On December 18, 2020, the Holding Foreign Companies Accountable Act, or the HFCAA, has been 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 a bill known as 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 currently enacted in the HFCAA. On February 4, 2022, the U.S. House of Representatives passed the America Competes Act of 2022 which includes the exact same amendments as the bill passed by the Senate. The America Competes Act however includes a broader range of legislation not related to the HFCAA in response to the U.S. Innovation and Competition Act passed by the Senate in 2021. The U.S. House of Representatives and U.S. Senate will need to agree on amendments to these respective bills to align the legislation and pass their amended bills before the U.S. President can sign into law.
On December 16, 2021, the PCAOB issued the HFCAA Determination Report (the “PCAOB Determination List"), according to which our auditor, who is headquartered in Hong Kong Special Administrative Region of the PRC (“Hong Kong”), is subject to the determinations that the PCAOB is unable to inspect or investigate completely because of positions taken by the Chinese authorities. On May 13, 2022, following the filing of our annual report on Form 10-K on April 15, 2022, the SEC conclusively identified us as a Commission-Identified Issuer that engages an auditor that the PCAOB is unable to inspect or investigate completely.
Under the current law, delisting and prohibition from over-the-counter trading of our common stock in the U.S. could take place in 2024. If this happens, there is no certainty that we will be able to list our common stock on a non-U.S. exchange or that a market for our common stock will develop outside of the U.S. The delisting of our common stock, or the threat of their being delisted, may materially and adversely affect the value of your investment. The potential enactment of the Accelerating Holding Foreign Companies Accountable Act would decrease the number of non-inspection years from three years to two, thus reducing the time period before our common stock may be prohibited from over-the-counter trading or delisted. If this bill were enacted, our common stock could be delisted from the exchange and prohibited from over-the-counter trading in the U.S. in 2023.
We have been reaching out to U.S. audit firms which do not fall within the PCAOB Determined List. However, we understand that these audit firms must go through a “client acceptance procedure” before they are able to accept engagement. We will disclose the developments regarding the engagement of U.S. audit firms in subsequent quarterly reports and annual reports.
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. 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. And the PCAOB is now required to further re-access its determinations by the end of 2022. In mid-September 2022, the inspection team of the PCAOB arrived in Hong Kong to start an eight to ten-week onsite audit inspections and investigations of the selected audit firms headquartered in mainland China and/or Hong Kong, with the assistant of the officials from CSRC. Notwithstanding the foregoing, the final result remains uncertain. There is no assurance that the Statement of Protocol will be effective in accomplishing its stated goals.
* Liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets (Note 2).
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. | Organization and nature of operations |
ZW Data Action Technologies Inc. (f/k/a ChinaNet Online Holdings, Inc.) (the “Company”) was incorporated in the State of Texas in April 2006 and re-domiciled to become a Nevada corporation in October 2006. On June 26, 2009, the Company consummated a share exchange transaction with China Net Online Media Group Limited (the “Share Exchange”), a company organized under the laws of British Virgin Islands (“China Net BVI”). As a result of the Share Exchange, China Net BVI became a wholly owned subsidiary of the Company and the Company is now a holding company, which, through certain contractual arrangements with operating companies in the People’s Republic of China (the “PRC”), is engaged in providing Internet advertising, precision marketing, Ecommerce online to offline (O2O) advertising and marketing services as well as the related data and technical services to small and medium enterprises (SMEs) in the PRC.
2. | Variable interest entities |
The Company is not an operating company in China, but a Nevada holding company with no equity ownership in the VIEs. The Company primarily conducts its operations in China through its PRC subsidiaries, the VIEs, with which the Company has entered into contractual arrangements, and their subsidiaries in 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, 2022 and December 31, 2021, respectively:
| | September 30, 2022 | | | December 31, 2021 | |
| | US$(’000) | | | US$(’000) | |
| | (Unaudited) | | | | | |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 203 | | | $ | 181 | |
Accounts receivable, net | | | 2,999 | | | | 2,796 | |
Prepayment and deposit to suppliers | | | 3,382 | | | | 5,287 | |
Due from related parties | | | 15 | | | | 90 | |
Other current assets, net | | | 3 | | | | 4 | |
Total current assets | | | 6,602 | | | | 8,358 | |
| | | | | | | | |
Long-term investments | | | 445 | | | | 496 | |
Operating lease right-of-use assets | | | 199 | | | | 21 | |
Property and equipment, net | | | 121 | | | | 168 | |
Deferred tax assets, net | | | 398 | | | | 441 | |
Total Assets | | $ | 7,765 | | | $ | 9,484 | |
| | | | | | | | |
Liabilities | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 276 | | | $ | 1,119 | |
Advance from customers | | | 858 | | | | 1,113 | |
Accrued payroll and other accruals | | | 61 | | | | 83 | |
Taxes payable | | | 2,562 | | | | 2,849 | |
Operating lease liabilities | | | 198 | | | | 9 | |
Lease payment liability related to short-term leases | | | 99 | | | | 110 | |
Other current liabilities | | | 109 | | | | 53 | |
Total current liabilities | | | 4,163 | | | | 5,336 | |
| | | | | | | | |
Operating lease liabilities-Non current | | | - | | | | 10 | |
Total Liabilities | | $ | 4,163 | | | $ | 5,346 | |
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)/income for the nine and three months ended September 30, 2022 and 2021, respectively:
| | Nine Months Ended September 30, | | | Three Months Ended September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | US$(’000) | | | US$(’000) | | | US$(’000) | | | US$(’000) | |
| | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | |
| | | | | | | | | | | | | | | | |
Revenues | | $ | 20,829 | | | $ | 30,932 | | | $ | 6,967 | | | $ | 10,314 | |
Cost of revenues | | | (21,811 | ) | | | (34,614 | ) | | | (7,267 | ) | | | (11,482 | ) |
Total operating expenses | | | (1,539 | ) | | | (1,184 | ) | | | (691 | ) | | | (472 | ) |
Net loss before allocation to noncontrolling interests | | | (2,551 | ) | | | (5,062 | ) | | | (998 | ) | | | (1,655 | ) |
3. | Liquidity and Capital Resources |
For the nine months ended September 30, 2022, the Company incurred a loss from operations of US$6.10 million and a net operating cash outflow of US$4.41 million. As of September 30, 2022, the Company had cash and cash equivalents of US$2.15 million and working capital of US$7.82 million.
The Company’s cash and cash equivalents balance was relatively low as of September 30, 2022 because that the Company is normally required to pay more advance payments to its major suppliers, i.e., the key search engines as a buffer before the National Holiday Golden Week of the PRC (the first week of October), to ensure adequate balances in its accounts for the consumption during the holiday. After the holiday, along with the subsequent collection of accounts receivable for services provided and additional advance payments from the customers, the Company’s cash and cash equivalents balance as of October 31, 2022 increased by approximately 13%, compared with that as of September 30, 2022.
The Company experienced temporary decreases in revenue and gross profit, and did not generate positive cash flow from its existing core business, i.e., Internet advertising and related data service business for the nine months ended September 30, 2022. This was primarily attributable to the repeated severe COVID-19 cases rebound in many provinces in China during the first nine months of fiscal 2022, which resulted in regional large-scale quarantine and business shutdown, and further resulted in pandemic fears and in return severely affected the SMEs owners’ confidence to further expand their businesses. Thus, the Company has been relying on proceeds generated from financing activities for its liquidity in fiscal 2022.
In order to improve operation performance, the Company started to introduce its new Software-as-a-Service (“SaaS”) services to customers in 2022. The Company’s SaaS services are provided based on technologies of its self-developed Blockchain Integrated Framework (“BIF”) platform. The Company entered into several framework contracts and memorandums with clients, pursuant to which the Company would provide SaaS subscription services via the platform on a monthly, quarterly or annual basis in early 2022. The subscriptions would enable 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. However, due to unexpected long time quarantine and business shutdown measures for COVID-19 epidemic control incurred in the first nine months of 2022, especially in the second fiscal quarter of 2022, some of these agreements were cancelled or delayed by customers. Although revenues from the new SaaS services business and its profitability have not met the Company’s expectations, it is expected to bring the Company positive cash flow, as these services are provided based on technologies of the Company’s self-developed software platform, which does not need any further material cash outflow to other third-party service providers.
In addition, to further improve its liquidity, the Company plans to negotiate with its major suppliers for more favorable payment terms, reduce its operating costs through optimizing the personnel structure among different offices, and reduce its office leasing spaces, if needed. The Company also intends to obtain revolving credit facilities to supplement its short-term working capital, as needed, from the commercial banks in the PRC. The Company has not experienced any difficulties in obtaining such credit facility before.
Based on the above discussion, the Company believes that its current cash and cash equivalents, its anticipated new cash flows from operations and financing activities, and other liquidity improving measures will ensure the Company has sufficient cash to meet its obligations as they become due with the next 12 months from the date hereof.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. | Summary of significant accounting policies |
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, 2022 and for the nine and three months ended September 30, 2022 and 2021 have been prepared 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 complete 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 Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, previously filed with the SEC (the “2021 Form 10-K”) on April 15, 2022.
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, 2022, its condensed consolidated results of operations for the nine and three months ended September 30, 2022 and 2021, and its condensed consolidated cash flows for the nine months ended September 30, 2022 and 2021, 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.
b) | Principles of consolidation |
The unaudited condensed consolidated interim financial statements include the accounts of all the subsidiaries and VIEs of the Company. All transactions and balances between the Company and its subsidiaries and VIEs have been eliminated upon consolidation.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of these consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. The Company continually evaluates these estimates and assumptions based on the most recently available information, historical experience and various other assumptions that the Company believes to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.
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, 2022 | | | December 31, 2021 | |
| | | | | | | | |
Balance sheet items, except for equity accounts | | | 7.0998 | | | | 6.3757 | |
| | | | | | | | |
| | Nine Months Ended September 30, | |
| | 2022 | | | 2021 | |
| | | | | | | | |
Items in the statements of operations and comprehensive loss | | | 6.6068 | | | | 6.4714 | |
| | | | | | | | |
| | Three Months Ended September 30, | |
| | 2022 | | | 2021 | |
| | | | | | | | |
Items in the statements of operations and comprehensive loss | | | 6.8287 | | | | 6.4707 | |
No representation is made that the RMB amounts could have been, or could be converted into US$ at the above rates.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
e) | Cash and cash equivalents |
Cash and cash equivalents consist of cash on hand and bank deposits, which are unrestricted as to withdrawal and use. The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.
The Company’s cash are held in accounts at major financial institutions located in the U.S. and the PRC. The Company believes that these financial institutions are of high credit quality, all of which have participated in the federal/national deposit insurance scheme of their respective jurisdiction. The Company’s cash held in accounts at the financial institutions in the U.S. are insured by the Federal Deposit Insurance Corporation (FDIC) for up to US$0.25 million per depositor per insured bank and the cash held in accounts at the financial institutions in the PRC are insured by the Deposit Insurance Capital Corporation (DICC), a wholly-owned subsidiary of the People’s Bank of China, for up to RMB0.50 million per depositor per insured bank. The Company, its subsidiaries, VIEs and VIEs’ subsidiaries have not experienced any losses in such accounts in the U.S. and the PRC and do not believe its cash is exposed to any significant risk.
f) | Fair value measurement |
Liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2022 and December 31, 2021 are as follows:
| | | | | | Fair value measurement at reporting date using | |
| | As of September 30, 2022 | | | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
| | US$(’000) | | | US$(’000) | | | US$(’000) | | | US$(’000) | |
| | (Unaudited) | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Warrant liabilities (Note 16) | | | 1,280 | | | | - | | | | - | | | | 1,280 | |
| | | | | | Fair value measurement at reporting date using | |
| | As of December 31, 2021 | | | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
| | US$(’000) | | | US$(’000) | | | US$(’000) | | | US$(’000) | |
| | | | | | | | | | | | | | | | |
Warrant liabilities (Note 16) | | | 2,039 | | | | - | | | | - | | | | 2,039 | |
The following table present the Company’s revenues disaggregated by products and services:
| | Nine Months Ended September 30, | | | Three Months Ended September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | US$(’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 | | | 18,605 | | | | 28,613 | | | | 6,236 | | | | 9,648 | |
--online advertising placements | | | 3,208 | | | | 5,720 | | | | 980 | | | | 2,125 | |
Ecommerce O2O advertising and marketing services | | | - | | | | 514 | | | | - | | | | 127 | |
Total revenues | | $ | 21,813 | | | $ | 34,847 | | | $ | 7,216 | | | $ | 11,900 | |
For the nine and three months ended September 30, 2022 and 2021, all the revenues were recognized over time, as the customers simultaneously received and consumed the benefits provided by the Company’s performance as the Company performed.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Contract costs
For the nine and three months ended September 30, 2022 and 2021, the Company did not have any significant incremental costs of obtaining contracts with customers incurred and/or costs incurred in fulfilling contracts with customers, which shall be recognized as an asset and amortized to expenses in a pattern that matches the timing of the revenue recognition of the related contract.
Contract liabilities
The table below summarized the movement of the Company’s contract liabilities for the nine months ended September 30, 2022:
| | Contract liabilities | |
| | US$(’000) | |
| | | | |
Balance as of January 1, 2022 | | | 1,245 | |
Exchange translation adjustment | | | (127 | ) |
Revenue recognized from beginning contract liability balances | | | (1,039 | ) |
Advances received from customers related to unsatisfied performance obligations | | | 872 | |
Balance as of September 30, 2022(Unaudited) | | $ | 951 | |
Advance from customers related to unsatisfied performance obligations are generally refundable. Refund of advance from customers were insignificant for the nine and three months ended September 30, 2022 and 2021.
For the nine and three months ended September 30, 2022 and 2021, there is no revenue recognized from performance obligations that were satisfied in prior periods.
h) | Research and development expenses |
The Company accounts for expenses for the enhancement, maintenance and technical support to the Company’s Internet platforms and intellectual properties that are used in its daily operations in research and development expenses. Research and development costs are charged to expenses when incurred. Expenses for research and development for the nine months ended September 30, 2022 and 2021 were approximately US$0.18 million and US$0.25 million, respectively. Expenses for research and development for the three months ended September 30, 2022 and 2021 were approximately US$0.06 million and US$0.09 million, respectively.
As of September 30, 2022, operating lease right-of-use assets and total operating lease liabilities recognized was approximately US$1.84 million and US$1.95 million, respectively.
Maturity of operating lease liabilities
| | Operating leases | |
| | US$(’000) | |
| | (Unaudited) | |
| | | | |
Three months ending December 31, 2022 | | | 119 | |
Year ending December 31, | | | | |
-2023 | | | 448 | |
-2024 | | | 307 | |
-2025 | | | 322 | |
-2026 | | | 338 | |
-2027 | | | 355 | |
-thereafter | | | 436 | |
Total undiscounted lease payments | | | 2,325 | |
Less: imputed interest | | | (379 | ) |
Total operating lease liabilities as of September 30, 2022 | | $ | 1,946 | |
| | | | |
Including: | | | | |
Operating lease liabilities | | | 389 | |
Operating lease liabilities-Non current | | | 1,557 | |
| | $ | 1,946 | |
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Operating lease expenses:
| | Nine Months Ended September 30, | | | Three Months Ended September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | US$(’000) | | | US$(’000) | | | US$(’000) | | | US$(’000) | |
| | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | |
| | | | | | | | | | | | | | | | |
Long-term operating lease contracts | | | 329 | | | | 212 | | | | 136 | | | | 88 | |
Short-term operating lease contracts | | | 39 | | | | 45 | | | | 10 | | | | 15 | |
Total | | $ | 368 | | | $ | 257 | | | $ | 146 | | | $ | 103 | |
Supplemental information related to operating leases:
| | Nine Months Ended September 30, 2022 | |
| | (Unaudited) | |
| | | | |
Operating cash flows used for operating leases (US$’000) | | | 300 | |
Right-of-use assets obtained in exchange for new lease liabilities (US$’000) | | | 266 | |
Weighted-average remaining lease term (years) | | | 5.87 | |
Weighted-average discount rate | | | 6 | % |
5. | Accounts receivable, net |
| | September 30, 2021 | | | December 31, 2021 | |
| | US$(’000) | | | US$(’000) | |
| | (Unaudited) | | | | | |
| | | | | | | | |
Accounts receivable | | | 5,336 | | | | 5,675 | |
Allowance for doubtful accounts | | | (2,337 | ) | | | (2,236 | ) |
Accounts receivable, net | | | 2,999 | | | | 3,439 | |
All of the accounts receivable are non-interest bearing. Based on the assessment of the collectability of the accounts receivable as of September 30, 2022 and December 31, 2021, the Company provided approximately US$2.34 million and US$2.24 million allowance for doubtful accounts, respectively, which were primarily related to the accounts receivable of the Company’s Internet advertising and related services segment with an aging over six months. The Company evaluates its accounts receivable with an aging over six months and determines the allowance based on aging data, historical collection experience, customer specific facts and economic conditions. For the nine and three months ended September 30, 2022, the Company provided approximately US$0.33 million and US$nil allowance for doubtful, respectively. For the nine and three months ended September 30, 2021, no allowance for doubtful accounts was provided.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. | Prepayments and deposit to suppliers |
| | September 30, 2022 | | | December 31, 2021 | |
| | US$(’000) | | | US$(’000) | |
| | (Unaudited) | | | | | |
| | | | | | | | |
Deposits to advertising resources providers | | | 1,066 | | | | 934 | |
Prepayments to advertising resources providers | | | 5,019 | | | | 5,185 | |
Deposit and prepayment for other investing contracts | | | 1,000 | | | | 1,000 | |
Other deposits and prepayments | | | 508 | | | | 440 | |
| | | 7,593 | | | | 7,559 | |
As of September 30, 2022, deposit and prepayment for other investing contracts represented a US$1.0 million refundable deposit paid for a potential acquisition transaction, which will be refunded if no definitive agreement is reached among the parties before the expected closing date, i.e., December 31, 2022. As of the date hereof, the Company is in the process of the due diligence process of the target company.
7. | Due from related parties |
| | September 30, 2022 | | | December 31, 2021 | |
| | US$(’000) | | | US$(’000) | |
| | (Unaudited) | | | | | |
| | | | | | | | |
Zhongwang Xiyue Technology (Beijing) Co., Ltd. (“Zhongwang Xiyue”) | | | 1 | | | | 62 | |
Guangzhou Gong Xiang Technology Co., Ltd. (“Gong Xiang Technology”) | | | 14 | | | | 28 | |
Due from related parties | | | 15 | | | | 90 | |
Related parties of the Company represented the Company’s direct or indirect unconsolidated investee companies and entities that the Company’s officers or directors can exercise significant influence.
As of September 30, 2022 and December 31, 2021, due from Zhongwang Xiyue represented the outstanding receivable for advertising and marketing service that the Company provided to this related party in its normal course of business, which is on the same terms as those provided to its unrelated clients.
As of September 30, 2022 and December 31, 2021, due from Gong Xiang Technology was a short-term working capital loan provided to this investee entity, which is expected to be fully repaid to the Company by December 31, 2022.
| | September 30, 2022 | | | December 31, 2021 | |
| | US$(’000) | | | US$(’000) | |
| | (Unaudited) | | | | | |
| | | | | | | | |
Short-term loans to unrelated parties | | | 2,197 | | | | 1,646 | |
Short-term loans interest receivables | | | 33 | | | | - | |
Staff advances for business operations | | | 10 | | | | 11 | |
Total other current assets | | | 2,240 | | | | 1,657 | |
Allowance for doubtful accounts | | | (617 | ) | | | - | |
Other current assets, net | | | 1,623 | | | | 1,657 | |
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In fiscal 2022, the Company provided unsecured, interest-bearing short-term working capital loans to two unrelated parties, which were set forth as below. These short-term working capital loans were recorded as other current assets.
On January 5, 2022, the Company provided a short-term working capital loan of US$2.5 million to an unrelated party, which would mature on May 5, 2022. The loan was unsecured and borne a fixed annualized interest rate of 7.5%. On April 25, 2022, the Company and the related party entered into a supplementary contract, based on which, 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, 2022, based on the loan principal of US$2.5 million. In addition, the Company agreed to extend the term of the remaining loan principal of US$1.48 million to October 31, 2022 with a revised fixed annualized interest rate of 5%. On October 31, 2022, the Company further extended the term of this loan to April 30, 2023. In October 2022, the Company received the loan interest of approximately US$0.03 million for the period from May 1, 2022 through September 30, 2022.
On April 21, 2022, the Company provided a short-term working capital loan of US$0.10 million to another unrelated party, which will mature on December 31, 2022. The loan is unsecured and bears a fixed annualized interest rate of 5%. The loan and the related loan interest is required to be repaid in lump sum at maturity on December 31, 2022.
As of September 30, 2022, other current assets also included a working capital loan of US$1.65 million 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 working capital 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 and defaults on the loan balance of US$0.62 million. The Company attempted to collect the outstanding loan balance. As of June 30, 2022, the Company fully allowanced the outstanding loan balance of US$0.62 million based on the Company’s assessment of the collectability of this outstanding balance. The Company intends to take further actions to safeguard its rights against the default after the Covid-19 quarantine policies between mainland China and Hong Kong were relieved, including but not limited to, sending legal letters to Digital Sun, negotiating the repayment plan in person and filing a lawsuit against Digital Sun after all other means of collection have been exhausted.
| | Amount | |
| | US$(’000) | |
| | | | |
Balance as of January 1, 2022 | | | 2,280 | |
Exchange translation adjustment | | | (131 | ) |
Cash investments during the year | | | - | |
Disposed during the year | | | - | |
Balance as of September 30, 2022 (Unaudited) | | | 2,149 | |
As of September 30, 2022, except for long-term investments which were fully impaired, the Company beneficially owned a 15.38%, 10%, 9.09%, 15%, 17% and 19% equity interest in each New Business Holdings Limited (“New Business”), Guang Dong WeFriend Co., Ltd. (“Guangdong WeFriend”), Shenzhen Global Best Products Import & Export Co., Ltd. (“Global Best Products”), Guangzhou Gong Xiang Technology Co., Ltd. (“Gong Xiang Technology”), Xiao Peng Education Technology (Hubei) Co., Ltd. (“Xiao Peng Education”) and Business Opportunity Chain (Guangzhou) Technology Co., Ltd. (“Business Opportunity Chain Guangzhou”), respectively.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company measures these investments which do 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 the identical or a similar investment of the Company.
10. | Property and equipment, net |
| | September 30, 2022 | | | December 31, 2021 | |
| | US$(’000) | | | US$(’000) | |
| | (Unaudited) | | | | | |
| | | | | | | | |
Vehicles | | | 838 | | | | 933 | |
Office equipment | | | 848 | | | | 944 | |
Electronic devices | | | 565 | | | | 629 | |
Leasehold improvement | | | 181 | | | | 202 | |
Property and equipment, cost | | | 2,432 | | | | 2,708 | |
Less: accumulated depreciation | | | (2,165 | ) | | | (2,333 | ) |
Property and equipment, net | | | 267 | | | | 375 | |
Depreciation expenses for the nine months ended September 30, 2022 and 2021 were approximately US$0.08 million and US$0.009 million, respectively. Depreciation expenses for the three months ended September 30, 2022 and 2021 were approximately US$0.03 million and US$0.005 million, respectively.
11. | Intangible assets, net |
| | As of September 30, 2022 (Unaudited) | |
Items | | Gross Carrying Value | | | Accumulated Amortization | | | Impairment | | | Net Carrying Value | |
| | US$(’000) | | | US$(’000) | | | US$(’000) | | | US$(’000) | |
Intangible assets subject to amortization: | | | | | | | | | | | | | | | | |
--10 years life: | | | | | | | | | | | | | | | | |
Cloud compute software technology | | | 1,307 | | | | (907 | ) | | | (400 | ) | | | - | |
Licensed products use right | | | 1,200 | | | | (341 | ) | | | - | | | | 859 | |
| | | | | | | | | | | | | | | | |
--5 years life: | | | | | | | | | | | | | | | | |
Internet Ad tracking system | | | 1,153 | | | | (347 | ) | | | - | | | | 806 | |
Live streaming technology | | | 1,500 | | | | (550 | ) | | | - | | | | 950 | |
| | | | | | | | | | | | | | | | |
--3 years life: | | | | | | | | | | | | | | | | |
Blockchain Integrated Framework | | | 4,038 | | | | (1,010 | ) | | | - | | | | 3,028 | |
Bo!News application | | | 338 | | | | (85 | ) | | | - | | | | 253 | |
Other computer software | | | 110 | | | | (110 | ) | | | - | | | | - | |
Total | | $ | 9,646 | | | $ | (3,350 | ) | | $ | (400 | ) | | $ | 5,896 | |
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| | As of December 31, 2021 | |
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 | | | 1,456 | | | | (1,010 | ) | | | (446 | ) | | | - | |
Licensed products use right | | | 1,205 | | | | (255 | ) | | | - | | | | 950 | |
| | | | | | | | | | | | | | | | |
--5 years life: | | | | | | | | | | | | | | | | |
Internet Ad tracking system | | | 1,158 | | | | (174 | ) | | | - | | | | 984 | |
Live streaming technology | | | 1,500 | | | | (325 | ) | | | - | | | | 1,175 | |
| | | | | | | | | | | | | | | | |
--3 years life: | | | | | | | | | | | | | | | | |
Blockchain Integrated Framework | | | 4,038 | | | | - | | | | - | | | | 4,038 | |
Bo!News application | | | 376 | | | | - | | | | - | | | | 376 | |
Other computer software | | | 123 | | | | (123 | ) | | | - | | | | - | |
Total | | $ | 9,856 | | | $ | (1,887 | ) | | $ | (446 | ) | | $ | 7,523 | |
Amortization expenses for the nine months ended September 30, 2022 and 2021 were approximately US$1.59 million and US$0.44 million, respectively. Amortization expenses for the three months ended September 30, 2022 and 2021 were approximately US$0.53 million and US$0.16 million, respectively.
Based on the adjusted carrying value of the finite-lived intangible assets after the deduction of the impairment losses, which has a weighted average remaining useful life of 3.27 years as of September 30, 2022, and assuming no further subsequent impairment of the underlying intangible assets, the estimated future amortization expenses is approximately US$0.53 million for the year ending December 31, 2022, approximately US$2.11 million each year for the year ending December 31, 2023 and 2024, approximately US$0.63 million for the year ending December 31, 2025, approximately US$0.18 million for the year ending December 31, 2026, and approximately US$0.12 million for the year ending December 31, 2027.
12. | Long-term deposits and prepayments |
As of September 30, 2022 and December 31, 2021, long-term deposits and prepayments represented the Company’s operating deposits and prepayments that were not expected to be refunded or consumed within one year of the respective reporting date.
13. | Accrued payroll and other accruals |
| | September 30, 2022 | | | December 31, 2021 | |
| | US$(’000) | | | US$(’000) | |
| | (Unaudited) | | | | | |
| | | | | | | | |
Accrued payroll and staff welfare | | | 115 | | | | 142 | |
Accrued operating expenses | | | 55 | | | | 247 | |
| | | 170 | | | | 389 | |
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of September 30, 2022 and December 31, 2021, taxes payable consists of:
| | September 30, 2022 | | | December 31, 2021 | |
| | US$(’000) | | | US$(’000) | |
| | (Unaudited) | | | | | |
| | | | | | | | |
Turnover tax and surcharge payable | | | 1,273 | | | | 1,414 | |
Enterprise income tax payable | | | 1,926 | | | | 2,120 | |
Total taxes payable | | | 3,199 | | | | 3,534 | |
For the nine and three months ended September 30, 2022 and 2021, the Company’s income tax benefit/(expenses) consisted of:
| | Nine Months Ended September 30, | | | Three Months Ended September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | US$(’000) | | | US$(’000) | | | US$(’000) | | | US$(’000) | |
| | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | |
| | | | | | | | | | | | | | | | |
Current | | | - | | | | - | | | | - | | | | - | |
Deferred | | | 2 | | | | 171 | | | | (2 | ) | | | 131 | |
Income tax benefit/(expenses) | | | 2 | | | | 171 | | | | (2 | ) | | | 131 | |
The Company’s deferred tax assets as of September 30, 2022 and December 31, 2021 were as follows:
| | September 30, 2022 | | | December 31, 2021 | |
| | US$(’000) | | | US$(’000) | |
| | (Unaudited) | | | | | |
| | | | | | | | |
Tax effect of net operating losses carried forward | | | 12,618 | | | | 12,130 | |
Operating lease cost | | | 28 | | | | 23 | |
Bad debts provision | | | 658 | | | | 559 | |
Valuation allowance | | | (12,906 | ) | | | (12,271 | ) |
Deferred tax assets, net | | | 398 | | | | 441 | |
The U.S. holding company has incurred aggregate net operating losses (“NOLs”) of approximately US$32.4 million and US$31.0 million as of September 30, 2022 and December 31, 2021, respectively. The NOLs carryforwards as of December 31, 2017 gradually expire over time, the last of which expires in 2037. 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, 2027. The Company maintains a full valuation allowance against its net U.S. deferred tax assets, since due to uncertainties surrounding future utilization, the Company estimates there will not be sufficient future earnings to utilize its U.S. deferred tax assets.
The NOLs carried forward incurred by the Company’s PRC subsidiaries and VIEs were approximately US$20.9 million and US$18.3 million as of September 30, 2022 and December 31, 2021, respectively. The losses carryforwards gradually expire over time, the last of which expires in 2027. The related deferred tax assets were calculated based on the respective NOLs 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$12.9 million and US$12.3 million valuation allowance as of September 30, 2022 and December 31, 2021, respectively, because it is considered more likely than not that a portion of the deferred tax assets will not be realized through sufficient future earnings of the entities to which the operating losses related.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine and three months ended September 30, 2022, the Company recorded approximately US$1.18 million and US$0.36 million deferred tax valuation allowance, respectively. For the nine and three months ended September 30, 2021, the Company recorded approximately US$2.15 million and US$0.19 million deferred tax valuation allowance, respectively.
15. | Long-term borrowing from a related party |
Long-term borrowing from a related party is a non-interest bearing loan from a related parity of the Company relating to the original paid-in capital contribution in the Company’s wholly-owned subsidiary Rise King Century Technology Development (Beijing) Co., Ltd. (“Rise King WFOE”), which is not expected to be repaid within one year.
16. | 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, 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 | |
| | 2021 Investors Warrants | | | 2021 Placement Agent Warrants | |
| | September 30, 2021 | | | June 30, 2021 | | | February 18, 2021* | | | September 30, 2021 | | | June 30, 2021 | | | February 18, 2021* | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Stock price | | $ | 1.26 | | | $ | 2.00 | | | $ | 4.48 | | | $ | 1.26 | | | $ | 2.00 | | | $ | 4.48 | |
Years to maturity | | | 2.88 | | | | 3.14 | | | | 3.50 | | | | 2.88 | | | | 3.14 | | | | 3.50 | |
Risk-free interest rate | | | 0.50 | % | | | 0.48 | % | | | 0.26 | % | | | 0.50 | % | | | 0.48 | % | | | 0.26 | % |
Dividend yield | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Expected volatility | | | 115 | % | | | 114 | % | | | 168 | % | | | 115 | % | | | 114 | % | | | 168 | % |
Exercise Price | | $ | 3.59 | | | $ | 3.59 | | | $ | 3.59 | | | $ | 4.4875 | | | $ | 4.4875 | | | $ | 4.4875 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of the warrant | | $ | 0.70 | | | $ | 1.25 | | | $ | 4.02 | | | $ | 0.65 | | | $ | 1.18 | | | $ | 3.96 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Warrant Liabilities (US$’000) | | $ | 1,824 | | | $ | 3,257 | | | $ | 10,476 | | | $ | 237 | | | $ | 431 | | | $ | 1,445 | |
* Closing date of the 2021 Financing.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Warrants issued in the 2020 Financing:
| | 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 | |
| | 2020 Investors Warrants | | | 2020 Placement Agent Warrants | |
| | September 30, 2021 | | | June 30, 2021 | | | December 31, 2020 | | | September 30, 2021 | | | June 30, 2021 | | | December 31, 2020 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Stock price | | $ | 1.26 | | | $ | 2.00 | | | $ | 1.35 | | | $ | 1.26 | | | $ | 2.00 | | | $ | 1.35 | |
Years to maturity | | | 2.20 | | | | 2.45 | | | | 2.95 | | | | 2.20 | | | | 2.45 | | | | 2.95 | |
Risk-free interest rate | | | 0.34 | % | | | 0.34 | % | | | 0.17 | % | | | 0.34 | % | | | 0.34 | % | | | 0.17 | % |
Dividend yield | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Expected volatility | | | 122 | % | | | 120 | % | | | 102 | % | | | 122 | % | | | 120 | % | | | 102 | % |
Exercise Price | | $ | 2.03 | | | $ | 2.03 | | | $ | 2.03 | | | $ | 2.03 | | | $ | 2.03 | | | $ | 2.03 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of the warrant | | $ | 0.80 | | | $ | 1.40 | | | $ | 0.74 | | | $ | 0.80 | | | $ | 1.40 | | | $ | 0.74 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Warrant Liabilities (US$’000) | | $ | 1,383 | | | $ | 2,420 | | | $ | 1,279 | | | $ | 242 | | | $ | 423 | | | $ | 224 | |
Warrants issued in the 2018 Financing:
| | 2018 Placement Agent Warrants | |
| | July 2, 2021* | | | June 30, 2021 | | | December 31, 2020 | |
| | | | | | | | | | | | |
Stock price | | $ | 1.94 | | | $ | 2.00 | | | $ | 1.35 | |
Years to maturity | | | 0.04 | | | | 0.05 | | | | 0.05 | |
Risk-free interest rate | | | 0.05 | % | | | 0.04 | % | | | 0.08 | % |
Dividend yield | | | - | | | | - | | | | - | |
Expected volatility | | | 75 | % | | | 74 | % | | | 59 | % |
Exercise Price | | $ | 1.4927 | | | $ | 1.4927 | | | $ | 1.4927 | |
| | | | | | | | | | | | |
Fair value of the warrant | | $ | 0.45 | | | $ | 0.51 | | | $ | 0.02 | |
| | | | | | | | | | | | |
Warrant liabilities (US$’000) | | $ | 58 | | | $ | 66 | | | $ | 2 | |
* The investor warrants issued in the 2018 Financing expired in July 2020. The placement agent warrants issued in the 2018 Financing were cashless exercised on July 2, 2021.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Changes in fair value of warrant liabilities
Nine and Three Months Ended September 30, 2022 (Unaudited)
| | As of September 30, 2022 | | | As of June 30, 2022 | | | As of December 31, 2021 | | | Change in Fair Value (gain)/loss | |
| | | | | | | | Nine Months Ended September 30, 2022 | | | Three Months Ended September 30, 2022 | |
| | (US$’000) | | | (US$’000) | | | (US$’000) | | | (US$’000) | | | (US$’000) | |
| | | | | | | | | | | | | | | | | | | | |
Warrants issued in the 2021 Financing: | |
--Investor Warrants | | | 782 | | | | 167 | | | | 964 | | | | (182 | ) | | | 615 | |
--Placement Agent Warrants | | | 106 | | | | 22 | | | | 132 | | | | (26 | ) | | | 84 | |
Warrants issued in the 2020 Financing: | | | | | | | | | | | | | | | | | |
--Investor Warrants | | | 328 | | | | 57 | | | | 795 | | | | (467 | ) | | | 271 | |
--Placement Agent Warrants | | | 64 | | | | 11 | | | | 148 | | | | (84 | ) | | | 53 | |
Warrant Liabilities | | | 1,280 | | | | 257 | | | | 2,039 | | | | (759 | ) | | | 1,023 | |
Nine and Three Months Ended September 30, 2021 (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | Change in Fair Value (gain)/loss | |
| | As of September 30, 2021 | | | As of July 2, 2021 | | | As of June 30, 2021 | | | As of February 18, 2021 | | | As of December 31, 2020 | | | Nine Months Ended September 30, 2021 | | | Three Months Ended September 30, 2021 | |
| | (US$’000) | | | (US$’000) | | | (US$’000) | | | (US$’000) | | | (US$’000) | | | (US$’000) | | | (US$’000) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Warrants issued in the 2021 Financing: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
--Investor Warrants | | | 1,824 | | | | * | | | | 3,257 | | | | 10,476 | | | | * | | | | (8,652 | ) | | | (1,433 | ) |
--Placement Agent Warrants | | | 237 | | | | * | | | | 431 | | | | 1,445 | | | | * | | | | (1,208 | ) | | | (194 | ) |
Warrants issued in the 2020 Financing: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
--Investor Warrants | | | 1,383 | | | | * | | | | 2,420 | | | | * | | | | 1,279 | | | | 104 | | | | (1,037 | ) |
--Placement Agent Warrants | | | 242 | | | | * | | | | 423 | | | | * | | | | 224 | | | | 18 | | | | (181 | ) |
Warrants issued in the 2018 Financing: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
--Placement Agent Warrants | | | - | | | | 58 | | | | 66 | | | | * | | | | 2 | | | | 56 | | | | (8 | ) |
| | | 3,686 | | | | 58 | | | | 6,597 | | | | 11,921 | | | | 1,505 | | | | (9,682 | ) | | | (2,853 | ) |
* Not applicable.
Warrants issued and outstanding as of September 30, 2022 and their movements during the nine months then ended are as follows:
| | Warrant Outstanding | | | Warrant Exercisable | |
| | Number of underlying shares | | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | | | Number of underlying shares | | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, January 1, 2022 | | | 5,001,705 | | | | 2.36 | | | $ | 3.02 | | | | 5,001,705 | | | | 2.36 | | | $ | 3.02 | |
Granted/Vested | | | - | | | | | | | | | | | | - | | | | | | | | | |
Exercised | | | - | | | | | | | | | | | | - | | | | | | | | | |
Balance, September 30, 2022 (Unaudited) | | | 5,001,705 | | | | 1.61 | | | $ | 3.02 | | | | 5,001,705 | | | | 1.61 | | | $ | 3.02 | |
17. | Restricted net assets |
The Company is a Nevada holding company with operations primarily conducted in China through its PRC subsidiaries, the consolidated VIEs and VIEs’ subsidiaries. The Company’s ability to pay dividends to U.S. investors may depend on receiving distributions from its PRC subsidiaries and settlement of the amounts owed under the VIE agreements from the consolidated VIEs. Any limitation on the ability of the Company’s PRC subsidiaries 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.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The PRC regulations currently permit payment of dividends only out of accumulated profits, as determined in accordance with PRC accounting standards and regulations. The Company’s 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, the Company’s PRC subsidiaries, the consolidated VIEs and their subsidiaries are restricted in their ability to transfer a portion of their net assets to the Nevada holding company. As of September 30, 2022 and December 31, 2021, net assets restricted in the aggregate, which include paid-in capital and statutory reserve funds of the Company’s PRC subsidiaries, the consolidated VIEs and their subsidiaries that are included in the Company’s consolidated net assets, were approximately US$15.2 million and US$13.2 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.
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”. The Company owns its PRC subsidiaries through CNET Online Technology Co. Limited (“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 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 subsidiaries to pay dividends/make distributions to the 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 then restrict the ability of the Company’s PRC subsidiaries to remit sufficient foreign currency to the Nevada holding company for the holding company 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, the Company’s PRC subsidiaries may purchase foreign currency for settlement of current account transactions, including payment of dividends to the Nevada holding company, 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 the Company’s 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 the Company’s ability to utilize revenue generated in Renminbi to pay 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 relevant Chinese governmental authorities. This could affect the Company’s ability to obtain foreign currency through debt or equity financing for its PRC subsidiaries.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
To date, none of the 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 the Nevada holding company has never declared or paid any cash dividends to U.S. investors.
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 foreseeable 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 business.
18. | 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$0.17 million for both the nine months ended September 30, 2022 and 2021. The total amounts for such employee benefits were approximately US$0.05 million and US$0.07 million for the three months ended September 30, 2022 and 2021, respectively.
19. | Concentration of risk |
Credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, and deposits and loans to unrelated parties. As of September 30, 2022, 20% of the Company’s cash and cash equivalents were held by major financial institutions located in China, the remaining 80% 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 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 receivable 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 receivable and deposits and loans to unrelated parties are significantly reduced.
Concentration of customers
The following tables summarized the information about the Company’s concentration of customers for the nine and three months ended September 30, 2022 and 2021, respectively:
| Customer A | | Customer B | | Customer C | | Customer D | | Customer E | | Customer F | | Customer G |
| | | | | | | | | | | | | |
Nine Months Ended September 30, 2022 | | | | | | | | | | | | | |
Revenues, customer concentration risk | * | | * | | * | | * | | * | | * | | - |
| | | | | | | | | | | | | |
Three Months Ended September 30, 2022 | | | | | | | | | | | | | |
Revenues, customer concentration risk | 10% | | * | | * | | * | | * | | * | | - |
| | | | | | | | | | | | | |
Nine Months Ended September 30, 2021 | | | | | | | | | | | | | |
Revenues, customer concentration risk | * | | 11% | | * | | * | | * | | * | | * |
| | | | | | | | | | | | | |
Three Months Ended September 30, 2021 | | | | | | | | | | | | | |
Revenues, customer concentration risk | * | | * | | 19% | | * | | * | | * | | * |
| | | | | | | | | | | | | |
As of September 30, 2022 | | | | | | | | | | | | | |
Accounts receivable, customer concentration risk | - | | - | | 35% | | 31% | | 17% | | 12% | | - |
| | | | | | | | | | | | | |
As of December 31, 2021 | | | | | | | | | | | | | |
Accounts receivable, customer concentration risk | - | | - | | 33% | | 32% | | 11% | | - | | 19% |
* Less than 10%.
- No transaction incurred for the reporting period/no balance existed as of the reporting date.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Concentration of suppliers
The following tables summarized the information about the Company’s concentration of suppliers for the nine and three months ended September 30, 2022 and 2021, respectively:
| Supplier A | | Supplier B | | Supplier C |
| | | | | |
Nine Months Ended September 30, 2022 | | | | | |
Cost of revenues, supplier concentration risk | 53% | | 27% | | * |
| | | | | |
Three Months Ended September 30, 2022 | | | | | |
Cost of revenues, supplier concentration risk | 63% | | 13% | | 14% |
| | | | | |
Nine Months Ended September 30, 2021 | | | | | |
Cost of revenues, supplier concentration risk | * | | 77% | | - |
| | | | | |
Three Months Ended September 30, 2021 | | | | | |
Cost of revenues, supplier concentration risk | * | | 85% | | - |
* Less than 10%.
- No transaction incurred for the reporting period.
20. | Commitments and contingencies |
The Company is 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. 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 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, 2022 (Unaudited)
| | Internet Ad and related service | | | Ecommerce O2O Ad and marketing services | | | Blockchain technology | | | Corporate | | | Inter-segment and reconciling item | | | Total | |
| | US$ (‘000) | | | US$ (‘000) | | | US$ (‘000) | | | US$ (‘000) | | | US$ (‘000) | | | US$ (‘000) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | | 21,813 | | | | - | | | | - | | | | - | | | | - | | | | 21,813 | |
Cost of revenues | | | 21,811 | | | | - | | | | - | | | | - | | | | - | | | | 21,811 | |
Total operating expenses | | | 1,517 | | | | 817 | | | | 1,100 | | | | 2,663 | (1) | | | - | | | | 6,097 | |
Depreciation and amortization expense included in total operating expenses | | | 270 | | | | 225 | | | | 1,100 | | | | 65 | | | | - | | | | 1,660 | |
Operating loss | | | (1,515 | ) | | | (817 | ) | | | (1,100 | ) | | | (2,663 | ) | | | - | | | | (6,095 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Change in fair value of warrant liabilities | | | - | | | | - | | | | - | | | | 759 | | | | - | | | | 759 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | (1,555 | ) | | | (816 | ) | | | (1,100 | ) | | | (1,800 | ) | | | - | | | | (5,271 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total assets-September 30, 2022 | | | 13,279 | | | | 1,101 | | | | 3,281 | | | | 39,802 | | | | (32,463 | ) | | | 25,000 | |
Total assets-December 31, 2021 | | | 12,150 | | | | 2,236 | | | | 4,414 | | | | 44,328 | | | | (30,497 | ) | | | 32,631 | |
(1) | Including approximately US$0.14 million share-based compensation expenses. |
Three Months Ended September 30, 2022 (Unaudited)
| | Internet Ad. and related service | | | Ecommerce O2O Ad and marketing services | | | Blockchain technology | | | Corporate | | | Inter-segment and reconciling item | | | Total | |
| | US$ (‘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$0.05 million share-based compensation expenses. |
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Nine Months Ended September 30, 2021 (Unaudited)
| | Internet Ad and related service | | | Ecommerce O2O Ad and marketing services | | | Blockchain technology | | | Corporate | | | Inter-segment and reconciling item | | | Total | |
| | US$ (‘000) | | | US$ (‘000) | | | US$ (‘000) | | | US$ (‘000) | | | US$ (‘000) | | | US$ (‘000) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | | 34,333 | | | | 514 | | | | - | | | | - | | | | - | | | | 34,847 | |
Cost of revenues | | | 34,614 | | | | 1,125 | | | | - | | | | - | | | | - | | | | 35,739 | |
Total operating expenses | | | 1,129 | | | | 1,113 | | | | 1 | | | | 8,533 | (1) | | | - | | | | 10,776 | |
Depreciation and amortization expense included in total operating expenses | | | 223 | | | | 225 | | | | 1 | | | | 1 | | | | - | | | | 450 | |
Operating loss | | | (1,410 | ) | | | (1,724 | ) | | | (1 | ) | | | (8,533 | ) | | | - | | | | (11,668 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Change in fair value of warrant liabilities | | | - | | | | - | | | | - | | | | 9,682 | | | | - | | | | 9,682 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss)/income | | | (1,230 | ) | | | (1,724 | ) | | | (2 | ) | | | 1,371 | | | | - | | | | (1,585 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Expenditure for long-term assets | | | 1,220 | | | | - | | | | - | | | | 246 | | | | - | | | | 1,466 | |
(1) | Including approximately US$6.95 million share-based compensation expenses. |
Three Months Ended September 30, 2021 (Unaudited)
| | Internet Ad. and related service | | | Ecommerce O2O Ad and marketing services | | | Blockchain technology | | | Corporate | | | Inter-segment and reconciling item | | | Total | |
| | US$ (‘000) | | | US$ (‘000) | | | US$ (‘000) | | | US$ (‘000) | | | US$ (‘000) | | | US$ (‘000) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | | 11,773 | | | | 127 | | | | - | | | | - | | | | - | | | | 11,900 | |
Cost of revenues | | | 11,482 | | | | 375 | | | | - | | | | - | | | | - | | | | 11,857 | |
Total operating expenses | | | 539 | | | | 455 | | | | - | | | | 623 | (1) | | | - | | | | 1,617 | |
Depreciation and amortization expense included in total operating expenses | | | 93 | | | | 75 | | | | - | | | | - | | | | - | | | | 168 | |
Operating loss | | | (248 | ) | | | (703 | ) | | | - | | | | (623 | ) | | | - | | | | (1,574 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Change in fair value of warrant liabilities | | | - | | | | - | | | | - | | | | 2,853 | | | | - | | | | 2,853 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss)/income | | | (264 | ) | | | (703 | ) | | | - | | | | 2,341 | | | | - | | | | 1,374 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Expenditure for long-term assets | | | - | | | | - | | | | - | | | | 85 | | | | - | | | | 85 | |
(1) | Including approximately US$0.09 million share-based compensation expenses. |
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
22. | (Loss)/earnings per share |
Basic and diluted (loss)/earnings per share for each of the periods presented are calculated as follows (All amounts, except number of shares and per share data, are presented in thousands of U.S. dollars):
| | Nine Months Ended September 30, | | | Three Months Ended September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | |
| | | | | | | | | | | | | | | | |
Net (loss)/income attributable to ZW Data Action Technologies Inc. (numerator for basic and diluted loss per share) | | $ | (5,271 | ) | | $ | (1,586 | ) | | $ | (2,840 | ) | | $ | 1,375 | |
| | | | | | | | | | | | | | | | |
Weighted average number of common shares outstanding -Basic and diluted | | | 35,572,200 | | | | 32,279,304 | | | | 35,827,677 | | | | 35,332,220 | |
| | | | | | | | | | | | | | | | |
(Loss)/earnings per share-Basic and diluted | | $ | (0.15 | ) | | $ | (0.05 | ) | | $ | (0.08 | ) | | $ | 0.04 | |
For the nine and three months ended September 30, 2022 and 2021, the diluted (loss)/earnings per share calculation did not include any outstanding warrants and options to purchase the Company’s common stock, because their effect was anti-dilutive.
23. | Share-based compensation expenses |
In March 2022, under its 2020 Omnibus Securities and Incentive Plan, the Company granted and issued an aggregate of 0.095 million fully-vested shares of the Company’s restricted common stock to two of the Company’s executive officers in exchange for their services to the Company for the year ending December 31, 2022. These shares were valued at the closing bid price of the Company’s common stock on the respective date of grant. Total compensation expenses amortized for the nine and three months ended September 30, 2022 was approximately US$0.05 million and US$0.02 million, respectively.
In June 2022, the Company granted and issued 0.40 million fully-vested and non-forfeitable shares of the Company restricted common stock to a management consulting and advisory service provider in exchange for its service for a 12-month period until May 2023. The Company valued these shares at US$0.35 per share, the closing bid price of the Company’s common stock on the grant date of these shares and recorded the related total cost of approximately US$0.14 million as a prepayment asset in prepayment and deposit to suppliers account upon the grant and issuance of these shares. 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.
For the nine months ended September 30, 2022, the Company also amortized an approximately US$0.04 million compensation expense in the aggregate, which was related to fully-vested and nonforfeitable restricted common stock granted and issued to one of its service providers in March 2020.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The table below summarized share-based compensation expenses recorded for the nine and three months ended September 30, 2022 and 2021, respectively:
| | Nine Months Ended September 30, | | | Three Months Ended September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | US$(’000) | | | US$(’000) | | | US$(’000) | | | US$(’000) | |
| | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | |
| | | | | | | | | | | | | | | | |
Sales and marketing expenses | | | - | | | | - | | | | - | | | | - | |
General and administrative expenses | | | 135 | | | | 6,945 | | | | 51 | | | | 88 | |
Research and development expenses | | | - | | | | - | | | | - | | | | - | |
Total | | | 135 | | | | 6,945 | | | | 51 | | | | 88 | |
The aggregate unrecognized share-based compensation expenses as of September 30, 2022 was approximately US$0.11 million, of which approximately US$0.05 million will be recognized for the year ending December 31, 2022 and approximately US$0.06 million will be recognized for the year ending December 31, 2023.
The Company primarily conducts its operations through its PRC operating subsidiaries and VIEs in the PRC. In January 2020, an outbreak of a novel coronavirus (COVID-19) spread all over the country during the first fiscal quarter of 2020. The spread of COVID-19 resulted in the World Health Organization 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 Chinese government had declared the COVID-19 outbreak largely under control within its border since the second fiscal quarter of 2020, there has been COVID-19 cases rebound in many provinces in China, and uncertainties associated with the future developments of the pandemic still exist. The Company will 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 any 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, no other material events which are required to be adjusted or disclosed as of the date of this consolidated financial statements.