ZW DATA ACTION TECHNOLOGIES INC. Forward-Looking Statements
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the related notes to the consolidated financial statements included elsewhere in this Form 10-K. Our audited consolidated financial statements have been prepared in accordance withU.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" and elsewhere in this Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements. ThePublic 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 has deprived our investors with the benefits of such inspections. Our auditor, the independent registered public accounting firm that issues the audit report in ourSEC filings, as an auditor of companies that are traded publicly inthe United States and a firm registered with the PCAOB, is subject to laws inthe United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor is located inHong 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. OnDecember 15, 2022 , the PCAOB announced that it was able to secure complete access to inspect and investigate PCAOB-registered public accounting firms headquartered inChina mainland andHong Kong in 2022. However, the inability of the PCAOB to conduct inspections of auditors inHong 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 ofChina mainland andHong 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. 47 -------------------------------------------------------------------------------- Our common stock may be delisted and prohibited from trading inthe 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 inChina mainland andHong 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. OnDecember 18, 2020 , the Holding Foreign Companies Accountable Act, or the HFCAA, was signed into law that states if theSEC 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, theSEC shall prohibit its common stock from being traded on a national securities exchange or in the over-the-counter trading market in theU.S. Furthermore, onJune 22, 2021 , theU.S. Senate passed theAccelerating Holding Foreign Companies Accountable Act, to prohibit securities of any registrant from being listed on any of theU.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. OnDecember 2, 2021 , theSEC adopted final amendments implementing the disclosure and submission requirements of the HFCAA, pursuant to which theSEC 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. OnDecember 29, 2022 , the Accelerating Holding Foreign Companies Accountable Act was signed into law. OnDecember 16, 2021 , the PCAOB issued a HFCAA Determination Report (the "2021 PCAOB Determinations") to notify theSEC of its determination that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered inChina mainland andHong Kong because of positions taken by the Chinese authorities, and our auditor was subject to this determination. OnMay 13, 2022 , theSEC 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 endedDecember 31, 2021 . OnAugust 26, 2022 , the PCAOB signed a Statement of Protocol on agreement governing on inspections of audit firms based in mainlandChina andHong Kong , withChina Securities Regulatory Commission ("CSRC") and Ministry of Finance ("MOF") of the PRC, in regarding to governing inspections and investigations of audit firms headquartered in mainlandChina andHong 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 mainlandChina andHong 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 inHong Kong over a nine-week period from September toNovember 2022 . OnDecember 15, 2022 , the PCAOB issued its 2022 HFCAA Determination Report to notify theSEC of its determination that the PCAOB was able to secure complete access to inspect and investigate PCAOB-registered public accounting firms headquartered inChina mainland andHong 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 inChina mainland andHong 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 endedDecember 31, 2022 . However, whether the PCAOB will continue to be able to satisfactorily conduct inspections of PCAOB-registered public accounting firms headquartered inChina mainland andHong Kong is subject to uncertainty and depends on a number of factors out of our, and our auditor's, control. 48
-------------------------------------------------------------------------------- The PCAOB is continuing to demand complete access inChina mainland andHong 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 inChina mainland andHong 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 theU.S. The prohibiting from trading inthe United States or delisting of our common stock or the threat of their being delisted could cause the value of our common stock to significantly decline or be worthless, and thus you could lose all or substantial portion of your investment. Overview Our company was incorporated in theState of Texas inApril 2006 and re-domiciled to become aNevada corporation inOctober 2006 . As a result of a share exchange transaction we consummated with China Net BVI inJune 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 new 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, critical accounting policies and management estimates
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles inthe United States of America ("U.S. GAAP") and include the accounts of our company, and all of our subsidiaries and VIEs. All transactions and balances between our company and our subsidiaries and VIEs have been eliminated upon consolidation. We prepare financial statements in conformity withU.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. We considered the policies discussed below to be critical to an understanding of our financial statements. 49
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Foreign currency translation and transactions
We conduct substantially all of our operations through our PRC operating
subsidiaries and VIEs, PRC is the primary economic environment in which we
operate. The exchange rates used to translate amounts in Renminbi ("RMB"), the
functional currency of the PRC, into our reporting currency, the United States
Dollar ("U.S. dollar" or "US$") for the purposes of preparing our consolidated
financial statements are as follows:
As of December 31,
2022 2021
Balance sheet items, except for equity accounts 6.9646 6.3757
Year Ended December 31,
2022 2021Items in the statements of operations and comprehensive loss 6.7261
6.4515
Impairment of long-lived assets
In accordance with ASC 360-10-35, long-lived assets, which include tangible
long-lived assets and intangible long-lived assets, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of long-lived assets to be held
and used is measured by a comparison of the carrying amount of the asset to the
estimated undiscounted future cash flows expected to be generated by the asset.
If the carrying amount of an asset exceeds its estimated future undiscounted
cash flows, an impairment loss is recognized for the difference between the
carrying amount of the asset and its fair value.
Revenue recognition
In accordance with ASC Topic 606 "Revenue from Contracts with Customers", our
revenues are recognized when control of the promised goods or services are
transferred to our customers, in an amount that reflects the consideration we
expected to be entitled to in exchange for those goods or services.
For the distribution of the right to use search engine marketing service, the
provision of advertising placement services, and the blockchain platform
subscription service, we recognize revenues over time when we consider the
services have been delivered to our customers, with the related benefits being
simultaneously received and consumed by our customers. For NFT generation
service provided through our BIF platform, revenues are recognized based on a
fixed price per NFT generation, when a NFT is generated, delivered and accepted
by customers ("point in time").
For the distribution of the right to use the third-party's search engine marketing service, we recognize the revenues on a gross basis, because we determine that we are a principal in the transaction, who controls the service before it is transferred to the customers.
Lease
We lease office spaces from unrelated parties during our normal course of
business. We account for these leases in accordance with ASC Topic 842 "Leases".
Other than office spaces leases, we do not have any other contract that is or
contains a lease under ASC Topic 842.
Our lease contracts do not contain any option for us to extend or terminate the
lease, and do not contain the option for us to purchase the underlying assets.
Based on the noncancelable lease period in the contract, we consider
contract-based, asset-based, market-based and entity-based factors to determine
the term over which we are reasonably certain to extend the lease, and then
determine the lease term of each contract. Our lease contracts only contain
fixed lease payments and do not contain any residual value guarantee. Our lease
contracts do not contain any nonlease component and are classified as operating
leases in accordance with ASC Topic 842-10-25-3.
50
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Our office spaces lease contracts with a duration of twelve months or less meet
the definition of short-term leases under ASC Topic 842. As an accounting
policy, we elected not to recognize right-of-use asset and related lease
liability to these short-term leases. Instead, we recognized the lease payments
of these short-term leases in our consolidated statements of operations and
comprehensive loss on a straight-line basis over the lease term.
As the implicit rates of our leases cannot be readily determined, in accordance
with ASC Topic 842-20-30-3, we then use our incremental borrowing rate as the
discount rate to determine the present value of our lease payments for each of
our lease contracts with a duration of over twelve months. The discount rate
used by us was determined based on the interest rate expected to be used by the
commercial banks in the PRC for long-term loans with the same maturity terms as
the respective lease contracts at lease inception, if lent to our company on a
collateralized basis.
Recent issued or adopted accounting standards
InJune 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. The amendments in this ASU replace the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. InNovember 2018 , the FASB issued ASU No. 2018-19, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses", which among other things, clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. For public entities, the amendments in these ASUs are effective for fiscal years beginning afterDecember 15, 2019 , including interim periods within those fiscal years. InNovember 2019 , the FASB issued ASU No. 2019-10, "Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)-Effective date", which deferred the effective date of this ASU until fiscal years beginning afterDecember 15, 2022 , including interim periods within those fiscal years, forSEC filers that are eligible to be smaller reporting companies under theSEC's definition. Our company, as aSEC smaller reporting company, has adopted the amendments in this ASU fromJanuary 1, 2023 . The adoption of this ASU did not have a material impact on our consolidated financial position and results of operations. A. RESULTS OF OPERATIONS FOR THE YEARS ENDEDDECEMBER 31, 2022 AND 2021 The following table sets forth a summary, for the periods indicated, of our consolidated results of operations. Our historical results presented below are not necessarily indicative of the results that may be expected for any future period. All amounts, except number of shares and per share data, are presented in thousands ofU.S. dollars. 51
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Year Ended December 31,
2022 2021
US$ US$
Revenues
From unrelated parties $ 26,235 $ 47,324
From related parties - 4
Total revenues 26,235 47,328
Cost of revenues 26,429 47,230
Gross (loss)/profit (194 ) 98
Operating expenses
Sales and marketing expenses 269 730
General and administrative expenses 8,304 12,632
Research and development expenses 229
326
Impairment on intangible assets 2,123 - Total operating expenses 10,925 13,688 Loss from operations (11,119 ) (13,590 ) Other income (expenses) Change in fair value of warrant liabilities 1,854
11,329
Interest income 116
4
Impairment on long-term investments (596 )
-
Loss on disposal of long-term investments - (38 ) Other expense, net (49 ) (216 ) Total other income 1,325 11,079 Loss before income tax benefit/(expense) and noncontrolling interests (9,794 ) (2,511 ) Income tax benefit/(expense) 3 (177 ) Net loss (9,791 ) (2,688 ) Net income attributable to noncontrolling interests - (66 ) Net loss attributable to ZW Data Action Technologies Inc.$ (9,791 ) $ (2,754 ) Loss per share Loss per common share Basic and diluted$ (1.37 ) $ (0.42 ) Weighted average number of common shares outstanding: Basic and diluted 7,136,290 6,618,754 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: Year Ended December 31, 2022 2021 Revenue type (Amounts expressed in thousands
of US dollars, except percentages)
-Internet advertising and related data service$ 3,548 13.5 %$ 7,442 15.7 % -Distribution of the right to use search engine marketing service 22,262 84.9 % 39,224 82.9 % Internet advertising and related services 25,810 98.4 % 46,666 98.6 % Blockchain-based SaaS services 425 1.6 % - - Ecommerce O2O advertising and marketing services - - 662 1.4 % Total$ 26,235 100 %$ 47,328 100 % Total Revenues: Our total revenues decreased toUS$26.24 million for the year endedDecember 31, 2022 fromUS$47.33 million for the year endedDecember 31, 2021 , which was primarily due to the decrease in our main stream service revenues, i.e., distribution of the right to use search engine marketing service. We derive the majority of our revenues from distribution of the right to use the search engine marketing ("SEM") services, sale of advertising space on our internet ad portals, and provision of the related data and technical services, all of which management considers as one aggregate business operation and relies upon the consolidated results of all operations in this business unit to make decisions about allocating resources and evaluating performance. Our advertising and marketing services to related parties were provided in the ordinary course of business on the same terms as those provided to our unrelated customers. Our service revenues from related parties were insignificant for both the years endedDecember 31, 2022 and 2021. 52 --------------------------------------------------------------------------------
? Internet advertising revenues for the year ended
approximately
rebound cases in many provinces in
long-term regional quarantine and large-scale business shutdown that affected
business of most of our clients, i.e., SMEs. This in return materially and
adversely affected the advertising investment budgets and advertising service
demands of our SME clients.
? Revenue generated from distribution of the right to use search engine marketing
service for the year ended
million, compared with approximately
from this business category was the same as discussed above about the Internet
advertising and related data services.
? For the year ended
million revenues from our Blockchain-based SaaS Services, which consist of an
approximately
approximately
? For the year ended
million Ecommerce O2O advertising and marketing service revenues through
distribution of the advertising spaces in outdoor billboards we purchased from
a third party. We terminated this business in the fourth quarter of fiscal
2021.
Cost of Revenues
Our cost of revenues consisted of advertising resources costs directly related
to the offering of our Internet advertising, precision marketing services and
our Ecommerce O2O advertising and marketing service, 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 ratio for the periods indicated, with inter-company
transactions eliminated:
Year Ended December 31,
2022 2021
(Amounts expressed in thousands ofUS dollars, except percentages)
Revenue Cost GP ratio Revenue Cost GP ratio
-Internet advertising
and related data
service $ 3,548 3,199 10 % $ 7,442 6,590 11 %
-Distribution of the
right to use search
engine marketing
service 22,262 22,894 -3 % 39,224 39,140 0.2 %
Internet advertising
and related services 25,810 26,093 -1 % 46,666 45,730 2 %
Blockchain-based SaaS
services 425 336 21 % - - -
Ecommerce O2O
advertising and
marketing services - - - 662 1,500 -127 %
Total $ 26,235 $ 26,429 -1 % $ 47,328 $ 47,230 0.2 %
Cost of revenues: our total cost of revenues decreased to approximately US$26.43
million for the year ended December 31, 2022 , compared with US$47.23 million for
the year ended December 31, 2021 . Our cost of revenues primarily consists of
search engine marketing resources purchased from key search engines, cost of
outdoor advertising resources, 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 year ended December 31, 2022 was primarily
due to the decrease in costs associated with the distribution of the right to
use search engine marketing service we purchased from key search engines, which
was in line with the decrease in the related revenues as discussed in the
revenues section above.
53--------------------------------------------------------------------------------
? 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 year ended
Internet advertising and data service was approximately
for the years ended
We anticipate the gross margin rate of this business category will maintain at
around 10%.
? 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
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 year ended
use search engine marketing service decreased to
with
year ended
directly attributable to the negative impacts on us of the repeated regional
COVID-19 rebound in many provinces of
materially and adversely affected the advertising investment budgets and
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
secure our client base and meet our working capital needs during fiscal 2022.
We are actively negotiating with our suppliers for more favorable discount, as
a result, along with the end of zero-COVID policy adopted by the Chinese
government since late 2022, we anticipate to gradually improve the gross margin
rate for this business category in future periods.
? For the year ended
services was approximately
cost of our self-developed BIF platform.
? For the year ended
and marketing service revenues were approximately
represented the amortized costs for the related outdoor billboards ad spaces we
pre-purchased for the year. Gross (loss)/profit As a result of the foregoing, we incurred a gross loss of approximatelyUS$0.19 million for the year endedDecember 31, 2022 , compared with a gross profit of approximatelyUS$0.10 million for the year endedDecember 31, 2021 . Our overall gross margin rate for the years endedDecember 31, 2022 and 2021 was approximately -1% and 0.2%, respectively. 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 84.9% of our total revenues for the year endedDecember 31, 2022 , to -3%, compared with the 0.2% gross margin rate last year. Operating Expenses Our operating expenses consist of sales and marketing expenses, general and administrative expenses, research and development expenses and impairment on intangible assets. 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. 54 --------------------------------------------------------------------------------
Year Ended December 31,
2022 2021
(Amounts expressed inthousands of US dollars, except percentages)
Percentage of
Percentage of total
Amount total revenue Amount revenue
Total Revenues $ 26,235 100 % $ 47,328 100 %
Gross (loss)/profit (194 ) -1 % 98 0.2 %
Sales and marketing expenses 269 1 % 730 2 %
General and administrative expenses 8,304 32 % 12,632 27 %
Research and development expenses 229 1 % 326 1 %
Impairment on intangible assets 2,123 8 % - -
Total operating expenses 10,925 42 % 13,688 30 %
Operating Expenses: Our operating expenses were approximately
? Sales and marketing expenses: For the year ended
and marketing expenses decreased to
the year ended
consist of advertising expenses for brand development that we pay to different
media outlets for the promotion and marketing of our advertising web portals
and our services, staff salaries, staff benefits, performance bonuses,
travelling expenses, communication expenses and other general office expenses
of our sales department. Due to certain aspects of our business nature, the
fluctuation of our sales and marketing expenses usually does not have a direct
linear relationship with the fluctuation of our net revenues. For the year
ended
primarily due to the decrease in brand building and promotion expenses of
approximately
general departmental expenses of approximately
? General and administrative expenses: Our general and administrative expenses
were approximately
expenses primarily consist of salaries and benefits of management, accounting,
human resources and administrative personnel, office rentals, depreciation of
office equipment, allowance for doubtful accounts, professional service fees,
maintenance, utilities and other general office expenses of our supporting and
administrative departments. For the year ended
in our general and administrative expenses were primarily due to the following
reasons: (1) the decrease in share-based compensation expenses of approximately
management, directors and employees in fiscal 2022, compared with that of
fiscal 2021; (2) the increase in allowance for doubtful accounts of
approximately
in many provinces throughout the year and the zero-COVID policy adopted by the
Chinese government, which resulted in large scale of business shutdown
throughout the year, and in return, materially and adversely affected the
liquidity of our SME clients; and (3) the increase in general departmental
expenses of approximately
? Research and development expenses: Our research and development expenses were
approximately
31, 2022 and 2021, respectively. Our research and development expenses
primarily consist of salaries and benefits of our staff in the research and
development department, office equipment depreciation expenses, and office
utilities and supplies allocated to our research and development department
etc. For the year ended
development expenses was primarily due to a reduction in headcount in our
research and development department, compared with last year.
? Impairment on intangible assets: For the year ended
recorded approximately
intangible assets, due to insufficient estimated future cash flows expected to
be generated by these assets. This was primarily attributable to the negative
impacts resulted from the severe COVID-19 rebounds in
zero-COVID policy adopted by the Chinese government throughout fiscal 2022,
which resulted in large scale quarantine and business shutdown, and in return,
materially and adversely affected the advertising investment budgets and
advertising service demands of our SME clients, and thus adversely affected the
future cash flows expected to be generated by these intangible assets.
55-------------------------------------------------------------------------------- Loss from operations: As a result of the foregoing, we incurred a net loss from operations of approximatelyUS$11.12 million andUS$13.59 million for the years endedDecember 31, 2022 and 2021, respectively. Change in fair value of warrant liabilities: We issued warrants in financing activities. We determined that these warrants should be accounted for as derivative liabilities, as the warrants are dominated in a currency (U.S. dollar) other than our functional currency (Renminbi or Yuan). As a result, a gain of change in fair value of approximatelyUS$1.85 million andUS$11.33 million was recorded in earnings for the years endedDecember 31, 2022 and 2021, respectively.
Interest income: For the year ended
Impairment on long-term investments: For the year endedDecember 31, 2022 , we recognized an approximatelyUS$0.60 million impairment loss on long-term investments, which was related to our cash investments in three of our unconsolidated investee entities whose business activities had become dormant as of the end of fiscal 2022.
Loss before income tax (benefit)/expense and noncontrolling interest: As a
result of the foregoing, our loss before income tax (benefit)/expense and
noncontrolling interest was approximately
Income tax (benefit)/expense: For the year endedDecember 31, 2022 , we recognized a deferred income tax benefit of approximatelyUS$0.003 million in relation to the net operating loss incurred by one of our operating VIEs, which we consider likely to be utilized with future earnings of this entity. For the year endedDecember 31, 2021 , we recognized a total deferred income tax expense ofUS$0.18 million , which consisted of an approximatelyUS$0.15 million and an approximatelyUS$0.03 million deferred income tax expense recognized in relation to additional deferred tax assets valuation allowance provided and utilization of prior year recognized deferred tax assets, respectively. Net loss: As a result of the foregoing, for the years endedDecember 31, 2022 and 2021, we incurred a net loss of approximatelyUS$9.79 million andUS$2.69 million , respectively. Net income attributable to noncontrolling interest: InMay 2018 , we incorporated a majority-owned subsidiary, Business Opportunity Chain and beneficially owned 51% equity interest. InOctober 2020 , we incorporated another majority-owned subsidiary, Qiweilian Guangzhou and beneficially owned 51% equity interest. Due to changes in business strategies, we disposed our 51% equity interest in both Business Opportunity Chain and Qiweilian Guangzhou to unrelated parties during fiscal 2021. For the year endedDecember 31, 2021 , net income allocated to the noncontrolling interests of these entities before they were disposed was approximatelyUS$0.07 million in the aggregate. Net loss attributable toZW Data Action Technologies Inc. : Total net loss as adjusted by net income attributable to the noncontrolling interest shareholders as discussed above yields the net loss attributable toZW Data Action Technologies Inc. Net loss attributable toZW Data Action Technologies Inc. was approximatelyUS$9.79 million andUS$2.75 million for the years endedDecember 31, 2022 and 2021, respectively. B. LIQUIDITY AND CAPITAL RESOURCES
Cash Transfer within Our Organization and the Related Restrictions
We are aNevada holding company with operations primarily conducted inChina 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. 56 -------------------------------------------------------------------------------- For the year endedDecember 31, 2022 , we did not transfer any cash to our operating subsidiaries. One of our subsidiaries paidUS$0.48 million operating expenses in cash on behalf of us to the service providers, as a repayment of the shareholder loans provided by us to this subsidiary in previous years. For the year endedDecember 31, 2021 , we transferred aggregatelyUS$16.33 million cash to our operating subsidiaries to support their business operations and expansions, of whichUS$5.0 million was transferred in form of capital contributions andUS$11.33 million was transferred in form of shareholder loans, of which aUS$2.0 million loan was subsequently converted to capital contribution during 2022.
For the years ended
Other than the cash transfers above, no other assets were transferred within our
organization for the years ended
Below table summarized the above cash transfers within our organization included in the cash flows statements of our Condensed Consolidating Schedules for the years endedDecember 31, 2022 and 2021, respectively, on page 28 under Risk Factors-Risks Relating to Regulation of Our Business and to Our Structure contained in Item 1A of this Annual Report: For the year ended December 31, 2022 The Consolidated Consolidated Company Subsidiaries VIEs Total US$'000 US$ '000 US$ '000 US$ '000 Net cash transferred from/(to) companies within the organization presented as cash provided by/(used in) investing activities 481 (342 ) 139 Net cash transferred (to)/from companies within the organization presented as cash (used in)/provided by financing activities (481 ) 342 (139 ) For the year ended December 31, 2021 The Consolidated Consolidated Company Subsidiaries VIEs Total US$'000 US$ '000 US$ '000 US$ '000 Net cash transferred to companies within the organization presented as cash used in investing activities (16,325 )* (4,253 )* - (20,578 ) Net cash transferred from companies within the organization presented as cash provided by financing activities - 16,328* 4,250* 20,578
* Difference between 16,325 and 16,328 and difference between 4,253 and 4,250 were rounding differences.
As we conduct our operations primarily inChina through our PRC subsidiaries, VIEs and their subsidiaries, and we intend to transfer most of our cash raised from theU.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. 57
-------------------------------------------------------------------------------- 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 inChina 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 ofDecember 31, 2022 and 2021, net assets restricted in the aggregate, were approximatelyUS$13.31 million andUS$11.58 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 outsideChina are subject to a 10% withholding tax. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainlandChina and the jurisdiction of the foreign holding company.Hong Kong has a tax arrangement with mainlandChina that provides for a 5% withholding tax on dividends subject to certain conditions and requirements, such as the requirements that theHong 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 aHong Kong tax resident and it is the beneficial owner of the dividends. The PRC government adopted regulations in 2018 which stipulate that in determining whether a non-resident enterprise has the status as a beneficial owner, comprehensive analysis shall be conducted based on the factors listed therein and the actual circumstances of the specific case shall be taken into consideration. Specifically, it expressly excludes an agent or a designated payee from being considered as a "beneficial owner". We own our PRC subsidiaries through China Net HK. China Net HK currently does not hold aHong Kong tax resident certificate from theInland 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 ofChina . 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 theState 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. 58 --------------------------------------------------------------------------------
To date, the VIEs have settled to our WFOE the amount owed under the VIE
agreements of
To date, none of our subsidiaries has made any distribution of earnings or issued any dividends to their respective shareholder in or outside ofChina , or to theNevada holding company, and theNevada 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 ourNevada 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 Years Ended
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 ofDecember 31, 2022 , we had cash and cash equivalents of approximatelyUS$4.39 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: Year Ended December 31, 2022 2021 Amounts in thousands of US dollars Net cash used in operating activities $ (3,189 )$ (8,838 ) Net cash provided by/(used in) investing activities 552 (5,467 ) Net cash provided by financing activities - 17,111 Effect of exchange rate changes (145 ) 70
Net (decrease)/increase in cash and cash equivalents $ (2,782 )
Net cash used in operating activities:
For the year ended
59
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(1) net loss excluding approximately
depreciation and amortizations; approximately
amortization of operating lease right-of-use assets, approximately
million of share-based compensation; approximately
from change in fair value of warrant liabilities; approximately
million of allowance for doubtful accounts; approximately
impairment on long-term investments; approximately
impairment on intangible assets; approximately
tax benefit; and approximately
yielded the non-cash, non-operating items excluded net loss of approximately
US$3.91 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$1.65 million, primarily due to utilization of the prepayment made to suppliers as
of
suppliers during fiscal 2022;
- other current liabilities and accruals increased by approximately
million in the aggregate, primarily due to delay paying these liabilities to
improve the working capital status during the year;
- due from related parties in relation to advertising services provided to
related parties decreased by approximately US$0.06 million ; and
- other current assets decreased by approximately US$0.002 million .
(3) offset by the use from operations from changes in operating assets and
liabilities, such as:
- accounts payable decreased by approximately
settlement of the amount due to a major internet Ad resource provider as of
December 31, 2021 during the year; - accounts receivable increased by approximatelyUS$0.28 million ; - advance from customers decreased by approximatelyUS$0.42 million ;
- operating lease liabilities and lease liabilities related to short-term leases
decreased by approximately
for our office lease costs during the year; and
- taxes payable decreased by approximately US$0.01 million .
For the year ended
(1) net loss excluding approximately
depreciation and amortizations; approximately
amortization of operating lease right-of-use assets; approximately
million of share-based compensation; approximately
from change in fair value of warrant liabilities; approximately
million of deferred tax expense; and approximately
non-operating losses, yielded the non-cash items excluding net loss of
approximately US$5.41 million .
(2) the receipt of cash from operations from changes in operating assets and
liabilities, such as:
- accounts payable increased by approximately
favorable payment terms granted by a new supplier;
- tax payables increased by approximately US$0.03 million ; and
- other current assets decreased by approximately US$0.01 million .
60--------------------------------------------------------------------------------
(3) offset by the use from operations from changes in operating assets and
liabilities, such as:
- accounts receivable increased by approximately
to increase in total revenues for the year ended
with that in previous year;
- prepayment and deposit to suppliers increased by approximately US$2.06 million, primarily due to the increase in deposits and prepayments made for
the purchase of search engine marketing service from a key search engine and
the purchase of other advertising resources from the related suppliers;
- advance from customers decreased by approximately US$0.22 million ;
- long-term deposits and prepayments increased by approximately
which was the deposit made for the lease of our new office spaces in
Guangzhou ; and
- accruals, operating lease liabilities, short-term lease payment payables and
other current liabilities decreased by approximately
aggregate, due to settlement of these operating liabilities during the year.
Net cash provided by/(used in) investing activities:
For the year endedDecember 31, 2022 , our cash provided by investing activities included the following transactions: (1) we provided short-term loans ofUS$2.60 million in the aggregate to two unrelated parties during the year. The current interest rate is 5% per annum for both loans; (2) we received an aggregate ofUS$2.05 million repayments of short-term loan principals, of whichUS$1.03 million was related to a loan provided in fiscal 2021, and aUS$0.09 million loan interest income; (3) we received a deposit refund ofUS$1.0 million , which was paid in fiscal 2021 for a potential merge and acquisition transaction, as there was no definitive agreement reached among the contract parties by the date as agreed upon; and (4) we received an approximatelyUS$0.01 million short-term loan repayment from one of our unconsolidated investees. In the aggregate, these transactions resulted in a net cash inflow provided by investing activities of approximatelyUS$0.55 million for the year endedDecember 31, 2022 . For the year endedDecember 31, 2021 , our cash used in investing activities included the following transactions: (1) we paid an aggregate of approximatelyUS$0.33 million for the purchase of vehicles, furniture and office equipment, and for the leasehold improvement of ourGuangzhou office; (2) we made an aggregate of approximatelyUS$2.26 million cash investment and temporary loans to our investee entities, including anUS$1.0 million investment for a 15.38% equity interest in an entity, for jointly developing blockchain, key opinion leader and e-sports platform and jointly operating IP data for e-sports and games with strategic partners; (3) we paidUS$1.16 million for the purchase of an Internet Ad tracking system to further enhance the effectiveness of our Internet advertising business; (4) we provided to an unrelated party short-term loans of approximatelyUS$2.95 million in the aggregate, of which an approximatelyUS$1.51 million was provided during 2021. The borrower repaid an approximatelyUS$1.30 million during 2021; (5) cash decreased by approximatelyUS$0.01 million as a result of deconsolidation of VIEs' subsidiaries during the year; and (6) we made an aggregate ofUS$2.50 million deposit and prepayment for other investing activities, including: (i) aUS$1.0 million refundable deposit for a potential merge and acquisition transaction, which had been refunded inDecember 2022 , as there was no definitive agreement reached by the date as agreed upon; and (ii) aUS$1.5 million prepayment in accordance with a cryptocurrency mining machine purchase agreement, which was subsequently cancelled due to the industry banning policies announced by the government. We were refunded withUS$1.0 million during the year and the remaining balance of theUS$0.5 million was charged off as our non-operating losses for the year endedDecember 31, 2021 , due to subsequent collection is considered remote. In the aggregate, these transactions resulted in a net cash outflow from investing activities of approximatelyUS$5.47 million for the year endedDecember 31, 2021 .
Net cash provided by financing activities:
For the year ended
For the year endedDecember 31, 2021 , we consummated an offering of approximately 1.04 million shares of our common stock to certain institutional investors at a purchase price of$17.95 per share. As part of the transaction, we also issued to the investors and the placement agent warrants to purchase up to 0.52 million shares and 0.07 million shares of our common stock, respectively, with an exercise price of$17.95 per share andUS$22.4375 per share, respectively. We received net proceeds of approximatelyUS$17.11 million , after deduction of approximatelyUS$1.60 million direct financing cost paid in cash. 61
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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. During fiscal 2022, there
had been repeated severe COVID-19 cases rebound in many provinces, including
first tier cities in China , such as Shanghai , Guangzhou , Shenzhen etc., regional
large-scale quarantine and business shutdown incurred, which resulted in
pandemic fears and in return severely 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. As a result, our core
business suffered from a temporary decrease in revenues, and we experienced a
gross loss from our core business for fiscal 2022. Thus, we have been relying on
proceeds generated from financing activities for our liquidity in fiscal 2022.
In December 2022 , after a severe lockdown in most parts of mainland China , the
Chinese government ended its three-year zero-COVID policy, most of the travel
restrictions and quarantine requirements were lifted accordingly. 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 new 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 new 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. We generated approximately US$0.43 million of revenues from
this new SaaS services in fiscal 2022 and expect to generate approximately
US$0.90 million of revenues from the SaaS services within the next 12 months.
Although revenues from the new SaaS services business and its profitability have
not met our expectations, it is expected 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 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.
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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$0.97 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 .
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