ZW Data Action Technologies Inc. - Quarter Report: 2023 March (Form 10-Q)

cnet20230331_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 March 31, 2023

☐ 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 1811, Xinghuo Keji Plaza, No. 2 Fufeng Road, Fengtai District, Beijing, China 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 May 22, 2023, the registrant had 7,204,506 shares of common stock outstanding.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION		PAGE

Item 1. Interim Financial Statements

	Condensed Consolidated Balance Sheets as of March 31, 2023 (Unaudited) and December 31, 2022	1 -2

	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2023 and 2022 (Unaudited)	3

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022 (Unaudited)	4 -5

	Condensed Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2023 and 2022 (Unaudited)	6

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7 -26

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		27 -33

Item 3. Quantitative and Qualitative Disclosures About Market Risk		38

Item 4. Controls and Procedures		38

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		38

Item 1A. Risk Factors		38

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		38

Item 3. Defaults Upon Senior Securities		38

Item 4. Mine Safety Disclosures		38

Item 5. Other Information		38

Item 6. Exhibits		39

Signatures		40

PART I. FINANCIAL INFORMATION

Item 1.

Interim Financial Statements

The Public Company Accounting Oversight Board (the “PCAOB”) had historically been unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections over our auditor deprived our investors of the benefits of such inspections.

Our auditor, the independent registered public accounting firm that issues the audit report in our SEC filings, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor is located in Hong Kong Special Administrative Region of the PRC ("Hong Kong"), China, a jurisdiction where the PCAOB was unable to conduct inspections and investigations before 2022. As a result, we and investors in our securities were deprived of the benefits of such PCAOB inspections. On December 15, 2022, the PCAOB announced that it was able to secure complete access to inspect and investigate PCAOB-registered public accounting firms headquartered in China mainland and Hong Kong in 2022. However, the inability of the PCAOB to conduct inspections of auditors in Hong Kong in the past made it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China mainland and Hong Kong that have been subject to the PCAOB inspections, which could cause investors and potential investors in our securities to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

Our common stock may be delisted and prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCAA, as amended by the Accelerating Holding Foreign Companies Accountable Act, if the PCAOB is unable to inspect or investigate completely auditors located in China mainland and Hong Kong. The delisting of our common stock or the threat of their being delisted could cause the value of our common stock to significantly decline or be worthless, and thus you could lose all or substantial portion of your investment.

On December 18, 2020, the Holding Foreign Companies Accountable Act, or the HFCAA, was signed into law that states if the SEC determines that issuers have filed audit reports issued by a registered public accounting firm that has not been subject to PCAOB inspection for three consecutive years beginning in 2021, the SEC shall prohibit its common stock from being traded on a national securities exchange or in the over-the-counter trading market in the U.S. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, to prohibit securities of any registrant from being listed on any of the U.S. securities exchanges or traded over-the-counter if the auditor of the registrant’s financial statements is not subject to PCAOB inspection for two consecutive years, instead of three consecutive years as enacted in the HFCAA. On December 2, 2021, the SEC adopted final amendments implementing the disclosure and submission requirements of the HFCAA, pursuant to which the SEC will identify an issuer as a “Commission-Identified Issuer” if the issuer has filed an annual report containing an audit report issued by a registered public accounting firm that the PCAOB has determined it is unable to inspect or investigate completely, and will then impose a trading prohibition on an issuer after it is identified as a Commission-Identified Issuer for three consecutive years. On December 29, 2022, the Accelerating Holding Foreign Companies Accountable Act was signed into law.

On December 16, 2021, the PCAOB issued a HFCAA Determination Report (the “2021 PCAOB Determinations”) to notify the SEC of its determination that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in China mainland and Hong Kong because of positions taken by the Chinese authorities, and our auditor was subject to this determination. On May 13, 2022, the SEC conclusively identified us as a Commission-Identified Issuer under the HFCAA following the filing of our annual report on Form 10-K for the fiscal year ended December 31, 2021.

On August 26, 2022, the PCAOB signed a Statement of Protocol on agreement governing on inspections of audit firms based in mainland China and Hong Kong, with China Securities Regulatory Commission (“CSRC”) and Ministry of Finance (“MOF”) of the PRC, in regarding to governing inspections and investigations of audit firms headquartered in mainland China and Hong Kong (the “Agreement”). As stated in the Agreement, the Chinese authorities committed that the PCAOB has direct access to view complete audit work papers under its inspections or investigations and has sole discretion to the selected audit firms and audit engagements. The Agreement opens access for the PCAOB to inspect and investigate the registered public accounting firms in mainland China and Hong Kong completely. The PCAOB then thoroughly tested compliance with every aspect of the Agreement necessary to determine complete access. This included sending a team of PCAOB staff to conduct on-site inspections and investigations in Hong Kong over a nine-week period from September to November 2022.

On December 15, 2022, the PCAOB issued its 2022 HFCAA Determination Report to notify the SEC of its determination that the PCAOB was able to secure complete access to inspect and investigate PCAOB-registered public accounting firms headquartered in China mainland and Hong Kong completely in 2022. The PCAOB Board vacated its 2021 PCAOB Determinations that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in China mainland and Hong Kong. For this reason, we do not expect to be identified as a Commission-Identified Issuer following the filing of our annual report for the fiscal year ended December 31, 2022. However, whether the PCAOB will continue to be able to satisfactorily conduct inspections of PCAOB-registered public accounting firms headquartered in China mainland and Hong Kong is subject to uncertainty and depends on a number of factors out of our, and our auditor’s, control.

The PCAOB is continuing to demand complete access in China mainland and Hong Kong moving forward and is already making plans to resume regular inspections in early 2023 and beyond, as well as to continue pursuing ongoing investigations and initiate new investigations as needed. The PCAOB does not have to wait another year to reassess its determinations. Should the PRC authorities obstruct the PCAOB’s access to inspect or investigate completely in any way and at any point, the PCAOB will act immediately to consider the need to issue new determinations consistent with the HFCAA.

We cannot assure you that our auditor will not be determined as a register public accounting firm that the PCAOB is unable to inspect or investigate completely for two consecutive years because of positions taken by the Chinese authorities and/or any other causes in the future. If the PCAOB in the future again determines that it is unable to inspect and investigate completely auditors in China mainland and Hong Kong, we may be identified as a Commission-Identified Issuer accordingly. If this happens, Nasdaq may determine to delist our common stock, and there is no certainty that we will be able to continue listing our common stock on other non-U.S. stock exchanges or that an active market for our common stock will immediately develop outside of the U.S. The prohibiting from trading in the United States or delisting of our common stock or the threat of their being delisted could cause the value of our common stock to significantly decline or be worthless, and thus you could lose all or substantial portion of your investment.

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

	March 31, 2023		December 31, 2022
	(US $)		(US $)
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	1,592	$	4,391
Accounts receivable, net of allowance for credit loss of $4,070 and $3,760, respectively		1,567		1,745
Prepayment and deposit to suppliers		4,390		4,567
Other current assets, net		3,327		1,610
Total current assets		10,876		12,313

Long-term investments		1,604		1,596
Operating lease right-of-use assets		1,680		1,761
Property and equipment, net		225		249
Intangible assets, net		2,964		3,264
Long-term deposits and prepayments		69		69
Deferred tax assets, net		413		406
Total Assets	$	17,831	$	19,658

Liabilities and Equity
Current liabilities:
Accounts payable *	$	218	$	205
Advances from customers *		720		739
Accrued payroll and other accruals *		266		438
Taxes payable *		3,280		3,248
Operating lease liabilities *		310		347
Lease payment liabilities related to short-term leases *		103		101
Other current liabilities *		341		437
Warrant liabilities		84		185
Total current liabilities		5,322		5,700

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

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

	March 31, 2023			December 31, 2022
	(US $)			(US $)
	(Unaudited)
Long-term liabilities:
Operating lease liabilities-Non current		1,500			1,535
Long-term borrowing from a related party		127			126
Total Liabilities		6,949			7,361

Commitments and contingencies

Equity:
ZW Data Action Technologies Inc.’s stockholders’ equity
Common stock (US$0.001 par value; authorized 20,000,000 shares; issued and outstanding 7,174,506 shares at March 31, 2023 and December 31, 2022)		7			7**
Additional paid-in capital		62,017			62,017**
Statutory reserves		2,598			2,598
Accumulated deficit		(54,859	)		(53,525	)
Accumulated other comprehensive income		1,119			1,200
Total stockholders’ equity		10,882			12,297

Total Liabilities and Equity	$	17,831		$	19,658

* Liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets (Note 2).

**Retrospectively restated for effect of the 1-for-5 reverse stock split effective on January 18, 2023, see Note 4(g).

See notes to condensed consolidated financial statements

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

	Three Months Ended March 31,
	2023			2022
	(US $)			(US $)
	(Unaudited)			(Unaudited)

Revenues	$	6,316		$	7,652
Cost of revenues		6,630			7,518
Gross (loss)/profit		(314	)		134

Operating expenses
Sales and marketing expenses		48			69
General and administrative expenses		932			1,548
Research and development expenses		18			68
Total operating expenses		998			1,685

Loss from operations		(1,312	)		(1,551	)

Other income/(expenses)
Interest income		72			46
Other expenses, net		(5	)		(9	)
Change in fair value of warrant liabilities		101			795
Total other income		168			832

Loss before income tax benefit		(1,144	)		(719	)
Income tax benefit		1			2
Net loss	$	(1,143	)	$	(717	)


Net loss	$	(1,143	)	$	(717	)
Foreign currency translation loss		(81	)		(22	)
Comprehensive loss	$	(1,224	)	$	(739	)

Loss per share
Loss per common share

Basic and diluted**	$	(0.16	)	$	(0.10	)

Weighted average number of common shares outstanding:

Basic and diluted**		7,174,506			7,079,962

**Retrospectively restated for effect of the 1-for-5 reverse stock split effective on January 18, 2023, see Note 4(g).

See notes to condensed consolidated financial statements

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Three Months Ended March 31,
	2023			2022
	(US $)			(US $)
	(Unaudited)			(Unaudited)
Cash flows from operating activities
Net loss	$	(1,143	)	$	(717	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		322			554
Amortization of operating lease right-of-use assets		106			60
Share-based compensation expenses		35			56
Provision for allowance for credit losses		301			-
Deferred taxes		(1	)		(2	)
Disposal of fixed assets		3			-
Change in fair value of warrant liabilities		(101	)		(795	)
Other non-operating income		(72	)		(45	)
Changes in operating assets and liabilities
Accounts receivable		(56	)		(159	)
Prepayment and deposit to suppliers		171			914
Other current assets		(1	)		13
Accounts payable		10			(373	)
Advances from customers		(27	)		(203	)
Accrued payroll and other accruals		(174	)		(66	)
Other current liabilities		(184	)		(36	)
Taxes payable		(8	)		7
Lease payment liability related to short-term leases		-			(42	)
Operating lease liabilities		(97	)		(56	)
Net cash used in operating activities		(916	)		(890	)

Cash flows from investing activities
Repayment of short-term loans from ownership investee entities		-			13
Short-term loan to unrelated parties		(2,000	)		(2,500	)
Repayment of short-term loans and interest income from unrelated parties		123			1,029
Net cash used in investing activities		(1,877	)		(1,458	)

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(In thousands)

	Three Months Ended March 31,
	2023			2022
	(US $)			(US $)
	(Unaudited)			(Unaudited)
Cash flows from financing activities

Net cash provided by/(used in) financing activities		-			-

Effect of exchange rate fluctuation on cash and cash equivalents		(6	)		(1	)

Net decrease in cash and cash equivalents		(2,799	)		(2,349	)

Cash and cash equivalents at beginning of the period		4,391			7,173
Cash and cash equivalents at end of the period	$	1,592		$	4,824

Supplemental disclosure of cash flow information

Income taxes paid	$	-		$	-
Interest expense paid	$	-		$	-

See notes to condensed consolidated financial statements

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2023 and 2022

(In thousands, except for number of shares)

	Common stock						Additional paid-in capital			Statutory reserves		Accumulated deficit			Accumulated other comprehensive income/(loss)			Total stockholders’ equity
	Number of shares			Amount
				(US $)			(US $)			(US $)		(US $)			(US $)			(US $)

Balance, January 1, 2023		7,174,506	**	$	7	**	$	62,017	**	$	2,598	$	(53,525	)	$	1,200		$	12,297
Cumulative effect adjustment related to adoption of ASU No. 2016-13, Financial Instruments-Credit losses (Topic 326)		-			-			-			-		(191	)		-			(191	)
Net loss for the period		-			-			-			-		(1,143	)		-			(1,143	)
Foreign currency translation adjustment		-			-			-			-		-			(81	)		(81	)
Balance, March 31, 2023 (unaudited)		7,174,506		$	7		$	62,017		$	2,598	$	(54,859	)	$	1,119		$	10,882

	Common stock**				Additional paid-in capital**		Statutory reserves		Accumulated deficit			Accumulated other comprehensive income/(loss)			Total stockholders ’ equity
	Number of shares		Amount
			(US $)		(US $)		(US $)		(US $)			(US $)			(US $)

Balance, January 1, 2022		7,075,506	$	7	$	61,813	$	2,598	$	(43,734	)	$	1,082		$	21,766
Share-based compensation in exchange for services from employees and directors		19,000		-		16		-		-			-			16
Net loss for the period		-		-		-		-		(717	)		-			(717	)
Foreign currency translation adjustment		-		-		-		-		-			(22	)		(22	)
Balance, March 31, 2022 (unaudited)		7,094,506	$	7	$	61,829	$	2,598	$	(44,451	)	$	1,060		$	21,043

**Retrospectively restated for effect of the 1-for-5 reverse stock split effective on January 18, 2023, see Note 4(g).

See notes to condensed consolidated financial statements

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.	Organization and nature of operations

ZW Data Action Technologies Inc. (the “Company”) was incorporated in the State of Texas in April 2006 and re-domiciled to become a Nevada corporation in October 2006. On June 26, 2009, the Company consummated a share exchange transaction with China Net Online Media Group Limited (the “Share Exchange”), a company organized under the laws of British Virgin Islands (“China Net BVI”). As a result of the Share Exchange, China Net BVI became a wholly owned subsidiary of the Company and the Company is now a holding company, which, through certain contractual arrangements with operating companies in the People’s Republic of China (the “PRC”), is engaged in providing Internet advertising, precision marketing, e-commerce online to offline (O2O) advertising and marketing services as well as the related data and technical services to small and medium enterprises (SMEs) in the PRC. The Company also develops blockchain enabled web/mobile applications and provides software solutions, i.e., Software-as-a-Service (“SaaS”) services for clients.

2.	Variable interest entities

The Company is not an operating company in China, but a Nevada holding company with no equity ownership in the VIEs. The Company primarily conducts its operations in China through its PRC subsidiaries, the VIEs, with which the Company has entered into contractual arrangements, and their subsidiaries in China. Summarized below is the information related to the VIEs’ assets and liabilities reported in the Company’s condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022, respectively:

	March 31, 2023		December 31, 2022
	US$(’000)		US$(’000)
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	340	$	578
Accounts receivable, net		1,567		1,745
Prepayment and deposit to suppliers		1,931		2,020
Other current assets		3		2
Total current assets		3,841		4,345

Long-term investments		167		165
Operating lease right-of-use assets		98		145
Property and equipment, net		104		113
Deferred tax assets, net		413		406
Total Assets	$	4,623	$	5,174

Liabilities
Current liabilities:
Accounts payable	$	218	$	205
Advances from customers		667		515
Accrued payroll and other accruals		39		63
Taxes payable		2,629		2,602
Operating lease liabilities		99		146
Lease payment liabilities related to short-term leases		103		101
Other current liabilities		204		320
Total current liabilities		3,959		3,952

Total Liabilities	$	3,959	$	3,952

Liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets.

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Summarized below is the information related to the financial performance of the VIEs reported in the Company’s condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2023 and 2022, respectively:

	Three Months Ended March 31,
	2023			2022
	US$(’000)			US$(’000)
	(Unaudited)			(Unaudited)

Revenues	$	6,148		$	7,198
Cost of revenues		(6,327	)		(7,518	)
Total operating expenses		(370	)		(259	)
Net loss before allocation to noncontrolling interests		(550	)		(585	)

3.	Liquidity and Capital Resources

For the three months ended March 31, 2023, the Company incurred a loss from operations of US$1.31 million and a net operating cash outflow of US$0.92 million. As of March 31, 2023, the Company had cash and cash equivalents of US$1.59 million and working capital of US$5.55 million.

The Company experienced temporary decreases in revenues, incurred a gross loss, and did not generate a positive net cash flow from its core business, i.e., Internet advertising and related data service business for the three months ended March 31, 2023. This was primarily attributable to the peak infection of COVID-19 in China incurred from November 2022 through February 2023, which affected a significant number of the Company’s workforce and most of its clients, and in return adversely affected the Company’s normal business activities, and caused temporary decrease in or delay in ad spending from its clients during the first fiscal quarter of 2023. Although the COVID-19 outbreak had been largely under control within China with most of the travel restrictions and quarantine requirements lifted accordingly, and the WHO declared that COVID-19 is no longer a global health emergency on May 5, 2023, the three-year COVID-19 pandemic in China affected the SMEs owners’ confidence to further expand their businesses, and thus adversely affected the SMEs owners’ demands on the Company’s online advertising and marketing services in the short run. As a result, the Company has been relying on proceeds generated from financing activities for its liquidity in the first fiscal quarter of 2023. Although there remain uncertainties as to the future development and impact of the COVID-19 pandemic, the Company anticipates a slow recovery of performance and improvement of cash flow status of its core business in the next 12 months.

In order to improve operation performance, from early 2022, the Company started to introduce its SaaS services to customers. The Company’s SaaS services are provided based on technologies of its self-developed Blockchain Integrated Framework (“BIF”) platform. The subscriptions of the Company’s BIF platform enable its clients to utilize the BIF platform as an enterprise management software to record, share and storage operating data on-chain, and/or to generate unique designed Non-fungible Token (“NFTs”) for their IPs and certificates. Although the unexpected long-time quarantine and business shutdown measures for COVID-19 epidemic control incurred throughout fiscal 2022 adversely affected the Company’s promotion of the SaaS services, and revenues from the new SaaS services business and its profitability have not met the Company’s expectations, the Company still expects the new SaaS services business to bring in positive cash flow and help to improve liquidity, as these services are provided based on technologies of the Company’s self-developed software platform, which does not need any further material cash outflow to other third-party service providers.

In addition, to further improve its liquidity, the Company plans to negotiate with its major suppliers for more favorable payment terms, reduce its operating costs through optimizing the personnel structure among different offices, and reduce its office leasing spaces, if needed. The Company also intends to obtain revolving credit facilities to supplement its short-term working capital, as needed, from the commercial banks in the PRC. The Company has not experienced any difficulties in obtaining such credit facility before.

Based on the above discussion, the Company believes that its current cash and cash equivalents, its anticipated new cash flows from operations and from investing and financing activities, and other liquidity improving measures will ensure the Company has sufficient cash to meet its obligations as they become due with the next 12 months from the date hereof.

4.	Summary of significant accounting policies

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”).

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The unaudited condensed consolidated interim financial information as of March 31, 2023 and for the three months ended March 31, 2023 and 2022 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally included in complete consolidated financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited condensed consolidated interim financial information should be read in conjunction with the financial statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, previously filed with the SEC (the “2022 Form 10-K”) on April 17, 2023.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s condensed consolidated financial position as of March 31, 2023, its condensed consolidated results of operations for the three months ended March 31, 2023 and 2022, and its condensed consolidated cash flows for the three months ended March 31, 2023 and 2022, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

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.

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.

Foreign currency translation

The exchange rates used to translate amounts in RMB into US$ for the purposes of preparing the condensed consolidated financial statements are as follows:

		March 31, 2023				December 31, 2022
Balance sheet items, except for equity accounts			6.8717				6.9646

	Three Months Ended March 31,
	2023		2022
Items in the statements of operations and comprehensive loss		6.8476		6.3504

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

Current expected credit losses

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendments in this ASU require the measurement and recognition of expected credit losses for financial assets held at amortized cost, which replace the existing incurred loss impairment model with an expected loss methodology. The Company, as a SEC smaller reporting company, has adopted the amendments in this ASU from January 1, 2023, using a modified retrospective transition method and did not restate the related accounts in the comparable period. Instead, the Company recognized a cumulative-effect adjustment to increase the opening balance of its accumulated deficit on January 1, 2023 by US$0.19 million, of which US$0.04 million was related to the cumulative-effect adjustment to allowance for credit loss of accounts receivable, and the remaining US$0.15 million was related to the cumulative-effect adjustment to allowance for credit loss of other current assets, which primarily consisted of short-term loans the Company provided to unrelated parties.

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The allowance for credit losses reflects the Company's current estimate of credit losses expected to be incurred over the life of the related financial assets. The allowance for credit losses is presented as a valuation account that is deducted from the amortized cost basis of financial asset(s) to present the net amount expected to be collected on the financial asset(s).

The Company considers various factors in establishing, monitoring, and adjusting its allowance for credit losses, including the aging and aging trends, customer/other parties’ creditworthiness and specific exposures related to particular customers/other parties. The Company also monitors other risk factors and forward-looking information, such as country specific risks and economic factors that may affect a customer/other party’s ability to pay in establishing and adjusting its allowance for credit losses. The Company assesses collectability by reviewing the financial assets on a collective basis where similar characteristics exist and on an individual basis when the Company identifies specific customers/other parties with known disputes or collectability issues. Accounts receivable and short-term loans to unrelated parties are written off after all collection efforts have ceased.

The following tables summarized the movements of the Company’s credit losses for the three months ended March 31, 2023 and 2022, respectively:

	Three Months Ended March 31,
	2023		2022
	US$(’000)		US$(’000)
	(Unaudited)		(Unaudited)
*Credit loss for accounts receivable:*
Balance as of beginning of the period		3,760		2,236
Cumulative-effect adjustment upon adoption of ASU No. 2016-13, Financial Instruments-Credit losses (Topic 326)		36		-
Provision for credit loss during the period		223		-
Written off during the period		-		-
Exchange translation adjustments		51		9
Balance as of end of the period		4,070		2,245

	Three Months Ended March 31,
	2023		2022
	US$(’000)		US$(’000)
	(Unaudited)		(Unaudited)
*Credit loss for other current assets:*
Balance as of beginning of the period		617		-
Cumulative-effect adjustment upon adoption of ASU No. 2016-13, Financial Instruments-Credit losses (Topic 326)	155			-
Provision for credit loss during the period	78			-
Written off during the period		-		-
Exchange translation adjustments		-		-
Balance as of end of the period		850		-

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Fair value measurement

Liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of March 31, 2023 and December 31, 2022 are as follows:

Fair value measurement at reporting date using

As of
March 31, 2023

Quoted Prices
in Active Markets
for Identical Assets/Liabilities
(Level 1)

Significant
Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

US$(’000)

(Unaudited)

Warrant liabilities (Note 14)

Fair value measurement at reporting date using

As of

December 31, 2022

Quoted Prices
in Active Markets
for Identical Assets/Liabilities
(Level 1)

Significant
Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

US$(’000)

Warrant liabilities (Note 14)

185

Reverse stock split

The Board of Directors of the Company approved a reverse stock split of the Company’s issued and outstanding shares of common stock, par value $0.001 per share (the “Common Stock”) at a ratio of 1-for-5 (the “Reverse Stock Split”). The Reverse Stock Split became effective on January 18, 2023 (the “Effective Date”). As a result, the number of shares of the Company’s authorized Common Stock was reduced from 100,000,000 shares to 20,000,000 shares and the issued and outstanding number of shares of the Common Stock was correspondingly decreased. The Reverse Stock Split has no effect on the par value of the Company’s Common Stock or authorized shares of preferred stock.

When the Reverse Stock Split became effective, each five shares of issued and outstanding Common Stock were converted into one newly issued and outstanding share of Common Stock. No fractional shares were issued in connection with the Reverse Stock Split. Any fractional shares of Common Stock that would have otherwise resulted from the Reverse Stock Split were rounded up to the nearest full share. No cash or other consideration was paid in connection with any fractional shares that would otherwise have resulted from the Reverse Stock Split.

As a result of the Reverse Stock Split, 35,827,677 shares of Common Stock that were issued and outstanding at January 18, 2023 was reduced to 7,174,506 shares of Common Stock (taking into account the rounding of fractional shares).

Except where otherwise specified, all number of shares, number of warrants, share prices, exercise prices and per share data in the condensed consolidated financial statements and notes to the condensed consolidated financial statements have been retroactively restated as if the Reverse Stock Split occurred at the beginning of the periods presented.

Revenue recognition

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

	Three Months Ended March 31,
	2023		2022
	US$(’000)		US$(’000)
	(Unaudited)		(Unaudited)
Internet advertising and related services
--distribution of the right to use search engine marketing service		6,161		6,594
--online advertising placements		130		1,058
Blockchain-based SaaS services		25		-
Total revenues		6,316		7,652

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	Three Months Ended March 31,
	2023		2022
	US$(’000)		US$(’000)
	(Unaudited)		(Unaudited)

Revenue recognized over time		6,316		7,652
Revenue recognized at a point in time		-		-
Total revenues		6,316		7,652

Contract balances

The table below summarized the movement of the Company’s contract liabilities (advance from customers) for the three months ended March 31, 2023:

	Contract liabilities
	US$(’000)

Balance as of January 1, 2023		739
Exchange translation adjustment		8
Revenue recognized from beginning contract liability balance		(550	)
Advances received from customers related to unsatisfied performance obligations		523
Balance as of March 31, 2023 (Unaudited)		720

Advance from customers related to unsatisfied performance obligations are generally refundable. Refund of advance from customers were insignificant for both the three months ended March 31, 2023 and 2022.

For the three months ended March 31, 2023 and 2022, there is no revenue recognized from performance obligations that were satisfied in prior periods.

Research and development expenses

The Company accounts for expenses for the enhancement, maintenance and technical support to the Company’s Internet platforms and intellectual properties that are used in its daily operations in research and development expenses. Research and development costs are charged to expense when incurred. Expenses for research and development for the three months ended March 31, 2023 and 2022 were approximately US$0.02 million and US$0.07 million, respectively.

Lease

As of March 31, 2023, operating lease right-of-use assets and total operating lease liabilities recognized was approximately US$1.68 million and US$1.81 million, respectively.

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Maturity of operating lease liabilities

	Operating leases
	US$(’000)
	(Unaudited)

Nine months ending December 31, 2023		329
Year ending December 31,
-2024		317
-2025		333
-2026		349
-2027		367
-2028		385
-thereafter		65
Total undiscounted lease payments		2,145
Less: imputed interest		(335	)
Total operating lease liabilities as of March 31, 2023		1,810

Including:
Operating lease liabilities		310
Operating lease liabilities-Non current		1,500
		1,810

Operating lease expenses:

	Three Months Ended March 31,
	2023		2022
	US$(’000)		US$(’000)
	(Unaudited)		(Unaudited)

Long-term operating lease contracts		133		90
Short-term operating lease contracts		6		15
Total		139		105

Supplemental information related to operating leases:

	Three Months Ended March 31,
	2023			2022
	US$(’000)			US$(’000)
	(Unaudited)			(Unaudited)

Operating cash flows used for operating leases (US$’000)		122			86
Right-of-use assets obtained in exchange for new lease liabilities (US$’000)		-			-
Weighted-average remaining lease term (years)		5.62			6.90
Weighted-average discount rate		6	%		6	%

5.	Accounts receivable, net

	March 31, 2023			December 31, 2022
	US$(’000)			US$(’000)
	(Unaudited)

Accounts receivable		5,637			5,505
Allowance for credit loss		(4,070	)		(3,760	)
Accounts receivable, net		1,567			1,745

All of the accounts receivable are non-interest bearing. The Company maintains an estimated allowance for credit losses to reduce its accounts receivable to the amount that it believes will be collected. The Company evaluates its accounts receivable on a collective (pool) basis and determines the allowance for credit loss based on aging data, historical collection experience, customer specific facts, current economic conditions and reasonable and supportable forecasts of future economic conditions. For the three months ended March 31, 2023, the Company provided approximately US$0.22 million credit losses for its accounts receivable.

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

6.	Prepayment and deposit to suppliers

	March 31, 2023		December 31, 2022
	US$(’000)		US$(’000)
	(Unaudited)

Deposits to advertising resources providers		866		1,077
Prepayments to advertising resources providers		3,045		3,036
Other deposits and prepayments		479		454
		4,390		4,567

7.	Other current assets, net

	March 31, 2023			December 31, 2022
	US$(’000)			US$(’000)

Short-term loans to unrelated parties		4,097			2,197
Short-term loans interest receivables		71			22
Staff advances for business operations		9			8
Total other current assets		4,177			2,227
Allowance for credit loss		(850	)		(617	)
Other current assets, net		3,327			1,610

As of March 31, 2023, the Company provided unsecured, interest-bearing short-term loans to two unrelated parties, which were set forth as below. These short-term loans were recorded as other current assets.

On January 5, 2022, the Company provided a short-term working capital loan of US$2.5 million to an unrelated party, which matured on May 5, 2022. The loan was unsecured and borne a fixed annualized interest rate of 7.5%. In April 2022, as agreed by both parties, the unrelated party repaid a portion of the loan principal of US$1.02 million, together with a loan interest of US0.06 million for the period from January 5, 2022 through April 30, 2022, based on the loan principal of US$2.5 million. The Company extended the term of the remaining loan principal of US$1.48 million to April 30, 2023 with a revised fixed annualized interest rate of 5%. In October 2022 and February 2023, the Company received loan interests of US$0.05 million in the aggregate for the period from May 1, 2022 through December 31, 2022. On April 30, 2023, the Company further extended the term of this loan to October 31, 2023. In May 2023, the Company received a loan interest of US$0.02 million for the period from January 1, 2023 through April 30, 2023.

On January 11, 2023, the Company provided a short-term of US$2.0 million to another unrelated party. The loan is unsecured and bears a fixed annualized interest rate of 12%. The loan and the related loan interest is required to be repaid in lump sum at maturity on July 17, 2023.

The Company evaluates its short-term loans provided to unrelated parties for expected credit losses on a regular basis, and maintains an estimated allowance for credit losses to reduce its short-term loans to the amount that it believes will be collected. The Company evaluates its short-term loans on an individual basis and determines the allowance for credit loss based on creditworthiness of the borrowers, aging information, past transaction history with the borrowers and their current condition, as well as the current economic conditions and reasonable and supportable forecasts of future economic conditions. For the three months ended March 31, 2023, the Company provided US$0.08 million credit losses on short-term loans provided to unrelated parties.

As of March 31,2023, other current assets also included a US$0.62 million remaining outstanding balance of a short-term loan that the Company provided to an unrelated party, Digital Sun Ventures Limited, a Hong Kong-based company (“Digital Sun”). In March 2021, the Company and Digital Sun reached an oral agreement, pursuant to which the Company provided a short-term loan of US$1.65 million to Digital Sun. The loan has a one-year term. The loan is unsecured, interest free and is required to be repaid in lump sum at maturity by March 2022. The Company provided this unsecured and interest free loan to Digital Sun in consideration of the promises and claims made by Digital Sun’s management that Digital Sun has close connections with international well-known media companies seeking for strategic cooperation partners in China, and Digital Sun will facilitate building strategic business partnerships among the Company and these media companies. As of March 31, 2022, Digital Sun had repaid US$1.03 million of this loan and defaults on the loan balance of US$0.62 million. The Company attempted to collect the outstanding loan balance. In June 2022, the Company fully allowanced the outstanding loan balance of US$0.62 million based on the Company’s assessment of the collectability of this outstanding balance. The Company had engaged a law firm and prepared and sent a legal letter to Digital Sun in March 2023, and the Company intends to take further actions to safeguard its rights against the default, including but not limited to, arranging meetings with the management of Digital Sun to negotiate the repayment plan in person and filing a lawsuit against Digital Sun after all other means of collection have been exhausted. As of the date hereof, the Company has not received any formal responses from Digital Sun.

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

8.	Long-term investments

	Amount
	US$(’000)

Balance as of January 1, 2023		1,596
Exchange translation adjustment		8
Balance as of March 31, 2023 (Unaudited)		1,604

As of March 31, 2023, except for long-term investments which were fully impaired, the Company beneficially owned a 15.38%, 10%, 9.9%, 9% and 19% equity interest in each New Business Holdings Limited (“New Business”), Guang Dong WeFriend Co., Ltd. (“Guangdong WeFriend”), Guangdong Yong Fu Xiang Health Management Co., Ltd (“Yong Fu Xiang”); Guangzhou Yuan Qi Man Man Technology Co., Ltd. (“Yuan Qi Man Man") and Business Opportunity Chain (Guangzhou) Technology Co., Ltd. (“Business Opportunity Chain Guangzhou”), respectively.

The Company measures these investments which do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the Company.

9.	Property and equipment, net

	March 31, 2023			December 31, 2022
	US$(’000)			US$(’000)
	(Unaudited)

Vehicles		797			855
Office equipment		876			865
Electronic devices		584			575
Leasehold improvement		187			185
Property and equipment, cost		2,444			2,480
Less: accumulated depreciation		(2,219	)		(2,231	)
Property and equipment, net		225			249

Depreciation expenses were approximately US$0.02 million and US$0.03 million for the three months ended March 31, 2023 and 2022, respectively.

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

10.

Intangible assets, net

	As of March 31, 2023 (Unaudited)
Items	Gross Carrying Value		Accumulated Amortization			Impairment			Net Carrying Value
	US$(’000)		US$(’000)			US$(’000)			US$(’000)
Intangible assets subject to amortization:
--10 years life:
Cloud compute software technology		1,351		(937	)		(414	)		-
Licensed products use right		1,200		(405	)		-			795

--5 years life:
Internet Ad tracking system		1,160		(463	)		-			697
Live streaming technology		1,500		(625	)		(875	)		-

--3 years life:
Blockchain integrated framework		4,038		(1,556	)		(1,010	)		1,472
Bo!News application		349		(116	)		(233	)		-
Other computer software		114		(114	)		-			-
Total	$	9,712	$	(4,216	)	$	(2,532	)	$	2,964

	As of December 31, 2022
Items	Gross Carrying Value		Accumulated Amortization			Impairment			Net Carrying Value
	US$(’000)		US$(’000)			US$(’000)			US$(’000)
Intangible assets subject to amortization:
--10 years life:
Cloud compute software technology		1,333		(924	)		(409	)		-
Licensed products use right		1,201		(374	)		-			827

--5 years life:
Internet Ad tracking system		1,160		(405	)		-			755
Live streaming technology		1,500		(625	)		(875	)		-

--3 years life:
Blockchain integrated framework		4,038		(1,346	)		(1,010	)		1,682
Bo!News application		345		(115	)		(230	)		-
Other computer software		113		(113	)		-			-
Total	$	9,690	$	(3,902	)	$	(2,524	)	$	3,264

Amortization expenses for the three months ended March 31, 2023 and 2022 were approximately US$0.30 million and US$0.53 million, respectively.

Based on the adjusted carrying value of the finite-lived intangible assets after the deduction of the impairment losses, which has a weighted average remaining useful life of 3.34 years as of March 31, 2023, and assuming no further subsequent impairment of the underlying intangible assets, the estimated future amortization expenses is approximately US$0.90 million for the year ending December 31, 2023, approximately US$1.19 million for the year ending December 31, 2024, approximately US$0.35 million for the year ending December 31, 2025, approximately US$0.18 million for the year ending December 31, 2026, and approximately US$0.12 million each year for the years ending December 31, 2027 and 2028.

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

11.

Accrued payroll and other accruals

	March 31, 2023		December 31, 2022
	US$(’000)		US$(’000)
	(Unaudited)

Accrued payroll and staff welfare		83		101
Accrued operating expenses		183		337
		266		438

12.

Taxation

As of March 31, 2023 and December 31, 2022, taxes payable consists of:

	March 31, 2023		December 31, 2022
	US$(’000)		US$(’000)
	(Unaudited)

Turnover tax and surcharge payable		1,297		1,288
Enterprise income tax payable		1,983		1,960
Total taxes payable		3,280		3,248

For the three months ended March 31, 2023 and 2022, the Company’s income tax benefit consisted of:

	Three Months Ended March 31,
	2023		2022
	US$(’000)		US$(’000)
	(Unaudited)		(Unaudited)

Current		-		-
Deferred		1		2
Income tax benefit		1		2

The Company’s deferred tax assets as of March 31, 2023 and December 31, 2022 were as follows:

	March 31, 2023			December 31, 2022
	US$(’000)			US$(’000)
	(Unaudited)

Tax effect of net operating losses carried forward		11,812			11,537
Operating lease cost		33			30
Impairment on long-term investments		146			144
Impairment on intangible assets		369			368
Bad debts provision		1,133			1,018
Valuation allowance		(13,080	)		(12,691	)
Deferred tax assets, net		413			406

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The U.S. holding company has incurred aggregate net operating losses (NOLs) of approximately US$32.0 million and US$31.8 million at March 31, 2023 and December 31, 2022, respectively. The NOLs carryforwards as of December 31, 2017 gradually expire over time, the last of which expires in 2037. NOLs incurred after December 31, 2017 will no longer be available to carry back but can be carried forward indefinitely, subject to an annual limit of 80% on the amount of taxable income that can be offset by NOLs arising in tax years ending after December 31, 2017. The Company maintains a full valuation allowance against its net U.S. deferred tax assets, since due to uncertainties surrounding future utilization, the Company estimates there will not be sufficient future earnings to utilize its U.S. deferred tax assets.

The NOLs carried forward incurred by the Company’s PRC subsidiaries and VIEs were approximately US$16.0 million and US$15.4 million as of March 31, 2023 and December 31, 2022, respectively. The losses carryforwards gradually expire over time, the last of which will expire in 2028. The related deferred tax assets were calculated based on the respective NOLs incurred by each of the PRC subsidiaries and VIEs and the respective corresponding enacted tax rate that will be in effect in the period in which the losses are expected to be utilized.

The Company recorded approximately US$13.0 million and US$12.7 million valuation allowance as of March 31, 2023 and December 31, 2022, respectively, because it is considered more likely than not that a portion of the deferred tax assets will not be realized through sufficient future earnings of the entities to which the operating losses related.

For the three months ended March 31, 2023 and 2022, the Company recorded approximately US$0.30 million and US$0.32 million deferred tax valuation allowance, respectively.

13.

Long-term borrowing from a related party

Long-term borrowing from a related party is a non-interest bearing loan from a related party of the Company relating to the original paid-in capital contribution in the Company’s wholly-owned subsidiary, Rise King Century Technology Development (Beijing) Co., Ltd. (“Rise King WFOE”), which is not expected to be repaid within one year.

14.

Warrant liabilities

The Company issued common stock purchase warrants to certain institutional investors and the Company’s placement agent in the registered direct offerings consummated in February 2021 (the “2021 Financing”) and December 2020 (the “2020 Financing”). Warrants issued to the investors and placement agent in the 2021 Financing were referred to as the “2021 Investors Warrants” and the “2021 Placement Agent Warrants”, respectively. Warrants issued to the investors and placement agent in the 2020 Financing were referred to as the “2020 Investors Warrants” and the “2020 Placement Agent Warrants”, respectively. The warrants issued in the 2021 Financing and the 2020 Financing were referred to collectively as the “Warrants”. The Company accounted for the Warrants as derivative liabilities and measured at fair value with changes in fair value be recorded in earnings in each reporting period.

Warrants issued in the 2021 Financing:

	2021 Investor Warrants						2021 Placement Agent Warrants
	March 31, 2023			December 31, 2022			March 31, 2023			December 31, 2022

Stock price	$	1.70		$	0.46	#	$	1.70		$	0.46	#
Years to maturity		1.38			1.63			1.38			1.63
Risk-free interest rate		4.44	%		4.625	%		4.44	%		4.625	%
Dividend yield		-			-			-			-
Expected volatility		113	%		99.74	%		113	%		99.74	%
Exercise Price	$	17.95		$	3.59	#	$	22.4375		$	4.4875	#

Fair value of the warrant	$	0.0937		$	0.0329		$	0.0727		$	0.0256

Warrant liabilities (US$’000)	$	49		$	86		$	5		$	9

	2021 Investor Warrants						2021 Placement Agent Warrants
	March 31, 2022			December 31, 2021			March 31, 2022			December 31, 2021

Stock price#	$	0.73		$	1.00		$	0.73		$	1.00
Years to maturity		2.38			2.63			2.38			2.63
Risk-free interest rate		2.35	%		0.87	%		2.35	%		0.87	%
Dividend yield		-			-			-			-
Expected volatility		121	%		115	%		121	%		115	%
Exercise Price#	$	3.59		$	3.59		$	4.4875		$	4.4875

Fair value of the warrant	$	0.24		$	0.37		$	0.23		$	0.36

Warrant liabilities (US$’000)	$	626		$	964		$	84		$	132

Warrants issued in the 2020 Financing:

	2020 Investor Warrants						2020 Placement Agent Warrants
	March 31, 2023			December 31, 2022			March 31, 2023			December 31, 2022

Stock price	$	1.70		$	0.46	#	$	1.70		$	0.46	#
Years to maturity		0.70			0.95			0.70			0.95
Risk-free interest rate		4.80	%		4.716	%		4.80	%		4.716	%
Dividend yield		-			-			-			-
Expected volatility		125	%		115.61	%		125	%		115.61	%
Exercise Price	$	10.15		$	2.03	#	$	10.15		$	2.03	#

Fair value of the warrant	$	0.0731		$	0.0439		$	0.0760		$	0.0456

Warrant liabilities (US$’000)	$	25		$	76		$	5		$	14

	2020 Investor Warrants						2020 Placement Agent Warrants
	March 31, 2022			December 31, 2021			March 31, 2022			December 31, 2021

Stock price#	$	0.73		$	1.00		$	0.73		$	1.00
Years to maturity		1.70			1.95			1.70			1.95
Risk-free interest rate		2.23	%		0.72	%		2.23	%		0.72	%
Dividend yield		-			-			-			-
Expected volatility		127	%		128	%		127	%		128	%
Exercise Price#	$	2.03		$	2.03		$	2.03		$	2.03

Fair value of the warrant	$	0.26		$	0.46		$	0.28		$	0.49

Warrant liabilities (US$’000)	$	449		$	795		$	85		$	148

# To reflect the actual inputs used for the determination of fair value of the Warrants, the stock prices and exercise prices presented were not retrospectively restated for effect of the 1-for-5 reverse stock split effective on January 18, 2023, see Note 4(g).

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Changes in fair value of warrant liabilities

Three Months Ended March 31, 2023 (Unaudited)

	As of March 31, 2023		As of December 31, 2022		Change in Fair Value (Gain)/Loss
	(US$’000)		(US$’000)		(US$’000)
Fair value of the Warrants:

Warrants issued in the 2021 Financing：
--Investor Warrants		49		86		(37	)
--Placement Agent Warrants		5		9		(4	)
Warrants issued in the 2020 Financing:
--Investor Warrants		25		76		(51	)
--Placement Agent Warrants		5		14		(9	)
Warrant liabilities		84		185		(101	)

Three Months Ended March 31, 2022 (Unaudited)

	As of March 31, 2022		As of December 31, 2021		Change in Fair Value (Gain)/Loss
	(US$’000)		(US$’000)		(US$’000)
Fair value of the Warrants:

Warrants issued in the 2021 Financing：
--Investor Warrants		626		964		(338	)
--Placement Agent Warrants		84		132		(48	)
Warrants issued in the 2020 Financing:
--Investor Warrants		449		795		(346	)
--Placement Agent Warrants		85		148		(63	)
Warrant liabilities		1,244		2,039		(795	)

Warrants issued and outstanding as of March 31, 2023 and their movements during the three months then ended are as follows:

	Warrant Outstanding						Warrant Exercisable
	Number of underlying shares		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number of underlying shares		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price

Balance, January 1, 2023		1,000,343		1.36	$	15.11		1,001,343		1.36	$	15.11
Granted/Vested		-						-
Exercised		-						-
Balance, March 31, 2023 (Unaudited)		1,000,343		1.11	$	15.11		1,000,343		1.11	$	15.11

15.

Restricted net assets

The Company is a Nevada holding company with operations primarily conducted in China through its PRC subsidiaries, the consolidated VIEs and VIEs’ subsidiaries. The Company’s ability to pay dividends to U.S. investors may depend on receiving distributions from its PRC subsidiaries and settlement of the amounts owed under the VIE agreements from the consolidated VIEs. Any limitation on the ability of the Company’s PRC subsidiaries and the consolidated VIEs to make payments to the Company, or the tax implications of making payments to the Company, could have a material adverse effect on its ability to pay dividends to the U.S. investors.

The PRC regulations currently permit payment of dividends only out of accumulated profits, as determined in accordance with PRC accounting standards and regulations. The Company’s PRC subsidiaries, the consolidated VIEs and their subsidiaries in China are also required to set aside at least 10% of their respective after-tax profit based on the PRC accounting standards and regulations each year to the statutory surplus reserve, until the balance in the reserve reaches 50% of the registered capital of the respective PRC entities. In accordance with these PRC laws and regulations, the Company’s PRC subsidiaries, the consolidated VIEs and their subsidiaries are restricted in their ability to transfer a portion of their net assets to the Nevada holding company. As of March 31, 2023 and December 31, 2022, net assets restricted in the aggregate, that are included in the Company’s consolidated net assets, were approximately US$13.68 million and US$13.31 million, respectively. Appropriations to the enterprise expansion fund and staff welfare and bonus fund of a foreign-invested PRC entity and appropriation to the discretionary surplus reserve of other PRC entities are at the discretion of the board of directors. To date, none of the Company’s PRC subsidiaries, the consolidated VIEs and their subsidiaries appropriated any of these non-mandatory funds and reserves. Furthermore, if these entities incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments.

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Under the PRC Enterprise Income Tax (“EIT”) Law and related regulations, dividends, interests, rent or royalties payable by a foreign-invested enterprise to its immediate holding company outside China are subject to a 10% withholding tax. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Hong Kong has a tax arrangement with mainland China that provides for a 5% withholding tax on dividends subject to certain conditions and requirements, such as the requirements that the Hong Kong enterprise owns at least 25% of the PRC enterprise distributing the dividend at all times within the 12-month period immediately preceding the distribution of dividends and provides that the recipient can demonstrate it is a Hong Kong tax resident and it is the beneficial owner of the dividends. The PRC government adopted regulations in 2018 which stipulate that in determining whether a non-resident enterprise has the status as a beneficial owner, comprehensive analysis shall be conducted based on the factors listed therein and the actual circumstances of the specific case shall be taken into consideration. Specifically, it expressly excludes an agent or a designated payee from being considered as a “beneficial owner”. The Company owns its PRC subsidiaries through China Net HK. China Net HK currently does not hold a Hong Kong tax resident certificate from the Inland Revenue Department of Hong Kong, there is no assurance that the reduced withholding tax rate will be available for the Company. If China Net HK is not considered to be the “beneficial owner” of the dividends by the Chinese local tax authority, any dividends paid to it by the Company’s PRC subsidiaries would be subject to a withholding tax rate of 10%.

There are no restrictions for the consolidated VIEs to settle the amounts owed under the VIE agreements to Rise King WFOE. However, arrangements and transactions among affiliated entities may be subject to audit or challenge by the PRC tax authorities. If at any time the VIE agreements and the related fee structure between the consolidated VIEs and Rise King WFOE is determined to be non-substantive and disallowed by Chinese tax authorities, the consolidated VIEs could, as a matter of last resort, make a non-deductible transfer to Rise King WFOE for the amounts owed under the VIE agreements. This would result in such transfer being non-deductible expenses for the consolidated VIEs but still taxable income for Rise King WFOE. If this happens, it may increase the Company’s tax burden and reduce its after-tax income in the PRC, and may materially and adversely affect its ability to make distributions to the holding company. The Company’s management is of the view that the likelihood that this scenario would happen is remote.

The Company’s PRC subsidiaries generate all of their revenue in Renminbi, Renminbi is not freely convertible into other currencies. As a result, any restriction on currency exchange may limit the ability of the Company’s PRC subsidiaries to pay dividends/make distributions to the Company. The Chinese government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. Shortages in availability of foreign currency may then restrict the ability of the Company’s PRC subsidiaries to remit sufficient foreign currency to the Nevada holding company for the holding company to pay dividends to the U.S. investors. Renminbi is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and foreign debt. Currently, the Company’s PRC subsidiaries may purchase foreign currency for settlement of current account transactions, including payment of dividends to the Nevada holding company, without the approval of the State Administration of Foreign Exchange of China (the “SAFE”) by complying with certain procedural requirements. However, the relevant Chinese governmental authorities may limit or eliminate the Company’s ability to purchase foreign currencies in the future for current account transactions. The Chinese government may continue to strengthen its capital controls, and additional restrictions and substantial vetting processes may be instituted by the SAFE for cross-border transactions falling under both the current account and the capital account. Any existing and future restrictions on currency exchange may limit the Company’s ability to utilize revenue generated in Renminbi to pay dividends in foreign currencies to holders of the Company’s securities. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, the SAFE and other relevant Chinese governmental authorities. This could affect the Company’s ability to obtain foreign currency through debt or equity financing for its PRC subsidiaries.

To date, none of the Company’s subsidiaries has made any distribution of earnings or issued any dividends to their respective shareholder in or outside of China, or to the Nevada holding company, and the Nevada holding company has never declared or paid any cash dividends to U.S. investors.

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company does not have any present plan to make any distribution of earnings/issue any dividends directly or indirectly to its Nevada holding company or pay any cash dividends on its common stock in the foreseeable future, because the Company currently intend to retain most, if not all, of its available funds and any future earnings to operate and expand the Company’s business.

16.

Employee defined contribution plan

Full time employees of the Company in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the PRC subsidiaries and VIEs of the Company make contributions to the government for these benefits based on certain percentages of the employees’ salaries. The employee benefits were expensed as incurred. The Company has no legal obligation for the benefits beyond the contributions made. The total amounts for such employee benefits were approximately US$0.04 million and US$0.07 million for the three months ended March 31, 2023 and 2022, respectively.

17.

Concentration of risk

Credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable and loans to unrelated parties. As of Mach 31, 2023, 59% of the Company’s cash and cash equivalents were held by financial institutions located in the United States of America, and the remaining 41% was held by major financial institutions located in the PRC. The Company believes that these financial institutions located in China and the United States of America are of high credit quality. For accounts receivable and loans to unrelated parties, the Company extends credit based on an evaluation of the customer’s or other parties’ financial condition, generally without requiring collateral or other security. In order to minimize the credit risk, the Company delegated a team responsible for credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. Further, the Company reviews the recoverable amount of each individual receivable at each balance sheet date to ensure that adequate allowances are made for current expected credit losses. In this regard, the Company considers that its credit risk for accounts receivable and loans to unrelated parties are significantly reduced.

Concentration of customers

The following tables summarized the information about the Company’s concentration of customers for the three months ended March 31, 2023 and 2022, respectively:

	Customer A	Customer B	Customer C	Customer D	Customer E

Three Months Ended March 31, 2023
Revenues, customer concentration risk	*	*	*	*	*

Three Months Ended March 31, 2022
Revenues, customer concentration risk	13%	*	*	*	*

As of March 31, 2023
Accounts receivable, customer concentration risk	10%	40%	25%	14%	10%

As of December 31, 2022
Accounts receivable, customer concentration risk	16%	33%	24%	16%	*

* Less than 10%.

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Concentration of suppliers

The following tables summarized the information about the Company’s concentration of suppliers for the three months ended March 31, 2023 and 2022, respectively:

	Supplier A	Supplier B	Supplier C
Three Months Ended March 31, 2023
Cost of revenues, supplier concentration risk	78%	14%	-

Three Months Ended March 31, 2022
Cost of revenues, supplier concentration risk	*	60%	22%

* Less than 10%.

- No transaction incurred for the reporting period.

18.

Commitments and contingencies

In August 2022, the Company obtained a 9.9% equity interest in Yong Fu Xiang, through subscription of a RMB6.73 million (approximately US$0.98 million) registered capital of the entity in cash, which amount was committed to be paid up before December 31, 2065.

In September 2022, the Company obtained a 9% equity interest in Yuan Qi Man Man, through subscription of a RMB0.09 million (approximately US$0.01 million) registered capital of the entity in cash, which amount was committed to be paid up before December 31, 2040.

The Company may from time to time become a party to various legal or administrative proceedings arising in its ordinary course of business. The Company evaluates the status of each legal matter and assesses the potential financial exposure. If the potential loss from any legal proceedings or litigation is considered probable and the amount can be reasonably estimated, the Company accrues a liability for the estimated loss. Significant judgment is required to determine the probability of a loss and whether the amount of the loss is reasonably estimated. As of the date hereof, based on the information currently available, the Company believes that the loss contingencies that may arise as a result of currently pending legal proceedings are not reasonably likely to have a material adverse effect on the Company’s business, results of operations, financial condition, and cash flows.

19.

Segment reporting

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

Three Months Ended March 31, 2023 (Unaudited)

	Internet Ad and related services			Ecommerce O2O Ad and marketing services			Blockchain technology			Corporate			Inter- segment and reconciling item			Total
	US$(‘000)			US$(‘000)			US$(‘000)			US$(‘000)			US$(‘000)			US$(‘000)

Revenues		6,291			-			25			-			-			6,316
Cost of revenues		6,420			-			210			-			-			6,630
Total operating expenses		349			4			-			645	⁽¹⁾		-			998
Depreciation and amortization expense included in cost of revenues and total operating expenses		91			-			210			21			-			322
Operating loss		(478	)		(4	)		(185	)		(645	)		-			(1,312	)

Change in fair value of warrant liabilities		-			-			-			101			-			101

Net loss		(482	)		(1	)		(186	)		(474	)					(1,143	)

Total assets-March 31, 2023		10,060			154			1,472			38,372			(32,227	)		17,831
Total assets-December 31, 2022		10,385			156			1,682			39,136			(31,701	)		19,658

(1)

Including approximately US$0.04 million share-based compensation expenses.

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Three Months Ended March 31, 2022 (Unaudited)

	Internet Ad and related services			Ecommerce O2O Ad and marketing services			Blockchain technology			Corporate			Inter- segment and reconciling item		Total
	US$(‘000)			US$(‘000)			US$(‘000)			US$(‘000)			US$(‘000)		US$(‘000)

Revenues		7,652			-			-			-			-		7,652
Cost of revenues		7,518			-			-			-			-		7,518
Total operating expenses		288			329			368			700	(1)		-		1,685
Depreciation and amortization expense included in cost of revenues and total operating expenses		89			75			368			22			-		554
Operating loss		(154	)		(329	)		(368	)		(700	)		-		(1,551	)

Change in fair value of warrant liabilities		-			-			-			795			-		795

Net (loss)/income		(167	)		(328	)		(368	)		146					(717	)

(1)

Including approximately US$0.06 million share-based compensation expenses.

20.

Loss per share

Basic and diluted loss per share for each of the periods presented are calculated as follows (All amounts, except number of shares and per share data, are presented in thousands of U.S. dollars):

	Three Months Ended March 31,
	2023			2022
	US$(’000)			US$(’000)
	(Unaudited)			(Unaudited)

Net loss attributable to ZW Data Action Technologies Inc. (numerator for basic and diluted loss per share)	$	(1,143	)	$	(717	)

Weighted average number of common shares outstanding -Basic and diluted		7,174,506			7,079,962

Loss per share -Basic and diluted	$	(0.16	)	$	(0.10	)

For the three months ended March 31, 2023 and 2022, the diluted loss per share calculation did not include any outstanding warrants to purchase the Company’s common stock, because they were out-of-the-money and their effect was anti-dilutive.

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

21.

Share-based compensation expenses

In June 2022, the Company granted and issued 0.08 million fully-vested and non-forfeitable shares of the Company restricted common stock to a management consulting and advisory service provider in exchange for its service for a 12-month period until May 2023. The Company valued these shares at US$1.75 per share, the closing bid price of the Company’s common stock on the grant date of these shares and recorded the related total cost of approximately US$0.14 million as a prepayment asset in prepayment and deposit to suppliers account upon the grant and issuance of these shares. Total compensation expenses amortized was approximately US$0.04 million for the three months ended March 31, 2023.

In March 2022, under its 2020 Omnibus Securities and Incentive Plan, the Company granted and issued an aggregate of 0.095 million fully-vested shares of the Company’s restricted common stock to two of the Company’s executive officers in exchange for their services to the Company for the year ended December 31, 2022. These shares were valued at the closing bid price of the Company’s common stock on the respective date of grant. Total compensation expenses amortized for the three months ended March 31, 2022 was approximately US$0.02 million.

For the three months ended March 31, 2022, the Company also amortized an approximately US$0.04 million compensation expense, which was related to fully-vested and nonforfeitable restricted common stock granted and issued to one of its service providers in March 2020.

The table below summarized share-based compensation expenses recorded for the three months ended March 31, 2023 and 2022, respectively:

	Three Months Ended March 31,
	2023		2022
	US$(’000)		US$(’000)
	(Unaudited)		(Unaudited)

Sales and marketing expenses		-		-
General and administrative expenses		35		56
Research and development expenses		-		-
Total		35		56

The aggregate unrecognized share-based compensation expenses as of March 31, 2023 was approximately US$0.02 million, which will be recognized for the year ending December 31, 2023.

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

22.

Subsequent events

In April 2023, under its 2020 Omnibus Securities and Incentive Plan, the Company granted and issued 0.03 million fully-vested shares of the Company’s restricted common stock to one of its independent directors in exchange for his service to the Company for the year ending December 31, 2023. These shares were valued at the closing bid price of the Company’s common stock on the grant date. Total compensation expenses of approximately US$0.05 million will be recorded for the year ending December 31,2023.

In March 2020, the spread of a novel coronavirus (“COVID-19”) resulted in the World Health Organization (the “WHO”) declaring the outbreak of COVID-19 as a global pandemic. The Company’s principal business activity is to provide advertising and marketing services to small and medium enterprises in the PRC, which is particularly sensitive to changes in general economic conditions. The pandemic of COVID-19 in the PRC had caused and may continue to cause decreases in or delays in advertising spending, and had negatively impacted and may continue to negatively impact the Company’s short-term ability to grow revenues. Although the COVID-19 outbreak had been largely under control within China with most of the travel restrictions and quarantine requirements lifted accordingly, and the WHO declared that COVID-19 is no longer a global health emergency on May 5, 2023, there remains uncertainty as to the future impact of the pandemic. The Company will continue to assess its financial impacts for the future periods. There can be no assurance that this assessment will enable the Company to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally or in the Company’s sector in particular.

Except for the above mentioned matters, there is no other material event which are required to be adjusted or disclosed as of the date of this consolidated financial statements.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this interim report. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “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, 2022. 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, blockchain-based SaaS services, and 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 a 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 services on our web portals, provision of ecommerce O2O advertising and marketing services as well as provision of other related value-added data and technical services to maximize market exposure and effectiveness for our clients. From early 2022, we started to introduce our SaaS services to customers. The SaaS services were designated in providing one-stop blockchain-powered enterprise management solutions via our BIF platform in forms of unique NFT generations, data record, share and storage modules subscriptions etc.

Basis of presentation, management estimates and critical accounting policies and estimates

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 4 “Summary of significant accounting policies” to our audited financial statements included in our 2022 Form 10-K.

We believe that the assumptions and estimates associated with revenue recognition, estimation of current expected credit loss and fair value measurement of warrant liabilities have the greatest potential impacts on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

●

Our revenues are recognized when control of the promised services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Our revenues from distribution of the right to use search engine marketing service are recognized on a gross basis, because we determine that we are a principal in the transaction who control the services before they are transferred to our customers.

●

We maintain an allowance for credit losses for accounts receivable and short-term loans provided to unrelated parties, which are recorded as valuation accounts that are deducted from the amortized cost basis of the related financial assets to present the net amount expected to be collected on the financial assets. The allowance for credit losses reflects our current estimate of credit losses expected to be incurred over the life of the related financial assets. We consider various factors in establishing, monitoring, and adjusting our allowance for credit losses, including the aging and aging trends, customer/other parties’ creditworthiness and specific exposures related to particular customers/other parties. We also monitor other risk factors and forward-looking information, such as country specific risks and economic factors that may affect a customer/other party’s ability to pay in establishing and adjusting its allowance for credit losses. We assess collectability by reviewing the financial assets on a collective basis where similar characteristics exist and on an individual basis when we identify specific customers/other parties with known disputes or collectability issues. Accounts receivable and short-term loans to unrelated parties are written off after all collection efforts have ceased.

●

We determined that the warrants we issued in various financing activities should be accounted for as derivative liabilities and measured at fair value with changes in fair value be recorded in earnings in each reporting period. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value of our warrant liabilities was determined based on significant unobservable inputs, such as volatility of our stock price, risk free interest rate.

A.	RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

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 are presented in thousands of U.S. dollars.

	Three Months Ended March 31,
	2023			2022
	(US $)			(US $)
	(Unaudited)			(Unaudited)

Revenues	$	6,316		$	7,652
Cost of revenues		6,630			7,518
Gross (loss)/profit		(314	)		134

Operating expenses
Sales and marketing expenses		48			69
General and administrative expenses		932			1,548
Research and development expenses		18			68
Total operating expenses		998			1,685

Loss from operations		(1,312	)		(1,551	)

Other income/(expenses)
Interest income		72			46
Other expenses, net		(5	)		(9	)
Change in fair value of warrant liabilities		101			795
Total other income		168			832

Loss before income tax benefit		(1,144	)		(719	)
Income tax benefit		1			2
Net loss	$	(1,143	)	$	(717	)

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:

	Three Months Ended March 31,
	2023				2022
Revenue type	(Amounts expressed in thousands of US dollars, except percentages)

-Internet advertising and related data service	$	130	2.1	%	$	1,058	13.8	%
-Distribution of the right to use search engine marketing service		6,161	97.5	%		6,594	86.2	%
Internet advertising and related services		6,291	99.6	%		7,652	100.0	%
Blockchain-based SaaS services		25	0.4	%		-	-
Total	$	6,316	100.0	%	$	7,652	100.0	%

Total Revenues: Our total revenues decreased to US$6.32 million for the three months ended March 31, 2023 from US$7.65 million for the same period last year, which was primarily due to the decrease in revenues from our Internet advertising and related data services business category.

●

Internet advertising revenues for the three months ended March 31, 2023 was approximately US$0.13 million, compared with US$1.06 million for the three months ended March 31, 2022. We experienced a continuous decline in revenues from this business category since the beginning of the COVID-19 pandemic in March 2020. The decrease in service revenues from this business category was primarily attributable to the following reasons: (1) the COVID-19 pandemic in China caused significant economic uncertainties and further resulted in the small and medium business owners’ pandemic fears, which in return materially and adversely affected the advertising investment budgets of our clients. As a result, our clients continued tightening their investment budget on advertising and marketing activities through traditional ad portals, and turned to focus more on singular ad, cheaper advertising channel, e.g., search engine marketing, which brings customers with direct internet traffic flow through clicks, thus a portion of our clients’ ad consumption shifts from using our ad portal placement services to using our search engine marketing service; (2) the advent of the App era with increased short-form video applications based platform advertising channels, such as: Douyin, Kuaishou etc., which have unique competitive advantages, also led advertisement diversion and revenue reduction on our traditional ad portals to a certain extent; and (3) besides the overall factors discussed above, the decrease in our revenues from this business category for the three months ended March 31, 2023 was also temporally intensified by the adverse impact caused by the peak infection of COVID-19 in China during the first fiscal quarter of 2023. We will continue monitoring our client’s needs of this business category and adjust our operational strategy accordingly.

●

Revenues from distribution of the right to use search engine marketing service, i.e., our main stream of service revenue, was approximately US$6.16 million and US$6.59 million for the three months ended March 31, 2023 and 2022, respectively. The decrease in service revenues from this business category was primarily attributable to the negative impact caused by the peak infection of COVID-19 in China from November 2022 through February 2023, which affected a significant number of our workforce and most of our clients, and resulted in temporary decrease in or delay in ad spending from our clients during the first fiscal quarter of 2023.

●	For the three months ended March 31, 2023, we generated an approximately US$0.03 million Blockchain-based platform subscription fee revenues.

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 software platform amortization cost related to our blockchain-based SaaS services. The following table sets forth our cost of revenues, disaggregated by type of services, by amount and gross profit/(loss) ratio for the periods indicated, with inter-company transactions eliminated:

	Three Months Ended March 31,
	2023							2022
	(Amounts expressed in thousands of US dollars, except percentages)
	Revenue		Cost		GP ratio			Revenue		Cost		GP ratio

-Internet advertising and related data service	$	130		103		21	%	$	1,058		971		8	%
-Distribution of the right to use search engine marketing service		6,161		6,317		-3	%		6,594		6,547		1	%
Internet advertising and related services		6,291		6,420		-2	%		7,652		7,518		2	%
Blockchain-based SaaS services		25		210		-740	%		-		-		-
Total	$	6,316	$	6,630		-5	%	$	7,652	$	7,518		2	%

Cost of revenues: our total cost of revenues decreased to US$6.63 million for the three months ended March 31, 2023 from US$7.52 million for the three months ended March 31, 2022. Our cost of revenues primarily consists of search engine marketing resources purchased from key search engines, amortization of software platform development cost and other direct costs associated with providing our services. The decrease in our total cost of revenues for the three months ended March 31, 2023 was primarily due to the decrease in cost related to providing Internet advertising and related data services on our ad portals, which was in line with the decrease in the related revenues as discussed above.

●

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 three months ended March 31, 2023, our total cost of revenues for Internet advertising and data service decreased to US$0.10 million from US$0.97 million for the three months ended March 31, 2022, which was in line with the decrease in revenues as discussed in the revenues section above. The gross margin rate of our Internet advertising and data service was 21% and 8% for the three months ended March 31, 2023 and 2022, respectively. Due to continuous decline in service revenues from this business category, we scaled down our investments for internet traffic flow on our ad portals, and, as a result, we anticipate an increase in gross margin rate of this business category in fiscal 2023, compared with that in fiscal 2022.

●

Costs for distribution of the right to use search engine marketing service was direct search engine resource 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 resource 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 three months ended March 31, 2023, our total cost of revenues for distribution of the right to use search engine marketing service was US$6.32 million and US$6.55 million for the three months ended March 31, 2023 and 2022, respectively. The gross margin rate of this service decreased to -3% for the three months ended March 31, 2023 from 1% for the same period last year. This was directly attributable to the negative impacts on us of the peak COVID-19 infection incurred during the first fiscal quarter of 2023, which temporarily decreased in or delayed in the advertising service demands from our SME clients. Under such circumstances, we had to sell the resources pre-purchased from key search engines at a loss to meet our working capital needs during the period. Along with the end of the COVID-19 pandemic as declared by the WHO in May 2023, we anticipate a gradual improvement of the operation performance and gross margin rate of this business category in future periods.

●	For the three months ended March 31, 2023, cost for our Blockchain-based SaaS services was approximately US$0.21 million, which represented the amortized cost of our self-developed BIF platform.

Gross (loss)/profit

As a result of the foregoing, we incurred a gross loss of approximately US$0.31 million for the three months ended March 31, 2023, compared with a gross profit of approximately US$0.13 million generated for the three months ended March 31, 2022. Our overall gross margin rate decreased to -5% for the three months ended March 31, 2023, compared with 2% for the three months ended March 31, 2022. The gross loss and the decrease in overall gross margin were primarily due to the decrease in gross margin of our main steam service revenues, i.e., distribution of the right to use search engine marketing services, which accounted for approximately 97.5% of our total revenues for the three months ended March 31, 2023 to -3%, compared with the 1% gross margin rate in the same period last year.

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.

	Three Months Ended March 31,
	2023						2022
	(Amounts expressed in thousands of US dollars, except percentages)
	Amount			% of total revenue			Amount		% of total revenue

Total revenues	$	6,316			100	%	$	7,652		100	%
Gross (loss)/profit		(314	)		-5	%		134		2	%

Sales and marketing expenses		48			0.8	%		69		0.9	%
General and administrative expenses		932			14.7	%		1,548		20.2	%
Research and development expenses		18			0.3	%		68		0.9	%
Total operating expenses		998			15.8	%		1,685		22.0	%

Operating expenses: Our total operating expenses was approximately US$1.00 million and US$1.69 million for the three months ended March 31, 2023 and 2022, respectively.

●

Sales and marketing expenses: Sales and marketing expenses was US$0.05 million and US$0.07 million for the three months ended March 31, 2023 and 2022, respectively. Our sales and marketing expenses primarily consist of advertising expenses for brand development and promotion of our services, staff salaries, staff benefits, performance bonuses, travel expenses, communication expenses and other general office expenses of our sales department. For the three months ended March 31, 2023, the decrease in our sales and marketing expenses was primarily due to the peak infection of COVID-19 in China from November 2022 through February 2023, which affected a significant number of our workforce employed in our operations, and thus adversely affected our normal business activities during the first fiscal quarter of 2023.

●

General and administrative expenses: General and administrative expenses was US$0.93 million and US$1.55 million for the three months ended March 31, 2023 and 2022, respectively. Our general and administrative expenses primarily consist of salaries and benefits of management, accounting, human resources and administrative personnel, office rentals, depreciation of office equipment, allowance for credit losses, professional service fees, maintenance, utilities and other general office expenses of our supporting and administrative departments. For the three months ended March 31, 2023, the changes in our general and administrative expenses was primarily due to the following reasons: (1) the increase in allowance for expected credit losses of approximately US$0.30 million; (2) the decrease in amortization of administrative assets of approximately US$0.45 million; and (3) the decrease in general administrative expenses of approximately US$0.47 million, as a result of the cost reduction plan executed by management and the adverse impact of our normal business activities caused by the peak infection period of COVID-19 during the first fiscal quarter of 2023.

●

Research and development expenses: Research and development expenses was US$0.02 million and US$0.07 million for the three months ended March 31, 2023 and 2022, 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 etc. For the three months ended March 31, 2023, the decrease in our research and development expenses was primarily due to a reduction in headcount in our research and development department, compared with that for the same period last year.

Loss from operations: As a result of the foregoing, we incurred a loss from operations of approximately US$1.31 million and US$1.55 million for the three months ended March 31, 2023 and 2022, respectively.

Interest income: For the three months ended March 31, 2023 and 2022, we recognized an approximately US$0.07 million and US$0.05 million interest income, respectively, which was primarily related to the interest we earned from the short-term loans we provided to unrelated parties.

Change in fair value of warrant liabilities: We issued warrants in various financing activities, and we determined that the warrants should be accounted for as derivative liabilities, as the warrants are dominated in a currency (U.S. dollar) other than our functional currency (Renminbi or Yuan). As a result, a gain of change in fair value of these warrant liabilities of approximately US$0.10 million and US$0.80 million was recognized for the three months ended March 31, 2023 and 2022, respectively.

Loss before income tax benefit: As a result of the foregoing, our loss before income tax benefit was approximately US$1.14 million and US$0.72 million for the three months ended March 31, 2023 and 2022, respectively.

Income Tax benefit: For the three months ended March 31, 2023 and 2022, we recognized an approximately US$0.001 million and US$0.002 million of income tax benefit, respectively, which was in relation to the net operating loss incurred by one of our operating VIEs for the respective period, which we consider likely to be utilized with respect to future earnings of this entity.

Net loss: As a result of the foregoing, for the three months ended March 31, 2023 and 2022, we incurred a net loss of approximately US$1.14 million and US$0.72 million, respectively.

B.	LIQUIDITY AND CAPITAL RESOURCES

Cash Transfer within Our Organization and the Related Restrictions

We are a Nevada holding company with operations primarily conducted in China through our PRC subsidiaries, VIEs and VIEs’ subsidiaries. The intercompany flow of funds within our organization is effected through capital contributions and intercompany loans. We do not have written policies regarding intercompany cash transfer within our organization. In accordance with our current internal cash management practices, all intercompany cash transfer within our organization requires prior approval by our financial director and our chief financial officer/or our chief executive officer before execution.

As we conduct our operations primarily in China through our PRC subsidiaries, VIEs and their subsidiaries, and we intend to transfer most of our cash raised from the U.S. stock market to these operating entities to support their operations and expansions, our ability to pay dividends to U.S. investors may depend on receiving distributions from our PRC subsidiaries and settlement of the amounts owed under the VIE agreements from the consolidated VIEs. Any limitation on the ability of our PRC subsidiaries and the consolidated VIEs to make payments to us, or the tax implications of making payments to us, could have a material adverse effect on our ability to pay dividends to our U.S. investors.

The PRC regulations currently permit payment of dividends only out of accumulated profits, as determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries, the consolidated VIEs and their subsidiaries in China are also required to set aside at least 10% of their respective after-tax profit based on the PRC accounting standards and regulations each year to the statutory surplus reserve, until the balance in the reserve reaches 50% of the registered capital of the respective PRC entities. In accordance with these PRC laws and regulations, our PRC subsidiaries, the consolidated VIEs and their subsidiaries are restricted in their ability to transfer a portion of their net assets to us. As of March 31, 2023 and December 31, 2022, net assets restricted in the aggregate, were approximately US$13.68 million and US$13.31 million, respectively. Appropriations to the enterprise expansion fund and staff welfare and bonus fund of a foreign-invested PRC entity and appropriation to the discretionary surplus reserve of other PRC entities are at the discretion of the board of directors. To date, none of our PRC subsidiaries, the consolidated VIEs and their subsidiaries appropriated any of these non-mandatory funds and reserves. Furthermore, if these entities incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments.

Under the PRC Enterprise Income Tax (“EIT”) Law and related regulations, dividends, interests, rent or royalties payable by a foreign-invested enterprise to its immediate holding company outside China are subject to a 10% withholding tax. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Hong Kong has a tax arrangement with mainland China that provides for a 5% withholding tax on dividends subject to certain conditions and requirements, such as the requirements that the Hong Kong enterprise owns at least 25% of the PRC enterprise distributing the dividend at all times within the 12-month period immediately preceding the distribution of dividends and provides that the recipient can demonstrate it is a Hong Kong tax resident and it is the beneficial owner of the dividends. The PRC government adopted regulations in 2018 which stipulate that in determining whether a non-resident enterprise has the status as a beneficial owner, comprehensive analysis shall be conducted based on the factors listed therein and the actual circumstances of the specific case shall be taken into consideration. Specifically, it expressly excludes an agent or a designated payee from being considered as a “beneficial owner”. We own our PRC subsidiaries through CNET Online Technology Co. Limited (“China Net HK”). China Net HK currently does not hold a Hong Kong tax resident certificate from the Inland Revenue Department of Hong Kong, there is no assurance that the reduced withholding tax rate will be available for us. If China Net HK is not considered to be the “beneficial owner” of the dividends by the Chinese local tax authority, any dividends paid to it by our PRC subsidiaries would be subject to a withholding tax rate of 10%.

There are no restrictions for the consolidated VIEs to settle the amounts owed under the VIE agreements to our WFOE. However, arrangements and transactions among affiliated entities may be subject to audit or challenge by the PRC tax authorities. If at any time the VIE agreements and the related fee structure between the consolidated VIEs and our WFOE is determined to be non-substantive and disallowed by Chinese tax authorities, the consolidated VIEs could, as a matter of last resort, make a non-deductible transfer to our WFOE for the amounts owed under the VIE agreements. This would result in such transfer being non-deductible expenses for the consolidated VIEs but still taxable income for our WFOE. If this happens, it may increase our tax burden and reduce our after-tax income in the PRC, and may materially and adversely affect our ability to make distributions to the holding company. Our management is of the view that the likelihood that this scenario would happen is remote.

Our PRC subsidiaries generate all of their revenue in Renminbi, Renminbi is not freely convertible into other currencies. As a result, any restriction on currency exchange may limit the ability of our PRC subsidiaries to pay dividends/make distributions to us. The Chinese government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. Shortages in availability of foreign currency may then restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to us for us to pay dividends to the U.S. investors. Renminbi is currently convertible under the “current account”, which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account”, which includes foreign direct investment and foreign debt. Currently, our PRC subsidiaries may purchase foreign currency for settlement of current account transactions, including payment of dividends to us, without the approval of the State Administration of Foreign Exchange of China (the “SAFE”) by complying with certain procedural requirements. However, the relevant Chinese governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. The Chinese government may continue to strengthen its capital controls, and additional restrictions and substantial vetting processes may be instituted by the SAFE for cross-border transactions falling under both the current account and the capital account. Any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to pay dividends in foreign currencies to holders of our securities. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, the SAFE and other relevant Chinese governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our PRC subsidiaries.

To date, none of our subsidiaries has made any distribution of earnings or issued any dividends to their respective shareholder in or outside of China, or to the Nevada holding company, and the Nevada holding company has never declared or paid any cash dividends to U.S. investors.

We currently do not have any plan to make any distribution of earnings/issue any dividends directly or indirectly to our Nevada holding company or pay any cash dividends on our common stock in the foreseeable future because we currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

Cash Flow Analysis for the Three Months Ended March 31, 2023 and 2022

Cash and cash equivalents represent cash on hand and deposits held at call with banks. We consider all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. As of March 31, 2023, we had cash and cash equivalents of approximately US$1.59 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:

	Three Months Ended March 31,
	2023			2022
	Amounts in thousands of US dollars

Net cash used in operating activities	$	(916	)	$	(890	)
Net cash used in investing activities		(1,877	)		(1,458	)
Net cash provided by/(used in) financing activities		-			-
Effect of Effect of exchange rate changes		(6	)		(1	)
Net decrease in cash and cash equivalents	$	(2,799	)	$	(2,349	)

Net cash used in operating activities

For the three months ended March 31, 2023, our net cash used in operating activities of approximately US$0.92 million were primarily attributable to:

(1)

net loss excluding approximately US$0.32 million of non-cash expenses of depreciation and amortizations; approximately US$0.11 million of amortization of operating lease right-of-use assets; approximately US$0.04 million of share-based compensation; approximately US$0.30 million of provision for allowance for credit losses; approximately US$0.003 million of loss in disposal of fixed assets; approximately US$0.10 million of gain from change in fair value of warrant liabilities; approximately US$0.001 million of deferred tax benefit; and approximately US$0.07 million of other non-operating income, yielded the non-cash and non-operating items excluded net loss of approximately US$0.55 million.

(2)

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

prepayment and deposit to suppliers decreased by approximately US$0.17 million, primarily due to refund of deposit from a major Internet Ad resource supplier during the period; and

accounts payables increased 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$0.06 million;

advance from customers decreased by approximately US$0.03 million, primarily due to recognizing revenues from opening contract liabilities during the period; and

accruals, taxes payable, operating lease liabilities and other current liabilities decreased by approximately US$0.46 million in the aggregate, primarily due to settlement of these liabilities during the period.

For the three months ended March 31, 2022, our net cash used in operating activities of approximately US$0.89 million were primarily attributable to:

(1)

net loss excluding approximately US$0.55 million of non-cash expenses of depreciation and amortizations; approximately US$0.06 million of amortization of operating lease right-of-use assets, approximately US$0.06 million of share-based compensation; approximately US$0.80 million of gain from change in fair value of warrant liabilities; approximately US$0.002 million of deferred tax benefit; and approximately US$0.05 million of other non-operating income, yielded the non-cash and non-operating items excluded net loss of approximately US$0.89 million.

(2)

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

prepayment and deposit to suppliers decreased by approximately US$0.91 million, primarily due to utilization of the prepayment made to suppliers as of December 31, 2021 through Ad resource and other services received from suppliers during the first fiscal quarter of 2022;

other current assets decreased by approximately by US$0.01 million; and

tax payables increased 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$0.16 million；

accounts payable decreased by approximately US$0.37 million, primarily due to settlement of the amount due to a major internet Ad resource provider as of December 31, 2021 during the period;

advance from customers decreased by approximately US$0.20 million, primarily due to recognizing revenues from opening contract liabilities during the period;

accruals, other current liabilities, operating lease liabilities and short-term lease payment payables decreased by approximately US$0.20 million in the aggregate, primarily due to settlement of these liabilities during the period.

Net cash used in investing activities

For the three months ended March 31, 2023, (1) we provided to an unrelated party a short-term loan of US$2.0 million, which will mature on July 17, 2023. This loan is unsecured and bears a fixed annualized interest rate of 12%; (2) we collected an US$0.10 million short-term loan, which was provided to another unrelated party in April 2022; and (3) we received a total interest income of approximately US$0.02 million, which was attributable to short-term loans we provided to unrelated parties in previous periods. In the aggregate, these transactions resulted in a net cash outflow from investing activities of approximately US$1.88 million for the three months ended March 31, 2023.

For the three months ended March 31, 2022, (1) we provided to an unrelated party a short-term loan of US$2.5 million, of which US$1.02 million had been collected in April 2022, and the remaining balance is expected to be repaid on October 31, 2023; and (2) we received an approximately US$1.03 million and US$0.01 million repayment of short-term loans, which was provided to another third-party borrower and one of our unconsolidated investees in previous periods, respectively. In the aggregate, these transactions resulted in a net cash outflow from investing activities of approximately US$1.46 million for the three months ended March 31, 2022.

Net cash provided by/(used in) financing activities

For both the three months ended March 31, 2023 and 2022, no cash was provided by or used in financing activities.

Future Liquidity, Material Cash Requirements and Capital Resources

Our future short-term liquidity needs within 12 months from the date hereof primarily include deposits and advance payments required for the purchase of search engine marketing resources and other online marketing resources to be distributed to our customers and payments for our operating expenses, which mainly consist of office rentals and employee salary and benefit.

In addition, in order to further develop our core business, i.e., our Internet advertising and related data service business, broaden and diversify the online marketing channels for customers, reinforce our industry competitive advantage and secure our client base, we are actively seeking target companies with complementary online marketing resources for acquisition and/or joint ventures cooperation. To date, we have not entered into any binding agreements with any potential target. It is not yet certain when the potential acquisition and/or cooperation will be consummated and what form(s) of consideration will be transferred by us. If this transaction were to be consummated, it will materially decrease our liquidity in the short run when the cash consideration, if any, is transferred. However, upon consummation of the acquisition, operating profits and new cash inflow may be generated from the acquired subsidiary, which may also help to improve the overall gross margin and cash flow status of our core business through the expected synergies of combining operations of the new acquired subsidiary and our own. Except this, we do not have other material non-operational cash requirements within 12 months from the date hereof.

Our current core business is to provide advertising and marketing services to small and medium enterprises (“SMEs”) in the PRC, which is particularly sensitive to changes in general economic conditions. Although the COVID-19 outbreak had been largely under control within China with most of the travel restrictions and quarantine requirements lifted accordingly, and the WHO declared that COVID-19 is no longer a global health emergency on May 5, 2023, the three-year COVID-19 pandemic in China affected the SMEs owners’ confidence to further expand their businesses, and thus adversely affected the SMEs owners’ demands on our online advertising and marketing services in the short run. As a result, our core business suffered from a temporary decrease in revenues, and we experienced a gross loss from our core business for the first fiscal quarter of 2023. Thus, we have been relying on proceeds generated from financing activities for our liquidity during the period. Although there remain uncertainties as to the future development and impact of the COVID-19 pandemic, we anticipate a slow recovery of performance and improvement of cash flow status of our core business in the next 12 months.

In order to improve operation performance, from early 2022, we started to introduce our SaaS services to our customers. The SaaS services were designated to provide one-stop blockchain-powered enterprise management solutions via our Blockchain Integrated Framework (“BIF”) platform in forms of unique NFT generations, data record, share and storage modules subscriptions etc. However, the unexpected long-time quarantine and business shutdown measures for COVID-19 epidemic control incurred throughout fiscal 2022 adversely affected our promotion of the SaaS services to our customers. To adapt to the economic change and alleviate the impact of COVID-19 epidemic control measures, we modified our short-term tactics of SaaS services into a more SMEs-friendly way, for example, we introduced a more flexible payment method of pay per generation of NFT. Although revenues from the SaaS services business and its profitability have not met our expectations, we expect the SaaS business to bring us positive cash flow and help to improve our liquidity, as these services are provided based on technologies of our self-developed software platform, which does not need any further material cash outflow to other third-party service providers.

In addition, for the next 12 months from the date hereof, we anticipate to generate additional cash inflows and/or improve our liquidity through the following: (1) our current outstanding short-term working capital loans provided to unrelated parties will mature within the next 12 months that we anticipate collecting these loan principals and the related interest income within the next 12 months; (2) if at any time we anticipate insufficiency of our working capital, we can apply for revolving credit facility from commercial banks in the PRC to supplement our short-term liquidity deficit. We have not experienced any difficulties in obtaining such credit facility before, and this could result in fixed obligations and incremental cost of interest; (3) in consideration of the long-term cooperation history and good track records with our major suppliers, we plan to negotiate with our suppliers for more favorable payment terms; and (4) we plan to reduce our operating costs through optimizing the personnel structure among different offices and reduce our office leasing spaces, if needed. This may incur incremental costs related to employee layoff compensation and contract termination penalty.

Based on the above discussion, we believe that our current cash and cash equivalents, our anticipated new cash flows from operations and investing and financing activities, and our other liquidity improving measures will ensure we have sufficient cash to meet our obligations as they become due within the next 12 months.

In the long term, beyond the next 12 months, we plan to further broaden the application scenarios of our blockchain-based SaaS services to be offered to the customers, continue expanding our core Internet advertising and marketing business through acquisitions, and develop Internet advertising and marketing channels that target overseas Internet users. As such, we may decide to enhance our liquidity position or increase our cash reserve for future investments through additional equity financing in the U.S. capital market. This would result in further dilution to our shareholders. We cannot assure you that such financing will be available in amounts or on terms acceptable to us, or at all.

C.	Off-Balance Sheet Arrangements

None.

D.	Disclosure of Contractual Obligations

In August 2022, we obtained a 9.9% equity interest in Guangdong Yong Fu Xiang Health Management Co., Ltd (“Yong Fu Xiang”), through subscription of a RMB6.73 million (approximately US$0.98 million) registered capital of the entity in cash, which amount was committed to be paid up before December 31, 2065.

In September 2022, we obtained a 9% equity interest in Guangzhou Yuan Qi Man Man Technology Co., Ltd. (“Yuan Qi Man Man"), through subscription of a RMB0.09 million (approximately US$0.01million) registered capital of the entity in cash, which amount was committed to be paid up before December 31, 2040.

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

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 March 31, 2023, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer have concluded that during the period covered by this report, the Company’s disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the first fiscal quarter of 2023 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.

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.

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: May 22, 2023	By:	/s/ Handong Cheng
	Name: Handong Cheng
	Title: Chief Executive Officer and Acting Chief Financial Officer (Principal Executive Officer and Principal Accounting and Financial Officer)