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. EffectiveOctober 14, 2020 , we changed our corporate name fromChinaNet Online Holdings, Inc. toZW Data Action Technologies Inc. Our shareholders approved the name change as part of the Company's annual shareholder meeting held onOctober 12, 2020 . 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. 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 of Guangzhou inSouthern China .ChinaNet Online Guangdong has officially commenced its operations sinceJuly 2020 . Along with the development of new customer base in southernChina in future periods, we plan to gradually transfer a portion of our core business activities to ChinaNet Online Guangdong. We are also currently seeking for new local business partners to develop new high-technology related business, including blockchain services. InJune 2020 , we made an investment ofRMB0.19 million (approximatelyUS$0.03 million ) in cash toBusiness Opportunity Chain (Guangzhou) Technology Co., Ltd. ("Business OpportunityChain Guangzhou "), a newly established entity in which we beneficially own a 19% equity interest. Our investment to Business OpportunityChain Guangzhou is aiming to further integrate our resources in customer base, media operations and technology for the development of webcast platform based business promotion service and franchise consultancy service.
In
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. 29
A. RESULTS OF OPERATIONS FOR THE NINE AND THREE MONTHS 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. Nine Months Ended September 30, Three Months Ended September 30, 2020 2019 2020 2019 (US $) (US $) (US $) (US $) (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenues From unrelated parties$ 27,086 $ 39,025 $ 12,300 $ 15,113 From a related party 18 503 4 395 Total revenues 27,104 39,528 12,304 15,508 Cost of revenues 26,548 37,828 12,945 14,616 Gross profit/(loss) 556 1,700 (641 ) 892 Operating expenses Sales and marketing expenses 293 461 58 111 General and administrative expenses 4,520 2,875 592 817 Research and development expenses 443 599
113 239 Total operating expenses 5,256 3,935 763 1,167 Loss from operations (4,700 ) (2,235 ) (1,404 ) (275 ) Other income (expenses) Interest expense, net - (33 ) 1 (10 ) Other expenses (4 ) (6 ) (21 ) (2 ) Change in fair value of warrant liabilities 4 351 (64 ) (120 ) Total other income - 312 (84 ) (132 ) Loss before income tax benefit and noncontrolling interests (4,700 ) (1,923 ) (1,488 ) (407 ) Income tax benefit 87 10 155 16 Net loss (4,613 ) (1,913 ) (1,333 ) (391 ) Net loss attributable to noncontrolling interests 2 8 - 3 Net loss attributable to ZW Data Action Technologies Inc.$ (4,611 ) $ (1,905 ) $ (1,333 ) $ (388 ) Revenues The following tables set forth a breakdown of our total revenues, disaggregated by type of services for the periods indicated, with inter-company transactions eliminated: Nine Months Ended September 30, 2020 2019 Revenue type (Amounts expressed in
thousands of US dollars, except percentages)
-Internet advertising and related data service $ 5,679 21.0 % $ 9,384 23.8 % -Distribution of the right to use search engine marketing service 18,004 66.4 % 30,134 76.2 % -Data and technical services 900 3.3 % 10 - Internet advertising and related services 24,583 90.7 % 39,528 100 % Ecommerce O2O advertising and marketing services 1,276 4.7 % - - Technical solution services 1,245 4.6 % - - Total $ 27,104 100 % $ 39,528 100 % 30 Three Months Ended September 30, 2020 2019 Revenue type (Amounts expressed in
thousands of US dollars, except percentages)
-Internet advertising and related data service $ 2,429 19.7 % $ 3,949 25.5 % -Distribution of the right to use search engine marketing service 8,706 70.8 % 11,554 74.5 % -Data and technical services 300 2.4 % 5 - Internet advertising and related services 11,435 92.9 % 15,508 100 % Ecommerce O2O advertising and marketing services 269 2.2 % - - Technical solution services 600 4.9 % - - Total $ 12,304
100 % $ 15,508 100 % Total Revenues:Our total revenues decreased toUS$27.10 million andUS$12.30 million for the nine and three months endedSeptember 30, 2020 fromUS$39.53 million andUS$15.51 million for the same periods last year, respectively, 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 and slow recovery in the second and third fiscal quarters of 2020.
l Internet advertising revenues for the nine and three months ended
2020 was approximately
compared with
ended
attributable to the COVID-19 outbreak and business shutdown during the first
fiscal quarter of 2020 in
quarters. The decrease in revenues from our Internet advertising has gradually
narrowed down to a less than 40% decrease in both the second and third fiscal
quarter of 2020, compared with an approximately 50% decrease in the first
fiscal quarter of 2020, which indicated a gradual improvement of our business
after the COVID-19 outbreak.
l Revenue generated from the distribution of the right to use search engine
marketing service for the nine and three months ended
decreased to approximately
compared with approximately
and three months ended
as discussed above. The performance of this business category also improved
after the COVID-19 outbreak, with the decrease in revenues significantly
narrowed down to 38% and 25% in the second and third fiscal quarter of 2020,
respectively, compared with a 70% decrease in revenues in the first fiscal
quarter of 2020.
l For the nine and three months ended
approximately
marketing service revenues from the distribution of the advertising spaces in
outdoor billboards we purchased from a third party.
l For the nine months and three months ended
generated an approximately
providing technical design and support services. 31 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: Nine Months EndedSeptember 30, 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$ 5,679 $ 4,904 14 %$ 9,384 $ 8,887 5 % -Distribution of the right to use search engine marketing service 18,004 19,147 -6 % 30,134 28,936 4 % -Data and technical services 900 796 12 % 10 5 50 % Internet advertising and related services 24,583 24,847 -1 % 39,528 37,828 4 % Ecommerce O2O advertising and marketing services 1,276 1,125 12 % - - - Technical solution services 1,245 576
54 % - - - Total$ 27,104 $ 26,548 2 %$ 39,528 $ 37,828 4 % Three Months Ended September 30, 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$ 2,429 $ 1,998 18 %$ 3,949 $ 3,669 7 % -Distribution of the right to use search engine marketing service 8,706 9,731 -12 % 11,554 10,947 5 % -Data and technical services 300 265 12 % 5 - 100 % Internet advertising and related services 11,435 11,994 -5 % 15,508 14,616 6 % Ecommerce O2O advertising and marketing services 269 375 -39 % - - - Technical solution services 600 576 4 % - - - Total$ 12,304 $ 12,945 -5 %$ 15,508 $ 14,616 6 % Cost of revenues: our total cost of revenues decreased toUS$26.55 million andUS$12.95 million for the nine and three months endedSeptember 30, 2020 , respectively, fromUS$37.83 million andUS$14.62 million for the nine and three months endedSeptember 30, 2019 , respectively. 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 nine and three months endedSeptember 30, 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.
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 nine and three months ended
for Internet advertising and data service decreased to approximately
million and
million and
2019, respectively, which was in line with the revenues decrease as discussed
above. The gross margin rate of our Internet advertising and data service
improved to 14% and 18% for the nine and three months ended
respectively, compared with 5% and 7% for the same periods last year,
respectively, which was attributable to our enhancement of data analysis
capabilities and optimization of cost control mechanism.
l Costs for distribution of the right to 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
purchased the 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 nine and three
months ended
the right to use search engine marketing service decreased to
and
million for the same periods last year, respectively. Gross margin rates of
this service for the nine and three months ended
-12%, respectively, as we had to sell the resource pre-purchased from key
search engines at a loss to meet our working capital needs 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 anticipant slight improvement of the
gross margin rate of this business category in future periods. Gross margin
rates of this service was 4% and 5% for the nine and three months ended
32
l For the nine and three months ended
advertising related data and technical service revenue was approximately
amortized licensee fee for the use of the related data analysis and management
system during the periods.
l For the nine and three months ended
O2O advertising and marketing service revenues was approximately
million and
for the related outdoor billboards ad spaces we pre-purchased during the
periods.
l For the nine and three months ended
for providing technical design and support services of approximately
million. Gross profit/(loss) As a result of the foregoing, we generated a gross profit of approximatelyUS$0.56 million for the nine months endedSeptember 30, 2020 and incurred a gross loss ofUS$0.64 million for the three months endedSeptember 30, 2020 , compared with gross profit of approximatelyUS$1.70 million andUS$0.89 million for the nine and three months endedSeptember 30, 2019 , respectively. Our overall gross margin was 2% and -5% for the nine and three months endedSeptember 30, 2020 , respectively, compared with 4% and 6% for the same periods last year, respectively. The decrease in our overall gross margin for the nine and three months endedSeptember 30, 2020 , compared with that in the same periods last year, respectively was primarily attributable to the gross loss rate of -6% and -12% incurred for our main stream of service revenues, i.e. the distribution of the right to search engine marketing service business category, for the nine and three months endedSeptember 30, 2020 , respectively, which revenues constituted approximately 66% and 71% of our total revenues for the nine and three months endedSeptember 30, 2020 , respectively. Operating Expenses
Our operating expenses consist of sales and marketing expenses, general and administrative expenses and research and development expenses. The following tables set forth our operating expenses, divided into their major categories by amount and as a percentage of our total revenues for the periods indicated.
Nine Months EndedSeptember 30, 2020 2019 (Amounts expressed in
thousands of US dollars, except percentages)
Amount % of total revenue Amount % of total revenue Total Revenues$ 27,104 100 % $ 39,528 100 % Gross Profit 556 2 % 1,700 4 % Sales and marketing expenses 293 1 % 461 1 %
General and administrative expenses 4,520 17 % 2,875 7 % Research and development expenses 443
2 % 599 2 % Total operating expenses$ 5,256 19 % $ 3,935 10 % 33 Three Months Ended September 30, 2020 2019 (Amounts expressed in
thousands of US dollars, except percentages)
Amount % of total revenue Amount % of total revenue Total Revenues$ 12,304 100 % $ 15,508 100 % Gross (Loss)/Profit (641 ) -5 % 892 6 %
Sales and marketing expenses 58 -% 111 1 % General and administrative expenses 592 5 % 817 5 % Research and development expenses 113 1 % 239 2 % Total operating expenses $ 763
6 % $ 1,167 8 %
Operating Expenses: Our total operating expenses was approximately
l Sales and marketing expenses: Sales and marketing expenses decreased to
million and
2020, respectively, compared with approximately
million for the nine and three months ended
respectively. Our sales and marketing expenses primarily consist of advertising
expenses for brand development that we pay to different media outlets for the
promotion and marketing of our advertising web portals and our services, 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 nine months ended
and marketing expenses was primarily due to the following reasons: (1) staff
salary and benefit expenses and general departmental expenses decreased by
approximately
quarter of 2020, resulted from the COVID-19 outbreak during the period and
related epidemic control measures imposed by the local governments where we
operate, and slow recovery of business performance after the outbreak in the
following quarters; and (2) the increase in share-based compensation expenses
of approximately
issued to our sales staff during the first fiscal quarter of 2020. For the
three months ended
expenses was primarily attributable to the decrease in performance based salary
and bonus expenses, due to significant decrease in net revenues generated in
the period, compared with the same period last year, as a result of the slow
recovery of economy during the COVID-19 pandemic.
l General and administrative expenses: General and administrative expenses was
million for the nine and three months ended
respectively. Our general and administrative 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 nine months ended
general and administrative expenses was primarily due to the following reasons:
(1) the increase in share-based compensation expenses of approximately
million, due to restricted shares granted and issued in the first fiscal
quarter of 2020; and (2) the increase in allowance for doubtful accounts of
approximately
the change in our general and administrative expenses was primarily due to the
following reasons: (1) the increase in allowance for doubtful accounts of
approximately
expenses of approximately
departmental expenses of approximately
plan executed by management after the COVID-19 outbreak.
l Research and development expenses: Research and development expenses was
approximately
ended
million 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. The decrease in research and
development expenses for the nine and three months ended
compared with that in the respective same period last year, were primarily due
to the cost reduction plan executed by the management. 34
Loss from operations: As a result of the foregoing, we incurred a loss from operations of approximatelyUS$4.70 million andUS$2.24 million for the nine months endedSeptember 30, 2020 and 2019, respectively. For the three months endedSeptember 30, 2020 and 2019, we incurred a loss from operations of approximatelyUS$1.40 million andUS$0.28 million respectively. Change in fair value of warrant liabilities: we issued warrants in our 2018 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$0.004 million was recorded for the nine months endedSeptember 30, 2020 , compared with a gain of approximatelyUS$0.35 million recorded for the nine months endedSeptember 30, 2019 . For the three months endedSeptember 30, 2020 , a loss of change in fair value of these warrant liabilities of approximatelyUS$0.06 million was recorded, compared with a loss of approximatelyUS$0.12 million recorded for the three months ended September
30, 2019.
Loss before income tax benefit and noncontrolling interests: As a result of the foregoing, our loss before income tax benefit and noncontrolling interest was approximatelyUS$4.70 million andUS$1.92 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Our loss before income tax benefit and noncontrolling interest was approximatelyUS$1.49 million andUS$0.41 million for the three months endedSeptember 30, 2020 and 2019, respectively. Income Tax benefit: For the nine and three months endedSeptember 30, 2020 , we recognized an approximatelyUS$0.09 million andUS$0.16 million income tax benefit, respectively, in relation to deferred tax assets we expect to be able to utilized in future periods. For the nine and three months endedSeptember 30, 2019 , we recognized an additional deferred tax benefit of both approximatelyUS$0.08 million , related to deferred tax assets we expect to be able to utilized in future periods, and these deferred tax benefit amounts recognized were partially offset by the approximatelyUS$0.07 million andUS$0.06 million of income tax expense incurred for the nine and three months endedSeptember 30, 2019 , respectively, through utilization of previously recognized, deferred tax assets, due to earnings generated during the periods by one of our operating entities. As a result, for the nine and three months endedSeptember 30, 2019 , we recognized a net income tax benefit of approximatelyUS$0.01 million andUS$0.02 million , respectively. Net loss: As a result of the foregoing, for the nine months endedSeptember 30, 2020 and 2019, we incurred a total net loss of approximatelyUS$4.61 million andUS$1.91 million , respectively. For the three months endedSeptember 30, 2020 and 2019, we incurred a total net loss of approximatelyUS$1.33 million andUS$0.39 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 nine months endedSeptember 30, 2020 and 2019, net loss allocated to the noncontrolling interest of Business Opportunity Chain was approximatelyUS$0.002 million andUS$0.008 million , respectively. For the three months endedSeptember 30, 2020 and 2019, net loss allocated to the noncontrolling interest of Business Opportunity Chain was approximately US$nil million andUS$0.003 million , respectively. 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. wasUS$4.61 million andUS$1.91 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Net loss attributable toZW Data Action Technologies Inc. was approximatelyUS$1.33 million andUS$0.39 million for the three months endedSeptember 30, 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 ofSeptember 30, 2020 , we had cash and cash equivalents of approximatelyUS$0.50 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. 35
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:
Nine
Months Ended
2020 2019 Amounts in thousands of US dollars
Net cash provided by/(used in) operating activities $ 595$ (4,055 ) Net cash used in investing activities (1,273 ) (796 ) Net cash (used in)/provided by financing activities (429 ) 1,956 Effect of exchange rate fluctuation 4 (10 ) Net decrease in cash and cash equivalents $ (1,103 )$ (2,905 )
Net cash provided by/(used in) operating activities
For the nine months ended
(1) net loss excluding approximately
depreciation and amortization; approximately
compensation expenses; approximately
accounts, approximately
liabilities and approximately
the non-cash item excluded net loss of approximatelyUS$1.26 million .
(2) the receipt of cash from operations from changes in operating assets and
liabilities such as:
- accounts receivable decreased by approximately
aggregate;
- 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 nine
months ended
- advance from customers increased by approximately
due to new advance payments received that related to unsatisfied service
performance obligations during the first nine months of 2020, which was
partially offset by recognition of revenue from opening contract liabilities
during the period;
- accounts payable, tax payables and short-term lease payment payables increased
by approximately
delay of some payments as a result of the COVID-19 outbreak and some of the
payments were not due until later periods, and
- amount due from related parties decreased by approximately
(3) offset by the use from operations from changes in operating assets and
liabilities such as:
- 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 of
- accruals decreased by approximately
- other current liabilities decreased by approximately
- we also prepaid approximately
36
For the nine 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
benefit, yielded the non-cash items excluded net loss of approximatelyUS$1.37 million .
(2) the receipt of cash from operations from changes in operating assets and
liabilities such as:
- advance from customers and a related party increased by approximately
million, in the aggregate, primarily due to new advance payments received that
related to unsatisfied service performance obligations during the first nine
months of 2019, which was partially offset by recognition of revenue from
opening contract liabilities during the period;
- due from related parties decreased by approximately
due to collection of
portion of a related party loan of approximately
- unpaid lease payments related to short-term lease agreements we entered into
during the second and third fiscal quarter of 2019 increased by approximately
US$0.18 million ;
- taxes payable increased by approximately
- other current liabilities increased by approximately
- other current assets 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 during 2019;
- accruals decreased by approximately
operational liabilities and payment for operating lease liabilities during
2019;
- prepayment and deposit to suppliers increased by approximately
primarily due to increase in prepayments for the purchase of search engine
resource as required by the major suppliers, and prepayments for the
implementation, training and license fees of a software system incurred during
the third quarter of 2019; and
- we also prepaid approximately
Net cash used in investing activities
For the nine months endedSeptember 30, 2020 , (1) we investedRMB0.19 million (approximatelyUS$0.03 million ) to a newly established entity, in which we hold a 19% equity interest; (2) we made an additional payment of approximatelyUS$0.30 million for the development of our blockchain technology-based platform applications; and (3) we lent to an unrelated third party a short-term loan of approximatelyUS$0.94 million . In the aggregate, these transactions resulted in a cash outflow from investing activities of approximatelyUS$1.27 million for the nine months endedSeptember 30, 2020 .
For the nine months ended
Net cash (used in)/provided by financing activities
For the nine months ended
37 For the nine months endedSeptember 30, 2019 , (1) we closed on the first half of a private placement with a select group of investors related the Securities Purchase Agreement entered into onAugust 7, 2019 . In connection with the closing, we issued 1,608,430 shares of common stock and received net proceeds of approximatelyUS$2.39 million , after deduction of approximatelyUS$0.01 million direct financing cost paid in cash; (2) we repaid approximatelyUS$0.88 million short-term bank loan, in the aggregate, 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$1.96 million for the nine months endedSeptember 30, 2019 . 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 ofSeptember 30, 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$6.21 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. 38 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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