SEC Filing | ZW Data Action Technologies Inc.

View:

Download DOC

Download PDF

Download XLS

Download XBRL

cnet20220930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to _____

Commission File Number: 001-34647

ZW Data Action Technologies Inc.

(Exact name of registrant as specified in its charter)

Nevada	20-4672080
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Room 1106, Xinghuo Keji Plaza, No. 2 Fufeng Road, Fengtai District, Beijing, China 100070

(Address of principal executive offices) (Zip Code)

+86-10-6084-6616

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.001		CNET		Nasdaq Capital Market

Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 18, 2022, the registrant had 35,827,677 shares of common stock outstanding.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION		PAGE

Item 1. Interim Financial Statements

	Condensed Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021	1-2

	Condensed Consolidated Statements of Operations and Comprehensive (Loss)/Income for the Nine and Three Months Ended September 30, 2022 and 2021 (Unaudited)	3-4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (Unaudited)	5-6

	Condensed Consolidated Statements of Changes in Equity for the Nine and Three Months Ended September 30, 2022 and 2021 (Unaudited)	7-8

	Notes to Condensed Consolidated Financial Statements (Unaudited)	9-29

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30-42

Item 3. Quantitative and Qualitative Disclosures About Market Risk		42

Item 4. Controls and Procedures		42

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		42

Item 1A. Risk Factors		43

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		43

Item 3. Defaults Upon Senior Securities		43

Item 4. Mine Safety Disclosures		43

Item 5. Other Information		43

Item 6. Exhibits		44

Signatures		45

PART I. FINANCIAL INFORMATION

Item 1. Interim Financial Statements

Our common stock may be delisted and prohibited from trading in the over-the-counter market under the Holding Foreign Companies Accountable Act, or the HFCAA, if the PCAOB is unable to inspect or fully investigate auditors located in China. On December 16, 2021, the PCAOB issued the HFCAA Determination Report (the “PCAOB Determination List"), according to which our auditor, who is headquartered in Hong Kong Special Administrative Region of the PRC (“Hong Kong”), is subject to the determinations that the PCAOB is unable to inspect or investigate completely because of positions taken by the Chinese authorities. On May 13, 2022, following the filing of our annual report on Form 10-K on April 15, 2022, the SEC conclusively identified us as a Commission-Identified Issuer that engages an auditor that the PCAOB is unable to inspect or investigate completely. Under the current law, delisting and prohibition from over-the-counter trading in the U.S. could take place in 2024. If this happens there is no certainty that we will be able to list our common stock on a non-U.S. exchange or that a market for our common stock will develop outside of the U.S. The delisting of our common stock, or the threat of their being delisted, may materially and adversely affect the value of your investment.

On December 18, 2020, the Holding Foreign Companies Accountable Act, or the HFCAA, has been signed into law that states if the SEC determines that issuers have filed audit reports issued by a registered public accounting firm that has not been subject to PCAOB inspection for three consecutive years beginning in 2021, the SEC shall prohibit its common stock from being traded on a national securities exchange or in the over-the-counter trading market in the U.S. Furthermore, on June 22, 2021, the U.S. Senate passed a bill known as the Accelerating Holding Foreign Companies Accountable Act, to prohibit securities of any registrant from being listed on any of the U.S. securities exchanges or traded over-the-counter if the auditor of the registrant’s financial statements is not subject to PCAOB inspection for two consecutive years, instead of three consecutive years as currently enacted in the HFCAA. On February 4, 2022, the U.S. House of Representatives passed the America Competes Act of 2022 which includes the exact same amendments as the bill passed by the Senate. The America Competes Act however includes a broader range of legislation not related to the HFCAA in response to the U.S. Innovation and Competition Act passed by the Senate in 2021. The U.S. House of Representatives and U.S. Senate will need to agree on amendments to these respective bills to align the legislation and pass their amended bills before the U.S. President can sign into law.

On December 16, 2021, the PCAOB issued the HFCAA Determination Report (the “PCAOB Determination List"), according to which our auditor, who is headquartered in Hong Kong Special Administrative Region of the PRC (“Hong Kong”), is subject to the determinations that the PCAOB is unable to inspect or investigate completely because of positions taken by the Chinese authorities. On May 13, 2022, following the filing of our annual report on Form 10-K on April 15, 2022, the SEC conclusively identified us as a Commission-Identified Issuer that engages an auditor that the PCAOB is unable to inspect or investigate completely.

Under the current law, delisting and prohibition from over-the-counter trading of our common stock in the U.S. could take place in 2024. If this happens, there is no certainty that we will be able to list our common stock on a non-U.S. exchange or that a market for our common stock will develop outside of the U.S. The delisting of our common stock, or the threat of their being delisted, may materially and adversely affect the value of your investment. The potential enactment of the Accelerating Holding Foreign Companies Accountable Act would decrease the number of non-inspection years from three years to two, thus reducing the time period before our common stock may be prohibited from over-the-counter trading or delisted. If this bill were enacted, our common stock could be delisted from the exchange and prohibited from over-the-counter trading in the U.S. in 2023.

We have been reaching out to U.S. audit firms which do not fall within the PCAOB Determined List. However, we understand that these audit firms must go through a “client acceptance procedure” before they are able to accept engagement. We will disclose the developments regarding the engagement of U.S. audit firms in subsequent quarterly reports and annual reports.

On August 26, 2022, the PCAOB signed a Statement of Protocol on agreement governing on inspections of audit firms based in mainland China and Hong Kong, with China Securities Regulatory Commission (“CSRC”) and Ministry of Finance (“MOF”) of the PRC, in regarding to governing inspections and investigations of audit firms headquartered in mainland China and Hong Kong. As stated in the agreement, the Chinese authorities committed that the PCAOB has direct access to view complete audit work papers under its inspections or investigations and has sole discretion to the selected audit firms and audit engagements. The agreement opens access for the PCAOB to inspect and investigate the registered public accounting firms in mainland China and Hong Kong completely. And the PCAOB is now required to further re-access its determinations by the end of 2022. In mid-September 2022, the inspection team of the PCAOB arrived in Hong Kong to start an eight to ten-week onsite audit inspections and investigations of the selected audit firms headquartered in mainland China and/or Hong Kong, with the assistant of the officials from CSRC. Notwithstanding the foregoing, the final result remains uncertain. There is no assurance that the Statement of Protocol will be effective in accomplishing its stated goals.

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for number of shares and per share data)

	September 30, 2022		December 31, 2021
	(US $)		(US $)
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	2,154	$	7,173
Accounts receivable, net of allowance for doubtful accounts of $2,337 and $2,236, respectively		2,999		3,439
Prepayment and deposit to suppliers		7,593		7,559
Due from related parties		15		90
Other current assets, net		1,623		1,657
Total current assets		14,384		19,918

Long-term investments		2,149		2,280
Operating lease right-of-use assets		1,838		2,019
Property and equipment, net		267		375
Intangible assets, net		5,896		7,523
Long-term deposits and prepayments		68		75
Deferred tax assets, net		398		441
Total Assets	$	25,000	$	32,631

Liabilities and Equity
Current liabilities:
Accounts payable *	$	276	$	1,119
Advance from customers *		951		1,245
Accrued payroll and other accruals *		170		389
Taxes payable *		3,199		3,534
Operating lease liabilities *		389		202
Lease payment liability related to short-term leases *		99		152
Other current liabilities *		197		141
Warrant liabilities		1,280		2,039
Total current liabilities		6,561		8,821

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands, except for number of shares and per share data)

	September 30, 2022			December 31, 2021
	(US $)			(US $)
	(Unaudited)
Long-term liabilities:
Operating lease liabilities-Non current *		1,557			1,907
Long-term borrowing from a related party		123			137
Total Liabilities		8,241			10,856

Commitments and contingencies

Equity:
ZW Data Action Technologies Inc.’s stockholders’ equity
Common stock (US$0.001 par value; authorized 100,000,000; issued and outstanding 35,827,677 shares and 35,332,677 shares at September 30, 2022 and December 31, 2021, respectively)		36			35
Additional paid-in capital		61,972			61,785
Statutory reserves		2,598			2,598
Accumulated deficit		(49,005	)		(43,734	)
Accumulated other comprehensive income		1,158			1,082
Total ZW Data Action Technologies Inc.’s stockholders’ equity		16,759			21,766

Total equity		16,759			21,766

Total Liabilities and Equity	$	25,000		$	32,631

* Liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets (Note 2).

See notes to unaudited condensed consolidated financial statements

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)/INCOME

(In thousands, except for number of shares and per share data)

	Nine Months Ended September 30,						Three Months Ended September 30,
	2022			2021			2022			2021
	(US $)			(US $)			(US $)			(US $)
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenues
From unrelated parties	$	21,813		$	34,843		$	7,216		$	11,896
From a related party		-			4			-			4
Total revenues		21,813			34,847			7,216			11,900
Cost of revenues		21,811			35,739			7,267			11,857
Gross profit/(loss)		2			(892	)		(51	)		43

Operating expenses
Sales and marketing expenses		219			159			72			58
General and administrative expenses		5,697			10,366			1,651			1,471
Research and development expenses		181			251			57			88
Total operating expenses		6,097			10,776			1,780			1,617

Loss from operations		(6,095	)		(11,668	)		(1,831	)		(1,574	)

Other income/(expenses)
Interest income		96			3			21			1
Other (expenses)/income, net		(33	)		265			(5	)		(37	)
Loss on disposal of long-term investments		-			(38	)		-			-
Change in fair value of warrant liabilities		759			9,682			(1,023	)		2,853
Total other income/(expenses)		822			9,912			(1,007	)		2,817

(Loss)/income before income tax benefit/(expense) and noncontrolling interests		(5,273	)		(1,756	)		(2,838	)		1,243
Income tax benefit/(expenses)		2			171			(2	)		131
Net (loss)/income		(5,271	)		(1,585	)		(2,840	)		1,374
Net (income)/loss attributable to noncontrolling interests		-			(1	)		-			1
Net (loss)/income attributable to ZW Data Action Technologies Inc.	$	(5,271	)	$	(1,586	)	$	(2,840	)	$	1,375

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)/INCOME

(CONTINUED）

(In thousands, except for number of shares and per share data)

	Nine Months Ended September 30,						Three Months Ended September 30,
	2022			2021			2022			2021
	(US $)			(US $)			(US $)			(US $)
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

Net (loss)/income	$	(5,271	)	$	(1,585	)	$	(2,840	)	$	1,374
Foreign currency translation income/(loss)		76			(25	)		93			(2	)
Comprehensive (loss)/income	$	(5,195	)	$	(1,610	)	$	(2,747	)	$	1,372
Comprehensive income attributable to noncontrolling interests		-			(1	)		-			-
Comprehensive (loss)/income attributable to ZW Data Action Technologies Inc.	$	(5,195	)	$	(1,611	)	$	(2,747	)	$	1,372

(Loss)/earnings per share
(Loss)/earnings per common share
Basic and diluted	$	(0.15	)	$	(0.05	)	$	( 0.08	)	$	0.04

Weighted average number of common shares outstanding:
Basic and diluted		35,572,200			32,279,304			35,827,677			35,332,220

See notes to unaudited condensed consolidated financial statements

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months Ended September 30,
	2022			2021
	(US $)			(US $)
	(Unaudited)			(Unaudited)
Cash flows from operating activities
Net loss	$	(5,271	)	$	(1,585	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		1,660			450
Amortization of operating lease right-of-use assets		239			149
Share-based compensation expenses		135			6,945
Provision for allowances for doubtful accounts		947			-
Loss on disposal of long-term investments		-			38
Deferred taxes		(2	)		(171	)
Change in fair value of warrant liabilities		(759	)		(9,682	)
Other non-operating income/(losses)		(93	)		24
Changes in operating assets and liabilities
Accounts receivable		(211	)		(257	)
Prepayment and deposit to suppliers		(459	)		(1,698	)
Due from related parties		59			-
Other current assets		25			6
Long-term deposits and prepayments		-			(314	)
Accounts payable		(784	)		142
Advance from customers		(179	)		(133	)
Accrued payroll and other accruals		(205	)		(126	)
Other current liabilities		735			(230	)
Taxes payable		4			(31	)
Lease payment liability related to short-term leases		(40	)		(54	)
Operating lease liabilities		(210	)		(73	)
Net cash used in operating activities		(4,409	)		(6,600	)

Cash flows from investing activities
Payment for leasehold improvements and purchase of vehicles, furniture and office equipment		-			(306	)
Cash effect of deconsolidation of VIEs’ subsidiaries		-			(8	)
Investments and advances to ownership investee entities		-			(1,919	)
Repayment from ownership investee entities		12			-
Short-term loans to unrelated parties		(2,600	)		(1,507	)
Repayment of short-term loans and interest income from unrelated parties		2,109			1,303
Payment for purchase of software technologies		-			(1,160	)
Deposit and prepayment paid for contracts of other investing activities		-			(2,500	)
Net cash used in investing activities		(479	)		(6,097	)

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(In thousands)

	Nine Months Ended September 30,
	2022			2021
	(US $)			(US $)
	(Unaudited)			(Unaudited)
Cash flows from financing activities
Proceeds from issuance of common stock and warrant (net of cash offering cost of US$1,600)		-			17,111
Net cash provided by financing activities		-			17,111

Effect of exchange rate fluctuation on cash and cash equivalents		(131	)		20

Net (decrease)/increase in cash and cash equivalents		(5,019	)		4,434

Cash and cash equivalents at beginning of the period		7,173			4,297
Cash and cash equivalents at end of the period	$	2,154		$	8,731

Supplemental disclosure of cash flow information

Income taxes paid	$	-		$	-
Interest expense paid	$	-		$	-

See notes to unaudited condensed consolidated financial statements

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2022

(In thousands, except for number of shares)

	Common stock				Additional paid-in capital		Statutory reserves		Accumulated deficit			Accumulated other comprehensive income			Total equity
	Number of shares		Amount
			(US $)		(US $)		(US $)		(US $)			(US $)			(US $)

Balance, January 1, 2022		35,332,677	$	35	$	61,785	$	2,598	$	(43,734	)	$	1,082		$	21,766
Share-based compensation in exchange for services from nonemployees		400,000		1		139		-		-			-			140
Share-based compensation in exchange for services from employees and directors		95,000		-		32		-		-			-			32
Net loss for the period		-		-		-		-		(2,431	)		-			(2,431	)
Foreign currency translation adjustment		-		-		-		-		-			(17	)		(17	)
Balance, June 30, 2022 (unaudited)		35,827,677	$	36	$	61,956	$	2,598	$	(46,165	)	$	1,065		$	19,490
Share-based compensation in exchange for services from employees and directors		-		-		16		-		-			-			16
Net loss for the period		-		-		-		-		(2,840	)		-			(2,840	)
Foreign currency translation adjustment		-		-		-		-		-			93			93
Balance, September 30, 2022 (Unaudited)		35,827,677	$	36	$	61,972	$	2,598	$	(49,005	)	$	1,158		$	16,759

See notes to unaudited condensed consolidated financial statements

ZW DATA ACTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2021

(In thousands, except for number of shares)

	Common stock				Additional paid-in capital		Statutory reserves		Accumulated deficit			Accumulated other comprehensive income			Noncontrolling interests			Total equity
	Number of shares		Amount
			(US $)		(US $)		(US $)		(US $)			(US $)			(US $)			(US $)

Balance, January 1, 2021		26,062,915	$	26	$	49,772	$	2,598	$	(40,980	)	$	1,129		$	(66	)	$	12,479
Issuance of common stock for private placement, net of $10,476 proceeds allocated to investor warrants labilities and $3,045 direct offering costs (including $1,445 proceeds allocated to placement agent warrants liabilities and $1,600 cash offering cost, respectively), respectively		5,212,000		5		5,185		-		-			-			-			5,190
Share-based compensation in exchange for services from employees and directors		4,015,735		4		6,699		-		-			-			-			6,703
Net (loss)/income for the period		-		-		-		-		(2,961	)		-			2			(2,959	)
Foreign currency translation adjustment		-		-		-		-		-			(22	)		(1	)		(23	)
Balance, June 30, 2021 (unaudited)		35,290,650	$	35	$	61,656	$	2,598	$	(43,941	)	$	1,107		$	(65	)	$	21,390
Share-based compensation in exchange for services from employees and directors		-		-		23		-		-			-			-			23
Cashless exercise of warrants		42,027		-		82		-		-			-			-			82
Net income/(loss) for the period		-		-		-		-		1,375			-			(1	)		1,374
Foreign currency translation adjustment		-		-		-		-		-			(3	)		1			(2	)
Balance, September 30, 2021 (unaudited)		35,332,677		35	$	61,761	$	2,598	$	(42,566	)	$	1,104		$	(65	)	$	22,867

See notes to unaudited condensed consolidated financial statements

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.	Organization and nature of operations

ZW Data Action Technologies Inc. (f/k/a ChinaNet Online Holdings, Inc.) (the “Company”) was incorporated in the State of Texas in April 2006 and re-domiciled to become a Nevada corporation in October 2006. On June 26, 2009, the Company consummated a share exchange transaction with China Net Online Media Group Limited (the “Share Exchange”), a company organized under the laws of British Virgin Islands (“China Net BVI”). As a result of the Share Exchange, China Net BVI became a wholly owned subsidiary of the Company and the Company is now a holding company, which, through certain contractual arrangements with operating companies in the People’s Republic of China (the “PRC”), is engaged in providing Internet advertising, precision marketing, Ecommerce online to offline (O2O) advertising and marketing services as well as the related data and technical services to small and medium enterprises (SMEs) in the PRC.

2.	Variable interest entities

The Company is not an operating company in China, but a Nevada holding company with no equity ownership in the VIEs. The Company primarily conducts its operations in China through its PRC subsidiaries, the VIEs, with which the Company has entered into contractual arrangements, and their subsidiaries in China. Summarized below is the information related to the VIEs’ assets and liabilities reported in the Company’s condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively:

	September 30, 2022		December 31, 2021
	US$(’000)		US$(’000)
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	203	$	181
Accounts receivable, net		2,999		2,796
Prepayment and deposit to suppliers		3,382		5,287
Due from related parties		15		90
Other current assets, net		3		4
Total current assets		6,602		8,358

Long-term investments		445		496
Operating lease right-of-use assets		199		21
Property and equipment, net		121		168
Deferred tax assets, net		398		441
Total Assets	$	7,765	$	9,484

Liabilities
Current liabilities:
Accounts payable	$	276	$	1,119
Advance from customers		858		1,113
Accrued payroll and other accruals		61		83
Taxes payable		2,562		2,849
Operating lease liabilities		198		9
Lease payment liability related to short-term leases		99		110
Other current liabilities		109		53
Total current liabilities		4,163		5,336

Operating lease liabilities-Non current		-		10
Total Liabilities	$	4,163	$	5,346

Liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets.

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Summarized below is the information related to the financial performance of the VIEs reported in the Company’s condensed consolidated statements of operations and comprehensive (loss)/income for the nine and three months ended September 30, 2022 and 2021, respectively:

	Nine Months Ended September 30,						Three Months Ended September 30,
	2022			2021			2022			2021
	US$(’000)			US$(’000)			US$(’000)			US$(’000)
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

Revenues	$	20,829		$	30,932		$	6,967		$	10,314
Cost of revenues		(21,811	)		(34,614	)		(7,267	)		(11,482	)
Total operating expenses		(1,539	)		(1,184	)		(691	)		(472	)
Net loss before allocation to noncontrolling interests		(2,551	)		(5,062	)		(998	)		(1,655	)

3.	Liquidity and Capital Resources

For the nine months ended September 30, 2022, the Company incurred a loss from operations of US$6.10 million and a net operating cash outflow of US$4.41 million. As of September 30, 2022, the Company had cash and cash equivalents of US$2.15 million and working capital of US$7.82 million.

The Company’s cash and cash equivalents balance was relatively low as of September 30, 2022 because that the Company is normally required to pay more advance payments to its major suppliers, i.e., the key search engines as a buffer before the National Holiday Golden Week of the PRC (the first week of October), to ensure adequate balances in its accounts for the consumption during the holiday. After the holiday, along with the subsequent collection of accounts receivable for services provided and additional advance payments from the customers, the Company’s cash and cash equivalents balance as of October 31, 2022 increased by approximately 13%, compared with that as of September 30, 2022.

The Company experienced temporary decreases in revenue and gross profit, and did not generate positive cash flow from its existing core business, i.e., Internet advertising and related data service business for the nine months ended September 30, 2022. This was primarily attributable to the repeated severe COVID-19 cases rebound in many provinces in China during the first nine months of fiscal 2022, which resulted in regional large-scale quarantine and business shutdown, and further resulted in pandemic fears and in return severely affected the SMEs owners’ confidence to further expand their businesses. Thus, the Company has been relying on proceeds generated from financing activities for its liquidity in fiscal 2022.

In order to improve operation performance, the Company started to introduce its new Software-as-a-Service (“SaaS”) services to customers in 2022. The Company’s SaaS services are provided based on technologies of its self-developed Blockchain Integrated Framework (“BIF”) platform. The Company entered into several framework contracts and memorandums with clients, pursuant to which the Company would provide SaaS subscription services via the platform on a monthly, quarterly or annual basis in early 2022. The subscriptions would enable the Company’s clients to utilize the BIF platform as an enterprise management software to record, share and storage operating data on-chain, and/or to generate unique designed Non-fungible Token (“NFTs”) for their IPs and certificates. However, due to unexpected long time quarantine and business shutdown measures for COVID-19 epidemic control incurred in the first nine months of 2022, especially in the second fiscal quarter of 2022, some of these agreements were cancelled or delayed by customers. Although revenues from the new SaaS services business and its profitability have not met the Company’s expectations, it is expected to bring the Company positive cash flow, as these services are provided based on technologies of the Company’s self-developed software platform, which does not need any further material cash outflow to other third-party service providers.

In addition, to further improve its liquidity, the Company plans to negotiate with its major suppliers for more favorable payment terms, reduce its operating costs through optimizing the personnel structure among different offices, and reduce its office leasing spaces, if needed. The Company also intends to obtain revolving credit facilities to supplement its short-term working capital, as needed, from the commercial banks in the PRC. The Company has not experienced any difficulties in obtaining such credit facility before.

Based on the above discussion, the Company believes that its current cash and cash equivalents, its anticipated new cash flows from operations and financing activities, and other liquidity improving measures will ensure the Company has sufficient cash to meet its obligations as they become due with the next 12 months from the date hereof.

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.	Summary of significant accounting policies

a)	Basis of presentation

The unaudited condensed consolidated interim financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

The unaudited condensed consolidated interim financial information as of September 30, 2022 and for the nine and three months ended September 30, 2022 and 2021 have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally included in complete consolidated financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited condensed consolidated interim financial information should be read in conjunction with the financial statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, previously filed with the SEC (the “2021 Form 10-K”) on April 15, 2022.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s condensed consolidated financial position as of September 30, 2022, its condensed consolidated results of operations for the nine and three months ended September 30, 2022 and 2021, and its condensed consolidated cash flows for the nine months ended September 30, 2022 and 2021, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

b)	Principles of consolidation

The unaudited condensed consolidated interim financial statements include the accounts of all the subsidiaries and VIEs of the Company. All transactions and balances between the Company and its subsidiaries and VIEs have been eliminated upon consolidation.

c)	Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of these consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. The Company continually evaluates these estimates and assumptions based on the most recently available information, historical experience and various other assumptions that the Company believes 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.

d)	Foreign currency translation

The exchange rates used to translate amounts in RMB into US$ for the purposes of preparing the condensed consolidated financial statements are as follows:

	September 30, 2022		December 31, 2021

Balance sheet items, except for equity accounts		7.0998		6.3757

	*Nine Months Ended September 30,*
	*2022*		*2021*

Items in the statements of operations and comprehensive loss		6.6068		6.4714

	*Three Months Ended September 30,*
	*2022*		*2021*

Items in the statements of operations and comprehensive loss		6.8287		6.4707

No representation is made that the RMB amounts could have been, or could be converted into US$ at the above rates.

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

e)	Cash and cash equivalents

Cash and cash equivalents consist of cash on hand and bank deposits, which are unrestricted as to withdrawal and use. The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.

The Company’s cash are held in accounts at major financial institutions located in the U.S. and the PRC. The Company believes that these financial institutions are of high credit quality, all of which have participated in the federal/national deposit insurance scheme of their respective jurisdiction. The Company’s cash held in accounts at the financial institutions in the U.S. are insured by the Federal Deposit Insurance Corporation (FDIC) for up to US$0.25 million per depositor per insured bank and the cash held in accounts at the financial institutions in the PRC are insured by the Deposit Insurance Capital Corporation (DICC), a wholly-owned subsidiary of the People’s Bank of China, for up to RMB0.50 million per depositor per insured bank. The Company, its subsidiaries, VIEs and VIEs’ subsidiaries have not experienced any losses in such accounts in the U.S. and the PRC and do not believe its cash is exposed to any significant risk.

f)	Fair value measurement

Liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2022 and December 31, 2021 are as follows:

Fair value measurement at reporting date using

As of

September 30, 2022

Quoted Prices
in Active Markets
for Identical Assets/Liabilities
(Level 1)

Significant
Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

US$(’000)

(Unaudited)

Warrant liabilities (Note 16)

1,280

Fair value measurement at reporting date using

As of

December 31, 2021

Quoted Prices
in Active Markets
for Identical Assets/Liabilities
(Level 1)

Significant
Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

US$(’000)

Warrant liabilities (Note 16)

2,039

g)	Revenue recognition

The following table present the Company’s revenues disaggregated by products and services:

	Nine Months Ended September 30,				Three Months Ended September 30,
	2022		2021		2022		2021
	US$(’000)		US$(’000)		US$(’000)		US$(’000)
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)

Internet advertising and related services
--distribution of the right to use search engine marketing service		18,605		28,613		6,236		9,648
--online advertising placements		3,208		5,720		980		2,125
Ecommerce O2O advertising and marketing services		-		514		-		127
Total revenues	$	21,813	$	34,847	$	7,216	$	11,900

For the nine and three months ended September 30, 2022 and 2021, all the revenues were recognized over time, as the customers simultaneously received and consumed the benefits provided by the Company’s performance as the Company performed.

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Contract costs

For the nine and three months ended September 30, 2022 and 2021, the Company did not have any significant incremental costs of obtaining contracts with customers incurred and/or costs incurred in fulfilling contracts with customers, which shall be recognized as an asset and amortized to expenses in a pattern that matches the timing of the revenue recognition of the related contract.

Contract liabilities

The table below summarized the movement of the Company’s contract liabilities for the nine months ended September 30, 2022:

	Contract liabilities
	US$(’000)

Balance as of January 1, 2022		1,245
Exchange translation adjustment		(127	)
Revenue recognized from beginning contract liability balances		(1,039	)
Advances received from customers related to unsatisfied performance obligations		872
Balance as of September 30, 2022(Unaudited)	$	951

Advance from customers related to unsatisfied performance obligations are generally refundable. Refund of advance from customers were insignificant for the nine and three months ended September 30, 2022 and 2021.

For the nine and three months ended September 30, 2022 and 2021, there is no revenue recognized from performance obligations that were satisfied in prior periods.

h)	Research and development expenses

The Company accounts for expenses for the enhancement, maintenance and technical support to the Company’s Internet platforms and intellectual properties that are used in its daily operations in research and development expenses. Research and development costs are charged to expenses when incurred. Expenses for research and development for the nine months ended September 30, 2022 and 2021 were approximately US$0.18 million and US$0.25 million, respectively. Expenses for research and development for the three months ended September 30, 2022 and 2021 were approximately US$0.06 million and US$0.09 million, respectively.

Lease

As of September 30, 2022, operating lease right-of-use assets and total operating lease liabilities recognized was approximately US$1.84 million and US$1.95 million, respectively.

Maturity of operating lease liabilities

	Operating leases
	US$(’000)
	(Unaudited)

Three months ending December 31, 2022		119
Year ending December 31,
-2023		448
-2024		307
-2025		322
-2026		338
-2027		355
-thereafter		436
Total undiscounted lease payments		2,325
Less: imputed interest		(379	)
Total operating lease liabilities as of September 30, 2022	$	1,946

Including:
Operating lease liabilities		389
Operating lease liabilities-Non current		1,557
	$	1,946

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Operating lease expenses:

Nine Months Ended September 30,

Three Months Ended September 30,

2022

2021

2022

2021

US$(’000)

(Unaudited)

Long-term operating lease contracts

329

212

136

Short-term operating lease contracts

Total

368

257

146

103

Supplemental information related to operating leases:

	Nine Months Ended September 30, 2022
	(Unaudited)

Operating cash flows used for operating leases (US$’000)		300
Right-of-use assets obtained in exchange for new lease liabilities (US$’000)		266
Weighted-average remaining lease term (years)		5.87
Weighted-average discount rate		6	%

5.	Accounts receivable, net

	September 30, 2021			December 31, 2021
	US$(’000)			US$(’000)
	(Unaudited)

Accounts receivable		5,336			5,675
Allowance for doubtful accounts		(2,337	)		(2,236	)
Accounts receivable, net		2,999			3,439

All of the accounts receivable are non-interest bearing. Based on the assessment of the collectability of the accounts receivable as of September 30, 2022 and December 31, 2021, the Company provided approximately US$2.34 million and US$2.24 million allowance for doubtful accounts, respectively, which were primarily related to the accounts receivable of the Company’s Internet advertising and related services segment with an aging over six months. The Company evaluates its accounts receivable with an aging over six months and determines the allowance based on aging data, historical collection experience, customer specific facts and economic conditions. For the nine and three months ended September 30, 2022, the Company provided approximately US$0.33 million and US$nil allowance for doubtful, respectively. For the nine and three months ended September 30, 2021, no allowance for doubtful accounts was provided.

ZW DATA ACTION TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

6.	Prepayments and deposit to suppliers

September 30,

2022

December 31,

2021

US$(’000)