ZW DATA ACTION TECHN
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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 |
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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
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
to place undue reliance on these forward-looking statements.
Overview
Our company was incorporated in the
re-domiciled to become a
share exchange transaction we consummated with China Net BVI in
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
our corporate name from
Technologies Inc.
Company's annual shareholder meeting held on
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,
in
technology headquarters to the city of Guangzhou in
Online Guangdong has officially commenced its operations since
with the development of new customer base in southern
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
million
("Business Opportunity
beneficially own a 19% equity interest. Our investment to Business Opportunity
media operations and technology for the development of webcast platform based
business promotion service and franchise consultancy service.
In
(Guangzhou) Technology Co., Ltd.
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
America
subsidiaries and VIEs. We prepare financial statements in conformity with
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.
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A. RESULTS OF OPERATIONS FOR THE NINE AND THREE MONTHS ENDED
2020
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
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
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.
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
million
million
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.
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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
2020
(Amounts expressed in
thousands of US dollars, except percentages)
Revenue Cost GP ratio Revenue Cost GP ratio
-Internet advertising and
related data service
-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
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
-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
Cost of revenues: our total cost of revenues decreased to
respectively, from
months ended
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
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
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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 approximately
gross loss of
compared with gross profit of approximately
for the nine and three months ended
overall gross margin was 2% and -5% for the nine and three months ended
last year, respectively. The decrease in our overall gross margin for the nine
and three months ended
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
revenues constituted approximately 66% and 71% of our total revenues for the
nine and three months ended
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
2020
(Amounts expressed in
thousands of US dollars, except percentages)
Amount % of total revenue Amount % of total revenue
Total Revenues
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
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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
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
and
respectively.
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 approximately
months ended
ended
approximately
Change in fair value of warrant liabilities: we issued warrants in our 2018
Financing consummated in
accounted for as derivative liabilities, as the warrants are dominated in a
currency (
a result, a gain of change in fair value of these warrant liabilities of
approximately
30, 2020
nine months ended
2020
approximately
approximately
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
and noncontrolling interest was approximately
million
Income Tax benefit: For the nine and three months ended
recognized an approximately
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
2019
in future periods, and these deferred tax benefit amounts recognized were
partially offset by the approximately
income tax expense incurred for the nine and three months ended
2019
assets, due to earnings generated during the periods by one of our operating
entities. As a result, for the nine and three months ended
we recognized a net income tax benefit of approximately
Net loss: As a result of the foregoing, for the nine months ended
2020
2019, we incurred a total net loss of approximately
million
Net loss attributable to noncontrolling interest: In
majority-owned subsidiary, Business Opportunity Chain and beneficially owns 51%
equity interest in it. For the nine months ended
net loss allocated to the noncontrolling interest of Business Opportunity Chain
was approximately
three months ended
noncontrolling interest of Business Opportunity Chain was approximately US$nil
million and
Net loss attributable to
adjusted by net loss attributable to the noncontrolling interest shareholders as
discussed above yields the net loss attributable to
Inc.
million
2019, respectively. Net loss attributable to
was approximately
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
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
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 )
Net cash provided by/(used in) operating activities
For the nine months ended
activities of approximately
(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 approximately
(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
activities of approximately
(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 approximately
(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
- 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 ended
(approximately
a 19% equity interest; (2) we made an additional payment of approximately
applications; and (3) we lent to an unrelated third party a short-term loan of
approximately
a cash outflow from investing activities of approximately
the nine months ended
For the nine months ended
share of cash investment of approximately
investee company incorporated in
million
transactions resulted in a net cash outflow from investing activities of
approximately
Net cash (used in)/provided by financing activities
For the nine months ended
million
37
For the nine months ended
a private placement with a select group of investors related the Securities
Purchase Agreement entered into on
closing, we issued 1,608,430 shares of common stock and received net proceeds of
approximately
direct financing cost paid in cash; (2) we repaid approximately
short-term bank loan, in the aggregate, matured in the first quarter and third
quarter of 2019; (3) we re-borrowed approximately
loan matured in the first quarter of 2019. In the aggregate, these transactions
resulted in a net cash inflow from financing activities of approximately
million
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
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
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
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
EIT law. A lower withholding tax rate will be applied if there is a tax treaty
arrangement between mainland
company. Holding companies in
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
following rules:
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 of
approval of the
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
of China
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
C. OFF-BALANCE SHEET ARRANGEMENTS
None.
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