UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172023
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 Number: 001-34647
ChinaNet Online Holdings,ZW Data Action Technologies Inc.
(Exact name of registrant as specified in its charter)
Nevada | 20-4672080 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Room 1811, Xinghuo Keji Plaza, No. 3 Min Zhuang2 Fufeng Road, Building 6,
Yu Quan Hui Gu Tuspark, HaidianFengtai District, Beijing, PRC 100195 100070
(Address
(Address of principal executive offices) (Zip Code)
+86-10-6084-6616
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.001 | CNET | Nasdaq Capital Market |
Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ 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 to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer (Do not check if a smaller reporting company) ☐ Smaller reporting company ☒ Emerging growth company ☐
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☒ | Smaller reporting company ☒ |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 14, 2017,20, 2023, the registrant had 12,340,5427,204,506 shares of common stock outstanding.
TABLE OF CONTENTS
Item 1. Interim Financial Statements
The Public Company Accounting Oversight Board (the “PCAOB”) had historically been unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections over our auditor deprived our investors of the benefits of such inspections.
Our former auditor, the independent registered public accounting firm that issued the audit report in our SEC filings, and our current auditor, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our former and current auditors are located in Hong Kong Special Administrative Region of the PRC ("Hong Kong"), China, a jurisdiction where the PCAOB was unable to conduct inspections and investigations before 2022. As a result, we and investors in our securities were deprived of the benefits of such PCAOB inspections. On December 15, 2022, the PCAOB announced that it was able to secure complete access to inspect and investigate PCAOB-registered public accounting firms headquartered in China mainland and Hong Kong in 2022. However, the inability of the PCAOB to conduct inspections of auditors in Hong Kong in the past made it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China mainland and Hong Kong that have been subject to the PCAOB inspections, which could cause investors and potential investors in our securities to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.
Our common stock may be delisted and prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCAA,as amended by the Accelerating Holding Foreign Companies Accountable Act,if the PCAOB is unable to inspect or investigate completely auditors located in China mainland and Hong Kong. The delisting of our common stock or the threat of their being delisted could cause the value of our common stock to significantly decline or be worthless, and thus you could lose all or substantial portion of your investment.
On December 18, 2020, the Holding Foreign Companies Accountable Act, or the HFCAA, was signed into law that states if the SEC determines that issuers have filed audit reports issued by a registered public accounting firm that has not been subject to PCAOB inspection for three consecutive years beginning in 2021, the SEC shall prohibit its common stock from being traded on a national securities exchange or in the over-the-counter trading market in the U.S. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, to prohibit securities of any registrant from being listed on any of the U.S. securities exchanges or traded over-the-counter if the auditor of the registrant’s financial statements is not subject to PCAOB inspection for two consecutive years, instead of three consecutive years as enacted in the HFCAA. On December 2, 2021, the SEC adopted final amendments implementing the disclosure and submission requirements of the HFCAA, pursuant to which the SEC will identify an issuer as a “Commission-Identified Issuer” if the issuer has filed an annual report containing an audit report issued by a registered public accounting firm that the PCAOB has determined it is unable to inspect or investigate completely, and will then impose a trading prohibition on an issuer after it is identified as a Commission-Identified Issuer for three consecutive years. On December 29, 2022, the Accelerating Holding Foreign Companies Accountable Act was signed into law.
On December 16, 2021, the PCAOB issued a HFCAA Determination Report (the “2021 PCAOB Determinations”) to notify the SEC of its determination that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in China mainland and Hong Kong because of positions taken by the Chinese authorities, and our former auditor was subject to this determination. On May 13, 2022, the SEC conclusively identified us as a Commission-Identified Issuer under the HFCAA following the filing of our annual report on Form 10-K for the fiscal year ended December 31, 2021.
On August 26, 2022, the PCAOB signed a Statement of Protocol on agreement governing on inspections of audit firms based in mainland China and Hong Kong, with China Securities Regulatory Commission (“CSRC”) and Ministry of Finance (“MOF”) of the PRC, in regarding to governing inspections and investigations of audit firms headquartered in mainland China and Hong Kong (the “Agreement”). As stated in the Agreement, the Chinese authorities committed that the PCAOB has direct access to view complete audit work papers under its inspections or investigations and has sole discretion to the selected audit firms and audit engagements. The Agreement opens access for the PCAOB to inspect and investigate the registered public accounting firms in mainland China and Hong Kong completely. The PCAOB then thoroughly tested compliance with every aspect of the Agreement necessary to determine complete access. This included sending a team of PCAOB staff to conduct on-site inspections and investigations in Hong Kong over a nine-week period from September to November 2022.
On December 15, 2022, the PCAOB issued its 2022 HFCAA Determination Report to notify the SEC of its determination that the PCAOB was able to secure complete access to inspect and investigate PCAOB-registered public accounting firms headquartered in China mainland and Hong Kong completely in 2022. The PCAOB Board vacated its 2021 PCAOB Determinations that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in China mainland and Hong Kong. For this reason, we do not expect to be identified as a Commission-Identified Issuer following the filing of our annual report for the fiscal year ended December 31, 2022. However, whether the PCAOB will continue to be able to satisfactorily conduct inspections of PCAOB-registered public accounting firms headquartered in China mainland and Hong Kong is subject to uncertainty and depends on a number of factors out of our, and our auditor’s, control.
The PCAOB is continuing to demand complete access in China mainland and Hong Kong moving forward and is already making plans to resume regular inspections in early 2023 and beyond, as well as to continue pursuing ongoing investigations and initiate new investigations as needed. The PCAOB does not have to wait another year to reassess its determinations. Should the PRC authorities obstruct the PCAOB’s access to inspect or investigate completely in any way and at any point, the PCAOB will act immediately to consider the need to issue new determinations consistent with the HFCAA.
We cannot assure you that our auditor will not be determined as a register public accounting firm that the PCAOB is unable to inspect or investigate completely for two consecutive years because of positions taken by the Chinese authorities and/or any other causes in the future. If the PCAOB in the future again determines that it is unable to inspect and investigate completely auditors in China mainland and Hong Kong, we may be identified as a Commission-Identified Issuer accordingly. If this happens, Nasdaq may determine to delist our common stock, and there is no certainty that we will be able to continue listing our common stock on other non-U.S. stock exchanges or that an active market for our common stock will immediately develop outside of the U.S. The prohibiting from trading in the United States or delisting of our common stock or the threat of their being delisted could cause the value of our common stock to significantly decline or be worthless, and thus you could lose all or substantial portion of your investment.
CHINANET ONLINE HOLDINGS,ZW DATA ACTION TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
thousands, except for number of shares and per share data)
September 30, 2017 | December 31, 2016 | September 30, 2023 | December 31, 2022 | |||||||||||||
| (US $) | (US $) | (US $) | (US $) | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Assets | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 1,234 | $ | 3,035 | $ | 1,314 | $ | 4,391 | ||||||||
| Term deposit | - | 3,056 | ||||||||||||||
| Accounts receivable, net | 4,653 | 3,322 | ||||||||||||||
| Other receivables, net | 2,863 | - | ||||||||||||||
Accounts receivable, net of allowance for credit loss of $3,943 and $3,760, respectively | 771 | 1,745 | ||||||||||||||
| Prepayment and deposit to suppliers | 5,450 | 4,754 | 4,874 | 4,567 | ||||||||||||
| Due from related parties, net | 234 | 213 | ||||||||||||||
| Other current assets | 95 | 95 | ||||||||||||||
Other current assets, net | 2,422 | 1,610 | ||||||||||||||
| Total current assets | 14,529 | 14,475 | 9,381 | 12,313 | ||||||||||||
| Long-term investments | 949 | 1,340 | 1,000 | 1,596 | ||||||||||||
Operating lease right-of-use assets | 1,406 | 1,761 | ||||||||||||||
| Property and equipment, net | 341 | 471 | 165 | 249 | ||||||||||||
| Intangible assets, net | 6,653 | 7,264 | 2,364 | 3,264 | ||||||||||||
| Goodwill | 5,195 | 4,970 | ||||||||||||||
| Deferred tax assets | 1,473 | 1,522 | ||||||||||||||
Long-term deposits and prepayments | 69 | 69 | ||||||||||||||
Deferred tax assets, net | 394 | 406 | ||||||||||||||
| Total Assets | $ | 29,140 | $ | 30,042 | $ | 14,779 | $ | 19,658 | ||||||||
| Liabilities and Equity | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Short-term bank loan * | $ | 753 | $ | 721 | ||||||||||||
| Accounts payable * | 625 | 102 | $ | 196 | $ | 205 | ||||||||||
| Advances from customers * | 2,267 | 1,420 | ||||||||||||||
Advance from customers * | 1,133 | 739 | ||||||||||||||
| Accrued payroll and other accruals * | 529 | 685 | 132 | 438 | ||||||||||||
| Due to new investors related to terminated security purchase agreements | 923 | 884 | ||||||||||||||
| Payable for purchasing of software technology * | 429 | 411 | ||||||||||||||
| Taxes payable * | 3,089 | 2,910 | 3,155 | 3,248 | ||||||||||||
| Other payables * | 715 | 487 | ||||||||||||||
Operating lease liabilities * | 216 | 347 | ||||||||||||||
Lease payment liability related to short-term leases * | 98 | 101 | ||||||||||||||
Other current liabilities * | 162 | 437 | ||||||||||||||
Warrant liabilities | - | 185 | ||||||||||||||
| Total current liabilities | 9,330 | 7,620 | 5,092 | 5,700 | ||||||||||||
CHINANET ONLINE HOLDINGS,ZW DATA ACTION TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except for number of shares and per share data)
September 30, 2017 | December 31, 2016 | September 30, 2023 | December 31, 2022 | |||||||||||||
| (US $) | (US $) | (US $) | (US $) | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Long-term liabilities: | ||||||||||||||||
| Long-term borrowing from a director | 132 | 126 | ||||||||||||||
Operating lease liabilities-Non current * | 1,324 | 1,535 | ||||||||||||||
Long-term borrowing from a related party | 122 | 126 | ||||||||||||||
| Total Liabilities | 9,462 | 7,746 | 6,538 | 7,361 | ||||||||||||
| 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 12,340,542 shares and 12,158,542 shares at September 30, 2017 and December 31, 2016, respectively) | 12 | 12 | ||||||||||||||
ZW Data Action Technologies Inc.’s stockholders’ equity | ||||||||||||||||
Common stock (US$0.001 par value; authorized 20,000,000 shares; issued and outstanding 7,204,506 shares and 7,174,506 shares at September 30, 2023 and December 31, 2022, respectively) | 7 | 7** | ||||||||||||||
| Additional paid-in capital | 29,769 | 29,285 | 62,055 | 62,017** | ||||||||||||
| Statutory reserves | 2,607 | 2,607 | 2,598 | 2,598 | ||||||||||||
| Accumulated deficit | (14,325 | ) | (10,362 | ) | (57,782 | ) | (53,525 | ) | ||||||||
| Accumulated other comprehensive income | 1,504 | 700 | 1,363 | 1,200 | ||||||||||||
| Total ChinaNet Online Holdings, Inc.’s stockholders’ equity | 19,567 | 22,242 | ||||||||||||||
| Noncontrolling interests | 111 | 54 | ||||||||||||||
| Total equity | 19,678 | 22,296 | ||||||||||||||
Total shareholders’ equity | 8,241 | 12,297 | ||||||||||||||
| Total Liabilities and Equity | $ | 29,140 | $ | 30,042 | $ | 14,779 | $ | 19,658 | ||||||||
*All of the VIEs' assets can be used to settle obligations of their primary beneficiary. Liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets (Note 2).
**Retrospectively restated for effect of the 1-for-5 reverse stock split effective on January 18, 2023, see Note 4(g).
See notes to unaudited condensed consolidated financial statements
F-2
CHINANET ONLINE HOLDINGS,ZW DATA ACTION TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands)
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| (US $) | (US $) | (US $) | (US $) | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Revenues | ||||||||||||||||
| From unrelated parties | $ | 31,171 | $ | 25,017 | $ | 13,509 | $ | 11,741 | ||||||||
| From related parties | 116 | 381 | 14 | 161 | ||||||||||||
| Total revenues | 31,287 | 25,398 | 13,523 | 11,902 | ||||||||||||
| Cost of revenues | 26,955 | 19,269 | 12,163 | 9,874 | ||||||||||||
| Gross profit | 4,332 | 6,129 | 1,360 | 2,028 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Sales and marketing expenses | 2,399 | 3,069 | 740 | 1,126 | ||||||||||||
| General and administrative expenses | 4,402 | 5,290 | 2,318 | 1,752 | ||||||||||||
| Research and development expenses | 1,012 | 1,530 | 312 | 514 | ||||||||||||
| Total operating expenses | 7,813 | 9,889 | 3,370 | 3,392 | ||||||||||||
| Loss from operations | (3,481 | ) | (3,760 | ) | (2,010 | ) | (1,364 | ) | ||||||||
| Other income (expenses) | ||||||||||||||||
| Interest income | 39 | 72 | 2 | 19 | ||||||||||||
| Interest expense | (109 | ) | (4 | ) | (36 | ) | (4 | ) | ||||||||
| Other expenses | (208 | ) | (112 | ) | (2 | ) | (99 | ) | ||||||||
| Total other expenses | (278 | ) | (44 | ) | (36 | ) | (84 | ) | ||||||||
| Loss before income tax expense, noncontrolling interests and discontinued operation | (3,759 | ) | (3,804 | ) | (2,046 | ) | (1,448 | ) | ||||||||
| Income tax expense | (115 | ) | (155 | ) | (2 | ) | (3 | ) | ||||||||
| Loss from continuing operations | (3,874 | ) | (3,959 | ) | (2,048 | ) | (1,451 | ) | ||||||||
| Loss from and on disposal of discontinued operation, net of income tax | - | (60 | ) | - | - | |||||||||||
| Net loss | (3,874 | ) | (4,019 | ) | (2,048 | ) | (1,451 | ) | ||||||||
| Net income attributable to noncontrolling interests from continuing operations | (89 | ) | (144 | ) | (39 | ) | (21 | ) | ||||||||
| Net loss attributable to ChinaNet Online Holdings, Inc. | $ | (3,963 | ) | $ | (4,163 | ) | $ | (2,087 | ) | $ | (1,472 | ) | ||||
CHINANET ONLINE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (CONTINUED)
(In thousands, except for number of shares and per share data)
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
(US $) | (US $) | (US $) | (US $) | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Revenues | $ | 25,317 | $ | 21,813 | $ | 9,181 | $ | 7,216 | ||||||||
Cost of revenues | 25,746 | 21,811 | 9,185 | 7,267 | ||||||||||||
Gross (loss)/ profit | (429 | ) | 2 | (4 | ) | (51 | ) | |||||||||
Operating expenses | ||||||||||||||||
Sales and marketing expenses | 148 | 219 | 55 | 72 | ||||||||||||
General and administrative expenses | 3,659 | 5,697 | 1,547 | 1,651 | ||||||||||||
Research and development expenses | 18 | 181 | - | 57 | ||||||||||||
Total operating expenses | 3,825 | 6,097 | 1,602 | 1,780 | ||||||||||||
Loss from operations | (4,254 | ) | (6,095 | ) | (1,606 | ) | (1,831 | ) | ||||||||
Other income/(expenses) | ||||||||||||||||
Interest income | 230 | 96 | 79 | 21 | ||||||||||||
Other expenses, net | (20 | ) | (33 | ) | (6 | ) | (5 | ) | ||||||||
Impairment on long-term investment | (207 | ) | - | 2 | - | |||||||||||
Change in fair value of warrant liabilities | 185 | 759 | 13 | (1,023 | ) | |||||||||||
Total other income/(expenses) | 188 | 822 | 88 | (1,007 | ) | |||||||||||
Loss before income tax benefit/(expense) and noncontrolling interests | (4,066 | ) | (5,273 | ) | (1,518 | ) | (2,838 | ) | ||||||||
Income tax benefit/(expenses) | - | 2 | (2 | ) | (2 | ) | ||||||||||
Net loss | $ | (4,066 | ) | $ | (5,271 | ) | $ | (1,520 | ) | $ | (2,840 | ) | ||||
ZW DATA ACTION TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (CONTINUED）
(In thousands, except for number of shares and per share data)
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| (US $) | (US $) | (US $) | (US $) | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Net loss | $ | (3,874 | ) | $ | (4,019 | ) | $ | (2,048 | ) | $ | (1,451 | ) | ||||
| Foreign currency translation gain/(loss) | 772 | (630 | ) | 340 | (152 | ) | ||||||||||
| Comprehensive loss | $ | (3,102 | ) | $ | (4,649 | ) | $ | (1,708 | ) | $ | (1,603 | ) | ||||
| Comprehensive income attributable to noncontrolling interests | (57 | ) | (113 | ) | (42 | ) | (19 | ) | ||||||||
| Comprehensive loss attributable to ChinaNet Online Holdings, Inc. | $ | (3,159 | ) | $ | (4,762 | ) | $ | (1,750 | ) | $ | (1,622 | ) | ||||
| Loss per share | ||||||||||||||||
| Loss from continuing operations per common share | ||||||||||||||||
| Basic and diluted | $ | (0.33 | ) | $ | (0.36 | ) | $ | (0.17 | ) | $ | (0.13 | ) | ||||
| Loss from discontinued operations per common share | ||||||||||||||||
| Basic and diluted | $ | - | $ | (0.01 | ) | $ | - | $ | - | |||||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
| Basic and diluted | 12,019,040 | 11,353,657 | 12,074,304 | 11,358,971 | ||||||||||||
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
(US $) | (US $) | (US $) | (US $) | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Net loss | $ | (4,066 | ) | $ | (5,271 | ) | $ | (1,520 | ) | $ | (2,840 | ) | ||||
Foreign currency translation income/(loss) | 163 | 76 | (39 | ) | 93 | |||||||||||
Comprehensive loss | $ | (3,903 | ) | $ | (5,195 | ) | $ | (1,559 | ) | $ | (2,747 | ) | ||||
Loss per share | ||||||||||||||||
Loss per common share | ||||||||||||||||
Basic and diluted** | $ | (0.57 | ) | $ | (0.74 | ) | $ | (0.21 | ) | $ | (0.40 | ) | ||||
Weighted average number of common shares outstanding: | ||||||||||||||||
Basic and diluted** | 7,191,649 | 7,123,411 | 7,204,506 | 7,174,506 | ||||||||||||
**Retrospectively restated for effect of the 1-for-5 reverse stock split effective on January 18, 2023, see Note 4(g).
See notes to unaudited condensed consolidated financial statements
F-4
CHINANET ONLINE HOLDINGS,ZW DATA ACTION TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2023 | 2022 | |||||||||||||
| (US $) | (US $) | (US $) | (US $) | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Cash flows from operating activities | ||||||||||||||||
| Net loss | $ | (3,874 | ) | $ | (4,019 | ) | $ | (4,066 | ) | $ | (5,271 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||||||||||
| Depreciation and amortization | 1,067 | 1,170 | 966 | 1,660 | ||||||||||||
Amortization of operating lease right-of-use assets | 310 | 239 | ||||||||||||||
| Share-based compensation expenses | 484 | 1,718 | 95 | 135 | ||||||||||||
| Loss on disposal of fixed assets/other long-term assets | - | 117 | ||||||||||||||
| Provision for allowances for doubtful accounts | 1,254 | - | ||||||||||||||
| Loss on deconsolidation of VIEs | - | 9 | ||||||||||||||
Provision for allowances for credit losses | 1,347 | 947 | ||||||||||||||
Loss on disposal of long-term investments | 207 | - | ||||||||||||||
| Deferred taxes | 115 | 155 | - | (2 | ) | |||||||||||
Disposal of fixed assets | 7 | - | ||||||||||||||
Change in fair value of warrant liabilities | (185 | ) | (759 | ) | ||||||||||||
Other non-operating income | (229 | ) | (93 | ) | ||||||||||||
| Changes in operating assets and liabilities | ||||||||||||||||
| Accounts receivable | (2,436 | ) | (1,196 | ) | 655 | (211 | ) | |||||||||
| Other receivables | 67 | 1,416 | ||||||||||||||
| Prepayment and deposit to suppliers | (470 | ) | (1,172 | ) | (389 | ) | (459 | ) | ||||||||
| Due from related parties | (11 | ) | (24 | ) | - | 59 | ||||||||||
| Other current assets | (33 | ) | 16 | - | 25 | |||||||||||
| Accounts payable | 506 | (129 | ) | (3 | ) | (784 | ) | |||||||||
| Advances from customers | 764 | (109 | ) | |||||||||||||
Advance from customers | 425 | (179 | ) | |||||||||||||
| Accrued payroll and other accruals | (169 | ) | (146 | ) | (304 | ) | (205 | ) | ||||||||
| Other payables | 36 | 403 | ||||||||||||||
Other current liabilities | (78 | ) | 735 | |||||||||||||
| Taxes payable | 46 | 66 | (1 | ) | 4 | |||||||||||
| Commitment and contingencies | - | (128 | ) | |||||||||||||
Lease payment liability related to short-term leases | - | (40 | ) | |||||||||||||
Operating lease liabilities | (293 | ) | (210 | ) | ||||||||||||
| Net cash used in operating activities | (2,654 | ) | (1,853 | ) | (1,536 | ) | (4,409 | ) | ||||||||
| Cash flows from investing activities | ||||||||||||||||
| Payment for office equipment and leasehold improvement | (2 | ) | (150 | ) | ||||||||||||
| Payment for purchasing of software technology | - | (1,977 | ) | |||||||||||||
| Term-deposit matured during the period | 3,118 | - | ||||||||||||||
| Long-term investment in and advance to cost/equity method investees | - | (787 | ) | |||||||||||||
| Withdraw long-term investment in cost/equity method investees | 441 | - | ||||||||||||||
| Short-term loan to an unrelated party | (2,795 | ) | - | |||||||||||||
| Proceeds from disposal of VIEs | - | 28 | ||||||||||||||
| Cash effect on deconsolidation of VIEs | - | (18 | ) | |||||||||||||
| Net cash provided by/(used in) investing activities | 762 | (2,904 | ) | |||||||||||||
Investments and advances to ownership investee entities | (43 | ) | - | |||||||||||||
Proceeds from disposal of long-term investments | 428 | - | ||||||||||||||
Deposit paid for purchase of equipment | (52 | ) | - | |||||||||||||
Repayment of short-term loans from ownership investee entities | - | 12 | ||||||||||||||
Short-term loans to unrelated parties | (2,000 | ) | (2,600 | ) | ||||||||||||
Repayment of short-term loans and interest income from unrelated parties | 168 | 2,109 | ||||||||||||||
Net cash used in investing activities | (1,499 | ) | (479 | ) | ||||||||||||
CHINANET ONLINE HOLDINGS,
ZW DATA ACTION TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
| Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2023 | 2022 | |||||||||||||
| (US $) | (US $) | (US $) | (US $) | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Cash flows from financing activities | ||||||||||||||||
| Proceeds from short-term bank loan | 441 | 456 | ||||||||||||||
| Repayment of short-term bank loan | (441 | ) | - | |||||||||||||
| Net cash provided by financing activities | - | 456 | - | - | ||||||||||||
| Changes in cash and cash equivalents included in assets classified as held for sale | - | 132 | ||||||||||||||
| Effect of exchange rate fluctuation on cash and cash equivalents | 91 | (88 | ) | (42 | ) | (131 | ) | |||||||||
| Net decrease in cash and cash equivalents | (1,801 | ) | (4,257 | ) | (3,077 | ) | (5,019 | ) | ||||||||
| Cash and cash equivalents at beginning of the period | 3,035 | 5,503 | 4,391 | 7,173 | ||||||||||||
| Cash and cash equivalents at end of the period | $ | 1,234 | $ | 1,246 | $ | 1,314 | $ | 2,154 | ||||||||
| Supplemental disclosure of cash flow information | ||||||||||||||||
| Income tax paid | $ | - | $ | 2 | ||||||||||||
Income taxes paid | $ | - | $ | - | ||||||||||||
| Interest expense paid | $ | 28 | $ | 4 | $ | - | $ | - | ||||||||
See notes to unaudited condensed consolidated financial statements
ZW DATA ACTION TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2023
(In thousands, except for number of shares)
Common stock | Additional paid-in capital | Statutory reserves | Accumulated deficit | Accumulated other comprehensive income/ (loss) | Total equity | |||||||||||||||||||||||
Number of shares | Amount | |||||||||||||||||||||||||||
(US $) | (US $) | (US $) | (US $) | (US $) | (US $) | |||||||||||||||||||||||
Balance, January 1, 2023 | 7,174,506** | $ | 7** | $ | 62,017** | $ | 2,598 | $ | (53,525 | ) | $ | 1,200 | $ | 12,297 | ||||||||||||||
Cumulative effect adjustment related to adoption of ASU No. 2016-13, Financial Instruments-Credit losses (Topic 326) | - | - | - | - | (191 | ) | - | (191 | ) | |||||||||||||||||||
Share-based compensation in exchange for services from employees and directors | 30,000 | - | 25 | - | - | - | 25 | |||||||||||||||||||||
Net loss for the period | - | - | - | - | (2,546 | ) | - | (2,546 | ) | |||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | 202 | 202 | |||||||||||||||||||||
Balance, June 30, 2023 (unaudited) | 7,204,506 | $ | 7 | $ | 62,042 | $ | 2,598 | $ | (56,262 | ) | $ | 1,402 | $ | 9,787 | ||||||||||||||
Share-based compensation in exchange for services from employees and directors | - | - | 13 | - | - | - | 13 | |||||||||||||||||||||
Net loss for the period | - | - | - | - | (1,520 | ) | - | (1,520 | ) | |||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | (39 | ) | (39 | ) | |||||||||||||||||||
Balance, September 30, 2023 (Unaudited) | 7,204,506 | $ | 7 | $ | 62,055 | $ | 2,598 | $ | (57,782 | ) | $ | 1,363 | $ | 8,241 | ||||||||||||||
**Retrospectively restated for effect of the 1-for-5 reverse stock split effective on January 18, 2023, see Note 4(g).
See notes to unaudited condensed consolidated financial statements
ZW DATA ACTION TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2022
(In thousands, except for number of shares)
Common stock** | Additional paid-in capital | Statutory reserves | Accumulated deficit | Accumulated other comprehensive income/ (loss) | Total equity | |||||||||||||||||||||||
Number of shares | Amount | |||||||||||||||||||||||||||
(US $) | (US $) | (US $) | (US $) | (US $) | (US $) | |||||||||||||||||||||||
Balance, January 1, 2022 | 7,075,506 | $ | 7 | $ | 61,813 | $ | 2,598 | $ | (43,734 | ) | $ | 1,082 | $ | 21,766 | ||||||||||||||
Share-based compensation in exchange for services from nonemployees | 80,000 | - | 140 | - | - | - | 140 | |||||||||||||||||||||
Share-based compensation in exchange for services from employees and directors | 19,000 | - | 16 | - | - | - | 32 | |||||||||||||||||||||
Net loss for the period | - | - | - | - | (2,431 | ) | - | (2,431 | ) | |||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | (17 | ) | (17 | ) | |||||||||||||||||||
Balance, June 30, 2022 (unaudited) | 7,174,506 | $ | 7 | $ | 61,985 | $ | 2,598 | $ | (46,165 | ) | $ | 1,065 | $ | 19,490 | ||||||||||||||
Share-based compensation in exchange for services from employees and directors | - | - | 16 | - | - | - | 16 | |||||||||||||||||||||
Net loss for the period | - | - | - | - | (2,840 | ) | - | (2,840 | ) | |||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | 93 | 93 | |||||||||||||||||||||
Balance, September 30, 2022 (Unaudited) | 7,174,506 | $ | 7 | $ | 62,001 | $ | 2,598 | $ | (49,005 | ) | $ | 1,158 | $ | 16,759 | ||||||||||||||
**Retrospectively restated for effect of the 1-for-5 reverse stock split effective on January 18, 2023, see Note 4(g).
See notes to unaudited condensed consolidated financial statements
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. | Organization and nature of operations |
ChinaNet Online Holdings,ZW Data Action Technologies Inc. (the “Company”) was incorporated in the State of Texas in April 2006 and re-domiciled to become a Nevada corporation in October 2006. On June 26, 2009, the Company consummated a share exchange transaction with China Net Online Media Group Limited (the “Share Exchange”), a company organized under the laws of British Virgin Islands (“China Net BVI”). As a result of the Share Exchange, China Net BVI became a wholly owned subsidiary of the Company and the Company is now a holding company, which, through certain contractual arrangements with operating companies in the People’s Republic of China (the “PRC”), is engaged in providing Internet advertising, precision marketing, e-commerce online to offline (O2O) sales channel expansion(O2O) advertising and marketing services as well as the related data and technical services to small and medium enterprises (“SMEs”)(SMEs) in the PRC. The Company also develops blockchain enabled web/mobile applications and entrepreneurial management and networkingprovides software solutions, i.e., Software-as-a-Service (“SaaS”) services for entrepreneursclients.
2. | Variable interest entities |
The Company is not an operating company in China, but a Nevada holding company with no equity ownership in the PRC.
As of September 30, 2017, theVIEs. The Company operatedprimarily conducts its business primarilyoperations in China through its PRC subsidiaries, the VIEs, with which the Company has entered into contractual arrangements, and operating entities, or Variable Interest Entities (“VIEs”) as discussedtheir subsidiaries in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, previously filed with the Securities and Exchange Commission (the “2016 Form 10-K”).
China. Summarized below is the information related to the VIEs’ assets and liabilities reported in the Company’s condensed consolidated balance sheets as of September 30, 2017 2023 and December 31, 2016, 2022, respectively:
September 30, 2017 | December 31, 2016 | September 30, 2023 | December 31, 2022 | |||||||||||||
| US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Assets | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 1,217 | $ | 2,915 | $ | 691 | $ | 578 | ||||||||
| Term deposit | - | 3,056 | ||||||||||||||
| Accounts receivable, net | 4,653 | 3,315 | 770 | 1,745 | ||||||||||||
| Other receivables, net | 2,863 | - | ||||||||||||||
| Prepayment and deposit to suppliers | 5,382 | 4,710 | 2,401 | 2,020 | ||||||||||||
| Due from related parties, net | 217 | 197 | ||||||||||||||
| Other current assets | 41 | 71 | ||||||||||||||
Other current assets, net | 2 | 2 | ||||||||||||||
| Total current assets | 14,373 | 14,264 | 3,864 | 4,345 | ||||||||||||
| Long-term investments | 45 | 43 | - | 165 | ||||||||||||
Operating lease right-of-use assets | - | 145 | ||||||||||||||
| Property and equipment, net | 201 | 286 | 77 | 113 | ||||||||||||
| Intangible assets, net | 4,934 | 5,468 | ||||||||||||||
| Goodwill | 5,195 | 4,970 | ||||||||||||||
| Deferred tax assets | 1,180 | 1,241 | ||||||||||||||
Deferred tax assets, net | 394 | 406 | ||||||||||||||
| Total Assets | $ | 25,928 | $ | 26,272 | $ | 4,335 | $ | 5,174 | ||||||||
| Liabilities | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Short-term bank loan | $ | 753 | $ | 721 | ||||||||||||
| Accounts payable | 612 | 83 | $ | 196 | $ | 205 | ||||||||||
| Advances from customers | 2,267 | 1,388 | ||||||||||||||
Advance from customers | 1,133 | 515 | ||||||||||||||
| Accrued payroll and other accruals | 195 | 256 | 39 | 63 | ||||||||||||
| Due to Control Group | 11 | 10 | ||||||||||||||
| Payable for purchasing of software technology | 429 | 411 | ||||||||||||||
| Taxes payable | 2,639 | 2,480 | 2,522 | 2,602 | ||||||||||||
| Other payables | 214 | �� | 162 | |||||||||||||
Operating lease liabilities | - | 146 | ||||||||||||||
Lease payment liability related to short-term leases | 98 | 101 | ||||||||||||||
Other current liabilities | 36 | 320 | ||||||||||||||
| Total current liabilities | 7,120 | 5,511 | 4,024 | 3,952 | ||||||||||||
| Deferred tax Liabilities | ||||||||||||||||
| Total Liabilities | $ | 7,120 | $ | 5,511 | $ | 4,024 | $ | 3,952 | ||||||||
F-7
All of the VIEs' assets can be used to settle obligations of their primary beneficiary. Liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Summarized below is the information related to the financial performance of the VIEs reported in the Company’s condensed consolidated statements of operations and comprehensive loss for the nine and three months ended September 30, 2017 2023 and 2016,2022, respectively:
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| US$(’000) | US$(’000) | |||||||
| Revenues | 31,231 | 25,289 | ||||||
| Cost of revenues | (26,954 | ) | (19,186 | ) | ||||
| Total operating expenses | (5,895 | ) | (6,384 | ) | ||||
| Loss from discontinued operations | - | (60 | ) | |||||
| Net loss before allocation to noncontrolling interests | (1,928 | ) | (603 | ) | ||||
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||
| Three Months Ended September 30, | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| 2017 | 2016 | US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||||||||
| US$(’000) | US$(’000) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||
| Revenues | 13,498 | 11,902 | $ | 25,098 | $ | 20,829 | $ | 9,157 | $ | 6,967 | ||||||||||||||
| Cost of revenues | (12,162 | ) | (9,872 | ) | (25,023 | ) | (21,811 | ) | (8,975 | ) | (7,267 | ) | ||||||||||||
| Total operating expenses | (2,736 | ) | (2,290 | ) | (1,179 | ) | (1,539 | ) | (436 | ) | (691 | ) | ||||||||||||
| Net loss before allocation to noncontrolling interests | (1,412 | ) | (343 | ) | ||||||||||||||||||||
Net loss | (1,326 | ) | (2,551 | ) | (259 | ) | (998 | ) | ||||||||||||||||
3. | Liquidity and Capital Resources |
The Company incurred operating losses and may continue to incur operating losses, and as a result, to generate negative cash flows as the Company implements its future business plan. For the nine months ended September 30, 2023, the Company incurred a loss from operations of US$4.25 million and a net operating cash outflow of US$1.54 million. As of September 30, 2023, the Company had cash and cash equivalents of US$1.31 million and working capital of US$4.29 million, compared with approximately US$4.39 million and US$6.61 millions as of December 31, 2022, respectively.
Currently, the Company does not have sufficient cash or commitments for financing to sustain its operation for the twelve months from the issuance date of these financial statements. The Company plans to optimize its internet resources cost investment strategy to improve the gross profit margin of its core business and to further strengthen the accounts receivables collection management, and negotiate with major suppliers for more favorable payment terms, all of which will help to substantially increase the cashflows from operations. In addition, to further improve its liquidity, the Company plans to reduce its operating costs through optimizing the personnel structure among different offices, and reduce its office leasing spaces, if needed. Beginning in early 2022, the Company introduced its SaaS services to customers. The Company’s SaaS services are provided based on technologies of its self-developed Blockchain Integrated Framework (“BIF”) platform. The BIF platform enables the Company’s clients to utilize the BIF platform as an enterprise management software to record, share and storage operating data on-chain, and/or to generate unique designed Non-fungible Token (“NFTs”) for their IPs and certificates. While the COVID-19 epidemic and the associated long-time quarantine and business shutdown measures throughout fiscal 2022 adversely affected the Company’s SaaS services promotion, and revenues from the new SaaS services business and its profitability have not met the Company’s expectations, the Company still expects these services to generate positive cash flow and improve liquidity since they rely on technologies of its self-developed software platform, thus reducing the need for substantial cash outflow to third-party service providers. In July 2023, the Company established a new majority-owned subsidiary, ChinaNet Yun Chuang (Guangzhou) Media Technology Co., Ltd. (“ChinaNet Yun Chuang”), to expand into the livestream operation industry, with expectations of generating operating profits and additional cash inflow from providing online-content production, distribution, promotion, and live streamer training and management services in the next 12 months.
If the Company fails to achieve these goals, the Company may need additional financing to execute its business plan. If additional financing is required, the Company cannot predict whether this additional financing will be in the form of equity, debt, or another form, and the Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In the event that financing sources are not available, or that the Company is unsuccessful in increasing its gross profit margin and reducing operating losses, the Company may be unable to implement its current plans for expansion, repay debt obligations or respond to competitive pressures, any of which would have a material adverse effect on the Company’s business, prospects, financial condition and results of operations. These factors raise substantial doubt about the Company's ability to continue as a going concern within one year after the date that the financial statements are issued.
The unaudited condensed consolidated financial statements as of September 30, 2023 have been prepared under the assumption that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable period of time. The Company's ability to continue as a going concern is dependent upon its uncertain ability to increase gross profit margin and reduce operating loss from its core business and/or obtain additional equity and/or debt financing. The accompanying financial statements as of September 30, 2023 do not include any adjustments that might result from the outcome of these uncertainties. If the Company is unable to continue as a going concern, it may have to liquidate its assets and may receive less than the value at which those assets are carried on the financial statements.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. | Summary of significant accounting policies |
a) | Basis of presentation |
The unaudited condensed consolidated interim financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The unaudited condensed consolidated interim financial information as of September 30, 2017 2023 and for the nine and three months ended September 30, 2017 2023 and 20162022 have been prepared without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally included in annualcomplete consolidated financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited condensed consolidated interim financial information should be read in conjunction with the financial statements and the notes thereto, included in the 2016Company’s Annual Report on Form 10-K.10-K for the fiscal year ended December 31, 2022, previously filed with the SEC (the “2022 Form 10-K”) on April 17, 2023.
In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s condensed consolidated financial position as of September 30, 2017, 2023, its condensed consolidated results of operations for the nine and three months ended September 30, 2017 2023 and 2016,2022, and its condensed consolidated cash flows for the nine months ended September 30, 2017 2023 and 2016,2022, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.
F-8
b) | Principles of consolidation |
The unaudited condensed consolidated interim financial statements include the financial statementsaccounts of all the subsidiaries and VIEs of the Company. All transactions and balances between the Company and its subsidiaries and VIEs have been eliminated upon consolidation.
c) | Use of estimates |
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of these condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. The Company continually evaluates these estimates and assumptions based on the most recently available information, historical experience and various other assumptions that the Company believes to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.
d) | Foreign currency translation |
The exchange rates used to translate amounts in RMB into US$ for the purposes of preparing the condensed consolidated financial statements are as follows:
| September 30, 2017 | December 31, 2016 | |||||||
| Balance sheet items, except for equity accounts | 6.6369 | 6.9370 | ||||||
September 30, 2023 | December 31, 2022 | |||||||
Balance sheet items, except for equity accounts | 7.1798 | 6.9646 | ||||||
Nine Months Ended September 30, | ||||||||
2023 | 2022 | |||||||
Items in the statements of operations and comprehensive loss | 7.0148 | 6.6068 | ||||||
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Items in the statements of operations and comprehensive loss, and statements of cash flows | 6.7983 | 6.5771 | ||||||
| Three Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Items in the statements of operations and comprehensive loss, and statements of cash flows | 6.6676 | 6.6648 | ||||||
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three Months Ended September 30, | ||||||||
2023 | 2022 | |||||||
Items in the statements of operations and comprehensive loss | 7.1649 | 6.8287 | ||||||
No representation is made that the RMB amounts could have been, or could be converted into US$ at the above rates.
e) | Current expected credit losses |
Advertising costsIn June 2016, the FASB issued ASU No.2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendments in this ASU require the measurement and recognition of expected credit losses for financial assets held at amortized cost, which replace the Company’s own brand building are not includableexisting incurred loss impairment model with an expected loss methodology. The Company, as a SEC smaller reporting company, has adopted the amendments in costthis ASU from January 1, 2023, using a modified retrospective transition method and did not restate the related accounts in the comparable period. Instead, the Company recognized a cumulative-effect adjustment to increase the opening balance of revenues, they are expensed whenits accumulated deficit on January 1, 2023 by US$0.19 million, of which US$0.04 million was related to the cumulative-effect adjustment to allowance for credit loss of accounts receivable, and the remaining US$0.15 million was related to the cumulative-effect adjustment to allowance for credit loss of other current assets, which primarily consisted of short-term loans the Company provided to unrelated parties.
The allowance for credit losses reflects the Company's current estimate of credit losses expected to be incurred or amortized over the estimated beneficial period and are included in “sales and marketing expenses” inlife of the statementsrelated financial assets. The allowance for credit losses is presented as a valuation account that is deducted from the amortized cost basis of operations and comprehensive loss. Forfinancial asset(s) to present the nine months ended September 30, 2017 and 2016, advertising expenses fornet amount expected to be collected on the Company’s own brand building were approximately US$1,583,000 and US$1,684,000, respectively. For the three months ended September 30, 2017 and 2016, advertising expenses for the Company’s own brand building were approximately US$480,000 and US$724,000, respectively.financial asset(s).
The Company accountsconsiders various factors in establishing, monitoring, and adjusting its allowance for credit losses, including the aging and aging trends, customer/other parties’ creditworthiness and specific exposures related to particular customers/other parties. The Company also monitors other risk factors and forward-looking information, such as country specific risks and economic factors that may affect a customer/other party’s ability to pay in establishing and adjusting its allowance for credit losses. The Company assesses collectability by reviewing the financial assets on a collective basis where similar characteristics exist and on an individual basis when the Company identifies specific customers/other parties with known disputes or collectability issues. Accounts receivable and short-term loans to unrelated parties are written off after all collection efforts have ceased.
The following tables summarized the movements of the Company’s credit losses for the costnine and three months ended September 30, 2023 and 2022, respectively:
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Credit loss for accounts receivable: | ||||||||||||||||
Balance as of beginning of the period | 3,760 | 2,236 | 3,715 | 2,454 | ||||||||||||
Cumulative-effect adjustment upon adoption of ASU No. 2016-13, Financial Instruments-Credit losses (Topic 326) | 36 | - | - | - | ||||||||||||
Provision for/(reverse of) credit loss during the period | 247 | 330 | 207 | - | ||||||||||||
Written off during the period | - | - | - | - | ||||||||||||
Exchange translation adjustments | (100 | ) | (229 | ) | 21 | (117 | ) | |||||||||
Balance as of end of the period | 3,943 | 2,337 | 3,943 | 2,337 | ||||||||||||
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Credit loss for other current assets: | ||||||||||||||||
Balance as of beginning of the period | 617 | - | 1,187 | 617 | ||||||||||||
Cumulative-effect adjustment upon adoption of ASU No. 2016-13, Financial Instruments-Credit losses (Topic 326) | 155 | - | - | - | ||||||||||||
Provision for credit loss during the period | 1,095 | 617 | 680 | - | ||||||||||||
Written off during the period | - | - | - | - | ||||||||||||
Exchange translation adjustments | - | - | - | - | ||||||||||||
Balance as of end of the period | 1,867 | 617 | 1,867 | 617 | ||||||||||||
f) | Fair value measurement |
Liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of developing September 30, 2023 and upgrading technologiesDecember 31, 2022 are as follows:
Fair value measurement at reporting date using | ||||||||||||||||
As of September 30, 2023 | Quoted Prices | Significant | Significant | |||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
(Unaudited) | ||||||||||||||||
Warrant liabilities (Note 14) | - | - | - | - | ||||||||||||
Fair value measurement at reporting date using | ||||||||||||||||
As of December 31, 2022 | Quoted Prices | Significant | Significant | |||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
Warrant liabilities (Note 14) | 185 | - | - | 185 | ||||||||||||
g) | Reverse stock split |
The Board of Directors of the Company approved a reverse stock split of the Company’s issued and platformsoutstanding shares of common stock, par value $0.001 per share (the “Common Stock”) at a ratio of 1-for-5 (the “Reverse Stock Split”). The Reverse Stock Split became effective on January 18, 2023 (the “Effective Date”). As a result, the number of shares of the Company’s authorized Common Stock was reduced from 100,000,000 shares to 20,000,000 shares and intellectual propertythe issued and outstanding number of shares of the Common Stock was correspondingly decreased. The Reverse Stock Split has no effect on the par value of the Company’s Common Stock or authorized shares of preferred stock.
When the Reverse Stock Split became effective, each five shares of issued and outstanding Common Stock were converted into one newly issued and outstanding share of Common Stock. No fractional shares were issued in connection with the Reverse Stock Split. Any fractional shares of Common Stock that are usedwould have otherwise resulted from the Reverse Stock Split were rounded up to the nearest full share. No cash or other consideration was paid in its daily operationsconnection with any fractional shares that would otherwise have resulted from the Reverse Stock Split.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As a result of the Reverse Stock Split, 35,827,677 shares of Common Stock that were issued and outstanding at January 18, 2023 was reduced to 7,174,506 shares of Common Stock (taking into account the rounding of fractional shares).
Except where otherwise specified, all number of shares, number of warrants, share prices, exercise prices and per share data in researchthe condensed consolidated financial statements and development cost. Researchnotes to the condensed consolidated financial statements have been retroactively restated as if the Reverse Stock Split occurred at the beginning of the periods presented.
h) | Revenue recognition |
The following table present the Company’s revenues disaggregated by products and development costs are charged to expense when incurred. Expenses for researchservices and developmenttiming of revenue recognition:
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Internet advertising and related services | ||||||||||||||||
--distribution of the right to use search engine marketing service | 24,815 | 18,605 | 9,011 | 6,236 | ||||||||||||
--online advertising placements | 427 | 3,208 | 145 | 980 | ||||||||||||
Blockchain-based SaaS services | 75 | - | 25 | - | ||||||||||||
Total revenues | $ | 25,317 | $ | 21,813 | $ | 9,181 | $ | 7,216 | ||||||||
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Revenue recognized over time | 25,242 | 21,813 | 9,156 | 7,216 | ||||||||||||
Revenue recognized at a point in time | 75 | - | 25 | - | ||||||||||||
Total revenues | $ | 25,317 | $ | 21,813 | $ | 9,181 | $ | 7,216 | ||||||||
Contract balances
The table below summarized the movement of the Company’s contract liabilities for the nine months ended September 30, 2017 and 20162023:
Contract liabilities | ||||
US$(’000) | ||||
Balance as of January 1, 2023 | 739 | |||
Exchange translation adjustment | (18 | ) | ||
Revenue recognized from beginning contract liability balances | (649 | ) | ||
Advances received from customers related to unsatisfied performance obligations | 1,061 | |||
Balance as of September 30, 2023(Unaudited) | 1,133 | |||
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Advance from customers related to unsatisfied performance obligations are generally refundable. Refund of advance from customers were approximately US$1,012,000 and US$1,530,000, respectively. Expenses for research and developmentinsignificant for the nine and three months ended September 30, 2017 2023 and 20162022.
For the nine and three months ended September 30, 2023 and 2022, there were no revenue recognized from performance obligations that were satisfied in prior periods.
i) | Lease |
As of September 30, 2023, operating lease right-of-use assets and total operating lease liabilities recognized was approximately US$312,0001.41 million and US$514,000,1.54 million, respectively.
F-9 Maturity of operating lease liabilities
Operating leases | |||||
US$(’000) | |||||
(Unaudited) | |||||
Three months ending December 31, 2023 | 73 | ||||
Year ending December 31, | |||||
| -2024 | 303 | ||||
| -2025 | 319 | ||||
| -2026 | 335 | ||||
| -2027 | 351 | ||||
| -2028 | 369 | ||||
-thereafter | 62 | ||||
Total undiscounted lease payments | 1,812 | ||||
Less: imputed interest | (272 | ) | |||
Total operating lease liabilities as of September 30, 2023 | 1,540 | ||||
Including: | |||||
Operating lease liabilities | 216 | ||||
Operating lease liabilities-Non current | 1,324 | ||||
| $ | 1,540 | ||||
Operating lease expenses:
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Long-term operating lease contracts | 386 | 329 | 125 | 136 | ||||||||||||
Short-term operating lease contracts | 23 | 39 | 9 | 10 | ||||||||||||
Total | $ | 409 | $ | 368 | $ | 134 | $ | 146 | ||||||||
Supplemental information related to operating leases:
Nine Months Ended September 30, 2023 | ||||
(Unaudited) | ||||
Operating cash flows used for operating leases (US$’000) | 409 | |||
Right-of-use assets obtained in exchange for new lease liabilities (US$’000) | - | |||
Weighted-average remaining lease term (years) | 5.42 | |||
Weighted-average discount rate | 6 | % |
In May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (as further amended or clarified by other related ASUs issued subsequently in 2015, 2016 and 2017). ASU No. 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and IFRS. Simultaneously, this ASU supersedes the revenue recognition requirements in ASC Topic 605-Revenue Recognition and most industry-specific guidance throughout the Industry Topics of the Codification. The core principle of this ASU requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; (5) recognize revenue when (or as) the entity satisfies a performance obligation. For public business entities, certain not-for-profit entities, and certain employee benefit plans, the amendments in ASU No. 2014-09 and the amendments in other related ASUs that affected the guidance in ASU 2014-09 should be applied to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company did not early adopt this ASU in fiscal 2017, and will apply the new revenue standard beginning January 1, 2018. Based on the Company’s preliminary evaluation, the Company does not currently expect the adoption of these amendments to have a material impact on its consolidated financial position and results of operations. However, adopting the new revenue standard will significantly increase the disclosure requirements of the sufficient information (qualitatively and quantitatively) to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company plans to continue the evaluation and analysis of its adoption of ASU 2014-09 (including those subsequently issued updates that clarify or amend ASU 2014-09’s provisions) throughout 2017 as the Company works towards the implementation and finalizes its determination of the impact that the adoption will have on its consolidated financial statements.ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. | Accounts receivable, net |
Term deposit as of December 31, 2016 represented the amount of cash placed as a term deposit by one of the Company’s operating VIEs in a major financial institution in China, which management believes is of high credit quality. The term deposit matured on July 7, 2017. The interest rate of the term deposit was 2.25% per annum.
September 30, 2017 | December 31, 2016 | September 30, 2023 | December 31, 2022 | |||||||||||||
| US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Accounts receivable | 8,802 | 6,034 | 4,714 | 5,505 | ||||||||||||
| Allowance for doubtful accounts | (4,149 | ) | (2,712 | ) | ||||||||||||
Allowance for credit loss | (3,943 | ) | (3,760 | ) | ||||||||||||
| Accounts receivable, net | 4,653 | 3,322 | 771 | 1,745 | ||||||||||||
All of the accounts receivable are non-interest bearing. Based on the assessment of the collectability of theThe Company maintains an estimated allowance for credit losses to reduce its accounts receivable as of September 30, 2017 and December 31, 2016, the Company provided approximately US$4,149,000 and US$2,712,000 allowance for doubtful accounts, which were primarily related to the accounts receivable of the Company’s internet advertising and TV advertising business segment.amount that it believes will be collected. The Company evaluates its accounts receivables with an aging over six monthsreceivable on a collective (pool) basis and determines the allowance for credit loss based on aging data, historical collection experience, customer specific facts, current economic conditions and reasonable and supportable forecasts of future economic conditions. For the nine and three months ended September 30, 2017,2023, the Company provided approximately US$1,254,0000.25 million and US$1,283,000 allowance0.21 million credit losses for doubtfulits accounts was provided.receivable, respectively. For the nine and three months ended September 30, 2016, no allowance2022, the Company provided approximately US$0.33 million and US$nil credit losses for doubtfulits accounts was provided or reversed.
receivable, respectively.
6. | Prepayments and deposit to suppliers |
F-10
September 30, 2023 | December 31, 2022 | |||||||
US$(’000) | US$(’000) | |||||||
(Unaudited) | ||||||||
Deposits to advertising resources providers | 923 | 1,077 | ||||||
Prepayments to advertising resources providers | 3,421 | 3,036 | ||||||
Other deposits and prepayments | 530 | 454 | ||||||
| 4,874 | 4,567 | |||||||
7. | Other current assets |
September 30, 2023 | December 31, 2022 | |||||||
US$(’000) | US$(’000) | |||||||
(Unaudited) | ||||||||
Short-term loans to unrelated parties | 4,097 | 2,197 | ||||||
Short-term loans interest receivables | 184 | 22 | ||||||
Staff advances for business operations | 8 | 8 | ||||||
Total other current assets | 4,289 | 2,227 | ||||||
Allowance for credit loss | (1,867 | ) | (617 | ) | ||||
Other current assets, net | 2,422 | 1,610 | ||||||
As of September 30, 2023, the Company provided unsecured, interest-bearing short-term loans to two unrelated parties, which were set forth as below. These short-term loans were recorded as other current assets.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Other receivables as of September 30, 2017 representedOn January 5, 2022, the Company provided a short-term working capital loan of US$2.5 million to an unrelated third party, which will expirematured on JuneMay 5, 2022. The loan was unsecured and borne a fixed annualized interest rate of 7.5%. In April 2022, as agreed by both parties, the unrelated party repaid a portion of the loan principal of US$1.02 million, together with a loan interest of US0.06 million for the period from January 5, 2022 through April 30, 2018.2022, based on the loan principal of US$2.5 million. The Company extended the term of the remaining loan principal of US$1.48 million to April 30, 2023 with a revised fixed annualized interest rate of 5%. In October 2022 and February 2023, the Company received loan interests of US$0.05 million in the aggregate for the period from May 1, 2022 through December 31, 2022. On April 30, 2023, the Company further extended the term of this loan to October 31, 2023. In May 2023, the Company received a loan interest of US$0.02 million for the period from January 1, 2023 through April 30, 2023. In July 2023, the Company received a loan interest of US$0.02 million for the period from May 1, 2023 through July 31, 2023. As the date thereof, due to the recent financial pressure of the unrelated party, the outstanding balance was approximately US$1.49 million that the Company and the unrelated party reached an agreement to collect and repay the remaining loan principal and related loan interests equally in each of the following six months.
On January 11, 2023, the Company provided a short-term of US$2.0 million to another unrelated party. The loan is unsecured and non-interest bearing. bears a fixed annualized interest rate of 12%. The original maturity date of this loan was July 17, 2023. On July 1, 2023, the Company extended the term of this loan for a six-month period. As a result, the principal of this loan and the related loan interest is required to be repaid in lump sum at maturity on January 18, 2024.
The Company expectsevaluates its short-term loans provided to fully collectunrelated parties for expected credit losses on a regular basis, and maintains an estimated allowance for credit losses to reduce its short-term loans to the amount that it believes will be collected. The Company evaluates its short-term loans on an individual basis and determines the allowance for credit loss based on creditworthiness of the borrowers, aging information, past transaction history with the borrowers and their current condition, as well as the current economic conditions and reasonable and supportable forecasts of future economic conditions. For the nine and three months ended September 30, 2023, the Company provided US$1.10 million and US$0.68 million credit losses on short-term loans provided to unrelated parties, respectively.
As of September 30, 2023, other current assets also included a US$0.62 million remaining outstanding balance of a short-term loan that the Company provided to an unrelated party, Digital Sun Ventures Limited, a Hong Kong-based company (“Digital Sun”). In March 2021, the Company and Digital Sun reached an oral agreement, pursuant to which the Company provided a short-term loan of US$1.65 million to Digital Sun. The loan has a one-year term. The loan is unsecured, interest free and is required to be repaid in lump sum at maturity by March 2022. The Company provided this unsecured and interest free loan to Digital Sun in consideration of the promises and claims made by Digital Sun’s management that Digital Sun has close connections with international well-known media companies seeking for strategic cooperation partners in China, and Digital Sun will facilitate building strategic business partnerships among the Company and these media companies. As of March 31, 2022, Digital Sun had repaid US$1.03 million of this loan byand defaults on the endloan balance of 2017. AsUS$0.62 million. The Company attempted to collect the outstanding loan balance. In June 2022, the Company fully allowanced the outstanding loan balance of September 30, 2017 and December 31, 2016, other receivables also included approximately RMB6.0 (US$0.9 million) overdue contractual deposits, which were related to advertising resources purchase contracts that had been completed with no further cooperation. BasedUS$0.62 million based on the Company’s assessment of the collectability of these overdue deposits as of September 30, 2017this outstanding balance. The Company had engaged a law firm and December 31, 2016,prepared and sent a legal letter to Digital Sun in March 2023, and the Company had provided full allowanceintends to take further actions to safeguard its rights against these doubtful accounts.
the default, including but not limited to, arranging meetings with the management of Digital Sun to negotiate the repayment plan in person and filing a lawsuit against Digital Sun after all other means of collection have been exhausted. As of the date hereof, the Company has not received any formal responses from Digital Sun.
8. | Long-term investments |
Amount | ||||
US$(’000) | ||||
Balance as of January 1, 2023 | 1,596 | |||
Exchange translation adjustment | (4 | ) | ||
Cash investments during the year | 43 | |||
Disposed during the year | (428 | ) | ||
Impairment losses provided during the year | (207 | ) | ||
Balance as of September 30, 2023 (Unaudited) | 1,000 | |||
September 30, 2017 | December 31, 2016 | |||||||
| US$(’000) | US$(’000) | |||||||
| (Unaudited) | ||||||||
| Deposits to internet resources providers | 888 | 1,074 | ||||||
| Prepayments to internet resources providers | 3,639 | 2,874 | ||||||
| Deposits to other services providers | 753 | 721 | ||||||
| Other deposits and prepayments | 170 | 85 | ||||||
| 5,450 | 4,754 | |||||||
ZW DATA ACTION TECHNOLOGIES INC.
The Company purchases internet resources from large internet search engines and technical services from suppliers to attract more internet traffic to its advertising portals and provide value-added services to its clients.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
According to the contracts signed between the Company and its suppliers, the Company is normally required to pay the contract amounts in advance. These prepayments will be transferred to cost of revenues when the related services are provided. As of September 30, 2017 and December 31, 2016, prepayments to internet resources providers primarily consisted of advance payments paid for purchasing internet resources from two of the Company’s largest internet resources suppliers.
As of September 30, 2017 and December 31, 2016, deposits to other service provider represented the deposit2023, except for an advisory contract related to finding new investors for the Company,long-term investments which will expire on December 31, 2017.
September 30, 2017 | December 31, 2016 | |||||||
| US$(’000) | US$(’000) | |||||||
| (Unaudited) | ||||||||
| Beijing Saimeiwei Food Equipment Technology Co., Ltd. | 33 | 31 | ||||||
| Chuangshi Meiwei (Beijing) International Investment Management Co., Ltd. | 156 | 150 | ||||||
| ChinaNet Chuang Tou (Shenzhen) Co., Ltd. | 14 | - | ||||||
| Guohua Shiji (Beijing) Communication Co., Ltd. | 181 | 175 | ||||||
| Beijing Saturday Education Technology Co., Ltd. | 1 | 1 | ||||||
| 385 | 357 | |||||||
| Allowance for doubtful accounts | (151 | ) | (144 | ) | ||||
| Due from related parties, net | 234 | 213 | ||||||
Related parties of the Company represented the Company’s direct or indirect unconsolidated investee companies. As of September 30, 2017 and December 31, 2016, due from related parties primarily included short-term working capital loans of RMB1.0 million (approximately US$0.15 million) and RMB1.2 million (approximately US$0.18 million) to Chuangshi Meiwei and Guohua Shiji, respectively. The working capital loans are lent to supplement the short-term operational needs of these related parties to assist certain of their business developing projects. The working capital loans are non-interest bearing and needs to be repaid to the Company within one year. Based on the assessment of the collectability, the Company provided approximately US$151,000 and US$144,000 allowance for doubtful accounts against its amounts due from related parties as of September 30, 2017 and December 31, 2016, respectively, which was related to the working capital loan lent to Chuangshi Meiwei.
F-11
September 30, 2017 | December 31, 2016 | |||||||
| US$(’000) | US$(’000) | |||||||
| (Unaudited) | ||||||||
| Equity method investments: | ||||||||
| Investment in equity method investees | 741 | 709 | ||||||
| Advance to equity method investees | 78 | 75 | ||||||
| Impairment on equity method investments | (819 | ) | (784 | ) | ||||
| Total equity method investments | - | - | ||||||
| Cost method investments: | ||||||||
| Investment in cost method investees | 1,108 | 1,492 | ||||||
| Impairment on cost method investments | (159 | ) | (152 | ) | ||||
| Total cost method investments | 949 | 1,340 | ||||||
| Total long-term investments | 949 | 1,340 | ||||||
Equity method investments
As of September 30, 2017, the Company beneficially owned 23.18% and 25.5% equity interest in Shenzhen Mingshan and Zhao Shang Ke Hubei, respectively. The Company accounts for its investments in these companies under equity method of accounting. Based on the facts of the significant decline in level of business activities from 2015, insufficient amount of working capital and the lack of commitment from majority shareholders, these two investment affiliates had become dormant and the possibility of the business recovery is remote. As a result, the Company reduced the carrying value of these investments to zero as of the end of 2015.
Cost method investments
As of September 30, 2017,were fully impaired, the Company beneficially owned a 19%15.38%, 9.9%, 9%, 9.9% and 9% equity interest in ChinaNet Chuang Toueach New Business Holdings Limited (“New Business”), Guangdong Yong Fu Xiang Health Management Co., Ltd (“Yong Fu Xiang”), Guangzhou Yuan Qi Man Man Technology Co., Ltd. (“Yuan Qi Man Man"), Wuhan Ju Liang Media Co., Ltd. (“Wuhan Ju Liang”) and Guohua Shiji, respectively,Fu Meng Hui (Guangzhou) Management Consulting Co., Ltd. (“Fu Meng Hui”), respectively.
In June 2023, the Company obtained a 9.9% equity interest in Wuhan Ju Liang through subscription of a RMB0.99 million (approximately US$0.14 million) registered capital of the entity in cash, which amount was committed to be paid up before August 1, 2052. Wuhan Ju Liang is primarily engaged in providing livestream operation services.
In June 2023, the Company disposed its 10% equity interest in Chuangshi MeiweiGuang Dong WeFriend Co., Ltd. (“Guangdong WeFriend”) to an unrelated party, and Beijing Saturday, respectively, andreceived RMB3.0 million (approximately US$0.43 million) proceeds from this transaction.
In August 2023, the Company obtained a 15%9% equity interest in ChinaNet Korea. Fu Meng Hui through subscription of a RMB0.45 million (approximately US$0.06 million) registered capital of the entity in cash, which amount was committed to be paid up before December 31, 2050. Fu Meng Hui is primarily engaged in providing cross boarder online marketplace consulting services.
The Company accountsmeasures each investment which does not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for its investments in these companies under cost method of accounting. As the business plan of ChinaNet Korea and Chuangshi Meiwei were not implemented smoothly and based on the factsidentical or a similar investment of the significant decline in level of business activities, insufficient amount of working capital andCompany.
For the lack of commitment from majority shareholders, the possibility of the business recovery of these two companies is remote. As a result, nine months ended September 30, 2023, the Company reduced the carrying value of theseprovided approximately US$0.21 million full impairment loss against its long-term investments to zero as of the end of 2016. The following table summarizes the movement of the investments in cost method investees for the nine months ended September 30, 2017:Business Opportunity Chain (Guangzhou) Technology Co., Ltd. (“Business Opportunity Chain Guangzhou”).
| Beijing Saturday | Guohua Shiji | ChinaNet Chuang Tou | Total | |||||||||||||
| US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
| Balance as of December 31, 2016 | 16 | 27 | 1,297 | 1,340 | ||||||||||||
| Withdraw of cash investment | - | - | (452 | ) | (452 | ) | ||||||||||
| Exchange translation adjustment | 1 | 1 | 59 | 61 | ||||||||||||
| Balance as of September 30, 2017 (Unaudited) | 17 | 28 | 904 | 949 | ||||||||||||
F-12
The Company contributed RMB9,000,000 (approximately US$1.35 million) in cash upon incorporation of ChinaNet Chuang Tou in November 2015. During the three months ended September 30, 2017, as approved by the shareholders of ChinaNet Chuang Tou, the Company withdrew RMB3,000,000 (approximately US$0.45 million) cash investment from ChinaNet Chuang Tou. This transaction does not have any impact on the shareholding and other shareholders’ rights of the Company in ChinaNet Chuang Tou.
9. | Property and equipment, net |
September 30, 2017 | December 31, 2016 | September 30, 2023 | December 31, 2022 | |||||||||||||
| US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Leasehold improvement | 332 | 317 | ||||||||||||||
| Vehicles | 797 | 763 | 689 | 855 | ||||||||||||
| Office equipment | 1,434 | 1,371 | 839 | 865 | ||||||||||||
| Electronic devices | 1,146 | 1,096 | 559 | 575 | ||||||||||||
Leasehold improvement | 179 | 185 | ||||||||||||||
| Property and equipment, cost | 3,709 | 3,547 | 2,266 | 2,480 | ||||||||||||
| Less: accumulated depreciation | (3,207 | ) | (2,922 | ) | (2,101 | ) | (2,231 | ) | ||||||||
| Less: impairment loss on abandoned fixed assets | (161 | ) | (154 | ) | ||||||||||||
| Property and equipment, net | 341 | 471 | 165 | 249 | ||||||||||||
Depreciation expenses in the aggregate for the nine months ended September 30, 2017 2023 and 20162022 were approximately US$149,0000.07 million and US$193,000,0.08 million, respectively. Depreciation expenses in the aggregate for the three months ended September 30, 2017 2023 and 20162022 were approximately US$49,0000.02 million and US$56,000,0.03 million, respectively.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
10. | Intangible assets, net |
September 30, 2017 | December 31, 2016 | |||||||
| US$(’000) | US$(’000) | |||||||
| (Unaudited) | ||||||||
| Intangible assets not subject to amortization: | ||||||||
| Domain name | 1,455 | 1,393 | ||||||
| Intangible assets subject to amortization: | ||||||||
| Customer relationship | 2,007 | 1,920 | ||||||
| Non-compete agreements | 1,104 | 1,057 | ||||||
| Software technologies | 310 | 295 | ||||||
| Cloud compute software technology | 1,399 | 1,338 | ||||||
| Intelligent marketing data service platform | 4,865 | 4,655 | ||||||
| Internet safety, information exchange security and data encryption software | 1,959 | 1,874 | ||||||
| Cloud video management system | 1,431 | 1,369 | ||||||
| Other computer software | 118 | 113 | ||||||
| Intangible assets, cost | 14,648 | 14,014 | ||||||
| Less: accumulated amortization | (6,035 | ) | (4,875 | ) | ||||
| Less: accumulated impairment losses | (1,960 | ) | (1,875 | ) | ||||
| Intangible assets, net | 6,653 | 7,264 | ||||||
As of September 30, 2023 (Unaudited) | ||||||||||||||||
Items | Gross Carrying Value | Accumulated Amortization | Impairment | Net Carrying Value | ||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
Intangible assets subject to amortization: | ||||||||||||||||
--10 years life: | ||||||||||||||||
Cloud compute software technology | 1,293 | (897 | ) | (396 | ) | - | ||||||||||
Licensed products use right | 1,197 | (466 | ) | - | 731 | |||||||||||
--5 years life: | ||||||||||||||||
Internet Ad tracking system | 1,160 | (579 | ) | - | 581 | |||||||||||
Live streaming technology | 1,500 | (625 | ) | (875 | ) | - | ||||||||||
--3 years life: | ||||||||||||||||
Blockchain Integrated Framework | 4,038 | (1,976 | ) | (1,010 | ) | 1,052 | ||||||||||
Bo!News application | 334 | (111 | ) | (223 | ) | - | ||||||||||
Other computer software | 109 | (109 | ) | - | - | |||||||||||
Total | $ | 9,631 | $ | (4,763 | ) | $ | (2,504 | ) | $ | 2,364 | ||||||
As of December 31, 2022 | ||||||||||||||||
Items | Gross Carrying Value | Accumulated Amortization | Impairment | Net Carrying Value | ||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
Intangible assets subject to amortization: | ||||||||||||||||
--10 years life: | ||||||||||||||||
Cloud compute software technology | 1,333 | (924 | ) | (409 | ) | - | ||||||||||
Licensed products use right | 1,201 | (374 | ) | - | 827 | |||||||||||
--5 years life: | ||||||||||||||||
Internet Ad tracking system | 1,160 | (405 | ) | - | 755 | |||||||||||
Live streaming technology | 1,500 | (625 | ) | (875 | ) | - | ||||||||||
--3 years life: | ||||||||||||||||
Blockchain Integrated Framework | 4,038 | (1,346 | ) | (1,010 | ) | 1,682 | ||||||||||
Bo!News application | 345 | (115 | ) | (230 | ) | - | ||||||||||
Other computer software | 113 | (113 | ) | - | - | |||||||||||
Total | $ | 9,690 | $ | (3,902 | ) | $ | (2,524 | ) | $ | 3,264 | ||||||
F-13
Amortization expenses in aggregate for the nine months ended September 30, 2017 2023 and 20162022 were approximately US$917,0000.90 million and US$977,000,1.59 million, respectively. Amortization expenses in aggregate for the three months ended September 30, 2017 2023 and 20162022 were approximately US$310,0000.30 million and US$354,000,0.53 million, respectively.
Based on the currentadjusted carrying value of the finite-lived intangible assets recorded,after the deduction of the impairment losses, which has a weighted average remaining useful life was 5.85of 3.05 years as of September 30, 2017, 2023, and assuming no further subsequent impairment of the underlying intangible assets, the estimated future amortization expenses is approximately US$308,0000.29 million for the three monthsyear ending December 31, 2017, 2023, approximately US$1,232,0001.19 million for the year ending December 31, 2024, approximately US$0.35 million for the year ending December 31, 2025, approximately US$0.18 million for the year ending December 31, 2026, and approximately US$0.12 million each year for the years ending December 31, 2018 through 2020, 2027 and approximately US$1,161,000 for the year ending December 31, 2021.2028.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
11. | Accrued payroll and other accruals |
September 30, 2023 | December 31, 2022 | |||||||
US$(’000) | US$(’000) | |||||||
(Unaudited) | ||||||||
Accrued payroll and staff welfare | 82 | 101 | ||||||
Accrued operating expenses | 50 | 337 | ||||||
| 132 | 438 | |||||||
12. | Taxation | |||
As of September 30, 2023 and December 31, 2016, one of the Company’s VIEs borrowed two short-term bank loans of RMB5.0 million (approximately US$0.7 million), in the aggregate, from a major financial institution in China to supplement its short-term working capital needs. The short-term bank loan of RMB3.0 million (approximately US$0.4 million) matured and was repaid on July 18, 2017, and was re-borrowed on August 16, 2017, which will mature on August 15, 2018. The remaining short-term bank loan of RMB 2.0 million (approximately US$0.3 million) matured and was repaid on October 18, 2017, and was re-borrowed on October 23, 2017, which will mature on October 22, 2018. The current interest rate of these short-term bank loan is 5.655% per annum, which is 30% over the benchmark rate of the People’s Bank of China (the “PBOC”).
September 30, 2017 | December 31, 2016 | |||||||
| US$(’000) | US$(’000) | |||||||
| (Unaudited) | ||||||||
| Accrued payroll and staff welfare | 241 | 319 | ||||||
| Accrued operating expenses | 288 | 366 | ||||||
| 529 | 685 | |||||||
In May 2015, the Company entered into securities purchase agreements with Beijing Jinrun Fangzhou Science & Technology Co, Ltd. (“Jinrun Fangzhou”) and Dongsys Innovation (Beijing) Technology Development Co., Ltd. (“Dongsys Innovation”), public companies listed on the National Equities Exchange and Quotations of the PRC (the “NEEQ”), respectively, pursuant to which these companies agreed to purchase a certain number of shares of common stock of the Company. The Company had received the 10% guarantee payment and 15% prepayment in an aggregate amount equal to US$806,000 from Jinrun Fangzhou, and the 10% guarantee payment in an amount equal to US$117,000 from Dongsys Innovation, respectively.
Due to certain restriction stipulated in the “Measures for Overseas Investment Management” issued by the Ministry of Commerce of the PRC (the “MOFCOM”), the Company and its investors experienced difficulties in obtaining approval for the transactions from the MOFCOM. As a result, on May 12, 2016, the Company terminated the security purchase agreements with the two investors, respectively. The Company did not make any repayment to these investors afterwards during 2016 and the first nine months of 2017. As agreed by the parties, beginning on January 1, 2017, the Company will bear a 12% annualized interest rate for the unpaid amounts and the amounts shall be refunded to the investors no later than December 31, 2017. The Company expects to settle the balances with the two investors within 2017. Interest expense for the unpaid amounts accrued for the nine and three months ended September 30, 2017 was approximately US$0.08 million and US$0.03 million, which has been recorded in other payables account.
F-14
Payable for purchasing of software technology as of September 30, 2017 and December 31, 2016 represented the remaining outstanding payment balance of approximately RMB2.85 million (approximately US$0.4 million) for purchasing of software technology, which transaction consummated in the fourth fiscal quarter of 2016. The Company expects to settle the balance with the counter party within 2017.
The entities within the Company file separate tax returns in the respective tax jurisdictions in which they operate.
i). The Company is incorporated in the state of Nevada. Under the current law of Nevada, the Company is not subject to state corporate income tax. Following the Share Exchange, the Company became a holding company and does not conduct any substantial operations of its own. No provision for federal corporate income tax has been made in the financial statements as the Company has no assessable profits for the nine and three months ended September 30, 2017, or any prior periods. The Company does not provide for U.S. taxes or foreign withholding taxes on undistributed earnings from its non-U.S. subsidiaries because such earnings are intended to be reinvested indefinitely. If undistributed earnings were distributed, foreign tax credits could become available under current law to reduce the resulting U.S. income tax liability.
ii). China Net BVI was incorporated in the British Virgin Islands (“BVI”). Under the current law of the BVI, China Net BVI is not subject to tax on income or capital gains. Additionally, upon payments of dividends by China Net BVI to its shareholders, no BVI withholding tax will be imposed.
iii). China Net HK was incorporated in Hong Kong and does not conduct any substantial operations of its own. No provision for Hong Kong profits tax has been made in the financial statements as China Net HK has no assessable profits for the nine and three months ended September 30, 2017 or any prior periods. Additionally, upon payments of dividends by China Net HK to its shareholders, no Hong Kong withholding tax will be imposed.
iv). The Company’s PRC operating subsidiaries and VIEs, being incorporated in the PRC, are governed by the income tax law of the PRC and is subject to PRC enterprise income tax (“EIT”). The EIT rate of PRC is 25%, which applies to both domestic and foreign invested enterprises.
F-15
For the nine and three months ended September 30, 2017 and 2016, the preferential income tax treatment enjoyed by the Company’s PRC VIE, Business Opportunity Online was based on the current applicable laws and regulations of the PRC and approved by the related government regulatory authorities and local tax authorities where Business Opportunity Online operates in. The preferential income tax treatment is subject to change in accordance with the PRC government economic development policies and regulations. The preferential income tax treatment is primarily determined by the regulation and policies of the PRC government in the context of the overall economic policy and strategy. As a result, the uncertainty of the preferential income tax treatment is subject to, but not limited to, the PRC government policy on supporting any specific industry’s development under the outlook and strategy of overall macroeconomic development.
Service revenues provided by the Company’s PRC operating subsidiaries and VIEs were subject to Value Added Tax (“VAT”). VAT rate for provision of modern services (other than lease of corporeal movables) is 6% and for small scale taxpayer, 3%. Therefore, for the nine and three months ended September 30, 2017 and 2016, the Company’s service revenues are subject to VAT at a rate of 6%, after deducting the VAT paid for the services purchased from suppliers, or at a rate of 3% without any deduction of VAT paid for the services purchased from suppliers. The surcharges of the VAT is 12%-14% of the VAT, depending on which tax jurisdiction the Company’s PRC operating subsidiaries and VIE operate in.
As of September 30, 2017 and December 31, 2016, 2022, taxes payable consists of:
September 30, 2017 | December 31, 2016 | September 30, 2023 | December 31, 2022 | |||||||||||||
| US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Turnover tax and surcharge payable | 1,246 | 1,147 | 1,248 | 1,288 | ||||||||||||
| Enterprise income tax payable | 1,843 | 1,763 | 1,907 | 1,960 | ||||||||||||
| Total taxes payable | 3,089 | 2,910 | 3,155 | 3,248 | ||||||||||||
For the nine and three months ended September 30, 2017 2023 and 2016,2022, the Company’s income tax expensebenefit/(expenses) consisted of:
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Current-PRC | - | - | - | - | ||||||||||||
| Deferred-PRC | (115 | ) | (155 | ) | (2 | ) | (3 | ) | ||||||||
| Income tax expenses | (115 | ) | (155 | ) | (2 | ) | (3 | ) | ||||||||
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Current | - | - | - | - | ||||||||||||
Deferred | - | 2 | (2 | ) | (2 | ) | ||||||||||
Income tax benefit/(expenses) | - | 2 | (2 | ) | (2 | ) | ||||||||||
The Company’s deferred tax assets at as of September 30, 2017 2023 and December 31, 2016 2022 were as follows:
September 30, 2023 | December 31, 2022 | |||||||
US$(’000) | US$(’000) | |||||||
(Unaudited) | ||||||||
Tax effect of net operating losses carried forward | 11,992 | 11,537 | ||||||
Operating lease cost | 33 | 30 | ||||||
Impairment on long-term investments | 190 | 144 | ||||||
Impairment on intangible assets | 367 | 368 | ||||||
Bad debts provision | 1,266 | 1,018 | ||||||
Valuation allowance | (13,454 | ) | (12,691 | ) | ||||
Deferred tax assets, net | 394 | 406 | ||||||
September 30, 2017 | December 31, 2016 | |||||||
| US$(’000) | US$(’000) | |||||||
| (Unaudited) | ||||||||
| Tax effect of net operating losses carried forward | 10,252 | 9,345 | ||||||
| Bad debts provision | 1,180 | 931 | ||||||
| Valuation allowance | (9,959 | ) | (8,754 | ) | ||||
| Total deferred tax assets | 1,473 | 1,522 | ||||||
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
F-16
The U.S. holding company has incurred aggregate net operating losses carried forward incurred by the Company (excluding its PRC operating subsidiaries(“NOLs”) of approximately US$32.3 million and VIEs) were approximately US$18,168,000 and US$17,544,000 at 31.8 million as of September 30, 2017 2023 and December 31, 2016, 2022, respectively which loss is applicable to the Company’s U.S. income tax return and carry forwards The NOLs carryforwards as of December 31, 2017 gradually expire over time, the last of which expires in 2037. A NOLs incurred after December 31, 2017 will no longer be available to carry back but can be carried forward indefinitely, subject to an annual limit of 80% on the amount of taxable income that can be offset by NOLs arising in tax years ending after December 31, 2017. The Company maintains a full valuation allowance has been recorded because it is considered more likely than not that theagainst its net U.S. deferred tax assets, since due to uncertainties surrounding future utilization, the Company estimates there will not be realized through sufficient future earnings of the entity to which the operating losses relate.utilize its U.S. deferred tax assets.
The net operating lossesNOLs carried forward (excluding bad debts provision and non-deductible expenses) incurred by the Company’s PRC subsidiaries and VIEs were approximately US$19,945,00016.9 million and US$17,939,000 at 15.4 million as of September 30, 2017 2023 and December 31, 2016, respectively, which loss is applicable to the Company’s PRC income tax return and carry forwards2022, respectively. The losses carryforwards gradually expire over time, the last of which expireswill expire in 2022.2028. The related deferred tax assets were calculated based on the respective net operating lossesNOLs incurred by each of the PRC subsidiaries and VIEs and the respective corresponding enacted tax rate that will be in effect in the period in which the losses are expected to be utilized.
The Company recorded approximately US$645,00013.5 million and US$446,000 net12.7 million valuation allowance for the nine months ended as of September 30, 2017 2023 and 2016, respectively, and approximately US$142,000 and US$149,000 net valuation allowance for the three months ended September 30, 2017 and 2016, December 31, 2022, respectively, because it is considered more likely than not that thisa portion of the deferred tax assets will not be realized through sufficient future earnings of the entities to which the operating losses relate. Therelated.
For the nine and three months ended September 30, 2023, the Company also utilizedrecorded approximately US$119,0000.91 million and US$267,000 previously recognized0.35 million deferred tax assets forvaluation allowance, respectively. For the nine and three months ended September 30, 20172022, the Company recorded approximately US$1.18 million and 2016, respectively, and approximately US$8,000 and US$74,000 previously recognized0.36 million deferred tax assets for the three months ended September 30, 2017 and 2016, respectively, due to earnings generated during the respective periods.valuation allowance, respectively.
Full valuation allowance to bad debts provision related deferred tax assets were recorded because it is considered more likely than not that this portion of deferred tax assets will not be realized through bad debts verification by the local tax authorities where the PRC subsidiaries and VIEs operate in.
The tax authority of the PRC government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those enterprises had completed their relevant tax filings, hence the Company’s tax filings may not be finalized. It is therefore uncertain as to whether the PRC tax authority may take different views about the Company’s tax filings which may lead to additional tax liabilities.
13. | Long-term borrowing from a |
Long-term borrowing from a directorrelated party is a non-interest bearing loan from a directorrelated parity of the Company relating to the original paid-in capital contribution in the Company’s wholly-owned subsidiary Rise King WFOE,Century Technology Development (Beijing) Co., Ltd. (“Rise King WFOE”), which is not expected to be repaid within one year.
14. | The Financing and warrant liabilities |
The Company issued warrants to certain institutional investors and the Company’s placement agent in the registered direct offerings consummated in February 2021 (the “2021 Financing”), December 2020 (the “2020 Financing”), and January 2018 (the “2018 Financing”), which warrants were accounted for as derivative liabilities and measured at fair value with changes in fair value be recorded in earnings in each reporting period.
Warrants issued in the 2021 Financing:
2021 Investors Warrants | 2021 Placement Agent Warrants | |||||||||||||||||||||||
September 30, 2023 | June 30, 2023 | December 31, 2022 | September 30, 2023 | June 30, 2023 | December 31, 2022 | |||||||||||||||||||
Stock price | $ | 0.91 | $ | 1.27 | $ 0.46# | $ | 0.91 | $ | 1.27 | $ 0.46# | ||||||||||||||
Years to maturity | 0.88 | 1.13 | 1.63 | 0.88 | 1.13 | 1.63 | ||||||||||||||||||
Risk-free interest rate | 5.49 | % | 5.34 | % | 4.625 | % | 5.49 | % | 5.34 | % | 4.625 | % | ||||||||||||
Dividend yield | - | - | - | - | - | - | ||||||||||||||||||
Expected volatility | 89 | % | 112 | % | 99.74 | % | 89 | % | 112 | % | 99.74 | % | ||||||||||||
Exercise Price | $ | 17.95 | $ | 17.95 | $ 3.59# | $ | 22.4375 | $ | 22.4375 | $ 4.4875# | ||||||||||||||
Fair value of the warrant | $ | 0.0002 | $ | 0.0232 | $ | 0.0329 | $ | 0.0001 | $ | 0.0157 | $ | 0.0256 | ||||||||||||
Warrant Liabilities (US$’000) | $ | 0 | $ | 12 | $ | 86 | $ | 0 | $ | 1 | $ | 9 | ||||||||||||
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2021 Investors Warrants | 2021 Placement Agent Warrants | |||||||||||||||||||||||
September 30, 2022 | June 30, 2022 | December 31, 2021 | September 30, 2022 | June 30, 2022 | December 31, 2021 | |||||||||||||||||||
Stock price | $ | 0.92 | $ | 0.34 | $ | 1.00 | $ | 0.92 | $ | 0.34 | $ | 1.00 | ||||||||||||
Years to maturity | 1.88 | 2.13 | 2.63 | 1.88 | 2.13 | 2.63 | ||||||||||||||||||
Risk-free interest rate | 4.16 | % | 2.97 | % | 0.87 | % | 4.16 | % | 2.97 | % | 0.87 | % | ||||||||||||
Dividend yield | - | - | - | - | - | - | ||||||||||||||||||
Expected volatility | 127 | % | 124 | % | 115 | % | 127 | % | 124 | % | 115 | % | ||||||||||||
Exercise Price | $ | 3.59 | $ | 3.59 | $ | 3.59 | $ | 4.4875 | $ | 4.4875 | $ | 4.4875 | ||||||||||||
Fair value of the warrant | $ | 0.297 | $ | 0.064 | $ | 0.37 | $ | 0.287 | $ | 0.061 | $ | 0.36 | ||||||||||||
Warrant Liabilities (US$’000) | $ | 782 | $ | 167 | $ | 964 | $ | 106 | $ | 22 | $ | 132 | ||||||||||||
Warrants issued in the 2020 Financing:
2020 Investors Warrants | 2020 Placement Agent Warrants | |||||||||||||||||||||||
September 30, 2023 | June 30, 2023 | December 31, 2022 | September 30, 2023 | June 30, 2023 | December 31, 2022 | |||||||||||||||||||
Stock price | $ | 0.91 | $ | 1.27 | $ 0.46# | $ | 0.91 | $ | 1.27 | $ 0.46# | ||||||||||||||
Years to maturity | 0.20 | 0.45 | 0.95 | 0.20 | 0.45 | 0.95 | ||||||||||||||||||
Risk-free interest rate | 5.44 | % | 5.46 | % | 4.716 | % | 5.44 | % | 5.46 | % | 4.716 | % | ||||||||||||
Dividend yield | - | - | - | - | - | - | ||||||||||||||||||
Expected volatility | 65 | % | 94 | % | 115.61 | % | 65 | % | 94 | % | 115.61 | % | ||||||||||||
Exercise Price | $ | 10.15 | $ | 10.15 | $ 2.03# | $ | 10.15 | $ | 10.15 | $ 2.03# | ||||||||||||||
Fair value of the warrant | $ | 0.000 | $ | 0.000 | $ | 0.0439 | $ | 0.000 | $ | 0.000 | $ | 0.0456 | ||||||||||||
Warrant Liabilities (US$’000) | $ | 0 | $ | 0 | $ | 76 | $ | 0 | $ | 0 | $ | 14 | ||||||||||||
2020 Investors Warrants | 2020 Placement Agent Warrants | |||||||||||||||||||||||
September 30, 2022 | June 30, 2022 | December 31, 2021 | September 30, 2022 | June 30, 2022 | December 31, 2021 | |||||||||||||||||||
Stock price | $ | 0.92 | $ | 0.34 | $ | 1.00 | $ | 0.92 | $ | 0.34 | $ | 1.00 | ||||||||||||
Years to maturity | 1.20 | 1.45 | 1.95 | 1.20 | 1.45 | 1.95 | ||||||||||||||||||
Risk-free interest rate | 3.90 | % | 2.79 | % | 0.72 | % | 3.90 | % | 2.79 | % | 0.72 | % | ||||||||||||
Dividend yield | - | - | - | - | - | - | ||||||||||||||||||
Expected volatility | 103 | % | 107 | % | 128 | % | 103 | % | 107 | % | 128 | % | ||||||||||||
Exercise Price | $ | 2.03 | $ | 2.03 | $ | 2.03 | $ | 2.03 | $ | 2.03 | $ | 2.03 | ||||||||||||
Fair value of the warrant | $ | 0.195 | $ | 0.033 | $ | 0.46 | $ | 0.211 | $ | 0.036 | $ | 0.49 | ||||||||||||
Warrant Liabilities (US$’000) | $ | 328 | $ | 57 | $ | 795 | $ | 64 | $ | 11 | $ | 148 | ||||||||||||
# To reflect the actual inputs used for the determination of fair value of the Warrants, the stock prices and exercise prices presented werenotretrospectively restated for effect of the1-for-5reverse stock split effective onJanuary 18, 2023,see Note4(g).
Changes in fair value of warrant liabilities
Nine and Three Months Ended September 30, 2023 (Unaudited)
|
|
| Change in Fair Value (gain)/loss | |||||||||||||||||
| As of September 30, 2023 | As of June 30, 2023 | As of December 31, 2022 | Nine Months Ended September 30, 2023 | Three Months Ended September 30, 2023 | ||||||||||||||||
(US$’000) | (US$’000) | (US$’000) | (US$’000) | (US$’000) | ||||||||||||||||
Warrants issued in the 2021 Financing: | ||||||||||||||||||||
--Investor Warrants | - | 12 | 86 | (86 | ) | (12 | ) | |||||||||||||
--Placement Agent Warrants | - | 1 | 9 | (9 | ) | (1 | ) | |||||||||||||
Warrants issued in the 2020 Financing: | ||||||||||||||||||||
--Investor Warrants | - | - | 76 | (76 | ) | - | ||||||||||||||
--Placement Agent Warrants | - | - | 14 | (14 | ) | - | ||||||||||||||
Warrant Liabilities | - | 13 | 185 | (185 | ) | (13 | ) | |||||||||||||
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Nine and Three Months Ended September 30, 2022 (Unaudited)
|
|
| Change in Fair Value (gain)/loss | |||||||||||||||||
| As of September 30, 2022 | As of June 30, 2022 | As of December 31, 2021 | Nine Months Ended September 30, 2022 | Three Months Ended September 30, 2022 | ||||||||||||||||
(US$’000) | (US$’000) | (US$’000) | (US$’000) | (US$’000) | ||||||||||||||||
Warrants issued in the 2021 Financing: | ||||||||||||||||||||
--Investor Warrants | 782 | 167 | 964 | (182 | ) | 615 | ||||||||||||||
--Placement Agent Warrants | 106 | 22 | 132 | (26 | ) | 84 | ||||||||||||||
Warrants issued in the 2020 Financing: | ||||||||||||||||||||
--Investor Warrants | 328 | 57 | 795 | (467 | ) | 271 | ||||||||||||||
--Placement Agent Warrants | 64 | 11 | 148 | (84 | ) | 53 | ||||||||||||||
Warrant Liabilities | 1,280 | 257 | 2,039 | (759 | ) | 1,023 | ||||||||||||||
Warrants issued and outstanding as of September 30, 2023 and their movements during the nine months then ended are as follows:
Warrant Outstanding | Warrant Exercisable | |||||||||||||||||||||||
Number of underlying shares | Weighted | Weighted | Number of underlying shares | Weighted | Weighted | |||||||||||||||||||
Balance, January 1, 2023 | 1,000,343 | 1.36 | $ | 15.11 | 1,000,343 | 1.36 | $ | 15.11 | ||||||||||||||||
Granted/Vested | - | - | ||||||||||||||||||||||
Exercised | - | - | ||||||||||||||||||||||
Balance, September 30, 2023 (Unaudited) | 1,000,343 | 0.61 | $ | 15.11 | 1,000,343 | 0.61 | $ | 15.11 | ||||||||||||||||
15. | Restricted net assets |
As most of the Company’sThe Company is a Nevada holding company with operations areprimarily conducted in China through its PRC subsidiarysubsidiaries, the consolidated VIEs and VIEs, theVIEs’ subsidiaries. The Company’s ability to pay dividends is primarily dependentto U.S. investors may depend on receiving distributions of funds from its PRC subsidiarysubsidiaries and settlement of the amounts owed under the VIE agreements from the consolidated VIEs. RelevantAny limitation on the ability of the Company’s PRC statutory lawssubsidiaries and the consolidated VIEs to make payments to the Company, or the tax implications of making payments to the Company, could have a material adverse effect on its ability to pay dividends to the U.S. investors.
The PRC regulations currently permit paymentspayment of dividends by its PRC subsidiary and VIEs only out of their retained earnings, if any,accumulated profits, as determined in accordance with PRC accounting standards and regulationsregulations. The Company’s PRC subsidiaries, the consolidated VIEs and after it has met the PRC requirements for appropriation to statutory reserves. Paidtheir subsidiaries in capital of the PRC subsidiary and VIEs included in the Company’s consolidated net assetsChina are also non-distributable for dividend purposes.
In accordance with the PRC regulations on Enterprises with Foreign Investment, a WFOE established in the PRC is required to provide certain statutory reserves, namely general reserve fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A WFOE is required to allocateset aside at least 10% of its annualtheir respective after-tax profit to the general reserve until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. Appropriationsaccounting standards and regulations each year to the enterprise expansion fund and staff welfare and bonus fund are atstatutory surplus reserve, until the discretionbalance in the reserve reaches 50% of the board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. Rise King WFOE is subject to the above mandated restrictions on distributable profits. Additionally, in accordance with the Company Lawregistered capital of the respective PRC a domestic enterprise is required to provide a statutory common reserve of at least 10% of its annual after-tax profit until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to provide for a discretionary surplus reserve, at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. All of the Company’s PRC VIEs are subject to the above mandated restrictions on distributable profits.
F-17
As a result ofentities. In accordance with these PRC laws and regulations, the Company’s PRC subsidiarysubsidiaries, the consolidated VIEs and VIEstheir subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company.Nevada holding company. As of September 30, 2017 2023 and December 31, 2016, 2022, net assets restricted in the aggregate, which include paid-in capital and statutory reserve funds of the Company’s PRC subsidiary and VIEs that are included in the Company’s consolidated net assets, waswere approximately US$8.113.52 million and US$7.813.31 million, respectively. Appropriations to the enterprise expansion fund and staff welfare and bonus fund of a foreign-invested PRC entity and appropriation to the discretionary surplus reserve of other PRC entities are at the discretion of the board of directors. To date, none of the Company’s PRC subsidiaries, the consolidated VIEs and their subsidiaries appropriated any of these non-mandatory funds and reserves. Furthermore, if these entities incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The current
Under the PRC Enterprise Income Tax (“EIT”) Law also imposed a 10% withholding income tax forand related regulations, dividends, distributedinterests, rent or royalties payable by a foreign investedforeign-invested enterprise to its immediate holding company outside China.China are subject to a 10% withholding tax. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Holding companies in Hong Kong has a tax arrangement with mainland China that provides for example,a 5% withholding tax on dividends subject to certain conditions and requirements, such as the requirements that the Hong Kong enterprise owns at least 25% of the PRC enterprise distributing the dividend at all times within the 12-month period immediately preceding the distribution of dividends and provides that the recipient can demonstrate it is a Hong Kong tax resident and it is the beneficial owner of the dividends. The PRC government adopted regulations in 2018 which stipulate that in determining whether a non-resident enterprise has the status as a beneficial owner, comprehensive analysis shall be conducted based on the factors listed therein and the actual circumstances of the specific case shall be taken into consideration. Specifically, it expressly excludes an agent or a designated payee from being considered as a “beneficial owner”. The Company owns its PRC subsidiaries through China Net HK. China Net HK currently does not hold a Hong Kong tax resident certificate from the Inland Revenue Department of Hong Kong, there is no assurance that the reduced withholding tax rate will be available for the Company. If China Net HK is not considered to be the “beneficial owner” of the dividends by the Chinese local tax authority, any dividends paid to it by the Company’s PRC subsidiaries would be subject to a 5% rate.withholding tax rate of 10%.
There are no restrictions for the consolidated VIEs to settle the amounts owed under the VIE agreements to Rise King WFOE. However, arrangements and transactions among affiliated entities may be subject to audit or challenge by the PRC tax authorities. If at any time the VIE agreements and the related fee structure between the consolidated VIEs and Rise King WFOE is determined to be non-substantive and disallowed by Chinese tax authorities, the consolidated VIEs could, as a matter of last resort, make a non-deductible transfer to Rise King WFOE for the amounts owed under the VIE agreements. This would result in such transfer being non-deductible expenses for the consolidated VIEs but still taxable income for Rise King WFOE. If this happens, it may increase the Company’s tax burden and reduce its after-tax income in the PRC, and may materially and adversely affect its ability to make distributions to the holding company. The Company’s management is of the view that the likelihood that this scenario would happen is remote.
The Company’s PRC subsidiaries generate all of their revenue in Renminbi, Renminbi is not freely convertible into other currencies. As a result, any restriction on currency exchange may limit the ability of the Company’s PRC subsidiary and VIEssubsidiaries to pay dividends/make dividends and other paymentsdistributions to the Company Company. The Chinese government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. Shortages in availability of foreign currency may also be restricted by changes in applicable foreign exchange and other laws and regulations.
Foreign currency exchange regulation in China is primarily governed bythen restrict the following rules:
Currently,Nevada holding company for the holding company to pay dividends to the U.S. investors. Renminbi is currently convertible under the Administration Rules, Renminbi is freely convertible for current“current account, items, including the distribution of” which includes dividends, interest payments, trade and service relatedservice-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and foreign debt. Currently, the Company’s PRC subsidiaries may purchase foreign currency for capitalsettlement of current account items, such as direct investments, loans, repatriationtransactions, including payment of investments and investments in securities outside of China, unlessdividends to the priorNevada holding company, without the approval of the State Administration of Foreign Exchange of China (the “SAFE”) is obtained and prior registrationby complying with certain procedural requirements. However, the SAFE is made. Foreign-invested enterprises like Rise King WFOE that needrelevant Chinese governmental authorities may limit or eliminate the Company’s ability to purchase foreign exchange forcurrencies in the distribution of profits to its shareholders may effect payment from their foreign exchange accounts or purchase and pay foreign exchange rates at the designated foreign exchange banks to their foreign shareholders by producing board resolutions for such profit distribution. Based on their needs, foreign-invested enterprises are permitted to open foreign exchange settlement accountsfuture for current account receiptstransactions. The Chinese government may continue to strengthen its capital controls, and payments of foreign exchange along with specialized accountsadditional restrictions and substantial vetting processes may be instituted by the SAFE for capital account receipts and payments of foreign exchange at certain designated foreign exchange banks.
Althoughcross-border transactions falling under both the current Exchange Rules allowaccount and the convertibility of Chinese Renminbi into foreign currency for current account items, conversion of Chinese Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of SAFE, which is under the authority of the People’s Bank of China. These approvals, however, do not guarantee the availability of foreign currency conversion. The Company cannot be sure that it will be able to obtain all required conversion approvals for its operations or the Chinese regulatory authorities will not impose greater restrictions on the convertibility of Chinese Renminbi in the future. Currently, most of the Company’s retained earnings are generated in Renminbi.account. Any existing and future restrictions on currency exchanges exchange may limit the Company’s ability to use its retained earningsutilize revenue generated in Renminbi to makepay dividends in foreign currencies to holders of the Company’s securities. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, the SAFE and other payments in U.S. dollarsrelevant Chinese governmental authorities. This could affect the Company’s ability to obtain foreign currency through debt or fund possible business activities outside China.equity financing for its PRC subsidiaries.
AsTo date, none of September 30, 2017the Company’s subsidiaries has made any distribution of earnings or issued any dividends to their respective shareholder in or outside of China, or to the Nevada holding company, and December 31, 2016, there was approximately US$14.8 million and US$17.6 million retained earningsthe Nevada holding company has never declared or paid any cash dividends to U.S. investors.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company does not have any present plan to make any distribution of earnings/issue any dividends directly or indirectly to its Nevada holding company or pay any cash dividends on its common stock in the aggregate, respectively, which was generated byforeseeable future, because the Company currently intend to retain most, if not all, of its available funds and any future earnings to operate and expand the Company’s PRC subsidiary and VIEs in Renminbi included in the Company’s consolidated net assets, aside from US$2.6 million and US$2.5 million of statutory reserve funds as of September 30, 2017 and December 31, 2016, respectively, that may be affected by increased restrictions on currency exchanges in the future, and accordingly, may further limit the Company’s PRC subsidiary’s and VIEs’ ability to make dividends or other payments in U.S. dollars to the Company, in addition to the approximately US$8.1 million and US$7.8 million of restricted net assets as of September 30, 2017 and December 31, 2016, as discussed above.
business.
F-18
16. | Employee defined contribution plan |
Full time employees of the Company in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the PRC subsidiaries of the Company make contributions to the government for these benefits based on certain percentages of the employees’ salaries. The employee benefits were expensed as incurred. The Company has no legal obligation for the benefits beyond the contributions made. The total amounts for such employee benefits were approximately US$318,0000.12 million and US$456,0000.17 million for the nine months ended September 30, 2017 2023 and 2016,2022, respectively. The total amounts for such employee benefits were approximately US$92,0000.04 million and US$158,0000.05 million for the three months ended September 30, 2017 2023 and 2016,2022, respectively.
17. | 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, term depositaccounts receivable, and accounts receivable.deposits and loans to unrelated parties. As of September 30, 2017 and December 31, 2016, substantially all2023, 55% of the Company’s cash and cash equivalents and term deposit were held by major financial institutions located in Mainland China, which managementthe remaining 45% was held by financial institutions located in the United States of America. The Company believes that these financial institutions located in China and the United States of America are of high credit quality. For accounts receivables,receivable and deposits and loans to unrelated parties, the Company extends credit based on an evaluation of the customer’s or other parties’ financial condition, generally without requiring collateral or other security. In order to minimize the credit risk, the Company delegated a team responsible for credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. Further, the Company reviews the recoverable amount of each individual trade debtreceivable at each balance sheet date to ensure that adequate allowances are made for doubtful accounts. In this regard, the Company considers that the Company’s credit risk for accounts receivables isreceivable and deposits and loans to unrelated parties are significantly reduced.
Risk arising from operations in foreign countries
All of the Company’s operations are conducted within the PRC. The Company’s operations in the PRC are subject to various political, economic, and other risks and uncertainties inherent in the PRC. Among other risks, the Company’s operations in the PRC are subject to the risks of restrictions on transfer of funds, changing taxation policies, foreign exchange restrictions and political conditions and governmental regulations.
Currency convertibility risk
Significant part of the Company’s businesses is transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts. These exchange control measures imposed by the PRC government authorities may restrict the ability of the Company’s PRC subsidiaries and VIEs to transfer its net assets, which to the Company through loans, advances or cash dividends.
Concentration of customers
For the nine months ended September 30, 2017, three customers individually accounted for 14%, 11% and 11% of the Company’s revenues. For the three months ended September 30, 2017, two of the three customers individually accounted for 25% and 16% of the Company’s revenues. Except for the aforementioned customer, there was no other single customer who accounted for more than 10% of the Company’s revenues for the nine or three months ended September 30, 2017.
For the three months ended September 30, 2016, two customers individually accounted for 14% and 12% of the Company’s revenues. Except for the aforementioned customers, there was no other single customer who accounted for more than 10% of the Company’s revenues for the nine or three months ended September 30, 2016.
As of September 30, 2017, three customers individually accounted for 15%, 14% and 13% of the Company’s accounts receivable. As of December 31, 2016, two customers individually accounted for 22% and 14% of the Company’s accounts receivable. Except for the aforementioned, there was no other single customer who accounted for more than 10% of the Company’s accounts receivable as of September 30, 2017 or December 31, 2016.
F-19
Concentration of suppliers
For the nine months ended September 30, 2017, two suppliers individually accounted for 68% and 22% of the Company’s cost of revenues. For the three months ended September 30, 2017, the same two suppliers individually accounted for 58% and 29% of the Company’s cost of revenues. Except for the afore-mentioned, there was no other single supplier who accounted for more than 10% of the Company’s cost of revenues for the nine or three months ended September 30, 2017.
For the nine months ended September 30, 2016, two suppliers individually accounted for 28% and 37% of the Company’s cost of revenues. For the three months ended September 30, 2016, the same two suppliers individually accounted for 52% and 16% of the Company’s cost of revenues. Except for the afore-mentioned, there was no other single supplier who accounted for more than 10% of the Company’s cost of revenues for the nine or three months ended September 30, 2016.
The following table sets forthtables summarized the information about the Company’s operating lease commitmentconcentration of customers for the nine and three months ended September 30, 2023 and 2022, respectively:
Customer A | Customer B | Customer C | Customer D | Customer E | Customer F | |||||||
Nine Months Ended September 30, 2023 | ||||||||||||
Revenues, customer concentration risk | * | * | * | * | * | 11% | ||||||
Three Months Ended September 30, 2023 | ||||||||||||
Revenues, customer concentration risk | - | * | * | * | * | 11% | ||||||
Nine Months Ended September 30, 2022 | ||||||||||||
Revenues, customer concentration risk | * | * | * | * | * | * | ||||||
Three Months Ended September 30, 2022 | ||||||||||||
Revenues, customer concentration risk | * | * | * | * | * | 10% | ||||||
As of September 30, 2023 | ||||||||||||
Accounts receivable, customer concentration risk | * | 11% | 17% | 44% | 17% | - | ||||||
As of December 31, 2022 | ||||||||||||
Accounts receivable, customer concentration risk | 16% | 33% | 24% | 16% | * | - |
* Less than 10%.
- No transaction incurred for the reporting period/no balance existed as of September 30, 2017:the reporting date.
| Office Rental | ||||
| US$(’000) | ||||
| (Unaudited) | ||||
| Three months ending December 31, | ||||
| -2017 | 111 | |||
| Year ending December 31, | ||||
| -2018 | 445 | |||
| -2019 | 111 | |||
| Total | $ | 667 | ||
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Excluding rental expenses included in discontinued operationConcentration of suppliers
The following tables summarized the information about the Company’s concentration of suppliers for the nine and three months ended September 30, 2016, rental expenses under operating leases2023 and 2022, respectively:
Supplier A | Supplier B | Supplier C | Supplier D | |||||
Nine Months Ended September 30, 2023 | ||||||||
Cost of revenues, supplier concentration risk | 65% | 20% | * | - | ||||
Three Months Ended September 30, 2023 | ||||||||
Cost of revenues, supplier concentration risk | 49% | 32% | * | - | ||||
Nine Months Ended September 30, 2022 | ||||||||
Cost of revenues, supplier concentration risk | * | - | 27% | 53% | ||||
Three Months Ended September 30, 2022 | ||||||||
Cost of revenues, supplier concentration risk | 14% | - | 13% | 63% |
* Less than 10%.
- No transaction incurred for the nine months ended September 30, 2017 and 2016 were approximately US$304,000 and US$447,000, respectively. For the three months ended September 30, 2017 and 2016, rental expenses under operating leases were approximately US$113,000 and US$137,000, respectively.
reporting period.
18. | Commitments and contingencies |
In August 2022, the Company obtained a 9.9% equity interest in Yong Fu Xiang, through subscription of a RMB6.73 million (approximately US$0.93 million) registered capital of the entity in cash, which amount was committed to be paid up before December 31, 2065.
In September 2022, the Company obtained a 9% equity interest in Yuan Qi Man Man, through subscription of a RMB0.09 million (approximately US$0.01 million) registered capital of the entity in cash, which amount was committed to be paid up before December 31, 2040.
In June 2023, the Company obtained a 9.9% equity interest in Wuhan Ju Liang, through subscription of a RMB0.99 million (approximately US$0.14 million) registered capital of the entity in cash, which amount was committed to be paid up before August 1, 2052.
In August 2023, the Company obtained a 9% equity interest in Fu Meng Hui, through subscription of a RMB0.45 million (approximately US$0.06 million) registered capital of the entity in cash, which amount was committed to be paid up before December 31, 2050.
The Company may from time to time become a party to various legal or administrative proceedings arising in its ordinary course of business. The Company evaluates the status of each legal matter and assesses the potential financial exposure. If the potential loss from any legal proceedings or litigation is considered probable and the amount can be reasonably estimated, the Company accrues a liability for the estimated loss. Significant judgment is required to determine the probability of a loss and whether the amount of the loss is reasonably estimated. As of the date hereof, based on the information currently available, the Company believes that the loss contingencies that may arise as a result of currently pending legal proceedings are not reasonably likely to have a material adverse effect on the Company’s business, results of operations, financial condition, and cash flows.
19. | Segment reporting |
The Company follows ASC Topic 280 “Segment Reporting”, which requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and evaluating their performance. Reportable operating segments include components of an entity about which separate financial information is available and which operating results are regularly reviewed by the chief operating decision maker (“CODM”), the Company’s Chief Executive Officer, to make decisions about resources to be allocated to the segment and assess each operating segment’s performance.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Nine Months Ended September 30, 2017 (Unaudited)2023 (Unaudited)
| Internet Ad. and data service | TV & Bank kiosks Ad. | Others | Inter- segment and reconciling item | Total | ||||||||||||||||
| US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | ||||||||||||||||
| Revenues | 31,287 | - | - | - | 31,287 | |||||||||||||||
| Cost of revenues | 26,955 | - | - | 26,955 | ||||||||||||||||
| Total operating expenses | 5,828 | 47 | 1,938 | (1) | - | 7,813 | ||||||||||||||
| Depreciation and amortization expense included in total operating expenses | 996 | 1 | 70 | - | 1,067 | |||||||||||||||
| Operating loss | (1,496 | ) | (47 | ) | (1,938 | ) | - | (3,481 | ) | |||||||||||
| Expenditure for long-term assets | - | - | 2 | - | 2 | |||||||||||||||
| Net loss from continuing operations | (1,887 | ) | (47 | ) | (1,940 | ) | - | (3,874 | ) | |||||||||||
| Total assets – September 30, 2017 | 28,982 | 476 | 11,170 | (11,488 | ) | 29,140 | ||||||||||||||
| Total assets – December 31, 2016 | 29,520 | 348 | 11,882 | (11,708 | ) | 30,042 | ||||||||||||||
Internet Ad and related service | Ecommerce | Blockchain technology | Corporate | Inter-segment and reconciling item | Total | |||||||||||||||||||
US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | |||||||||||||||||||
Revenues | 25,242 | - | 75 | - | - | 25,317 | ||||||||||||||||||
Cost of revenues | 25,116 | - | 630 | - | - | 25,746 | ||||||||||||||||||
Total operating expenses | 1,063 | 11 | - | 2,751 | (1) | - | 3,825 | |||||||||||||||||
Depreciation and amortization expense included in cost of revenues and total operating expenses | 274 | - | 630 | 62 | - | 966 | ||||||||||||||||||
Operating loss | (937 | ) | (11 | ) | (555 | ) | (2,751 | ) | - | (4,254 | ) | |||||||||||||
Change in fair value of warrant liabilities | - | - | - | 185 | - | 185 | ||||||||||||||||||
Net loss | (961 | ) | (6 | ) | (556 | ) | (2,543 | ) | - | (4,066 | ) | |||||||||||||
Total assets-September 30, 2023 | 9,474 | 142 | 1,051 | 36,525 | (32,413 | ) | 14,779 | |||||||||||||||||
Total assets-December 31, 2022 | 10,385 | 156 | 1,682 | 39,136 | (31,701 | ) | 19,658 | |||||||||||||||||
(1) | Including approximately US$ |
F-20
Three Months Ended September 30, 2017 (Unaudited)2023 (Unaudited)
Internet Ad and related service | Ecommerce | Blockchain technology | Corporate | Inter-segment and reconciling item | Total | |||||||||||||||||||
US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | |||||||||||||||||||
Revenues | 9,156 | - | 25 | - | - | 9,181 | ||||||||||||||||||
Cost of revenues | 8,975 | - | 210 | - | - | 9,185 | ||||||||||||||||||
Total operating expenses | 380 | 2 | - | 1,220 | (1) | - | 1,602 | |||||||||||||||||
Depreciation and amortization expense included in cost of revenues and total operating expenses | 90 | - | 210 | 21 | - | 321 | ||||||||||||||||||
Operating loss | (199 | ) | (2 | ) | (185 | ) | (1,220 | ) | - | (1,606 | ) | |||||||||||||
Change in fair value of warrant liabilities | - | - | - | 13 | - | 13 | ||||||||||||||||||
Net loss | (211 | ) | (1 | ) | (185 | ) | (1,123 | ) | - | (1,520 | ) | |||||||||||||
(1) Including approximately US$0.01 million share-based compensation expenses.
| Internet Ad. and data service | TV & Bank kiosks Ad. | Others | Inter- segment and reconciling item | Total | ||||||||||||||||
| US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | ||||||||||||||||
| Revenues | 13,523 | - | - | - | 13,523 | |||||||||||||||
| Cost of revenues | 12,163 | - | - | - | 12,163 | |||||||||||||||
| Total operating expenses | 2,646 | (9 | ) | 733 | (1) | - | 3,370 | |||||||||||||
| Depreciation and amortization expense included in total operating expenses | 338 | - | 22 | - | 360 | |||||||||||||||
| Operating income/(loss) | (1,286 | ) | 9 | (733 | ) | - | (2,010 | ) | ||||||||||||
| Expenditure for long-term assets | - | - | - | - | - | |||||||||||||||
| Net (loss)/income from continuing operations | (1,324 | ) | 9 | (733 | ) | - | (2,048 | ) | ||||||||||||
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Nine Months Ended September 30, 2016 (Unaudited)2022 (Unaudited)
| Internet Ad. and data service | TV & Bank kiosks Ad. | Others | Inter- segment and reconciling item | Total | Internet Ad and related service | Ecommerce | Blockchain technology | Corporate | Inter-segment and reconciling item | Total | ||||||||||||||||||||||||||||||||||
| US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | ||||||||||||||||||||||||||||||||||
| Revenues | 25,398 | - | - | - | 25,398 | 21,813 | - | - | - | - | 21,813 | |||||||||||||||||||||||||||||||||
| Cost of revenues | 19,269 | - | - | - | 19,269 | 21,811 | - | - | - | - | 21,811 | |||||||||||||||||||||||||||||||||
| Total operating expenses | 6,625 | 106 | 3,158 | (1) | - | 9,889 | 1,517 | 817 | 1,100 | 2,663 | (1) | - | 6,097 | |||||||||||||||||||||||||||||||
| Depreciation and amortization expense included in total operating expenses | 1,079 | 15 | 76 | - | 1,170 | 270 | 225 | 1,100 | 65 | - | 1,660 | |||||||||||||||||||||||||||||||||
| Operating loss | (496 | ) | (106 | ) | (3,158 | ) | - | (3,760 | ) | (1,515 | ) | (817 | ) | (1,100 | ) | (2,663 | ) | - | (6,095 | ) | ||||||||||||||||||||||||
| Expenditure for long-term assets | 2,036 | - | 103 | - | 2,139 | |||||||||||||||||||||||||||||||||||||||
Change in fair value of warrant liabilities | - | - | - | 759 | - | 759 | ||||||||||||||||||||||||||||||||||||||
| Net loss from continuing operations | (758 | ) | (105 | ) | (3,096 | ) | - | (3,959 | ) | |||||||||||||||||||||||||||||||||||
Net loss | (1,555 | ) | (816 | ) | (1,100 | ) | (1,800 | ) | - | (5,271 | ) | |||||||||||||||||||||||||||||||||
(1) | Including approximately US$ |
F-21
Three Months Ended September 30, 2016 (Unaudited)2022 (Unaudited)
Internet Ad. and related service | Ecommerce | Blockchain technology | Corporate | Inter-segment and reconciling item | Total | |||||||||||||||||||
US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | |||||||||||||||||||
Revenues | 7,216 | - | - | - | - | 7,216 | ||||||||||||||||||
Cost of revenues | 7,267 | - | - | - | - | 7,267 | ||||||||||||||||||
Total operating expenses | 628 | 80 | 365 | 707 | (1) | - | 1,780 | |||||||||||||||||
Depreciation and amortization expense included in total operating expenses | 91 | 75 | 365 | 21 | - | 552 | ||||||||||||||||||
Operating loss | (679 | ) | (80 | ) | (365 | ) | (707 | ) | - | (1,831 | ) | |||||||||||||
Change in fair value of warrant liabilities | - | - | - | (1,023 | ) | - | (1,023 | ) | ||||||||||||||||
Net loss | (688 | ) | (80 | ) | (365 | ) | (1,707 | ) | - | (2,840 | ) | |||||||||||||
(1) | Including approximately US$0.05 million share-based compensation expenses. |
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| Internet Ad. and data service | TV & Bank kiosks Ad. | Others | Inter- segment and reconciling item | Total | ||||||||||||||||
| US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | US$ (‘000) | ||||||||||||||||
| Revenues | 11,902 | - | - | - | 11,902 | |||||||||||||||
| Cost of revenues | 9,874 | - | - | - | 9,874 | |||||||||||||||
| Total operating expenses | 2,418 | 30 | 944 | (1) | - | 3,392 | ||||||||||||||
| Depreciation and amortization expense included in total operating expenses | 367 | 14 | 29 | - | 410 | |||||||||||||||
| Operating loss | (390 | ) | (30 | ) | (944 | ) | - | (1,364 | ) | |||||||||||
| Expenditure for long-term assets | - | - | - | - | - | |||||||||||||||
| Net loss from continuing operations | (474 | ) | (29 | ) | (948 | ) | - | (1,451 | ) | |||||||||||
20. |
| Loss per share |
Basic and diluted loss 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 U.S. dollars):
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Net loss attributable to ChinaNet Online Holdings, Inc. from continuing operations (numerator for basic and diluted loss per share from continuing operations) | $ | (3,963 | ) | $ | (4,103 | ) | $ | (2,087 | ) | $ | (1,472 | ) | ||||
| Net loss attributable to ChinaNet Online Holdings, Inc. from discontinued operation (numerator for basic and diluted loss per share from discontinued operation) | $ | - | $ | (60 | ) | $ | - | $ | - | |||||||
| Weighted average number of common shares outstanding -Basic and diluted | 12,019,040 | 11,353,657 | 12,074,304 | 11,358,971 | ||||||||||||
| Loss per share-Basic and diluted from continuing operations | $ | (0.33 | ) | $ | (0.36 | ) | $ | (0.17 | ) | $ | (0.13 | ) | ||||
| Loss per share-Basic and diluted from discontinued operations | $ | - | $ | (0.01 | ) | $ | - | $ | - | |||||||
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Net loss attributable to ZW Data Action Technologies Inc. (numerator for basic and diluted loss per share) | $ | (4,066 | ) | $ | (5,271 | ) | $ | (1,520 | ) | $ | (2,840 | ) | ||||
Weighted average number of common shares outstanding -Basic and diluted | 7,191,649 | 7,123,411 | 7,204,506 | 7,174,506 | ||||||||||||
Loss per share-Basic and diluted | $ | (0.57 | ) | $ | (0.74 | ) | $ | (0.21 | ) | $ | (0.40 | ) | ||||
F-22
For the nine and three months ended September 30, 2017,2023 and 2022, the diluted loss per share calculation for continuing operations did not include optionsany outstanding warrants to purchase up to 835,216 shares of the Company’s common stock, because they were out of the money,out-of-the-money and did not include 266,238 shares of unvested restricted common stock, because their effect was anti-dilutive, asanti-dilutive.
21. | Share-based compensation expenses |
In April 2023, under its 2020 Omnibus Securities and Incentive Plan, the Company incurred a loss for the periods from continuing operations.
For the ninegranted and three months ended September 30, 2016, the diluted loss per share calculation for continuing and discontinued operations did not include options to purchase up to 835,216 shares of the Company’s common stock, because they were out of the money, and did not include 799,571 shares of unvested restricted common stock, because their effect was anti-dilutive, as the Company incurred a loss for the periods from both continuing and discontinued operations.
The Company granted 75,000 and 20,000issued 0.03 million fully-vested shares of the Company’s restricted common stock to one of its investor relations services provider,independent directors in exchange for its serviceshis service to the Company for the year ended ending December 31, 2017 and 2016, respectively. 2023. These shares were valued at US$1.02 and US$3.001.65 per share, the closing bid price of the Company’s common stock on the earlier of the performance commitment date or the date service was completed, respectively.grant date. Total compensation expense recognizedexpenses amortized for the service was US$57,380nine and US$19,130 for the nine and three months ended September 30, 2017, respectively. Total compensation expense recognized for the service 2023 was approximately US$45,0000.04 million and US$15,000 for the nine and three months ended September 30, 2016,0.02 million, respectively.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In July 2017, June 2022, the Company granted and issued 75,0000.08 million fully-vested and non-forfeitable shares of the Company’sCompany restricted common stock to twoa management consulting and advisory service providersprovider in exchange for its services to the Companyservice for a 12-month12-month period commencing on July 1, 2017. Theseuntil May 2023. The Company valued these shares were valued at US$1.001.75 per share, the closing bid price of the Company’s common stock on the earliergrant date of these shares and recorded the performance commitment date orrelated total cost of approximately US$0.14 million as a prepayment asset in prepayment and deposit to suppliers account upon the date service was completed.grant and issuance of these shares. Total compensation expense recognizedexpenses amortized for the nine and three months ended September 30, 2017 2023 was approximately US$18,750,0.06 million and US$nil, respectively. Total compensation expenses amortized for the nine and three months ended September 30, 2022 was approximately US$0.05 million and US$0.04 million, respectively.
F-23
In February 2017,March 2022, under its 2020 Omnibus Securities and Incentive Plan, the Company granted 20,000and issued an aggregate of 0.019 million fully-vested shares of the Company’s restricted common stock to onetwo of its independent directorsthe Company’s executive officers in exchange for histheir services provided to the Company. Company for the year ended December 31, 2022. These shares were valued at US$1.12 per share, the closing bid price of the Company’s common stock on the date of grant. Total compensation expense recognized for the nine and three months ended September 30, 2017 was US$22,400 and US$nil, respectively.
On April 1, 2016, the Company granted 16,000 shares of the Company’s restricted common stock in aggregate to two marketing service providers in exchange for their services to the Company for a 12-month period commencing on April 1, 2016. These shares were valued at US$1.73 per share, the closing bid price of the Company’s common stock on the earlier of the performance commitment date or the date service was completed. Total compensation expense recognized for the nine and three months ended September 30, 2017 was approximately US$6,900 and US$nil, respectively. Total compensation expense recognized for the nine and three months ended September 30, 2016 was approximately US$13,800 and US$6,900, respectively.
On September 14, 2015, under its 2015 Omnibus Securities and Incentive Plan, the Company granted its employees in the aggregate of 266,238 shares of the Company’s restricted common stock, which will be vested on the third anniversary of the date of the grant. These shares were valued at US$2.10 per share, the closing bid price of the Company’s common stock on the date of grant. The Company adopted a 5% forfeiture rate for recognition of the related compensation expenses of these unvested shares. Total compensation expenses recognized for the nine and three months ended September 30, 2017 was approximately US$132,300 and US$44,600 respectively. Total compensation expenses recognized for the nine and three months ended September 30, 2016 was approximately US$132,790 and US$44,600, respectively.
On September 14, 2015, under its 2015 Omnibus Securities and Incentive Plan, the Company also granted 5-year common stock purchase options to its employees, in the aggregate, to purchase up to 477,240 shares of the Company’s restricted common stock at an exercise price of US$2.10 per share, of which 159,080 options vested upon the date of grant, 159,080 options vested on September 14, 2016 and the remaining 159,080 options vested on September 14, 2017. These options were valuated at US$1.03-US$1.39 per option. Total compensation expenses recognized for these options for the nine and three months ended September 30, 2017 was approximately US$155,000 and US$53,100, respectively. Total compensation expenses recognized for these options for the nine and three months ended September 30, 2016 was approximately US$150,000 and US$57,500, respectively.
The Company granted 140,000 shares of the Company’s restricted common stock to a management consulting service provider in exchange for its services to the Company for a 24-month period commencing on May 1, 2015. These shares were valued at US$3.93 per share, the closing bid price of the Company’s common stock on the earlier of the performance commitment date or the date service was completed. Total compensation expense recognized for the nine and three months ended September 30, 2017 was approximately US$91,580 and US$nil, respectively. Total compensation expense recognized for the nine and three months ended September 30, 2016 was approximately US$206,100 and US$68,700, respectively.
On December 30, 2014, the Company issued 1,680,000 shares of the Company’s restricted common stock to its executive officers, of which 613,334 restricted shares vested upon issuance, 533,333 restricted shares vested on December 30, 2015 and the remaining 533,333 restricted shares vested on December 30, 2016. The restricted stock was valued at $2.93 per share, the closing bid price of the Company’s common stock on therespective date of grant. Total compensation expenses recognizedamortized for the nine and three months ended September 30, 2016 2022 was approximately US$1,170,0000.05 million and US$390,000,0.02 million, respectively.
**The number ofFor the nine months ended September 30, 2022, the Company also amortized an approximately US$0.04 million compensation expense in the aggregate, which was related to fully-vested and nonforfeitable restricted common stocks, common stock purchase optionsgranted and the related stock price discussedissued to one of its service providers in the above paragraphs, which related transactions occurred before August 19, 2016, have been retroactively restated to reflect the Company’s 1 for 2.5 reverse stock split, which was effective on August 19, 2016.March 2020.
F-24
Options issuedThe table below summarized share-based compensation expenses recorded for the nine and outstanding at three months ended September 30, 2017 2023 and their movements during the nine months then ended are as follows:2022, respectively:
| Option Outstanding | Option Exercisable | |||||||||||||||||||||||
| Number of underlying shares | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number of underlying shares | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | |||||||||||||||||||
| Balance, December 31, 2016 | 835,216 | 4.04 | $ | 2.49 | 676,136 | 4.11 | $ | 2.59 | ||||||||||||||||
| Granted/Vested | - | 159,080 | 2.95 | $ | 2.10 | |||||||||||||||||||
| Forfeited | - | - | ||||||||||||||||||||||
| Exercised | - | - | ||||||||||||||||||||||
| Balance, September 30, 2017 (unaudited) | 835,216 | 3.29 | $ | 2.49 | 835,216 | 3.29 | $ | 2.49 | ||||||||||||||||
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
US$(’000) | US$(’000) | US$(’000) | US$(’000) | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Sales and marketing expenses | - | - | - | - | ||||||||||||
General and administrative expenses | 95 | 135 | 12 | 51 | ||||||||||||
Research and development expenses | - | - | - | - | ||||||||||||
Total | 95 | 135 | 12 | 51 | ||||||||||||
The aggregate unrecognized share-based compensation expenses as of September 30, 2017 and 2016 is2023 was approximately US$233,000 and US$1,111,000, respectively.
0.01 million, which will be recognized for the year ending December 31, 2023.
22. | Subsequent |
In March 2020, the spread of a novel coronavirus (“COVID-19”) resulted in the World Health Organization (the “WHO”) declaring the outbreak of COVID-19 as a global pandemic. The Company’s principal business activity is to provide advertising and marketing services to small and medium enterprises in the PRC, which is particularly sensitive to changes in general economic conditions. The pandemic of COVID-19 in the PRC had caused and may continue to cause decreases in or delays in advertising spending, and had negatively impacted and may continue to negatively impact the Company’s short-term ability to grow revenues. Although the COVID-19 outbreak had been largely under control within China with most of the travel restrictions and quarantine requirements lifted accordingly, and the WHO declared that COVID-19 is no longer a global health emergency on May 5, 2023, there remains uncertainty as to the future impact of the pandemic. The Company has performed an evaluationwill continue to assess its financial impacts for the future periods. There can be no assurance that this assessment will enable the Company to avoid part or all of subsequent events throughany impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally or in the Company’s sector in particular.
Except for the above mentioned matters, there is no other material event which are required to be adjusted or disclosed as of the date theof this consolidated financial statements were issued, and has determined that there are no such events that are material to the financial statements.
F-25
Item 2 Management’s2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this interim report. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,“expect,” “anticipate,“anticipate,” “intend,“intend,” “believe,“believe,” or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors”“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2022. Readers are cautioned not to place undue reliance on these forward-looking statements.
The Public Company Accounting Oversight Board (the “PCAOB”) had historically been unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections over our auditor deprived our investors of the benefits of such inspections.
Our former auditor, the independent registered public accounting firm that issued the audit report in our SEC filings, and our current auditor, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our former and current auditors are located in Hong Kong Special Administrative Region of the PRC ("Hong Kong"), China, a jurisdiction where the PCAOB was unable to conduct inspections and investigations before 2022. As a result, we and investors in our securities were deprived of the benefits of such PCAOB inspections. On December 15, 2022, the PCAOB announced that it was able to secure complete access to inspect and investigate PCAOB-registered public accounting firms headquartered in China mainland and Hong Kong in 2022. However, the inability of the PCAOB to conduct inspections of auditors in Hong Kong in the past made it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China mainland and Hong Kong that have been subject to the PCAOB inspections, which could cause investors and potential investors in our securities to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.
Our common stock may be delisted and prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCAA,as amended by the Accelerating Holding Foreign Companies Accountable Act,if the PCAOB is unable to inspect or investigate completely auditors located in China mainland and Hong Kong. The delisting of our common stock or the threat of their being delisted could cause the value of our common stock to significantly decline or be worthless, and thus you could lose all or substantial portion of your investment.
On December 18, 2020, the Holding Foreign Companies Accountable Act, or the HFCAA, was signed into law that states if the SEC determines that issuers have filed audit reports issued by a registered public accounting firm that has not been subject to PCAOB inspection for three consecutive years beginning in 2021, the SEC shall prohibit its common stock from being traded on a national securities exchange or in the over-the-counter trading market in the U.S. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, to prohibit securities of any registrant from being listed on any of the U.S. securities exchanges or traded over-the-counter if the auditor of the registrant’s financial statements is not subject to PCAOB inspection for two consecutive years, instead of three consecutive years as enacted in the HFCAA. On December 2, 2021, the SEC adopted final amendments implementing the disclosure and submission requirements of the HFCAA, pursuant to which the SEC will identify an issuer as a “Commission-Identified Issuer” if the issuer has filed an annual report containing an audit report issued by a registered public accounting firm that the PCAOB has determined it is unable to inspect or investigate completely, and will then impose a trading prohibition on an issuer after it is identified as a Commission-Identified Issuer for three consecutive years. On December 29, 2022, the Accelerating Holding Foreign Companies Accountable Act was signed into law.
On December 16, 2021, the PCAOB issued a HFCAA Determination Report (the “2021 PCAOB Determinations”) to notify the SEC of its determination that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in China mainland and Hong Kong because of positions taken by the Chinese authorities, and our former auditor was subject to this determination. On May 13, 2022, the SEC conclusively identified us as a Commission-Identified Issuer under the HFCAA following the filing of our annual report on Form 10-K for the fiscal year ended December 31, 2021.
On August 26, 2022, the PCAOB signed a Statement of Protocol on agreement governing on inspections of audit firms based in mainland China and Hong Kong, with China Securities Regulatory Commission (“CSRC”) and Ministry of Finance (“MOF”) of the PRC, in regarding to governing inspections and investigations of audit firms headquartered in mainland China and Hong Kong (the “Agreement”). As stated in the Agreement, the Chinese authorities committed that the PCAOB has direct access to view complete audit work papers under its inspections or investigations and has sole discretion to the selected audit firms and audit engagements. The Agreement opens access for the PCAOB to inspect and investigate the registered public accounting firms in mainland China and Hong Kong completely. The PCAOB then thoroughly tested compliance with every aspect of the Agreement necessary to determine complete access. This included sending a team of PCAOB staff to conduct on-site inspections and investigations in Hong Kong over a nine-week period from September to November 2022.
On December 15, 2022, the PCAOB issued its 2022 HFCAA Determination Report to notify the SEC of its determination that the PCAOB was able to secure complete access to inspect and investigate PCAOB-registered public accounting firms headquartered in China mainland and Hong Kong completely in 2022. The PCAOB Board vacated its 2021 PCAOB Determinations that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in China mainland and Hong Kong. For this reason, we do not expect to be identified as a Commission-Identified Issuer following the filing of our annual report for the fiscal year ended December 31, 2022. However, whether the PCAOB will continue to be able to satisfactorily conduct inspections of PCAOB-registered public accounting firms headquartered in China mainland and Hong Kong is subject to uncertainty and depends on a number of factors out of our, and our auditor’s, control.
The PCAOB is continuing to demand complete access in China mainland and Hong Kong moving forward and is already making plans to resume regular inspections in early 2023 and beyond, as well as to continue pursuing ongoing investigations and initiate new investigations as needed. The PCAOB does not have to wait another year to reassess its determinations. Should the PRC authorities obstruct the PCAOB’s access to inspect or investigate completely in any way and at any point, the PCAOB will act immediately to consider the need to issue new determinations consistent with the HFCAA.
We cannot assure you that our auditor will not be determined as a register public accounting firm that the PCAOB is unable to inspect or investigate completely for two consecutive years because of positions taken by the Chinese authorities and/or any other causes in the future. If the PCAOB in the future again determines that it is unable to inspect and investigate completely auditors in China mainland and Hong Kong, we may be identified as a Commission-Identified Issuer accordingly. If this happens, Nasdaq may determine to delist our common stock, and there is no certainty that we will be able to continue listing our common stock on other non-U.S. stock exchanges or that an active market for our common stock will immediately develop outside of the U.S. The prohibiting from trading in the United States or delisting of our common stock or the threat of their being delisted could cause the value of our common stock to significantly decline or be worthless, and thus you could lose all or substantial portion of your investment.
Overview
We wereOur company was incorporated in the State of Texas in April 2006 and re-domiciled to become a Nevada corporation in October 2006. On June 26, 2009, we consummatedAs a result of a share exchange transaction we consummated with China Net Online Media Group Limited (the “Share Exchange”), a company organized under the laws of British Virgin Islands (“China Net BVI”). As a result of the Share Exchange, China Net BVI became a wholly owned subsidiary of us andin June 2009, we are now a holding company, which through certain contractual arrangements with operating entitiescompanies in the PRC, is engaged in providing Internet advertising, precision marketing, online-to-offline (O2O) sales channel expansionblockchain-based SaaS services, and ecommerce O2O advertising and marketing services and the related data and technical services to SMEs in China and entrepreneurial management and networking services for entrepreneurs in the PRC.
Through our PRC operating subsidiaries and VIEs, we primarily operate a one-stop services for our clients on our integrated service platform, primarily including omni-channelOmni-channel advertising, precision advertisingmarketing and marketing system platform, CloudX, and its data analysis management system. Our omni-channel precision advertising and marketing system platform consists primarily of all major digital advertising and marketing portals, include internet and mobile, and our other non-digital advertising units, such as TV and paper ads. We provide and monitor varietiesoffer a variety channels of advertising and marketing campaignsservices through CloudX and generates effective sales leads through the combination effectsthis system, which primarily include distribution of the Internet, mobile, content and others, including TV and offline medias. We also provideright to use search engine marketing services we purchased from key search engines, provision of online advertising placements services on our web portals, provision of ecommerce O2O advertising and marketing services as well as provision of other related value-added data and technical services through CloudX to maximize market exposure and effectiveness for our clients. OurBeginning in early 2022, we introduced our SaaS services to customers. The SaaS services were designated in providing one-stop blockchain-powered enterprise management solutions via our BIF platform in forms of unique NFT generations, data analysis management system is an informationrecord, share and data analysis portal for SMEs or entrepreneurs who plans to start their own business, helping them for a higher survival and faster deal closing rate. It is built based on the cores of CloudX to further expand our service and data-link to assist our clients in developing their sales both online and offline, which establishes a traceable and looped online to offline (O2O) ecosystem for our clients in their ground sales expansion throughout the cities in the PRC. During the past few years, we have been cooperating with third parties to develop our SMEs intelligent operation and marketing data service platform and applications, which consists of several online cloud technology based tools on digital advertising and marketing, sales lead management, elite store management, client membership management and other administrative operational management tools. These are specifically designed for small business in China to match their simplicity. We are intending to utilize these applications to create a social community-based consumption ecosystem, sustained by our in-process developing Big Data and artificial intelligent technologies, and analyzing data from operation, prediction and prescription which lead the SMEs improving their marketing efficiency with better return on investment (ROI) and sales effectiveness with their target customers.storage modules subscriptions etc.
Basis of presentation, management estimates and critical accounting policies
Our unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, as promulgated by the SEC,GAAP”) and include the accounts of our Company,company, and all of our subsidiaries and VIEs. We prepare financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses during the financial reporting period. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. In order to understand the significant accounting policies that we adopted for the preparation of our condensed consolidated interim financial statements, youreaders should refer to the information set forth in Note 34 “Summary of significant accounting policies” to our audited financial statements in our 20162022 Form 10-K.
26
We believe that the assumptions and estimates associated with revenue recognition, estimation of current expected credit loss and fair value measurement of warrant liabilities have the greatest potential impacts on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
● | Our revenues are recognized when control of the promised services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Our revenues from distribution of the right to use search engine marketing service are recognized on a gross basis, because we determine that we are a principal in the transaction who control the services before they are transferred to our customers. |
● | We maintain an allowance for credit losses for accounts receivable and short-term loans provided to unrelated parties, which are recorded as valuation accounts that are deducted from the amortized cost basis of the related financial assets to present the net amount expected to be collected on the financial assets. The allowance for credit losses reflects our current estimate of credit losses expected to be incurred over the life of the related financial assets. We consider various factors in establishing, monitoring, and adjusting our allowance for credit losses, including the aging and aging trends, customer/other parties’ creditworthiness and specific exposures related to particular customers/other parties. We also monitor other risk factors and forward-looking information, such as country specific risks and economic factors that may affect a customer/other party’s ability to pay in establishing and adjusting its allowance for credit losses. We assess collectability by reviewing the financial assets on a collective basis where similar characteristics exist and on an individual basis when we identify specific customers/other parties with known disputes or collectability issues. Accounts receivable and short-term loans to unrelated parties are written off after all collection efforts have ceased. |
● | We determined that the warrants we issued in various financing activities should be accounted for as derivative liabilities and measured at fair value with changes in fair value be recorded in earnings in each reporting period. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value of our warrant liabilities was determined based on significant unobservable inputs, such as volatility of our stock price, risk free interest rate. |
A.RESULTS OF OPERATIONS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 20172023 AND 20162022
The following table sets forth a summary, for the periods indicated, of our consolidated results of operations. Our historical results presented below are not necessarily indicative of the results that may be expected for any future period. All amounts except number of shares and per share data, are presented in thousands of U.S. dollars.
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| US$ | US$ | US$ | US$ | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Revenues | ||||||||||||||||
| From unrelated parties | $ | 31,171 | $ | 25,017 | $ | 13,509 | $ | 11,741 | ||||||||
| From related parties | 116 | 381 | 14 | 161 | ||||||||||||
| Total revenues | 31,287 | 25,398 | 13,523 | 11,902 | ||||||||||||
| Cost of revenues | 26,955 | 19,269 | 12,163 | 9,874 | ||||||||||||
| Gross profit | 4,332 | 6,129 | 1,360 | 2,028 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Sales and marketing expenses | 2,399 | 3,069 | 740 | 1,126 | ||||||||||||
| General and administrative expenses | 4,402 | 5,290 | 2,318 | 1,752 | ||||||||||||
| Research and development expenses | 1,012 | 1,530 | 312 | 514 | ||||||||||||
| Total operating expenses | 7,813 | 9,889 | 3,370 | 3,392 | ||||||||||||
| Loss from operations | (3,481 | ) | (3,760 | ) | (2,010 | ) | (1,364 | ) | ||||||||
| Other income (expenses) | ||||||||||||||||
| Interest income | 39 | 72 | 2 | 19 | ||||||||||||
| Interest expense | (109 | ) | (4 | ) | (36 | ) | (4 | ) | ||||||||
| Other expenses | (208 | ) | (112 | ) | (2 | ) | (99 | ) | ||||||||
| Total other expenses | (278 | ) | (44 | ) | (36 | ) | (84 | ) | ||||||||
| Loss before income tax expense, noncontrolling interests and discontinued operation | (3,759 | ) | (3,804 | ) | (2,046 | ) | (1,448 | ) | ||||||||
| Income tax expense | (115 | ) | (155 | ) | (2 | ) | (3 | ) | ||||||||
| Loss from continuing operations | (3,874 | ) | (3,959 | ) | (2,048 | ) | (1,451 | ) | ||||||||
| Loss from and on disposal of discontinued operation, net of income tax | - | (60 | ) | - | - | |||||||||||
| Net loss | (3,874 | ) | (4,019 | ) | (2,048 | ) | (1,451 | ) | ||||||||
| Net income attributable to noncontrolling interests from continuing operations | (89 | ) | (144 | ) | (39 | ) | (21 | ) | ||||||||
| Net loss attributable to ChinaNet Online Holdings, Inc. | $ | (3,963 | ) | $ | (4,163 | ) | $ | (2,087 | ) | $ | (1,472 | ) | ||||
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
(US $) | (US $) | (US $) | (US $) | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Revenues | 25,317 | 21,813 | 9,181 | 7,216 | ||||||||||||
Cost of revenues | 25,746 | 21,811 | 9,185 | 7,267 | ||||||||||||
Gross (loss)/ profit | (429 | ) | 2 | (4 | ) | (51 | ) | |||||||||
Operating expenses | ||||||||||||||||
Sales and marketing expenses | 148 | 219 | 55 | 72 | ||||||||||||
General and administrative expenses | 3,659 | 5,697 | 1,547 | 1,651 | ||||||||||||
Research and development expenses | 18 | 181 | - | 57 | ||||||||||||
Total operating expenses | 3,825 | 6,097 | 1,602 | 1,780 | ||||||||||||
Loss from operations | (4,254 | ) | (6,095 | ) | (1,606 | ) | (1,831 | ) | ||||||||
Other income/(expenses) | ||||||||||||||||
Interest income | 230 | 96 | 79 | 21 | ||||||||||||
Other expenses, net | (20 | ) | (33 | ) | (6 | ) | (5 | ) | ||||||||
Impairment of long-term investments | (207 | ) | - | 2 | - | |||||||||||
Change in fair value of warrant liabilities | 185 | 759 | 13 | (1,023 | ) | |||||||||||
Total other income/(expenses) | 188 | 822 | 88 | (1,007 | ) | |||||||||||
Loss before income tax benefit/(expense) | (4,066 | ) | (5,273 | ) | (1,518 | ) | (2,838 | ) | ||||||||
Income tax benefit/(expense) | - | 2 | (2 | ) | (2 | ) | ||||||||||
Net loss | $ | (4,066 | ) | $ | (5,271 | ) | $ | (1,520 | ) | $ | (2,840 | ) | ||||
27
Revenues
The following tables set forth a breakdown of our total revenues, divided into three segmentsdisaggregated by type of services for the periods indicated, with inter-segmentinter-company transactions eliminated:
| Nine Months Ended September 30, | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| Revenue type | (Amounts expressed in thousands of US dollars, except percentages) | |||||||||||||||
| -Internet advertising and data service | $ | 6,978 | 22.3 | % | $ | 13,676 | 53.8 | % | ||||||||
| -Search engine marketing and data service | 24,253 | 77.5 | % | 11,701 | 46.1 | % | ||||||||||
| -Technical services | 56 | 0.2 | % | 21 | 0.1 | % | ||||||||||
| Internet advertising and related data services | $ | 31,287 | 100 | % | $ | 25,398 | 100 | % | ||||||||
Nine Months Ended September 30, | ||||||||||||||||
2023 | 2022 | |||||||||||||||
Revenue type | (Amounts expressed in thousands of US dollars, except percentages) | |||||||||||||||
-Internet advertising and related data service | $ | 427 | 1.7 | % | $ | 3,208 | 14.7 | % | ||||||||
-Distribution of the right to use search engine marketing service | 24,815 | 98.0 | % | 18,605 | 85.3 | % | ||||||||||
Internet advertising and related services | 25,242 | 99.7 | % | 21,813 | 100 | % | ||||||||||
Blockchain-based SaaS services | 75 | 0.3 | % | - | - | |||||||||||
Total | $ | 25,317 | 100 | % | $ | 21,813 | 100 | % | ||||||||
| Three Months Ended September 30, | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| Revenue type | (Amounts expressed in thousands of US dollars, except percentages) | |||||||||||||||
| -Internet advertising and data service | $ | 2,232 | 16.5 | % | $ | 4,387 | 36.9 | % | ||||||||
| -Search engine marketing and data service | 11,266 | 83.3 | % | 7,515 | 63.1 | % | ||||||||||
| -Technical services | 25 | 0.2 | % | - | - | |||||||||||
| Internet advertising and related data services | $ | 13,523 | 100 | % | $ | 11,902 | 100 | % | ||||||||
Three Months Ended September 30, | ||||||||||||||||
2023 | 2022 | |||||||||||||||
Revenue type | (Amounts expressed in thousands of US dollars, except percentages) | |||||||||||||||
-Internet advertising and related data service | $ | 145 | 1.6 | % | $ | 980 | 13.6 | % | ||||||||
-Distribution of the right to use search engine marketing service | 9,011 | 98.1 | % | 6,236 | 86.4 | % | ||||||||||
Internet advertising and related services | 9,156 | 99.7 | % | 7,216 | 100 | % | ||||||||||
Blockchain-based SaaS services | 25 | 0.3 | % | - | - | |||||||||||
Total | $ | 9,181 | 100 | % | $ | 7,216 | 100 | % | ||||||||
Total Revenues: Our total revenues increased to US$31.325.32 million and US$13.59.18 million respectively, for the nine and three months ended September 30, 20172023, respectively, from US$25.421.81 million and US$11.97.22 million respectively, for the same periodperiods last year, respectively, which was primarily due to the increase in our main stream service revenues, fromi.e., distribution of the right to use search engine marketing and data service during the periods.
We derive the majority of our internet advertising and related data service revenues from the sales of effective sales leads and advertising space from our internet portals, sales of omni-channel and search engine marketing and data service and other related value added services, including content management services, to unrelated third parties and to certain related parties. Our internet advertising and related data services to related parties were provided in the ordinary course of business on the same terms as those provided to our unrelated customers. For the nine and three months ended September 30, 2017 and 2016, our service revenues from related parties in the aggregate was less than 1.5% of the total revenues for each respective reporting period.
The tables below summarize the revenues, cost of revenues, gross profit and net loss generated from each of our VIEs and subsidiaries for the nine and three months ended September 30, 2017 and 2016, respectively, with inter-company transactions eliminated:
For the nine months ended September 30, 2017:
| Name of subsidiary or VIE | Revenue from unrelated parties | Revenue from related parties | Total | |||||||||
| ($’000) | ($’000) | ($’000) | ||||||||||
| Rise King WFOE and subsidiaries | 56 | - | 56 | |||||||||
| Business Opportunity Online and subsidiaries | 31,115 | 116 | 31,231 | |||||||||
| Total revenues | 31,171 | 116 | 31,287 | |||||||||
For the three months ended September 30, 2017:
| Name of subsidiary or VIE | Revenue from unrelated parties | Revenue from related parties | Total | |||||||||
| ($’000) | ($’000) | ($’000) | ||||||||||
| Rise King WFOE and subsidiaries | 25 | - | 25 | |||||||||
| Business Opportunity Online and subsidiaries | 13,484 | 14 | 13,498 | |||||||||
| Total revenues | 13,509 | 14 | 13,523 | |||||||||
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For the nine months ended September 30, 2017:
| Name of subsidiary or VIE | Cost of Revenues | Gross Profit | ||||||
| ($’000) | ($’000) | |||||||
| Rise King WFOE and subsidiaries | 1 | 55 | ||||||
| Business Opportunity Online and subsidiaries | 26,954 | 4,277 | ||||||
| Total | 26,955 | 4,332 | ||||||
For the three months ended September 30, 2017:
| Name of subsidiary or VIE | Cost of Revenues | Gross Profit | ||||||
| ($’000) | ($’000) | |||||||
| Rise King WFOE and subsidiaries | 1 | 24 | ||||||
| Business Opportunity Online and subsidiaries | 12,162 | 1,336 | ||||||
| Total | 12,163 | 1,360 | ||||||
For the nine months ended September 30, 2017:services.
● | Internet advertising revenues for the nine and three months ended September 30, 2023 was approximately US$0.43 million and US$0.15 million, respectively, compared with US$3.21 million and US$0.98 million for the nine and three months ended September 30, 2022, respectively. The decline in service revenues from this business category was primarily attributable to the following reasons: (1) the past three-year COVID-19 pandemic in China has induced significant economic uncertainties and heightened pandemic-related concerns and fears among small and medium business owners’. Consequently, this substantially affected the advertising investment budgets of our clients. As a result, our clients continued tightening their advertising and marketing expenditure through traditional ad portals. They shifted their focus more on singular, cost-effective advertising channels, such as search engine marketing, which provides customers with direct internet traffic flow through clicks. Consequently, a portion of our clients’ ad consumption shifted from our ad portal placement services to our search engine marketing service; and (2) the emergence of the App era, characterized by an increase in short-form video applications and platform-based advertising channels like Douyin and Kuaishou, which offer unique competitive advantages, has also led a diversion of advertisements and a reduction in revenue on our traditional ad portals to some extent. We will continue to closely monitor our clients’ needs in this business category and adjust our operational strategy accordingly. | |||
● | ||||
For the three months ended September 30, 2017:
● | For the nine and three months ended September 30, 2023, we generated an approximately US$0.08 million and US$0.03 million Blockchain-based platform subscription fee revenues, respectively. | |||
For the nine months ended September 30, 2016:
| Name of subsidiary or VIE | Revenue from unrelated parties | Revenue from related parties | Total | |||||||||
| ($’000) | ($’000) | ($’000) | ||||||||||
| Rise King WFOE and subsidiaries | 109 | - | 109 | |||||||||
| Business Opportunity Online and subsidiaries | 24,908 | 381 | 25,289 | |||||||||
| Total revenues | 25,017 | 381 | 25,398 | |||||||||
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For the three months ended September 30, 2016:
| Name of subsidiary or VIE | Revenue from unrelated parties | Revenue from related parties | Total | |||||||||
| ($’000) | ($’000) | ($’000) | ||||||||||
| Rise King WFOE and subsidiaries | - | - | - | |||||||||
| Business Opportunity Online and subsidiaries | 11,741 | 161 | 11,902 | |||||||||
| Total revenues | 11,741 | 161 | 11,902 | |||||||||
For the nine months ended September 30, 2016:
| Name of subsidiary or VIE | Cost of Revenues | Gross Profit | ||||||
| ($’000) | ($’000) | |||||||
| Rise King WFOE and subsidiaries | 83 | 26 | ||||||
| Business Opportunity Online and subsidiaries | 19,186 | 6,103 | ||||||
| Total | 19,269 | 6,129 | ||||||
For the three months ended September 30, 2016:
| Name of subsidiary or VIE | Cost of Revenues | Gross Profit/(Loss) | ||||||
| ($’000) | ($’000) | |||||||
| Rise King WFOE and subsidiaries | 2 | (2 | ) | |||||
| Business Opportunity Online and subsidiaries | 9,872 | 2,030 | ||||||
| Total | 9,874 | 2,028 | ||||||
For the nine months ended September 30, 2016:
For the three months ended September 30, 2016:
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Management considers revenues generated from internet advertising and data service, search engine marketing and data service and other related technical services as one aggregate business operation and relies upon the consolidated results of all the operations in this business unit to make decisions about allocating resources and evaluating performance.
Cost of revenues
Our cost of revenues consisted of costs directly related to the offering of our Internet advertising, precision marketing and related data and technical services, and technical services.software platform amortization cost related to our blockchain-based SaaS service. The following table sets forth our cost of revenues, divided into three segments,disaggregated by type of services, by amount and gross profit ratio for the periods indicated, with inter-segmentinter-company transactions eliminated:
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||||||
| (Amounts expressed in thousands of US dollars, except percentages) | ||||||||||||||||||||||||
| Revenue | Cost | GP ratio | Revenue | Cost | GP ratio | |||||||||||||||||||
| -Internet advertisement and data service | $ | 6,978 | $ | 3,864 | 45 | % | $ | 13,676 | $ | 7,863 | 43 | % | ||||||||||||
| -Search engine marketing and data service | 24,253 | 23,090 | 5 | % | 11,701 | 11,402 | 3 | % | ||||||||||||||||
| -Technical services | 56 | 1 | 98 | % | 21 | 4 | 81 | % | ||||||||||||||||
| Internet advertising and related data services | $ | 31,287 | $ | 26,955 | 14 | % | $ | 25,398 | $ | 19,269 | 24 | % | ||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
2023 | 2022 | |||||||||||||||||||||||
(Amounts expressed in thousands of US dollars, except percentages) | ||||||||||||||||||||||||
Revenue | Cost | GP ratio | Revenue | Cost | GP ratio | |||||||||||||||||||
-Internet advertising and related data service | $ | 427 | $ | 350 | 18 | % | $ | 3,208 | $ | 2,871 | 11 | % | ||||||||||||
-Distribution of the right to use search engine marketing service | 24,815 | 24,766 | 0.2 | % | 18,605 | 18,940 | -2 | % | ||||||||||||||||
Internet advertising and related services | 25,242 | 25,116 | 0.5 | % | 21,813 | 21,811 | 0.01 | % | ||||||||||||||||
Blockchain-based SaaS services | 75 | 630 | -740 | % | - | - | - | |||||||||||||||||
Total | $ | 25,317 | $ | 25,746 | -2 | % | $ | 21,813 | $ | 21,811 | 0.01 | % | ||||||||||||
| Three Months Ended September 30, | ||||||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||||||
| (Amounts expressed in thousands of US dollars, except percentages) | ||||||||||||||||||||||||
| Revenue | Cost | GP ratio | Revenue | Cost | GP ratio | |||||||||||||||||||
| -Internet advertisement and data service | $ | 2,232 | $ | 1,291 | 42 | % | $ | 4,387 | $ | 2,534 | 42 | % | ||||||||||||
| -Search engine marketing and data service | 11,266 | 10,871 | 4 | % | 7,515 | 7,338 | 2 | % | ||||||||||||||||
| -Technical services | 25 | 1 | 96 | % | - | 2 | - | |||||||||||||||||
| Internet advertising and related data services | $ | 13,523 | $ | 12,163 | 10 | % | $ | 11,902 | $ | 9,874 | 17 | % | ||||||||||||
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Three Months Ended September 30, | ||||||||||||||||||||||||
2023 | 2022 | |||||||||||||||||||||||
(Amounts expressed in thousands of US dollars, except percentages) | ||||||||||||||||||||||||
Revenue | Cost | GP ratio | Revenue | Cost | GP ratio | |||||||||||||||||||
-Internet advertising and related data service | $ | 145 | $ | 116 | 20 | % | $ | 980 | $ | 833 | 15 | % | ||||||||||||
-Distribution of the right to use search engine marketing service | 9,011 | 8,859 | 2 | % | 6,236 | 6,434 | -3 | % | ||||||||||||||||
Internet advertising and related services | 9,156 | 8,975 | 2 | % | 7,216 | 7,267 | -0.7 | % | ||||||||||||||||
Blockchain-based SaaS services | 25 | 210 | -740 | % | - | - | - | |||||||||||||||||
Total | $ | 9,181 | $ | 9,185 | -0.04 | % | $ | 7,216 | $ | 7,267 | -0.7 | % | ||||||||||||
Cost of revenuesrevenues: : Our total cost of revenues increased to US$26.9625.75 million and US$12.169.19 million for the nine and three months ended September 30, 2017,2023, respectively, from US$19.2721.81 million and US$9.877.27 million for the same periodsnine and three months ended September 30, 2022, respectively. Our cost of revenues primarily consists of search engine marketing resources purchased from key search engines, amortization of software platform development cost and other direct costs associated with providing our services. The increase in 2016, respectively, whichour total cost of revenues for the nine and three months ended September 30, 2023 was primarily due to the increase in costs associated with distribution of the right to use search engine marketing and data service andwe purchased from key search engines during the periods, which was in line with the increase in the related revenues as discussed above. Our cost of revenues related to our advertising, marketing and data services primarily consists of internet resources purchased from key search engines and technical services providers related to lead generation, sponsored search and other direct cost associated with providing services.
● | Costs for Internet advertising and data service primarily consist of cost of internet traffic flow and technical services we purchased from other portals and technical suppliers for obtaining effective sales lead generation to promote business opportunity advertisements placed on our own ad portals. For the nine and three months ended September 30, 2023, our total cost of revenues for Internet advertising and data service was approximately US$0.35 million and US$0.12 million, respectively, compared with approximately US$2.87 million and US$0.83 million for the nine and three months ended September 30, 2022, respectively. The gross margin rate of our Internet advertising and data service was 18% and 20% for the nine and three months ended September 30, 2023, compared with 11% and 15% for the nine and three months ended September 30, 2022, respectively. Due to continuous decline in service revenues from this business category, we scaled down our investments for internet traffic flow on our ad portals, and, as a result, we anticipate an increase in gross margin rate of this business category in fiscal 2023, compared with that in fiscal 2022. |
● | Costs for distribution of the right to use search engine marketing service was direct search engine resources consumed for the right to use search engine marketing service that we purchased from key search engines and distributed to our customers. We purchased these search engine resources from well-known search engines and/or their delegated agencies in China, for example, Baidu, Qihu 360 and Sohu (Sogou) etc. We purchased the resources in relatively large amounts under our own name at a relatively lower rate compared to the market rates. We charged our clients the actual cost they consumed on search engines for the use of this service and a premium at certain percentage of that actual consumed cost. For the nine and three months ended September 30, 2023, our total cost of revenues for distribution of the right to use search engine marketing service was US$24.77 million and US$8.86 million, respectively, compared with US$18.94 million and US$6.43 million for the same periods last year, respectively. The increase in cost of revenues for the nine and three months ended September 30, 2023 was in line with the increase in revenues from this business category. Gross margin rate of this business category was 0.2% and 2% for the nine and three months ended September 30, 2023, respectively, compared with -2% and -3% gross margin rate incurred for the same periods last year, respectively. |
● | For the nine months and three months ended September 30, 2023, cost for our Blockchain-based SaaS services was approximately US$0.63 million and US$0.21 million, respectively, which represented the amortized cost of our self-developed BIF platform. |
Gross (loss)/profit
As a result of the foregoing, for the nine months ended September 30, 2023, we incurred a gross loss of approximately US$0.43 million, compared with a gross profit of approximately US$0.002 million for the nine months ended September 30, 2022. For internet advertisingthe three months ended September 30, 2023, we incurred an approximately US$0.004 million gross loss, compared with a gross loss of approximately US$0.05 million for the three months ended September 30, 2022. Our overall gross margin was -2% and data service, cost associated-0.04% for the nine and three months ended September 30, 2023, respectively, compared with obtaining internet resources was0.01% and -0.7% for the largest component of our cost of revenues, accounting for over 80% of our total internet advertising and data service cost of revenues. We purchased these internet resources from other well-known search engines, internet portals and mobile portals in China, for example, Baidu, Qihu 360, Sohu (Sogou), WeChat, Toutiao and others. The purchase of these internet resources in large amounts allowed us to negotiate discounts with our suppliers.same periods last year, respectively. For the nine and three months ended September 30, 2017,2023, the gross margin rate of our total costmain stream of service revenues, for internet advertisingi.e. distribution of the right to use search engine marketing services, improved to 0.2% and data service was US$3.86 million and US$1.29 million,2%, respectively, compared with US$7.86 millionthe -2% and US$2.53 million-3% gross margin rate for the same periods last year respectively. The decrease in our total cost of revenues associated with internet advertising and data service was in line with the decrease in internet advertising and data service revenues as discussed in the above section. During the past few years, we continued developing our precision advertising and marketing system, CloudX, which optimized our digital marketing tactics by conglomerating different marketing channel for a single large customer and relatively increasing our classified segment and industry level marketing scheme with improved cost efficiency. These helped us and our clients achieve better lead results and effects with more acceptable and lower costs, and better ROI. Despite of temporarily decreasing in revenue, the gross margin rate for our internet advertising and data service remained at the level of 45% and 42% for the nine and three months ended September 30, 2017, respectively, compared with 43% and 42% for the nine and three months ended September 30, 2016, respectively.
Gross Profit
As a result of the foregoing, our gross profit was US$4.33 million and US$1.36 million, respectively, for the nine and three months ended September 30, 2017, compared with US$6.13 million and US$2.03 million, respectively, for the nine and three months ended September 30, 2016. Our overall gross margin decreased to 14% and 10% for the nine and three months ended September 30, 2017, respectively, compared with 24% and 17% for the nine and three months ended September 30, 2016. The decrease in our overall gross margin rate was a direct result of the increase in revenues from the relative lower margin search engine marketing and data service for the nine and three months ended September 30, 2017, compared with that in the same periods last year, which constituted approximately 77.5% and 83.3% of our total revenues for the nine and three months ended September 30, 2017, respectively, compared with 46.1% and 63.1% of the total revenues in the same periods last year, respectively.
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Operating Expenses and Net Loss
Our operating expenses consist of sales and marketing expenses, general and administrative expenses and research and development expenses. The following tables set forth our operating expenses, divided into their major categories by amount and as a percentage of our total revenues for the periods indicated.
| Nine Months Ended September 30, | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| (Amounts expressed in thousands of US dollars, except percentages) | ||||||||||||||||
| Amount | % of total revenue | Amount | % of total revenue | |||||||||||||
| Total Revenues | $ | 31,287 | 100 | % | $ | 25,398 | 100 | % | ||||||||
| Gross Profit | 4,332 | 14 | % | 6,129 | 24 | % | ||||||||||
| Sales and marketing expenses | 2,399 | 8 | % | 3,069 | 12 | % | ||||||||||
| General and administrative expenses | 4,402 | 14 | % | 5,290 | 21 | % | ||||||||||
| Research and development expenses | 1,012 | 3 | % | 1,530 | 6 | % | ||||||||||
| Total operating expenses | $ | 7,813 | 25 | % | $ | 9,889 | 39 | % | ||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2017 | 2016 | 2023 | 2022 | |||||||||||||||||||||||||||||
| (Amounts expressed in thousands of US dollars, except percentages) | (Amounts expressed in thousands of US dollars, except percentages) | |||||||||||||||||||||||||||||||
| Amount | % of total revenue | Amount | % of total revenue | Amount | % of total revenue | Amount | % of total revenue | |||||||||||||||||||||||||
| Total Revenues | $ | 13,523 | 100 | % | $ | 11,902 | 100 | % | ||||||||||||||||||||||||
| Gross Profit | 1,360 | 10 | % | 2,028 | 17 | % | ||||||||||||||||||||||||||
Total revenues | $ | 25,317 | 100 | % | $ | 21,813 | 100 | % | ||||||||||||||||||||||||
Gross (loss)/ profit | (429 | ) | -2 | % | 2 | 0.01 | % | |||||||||||||||||||||||||
| Sales and marketing expenses | 740 | 6 | % | 1,126 | 9 | % | 148 | 1 | % | 219 | 1 | % | ||||||||||||||||||||
| General and administrative expenses | 2,318 | 17 | % | 1,752 | 15 | % | 3,659 | 14 | % | 5,697 | 26 | % | ||||||||||||||||||||
| Research and development expenses | 312 | 2 | % | 514 | 4 | % | 18 | - | 181 | 1 | % | |||||||||||||||||||||
| Total operating expenses | $ | 3,370 | 25 | % | $ | 3,392 | 28 | % | $ | 3,825 | 15 | % | $ | 6,097 | 28 | % | ||||||||||||||||
| Three Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| (Amounts expressed in thousands of US dollars, except percentages) | ||||||||||||||||
Amount | % of total revenue | Amount | % of total revenue | |||||||||||||
Total revenues | $ | 9,181 | 100 | % | $ | 7,216 | 100 | % | ||||||||
Gross loss | (4 | ) | -0.04 | % | (51 | ) | -0.7 | % | ||||||||
Sales and marketing expenses | 55 | 1 | % | 72 | 1 | % | ||||||||||
General and administrative expenses | 1,547 | 16 | % | 1,651 | 23 | % | ||||||||||
Research and development expenses | - | - | 57 | 1 | % | |||||||||||
Total operating expenses | $ | 1,602 | 17 | % | $ | 1,780 | 25 | % | ||||||||
Operating Expenses: Our total operating expenses decreased to US$7.81 million for the nine months ended September 30, 2017 from US$9.89 million for the same period of 2016. For the three months ended September 30, 2017, our total operating expenses decreased slightly to US$3.37 million from US$3.39 million for the same period of 2016.
33
● | Sales and marketing expenses: Sales and marketing expenses was US$ |
We recognized a net deferred income tax expense of approximately US$0.16 million and US$0.003compared with approximately US$0.22 million and US$0.07 million for the nine and three months ended September 30, 2022, respectively. Our sales and marketing expenses primarily consist of staff salaries and benefits, performance bonuses, travel expenses, communication expenses and other general office expenses of our sales department. Due to certain aspects of our business nature, the fluctuation of our sales and marketing expenses usually does not have a direct linear relationship with the fluctuation of our net revenues. For the nine and three months ended September 30, 2023, the decrease in our sales and marketing expenses was primarily due to the gradual downsize of the sales team in our Hubei office during the periods, as part of management’s cost reduction plan in fiscal 2023.
● | General and administrative expenses: General and administrative expenses was US$3.66 million and US$1.55 million for the nine and three months ended September 30, 2023, respectively, compared with US$5.70 million and US$1.65 million for the nine and three months ended September 30, 2022, respectively. Our general and administrative expenses primarily consist of salaries and benefits of management, accounting, human resources and administrative personnel, office rentals, depreciation of office equipment, allowance for doubtful accounts, professional service fees, maintenance, utilities and other general office expenses of our supporting and administrative departments. For the nine months ended September 30, 2023, the change in our general and administrative expenses was primarily due to the following reasons: (1) the decrease in share-based compensation expenses of approximately US$0.04 million, due to less shares of the Company’s restricted common stock that were granted and issued to management and employees in the first nine months of 2022, compared with shares that were granted and issued in the same period last year; (2) the increase in allowance for expected credit losses of approximately US$0.40 million; (3) the decrease in amortization of administrative assets of approximately US$1.33 million, primarily due to impairment loss recognized against intangible assets by the end of fiscal 2022; and (4) the decrease in other general administrative expenses of approximately US$1.07 million, as a result of the cost reduction plan executed by the management. For the three months ended September 30, 2023, the changes in our general and administrative expenses was primarily attributable to the following reasons: (1) the decrease in amortization of administrative assets of approximately US$0.44 million, primarily due to impairment loss recognized against intangible assets by the end of fiscal 2022; (2) the decrease in other general administrative expenses of approximately US$0.55 million, as a result of the cost reduction plan executed by management; and (3) the increase in allowance for expected credit losses of approximately US$0.89 million, respectively. |
Loss from operations: As a result of the foregoing, we incurred a loss from operations of approximately US$4.25 million and US$6.10 million for the nine months ended September 30, 2023 and 2022, respectively. For the three months ended September 30, 2016,2023 and 2022, we incurred a loss from operations of approximately US$1.61 million and US$1.83 million, respectively.
Interest Income: For the nine and three months ended September 30, 2016,2023, interest income recognized were primarily related to the interest we earned from the short-term loans we provided to unrelated parties.
Impairment on long-term investments: For the nine months ended September 30, 2023, we recognized an approximately US$0.090.21 million impairment loss on long-term investments, which was related to our cash investments in one of our unconsolidated investee entities whose business activities had become dormant.
Change in fair value of warrant liabilities: We issued warrants in financing activities. We determined that these warrants should be accounted for as derivative liabilities, as the warrants are dominated in a currency (U.S. dollar) other than our functional currency (Renminbi or Yuan). As a result, a gain of change in fair value of these warrant liabilities of approximately US$0.19 million and US$0.030.76 million was recorded for the nine months ended September 30, 2023 and 2022, respectively. For the three months ended September 30, 2023, we incurred a gain of change in fair value of warrant liabilities of approximately US$0.01 million, compared with a loss of change in fair value of warrant liabilities of approximately US$1.02 million for the three months ended September 30, 2022.
Loss before income tax benefit/(expense): As a result of the foregoing, our loss before income tax benefit respectively, was approximately US$4.07 million and US$5.27 million for the nine months ended September 30, 2023 and 2022, respectively. For the three months ended September 30, 2023, we incurred an approximately US$1.52 million loss before income tax expense, compared with an approximately US$2.84 million loss before income tax expense for the three months ended September 30, 2022.
Income Tax benefit/(expense): For the three months ended September 30, 2023, we recognized an approximately US$0.002 million income tax expense in relation to the amortizationnet operating income generated by one of the intangibleour operating VIEs, which resulted in a decrease in deferred tax assets identified in the acquisition transactions consummatedrecognized in previous years;reporting periods. For the nine months and three months ended September 30, 2022, we recognized an approximately US$0.070.002 million and US$nil of our income tax benefit wasand US$0.002 million income tax expense in relation to the net operating loss and the net operating income incurred by the same one of our PRC operating VIEs for the period, respectively, which we consider likely to be able to utilized with respect to future earningsrespective periods.
Net loss: As a result of the entities to whichforegoing, for the operating losses relate;nine months ended September 30, 2023 and 2022, we also incurred a total net loss of approximately US$0.314.07 million and US$0.0335.27 million, deferred income tax expense by utilizing deferred tax assetsrespectively. For the three months ended September 30, 2023, we recognized in previous years due to earnings generated duringa net loss of approximately US$1.52 million, compared with a net loss of approximately US$2.84 million for the periods, respectively.three months ended September 30, 2022.
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B.LIQUIDITY AND CAPITAL RESOURCES
Cash Transfer within Our Organization and the Related Restrictions
We are a Nevada holding company with operations primarily conducted in China through our PRC subsidiaries, VIEs and VIEs’ subsidiaries. The intercompany flow of funds within our organization is effected through capital contributions and intercompany loans. We do not have written policies regarding intercompany cash transfer within our organization. In accordance with our current internal cash management practices, all intercompany cash transfer within our organization requires prior approval by our financial director and our chief financial officer/or our chief executive officer before execution.
As we conduct our operations primarily in China through our PRC subsidiaries, VIEs and their subsidiaries, and we intend to transfer most of our cash raised from the U.S. stock market to these operating entities to support their operations and expansions, our ability to pay dividends to U.S. investors may depend on receiving distributions from our PRC subsidiaries and settlement of the amounts owed under the VIE agreements from the consolidated VIEs. Any limitation on the ability of our PRC subsidiaries and the consolidated VIEs to make payments to us, or the tax implications of making payments to us, could have a material adverse effect on our ability to pay dividends to our U.S. investors.
The PRC regulations currently permit payment of dividends only out of accumulated profits, as determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries, the consolidated VIEs and their subsidiaries in China are also required to set aside at least 10% of their respective after-tax profit based on the PRC accounting standards and regulations each year to the statutory surplus reserve, until the balance in the reserve reaches 50% of the registered capital of the respective PRC entities. In accordance with these PRC laws and regulations, our PRC subsidiaries, the consolidated VIEs and their subsidiaries are restricted in their ability to transfer a portion of their net assets to us. As of September 30, 2023 and December 31, 2022, net assets restricted in the aggregate, which include paid-in capital and statutory reserve funds of our PRC subsidiaries, the consolidated VIEs and their subsidiaries that are included in our consolidated net assets, were approximately US$13.52 million and US$13.31 million, respectively. Appropriations to the enterprise expansion fund and staff welfare and bonus fund of a foreign-invested PRC entity and appropriation to the discretionary surplus reserve of other PRC entities are at the discretion of the board of directors. To date, none of our PRC subsidiaries, the consolidated VIEs and their subsidiaries appropriated any of these non-mandatory funds and reserves. Furthermore, if these entities incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments.
Under the PRC Enterprise Income Tax (“EIT”) Law and related regulations, dividends, interests, rent or royalties payable by a foreign-invested enterprise to its immediate holding company outside China are subject to a 10% withholding tax. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Hong Kong has a tax arrangement with China that provides for a 5% withholding tax on dividends subject to certain conditions and requirements, such as the requirements that the Hong Kong enterprise owns at least 25% of the PRC enterprise distributing the dividend at all times within the 12-month period immediately preceding the distribution of dividends and provides that the recipient can demonstrate it is a Hong Kong tax resident and it is the beneficial owner of the dividends. The PRC government adopted regulations in 2018 which stipulate that in determining whether a non-resident enterprise has the status as a beneficial owner, comprehensive analysis shall be conducted based on the factors listed therein and the actual circumstances of the specific case shall be taken into consideration. Specifically, it expressly excludes an agent or a designated payee from being considered as a “beneficial owner”. We own our PRC subsidiaries through China Net HK. China Net HK currently does not hold a Hong Kong tax resident certificate from the Inland Revenue Department of Hong Kong, there is no assurance that the reduced withholding tax rate will be available for us. If China Net HK is not considered to be the “beneficial owner” of the dividends by the Chinese local tax authority, any dividends paid to it by our PRC subsidiaries would be subject to a withholding tax rate of 10%.
There are no restrictions for the consolidated VIEs to settle the amounts owed under the VIE agreements to our WFOE. However, arrangements and transactions among affiliated entities may be subject to audit or challenge by the PRC tax authorities. If at any time the VIE agreements and the related fee structure between the consolidated VIEs and our WFOE is determined to be non-substantive and disallowed by Chinese tax authorities, the consolidated VIEs could, as a matter of last resort, make a non-deductible transfer to our WFOE for the amounts owed under the VIE agreements. This would result in such transfer being non-deductible expenses for the consolidated VIEs but still taxable income for our WFOE. If this happens, it may increase our tax burden and reduce our after-tax income in the PRC, and may materially and adversely affect our ability to make distributions to the holding company. Our management is of the view that the likelihood that this scenario would happen is remote. To date, the VIEs have settled to our WFOE the amount owed under the VIE agreements of RMB15.25 million (approximately US$2.27 million) in the aggregate.
Our PRC subsidiaries generate all of their revenue in Renminbi, Renminbi is not freely convertible into other currencies. As a result, any restriction on currency exchange may limit the ability of our PRC subsidiaries to pay dividends/make distributions to us. The Chinese government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. Shortages in availability of foreign currency may then restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to us for us to pay dividends to the U.S. investors. Renminbi is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and foreign debt. Currently, our PRC subsidiaries may purchase foreign currency for settlement of current account transactions, including payment of dividends to us, without the approval of the State Administration of Foreign Exchange of China (the “SAFE”) by complying with certain procedural requirements. However, the relevant Chinese governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. The Chinese government may continue to strengthen its capital controls, and additional restrictions and substantial vetting processes may be instituted by the SAFE for cross-border transactions falling under both the current account and the capital account. Any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to pay dividends in foreign currencies to holders of our securities. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, the SAFE and other relevant Chinese governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our PRC subsidiaries.
To date, none of our subsidiaries has made any distribution of earnings or issued any dividends to their respective shareholder in or outside of China, or to the Nevada holding company, and the Nevada holding company has never declared or paid any cash dividends to U.S. investors.
We do not have any present plan to make any distribution of earnings/issue any dividends directly or indirectly to our Nevada holding company or pay any cash dividends on our common stock in the foreseeable future because we currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
Cash Flow Analysis for the Nine Months Ended September 30, 2023 and 2022
Cash and cash equivalents represent cash on hand and deposits held at call with banks. We consider all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. As of September 30, 2017,2023, we had cash and cash equivalents of approximately US$1.231.31 million.
Our liquidity needs include (i) net cash used in operating activities that consists of (a) cash required to fund the initial build-out, continued expansion of our network and new services and (b) our working capital needs, which include deposits and advance payments to internet resourcesearch engine resources and technical servicesother advertising resources providers, payment of our operating expenses and financing of our accounts receivable; and (ii) net cash used in investing activities that consist of the payment for acquisitionsinvestment to further expand technologies related to our existing and future business and client base,activities, investment in software technologies to enhance the functionality of the management toolsour current advertising portals for providing our advertising, marketing and data services and to secure the safety of our general network, and investment in other general office equipment.to establish joint ventures with strategic partners for the development of new technologies and services. To date, we have financed our liquidity need primarily through proceeds we generated from operating activities we generated. Our existing cash is adequate to fund operations for the next twelve months.financing activities.
The following table provides detailed information about our net cash flow for the periods indicated:
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Amounts in thousands of US dollars | ||||||||
| Net cash used in operating activities | (2,654 | ) | (1,853 | ) | ||||
| Net cash provided by/(used in) investing activities | 762 | (2,904 | ) | |||||
| Net cash provided by financing activities | - | 456 | ||||||
| Changes in cash and cash equivalents included in assets classified as held for sale | - | 132 | ||||||
| Effect of foreign currency exchange rate changes on cash | 91 | (88 | ) | |||||
| Net decrease in cash and cash equivalents | $ | (1,801 | ) | $ | (4,257 | ) | ||
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Nine Months Ended September 30, | ||||||||
2023 | 2022 | |||||||
Amounts in thousands of US dollars | ||||||||
Net cash used in operating activities | $ | (1,536 | ) | $ | (4,409 | ) | ||
Net cash used in investing activities | (1,499 | ) | (479 | ) | ||||
Net cash provided by financing activities | - | - | ||||||
Effect of foreign currency exchange rate changes | (42 | ) | (131 | ) | ||||
Net decrease in cash and cash equivalents | $ | (3,077 | ) | $ | (5,019 | ) | ||
Net cash used in operating activities
For the nine months ended September 30, 2017,2023, our net cash used in operating activities of approximately US$2.651.54 million were primarily attributable to:
(1) | net loss excluding approximately US$ |
(2) | the receipt of cash from operations from changes in operating assets and liabilities such as: |
- | accounts receivable decreased by approximately US$0.66 million, primarily due to collection from two major clients during the period; and |
- | advance from customers increased by approximately US$ |
(3) |
| offset by the use from operations from changes in operating assets and liabilities such as: |
- | prepayment and |
- | account payables decreased by approximately US$ |
- | the other current liabilities and taxes payables decreased by approximately US$0.08 million; and |
- | accruals, operating lease liabilities and short-term lease payment payables decreased by approximately US$0.60 million in the aggregate, due to settle of these operating liabilities during the period. |
For the nine months ended September 30, 2016,2022, our net cash used in operating activities of approximately US$1.854.41 million were primarily attributable to:
(1) | net loss excluding approximately US$ |
(2) | the receipt of cash from operations from changes in operating assets and liabilities such as: |
| - | other |
| - | due from related parties in relation to advertising services provided to related parties decreased by approximately US$ |
| - | other current assets decreased by approximately US$ |
(3) |
| offset by the use from operations from changes in operating assets and liabilities such as: |
| - | accounts receivable |
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| - |
| - | accounts payable decreased by approximately US$0.78 million, primarily due to settlement to one of our major suppliers during the period; |
| - | advance from customers decreased by approximately US$ |
| - |
Net cash provided by/(used in)in investing activities
For the nine months ended September 30, 2017, our cash provided by investing activities included the following transactions:2023, (1) we spentprovided to an unrelated party a short-term loan of US$2.0 million. The loan is unsecured and bears a fixed annualized interest rate of 12%. The original maturity date of this loan was July 17, 2023. On July 1, 2023, we extended the term of this loan for a six-month period to January 18, 2024; (2) we collected an US$0.10 million short-term loan, which was provided to another unrelated party in April 2022; (3) we received a total interest income of approximately US$0.0020.07 million, forwhich was attributable to short-term loans we provided to unrelated parties in previous periods; (4) we made an additional investment of approximately US$0.04 million to one of our unconsolidated investee entities; (5) we received an approximately US$0.43 million proceeds from the purchasedisposal of general office equipment; (2) our termequity interest in another unconsolidated investee entity to an unrelated party; and (6) we made an deposit of approximately US$3.12 million matured in July 2017, which was recorded as a cash inflow from investing activities during the period; (3) we withdrew approximately US$0.44 million cash investment from one of our cost method investee companies during the period, which was also recorded as a cash inflow from investing activities during the period; and (4) we lent a short-term working capital loan of approximately US$2.8 million to an unrelated third party during the period. In the aggregate, these transactions resulted in a net cash inflow from investing activities of approximately US$0.76US0.05 million for the nine months ended September 30, 2017.
For the nine months ended September 30, 2016, our cash used in investing activities included the following transactions: (1) we spent approximately US$0.15 million for the purchase of general office equipment and expenditures on leasehold improvements; (2) we paid approximately US$1.98 million to purchase software technology related to Internet operation safety, information exchange security and data encryption and management; (3) we lent two of our cost method investees an aggregate of approximately US$0.31 million of short-term working capital loans during the period; (4) we made additional investments to our investee companies of approximately US$0.47 million in aggregate during the period; (5) cash divested from deconsolidation of VIE of approximately US$0.02 million; and (6) proceeds from disposal of investee companies of approximately US$0.03 million.purchase. In the aggregate, these transactions resulted in a net cash outflow from investing activities of approximately US$2.901.50 million for the nine months ended September 30, 2016.2023.
For the nine months ended September 30, 2022, (1) we provided short-term loans of US$2.60 million in the aggregate to two unrelated parties during the period. The current interest rate is 5% per annum for both loans; (2) we received an aggregate of US$2.05 million repayments of short-term loan principals, of which US$1.03 million was related to a loan provided in fiscal 2021, and a US$0.06 million loan interest income, respectively; and (3) we also received an approximately US$0.01 million short-term loan repayment from one of our unconsolidated investees. In the aggregate, these transactions result in a net cash outflow used in investing activities of approximately US$0.48 million for the nine months ended September 30, 2022.
Net cash provided by financing activities
For the nine months ended September 30, 2017,2023 and 2022, no cash was provided by or used in financing activities.
Future Liquidity, Material Cash Requirements and Capital Resources
Our future short-term liquidity needs within 12 months from the date hereof primarily include deposits and advance payments required for the purchase of search engine marketing resources and other online marketing resources to be distributed to our customers and payments for our operating expenses, which mainly consist of office rentals and employee salary and benefit.
In addition, in order to further develop our core business, i.e., our Internet advertising and related data service business, broaden and diversify the online marketing channels for customers, reinforce our industry competitive advantage and secure our client base, we repaid approximately US$0.4 million short-term bank loan maturedare actively seeking target companies with complementary online marketing resources for acquisition and/or joint ventures cooperation. To date, we have not entered into any binding agreements with any potential target. It is not yet certain when the potential acquisition and/or cooperation will be consummated and what form(s) of consideration will be transferred by us. If this transaction were to be consummated, it will materially decrease our liquidity in July 2017,the short run when the cash consideration, if any, is transferred. However, upon consummation of the acquisition, operating profits and new cash inflow may be generated from the acquired subsidiary, which was recordedmay also help to improve the overall gross margin and cash flow status of our core business through the expected synergies of combining operations of the new acquired subsidiary and our own. Except this, we do not have other material non-operational cash requirements within 12 months from the date hereof.
Currently, we do not have sufficient cash or commitments for financing to sustain our operation for the twelve months from the issuance date of these financial statements. We plan to optimize our internet resources cost investment strategy to improve the gross profit margin of our core business and to further strengthen the accounts receivables collection management and negotiate with major suppliers for more favorable payment terms, all of which will help to substantially increase the cash flows from operations. In addition, to further improve our liquidity, we plan to reduce our operating costs through optimizing the personnel structure among different offices, and reduce our office leasing spaces, if needed. Beginning in early 2022, we introduced our SaaS services to customers. Our SaaS services are provided based on technologies of our self-developed Blockchain Integrated Framework (“BIF”) platform. Our BIF platform enable our clients to utilize the BIF platform as aan enterprise management software to record, share and storage operating data on-chain, and/or to generate unique designed Non-fungible Token (“NFTs”) for their IPs and certificates. While the COVID-19 epidemic and the associated long-time quarantine and business shutdown measures throughout fiscal 2022 adversely affected our SaaS services promotion, and revenues from the new SaaS services business and our profitability have not met our expectations, we still expect these services business to generate positive cash flow and help to improve liquidity since they rely on technologies of our self-developed software platform, thus reducing the need for substantial cash outflow to other third-party service providers. In July 2023, we established a new majority-owned subsidiary, ChinaNet Yun Chuang, to expand into the livestream operation industry, with expectations of generating operating profits and additional cash inflow from financing activities duringproviding online-content production, distribution, promotion, and live streamer training and management services in the period, and we re-borrowed the loan in August 2017 for one-year until August 2018, which was recorded as cash provided by financing activities during the period.next 12 months.
ForIn addition, for the ninenext 12 months ended September 30, 2016,from the date hereof, we borrowed approximately US$0.46 millionanticipate to generate additional cash inflows and/or improve our liquidity through the following: (1) our current outstanding short-term bankworking capital loans provided to unrelated parties will mature within the next 12 months that we anticipate collecting these loan from oneprincipals and the related interest income within the next 12 months; (2) if at any time we anticipate insufficiency of the majorour working capital, we can apply for revolving credit facility from commercial banks in the PRC which was recorded as cash provided by financing activities duringto supplement our short-term liquidity deficit. We have not experienced any difficulties in obtaining such credit facility before, and this could result in fixed obligations and incremental cost of interest; (3) in consideration of the period.long-term cooperation history and good track records with our major suppliers, we plan to negotiate with our suppliers for more favorable payment terms; and (4) we plan to reduce our operating costs through optimizing the personnel structure among different offices and reduce our office leasing spaces, if needed. This may incur incremental costs related to employee layoff compensation and contract termination penalty.
Restricted Net Assets
As most ofIf we fail to achieve these goals, we may need additional financing to execute our operations are conducted through our PRC subsidiary and VIEs, our ability to pay dividendsbusiness plan. If additional financing is primarily dependent on receiving distributions of funds from our PRC subsidiary and VIEs. Relevant PRC statutory laws and regulations permit payments of dividends by our PRC subsidiary and VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations and after it has met the PRC requirements for appropriation to statutory reserves. Paid in capital of the PRC subsidiary and VIEs included in our consolidated net assets are also not distributable for dividend purposes.
In accordance with the PRC regulations on Enterprises with Foreign Investment, a WFOE establishedrequired, we cannot predict whether this additional financing will be in the PRC is required to provide certain statutory reserves, namely general reserve fund, the enterprise expansion fundform of equity, debt, or another form, and staff welfare and bonus fund which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A WFOE is required to allocate at least 10% of its annual after-tax profit to the general reserve until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and arewe may not distributable as cash dividends. Rise King WFOE is subject to the above mandated restrictions on distributable profits. Additionally, in accordance with the Company Law of the PRC, a domestic enterprise is required to provide a statutory common reserve of at least 10% of its annual after-tax profit until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to provide for a discretionary surplus reserve, at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. All of our PRC VIEs are subject to the above mandated restrictions on distributable profits.
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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 September 30, 2017 and December 31, 2016, net assets restricted in the aggregate, which includes paid-in capital and statutory reserve funds of our PRC subsidiary and VIEs that are included in our consolidated net assets, was approximately US$8.1 million and US$7.8 million, respectively.
The current PRC Enterprise Income Tax Law also imposed a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside China. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Holding companies in Hong Kong, for example, will be subject to a 5% rate.
The ability of our PRC subsidiaries to make dividends and other payments to us may also be restricted by changes in applicable foreign exchange and other laws and regulations.
Foreign currency exchange regulation in China is primarily governed by the following rules:
Currently, under the Administration Rules, Renminbi is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of China, unless the prior approval of the State Administration of Foreign Exchange (the “SAFE”) is obtained and prior registration with the SAFE is made. Foreign-invested enterprises like Rise King WFOE that need foreign exchange for the distribution of profits to its shareholders may effect payment from their foreign exchange accounts or purchase and pay foreign exchange rates at the designated foreign exchange banks to their foreign shareholders by producing board resolutions for such profit distribution. Based on their needs, foreign-invested enterprises are permitted to open foreign exchange settlement accounts for current account receipts and payments of foreign exchange along with specialized accounts for capital account receipts and payments of foreign exchange at certain designated foreign exchange banks.
Although the current Exchange Rules allow the convertibility of Chinese Renminbi into foreign currency for current account items, conversion of Chinese Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of SAFE, which is under the authority of the People’s Bank of China. These approvals, however, do not guarantee the availability of foreign currency conversion. We cannot be sure that it will be able to obtain all required conversion approvalsthe necessary additional capital on a timely basis, on acceptable terms, or at all. In the event that financing sources are not available, or that we are unsuccessful in increasing our gross profit margin and reducing operating losses, we may be unable to implement our current plans for expansion, repay debt obligations or respond to competitive pressures, any of which would have a material adverse effect on our operations or the Chinese regulatory authorities will not impose greater restrictions on the convertibilitybusiness, prospects, financial condition and results of Chinese Renminbi in the future. Currently, most of our retained earnings are generated in Renminbi. Any future restrictions on currency exchanges may limitoperations. These factors raise substantial doubt about our ability to use retained earnings generated in Renminbi to make dividends or other payments in U.S. dollars or fund possible business activities outside China.continue as a going concern within one year after the date that the financial statements are issued.
As of September 30, 2017 and December 31, 2016, there were approximately US$14.8 million and US$17.6 million retained earnings in the aggregate, respectively, which were generated by our PRC subsidiary and VIEs in Renminbi included in ourThe unaudited condensed consolidated net assets, aside from US$2.6 million and US$2.5 million of statutory reserve fundsfinancial statements as of September 30, 20172023 have been prepared under the assumption that we will continue as a going concern, which contemplates, among other things, the realization of assets and December 31, 2016, respectively, that may be affected by increased restrictions on currency exchangesthe satisfaction of liabilities in the future, and accordingly, may further limit our PRC subsidiary’s or VIEs’normal course of business over a reasonable period of time. Our ability to make dividends continue as a going concern is dependent upon our uncertain ability to increase gross profit margin and reduce operating loss from our core business and/or other payments in U.S. dollars to us, in addition to the approximately US$8.1 million and US$7.8 million of restricted net assetsobtain additional equity and/or debt financing. The accompanying financial statements as of September 30, 20172023 do not include any adjustments that might result from the outcome of these uncertainties. If we are unable to continue as a going concern, we may have to liquidate our assets and December 31, 2016, as discussed above.may receive less than the value at which those assets are carried on the financial statements.
In the long term, beyond the next 12 months, we plan to further broaden the application scenarios of our blockchain-based SaaS services to be offered to the customers, continue expanding our core Internet advertising and marketing business through acquisitions, and develop Internet advertising and marketing channels that target overseas Internet users. As such, we may decide to enhance our liquidity position or increase our cash reserve for future investments through additional equity financing in the U.S. capital market. This would result in further dilution to our shareholders. We cannot assure you that such financing will be available in amounts or on terms acceptable to us, or at all.
C. OFF-BALANCE SHEET ARRANGEMENTSOff-Balance Sheet Arrangements
None.
D.Disclosure of Contractual Obligations
In August 2022, we obtained a 9.9% equity interest in Guangdong Yong Fu Xiang Health Management Co., Ltd (“Yong Fu Xiang”), through subscription of a RMB6.73 million (approximately US$0.98 million) registered capital of the entity in cash, which amount was committed to be paid up before December 31, 2065.
In September 2022, we obtained a 9% equity interest in Guangzhou Yuan Qi Man Man Technology Co., Ltd. (“Yuan Qi Man Man"), through subscription of a RMB0.09 million (approximately US$0.01million) registered capital of the entity in cash, which amount was committed to be paid up before December 31, 2040.
In June 2023, we obtained a 9.9% equity interest in Wuhan Ju Liang, through subscription of a RMB0.99 million (approximately US$0.14 million) registered capital of the entity in cash, which amount was committed to be paid up before August 1, 2052.
In August 2023, the Company obtained a 9% equity interest in Fu Meng Hui through subscription of a RMB0.45 million (approximately US$0.06 million) registered capital of the entity in cash, which amount was committed to be paid up before December 31, 2050.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable to smaller reporting companies.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal accounting and financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended September 30, 2017,2023, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer have concluded that during the period covered by this report, the Company’s disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the third fiscal quarter of 20172023 covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
We are currently not a party to any legal or administrative proceedings and are not aware of any pending or threatened legal or administrative proceedings against us in all material aspects. We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.
This information has been omitted based on the Company’s status as a smaller reporting company.
Item 2.Unregistered Sales of Equity Securities, and Use of Proceeds, and Issuer Purchases of Equity Securities
None.
Item 3.Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.Not applicable.
None.During our fiscal quarter ended September 30, 2023, none of our directors or officers informed us of the adoption or termination of a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” as those terms are defined in Item 408(a) of Regulation S-K.
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The exhibits listed on the Exhibit Index below are provided as part of this report.
Exhibit No. | Document Description | |
101 | The following materials are filed herewith: (i) Inline XBRL Instance, (ii) Inline XBRL Taxonomy Extension Schema, (iii) Inline XBRL Taxonomy Extension Calculation, (iv) XBRL Taxonomy Extension Labels, (v) XBRL Taxonomy Extension Presentation, and (vi) Inline XBRL Taxonomy Extension Definition. | |
104 | Cover Page Interactive Data |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ZW DATA ACTION TECHNOLOGIES INC. | |||
Date: November | By: | /s/ Handong Cheng | |
Name: Handong Cheng | |||
Title: Chief Executive Officer
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