Our auditor, the independent registered public accounting firm that issues the audit report in our SEC filings, 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 auditor is 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.
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 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.
* 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).
**Retrospectively restated for effect of the 1-for-5 reverse stock split effective on January 18, 2023, see Note 4(g).
**Retrospectively restated for effect of the 1-for-5 reverse stock split effective on January 18, 2023, see Note 4(g).
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| 1. | Organization and nature of operations |
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) advertising and marketing services as well as the related data and technical services to small and medium enterprises (SMEs) in the PRC. The Company also develops blockchain enabled web/mobile applications and provides software solutions, i.e., Software-as-a-Service (“SaaS”) services for clients.
| 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 March 31, 2023 and December 31, 2022, respectively:
| | | March 31, 2023 | | | December 31,
2022 | |
| | | US$(’000) | | | US$(’000) | |
| | | (Unaudited) | | | | | |
| Assets | | | | | | | | |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 340 | | | $ | 578 | |
| Accounts receivable, net | | | 1,567 | | | | 1,745 | |
| Prepayment and deposit to suppliers | | | 1,931 | | | | 2,020 | |
| Other current assets | | | 3 | | | | 2 | |
| Total current assets | | | 3,841 | | | | 4,345 | |
| | | | | | | | | |
| Long-term investments | | | 167 | | | | 165 | |
| Operating lease right-of-use assets | | | 98 | | | | 145 | |
| Property and equipment, net | | | 104 | | | | 113 | |
| Deferred tax assets, net | | | 413 | | | | 406 | |
| Total Assets | | $ | 4,623 | | | $ | 5,174 | |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 218 | | | $ | 205 | |
| Advances from customers | | | 667 | | | | 515 | |
| Accrued payroll and other accruals | | | 39 | | | | 63 | |
| Taxes payable | | | 2,629 | | | | 2,602 | |
| Operating lease liabilities | | | 99 | | | | 146 | |
| Lease payment liabilities related to short-term leases | | | 103 | | | | 101 | |
| Other current liabilities | | | 204 | | | | 320 | |
| Total current liabilities | | | 3,959 | | | | 3,952 | |
| | | | | | | | | |
| Total Liabilities | | $ | 3,959 | | | $ | 3,952 | |
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 three months ended March 31, 2023 and 2022, respectively:
| | | Three Months Ended March 31, | |
| | | 2023 | | | 2022 | |
| | | US$(’000) | | | US$(’000) | |
| | | (Unaudited) | | | (Unaudited) | |
| | | | | | | | | |
| Revenues | | $ | 6,148 | | | $ | 7,198 | |
| Cost of revenues | | | (6,327 | ) | | | (7,518 | ) |
| Total operating expenses | | | (370 | ) | | | (259 | ) |
| Net loss before allocation to noncontrolling interests | | | (550 | ) | | | (585 | ) |
| 3. | Liquidity and Capital Resources |
For the three months ended March 31, 2023, the Company incurred a loss from operations of US$1.31 million and a net operating cash outflow of US$0.92 million. As of March 31, 2023, the Company had cash and cash equivalents of US$1.59 million and working capital of US$5.55 million.
The Company experienced temporary decreases in revenues, incurred a gross loss, and did not generate a positive net cash flow from its core business, i.e., Internet advertising and related data service business for the three months ended March 31, 2023. This was primarily attributable to the peak infection of COVID-19 in China incurred from November 2022 through February 2023, which affected a significant number of the Company’s workforce and most of its clients, and in return adversely affected the Company’s normal business activities, and caused temporary decrease in or delay in ad spending from its clients during the first fiscal quarter of 2023. 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, the three-year COVID-19 pandemic in China affected the SMEs owners’ confidence to further expand their businesses, and thus adversely affected the SMEs owners’ demands on the Company’s online advertising and marketing services in the short run. As a result, the Company has been relying on proceeds generated from financing activities for its liquidity in the first fiscal quarter of 2023. Although there remain uncertainties as to the future development and impact of the COVID-19 pandemic, the Company anticipates a slow recovery of performance and improvement of cash flow status of its core business in the next 12 months.
In order to improve operation performance, from early 2022, the Company started to introduce 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 subscriptions of the Company’s BIF platform enable its 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. Although the unexpected long-time quarantine and business shutdown measures for COVID-19 epidemic control incurred throughout fiscal 2022 adversely affected the Company’s promotion of the SaaS services, and revenues from the new SaaS services business and its profitability have not met the Company’s expectations, the Company still expects the new SaaS services business to bring in positive cash flow and help to improve liquidity, 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 from investing 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.
| 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”).
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The unaudited condensed consolidated interim financial information as of March 31, 2023 and for the three months ended March 31, 2023 and 2022 have been prepared pursuant to the rules and regulations of the 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, 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 March 31, 2023, its condensed consolidated results of operations for the three months ended March 31, 2023 and 2022, and its condensed consolidated cash flows for the three months ended March 31, 2023 and 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.
| | 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:
| | | March 31, 2023 | | | December 31, 2022 | |
| Balance sheet items, except for equity accounts | | | 6.8717 | | | | 6.9646 | |
| | | Three Months Ended March 31, | |
| | | 2023 | | | 2022 | |
| Items in the statements of operations and comprehensive loss | | | 6.8476 | | | | 6.3504 | |
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 |
In 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 existing incurred loss impairment model with an expected loss methodology. The Company, as a SEC smaller reporting company, has adopted the amendments in this 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 its 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$0.15 million was related to the cumulative-effect adjustment to allowance for credit loss of other current assets, which primarily consisted of short-term loans the Company provided to unrelated parties.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The allowance for credit losses reflects the Company's current estimate of credit losses expected to be incurred over the life of the related financial assets. The allowance for credit losses is presented as a valuation account that is deducted from the amortized cost basis of financial asset(s) to present the net amount expected to be collected on the financial asset(s).
The Company considers various factors in establishing, monitoring, and adjusting its allowance for credit losses, including the aging and aging trends, customer/other parties’ creditworthiness and specific exposures related to particular customers/other parties. The Company also monitors other risk factors and forward-looking information, such as country specific risks and economic factors that may affect a customer/other party’s ability to pay in establishing and adjusting its allowance for credit losses. The Company assesses collectability by reviewing the financial assets on a collective basis where similar characteristics exist and on an individual basis when the Company identifies specific customers/other parties with known disputes or collectability issues. Accounts receivable and short-term loans to unrelated parties are written off after all collection efforts have ceased.
The following tables summarized the movements of the Company’s credit losses for the three months ended March 31, 2023 and 2022, respectively:
| | | Three Months Ended March 31, | |
| | | 2023 | | | 2022 | |
| | | US$(’000) | | | US$(’000) | |
| | | (Unaudited) | | | (Unaudited) | |
| Credit loss for accounts receivable: | | | | | | | | |
| Balance as of beginning of the period | | | 3,760 | | | | 2,236 | |
| Cumulative-effect adjustment upon adoption of ASU No. 2016-13, Financial Instruments-Credit losses (Topic 326) | | | 36 | | | | - | |
| Provision for credit loss during the period | | | 223 | | | | - | |
| Written off during the period | | | - | | | | - | |
| Exchange translation adjustments | | | 51 | | | | 9 | |
| Balance as of end of the period | | | 4,070 | | | | 2,245 | |
| | | Three Months Ended March 31, | |
| | | 2023 | | | 2022 | |
| | | US$(’000) | | | US$(’000) | |
| | | (Unaudited) | | | (Unaudited) | |
| Credit loss for other current assets: | | | | | | | | |
| Balance as of beginning of the period | | | 617 | | | | - | |
| Cumulative-effect adjustment upon adoption of ASU No. 2016-13, Financial Instruments-Credit losses (Topic 326) | | 155 | | | | - | |
| Provision for credit loss during the period | | 78 | | | | - | |
| Written off during the period | | | - | | | | - | |
| Exchange translation adjustments | | | - | | | | - | |
| Balance as of end of the period | | | 850 | | | | - | |
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| | f) | Fair value measurement |
Liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of March 31, 2023 and December 31, 2022 are as follows:
| | | | | | | Fair value measurement at reporting date using | |
| | | As of
March 31, 2023 | | | Quoted Prices
in Active Markets
for Identical Assets/Liabilities
(Level 1) | | | Significant
Other
Observable Inputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | |
| | | US$(’000) | | | US$(’000) | | | US$(’000) | | | US$(’000) | |
| | | (Unaudited) | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Warrant liabilities (Note 14) | | | 84 | | | | - | | | | - | | | | 84 | |
| | | | | | | Fair value measurement at reporting date using | |
| | | As of December 31, 2022 | | | Quoted Prices
in Active Markets
for Identical Assets/Liabilities
(Level 1) | | | Significant
Other
Observable Inputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | |
| | | US$(’000) | | | US$(’000) | | | US$(’000) | | | US$(’000) | |
| | | | | | | | | | | | | | | | | |
| Warrant liabilities (Note 14) | | | 185 | | | | - | | | | - | | | | 185 | |
The Board of Directors of the Company approved a reverse stock split of the Company’s issued and outstanding shares of common stock, par value $0.001 per share (the “Common Stock”) at a ratio of 1-for-5 (the “Reverse Stock Split”). The Reverse Stock Split became effective on January 18, 2023 (the “Effective Date”). As a result, the number of shares of the Company’s authorized Common Stock was reduced from 100,000,000 shares to 20,000,000 shares and the issued and outstanding number of shares of the Common Stock was correspondingly decreased. The Reverse Stock Split has no effect on the par value of the Company’s Common Stock or authorized shares of preferred stock.
When the Reverse Stock Split became effective, each five shares of issued and outstanding Common Stock were converted into one newly issued and outstanding share of Common Stock. No fractional shares were issued in connection with the Reverse Stock Split. Any fractional shares of Common Stock that would have otherwise resulted from the Reverse Stock Split were rounded up to the nearest full share. No cash or other consideration was paid in connection with any fractional shares that would otherwise have resulted from the Reverse Stock Split.
As a result of the Reverse Stock Split, 35,827,677 shares of Common Stock that were issued and outstanding at January 18, 2023 was reduced to 7,174,506 shares of Common Stock (taking into account the rounding of fractional shares).
Except where otherwise specified, all number of shares, number of warrants, share prices, exercise prices and per share data in the condensed consolidated financial statements and notes to the condensed consolidated financial statements have been retroactively restated as if the Reverse Stock Split occurred at the beginning of the periods presented.
The following tables present the Company’s revenues disaggregated by products and services and timing of revenue recognition:
| | | Three Months Ended March 31, | |
| | | 2023 | | | 2022 | |
| | | US$(’000) | | | US$(’000) | |
| | | (Unaudited) | | | (Unaudited) | |
| Internet advertising and related services | | | | | | | | |
| --distribution of the right to use search engine marketing service | | | 6,161 | | | | 6,594 | |
| --online advertising placements | | | 130 | | | | 1,058 | |
| Blockchain-based SaaS services | | | 25 | | | | - | |
| Total revenues | | | 6,316 | | | | 7,652 | |
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| | | Three Months Ended March 31, | |
| | | 2023 | | | 2022 | |
| | | US$(’000) | | | US$(’000) | |
| | | (Unaudited) | | | (Unaudited) | |
| | | | | | | | | |
| Revenue recognized over time | | | 6,316 | | | | 7,652 | |
| Revenue recognized at a point in time | | | - | | | | - | |
| Total revenues | | | 6,316 | | | | 7,652 | |
Contract balances
The table below summarized the movement of the Company’s contract liabilities (advance from customers) for the three months ended March 31, 2023:
| | | Contract liabilities | |
| | | US$(’000) | |
| | | | | |
| Balance as of January 1, 2023 | | | 739 | |
| Exchange translation adjustment | | | 8 | |
| Revenue recognized from beginning contract liability balance | | | (550 | ) |
| Advances received from customers related to unsatisfied performance obligations | | | 523 | |
| Balance as of March 31, 2023 (Unaudited) | | | 720 | |
Advance from customers related to unsatisfied performance obligations are generally refundable. Refund of advance from customers were insignificant for both the three months ended March 31, 2023 and 2022.
For the three months ended March 31, 2023 and 2022, there is no revenue recognized from performance obligations that were satisfied in prior periods.
| | i) | 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 expense when incurred. Expenses for research and development for the three months ended March 31, 2023 and 2022 were approximately US$0.02 million and US$0.07 million, respectively.
As of March 31, 2023, operating lease right-of-use assets and total operating lease liabilities recognized was approximately US$1.68 million and US$1.81 million, respectively.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Maturity of operating lease liabilities
| | | Operating leases | |
| | | US$(’000) | |
| | | (Unaudited) | |
| | | | | |
| Nine months ending December 31, 2023 | | | 329 | |
| Year ending December 31, | | | | |
| -2024 | | | 317 | |
| -2025 | | | 333 | |
| -2026 | | | 349 | |
| -2027 | | | 367 | |
| -2028 | | | 385 | |
| -thereafter | | | 65 | |
| Total undiscounted lease payments | | | 2,145 | |
| Less: imputed interest | | | (335 | ) |
| Total operating lease liabilities as of March 31, 2023 | | | 1,810 | |
| | | | | |
| Including: | | | | |
| Operating lease liabilities | | | 310 | |
| Operating lease liabilities-Non current | | | 1,500 | |
| | | | 1,810 | |
Operating lease expenses:
| | | Three Months Ended March 31, | |
| | | 2023 | | | 2022 | |
| | | US$(’000) | | | US$(’000) | |
| | | (Unaudited) | | | (Unaudited) | |
| | | | | | | | | |
| Long-term operating lease contracts | | | 133 | | | | 90 | |
| Short-term operating lease contracts | | | 6 | | | | 15 | |
| Total | | | 139 | | | | 105 | |
Supplemental information related to operating leases:
| | | Three Months Ended March 31, | |
| | | 2023 | | | 2022 | |
| | | US$(’000) | | | US$(’000) | |
| | | (Unaudited) | | | (Unaudited) | |
| | | | | | | | | |
| Operating cash flows used for operating leases (US$’000) | | | 122 | | | | 86 | |
| Right-of-use assets obtained in exchange for new lease liabilities (US$’000) | | | - | | | | - | |
| Weighted-average remaining lease term (years) | | | 5.62 | | | | 6.90 | |
| Weighted-average discount rate | | | 6 | % | | | 6 | % |
| 5. | Accounts receivable, net |
| | | March 31, 2023 | | | December 31, 2022 | |
| | | US$(’000) | | | US$(’000) | |
| | | (Unaudited) | | | | | |
| | | | | | | | | |
| Accounts receivable | | | 5,637 | | | | 5,505 | |
| Allowance for credit loss | | | (4,070 | ) | | | (3,760 | ) |
| Accounts receivable, net | | | 1,567 | | | | 1,745 | |
All of the accounts receivable are non-interest bearing. The Company maintains an estimated allowance for credit losses to reduce its accounts receivable to the amount that it believes will be collected. The Company evaluates its accounts receivable 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 three months ended March 31, 2023, the Company provided approximately US$0.22 million credit losses for its accounts receivable.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| 6. | Prepayment and deposit to suppliers |
| | | March 31, 2023 | | | December 31, 2022 | |
| | | US$(’000) | | | US$(’000) | |
| | | (Unaudited) | | | | | |
| | | | | | | | | |
| Deposits to advertising resources providers | | | 866 | | | | 1,077 | |
| Prepayments to advertising resources providers | | | 3,045 | | | | 3,036 | |
| Other deposits and prepayments | | | 479 | | | | 454 | |
| | | | 4,390 | | | | 4,567 | |
| 7. | Other current assets, net |
| | | March 31, 2023 | | | December 31, 2022 | |
| | | US$(’000) | | | US$(’000) | |
| | | | | | | | | |
| Short-term loans to unrelated parties | | | 4,097 | | | | 2,197 | |
| Short-term loans interest receivables | | | 71 | | | | 22 | |
| Staff advances for business operations | | | 9 | | | | 8 | |
| Total other current assets | | | 4,177 | | | | 2,227 | |
| Allowance for credit loss | | | (850 | ) | | | (617 | ) |
| Other current assets, net | | | 3,327 | | | | 1,610 | |
As of March 31, 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.
On January 5, 2022, the Company provided a short-term working capital loan of US$2.5 million to an unrelated party, which matured on May 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, 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.
On January 11, 2023, the Company provided a short-term of US$2.0 million to another unrelated party. The loan is unsecured and bears a fixed annualized interest rate of 12%. The loan and the related loan interest is required to be repaid in lump sum at maturity on July 17, 2023.
The Company evaluates its short-term loans provided to unrelated 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 three months ended March 31, 2023, the Company provided US$0.08 million credit losses on short-term loans provided to unrelated parties.
As of March 31,2023, 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 and defaults on the loan balance of US$0.62 million. The Company attempted to collect the outstanding loan balance. In June 2022, the Company fully allowanced the outstanding loan balance of US$0.62 million based on the Company’s assessment of the collectability of this outstanding balance. The Company had engaged a law firm and prepared and sent a legal letter to Digital Sun in March 2023, and the Company intends to take further actions to safeguard its rights against the default, including but not limited to, arranging meetings with the management of Digital Sun to negotiate the repayment plan in person and filing a lawsuit against Digital Sun after all other means of collection have been exhausted. As of the date hereof, the Company has not received any formal responses from Digital Sun.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| | | Amount | |
| | | US$(’000) | |
| | | | | |
| Balance as of January 1, 2023 | | | 1,596 | |
| Exchange translation adjustment | | | 8 | |
| Balance as of March 31, 2023 (Unaudited) | | | 1,604 | |
As of March 31, 2023, except for long-term investments which were fully impaired, the Company beneficially owned a 15.38%, 10%, 9.9%, 9% and 19% equity interest in each New Business Holdings Limited (“New Business”), Guang Dong WeFriend Co., Ltd. (“Guangdong WeFriend”), Guangdong Yong Fu Xiang Health Management Co., Ltd (“Yong Fu Xiang”); Guangzhou Yuan Qi Man Man Technology Co., Ltd. (“Yuan Qi Man Man") and Business Opportunity Chain (Guangzhou) Technology Co., Ltd. (“Business Opportunity Chain Guangzhou”), respectively.
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.
| 9. | Property and equipment, net |
| | | March 31, 2023 | | | December 31, 2022 | |
| | | US$(’000) | | | US$(’000) | |
| | | (Unaudited) | | | | | |
| | | | | | | | | |
| Vehicles | | | 797 | | | | 855 | |
| Office equipment | | | 876 | | | | 865 | |
| Electronic devices | | | 584 | | | | 575 | |
| Leasehold improvement | | | 187 | | | | 185 | |
| Property and equipment, cost | | | 2,444 | | | | 2,480 | |
| Less: accumulated depreciation | | | (2,219 | ) | | | (2,231 | ) |
| Property and equipment, net | | | 225 | | | | 249 | |
Depreciation expenses were approximately US$0.02 million and US$0.03 million for the three months ended March 31, 2023 and 2022, respectively.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| 10. | Intangible assets, net |
| | | As of March 31, 2023 (Unaudited) | |
| Items | | Gross Carrying Value | | | Accumulated Amortization | | | Impairment | | | Net Carrying Value | |
| | | US$(’000) | | | US$(’000) | | | US$(’000) | | | US$(’000) | |
| Intangible assets subject to amortization: | | | | | | | | | | | | | | | | |
| --10 years life: | | | | | | | | | | | | | | | | |
| Cloud compute software technology | | | 1,351 | | | | (937 | ) | | | (414 | ) | | | - | |
| Licensed products use right | | | 1,200 | | | | (405 | ) | | | - | | | | 795 | |
| | | | | | | | | | | | | | | | | |
| --5 years life: | | | | | | | | | | | | | | | | |
| Internet Ad tracking system | | | 1,160 | | | | (463 | ) | | | - | | | | 697 | |
| Live streaming technology | | | 1,500 | | | | (625 | ) | | | (875 | ) | | | - | |
| | | | | | | | | | | | | | | | | |
| --3 years life: | | | | | | | | | | | | | | | | |
| Blockchain integrated framework | | | 4,038 | | | | (1,556 | ) | | | (1,010 | ) | | | 1,472 | |
| Bo!News application | | | 349 | | | | (116 | ) | | | (233 | ) | | | - | |
| Other computer software | | | 114 | | | | (114 | ) | | | - | | | | - | |
| Total | | $ | 9,712 | | | $ | (4,216 | ) | | $ | (2,532 | ) | | $ | 2,964 | |
| | | 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 | |
Amortization expenses for the three months ended March 31, 2023 and 2022 were approximately US$0.30 million and US$0.53 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 3.34 years as of March 31, 2023, and assuming no further subsequent impairment of the underlying intangible assets, the estimated future amortization expenses is approximately US$0.90 million for the year ending December 31, 2023, approximately US$1.19 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$0.12 million each year for the years ending December 31, 2027 and 2028.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| 11. | Accrued payroll and other accruals |
| | | March 31, 2023 | | | December 31, 2022 | |
| | | US$(’000) | | | US$(’000) | |
| | | (Unaudited) | | | | | |
| | | | | | | | | |
| Accrued payroll and staff welfare | | | 83 | | | | 101 | |
| Accrued operating expenses | | | 183 | | | | 337 | |
| | | | 266 | | | | 438 | |
As of March 31, 2023 and December 31, 2022, taxes payable consists of:
| | | March 31, 2023 | | | December 31, 2022 | |
| | | US$(’000) | | | US$(’000) | |
| | | (Unaudited) | | | | | |
| | | | | | | | | |
| Turnover tax and surcharge payable | | | 1,297 | | | | 1,288 | |
| Enterprise income tax payable | | | 1,983 | | | | 1,960 | |
| Total taxes payable | | | 3,280 | | | | 3,248 | |
For the three months ended March 31, 2023 and 2022, the Company’s income tax benefit consisted of:
| | | Three Months Ended March 31, | |
| | | 2023 | | | 2022 | |
| | | US$(’000) | | | US$(’000) | |
| | | (Unaudited) | | | (Unaudited) | |
| | | | | | | | | |
| Current | | | - | | | | - | |
| Deferred | | | 1 | | | | 2 | |
| Income tax benefit | | | 1 | | | | 2 | |
The Company’s deferred tax assets as of March 31, 2023 and December 31, 2022 were as follows:
| | | March 31, 2023 | | | December 31, 2022 | |
| | | US$(’000) | | | US$(’000) | |
| | | (Unaudited) | | | | | |
| | | | | | | | | |
| Tax effect of net operating losses carried forward | | | 11,812 | | | | 11,537 | |
| Operating lease cost | | | 33 | | | | 30 | |
| Impairment on long-term investments | | | 146 | | | | 144 | |
| Impairment on intangible assets | | | 369 | | | | 368 | |
| Bad debts provision | | | 1,133 | | | | 1,018 | |
| Valuation allowance | | | (13,080 | ) | | | (12,691 | ) |
| Deferred tax assets, net | | | 413 | | | | 406 | |
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The U.S. holding company has incurred aggregate net operating losses (NOLs) of approximately US$32.0 million and US$31.8 million at March 31, 2023 and December 31, 2022, 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, 2017. 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$16.0 million and US$15.4 million as of March 31, 2023 and December 31, 2022, respectively. The losses carryforwards gradually expire over time, the last of which will expire in 2028. 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$13.0 million and US$12.7 million valuation allowance as of March 31, 2023 and December 31, 2022, 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.
For the three months ended March 31, 2023 and 2022, the Company recorded approximately US$0.30 million and US$0.32 million deferred tax valuation allowance, respectively.
| 13. | Long-term borrowing from a related party |
Long-term borrowing from a related party is a non-interest bearing loan from a related party 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.
The Company issued common stock purchase warrants to certain institutional investors and the Company’s placement agent in the registered direct offerings consummated in February 2021 (the “2021 Financing”) and December 2020 (the “2020 Financing”). Warrants issued to the investors and placement agent in the 2021 Financing were referred to as the “2021 Investors Warrants” and the “2021 Placement Agent Warrants”, respectively. Warrants issued to the investors and placement agent in the 2020 Financing were referred to as the “2020 Investors Warrants” and the “2020 Placement Agent Warrants”, respectively. The warrants issued in the 2021 Financing and the 2020 Financing were referred to collectively as the “Warrants”. The Company accounted for the Warrants 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 Investor Warrants | | | 2021 Placement Agent Warrants | |
| | | March 31, 2023 | | | December 31, 2022 | | | March 31, 2023 | | | December 31, 2022 | |
| | | | | | | | | | | | | | | | | |
| Stock price | | $ | 1.70 | | | $ | 0.46 | # | | $ | 1.70 | | | $ | 0.46 | # |
| Years to maturity | | | 1.38 | | | | 1.63 | | | | 1.38 | | | | 1.63 | |
| Risk-free interest rate | | | 4.44 | % | | | 4.625 | % | | | 4.44 | % | | | 4.625 | % |
| Dividend yield | | | - | | | | - | | | | - | | | | - | |
| Expected volatility | | | 113 | % | | | 99.74 | % | | | 113 | % | | | 99.74 | % |
| Exercise Price | | $ | 17.95 | | | $ | 3.59 | # | | $ | 22.4375 | | | $ | 4.4875 | # |
| | | | | | | | | | | | | | | | | |
| Fair value of the warrant | | $ | 0.0937 | | | $ | 0.0329 | | | $ | 0.0727 | | | $ | 0.0256 | |
| | | | | | | | | | | | | | | | | |
| Warrant liabilities (US$’000) | | $ | 49 | | | $ | 86 | | | $ | 5 | | | $ | 9 | |
| | | 2021 Investor Warrants | | | 2021 Placement Agent Warrants | |
| | | March 31, 2022 | | | December 31, 2021 | | | March 31, 2022 | | | December 31, 2021 | |
| | | | | | | | | | | | | | | | | |
| Stock price# | | $ | 0.73 | | | $ | 1.00 | | | $ | 0.73 | | | $ | 1.00 | |
| Years to maturity | | | 2.38 | | | | 2.63 | | | | 2.38 | | | | 2.63 | |
| Risk-free interest rate | | | 2.35 | % | | | 0.87 | % | | | 2.35 | % | | | 0.87 | % |
| Dividend yield | | | - | | | | - | | | | - | | | | - | |
| Expected volatility | | | 121 | % | | | 115 | % | | | 121 | % | | | 115 | % |
| Exercise Price# | | $ | 3.59 | | | $ | 3.59 | | | $ | 4.4875 | | | $ | 4.4875 | |
| | | | | | | | | | | | | | | | | |
| Fair value of the warrant | | $ | 0.24 | | | $ | 0.37 | | | $ | 0.23 | | | $ | 0.36 | |
| | | | | | | | | | | | | | | | | |
| Warrant liabilities (US$’000) | | $ | 626 | | | $ | 964 | | | $ | 84 | | | $ | 132 | |
Warrants issued in the 2020 Financing:
| | | 2020 Investor Warrants | | | 2020 Placement Agent Warrants | |
| | | March 31, 2023 | | | December 31, 2022 | | | March 31, 2023 | | | December 31, 2022 | |
| | | | | | | | | | | | | | | | | |
| Stock price | | $ | 1.70 | | | $ | 0.46 | # | | $ | 1.70 | | | $ | 0.46 | # |
| Years to maturity | | | 0.70 | | | | 0.95 | | | | 0.70 | | | | 0.95 | |
| Risk-free interest rate | | | 4.80 | % | | | 4.716 | % | | | 4.80 | % | | | 4.716 | % |
| Dividend yield | | | - | | | | - | | | | - | | | | - | |
| Expected volatility | | | 125 | % | | | 115.61 | % | | | 125 | % | | | 115.61 | % |
| Exercise Price | | $ | 10.15 | | | $ | 2.03 | # | | $ | 10.15 | | | $ | 2.03 | # |
| | | | | | | | | | | | | | | | | |
| Fair value of the warrant | | $ | 0.0731 | | | $ | 0.0439 | | | $ | 0.0760 | | | $ | 0.0456 | |
| | | | | | | | | | | | | | | | | |
| Warrant liabilities (US$’000) | | $ | 25 | | | $ | 76 | | | $ | 5 | | | $ | 14 | |
| | | 2020 Investor Warrants | | | 2020 Placement Agent Warrants | |
| | | March 31, 2022 | | | December 31, 2021 | | | March 31, 2022 | | | December 31, 2021 | |
| | | | | | | | | | | | | | | | | |
| Stock price# | | $ | 0.73 | | | $ | 1.00 | | | $ | 0.73 | | | $ | 1.00 | |
| Years to maturity | | | 1.70 | | | | 1.95 | | | | 1.70 | | | | 1.95 | |
| Risk-free interest rate | | | 2.23 | % | | | 0.72 | % | | | 2.23 | % | | | 0.72 | % |
| Dividend yield | | | - | | | | - | | | | - | | | | - | |
| Expected volatility | | | 127 | % | | | 128 | % | | | 127 | % | | | 128 | % |
| Exercise Price# | | $ | 2.03 | | | $ | 2.03 | | | $ | 2.03 | | | $ | 2.03 | |
| | | | | | | | | | | | | | | | | |
| Fair value of the warrant | | $ | 0.26 | | | $ | 0.46 | | | $ | 0.28 | | | $ | 0.49 | |
| | | | | | | | | | | | | | | | | |
| Warrant liabilities (US$’000) | | $ | 449 | | | $ | 795 | | | $ | 85 | | | $ | 148 | |
# To reflect the actual inputs used for the determination of fair value of the Warrants, the stock prices and exercise prices presented were not retrospectively restated for effect of the 1-for-5 reverse stock split effective on January 18, 2023, see Note 4(g).
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Changes in fair value of warrant liabilities
Three Months Ended March 31, 2023 (Unaudited)
| | | As of
March 31, 2023 | | | As of
December 31, 2022 | | | Change in Fair Value
(Gain)/Loss | |
| | | (US$’000) | | | (US$’000) | | | (US$’000) | |
| Fair value of the Warrants: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Warrants issued in the 2021 Financing： | | | | | | | | | | | | |
| --Investor Warrants | | | 49 | | | | 86 | | | | (37 | ) |
| --Placement Agent Warrants | | | 5 | | | | 9 | | | | (4 | ) |
| Warrants issued in the 2020 Financing: | | | | | | | | | | | | |
| --Investor Warrants | | | 25 | | | | 76 | | | | (51 | ) |
| --Placement Agent Warrants | | | 5 | | | | 14 | | | | (9 | ) |
| Warrant liabilities | | | 84 | | | | 185 | | | | (101 | ) |
Three Months Ended March 31, 2022 (Unaudited)
| | | As of March 31, 2022 | | | As of December 31, 2021 | | | Change in Fair Value (Gain)/Loss | |
| | | (US$’000) | | | (US$’000) | | | (US$’000) | |
| Fair value of the Warrants: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Warrants issued in the 2021 Financing： | | | | | | | | | | | | |
| --Investor Warrants | | | 626 | | | | 964 | | | | (338 | ) |
| --Placement Agent Warrants | | | 84 | | | | 132 | | | | (48 | ) |
| Warrants issued in the 2020 Financing: | | | | | | | | | | | | |
| --Investor Warrants | | | 449 | | | | 795 | | | | (346 | ) |
| --Placement Agent Warrants | | | 85 | | | | 148 | | | | (63 | ) |
| Warrant liabilities | | | 1,244 | | | | 2,039 | | | | (795 | ) |
Warrants issued and outstanding as of March 31, 2023 and their movements during the three 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, 2023 | | | 1,000,343 | | | | 1.36 | | | $ | 15.11 | | | | 1,001,343 | | | | 1.36 | | | $ | 15.11 | |
| Granted/Vested | | | - | | | | | | | | | | | | - | | | | | | | | | |
| Exercised | | | - | | | | | | | | | | | | - | | | | | | | | | |
| Balance, March 31, 2023 (Unaudited) | | | 1,000,343 | | | | 1.11 | | | $ | 15.11 | | | | 1,000,343 | | | | 1.11 | | | $ | 15.11 | |
| 15. | 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.
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 March 31, 2023 and December 31, 2022, net assets restricted in the aggregate, that are included in the Company’s consolidated net assets, were approximately US$13.68 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 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)
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 mainland 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 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.
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.
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 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.
| 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 and VIEs 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$0.04 million and US$0.07 million for the three months ended March 31, 2023 and 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, accounts receivable and loans to unrelated parties. As of Mach 31, 2023, 59% of the Company’s cash and cash equivalents were held by financial institutions located in the United States of America, and the remaining 41% was held by major financial institutions located in the PRC. 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 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 current expected credit losses. In this regard, the Company considers that its credit risk for accounts receivable 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 three months ended March 31, 2023 and 2022, respectively:
| | | Customer A | | Customer B | | Customer C | | Customer D | | Customer E |
| | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | | | | | | | | | |
| Revenues, customer concentration risk | | * | | * | | * | | * | | * |
| | | | | | | | | | | |
| Three Months Ended March 31, 2022 | | | | | | | | | | |
| Revenues, customer concentration risk | | 13% | | * | | * | | * | | * |
| | | | | | | | | | | |
| As of March 31, 2023 | | | | | | | | | | |
| Accounts receivable, customer concentration risk | | 10% | | 40% | | 25% | | 14% | | 10% |
| | | | | | | | | | | |
| As of December 31, 2022 | | | | | | | | | | |
| Accounts receivable, customer concentration risk | | 16% | | 33% | | 24% | | 16% | | * |
* Less than 10%.
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 three months ended March 31, 2023 and 2022, respectively:
| | | Supplier A | | Supplier B | | Supplier C |
| Three Months Ended March 31, 2023 | | | | | | |
| Cost of revenues, supplier concentration risk | | 78% | | 14% | | - |
| | | | | | | |
| Three Months Ended March 31, 2022 | | | | | | |
| Cost of revenues, supplier concentration risk | | * | | 60% | | 22% |
* Less than 10%.
- No transaction incurred for the 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$0.98 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$0.01 million) registered capital of the entity in cash, which amount was committed to be paid up before December 31, 2040.
The Company may from time to time become a party to various legal or administrative proceedings arising in its ordinary course of business. The Company evaluates the status of each legal matter and assesses the potential financial exposure. If the potential loss from any legal proceedings or litigation is considered probable and the amount can be reasonably estimated, the Company accrues a liability for the estimated loss. Significant judgment is required to determine the probability of a loss and whether the amount of the loss is reasonably estimated. As of the date hereof, based on the information currently available, the Company believes that the loss contingencies that may arise as a result of currently pending legal proceedings are not reasonably likely to have a material adverse effect on the Company’s business, results of operations, financial condition, and cash flows.
The Company follows ASC Topic 280 “Segment Reporting”, which requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and evaluating their performance. Reportable operating segments include components of an entity about which separate financial information is available and which operating results are regularly reviewed by the chief operating decision maker (“CODM”), the Company’s Chief Executive Officer, to make decisions about resources to be allocated to the segment and assess each operating segment’s performance.
Three Months Ended March 31, 2023 (Unaudited)
| | | Internet Ad and related
services | | | Ecommerce
O2O Ad and
marketing
services | | | Blockchain
technology | | | Corporate | | | Inter-
segment and
reconciling
item | | | Total | |
| | | US$(‘000) | | | US$(‘000) | | | US$(‘000) | | | US$(‘000) | | | US$(‘000) | | | US$(‘000) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues | | | 6,291 | | | | - | | | | 25 | | | | - | | | | - | | | | 6,316 | |
| Cost of revenues | | | 6,420 | | | | - | | | | 210 | | | | - | | | | - | | | | 6,630 | |
| Total operating expenses | | | 349 | | | | 4 | | | | - | | | | 645 | (1) | | | - | | | | 998 | |
| Depreciation and amortization expense included in cost of revenues and total operating expenses | | | 91 | | | | - | | | | 210 | | | | 21 | | | | - | | | | 322 | |
| Operating loss | | | (478 | ) | | | (4 | ) | | | (185 | ) | | | (645 | ) | | | - | | | | (1,312 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Change in fair value of warrant liabilities | | | - | | | | - | | | | - | | | | 101 | | | | - | | | | 101 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | (482 | ) | | | (1 | ) | | | (186 | ) | | | (474 | ) | | | | | | | (1,143 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets-March 31, 2023 | | | 10,060 | | | | 154 | | | | 1,472 | | | | 38,372 | | | | (32,227 | ) | | | 17,831 | |
| Total assets-December 31, 2022 | | | 10,385 | | | | 156 | | | | 1,682 | | | | 39,136 | | | | (31,701 | ) | | | 19,658 | |
| | (1) | Including approximately US$0.04 million share-based compensation expenses. |
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three Months Ended March 31, 2022 (Unaudited)
| | | Internet Ad and related
services | | | Ecommerce
O2O Ad and
marketing
services | | | Blockchain
technology | | | Corporate | | | Inter-
segment and
reconciling
item | | | Total | |
| | | US$(‘000) | | | US$(‘000) | | | US$(‘000) | | | US$(‘000) | | | US$(‘000) | | | US$(‘000) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues | | | 7,652 | | | | - | | | | - | | | | - | | | | - | | | | 7,652 | |
| Cost of revenues | | | 7,518 | | | | - | | | | - | | | | - | | | | - | | | | 7,518 | |
| Total operating expenses | | | 288 | | | | 329 | | | | 368 | | | | 700 | (1) | | | - | | | | 1,685 | |
| Depreciation and amortization expense included in cost of revenues and total operating expenses | | | 89 | | | | 75 | | | | 368 | | | | 22 | | | | - | | | | 554 | |
| Operating loss | | | (154 | ) | | | (329 | ) | | | (368 | ) | | | (700 | ) | | | - | | | | (1,551 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Change in fair value of warrant liabilities | | | - | | | | - | | | | - | | | | 795 | | | | - | | | | 795 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net (loss)/income | | | (167 | ) | | | (328 | ) | | | (368 | ) | | | 146 | | | | | | | | (717 | ) |
| | (1) | Including approximately US$0.06 million share-based compensation expenses. |
Basic and diluted loss per share for each of the periods presented are calculated as follows (All amounts, except number of shares and per share data, are presented in thousands of U.S. dollars):
| | | Three Months Ended March 31, | |
| | | 2023 | | | 2022 | |
| | | US$(’000) | | | US$(’000) | |
| | | (Unaudited) | | | (Unaudited) | |
| | | | | | | | | |
| Net loss attributable to ZW Data Action Technologies Inc. (numerator for basic and diluted loss per share) | | $ | (1,143 | ) | | $ | (717 | ) |
| | | | | | | | | |
| Weighted average number of common shares outstanding -Basic and diluted | | | 7,174,506 | | | | 7,079,962 | |
| | | | | | | | | |
| Loss per share -Basic and diluted | | $ | (0.16 | ) | | $ | (0.10 | ) |
For the three months ended March 31, 2023 and 2022, the diluted loss per share calculation did not include any outstanding warrants to purchase the Company’s common stock, because they were out-of-the-money and their effect was anti-dilutive.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| 21. | Share-based compensation expenses |
In June 2022, the Company granted and issued 0.08 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$1.75 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 was approximately US$0.04 million for the three months ended March 31, 2023.
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 ended 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 three months ended March 31, 2022 was approximately US$0.02 million.
For the three months ended March 31, 2022, the Company also amortized an approximately US$0.04 million compensation expense, which was related to fully-vested and nonforfeitable restricted common stock granted and issued to one of its service providers in March 2020.
The table below summarized share-based compensation expenses recorded for the three months ended March 31, 2023 and 2022, respectively:
| | | Three Months Ended March 31, | |
| | | 2023 | | | 2022 | |
| | | US$(’000) | | | US$(’000) | |
| | | (Unaudited) | | | (Unaudited) | |
| | | | | | | | | |
| Sales and marketing expenses | | | - | | | | - | |
| General and administrative expenses | | | 35 | | | | 56 | |
| Research and development expenses | | | - | | | | - | |
| Total | | | 35 | | | | 56 | |
The aggregate unrecognized share-based compensation expenses as of March 31, 2023 was approximately US$0.02 million, which will be recognized for the year ending December 31, 2023.
ZW DATA ACTION TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In April 2023, under its 2020 Omnibus Securities and Incentive Plan, the Company granted and issued 0.03 million fully-vested shares of the Company’s restricted common stock to one of its independent directors in exchange for his service to the Company for the year ending December 31, 2023. These shares were valued at the closing bid price of the Company’s common stock on the grant date. Total compensation expenses of approximately US$0.05 million will be recorded for the year ending December 31,2023.
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 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, there is no other material event which are required to be adjusted or disclosed as of the date of this consolidated financial statements.