Annual Statements Open main menu

ZW Data Action Technologies Inc. - Quarter Report: 2021 September (Form 10-Q)

cnet20210930_10q.htm
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2021

 

or

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____ to _____

 

 

Commission File Number: 001-34647

 

ZW Data Action Technologies Inc.

(Exact name of registrant as specified in its charter)

 

Nevada

20-4672080

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

Room 1106, Xinghuo Keji Plaza, No. 2 Fufeng Road, Fengtai District, Beijing, PRC 100070

 

(Address of principal executive offices) (Zip Code)

 

+86-10-6084-6616

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001

 

CNET

 

Nasdaq Capital Market

 

Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐  Accelerated filer ☐
Non-accelerated filer ☒Smaller reporting company ☒
 Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of November 15, 2021, the registrant had 35,332,677 shares of common stock outstanding.

 

 

 

 

TABLE OF CONTENTS

 

 

PART I. FINANCIAL INFORMATION

PAGE

     

Item 1. Interim Financial Statements

 
     
 

Condensed Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020

1-2

     
 

Condensed Consolidated Statements of Operations and Comprehensive (Loss)/Income for the Nine and Three Months Ended September 30, 2021 and 2020 (Unaudited)

3-4

     
 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (Unaudited)

5-6

     
 

Condensed Consolidated Statements of Changes in Equity for the Nine and Three Months Ended September 30, 2021 and 2020 (Unaudited)

7-8

     
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

9-30

     

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

31-40

   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

40

     

Item 4. Controls and Procedures

40

     

PART II. OTHER INFORMATION

 
     

Item 1. Legal Proceedings

41

     

Item 1A. Risk Factors

41

   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

41

     

Item 3. Defaults Upon Senior Securities

41

   

Item 4. Mine Safety Disclosures

41

     

Item 5. Other Information

41

     

Item 6. Exhibits

42

     

Signatures

43

 

 

 

PART I.  FINANCIAL INFORMATION

 

 

Item 1.    Interim Financial Statements

 

 

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for number of shares and per share data)

 

  

September 30, 2021

  

December 31, 2020

 
  

(US $)

  

(US $)

 
  

(Unaudited)

     

Assets

        

Current assets:

        

Cash and cash equivalents *

 $8,731  $4,297 

Accounts receivable, net of allowance for doubtful accounts of $2,198 and $4,247, respectively *

  2,669   2,407 

Prepayment and deposit to suppliers *

  8,673   4,657 

Due from related parties *

  96   61 

Other current assets *

  1,658   1,462 

Total current assets

  21,827   12,884 
         

Long-term investments *

  1,911   67 

Operating lease right-of-use assets *

  2,042   48 

Property and equipment, net *

  190   60 

Intangible assets, net *

  3,275   2,557 

Blockchain platform applications development costs

  4,408   4,406 

Long-term deposits and prepayments *

  481   39 

Deferred tax assets, net *

  781   606 

Total Assets

 $34,915  $20,667 
         

Liabilities and Equity

        

Current liabilities:

        

Accounts payable *

 $750  $608 

Advance from customers *

  1,311   1,436 

Accrued payroll and other accruals *

  350   489 

Taxes payable *

  3,414   3,430 

Operating lease liabilities *

  193   18 

Lease payment liability related to short-term leases *

  150   203 

Other current liabilities *

  136   333 

Warrant liabilities

  3,686   1,505 

Total current liabilities

  9,990   8,022 

 

1

 

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands, except for number of shares and per share data)

 

  

September 30, 2021

  

December 31, 2020

 
  

(US $)

  

(US $)

 
  

(Unaudited)

     

Long-term liabilities:

        

Operating lease liabilities-Non current *

  1,923   32 

Long-term borrowing from a related party

  135   134 

Total Liabilities

  12,048   8,188 
         

Commitments and contingencies

          
         

Equity:

        

ZW Data Action Technologies Inc.’s stockholders’ equity

        

Common stock (US$0.001 par value; authorized 100,000,000 and 50,000,000 shares at September 30, 2021 and December 31, 2020, respectively; issued and outstanding 35,332,677 shares and 26,062,915 shares at September 30, 2021 and December 31, 2020, respectively)

  35   26 

Additional paid-in capital

  61,761   49,772 

Statutory reserves

  2,598   2,598 

Accumulated deficit

  (42,566)  (40,980)

Accumulated other comprehensive income

  1,104   1,129 

Total ZW Data Action Technologies Inc.’s stockholders’ equity

  22,932   12,545 
         

Noncontrolling interests

  (65)  (66)

Total equity

  22,867   12,479 
         

Total Liabilities and Equity

 $34,915  $20,667 

 

*All of the VIEs' assets can be used to settle obligations of their primary beneficiary. Liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets (Note 2).

 

 

 

See notes to unaudited condensed consolidated financial statements

 

2

 

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)/INCOME

(In thousands, except for number of shares and per share data)

 

   

Nine Months Ended September 30,

   

Three Months Ended September 30,

 
   

2021

   

2020

   

2021

   

2020

 
   

(US $)

   

(US $)

   

(US $)

   

(US $)

 
   

(Unaudited)

   

(Unaudited)

   

(Unaudited)

   

(Unaudited)

 

Revenues

                               

From unrelated parties

  $ 34,843     $ 27,086     $ 11,896     $ 12,300  

From a related party

    4       18       4       4  

Total revenues

    34,847       27,104       11,900       12,304  

Cost of revenues

    35,739       26,548       11,857       12,945  

Gross (loss)/profit

    (892 )     556       43       (641 )
                                 

Operating expenses

                               

Sales and marketing expenses

    159       293       58       58  

General and administrative expenses

    10,366       4,520       1,471       592  

Research and development expenses

    251       443       88       113  

Total operating expenses

    10,776       5,256       1,617       763  
                                 

Loss from operations

    (11,668 )     (4,700 )     (1,574 )     (1,404 )
                                 

Other income/(expenses)

                               

Interest income/(expense), net

    3       -       1       1  

Other income/(expenses), net

    265       (4 )     (37 )     (21 )

Loss on disposal of long-term investments

    (38 )     -       -       -  

Change in fair value of warrant liabilities

    9,682       4       2,853       (64 )

Total other income/(expenses)

    9,912       -       2,817       (84 )
                                 

(Loss)/income before income tax benefit and noncontrolling interests

    (1,756 )     (4,700 )     1,243       (1,488 )

Income tax benefit

    171       87       131       155  

Net (loss)/income

    (1,585 )     (4,613 )     1,374       (1,333 )

Net (income)/loss attributable to noncontrolling interests

    (1 )     2       1       -  

Net (loss)/income attributable to ZW Data Action Technologies Inc.

  $ (1,586 )   $ (4,611 )   $ 1,375     $ (1,333 )

 

 

3

 

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)/INCOMECONTINUED

(In thousands, except for number of shares and per share data)

 

   

Nine Months Ended September 30,

   

Three Months Ended September 30,

 
   

2021

   

2020

   

2021

   

2020

 
   

(US $)

   

(US $)

   

(US $)

   

(US $)

 
   

(Unaudited)

   

(Unaudited)

   

(Unaudited)

   

(Unaudited)

 
                                 

Net (loss)/income

  $ (1,585 )   $ (4,613 )   $ 1,374     $ (1,333 )

Foreign currency translation loss

    (25 )     (135 )     (2 )     (203 )

Comprehensive (loss)/income

  $ (1,610 )   $ (4,748 )   $ 1,372     $ (1,536 )

Comprehensive (income)/loss attributable to noncontrolling interests

    (1 )     3       -       2  

Comprehensive (loss)/income attributable to ZW Data Action Technologies Inc.

  $ (1,611 )   $ (4,745 )   $ 1,372     $ (1,534 )
                                 

(Loss)/earnings per share

                               

(Loss)/earnings per common share

                               

Basic and diluted

  $ (0.05 )   $ (0.22 )   $ 0.04     $ (0.06 )
                                 

Weighted average number of common shares outstanding:

                               

Basic and diluted

    32,279,304       21,271,301       35,332,220       21,720,259  

 

 

See notes to unaudited condensed consolidated financial statements

 

4

 

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

   

Nine Months Ended September 30,

 
   

2021

   

2020

 
   

(US $)

   

(US $)

 
   

(Unaudited)

   

(Unaudited)

 

Cash flows from operating activities

               

Net loss

  $ (1,585 )   $ (4,613 )

Adjustments to reconcile net loss to net cash (used in)/provided by operating activities

               

Depreciation and amortization

    450       622  

Amortization of operating lease right-of-use assets

    149       7  

Share-based compensation expenses

    6,945       2,066  

Provision for allowances for doubtful accounts

    -       751  

Loss on disposal of long-term investments

    38       -  

Deferred taxes

    (171 )     (87 )

Change in fair value of warrant liabilities

    (9,682 )     (4 )

Other losses

    24       -  

Changes in operating assets and liabilities

               

Accounts receivable

    (257 )     254  

Prepayment and deposit to suppliers

    (1,698 )     1,077  

Due from related parties

    -       24  

Other current assets

    6       (5 )

Long-term deposits and prepayments

    (314 )     (375 )

Accounts payable

    142       137  

Advance from customers

    (133 )     754  

Accrued payroll and other accruals

    (126 )     (55 )

Other current liabilities

    (230 )     (38 )

Taxes payable

    (31 )     8  

Lease payment liability related to short-term leases

    (54 )     81  

Operating lease liabilities

    (73 )     (9 )

Net cash (used in)/provided by operating activities

    (6,600 )     595  
                 

Cash flows from investing activities

               

Payment for leasehold improvements and purchase of vehicles, furniture and office equipment

    (306 )     -  

Cash effect of deconsolidation of VIEs’ subsidiaries

    (8 )     -  

Investments and advances to ownership investee entities

    (1,919 )     (27 )

Short-term loan to an unrelated party

    (1,507 )     (944 )

Repayment of short-term loan from an unrelated party

    1,303       -  

Payment for purchase of software technologies

    (1,160 )     -  

Deposit and prepayment paid for contracts of other investing activities

    (2,500 )     -  

Payment for blockchain platform applications development costs

    -       (302 )

Net cash used in investing activities

    (6,097 )     (1,273 )

 

5

 

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(In thousands)

 

   

Nine Months Ended September 30,

 
   

2021

   

2020

 
   

(US $)

   

(US $)

 
   

(Unaudited)

   

(Unaudited)

 

Cash flows from financing activities

               

Proceeds from issuance of common stock and warrant (net of cash offering cost of US$1,600)

    17,111       -  

Repayment of short-term bank loan

    -       (429 )

Net cash provided by/(used in) financing activities

    17,111       (429 )
                 

Effect of exchange rate fluctuation on cash and cash equivalents

    20       4  
                 

Net increase/(decrease) in cash and cash equivalents

    4,434       (1,103 )
                 

Cash and cash equivalents at beginning of the period

    4,297       1,603  

Cash and cash equivalents at end of the period

  $ 8,731     $ 500  
                 

Supplemental disclosure of cash flow information

               
                 

Income taxes paid

  $ -     $ -  

Interest expense paid

  $ -     $ 2  

 

 

See notes to unaudited condensed consolidated financial statements

 

6

 

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2021

(In thousands, except for number of shares)

 

  

Common stock

  

Additional paid-in capital

  

Statutory reserves

  

Accumulated deficit

  

Accumulated other comprehensive income

  

Noncontrolling interests

  

Total equity

 
  

Number of shares

  

Amount

                         
      

(US $)

  

(US $)

  

(US $)

  

(US $)

  

(US $)

  

(US $)

  

(US $)

 
                                 

Balance, January 1, 2021

  26,062,915  $26  $49,772  $2,598  $(40,980) $1,129  $(66) $12,479 

Issuance of common stock for private placement, net of $10.48 million proceeds allocated to investor warrants labilities and $3.05 million direct offering costs (including $1.45 million proceeds allocated to placement agent warrants liabilities), respectively

  5,212,000   5   5,185   -   -   -   -   5,190 

Share-based compensation in exchange for services from employees and directors

  4,015,735   4   6,699   -   -   -   -   6,703 

Net (loss)/income for the period

  -   -   -   -   (2,961)  -   2   (2,959)

Foreign currency translation adjustment

  -   -   -   -   -   (22)  (1)  (23)

Balance, June 30, 2021 (unaudited)

  35,290,650  $35  $61,656  $2,598  $(43,941) $1,107  $(65) $21,390 

Share-based compensation in exchange for services from employees and directors

  -   -   23   -   -   -   -   23 

Cashless exercise of warrants

  42,027   -   82   -   -   -   -   82 

Net income/(loss) for the period

  -   -   -   -   1,375   -   (1)  1,374 

Foreign currency translation adjustment

  -   -   -   -   -   (3)  1   (2)

Balance, September 30, 2021 (Unaudited)

  35,332,677  $35  $61,761  $2,598  $(42,566) $1,104  $(65) $22,867 

 

 

See notes to unaudited condensed consolidated financial statements

 

7

 

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2020

(In thousands, except for number of shares)

 

  

Common stock

  

Additional paid-in capital

  

Statutory reserves

  

Accumulated deficit

  

Accumulated other comprehensive income

  

Noncontrolling interests

  

Total equity

 
  

Number of shares

  

Amount

                         
      

(US $)

  

(US $)

  

(US $)

  

(US $)

  

(US $)

  

(US $)

  

(US $)

 
                                 

Balance, January 1, 2020

  19,629,403  $20  $43,111  $2,607  $(35,773) $1,505  $(57) $11,413 

Share-based compensation in exchange for services from nonemployees

  430,000   -   477   -   -   -   -   477 

Share-based compensation in exchange for services from employees and directors

  1,632,523   2   1,905   -   -   -   -   1,907 

Net loss for the period

  -   -   -   -   (3,278)  -   (2)  (3,280)

Foreign currency translation adjustment

  -   -   -   -   -   67   1   68 

Balance, June 30, 2020 (unaudited)

  21,691,926   22   45,493   2,607   (39,051)  1,572   (58)  10,585 

Share-based compensation in exchange for services from nonemployees

  50,000   -   76   -   -   -   -   76 

Net loss for the period

  -   -   -   -   (1,333)  -   -   (1,333)

Foreign currency translation adjustment

  -   -   -   -   -   (201)  (2)  (203)

Balance, September 30, 2020 (Unaudited)

  21,741,926  $22  $45,569  $2,607  $(40,384) $1,371  $(60) $9,125 

 

 

See notes to unaudited condensed consolidated financial statements

 

8

 

ZW DATA ACTION TECHNOLOGIES INC.

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

 

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, 2021 and December 31, 2020, respectively:

 

  

September 30,

2021

  

December 31,
2020

 
  

US$(000)

  

US$(000)

 
  

(Unaudited)

     

Assets

        

Current assets:

        

Cash and cash equivalents

 $143  $277 

Accounts receivable, net

  2,155   1,142 

Prepayment and deposit to suppliers

  4,233   2,818 

Due from related parties

  96   61 

Other current assets

  3   10 

Total current assets

  6,630   4,308 
         

Long-term investments

  449   67 

Operating lease right-of-use assets

  23   48 

Property and equipment, net

  86   32 

Intangible assets, net

  -   9 

Long-term deposits and prepayments

  88   - 

Deferred tax assets, net

  436   536 

Total Assets

 $7,712  $5,000 
         

Liabilities

        

Current liabilities:

        

Accounts payable

 $750  $270 

Advance from customers

  1,108   1,436 

Accrued payroll and other accruals

  75   168 

Taxes payable

  2,737   2,755 

Operating lease liabilities

  9   18 

Lease payment liability related to short-term leases

  109   108 

Other current liabilities

  73   213 

Total current liabilities

  4,861   4,968 
         

Operating lease liabilities-Non current

  10   32 

Total Liabilities

 $4,871  $5,000 

 

All of the VIEs' assets can be used to settle obligations of their primary beneficiary. Liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets.

 

9

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Summarized below is the information related to the financial performance of the VIEs reported in the Company’s condensed consolidated statements of operations and comprehensive loss for the nine and three months ended September 30, 2021 and 2020, respectively:

 

  

Nine Months Ended September 30,

  

Three Months Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 
  

US$(000)

  

US$(000)

  

US$(000)

  

US$(000)

 
  

(Unaudited)

  

(Unaudited)

  

(Unaudited)

  

(Unaudited)

 
                 

Revenues

 $30,932  $23,683  $10,314  $11,135 

Cost of revenues

  (34,614)  (24,051)  (11,482)  (11,729)

Total operating expenses

  (1,184)  (1,515)  (472)  (123)

Net loss before allocation to noncontrolling interests

  (5,062)  (1,802)  (1,655)  (642)

 

 
 

3.

  Summary of significant accounting policies

 

 

a)

Basis of presentation 

 

The unaudited condensed consolidated interim financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

The unaudited condensed consolidated interim financial information as of September 30, 2021 and for the nine and three months ended September 30, 2021 and 2020 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, 2020, previously filed with the SEC (the “2020 Form 10-K”) on April 13, 2021.

 

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, 2021, its condensed consolidated results of operations for the nine and three months ended September 30, 2021 and 2020, and its condensed consolidated cash flows for the nine months ended September 30, 2021 and 2020, 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.

 

 

c)

Use of estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of these 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:

 

10

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

  

September 30, 2021

  

December 31, 2020

 
         

Balance sheet items, except for equity accounts

  6.4854   6.5249 

 

  

Nine Months Ended September 30,

 
  

2021

  

2020

 
         

Items in the statements of operations and comprehensive loss

  6.4714   6.9917 

 

  

Three Months Ended September 30,

 
  

2021

  

2020

 
         

Items in the statements of operations and comprehensive loss

  6.4707   6.9205 

 

No representation is made that the RMB amounts could have been, or could be converted into US$ at the above rates.

 

 

e)

Fair value measurement

 

Liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2021 and December 31, 2020 are as follows:

 

      

Fair value measurement at reporting date using

 
  

As of

September 30, 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)

 
  

(Unaudited)

             
                 

Warrant liabilities (Note 16)

  3,686   -   -   3,686 

 

      

Fair value measurement at reporting date using

 
  

As of

December 31, 2020

  

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)

  1,505   -   -   1,505 

 

 

f)

Revenue recognition

 

The following tables present the Company’s revenues disaggregated by products and services and timing of revenue recognition:

 

  

Nine Months Ended September 30,

  

Three Months Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 
  

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

  28,613   18,004   9,648   8,706 

--online advertising placements

  5,720   5,679   2,125   2,429 

--data and technical services

  -   900   -   300 

Ecommerce O2O advertising and marketing services

  514   1,276   127   269 

Technical solution services

  -   1,245   -   600 

Total revenues

 $34,847  $27,104  $11,900  $12,304 

 

11

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

  

Nine Months Ended September 30,

  

Three Months Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 
  

US$(000)

  

US$(000)

  

US$(000)

  

US$(000)

 
  

(Unaudited)

  

(Unaudited)

  

(Unaudited)

  

(Unaudited)

 
                 

Revenue recognized over time

  34,847   25,859   11,900   11,704 

Revenue recognized at a point in time

  -   1,245   -   600 

Total revenues

 $34,847  $27,104  $11,900  $12,304 

 

Contract costs

 

For the nine and three months ended September 30, 2021 and 2020, 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, 2021:

 

  

Contract liabilities

 
  

US$(000)

 
     

Balance as of January 1, 2021

  1,436 

Exchange translation adjustment

  9 

Revenue recognized from beginning contract liability balances

  (1,305)

Advances received from customers related to unsatisfied performance obligations

  1,171 

Balance as of September 30, 2021 (Unaudited)

 $1,311 

 

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, 2021 and 2020.

 

For the nine and three months ended September 30, 2021 and 2020, there is no revenue recognized from performance obligations that were satisfied in prior periods.

 

 

g)

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 nine months ended September 30, 2021 and 2020 were approximately US$0.25 million and US$0.44 million, respectively. Expenses for research and development for the three months ended September 30, 2021 and 2020 were approximately US$0.09 million and US$0.11 million, respectively.

 

12

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

h)

Lease

 

As of September 30, 2021, operating lease right-of-use assets and total operating lease liabilities recognized was approximately US$2.04 million and US$2.12 million, respectively.

 

Maturity of operating lease liabilities

 

   

Operating leases

 
   

US$(000)

 
   

(Unaudited)

 
      

Three months ending December 31, 2021

   73 

Year ending December 31,

     
-2022   315 
-2023   330 
-2024   336 
-2025   353 
-2026   370 

-thereafter

   866 

Total undiscounted lease payments

   2,643 

Less: imputed interest

   (527)

Total operating lease liabilities as of September 30, 2021

  $2,116 
      

Including:

     

Operating lease liabilities

   193 

Operating lease liabilities-Non current

   1,923 
   $2,116 

 

Operating lease expenses:

 

  

Nine Months Ended September 30,

  

Three Months Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 
  

US$(000)

  

US$(000)

  

US$(000)

  

US$(000)

 
  

(Unaudited)

  

(Unaudited)

  

(Unaudited)

  

(Unaudited)

 
                 

Long-term operating lease contracts

  212   7   88   2 

Short-term operating lease contracts

  45   114   15   35 

Total

 $257  $121  $103  $37 

 

Supplemental information related to operating leases:

 

  

Nine Months Ended September 30, 2021

 
  

(Unaudited)

 
     

Operating cash flows used for operating leases (US$’000)

  136 

Right-of-use assets obtained in exchange for new lease liabilities (US$’000)

  2,179 

Weighted-average remaining lease term (years)

  7.38 

Weighted-average discount rate

  6%

 

13

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 
 

4.

  Accounts receivable, net

 

  

September 30,

2021

  

December 31,

2020

 
  

US$(000)

  

US$(000)

 
  

(Unaudited)

     
         

Accounts receivable

  4,867   6,654 

Allowance for doubtful accounts

  (2,198)  (4,247)

Accounts receivable, net

  2,669   2,407 

 

All of the accounts receivable are non-interest bearing. Based on the assessment of the collectability of the accounts receivable as of September 30, 2021 and December 31, 2020, the Company provided approximately US$2.20 million and US$4.25 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, 2021, no allowance for doubtful accounts was provided. For the nine and three months ended September 30, 2020, approximately US$0.75 million and US$nil million allowance for doubtful accounts was provided, respectively. For the nine months ended September 30, 2021, the Company charged off approximately US$2.08 million accounts receivable against its related allowance, as all means of collection have been exhausted and the potential for recovery is considered remote.

 

 
 

5.

  Prepayments and deposit to suppliers

 

   

September 30,

2021

   

December 31,

2020

 
   

US$(000)

   

US$(000)

 
   

(Unaudited)

         
                 

Deposits to advertising resources providers

    620       307  

Prepayments to advertising resources providers

    5,111       3,696  

Deposit and prepayment for other investing contracts

    2,500       -  

Other deposits and prepayments

    442       654  
      8,673       4,657  

 

As of September 30, 2021, deposit and prepayment for other investing contracts consisted of a US$1.0 million refundable deposit paid for a potential merge and acquisition transaction, which will be refunded if no definitive agreement is reached among the parties before the expected closing date, i.e. December 31, 2021, and a US$1.5 million prepayment paid in accordance with a cryptocurrency mining machine purchase agreement, respectively.

 

As of the date hereof, the Company is in the due diligence process for the potential merge and acquisition transaction.

 

Due to the recent policies promulgated by the Chinese government which ban cryptocurrency mining business commencing in May 2021, the Company cancelled its cryptocurrency mining machine purchase agreement with the supplier and expects to be refunded with the prepayment of US$1.5 million before the end of fiscal 2021.

 

 
 

6.

  Due from related parties

 

  

September 30,

2021

  

December 31,

2020

 
  

US$(000)

  

US$(000)

 
  

(Unaudited)

     
         

Zhongwang Xiyue Technology (Beijing) Co., Ltd. (“Zhongwang Xiyue”)

  61   61 

Business Opportunity Chain (Guangzhou) Technology Co., Ltd. (“Business Opportunity Chain Guangzhou”)

  8   - 

Guangzhou Gong Xiang Technology Co., Ltd. (“Gong Xiang Technology”)

  27   - 

Due from related parties

  96   61 

 

14

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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, 2021 and December 31, 2020, 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, 2021, due from Gong Xiang Technology and Business Opportunity Chain Guangzhou were short-term working capital loans provided to these investee entities, which are expected to be repaid to the Company for the year ending December 31, 2021.

 

 
 

7.

  Other current assets

 

  

September 30, 2021

  

December 31,2020

 
  

Gross

  

Allowance for doubtful accounts

  

Net

  

Gross

  

Allowance for doubtful accounts

  

Net

 
  

US$(000)

  

US$(000)

  

US$(000)

  

US$(000)

  

US$(000)

  

US$(000)

 
  

(Unaudited)

  

(Unaudited)

  

(Unaudited)

             
                         

Staff advances for business operations

  10   -   10   18   -   18 

Short-term loan to an unrelated party

  1,648   -   1,648   1,444   -   1,444 

Total

  1,658   -   1,658   1,462   -   1,462 

 

As of September 30, 2021, other current assets primarily include a temporary working capital loan that the Company provided to an unrelated party. This loan is unsecured, interest free, and is expected to be fully repaid to the Company in March 2022.

 

 
 

8.

  Long-term investments

 

  

Amount

 
  

US$(000)

 
     

Balance as of January 1, 2021

  67 

Cash investments during the year

  1,882 

Disposed during the year

  (38)

Balance as of September 30, 2021 (Unaudited)

  1,911 

 

As of September 30, 2021, except for long-term investments which were fully impaired, the Company beneficially owned a 15.38%, 10%, 15%, 17% and 19% equity interest in each New Business Holdings Limited (“New Business”), Guang Dong WeFriend Co., Ltd. (“Guangdong WeFriend”), 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.

 

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.

 

15

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

For the nine months ended September 30, 2021, the Company made a cash investment of approximately US$1.0 million, US$0.46 million, US$0.23 million, US$0.11 million and US$0.08 million to each New Business, Guangdong WeFriend, Gong Xiang Technology, Business Opportunity Chain Guangzhou and Xiao Peng Education, respectively.

 

In May 2021, the Company disposed the 4.9% equity interest it owned in Local Chain Xi’an Information Technology Co., Ltd. (“Local Chain Xi’an”) to an unrelated party and recorded an approximately US$0.04 million disposal loss for the nine months ended September 30, 2021.

 

 
 

9.

  Property and equipment, net

 

   

September 30,

2021

   

December 31,

2020

 
   

US$(000)

   

US$(000)

 
   

(Unaudited)

         
                 

Vehicles

    918       811  

Office equipment

    928       894  

Electronic devices

    618       615  

Property and equipment, cost

    2,464       2,320  

Less: accumulated depreciation

    (2,274 )     (2,260 )

Property and equipment, net

    190       60  

 

Depreciation expenses for the nine months ended September 30, 2021 and 2020 were approximately US$0.009 million and US$0.006 million, respectively. Depreciation expenses for the three months ended September 30, 2021 and 2020 were approximately US$0.005 million and US$0.002 million, respectively.

 

 
 

10.

  Intangible assets, net

 

  

As of September 30, 2021 (Unaudited)

 

Items

 

Gross

Carrying

Value

  

Accumulated

Amortization

  

Impairment

  

Net

Carrying

Value

 
  

US$(000)

  

US$(000)

  

US$(000)

  

US$(000)

 

Intangible assets subject to amortization:

                

Cloud compute software technology

  1,431   (992)  (439)  - 

Internet Ad tracking system

  1,161   (116)  -   1,045 

Live streaming technology

  1,500   (250)  -   1,250 

Licensed products use right

  1,206   (226)  -   980 

Other computer software

  121   (121)  -   - 

Total

 $5,419  $(1,705) $(439)  $3,275 

 

  

As of December 31, 2020

 

Items

 

Gross

Carrying

Value

  

Accumulated

Amortization

  

Impairment

  

Net

Carrying

Value

 
  

US$(000)

  

US$(000)

  

US$(000)

  

US$(000)

 

Intangible assets subject to amortization:

                

Cloud compute software technology

  1,423   (978)  (436)  9 

Live streaming technology

  1,500   (25)  -   1,475 

Licensed products use right

  1,208   (135)  -   1,073 

Other computer software

  120   (120)  -   - 

Total

 $4,251  $(1,258) $(436) $2,557 

 

16

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Amortization expenses for the nine months ended September 30, 2021 and 2020 were approximately US$0.44 million and US$0.62 million, respectively. Amortization expenses for the three months ended September 30, 2021 and 2020 were approximately US$0.16 million and US$0.21 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 5.45 years as of September 30, 2021, and assuming no further subsequent impairment of the underlying intangible assets, the estimated future amortization expenses is  approximately US$0.16 million for the year ending December 31, 2021, approximately US$0.65 million each year for the year ending December 31, 2022 through 2024, approximately US$0.63 million for the year ending December 31, 2025, and approximately US$0.18 million for the year ending December 31, 2026.

 

 
 

11.

  Blockchain software application platform development costs

 

In 2018, the Company entered into technical development contracts with two unrelated entities for the development of two blockchain technology-based platform applications with a contract amount of US$4.50 million and RMB3.0 million (approximately US$0.46 million), respectively. These two blockchain technology-based applications are named OMG and Bo!News, respectively. As of September 30, 2021, in accordance with ASC 350-40 “Intangibles-Goodwill and Other-Internal-Use Software”, the Company capitalized approximately US$4.41 million development costs in the aggregate under these two contracts. During 2020, the Company further developed its Blockchain Integrated Framework (“BIF”) for retail business, which provides a framework platform for more accessible and efficient integration of small and medium sized retail business users. As of September 30, 2021, the Company had finalized the upgrade and integration of the Bo!News application, which provides a digitalized franchise management system for the SMEs, and the BIF for the SMEs’ smart retail business, which provides blockchain Software-as-a-Service (“SaaS”) services, including: OMG membership card management, trusted and decentralized payment management and Non-Fungible Token (“NFT”) management services. The Company expects to fully launch these applications during the fourth fiscal quarter of 2021, after completing the test run processes.

 

 
 

12.

  Long-term deposits and prepayments

 

As of September 30, 2021, long-term deposits and prepayments consisted of an approximately US$0.31 million of the Company’s operating deposits and prepayments that were not expected to be refunded or consumed within one year of September 30, 2021, and an approximately US$0.17 million prepayment for the leasehold improvement project of the Company’s Guangzhou office, which has been completed by the end of October 2021.

 

 
 

13.

  Accrued payroll and other accruals

 

  

September 30,

2021

  

December 31,

2020

 
  

US$(000)

  

US$(000)

 
  

(Unaudited)

     
         

Accrued payroll and staff welfare

  174   229 

Accrued operating expenses

  176   260 
   350   489 

 

17

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 
 

14.

  Taxation

 

As of September 30, 2021 and December 31, 2020, taxes payable consists of:

 

  

September 30,

2021

  

December 31,

2020

 
  

US$(000)

  

US$(000)

 
  

(Unaudited)

     
         

Turnover tax and surcharge payable

  1,326   1,353 

Enterprise income tax payable

  2,088   2,077 

Total taxes payable

  3,414   3,430 

 

For the nine and three months ended September 30, 2021 and 2020, the Company’s income tax benefit consisted of:

 

  

Nine Months Ended September 30,

  

Three Months Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 
  

US$(000)

  

US$(000)

  

US$(000)

  

US$(000)

 
  

(Unaudited)

  

(Unaudited)

  

(Unaudited)

  

(Unaudited)

 
                 

Current

  -   -   -   57 

Deferred

  171   87   131   98 

Income tax benefit

  171   87   131   155 

 

The Company’s deferred tax assets as of September 30, 2021 and December 31, 2020 were as follows:

 

  

September 30,

2021

  

December 31,

2020

 
  

US$(000)

  

US$(000)

 
  

(Unaudited)

     
         

Tax effect of net operating losses carried forward

  12,457   10,123 

Operating lease cost

  20   - 

Bad debts provision

  330   728 

Valuation allowance

  (12,026)  (10,245)

Deferred tax assets, net

  781   606 

 

The U.S. holding company has incurred aggregate NOLs of approximately US$30.7 million and US$23.3 million as of September 30, 2021 and December 31, 2020, 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$24.9 million and US$22.5 million as of September 30, 2021 and December 31, 2020, respectively. The losses carryforwards gradually expire over time, the last of which expires in 2031 due to certain subsidiary enjoys the High and New Technology Enterprise’s privileged NOLs carryforward policy. 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$12.0 million and US$10.2 million valuation allowance as of September 30, 2021 and December 31, 2020, 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.

 

18

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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. For the nine and three months ended September 30, 2020, the Company recorded approximately US$0.90 million and US$0.14 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 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.

 

 
 

16.

  The Financing and warrant liabilities

 

The February 2021 Financing:

 

On February 18, 2021 (the “Closing Date”), the Company consummated a registered direct offering of 5,212,000 shares of the Company’s common stock to certain institutional investors at a purchase price of US$3.59 per share (the “February 2021 Financing”). As part of the transaction, the Company also issued to the investors warrants to purchase up to 2,606,000 shares of the Company’s common stock at an exercise price of US$3.59 per share (the “2021 Investor Warrants”). The 2021 Investor Warrants are exercisable at any time on or after February 18, 2021 and on or prior to the close of business on August 18, 2024 (the third and one-half years anniversary of the Closing Date). The Company received gross proceeds of approximately US$18.7 million from the February 2021 Financing.

 

The placement agent of the February 2021 Financing received (i) a placement fee in the amount equal to 7% of the gross proceeds and (ii) warrants to purchase up to 364,840 shares of the Company’s common stock at an exercise price of US$4.4875 per share. (the “2021 Placement Agent Warrants” and together with the 2021 Investor Warrants, the “2021 Warrants”). The 2021 Placement Agent Warrants are exercisable at any time on or after August 18, 2021 (the six-month anniversary of the Closing Date) and on or prior to the close of business on August 18, 2024 (the third and one-half years anniversary of the Closing Date).

 

The initial exercise prices of the 2021 Warrants are subject to anti-dilution provisions that require adjustment of the number of shares of common stock that may be acquired upon exercise of the 2021 Warrants, or to the exercise price of such shares, or both, to reflect stock dividends and splits, subsequent rights offerings, pro-rata distributions, and certain fundamental transactions. The 2021 Warrants also contain “full ratchet” price protection in the event of subsequent issuances below the applicable exercise price (the “Down round feature”).

 

The 2021 Warrants may not be exercised if it would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common shares (the “Beneficial Ownership Limitation”). The holder of the 2021 Warrants, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation, provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the Company’s outstanding common shares. Any increase in the Beneficial Ownership Limitation will not be effective until the 61st day after such notice is delivered to the Company.

 

Accounting for securities issued in the February 2021 Financing

 

The Company determined that the Company’s common stock issued in the February 2021 Financing should be classified as permanent equity as there was no redemption provision at the option of the holders that is not within the control the Company on or after an agreed upon date.

 

The Company analyzed the 2021 Warrants issued in the February 2021 Financing in accordance with ASC Topic 815 “Derivatives and Hedging”. In accordance with ASC Topic 815, the Company determined that the 2021 Warrants should not be considered index to its own stock, as the strike price of the 2021 Warrants is dominated in a currency (U.S. dollar) other than the functional currency of the Company (Renminbi or Yuan). As a result, the 2021 Warrants does not meet the scope exception of ASC Topic 815, therefore, should be accounted for as derivative liabilities and measure at fair value with changes in fair value be recorded in earnings in each reporting period.

 

19

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Fair value of the warrants

 

The Company used Binomial model to determine the fair value of the 2021 Warrants based on the assumptions summarized as below:

 

  

As of February 18, 2021

 
         
  

2021 Investor
Warrants

  

2021 Placement Agent
Warrants

 
         

Stock price

 $4.48  $4.48 

Years to maturity

  3.50   3.50 

Risk-free interest rate

  0.26%  0.26%

Dividend yield

  -   - 

Expected volatility

  168%  168%

Exercise Price

 $3.59  $4.4875 
         

Fair value of the warrant

 $4.02  $3.96 
         

Warrant liabilities (US$’000)

 $10,476  $1,445 

 

Stock price is the closing bid price of the Company’s common stock at the respective valuation date. Years to maturity is the respective remaining contract life of the warrants. Yield-to-maturities in continuous compounding of the United States Government Bonds with the time-to-maturities same as the respective warrant are adopted as the risk-free rate. Annualized historical stock price volatility of the Company at the respective valuation date is deemed to be appropriate to serve as the expected volatility of the stock price of the Company. The dividend yield is calculated based on management’s estimate of dividends to be paid on the underlying stock. Exercise price is the contractual exercise price of the 2021 Warrants.

 

Allocation of gross proceeds from the February 2021 Financing

 

The Company allocated the total proceeds from the February 2021 Financing as summarized below:

 

  

Initial measurement

 
  

(USD000)

 
     

Investor Warrants

  10,476 

Common Stock (par value and additional paid in capital)

  8,235 

Total proceeds from the Financing

  18,711 

 

The 2021 Investor Warrants issued in the February 2021 Financing was initially measurement at fair value. The residual amount, representing difference between the total proceeds and the fair value of the 2021 Investor Warrants as of the Closing Date was assigned as the carrying value of the common stock issued in the February 2021 Financing.

 

Offering costs

 

Offering costs in the amount of approximately US$3.05 million consisting of cash payment of approximately US$1.31 million placement fee, approximately US$0.29 million other direct offering cost of professional service fees and fair value of the 2021 Placement Agent Warrants of approximately US$1.45 million, which were charged to additional paid-in-capital.

 

Subsequent measurement and changes in fair value of the 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, December 2020 and January 2018, 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.

 

20

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

For the nine and three months ended September 30, 2021:

 

Warrants issued in the February 2021 Financing:

 

  

2021 Investor Warrants

  

2021 Placement Agent Warrants

 
  

September 30, 2021

  

June 30, 2021

  

September 30, 2021

  

June 30, 2021

 
                 

Stock price

 $1.26  $2.00  $1.26  $2.00 

Years to maturity

  2.88   3.14   2.88   3.14 

Risk-free interest rate

  0.50%  0.48%  0.50%  0.48%

Dividend yield

  -   -   -   - 

Expected volatility

  115%  114%  115%  114%

Exercise Price

 $3.59  $3.59  $4.4875  $4.4875 
                 

Fair value of the warrant

 $0.70  $1.25  $0.65  $1.18 
                 

Warrant liabilities (US$’000)

 $1,824  $3,257  $237  $431 

 

Warrants issued in the 2020 Financing:

 

On December 14, 2020, the Company consummated a registered direct offering of 4,320,989 shares of the Company’s common stock to certain institutional investors at a purchase price of US$1.62 per share (the “2020 Financing”). As part of the transaction, the Company also issued, to the investors warrants to purchase up to 1,728,396 shares of the Company’s common stock at an exercise price of U$$2.03 per share (the “2020 Investor Warrants”), and to the placement agent, warrants to purchase up to 302,469 shares of the Company’s common stock on substantially the same terms as the 2020 Investor Warrants (the “2020 Placement Agent Warrants” and together with the 2020 Investor Warrants, the “2020 Warrants”). The 2020 Warrants are exercisable at any time on or after June 14, 2021 and on or prior to the close of business on December 14, 2023.

 

  

2020 Investor Warrants and 2020 Placement Agent Warrants

 
  

September 30, 2021

  

June 30, 2021

  

December 31, 2020

 
             

Stock price

 $1.26  $2.00  $1.35 

Years to maturity

  2.20   2.45   2.95 

Risk-free interest rate

  0.34%  0.34%  0.17%

Dividend yield

  -   -   - 

Expected volatility

  122%  120%  102%

Exercise Price

 $2.03  $2.03  $2.03 
             

Fair value of the warrant

 $0.80  $1.40  $0.74 
             

Investor warrants liabilities (US$’000)

 $1,383  $2,420  $1,279 
             

Placement agent warrants liabilities (US$’000)

 $242  $423  $224 

 

Warrants issued in the 2018 Financing:

 

On January 17, 2018, the Company consummated a registered direct offering of 2,150,001 shares of the Company’s common stock to certain institutional investors at a purchase price of US$5.15 per share (“the 2018 Financing”). As part of the transaction, the Company also issued, to the investors warrants (the “2018 Investor Warrants”) to purchase up to 645,000 shares of the Company’s common stock at an exercise price of $6.60 per share. The 2018 Investors Warrants expired on July 18, 2020. The placement agent of the 2018 Financing received warrants to purchase up to 129,000 shares of the Company’s common stock at an exercise price of US$6.60 per share, with a three-year term (the “2018 Placement Agent Warrants” and together with the 2018 Investor Warrants, the “2018 Warrants”). On September 25, 2019, the exercise price of the 2018 Warrants was adjusted to US$1.4927. On January 18, 2021, the expiration date of the 2018 Placement Agent Warrants was extended to July 18, 2021.

21

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

  

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 2018 Placement Agent Warrants were cashless exercised on July 2, 2021. As a result, the Company issued approximately 0.04 million shares of the Company’s restricted common stock, with a loss of approximately US$0.02 million recognized in other income/(loss) account, which represented the difference between the fair value of these warrants on the date of the exercise and the cost of the Company’s restricted common stock issued, based on the close bid price of the Company’s common stock on the same date.

 

For the nine and three months ended September 30, 2020:

 

Warrants issued in the 2018 Financing:

 

  

2018 Investors warrants

  

2018 Placement agent warrants

 
  

September 30,

2020 #

  

June 30,

2020

  

December 31,

2019

  

September 30,

2020

  

June 30,

2020

  

December 31,

2019

 
                         

Stock price

    $1.00  $1.17  $2.02  $1.00  $1.17 

Years to maturity

     0.05   0.55   0.30   0.55   1.05 

Risk-free interest rate

     0.19%  1.58%  0.13%  0.18%  1.57%

Dividend yield

     -   -   -   -   - 

Expected volatility

     143%  60%  133%  112%  80%

Exercise Price

    $1.4927  $1.4927  $1.4927  $1.4927  $1.4927 
                         

Fair value of the warrant

 $-  $0.02  $0.11  $0.80  $0.20  $0.28 
                         

Warrant Liabilities (US$’000)

 $-  $13  $71  $103  $26  $36 

 

# The 2018 investors warrants had expired during the three months ended September 30, 2020.

 

Changes in fair value of warrant liabilities

 

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 February 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)

 

22

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Nine and Three Months Ended September 30, 2020 (Unaudited)

 

  

 

  

 

  

 

  

Change in Fair Value (gain)/loss

 
    

As of

September 30, 2020

    

As of

June 30, 2020

    

As of

December 31, 2019

  

Nine Months Ended

September 30, 2020

  

Three Months Ended

September 30, 2020

 
  

(US$000)

  

(US$000)

  

(US$000)

  

(US$000)

  

(US$000)

 
                     

Warrants issued in the 2018 Financing:

 

--Investor Warrants

  -   13   71   (71)  (13)

--Placement Agent Warrants

  103   26   36   67   77 
   103   39   107   (4)  64 

 

Warrants issued and outstanding as of September 30, 2021 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, 2021

  2,159,865   2.78  $2.00   129,000   0.05  $1.4927 

Granted/Vested

  2,970,840   2.88  $3.70   5,001,705   2.61  $3.02 

Forfeited

  -           -         

Exercised

  (129,000)     $1.4927   (129,000)     $1.4927 

Balance, September 30, 2021 (Unaudited)

  5,001,705   2.61  $3.02   5,001,705   2.61  $3.02 

 

 
 

17.

  Restricted net assets

 

As substantially all of the Company’s operations are conducted through its PRC subsidiaries and VIEs, the Company’s ability to pay dividends is primarily dependent on receiving distributions of funds from its PRC subsidiaries and VIEs. Relevant PRC statutory laws and regulations permit payments of dividends by its PRC subsidiaries and VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations and after it has met the PRC requirements for appropriation to statutory reserves. Paid in capital of the PRC subsidiaries and VIEs included in the Company’s consolidated net assets are also non-distributable for dividend purposes.

 

In accordance with the PRC regulations on Enterprises with Foreign Investment, a WFOE established in the PRC is required to provide certain statutory reserves, namely general reserve fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A WFOE is required to allocate at least 10% of its annual after-tax profit to the general reserve until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. Rise King WFOE is subject to the above mandated restrictions on distributable profits. Additionally, in accordance with the Company Law of the PRC, a domestic enterprise is required to provide a statutory common reserve of at least 10% of its annual after-tax profit until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to provide for a discretionary surplus reserve, at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. All of the Company’s other PRC subsidiaries and PRC VIEs are subject to the above mandated restrictions on distributable profits.

 

In accordance with these PRC laws and regulations, the Company’s PRC subsidiaries and VIEs are restricted in their ability to transfer a portion of their net assets to the Company. As of September 30, 2021 and December 31, 2020, net assets restricted in the aggregate, which include paid-in capital and statutory reserve funds of the Company’s PRC subsidiaries and VIEs that are included in the Company’s consolidated net assets, were approximately US$13.2 million and US$8.2 million, respectively.

 

23

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The current PRC Enterprise Income Tax (“EIT”) Law also imposes a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside China. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company.

 

The ability of the Company’s PRC subsidiaries and VIEs to make dividends and other payments to the Company may also be restricted by changes in applicable foreign exchange and other laws and regulations.

 

Foreign currency exchange regulation in China is primarily governed by the following rules:

 

 

   ●

   Foreign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules;

 

   ●

   Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.

 

Currently, under the Administration Rules, Renminbi is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of China, unless the prior approval of the State Administration of Foreign Exchange (the “SAFE”) is obtained and prior registration with the SAFE is made. Foreign-invested enterprises like Rise King WFOE that need foreign exchange for the distribution of profits to its shareholders may effect payment from their foreign exchange accounts or purchase and pay foreign exchange rates at the designated foreign exchange banks to their foreign shareholders by producing board resolutions for such profit distribution. Based on their needs, foreign-invested enterprises are permitted to open foreign exchange settlement accounts for current account receipts and payments of foreign exchange along with specialized accounts for capital account receipts and payments of foreign exchange at certain designated foreign exchange banks.

 

Although the current Exchange Rules allow converting of Chinese Renminbi into foreign currency for current account items, conversion of Chinese Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of SAFE, which is under the authority of the People’s Bank of China. These approvals, however, do not guarantee the availability of foreign currency conversion. The Company cannot be sure that it will be able to obtain all required conversion approvals for its operations or the Chinese regulatory authorities will not impose greater restrictions on the convertibility of Chinese Renminbi in the future. Currently, most of the Company’s retained earnings are generated in Renminbi. Any future restrictions on currency exchanges may limit the Company’s ability to use its retained earnings generated in Renminbi to make dividends or other payments in U.S. dollars or fund possible business activities outside China.

 

 
 

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 and US$0.08 million for the nine months ended September 30, 2021 and 2020, respectively. The total amounts for such employee benefits were approximately US$0.07 million and US$0.03 million for the three months ended September 30, 2021 and 2020, 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, 2021, 15% of the Company’s cash and cash equivalents were held by major financial institutions located in Mainland and Hong Kong, China, the remaining 85% 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.

 

24

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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, 2021 and 2020, respectively:

 

 

Customer A

 

Customer B

 

Customer C

 

Customer D

 

Customer E

 

Customer F

 

Customer G

              

Nine Months Ended September 30, 2021

             

Revenues, customer concentration risk

13%

 

11%

 

*

 

*

 

*

 

-

 

-

              

Three Months Ended September 30, 2021

             

Revenues, customer concentration risk

26%

 

*

 

*

 

*

 

*

 

-

 

-

              

Nine Months Ended September 30, 2020

             

Revenues, customer concentration risk

16%

 

-

 

*

 

-

 

*

 

*

 

*

              

Three Months Ended September 30, 2020

             

Revenues, customer concentration risk

21%

 

-

 

*

 

-

 

*

 

*

 

*

              

As of September 30, 2021

             

Accounts receivable, customer concentration risk

*

 

-

 

24%

 

36%

 

19%

 

-

 

-

              

As of December 31, 2020

             

Accounts receivable, customer concentration risk

*

 

-

 

28%

 

-

 

-

 

27%

 

21%

 

* Less than 10%.

 

- No transaction incurred for the reporting period/no balance existed as of the reporting date.

 

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, 2021 and 2020, respectively:

 

  

Supplier A

 

Supplier B

     

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%

 

*

     

Nine Months Ended September 30, 2020

    

Cost of revenues, supplier concentration risk

 

-

 

78%

     

Three Months Ended September 30, 2020

    

Cost of revenues, supplier concentration risk

 

-

 

78%

 

* Less than 10%.

 

- No transaction incurred for the reporting period.

 

25

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 
 

20.

  Commitments and contingencies

 

In September 2021, in accordance with an investment contract entered into among the Company, Shenzhen Global Best Products Import & Export Co., Ltd., (“Global Best Products”), and its shareholders, the Company obtained a 9.09% equity interest in Global Best Products through the subscription of a RMB5.0 million (approximately US$0.77 million) new share capital issued by the entity. In November 2021, the Company made its first cash investment of RMB2.0 million (approximately US$0.31 million) to Global Best Products, the remaining amount is expected to be invested before June 30, 2022.

 

In 2018, the Company entered into contracts with two unrelated third parties in relation to the development of the Company’s blockchain technology-powered platform applications. Total contract amount of these two contracts was approximately US$4.96 million. As of September 30, 2021, the Company had paid approximately US$4.41 million in the aggregate. The remaining unpaid contract amount is expected to be paid during the year ending December 31, 2021.

 

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.

 

 
 

21.

  Segment reporting

 

The Company follows ASC Topic 280 “Segment Reporting”, which requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and evaluating their performance. Reportable operating segments include components of an entity about which separate financial information is available and which operating results are regularly reviewed by the chief operating decision maker (“CODM”), the Company’s Chief Executive Officer, to make decisions about resources to be allocated to the segment and assess each operating segment’s performance.

 

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 
                         

Total assets-September 30, 2021

  11,146   3,890   4,408   46,409   (30,938)  34,915 

Total assets-December 31, 2020

  8,310   3,206   4,409   27,766   (23,024)  20,667 

 

 

(1)

Including approximately US$6.95 million share-based compensation expenses.

 

26

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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.

 

Nine Months Ended September 30, 2020 (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

  24,583   1,276   -   1,245   -   27,104 

Cost of revenues

  24,847   1,125   -   576   -   26,548 

Total operating expenses

  2,361   15   5   2,875(1)  -   5,256 

Depreciation and amortization expense included in total operating expenses

  617   -   2   3   -   622 

Operating (loss)/income

  (2,625)  136   (5)  (2,206)  -   (4,700)
                         

Change in fair value of warrant liabilities

  -   -   -   4   -   4 
                         

Expenditure for long-term assets

  -   -   302   -   -   302 
                         

Net (loss)/income

  (2,543)  110   (5)  (2,175)  -   (4,613)

 

 

(1)

Including approximately US$2.07 million share-based compensation expenses.

 

27

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Three Months Ended September 30, 2020 (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

  11,435   269   -   600   -   12,304 

Cost of revenues

  11,994   375   -   576   -   12,945 

Total operating expenses

  409   6   1   347(1)  -   763 

Depreciation and amortization expense included in total operating expenses

  205   -   1   1   -   207 

Operating loss

  (968)  (112)  (1)  (323)  -   (1,404)
                         

Change in fair value of warrant liabilities

  -   -   -   (64)  -   (64)
                         

Net loss

  (893)  (94)  (1)  (345)  -   (1,333)

 

 

(1)

Including approximately US$0.08 million share-based compensation expenses.

 

 
 

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,

 
  

2021

  

2020

  

2021

  

2020

 
  

(Unaudited)

  

(Unaudited)

  

(Unaudited)

  

(Unaudited)

 
                 

Net (loss)/income attributable to ZW Data Action Technologies Inc. (numerator for basic and diluted loss per share)

 $(1,586) $(4,611) $1,375  $(1,333)
                 
                 

Weighted average number of common shares outstanding -Basic and diluted

  32,279,304   21,271,301   35,332,220   21,720,259 
                 

(Loss)/earnings per share-Basic and diluted

 $(0.05) $(0.22) $0.04  $(0.06)

 

28

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

For the nine and three months ended September 30, 2021 and 2020, 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 May 2021, under its 2020 Omnibus Securities and Incentive Plan, the Company granted and issued 3.99 million fully-vested shares of the Company’s restricted common stock to its management and employees for their services provided to the Company. These shares were valued at the closing bid price of the Company’s common stock on the date of grant, which was US$1.67 per share. Total compensation expenses recognized was approximately US$6.66 million for the nine months ended September 30, 2021.

 

In March 2021, 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 the Company’s independent directors for his service to the Company for the year ending December 31, 2021. These shares were valued at the closing bid price of the Company’s common stock on the date of grant, which was US$3.13 per share. Total compensation expenses amortized for the nine and three months ended September 30, 2021 was approximately US$0.07 million and US$0.02 million, respectively.

 

For the nine and three months ended September 30, 2021, the Company also amortized an approximately US$0.22 million and US$0.07 million compensation expense in the aggregate, respectively, which was related to fully-vested and nonforfeitable restricted common stock granted and issued to two of its service providers in March 2020 and August 2020, respectively.

 

During the first nine months of 2020, under its 2015 Omnibus Securities and Incentive Plan, the Company granted and issued in the aggregate of approximately 1.63 million fully-vested shares of the Company’s restricted common stock to its management, employees and directors. These shares were valued at the closing bid price of the Company’s common stock on the respective date of grant. Total compensation expenses of approximately US$1.92 million and US$0.01 million was recorded for the nine and three months ended September 30, 2020, respectively.

 

During the first nine months of 2020, the Company granted and issued 0.48 million shares of the Company restricted common stock in the aggregate to two consulting and advisory service providers in exchange for their respective services. According to the service agreements, these shares are fully-vested upon issuance at the contract inception and shall not be subject to forfeiture upon termination of the agreement. The Company valued these shares at the closing bid price of the Company’s common stock on the respective date of grant and recorded the related total costs as prepayment assets in prepayment and deposit to suppliers account upon grant and issuance of these fully-vested and nonforfeitable shares. Total compensation expenses amortized for the nine and three months ended September 30, 2020 was approximately US$0.15 million and US$0.07 million, respectively.

 

The table below summarized share-based compensation expenses recorded for the nine and three months ended September 30, 2021 and 2020, respectively:

 

  

Nine Months Ended September 30,

  

Three Months Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 
  

US$(000)

  

US$(000)

  

US$(000)

  

US$(000)

 
  

(Unaudited)

  

(Unaudited)

  

(Unaudited)

  

(Unaudited)

 
                 

Sales and marketing expenses

  -   122   -   - 

General and administrative expenses

  6,945   1,798   88   79 

Research and development expenses

  -   146   -   - 

Total

  6,945   2,066   88   79 

 

29

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The aggregate unrecognized share-based compensation expenses as of September 30, 2021 was approximately US$0.12 million, of which approximately US$0.08 million will be recognized for the year ending December 31, 2021 and approximately US$0.04 million will be recognized for the year ending December 31, 2022.

 

Options issued and outstanding as of September 30, 2021 and their movements during the nine months then ended are as follows:

 

  

Option Outstanding

  

Option Exercisable

 
  

 

Number of underlying shares  

Weighted
Average
Remaining
Contractual
Life (Years)

  

Weighted
Average
Exercise
Price

  

Number of underlying shares

  

Weighted
Average
Remaining
Contractual
Life (Years)

  

Weighted
Average
Exercise
Price

 
                         

Balance, January 1, 2021

  277,976   0.91  $3.00   277,976   0.91  $3.00 

Granted/Vested

  -           -         

Expired

  -           -         

Exercised

  -           -         

Balance, September 30, 2021 (Unaudited)

  277,976   0.16  $3.00   277,976   0.16  $3.00 

 

 
 

24.

  Subsequent events

 

The Company primarily conducts its operations in the PRC. In January 2020, an outbreak of a novel coronavirus (COVID-19) surfaced in Wuhan City, Hubei province of the PRC, and 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, 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 event which are required to be adjusted or disclosed as of the date of this consolidated financial statements.

 

30

 
 

Item 2.          Managements Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this interim report. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words expect, anticipate, intend, believe, or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth under the heading Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Readers are cautioned not to place undue reliance on these forward-looking statements.

 

Overview

 

Our company was incorporated in the State of Texas in April 2006 and re-domiciled to become a Nevada corporation in October 2006. As a result of a share exchange transaction we consummated with China Net BVI in June 2009, we are now a holding company, which through certain contractual arrangements with operating companies in the PRC, is engaged in providing Internet advertising, precision marketing, other ecommerce O2O advertising and marketing services and the related data and technical services to SMEs in the PRC.

 

Through our PRC operating subsidiaries and VIEs, we primarily operate a one-stop services for our clients on our Omni-channel advertising, precision marketing and data analysis management system. We offer variety channels of advertising and marketing services through this system, which primarily include distribution of the right to use search engine marketing services we purchased from key search engines, provision of online advertising placements on our web portals, provision of Ecommerce O2O advertising and marketing services as well as provision of other related value-added data and technical services to maximize market exposure and effectiveness for our clients.  

 

During the third quarter of 2021, the Company finalized its blockchain infrastructure (“BIF”) platform for business applications of Non-Fungible Token (“NFT”) to provide micro, small and medium enterprises (“MSMEs”) one-stop enterprise-level blockchain network and application services. Upon test launch of its BIF automation platform, the Company cooperated with one of its strategic partners to provide digital transformations and solutions of NFT through BIF platform. The Company expects to fully launch the platform to MSMEs during the fourth fiscal quarter of 2021. 

 

Meanwhile, the Company completed an upgrade to its official website reflecting the Company’s recent developments on its BIF platform and related business transformation. The Company is integrating its value-added blockchain service platform into its existing information services and expects to become an integrated digital operation service provider with Information + transaction + Blockchain in the near future.

 

Basis of presentation, management estimates and critical accounting policies

 

Our unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and include the accounts of our company, and all of our subsidiaries and VIEs. We prepare financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses during the financial reporting period. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. In order to understand the significant accounting policies that we adopted for the preparation of our condensed consolidated interim financial statements, readers should refer to the information set forth in Note 3 “Summary of significant accounting policies” to our audited financial statements in our 2020 Form 10-K.

 

A.         RESULTS OF OPERATIONS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

 

The following table sets forth a summary, for the periods indicated, of our consolidated results of operations. Our historical results presented below are not necessarily indicative of the results that may be expected for any future period. All amounts, except number of shares and per share data, are presented in thousands of U.S. dollars.

 

31

 

   

Nine Months Ended September 30,

   

Three Months Ended September 30,

 
   

2021

   

2020

   

2021

   

2020

 
   

(US $)

   

(US $)

   

(US $)

   

(US $)

 
   

(Unaudited)

   

(Unaudited)

   

(Unaudited)

   

(Unaudited)

 

Revenues

                               

From unrelated parties

  $ 34,843     $ 27,086     $ 11,896     $ 12,300  

From a related party

    4       18       4       4  

Total revenues

    34,847       27,104       11,900       12,304  

Cost of revenues

    35,739       26,548       11,857       12,945  

Gross (loss)/profit

    (892 )     556       43       (641 )
                                 

Operating expenses

                               

Sales and marketing expenses

    159       293       58       58  

General and administrative expenses

    10,366       4,520       1,471       592  

Research and development expenses

    251       443       88       113  

Total operating expenses

    10,776       5,256       1,617       763  
                                 

Loss from operations

    (11,668 )     (4,700 )     (1,574 )     (1,404 )
                                 

Other income (expenses)

                               
                                 

Interest income/(expense), net

    3       -       1       1  

Other income/(expense), net

    265       (4 )     (37 )     (21 )

Loss on disposal of long-term investments

    (38 )     -       -       -  

Change in fair value of warrant liabilities

    9,682       4       2,853       (64 )

Total other income/expenses)

    9,912       -       2,817       (84 )
                                 

(Loss)/income before income tax benefit and noncontrolling interests

    (1,756 )     (4,700 )     1,243       (1,488 )

Income tax benefit

    171       87       131       155  

Net (loss)/income

    (1,585 )     (4,613 )     1,374       (1,333 )

Net (income)/loss attributable to noncontrolling interests

    (1 )     2       1       -  

Net (loss)/income attributable to ZW Data Action Technologies Inc.

  $ (1,586 )   $ (4,611 )   $ 1,375     $ (1,333 )

 

Revenues

 

The following tables set forth a breakdown of our total revenues, disaggregated by type of services for the periods indicated, with inter-company transactions eliminated:

 

   

Nine Months Ended September 30,

 
   

2021

   

2020

 

Revenue type

 

(Amounts expressed in thousands of US dollars, except percentages)

 
                                 

-Internet advertising and related data service

  $ 5,720       16.4 %   $ 5,679       21.0 %

-Distribution of the right to use search engine marketing service

    28,613       82.1 %     18,004       66.4 %

-Data and technical services

    -       -       900       3.3 %

Internet advertising and related services

    34,333       98.5 %     24,583       90.7 %

Ecommerce O2O advertising and marketing services

    514       1.5 %     1,276       4.7 %

Technical solution services

    -       -       1,245       4.6 %

Total

  $ 34,847       100 %   $ 27,104       100 %

 

32

 

   

Three Months Ended September 30,

 
   

2021

   

2020

 

Revenue type

 

(Amounts expressed in thousands of US dollars, except percentages)

 
                                 

-Internet advertising and related data service

  $ 2,125       17.8 %   $ 2,429       19.7 %

-Distribution of the right to use search engine marketing service

    9,648       81.1 %     8,706       70.8 %

-Data and technical services

    -       -       300       2.4 %

Internet advertising and related services

    11,773       98.9 %     11,435       92.9 %

Ecommerce O2O advertising and marketing services

    127       1.1 %     269       2.2 %

Technical solution services

    -       -       600       4.9 %

Total

  $ 11,900       100 %   $ 12,304       100 %

 

 

Total Revenues: Our total revenues were US$34.85 million and US$11.90 million for the nine and three months ended September 30, 2021, respectively, compared with US$27.10 million and US$12.30 million for the same periods last year, respectively.

 

 

    ●    

Internet advertising revenues for the nine and three months ended September 30, 2021 was approximately US$5.72 million and US$2.13 million, respectively, compared with US$5.68 million and US$2.43 million for the nine and three months ended September 30, 2020, respectively. Management expects no significant fluctuation on service revenues from this business category in fiscal 2021, compared with that in last fiscal year.

     
 

    ●

Revenue generated from distribution of the right to use search engine marketing service for the nine and three months ended September 30, 2021 was approximately US$28.61 million and US$9.65 million, respectively, compared with approximately US$18.00 million and US$8.71 million for the nine and three months ended September 30, 2020, respectively. The increase in revenues from this business category for both the nine and three months ended September 30, 2021 were directly attributable to the successful containment of the COVID-19 epidemic in China within the first half year of fiscal 2020, which resulted in the gradually recovery of business activities and economy since the second half of fiscal 2020. Although there are COVID-19 cases rebound in several provinces in China since July 2021 and uncertainties associated with the future developments of the pandemic still exist, management expects that revenues from this business will continue to grow in the fourth fiscal quarter of 2021, compared with that in the same period last year.

     
 

    ●

For the nine and three months ended September 30, 2021, we generated an approximately US$0.51 million and US$0.13 million Ecommerce O2O advertising and marketing service revenues, respectively, compared with an approximately US$1.28 million and US$0.27 million service revenues generated for the nine and three months ended September 30, 2020, respectively. We generated these revenues from distribution of the advertising spaces in outdoor billboards we purchased from a third party for the reporting periods.

 

Cost of revenues

 

Our cost of revenues consisted of costs directly related to the offering of our Internet advertising, precision marketing and related data and technical services, and cost related to our Ecommerce O2O advertising and marketing service. The following table sets forth our cost of revenues, disaggregated by type of services, by amount and gross profit ratio for the periods indicated, with inter-company transactions eliminated:

 

   

Nine Months Ended September 30,

 
   

2021

   

2020

 
   

(Amounts expressed in thousands of US dollars, except percentages)

 
   

Revenue

   

Cost

   

GP ratio

   

Revenue

   

Cost

   

GP ratio

 
                                                 

-Internet advertising and related data service

  $ 5,720     $ 5,112       11 %   $ 5,679     $ 4,904       14 %

-Distribution of the right to use search engine marketing service

    28,613       29,502       -3 %     18,004       19,147       -6 %

-Data and technical services

    -       -       -       900       796       12 %

Internet advertising and related services

    34,333       34,614       -1 %     24,583       24,847       -1 %

Ecommerce O2O advertising and marketing services

    514       1,125       -119 %     1,276       1,125       12 %

Technical solution services

    -       -       -       1,245       576       54 %

Total

  $ 34,847     $ 35,739       -3 %   $ 27,104     $ 26,548       2 %

 

33

 

   

Three Months Ended September 30,

 
   

2021

   

2020

 
   

(Amounts expressed in thousands of US dollars, except percentages)

 
   

Revenue

   

Cost

   

GP ratio

   

Revenue

   

Cost

   

GP ratio

 
                                                 

-Internet advertising and related data service

  $ 2,125     $ 1,867       12 %   $ 2,429     $ 1,998       18 %

-Distribution of the right to use search engine marketing service

    9,648       9,615       0.3 %     8,706       9,731       -12 %

-Data and technical services

    -       -       -       300       265       12 %

Internet advertising and related services

    11,773       11,482       2 %     11,435       11,994       -5 %

Ecommerce O2O advertising and marketing services

    127       375       -195 %     269       375       -39 %

Technical solution services

    -       -       -       600       576       4 %

Total

  $ 11,900     $ 11,857       0.4 %   $ 12,304     $ 12,945       -5 %

 

Cost of revenues: our total cost of revenues was US$35.74 million and US$11.86 million for the nine and three months ended September 30, 2021, respectively, compared with US$26.55 million and US$12.95 million for the nine and three months ended September 30, 2020, respectively. Our cost of revenues primarily consists of search engine marketing resources purchased from key search engines, cost of outdoor advertising resources and other direct costs associated with providing our services.

 

 

    ●

Costs for Internet advertising and data service primarily consist of cost of internet traffic flow and technical services we purchased from other portals and technical suppliers for obtaining effective sales lead generation to promote business opportunity advertisements placed on our own ad portals. For the nine and three months ended September 30, 2021, our total cost of revenues for Internet advertising and data service was approximately US$5.11 million and US$1.87 million, respectively, compared with approximately US$4.90 million and US$2.00 million for the nine and three months ended September 30, 2020, respectively. The gross margin rate of our Internet advertising and data service was 11% and 12% for the nine and three months ended September 30, 2021, compared with 14% and 18% for the nine and three months ended September 30, 2020, respectively. We anticipate the gross margin rate will continue to improve in the fourth fiscal quarter of 2021.

     
 

    ●

Costs for distribution of the right to use search engine marketing service was direct search engine resources consumed for the right to use search engine marketing service that we purchased from key search engines and distributed to our customers. We purchased these search engine resources from well-known search engines in China, for example, Baidu, Qihu 360 and Sohu (Sogou) etc. We purchased the resources in relatively large amounts under our own name at a relatively lower rate compared to the market rates. We charged our clients the actual cost they consumed on search engines for the use of this service and a premium at certain percentage of that actual consumed cost. For the nine and three months ended September 30, 2021, our total cost of revenues for distribution of the right to use search engine marketing service was US$29.50 million and US$9.62 million, respectively, compared with US$19.15 million and US$9.73 million for the same periods last year, respectively. Gross margin rate of this business category was -3% and 0.3% for the nine and three months ended September 30, 2021, respectively, significantly improved from -6% and -12% gross margin rate incurred for the same periods last year, respectively. We anticipate the gross margin rate will continue to improve in the fourth fiscal quarter of 2021, as we anticipate continuous increase in service revenues and the related cost consumption from this business category, which may put us in a better position to negotiate a lower rate with the suppliers in future periods.

     
 

    ●

For the nine months ended September 30, 2021 and 2020, cost for our Ecommerce O2O advertising and marketing service was both approximately US$1.13 million, and for the three months ended September 30, 2021 and 2020, cost for our Ecommerce O2O advertising and marketing service was both approximately US$0.38 million, which costs represented the amortized cost of the related outdoor billboards ad spaces we pre-purchased during the periods.

 

Gross (loss)/profit

 

As a result of the foregoing, for the nine months ended September 30, 2021, we incurred a gross loss of approximately US$0.89 million, compared with a gross profit of approximately US$0.56 million for the nine months ended September 30, 2020. For the three months ended September 30, 2021, we recognized an approximately US$0.04 million gross profit, compared with a gross loss of approximately US$0.64 million for the three months ended September 30, 2020. Our overall gross margin was -3% and 0.4% for the nine and three months ended September 30, 2021, respectively, compared with 2% and -5% for the same periods last year, respectively. The improvement of our overall gross margin rate for the three months ended September 30, 2021, as compared with those for the first and second fiscal quarters of 2021, was directly attributable to the gross margin rate improvement of our main stream of service revenues, i.e. distribution of the right to use search engine marketing services, which accounted for approximately 82.1% and 81.1% of our total revenues for the nine and three months ended September 30, 2021, respectively. Our gross margin for distribution of the right to use search engine marketing services improved to 0.3% for the three months ended September 30, 2021 from -9% and -3% for the first and second fiscal quarter of 2021, respectively, as a result of better discount rate obtained from suppliers.

 

34

 

Operating Expenses

 

Our operating expenses consist of sales and marketing expenses, general and administrative expenses and research and development expenses. The following tables set forth our operating expenses, divided into their major categories by amount and as a percentage of our total revenues for the periods indicated.

 

   

Nine Months Ended September 30,

 
   

2021

   

2020

 
   

(Amounts expressed in thousands of US dollars, except percentages)

 
   

Amount

   

% of total revenue

   

Amount

   

% of total revenue

 
                                 

Total revenues

  $ 34,847       100 %   $ 27,104       100 %

Gross (loss)/profit

    (892 )     -3 %     556       2 %

Sales and marketing expenses

    159       -       293       1 %

General and administrative expenses

    10,366       30 %     4,520       17 %

Research and development expenses

    251       1 %     443       2 %

Total operating expenses

  $ 10,776       31 %   $ 5,256       19 %

 

   

Three Months Ended September 30,

 
   

2021

   

2020

 
   

(Amounts expressed in thousands of US dollars, except percentages)

 
   

Amount

   

% of total revenue

   

Amount

   

% of total revenue

 
                                 

Total revenues

  $ 11,900       100 %   $ 12,304       100 %

Gross profit/(loss)

    43       0.4 %     (641 )     -5 %

Sales and marketing expenses

    58       -       58       -  

General and administrative expenses

    1,471       13 %     592       5 %

Research and development expenses

    88       1 %     113       1 %

Total operating expenses

  $ 1,617       14 %   $ 763       6 %

 

Operating Expenses: Our total operating expenses was approximately US$10.78 million and US$1.62 million for the nine and three months ended September 30, 2021, respectively, compared with approximately US$5.26 million and US$0.76 million for the nine and three months ended September 30, 2020, respectively.

 

 

    ●

Sales and marketing expenses: Sales and marketing expenses was US$0.16 million and US$0.06 million for the nine and three months ended September 30, 2021, respectively, compared with approximately US$0.29 million and US$0.06 million for the nine and three months ended September 30, 2020, respectively. Our sales and marketing expenses primarily consist of advertising expenses for brand development that we pay to different media outlets for the promotion and marketing of our advertising web portals and our services, staff salaries and benefits, performance bonuses, travel expenses, communication expenses and other general office expenses of our sales department. Due to certain aspects of our business nature, the fluctuation of our sales and marketing expenses usually does not have a direct linear relationship with the fluctuation of our net revenues. For the nine months ended September 30, 2021, the decrease in our sales and marketing expenses was primarily due to the decrease in share-based compensation expenses of approximately US$0.12 million, related to restricted shares granted and issued to our sales staff during the first fiscal quarter of last year. For the three months ended September 30, 2021, there was no significant fluctuation of our sales and marketing expenses, compared with that for the same period last year.

 

35

 

 

    ●

General and administrative expenses: General and administrative expenses was US$10.37 million and US$1.47 million for the nine and three months ended September 30, 2021, respectively, compared with US$4.52 million and US$0.59 million for the nine and three months ended September 30, 2020, respectively. Our general and administrative expenses primarily consist of salaries and benefits of management, accounting, human resources and administrative personnel, office rentals, depreciation of office equipment, allowance for doubtful accounts, professional service fees, maintenance, utilities and other general office expenses of our supporting and administrative departments. For the nine months ended September 30, 2021, the change in our general and administrative expenses was primarily due to the following reasons: (1) the increase in share-based compensation expenses of approximately US$5.15 million, due to more shares of the Company’s restricted common stock were granted and issued to management and employees in the second fiscal quarter of 2021, compared with that granted and issued in the first fiscal quarter of last year; (2) the increase in general office administrative expense of approximately US$1.45 million, primarily attributable to the increase in lease and other administrative costs of our new office in Guangzhou and recovery from the COVID-19 epidemic, which resulted in the office shutdown during the first fiscal quarter of last year; and (3) the decrease in allowance for doubtful accounts of approximately US$0.75 million, due to improved collection management. For the three months ended September 30, 2021, the increase in our general and administrative expenses was primarily due to the increase in general departmental expenses of approximately US$0.88 million, which were primarily related to the expansion of our new office in Guangzhou.

     
      ● Research and development expenses: Research and development expenses was approximately US$0.25 million and US$0.09 million for the nine and three months ended September 30, 2021, respectively, compared with approximately US$0.44 million and US$0.11 million for the nine and three months ended September 30, 2020, respectively. Our research and development expenses primarily consist of salaries and benefits of our staff in the research and development department, equipment depreciation expenses, and office utilities and supplies allocated to our research and development department. For the nine months ended September 30, 2021, the decrease in our research and development expenses was primarily due to the decrease in share-based compensation expenses of approximately US$0.15 million, related to restricted shares granted and issued to our research and development staff during the first fiscal quarter of last year. For the three months ended September 30, 2021, the decrease in our research and development expenses was primarily due to a reduction in headcount in our research and development department, compared with the same period last year.

 

Loss from operations: As a result of the foregoing, we incurred a loss from operations of approximately US$11.67 million and US$4.70 million for the nine months ended September 30, 2021 and 2020, respectively. For the three months ended September 30, 2021 and 2020, we incurred a loss from operations of approximately US$1.57 million and US$1.40 million, respectively.

 

Change in fair value of warrant liabilities: We issued warrants in financing activities. We determined that these warrants should be accounted for as derivative liabilities, as the warrants are dominated in a currency (U.S. dollar) other than our functional currency (Renminbi or Yuan). As a result, a gain of change in fair value of these warrant liabilities of approximately US$9.68 million and US$2.85 million was recorded for the nine and three months ended September 30, 2021, respectively, compared with a gain of change in fair value of these warrant liabilities of approximately US$0.004 million and a loss of approximately US$0.06 million recorded for the nine and three months ended September 30, 2020, respectively.

 

(Loss)/income before income tax benefit and noncontrolling interests: As a result of the foregoing, our loss before income tax benefit and noncontrolling interest was approximately US$1.76 million and US$4.70 million for the nine months ended September 30, 2021 and 2020, respectively. For the three months ended September 30, 2021, we recognized an approximately US$1.24 million income before income tax benefit and noncontrolling interest, compared with an approximately US$1.49 million loss before income tax benefit and noncontrolling interest for the three months ended September 30, 2020.

 

Income Tax benefit: For the nine months ended September 30, 2021, we recognized an approximately US$0.27 million income tax benefit in relation to the net operating loss incurred by one of our operating VIEs for the period, which we consider likely to be utilized with respect to future earnings of this entity, which amount was partially offset by an approximately US$0.08 million and an approximately US$0.02 million income tax expense recognized in relation to additional deferred tax assets provision provided and utilization of prior period recognized deferred tax assets by two other operating VIEs during the period, respectively. For the three months ended September 30, 2021, we recognized an approximately US$0.13 million income tax benefit in relation to the net operating loss incurred by one of our operating VIEs for the period. For the nine and three months ended September 30, 2020, we recognized an approximately US$0.09 million and US$0.16 million income tax benefit, respectively, in relation to deferred tax assets we expect to be able to utilized in future periods.

 

Net (loss)/income: As a result of the foregoing, for the nine months ended September 30, 2021 and 2020, we incurred a total net loss of approximately US$1.59 million and US$4.61 million, respectively. For the three months ended September 30, 2021, we recognized a net income of approximately US$1.37 million, compared with a net loss of approximately US$1.33 million for the three months ended September 30, 2020.

 

36

 

Net (income)/loss attributable to noncontrolling interest: In May 2018, we incorporated a majority-owned subsidiary, Business Opportunity Chain, in which we beneficially own 51% equity interest. In October 2020, we incorporated another majority-owned subsidiary, Qiweilian Guangzhou and beneficially owned 51% equity interest. In March 2021, due to changes in business strategy of the noncontrolling interest shareholder of Qiweilian Guangzhou, we suspended the cooperation with that shareholder and sold our 51% equity interest in Qiweilian Guangzhou to unrelated parties. For the nine months ended September 30, 2021, net income allocated to the noncontrolling interest shareholder of Qiweilian Guangzhou, before we deconsolidated the entity, offset by the net loss allocated to the noncontrolling interest of Business Opportunity Chain was approximately US$0.001 million, compared with a net loss allocated to the noncontrolling interest shareholder of Business Opportunity Chain of approximately US$0.001 million for the three months ended September 30, 2021. For the nine and three months ended September 30, 2020, net loss allocated to the noncontrolling interest of Business Opportunity Chain was approximately US$0.002 million and US$nil, respectively.

 

Net (loss)/income attributable to ZW Data Action Technologies Inc.: Total net (loss)/income as adjusted by net income/(loss) attributable to the noncontrolling interest shareholders as discussed above yields the net (loss)/income attributable to ZW Data Action Technologies Inc. Net loss attributable to ZW Data Action Technologies Inc. was approximately US$1.59 million and US$4.61 million for the nine months ended September 30, 2021 and 2020, respectively. For the three months ended September 30, 2021, net income attributable to ZW Data Action Technologies Inc. was approximately US$1.38 million, compared with a net loss attributable to ZW Data Action Technologies Inc. of approximately US$1.33 million for the three months ended September 30, 2020.

 

B.         LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents represent cash on hand and deposits held at call with banks. We consider all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. As of September 30, 2021, we had cash and cash equivalents of approximately US$8.73 million.

 

Our liquidity needs include (i) net cash used in operating activities that consists of (a) cash required to fund the initial build-out, continued expansion of our network and new services and (b) our working capital needs, which include deposits and advance payments to search engine resources and other advertising resources providers, payment of our operating expenses and financing of our accounts receivable; and (ii) net cash used in investing activities that consist of the investment to expand technologies related to our existing and future business activities, investment to enhance the functionality of our current advertising portals for providing advertising, marketing and data services and to secure the safety of our general network, and investment to establish joint ventures with strategic partners for the development of new technologies and services. To date, we have financed our liquidity need primarily through proceeds we generated from financing activities.

 

The following table provides detailed information about our net cash flow for the periods indicated:

 

   

Nine Months Ended September 30,

 
   

2021

   

2020

 
   

Amounts in thousands of US dollars

 
                 

Net cash (used in)/provided by operating activities

  $ (6,600 )   $ 595  

Net cash used in investing activities

    (6,097 )     (1,273 )

Net cash provided by/(used in) financing activities

    17,111       (429 )

Effect of foreign currency exchange rate changes

    20       4  

Net increase/(decrease) in cash and cash equivalents

  $ 4,434     $ (1,103 )

 

Net cash (used in)/provided by operating activities

 

For the nine months ended September 30, 2021, our net cash used in operating activities of approximately US$6.60 million were primarily attributable to:

 

 

(1)

net loss excluding approximately US$0.45 million of non-cash expenses of depreciation and amortizations; approximately US$0.15 million amortization of operating lease right-of-use assets, approximately US$6.95 million share-based compensation; approximately US$9.68 million gain from change in fair value of warrant liabilities, approximately US$0.06 million loss on disposal of long-term investment and other non-operating loss, and approximately US$0.17 million deferred tax benefit, yielded the non-cash items excluded net loss of approximately US$3.83 million.

 

37

 

 

(2)

the receipt of cash from operations from changes in operating assets and liabilities such as:

 

 

-

accounts payable increased by approximately US$0.14 million, due to more favorable payment terms granted by a new supplier; and

 

 

-

other current assets decreased by approximately US$0.01 million.

 

 

(3)

offset by the use from operations from changes in operating assets and liabilities such as:

 

 

-

accounts receivable increased by approximately US$0.26 million;

 

 

-

prepayment and deposit to suppliers increased by approximately US$1.70 million, primarily due to new deposits and prepayments made for the purchase of various advertising resources during the period;

 

 

-

long-term deposits and prepayments increased by approximately US$0.31 million, which were made for the purchase of advertising resources and lease of our new office spaces during the period, and these amounts were not expected to be consumed or refunded within one year of September 30, 2021;

 

 

-

advance from customers decreased by approximately US$0.13 million, primarily due to recognition of revenue from opening contract liabilities during the period; and

 

 

-

accruals, tax payables, operating lease liabilities, short-term lease payment payables and other current liabilities decreased by approximately US$0.52 million in the aggregate, due to settlement of these operating liabilities during the period.

 

For the nine months ended September 30, 2020, our net cash provided by operating activities of approximately US$0.60 million were primarily attributable to:

 

 

(1)

net loss excluding approximately US$0.63 million of non-cash expenses of depreciation and amortization; approximately US$2.07 million share-based compensation expenses; approximately US$0.75 million allowance for doubtful accounts, approximately US$0.004 million gain in fair value of warrant liabilities and approximately US$0.09 million deferred tax benefit yielded the non-cash item excluded net loss of approximately US$1.26 million.

 

 

(2)

the receipt of cash from operations from changes in operating assets and liabilities such as:

 

 

-

accounts receivable decreased by approximately US$0.25 million in the aggregate;

 

 

-

prepayment and deposit to suppliers decreased by approximately US$1.08 million, primarily due to utilization of the prepayment made to suppliers in fiscal 2019 through Ad resources and other services received from suppliers during the nine months ended September 30, 2020;

 

 

-

advance from customers increased by approximately US$0.75 million, primarily due to new advance payments received that related to unsatisfied service performance obligations during the first nine months of 2020, which was partially offset by recognition of revenue from opening contract liabilities during the period;

 

 

-

accounts payable, tax payables and short-term lease payment payables increased by approximately US$0.23 million in the aggregate, primarily due to the factors that some of the payments were temporarily delayed as a result of the COVID-19 outbreak and some of the payments were not due until later periods, and

 

 

-

amount due from related parties decreased by approximately US$0.02 million.

 

 

(3)

offset by the use from operations from changes in operating assets and liabilities such as:

 

 

-

long-term prepayment increased by approximately US$0.38 million, which was made for the purchase of ad resources during the first fiscal quarter of 2020, and this amount was not expected to be consumed within one year of September 30, 2020;

 

 

-

accruals decreased by approximately US$0.06 million;

 

 

-

other current liabilities decreased by approximately US$0.04 million; and

 

 

-

we also prepaid approximately US$0.01 million lease payment during the period.

 

38

 

Net cash used in investing activities

 

For the nine months ended September 30, 2021, (1) we paid an aggregate of approximately US$0.31 million for the purchase of vehicles, furniture and office equipment, and for our leasehold improvement project in Guangzhou; (2) we made an aggregate of approximately US$1.89 million cash investment to our investee entities, including an US$1.0 million investment for a 15.38% equity interest in an entity, for jointly developing blockchain, key opinion leader and e-sports platform and jointly operating IP data for e-sports and games with strategic partners, and we also provided an additional approximately US$0.04 million temporary loans in the aggregate to two of our investee entities; (3) we paid US$1.16 million for the purchase of an Internet Ad tracking system to further enhance the effectiveness of our Internet advertising business; (4) we provided to an unrelated party short-term loans of approximately US$2.95 million in the aggregate, of which an approximately US$1.51 million was provided during the first nine months of 2021. The borrower repaid an approximately US$1.30 million during the first nine months of 2021, and the remaining balance of approximately US$1.65 million is expected to be fully repaid in March 2022; (5) cash decreased by approximately US$0.01 as a result of deconsolidation of VIEs’ subsidiaries during the period; and (6) we made an aggregate of US$2.50 million deposit and prepayment for other investing activities, including: (i) a US$1.0 million refundable deposit for a potential merge and acquisition transaction, which will be refunded if no definitive agreement is reached by December 31, 2021; and (ii) a US$1.5 million prepayment in accordance with a cryptocurrency mining machine purchase agreement, which had been cancelled due to the industry banning policies announced by the government, and the prepayment is expected to be refunded before the end of fiscal 2021. In the aggregate, these transactions resulted in a cash outflow from investing activities of approximately US$6.10 million for the nine months ended September 30, 2021.

 

For the nine months ended September 30, 2020, (1) we invested approximately US$0.03 million to a newly established entity, in which we hold a 19% equity interest; (2) we made an additional payment of approximately US$0.30 million for the development of our blockchain technology-based platform applications; and (3) we provided to an unrelated party a short-term loan of approximately US$0.94 million. In the aggregate, these transactions resulted in a cash outflow from investing activities of approximately US$1.27 million for the nine months ended September 30, 2020.

 

Net cash provided by/(used in) financing activities

 

For the nine months ended September 30, 2021, we consummated an offering of approximately 5.21 million shares of our common stock to certain institutional investors at a purchase price of $3.59 per share. As part of the transaction, we also issued to the investors and the placement agent warrants to purchase up to 2.61 million shares and 0.36 million shares of our common stock, respectively, with an exercise price of $3.59 per share and US$4.4875 per share, respectively. We received net proceeds of approximately US$17.1 million, after deduction of approximately US$1.6 million direct financing cost paid in cash.

 

For the nine months ended September 30, 2020, we repaid an approximately US$0.43 million short-term bank loan matured in January 2020.

 

Restricted Net Assets

 

As substantially all of our operations are conducted through our PRC subsidiaries and VIEs, our ability to pay dividends is primarily dependent on receiving distributions of funds from our PRC subsidiaries and VIEs. Relevant PRC statutory laws and regulations permit payments of dividends by our PRC subsidiaries and VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations and after it has met the PRC requirements for appropriation to statutory reserves. Paid in capital of the PRC subsidiaries and VIEs included in our consolidated net assets are also not distributable for dividend purposes.

 

In accordance with the PRC regulations on Enterprises with Foreign Investment, a WFOE established in the PRC is required to provide certain statutory reserves, namely general reserve fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A WFOE is required to allocate at least 10% of its annual after-tax profit to the general reserve until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. Rise King WFOE is subject to the above mandated restrictions on distributable profits. Additionally, in accordance with the Company Law of the PRC, a domestic enterprise is required to provide a statutory common reserve of at least 10% of its annual after-tax profit until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to provide for a discretionary surplus reserve, at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. All of our other PRC subsidiaries and PRC VIEs are subject to the above mandated restrictions on distributable profits.

 

39

 

In accordance with these PRC laws and regulations, our PRC subsidiaries and VIEs are restricted in their ability to transfer a portion of their net assets to us. As of September 30, 2021 and December 31, 2020, net assets restricted in the aggregate, which includes paid-in capital and statutory reserve funds of our PRC subsidiaries and VIEs that are included in our consolidated net assets were approximately US$13.2 million and US$8.2 million, respectively.

 

The current PRC Enterprise Income Tax (“EIT”) Law also imposes a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside China, which were exempted under the previous EIT law. 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.

 

The ability of our PRC subsidiaries to make dividends and other payments to us may also be restricted by changes in applicable foreign exchange and other laws and regulations.

 

Foreign currency exchange regulation in China is primarily governed by the following rules:

 

 

    ●

Foreign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules;

     
 

    ●

Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.

 

Currently, under the Administration Rules, Renminbi is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of China, unless the prior approval of the State Administration of Foreign Exchange (the “SAFE”) is obtained and prior registration with the SAFE is made. Foreign-invested enterprises like Rise King WFOE that need foreign exchange for the distribution of profits to its shareholders may effect payment from their foreign exchange accounts or purchase and pay foreign exchange rates at the designated foreign exchange banks to their foreign shareholders by producing board resolutions for such profit distribution. Based on their needs, foreign-invested enterprises are permitted to open foreign exchange settlement accounts for current account receipts and payments of foreign exchange along with specialized accounts for capital account receipts and payments of foreign exchange at certain designated foreign exchange banks.

 

Although the current Exchange Rules allow converting of Renminbi into foreign currency for current account items, conversion of Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of SAFE, which is under the authority of the People’s Bank of China. These approvals, however, do not guarantee the availability of foreign currency conversion. We cannot be sure that it will be able to obtain all required conversion approvals for our operations or the Chinese regulatory authorities will not impose greater restrictions on the convertibility of Renminbi in the future. Currently, most of our retained earnings are generated in Renminbi. Any future restrictions on currency exchanges may limit our ability to use retained earnings generated in Renminbi to make dividends or other payments in U.S. dollars or fund possible business activities outside China.

 

C.         OFF-BALANCE SHEET ARRANGEMENTS

 

None.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable to smaller reporting companies.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

40

 

Under the supervision and with the participation of our management, including our principal executive officer and principal accounting and financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the fiscal quarter ended September 30, 2021, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer have concluded that during the period covered by this report, the Company’s disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the fiscal quarter of 2021 covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.  OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

We are currently not a party to any legal or administrative proceedings and are not aware of any pending or threatened legal or administrative proceedings against us in all material aspects. We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.

 

Item 1A. Risk Factors

 

This information has been omitted based on the Company’s status as a smaller reporting company.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5.  Other Information

 

None.

 

41

 

 

Item 6. Exhibits

 

The exhibits listed on the Exhibit Index below are provided as part of this report.

 

Exhibit No.

 

Document Description

31.1

 

Certification of the Principal Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     

31.2

 

Certification of the Principal Accounting and Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     

32.1

 

Certification of the Principal Executive Officer and of the Principal Accounting and Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).

     

101

 

The following materials are filed herewith: (i) Inline XBRL Instance, (ii) Inline XBRL Taxonomy Extension Schema, (iii) Inline XBRL Taxonomy Extension Calculation, (iv) XBRL Taxonomy Extension Labels, (v) XBRL Taxonomy Extension Presentation, and (vi) Inline XBRL Taxonomy Extension Definition.

     

104

 

Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

42

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

     
 

ZW DATA ACTION TECHNOLOGIES INC.

     

Date: November 15, 2021

By:

/s/ Handong Cheng

 

Name: Handong Cheng

 

Title: Chief Executive Officer

(Principal Executive Officer)

   

By:

/s/ Mark Li

 

Name: Mark Li

 

Title: Chief Financial Officer

(Principal Accounting and Financial Officer)

 

43