ZW DATA ACTION TECHN

CNET
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ZW DATA ACTION TECHNOLOGIES : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/13/2020 | 04:20pm

Forward-Looking Statements






You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with our consolidated financial
statements and the related notes included elsewhere in this interim report. Our
consolidated financial statements have been prepared in accordance with U.S.
GAAP. The following discussion and analysis contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, including, without limitation,
statements regarding our expectations, beliefs, intentions or future strategies
that are signified by the words "expect," "anticipate," "intend," "believe," or
similar language. All forward-looking statements included in this document are
based on information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements. Our business and
financial performance are subject to substantial risks and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements. In evaluating our business, you should carefully consider the
information set forth under the heading "Risk Factors" in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2019. Readers are cautioned not
to place undue reliance on these forward-looking statements.



Overview




Our company was incorporated in the State of Texas in April 2006 and
re-domiciled to become a Nevada corporation in October 2006. As a result of a
share exchange transaction we consummated with China Net BVI in June 2009, we
are now a holding company, which through certain contractual arrangements with
operating companies in the PRC, is engaged in providing advertising, precision
marketing, online to offline sales channel expansion and the related data and
technical services to SMEs in the PRC. Effective October 14, 2020, we changed
our corporate name from ChinaNet Online Holdings, Inc. to ZW Data Action
Technologies Inc.
Our shareholders approved the name change as part of the
Company's annual shareholder meeting held on October 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")
in May 2020 as we are in the process of expanding our corporate business and
technology headquarters to the city of Guangzhou in Southern China. ChinaNet
Online Guangdong has officially commenced its operations since July 2020. Along
with the development of new customer base in southern China 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.



In June 2020, we made an investment of RMB0.19 million (approximately US$0.03
million
) in cash to Business Opportunity Chain (Guangzhou) Technology Co., Ltd.
("Business Opportunity Chain Guangzhou"), a newly established entity in which we
beneficially own a 19% equity interest. Our investment to Business Opportunity
Chain 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 October 2020, we incorporated a new majority-owned subsidiary, Qiweilian
(Guangzhou) Technology Co., Ltd.
("Qiweilian"), in which an unrelated party owns
49% and we own 51% equity interest. Qiweilian was established for the
development of digital business promotion services to SMEs based on WeChat.



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 in the United States of
America
("U.S. GAAP") and include the accounts of our company, and all of our
subsidiaries and VIEs. We prepare financial statements in conformity with U.S.
GAAP, which requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities on the date of the financial statements and the reported amounts of
revenues and expenses during the financial reporting period. We continually
evaluate these estimates and assumptions based on the most recently available
information, our own historical experience and various other assumptions that we
believe to be reasonable under the circumstances. Since the use of estimates is
an integral component of the financial reporting process, actual results could
differ from those estimates. Some of our accounting policies require higher
degrees of judgment than others in their application. In order to understand the
significant accounting policies that we adopted for the preparation of our
condensed consolidated interim financial statements, readers should refer to the
information set forth in Note 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 SEPTEMBER 30,
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 of U.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 to US$27.10 million and US$12.30
million
for the nine and three months ended September 30, 2020 from US$39.53
million
and US$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 September 30,



2020 was approximately US$5.68 million and US$2.43 million, respectively,



compared with US$9.38 million and US$3.95 million for the nine and three months



ended September 30, 2019, respectively. The decreases were directly



attributable to the COVID-19 outbreak and business shutdown during the first



fiscal quarter of 2020 in China, and slow recovery of economy in the following



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 September 30, 2020



decreased to approximately US$18.00 million and US$8.71 million, respectively,



compared with approximately US$30.13 million and US$11.55 million for the nine



and three months ended September 30, 2019, respectively, due to the same reason



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 September 30, 2020, we generated an



approximately US$1.28 million and US$0.27 million Ecommerce O2O advertising and



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 September 30, 2020, we also



generated an approximately US$1.25 million and US$0.60 million revenue from



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 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 $ 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 900 100% 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 to US$26.55 million and
US$12.95 million for the nine and three months ended September 30, 2020,
respectively, from US$37.83 million and US$14.62 million for the nine and three
months ended September 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 ended September 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 September 30, 2020, our total cost of revenues



for Internet advertising and data service decreased to approximately US$4.90



million and US$2.00 million, respectively, compared with approximately US$8.89



million and US$3.67 million for the nine and three months ended September 30,



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 September 30, 2020,



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 China, for example, Baidu, Qihu 360 and Sohu (Sogou) etc. We



purchased the resource in relatively large amounts under our own name at a



relatively lower rate compared to the market. 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 September 30, 2020, our total cost of revenues for distribution of



the right to use search engine marketing service decreased to US$19.15 million



and US$9.73 million, respectively, compared with US$28.94 million and US$10.95



million for the same periods last year, respectively. Gross margin rates of



this service for the nine and three months ended September 30, 2020 was -6% and



-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



September 30, 2019, respectively.





32







l For the nine and three months ended September 30, 2020, cost for our Internet



advertising related data and technical service revenue was approximately



US$0.80 million and US$0.27 million, respectively, which represented the



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 September 30, 2020, cost for our Ecommerce



O2O advertising and marketing service revenues was approximately US$1.13



million and US$0.38 million, respectively, which represented the amortized cost



for the related outdoor billboards ad spaces we pre-purchased during the



periods.





l For the nine and three months ended September 30, 2020, we also incurred cost



for providing technical design and support services of approximately US$0.58



million.




Gross profit/(loss)



As a result of the foregoing, we generated a gross profit of approximately
US$0.56 million for the nine months ended September 30, 2020 and incurred a
gross loss of US$0.64 million for the three months ended September 30, 2020,
compared with gross profit of approximately US$1.70 million and US$0.89 million
for the nine and three months ended September 30, 2019, respectively. Our
overall gross margin was 2% and -5% for the nine and three months ended
September 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 ended September 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 ended September 30, 2020, respectively, which
revenues constituted approximately 66% and 71% of our total revenues for the
nine and three months ended September 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 Ended September 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
US$5.26 million and US$0.76 million for the nine and three months ended
September 30, 2020, respectively, compared with approximately US$3.94 million
and US$1.17 million for the nine and three months ended September 30, 2019,
respectively.



l Sales and marketing expenses: Sales and marketing expenses decreased to US$0.29



million and US$0.06 million for the nine and three months ended September 30,



2020, respectively, compared with approximately US$0.46 million and US$0.11



million for the nine and three months ended September 30, 2019,



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 September 30, 2020, the changes in our sales



and marketing expenses was primarily due to the following reasons: (1) staff



salary and benefit expenses and general departmental expenses decreased by



approximately US$0.29 million, due to office shutdown during the first fiscal



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 US$0.12 million, related to restricted shares granted and



issued to our sales staff during the first fiscal quarter of 2020. For the



three months ended September 30, 2020, the decrease in our sales and marketing



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



US$4.52 million and US$0.59 million for the nine and three months ended



September 30, 2020, respectively, compared with US$2.88 million and US$0.82



million for the nine and three months ended September 30, 2019,



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 September 30, 2020, 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 US$1.49



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 US$0.31 million. For the three months ended September 30, 2020,



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 US$0.02 million; (2) the decrease in share-based compensation



expenses of approximately US$0.03 million; and (3) the decrease in general



departmental expenses of approximately US$0.22 million, due to cost reduction



plan executed by management after the COVID-19 outbreak.



l Research and development expenses: Research and development expenses was



approximately US$0.44 million and US$0.11 million for the nine and three months



ended September 30, 2020, respectively, compared with approximately US$0.60



million and US$0.24 million for the nine and three months ended September 30,



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 September 30, 2020,



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 approximately US$4.70 million and US$2.24 million for the nine
months ended September 30, 2020 and 2019, respectively. For the three months
ended September 30, 2020 and 2019, we incurred a loss from operations of
approximately US$1.40 million and US$0.28 million respectively.



Change in fair value of warrant liabilities: we issued warrants in our 2018
Financing consummated in January 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
approximately US$0.004 million was recorded for the nine months ended September
30, 2020
, compared with a gain of approximately US$0.35 million recorded for the
nine months ended September 30, 2019. For the three months ended September 30,
2020
, a loss of change in fair value of these warrant liabilities of
approximately US$0.06 million was recorded, compared with a loss of
approximately US$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
approximately US$4.70 million and US$1.92 million for the nine months ended
September 30, 2020 and 2019, respectively. Our loss before income tax benefit
and noncontrolling interest was approximately US$1.49 million and US$0.41
million
for the three months ended September 30, 2020 and 2019, respectively.



Income Tax benefit: For the nine and three months ended September 30, 2020, we
recognized an approximately US$0.09 million and US$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 ended September 30,
2019
, we recognized an additional deferred tax benefit of both approximately
US$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 approximately US$0.07 million and US$0.06 million of
income tax expense incurred for the nine and three months ended September 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 ended September 30, 2019,
we recognized a net income tax benefit of approximately US$0.01 million and
US$0.02 million, respectively.



Net loss: As a result of the foregoing, for the nine months ended September 30,
2020
and 2019, we incurred a total net loss of approximately US$4.61 million and
US$1.91 million, respectively. For the three months ended September 30, 2020 and
2019, we incurred a total net loss of approximately US$1.33 million and US$0.39
million
, respectively.



Net loss attributable to noncontrolling interest: In May 2018, we incorporated a
majority-owned subsidiary, Business Opportunity Chain and beneficially owns 51%
equity interest in it. For the nine months ended September 30, 2020 and 2019,
net loss allocated to the noncontrolling interest of Business Opportunity Chain
was approximately US$0.002 million and US$0.008 million, respectively. For the
three months ended September 30, 2020 and 2019, net loss allocated to the
noncontrolling interest of Business Opportunity Chain was approximately US$nil
million and US$0.003 million, respectively.



Net loss attributable to ZW 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 to ZW Data Action Technologies
Inc.
Net loss attributable to ZW Data Action Technologies Inc. was US$4.61
million
and US$1.91 million for the nine months ended September 30, 2020 and
2019, respectively. Net loss attributable to ZW Data Action Technologies Inc.
was approximately US$1.33 million and US$0.39 million for the three months ended
September 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 of
September 30, 2020, we had cash and cash equivalents of approximately US$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 September 30,



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 ) (100% )
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 September 30, 2020, our net cash provided by operating
activities of approximately US$0.60 million were primarily attributable to:



(1) net loss excluding approximately US$0.63 million of non-cash expenses of



depreciation and amortization; approximately US$2.07 million share-based



compensation expenses; approximately US$0.75 million allowance for doubtful



accounts, approximately US$0.004 million gain in fair value of warrant



liabilities and approximately US$0.09 million deferred tax benefit yielded



the non-cash item excluded net loss of approximately US$1.26 million.





(2) the receipt of cash from operations from changes in operating assets and



liabilities such as:





- accounts receivable decreased by approximately US$0.25 million in the



aggregate;





- prepayment and deposit to suppliers decreased by approximately US$1.08 million,



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 September 30, 2020;



- advance from customers increased by approximately US$0.75 million, primarily



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 US$0.23 million in the aggregate, primarily due to temporary



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 US$0.02 million.



(3) offset by the use from operations from changes in operating assets and



liabilities such as:





- long-term prepayment increased by approximately US$0.38 million, which



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 September 30, 2020;



- accruals decreased by approximately US$0.06 million;



- other current liabilities decreased by approximately US$0.04 million; and



- we also prepaid approximately US$0.01 million lease payment during the period.







36





For the nine months ended September 30, 2019, our net cash used in operating
activities of approximately US$4.06 million were primarily attributable to:



(1) net loss excluding approximately US$0.07 million of non-cash expenses of



depreciation and amortizations; approximately US$0.09 million amortization of



operating lease right-of-use assets; approximately US$0.31 million



share-based compensation; approximately US$0.45 million allowance for



doubtful accounts; approximately US$0.35 million gain from change in fair



value of warrant liabilities and approximately US$0.01 million deferred tax



benefit, yielded the non-cash items excluded net loss of approximately
US$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 US$4.16



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 US$0.23 million, primarily



due to collection of US$0.2 million from an officer of our company and a



portion of a related party loan of approximately US$0.03 million;



- 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 US$0.12 million;



- other current liabilities increased by approximately US$0.29 million; and



- other current assets decreased by approximately US$0.01 million.



(3) offset by the use from operations from changes in operating assets and



liabilities such as:





- accounts receivable increased by approximately US$0.29 million;



- accounts payable decreased by approximately US$1.95 million, due to settlement



with major suppliers of search engine resource during 2019;



- accruals decreased by approximately US$0.24 million, due to settlement of these



operational liabilities and payment for operating lease liabilities during



2019;





- prepayment and deposit to suppliers increased by approximately US$5.19 million,



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 US$0.01 million lease payment during the period.



Net cash used in investing activities






For the nine months ended September 30, 2020, (1) we invested RMB0.19 million
(approximately US$0.03 million) to a newly established entity, in which we hold
a 19% equity interest; (2) we made an additional payment of approximately
US$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
approximately US$0.94 million. In the aggregate, these transactions resulted in
a cash outflow from investing activities of approximately US$1.27 million for
the nine months ended September 30, 2020.




For the nine months ended September 30, 2019, (1) we contributed our pro-rata
share of cash investment of approximately US$0.04 million to an ownership
investee company incorporated in October 2018; and (2) we prepaid US$0.76
million
for the development of a software system. In the aggregate, these
transactions resulted in a net cash outflow from investing activities of
approximately US$0.80 million for the nine months ended September 30, 2019.



Net cash (used in)/provided by financing activities



For the nine months ended September 30, 2020, we repaid an approximately US$0.43
million
short-term bank loan matured in January 2020.




37






For the nine months ended September 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 on August 7, 2019. In connection with the
closing, we issued 1,608,430 shares of common stock and received net proceeds of
approximately US$2.39 million, after deduction of approximately US$0.01 million
direct financing cost paid in cash; (2) we repaid approximately US$0.88 million
short-term bank loan, in the aggregate, matured in the first quarter and third
quarter of 2019; (3) we re-borrowed approximately US$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 approximately US$1.96
million
for the nine months ended September 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 with Foreign 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 of September 30, 2020 and December 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
approximately US$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 outside China, which were exempted under the previous
EIT law. A lower withholding tax rate will be applied if there is a tax treaty
arrangement between mainland China and the jurisdiction of the foreign holding
company. Holding companies in Hong 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 China is primarily governed by the
following rules:



l Foreign Exchange Administration Rules (1996), as amended in August 2008, or the



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 of China, unless the prior
approval of the State 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 the People'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 in U.S. dollars or fund possible business activities outside China.



C. OFF-BALANCE SHEET ARRANGEMENTS




None.

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