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. 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, other ecommerce O2O advertising and marketing services and the related data and technical services to SMEs in the PRC. 37 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, 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.
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.
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,
2020 2019
Balance sheet items, except for equity accounts 6.5249 6.9762
Year Ended December 31,
2020 2019
Items in the statements of operations and
comprehensive loss 6.8976 6.8985
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, 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 sales of effective sale lead information and sales of software, we recognize
revenues at a point in time upon control of the promised goods is delivered and
accepted by our customers, and we have no performance obligation after the
delivery. For technical solution services provided, we recognized revenues
either at a point in time upon completion of the service performance obligation,
when we had the enforceable right to the payment of the services delivered to
the customers or recognized ratably over the period the services were provided,
if the customers simultaneously received and consumed the benefits providedby us. 38
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, which is 0.4-3 years. 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. Our office spaces lease contracts with a duration of less than twelve months 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 for the years endedDecember 31, 2020 and 2019 was 6%, which was determined based on the interest rate expected to be used by the commercial banks in the PRC for the 1-5 years long-term loan, 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 not adopted the amendments in this ASU and is currently evaluating the impacts on our consolidated financial position and results of operations upon adopting these amendments. InAugust 2018 , the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement". The amendments in this ASU eliminate, add and modify certain disclosure requirements for fair value measurements. The amendments in this ASU, among other things, require public companies to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2019 , and entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. We have adopted the amendments in these ASUs onJanuary 1, 2020 , and the adoption of these amendments did not have a material impact on our consolidated financial position and results of operations. 39
A. RESULTS OF OPERATIONS FOR THE YEARS ENDED
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. Year Ended December 31, 2020 2019 US$ US$ Revenues From unrelated parties$ 38,390 $ 57,181 From related parties 18 899 Total revenues 38,408 58,080 Cost of revenues 37,776 52,582 Gross profit 632 5,498 Operating expenses Sales and marketing expenses 361 540
General and administrative expenses 5,433
5,777
Research and development expenses 539
869
6,333 7,186
Loss from operations (5,701 ) (1,688 )
Other income (expenses)Change in fair value of warrant liabilities 653 499 Interest income/(expense), net 1
(35 )
Other (expenses)/income, net (31 ) 3
Total other income 623 467
Loss before income tax expense and noncontrolling interests (5,078 ) (1,221 )
Income tax expense (143 ) (49 )
Net loss (5,221 ) (1,270 )Net loss attributable to noncontrolling interests 5 9 Net loss attributable to ZW Data Action Technologies Inc.$ (5,216 ) $ (1,261 ) Loss per share Loss per common share Basic and diluted$ (0.24 ) $ (0.07 ) Weighted average number of common shares outstanding: Basic and diluted 21,602,107 17,130,335 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: 40 Year Ended December 31, 2020 2019 Revenue type (Amounts expressed in
thousands of US dollars, except percentages)
-Internet advertising and related data service $ 8,421 21.9 % $ 14,807 25.5 % -Distribution of the right to use search engine marketing service 25,997 67.7 % 41,361 71.2 % -Data and technical services 1,200 3.1 % 710 1.2 % Internet advertising and related services 35,618 92.7 % 56,878 97.9 % Ecommerce O2O advertising and marketing services 1,545 4.0 % - - Technical solution services 1,245
3.3 % - - Software sales - - 1,202 2.1 % Total $ 38,408 100 % $ 58,080 100 % Total Revenues: Our total revenues decreased toUS$38.41 million for the year endedDecember 31, 2020 fromUS$58.08 million for the year endedDecember 31, 2019 , which was primarily due to the decrease in revenues from our Internet advertising and distribution of the right to use search engine marketing service business categories, as a result of the COVID-19 outbreak during the first fiscal quarter of 2020, which resulted in complete shutdown of our business operations after theChinese New Year in early February until mid-April; slow resuming of business activities afterwards due to travel restrictions and quarantine measures adopted by the local governments where we have operations; and significant decrease in advertising investment budgets of our SMEs clients due to uncertainties associated with the future developments of the pandemic. 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, sales of effective sales lead information 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, 2020 and 2019.
· Internet advertising revenues decreased to
ended
COVID-19 outbreak and business shutdown during the first fiscal quarter of 2020
in
The
decrease in revenues from our Internet advertising slightly narrowed down to an
approximately 42% decrease for the last three fiscal quarters of 2020, compared
with an approximately 48% decrease in the first fiscal quarter of 2020. We
expect the performance of this business category will continue improving in
fiscal 2021.
· Revenue generated from distribution of the right to use search engine marketing
service for the year ended
compared with approximately
2019, due to the same reason as discussed above. The performance of this
business category improved after the COVID-19 outbreak, with the decrease in
revenues significantly narrowed down to an approximately 31% decrease for the
last three fiscal quarters of 2020, compared with a 70% decrease in revenues in
the first fiscal quarter of 2020. We expect the performance of this business
category will continue improving in fiscal 2021.
· For the years ended
Internet advertising and marketing data analysis and management, respectively.
· For the year ended
million Ecommerce O2O advertising and marketing service revenues from the
distribution of the advertising spaces in outdoor billboards we purchased from
a third party.
· For the years ended
approximately
an approximatelyUS$1.20 million non-recurring software sale revenue, respectively. 41 Cost of Revenues Our cost of revenues consisted of costs directly related to the offering of our Internet advertising, precision marketing and related data and technical services, and cost related to our Ecommerce O2O advertising and marketing service. The following table sets forth our cost of revenues, disaggregated by type of services, by amount and gross profit ratio for the periods indicated, with inter-company transactions eliminated: Year EndedDecember 31, 2020 2019 (Amounts expressed in
thousands of US dollars, except percentages)
Revenue Cost GP ratio Revenue Cost GP ratio
-Internet advertising and
related data service $ 8,421 6,688 21 % $ 14,807 13,802 7 %
-Distribution of the right to
use search engine marketing
service 25,997 27,950 -8 % 41,361 38,775 6 %
-Data and technical services 1,200 1,062 12 % 710 5 99 %
Internet advertising and related
services 35,618 35,700 -0.2 % 56,878 52,582 8 %
Ecommerce O2O advertising and
marketing services 1,545 1,500 3 % - -
Technical solution services 1,245 576 54 % - -
Software sales - - - 1,202 - 100 %
Total $ 38,408 $ 37,776 2 %$ 58,080 $ 52,582 9 % Cost of revenues: our total cost of revenues decreased to approximatelyUS$37.78 million for the year endedDecember 31, 2020 , compared withUS$52.58 million for the year endedDecember 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 data and technical services, and other direct costs associated with providing our services. The decrease in our total cost of revenues for the year endedDecember 31, 2020 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 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.
· Costs for Internet advertising and data service primarily consisted 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
advertising and data service decreased to approximately
compared with approximately
2019, which was in line with the decrease in revenues as discussed above. The
gross margin rate of our Internet advertising and data service improved
significantly to 21% for the year ended
last year, which was attributable to the enhancement of our data analysis
capabilities and optimization of cost control mechanism.
· 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
pre-purchased from key search engines at a loss to meet our working capital
needs, before we consummated our 2020 Financing in December, and secure our
client base under the circumstances of COVID-19 outbreak and slow recovery of
economy after the pandemic. We are actively negotiating with our suppliers for
more favorable discount, as a result, we anticipate to improve the gross margin
rate for this business category in future periods. Gross margin rate of this
service was 6% for the year ended
42
· For the year ended
data and technical service revenues was approximately
represented the amortized licensee fee for the use of the related data analysis
and management system during the year.
· For the year ended
and marketing service revenues was approximately
represented the amortized cost for the related outdoor billboards ad spaces we
pre-purchased during the year.
· For the year ended
technical design and support services of approximatelyUS$0.58 million . Gross Profit As a result of the foregoing, our gross profit wasUS$0.63 million for the year endedDecember 31, 2020 , compared withUS$5.50 million for the year endedDecember 31, 2019 . Our overall gross margin rate for the years endedDecember 31, 2020 and 2019 was approximately 2% and 9%, respectively. The decrease in our overall gross margin rate was primarily attributable to the gross profit rate of -8% incurred for our main stream of service revenues, i.e. distribution of the right to use search engine marketing services, compared with an approximately 6% gross profit rate we achieved for this business category in last year. The revenues from distribution of the right to use search engine marketing services constituted approximately 67.7% and 71.2% of our total revenues for the years endedDecember 31, 2020 and 2019, respectively. 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.
Year Ended December 31,
2020 2019
(Amounts expressed inthousands of US dollars, except percentages)
Percentage of total Percentage of total
Amount revenue Amount revenue
Total Revenues $ 38,408 100 % $ 58,080 100 %
Gross Profit 632 2 % 5,498 9 %
Sales and marketing expenses 361 1 % 540 1 %
General and administrative expenses 5,433 14 % 5,777 10 %
Research and development expenses 539 1 % 869 1 % Total operating expenses 6,333 16 % 7,186 12 %
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, 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 year ended
changes in our sales and marketing expenses was primarily due to the following
reasons: (1) staff salary and benefit expenses, performance based bonus and
general departmental expenses decreased by approximately
to office shutdown during the first fiscal quarter of 2020, resulted from the
COVID-19 outbreak, and slow recovery of business performance after the outbreak
in the following quarters of 2020; and (2) the increase in share-based
compensation expenses of approximately
shares granted and issued to our sales staff in fiscal 2020.
43
· 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 was primarily due to the following
reasons: (1) the increase in share-based compensation expenses of approximately
(2) the decrease in allowance for doubtful accounts of approximately
million; and (3) the decrease in general departmental expenses of approximately
2020, and cost reduction plan executed by management after the COVID-19
outbreak.
· Research and development expenses: our research and development expenses were
approximately
31, 2020 and 2019, respectively. Our research and development expenses
primarily consist of salaries and benefits of our staff in the research and
development department, equipment depreciation expenses, and office utilities
and supplies allocated to our research and development department etc. The
changes in research and development expenses for the year ended
2020 was primarily due to the following reasons: (1) staff salary and benefit
and general departmental expenses decreased by approximately
due to office shutdown during the first fiscal quarter of 2020, and cost
reduction plan executed by management after the COVID-19 outbreak; (2) the
increase in share-based compensation expenses of approximately
related to restricted shares granted and issued to our research and development
staff in fiscal 2020; and (3) the decrease in research and development services
purchased from third parties of approximatelyUS$0.27 million .
Loss from operations: As a result of the foregoing, we incurred a net loss from operations of approximatelyUS$5.70 million andUS$1.69 million for the years endedDecember 31, 2020 and 2019, respectively. Change in fair value of warrant liabilities: We issued warrants in the financing we consummated inJanuary 2018 andDecember 2020 . 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$0.65 million andUS$0.50 million was recorded in earnings for the years endedDecember 31, 2020 and 2019, respectively. Loss before income tax expense and noncontrolling interest: As a result of the foregoing, our loss before income tax expense and noncontrolling interest was approximatelyUS$5.08 million andUS$1.22 million for the years endedDecember 31, 2020 and 2019, respectively. Income tax expense: We recognized an income tax expense of approximatelyUS$0.14 million andUS$0.05 million for the years endedDecember 31, 2020 and 2019, respectively. For the year endedDecember 31, 2020 , we recognized an approximatelyUS$0.14 million net deferred income tax expenses, as a result of additional valuation allowances provided against our deferred tax assets during the year. For the year endedDecember 31, 2019 , we provided an approximatelyUS$0.22 million current income tax expense, related to profit generated by one of our operating subsidiaries, which amount was offset by the approximatelyUS$0.17 million deferred income tax benefit related to additional deferred tax assets recognized during the year. 44 Net loss: As a result of the foregoing, for the years endedDecember 31, 2020 and 2019, we incurred a net loss of approximatelyUS$5.22 million andUS$1.27 million , respectively.
Loss attributable to noncontrolling interest: InMay 2018 , we incorporated a majority-owned subsidiary, Business Opportunity Chain Beijing and beneficially own 51% equity interest in it. InOctober 2020 , we incorporated another majority-owned subsidiary, Qiweilian Guangzhou and beneficially own 51% equity interest in it. For the year endedDecember 31, 2020 , net loss allocated to the noncontrolling interest of Business Opportunity Chain Beijing and QiweilianGuangzhou was approximatelyUS$0.005 million in the aggregate. For the year endedDecember 31, 2019 , net loss allocated to the noncontrolling interest of Business Opportunity Chain was approximatelyUS$0.01 million . Net loss attributable toZW Data Action Technologies Inc. :Total net loss as adjusted by net loss 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$5.22 million andUS$1.26 million for the years endedDecember 31, 2020 and 2019, respectively.
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 ofDecember 31, 2020 , we had cash and cash equivalents of approximatelyUS$4.30 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.
The following table provides detailed information about our net cash flow for
the periods indicated:
Year Ended December 31,
2020 2019
Amounts in thousands of US dollars
Net cash provided by/(used in) operating activities
$ (4,311 ) Net cash used in investing activities (3,472 ) (2,158 ) Net cash provided by financing activities 5,815 4,352 Effect of exchange rate changes 25 (22 )
Net increase/(decrease) in cash and cash equivalents
$ (2,139 )
Net cash provided by/(used in) operating activities:
For the year ended
(1) net loss excluding approximately
depreciation and amortizations; approximately
of operating lease right-of-use assets; approximately
disposal of fixed assets; approximately
doubtful accounts; approximately
approximately
liabilities; and approximately
the non-cash items excluding net loss of approximately
45
(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 as of December
31, 2019 through Ad resource and other services received from suppliers during
fiscal 2020;
- accounts receivables and due from related parties related to services provided
decreased by approximately
- accounts payable increased by approximately
- taxes payable, lease payment liabilities and short-term lease payment
liabilities increased by approximately
(3) offset by the use from operations from changes in operating assets and
liabilities, such as:
- advance from customers decreased by approximately
due to recognizing revenues from beginning contract liabilities during the
year;
- accruals and other current liabilities decreased by approximately
million in the aggregate; and
- prepaid lease prepayment and other current assets increased by approximately
US$0.02 million in the aggregate.
For the year ended
(1) net loss excluding approximately
depreciation and amortizations; approximately
of operating lease right-of-use assets; approximately
allowance for doubtful accounts; approximately
compensation; approximately
warrant liabilities and approximately
yielded the non-cash items excluding net income of approximately
million.
(2) the receipt of cash from operations from changes in operating assets and
liabilities, such as:
- accounts receivable decreased by approximately
to strengthening of the accounts receivable collection management to improve
our operating cashflows during the year;
- advance from customers increased by approximately
due to the increase in advances received from customers for the use of search
engine marketing service distributed by us;
- due from related parties decreased by approximately
due to collection of a
- taxes payable and other current liabilities increased by approximately
million in the aggregate;
- lease payment liabilities related to short-term leases of our office spaces
increased by approximately
- other current assets decreased by approximately
46
(3) offset by the use from operations from changes in operating assets and
liabilities, such as:
- prepayment and deposit to suppliers increased by approximately
primarily due to the increase in deposit and prepayment for the purchase of
search engine marketing service from a key search engine and the purchase of
other advertising resources from the related suppliers;
- accounts payable decreased by approximately
the settlement of the payables with key suppliers related to services provided
in last year;
- accruals decreased by approximately
- we also prepaid approximately
Net cash used in investing activities:
For the year endedDecember 31, 2020 , our cash used in investing activities included the following transactions: (1) we contributed our pro-rata share of cash investment of approximatelyUS$0.03 million to an ownership investee company during the year; (2) we provided to an unrelated party a short-term loan of approximatelyUS$1.44 million , which is expected to be fully repaid inApril 2021 ; (3) we made an additional payment of approximatelyUS$0.50 million for the continue development and upgrade of our blockchain technology-based platform applications during the year; (4) we paidUS$1.50 million for the purchase of a live streaming technology during the year; and (5) we also received approximatelyUS$0.003 million proceeds from disposal of our fixed assets. In the aggregate, these transactions resulted in a net cash outflow from investing activities of approximatelyUS$3.47 million for the year endedDecember 31, 2020 . For the year endedDecember 31, 2019 , our cash used in investing activities included the following transactions: (1) we contributed our pro-rata share of cash investment of approximatelyUS$0.04 million to an ownership investee company during the year; (2) we made an additional payment of approximatelyUS$0.16 million for the continue development of our blockchain technology-based platform applications; and (3) we also paid approximatelyUS$1.96 million in the aggregate for a 10-year licensed products use right and a software technology to better manage our internet resource and strengthen our data analysis ability. In the aggregate, these transactions resulted in a cash outflow from investing activities of approximatelyUS$2.16 million for the year endedDecember 31, 2019 .
Net cash provided by financing activities:
For the year endedDecember 31, 2020 , our net cash provided by financing activities included the following transactions: (1) we consummated a registered direct offering of an approximately 4.32 million shares of our common stock to certain institutional investors at a purchase price of$1.62 per share. As part of the transaction, we also issued to the investors and the placement agent warrants for the purchase of up to 1.73 million shares and 0.30 million shares of our common stock, respectively, with an exercise price of$2.03 per share. We received net proceeds of approximatelyUS$6.25 million , after deduction of approximatelyUS$0.75 million direct financing cost paid in cash; and (2) we repaid an approximatelyUS$0.44 million short-term bank loan matured inJanuary 2020 . In the aggregate, these transactions resulted in a net cash inflow from financing activities of approximatelyUS$5.82 million for the year endedDecember 31, 2020 . For the year endedDecember 31, 2019 , our net cash provided by financing activities included the following transactions: (1) we consummated a private placement whereby we sold approximately 3.22 million shares of our common stock to a selected group of investors at a purchase price of$1.4927 per share for a total net proceeds of approximatelyUS$4.79 million , after deducting approximatelyUS$0.02 million direct offering cost paid in cash; (2) we repaid in the aggregate approximatelyUS$0.87 million short-term bank loans that matured in the first quarter and third quarter of 2019; (3) we re-borrowed approximatelyUS$0.44 million short-term loan matured in the first quarter of 2019. In the aggregate, these transactions resulted in a net cash inflow from financing activities of approximatelyUS$4.35 million for the year endedDecember 31, 2019 . 47 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 ofDecember 31, 2020 and 2019, net assets restricted in the aggregate, which include paid-in capital and statutory reserve funds of our PRC subsidiaries and VIEs that are included in our consolidated net assets, were approximatelyUS$8.2 million andUS$6.2 million , respectively. The current PRC Enterprise Income Tax ("EIT") Law also imposes a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company 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
· Foreign Exchange Administration Rules (1996), as amended in
Exchange Rules;
· Administration Rules of the Settlement, Sale and Payment of Foreign Exchange
(1996), or the Administration Rules. Currently, under the Administration Rules, Renminbi is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside 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. 48
Although the current Exchange Rules allow converting Chinese Renminbi into foreign currency for current account items, conversion of Chinese Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of SAFE, which is under the authority of 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 Chinese 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.
D. Disclosure of Contractual Obligations
In 2018, we entered into contracts with two unrelated third parties in relation to the development of our blockchain technology-powered platform applications. Total contract amount of these two contracts was approximatelyUS$4.96 million . As ofDecember 31, 2020 , we had paid approximatelyUS$4.41 million in the aggregate. The remaining unpaid contract amount is expected to be paid during the year endingDecember 31, 2021 .
© Edgar Online, source
