ZW Data Action Technologies Inc

Previous wording

Our auditor, the independent registered public accounting firm that issues the audit report in our SEC filings, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor is located in Hong Kong Special Administrative Region of the PRC ("Hong Kong"), China, a jurisdiction where the PCAOB was unable to conduct inspections and investigations before 2022. As a result, we and investors in our securities were deprived of the benefits of such PCAOB inspections. On December 15, 2022, the PCAOB announced that it was able to secure complete access to inspect and investigate PCAOB-registered public accounting firms headquartered in China mainland and Hong Kong in 2022. However, the inability of the PCAOB to conduct inspections of auditors in Hong Kong in the past made it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China mainland and Hong Kong that have been subject to the PCAOB inspections, which could cause investors and potential investors in our securities to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

Current wording

Our auditor, ARK Pro CPA & Co. (“ARK”), the independent registered public accounting firm that issues the audit report in our SEC filings, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor is located in Hong Kong Special Administrative Region of the PRC ("Hong Kong"), China, a jurisdiction where the PCAOB was unable to conduct inspections and investigations before 2022. As a result, we and investors in our securities were deprived of the benefits of such PCAOB inspections. On December 15, 2022, the PCAOB announced that it was able to secure complete access to inspect and investigate PCAOB-registered public accounting firms headquartered in China mainland and Hong Kong in 2022. However, the inability of the PCAOB to conduct inspections of auditors in Hong Kong in the past made it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China mainland and Hong Kong that have been subject to the PCAOB inspections, which could cause investors and potential investors in our securities to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

Previous wording

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 services 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. Beginning in early 2022, we introduced our SaaS services to customers. The SaaS services were designated in providing one-stop blockchain-powered enterprise management solutions via our BIF platform in forms of unique NFT generations, data record, share and storage modules subscriptions.

Current wording

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 services 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. Beginning in early 2022, we introduced our SaaS services to customers. The SaaS services were designated in providing one-stop blockchain-powered enterprise management solutions via our BIF platform in forms of unique NFT generations, data record, share and storage modules subscriptions etc.

Previous wording

A. ** RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023**

Current wording

A. RESULTS OF OPERATIONS FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2024 AND 2023

Previous wording

Total Revenues: Our total revenues decreased to US$3.53 million for the three months ended March 31, 2024 from US$6.32 million for the same period last year, which was primarily due to the decrease in revenues from our Internet advertising and related data services business category.

Current wording

Total Revenues: Our total revenues decreased to US$9.95 million and US$6.42 million for the six and three months ended June 30, 2024, respectively, from US$16.14 million and US$9.82 million for the same periods last year, respectively, which was primarily due to the decrease in our main stream service revenues, i.e., distribution of the right to use search engine marketing services.

Previous wording

***Cost of revenues:***our total cost of revenues decreased to US$3.46 million for the three months ended March 31, 2024 from US$6.63 million for the three months ended March 31, 2023. Our cost of revenues primarily consists of search engine marketing resources purchased from key search engines, amortization of software platform development cost and other direct costs associated with providing our services. The decrease in our total cost of revenues for the three months ended March 31, 2024 was primarily due to the decrease in cost related to providing Internet advertising and related data services on our ad portals, which was in line with the decrease in the related revenues as discussed above.

Current wording

***Cost of revenues:***Our total cost of revenues decreased to US$9.55 million and US$6.09 million for the six and three months ended June 30, 2024, respectively, from US$16.56 million and US$9.93 million for the six and three months ended June 30, 2023, respectively. Our cost of revenues primarily consists of search engine marketing resources purchased from key search engines, amortization of software platform development cost and other direct costs associated with providing our services. The decrease in our total cost of revenues for the six and three months ended June 30, 2024 was primarily due to the decrease in costs associated with distribution of the right to use search engine marketing service we purchased from key search engines during the periods, which was in line with the decrease in the related revenues as discussed above.

Previous wording

As a result of the foregoing, we incurred a gross profit of approximately US$0.07 million for the three months ended March 31, 2024, compared with a gross loss of approximately US$0.31 million generated for the three months ended March 31, 2023. Our overall gross margin rate increased to 2% for the three months ended March 31, 2024, compared with -5% for the three months ended March 31, 2023. The gross profit and the increase in overall gross margin were primarily due to the improved gross margins of our main stream service revenues, i.e., distribution of the right to use search engine marketing services, which accounted for approximately 99.8% of our total revenues for the three months ended March 31, 2024, to 2%, compared with the -2.5% gross margin rate in the same period last year.

Current wording

As a result of the foregoing, for the six months ended June 30, 2024, we incurred a gross profit of approximately US$0.40 million, compared with a gross loss of approximately US$0.43 million for the six months ended June 30, 2023. For the three months ended June 30, 2024, we incurred an approximately US$0.33 million gross profit, compared with a gross loss of approximately US$0.11 million for the three months ended June 30, 2023. Our overall gross margin was 4.0% and 5.1% for the six and three months ended June 30, 2024, respectively, compared with -2.6% and -1.1% for the same periods last year, respectively. For the six months ended June 30, 2024, the gross margin rate of our main stream of service revenues, i.e. distribution of the right to use search engine marketing services, improved to 0.8%, compared with -0.7% gross margin rate for the same period last year. In addition, for the six months ended June 30, 2024, the gross margin rate of our blockchain-based SaaS services was 44%, compared with -740% for the same period last year.

Previous wording

***Operating expenses:***Our total operating expenses was approximately US$1.00 million and US$1.00 million for the three months ended March 31, 2024 and 2023, respectively.

Current wording

***Operating Expenses:***Our total operating expenses was approximately US$1.62 million and US$0.63 million for the six and three months ended June 30, 2024, respectively, compared with approximately US$2.22 million and US$1.23 million for the six and three months ended June 30, 2023, respectively.

Previous wording

**Loss from operations:**As a result of the foregoing, we incurred a loss from operations of approximately US$0.92 million and US$1.31 million for the three months ended March 31, 2024 and 2023, respectively.

Current wording

***Loss from operations:***As a result of the foregoing, we incurred a loss from operations of approximately US$1.22 million and US$2.65 million for the six months ended June 30, 2024 and 2023, respectively. For the three months ended June 30, 2024 and 2023, we incurred a loss from operations of approximately US$0.30 million and US$1.34 million, respectively.

Previous wording

**Interest income:**For the three months ended March 31, 2024 and 2023, we recognized an approximately US$0.09 million and US$0.07 million interest income, respectively, which was primarily related to the interest we earned from the short-term loans we provided to unrelated parties.

Current wording

***Interest Income:***For the six and three months ended June 30, 2024, interest income recognized were primarily related to the interest we earned from the short-term loans we provided to unrelated parties.

Previous wording

Change in fair value of warrant liabilities: We issued warrants in various financing activities, and we determined that the warrants should be accounted for as derivative liabilities, as the warrants are dominated in a currency (U.S. dollar) other than our functional currency (Renminbi or Yuan). For the three months ended March 31, 2024, we did not recognize any gain of change in fair value of these warrant liabilities, compared with approximately US$0.10 million for the three months ended March 31, 2023.

Current wording

Change in fair value of warrant liabilities: We issued warrants in financing activities. We determined that these warrants should be accounted for as derivative liabilities, as the warrants are dominated in a currency (U.S. dollar) other than our functional currency (Renminbi or Yuan). For the six and three months ended June 30, 2024, we did not recognize any change in fair value of these warrant liabilities, compared to a gain of change in fair value of approximately US$0.17 million and US$0.07 million for the six and three months ended June 30, 2023, respectively.

Previous wording

Loss before income tax benefit: ** **As a result of the foregoing, our loss before income tax benefit was approximately US$0.85 million and US$1.14 million for the three months ended March 31, 2024 and 2023, respectively.

Current wording

***Loss before income tax benefit/(expense):***As a result of the foregoing, our loss before income tax benefit was approximately US$1.09 million and US$2.55 million for the six months ended June 30, 2024 and 2023, respectively. For the three months ended June 30, 2024, we incurred an approximately US$0.23 million loss before income tax expense, compared with an approximately US$1.40 million loss before income tax expense for the three months ended June 30, 2023.

Previous wording

Income Tax benefit: For the three months ended March 31, 2024 and 2023, we recognized approximately US$0.003 million and US$0.001 million, respectively, in income tax benefits. These benefits were related to the net operating loss incurred by one of our operating VIEs for each respective period. We anticipate these losses will likely be utilized against future earnings of this entity.

Current wording

Income Tax benefit/(expense): For the six months ended June 30, 2024 and 2023, we recognized approximately US$0.004 million and US$0.002 million, respectively, in income tax benefits. For the three months ended June 30, 2024 and 2023, we recognized approximately US$0.001 million and US$0.001 million, respectively, in income tax benefits. These benefits were related to the net operating loss incurred by one of our operating VIEs for each respective period. We anticipate these losses will likely be utilized against future earnings of this entity.

Previous wording

**Net loss:**As a result of the foregoing, for the three months ended March 31, 2024 and 2023, we incurred a net loss of approximately US$0.85 million and US$1.14 million, respectively.

Current wording

***Net loss:***As a result of the foregoing, for the six months ended June 30, 2024 and 2023, we incurred a total net loss of approximately US$1.08 million and US$2.55 million, respectively. For the three months ended June 30, 2024, we recognized a net loss of approximately US$0.23 million, compared with a net loss of approximately US$1.40 million for the three months ended June 30, 2023.

Previous wording

The PRC regulations currently permit payment of dividends only out of accumulated profits, as determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries, the consolidated VIEs and their subsidiaries in China are also required to set aside at least 10% of their respective after-tax profit based on the PRC accounting standards and regulations each year to the statutory surplus reserve, until the balance in the reserve reaches 50% of the registered capital of the respective PRC entities. In accordance with these PRC laws and regulations, our PRC subsidiaries, the consolidated VIEs and their subsidiaries are restricted in their ability to transfer a portion of their net assets to us. As of March 31, 2024 and December 31, 2023, net assets restricted in the aggregate, which include paid-in capital and statutory reserve funds of our PRC subsidiaries, the consolidated VIEs and their subsidiaries that are included in our consolidated net assets, were approximately US$13.36 million and US$13.41 million, respectively. Appropriations to the enterprise expansion fund and staff welfare and bonus fund of a foreign-invested PRC entity and appropriation to the discretionary surplus reserve of other PRC entities are at the discretion of the board of directors. To date, none of our PRC subsidiaries, the consolidated VIEs and their subsidiaries appropriated any of these non-mandatory funds and reserves. Furthermore, if these entities incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments.

Current wording

The PRC regulations currently permit payment of dividends only out of accumulated profits, as determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries, the consolidated VIEs and their subsidiaries in China are also required to set aside at least 10% of their respective after-tax profit based on the PRC accounting standards and regulations each year to the statutory surplus reserve, until the balance in the reserve reaches 50% of the registered capital of the respective PRC entities. In accordance with these PRC laws and regulations, our PRC subsidiaries, the consolidated VIEs and their subsidiaries are restricted in their ability to transfer a portion of their net assets to us. As of June 30, 2024 and December 31, 2023, net assets restricted in the aggregate, which include paid-in capital and statutory reserve funds of our PRC subsidiaries, the consolidated VIEs and their subsidiaries that are included in our consolidated net assets, were approximately US$13.31 million and US$13.41 million, respectively. Appropriations to the enterprise expansion fund and staff welfare and bonus fund of a foreign-invested PRC entity and appropriation to the discretionary surplus reserve of other PRC entities are at the discretion of the board of directors. To date, none of our PRC subsidiaries, the consolidated VIEs and their subsidiaries appropriated any of these non-mandatory funds and reserves. Furthermore, if these entities incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments.

Previous wording

Cash Flow Analysis for the Three Months Ended March 31, 2024 and 2023

Current wording

Cash Flow Analysis for the Six Months Ended June 30, 2024 and 2023

Previous wording

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 March 31, 2024, we had cash and cash equivalents of approximately US$0.47 million.

Current wording

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 June 30, 2024, we had cash and cash equivalents of approximately US$0.51 million.

Previous wording

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 resources and other advertising resources 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, and investment to establish joint ventures with strategic partners for the development of new technologies and services. To date, we have financed our liquidity need primarily through proceeds we generated from financing activities.

Current wording

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 resources and other advertising resources 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, and investment to establish joint ventures with strategic partners for the development of new technologies and services. To date, we have financed our liquidity needs primarily through proceeds we generated from financing activities.

Previous wording

For the three months ended March 31, 2024, our net cash used in operating activities of approximately US$0.35 million were primarily attributable to:

Current wording

For the six months ended June 30, 2024, our net cash used in operating activities of approximately US$1.03 million were primarily attributable to:

Previous wording

For the three months ended March 31, 2023, our net cash used in operating activities of approximately US$0.92 million were primarily attributable to:

Current wording

For the six months ended June 30, 2023, our net cash used in operating activities of approximately US$0.86 million were primarily attributable to:

Previous wording

During the three months ended March 31, 2024, we acquired cash of approximately US$0.009 million through the acquisition of a 51% equity interest in Beijing Yi En. This transaction contributed to a net cash inflow from investing activities of approximately US$0.009 million for the three months ended March 31, 2024.

Current wording

For the six months ended June 30, 2024, (1) we purchased office equipment of approximately US$0.003 million; (2) we made an additional investment of approximately US$0.002 million to one of our unconsolidated investee entities; (3) we collected US$0.49 million in short-term loan principal from short-term loans we provided to unrelated parties in previous periods; (4) we received total interest payment of approximately US$0.41 million, which was attributable to short-term loans we provided to unrelated parties in previous periods; (5) we received approximately US$0.15 million in proceeds from the disposal of long-term investments; (6) we acquired cash of approximately US$0.009 million through the acquisition of a 51% equity interest in Beijing Yi En; and (7) we made deposits on investment contracts of approximately US$0.40 million. In the aggregate, these transactions resulted in a net cash inflow from investing activities of approximately US$0.65 million for the six months ended June 30, 2024.

Previous wording

For the three months ended March 31, 2023, (1) we provided to an unrelated party a short-term loan of US$2.0 million, which will mature on July 17, 2023. This loan is unsecured and bears a fixed annualized interest rate of 12%; (2) we collected an US$0.10 million short-term loan, which was provided to another unrelated party in April 2022; and (3) we received a total interest income of approximately US$0.02 million, which was attributable to short-term loans we provided to unrelated parties in previous periods. In the aggregate, these transactions resulted in a net cash outflow from investing activities of approximately US$1.88 million for the three months ended March 31, 2023.

Current wording

For the six months ended June 30, 2023, (1) we provided to an unrelated party a short-term loan of US$2.0 million. The loan is unsecured and bears a fixed annualized interest rate of 12%. The original maturity date of this loan was July 17, 2023. On July 1, 2023, we extended the term of this loan for a six-month period to January 18, 2024; (2) we collected US$0.10 million in short-term loan principal, which was provided to another unrelated party in April 2022; (3) we received total interest payments of approximately US$0.05 million, which was attributable to short-term loans we provided to unrelated parties in previous periods; (4) we made an additional investment of approximately US$0.04 million to one of our unconsolidated investee entities; and (5) we received an approximately US$0.43 million proceeds from the disposal of our equity interest in another unconsolidated investee entity to an unrelated party. In the aggregate, these transactions resulted in a net cash outflow from investing activities of approximately US$1.46 million for the six months ended June 30, 2023.

Previous wording

Net cash provided by/(used in)** **financing activities

Current wording

Net cash provided by financing activities

Previous wording

For both the three months ended March 31, 2024 and 2023, no cash was provided by or used in financing activities.

Current wording

For the six months ended June 30, 2024, capital contribution from noncontrolling interests was approximately US$0.70 million. In contrast, no cash was provided by or used in financing activities for the six months ended June 30, 2023.

Previous wording

In addition, in order to further develop our core business, i.e., our Internet advertising and related data service business, broaden and diversify the online marketing channels for customers, reinforce our industry competitive advantage and secure our client base, we are actively seeking target companies with complementary online marketing resources for acquisition and/or joint ventures cooperation. In March 2024, the Company acquired a 51% equity interest in Yi En (Beijing) Technology Co., Ltd. at a total consideration of RMB1 to expand our internet advertising and the distribution of the right to use search engine marketing services in the PRC with the expectation that the acquisition can synergize with our existing businesses and provide economies of scale that will generate operating profits and additional cash inflow in the next 12 months.

Current wording

In addition, in order to further develop our core business, i.e., our internet advertising and related data service business, broaden and diversify the online marketing channels for customers, reinforce our industry competitive advantage and secure our client base, we are actively seeking target companies with complementary online marketing resources for acquisition and/or joint ventures cooperation. It is not yet certain when the potential acquisition and/or cooperation will be consummated and what form(s) of consideration will be transferred by us. If this transaction were to be consummated, it will materially decrease our liquidity in the short run when the cash consideration, if any, is transferred. However, upon consummation of the acquisition, operating profits and new cash inflow may be generated from the acquired subsidiary, which may also help to improve the overall gross margin and cash flow status of our core business through the expected synergies of combining operations of the new acquired subsidiary and our own. Except this, we do not have other material non-operational cash requirements within 12 months from the date hereof.

Previous wording

We plan to optimize our internet resources cost investment strategy to improve the gross profit margin of our core business and to further strengthen the accounts receivables collection management and negotiate with major suppliers for more favorable payment terms, all of which will help to substantially increase the cash flows from operations. In addition, to further improve our liquidity, we plan to reduce our operating costs through optimizing the personnel structure among different offices, and reduce our office leasing spaces, if needed. Beginning in early 2022, we introduced our SaaS services to customers. Our SaaS services are provided based on technologies of our self-developed Blockchain Integrated Framework (“BIF”) platform. Our BIF platform enable our 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. Although revenues from the new SaaS services business and its profitability have not met our expectations, it is expected to bring us positive cash flow and help to improve our liquidity, as these services are provided based on technologies of our self-developed software platform, which does not need any further material cash outflow to other third-party service providers.

Current wording

We plan to optimize our internet resources cost investment strategy to improve the gross profit margin of our core business. Additionally, we will focus on improving accounts receivables collection management and negotiating better payment terms with major suppliers. These efforts are expected to substantially boost our cash flows from operations. In addition, to further improve our liquidity, we plan to reduce our operating costs through optimizing the personnel structure among different offices, and reduce our office leasing spaces, if needed. Beginning in early 2022, we began offering our SaaS services to customers. Our SaaS services are provided based on technologies of our self-developed Blockchain Integrated Framework (“BIF”) platform, which allows clients to utilize the BIF platform as an enterprise management software to record, share and store operating data on-chain, and/or to generate unique designed Non-fungible Token (“NFTs”) for their intellectual properties and certificates. Although revenues from the new SaaS services business and its profitability have not met our expectations, we anticipate that it will generate positive cash flow and improve our liquidity. This is because these services leverage our self-developed software platform, which does not require significant cash outflow to third-party service providers.