008. The new EIT Law imposes a unified income tax rate of 25% on all companies established in China. Under the EIT Law, an enterpriseestablished 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 36 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 thePRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our global income will be subject to PRC income tax ata tax rate of 25%. With the introduction of the EIT Law, China has resumed imposition of a withholding tax (10% in the absence of a bilateral tax treaty or newdomestic regulation reducing such withholding tax rate to a lower rate). Per the Double Tax Avoidance Arrangement between Hong Kong and MainlandChina, a Hong Kong company as the investor, which is considered a “non-resident enterprise” under the EIT Law, may enjoy the reduced withholding taxrate 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 ofour 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, wecannot assure whether such dividends may be taxed at a reduced withholding tax rate of 5% per the Double Tax Avoidance Arrangement between HongKong 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 KingWFOE 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 inTax Treaties, issued on February 20, 2009 by the State Administration of Taxation, if the relevant PRC tax authorities determine, in their discretion, that acompany benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may adjust thepreferential 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 ofnumerous terms as well as the interpretation and specific applications of various provisions unclear and unspecified. Any increase in our tax rate in the futurecould 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 consequencesto 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 “residententerprise,” meaning that it can be treated the same as a Chinese enterprise for enterprise income tax purposes. The implementing rules of the new EIT Lawdefines “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 PRCtax 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 incometax reporting obligations. This would mean that income such as interest on offering proceeds and other non-China source income would be subject to PRCenterprise 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 subsidiarywould qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchangecontrol authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities thatare 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 bytheir employees who are subject to PRC individual income tax. If they fail to withhold or pay such individual income tax in accordance with applicablePRC 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 Entities will be obligated to withhold and pay individual income tax in respect of thesalaries and other income received by their employees who are subject to PRC 37 individual income tax. Such companies may be subject to certain sanctions and other liabilities under PRC laws in case of failure to withhold and payindividual 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 (whichcould include both PRC employees and expatriate employees subject to PRC individual income tax) are required to pay PRC individual income tax inrespect of their income derived from exercising or otherwise disposing of their stock options. Our PRC entities will be obligated to file documents related toemployee 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 orelsewhere, 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 legalcases have little precedential value. Although legislation in the PRC over the past 30 years has significantly improved the protection afforded to variousforms of foreign investment and contractual arrangements in the PRC, these laws, regulations and legal requirements are relatively new. Due to the limitedvolume of published judicial decisions, their non-binding nature, the short history since their enactments, the discrete understanding of the judges orgovernment agencies of the same legal provision, inconsistent professional abilities of the judicators, and the inclination to protect local interest in the courtrooms, interpretation and enforcement of PRC laws and regulations involve uncertainties, which could limit the legal protection available to us, and foreigninvestors, 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. Inaddition, 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) thatmay have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until a period of time after the violation. Inaddition, any litigation in the PRC, regardless of outcome, may be protracted and result in substantial costs and diversion of resources and managementattention. 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 tooccur. Our executive officers, directors, and principal stockholders hold approximately 36% of our outstanding Common Stock. Accordingly, thesestockholders are able to exert substantial influence over all matters requiring stockholder approval, including the election of directors and approval ofsignificant corporate transactions. This could delay or prevent an outside party from acquiring or merging with us even if our other stockholders wanted it tooccur. 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 bemaintained in the future. As of April 12, 2013, the closing trade price of our Common Stock was $0.75 per share. As of April 12, 2013, we had approximately635 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 hada trading range with a low price of $0.37 per share and a high price of $4.65 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 factorsthat may materially affect the market price of our Common Stock are beyond 38 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 ourcommon stock. These factors may materially adversely affect the market price of our Common Stock, regardless of our performance. In addition, the publicstock markets have experienced extreme price and trading volume volatility particularly for companies whose primary operations are located in the PRC.This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to the operating performance ofthe 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 notprovide coverage of the Company since there is little incentive to brokerage firms to recommend the purchase of its Common Stock. No assurance can begiven that brokerage firms will want to conduct any secondary offerings on behalf of the Company in the future. The outstanding warrants and options may adversely affect us in the future and cause dilution to existing stockholders. We currently have warrants outstanding to purchase up to 2,363,456 shares of our Common Stock, which will expire on August 20, 2014. Theexercise price of these warrants ranges from $2.50 to $3.75 per share, subject to adjustment in certain circumstances. We also have common stock optionsoutstanding to purchase up to 54,000 shares of our Common Stock, issued to our independent directors, which will expire on November 30, 2014. Theexercise price of these options is $5.00 per share. On November 30, 2011, we also issued common stock options to purchase up to 885,440 shares of ourCommon Stock in the aggregate to our management, executive directors and employees, subject to forfeiture upon an employee's cessation of employment atthe discretion of the Company. The exercise price of these options is $1.20 per share and these options will expire on November 30, 2021. Exercise of thesewarrants and options 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 these warrants and options could have a depressive effect on the price of ourstock, particularly if there is not a coinciding increase in demand by purchasers of our Common Stock. Further, the terms on which we may obtain additionalfinancing during the period any of these warrants and options remain outstanding may be adversely affected by the existence of these warrants and options aswell. We may need additional capital and may sell additional securities or other equity securities or incur indebtedness, which could result in additionaldilution 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 oracquisitions we may decide to pursue. If our cash resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debtsecurities or obtain a credit facility. The sale of additional equity securities or equity-linked debt securities could result in additional dilution to ourshareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants thatwould 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 ourstock. We have never paid any cash dividends on our Common Stock and do not anticipate paying any cash dividends on our common stock in theforeseeable 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. 39 Techniques employed by manipulative short sellers in Chinese small cap stocks may drive down the market price of our common stock. Short selling is the practice of selling securities that the seller does not own but rather has, supposedly, borrowed from a third party with theintention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securitiesbetween the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it receivedin the sale. As it is therefore in the short seller’s best interests for the price of the stock to decline, many short sellers (sometime known as “disclosed shorts”)publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative marketmomentum and generate profits for themselves after selling a stock short. While traditionally these disclosed shorts were limited in their ability to accessmainstream business media or to otherwise create negative market rumors, the rise of the Internet and technological advancements regarding documentcreation, videotaping and publication by weblog (“blogging”) have allowed many disclosed shorts to publicly attack a company’s credibility, strategy andveracity by means of so-called research reports that mimic the type of investment analysis performed by large Wall Street firm and independent researchanalysts. These short attacks have, in the past, led to selling of shares in the market, on occasion in large scale and broad base. Issuers with businessoperations based in China and who have limited trading volumes and are susceptible to higher volatility levels than U.S. domestic large-cap stocks, can beparticularly vulnerable to such short attacks. These short seller publications are not regulated by any governmental, self-regulatory organization or other official authority in the U.S., are notsubject to the certification requirements imposed by the Securities and Exchange Commission in Regulation AC (Regulation Analyst Certification) and,accordingly, the opinions they express may be based on distortions of actual facts or, in some cases, fabrications of facts. In light of the limited risksinvolved in publishing such information, and the enormous profit that can be made from running just one successful short attack, unless the short sellersbecome subject to significant penalties, it is more likely than not that disclosed shorts will continue to issue such reports. While we intend to strongly defend our public filings against any such short seller attacks, oftentimes we are constrained, either by principles offreedom of speech, applicable state law (often called “Anti-SLAPP statutes”), or issues of commercial confidentiality, in the manner in which we can proceedagainst the relevant short seller. You should be aware that in light of the relative freedom to operate that such persons enjoy – oftentimes blogging fromoutside the U.S. with little or no assets or identity requirements – should we be targeted for such an attack, our stock will likely suffer from a temporary, orpossibly long term, decline in market price should the rumors created not be dismissed by market participants. The NASDAQ may delist our securities from quotation on its exchange which could limit investors’ ability to make transactions in our securities andsubject us to additional trading restrictions. Our Common Stock is traded on the NASDAQ, a national securities exchange. We cannot assure you that our securities will meet the continuedlisting requirements be listed on the NASDAQ in the future. On May 30, 2012, we received a letter from the Nasdaq Stock Market LLC (“Nasdaq”), which stated that, based upon the closing bid price for thelast 30 consecutive business days, the Company no longer meets the requirement set forth in Nasdaq Rule 5550(a)(2), which requires listed securities tomaintain a minimum bid price of $1 per share (the “Minimum Bid Price Rule”). In accordance with Nasdaq Rule 5810(c)(3)(A), we were provided with aperiod of 180 calendar days, or until November 26, 2012, to regain compliance with the Minimum Bid Price Rule. We would regain compliance with theMinimum Bid Price Rule if the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days at any timeprior to November 26, 2012. On November 30, 2012, we received a letter from the NASDAQ Stock Market LLC (the “NASDAQ”) notifying that we have regained compliancewith the minimum bid price requirement for continued listing set forth in NASDAQ Listing Rule 5450(a)(1), as our common stock had achieved a closing bidprice of $1.00 or more for 10 consecutive business days from November 15, 2012 to November 29, 2012. 40 Although, we has regained compliance with NASDAQ Listing Rule 5450(a)(1), we cannot assure you our securities will meet the continued listingrequirements be listed on the NASDAQ in the future. If the NASDAQ delists our Common Stock from trading on its exchange, we could face significantmaterial adverse consequences including: · a limited availability of market quotations for our securities; · a determination that our Common Stock is a “penny stock” which will require brokers trading in our Common Stock to adhere to more stringentrules and possibly resulting in a reduced level of trading activity in the secondary trading market for our Common Stock; · a limited amount of news and analyst coverage for our company; and · a decreased ability to issue additional securities or obtain additional financing in the future. 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.” Brokersand dealers effecting transactions in “penny stock” must disclose certain information concerning the transaction, obtain a written agreement from thepurchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell theCommon Stock and may affect your ability to sell shares. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2 PROPERTIES The following table summarizes 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 Tuspark, Haidian District, Beijing, PRC, 1stFloor Leased2No. 3 Min, Zhuang Road, Building 6, Yu Quan Hui Gu Tuspark, Haidian District, Beijing, PRC, 2ndFloor Leased3No. 3 Min, Zhuang Road, Building 6, Yu Quan Hui Gu Tuspark, Haidian District, Beijing, PRC,Basement Leased4No. 15 Changzheng Road, Xiaogan City, Hubei Province, PRC, 2nd Floor Leased5No. 15 Changzheng Road, Xiaogan City, Hubei Province, PRC, 3rd Floor Leased6Quanzhou Hangdao Plaza, Baozhou Road, Fengze District, Quanzhou City, Fujian Province, PRC, 4thFloor, Room 401-402 Leased7Building 2, San Jiang Plaza, Puxi Road, Road, Fengze District, Quanzhou City, Fujian Province, PRC,Room 101 Leased87A-02, Building 2, No.2 Shangdi Xinxi Road, Haidian District, Beijing, PRC Leased9Roon 601, Hui Gu Shi Kong, East Lake Development Zone, Wuhan City, Hubei Province, PRCLeased 41 The properties listed in Items 1, 2 and 3 above are our principal executive offices and are used by all of our business segments. The properties listedin Items 4, 5 and 9 above are the offices for our operating VIEs in Hubei province, and are primarily used by our internet advertising and TV advertisingbusiness segments. The properties listed in Items 6 and 7 above are the offices for our operating VIEs in Quanzhou, Fujian province, and are primarily used byour brand management and sales channel building business segment. The property listed in Item 8 is used by one of our operating VIEs in Beijing, and isprimarily used by our internet advertising business segment. We believe that our existing facilities and equipment are well maintained and in good operating condition, and are sufficient to meet our needs forthe foreseeable future. ITEM 3 LEGAL PROCEEDINGS We may be subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time. We are not currentlya party to any litigation or other legal proceedings brought against us. We are also not aware of any legal proceeding, investigation or claim, or other legalexposure that has a more than remote possibility of having a material adverse effect on our business, financial condition or results of operations. ITEM 4 MINE SAFETY DISCLOSURES Not applicable. PART II. ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES Our common stock has been listed on the Nasdaq Global Stock Exchange under the symbol “CNET” since September 14, 2010. Prior to that time,from March 4, 2010 through September 13, 2010, our common stock was listed on the NYSE AMEX under the trading symbol “CNET.” Prior to that, ourcommon stock was quoted on the OTC Bulletin Board (“OTCBB “) under the trading symbol “EMZG”, until August 14, 2009, when our ticker symbol waschange to “CHNT”. The last reported price for our common stock on the Nasdaq Global Market on April 12, 2013 was $0.75 per share. The following table shows the high and low closing sale prices for our common stock reported by the Nasdaq Global Stock Exchange for the twoyears ended December 31, 2012 and subsequent periods.Year Period High Low 2011 First Quarter $4.65 $3.25 Second Quarter $3.80 $1.34 Third Quarter $2.60 $1.11 Fourth Quarter $1.32 $1.04 2012 First Quarter $1.17 $0.97 Second Quarter $1.06 $0.63 Third Quarter $0.69 $0.37 Fourth Quarter $1.22 $0.44 2013 First Quarter $1.02 $0.71 Second Quarter (through April 12, 2013) $0.80 $0.73 42 Holders As of April 12, 2013, there were approximately 635 record holders of our common stock. Dividends We have never paid any dividends on our common stock and we plan to retain earnings, if any, for use in the development and growth of ourbusiness. Payment of future dividends, if any, will be at the discretion of the board of directors after taking into account various factors, including currentfinancial condition, operating results and current and anticipated cash needs. If we ever determine to pay a dividend, we may experience difficulties incompleting the administrative procedures necessary to obtain and remit foreign currency from China for the payment of such dividends from the profits of ourPRC subsidiary and VIEs. Securities Authorized for Issuance Under Equity Compensation Plans Additional information required under this item is incorporated herein by reference to Item 12 of this Annual Report on Form 10-K under theheading "Equity Compensation Plan Information." Equity Repurchases During the fourth quarter of our fiscal year ended December 31, 2012, neither we nor any “affiliated purchaser” (as defined in Rule 10b-18(a)(3)under the Exchange Act) purchased any shares of our common stock, the only class of our equity securities registered pursuant to Section 12 of the ExchangeAct. Recent Sales of Unregistered Securities Any previous sales of unregistered securities by the Company have been previously disclosed in our reports on Form 10-Q or Form 8-K, asapplicable, filed with the SEC. ITEM 6 SELECTED FINANCIAL DATA As a smaller reporting company, we are not required to include disclosure under this Item. ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our auditedconsolidated financial statements and the related notes to the consolidated financial statements included elsewhere in this Form 10-K. Our auditedconsolidated financial statements have been prepared in accordance with U.S. GAAP. In addition, our audited consolidated financial statements and thefinancial data included in this Form 10-K reflect our reorganization and have been prepared as if our current corporate structure had been in placethroughout the relevant periods. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations,beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” “believe,” or similar language. All forward-lookingstatements included in this document are based on information available to us on the date hereof, and 43 we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks anduncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefullyconsider the information set forth under the heading “Risk Factors” and elsewhere in this Form 10-K. Readers are cautioned not to place undue reliance onthese forward-looking statements. Overview Our company (formerly known as Emazing Interactive, Inc.) was incorporated in the State of Texas in April 2006 and re-domiciled to become aNevada corporation in October 2006. From the date of our company’s incorporation until June 26, 2009, when our company consummated the ShareExchange (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 GroupLimited, a company organized under the laws of British Virgin Islands (“China Net BVI”), (ii) China Net BVI’s shareholders, Allglad Limited, a British VirginIslands company (“Allglad”), Growgain Limited, a British Virgin Islands company (“Growgain”), Rise King Investments Limited, a British Virgin Islandscompany (“Rise King BVI”), Star (China) Holdings Limited, a British Virgin Islands company (“Star”), Surplus Elegant Investment Limited, a British VirginIslands 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 ChinaNet 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”)in the aggregate of our common stock (the “Share Exchange”). As a result of the Share Exchange, China Net BVI became our wholly owned subsidiary andwe are now a holding company which, through certain contractual arrangements with operating companies in the People’s Republic of China (the “PRC”), isengaged in providing advertising, marketing, communication and brand management and sales channel building services to small and medium companies inChina. Our wholly owned subsidiary, China Net BVI, was incorporated in the British Virgin Islands on August 13, 2007. On April 11, 2008, China Net BVIbecame 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 ofRise King WFOE as the “Offshore Restructuring.” PRC regulations prohibit direct foreign ownership of business entities providing internet content, or ICP services in the PRC, and restrict foreignownership of business entities engaging in the advertising business. In October 2008, a series of contractual arrangements (the “Contractual Agreements” orthe “VIE Agreements) were entered between Rise King WFOE and Business Opportunity Online (Beijing) Network Technology Co., Ltd. (“BusinessOpportunity Online”), Beijing CNET Online Advertising Co., Ltd. (“Beijing CNET Online”) (collectively the “PRC Operating Entities”) and its commonindividual owners (the “PRC Shareholders” or the “Control Group”). The Contractual Agreements allowed China Net BVI through Rise King WFOE to,among other things, secure significant rights to influence the PRC Operating Entities’ business operations, policies and management, approve all mattersrequiring shareholder approval, and receive 100% of the income earned by the PRC Operating Entities. In return, Rise King WFOE provides consultingservices to the PRC Operating Entities. In addition, to ensure that the PRC Operating Entities and the PRC Shareholders perform their obligations under theContractual Arrangements, the PRC Shareholders have pledged all of their equity interests in the PRC Operating Entities to Rise King WFOE. They havealso entered into an option agreement with Rise King WFOE which provides that at such time as when the current restrictions under PRC law on foreignownership of Chinese companies engaging in the Internet content, information services or advertising business in China are lifted, Rise King WFOE mayexercise its option to purchase the equity interests in the PRC Operating Entities directly. 44 Pursuant to the Contractual Agreements, all of the equity owners’ rights and obligations of the VIEs were assigned to Rise King WFOE, whichresulted in the equity owners lacking the ability to make decisions that have a significant effect on the VIEs, Rise King WFOE’s ability to extract the profitsfrom the operation of the VIEs and assume the residual benefits of the VIEs. Due to the fact that Rise King WFOE and its indirect parent are the sole interestholders of the VIEs, we included the assets, liabilities, revenues and expenses of the VIEs in our consolidated financial statements, which is consistent withthe provisions of FASB Accounting Standards Codification (“ASC”) Topic 810, “Consolidation” subtopic 10. As of the date of the Share Exchange, through a series of contractual agreements, we operate our business in China primarily through BusinessOpportunity Online and Beijing CNET Online. Beijing CNET Online owns 51% of Shanghai Borongdingsi Computer Technology Co., Ltd. (“ShanghaiBorongdingsi”). Business Opportunity Online, Beijing CNET Online and Shanghai Borongdingsi, were incorporated on December 8, 2004, January 27, 2003and August 3, 2005, respectively. Shanghai Borongdingsi is 51% owned by Beijing CNET Online. Beijing CNET Online and Shanghai Borongdingsi entered into a cooperationagreement in June 2008, followed up with a supplementary agreement in December 2008, to conduct a bank kiosk advertisement business. The business isbased on a bank kiosk cooperation agreement between Shanghai Borongdingsi and Henan provincial branch of China Construction Bank which allowsShanghai Borongdingsi or its designated party to conduct in-door advertisement business within the business outlets throughout Henan Province. The bankkiosk cooperation agreement has a term of eight years beginning in August 2008. However, Shanghai Borongdingsi was not able to conduct theadvertisement business as a stand-alone business due to the lack of an advertisement business license and supporting financial resources. Pursuant to theaforementioned cooperation agreements, Beijing CNET Online committed to purchase equipment and to provide working capital, technical and other relatedsupport to Shanghai Borongdingsi. Beijing CNET Online owns the equipment used in the kiosk business, is entitled to sign contracts in its name on behalf ofthe business, and holds the right to collect the advertisement revenue generated from the bank kiosk business exclusively until it recovers the cost ofpurchasing the equipment. Thereafter, Beijing CNET Online has agreed to distribute 49% of the net profit generated from the bank kiosk advertisingbusiness, if any, to the minority shareholders of Shanghai Borongdingsi. On June 24, 2010, one of our VIEs, Business Opportunity Online, together with three other individuals, who were not affiliated with the Company,formed a new company, Shenzhen City Mingshan Network Technology Co., Ltd. (“Shenzhen Mingshan”). Shenzhen Mingshan is 51% owned by BusinessOpportunity Online and 49% owned collectively by the other three individuals. Shenzhen Mingshan is primarily engaged in developing and designinginternet based software, online games and the related operating websites and providing related internet and information technology services necessary tooperate such games and websites. On January 6, 2011, as approved by the shareholders of Shenzhen Mingshan, an unaffiliated third party investedRMB15,000,000 (approximately US$2,374,883) into Shenzhen Mingshan in exchange for a 60% equity interest in Shenzhen Mingshan. As a result of thistransaction, our share of the equity interest in Shenzhen Mingshan decreased from 51% to 20.4% and we ceased to have a controlling financial interest inShenzhen Mingshan, but still retained an investment in, and significant influence over, Shenzhen Mingshan. On December 19, 2012, as approved by theshareholders of Shenzhen Mingshan, Shenzhen Mingshan reduced its registered and paid-in capital from RMB25,000,000 (approximately US$3,958,139) toRMB22,000,000 (approximately US$3,483,162), resulted from a decrease of paid-in capital from three other noncontrolling shareholders, except BusinessOpportunity Online. As a result, our share of the equity interest in Shenzhen Mingshan increased from 20.4% to 23.18% and we continued to retainsignificant influence over Shenzhen Mingshan. Therefore, as of December 31, 2012, Shenzhen Mingshan was an equity investment affiliate of ours. On December 6, 2010, through our wholly-owned subsidiary, Rise King WFOE, we entered into a series of exclusive contractual arrangements,which were similar to the Contractual Agreements discussed above, with Rise King (Shanghai) Advertisement Media Co., Ltd. (“Shanghai Jing Yang”), acompany incorporated under PRC laws in December 2009. The contractual arrangements that we entered into with Shanghai Jing Yang allow us, throughRise King WFOE, to, among other things, secure significant rights to influence Shanghai Jing Yang’s business operations, policies and management, approveall matters requiring shareholder approval, and receive 100% of the income earned by Shanghai Jing Yang. From the date of incorporation until December 6,2010, Shanghai Jing Yang did not conduct 45 any business activities. Therefore, Shanghai Jing Yang’s accounts were included in our consolidated financial statements with no goodwill recognized inaccordance with ASC Topic 810 “Consolidation”. On December 8, 2010, Shanghai Jing Yang acquired a 49% equity interest in a newly established company, Beijing Yang Guang Media InvestmentCo., Ltd. (“Beijing Yang Guang”). In August 2011, Shanghai Jing Yang sold back its 49% equity interest in Beijing Yang Guang to the majority shareholderof Beijing Yang Guang. We, through one of our VIEs, Beijing CNET Online, acquired a 100% equity interest in Quanzhou Zhi Yuan Marketing Planning Co., Ltd.(“Quanzhou Zhi Yuan”) and a 51% equity interest in Quanzhou Tian Xi Shun He Advertisement Co., Ltd. (“Quanzhou Tian Xi Shun He”) on January 4, 2011and February 23, 2011, respectively. Quanzhou Zhi Yuan and Quanzhou Tian Xi Shun He are both independent advertising companies based in Fujianprovince of the PRC, which provide comprehensive branding and marketing services to over fifty SMEs focused primarily in the sportswear and clothingindustry. In June 2011, Beijing CNET Online acquired the remaining 49% equity interest in Quanzhou Tian Xi Shun He. Quanzhou Tian Xi Shun He becamea wholly owned subsidiary of Beijing CNET Online. On January 28, 2011, one of our VIEs, Business Opportunity Online, formed a new wholly owned subsidiary, Business Opportunity Online (Hubei)Network Technology Co., Ltd. (“Business Opportunity Online Hubei”). Business Opportunity Online Hubei is primarily engaged in internet advertisementdesign, production and promulgation. On March 1, 2011, one of our VIEs, Business Opportunity Online, together with an individual, who was not affiliated with us, formed a newcompany, Beijing Chuang Fu Tian Xia Network Technology Co., Ltd. (“Beijing Chuang Fu Tian Xia”). Business Opportunity Online and the co-foundingindividual owned 51% and 49% of the equity interests of Beijing Chuang Fu Tian Xia, respectively. In addition to capital investment, the co-foundingindividual is required to provide the controlled domain names, www.liansuo.com and www.chuangye.com to be registered under the established company.Beijing Chuang Fu Tian Xia is primarily engaged in providing and operating internet advertising, marketing and communication services to SMEs throughthe websites associated the above mentioned domain names. On April 18, 2011, Business Opportunity Online Hubei formed a new wholly owned company, Hubei CNET Advertising Media Co., Ltd. (“HubeiCNET”). Hubei CNET is primarily engaged in advertisement design, production, promulgation and providing the related advertising and marketingconsultancy services. On April 18, 2011, Business Opportunity Online Hubei, together with an individual, who was not affiliated with us, formed a new company, ZhaoShang Ke Network Technology (Hubei) Co., Ltd. (“Zhao Shang Ke Hubei”). Business Opportunity Online Hubei and the co-founding individual owned 51%and 49% of the equity interests of Zhao Shang Ke Hubei, respectively. Zhao Shang Ke Hubei is primarily engaged in providing advertisement design,production, promulgation and sales channels building services. On December 29, 2011, as approved by the shareholders of Zhao Shang Ke Hubei, twounaffiliated third party investors invested RMB10,000,000 (approximately US$1,583,255) into Zhao Shang Ke Hubei in exchange for an aggregate 50%equity interests in Zhao Shang Ke Hubei. As a result of this transaction, our share of the equity interests in Zhao Shang Ke Hubei decreased from 51% to25.5% and we ceased to have a controlling financial interest in Zhao Shang Ke Hubei, but still retained an investment in, and significant influence over,Zhao Shang Ke Hubei. Therefore, as of December 31, 2012, Zhao Shang Ke Hubei was an equity investment affiliate of ours. On July 1, 2011, Quanzhou Zhi Yuan formed a new wholly owned company, Xin Qi Yuan Advertisement Planning (Hubei) Co., Ltd. (“Xin Qi YuanHubei”). Xin Qi Yuan Hubei is primarily engaged in advertisement design, production, promulgation and providing the related advertising and marketingconsultancy services. On July 1, 2011, Quanzhou Tian Xi Shun He formed a new wholly owned company, Mu Lin Sen Advertisement (Hubei) Co., Ltd. (“Mu Lin SenHubei”). Mu Lin Sen Hubei is primarily engaged in advertisement design, production, promulgation and providing the related advertising and marketingconsultancy services. 46 On July 1, 2011, Business Opportunity Online Hubei, together with an individual who is not affiliated with us, formed a new company, Sheng TianNetwork Technology (Hubei) Co., Ltd. (“Sheng Tian Hubei”). Business Opportunity Online Hubei and the co-founding individual owned 51% and 49% ofthe equity interests of Sheng Tian Hubei, respectively. Sheng Tian Hubei is primarily engaged in computer system design, development and promotion,software development and promotion, and providing the related technical consultancy services. On September 5, 2011, Business Opportunity Online Hubei formed a new wholly owned company, Chongqing Business Opportunity OnlineTechnology Co., Ltd. (“Business Opportunity Online Chongqing”). Business Opportunity Online Chongqing is primarily engaged in internet advertisementdesign, production and promulgation. In September 2012, the Company sold all of its equity interest in Business Opportunity Online Chongqing to twounaffiliated parties. Business Opportunity Online Chongqing was dormant from the time of its incorporation through the date the Company disposed of itsequity interest to two unaffiliated parties. No gain or loss was incurred in connection with this transaction, as we recovered all of its net assets, which are allcash and cash equivalents from the buyers. On December 20, 2011, Business Opportunity Online Hubei acquired a 51% equity interest in Sou Yi Lian Mei Network Technology (Beijing) Co.Ltd., (“Sou Yi Lian Mei”). In September 2012, Business Opportunity Online Hubei acquired the remaining 49% equity interest in Sou Yi Lian Mei. Sou YiLian Mei became a wholly owned subsidiary of Business Opportunity Online Hubei accordingly. Sou Yi Lian Mei is primary engaged in providing onlineadvertising and marketing services and operates its business primarily through its wholly-owned subsidiary, Jin Du Ya He (Beijing) Network TechnologyCo., Ltd (“Jin Du Ya He”). Through our PRC operating subsidiary and VIEs, we primarily operate an one-stop services for our clients on four major service platforms, includingsocial networking service information platform, multi-channel advertising and promotion platform, brand management and sales channel building platformand management tools platform. Our social networking service information platform primarily consists of www. chuangye.com, an information and serviceportal for entrepreneurs or any individual who plans to start their own business. Our multi-channel advertising and promotion platform primarily consists ofinternet advertising and marketing portals, including www.28.com (“28.com”), www.liansuo.com (“liansuo.com”) and www.sooe.cn (“sooe.cn”), ChinaNetTV as our TV production and advertising unit and the bank kiosk advertising unit. We provide varieties of marketing campaigns through this platform by thecombination of the Internet, mobile, television, bank kiosks and printed-medias to maximize market exposure and effectiveness for our clients. Our bandmanagement and sales channel expansion platform consists of our brand consulting and management service and offline sales channel expansion service,which is to physically help small businesses to recruit dealers, wholesalers, partners or franchisees based on their business needs. Management tools platformconsists of a mobile-based sales and administrative management tools specifically designed for small business in China to match their simplicity. Basis of presentation, critical accounting policies and management estimates Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ofAmerica (“U.S. GAAP”) and include the accounts of our Company, and all of our subsidiaries and VIEs. We prepare financial statements in conformity withU.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets andliabilities on the date of the financial statements and the reported amounts of revenues and expenses during the financial reporting period. We continuallyevaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions thatwe believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual resultscould differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We consider thepolicies discussed below to be critical to an understanding of our financial statements. Foreign currency translation Our functional currency is United States dollars (“US$”), and the functional currency of China Net HK is Hong Kong dollars (“HK$”). Thefunctional currency of our PRC operating subsidiary and VIEs is Renminbi (“RMB’), and PRC is the primary economic environment in which we operate. 47 For financial reporting purposes, the financial statements of our PRC operating subsidiary and VIEs, which are prepared using the RMB, aretranslated into our reporting currency, the United States Dollar (“U.S. dollar”). Assets and liabilities are translated using the exchange rate at each balancesheet date. Revenue and expenses are translated using average rates prevailing during each reporting period, and stockholders’ equity is translated athistorical exchange rates. Adjustments resulting from the translation are recorded as a separate component of accumulated other comprehensive income instockholders’ equity. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange ratesprevailing at the dates of the transactions. The resulting exchange differences are included in the determination of net income of the consolidated financialstatements for the respective periods. The exchange rates used to translate amounts in RMB into US$ for the purposes of preparing the consolidated financial statements are as follows: As of December 31, 2012 2011 Balance sheet items, except for equity accounts 6.3161 6.3647 Year ended December 31, 2012 2011 Items in the statements of income and comprehensive income, and statements cash flows 6.3198 6.4735 No representation is made that the RMB amounts could have been, or could be converted into US$ at the above rates. Investment in equity investment affiliates Investee companies that are not consolidated, but over which we exercise significant influence, are accounted for under the equity method ofaccounting in accordance with ASC Topic 323 “Equity Method and Joint Ventures”. Whether or not we exercise significant influence with respect to anInvestee depends on an evaluation of several factors including, among others, representation on the investee companies’ board of directors and ownershiplevel, which is generally a 20% to 50% interest in the voting securities of the investee companies. Under the equity method of accounting, an investeecompany’s accounts are not reflected within our consolidated balance sheets and statements of income and comprehensive income; however, our share of theearnings or losses of the investee company is reflected in the caption “Share of earnings (losses) in equity investment affiliates” in the consolidatedstatements of income and comprehensive income. Our carrying value (including advance to the investees) in equity method investee companies is reflectedin the caption “Investment in and advance to equity investment affiliates” in our consolidated balance sheets. When our carrying value in an equity method investee company is reduced to zero, no further losses are recorded in our consolidated financialstatements unless we guaranteed obligations of the investee company or have committed additional funding. When the investee company subsequentlyreports income, we will not record its share of such income until it equals the amount of its share of losses not previously recognized. Goodwill Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of acquisitions ofinterests in our subsidiaries. Goodwill is not depreciated or amortized but is tested for impairment at the reporting unit level at least on an annual basis, and between annual testswhen an event occurs or circumstances change that could indicate that the asset might be impaired. The test consists of two steps. First, identify potentialimpairment by comparing the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value of the reporting unit is greater thanits carrying amount, goodwill is not considered impaired. Second, if there is impairment identified in the first step, an 48 impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of goodwill. The implied fairvalue of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with ASCTopic 805, “Business Combinations.” Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units, assigningassets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. The judgment inestimating the fair value of reporting units includes estimating future cash flows, determining appropriate discount rates and making other assumptions.Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit. Deconsolidation We accounted for deconsolidation of subsidiaries in accordance with ASC Topic 810 “Consolidation”. In accordance with ASC Topic 810-10-40-5, the parent shall account for the deconsolidation of a subsidiary by recognizing a gain or loss in netincome attributable to the parent, measured as the difference between: a. The aggregate of all of the following: 1. The fair value of any consideration received; 2. The fair value of any retained noncontrolling investment in the former subsidiary at the date the subsidiary is deconsolidated; 3. The carrying amount of any noncontrolling interest in the former subsidiary (including any accumulated other comprehensive incomeattributable to the noncontrolling interest) at the date the subsidiary is deconsolidated. b. The carrying amount of the former subsidiary’s assets and liabilities. Changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary We accounted for changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary in accordancewith ASC Topic 810 “Consolidation”, subtopic 10, which requires the transaction be accounted for as equity transactions (investments by owners anddistributions to owners acting in their capacity as owners). Therefore, no gain or loss shall be recognized in consolidated net income or comprehensiveincome. The carrying amount of the noncontrolling interest shall be adjusted to reflect the change in its ownership interest in the subsidiary. Any differencebetween the fair value of the consideration received or paid and the amount by which the noncontrolling interest is adjusted shall be recognized in equityattributable to the parent and reallocated the subsidiary’s accumulated comprehensive income, if any, among the parent and the noncontrolling interestthrough an adjustment to the parent’s equity. Revenue recognition Our revenue recognition policies are in compliance with ASC Topic 605. In accordance with ASC Topic 605, revenues are recognized when all fourof 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 include revenues from reselling of advertising time purchased from TV stations, internet advertising and providing related value addedtechnical services, reselling of internet advertising spaces and other advertisement related resources. No revenue from advertising-for-advertising bartertransactions was recognized because the transactions did not meet the criteria for recognition in ASC Topic 605, subtopic 20. Advertising contracts establishthe fixed price and advertising services to be provided. Pursuant to advertising contracts, we provide advertisement 49 placements in different formats, including but not limited to banners, links, logos, buttons, rich media and content integration. Revenue is recognized ratablyover 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 asingle unit of accounting for revenue recognition purposes. Value added technical services are provided based on two types of contracts: (i) fixed price and(ii) fixed price with minimum performance threshold. For contracts with fixed price term, revenue is recognized on a pro-rata basis over the engaged serviceperiod. For fixed price contracts with minimum performance threshold, revenue is recognized when the specified performance criteria is met. Based upon ourcredit assessments of our customers prior to entering into contracts, we determine if collectability is reasonably assured. In situations where collectability isnot deemed to be reasonably assured, we recognize revenue upon receipt of cash from customers, only after services have been provided and all other criteriafor revenue recognition have been met. Taxation 1. Income tax We adopt ASC Topic 740 “Income taxes” and use liability method to account for income taxes. Under this method, deferred tax assets and liabilitiesare determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect inthe 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 availableevidence, 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 ratesis recognized in income statement in the period that includes the enactment date. We adopt ASC Topic 740-10-25-5 through 740-10-25-7 and 740-10-25-13, which prescribes a more likely than not threshold for financial statementrecognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on recognition ofincome tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated withtax positions, accounting for income taxes in interim periods, and income tax disclosures. For the years ended December 31, 2012 and 2011, we did not haveany interest and penalties associated with tax positions and did not have any significant unrecognized uncertain tax positions. i). We were incorporated in the State of Nevada. Under the current laws of Nevada we are not subject to state corporate income tax. We became aholding company and do not conduct any substantial operations of our own after the Share Exchange. No provision for federal corporate income tax has beenmade in our financial statements as no assessable profits for the years ended December 31, 2012 and 2011, or any prior periods. We do not provide for U.S.taxes or foreign withholding taxes on undistributed earnings from non-U.S. subsidiaries and VIEs because such earnings are intended to be reinvestedindefinitely. If undistributed earnings were distributed, foreign tax credits could become available under current law to reduce the resulting U.S. income taxliability. ii). China Net BVI was incorporated in the British Virgin Islands (“BVI”). Under the current laws of the BVI, we are not subject to tax on income orcapital 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 profitstax have been made in our financial statements as no assessable profits for the years ended December 31, 2012 and 2011, or any prior periods. 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 subsidiary and VIEs, being incorporated in the PRC, are governed by the income tax law of the PRC and are subject to PRCenterprise 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 andforeign invested enterprises. · Rise King WFOE is a software company qualified by the related PRC governmental authorities and was approved by the local tax authorities ofBeijing, the PRC, to be entitled to a two-year EIT exemption from its first profitable year and a 50% reduction of its applicable EIT rate, which is 25%to 12.5% of its taxable income for the succeeding three years. Rise King WFOE had a net loss for the year ended December 31, 2008 and its firstprofitable year was fiscal year 2009 which has been verified by the local tax bureau by accepting the application filed by us. Therefore, it wasapproved to be entitled to a two-year EIT exemption for fiscal year 2009 through fiscal year 2010 and a 50% reduction of its applicable EIT rate whichis 25% to 12.5% for fiscal year 2011 through fiscal year 2013. Therefore, for the years ended December 31, 2012 and 2011, the applicable income taxrate for Rise King WFOE was both 12.5%. After fiscal year 2013, the applicable income tax rate of Rise King WFOE will be 25% under the current EITlaw of PRC. 50 · Business Opportunity Online was approved by the related PRC governmental authorities as a High and New Technology Enterprise under the New EITlaw effective September 4, 2009, and was approved by the local tax authorities of Beijing, the PRC, to be entitled to a favorable statutory tax rate of15%. Business Opportunity Online’s High and New Technology Enterprise certificate would expire on September 4, 2012. On July 9, 2012, BusinessOpportunity Online passed the administrative review conducted by the related PRC governmental authorities for obtaining the renewed certificate,which enabled it to continue to enjoy the 15% preferential income tax rate as a High and New Technology Enterprise. Therefore, for the years endedDecember 31, 2012 and 2011, the applicable income tax rate of Business Opportunity Online was both 15%. · Business Opportunity Online Hubei was incorporated in Xiaotian Industrial Park of Xiaogan Economic Development Zone in Xiaogan City, Hubeiprovince of the PRC in 2011. It was approved by the related local government authorities to apply the deemed income tax method for its computationof income tax expense for the year ended December 31, 2011. Under the deemed income tax method, the deemed profit is calculated based on 10% ofthe total revenue and the applicable income tax rate is 25%. Therefore, for the year ended December 31, 2011, Business Opportunity Online Hubeicalculated its income tax expenses based on 2.5% of the total revenue recognized for the reporting period. Starting from January 1, 2012, the local taxauthorities cancelled the deemed income tax method for computation of income tax expenses for the entity. As such, the applicable income tax rate forthe entity increased to 25%. On June 15, 2012, Business Opportunity Online Hubei was approved by the related PRC governmental authorities to bequalified as a software company and was approved by the local tax authorities of Xiaogan City, Hubei province, the PRC, to be entitled to a two-yearEIT exemption for fiscal years 2012 and 2013, and a 50% reduction of its applicable EIT rate which is 25% to 12.5% of its taxable income for thesucceeding three years until December 31, 2016. Therefore, for the year ended December 31, 2012, the applicable income tax rate of BusinessOpportunity Online Hubei is nil%. · Hubei CNET was incorporated in Xiaotian Industrial Park of Xiaogan Economic Development Zone in Xiaogan City, Hubei province of the PRC in2011. It was approved by the related local government authorities to apply the deemed income tax method for its computation of income tax expensefor the year ended December 31, 2011. Under the deemed income tax method, the deemed profit is calculated based on 10% of the total revenue andthe applicable income tax rate is 25%. Therefore, for the year ended December 31, 2011, Hubei CNET calculated its income tax expenses based on2.5% of the total revenue recognized for the reporting period. Starting from January 1, 2012, the local tax authorities cancelled the deemed income taxmethod for computation of income tax expenses for the entity and the applicable income tax rate for the entity increased to 25%. Therefore, for theyear ended December 31, 2012, the applicable income tax rate for Hubei CNET is 25%. · The applicable income tax rate for the rest of our PRC operating entities was 25% for the years ended December 31, 2012 and 2011. · The New EIT also imposed a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding companyoutside China, which were exempted under the previous enterprise income tax law and rules. A lower withholding tax rate will be applied if there is atax 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% preferentialwithholding tax rate upon distribution of the dividends to this intermediate holding company. 51 For the years ended December 31, 2012 and 2011, all of the preferential income tax treatments enjoyed by our PRC subsidiary and VIEs were basedon the current applicable laws and regulations of the PRC and approved by the related government regulatory authorities and local tax authorities where ourrespective PRC subsidiary and VIEs operate. Rise King WFOE, Business Opportunity Online, Business Opportunity Online Hubei, Hubei CNET and weremost affected by these preferential income tax treatments within the structure of us. The preferential income tax treatments are subject to change inaccordance with the PRC government economic development policies and regulations. These preferential income tax treatments are mainly determined bythe regulation and policies of the PRC government in the context of the overall economic policy and strategy. As a result, the uncertainty of thesespreferential income tax treatments are subject to, but not limited to, the PRC government policy on supporting any specific industry’s development under theoutlook and strategy of overall macroeconomic development. 2. Turnover taxes and the relevant surcharges For fiscal 2011, revenue from advertisement services is subject to 5.5% business tax (including surcharges) and 3% cultural industry developmentsurcharge of the net service income after deducting amount paid to ending media promulgators. Revenue from internet technical services is subjected to 5.5%business tax (including surcharges). Beginning on January 1, 2012, PRC tax authorities increased the local business tax rate by 0.1%-0.2%. Therefore, from January 1, 2012 throughAugust 31, 2012 (for our PRC operating entities incorporated in Beijing) or October 31, 2012 (for our PRC operating entities incorporated in Fujianprovince) or November 30, 2012 (for our PRC operating entities incorporated in Hubei province), revenue from advertisement services was subject to 5.6%-5.7% business tax (including surcharges), depending on which tax jurisdiction our PRC operating subsidiary and VIE operate in, and 3% cultural industrydevelopment surcharge of the net service income after deducting amount pay to ending media promulgators. Revenue from internet technical services issubjected to 5.6%-5.7% business tax (including surcharges), depending on which tax jurisdiction our operating subsidiary and VIE operate in. On July 31, 2012, the Ministry of Finance (the “MOF”) and the State Administration of Taxation (the “SAT”) of the PRC jointly promulgated a“Circular on Launching the Pilot Collection of Value Added Tax in lieu of Business Tax in Transportation and Certain Areas of Modern Services Industriesin Eight Provinces and Municipalities Including Beijing” (“Circular Cai Shui [2012] No. 71”), pursuant to which a business tax to value added tax (the“VAT”) transformation pilot program was launched. The implementation date for Beijing is September 1, 2012, for Fujian province, November 1, 2012, andfor Hubei province, December 1, 2012. Other circulars such as “Circular on Carrying out the Pilot Collection of Value Added Tax in Lieu of Business Tax tobe imposed on Transportation Industry and Part of Modern Services Industry in Shanghai” (“Circular Cai Shui [2011] No. 111”) jointly promulgated by theMOF and the SAT on November 16, 2011 which contains detailed implementation measures for such VAT pilot program apply to the locations includingBeijing, Fujian province and Hubei province. In accordance with the Circular Cai Shui [2011] No. 111, the VAT rate for provision of modern services (otherthan lease of corporeal movables) is 6% and for small scale taxpayer, 3%. Therefore, beginning on September 1, 2012, for our PRC operating subsidiary andVIEs incorporated in Beijing, November 1, 2012, for our PRC operating VIEs incorporated in Fujian province, December 1, 2012, for our PRC operating VIEsincorporated in Hubei province, service revenues are subject to VAT at a rate of 6%, after deducting the VAT paid for the services purchased from suppliers,or at a rate of 3% without any deduction of VAT paid for the services purchased from suppliers. The surcharges of the VAT is 12%-14% of the VAT,depending on which tax jurisdiction our PRC operating subsidiary and VIE operate in. Business tax is a price including tax in the PRC turnover tax system, which is calculated based on the revenue inclusive of turnover tax. Therefore,revenues achieved by the Company which are subject to business tax are presented on a gross basis inclusive of business tax, and on the other hand, businesstax was included in cost of revenues upon recognition of services revenues. Contrastively, VAT is a price excluding tax in the PRC 52 turnover tax system, which is calculated based on the revenue exclusive of turnover tax. Therefore, revenues achieved by the Company which are subject toVAT is presented on a net basis exclusive of VAT. The tax authority of the PRC government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after thoseenterprises had completed their relevant tax filings, hence our tax filings may not be finalized. It is therefore uncertain as to whether the PRC tax authoritymay take different views about our tax filings which may lead to additional tax liabilities. Recent Accounting Pronouncements In July 2012, the FASB issued ASU 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets forImpairment." This ASU simplifies how entities test indefinite-lived intangible assets for impairment which improve consistency in impairment testingrequirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it is more likelythan not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessment concludes it is more likelythan not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing asoutlined in the previously issued standards. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning afterSeptember 15, 2012; early adoption is permitted. The adoption of this standard is not expected to have a material impact on our consolidated financialposition or results of operations. In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of AccumulatedOther Comprehensive Income”, The ASU does not change the current requirements for reporting net income or other comprehensive income in financialstatements. However, this ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income bycomponent. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amountsreclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required underU.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to bereclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detailabout those amounts. The guidance is effective prospectively for reporting periods beginning after December 15, 2012 for public entities. The adoption ofthis standard is not expected to have a material impact on our consolidated financial position or 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 afuture date are not expected to have a material impact on our consolidated financial position and results of operations upon adoption. A. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2012 AND 2011 The following table sets forth a summary, for the periods indicated, of our consolidated results of operations. Our historical results presented beloware not necessarily indicative of the results that may be expected for any future period. All amounts, except number of shares and per share data, are presentedin thousands of US dollars. 53 Year ended December 31, 2012 2011 US$ US$ Sales From unrelated parties $46,403 $28,105 From related parties 197 626 46,600 28,731 Cost of sales 31,558 12,027 Gross margin 15,042 16,704 Operating expenses Selling expenses 2,683 3,506 General and administrative expenses 6,030 7,904 Research and development expenses 1,819 2,132 10,532 13,542 Income from operations 4,510 3,162 Other income (expenses) Changes in fair value of contingent consideration receivables (160) (70)Interest income 186 13 Gain on deconsolidation of subsidiaries - 925 Other (expenses) income (150) 5 (124) 873 Income before income tax expense, equity method investments and noncontrolling interests 4,386 4,035 Income tax expense 529 1,035 Income before equity method investments and noncontrolling interests 3,857 3,000 Share of losses in equity investment affiliates (449) (219)Net income 3,408 2,781 Net (income) loss attributable to noncontrolling interests (412) 214 Net income attributable to ChinaNet Online Holdings, Inc. 2,996 2,995 Dividend of Series A convertible preferred stock - (407)Net income attributable to common stockholders of ChinaNet Online Holdings, Inc. $2,996 $2,588 Earnings per share Earnings per common share Basic $0.14 $0.14 Diluted $0.14 $0.14 Weighted average number of common shares outstanding: Basic 22,185,556 18,545,609 Diluted 22,185,556 18,759,240 NON-GAAP MEASURES To supplement the audited consolidated statement of income and comprehensive income presented in accordance with GAAP, we are also providingnon-GAAP measures of income from operations, income before income tax expenses, net income, net income attributable to us, net income attributable to ourcommon stockholders and basic and diluted earnings per share for the year ended December 31, 2012 and 2011, which are adjusted from results based onGAAP to exclude the non-cash gain and expenses recorded, which related to changes in fair value of contingent consideration receivables related to the“make-good” provisions upon acquisition of VIEs for the year ended December 31, 2012; the gain on deconsolidation of subsidiaries, the related deferredincome tax expenses, changes in fair value of contingent consideration receivables related to the “make-good” provisions upon acquisition of VIEs, and non-cash share-based compensation expenses recognized for the restricted stock and common stock purchase options issued to our management, directors andemployees for the year ended December 31, 2011. The non-GAAP financial measures are provided to enhance the investors' overall understanding of our current performance in on-going coreoperations 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 our operatingbusiness results internally and therefore deemed it important to provide all of this information to investors. 54 The following table presents reconciliations of our non-GAAP financial measures to the audited consolidated statements of income andcomprehensive income for the years ended December 31, 2012 and 2011 (all amounts, except number of shares and per share data, are presented in thousandsof US dollars): Year Ended December 31, 2012 2011 GAAP NON GAAP GAAP NONGAAP US$ US$ US$ US$ Gross Profit $15,042 $15,042 $16,704 $16,704 Operating expenses Selling expenses 2,683 2,683 3,506 2,827 General and administrative expenses 6,030 6,030 7,904 6,647 Research and development expenses 1,819 1,819 2,132 1,461 10,532 10,532 13,542 10,935 Income from operations 4,510 4,510 $3,162 Adjusted income from operations $5,769 Other income (expenses): Changes in fair value of contingent consideration receivables (160) - (70) - Interest income 186 186 13 13 Gain on deconsolidation of subsidiaries - - 925 - Other (expenses) income (150) (150) 5 5 (124) 873 36 18 Income before income tax expense, equity method investments and noncontrollinginterests 4,386 4,035 Adjusted income before income tax expense, equity method investments andnoncontrolling interests 4,546 5,787 Income tax expense 529 529 1,035 827 Income before equity method investments and noncontrolling interests 3,857 3,000 Adjusted income before equity method investments and noncontrolling interests 4,017 4,960 Share of losses in equity investment affiliates (449) (449) (219) (219)Net income 3,408 2,781 Adjusted net income 3,568 4,741 Net (income) loss attributable to noncontrolling interest (412) (412) 214 214 Net income attributable to ChinaNet Online Holdings, Inc. 2,996 2,995 Adjusted net income attributable to ChinaNet Online Holdings, Inc. 3,156 4,955 Dividend for series A convertible preferred stock - - (407) (407)Net income attributable to common shareholders of ChinaNet Online $2,996 $2,588 Adjusted net income attributable to common shareholders of ChinaNet Online $3,156 $4,548 Earnings per common share-Basic $0.14 $0.14 Adjusted earnings per common share-Basic $0.14 $0.25 Earnings per common share-Diluted $0.14 $0.14 Adjusted earnings per common share-Diluted $0.14 $0.24 Weighted average number of common shares outstanding: Basic 22,185,556 22,185,556 18,545,609 18,545,609 Diluted 22,185,556 22,185,556 18,759,240(1) 20,384,766(2) (1) For the year ended December 31, 2011, the effect of the 1,625,526 incremental shares resulted from assumed conversion of the convertible preferredstock was not included, because its effect was anti-dilutive under GAAP measures. (2) For the year ended December 31, 2011, the effect of the 1,625,526 incremental shares resulted from assumed conversion of the convertible preferredstock was included, because the effect was dilutive for not including the non-cash gain and expenses related to the non-recurring transactionsincurred under NON-GAAP measures. 55 REVENUE The following tables set forth a breakdown of our total revenue, divided into five segments for the periods indicated, with inter-segment transactionseliminated: Year ended December 31, 2012 2011 Revenue type (Amounts expressedin thousands of US dollars, except percentages) Internet advertisement $21,121 45.3% $15,359 53.4%Technical services 245 0.5% 4,622 16.1%TV advertisement 20,454 43.9% 6,434 22.4%Bank kiosks 282 0.6% 487 1.7%Brand management and sales channel building 4,498 9.7% 1,829 6.4%Total $46,600 100% $28,731 100% Total Revenues: Our total revenues increased to US$46.6 million for the year ended December 31, 2012 from US$28.7 million for the year ended December31, 2011, representing a 62% increase. We derive the majority of our advertising service revenues from the sale of advertising space on our internet portals and from providing the relatedtechnical support and services, internet marketing service and content management services to unrelated third parties and to certain related parties. We alsoderive revenue from the sale of advertising time purchased from different TV programs. Our advertising services to related parties were provided in theordinary course of business on the same terms as those provided to our unrelated advertising clients. For the year ended December 31, 2012 and 2011, ourservice revenue from related parties in the aggregate was less than 2.5% of the total revenue we achieved for each respective reporting period. Our advertising service revenues are recorded net of any sales discounts. Sales discounts include volume discounts and other customary incentivesoffered to our small and medium-sized franchise and merchant clients, including providing them with additional advertising time for their advertisements ifwe have unused space available on our websites and represent the difference between our official list price and the amount we actually charge our clients. Wetypically sign service contracts with our small and medium-sized franchisor and other clients that require us to place the advertisements on our portalwebsites in specified locations on the sites and for agreed periods; and/or 56 place the advertisements onto our purchased advertisement time during specific TV programs for agreed periods. We recognize revenues as the advertisementairs over the contractual term based on the schedule agreed upon with our clients. As a result of the research and development activities conducted and managed by Rise King WFOE, beginning in December 2009, our WFOE beganproviding a number of value added technical services and management systems to our internet advertisement customers, which services enhance the qualityand performance of the internet advertising services provided by Business Opportunity Online. These value added technical services are primarily onlinetechnical management systems and platforms. Customers use these technical services to analyze, monitor and manage their advertisements on our keyadvertising portal, 28.com, their other traffic generating activities and their online marketing campaign activities. Revenues generated by Rise King WFOEare from the provision of technical and management systems including tools, databases and services developed and managed by Rise King WFOE to analyze,monitor and manage a customer’s advertisements on our key advertising portal, 28.com, their traffic generating activities, and their online marketingcampaign activities. Most of these services are based on fixed price terms; revenues are then generated and recognized from the use of the online managementsystem and tools on a periodic basis, together with the satisfaction of other applicable performance thresholds, if specified. Rise King WFOE’s customers aresimilar to our internet advertising customers, with over 70% of the WFOE’s customers also being customers of our internet advertisement services. The other30% of Rise King WFOE’s customers do not directly advertise on our web portal but use Rise King WFOE’s management systems and the internetinformation collected from our key advertising web portal to monitor and manage their traffic generating activities and online marketing campaign activities.These value added technical services, operated and managed by Rise King WFOE, are primarily developed and offered as additions to the internetadvertisement services provided by Business Opportunity Online. The revenue generating activities conducted by Rise King WFOE are not prohibited underthe known and existing PRC laws and regulations, as our WFOE is providing value-added technical services to our clients, and is not engaged in the internetadvertising business or any other business that is subject to obtaining an Internet Content Provider License. For the internet advertisement servicesconducted by our VIE, Business Opportunity Online, customers use our internet advertising portal, www. 28.com, to place internet advertisements in differentformats, such as: banners, links, logos, buttons, as well as mini-sites. Customers get internet visits and messages from their advertisements placed on ourportal. For the value added technical services provided by our WFOE, customers primarily use the technical and management systems offered by it toanalyze, monitor and manage their advertisements and traffic generating activities on our advertising portal. For example, Rise King WFOE’s customers canuse our management tools to obtain analysis of messages and sales leads received from their internet advertising. The tables below summarize the revenues, cost of sales, gross margin and net income generated from each of our VIEs and subsidiaries for the yearended December 31, 2012 and 2011, respectively. For the year ended December 31, 2012: Name of subsidiary or VIE Revenuefromunrelatedparties Revenue fromrelatedparties Revenue frominter-company Total $(’000) $(’000) $(’000) $(’000) Rise King WFOE 156 89 40 285 Business Opportunity Online and subsidiaries 37,961 108 - 38,069 Beijing CNET Online and subsidiaries 8,286 - 228 8,514 Shanghai Jing Yang - - - - Inter-co., elimination - - (268) (268)Total revenue 46,403 197 - 46,600 57 For the year ended December 31, 2012: Name of subsidiary or VIE Cost of Sales Gross Margin $(’000) $(’000) Rise King WFOE 9 276 Business Opportunity Online and subsidiaries 26,643 11,426 Beijing CNET Online and subsidiaries 5,134 3,380 Shanghai Jing Yang - - Inter-co., elimination (228) (40)Total 31,558 15,042 For the year ended December 31, 2012: Name of subsidiary or VIE Net Income $(’000) Rise King WFOE (1,520)Business Opportunity Online and subsidiaries 4,503 Beijing CNET Online and subsidiaries 1,418 Shanghai Jing Yang (11)ChinaNet Online Holdings, Inc. (982)Total net income before allocation to the noncontrolling interest 3,408 For the year ended December 31, 2011: Name of subsidiary or VIE Revenuefromunrelatedparties Revenuefromrelatedparties Revenue frominter-company Total $(’000) $(’000) $(’000) $(’000) Rise King WFOE 4,451 171 - 4,622 Business Opportunity Online and subsidiaries 20,191 455 - 20,646 Beijing CNET Online and subsidiaries 3,460 - 14 3,474 Shanghai Jing Yang 3 - - 3 Inter-co., elimination - - (14) (14)Total revenue 28,105 626 - 28,731 For the year ended December 31, 2011: Name of subsidiary or VIE Cost of Sales Gross Margin $(’000) $(’000) Rise King WFOE 254 4,368 Business Opportunity Online and subsidiaries 9,980 10,666 Beijing CNET Online and subsidiaries 1,807 1,667 Shanghai Jing Yang - 3 Inter-co., elimination (14) - Total 12,027 16,704 58 For the year ended December 31, 2011: Name of subsidiary or VIE Net Income $(’000) Rise King WFOE 594 Business Opportunity Online and subsidiaries 5,935 Beijing CNET Online and subsidiaries (113)Shanghai Jing Yang 27 ChinaNet Online Holdings, Inc. (3,662)Total net income before allocation to the noncontrolling interest 2,781 Management considers revenues generated from internet advertising and the related technical services as one aggregate business operation andrelies upon the consolidated results of all the operations in this business unit, when making decisions about allocating resources and assessing performance. · Internet advertising revenues for the year ended December 31, 2012 were approximately US$21.1 million as compared to US$15.4 million for the sameperiod in 2011, representing an increase of 37%. The increase in internet advertising revenue for the year ended December 31, 2012 was due to theaddition of the internet advertising revenue generated by Sou Yi Lian Mei of approximately US$7.0 million, resulting from the 51% and 49% equityinterest acquisition in Sou Yi Lian Mei in December 2011 and September 2012, respectively. The internet advertising revenue generated by the otheroperating VIEs of approximately US$14.1 million for the year ended December 31, 2012 decreased by approximately 8.4% as compared to US$15.4million in internet advertising revenue generated in the same period of 2011. This decrease was primarily due to a decrease in the average internetadvertising spending per customer caused by the general decline of China’s economy beginning in the second quarter of 2011, continued into fiscal2012. · Revenues generated from technical services offered by Rise King WFOE were US$0.25 million for the year ended December 31, 2012, as compared toUS$4.6 million for the same period in 2011. Due to the Chinese government’s monetary policy of increasing interest rates and tightening the moneysupply, economic difficulties began in the second quarter of 2011, which only recovered slightly in fiscal 2012 with no significant improvement in theoverall economy. In response to the overall economic downturn in China, and from the second half of 2011, the majority of our clients cancelled thesubscription of these services and only continued their basic internet advertising service, which was recorded in as our internet advertising revenuediscussed above and reduced their advertising spending significantly. · Our TV advertising revenue increased significantly to US$20.5 million for the year ended December 31, 2012 from US$6.4 million for the same periodin 2011. We generated this US$20.5 million of TV advertising revenue for the year ended December 31, 2012 by selling approximately 18,510minutes of advertising time purchased from different provincial TV stations as compared with approximately 6,040 minutes of advertising time that wesold in the same period of 2011. This increase in TV advertising time selling was due to enhanced cooperation with the TV station responsible forlaunching the entrepreneurial reality show, which is based on the same concept and premise as the hit TV game show “Shark Tank” in the U.S. Thisshow is intended to get the general public to visit our website, Chuanye.com and create additional traffic on our two advertising portals, 28.com andLiansuo.com, and in return to monetize more branded larger size small and medium enterprises to subscribe our services while securing ourcompetitive advantage in the TV business segment against our competitors with more time purchased in 2012 as compared with 2011. The TV show isconsidered to be an alternative economic resource to obtain internet traffic to our web portals as the costs associated with our internet resources areincreasing year over year and TV cost has a relatively lower rate of increase. However, due to the regular Chinese New Year holiday which takes placein the first quarter of each fiscal year and is always considered to the slowest time of the year, and the economic downturn happened from the secondhalf of 2011, which continued to 2012, we had to combine the time slots of the first quarter of the year at cost with other quarter’s available time slotssales in order to counter off the deficiency in sales margin incurred during this time of the year. As a result of such combination, we achieved only0.2% gross profit rate for this segment in the first quarter of 2012, this situation was improved in the following quarters of 2012 with our gross profitrate of this business segment improved to 1% for the year ended December 31, 2012. 59 · For the year ended December 31, 2012, we earned approximately US$0.28 million of revenue from the bank kiosk business segment as compared toapproximately US$0.49 million for the same period in 2011. The decrease in advertising revenue from the bank kiosk business was a result of thedecline of the general economy in China, which caused a significant reduction in our customers’ overall advertising spending as discussed above. Thebank kiosk advertising business is not intended to expand at the moment as management’s main focus is on expanding internet business. Therefore, itwas not a significant contributor to revenue for either year ended December 31, 2012 or 2011. Management currently maintains this business withoutany expansion plans and some of the technology used in this business unit will be fully integrated into the overall advertising and marketing platform. · For the year ended December 31, 2012, we achieved approximately US$4.5 million service revenue from our brand management and sales channelbuilding segment as compared to US$1.8 million service revenue generated in the same period of 2011. The increase in the revenue from this businesssegment was primarily due to the increase in the average brand advertising and marketing spending per customer from larger-sized and ex-exportingcustomers acquired for the year ended December 31 2012, as a result of our further expansion of our client base for this business segment in 2012. Cost of revenues Our cost of revenue consisted of costs directly related to the offering of our advertising services, technical services, marketing services and brandmanagement and sales channel building services. The following table sets forth our cost of revenues, divided into five segments, by amount and gross profitratio for the periods indicated, with inter-segment transactions eliminated: Year ended December 31, 2012 2011 (Amounts expressed in thousands of US dollars, except percentages) Revenue Cost GP ratio Revenue Cost GP ratio Internet advertisement $21,121 9,781 54% $15,359 6,033 61%Technical service 245 9 96% 4,622 254 95%TV advertisement 20,454 20,222 1% 6,434 5,233 19%Bank kiosk 282 18 94% 487 42 91%Brand management and sales channel building 4,498 1,528 66% 1,829 465 75%Total $46,600 $31,558 32% $28,731 $12,027 58% Cost of revenues: Our total cost of revenues increased to US$31.6 million for the year ended December 31, 2012 from US$12.0 million for the same period in2011. The increase in total cost of revenues for the year ended December 31, 2012 was primarily due to the significant increase in costs associated with ourTV advertisement business segment, which was in line with the increase in our TV advertisement revenue for the year ended December 31, 2012, as discussedabove. Our cost of revenues related to the offering of our advertising and marketing services primarily consists of internet resources purchased from otherportal websites and technical services providers related to lead generation, sponsored search, TV advertisement time costs purchased from TV stations, directlabor cost associated with providing services and business taxes and surcharges. 60 · Cost associated with obtaining internet resources was the largest component of our cost of revenue for internet advertisement, accounting forapproximately 80%-90% of our total internet advertisement cost of sales. We purchased these internet resources from other well-known portal websitesin China, for example, Baidu, Sohu and Tecent (QQ). Our purchasing of these internet resources in large volumes allowed us to negotiate discountswith our suppliers. The majority of the resources purchased were used by the internet advertising unit to attract more internet traffic to our advertisingportals, assist our internet advertisement clients to obtain more diversified exposure and to generate more visits to their advertisements and mini-sitesplaced on our portal websites, which result in potential sales leads. For the year ended December 31, 2012 and 2011, our total cost of sales for internetadvertising revenue was US$9.8 million and US$6.0 million, respectively. The increase in our cost of sales for internet advertising revenue wasprimarily due to the increase in the purchase price of these resources and the addition of the internet advertising cost of sales recorded by Sou Yi LianMei for the year ended December 31, 2012, which was approximately US$2.5 million. The internet cost of revenue incurred by the other operatingVIEs of approximately US$7.3 million for the year ended December 31, 2012, increased by approximately 22%, as compared to US$6.0 million ininternet advertising cost of revenue incurred in the same period of 2011. This increase was primarily due to the increase in the purchase price of suchresources in 2012 as compared to 2011 and the increased demand of these resources to improve customer satisfaction. Given the foregoing, gross profitrate of internet advertising business segment furnished approximately 54% for the year ended December 31, 2012, as compared to 61% achieved in thesame period in 2011. · Beginning in December 2009, our WFOE began providing a number of value added technical services to our internet advertisement customers. Thedirect cost of sales for the WFOE’s technical services revenue recognized by our WFOE was primarily the PRC business tax expenses, which wasapproximately 5% of the total technical service revenue recognized by Rise King WFOE. The decrease in the business tax expenses incurred by ourWFOE in 2012 was in line with the decrease in the technical services revenue earned by our WFOE in 2012 as compared to that in 2011. · TV advertisement time cost is the largest component of cost of revenue for TV advertisement revenue. We purchase TV advertisement time fromdifferent provincial TV stations and resell it to our TV advertisement clients. Our TV advertisement time cost was approximately US$20.2 million andUS$5.2 million for the years ended December 31, 2012 and 2011, respectively. The significant increase in our total TV advertisement time cost was inline with the significant increase of TV advertising revenue for the year ended December 31, 2012 as compared to that in the same periods of 2011, asdiscussed above. · Cost recognized for brand management and sales channel building business segment primarily consisted of director labor cost for providing theseservices to our customers and the related business tax and business tax surcharges. The increase in cost of service in this segment was in line with theincrease of revenue achieved by this segment for the year ended December 31, 2012 as compared to that in the same periods of 2011. Gross Profit As a result of the foregoing, our gross profit was US$15.0 million for the year ended December 31, 2012 as compared to US$16.7 million for thesame period in 2011. Our overall gross profit rate decreased to 32% for the year ended December 31, 2012, as compared to 58% for the same period in 2011.For the year ended December 31, 2012, the decrease in the overall gross profit rate was a direct result of (1) the significant increase of the low margin TVadvertising revenue, which accounted for approximately 44% of the total revenue we achieved for the year ended December 31, 2012, as compared to 22% inthe same period of 2011; and (2) lower gross profit rate achieved from the two major segment of our business, internet advertising segment and TVadvertising segment, which achieved 54% and 1% gross profit rate for the year ended December 31, 2012, respectively, as compared to 61% and 19% grossprofit rate achieved for the year ended December 31, 2011, respectively. Operating Expenses and Net Income Our operating expenses consist of selling expenses, general and administrative expenses and research and development expenses. The followingtables set forth our operating expenses, divided into their major categories by amount and as a percentage of our total revenues for the periods indicated. 61 Years ended December 31, 2012 2011 (Amounts expressed in thousands of US dollars, except percentages) Amount % of total revenue Amount % of total revenue Total Revenue $46,600 100% $28,731 100%Gross Profit 15,042 32% 16,704 58%Selling expenses 2,683 6% 3,506 12%General and administrative expenses 6,030 13% 7,904 28%Research and development expenses 1,819 4% 2,132 7%Total operating expenses 10,532 23% 13,542 47% Operating Expenses: Our operating expenses decreased to US$10.5 million for the year ended December 31, 2012 from US$13.5 million for the same periodof 2011. · Selling expenses: For the year ended December 31, 2012, our selling expenses decreased to US$2.68 million from US$3.51 million for the same periodof 2011. Our selling expenses primarily consist of advertising expenses for brand development that we pay to TV stations and other media outlets forthe promotion and marketing of our advertising web portals, other advertising and promotional expenses, website server hosting and broadbandleasing expenses, staff salaries, staff benefits, performance bonuses, travelling expenses, communication expenses and other general office expenses ofour sales department. For the year ended December 31, 2012, the change in our selling expenses was primarily due to the following reasons: (1) theincrease in staff salary, bonus, employee related benefit expenses and other general selling expenses, such as travelling expenses, business andentertainment expenses and communication expenses of approximately US$1.02 million, primarily due to the expansion of our sales department andinclusion of the selling expenses incurred by Sou Yi Lian Mei, the new VIE we acquired in December 2011; (2) increase in website server hosting andbroadband leasing expense of approximately US$0.13 million due to the same reason as discussed above; (3) decrease in selling expenses ofapproximately US$0.23 million due to deconsolidation Zhao Shang Ke Hubei incurred in December 2011; (4) decreased of share-based compensationexpenses of approximately US$0.68 million, which is a non-recurring selling expense in 2011, due to insurance of restricted stock and common stockoptions to management, directors and employee in November 2011,; and (5) our brand development advertising expenses for our advertising webportals decreased by approximately US$1.07 million. Due to the current economic downturn, increase of TV advertising cost and overall costreduction plan, we decided to slow down the brand-building activities until the recovery of the economy based on the factor that, our key advertisingweb portal, 28.com, has been already recognized as one of the most popular Chinese internet portals providing internet advertising and marketingservices with sales leads, and other value-added services to SMEs, particularly for small and medium-sized franchisors, in the PRC, by the investmentwe made in brand building over the last three years. In 2012, we actively participated in both domestic and international franchise exhibitions, whichis considered as a more cost-effective way for our continue brand building efforts. · General and administrative expenses: General and administrative expenses decreased to US$6.03 million for the year ended December 31, 2012 ascompared to US$7.90 million for the same period in 2011. Our general and administrative expenses primarily consist of salaries and benefits formanagement, accounting and administrative personnel, office rentals, depreciation of office equipment, professional service fees, maintenance,utilities and other office expenses. For the year ended December 31, 2012, the change in our general and administrative expenses was primarily due tothe following reasons: (1) the increase in amortization expenses related to the intangible assets identified in the acquisition transactions consummatedin 2011 of approximately US$0.51 million, which was primarily due to the acquisition of Sou Yi Lian Mei consummated in late December 2011 andthe related amortization expenses was only included for the year ended December 31, 2012; (2) the increase in staff salary, bonus, employee relatedbenefit expenses and other general expenses, such as entertainment expenses, travelling expenses and communication expenses of approximatelyUS$0.51 million, primarily due to inclusion of the general and administrative expenses incurred by Sou Yi Lian Mei, the new VIE we acquired in lateDecember 2011; (3) the decrease in G&A expenses of approximately US$0.19 million due to deconsolidation Zhao Shang Ke Hubei incurred inDecember 2011; (4) the decrease in allowance for doubtful accounts we provided for the year ended December 31, 2012 of approximately US$1.44million; and (5) the decrease in share-based compensation expense in relation to restricted stock and common stock purchase options issued tomanagement, directors and employee in November 2011 of approximately US$1.26 million, which is a non-recurring general and administrativeexpense in 2011. 62 · Research and development expenses: Research and development expenses decreased to US$1.82 million for the year ended December 31, 2012 fromUS$2.13 million for the same period of 2011. Our research and development expenses primarily consist of salaries and benefits for the research anddevelopment staff, equipment depreciation expenses, and office utilities and supplies allocated to our research and development department. For theyear ended December 31, 2012, the change in our research and development expenses was primarily due to the following reasons: (1) the decrease inshare-based compensation expense in relation to restricted stock and common stock purchase options issued to members of our research anddevelopment department in November 2011 of approximately US$0.67 million, which is a non-recurring research and development expense in 2011;(2) the increase in amortization expenses of cloud-computing based software technologies we acquired in July 2011 of approximately US$0.08million; and (3) the increase of salary, staff benefit expenses and other R&D expenses of approximately US$0.28 million due to expansion of ourresearch and development department in 2012. We expect that our research and development expenses will increase in future periods as we continue toexpand, optimize and enhance the technology of our portal websites, upgrade our advertising and internet management software and develop ourcloud-computing based management tools. In the next three to five years, we expect our research and development expenses to be within the range offour percent to six percent of our total revenues. Operating Profit: As a result of the foregoing, our operating profit increased to US$4.5 million for the year ended December 31, 2012 from US$3.2 million forthe same period of 2011. Excluding the approximately US$2.6 million of non-recurring share-based compensation expenses related to the restricted stockand common stock purchase options issued to management, directors and employees in November 2011, the adjusted NON-GAAP operating profit for theyear ended December 31, 2011 was US$5.8 million. Changes in Fair Value of Contingent Consideration Receivables: Contingent consideration receivables arose from certain “make good” provisions enteredinto by and between the Company and the former stockholders of Quanzhou Zhi Yuan, Quanzhou Tian Xi Shun He and Sou Yi Lian Mei, upon acquisition ofthese operating VIEs. These “make good” provisions provide that if the acquired VIEs’ audited pretax profit or after tax profit for the year ended December31, 2012 and 2011 increases by less than a certain amount or percentage as compared to that of the prior year, then the former VIE stockholders will berequired to compensate the Company in cash for the difference between target pretax profit or after tax profit and the actual pretax profit or after tax profit, asapplicable. We assessed the fair value of these contingent consideration receivables at the respective acquisition date of these acquired VIEs and reassessedthese fair values as of each of the reporting periods. The changes in the fair value of these contingent consideration receivables of approximately US$0.16million and US$0.07 million for the year ended December 31, 2012 and 2011, respectively, was included in our consolidated statement of income andcomprehensive income. Gain on deconsolidation of subsidiaries: The deconsolidation of Shenzhen Mingshan and Zhao Shang Ke Hubei that occurred on January 6, 2011 andDecember 29, 2011, respectively, were accounted for in accordance with ASC Topic 810 “Consolidation”. We recognized a gain of approximately US$0.23million upon deconsolidation of Shenzhen Mingshan and a gain of approximately US$0.69 million upon deconsolidation of Zhao Shang Ke Hubei in ourconsolidated statements of income and comprehensive income for the year ended December 31, 2011, with a corresponding increase to the carrying value ofthe investment in Shenzhen Mingshan and Zhao Shang Ke Hubei, respectively, in our consolidated balance sheet. These deconsolidation gains representedthe excess of the fair value of our retained equity interest in Shenzhen Mingshan and Zhao Shang Ke Hubei over its respective carrying value as of therespective date of deconsolidation. Income before income tax expense, equity method investments and noncontrolling interests: As a result of the foregoing, our income before income taxexpenses, equity method investment and noncontrolling interest increased to US$4.4 million for the year ended December 31, 2012 from US$4.0 million forthe same period in 2011. Adjusted Non-GAAP income before income tax expenses, equity method investments and noncontrolling interest, which 63 excludes the previously discussed non-cash gains or expenses recognized for non-recurring transactions for the year ended December 31, 2012 and 2011, wasapproximately US$4.5 million and US$5.8 million for the year ended December 31, 2012 and 2011, respectively. Income tax expenses: We recognized an income tax expense of approximately US$0.53 million and US$1.04 million for the year ended December 31, 2012and 2011, respectively. For the year ended December 31, 2012 and 2011, income tax expenses included: (1) current income tax expenses of approximatelyUS$1.36 million and US$1.01 million, respectively; and (2) deferred income tax benefit of approximately US$0.83 million for the year ended December 31,2012 and net deferred income tax expenses of approximately US$ 0.03 million for the year ended December 31, 2011. For the year ended December 31, 2012,the increase in current income tax expenses was primarily due to the increase in the overall effective income tax rate of our profitable PRC operating VIEs.For the year ended December 31, 2012 deferred income tax benefit recognized in relation to the amortization of the intangible assets identified in theacquisition transactions consummated in 2011 was approximately US$0.22 million. For the year ended December 31, 2012, deferred income tax benefitrecognized also include an approximately US$0.61 million deferred income tax benefit in relation to the net operating losses incurred by our PRC operatingVIEs for the year ended December 31, 2012, which we consider likely to be able to be utilized with respect to future earnings of the entities to which theoperating losses relate. For the year ended December 31, 2011, our net deferred income tax expenses included an approximately US$0.21 million deferredincome tax expenses in relation to the gain on deconsolidation of subsidiaries recognized for the year ended December 31, 2011, an approximately US$0.09million deferred income tax benefit in relation to the amortization expenses of the intangible assets identified upon acquisition of Quanzhou Zhi Yuan andQuanzhou Tian Xi Shun He for the year ended December 31, 2011 and an approximately US$0.09 million deferred income tax benefit in relation to the netoperating loss carry forward incurred by our PRC operating VIEs, which we consider likely to be able to be utilized with respect to future earnings of theentities to which the operating losses relate. Income before equity method investments and noncontrolling interests: As a result of the foregoing, our income before equity method investment andnoncontrolling interest increased to US$3.9 million for the year ended December 31, 2012 from US$3.0 million for the same period of 2011. Adjusted Non-GAAP income before equity method investments and noncontrolling interest, which excludes the previously discussed non-cash gains or expensesrecognized for non-recurring transactions for the year ended December 31, 2012 and 2011, was approximately US$4.0 million and US$5.0 million for theyear ended December 31, 2012 and 2011, respectively. Share of losses in equity investment affiliates: We acquired a 49% equity interest in Beijing Yang Guang in December 2010. In August 2011, we transferredour 49% equity interest in Beijing Yang Guang back to its majority shareholder. For the year ended December 31, 2011, our pro-rata share of earningsrecognized in Beijing Yang Guang was approximately US$0.03 million. Shenzhen Mingshan used to be 51% owned by one of our operating VIEs and wasconsolidated by us from its date of incorporation through January 6, 2011. On January 6, 2011, an unaffiliated third party invested RMB15,000,000(approximately US$2,374,883) to Shenzhen Mingshan in exchange for a 60% equity interest in Shenzhen Mingshan, and our percentage of equity interest inShenzhen Mingshan decreased from 51% to 20.4% accordingly. Shenzhen Mingshan became an equity investment affiliate of ours. In December 2012, asapproved by the shareholders of Shenzhen Mingshan, Shenzhen Mingshan reduced its registered and paid-in capital from RMB25,000,000 (approximatelyUS$3,958,139) to RMB22,000,000 (approximately US$3,483,162), resulted from a decrease of paid-in capital from three other noncontrolling shareholders,except Business Opportunity Online. As a result, our share of the equity interest in Shenzhen Mingshan increased from 20.4% to 23.18% and we continued toretain significant influence over Shenzhen Mingshan. Accordingly, we recognized our pro-rata share of losses in Shenzhen Mingshan immediately after thedeconsolidation based on our percentage of equity interest in Shenzhen Mingshan for each period, which was approximately US$0.11 million and US$0.25million for the year ended December 31, 2012 and 2011, respectively. Zhao Shang Ke Hubei used to be 51% owned by one of our operating VIEs and wasconsolidated by us from its date of incorporation through December 29, 2011. On December 29, 2011, two unaffiliated third party investors investedRMB10,000,000 (approximately US$1,583,255) to Zhao Shang Ke Hubei in exchange for a 50% equity interest in Zhao Shang Ke Hubei, and our percentageof equity interest in Zhao Shang Ke Hubei decreased from 51% to 25.5% accordingly. Zhao Shang Ke Hubei then became an equity investment affiliate ofours. Accordingly, we recognized our pro-rata share of losses in Zhao Shang Ke Hubei immediately after the deconsolidation, which was approximatelyUS$0.34 million for the year ended December 31, 2012. Given the 64 foregoing, net amount recognized as share of losses in equity investment affiliates was approximately US$0.45 million and US$0.22 million for the yearended December 31, 2012 and 2011, respectively. Net income: As a result of the foregoing, our net income increased to US$3.4 million for the year ended December 31, 2012 from US$2.8 million for the sameperiod of 2011. Excluding the non-cash gain recognized for deconsolidation of subsidiaries of approximately US$0.93 million, the related deferred incometax expenses of approximately US$0.21 million, the non-cash expenses of share-based compensation recognized for the restricted stock and common stockpurchase options issued in November 2011 of approximately US$2.6 million and the non-cash charge of the changes in fair value of the contingentconsideration receivables of approximately US$0.07 million for the year ended December 31, 2011; and the non-cash charge of the changes in fair value ofthe contingent consideration receivables of approximately US$0.16 million for the year ended December 31, 2012, we achieved adjusted Non-GAAP netincome amounting to US$3.6 million and US$4.7 million for the years ended December 31, 2012 and 2011, respectively. Income / loss attributable to noncontrolling interest: Shenzhen Mingshan was 51% owned by Business Opportunity Online upon incorporation until it wasdeconsolidated from us in January 2011. Quanzhou Tian Xi Shun He was 51% owned by Beijing CNET Online upon acquisition before it became a wholly-owned subsidiary of Beijing CNET Online in June 2011. Zhao Shang Ke Hubei was 51% owned by Business Opportunity Online Hubei upon incorporationuntil it was deconsolidated from us in December 2011. Beijing Chuang Fu Tian Xia and Sheng Tian Hubei were 51% owned by Business Opportunity Onlineand Business Opportunity Online Hubei, respectively, upon incorporation. Sou Yi Lian Mei was 51% owned by Business Opportunity Online Hubei before itbecame a wholly-owned subsidiary of Business Opportunity Online Hubei in September 2012. Accordingly, net income/losses incurred by these entitiesduring the period when they were majority-owned subsidiaries of our PRC VIEs were allocated between their respective shareholders based on theirrespective percentage of the ownership in these entities for the year ended December 31, 2012 and 2011. For the year ended December 31, 2012, the netincome allocated to the noncontrolling interest of Sou Yi Lian Mei was approximately US$0.62 million, the aggregate net losses allocated to thenoncontroliing interest of Beijing Chuang Fu Tian Xia and Sheng Tian Hubei was approximately US$0.21 million. Given the foregoing, net incomeattributable to noncontrolling interest in the aggregate was approximately US$0.41 million for the year ended December 31, 2012. For the year endedDecember 31, 2011, the aggregate net losses allocated to the noncontrolling interest of Quanzhou Tian Xi Shun He, Zhao Shang Ke Hubei, Beijing ChuangFu Tian Xia and Sheng Tian Hubei were approximately US$0.21 million. Net income attributable to ChinaNet Online Holdings, Inc.: Total net income as adjusted by the net income or loss attributable to the noncontrolling interestshareholders as discussed above yields the net income attributable to ChinaNet Online Holdings, Inc. Our net income attributable to ChinaNet OnlineHoldings, Inc. was US$3.0 million for both the year ended December 31, 2012 and 2011. Adjusted Non-GAAP net income attributable to ChinaNet OnlineHoldings, Inc. which excludes the previously discussed non-cash gains or expenses recognized for non-recurring transactions for the year ended December31, 2012 and 2011 was approximately US$3.2 million and US$5.0 million for the year ended December 31, 2012 and 2011, respectively. Dividend for Series A convertible preferred stock: Cash dividend to Series A convertible stock holders was calculated at the per annum rate of 10% of theliquidation preference amount of the Series A preferred stock which was US$2.5 per share and the actual number of days each share outstanding within eachof the reporting period. As all of the outstanding Series A convertible preferred stock of us was automatically converted into our common stock on August 21,2011, no preferred stock dividend was accrued for the year ended December 31, 2012. The cash dividends we accrued for the Series A convertible preferredstock were approximately US$0.41 million for the years ended December 31, 2011. Net income attributable to ChinaNet’s common shareholders: Net income attributable to ChinaNet’s common shareholders represents the net income afterallocation to noncontrolling interests minus the cash dividend accrued for Series A convertible preferred stock. Our net income attributable to ChinaNet’scommon shareholders increased to US$3.0 million for the year ended December 31, 2012 from US$2.6 million for the same period of 2011. Adjusted Non-GAAP net income attributable to ChinaNet’s common shareholders, which excludes the previously discussed non-cash gains or expenses recognized for non-recurring transactions, was approximately US$3.2 million and US$4.5 million for the years ended December 31, 2012 and 2011, respectively. 65 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 originalmaturities of three months or less at the time of purchase to be cash equivalents. As of December 31, 2012, we had cash and cash equivalents ofapproximately US$5.5 million and we also have approximately US$3.4 million of term deposit placed in one of the major financial institutes in China whichwill expire in July 2013. Our liquidity needs include (i) net cash used in operating activities that consists of (a) cash required to fund the initial build-out and continuedexpansion of our network and (b) our working capital needs, which include deposits and advance payment to TV advertising slots and internet resourceproviders, payment of our operating expenses and financing of our accounts receivable; and (ii) net cash used in investing activities that consist of thepayment for acquisitions to further expand our business and client base, investment in software technologies to enhance the functionality of the managementtools provided by our advertising portals and investment in other general office equipment. To date, we have financed our liquidity need primarily throughproceeds from operating activities we generated in prior years. Our existing cash is adequate to fund operations for the next 12 months. The following table provides detailed information about our net cash flow for the periods indicated: Year ended December 31, 2012 2011 Amounts in thousands of US dollars Net cash provided by/(used in) operating activities $5,028 $(603)Net cash used in investing activities (9,919) (6,084)Net cash (used in)/provided by financing activities (385) 1,482 Effect of foreign currency exchange rate changes on cash 64 310 Net decrease in cash and cash equivalents $(5,212) $(4,895) Net cash provided by / (used in) operating activities: For the year ended December 31, 2012, our net cash provided by operating activities of approximately US$5.03 million were primarily attributableto: (1) net income excluding approximately US$1.69 million of non-cash expenses of depreciation, amortizations, share-based compensation;approximately US$1.14 million of non-cash charge of bad debts provisions; approximately US$0.45 million of share of losses in equityinvestment affiliates and approximately US$0.16 million of change in fair value of contingent consideration receivable, and net of approximatelyUS$0.83 million of deferred income tax benefit, of approximately US$6.02 million; (2) the receipt of cash from operations from changes in operating assets and liabilities such as: - other receivables decreased by approximately US$1.4 million, which was primarily due to the collection of the overdue contractexecution guarantee deposits and the partial collection of the loan made for the production of the TV series “Xiao Zhan Feng Yun”; - prepayments and deposits to suppliers decreased by approximately US$0.88 million, primarily due to the decrease in prepayments anddeposits paid for the TV advertisement time purchased for reselling in 2013; - advance from customers and due to related parties for advertising services to be provided increased by approximately US$0.33 million; - taxes payable increased by approximately US$1.60 million; and 66 - other payables and accrued payroll and other accruals increased by approximately US$0.36 million. (3) offset by the use from operations from changes in operating assets and liabilities such as: - accounts receivable and due from related parties for the advertising services provided increased by approximately US$5.40 million;and - accounts payable decreased by approximately US$0.16 million. For the year ended December 31, 2011, our net cash used in operating activities of approximately US$0.6 million were primarily attributable to: (1) net income excluding approximately US$0.9 million non-cash gain recognized upon deconsolidation of subsidiaries, US$2.58 million of non-cash charge of bad debts provisions, US$2.9 million of non-cash share-based compensation expenses, which primarily resulted from the 2,000,000shares of restricted stock and 885,440 shares of common stock purchase options issued to our management and employees on November 30, 2011and US$1.3 million of other non-cash expenses of depreciation, amortizations and our share of losses in equity investment affiliates ofapproximately US$8.7 million; (2) the receipt of cash from operations from changes in operating assets and liabilities such as: - Other receivables decreased by approximately US$5.3 million, which was primarily due to the collection of the third party loans andthe partial collection of the loan made for the production of the TV series “Xiao Zhan Feng Yun”; - accounts payable, other payables and accrued payroll and other accruals increased by approximately U$S0.7 million; and - taxes payable increased by approximately US$0.8 million. (3) offset by the use from operations from changes in operating assets and liabilities such as: - accounts receivable and due from related parties for the advertising services provided increased by approximately US$2.2 million; - prepayments and deposits to suppliers increased by approximately US$11.2 million, primarily due to the prepayments and depositspaid for the TV advertisement time purchased for fiscal 2012; - advance from customers and due to related parties for advertising services to be provided decreased by approximately US$1.7 million; - due to director and due to Control Group decreased by approximately US$0.7 million, as in year 2011, we settled the balances due tothem for the cost and operating expenses paid by them on behalf of our company in previous years; and - payments of approximately US$0.2 million for other current assets. Net cash used in investing activities: For the year ended December 31, 2012, our net cash used in investing activities included the following transactions: (1) we paid an aggregate ofapproximately US$5.78 million in connection with the acquisition of equity interest in Sou Yi Lian Mei; (2) we placed approximately US$3.36 million cashas term deposit in one of the major financial institutions in China, which will expire in July 2013 and this amount was recorded as a decrease in cash and cashequivalents, i.e. cash outflow in investing activity for the year ended December 31, 2012; (3) during the year ended December 31, 2012, we made anapproximately US$2.45 million project development deposit to a third party 67 project development and management company for the participation in the development and management of the Xiaogan TMT Zone, which had been fullyrefunded before December 31, 2012 due to our withdrawing from this project after evaluation; (4) we made an approximately US$0.48 million temporary loanto unrelated entities; and (5) we spent approximately US$0.31 million in general office equipment during the year ended December 31, 2012. In theaggregate, these transactions resulted in a net cash outflow from investing activities of approximately US$9.92 million for the year ended December 31,2012. For the year ended December 31, 2011, our net cash used in investing activities included the following transactions: (1) we paid approximatelyUS$9.7 million in connection with the acquisitions incurred during the year, including the acquisitions of a 100% equity interest of Quanzhou Zhi Yuan anda 51% equity interest of Quanzhou Tian Xi Shun He in January 2011, the acquisition of the remaining 49% equity interest in Quanzhou Tian Xi Shun He inJune 2011 and the acquisition of a 51% equity interest in Sou Yi Lian Mei in December 2011; (2) total cash acquired from the above acquisitions recorded ascash inflow from investing activities during the year was approximately US$0.3 million, (3) we paid approximately US$1.7 million to our equity investmentaffiliates during the year, including an additional US$1.5 million working capital loan to Beijing Yang Guang in the first quarter of 2011 and anapproximately US$0.2 million additional cash investment to ShenZhen Mingshan in the third quarter of 2011; (4) from August to December 2011, after wedisposed our investment in Beijing Yang Guang, we collected approximately US$8.9 million in the aggregate for (i) the cash consideration of the disposal ofthe 49% equity interest in Beijing Yang Guang; (ii) our pro-rata share of earnings generated from Beijing Yang Guang during the period when we held the49% equity interest in it; and (iii) all of the outstanding working capital loans lent to Beijing Yang Guang in 2010 and 2011; (5) cash effect ofdeconsolidation of Shenzhen Mingshan and Zhao Shang Ke Hubei recorded as cash outflow from investing activities during the year was approximatelyUS$1.7 million, which represented the cash balance of the deconsolidated subsidiaries as of their respective deconsolidation dates; and (6) we also investedapproximately US$0.7 million in fixed assets and approximately US$1.4 million in intangible assets, which investments were primarily related to the cloud-computing based software technologies purchased during the year. In the aggregate, these transactions resulted in a net cash outflow from investing activitiesof approximately US$6.1 million for the year ended December 31, 2011. Net cash (used in) / provided by financing activities: For the year ended December 31, 2012, our net cash used in financing activities was approximately US$0.39 million which primarily consisted ofthe following transactions: (1) cash dividends paid to our preferred stockholders of approximately US$0.01 million; (2) one of our VIEs borrowed anapproximately US$0.32 million working capital loan from Zhao Shang Ke Hubei, our equity investment affiliate during the three months ended March 31,2012; and (3) our VIEs repaid all previously borrowed outstanding working capital loan of approximately US$0.54 million to Zhao Shang Ke Hubei duringthe three months ended June 30, 2012; (4) we also repaid approximately US$0.16 million to the legal (nominal) shareholders of Shanghai Jing Yang, withwhom we entered into the VIE contractual arrangements in December 2010, for the initial paid-in capital they contributed upon incorporation of ShanghaiJing Yang. For the year ended December 31, 2011, our net cash provided by financing activities was approximately US$1.5 million which primarily consistedof the following transactions: (1) cash dividends paid to our preferred stockholders of approximately US$0.7 million; (2) cash contributed by thenoncontrolling interest shareholders of our newly formed VIEs of approximately US$0.4 million in connection with the establishment of these VIEs in 2011;(3) we received approximately US$1.5 million from the two new investors of Zhao Shang Ke Hubei in advance before it was deconsolidated from us, whichwas recorded as cash inflow from financing activities during the year; and (4) we, through one of our VIEs borrowed approximately US$0.2 million workingcapital loan from Zhao Shang Ke Hubei, which was also recorded as cash inflow from financing activities during the year. Restricted Net Assets As most of our operations are conducted through our PRC subsidiary and VIEs, our ability to pay dividends is primarily dependent on receivingdistributions of funds from our PRC subsidiary and VIEs. Relevant PRC statutory laws and regulations permit payments of dividends by our PRC subsidiaryand VIEs only out of their retained 68 earnings, if any, as determined in accordance with PRC accounting standards and regulations and after it has met the PRC requirements for appropriation tostatutory reserves. Paid in capital of the PRC subsidiary and VIEs included in our consolidated net assets are also not distributable for dividend purposes. In accordance with the PRC regulations on Enterprises with Foreign Investment, a WFOE established in the PRC is required to provide certainstatutory reserves, namely general reserve fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit asreported in the enterprise’s PRC statutory accounts. A WFOE is required to allocate at least 10% of its annual after-tax profit to the general reserve until suchreserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. Appropriations to the enterprise expansion fund and staffwelfare and bonus fund are at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and are notdistributable as cash dividends. Rise King WFOE is subject to the above mandated restrictions on distributable profits. Additionally, in accordance with theCompany Law of the PRC, a domestic enterprise is required to provide a statutory common reserve of at least 10% of its annual after-tax profit until suchreserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to provide for adiscretionary surplus reserve, at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and are notdistributable as cash dividends. All of our PRC VIEs are subject to the above mandated restrictions on distributable profits. As a result of these PRC laws and regulations, our PRC subsidiary and VIEs are restricted in their ability to transfer a portion of their net assets to us. As of December 31, 2012 and 2011, net assets restricted in the aggregate, which includes paid-in capital and statutory reserve funds of our PRC subsidiaryand VIEs that are included in our consolidated net assets, was approximately US$5.5 million and US$4.7 million, respectively. The New PRC Enterprise Income Tax (“EIT”) Law, which was effected on January 1, 2008, also imposed a 10% withholding income tax fordividends distributed by a foreign invested enterprise to its immediate holding company outside China, which were exempted under the previous EIT law. Alower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company.Holding companies in Hong Kong, for example, will be subject to a 5% rate. Rise King WFOE is invested by its immediate holding company in Hong Kongand will be entitled to the 5% preferential withholding tax rate upon distribution of the dividends to its immediate holding company. The ability of our PRC subsidiaries to make dividends and other payments to us may also be restricted by changes in applicable foreign exchangeand other laws and regulations. Foreign currency exchange regulation in China is primarily governed by the following rules: · Foreign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules; · Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules. Currently, under the Administration Rules, Renminbi is freely convertible for current account items, including the distribution of dividends, interestpayments, trade and service related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation ofinvestments and investments in securities outside of China, unless the prior approval of the State Administration of Foreign Exchange (the “SAFE”) isobtained and prior registration with the SAFE is made. Foreign-invested enterprises like Rise King WFOE that need foreign exchange for the distribution ofprofits to its shareholders may effect payment from their foreign exchange accounts or purchase and pay foreign exchange rates at the designated foreignexchange banks to their foreign shareholders by producing board resolutions for such profit distribution. Based on their needs, foreign-invested enterprisesare permitted to open foreign exchange settlement accounts for current account receipts and payments of foreign exchange along with specialized accountsfor capital account receipts and payments of foreign exchange at certain designated foreign exchange banks. 69 Although the current Exchange Rules allow the convertibility of Chinese Renminbi into foreign currency for current account items, conversion ofChinese Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of SAFE, which isunder the authority of the People’s Bank of China. These approvals, however, do not guarantee the availability of foreign currency conversion. We cannot besure that it will be able to obtain all required conversion approvals for our operations or the Chinese regulatory authorities will not impose greater restrictionson the convertibility of Chinese Renminbi in the future. Currently, most of our retained earnings are generated in Renminbi. Any future restrictions oncurrency exchanges may limit our ability to use retained earnings generated in Renminbi to make dividends or other payments in U.S. dollars or fundpossible business activities outside China. As of December 31, 2012 and 2011, there were approximately US$38.1 million and US$34.0 million retained earnings in the aggregate,respectively, which were generated by our PRC subsidiary and VIEs in Renminbi included in our consolidated net assets, aside from US$2.4 million andUS$2.2 million statutory reserve funds as of December 31, 2012 and 2011, respectively, that may be affected by increased restrictions on currency exchangesin the future and accordingly may further limit our PRC subsidiary’ or VIEs’ ability to make dividends or other payments in U.S. dollars to us, in addition tothe approximately US$5.5 million and US$4.7 million restricted net assets as of December 31, 2012 and 2011, respectively, as discussed above. C. Off-Balance Sheet Arrangements None. D. Tabular Disclosure of Contractual Obligations The following table sets forth our company’s contractual obligations as of December 31, 2012: Office Rental Server hostingand board-band Leasing Total US$(’000) US$(’000) US$(’000) Year ending December 31, -2013 367 69 436 -2014 293 - 293 -2015 293 - 293 -2016 73 - 73 1,026 69 1,095 ITEM 7B. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to include disclosure under this Item. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Financial Statements Our consolidated financial statements and the notes thereto begin on page F-1 of this Annual Report. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL DISCLOSURES 70 The practice of Bernstein & Pinchuk LLP (“B&P”), our company’s independent registered public accounting firm, entered into a joint ventureagreement with Marcum LLP and formed Marcum Bernstein & Pinchuk LLP (“MarcumBP”) in a transaction pursuant to which B&P merged its Chinaoperations into MarcumBP and certain of the professional staff of B&P joined MarcumBP as employees of MarcumBP (“the “Merger”). Accordingly, andsolely as a result of the Merger, effective April 14, 2011, B&P effectively resigned as our company’s independent registered public accounting firm andMarcumBP became our company's independent registered public accounting firm. This change in our company’s independent registered public accountingfirm was approved by the Audit Committee of our company’s Board of Directors.The principal accountant's reports of B&P on the financial statements of our company as of and for the years ended December 31, 2010 and 2009 didnot contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. There were no disagreements with Marcum BP and BP on accounting and financial disclosures during the period that they serviced as ourcompany’s independent registered public accounting firm, respectively. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Disclosure Controls and Procedures Under the supervision and with the participation of management, including our chief executive officer and the chief financial officer, we conductedan evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act, as of the end of December 31, 2012. Based on this evaluation, our chief executive officer and chief financial officer concluded as ofDecember 31, 2012 that our disclosure controls and procedures were effective such that the material information required to be included in our SEC reports isrecorded, processed, summarized and reported within the time periods specified in SEC rules and forms relating to our company, including our consolidatingsubsidiaries and VIEs, and was made known to them by others within those entities, particularly during the period when this report was being prepared. Management’s Report on Internal Control over Financial Reporting The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as such term isdefined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generallyaccepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, management conducted an evaluationof the effectiveness of its internal control over financial reporting as of December 31, 2012. The framework on which such evaluation was based is containedin the report entitled “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the“COSO Report”). Based on that evaluation and the criteria set forth in the COSO Report, management concluded that its internal control over financialreporting was effective as of December 31, 2012. Changes in Internal Controls over Financial Reporting 71 There were no significant changes in our internal controls over financial reporting identified in connection with this evaluation that occurred duringour last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. Management Process to Assess the Effectiveness of Internal Control over Financial Reporting To comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, the Company followed a comprehensive compliance processacross our major operations to evaluate our internal control over financial reporting, engaging employees at all levels of the organization. Our internalcontrol environment includes a corporate-wide attitude of integrity and control consciousness. This is exemplified by our ethics education program thatincludes long-standing principles and policies on ethical business conduct that require employees to maintain the highest ethical and legal standards in theconduct of our business. We have distributed the Board of Directors approved policy on ethics and code of business conduct to all employees and requiredthem to study and abide by the policy. We encourage any employee may report suspected violations of law or our policy. The internal control system furtherincludes careful selection and training of supervisory and management personnel, appropriate delegation of authority and division of responsibility,dissemination of accounting and business policies throughout the Company, and an extensive program of internal audits with management follow-up. OurBoard of Directors, assisted by the Audit Committee, monitors the integrity of our financial statements and financial reporting procedures, the performance ofour internal audit function and independent auditors, and other matters set forth in its charter. The Committee, which currently consists of three independentdirectors, meets regularly with representatives of management, and with the independent auditors and the Internal Auditor, with and without managementrepresentatives in attendance, to review their activities. Attestation Report of the Registered Public Accounting Firm This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financialreporting. As a smaller reporting company, management’s report is not subject to attestation by our registered public accounting firm. ITEM 9B. OTHER INFORMATION There is no information required to be disclosed in a report on Form 8-K during the fourth quarter of the year covered by this Form 10-K but notreported. PART III. Certain information required by Part III is omitted from this Annual Report on Form 10-K since we intend to file our definitive Proxy Statement forour next Annual Meeting of Stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the “Proxy Statement”), within120 days of the end of the fiscal year covered by this report, and certain information to be included in the Proxy Statement is incorporated herein byreference. ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information set forth in the Proxy Statement under the captions Election of Directors—Nominees of the Board of Directors; Election of Directors—Section 16(a) Beneficial Ownership Compliance; Election of Directors—Board Operations, last paragraph; and Election of Directors—Board Committees—Audit Committee—first sentence of first paragraph and second sentence of second paragraph and Election of Directors—Board Committees—Nominatingand Corporate Governance Committee—last paragraph is incorporated herein by reference. ITEM 11 EXECUTIVE COMPENSATION 72 The information set forth in the Proxy Statement under the captions Election of Directors—Executive Compensation is incorporated herein byreference. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information set forth in the Proxy Statement under the caption Security Ownership of Certain Beneficial Owners and Management isincorporated herein by reference. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information set forth in the Proxy Statement under the caption Election of Directors—Nominees of the Board of Directors identifying thedirectors and in the last paragraph under that caption, and the information under the caption Election of Directors—Certain Relationships and RelatedTransactions is incorporated herein by reference. ITEM 14 PRINCIPAL ACCOUNTANT FEE AND SERVICES The information set forth in the Proxy Statement under the captions Ratification of the Appointment of Independent Accountants—Services andFees of Independent Accountants and Ratification of the Appointment of Independent Accountants—Pre-Approval of Services is incorporated herein byreference. PART IV. ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES a) The following are filed with this report: (1) The financial statements listed on the Financial Statement’s Table of Contents(2) Not applicable(3) The exhibits referred to below, which include the following managerial contracts or compensatory plans or arrangements:2.1Share Exchange Agreement, dated as of June 26, 2009, by and among Emazing Interactive, Inc., G. Edward Hancock, China Net Online MediaGroup Limited, and the shareholders of China Net Online Media Group Limited.(1) 2.2Escrow Agreement, dated as of June 8, 2009, by and between Emazing Interactive, Inc., China Net Online Media Group Limited, EdwardHancock and Leser, Hunter, Taubman & Taubman. (1) 2.3Agreement and Plan of Merger (2) 3.1Articles of Incorporation of Emazing Interactive, Inc., as amended (1) 3.2Articles of Merger. (2) 3.3By-laws. (4) 4.1Registration Rights Agreement, dated as of June 26, 2009, by and among Emazing Interactive, Inc. and certain stockholders listed therein. (1) 73 4.2Form of Series A-1 Warrant. (3) 4.3Form of Series A-2 Warrant. (3) 4.4Registration Rights Agreement, dated as of August 21, 2009. (3) 4.5*2011 Omnibus Securities and Incentive Plan (9) 10.1Exclusive 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) 10.2Exclusive 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 AdvertisingCo., Ltd. (1) 10.3Exclusive 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) 10.4Exclusive 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) 10.5Equity 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 AdvertisingCo., Ltd. (1) 10.6Equity 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) 10.7Equity 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) 10.8Power 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) 10.9Power of Attorney of Xuanfu Liu, dated as of October 8, 2008, appointing Rise King Century Technology Development (Beijing) Co., Ltd. as hisagent and attorney in connection with his equity interest in Beijing CNET Online Advertising Co., Ltd. (1) 10.10Power of Attorney of Li Sun, dated as of October 8, 2008, appointing Rise King Century Technology Development (Beijing) Co., Ltd. as heragent and attorney in connection with her equity interest in Beijing CNET Online Advertising Co., Ltd. (1) 10.11Exclusive 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) 74 10.12Exclusive 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 inBusiness Opportunity Online (Beijing) Network Technology Co., Ltd. (1) 10.13Exclusive 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 BusinessOpportunity Online (Beijing) Network Technology Co., Ltd. (1) 10.14Exclusive 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 BusinessOpportunity Online (Beijing) Network Technology Co., Ltd. (1) 10.15Equity 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 inBusiness Opportunity Online (Beijing) Network Technology Co., Ltd. (1) 10.16Equity 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 BusinessOpportunity Online (Beijing) Network Technology Co., Ltd. (1) 10.17Equity 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 BusinessOpportunity Online (Beijing) Network Technology Co., Ltd. (1) 10.18Power 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) 10.19Power of Attorney of Xuanfu Liu, dated as of October 8, 2008, appointing Rise King Century Technology Development (Beijing) Co., Ltd. as hisagent and attorney in connection with his equity interest in Business Opportunity Online (Beijing) Network Technology Co., Ltd. (1) 10.20Power of Attorney of Li Sun, dated as of October 8, 2008, appointing Rise King Century Technology Development (Beijing) Co., Ltd. as heragent and attorney in connection with her equity interest in Business Opportunity Online (Beijing) Network Technology Co., Ltd. (1) 10.21Entrustment Agreement, dated June 5, 2009, by and between Rise King Investments Limited and Handong Cheng, Xuanfu Liu and Li Sun. (1) 10.22Share Transfer Agreement, dated April 28, 2009, by and between Yang Li and Handong Cheng (1) 10.23Share Transfer Agreement, dated April 28, 2009, by and between Yang Li and Xuanfu Liu (1) 10.24Share Transfer Agreement, dated April 28, 2009, by and between Yang Li and Li Sun (1) 10.25Internet Banking Experiencing All-in-One Engine Strategic Cooperation Agreement, dated August 7, 2008, by and between Henan Branch ofChina Construction Bank and Shanghai Borongdingsi Computer Technology Co., Ltd. (1) 75 10.26Cooperation Agreement, dated July 8, 2008, by and between Beijing CNET Online Advertising Co., Ltd. and Shanghai Borongdingsi ComputerTechnology Co., Ltd. (1) 10.27Supplemental 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) 10.28Office Lease Agreement, dated January 1, 2009, by and between Beijing YuQuanHuiGu Realty Management Ltd. Co. and Business OpportunityOnline (Beijing) Network Technology Ltd. Co. (1) 10.29Office Lease Agreement, dated January 1, 2009, by and between Beijing YuQuanHuiGu Realty Management Ltd. Co. and Beijing CNET OnlineAdvertising Co., Ltd. (1) 10.30Office Lease Agreement, dated January 1, 2009, by and between Beijing YuQuanHuiGu Realty Management Ltd. Co. and Rise King CenturyTechnology Development (Beijing) Co., Ltd. (1) 10.31Securities Purchase Agreement, dated as of August 21, 2009. (3) 10.32Securities Escrow Agreement, dated as of August 21, 2009. (3) 10.33*Independent Director Agreement effective as of November 30, 2009 by and between the Company and Douglas MacLellan. (5) 10.34*Independent Director Agreement effective as of November 30, 2009 by and between the Company and Mototaka Watanabe. (5) 10.35*Independent Director Agreement effective as of November 30, 2009 by and between the Company and Zhiqing Chen. (5) 10.36Warrant Amendment Agreement (7) 10.37Exclusive Business Cooperation Agreement, dated as of December 6, 2010, by and between Rise King Century Technology Development(Beijing) Co., Ltd. and Rise King (Shanghai) Advertisement & Media Co., Ltd. (8) 10.38Exclusive Option Agreement, dated as of December 6, 2010, by and among Rise King Century Technology Development (Beijing) Co., Ltd., WeiYanmin and Rise King (Shanghai) Advertisement & Media Co., Ltd. (8) 10.39Exclusive Option Agreement, dated as of December 6, 2010, by and among Rise King Century Technology Development (Beijing) Co., Ltd., WuHuamin and Rise King (Shanghai) Advertisement & Media Co., Ltd. (8) 10.40Equity Interest Pledge Agreement dated as of December 6, 2010, by and among Rise King Century Technology Development (Beijing) Co., Ltd.,Wei Yanmin and Rise King (Shanghai) Advertisement & Media Co., Ltd. (8) 10.41Equity Interest Pledge Agreement dated as of December 6, 2010, by and among Rise King Century Technology Development (Beijing) Co., Ltd.,Wu Huamin and Rise King (Shanghai) Advertisement & Media Co., Ltd. (8) 76 10.42Power of Attorney of Wei Yanmin, dated as of December 6, 2010, appointing Rise King Century Technology Development (Beijing) Co., Ltd. ashis exclusive agent and attorney in connection with his equity interest in Rise King (Shanghai) Advertisement & Media Co., Ltd. (8) 10.43Power of Attorney of Wu Huamin, dated as of December 6, 2010, appointing Rise King Century Technology Development (Beijing) Co., Ltd. ashis exclusive agent and attorney in connection with his equity interest in Rise King (Shanghai) Advertisement & Media Co., Ltd. (8) 10.44Equity Transfer Agreement, dated as of December 15, 2011, Among Business Opportunity Online (Hubei) Network Technology Co., Ltd., LiuYihang, Wei Yanmin and Soo Yi Lian Mei Network Technology (Beijing) Co. Ltd. (10) 10.45English Translation of the Equity Transfer Agreement by and among Business Opportunity Online (Hubei) Network Technology Co., Ltd., LiuYihong and Sou Yi Lian Mei Network Technology (Beijing) Co., Ltd., dated September 10, 2012. (11) 14Code of Ethics (6) 21.1Subsidiaries of the Registrant + 23.1Consent of Marcum Bernstein & Pinchuk LLP + 31.1Certification pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. + 31.2Certification pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. + 32.1Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. + +Filed herewith *Denotes managerial contracts or compensatory plans or arrangements: (1)Incorporated by reference herein to the Report on Form 8-K filed on 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 onOctober 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 Current Report on Form 8-K filed on December 21, 2009 77 (7)Incorporated by reference herein to the Company’s Annual Report on Form 10-K filed on March 31, 2010. (8)Incorporated by reference herein to the Company’s Annual Report on Form 10-K filed on March 31, 2011. (9)Incorporated by reference herein to the Company’s Registration Statement on Form S-1 filed on May 11, 2011. (10)Incorporated by reference herein to the Company’s Current Report on Form 8-K filed on December 16, 2011. (11)Incorporated by reference herein to the Company’s Current Report on Form 8-K filed on September 11, 2012. (b)The exhibits listed on the Exhibit Index are filed as part of this report. (c)Not applicable. 78 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to besigned on its behalf by the undersigned thereunto duly authorized. ChinaNet Online Holdings, Inc. Dated: April 15, 2013By:/s/ Handong Cheng Name:Handong Cheng Title:Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.Dated: April 15, 2013By:/s/ Handong Cheng Name:Handong Cheng Title:Chairman and Chief Executive Officer(Principal Executive Officer)Dated: April 15, 2013By:/s/ Zhige Zhang Name:Zhige Zhang Title:Chief Financial Officer(Principal Financial Officer) and DirectorDated: April 15, 2013By:/s/ Zhiqing Chen Name:Zhiqing Chen Title:DirectorDated: April 15, 2013By:/s/ Mototaka Watanabe Name:Mototaka Watanabe Title:DirectorDated: April 15, 2013By:/s/ Douglas MacLellan Name:Douglas MacLellan Title:Director 79 CHINANET ONLINE HOLDINGS, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 Pages Report of Independent Registered Public Accounting FirmF-1 Consolidated Balance Sheets as of December 31, 2012 and 2011F-2 - F-3 Consolidated Statements of Income and Comprehensive Income for the Years ended December 31, 2012 and 2011F-4 - F-5 Consolidated Statements of Cash Flows for the Years ended December 31, 2012 and 2011F-6 - F-7 Consolidated Statements of Changes in Equity for the Years ended December 31, 2012 and 2011F-8 - F-9 Notes to Consolidated Financial StatementsF-10 - F-43  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Audit Committee of the Board of Directors and Stockholders ofChinaNet Online Holdings, Inc. We have audited the accompanying consolidated balance sheets of ChinaNet Online Holdings, Inc. and Subsidiaries (the “Company”) as of December 31,2012 and 2011, and the related consolidated statements of income and comprehensive income, changes in equity and cash flows for each of the years in thetwo-year period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to expressan opinion on these financial statements based on our audit. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis 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 31,2012 and 2011, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2012 in conformity withaccounting principles generally accepted in the United States of America. /s/ Marcum Bernstein & Pinchuk LLP Marcum Bernstein & Pinchuk LLPNew York, New YorkApril 15, 2013 F-1 CHINANET ONLINE HOLDINGS, INC.CONSOLIDATED BALANCE SHEETS(In thousands) As of December 31, 2012 2011 (US $) (US $) Assets Current assets: Cash and cash equivalents $5,483 $10,695 Term deposit 3,357 - Accounts receivable, net 8,486 4,444 Other receivables, net 3,103 3,631 Prepayment and deposit to suppliers 14,596 15,360 Due from related parties 210 324 Contingent consideration receivables - 159 Other current assets 136 129 Deferred tax assets-current 50 - Total current assets 35,421 34,742 Investment in and advance to equity investment affiliates 959 1,396 Property and equipment, net 1,636 1,902 Intangible assets, net 7,167 8,151 Goodwill 11,083 10,999 Deferred tax assets-non current 652 92 Total Assets $56,918 $57,282 Liabilities and Equity Current liabilities: Accounts payable * $110 $268 Advances from customers * 1,065 724 Accrued payroll and other accruals * 904 616 Due to equity investment affiliate * - 220 Due to related parties * - 161 Payable for acquisition * 1,266 550 Taxes payable * 6,683 5,040 Other payables * 217 114 Dividend payable - 5 Total current liabilities 10,245 7,698 F-2 CHINANET ONLINE HOLDINGS, INC.CONSOLIDATED BALANCE SHEETS (CONTINUED)(In thousands, except for number of shares) As of December 31, 2012 2011 (US $) (US $) Long-term liabilities: Deferred tax liability-non current * 1,689 1,893 Long-term borrowing from director 139 137 Total Liabilities 12,073 9,728 Commitments and contingencies Equity: ChinaNet Online Holdings, Inc.’s stockholders’ equity Common stock (US$0.001 par value; authorized 50,000,000 shares; issued and outstanding 22,186,540 shares and22,146,540 shares at December 31, 2012 and 2011, respectively 22 22 Additional paid-in capital 20,008 20,747 Statutory reserves 2,296 2,117 Retained earnings 19,505 16,688 Accumulated other comprehensive income 2,393 2,132 Total ChinaNet Online Holdings, Inc.’s stockholders’ equity 44,224 41,706 Noncontrolling interests 621 5,848 Total equity 44,845 47,554 Total Liabilities and Equity $56,918 $57,282 *All of the VIEs' assets can be used to settle obligations of their primary beneficiary. Liabilities recognized as a result of consolidating these VIEs do notrepresent additional claims on the Company’s general assets (Note 2). See notes to consolidated financial statements F-3 CHINANET ONLINE HOLDINGS, INC.CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(In thousands) Year Ended December 31, 2012 2011 (US $) (US $) Sales From unrelated parties $46,403 $28,105 From related parties 197 626 46,600 28,731 Cost of sales 31,558 12,027 Gross margin 15,042 16,704 Operating expenses Selling expenses 2,683 3,506 General and administrative expenses 6,030 7,904 Research and development expenses 1,819 2,132 10,532 13,542 Income from operations 4,510 3,162 Other income (expenses) Changes in fair value of contingent consideration receivables (160) (70)Interest income 186 13 Gain on deconsolidation of subsidiaries - 925 Other (expenses)/income (150) 5 (124) 873 Income before income tax expense, equity method investments and noncontrolling interests 4,386 4,035 Income tax expense 529 1,035 Income before equity method investments and noncontrolling interests 3,857 3,000 Share of losses in equity investment affiliates (449) (219)Net income 3,408 2,781 Net (income) / losses attributable to noncontrolling interests (412) 214 Net income attributable to ChinaNet Online Holdings, Inc. 2,996 2,995 F-4 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, 2012 2011 (US $) (US $) Net income attributable to ChinaNet Online Holdings, Inc. $2,996 $2,995 Dividend of Series A convertible preferred stock - (407)Net income attributable to common stockholders of ChinaNet Online Holdings, Inc. $2,996 $2,588 Net income 3,408 2,781 Foreign currency translation gain 267 1,254 Comprehensive Income $3,675 $4,035 Comprehensive (income) / losses attributable to noncontrolling interests (418) 162 Comprehensive income attributable to ChinaNet Online Holdings, Inc. $3,257 $4,197 Earnings per share Earnings per common share Basic $0.14 $0.14 Diluted $0.14 $0.14 Weighted average number of common shares outstanding: Basic 22,185,556 18,545,609 Diluted 22,185,556 18,759,240 See notes to consolidated financial statements F-5 CHINANET ONLINE HOLDINGS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended December 31, 2012 2011 (US $) (US $) Cash flows from operating activities Net income $3,408 $2,781 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 1,637 1,012 Share-based compensation expenses 48 2,900 Changes in fair value of contingent consideration receivables 160 70 Allowances for doubtful debts 1,141 2,583 Share of losses in equity investment affiliates 449 219 Gain on deconsolidation of subsidiaries - (925)Loss / (gain) on disposal of property and equipment 2 (3)Deferred taxes (828) 27 Changes in operating assets and liabilities Accounts receivable (5,516) (2,100)Other receivables 1,400 5,276 Prepayment and deposit to suppliers 882 (11,247)Due from related parties 117 (130)Other current assets (5) (197)Accounts payable (158) 27 Advances from customers 335 (1,575)Accrued payroll and other accruals 285 166 Due to director - (559)Due to Control Group - (82)Due to related parties (4) (139)Other payables 72 490 Taxes payable 1,603 803 Net cash provided by (used in) operating activities 5,028 (603) Cash flows from investing activities Purchases of vehicles and office equipment (314) (741)Purchase of intangible assets - (1,445)Short-term loan to unrelated entities (475) - Project development deposit to a third party (2,453) - Refund of project development deposit from a third party 2,453 - Cash from acquisition of VIEs - 330 Cash effect on deconsolidation of VIEs - (1,670)Long-term investment in and advance to equity investment affiliates - (1,712)Disposal of investment in and loan repayment from equity investment affiliate - 8,885 Payment for acquisition of VIEs (5,775) (9,731)Placement of term deposit (3,355) - Net cash used in investing activities (9,919) (6,084) F-6 CHINANET ONLINE HOLDINGS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)(In thousands) Year Ended December 31, 2012 2011 (US $) (US $) Cash flows from financing activities Cash investment contributed by noncontrolling interests - 378 Dividend paid to convertible preferred stockholders (5) (657)Short-term loan borrowed from an equity investment affiliate 316 216 Short-term loan repaid to an equity investment affiliate (538) - Repayment to legal (nominal) shareholders of Shanghai Jing Yang (158) - Capital contributions received in advance from new shareholders of Zhao Shang Ke Hubei before deconsolidation - 1,545 Net cash (used in) provided by financing activities (385) 1,482 Effect of exchange rate fluctuation on cash and cash equivalents 64 310 Net decrease in cash and cash equivalents (5,212) (4,895) Cash and cash equivalents at beginning of the year 10,695 15,590 Cash and cash equivalents at end of the year $5,483 $10,695 Supplemental disclosure of cash flow information Income taxes paid $75 $319 Non-cash transactions: Restricted stock and options granted for future service $42 $6 Payment for acquisition of Sou Yi Lian Mei (1) $1,266 $550 (1) Refer to Note 4 See notes to consolidated financial statements F-7 CHINANET ONLINE HOLDINGS, INC.CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY(In thousands, except for number of shares) Total equity Series A convertiblepreferred stock Common Stock Additionalpaid-incapital Statutoryreserves Retainedearnings Accumulatedothercomprehensiveincome Non-ControllingInterests TotalEquity Number ofshares Amount Number ofshares Amount (US $) (US $) (US $) (US $) (US $) (US $) (US $) (US $) Balance, January 1,2011 2,877,600 3 17,102,320 17 18,614 1,587 14,630 930 (70) 35,711 Preferred stockconverted intocommon stock (2,877,600) (3) 2,877,600 3 - - - - - - Share basedcompensationrelated to services - - - - 141 - - - - 141 Restricted sharesissued for services - - 60,000 - 152 - - - - 152 Restricted stock andoptions issued tomanagement,employees anddirectors onNovember 30, 2011 - - 2,000,000 2 2,605 - - - - 2,607 Share issued under theWarrant Tender Offeron December 30,2011 - - 106,620 - - - - - - - Noncontrolling equityinterests in acquiredVIEs - - - - - - - - 6,054 6,054 Noncontrolling equityinterests in newlyformed VIEs - - - - (703) - - - 1,079 376 Deconsolidation ofVIEs - - - - - - - - (20) (20)Purchased ofnoncontrollinginterests in a VIE - - - - (62) - - - (1,033) (1,095)Net income for the year - - - - - - 2,995 - (214) 2,781 Appropriation ofstatutory reserves - - - - - 530 (530) - - - Preferred stockdividend - - - - - - (407) - - (407)Foreign currencytranslationadjustment - - - - - - - 1,202 52 1,254 Balance, December31, 2011 - - 22,146,540 22 20,747 2,117 16,688 2,132 5,848 47,554 F-8 CHINANET ONLINE HOLDINGS, INC.CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED)(In thousands, except for number of shares) Total equity (Continued) Series A convertiblepreferred stock Common Stock Additionalpaid-incapital Statutoryreserves Retainedearnings Accumulatedothercomprehensiveincome Non-ControllingInterests TotalEquity Number ofshares Amount Number ofshares Amount (US $) (US $) (US $) (US $) (US $) (US $) (US $) Restricted sharesissued for services - - 40,000 - 42 - - - - 42 Share basedcompensationrelated to services - - - - 6 - - - - 6 Purchased ofnoncontrollinginterests in a VIE - - - - (787) - - - (5,645) (6,432)Appropriation ofstatutory reserves - - - - - 179 (179) - - - Net income for theyear - - - - - - 2,996 - 412 3,408 Foreign currencytranslationadjustment - - - - - - - 261 6 267 - - 22,186,540 22 20,008 2,296 19,505 2,393 621 44,845 See notes to consolidated financial statements F-9 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Organization and nature of operationsChinaNet Online Holdings, Inc. (formerly known as Emazing Interactive, Inc.) (the “Company”) was incorporated in the State of Texas in April 2006 andre-domiciled to become a Nevada corporation in October 2006. From the date of the Company’s incorporation until June 26, 2009, when the Companyconsummated the Share Exchange (discussed below), the Company’s activities were primarily concentrated in web server access and company brandingin 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 GroupLimited, a company organized under the laws of British Virgin Islands (“China Net BVI”), (ii) China Net BVI’s shareholders, Allglad Limited, a BritishVirgin Islands company (“Allglad”), Growgain Limited, a British Virgin Islands company ("Growgain"), Rise King Investments Limited, a British VirginIslands company (“Rise King BVI”), Star (China) Holdings Limited, a British Virgin Islands company (“Star”), Surplus Elegant Investment Limited, aBritish 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 andoutstanding ordinary shares of China Net BVI (the “China Net BVI Shares”) and (iii) G. Edward Hancock, the principal stockholder of the Company atthat time. Pursuant to the terms of the Exchange Agreement, the China Net BVI Shareholders transferred to the Company all of the China Net BVI Sharesin exchange for the issuance of 13,790,800 shares (the “Exchange Shares”) in the aggregate 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”), is engaged in providingadvertising, marketing, communication and brand management and sales channel building services to small and medium companies in China.The Company’s wholly owned subsidiary, China Net BVI was incorporated in the British Virgin Islands on August 13, 2007. On April 11, 2008, ChinaNet BVI became the parent holding company of a group of companies comprised of CNET Online Technology Limited, a Hong Kong company (“ChinaNet HK”), which established and is the parent company of Rise King Century Technology Development (Beijing) Co., Ltd., a wholly foreign-ownedenterprise (“WFOE”) established in the PRC (“Rise King WFOE”). The Company refers to the transactions that resulted in China Net BVI becoming anindirect parent company of Rise King WFOE as the “Offshore Restructuring.”PRC regulations prohibit direct foreign ownership of business entities providing internet content, or ICP services in the PRC, and restrict foreignownership of business entities engaging in the advertising business. In October 2008, a series of contractual arrangements (the “Contractual Agreements”or “VIE Agreements”) were entered into among Rise King WFOE and Business Opportunity Online (Beijing) Network Technology Co., Ltd. (“BusinessOpportunity Online”), Beijing CNET Online Advertising Co., Ltd. (“Beijing CNET Online”) (collectively the “PRC Operating Entities”) and its commonindividual owners (the “PRC Shareholders” or the “Control Group”). The Contractual Agreements allowed China Net BVI, through Rise King WFOE, to,among other things, secure significant rights to influence the PRC Operating Entities’ business operations, policies and management, approve all mattersrequiring shareholder approval, and receive 100% of the income earned by the PRC Operating Entities. In return, Rise King WFOE provides consultingservices to the PRC Operating Entities. In addition, to ensure that the PRC Operating Entities and the PRC Shareholders perform their obligations underthe Contractual Arrangements, the PRC Shareholders have pledged all of their equity interests in the PRC Operating Entities to Rise King WFOE. Theyalso entered into an option agreement with Rise King WFOE which provides that at such time as when the current restrictions under PRC law on foreignownership of Chinese companies engaging in the Internet content, information services or advertising business in China are lifted, Rise King WFOE mayexercise its option to purchase the equity interests in the PRC Operating Entities, directly (See Note 2 for significant terms of these ContractualArrangements).Pursuant to the Contractual Agreements, all of the equity owners' rights and obligations of the VIEs were assigned to Rise King WFOE, which resulted inthe equity owners lacking the ability to make decisions that have a significant effect on the VIEs, Rise King WFOE's ability to extract the profits from theoperation of the VIEs and assume the residual benefits of the VIEs. Due to the fact that Rise King WFOE and its indirect parent are the sole interestholders of the VIEs, the Company included the assets, liabilities, revenues and expenses of the VIEs in its consolidated financial statements, which isconsistent with the provisions of FASB Accounting Standards Codification ("ASC") Topic 810 “Consolidation”, subtopic 10. F-10 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of the date of the Share Exchange, through the Contractual Agreements, the Company operates its business in China primarily through BusinessOpportunity Online and Beijing CNET Online. Beijing CNET Online owns 51% of Shanghai Borongdingsi Computer Technology Co., Ltd. (“ShanghaiBorongdingsi”). Business Opportunity Online, Beijing CNET Online and Shanghai Borongdingsi, were incorporated on December 8, 2004, January 27,2003 and August 3, 2005, respectively.Shanghai Borongdingsi is 51% owned by Beijing CNET Online. Beijing CNET Online and Shanghai Borongdingsi entered into a cooperationagreement in June 2008, followed up with a supplementary agreement in December 2008, to conduct a bank kiosk advertisement business. The businessis based on a bank kiosk cooperation agreement between Shanghai Borongdingsi and Henan provincial branch of China Construction Bank whichallows 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 beginning in August 2008. However, Shanghai Borongdingsi was not able to conductthe advertisement business as a stand-alone business due to the lack of an advertisement business license and supporting financial resources. Pursuant tothe aforementioned cooperation agreements, Beijing CNET Online committed to purchase equipment and to provide working capital, technical andother related support to Shanghai Borongdingsi. Beijing CNET Online owns the equipment used in the kiosk business, is entitled to sign contracts in itsname on behalf of the business, and holds the right to collect the advertisement revenue generated from the bank kiosk business exclusively until itrecovers the cost of purchasing the equipment. Thereafter, Beijing CNET Online has agreed to distribute 49% of the net profit generated from the bankkiosk advertising business, if any, to the minority shareholders of Shanghai Borongdingsi.On June 24, 2010, one of the Company’s VIEs, Business Opportunity Online, together with three other individuals, who were not affiliated with theCompany, formed a new company, Shenzhen City Mingshan Network Technology Co., Ltd. (“Shenzhen Mingshan”). Shenzhen Mingshan is 51% ownedby Business Opportunity Online and 49% owned collectively by the other three individuals. Shenzhen Mingshan is primarily engaged in developingand designing internet based software, online games and the related operating websites and providing related internet and information technologyservices necessary to operate such games and websites. On January 6, 2011, as approved by the shareholders of Shenzhen Mingshan, an unaffiliated thirdparty invested RMB15,000,000 (approximately US$2,374,883) into Shenzhen Mingshan in exchange for a 60% equity interest in Shenzhen Mingshan.Therefore, beginning on January 6, 2011, the new investor became the majority shareholder of Shenzhen Mingshan. The Company’s share of the equityinterest in Shenzhen Mingshan decreased from 51% to 20.4% and the Company ceased to have a controlling financial interest in Shenzhen Mingshan,but still retains an investment in, and significant influence over, Shenzhen Mingshan. On December 19, 2012, as approved by the shareholders ofShenzhen Mingshan, Shenzhen Mingshan reduced its registered and paid-in capital from RMB25,000,000 (approximately US$3,958,139) toRMB22,000,000 (approximately US$3,483,162), resulted from a decrease in paid-in capital from three other noncontrolling shareholders, exceptBusiness Opportunity Online. As a result, the Company’s share of the equity interest in Shenzhen Mingshan increased from 20.4% to 23.18% and theCompany continued to retain significant influence over Shenzhen Mingshan.On December 6, 2010, Rise King WFOE entered into a series of exclusive contractual arrangements, which were similar to the Contractual Agreementsdiscussed above, with Rise King (Shanghai) Advertisement Media Co., Ltd. (“Shanghai Jing Yang”), a company incorporated under the PRC laws inDecember 2009 and primarily engaged in the advertising business, pursuant to which the Company, through its wholly owned subsidiary, Rise KingWFOE obtained all of the equity owners' rights and obligations of Shanghai Jing Yang, and the ability to extract the profits from the operation andassume the residual benefits of Shanghai Jing Yang, and hence became the sole interest holder of Shanghai Jing Yang. As of the date these contractualagreements were entered into, Shanghai Jing Yang did not have the resources necessary to conduct any business activities by itself and the carryingamount of the net assets of Shanghai Jing Yang which was all cash and cash equivalents approximate its fair values due to their short maturities.Therefore, Shanghai Jing Yang’s accounts were included in the Company’s consolidated financial statements with no goodwill recognized in accordancewith ASC Topic 810 “Consolidation”.On December 8, 2010, the Company, through one of its VIEs, Shanghai Jing Yang acquired a 49% equity interest in a newly established company,Beijing Yang Guang Media Investment Co., Ltd. (“Beijing Yang Guang”). In August 2011, Shanghai Jing Yang sold back its 49% equity interest inBeijing Yang Guang to the majority shareholder of Beijing Yang Guang.The Company, through one of its VIEs, Beijing CNET Online, acquired a 100% equity interest in Quanzhou Zhi Yuan Marketing Planning Co., Ltd.(“Quanzhou Zhi Yuan”) and a 51% equity interest in Quanzhou Tian Xi Shun He Advertisement Co., Ltd. (“Quanzhou Tian Xi Shun He”) on January 4,2011 and February 23, 2011, respectively. Quanzhou Zhi Yuan and Quanzhou Tian Xi Shun He are both independent advertising companies based inFujian province of the PRC, which provide comprehensive branding and marketing services to over fifty small to medium sized companies focusedprimarily in the sportswear and clothing industry. In June 2011, Beijing CNET Online acquired the remaining 49% equity interest in Quanzhou Tian XiShun He. Quanzhou Tian Xi Shun He became a wholly owned subsidiary of Beijing CNET Online accordingly. F-11 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On January 28, 2011, one of the Company’s VIEs, Business Opportunity Online, formed a new wholly owned subsidiary, Business Opportunity Online(Hubei) Network Technology Co., Ltd. (“Business Opportunity Online Hubei”). Business Opportunity Online Hubei is primarily engaged in internetadvertisement design, production and promulgation.On March 1, 2011, one of the Company’s VIEs, Business Opportunity Online, together with an individual, who was not affiliated with the Company,formed a new company, Beijing Chuang Fu Tian Xia Network Technology Co., Ltd. (“Beijing Chuang Fu Tian Xia”). Beijing Chuang Fu Tian Xia is51% owned by Business Opportunity Online and 49% owned by the co-founding individual. In addition to capital investment, the co-foundingindividual is required to provide the controlled domain names, www.liansuo.com and www.chuangye.com to be registered under the establishedcompany. Beijing Chuang Fu Tian Xia is primarily engaged in providing and operating internet advertising, marketing and communication services tosmall and medium companies through the websites associated the above mentioned domain names.On April 18, 2011, the Company, through one of its VIEs, Business Opportunity Online Hubei formed a new wholly owned company, Hubei CNETAdvertising Media Co., Ltd. (“Hubei CNET”). Hubei CNET is primarily engaged in advertisement design, production, promulgation and providing therelated advertising and marketing consultancy services.On April 18, 2011, one of the Company’s VIEs, Business Opportunity Online Hubei, together with an individual, who was not affiliated with theCompany, formed a new company, Zhao Shang Ke Network Technology (Hubei) Co., Ltd. (“Zhao Shang Ke Hubei”). Zhao Shang Ke Hubei is 51%owned by Business Opportunity Online Hubei and 49% owned by the co-founding individual. Zhao Shang Ke Hubei is primarily engaged in providingadvertisement design, production, promulgation and sales channels building services. On December 29, 2011, as approved by the shareholders of ZhaoShang Ke Hubei, two unaffiliated third party investors invested RMB10,000,000 (approximately US$1,583,255) into Zhao Shang Ke Hubei in exchangefor an aggregate 50% equity interest in Zhao Shang Ke Hubei. Therefore, beginning on December 29, 2011, the Company’s share of the equity interest inZhao Shang Ke Hubei decreased from 51% to 25.5% and ceased to have a controlling financial interest in Zhao Shang Ke Hubei, but still retained aninvestment in, and significant influence over, Zhao Shang Ke Hubei.On July 1, 2011, one of the Company’s VIEs, Quanzhou Zhi Yuan, formed a new wholly owned company, Xin Qi Yuan Advertisement Planning (Hubei)Co., Ltd. (“Xin Qi Yuan Hubei”). Xin Qi Yuan Hubei is primarily engaged in advertisement design, production, promulgation and providing the relatedadvertising and marketing consultancy services.On July 1, 2011, one of the Company’s VIEs, Quanzhou Tian Xi Shun He, formed a new wholly owned company, Mu Lin Sen Advertisement (Hubei)Co., Ltd. (“Mu Lin Sen Hubei”). Mu Lin Sen Hubei is primarily engaged in advertisement design, production, promulgation and providing the relatedadvertising and marketing consultancy services.On July 1, 2011, one of the Company’s VIEs, Business Opportunity Online Hubei, together with an individual who is not affiliated with the Company,formed a new company, Sheng Tian Network Technology (Hubei) Co., Ltd. (“Sheng Tian Hubei”). Sheng Tian Hubei is 51% owned by BusinessOpportunity Online Hubei and 49% owned by the co-founding individual. Sheng Tian Hubei is primarily engaged in computer system design,development and promotion, software development and promotion, and providing the related technical consultancy services.On September 5, 2011, one of the Company’s VIEs, Business Opportunity Online Hubei, formed a new wholly owned company, Chongqing BusinessOpportunity Online Technology Co., Ltd. (“Business Opportunity Online Chongqing”). Business Opportunity Online Chongqing is primarily engagedin internet advertisement design, production and promulgation. In September 2012, the Company sold all of its equity interest in Business OpportunityOnline Chongqing to two unaffiliated parties. Business Opportunity Online Chongqing was dormant from the time of its incorporation through the datethe Company disposed of its equity interest to two unaffiliated parties. No gain or loss was incurred in connection with this transaction, as the Companyrecovered all of its net assets, which are all cash and cash equivalents from the buyers.On December 20, 2011, one of the Company’s VIEs, Business Opportunity Online Hubei acquired a 51% equity interest in Sou Yi Lian Mei NetworkTechnology (Beijing) Co. Ltd., (“Sou Yi Lian Mei”). In September 2012, Business Opportunity Online Hubei acquired the remaining 49% equityinterest in Sou Yi Lian Mei. Sou Yi Lian Mei became a wholly owned subsidiary of Business Opportunity Online Hubei accordingly. Sou Yi Lian Mei isprimary engaged in providing online advertising and marketing services and operates its business primarily through its wholly-owned subsidiary, Jin DuYa He (Beijing) Network Technology Co., Ltd (“Jin Du Ya He”). F-12 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2012, the Company operated its business primarily in China through its PRC subsidiary and PRC operating entities, or VIEs asdescribed above. 2. Variable Interest EntitiesTo satisfy PRC laws and regulations, the Company conducts certain business in the PRC through its Variable Interest Entities (“VIEs”).The significant terms of the VIE Agreements are summarized below:Exclusive Business Cooperation Agreements: Pursuant to the Exclusive Business Cooperation Agreements entered into by and between Rise KingWFOE and each of the PRC Operating Entities, Rise King WFOE has the exclusive right to provide to the PRC Operating Entities complete technicalsupport, business support and related consulting services during the term of these agreements, which includes but is not limited to technical services,business consultations, equipment or property leasing, marketing consultancy system integration, product research and development, and systemmaintenance. In exchange for such services, each PRC Operating Entity has agreed to pay a service fee to Rise King WFOE equal to 100% of the netincome of each PRC Operating Entity. Adjustments may be made upon approval by Rise King WFOE based on services rendered by Rise King WFOEand operational needs of the PRC Operating Entities. The payment shall be made on a monthly basis, if at year end, after an audit of the financialstatements of any PRC Operating Entities, there is determined to be any shortfall in the payment of 100% of the annual net income, such PRC OperatingEntity shall pay such shortfall to Rise King WFOE. Each agreement has a ten-year term. The term of these agreements may be extended if confirmed inwriting by Rise King WFOE, prior to the expiration of the term. The extended term shall be determined by Rise King WFOE, and the PRC OperatingEntities shall accept such extended term unconditionally.Exclusive Option Agreements: Under the Exclusive Option Agreements entered into by and among Rise King WFOE, each of the PRC Shareholdersirrevocably 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 oftheir respective equity interest in any PRC Operating Entities for a purchase price of RMB 10, or a purchase price to be adjusted to be in compliance withapplicable PRC laws and regulations. Rise King WFOE, or its designated person, has the sole discretion to decide when to exercise the option, whether inpart 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 Entities and each ofthe PRC Shareholders, the PRC Shareholders pledged all of their equity interests in the PRC Operating Entities to guarantee the PRC Operating Entities’performance of its obligations under the Exclusive Business Cooperation Agreements. If the PRC Operating Entities or any of the PRC Shareholdersbreaches its/his/her respective contractual obligations under these agreements, or upon the occurrence of one of the events regarded as an event ofdefault under each such agreement, Rise King WFOE, as pledgee, will be entitled to certain rights, including the right to dispose of the pledged equityinterests. The PRC Shareholders of the PRC Operating Entities agreed not to dispose of the pledged equity interests or take any actions that wouldprejudice 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'sinterest in the pledge. Each of the equity pledge agreements will be valid until all the payments related to the services provided by Rise King WFOE tothe PRC Operating Entities due under the Exclusive Business Cooperation Agreements have been fulfilled. Therefore, the equity pledge agreementsshall only be terminated when the payments related to the ten-year Exclusive Business Cooperation Agreement are paid in full and the WFOE does notintend to extend the term of the Exclusive Business Cooperation Agreement.Irrevocable Powers of Attorney: The PRC Shareholders have each executed an irrevocable power of attorney to appoint Rise King WFOE as theirexclusive attorneys-in-fact to vote on their behalf on all PRC Operating Entities matters requiring shareholder approval. The term of each power ofattorney is valid so long as such shareholder is a shareholder of the respective PRC Operating Entity. F-13 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As a result of these VIE Agreements, the Company through its wholly-owned subsidiary, Rise King WFOE, was granted with unconstrained decisionmaking rights and power over key strategic and operational functions that would significantly impact the PRC Operating Entities or the VIEs’ economicperformance, which includes, but is not limited to, the development and execution of the overall business strategy; important and material decisionmaking; decision making for merger and acquisition targets and execution of merger and acquisition plans; business partnership strategy developmentand execution; government liaison; operation management and review; and human resources recruitment and compensation and incentive strategydevelopment and execution. Rise King WFOE also provides comprehensive services to the VIEs for their daily operations, such as operational technicalsupport, OA technical support, accounting support, general administration support and technical support for products and services. As a result of theExclusive Business Cooperation Agreements, the Equity Pledge Agreements and the Exclusive Option Agreements, the Company will bear all of theVIEs’ operating costs in exchange for 100% of the net income of the VIEs. Under these agreements, the Company has the absolute and exclusive right toenjoy economic benefits similar to equity ownership through the VIE Agreements with our PRC Operating Entities and their shareholders.These contractual arrangements may not be as effective in providing the Company with control over the VIEs as direct ownership. Due to its VIEstructure, the Company has to rely on contractual rights to effect control and management of the VIEs, which exposes it to the risk of potential breach ofcontract by the shareholders of the VIEs for a number of reasons. For example, their interests as shareholders of the VIEs and the interests of the Companymay conflict and the Company may fail to resolve such conflicts; the shareholders may believe that breaching the contracts will lead to greater economicbenefit for them; or the shareholders may otherwise act in bad faith. If any of the foregoing were to happen, the Company may have to rely on legal orarbitral proceedings to enforce its contractual rights, including specific performance or injunctive relief, and claiming damages. Such arbitral and legalproceedings may cost substantial financial and other resources, and result in a disruption of its business, and the Company cannot assure that theoutcome will be in its favor. Apart from the above risks, there are no significant judgments or assumptions regarding enforceability of the contracts.In addition, as all of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration orlitigation in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legalprocedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in thePRC legal system could further limit the Company’s ability to enforce these contractual arrangements. Furthermore, these contracts may not beenforceable in China if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise notenforceable for public policy reasons. In the event the Company is unable to enforce these contractual arrangements, it may not be able to exert effectivecontrol over the VIEs, and its ability to conduct its business may be materially and adversely affected.Summarized below is the information related to the consolidated VIEs’ assets and liabilities as of December 31, 2012 and 2011, respectively: As of December 31, 2012 2011 US$(’000) US$(’000) Assets Current assets: Cash and cash equivalents $4,275 $8,322 Term deposit 3,357 - Accounts receivable, net 8,392 3,705 Other receivables, net 2,921 3,619 Prepayment and deposit to suppliers 14,587 15,360 Due from related parties 49 192 Contingent consideration receivables - 159 Other current assets 35 23 Deferred tax assets-current 50 - Total current assets 33,666 31,380 Investment in and advance to equity investment affiliates 916 1,354 Property and equipment, net 1,389 1,507 Intangible assets, net 7,152 8,111 Goodwill 11,083 10,999 Deferred tax assets-non current 511 92 Total Assets $54,717 $53,443 Liabilities Current liabilities: Accounts payable $110 $268 Advances from customers 1,065 724 Accrued payroll and other accruals 455 251 Due to equity investment affiliate - 220 Due to related parties - 161 Due to Control Group 11 11 Payable for acquisition 1,266 550 Taxes payable 6,136 4,409 Other payables 196 107 Total current liabilities 9,239 6,701 Deferred tax Liabilities-non current 1,689 1,893 Total Liabilities $10,928 $8,594 F-14 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS All of the VIEs' assets can be used to settle obligations of their primary beneficiary. Liabilities recognized as a result of consolidating these VIEs do notrepresent additional claims on the Company’s general assets.For the year ended December 31, 2012, the financial performance of the VIEs reported in the Company’s consolidated statements of income andcomprehensive income includes sales of approximately US$46,355,000, cost of sales of approximately US$31,550,000, operating expenses ofapproximately US$7,655,000 and net income before allocation to noncontrolling interests of approximately US$5,910,000.For the year ended December 31, 2011, the financial performance of the VIEs reported in the Company’s consolidated statements of income andcomprehensive income includes sales of approximately US$24,109,000, cost of sales of approximately US$11,772,000, operating expenses ofapproximately US$6,424,000 and net income before allocation to noncontrolling interests of approximately US$5,849,000. 3. Summary of significant accounting policies a) Basis of presentation The consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United Statesof America (“U.S. GAAP”). b) Principles of consolidation The consolidated financial statements include the financial statements of all the subsidiaries and VIEs of the Company. All transactions andbalances between the Company and its subsidiaries and VIEs have been eliminated upon consolidation. According to the agreements betweenBeijing CNET Online and Shanghai Borongdingsi, although Beijing CNET Online legally owns 51% of Shanghai Borongdingsi’s interests, BeijingCNET Online only controls the assets and liabilities related to the bank kiosks business, which has been included in the financial statements ofBeijing CNET Online, but does not control other assets of Shanghai Borongdingsi, thus, Shanghai Borongdingsi’s financial statements were notconsolidated by the Company. c) Use of estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of these consolidated financialstatements, and the reported amounts of revenue and expenses during the reporting period. The Company continually evaluates these estimates andassumptions based on the most recently available information, historical experience and various other assumptions that the Company believe to bereasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differfrom those estimates. F-15 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS d) Foreign currency translation and transactions The functional currency of the Company is United States dollars (“US$”), and the functional currency of China Net HK is Hong Kong dollars(“HK$”). The functional currency of the Company’s PRC operating subsidiary and VIEs is Renminbi (“RMB”), and PRC is the primary economicenvironment in which the Company operates. For financial reporting purposes, the financial statements of the Company’s PRC operating subsidiary and VIEs, which are prepared using the RMB,are translated into the Company’s reporting currency, the United States Dollar (“U.S. dollar”). Assets and liabilities are translated using the exchangerate at each balance sheet date. Revenue and expenses are translated using average rates prevailing during each reporting period, and stockholders’equity is translated at historical exchange rates. Adjustments resulting from the translation are recorded as a separate component of accumulatedother comprehensive income in stockholders’ equity. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange ratesprevailing at the dates of the transactions. The resulting exchange differences are included in the determination of net income of the consolidatedstatements of income and comprehensive income for the respective periods. The exchange rates used to translate amounts in RMB into US$ for the purposes of preparing the consolidated financial statements are as follows: As of December 31, 2012 2011 Balance sheet items, except for equity accounts 6.3161 6.3647 Year ended December 31, 2012 2011 Items in the statements of income and comprehensive income, and statements of cash flows 6.3198 6.4735 No representation is made that the RMB amounts could have been, or could be converted into US$ at the above rates. e) 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 allhighly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. f) Term deposits Term deposits consist of bank deposits with an original maturity of between three to twelve months. 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 accountsreceivable. The Company determines the allowance based on aging data, historical collection experience, customer specific facts and economicconditions. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recoveryis considered remote. The Company did not have any off-balance-sheet credit exposure relating to its customers, suppliers or others. F-16 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS h) Investment in equity method affiliates Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equitymethod of accounting in accordance to ASC Topic 323 “Equity Method and Joint Ventures”. Whether or not the Company exercises significantinfluence with respect to an investee depends on an evaluation of several factors including, among others, representation on the investee companies’board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the investee companies. Under the equitymethod of accounting, an investee company’s accounts are not reflected within the Company’s consolidated balance sheets and statements ofincome and comprehensive income; however, the Company’s share of the earnings or losses of the investee company is reflected in the caption“Share of earnings (losses) in equity investment affiliates” in the consolidated statements of income and comprehensive income. The Company’scarrying value (including advance to the investee) in equity method investee companies is reflected in the caption “Investment in and advance toequity investment affiliates” in the Company’s consolidated balance sheets. When the Company’s carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company’sconsolidated financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. Whenthe investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share oflosses not previously recognized. 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 intoaccount their respective estimated residual values over the following estimated useful lives:Vehicles5 yearsOffice equipment3-5 yearsElectronic devices5 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 dispositionfor the difference between the net book value and proceeds received thereon. Maintenance and repairs which do not improve or extend the expecteduseful lives of the assets are charged to expenses as incurred. j) Intangible assets, net Purchased software and software platform is initially recorded at cost and amortized on a straight-line basis over the estimated useful economic life. Intangible assets other than goodwill acquired through various acquisitions are amortized on a straight-line basis over their expected usefuleconomic lives. If an acquired intangible asset is determined to have an indefinite useful life, it should not be amortized until its useful life is determined to be nolonger indefinite. The Company reviews intangible assets' remaining useful lives in each reporting period. If such an asset is later determined to havea finite useful life, the asset will be tested for impairment. That asset will then be amortized prospectively over its estimated remaining useful life andaccounted for in the same way as intangible assets subject to amortization. The Company accounted for website development costs in accordance with ASC Topic 350-50, which requires that certain costs related to thedevelopment or purchase of internal-use software and systems as well as the costs incurred in the application development stage related to itswebsite be capitalized and amortized over the estimated useful life of the software or system. ASC Topic 350-50 also require that costs related to thepreliminary project stage, data conversion and post implementation/operation stage of an internal-use software development project be expensed asincurred. In accordance with ASC Topic 350-50, the Company analyzed its website development cost which is subject to capitalization, incurred during theyears ended December 31, 2012 and 2011 for the development of www.liansuo.com and www.chuangye.com, the Company did not capitalize suchcost, as the amount was considered immaterial, which was primarily the labor cost of its staff in the research and development department. F-17 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS k) Impairment of long-lived assets Long-lived assets, which include tangible long-lived assets and intangible long-lived assets, are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held andused is measured by a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated bythe asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recognized for the differencebetween the carrying amount of the asset and its fair value. For the years ended December 31, 2012 and 2011, the Company did not record any impairment losses associated with long-lived assets. l) Goodwill Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of the Company'sacquisitions of interests in its consolidated VIEs. Goodwill is not depreciated or amortized but is tested for impairment at the reporting unit level at least on an annual basis, and between annual testswhen an event occurs or circumstances change that could indicate that the asset might be impaired. The test consists of two steps. First, identifypotential impairment by comparing the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value of the reportingunit is greater than its carrying amount, goodwill is not considered impaired. Second, if there is impairment identified in the first step, an impairmentloss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of goodwill. The implied fairvalue of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordancewith Topic 805 “Business Combinations.” Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units, assigningassets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. The judgment inestimating the fair value of reporting units includes estimating future cash flows, determining appropriate discount rates and making otherassumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit. For the years ended December 31, 2012 and 2011, the Company did not record any impairment losses associated with Goodwill. m) Deconsolidation The Company accounts for deconsolidation of subsidiaries in accordance with ASC Topic 810 “Consolidation”. In accordance with ASC Topic 810-10-40-5, the parent shall account for the deconsolidation of a subsidiary by recognizing a gain or loss in netincome attributable to the parent, measured as the difference between: a. The aggregate of all of the following: 1. The fair value of any consideration received; 2. The fair value of any retained noncontrolling investment in the former subsidiary at the date the subsidiary is deconsolidated; 3. The carrying amount of any noncontrolling interest in the former subsidiary (including any accumulated other comprehensive incomeattributable to the noncontrolling interest) at the date the subsidiary is deconsolidated. b. The carrying amount of the former subsidiary’s assets and liabilities. F-18 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS n) Changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary The Company accounted for changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary inaccordance with ASC Topic 810 “Consolidation”, subtopic 10, which requires the transaction be accounted for as equity transactions (investmentsby owners and distributions to owners acting in their capacity as owners). Therefore, no gain or loss shall be recognized in consolidated net incomeor comprehensive income. The carrying amount of the noncontrolling interest shall be adjusted to reflect the change in its ownership interest in thesubsidiary. Any difference between the fair value of the consideration received or paid and the amount by which the noncontrolling interest isadjusted shall be recognized in equity attributable to the parent and reallocated the subsidiary’s accumulated comprehensive income, if any, amongthe parent and the noncontrolling interest through an adjustment to the parent’s equity. o) Fair Value The Company’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, other receivables, prepayment anddeposits, accounts payable, advances from customers, accruals and other payables. The carrying values of these financial instruments approximatefair values due to their short maturities. ASC Topic 820 "Fair Value Measurement and Disclosures," defines fair value as the exchange price that would be received for an asset or paid totransfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between marketparticipants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable andunobservable 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 notactive; 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 hierarchydisclosures each quarter. p) Revenue recognition The Company's revenue recognition policies are in compliance with ASC Topic 605 “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 beenrendered, (iii) the fees are fixed or determinable, and (iv) collectability is reasonably assured. Sales include revenues from reselling of advertising time purchased from TV stations and, internet advertising and providing related value addedtechnical services, reselling of internet advertising spaces and other advertisement related resources. No revenue from advertising-for-advertisingbarter transactions was recognized because the transactions did not meet the criteria for recognition in ASC Topic 605, subtopic 20. Advertisingcontracts establish the fixed price and advertising services to be provided. Pursuant to advertising contracts, the Company provides advertisementplacements in different formats, including but not limited to banners, links, logos, buttons, rich media and content integration. Revenue isrecognized ratably over the period the advertising is provided and, as such, the Company considers the services to have been delivered. TheCompany treats all elements of advertising contracts as a single unit of accounting for revenue recognition purposes. Value added technical servicesare provided based on two types of contracts: (i) fixed price and (ii) fixed price with minimum performance threshold. For contracts with fixed priceterms, revenue is recognized on a pro-rata basis over the engaged service period. For fixed price contracts with minimum performance threshold,revenue is recognized when the specified performance criteria is met. Based upon the Company’s credit assessments of its customers prior to enteringinto contracts, the Company determines if collectability is reasonably assured. In situations where collectability is not deemed to be reasonablyassured, the Company recognizes revenue upon receipt of cash from customers, only after services have been provided and all other criteria forrevenue recognition have been met. F-19 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS q) Cost of sales Cost of sales primarily includes the cost of media advertising time, internet advertisement related resources and other technical services purchasedfrom third parties, direct labor cost and benefits and PRC business tax. r) Advertising costs Advertising costs for the Company’s own brand building are not includable in cost of sales, they are expensed when incurred or amortized over theestimated beneficial period and are included in “selling expenses” in the statement of income and comprehensive income. For the years endedDecember 31, 2012 and 2011, advertising expenses for the Company’s own brand building were approximately US$289,000 and US$1,357,000,respectively. s) Research and development expenses The Company accounts for the cost of developing and upgrading technologies and platforms and intellectual property that are used in its dailyoperations in research and development cost. Research and development costs are charged to expense when incurred. Expenses for research anddevelopment for the years ended December 31, 2012 and 2011 were approximately US$1,819,000 and US$2,132,000, respectively. t) Income taxes The Company adopts ASC Topic 740 “Income taxes” and uses liability method to account for income taxes. Under this method, deferred tax assetsand liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax ratesthat will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred taxassets, 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 statement of income and comprehensive income in the period that includes theenactment date. u) Uncertain tax positions The Company follows the guidance of ASC Topic 740-10-25-5 through 740-10-25-7 and 740-10-25-13, which prescribes a more likely than notthreshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation alsoprovides 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. The Company recognizes interest on non-payment of income taxes under requirement by tax law and penalties associated with tax positions when atax position does not meet the minimum statutory threshold to avoid payment of penalties. According to the PRC Tax Administration andCollection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or thewithholding agent. The statute of limitations is extended to five years under special circumstances, where the underpayment of taxes is more thanRMB100,000. In the case of transfer pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion.The tax returns of the Company’s PRC VIEs and subsidiaries are subject to examination by the relevant tax authorities. The Company did not haveany material interest or penalties associated with tax positions and did not have any significant unrecognized uncertain tax positions as of December31, 2012 and 2011, respectively. v) Share-based Compensation The Company accounted for share-based compensation to employees in accordance with ASC Topic 718 “Compensation-Stock Compensation”which requires that share-based payment transactions be measured based on the grant-date fair value of the equity instrument issued and recognizedas compensation expense over the requisite service period, or vesting period. F-20 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS w) Noncontrolling interest The Company accounts for noncontrolling interest in accordance with ASC Topic 810-10-45, which requires the Company to presentnoncontrolling interests (previously referred to as minority interests) as a separate component of total shareholders’ equity on the consolidatedbalance sheet and the consolidated net income attributable to the parent and the noncontrolling interest be clearly identified and presented on theface of the consolidated income and comprehensive income statement. ASC Topic 810-10-45 also requires that losses attributable to the parent andthe noncontrolling interest in a subsidiary be attributed to those interests even if it results in a deficit noncontrolling interest balance. x) Comprehensive income The Company accounts for comprehensive income in accordance with ASC Topic 220 “Comprehensive Income”, which establishes standards forreporting and displaying comprehensive income and its components in the consolidated financial statements. Comprehensive income is defined asthe change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting frominvestments from owners and distributions to owners. Accumulated other comprehensive income, as presented in the Company’s consolidatedbalance sheets are the cumulative foreign currency translation adjustments. y) Earnings per share Earnings per share are calculated in accordance with ASC Topic 260, “Earnings Per Share”. Basic earnings per share is computed by dividingincome attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Dilutedearnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or convertedinto common stock. Common shares issuable upon the conversion of the convertible preferred shares are included in the computation of dilutedearnings per share on an “if-converted” basis when the impact is dilutive. The dilutive effect of outstanding common stock warrants and options arereflected in the diluted earnings per share by application of the treasury stock method when the impact is dilutive. z) Commitments and contingencies The Company has adopted ASC 450 “Contingencies” subtopic 20, 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 thefinancial statements indicates that it is probable that a liability have been incurred and the amount of the loss can be reasonably estimated. Legalexpenses associated with the contingency are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of theloss contingency is made in the financial statements when it is at least reasonably possible that a material loss could be incurred. aa) Recent accounting standards In July 2012, the FASB issued ASU 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets forImpairment." This ASU simplifies how entities test indefinite-lived intangible assets for impairment which improve consistency in impairmenttesting requirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether itis more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessmentconcludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to performquantitative impairment testing as outlined in the previously issued standards. The guidance is effective for annual and interim impairment testsperformed for fiscal years beginning after September 15, 2012; early adoption is permitted. The adoption of this standard is not expected to have amaterial impact on the Company’s consolidated financial position or results of operations. In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of AccumulatedOther Comprehensive Income”, The ASU does not change the current requirements for reporting net income or other comprehensive income infinancial statements. However, this ASU requires an entity to provide information about the amounts reclassified out of accumulated othercomprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presentedor in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but onlyif the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amountsthat are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosuresrequired under U.S. GAAP that provide additional detail about those amounts. The guidance is effective prospectively for reporting periodsbeginning after December 15, 2012 for public entities. The adoption of this standard is not expected to have a material impact on the Company’sconsolidated financial position or results of operations. F-21 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until afuture date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption. 4. AcquisitionsFor the year ended December 31, 2011, in order to further diversify the channels of the Company’s advertising and marketing campaign services, achievean entry into Fujian province, a base of fast growing small to medium enterprises, and expand the Company’s market opportunities from theseenterprises, which are looking to domestically expand their businesses through franchises, dealerships and merchants in China, the Company acquired a100% equity interest and a 51% equity interest in Quanzhou Zhi Yuan and Quanzhou Tian Xi Shun He, respectively. In order to establish the distinctbrands in each of the Company’s targeted customer segment and achieved more diversified operational synergies of the Company’s internet advertisingand marketing business, the Company acquired a 51% equity interest in Sou Yi Lian Mei, an established internet advertising and marketing servicesprovider for merchant and franchise enterprises and organizations primarily involved in small office/home office ("SOHO") and emerging business,through its web portal, www.sooe.cn.Each acquisition was accounted for using the acquisition method of accounting in accordance with ASC Topic 805 “Business Combinations”, andaccordingly the acquired assets and liabilities were recorded at their fair values on the dates of acquisitions and the results of their operations have beenincluded in the Company’s results of operations since the dates of their acquisitions.The income approach is applied for identifiable intangible assets (except software technologies) and noncontrolling interests’ valuation, based on a five-year financial projection and using the discounted cash flow method to calculate the present value of the future economic benefits. Key inputs used forsuch valuation include: weighted average cost of capital (“WPCC”), discount rate, and terminal growth rate. The income approach explicitly recognizesthat the current value of an asset is premised upon the expected receipt of future economic benefits focusing on the income producing capability of abusiness or an asset. It measures the current value of a business or asset by calculating the present value of its future economic benefits such as earnings,cost savings, tax deduction, and proceeds from disposition. Indications of value are developed by discounting these benefits to their present value at arate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation, and risk associated with the particular investmentwhich reflects both current return requirements of the market and specific investment. The discount rate selected is generally based on rates of returnavailable from alternative investments of similar type and quality as of each assessment date. The Cost approach is applied for software technologiesvaluation based on the estimated replacement cost of the software technologies. The Monte Carlo simulation is applied for the valuation of contingentconsideration receivables. Contingent consideration receivables arose from certain “make good” provisions stipulated in the acquisition agreementswith the sellers, which were that if audited pretax profit or after tax profit for the required further years increases by less than certain amount or percentagewhile compared to audited pretax profit or after tax profit of the prior year, the sellers need to compensate the Company in cash for the differencebetween target pretax profit or after tax profit and actual result achieved then.Goodwill recognized from these transactions mainly represented the expected operational synergies upon acquisition of these subsidiaries andintangibles not qualifying for separate recognition. Goodwill is nondeductible for income tax purpose in the tax jurisdiction of these acquisitiontransactions incurred.Acquisition of Quanzhou Zhi YuanThe following table summarizes the assignment of fair value to identifiable assets and liabilities assumed as of January 4, 2011 (the acquisition date ofQuanzhou Zhi Yuan): F-22 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair Value AmortizationPeriod US$(’000) (Years) Cash and cash equivalents $11 Accounts receivables 17 Property and equipment, net 57 Other current liabilities (13) Deferred tax liabilities (196) Acquired intangible assets: Trade Name 113 IndefiniteContract Backlog 18 0.7Customer Relationship 547 8Non-Compete Agreement 106 5Goodwill: Assembled Workforce 20 Other unidentifiable intangibles 708 728 Total Value $1,388 Purchase price $1,440 Contingent consideration receivable (52) Total amount to be allocated $1,388 Acquisition of Quanzhou Tian Xi Shun HeThe following table summarized the assignment of fair value to identifiable assets and liabilities assumed as of February 23, 2011 (the acquisition date ofQuanzhou Tian Xi Shun He): Fair Value AmortizationPeriod US$(’000) (Years) Cash and cash equivalents $12 Accounts receivables 55 Property and equipment, net 41 Other current liabilities (34) Deferred tax liabilities (289) Acquired intangible assets: Trade Name 182 IndefiniteContract Backlog 170 0.6Customer Relationship 722 9Non-Compete Agreement 83 5Goodwill: Assembled Workforce 23 Other unidentifiable intangibles 1,143 1,166 Total Value $2,108 Purchase price 1,138 Fair value of noncontrolling interest 1,034 Contingent consideration receivable (64) Total amount to be allocated $2,108 Acquisition of Sou Yi Lian MeiThe following table summarized the assignment of fair value to identifiable assets and liabilities assumed as of December 20, 2011 (the acquisition dateof Sou Yi Lian Mei): F-23 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair Value AmortizationPeriod US$(’000) (Years) Cash and cash equivalents $310 Accounts receivables 1,957 Property and equipment, net 23 Other current liabilities 33 Deferred tax liabilities (2,140) Acquired intangible assets: (1,266) Domain Name 1,512 IndefiniteCustomer Relationship 2,085 5Non-Compete Agreement 1,148 6Software technologies 321 5Goodwill: Assembled Workforce 42 Other unidentifiable intangibles 8,963 9,005 Total Value $12,988 Purchase price 8,078 Fair value of noncontrolling interest 5,021 Contingent consideration receivable (111) Total amount to be allocated $12,988 The operating results of these acquirees are only included from the date of their respective acquisition dates. For the year ended December 31, 2011, thefinancial performance of the acquirees reported in the Company’s consolidated statements of income and comprehensive income includes sales ofapproximately US$1,474,000 and net income before allocation to noncontrolling interests of approximately US$441,000. The following unaudited pro-forma financial results for the year ended December 31, 2011, combines the historical operating results of the Companywith those of Quanzhou Zhi Yuan, Quanzhou Tian Xi Shun He and Sou Yi Lian Mei in the aggregate, as if these acquisitions had been completed as ofthe beginning of the reporting periods, and also includes the adjustments for the business combination effect of the amortization charges from acquiredintangible assets and the related tax effects. (Amounts in thousands, except for per share data): Year endedDecember 31, 2011 Revenue $35,659 Net income before allocation to the noncontrolling interests $4,508 Earnings per share-Basic $0.19 Earnings per share-Diluted $0.19 Subsequently, the Company acquired the remaining 49% equity interest in Quanzhou Tian Xi Shun He and Sou Yi Lian Mei in June 2011 andSeptember 2012, respectively. The Company accounted for changes in a parent’s ownership interest while the parent retains its controlling financialinterest in its subsidiary in accordance with ASC Topic 810 “Consolidation”, which requires the transaction be accounted for as equity transactions withno gain or loss recognized in earnings for these transactions for the years ended December 31, 2012 and 2011.The difference between the cash consideration paid and the amount by which the noncontrolling interest was adjusted to reflect the change in itsownership interest in the subsidiary was approximately US$787,000 for the 49% equity interest acquisition in Sou Yi Lian Mei and approximatelyUS$62,000 for the 49% equity interest acquisition in Quanzhou Tian Xi Shun He was recognized in equity attributable to the Company for the yearsended December 31, 2012 and 2011, respectively. F-24 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Cash and cash equivalent As of December 31, 2012 2011 US$(’000) US$(’000) Cash 893 181 Bank deposit 4,590 10,514 5,483 10,695 6. Term deposit Term deposit as of December 31, 2012 represented the amount of cash placed as a term deposit by one of the Company’s operating VIEs in a majorfinancial institution of China, which management believes is of high credit quality. The interest rate of the term deposit is 3.5% per annual and the termdeposit will mature on July 5, 2013. 7. Accounts receivable, net As of December 31, 2012 2011 US$(’000) US$(’000) Accounts receivable 12,116 6,546 Allowance for doubtful debts (3,630) (2,102)Accounts receivable, net 8,486 4,444 All of the accounts receivable are non-interest bearing. Based on the assessment of the collectability of the accounts receivable, the Companyprovided approximately US$3,630,000 and US$2,102,000 allowance for doubtful debts for the years ended December 31, 2012 and 2011,respectively, which were related to the accounts receivable of the Company’s internet advertising and TV advertising business segment with anaging over six months. For the year ended December 31, 2012, approximately US$1,510,000 allowance for doubtful debts was provided. 8. Other receivables, net As of December 31, 2012 2011 US$(’000) US$(’000) Short-term loan for marketing campaign 2,375 2,985 Short-term loans to unrelated entities 475 - Term deposit interest receivable 59 - Staff advances for normal business purpose 194 279 Overdue contract guarantee deposits 158 891 Allowance for doubtful debts (158) (524)Other receivables, net 3,103 3,631 F-25 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Short-term loan for marketing campaign: for one of the major marketing campaigns, the Company made a marketing-related loan ofRMB25,000,000 (approximately US$3,958,139) to a TV series of 36 episodes, called “Xiao Zhang Feng Yun.” This TV series was produced incommemoration of “The Republican Revolution of 1911” (the Chinese bourgeois democratic revolution led by Dr. Sun Yat-sen which overthrew theQing Dynasty). By participating in this TV series, the Company’s logo will be shown during the credits at the end of each episode and also shown asa separate card during the closing before the credit screen. This TV series has been broadcasted on CCTV 8 and www.sina.com.cn since September2011 and continues to sell its broadcasting rights to other provincial TV channels for additional exposure. For the years ended December 31, 2012and 2011, the Company has collected an aggregate of RMB10,000,000 (approximately US$1,583,255) from the borrower. In accordance with thecommunication between the Company and the borrower, the Company has extended the term of this loan from December 31, 2012 to December 31,2013, as this TV series is still selling broadcasting rights to TV stations and other media and the Company has agreed a repayment schedule with theborrower, which is within one year. The Company will continue to assess the collectability of this loan and if an event occurs or circumstanceschange that could indicate that the collectability of this loan is remote, a full allowance of bad debts provision will be provided for the remainingoutstanding balance of this loan. For all advertising resources purchasing contracts signed by the Company with its resource providers, the Company is required to make contractguarantee deposits, which are either used to pay the actual contract amount of resources used in the last month of each contract period or to berefunded to the Company of the remaining balance upon expiration of the contract. Overdue contract guarantee deposits represented the portion ofthe contract guarantee deposits, which related advertising resources purchasing contracts had been completed as of each of the reporting dates.Based on the assessment of the collectability of these overdue contract guarantee deposits as of December 31, 2012 and 2011, the Companyprovided approximately US$158,000 and US$524,000 allowance for doubtful debts, respectively, which was related to the contract guaranteedeposits of its TV advertising business segment. For the year ended December 31, 2012, approximately US$370,000 allowance for doubtful debtswas reversed due to subsequent collection of these overdue deposits in 2012. 9. Prepayments and deposit to suppliers As of December 31, 2012 2011 US$(’000) US$(’000) Contract execution guarantees to TV advertisement and internet resources providers 9,463 10,050 Prepayments to TV advertisement and internet resources providers 5,069 5,285 Other deposits and prepayments 64 25 14,596 15,360 Contract execution guarantees to TV advertisement and internet resource providers are paid as contractual deposits to the Company’s resources andservices providers. These amounts will be used to offset the contact amount and service fee needed to be paid for the resources and servicesprovided in the last month of each contract period or refunded to the Company upon expiration of the purchase contracts. According to the contracts signed between the Company and its suppliers, the Company is normally required to pay the contract amount inadvance. These prepayments will be transferred to cost of sales when the related services are provided. 10. Due from related parties As of December 31, 2012 2011 US$(’000) US$(’000) Beijing Fengshangyinli Technology Co., Ltd. 53 113 Beijing Saimeiwei Food Equipment Technology Co., Ltd. 87 74 Beijing Telijie Century Environmental Technology Co., Ltd. 70 137 210 324 F-26 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS These related parties are directly or indirectly owned by the Control Group of the Company. The Control Group refers to Mr. Handong Cheng, Mr.Xuanfu Liu and Ms. Li Sun (acting as nominee for Mr. Zhige, Zhang), the owners of the Company’s PRC VIEs, Business Opportunities Online andBeijing CNET Online before the Offshore Restructuring. The Company provides advertising services to these related parties in its normal course ofbusiness on the same terms as those provided to its unrelated advertising clients. Due from related parties represented the outstanding receivables forthe advertising services that the Company provided to these related parties as of each of the reporting date. 11. Contingent consideration receivables Amount US$(’000) Balance as of December 31, 2011 159 Changes in fair value of contingent consideration receivables recognized (160)Exchange translation adjustment 1 Balance as of December 31, 2012 - Contingent consideration receivables arose from certain “make good” provisions entered into by and between the Company and former stockholdersof the VIEs upon the acquisition of the Company’s consolidated VIEs. These “make good” provisions provide that if the acquired VIEs’ auditedpretax profit or after tax profit for the year ended December 31, 2012 increases by less than a certain amount or percentage as compared to that of theprior year, then the former VIE stockholders will be required to compensate the Company in cash for the difference between target pretax profit orafter tax profit and the actual pretax profit or after tax profit, as applicable. The related VIEs acquired in 2011 which subject to the “make good” provisions discussed above have all achieved its respective target pre-tax orafter tax profit for the year ended December 31, 2012 and the former stockholders of these VIEs will not compensate the Company any cash inaccordance with the acquisition agreement. Therefore, any remaining balance of contingent consideration receivables was charged against earningsas charge in fair value of contingent consideration receivables in the Company’s consolidated statements of income and comprehensive income forthe year ended December 31, 2012. 12. Investment in and advance to equity investment affiliates As of December 31, 2012 2011 US$(’000) US$(’000) Investment in equity investment affiliates 916 1,354 Advance to equity investment affiliates 43 42 959 1,396 The following table summarizes the movement of the investment in and advance to equity investment affiliates for the year ended December 31,2012: ShenzhenMingshan Zhao ShangKe Hubei Total US$(’000) US$(’000) US$(’000) Balance as of December 31, 2011 595 801 1,396 Share of losses in equity investment affiliates (109) (340) (449)Exchange translation adjustment 6 6 12 Balance as of December 31, 2012 492 467 959 F-27 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSShenzhen Mingshan:Shenzhen Mingshan was incorporated on June 24, 2010 by one of the Company’s VIEs, Business Opportunities Online and three other individualswho were not affiliated with the Company. Shenzhen Mingshan was 51% owned by the Company and was a consolidated VIE of the Company fromthe date of incorporation through January 6, 2011. On January 6, 2011, an unaffiliated third party invested RMB15,000,000 (approximatelyUS$2,374,883) into Shenzhen Mingshan in exchange for a 60% equity interest in Shenzhen Mingshan. The Company’s share of equity interestdecreased from 51% to 20.4% accordingly. On December 19, 2012, as approved by the shareholders of Shenzhen Mingshan, Shenzhen Mingshanreduced its registered and paid-in capital from RMB25,000,000 (approximately US$3,958,139) to RMB22,000,000 (approximately US$3,483,162),resulted from a decrease of paid-in capital from three other noncontrolling shareholders, except Business Opportunity Online. As a result, theCompany’s share of the equity interest in Shenzhen Mingshan increased from 20.4% to 23.18% and the Company continued to retain significantinfluence over Shenzhen Mingshan.The deconsolidation of Shenzhen Mingshan occurred in January 2011 was accounted for in accordance with ASC Topic 810 “Consolidation”. Forthe year ended December 31, 2011, the Company recognized a gain of approximately US$232,000 upon deconsolidation of Shenzhen Mingshan,which has been recorded as a gain on deconsolidation of subsidiaries in the Company’s consolidated statements of income and comprehensiveincome with a corresponding increase in the carrying value of the investment in Shenzhen Mingshan in the Company’s consolidated balance sheet.This gain represents the excess of the fair value of the Company’s retained equity interest over its carrying value as of the date of deconsolidation.For the years ended December 31, 2012 and 2011, the Company recognized its pro-rata shares of losses in Shenzhen Mingshan of approximatelyUS$109,000 and US$249,000, respectively. These losses recognized were reflected in the caption of “Share of losses in equity investment affiliates”in the Company’s consolidated statements of income and comprehensive income with a corresponding decrease to the carrying value of theinvestment in Shenzhen Mingshan in the Company’s consolidated balance sheet.Zhao Shang Ke Hubei: Zhao Shang Ke Hubei was incorporated on April 18, 2011 by one of the Company’s VIEs, Business Opportunities Online Hubei and a co-foundingindividual who was not affiliated with the Company. Zhao Shang Ke Hubei was 51% owned by the Company and was a consolidated VIE of theCompany from the date of incorporation through December 29, 2011. On December 29, 2011, two unaffiliated third party investors investedRMB10,000,000 (approximately US$1,583,255) into Zhao Shang Ke Hubei in exchange for an aggregate 50% equity interest in Zhao Shang KeHubei. The Company’s share of equity interest decreased from 51% to 25.5% accordingly. The deconsolidation of Zhao Shang Ke Hubei occurred in December 2011 was accounted for in accordance with ASC Topic 810 “Consolidation”.For the year ended December 31, 2011, the Company recognized a gain of approximately US$693,000 upon deconsolidation of Zhao Shang KeHubei, which has been recorded as a gain on deconsolidation of subsidiaries in the Company’s consolidated statements of income andcomprehensive income with a corresponding increase in the carrying value of the investment in Zhao Shang Ke Hubei in the Company’sconsolidated balance sheet. This gain represents the excess of the fair value of the Company’s retained equity interest over its carrying value as ofthe date of deconsolidation. The Company applied the equity method of accounting prospectively from the date immediately after the deconsolidation. For the year endedDecember 31, 2012, the Company recognized its pro-rata share of losses in Zhao Shang Ke Hubei of approximately US$340,000, which wasreflected in the caption of “Share of losses in equity investment affiliates” in the Company’s consolidated statements of income and comprehensiveincome with a corresponding decrease to the carrying value of the investment in Zhao Shang Ke Hubei in the Company’s consolidated balancesheet. For the year ended December 31, 2011, the Company did not recognize its pro-rata share of losses in Zhao Shang Ke Hubei as the amount isimmaterial. F-28 13. Property and equipment, net As of December 31, 2012 2011 US$(’000) US$(’000) Vehicles 925 683 Office equipment 1,481 1,399 Electronic devices 1,205 1,196 Property and equipment, cost 3,611 3,278 Less: accumulated depreciation (1,975) (1,376)Property and equipment, net 1,636 1,902 Depreciation expenses in aggregate for the years ended December 31, 2012 and 2011 were approximately US$591,000 and US$551,000,respectively. 14. Intangible assets, net As of December 31, 2012 2011 US$(’000) US$(’000) Intangible assets not subject to amortization: Trade name 309 306 Domain name 1,529 1,518 Intangible assets subject to amortization: Contract backlog 196 195 Customer relationship 3,434 3,408 Non-compete agreements 1,358 1,348 Software technologies 325 322 Cloud-computing based software platforms 1,470 1,458 Other computer software 76 75 Intangible assets, cost 8,697 8,630 Less: accumulated amortization (1,530) (479)Intangible assets, net 7,167 8,151 Amortization expenses in aggregate for the years ended December 31, 2012 and 2011 were approximately US$1,046,000 and US$461,000,respectively. Based on the carrying value of the finite-lived intangible assets recorded as of December 31, 2012, and assuming no subsequent impairment of theunderlying intangible assets, the estimated future amortization expenses is approximately US$1,022,000 per year through December 31, 2015,approximately US$982,000 for the year ended December 31, 2016 and approximately US$496,000 for the year ended December 31, 2017. F-29 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. Goodwill Amount US$(’000) Balance as of January 1, 2011 - Acquisitions: (Note 4) --Quanzhou Zhi Yuan 728 --Quanzhou Tian Xi Shun He 1,166 --Sou Yi Lian Mei 9,005 Exchange translation adjustment 100 Balance as of December 31, 2011 10,999 Exchange translation adjustment 84 Balance as of December 31, 2012 11,083 16. Accrued payroll and other accruals As of December 31, 2012 2011 US$(’000) US$(’000) Accrued payroll and staff welfare 538 344 Accrued operating expenses 366 272 904 616 17. Due to equity investment affiliate As of December 31, 2012 2011 US$(’000) US$(’000) Zhao Shang Ke Hubei - 220 Zhao Shang Ke Hubei is an equity investment affiliate of the Company. Amounts due to Zhao Shang Ke Hubei as of December 31, 2011 representeda temporary non-interest bearing working capital loans borrowed by one of the Company’s VIEs from Zhao Shang Ke Hubei, which was repaidduring the year ended December 31, 2012. 18. Due to related parties As of December 31, 2012 2011 US$(’000) US$(’000) Beijing Saimeiwei Food Equipments Technology Co., Ltd - 4 Due to legal (nominal) shareholders of Shanghai Jing Yang - 157 - 161 Shanghai Jing Yang was incorporated in December 2009 by the Company’s senior management, prior to entering into the Contractual Agreementswith the Company (see Note 1), the legal shareholders contributed RMB1,000,000 (approximately US$157,000) as the original paid-in capital ofShanghai Jing Yang upon incorporation, which was returned to the legal shareholders of Shanghai Jing Yang during the year ended December 31,2012. F-30 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. Payable for acquisition As of December 31, 2012 2011 US$(’000) US$(’000) Sou Yi Lian Mei 1,266 550 Payable for acquisition as of December 31, 2012 and 2011 represented the outstanding payment of approximately RMB8.0 million and RMB3.5million for the acquisition of the 49% equity interest and the 51% equity interest of Sou Yi Lian Mei consummated in September 2012 andDecember 2011, respectively. 20. Taxation 1) Income tax The entities within the Company file separate tax returns in the respective tax jurisdictions in which they operate. i). The Company is incorporated in the state of Nevada. Under the current law of Nevada, the company is not subject to state corporate income tax.Following the Share Exchange, the Company became a holding company and does not conduct any substantial operations of its own. No provisionfor federal corporate income tax has been made in the financial statements as the Company has no assessable profits for the years ended December31, 2012 and 2011, or any prior periods. The Company does not provide for U.S. taxes or foreign withholding taxes on undistributed earnings fromits non-U.S. subsidiaries because such earnings are intended to be reinvested indefinitely. If undistributed earnings were distributed, foreign taxcredits could become available under current law to reduce the resulting U.S. income tax liability. ii). China Net BVI was incorporated in the British Virgin Islands (“BVI”). Under the current law of the BVI, China Net BVI is not subject to tax onincome or capital gains. Additionally, upon payments of dividends by China Net BVI to its shareholders, no BVI withholding tax will be imposed. iii). China Net HK was incorporated in Hong Kong and does not conduct any substantial operations of its own. No provision for Hong Kong profitstax has been made in the financial statements as China Net HK has no assessable profits for the years ended December 31, 2012 and 2011, or anyprior periods. Additionally, upon payments of dividends by China Net HK to its shareholders, no Hong Kong withholding tax will be imposed. iv). The Company’s PRC operating subsidiary and VIEs, being incorporated in the PRC, are governed by the income tax law of the PRC and issubject to PRC enterprise income tax (“EIT”). Effective from January 1, 2008, the EIT rate of PRC was changed from 33% to 25%, and applies toboth domestic and foreign invested enterprises. lRise King WFOE is a software company qualified by the related PRC governmental authorities and was approved by the local tax authoritiesof Beijing, the PRC, to be entitled to a two-year EIT exemption from its first profitable year and a 50% reduction of its applicable EIT rate,which is 25% to 12.5% of its taxable income for the succeeding three years. Rise King WFOE had a net loss for the year ended December 31,2008 and its first profitable year was fiscal year 2009 which has been verified by the local tax bureau by accepting the application filed byus. Therefore, it was approved to be entitled to a two-year EIT exemption for fiscal year 2009 through fiscal year 2010 and a 50% reduction ofits applicable EIT rate which is 25% to 12.5% for fiscal year 2011 through fiscal year 2013. Therefore, for the years ended December 31, 2012and 2011, the applicable income tax rate for Rise King WFOE was both 12.5%. After fiscal year 2013, the applicable income tax rate of RiseKing WFOE will be 25% under the current EIT law of PRC. lBusiness Opportunity Online was approved by the related PRC governmental authorities as a High and New Technology Enterprise under theNew EIT law effective September 4, 2009, and was approved by the local tax authorities of Beijing, the PRC, to be entitled to a favorablestatutory tax rate of 15%. Business Opportunity Online’s High and New Technology Enterprise certificate would expire on September 4,2012. On July 9, 2012, Business Opportunity Online passed the administrative review conducted by the related PRC governmentalauthorities for obtaining the renewed certificate, which enabled it to continue to enjoy the 15% preferential income tax rate as a High andNew Technology Enterprise. Therefore, for the years ended December 31, 2012 and 2011, the applicable income tax rate of BusinessOpportunity Online was both 15%. F-31 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS lBusiness Opportunity Online Hubei was incorporated in Xiaotian Industrial Park of Xiaogan Economic Development Zone in Xiaogan City,Hubei province of the PRC in 2011. It was approved by the related local government authorities to apply the deemed income tax method forits computation of income tax expense for the year ended December 31, 2011. Under the deemed income tax method, the deemed profit iscalculated based on 10% of the total revenue and the applicable income tax rate is 25%. Therefore, for the year ended December 31, 2011,Business Opportunity Online Hubei calculated its income tax expenses based on 2.5% of the total revenue recognized for the reportingperiod. Starting from January 1, 2012, the local tax authorities cancelled the deemed income tax method for computation of income taxexpenses for the entity. As such, the applicable income tax rate for the entity increased to 25%. On June 15, 2012, Business OpportunityOnline Hubei was approved by the related PRC governmental authorities to be qualified as a software company and was approved by thelocal tax authorities of Xiaogan City, Hubei province, the PRC, to be entitled to a two-year EIT exemption for fiscal years 2012 and 2013, anda 50% reduction of its applicable EIT rate which is 25% to 12.5% of its taxable income for the succeeding three years until December 31,2016. Therefore, for the year ended December 31, 2012, the applicable income tax rate of Business Opportunity Online Hubei is nil%. lHubei CNET was incorporated in Xiaotian Industrial Park of Xiaogan Economic Development Zone in Xiaogan City, Hubei province of thePRC in 2011. It was approved by the related local government authorities to apply the deemed income tax method for its computation ofincome tax expense for the year ended December 31, 2011. Under the deemed income tax method, the deemed profit is calculated based on10% of the total revenue and the applicable income tax rate is 25%. Therefore, for the year ended December 31, 2011, Hubei CNETcalculated its income tax expenses based on 2.5% of the total revenue recognized for the reporting period. Starting from January 1, 2012, thelocal tax authorities cancelled the deemed income tax method for computation of income tax expenses for the entity and the applicableincome tax rate for the entity increased to 25%. Therefore, for the year ended December 31, 2012, the applicable income tax rate for HubeiCNET is 25%. lThe applicable income tax rate for other PRC operating entities of the Company is 25% for the years ended December 31, 2012 and 2011. lThe New EIT also imposed a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holdingcompany outside China, which were exempted under the previous enterprise income tax law and rules. A lower withholding tax rate will beapplied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Holding companiesin Hong Kong, for example, will be subject to a 5% rate. Rise King WFOE is invested by immediate holding company in Hong Kong and willbe entitled to the 5% preferential withholding tax rate upon distribution of the dividends to its immediate holding company. For the years ended December 31, 2012 and 2011, all of the preferential income tax treatments enjoyed by the Company’s PRC subsidiary and VIEswere based on the current applicable laws and regulations of the PRC and approved by the related government regulatory authorities and local taxauthorities where the Company’s respective PRC subsidiary and VIEs operate. Rise King WFOE, Business Opportunity Online, BusinessOpportunity Online Hubei and Hubei CNET were most affected by these preferential income tax treatments within the structure of the Company. Thepreferential income tax treatments are subject to change in accordance with the PRC government economic development policies and regulations.These preferential income tax treatments are mainly determined by the regulation and policies of the PRC government in the context of the overalleconomic policy and strategy. As a result, the uncertainty of theses preferential income tax treatments are subject to, but not limited to, the PRCgovernment policy on supporting any specific industry’s development under the outlook and strategy of overall macroeconomic development. 2) Turnover taxes and the relevant surcharges For fiscal 2011, revenue from advertisement services is subject to 5.5% business tax (including surcharges) and 3% cultural industry developmentsurcharge of the net service income after deducting amount paid to ending media promulgators. Revenue from internet technical services issubjected to 5.5% business tax (including surcharges). Beginning on January 1, 2012, PRC tax authorities increased the local business tax rate by 0.1%-0.2%. Therefore, from January 1, 2012 throughAugust 31, 2012 (for the Company’s PRC operating entities incorporated in Beijing) or October 31, 2012 (for the Company’s PRC operatingentities incorporated in Fujian province) or November 30, 2012 (for the Company’s PRC operating entities incorporated in Hubei province), revenuefrom advertisement services is subject to 5.6%-5.7% business tax (including surcharges), depending on which tax jurisdiction the Company’s PRCoperating subsidiary and VIE operate in, and 3% cultural industry development surcharge of the net service income after deducting amount paid toending media promulgators. Revenue from internet technical services was subjected to 5.6%-5.7% business tax (including surcharges), dependingon which tax jurisdiction the Company’s PRC operating subsidiary and VIE operate in. F-32 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On July 31, 2012, the Ministry of Finance (the “MOF”) and the State Administration of Taxation (the “SAT”) of the PRC jointly promulgated a“Circular on Launching the Pilot Collection of Value Added Tax in lieu of Business Tax in Transportation and Certain Areas of Modern ServicesIndustries in Eight Provinces and Municipalities Including Beijing” (“Circular Cai Shui [2012] No. 71”), pursuant to which a business tax to valueadded tax (the “VAT”) transformation pilot program was launched. The implementation date for Beijing is September 1, 2012, for Fujian province,November 1, 2012, and for Hubei province, December 1, 2012. Other circulars such as “Circular on Carrying out the Pilot Collection of Value AddedTax in Lieu of Business Tax to be imposed on Transportation Industry and Part of Modern Services Industry in Shanghai” (“Circular Cai Shui [2011]No. 111”) jointly promulgated by the MOF and the SAT on November 16, 2011 which contains detailed implementation measures for such VATpilot program apply to the locations including Beijing, Fujian province and Hubei province. In accordance with the Circular Cai Shui [2011] No.111, the VAT rate for provision of modern services (other than lease of corporeal movables) is 6% and for small scale taxpayer, 3%. Therefore,beginning on September 1, 2012, for the Company’s PRC operating subsidiary and VIEs incorporated in Beijing, November 1, 2012, for theCompany’s PRC operating VIEs incorporated in Fujian province, December 1, 2012, for the Company’s PRC operating VIEs incorporated in Hubeiprovince, service revenues are subject to VAT at a rate of 6%, after deducting the VAT paid for the services purchased from suppliers, or at a rate of3% without any deduction of VAT paid for the services purchased from suppliers. The surcharges of the VAT is 12%-14% of the VAT, depending onwhich tax jurisdiction the Company’s PRC operating subsidiary and VIE operate in. Business tax is a price including tax in the PRC turnover tax system, which is calculated based on the revenue inclusive of turnover tax. Therefore,revenues achieved by the Company which are subject to business tax are presented on a gross basis inclusive of business tax, and on the other hand,business tax was included in cost of revenues upon recognition of services revenues. Contrastively, VAT is a price excluding tax in the PRCturnover tax system, which is calculated based on the revenue exclusive of turnover tax. Therefore, revenues achieved by the Company which aresubject to VAT is presented on a net basis exclusive of VAT. As of December 31, 2012 and 2011, taxes payable consists of: As of December 31, 2012 2011 US$(’000) US$(’000) Turnover tax and surcharge payable 2,609 2,212 Enterprise income tax payable 4,074 2,770 Individual income tax payable - 58 6,683 5,040 A reconciliation of the provision for income taxes determined at the US federal corporate income tax rate to the Company’s effective income tax rateis as follows: F-33 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2012 2011 US$(’000) US$(’000) Pre-tax income 4,386 4,035 US federal rate 35% 35% Income tax expense computed at U.S. federal rate 1,535 1,412 Reconciling items: Rate differential for domestic earnings (537) (770)Preferential tax treatments and tax holiday effects (1,039) (1,552)Valuation allowance on deferred tax assets 512 1,921 Loss not recognized as deferred tax assets 3 - Non-deductible expenses and non-taxable income 55 24 Effective income tax expense 529 1,035 For the years ended December 31, 2012 and 2011, the Company’s income tax expense consisted of: Year Ended December 31, 2012 2011 US$(’000) US$(’000) Current-PRC 1,357 1,008 Deferred-PRC (828) 27 529 1,035 The Company’s deferred tax liabilities at December 31, 2012 and changes for the year then ended were as follows: Amount US$(’000) Balance as of December 31, 2011 1,893 Reversal during the period (219)Exchange translation adjustment 15 Balance as of December 31, 2012 1,689 Deferred tax liabilities arose on the recognition of the identifiable intangible assets acquired from acquisition transactions and deconsolidation ofsubsidiaries consummated in 2011. Reversal for the year ended December 31, 2012 of approximately US$219,000 was due to amortization of theacquired intangible assets.The Company’s deferred tax assets at December 31, 2012 and 2011 were as follows: As of December 31, 2012 2011 US$(’000) US$(’000) Tax effect of net operating losses carried forward 2,929 1,975 Bad debts provision 824 651 Valuation allowance (3,051) (2,534) 702 92 F-34 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2012 2011 US$(’000) US$(’000) Deferred tax assets reclassified as current asset 50 - Deferred tax assets reclassified as non-current asset 652 92 702 92 The net operating losses carried forward incurred by the Company (excluding its PRC operating subsidiary and VIEs) were approximatelyUS$6,363,000 and US$5,381,000 at December 31, 2012 and 2011, respectively, which loss carry forwards gradually expire over time, the last ofwhich expires in 2032. A full valuation allowance has been recorded because it is considered more likely than not that the deferred tax assets willnot be realized through sufficient future earnings of the entity to which the operating losses relate.The net operating losses carried forward (excluding bad debts provision and non-deductible expenses) incurred by the Company’s PRC subsidiaryand VIEs were approximately US$4,093,000 and US$361,000 at December 31, 2012 and 2011, respectively, which loss carry forwards graduallyexpire over time, the last of which expires in 2017. The related deferred tax assets was calculated based on the respective net operating lossesincurred by each of the PRC subsidiary and VIEs and the respective corresponding enacted tax rate that will be in effect in the period in which thedifferences are expected to reverse. No valuation allowance has been recorded because it is considered more likely than not that the deferred taxassets will be realized through sufficient future earnings of the entities to which the operating losses relate.As of December 31, 2012, the bad debts provision recorded by the Company’s PRC subsidiary and VIEs were approximately US$3,788,000. A fullvaluation allowance has been recorded because it is considered more likely than not that the deferred tax assets will not be realized through baddebts verification by the local tax authorities where the PRC subsidiary and VIEs operate.The Company’s non-current portion of deferred tax assets and deferred tax liabilities were attributable to different tax-paying components of the entity, which were under different tax jurisdictions. Therefore, in accordance with ASC Topic 740 “Income taxes”, thenon-current portion of deferred tax assets and deferred tax liabilities were presented separately in the Company’s balance sheets. The tax authority of the PRC government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after thoseenterprises had completed their relevant tax filings, hence the Company’s tax filings may not be finalized. It is therefore uncertain as to whether thePRC tax authority may take different views about the Company’s tax filings which may lead to additional tax liabilities. 21. Dividend payable As of December 31, 2012 2011 US$(’000) US$(’000) Dividend payable to Series A convertible stock holders - 5 Dividend to Series A convertible preferred stockholders was accrued at the per annum rate of 10% and calculated based on US$2.5 per share liquidationpreference and the actual number of days of each share of the Series A convertible preferred stock outstanding for each of the reporting periods. OnAugust 21, 2011, all of the Company’s outstanding Series A convertible preferred stock, which had not been voluntarily converted into the Company’scommon shares, were fully converted into the Company’s common shares under the mandatory conversion clause entered into by and between theCompany and its Series A convertible preferred stockholders. For the years ended December 31, 2012 and 2011, the Company paid dividends ofapproximately US$5,000 and US$657,000 to its Series A convertible preferred stockholders, respectively. F-35 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22. Long-term borrowing from director As of December 31, 2012 2011 US$(’000) US$(’000) Long-term borrowing from director 139 137 Long-term borrowing from director is a non-interest bearing loan from a director of the Company relating to the original paid-in capital contributionin the Company’s wholly-owned subsidiary Rise King WFOE. 23. Warrants In the Company’s August 2009 Financing, the Company issued to its investors (i) Series A-1 Warrant to purchase 2,060,800 shares of common stock atan exercise price of US$3.00 per share with a three-year term, and (ii) Series A-2 Warrants to purchase 2,060,800 shares of common stock at an exerciseprice of US$3.75 with a five-year term. The Company also issued to its placement agent warrants to purchase up to 329,728 shares of common stock at anexercise 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”). On December 1, 2011, the Company initiated an exchange offer (the “Offer”) pursuant to which holders of certain of the Company’s outstanding warrants(the “Warrants”) to purchase an aggregate of 4,121,600 shares of the Company’s common stock had the opportunity to acquire shares of the Company’scommon stock (the “Shares”) through a warrant for share exchange. The Company issued the Shares in exchange for the Warrants in accordance with thefollowing exchange ratios: (A) with respect to any Series A-1 Warrant, one (1) Share in exchange for every twenty (20) Shares for which such Series A-1Warrant was exercisable, and (B) with respect to any Series A-2 Warrant, one (1) Share in exchange for every ten (10) Shares for which such Series A-2Warrant was exercisable; provided that each holder must have exchanged all its Series A-1 Warrants and/or all its Series A-2 Warrants pursuant to theterms and conditions thereof. The Offer continued for a period of twenty (20) business days from December 1, 2011 and expired on December 30, 2011,at 5:00 p.m., Eastern Time. Based on information provided by Empire Stock Transfer Inc., the Company’s stock transfer agent, and pursuant to the termsof the Offer, 1,418,800 Series A-1 Warrants were tendered in exchange for approximately 70,940 Shares and 356,800 Series A-2 Warrants were tenderedin exchange for approximately 35,680 Shares, for a total of 1,775,600 Warrants exchanged for approximately 106,620 Shares. The Company hadaccepted for exchange all of the Warrants validly tendered and not withdrawn. On August 20, 2012, Series A-1 warrants to purchase up to 642,000 share of the Company’s common stock issued on August 21, 2009 expired. Theremaining Series A-2 warrants to purchase up to 1,704,000 shares of the Company’s common stock and placement agent warrants to purchase up to659,456 shares of the Company’s common stock will expire on August 20, 2014. Warrants issued and outstanding at December 31, 2012 and 2011, and changes during the two-year period ended December 31, 2012 are as follows: Warrants Outstanding Warrants Exercisable Number ofunderlyingshares WeightedAverageExercisePrice AverageRemainingContractualLife (years) Number ofunderlyingshares WeightedAverageExercisePrice AverageRemainingContractualLife (years) Balance, January 1, 2011 4,781,056 $3.31 2.77 4,781,056 $3.31 2.77 Granted / Vested - - Forfeited - - Exercised - - Exchanged in the Offer (1,775,600) $3.15 (1,775,600) $3.15 Balance, December 31, 2011 3,005,456 $3.41 2.21 3,005,456 $3.41 2.21 Granted / Vested - - Forfeited - - Exercised - - Expired (642,000) $3.00 (642,000) $3.00 Balance, December 31, 2012 2,363,456 $3.52 1.63 2,363,456 $3.52 1.63 F-36 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24. Restricted net assetsAs most of the Company’s operations are conducted through its PRC subsidiary and VIEs, the Company’s ability to pay dividends is primarilydependent on receiving distributions of funds from its PRC subsidiary and VIEs. Relevant PRC statutory laws and regulations permit payments ofdividends by its PRC subsidiary and VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting standards andregulations and after it has met the PRC requirements for appropriation to statutory reserves. Paid in capital of the PRC subsidiary and VIEs included inthe Company’s consolidated net assets are also non-distributable for dividend purposes. In accordance with the PRC regulations on Enterprises with Foreign Investment, a WFOE established in the PRC is required to provide certain statutoryreserves, namely general reserve fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reportedin the enterprise’s PRC statutory accounts. A WFOE is required to allocate at least 10% of its annual after-tax profit to the general reserve until suchreserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. Appropriations to the enterprise expansion fund andstaff welfare and bonus fund are at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and are notdistributable as cash dividends. Rise King WFOE is subject to the above mandated restrictions on distributable profits. Additionally, in accordance withthe Company Law of the PRC, a domestic enterprise is required to provide a statutory common reserve of at least 10% of its annual after-tax profit untilsuch reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to providefor a discretionary surplus reserve, at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and arenot distributable as cash dividends. All of the Company’s PRC VIEs are subject to the above mandated restrictions on distributable profits.As a result of these PRC laws and regulations, the Company’s PRC subsidiary and VIEs are restricted in their ability to transfer a portion of their netassets to the Company. As of December 31, 2012 and 2011, net assets restricted in the aggregate, which include paid-in capital and statutory reservefunds of the Company’s PRC subsidiary and VIEs that are included in the Company’s consolidated net assets, was approximately US$5.5 million andUS$4.7 million, respectively.The New PRC Enterprise Income Tax (“EIT”) Law, which was effected on January 1, 2008, also imposed a 10% withholding income tax for dividendsdistributed by a foreign invested enterprise to its immediate holding company outside China, which were exempted under the previous EIT law. A lowerwithholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company.Holding companies in Hong Kong, for example, will be subject to a 5% rate. Rise King WFOE is invested by its immediate holding company in HongKong and will be entitled to the 5% preferential withholding tax rate upon distribution of the dividends to its immediate holding company.The ability of the Company’s PRC subsidiary and VIEs to make dividends and other payments to the Company may also be restricted by changes inapplicable foreign exchange and other laws and regulations.Foreign currency exchange regulation in China is primarily governed by the following rules:lForeign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules;lAdministration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.Currently, under the Administration Rules, Renminbi is freely convertible for current account items, including the distribution of dividends, interestpayments, trade and service related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation ofinvestments and investments in securities outside of China, unless the prior approval of the State Administration of Foerign Exchange (the “SAFE”) isobtained and prior registration with the SAFE is made. Foreign-invested enterprises like Rise King WFOE that need foreign exchange for the distributionof profits to its shareholders may effect payment from their foreign exchange accounts or purchase and pay foreign exchange rates at the designatedforeign exchange banks to their foreign shareholders by producing board resolutions for such profit distribution. Based on their needs, foreign-investedenterprises are permitted to open foreign exchange settlement accounts for current account receipts and payments of foreign exchange along withspecialized accounts for capital account receipts and payments of foreign exchange at certain designated foreign exchange banks.Although the current Exchange Rules allow the convertibility of Chinese Renminbi into foreign currency for current account items, conversion ofChinese Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of SAFE, which isunder the authority of the People’s Bank of China. These approvals, however, do not guarantee the availability of foreign currency conversion. TheCompany cannot be sure that it will be able to obtain all required conversion approvals for its operations or the Chinese regulatory authorities will notimpose greater restrictions on the convertibility of Chinese Renminbi in the future. Currently, most of the Company’s retained earnings are generated inRenminbi. Any future restrictions on currency exchanges may limit the Company’s ability to use its retained earnings generated in Renminbi to makedividends or other payments in U.S. dollars or fund possible business activities outside China. F-37 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2012 and 2011, there was approximately US$38.1 million and US$34.0 million retained earnings in the aggregate, respectively,which was generated by the Company’s PRC subsidiary and VIEs in Renminbi included in the Company’s consolidated net assets, aside from US$2.4million and US$2.2 million statutory reserve funds as of December 31, 2012 and 2011, respectively, that may be affected by increased restrictions oncurrency exchanges in the future and accordingly may further limit the Company’s PRC subsidiary’ and VIEs’ ability to make dividends or otherpayments in U.S. dollars to the Company, in addition to the approximately US$5.5 million and US$4.7 million restricted net assets as of December 31,2012 and 2011, respectively, as discussed above. 25. Related party transactions Revenue from related parties: Year Ended December 31, 2012 2011 US$(’000) US$(’000) -Beijing Saimeiwei Food Equipment Technology Co., Ltd, 123 85 -Beijing Fengshangyinli Technology Co., Ltd. 2 307 -Beijing Telijie Century Environmental Technology Co., Ltd. 72 234 197 626 Sales of fixed assets to an equity investment affiliate: For the year ended December 31, 2011, Rise King WFOE sold some spared computer servers to Shenzhen Mingshan, the Company’s equity investmentaffiliates for approximately US$36,000, the profit from this transaction which was included in the Company’s consolidated earnings was approximatelyUS$3,000. 26. 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 pensionbenefits, medical care, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the PRCsubsidiaries of the Company make contributions to the government for these benefits based on certain percentages of the employees’ salaries. Theemployee benefits were expensed as incurred. The Company has no legal obligation for the benefits beyond the contributions made. The total amountsfor such employee benefits were approximately US$451,000 and US$381,000 for the years ended December 31, 2012 and 2011, respectively. 27. Concentration of risk Credit risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents,accounts receivable, other receivables and prepayments and deposits to suppliers. As of December 31, 2012 and 2011, substantially all of the Company’scash and cash equivalents were held by major financial institutions located in Mainland China and Hong Kong Special Administrative Region of thePRC, which management believes are of high credit quality. F-38 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, andother risks and uncertainties inherent in the PRC. Among other risks, the Company’s operations in the PRC are subject to the risks of restrictions ontransfer of funds, changing taxation policies, foreign exchange restrictions; and political conditions and governmental regulations. Currency convertibility risk Significant part of the Company’s businesses is transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchangetransactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange ratesquoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requiressubmitting a payment application form together with suppliers’ invoices and signed contracts. These exchange control measures imposed by the PRCgovernment authorities may restrict the ability of the Company’s PRC subsidiary and VIEs to transfer its net assets, which to the Company through loans,advances or cash dividends. Concentration of customers For the year ended December 31, 2011, one customer accounted for 12% of the Company’s sales. Except for the aforementioned customer, there was noother single customer who accounted for more than 10% of the Company’s sales for the years ended December 31, 2012 and 2011, respectively. As of December 31, 2012, one customer accounted for 10% of the Company’s accounts receivables. As of December 31, 2011, one customer accountedfor 21% of the Company’s accounts receivables. Except for the aforementioned customer, there was no other single customer who accounted for morethan 10% of the Company’s accounts receivable as of December 31, 2012 and 2011, respectively. Concentration of suppliers For the year ended December 31, 2012, three suppliers individually accounted for 52%, 15% and 11% of the Company’s cost of sales, respectively. Forthe year ended December 31, 2011, two suppliers individually accounted for 36% and 24% of the Company’s cost of sales, respectively. Except for theafore-mentioned, there was no other single supplier who accounted for more than 10% of the Company’s cost of sales for the years ended December 31,2012 and 2011, respectively. 28. Commitments The following table sets forth the Company’s contractual obligations as of December 31, 2012: Office Rental Server hostingand board-band Leasing Total US$(’000) US$(’000) US$(’000) Year ending December 31, -2013 367 69 436 -2014 293 - 293 -2015 293 - 293 -2016 73 - 73 Total 1,026 69 1,095 29. Segment reporting The Company follows ASC Topic 280 “Segment Reporting”, which requires that companies disclose segment data based on how management makesdecisions about allocating resources to segments and evaluating their performance. Reportable operating segments include components of an entityabout which separate financial information is available and which operating results are regularly reviewed by the chief operating decision maker(“CODM”) to make decisions about resources to be allocated to the segment and assess each operating segment’s performance. F-39 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 InternetAd. TVAd. Bankkiosk Brandmanagementand saleschannelbuilding Others Inter-segment andreconciling item Total US$(‘000) US$(‘000) US$(‘000) US$(‘000) US$(‘000) US$(‘000) US$(‘000) Revenue 21,366 20,682 282 4,498 40 (268) 46,600 Cost of sales 9,790 20,450 18 1,528 - (228) 31,558 Total operating expenses 7,005 338 210 1,205 1,774* - 10,532 Depreciation and amortization expenseincluded in total operating expenses 1,053 60 210 215 99 - 1,637 Operating income (loss) 4,571 (106) 54 1,765 (1,734) (40) 4,510 Changes in fair value of contingentconsideration receivables (160) - - - - - (160)Share of losses in equity investmentaffiliates - - - (340) (109) - (449)Expenditure for long-term assets 306 8 - - - - 314 Net income (loss) 4,181 (64) 54 982 (1,705) (40) 3,408 Total assets – December 31, 2012 38,215 16,628 596 8,965 15,338 (22,824) 56,918 *Including approximate US$48,000 share-based compensation expenses. Year Ended December 31, 2011 InternetAd. TVAd. Bankkiosk Brandmanagementand saleschannelbuilding Others Inter-segment andreconciling item Total US$(‘000) US$(‘000) US$(‘000) US$(‘000) US$(‘000) US$(‘000) US$(‘000) Revenue 19,981 6,448 487 1,829 - (14) 28,731 Cost of sales 6,287 5,247 42 465 (14) 12,027 Total operating expenses 6,834 1,002 226 889 4,591* - 13,542 Depreciation and amortization expenseincluded in total operating expenses 263 76 191 387 95 - 1,012 Operating income (loss) 6,860 199 219 475 (4,591) - 3,162 Changes in fair value of contingentconsideration receivables - - - (70) - - (70)Gain on deconsolidation of subsidiaries - - - 693 232 - 925 Share of earnings (losses) in equityinvestment affiliates - 26 - - (245) - (219)Expenditure for long-term assets 1,564 4 186 417 15 - 2,186 Net income (loss) 6,247 179 219 769 (4,633) - 2,781 Total assets – December 31, 2011 61,741 15,954 800 6,369 16,305 (43,887) 57,282 *Including approximate US$2,900,000 share-based compensation expenses. F-40 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30. Earnings per share Basic and diluted earnings per share for each of the periods presented are calculated as follows (All amounts, except number of shares and per share data,are presented in thousands of US dollars): Year ended December 31, 2012 2011 US$(’000) US$(’000) (Amount in thousands except for thenumber of shares and per share data) Net income attributable to ChinaNet Online Holdings, Inc. $2,996 $2,995 Less: Dividend for Series A convertible preferred stock - 407 Net income attributable to common shareholders of ChinaNet Online Holdings, Inc. (numerator for basic earningsper share) 2,996 2,588 Add: Dividend for Series A convertible preferred stock - - Net income attributable to common shareholders of ChinaNet Online Holdings, Inc. (numerator for diluted earningsper share) $2,996 $2,588 Weighted average number of common shares outstanding - Basic 22,185,556 18,545,609 Effect of diluted securities: Series A Convertible preferred stock - - Warrants - 213,631 Weighted average number of common shares outstanding -Diluted 22,185,556 18,759,240 Earnings per share-Basic $0.14 $0.14 Earnings per share-Diluted $0.14 $0.14 For the year ended December 31, 2012, the diluted earnings per share calculation did not include the warrants and options to purchase up to 2,772,161and 939,440 shares of common stock, respectively, because their effect was anti-dilutive. For the year ended December 31, 2011, the diluted earnings per share calculation did not include the effect of the 1,625,526 incremental shares resultedfrom assumed conversion of the convertible preferred stock, because their effect were anti-dilutive. For the year ended December 31, 2011, the dilutedearnings per share calculation also did not include the warrants and options to purchase up to 3,072,411 and 129,202 shares of common stock,respectively, because their effect was anti-dilutive. 31. Share-based compensation expensesOn July 12, 2010, the Company renewed its investor relations service contract with Hayden Communications International, Inc. (“HCI”) for an18-monthperiod commencing on July 12, 2010. As additional compensation, the Company issued HCI 60,000 restricted shares of the Company’s common stock.These shares were valued at $3.80 per share, the closing bid price of the Company’s common stock on the date of grant. The related compensationexpenses were amortized over the 18-month service period. Total compensation expenses recognized for the years ended December 31, 2012 and 2011was U$$6,333 and US$152,000 respectively.As a result of the merger of HCI and MZ Group, the Company terminated the service contract with HCI and engaged MZHCI, LLP (“MZ-HCI”) to provideinvestor relations services for a 24-month period commencing on January 1, 2012. As additional compensation, the Company granted 80,000 restrictedshares of the Company’s common stock. These shares were valued at $1.05 per share, the closing bid price of the Company’s common stock on the dateof grant. The related compensation expenses were amortized over the requisite service period. Total compensation expenses recognized for the yearsended December 31, 2012 and 2011 was US$42,000 and US$nil, respectively. F-41 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On November 30, 2009, the Company granted 5-year options to each of its three independent directors, Mr. Douglas MacLellan, Mr. Mototaka Watanabeand 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, inconsideration of their services to the Company. These options vest quarterly at the end of each 3-month period, in equal installments over the 24-monthperiod from the date of grant. The company utilized Black-Scholes option pricing model to gauge the grant date fair value of these options of US$4.05per option. The related compensation expenses were amortized over its vesting period. Total compensation expenses recognized for these options for theyear ended December 31, 2011 was US$141,480.The Company estimated the fair value of these common stock options granted on November 30, 2009 using the Black-Scholes option pricing modelbased on the following assumptions:Underlying stock price $5.00 Expected term (years) 3.00 Risk-free interest rate 1.10%Dividend yield - Expected Volatility 150%Exercise price of the option $5.00 Value per option $4.05 Underlying stock price is the closing bid price of the Company’s common stock on the date of grant. 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 Companydeveloped a weighted-average expected term at 3 years based on analysis of the vesting schedule and exercise assumptions. The risk-free interest rate isbased 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 underlyingstock. Exercise price of the option is the contractual exercise price of the option.On November 30, 2011, under the Company’s 2011 Omnibus Securities and Incentive Plan, adopted by the stockholders of the Company at its annualmeeting held on June 15, 2011, the Company issued its management, employees and directors in the aggregate of 2,000,000 restricted shares of theCompany’s common stock for the services they provided to the Company. The restricted stock is subject to a strict lock-up for an initial six-monthperiod. Following the initial six-month period, the restricted stock will continue to be locked up until the earlier of (i) the date upon which the closingprice of the Company's common stock equals or exceeds $2.50 for five consecutive trading days, and (ii) November 30, 2013. In addition, the restrictedstock is subject to forfeiture upon an employee's cessation of employment at the discretion of the Company. The restricted stock was fully vested uponissuance and was valued at $1.14 per share, the closing bid price of the Company’s common stock on the date of grant. Total compensation costrecognized for the year ended December 31, 2011 was US$2,280,000.On November 30, 2011, under the Company’s 2011 Omnibus Securities and Incentive Plan, the Company also issued its management, employees anddirectors in the aggregate of 885,440 options to purchase up the same number of the company’s common stock at an exercise price of US$1.20 per share.These options were fully vested and exercisable upon issuance and subject to forfeiture upon an employee's cessation of employment at the discretion ofthe Company. Total compensation expenses recognized for these options for the year ended December 31, 2011 was US$328,000.The Company estimated the fair value of these options granted on November 30, 2011 using the Black-Scholes option pricing model based on thefollowing assumptions:Adjusted underlying stock price $1.037 Expected term (years) 5.00 Risk-free interest rate 0.95%Dividend yield - Expected Volatility 46.73%Exercise price of the option $1.20 Value per option $0.37 F-42 CHINANET ONLINE HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Adjusted underlying stock price is based on the closing bid price of the Company common stock on the grant date, after adjustment for the 2,000,000restricted shares award issued on November 30, 2011. Expected tenor are used when estimates of the expected lives of the options, based on vestingschedule and exercise assumptions, which has taken into account of early exercise behavior of the option holders. Yield-to-maturities in continuouscompounding of the United States Government Bonds with the time-to-maturities same as the expected tenor of the options of 5 year are adopted as therisk-free rate. Average/median of industry annualized historical stock price volatility from an appropriate index as at the grant date is deemed to beappropriate to serve as the expected volatility of the stock price of the Company. The dividend yield is calculated based on management’s estimate ofdividends to be paid on the underlying stock. Exercise price of the option is the contractual exercise price of the option.Options issued and outstanding at December 31, 2012 and 2011, and changes during the two-year period ended December 31, 2012 are as follows: Option Outstanding Option Exercisable Number ofunderlyingshares WeightedAverageRemainingContractualLife (Years) WeightedAverageExercisePrice Number ofunderlyingshares WeightedAverageRemainingContractualLife (Years) WeightedAverageExercisePrice Balance, January 1, 2011 54,000 3.92 $5.00 27,000 3.92 $5.00 Granted/Vested 885,440 10.00 $1.20 912,440 9.80 $1.31 Forfeited - - Exercised - - Balance, December 31, 2011 939,440 9.51 $1.42 939,440 9.51 $1.42 Granted/Vested - - Forfeited - - Exercised - - Balance, December 31, 2012 939,440 8.51 $1.42 939,440 8.51 $1.42 The aggregate unrecognized share-based compensation expenses as of December 31, 2012 and 2011 is approximately US$42,000 and US$6,000,respectively. 32. Subsequent EventsThe Company has evaluated subsequent events from the balance sheet date through the date that the financial statements are issued and no materialsubsequent event found. F-43Exhibit 21.1 Subsidiaries China Net Online Media Group Limited, a British Virgin Islands company. CNET Online Technology Limited, a Hong Kong company. Rise King Century Technology Development (Beijing) Co., Ltd., a wholly foreign-owned enterprise (“WOFE”), established in the People’s Republic ofChina (the “PRC”). Through a series of contractual agreements between the WFOE and Business Opportunity Online (as defined below), Beijing CNET Online (as defined below)and Shanghai Jing Yang (as defined below), the Company, through the WFOE, secures significant rights to influence the three companies’ businessoperations, policies and management, approve all matters requiring shareholder approval, and the right to receive 100% of the income earned by the threecompanies.Business Opportunity Online (Beijing) Network Technology Co., Ltd. (“Business Opportunity Online”), incorporated in the PRC.Beijing CNET Online Advertising Co., Ltd. (“Beijing CNET Online”), incorporated in the PRC.Rise King (Shanghai) Advertising Media Co., Ltd. (“Shanghai Jing Yang”), incorporated in the PRC.Beijing CNET Online is a 51% shareholder of Shanghai Borongdingsi Computer Technology Co., Ltd. (“Shanghai Borongdingsi”), the sole shareholder ofQuanzhou Zhi Yuan Marketing Planning Technology Co., Ltd. (“Quanzhou Zhi Yuan”), and the sole shareholder of Quanzhou Tian Xi Sun HeAdvertisement Co., Ltd. (“Quanzhou Tian Xi Sun He”), each of which is incorporated in the PRC. Business Opportunity Online is a 51% shareholder of Beijing Chuang Fu Tian Xia Network Technology Co., Ltd. (“Beijing Chuang Fu Tian Xia”), the soleshareholder of Business Opportunity Online (Hubei) Network Technology Co., Ltd. (“Hubei Business Opportunity Online”), and a 23.18% shareholder ofShenzhen City Mingshan Network Technology Co., Ltd. (“Shenzhen Mingshan”), each of which is incorporated in the PRC. Hubei Business Opportunity Online is the sole shareholder of Hubei CNET Advertising Media Co., Ltd. (“Hubei CNET”), a 51% shareholder of Sheng TianNetwork Technology (Hubei) Co., Ltd. (“Hubei Sheng Tian”), the sole shareholder of Sou Yi Lian Mei Network Technology (Beijing) Co., Ltd. (“Sou Yi LianMei”), a 25.5% shareholder of Zhao Shang Ke Network Technology (Hubei) Co., Ltd. (“Zhao Shang Ke”), each of which is incorporated in the PRC. Quanzhou Zhi Yuan is the sole shareholder of Xin Qi Yuan Advertisement Planning (Hubei) Co., Ltd. (“Hubei Xin Qi Yuan”), which is incorporated in thePRC. Quanzhou Tian Xi Sun He is the sole shareholder of Mu Lin Sen Advertisement (Hubei) Co., Ltd. (“Hubei Mu Lin Sen”), which is incorporated in the PRC.. Sou Yi Lian Mei is the sole shareholder of Jin Du Ya He (Beijing) Network Technology Co., Ltd. (“Jin Du Ya He”), which is incorporated in the PRC. 1Exhibit 23.1 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENTWe consent to the incorporation by reference in the Registration Statement of ChinaNet Online Holdings, Inc. (the “Company”) on Form S-8 (file No. 333-178269) of our report dated April 15, 2013, with respect to our audits of the consolidated financial statements of the Company as of December 31, 2012 and2011 and for the years ended December 31, 2012 and 2011, which report is included in this Annual Report on Form 10-K of the Company for the year endedDecember 31, 2012./s/ Marcum Bernstein & Pinchuk llp Marcum Bernstein & Pinchuk LLPNew York, New YorkApril 15, 2013 Exhibit 31.1 CERTIFICATION I, Handong Cheng, the Chief Executive Officer of the registrant, certify that: (1) I have reviewed this Annual Report on Form 10-K of ChinaNet Online Holdings, Inc., for the fiscal year ended December 31, 2012. (2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; (4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15a-15(f)) for the registrant and have:a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries and VIEs, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared;b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles:c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’sfourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and (5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting. Date: April 15, 2013 By: /s/ Handong ChengName: Handong ChengTitle: Chief Executive OfficerExhibit 31.2 CERTIFICATION I, Zhige Zhang, the Chief Financial Officer of the registrant, certify that: (1) I have reviewed this Annual Report on Form 10-K of ChinaNet Online Holdings, Inc., for the fiscal year ended December 31, 2012. (2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; (4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15a-15(f)) for the registrant and have:a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries and VIEs, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared;b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles:c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’sfourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and (5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb. any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting. Date: April 15, 2013 By: /s/ Zhige ZhangName: Zhige ZhangTitle: Chief Financial OfficerExhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 In connection with the Annual Report of ChinaNet Online Holdings, Inc. (the “Company”), on Form 10-K for the year ended December 31, 2012 asfiled with the Securities and Exchange Commission (“SEC”) on the date hereof (the “Report”), each of the undersigned of the Company, certifies, pursuant to18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies, in all material respects, with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. By: /s/ Handong ChengName: Handong ChengTitle: Chief Executive OfficerApril 15, 2013 By: /s/ Zhige ZhangName: Zhige ZhangTitle: Chief Financial OfficerApril 15, 2013

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