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ChinaNet Online Holdings Reports Third Quarter 2010 Earnings; Adjusted Net Income Grew 100% To $3.9 Million With Adjusted Diluted EPS Of $0.19

About Non-GAAP Financial Measures

To supplement our consolidated financial statements, which statements are prepared and presented in accordance with GAAP, we use the following non-GAAP financial measures: adjusted net income and adjusted EPS (basic and diluted). The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We use these non-GAAP financial measures for financial and operational decision making and as a means to evaluate period-to-period comparisons. Our management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our "recurring core business operating results." We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting and analyzing future periods. We believe these non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision making and (2) they are used by our institutional investors and the analyst community to help them analyze the health of our business.

 
CHINANET ONLINE HOLDINGS, INC. CONSOLIDATED INCOME STATEMENT (In thousands, except for number of shares and per share data)
 
  Nine months ended September 30 Three months ended September 30,
  2010 2009 2010 2009
  (US $'000) (US $'000) (US $'000) (US $'000)
  (Unaudited) (Unaudited) (Unaudited) (Unaudited)
         
Sales        
 To unrelated parties $ 30,304  $ 25,320  $ 8,631  $  7,604 
 To related parties 872 1,985 265 522
  31,176 27,305 8,896 8,126
Cost of sales 15,791 15,918 3,110 4,029
Gross margin 15,385 11,387 5,786 4,097
         
Operating expenses        
 Selling expenses 2,187 3,253 851 624
General and administrative expenses 2,410 1,530 815 614
 Research and development expenses 605 347 276 133
  5,202 5,130 1,942 1,371
         
Income from operations 10,183 6,257 3,844 2,726
         
Other income (expenses):        
 Changes in fair value of warrants 1,861 (1,289) -- (1,289)
 Interest income 8 9 4 4
 Other income 8 8 4 2
 Other expenses (1) (100) 0 (99)
  1,876 (1,372) 8 (1,382)
         
Income before income tax expense 12,059 4,885 3,852 1,344
 Income tax expense 304 1,653 25 696
Net income 11,755 3,232 3,827 648
Net loss attributable to noncontrolling interest 127 -- 50 --
Net income attributable to ChinaNet Online Holdings, Inc.   11,882   3,232   3,877   648
         
Other comprehensive income        
 Foreign currency translation gain 442 13 365 8
Comprehensive income $ 12,197 $ 3,245  $ 4,192  $  656 
         
Net income attributable to ChinaNet Online Holdings, Inc. $  11,882 $   3,232 $ 3,877 $ 648
         
Beneficial conversion feature of Series A convertible preferred stock -- (5,898) -- (5,898)
         
Dividend of Series A convertible preferred stock (612) -- (190) --
         
Net income attributable to common shareholders of ChinaNet Online Holdings, Inc.     $   11,270     $    (2,666)     $  3,687     $ (5,250)
         
Earnings per share        
Earnings per common share        
Basic $ 0.68 $ (0.18) $ 0.22 $ (0.33)
Diluted $ 0.57 $ (0.18) $ 0.19 $ (0.33)
         
Weighted average number of common shares outstanding:        
Basic 16,676,752 14,495,560 16,939,961 15,774,300
 Diluted 20,905,796 14,495,560 20,916,463 15,774,300
 
CHINANET ONLINE HOLDINGS INC. CONSOLIDATED BALANCE SHEETS (In thousands)
     
  September 30, December 31,
  2010 2009
  (US $'000) (US $'000)
  (Unaudited)  
Assets    
Current assets:    
Cash and cash equivalents $  22,241  $   13,917 
Accounts receivable, net 4,455 3,173
Other receivables 2,856 2,636
Prepayment and deposit to suppliers 4,221 4,111
Due from related parties 214 492
Inventories 2 2
Other current assets 174 30
Total current assets 34,163 24,361
     
Property and equipment, net 1,518 1,355
Intangible assets, net 59 --
Other long-term assets 31 48
TOTAL ASSETS $ 35,771 $ 25,764
     
Liabilities and Equity    
Current liabilities:    
Accounts payable $ 374  $     290 
Advances from customers 1,009 914
Other payables 22 27
Accrued payroll and other accruals 298 191
Due to related parties -- 24
Due to Control Group 416 1,142
Due to director 389 --
Taxes payable 2,010  1,978
Dividends payable 380 373
Total current liabilities 4,898 4,939
     
Long-term borrowing from director 131 128
Warrant liabilities -- 9,564
     
Commitments and contingencies -- --
Stockholders' Equity:    
Series A convertible preferred stock (US$0.001 par value; authorized-8,000,000 shares; issued and outstanding-2,918,600 and 4,121,600 shares at September 30, 2010 and December 31, 2009 respectively; aggregate liquidation preference amount: $7,677 and $10,677, including accrued but unpaid dividends of $380 and $373, at September 30, 2010 and December 31, 2009, respectively.) 3 4
Common stock (US$0.001 par value; authorized-50,000,000 shares; issued and outstanding- 17,061,320 shares and 15,828,320 shares at September 30, 2010 and December 31, 2009 respectively) 17 16
Additional paid-in capital 18,454 10,574
Statutory reserves 372 372
Retained earnings 11,320 50
Accumulated other comprehensive income 559 117
Total ChinaNet's Online Holdings, Inc.'s stockholders' equity   30,725   11,133
     
Noncontrolling interest 17 --
Total equity 30,742 11,133
     
TOTAL LIABILITIES AND EQUITY $   35,771  $ 25,764
 
CHINANET ONLINE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
     
  For the nine months ended September 30,
  2010 2009
  (US $'000) (US $'000)
  (Unaudited) (Unaudited)
     
Cash flows from operating activities    
Net income $   11,755  $  3,232
Adjustments to reconcile net income to net cash provide d by operating activities    
 Depreciation and amortization 275 134
 Share-based compensation expenses 177 190
 Changes in fair value of warrants (1,861) 1,289
 Disposal of fixed assets -- 19
Changes in operating assets and liabilities    
 Accounts receivable (1,195) (1,445)
 Other receivables 2,095 (166)
 Prepayments and deposit to suppliers (24) 9
 Due from related parties 283 (154)
Other current assets (141) 33
 Accounts payable 77 117
 Advances from customers 76 361
 Accrued payroll and other accruals 104 134
 Due to related parties (24) (327)
 Due to director 389 --
 Due to Control Group (738) 33
 Other payables (5) --
 Taxes payable (8) 1,275
Net cash provided by operating activities 11,235 4,734
     
Cash flows from investing activities    
Purchases of vehicles and office equipment (385) (310)
Purchases of intangible assets (59) --
Purchases of other long-term assets (4) (38)
Net cash used in investing activities (448) (348)
     
Cash flows from financing activities    
Cash investment contributed by noncontrolling interest 144 --
Dividend paid to convertible preferred stockholders (605) --
Increase of short-term loan to third parties (2,257) (2,024)
Decrease of short-term loan from directors -- (13)
Cancellation and retirement of common stock -- (300)
Proceeds from issuance of Series A convertible preferred stock and warrants (net of issuance cost of US$ 1,142)     --     9,162
Net cash (used in)/provided by financing activities (2,718) 6,825
     
Effect of exchange rate fluctuation on cash and cash equivalents   255   10
     
Net increase in cash and cash equivalents 8,324 11,221
     
 Cash and cash equivalents at beginning of year 13,917 2,679
 Cash and cash equivalents at end of period $ 22,241 $ 13,900
     
Supplemental disclosure of cash flow information    
     
 Interest paid  $  -- $   --
 Income tax paid  $     1,242  $    900  
     
Non-cash transactions:    
     
Warrant liability reclassify to additional paid in capital $   7,703 $   --
CONTACT: HC International, Inc.
         Ted Haberfield, Executive VP
         +1-760-755-2716
         thaberfield@hcinternational.net

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