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 consolidated financial statements and the related notes included elsewhere in this interim report. Our 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" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . Readers are cautioned not to place undue reliance on these forward-looking statements. 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 advertising, precision marketing, online to offline sales channel expansion 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 on our web portals, sales of effective sale lead information as well as provision of other related value-added data and technical services to maximize market exposure and effectiveness for our clients. To enhance the reliability of our future blockchain services and optimize location for client proximity, we incorporated a new wholly-owned subsidiary,ChinaNet Online (Guangdong) Technology Co., Ltd. ("ChinaNet Online Guangdong") inMay 2020 as we are in the process of expanding our corporate business and technology headquarters to the city ofGuangzhou inSouthern China . We expect to officially open our newGuangzhou headquarters inJuly 2020 .
Basis of presentation, management estimates and critical accounting policies
Our unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles inthe 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 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. Some of our accounting policies require higher degrees of judgment than others in their application. In order to understand the significant accounting policies that we adopted for the preparation of our condensed consolidated interim financial statements, readers should refer to the information set forth in Note 3 "Summary of significant accounting policies" to our audited financial statements in our 2019 Form 10-K. 26 A. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDEDMARCH 31, 2020 AND 2019
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. Three Months Ended March 31, 2020 2019 (US $) (US $) (Unaudited) (Unaudited) Revenues From unrelated parties$ 4,371 $ 8,560 From related parties 13 7 Total revenues 4,384 8,567 Cost of revenues 3,485 8,125 Gross profit 899 442 Operating expenses Sales and marketing expenses 165 169
General and administrative expenses 2,796 810 Research and development expenses 214
201
Total operating expenses 3,175 1,180
Loss from operations (2,276 ) (738 )
Other income/(expenses)
Interest expense, net (1 ) (11 )
Other expenses (1 ) (2 )Change in fair value of warrant liabilities 46 (350 ) Total other income/(expenses) 44 (363 ) Loss before income tax expense and noncontrolling interests (2,232 ) (1,101 ) Income tax expense (78 ) (39 ) Net loss (2,310 ) (1,140 )
Net loss attributable to noncontrolling interests - 2
Net loss attributable to
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,
2020 2019
Revenue type (Amounts expressed inthousands of US dollars, except percentages)
-Internet advertising and related data service $ 948 21.6 % $ 1,837 21.4 % -Distribution of the right to use search engine marketing service 1,988 45.4 % 6,725 78.5 % -Data and technical services 300 6.8 % 5 0.1 % Internet advertising and related services 3,236 73.8 % 8,567 100 % Ecommerce O2O advertising and marketing services 503 11.5 % - - Technical solution services 645 14.7 % - - Total $ 4,384 100.0 % $ 8,567 100.0 % Total Revenues:Our total revenues decreased toUS$4.38 million for the three months endedMarch 31, 2020 fromUS$8.57 million for the same period last year, which was primarily due to the decrease in revenues from our Internet advertising and related services business segment, as a result of the COVID-19 outbreak during the first fiscal quarter of 2020.
l Revenues from our core businesses, Internet advertising and distribution of the
right to use search engine marketing service for the three months ended March
31, 2020 decreased significantly to
respectively, compared with
months ended
attributable to the COVID-19 outbreak during the first fiscal quarter of 2020
in
and suppliers' remain closed after the
governments.
27
l For the three months ended
from distribution of the right to access a data analysis and management system
we purchased from a third party.
l For the three months ended
distribution of the advertising spaces in outdoor billboards we purchased from
a third party; and an approximately
E-commence website technical design service.
Cost of revenues
Our cost of revenues consisted of costs directly related to the offering of our
online advertising, precision marketing and related data and technical services,
and cost related to our Ecommerce O2O advertising and marketing service. The
following table sets forth our cost of revenues, disaggregated by type of
services, by amount and gross profit ratio for the periods indicated, with
inter-company transactions eliminated:
Three Months Ended March 31,
2020 2019
(Amounts expressed in thousandsof US dollars, except percentages)
Revenue Cost GP ratio Revenue Cost GP ratio
-Internet advertising and
related data service $ 948 834 12 % $ 1,837 1,734 6 %
-Distribution of the right
to use search engine
marketing service 1,988 2,011 -1 % 6,725 6,391 5 %
-Data and technical
services 300 265 12 % 5 - 100 %
Internet advertising and
related services 3,236 3,110 4 %
Ecommerce O2O advertising
and marketing services 503 375 25 % - - -
Technical solution services 645 - 100 % - - -
Total $ 4,384 $ 3,485 21%$ 8,567 $ 8,125 5 % Cost of revenues: our total cost of revenues decreased toUS$3.49 million for the three months endedMarch 31, 2020 fromUS$8.13 million for the three months endedMarch 31, 2019 . Our cost of revenues primarily consists of search engine marketing resources purchased from key search engines, cost of outdoor advertising resource, license fee paid for providing date and technical services, and other direct costs associated with providing our services. The decrease in our total cost of revenues for the three months endedMarch 31, 2020 was primarily due to the decrease in costs associated with distribution of the right to use search engine marketing service we purchased from key search engines and cost related to providing Internet advertising services on our ad portals, which was in line with the decrease in the related revenues as discussed above.
l 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
advertising and data service decreased significantly to
approximately
was in line with the revenues decrease as a result of the COVID-19 outbreak
during the period. The gross margin rate of our internet advertising and data
service was 12% for the three months ended
the three months ended
analysis capabilities and optimization of cost control mechanism, the gross
profit margin of this business started to improve from the second half of 2019.
However, as the business activities of this business for the three months ended
period, the performance of this business for the three months ended
2020 in terms of revenue volume and related cost consumption may not be
indicative for the full fiscal year or any future periods, or comparable to any
historical reporting periods.
l Costs for search engine marketing service was direct search engine resource
costs consumed for the right to use search engine marketing service we
purchased from key search engines and distributed to our customers. We
purchased these search engine resources from well-known search engines in
resource in relatively large amounts under our own name at a relatively lower
rate compared to the market. 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
2020, our total cost of revenues for distribution of the right to use search
engine marketing service decreased significantly to
approximately
was in line with the decrease in revenues as a result of the COVID-19 outbreak
during the period. Gross margin rate of this service decreased to -1% for the
three months ended
from key search engines with no profit to meet our working capital needs under
the COVID-19 outbreak circumstance. As stated above, due to the COVID-19
outbreak impacts during the first fiscal quarter of 2020, the performance of
this business for the three months ended
volume and related cost consumption may not be indicative for the full fiscal
year or any future periods, or comparable to any historical reporting periods.
28
l For the three months ended
related data and technical service revenue of approximately
the amortized licensee fee for the use of the related data analysis and
management system during the period.
l For the three months ended
advertising and marketing service revenues of approximately
the amortized cost for the related outdoor billboards ad spaces we pre-purchased. Gross Profit As a result of the foregoing, our gross profit was approximatelyUS$0.90 million andUS$0.44 million for the three months endedMarch 31, 2020 and 2019, respectively. Our overall gross margin was 21% and 5% for the three months endedMarch 31, 2020 and 2019, respectively. As stated above, as the business activities of our core businesses for the three months endedMarch 31, 2020 were significantly affected by the COVID-19 outbreak during the period, our financial performance for the three months endedMarch 31, 2020 in terms of revenue streams, revenue volume and related cost consumption may not be indicative for the full fiscal year or any future periods, or comparable to any historical
reporting periods. 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
2020 2019
(Amounts expressed in thousands of US dollars, except percentages)
Amount % of total revenue Amount % of total revenue
Total Revenues $ 4,384 100 % $ 8,567 100 %
Gross Profit 899 21 % 442 5 %Sales and marketing expenses 165 4 % 169 2 % General and administrative expenses 2,796 64 % 810 10 % Research and development expenses 214
5 % 201 2 %
Total operating expenses $ 3,175 73 % $ 1,180 14 %
Operating Expenses: Our total operating expenses was approximately
US$3.18 million and US$1.18 million for the three months ended March 31, 2020
and 2019, respectively. The increase was primarily attribute to the increase in
share-based compensation expenses for the issuance of restricted shares to our
employees under our 2015 Omnibus Securities and Incentive Plan during the three
months ended March 31, 2020 .
l Sales and marketing expenses: Sales and marketing expenses was both
million for the three months ended
marketing expenses primarily consist of advertising expenses for brand
development that we pay to different media outlets for the promotion and
marketing of our advertising web portals and our services, other advertising
and promotional expenses, 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 three
months ended
was primarily due to the following reasons: (1) general departmental expenses
decreased by approximately
the first fiscal quarter of 2020 in
closure after the
from the epidemic control measures imposed by the local governments where we
operate; and (2) the increase in share-based compensation expenses of
approximately
to our sales staff during the first fiscal quarter of 2020.
29
l General and administrative expenses: General and administrative expenses
increased to
expenses primarily consist of salaries and benefits of management, accounting
and administrative personnel, office rentals, depreciation of office equipment,
allowance for doubtful accounts, professional service fees, maintenance,
utilities and other office expenses. For the three months ended
the change in our general and administrative expenses was primarily due to the
following reasons: (1) the increase in share-based compensation expenses of
approximately
the first fiscal quarter of 2020; (2) the increase in allowance for doubtful
accounts of approximately
service fees and intangible assets amortization expenses of approximately
US$0.22 million .
l Research and development expenses: Research and development expenses were
and 2019, respectively. Our research and development expenses primarily
consist of salaries and benefits of our research and development staff,
equipment depreciation expenses, and office utilities and supplies allocated
to our research and development department etc. For the three months ended
primarily due to the following reasons: (1) general departmental expenses
decreased by approximately
the COVID-19 outbreak as discussed above; and (2) the increase in share-based
compensation expenses of approximately
shares granted and issued to our R&D staff during the first fiscal quarter of
2020.
Loss from operations: As a result of the foregoing, we incurred a loss from
operations of approximately
Change in fair value of warrant liabilities: we issued warrants in our Financing consummated inJanuary 2018 , which we determined that 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 approximatelyUS$0.05 million was recorded for the three months endedMarch 31, 2020 , compared with a loss of change in fair value of these warrant liabilities of approximatelyUS$0.35 million recorded for the three months endedMarch 31, 2019 . Loss before income tax expense and noncontrolling interests: As a result of the foregoing, our loss before income tax expense and noncontrolling interest was approximatelyUS$2.23 million andUS$1.10 million for the three months endedMarch 31, 2020 and 2019, respectively. Income Tax expense: For the three months endedMarch 31, 2020 , we recognized an approximatelyUS$0.08 million income tax expense in relation to net income generated by one of our operating subsidiaries for the period, which amount was partially offset by an approximatelyUS$0.01 million income tax benefit recognized in relation to the net operating loss incurred by another operating VIE of ours for the period, which we consider likely to be utilized with respect to future earnings of this entity. For the three months endedMarch 31, 2019 , we recognized an approximatelyUS$0.06 million income tax expense in relation to utilization of previously recognized deferred tax assets by one of our operating VIEs for the period, which amount was partially offset by an approximatelyUS$0.02 million income tax benefit recognized in relation to the net operating loss incurred by another operating VIE of ours for the 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 endedMarch 31, 2020 and 2019, we incurred a total net loss of approximatelyUS$2.31 million andUS$1.14 million , respectively. Net loss attributable to noncontrolling interest: InMay 2018 , we incorporated a majority-owned subsidiary, Business Opportunity Chain and beneficially owns 51% equity interest in it. For the three months endedMarch 31, 2020 and 2019, net loss allocated to the noncontrolling interest of Business Opportunity Chain was approximately US$nil andUS$0.002 million , respectively. Net loss attributable toChinaNet Online Holdings, Inc. : Total net loss as adjusted by net loss attributable to the noncontrolling interest shareholders as discussed above yields the net loss attributable toChinaNet Online Holdings, Inc. Net loss attributable toChinaNet Online Holdings, Inc. wasUS$2.31 million andUS$1.14 million for the three months endedMarch 31, 2020 and 2019, respectively. 30 B. LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents represent cash on hand and deposits held at call with banks. We consider all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. As ofMarch 31, 2020 , we had cash and cash equivalents of approximatelyUS$1.56 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 resource and other advertising resource 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. To date, we have financed our liquidity need primarily through proceeds we generated from financing activities. As discussed in Note 3(b) to our unaudited condensed consolidated financial statements, there is substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. We intend to improve our cashflow status through improving gross profit margin, strengthening receivables collection management, negotiating with vendors for more favorable payment terms and obtaining more credit facilities from banks or other form of financing. The following table provides detailed information about our net cash flow for the periods indicated: Three Months EndedMarch 31, 2020 2019 Amounts in thousands of US dollars
Net cash provided by/(used in) operating activities $ 1,518
(1,117 ) (36 )
Net cash used in financing activities (430 ) -
Effect of foreign currency exchange rate changes on cash and cash equivalents
(19 ) 47
Net decrease in cash and cash equivalents $ (48 ) $ (2,259 ) Net cash provided by/(used in) operating activities
For the three months ended
(1) net loss excluding approximately
depreciation and amortizations; approximately
compensation; approximately
approximately
liabilities and approximately
the non-cash items excluded net income of approximately
(2) the receipt of cash from operations from changes in operating assets and
liabilities such as:
- prepayment and deposit to suppliers decreased by approximately
primarily due to utilization of the prepayment made to suppliers in fiscal 2019
through Ad resource and other services received from suppliers during the first
fiscal quarter of 2020;
- advance from customers increased by approximately
due to new advance payments received from customers during the first fiscal
quarter of 2020, which was partially offset by recognition of revenue from
opening contract liabilities during the period;
- due from related parties decreased by approximately
collection of advertising service fee from related parties;
- accruals, tax payables, short-term lease payment payables and other current
liabilities increased by approximately
primarily due to temporary delay of some payments during the COVID-19 outbreak
in the first fiscal quarter of 2020 and some of the payments were not due until
later periods.
31
(3) offset by the use from operations from changes in operating assets and
liabilities such as:
- accounts receivable increased by approximately
- accounts payable decreased by approximately
- long-term prepayment increased by approximately
prepayment was made for the purchase of ad resource during the first fiscal
quarter of 2020, and this amount was not expected to be consumed within one
year ofMarch 31, 2020 .
For the three months ended
(1) net loss excluding approximately
depreciation and amortizations; approximately
operating lease right-of-use assets; approximately
share-based compensation; approximately
doubtful accounts; approximately
value of warrant liabilities and approximately
expense, yielded the non-cash items excluded net loss of approximately
US$0.34 million .
(2) the receipt of cash from operations from changes in operating assets and
liabilities such as:
- advance from customers increased by approximately
due to new advance payments received from customers during the first fiscal
quarter of 2019, which was partially offset by recognition of revenue from
opening contract liabilities during the period;
- taxes payable increased by approximately
- other current assets decreased by approximately
- loan to a related party of the Company decreased by approximately
million due to repayment received during the period; and
- prepayment to suppliers decreased by approximately
(3) offset by the use from operations from changes in operating assets and
liabilities such as:
- accounts receivable increased by approximately
- accounts payable decreased by approximately
with major suppliers of search engine resource in the first fiscal quarter of
2019;
- accruals and other current liabilities decreased by approximately
million in the aggregate, due to settlement of these operational liabilities
and payment for operating lease liabilities during the first fiscal quarter of
2019; and
- we also prepaid approximately
Net cash used in investing activities
For the three months endedMarch 31, 2020 , (1) we made an additional payment of approximatelyUS$0.30 million for the development of our blockchain technology-based platform applications and (2) we lent to an unrelated third party a short-term loan of approximatelyUS$0.82 million . In the aggregate, these transactions resulted in a cash outflow from investing activities of approximatelyUS$1.12 million for the three months endedMarch 31, 2020 . For the three months endedMarch 31, 2019 , we contributed our pro-rata share of cash investment of approximatelyUS$0.04 million to an ownership investee company incorporated inOctober 2018 , which transaction was recorded as a cash outflow from investing activities during the period. 32
Net cash used in financing activities
For the three months ended
For the three months ended
Restricted Net Assets As substantially all of our operations are conducted through our PRC subsidiaries and VIEs, our ability to pay dividends is primarily dependent on receiving distributions of funds from our PRC subsidiaries and VIEs. Relevant PRC statutory laws and regulations permit payments of dividends by our PRC subsidiaries and VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations and after it has met the PRC requirements for appropriation to statutory reserves. Paid in capital of the PRC subsidiaries and VIEs included in our consolidated net assets are also not distributable for dividend purposes. In accordance with the PRC regulations on Enterprises withForeign Investment , a WFOE established in the PRC is required to provide certain statutory reserves, namely general reserve fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the enterprise's PRC statutory accounts. A WFOE is required to allocate at least 10% of its annual after-tax profit to the general reserve until such reserve has reached 50% of its registered capital based on the enterprise's PRC statutory accounts. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. Rise King WFOE is subject to the above mandated restrictions on distributable profits. Additionally, in accordance with the Company Law of the PRC, a domestic enterprise is required to provide a statutory common reserve of at least 10% of its annual after-tax profit until such reserve has reached 50% of its registered capital based on the enterprise's PRC statutory accounts. A domestic enterprise is also required to provide for a discretionary surplus reserve, at the discretion of the board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. All of our other PRC subsidiaries and PRC VIEs are subject to the above mandated restrictions on distributable profits. In accordance with these PRC laws and regulations, our PRC subsidiaries and VIEs are restricted in their ability to transfer a portion of their net assets to us. As ofMarch 31, 2020 andDecember 31, 2019 , net assets restricted in the aggregate, which includes paid-in capital and statutory reserve funds of our PRC subsidiaries and VIEs that are included in our consolidated net assets were both approximatelyUS$12.0 million . The current PRC Enterprise Income Tax ("EIT") Law also imposes a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outsideChina , which were exempted under the previous EIT law. 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. Holding companies inHong Kong , for example, will be subject to a 5% rate, subject to approval from the related PRC tax authorities. The ability of our PRC subsidiaries to make dividends and other payments to us may also be restricted by changes in applicable foreign exchange and other
laws and regulations.
Foreign currency exchange regulation in
l Foreign Exchange Administration Rules (1996), as amended in
Exchange Rules;
l Administration Rules of the Settlement, Sale and Payment of Foreign Exchange
(1996), or the Administration Rules. Currently, under the Administration Rules, Renminbi is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside ofChina , unless the prior approval of theState Administration of Foreign Exchange (the "SAFE") is obtained and prior registration with the SAFE is made. Foreign-invested enterprises like Rise King WFOE that need foreign exchange for the distribution of profits to its shareholders may effect payment from their foreign exchange accounts or purchase and pay foreign exchange rates at the designated foreign exchange banks to their foreign shareholders by producing board resolutions for such profit distribution. Based on their needs, foreign-invested enterprises are permitted to open foreign exchange settlement accounts for current account receipts and payments of foreign exchange along with specialized accounts for capital account receipts and payments of foreign exchange at certain designated foreign exchange banks. 33 Although the current Exchange Rules allow converting of Renminbi into foreign currency for current account items, conversion of Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of SAFE, which is under the authority of thePeople's Bank of China . These approvals, however, do not guarantee the availability of foreign currency conversion. We cannot be sure that it will be able to obtain all required conversion approvals for our operations or the Chinese regulatory authorities will not impose greater restrictions on the convertibility of Renminbi in the future. Currently, most of our retained earnings are generated in Renminbi. Any future restrictions on currency exchanges may limit our ability to use retained earnings generated in Renminbi to make dividends or other payments inU.S. dollars or fund possible business activities outsideChina . C. OFF-BALANCE SHEET ARRANGEMENTS
None.
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