10-K
1
f10k_040721p.htm
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
;
COMMISSION FILE NO. 001-34647
ZW DATA ACTION TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
Room 1106, Xinghuo Keji Plaza, No. 2 Fengfu
Road, Fengtai District, Beijing, PRC
(Address of principal executive offices)
+86-10-6084-6616
(Issuer’s telephone number, including area
code)
Securities Registered Pursuant to Section
12(b) of the Act:
Title of Each Class Trading Symbol(s) Name of Exchange On which Registered
Common Stock, par value $0.001 CNET Nasdaq Capital Market
Securities Registered Pursuant to Section
12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act.
Yes ☐ No ☒
Indicate by check mark 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 definition
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 has filed a report on
and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
☐
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act).
Yes ☐ No ☒
The aggregate market value of the 15,866,895 shares of common equity
stock held by non-affiliates of the Registrant was approximately $15,866,895 on the last business day of the Registrant’s most recently
completed second fiscal quarter, based on the last sale price of the registrant’s common stock on such date of $1.00 per share,
as reported on the Nasdaq Capital Market.
The number of shares outstanding of the Registrant’s
common stock, $0.001 par value as of April 13, 2021 was 31,304,915.
TABLE OF CONTENTS
PART I 2
ITEM 1 BUSINESS 2
ITEM 1A. RISK FACTORS 19
ITEM 1B. UNRESOLVED STAFF COMMENTS 35
ITEM 2 PROPERTIES 35
ITEM 3 LEGAL PROCEEDINGS 36
ITEM 4 MINE SAFETY DISCLOSURES 36
PART II. 36
ITEM 6 SELECTED FINANCIAL DATA 37
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 49
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 49
ITEM 9A. CONTROLS AND PROCEDURES 49
ITEM 9B. OTHER INFORMATION 50
PART III. 50
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 50
ITEM 11 EXECUTIVE COMPENSATION 55
ITEM 14 PRINCIPAL ACCOUNTANT FEE AND SERVICES 59
PART IV. 60
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 60
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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. These
statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology
including “anticipates”, “believes”, “expects”, “can”, “continue”, “could”,
“estimates”, “expects”, “intends”, “may”, “plans”, “potential”,
“predict”, “should” or “will” or the negative of these terms or other comparable terminology. These
statements are only predictions. Uncertainties and other factors, including the risks outlined under Risk Factors contained in Item 1A
of this Form 10-K, may cause our actual results, levels of activity, performance or achievements to be materially different from any future
results, levels or activity, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our expectations are as
of the date this Form 10-K is filed, and we do not intend to update any of the forward-looking statements after the filing date to conform
these statements to actual results, unless required by law.
We file annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and proxy and information statements and amendments to reports filed or furnished pursuant to Sections 13(a)
and 15(d) of the Securities Exchange Act of 1934, as amended. The SEC also maintains a website (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding us and other companies that file materials with the SEC electronically.
You may also obtain copies of reports filed with the SEC, free of charge, via a link included on our website at www.zdat.com.
PART I
ITEM 1 BUSINESS
We are a holding company that conducts our primary
businesses through our PRC subsidiaries and operating entities (the “VIEs”). We primarily operate a one-stop services for
our clients on our Omni-channel advertising, precision marketing and data analysis management system.
We derive our revenue principally by:
l selling effective sales lead information; and
We generated total revenues of US$38.4 million
for the year ended December 31, 2020, compared with US$58.1 million in 2019. Net loss attributable
to our stockholders was US$5.22 million and US$1.26 million for the years ended December 31, 2020 and 2019, respectively.
In early 2018, we commenced to expand our business
into the blockchain industry and the related technology. In January 2018, we announced our strategic partnership with Wuxi Jingtum Network
Technology ("Jingtum”), a credible blockchain ecology builder. This strategic partnership with Jingtum is focused on blockchain
technology to build a credible, fair and transparent platform for business opportunities and transactions. We aim to build a credible,
traceable, and highly secured blockchain application infrastructure platform and develop effective business applications, including both
mobile and web applications, to meet the large demand from the small and medium enterprises (“SMEs”). We believe that the
applications of blockchain in the field of business development and marketing can help SMEs build a new business ecosystem based on algorithmic
trust. With the introduction of blockchain technology, we will gradually shift our platform-centric services in the past towards decentralizing
services, solving trust issues in business cooperation and services and enhancing user vitality and loyalties. We also plan to gradually
shift from providing information services to providing transaction services for business opportunities so as to create a multi-industry
and cross-chain value-based internet sharing business.
For the years ended December 31, 2020 and 2019,
as we initiated our Business Opportunity Social Ecosystem (“BOSE”), we were in the process of developing two blockchain-technology
powered platform applications named BO!News and OMG, respectively. Our blockchain-powered platform together with the applications aim
to build a social community which facilitates various types of users, such as business owners, entrepreneurs, suppliers and customers
or any individual who is interested in starting up a business, to share business opportunities and related information and allows users
to conduct certain business transactions that can be recorded and verified through the blockchain-technology applied by our applications.
In return, our platform will use a reward point mechanism generated on blockchain in the form of token to keep track and award the users
for their contributions to our platform applications. These reward points are not associated with any cryptocurrency and will not be listed
in any crypto exchange can only be used within our BOSE, such as, exchange for our advertising and marketing services.
We have engaged RedRun
Limited (“RedRun”) and Beijing Shengshi Kaida Technical Service Co., Ltd. (“Shengshi Kaida”) for the development
of OMG and Bo!News, respectively. Total contract amounts for OMG and Bo!News is US$4.5 million and US$0.46 million, respectively. The
following table summarized the material remaining development costs of these blockchain-powered applications as of December 31, 2020.
Total Estimated Payment Schedule
Remaining development costs under RedRun Agreement: 462 300 162
Remaining development costs under Shengshi Kaida Agreement 92 - 92
Total Remaining Development Costs: 554 300 254
Our platform
will support two blockchain-powered Apps: BO!News and OMG.
Our users will use BO!News on account of that we publish
it as an App for life and entrepreneurial social interaction app, which enables its future users an much easier access to daily
news, social medias and social information associating with daily life events and entrepreneurship. In chorus, they can contribute
and share their own experiences by generating their personal contents in writing, forwarding from other medias, streaming or short
videos. In return, they would be rewarded with reward points in form of token, which
are recorded on the blockchain for a transparent and creditable proof with a fixed value (which value is not finally determined
yet). The reward points in form of token issued by the BO!News App, are not associated with cryptocurrency and will not be listed
in any crypto exchange. These reward points are also not transferrable and can only be used to exchange goods or products within
our ecosystem, i.e. the BOSE, of ChinaNet. For example, to exchange for advertising service, or other gifts offered on the App,
which will be further identified to the public when the DAU (“Daily Active User”) of BO!News App reaches sustainable
level. With the anticipated sustainable level of DAU on the App, we would also be able to introduce BO!News as a new marketing
channel for our existing client base, as well as acquisition of new clients, and to generate additional recurring internet advertising
revenues accordingly.
OMG is developed
for a larger business scope than BO!News, and is similar to an App called StorCard in Germany, but with more functions. OMG App will enable
users (consumers and merchants) to integrate other stores’ reward/loyalty point cards into OMG point consolidation and exchange
system built on the blockchain infrastructure platform. OMG will be also featured with its blockchain-powered CRM plus and Advertising
sharing system that combines with all previous advertising technology we have developed and sourced throughout years. It will provide
both consumers and merchants a very easy in-and-cross store spending experience through a combined reward card, which will help consumers
managing all of their different reward/loyalty points cards in a single way. Merchants will also get benefit of using it as a marketing
platform to push their advertising or promotion to their and non-competitors’ customer bases. For example: Merchant A and B are
both OMG App’s participating merchants, as a result, their customers’ loyalty points databases are connected to OMG through
secured API system. User X is a customer of both Merchant A and Merchant B, who wants to redeem a gift card with Merchant B’s loyalty/reward
points, however, he does not have enough Merchant B’s loyalty/reward points. Through the OMG App, User X makes an offer of exchange
Merchant A’s loyalty/reward points for Merchant B’s loyalty/reward points, and the OMG App matching system has found User
Y, who wants to exchange Merchant B’s loyalty/reward points for Merchant A’s points for redeeming a reward gift in Merchant
A. User X and Y are then acknowledged by the OMG App interactively, and then are able to exchange the loyalty/reward points for their
specific needs based on their own negotiated exchange rate between Merchant A and Merchant B’s loyalty/reward points. Their transaction
will be executed by the agreed terms input onto smart contract through the OMG App and recorded on the public chain for transaction authentication
and verification. In addition, this transaction activity will be recorded by the OMG App, and User X and Y will also be rewarded with
the loyalty points issued by OMG for conducting this transaction on OMG, which will be recorded and stored on our hyperledger blockchain
in the form of token.
Hence, all
the behaviors, including the merchants’ reward/loyalty points exchange transaction mentioned previously, conducted both personal
or business-oriented within OMG will be rewarded with points issued by the platform in form of token (“OMG reward points”).
Same as the points rewarded to the users of the BO!News App, the OMG reward points issued in form of token are also not associated with
cryptocurrency, and will not be listed in any crypto exchange. These reward points will grant privileges on higher sales discount, better
point consumption rate, credit rating, faster matching and so forth, which rules will be finalized before our final commercial release
of the OMG App, and will only be used for the business or consumption purposes within the BOSE of ChinaNet. Our final blockchain platform
has been designed and is developing to adopt both hyperledger and public chains in a hybrid structure.
We anticipant
to generate service revenues from our participating merchants for using our blockchain-powered OMG application. With sustainable level
of DAU on this App, we also anticipant to generate additional recurring internet advertising service revenues on OMG application from
our existing client base, as well as from new customers in future periods.
We have been
building our blockchain infrastructure platform on Ethereum platform, and is now integrating with hyperledger solution to ensure the openness
and easiness of the blockchain platform. The risks involved in our blockchain platform including but not exclusive to, the security risk,
infrastructure risk, transition (blackhole) risk and so forth. As such, any malfunction, breakdown, divergence or abandonment of the Ethereum
platform may have an adverse effect on the our blockchain-powered platform. As a result, we are in the process of testing and integrating
with hyperledger and other public cross-chain solution, to minimize related risks and challenges.
As in our
planning, we intend to issue reward points in the form of token for user interactions within our Apps and it is NOT officially implemented
yet. As previously mentioned, when users of our Apps (i.e. BO!News or OMG) post and share some contents, or conduct a transaction within
the App, they can get some rewards in the form of token as a proof recorded on the blockchain. The reward points will also be given to
the users when their article attracts internet traffics (i.e. clicks and viewings) and interactions (i.e. messages or the click on the
ads within the content). The reason of using blockchain is to improve the social credibility of activities recorded and transactions conducted.
All the points received by the users are stored in the wallet of the Apps on the hyperledger chain, which is in a closed environment.
If a person mobile phone got stolen and his password of the mobile phone and App got cracked, then his or her points will likely be stolen.
But as these points can only be used within our BOSE ecosystem, hence it means zero value outside of this ecosystem, and if we got informed
in advance, we can manage to cancel the points and reissue the points to them to prevent the owner’s possible losses. Finally, as
stated previously, the reward point issued in form of token is not equivalent to any cryptocurrency and will not be listed on any exchange.
In early December 2020, we completed our Blockchain
Integrated Framework, or BIF, for retail business, to provide a framework platform for more accessible and efficient integration of small
and medium sized retail business users. BIF provides on-time delivery, real-time information, and record-time service for retail business
users while consolidating both Key Opinion Leader (“KOL”) and Online-to-Offline marketing and advertising information. Harnessing
the benefits of blockchain-powered technology, we believe BIF could improve security, give retailers more control over their data,
and create new forms of marketing to help retailers meet consumer needs with higher precision and capture the value otherwise missed.
We plan to complete the integration of BO!News and OMG onto BIF for commercial release by the first half of 2021 and launch BIF to retail
business users before the end of the third fiscal quarter of 2021.
To enhance the reliability of our future blockchain
services and optimize location for client proximity, we incorporated a new wholly-owned subsidiary, ChinaNet Online (Guangdong) Technology
Co., Ltd. (“ChinaNet Online Guangdong”) in May 2020 as we are in the process of expanding our corporate business and technology
headquarters to the city of Guangzhou in Southern China. ChinaNet Online Guangdong has officially commenced its operations since July
2020. Along with the development of new customer base in southern China in future periods, we plan to gradually transfer a portion of
our core business activities to ChinaNet Online Guangdong. We are also currently seeking for new local business partners to develop new
high-technology related business, including blockchain services.
In early December 2020, we announced the official opening of our first live streaming platform
in Guangzhou, China. It features livestreaming ecommerce, ecommerce support service, influencer stream shopping, private traffic
boosting, supply chain service, and supply chain finance.
With further enhancement of technology on both
blockchain development and internet traffic and data analytics for the implementation of BOSE, in January and February 2021, we have initiated
and executed a series of partnerships and cooperation to execute our business plans on building up BOSE to capture the business opportunity
with the opening of our live steaming platform. Our preliminary business plans include: connecting BOSE to Enterprise Wechat and CRM SaaS
for consolidating and accumulating behavior data in social media; enhancing online branding and management service and aggregating more
efficient ROI and cost-effective advertising and marketing services to our clients; offering services for the supply chain finance with
the focus on the target audiences of KOLs and O2O e-commerce merchants, with options and selections of digital assets, and adopting crypto
payment gateways with licensed partners; utilizing upgraded decentralized financial technology and building Defi service on BIF platform
for intellectual property rights with expansion of the BIF technology on blockchain mining.
In December 2020, we completed an offering of shares
of our common stock together with warrants which resulted in gross proceeds of $7.0 million (the “2020 Financing”).
In February 2021, we completed an additional offering of shares of common stock and a concurrent private placement of warrants to purchase
common stock which results in gross proceeds of $18.7 million (the “February 2021 Financing”).
Impact of
COVID-19 on Our Operations and Financial Performance
Our business is subject to the impact of natural
catastrophic events, such as earthquakes, or floods, public health crisis, such as disease outbreaks, epidemics, or pandemics in China,
and all these could result in a decrease or sharp downturn of economies, including our markets and business locations in the current and
future periods. The outbreak of the coronavirus (COVID-19) pandemic in China resulted in increased travel restrictions, and
shutdown of businesses, which has caused slower recovery of the China economy. We may experience impact from quarantines, market
downturns and changes in customer behavior related to pandemic fears and impact on our workforce if the virus continues to spread. We
experienced a decrease in revenue in 2020 due to the outbreak. COVID-19 affected a significant number of our workforce employed in our
operations, and as a result we are experiencing a slow resumption of operations and may experience delays or the inability to delivery
our service on a timely basis. In addition, one or more of our customers, partners, service providers or suppliers may experience financial
distress, delayed or defaults on payment, file for bankruptcy protection, sharp diminishing of business, or suffer disruptions in their
business due to the outbreak. The extent to which the COVID-19 pandemic impacts our results will depend on future developments and reactions
in China, which are highly uncertain and will include emerging information concerning the severity of the COVID-19 pandemic and the actions
taken by governments and private businesses to attempt to contain the coronavirus. The COVID-19 situation is likely to result in a potential
material adverse impact on our business, results of operations and financial condition in the short run if it has become worse in China.
Wider-spread COVID-19 in China and globally could prolong the deterioration in economic conditions and could cause decreases or delays
in advertising spending and reduce and/or negatively impact our short-term ability to grow our revenues. Any decreased collectability
of accounts receivable, bankruptcy of small and medium businesses, or early termination of agreements due to deterioration in economic
conditions could negatively impact our results of operations.
Our Subsidiaries, Variable Interest Entities (VIEs) and Ownership
Interest Investment Affiliates
As of December 31, 2020, our corporate structure
is set forth below:
(1) We sold the entity to unrelated parties in January 2021.
(3) We sold the entity to unrelated parties in March 2021.
We were incorporated in the State of Texas in April
2006 and re-domiciled to become a Nevada corporation in October 2006. On June 26, 2009, we consummated a share exchange transaction with
China Net Online Media Group Limited (“China Net BVI”) (the “Share Exchange”). As a result of the Share Exchange,
China Net BVI became a wholly owned subsidiary of ours and we are now a holding company, which, through certain contractual arrangements
with operating companies in the People’s Republic of China (the “PRC”), is primarily engaged in providing Internet advertising,
precision marketing, e-commerce online to offline (“O2O”) advertising and marketing and the related data and technical services
to SMEs in the PRC.
Effective
October 14, 2020, we changed our corporate name from ChinaNet Online Holdings, Inc. to ZW Data Action Technologies Inc.
Our subsidiaries and our VIE Structure
Our direct wholly owned subsidiary, China Net BVI,
was incorporated in the British Virgin Islands on August 13, 2007. On April 11, 2008, China Net BVI became the parent holding company
of a group of companies comprised of CNET Online Technology Co. Limited, a Hong Kong company (“China Net HK”), which established,
and is the parent company of, Rise King Century Technology Development (Beijing) Co., Ltd., a wholly foreign-owned enterprise (“WFOE”)
established in the PRC (“Rise King WFOE”). In October 2008, Rise King WFOE acquired control over Business Opportunity Online
(Beijing) Network Technology Co., Ltd. (“Business Opportunity Online”) and Beijing CNET Online Advertising Co., Ltd. (“Beijing
CNET Online”) (collectively the “PRC Operating Entities” or the “VIEs”) by entering into a series of contracts
(the “Contractual Agreements” or the “VIE Agreements”), which enabled Rise King WFOE to operate the business and
manage the affairs of the PRC Operating Entities.
China has adopted a reformed system with respect
to foreign investment administration, under which the Chinese government applies national treatment to foreign investors in terms of investment
entry and the foreign investor needs to comply with the requirements as provided in The Special Administrative Measures for Foreign Investment
(the “Negative List”). The Negative List will be issued by, amended or released upon approval by the State Council, from time
to time. The Negative List will consist of a list of industries in which foreign investments are prohibited and a list of industries in
which foreign investments are restricted. Foreign investors will be prohibited from making investments in prohibited industries, while
foreign investments must satisfy certain conditions for investments in restricted industries, such as: there always a limitation on foreign
investment and ownership. Foreign investments and domestic investments in industries outside the scope of the prohibited industries and
restricted industries will be treated equally. The most recent version of the Negative List was promulgated jointly by the Ministry of
Commerce (“MOFCOM”) and the National Development and Reform Commission (“NDRC”) on June 23, 2020, which came into
effective on July 23, 2020 (the “2020 Negative List”).
The business of the PRC Operating Entities falls
under the class of a business that provides Internet content or information services, a type of value-added telecommunication services,
for which restrictions upon foreign ownership apply. The 2020 Negative List retains the restrictions on foreign ownership related to value-added
telecommunication services. As a result, Rise King WFOE is not allowed to conduct the business the PRC Operating Entities companies are
currently pursuing. Advertising business is open to foreign investment but used to require that the foreign investors of a WFOE should
have been carrying out advertising business for over three years pursuant to the Foreign Investment Advertising Measures as amended by
MOFCOM and the State Administration of Industry and Commerce (“SAIC”, currently known as the State Administration for Market
Regulations, (“SAMR”)) on August 22, 2008, which was repealed in June 29, 2015. Before June 29, 2015, Rise King WFOE was not
allowed to engage in the advertising business because its shareholder, China Net HK, did not meet such requirements. As a result, in order
to control the business and operations of the PRC Operating Entities and consolidate the financial results of the two companies in a manner
that does not violate the related PRC laws, Rise King WFOE executed the Contractual Agreements with the PRC Shareholders and each of the
PRC Operating Entities.
Summary of the material terms of the VIE Agreements:
Exclusive Business Cooperation Agreements:
Pursuant to the Exclusive Business Cooperation
Agreements entered into by and between Rise King WFOE and each of the PRC Operating Entities, Rise King WFOE has the exclusive right provide
to the PRC Operating Entities complete technical support, business support and related consulting services during the term of these agreements,
which includes but is not limited to technical services, business consultations, equipment or property leasing, marketing consultancy,
system integration, product research and development, and system maintenance. In exchange for such services, each PRC Operating Entity
has agreed to pay a service fee consisting of a management fee and a fee for services provided, to Rise King WFOE, which shall be determined
by Rise King WFOE according to the following factors: the complexity and difficulty of the services, seniority of and time consumed by
the employees, specific contents, scope and value of the services, market price of the same type of services, and operation conditions
of the PRC Operating Entities. Each agreement shall remain effective unless terminated in accordance with the provisions thereof or terminated
in writing by Rise King WFOE.
Exclusive Option Agreements:
Under the Exclusive Option Agreements entered into
by and among Rise King WFOE, each of the PRC Shareholders irrevocably granted to Rise King WFOE, or its designated person, an exclusive
option to purchase, to the extent permitted by PRC law, a portion or all of their respective equity interest in any PRC Operating Entities
for a purchase price of RMB10, or a purchase price to be adjusted to be in compliance with applicable PRC laws and regulations. Rise King
WFOE, or its designated person, has the sole discretion to decide when to exercise the option, whether in part or in full. Each of these
agreements shall become effective upon execution and remain effective until all equity interests held by the relevant PRC Shareholder(s)
in the PRC Operating Entities have been transferred or assigned to Rise King WFOE and/or any other person designated by Rise King WFOE.
Equity Pledge Agreements:
Under the Equity Pledge Agreements entered into
by and among Rise King WFOE, the PRC Operating Entities and each of the PRC Shareholders, the PRC Shareholders pledged all of their equity
interests in the PRC Operating Entities to guarantee the PRC Operating Entities’ and the PRC Shareholders’ performance of
the relevant obligations under the Exclusive Business Cooperation Agreements and other Contractual Agreements. If the PRC Operating Entities
or any of the PRC Shareholders breaches its/his/her respective contractual obligations under these agreements, or upon the occurrence
of one of the events regarded as an event of default under each such agreement, Rise King WFOE, as pledgee, will be entitled to certain
rights, including the right to dispose of the pledged equity interests. The PRC Shareholders of the PRC Operating Entities agreed not
to dispose of the pledged equity interests or take any actions that would prejudice Rise King WFOE's interest, and to notify Rise King
WFOE of any events or upon receipt of any notices which may affect Rise King WFOE's interest in the pledge. Each of the equity pledge
agreements will be valid until all the obligations under the Exclusive Business Cooperation Agreements and other Contractual Agreements
have been fulfilled, including the service fee payments related to the Exclusive Business Cooperation Agreement are paid in full.
Irrevocable Powers of Attorney:
The PRC Shareholders have each executed an irrevocable
power of attorney to appoint Rise King WFOE as their exclusive attorneys-in-fact to vote on their behalf on all PRC Operating Entities
matters requiring shareholder approval. The term of each power of attorney is valid so long as such shareholder is a shareholder of the
respective PRC Operating Entity.
As a result of these Contractual Agreements, we
through our wholly-owned subsidiary, Rise King WFOE, were granted with unconstrained decision making rights and power over key strategic
and operational functions that would significantly impact the PRC Operating Entities or the VIEs’ economic performance, which includes,
but is not limited to, the development and execution of the overall business strategy; important and material decision making; decision
making for merger and acquisition targets and execution of merger and acquisition plans; business partnership strategy development and
execution; government liaison; operation management and review; and human resources recruitment and compensation and incentive strategy
development and execution. Rise King WFOE also provides comprehensive services to the VIEs for their daily operations, such as operational
technical support, office administration technical support, accounting support, general administration support and technical support for
products and services. As a result of the Exclusive Business Cooperation Agreements, the Equity Pledge Agreements and the Exclusive Option
Agreements, we will bear all of the VIEs’ operating costs in exchange for the net income of the VIEs. Under these agreements, we
have the absolute and exclusive right to enjoy economic benefits similar to equity ownership through the VIE Agreements with our PRC Operating
Entities and their shareholders. Due to the fact that Rise King WFOE and its indirect parent are the sole interest holders of the VIEs,
we included the assets, liabilities, revenues and expenses of the VIEs in our consolidated financial statements, which is consistent with
the provisions of FASB Accounting Standards Codification ("ASC") Topic 810 “Consolidation”, subtopic 10.
Please refer to the discussion of uncertainties and risks in relation to our VIE Structure on page
14 under Business-Government Regulation contained in Item 1 and page 24 under Risk Factors-Risks Relating to Regulation of Our
Business and to Our Structure contained in Item 1A of this Annual Report.
As of December 31, 2020, besides China Net BVI,
China Net HK and Rise King WFOE, as discussed above, we also have four other indirectly wholly-owned subsidiaries, ChinaNet Investment
Holding Ltd, a British Virgin Islands company (“ChinaNet Investment BVI”), Grandon Investments Limited, a British Virgin Islands
company (“Grandon BVI”), Winner Glory Limited, a Hong Kong company and ChinaNet Online Holdings Co., Ltd., a PRC company (“ChinaNet
Online PRC”). ChinaNet Investment BVI co-founded ChinaNet Online Holdings Korea, a Korean company (“ChinaNet Korea”)
with four unaffiliated individuals and beneficially owns 15% equity interest in ChinaNet Korea. The business activities of ChinaNet Korea
are currently dormant. ChinaNet Online PRC co-founded Business Opportunity Chain (Beijing) Technology Development Co., Ltd., a PRC company
(“Business Opportunity Chain Beijing”) with three unrelated parties, of which ChinaNet Online PRC owns 51% equity interest.
Business Opportunity Chain Beijing was established to perform research and develop and provide other technical support for our blockchain
business unit.
Our VIEs, VIEs’ subsidiaries and other ownership interest
investment affiliates
As discussed above, through Rise King WFOE, we
beneficially own two VIEs: Business Opportunities Online and Beijing CNET Online. Business Opportunities Online is primarily engaged in
providing Internet advertising, precision marketing and related data service to the SMEs. The business activities of Beijing CNET Online
are currently dormant.
As of December 31, 2020, Business Opportunity
Online has the following directly or indirectly wholly-owned subsidiaries in the PRC: Beijing Chuang Fu Tian Xia Network Technology
Co., Ltd. (“Beijing Chuang Fu Tian Xia”), Business Opportunity Online (Hubei) Network Technology Co., Ltd. (“Business
Opportunity Online Hubei”), Beijing Chuang Shi Xin Qi Advertising Media Co., Ltd. (“Beijing Chuang Shi Xin Qi”),
Beijing Hong Da Shi Xing Network Technology Co., Ltd. (“Beijing Hong Da Shi Xing”) and Beijing Shi Ji Cheng Yuan Advertising
Media Co., Ltd. (“Beijing Shi Ji Cheng Yuan”), all of which are engaged in providing Internet advertising, precision
marketing and related data service to the SMEs. Beijing Shi Ji Cheng Yuan was subsequently sold by us to unrelated parties in
January 2021.
To enhance the reliability of our future blockchain services and
optimize location for client proximity, we expanded our corporate business and technology headquarters to the city of Guangzhou
in Southern China. As a result, in May 2020, we incorporated a new wholly-owned subsidiary, ChinaNet Online (Guangdong) Technology
Co., Ltd. (“ChinaNet Online Guangdong”), which primarily focuses on the overall business and technology development
of our company and developing and operating blockchain technology-based products and services. In October 2020, we co-founded Qiweilian
(Guangzhou) Technology Co., Ltd. (“Qiweilian Guangzhou”), in which we beneficially owned a 51% equity interest. In
March 2021, due to changes in business strategy of the minority shareholder, we suspended the cooperation with the minority shareholder
and sold our 51% equity interest in Qiweilian to unrelated parties.
As of December 31, 2020, we also beneficially own
a 4.9% equity interest in Local Chain Xi’an Information Technology Co., Ltd. (“Local Chain Xi’an), a 19% equity interest
in both Guohua Shiji (Beijing) Communication Co., Ltd. (“Guohua Shiji”) and Business Opportunity Chain (Guangzhou) Technology
Co., Ltd. (“Business Opportunity Chain Guangzhou”) and a 25.5% equity interest in Zhao Shang Ke Network Technology (Hubei)
Co., Ltd. (“Zhaoshangke Hubei”). Except for Business Opportunity Chain Guangzhou, which is primarily engaged in the development
of webcast platform based business promotion service and franchise consultancy service, the business activities of all other investee
entities of us are dormant. Zhaoshangke Hubei was subsequently liquidated and deregistered with the local authorities in February 2021.
Industry
and Market Overview
Overview of the Advertising Market in China
According to the advertising spend forecasts released
by Dentsu International in January 2021, the global advertising spend will reach US$579 billion, with an estimated growth rate of 5.8%
in 2021. Ad spend in the Asia Pacific is expected to grow by 5.9%, with share of digital forecast to increase 9.1% to a share of 57.5%
of all spend.
China’s advertising market is slowing in
step with its economy and was also adversely affected by the COVID-19 outbreak in the first fiscal quarter of 2020, however, still remains
one of the key drivers of global growth of advertising. Dentsu International forecasts that China’s total advertising spend will
grow by 5.3% and 5.0% in 2021 and 2022, respectively.
The growth of China’s advertising market
is driven by a number of factors, including the sustained economic growth and increases in disposable income and consumption in China.
China was the second largest economy in the world in terms of gross domestic product (“GDP”), which amounted to US$15.5 trillion
in 2020, grew by 2.3% year over year. China is the only major economy in the world that achieved positive economic growth in 2020. According
to the National Bureau of Statistics of China, the annual disposable income per capita in urban households increased to RMB43,834 in 2020,
adjusted by the price factors, the actual increase was 1.2%.
Overview of the Internet Advertising Industry
According to the advertising spend forecasts released
by Dentsu International in January 2021, global ad-spend growth continues to be dominated by digital channels, which is expected to reach
US$289.5 billion and 50.0% of the total ad-spend in 2021, and further increase to 51.2% of the total ad-spend in 2022.
In China, the Internet advertising market growth
is expected to stem primarily from a higher internet penetration rate of just 70.4% by the end of December 2020, compared with 64.5% by
the end of March 2020. Total internet users reached to approximately 989 million people by the end of December 2020, increased by approximately
85.4 million people, compared with that as of March 2020. (According to the 47th China Internet Network Development Statistical
Report issued by China Internet Network Information Center (the “CNNIC”) in February 2021). According to the 47th
CNNIC report, as of December 2020, the mobile internet user reached to 986 million people, compared with 897 million people as of March
2020, which accounted for 99.7% of the total internet users, as compared with 99.3% as of March 2020.
According to a report published by iResearch Inc.
in July 2020, online advertising revenue in China reached RMB646.43 billion Yuan (approximately US$93.7 billion) in 2019 and was estimated
to hit RMB793.24 billion Yuan (approximately US$115.0 billion) in 2020, up 22.7% year-over-year. Its growth is forecasted to slow in step
with its economy in the next few years, with an estimation of a year-over-year increase of 23.9% and 22.4% in 2021 and 2022, respectively.
The diagram below depicts the Market Scale of China’s
Online Advertising from 2015 to 2022:
High Demand for the Internet Advertising from SMEs and O2O Business
in China
We believe that the Internet advertising market
in China has significant potential for future growth due to high demand from the rapid development of SMEs and O2O business.
The development of the SME market is still in its
early stages in China. Since their sales channels and distribution networks are still underdeveloped, they are driven to search for new
participants by utilizing Internet advertising and precision marketing. The SMEs tend to be smaller, less-developed brands primarily
focused on restaurants, garments, building materials, home appliances, and entertainment with low start-up costs. The Chinese government
has promulgated a series of laws and regulations to protect and promote the development of SMEs which appeals to entrepreneurs looking
to benefit from the central government’s support of increased domestic demand. SMEs are now responsible for about 50% of China’s
tax revenues, 60% of China’s GDP and employment of approximately 80% of the urban Chinese workforce. SMEs are creating new urban
jobs, and they are the main destination for new graduates entering the workforce and workers laid-off from state-owned enterprises (SOEs)
that re-enter the workforce.
In recent years, the capital market, Internet giants
and traditional offline services business in China have all accelerated their O2O business arrangement and development. With the advent
of the mobile Internet era, the innovation of user needs, and applications have become the main trend of the Internet, including online
payments, location-based services, online and offline interaction and more. Due to the slowdown of China’s economy growth in recent
years, the competitive market pressure within the local life services industry has increased. Under these circumstances, more and more
traditional offline service providers started to use the Internet-based tools (PC, tablet and mobile) to market and promote their products
and services. The rapid development of social media and tools, such as: WeChat and Weibo, also have had a very important influence on
the development of the O2O market, and using social media and tools to promote brands and maintain customer relationships has become an
important adverting and marketing trend for all offline business.
Our Principal Products and Services
Internet Advertising, Precision Marketing and
Related Data Services
Founded in 2003 and 2011, respectively, 28.com
and liansuo.com are two of the leading Internet portals for information relating to small business opportunities in China, and 28.com
is one of the earliest entrants in this sector. In the past few years, we further developed and upgraded the system and tools of our advertising
portals, including customer user interface, and integrated our mobile functions. Besides our advertising portals, we also have established
solid partnership relations with key search engines in China which entitle us to the distribution of the right to use their search engine
marketing service which allows our customers to invest in their online advertising and marketing campaign through multi-channel to maximize
market exposure and effectiveness.
Our Internet advertising, precision marketing and
related data services provide advertisers with tools to build sales channels directly in the form of franchisees, sales agents, distributors,
and/or resellers, and have the following features which enable them to be attractive to the advertisers:
· Generating effective sales leads information; and
We typically charge our clients a fixed monthly
fee for the Internet advertising and related data services that we provide on our ad portals. For distribution of the right to use the
search engine marketing service, revenue is recognized on a monthly basis and at a gross amount, based on the direct cost consumed through
search engines for providing such services with a premium, which typically is 3%-8%. A certain group of our clients also purchase effective
sales lead information collected by our online advertising system, and we charge a fixed fee, which varies for different business types,
for each effective sales lead information delivered to clients.
For the year ended December 31, 2020, we had approximately
660 clients who used our Internet advertising, marketing and data services, compared with 1,100 clients for the year ended December 31,
2019. We achieved US$35.6 million and US$56.9 million of Internet advertising, precision marketing and related data and technical services
revenues for the years ended December 31, 2020 and 2019, respectively, which accounted for 92.7% and 97.9% of our total revenues for the
years ended December 31, 2020 and 2019, respectively. The overall gross profit margin of this business segment decreased significantly
to -0.2% for the year ended December 31, 2020 from 8% for the year ended December 31, 2019. The decrease in performances of this business
segment was directly resulted from the COVID-19 outbreak and business shutdown during the first
fiscal quarter of 2020 in China, and slow recovery of economy in the following quarters.
Other services revenues
For the year ended December 31, 2020, we achieved US$1.55 million
e-commerce O2O advertising and marketing service revenues and US$1.25 million other technical solution service revenues. For the
year ended December 31, 2019, we achieved US$1.2 million non-recurring software sales revenue.
Sales and Marketing
For the year ended December 31, 2020, we derived
92.7% of total net revenues from our Internet advertising and the provision of related data and technical services, compared with 97.9%
for the year ended December 31, 2019.
We employ experienced advertising sales people
and provide in-house education and training to our sales people to ensure that they provide our current and prospective clients with comprehensive
information about our services, the benefits of using our advertising, marketing and data services and relevant information regarding
the advertising industry. We also market our advertising services from time to time by placing advertisements on television and other
well-known portals in China, participating in domestic and international franchise exhibitions in China and other countries and acting
as a sponsor to third-party programming and shows.
Suppliers
Our suppliers are major search engines, Internet
gateways, other advertising resources suppliers and technical service providers. Among these suppliers, for the year ended December 31,
2020, resources purchased from one of the largest search engines in China counted for approximately 78% of our search engine resource
cost, compared with 89% for the year ended December 31, 2019.
Research and Development
We plan to increase expenditures to enhance the
safety of our hardware and server that we depend on to support our network and manage and monitor programs on the network in future years.
Whether we continue to further deploy newer technology will depend upon cost and network security. We also focus on enhancing related
software systems enabling us to track and monitor advertiser demands and the related data collection and analysis. In the next few years,
we intend to move our research and development efforts to mobile-based application system and data collection and analysis tools, and
our new blockchain-technology powered Business Opportunity Social Ecosystem.
Intellectual Property
As of December 31, 2020, we had twenty-four software
copyright certificates issued by the State Copyright Office of the PRC, including, but not limited to, software systems covering monitor
and management platforms on Internet advertising effects, analysis systems on Internet traffic statistics and Internet user behavior,
analysis systems on log-based visit hotspot and browsing trails, analysis systems on mobile advertising platform and cloud-compute technology.
Competition
We compete with other Internet advertising companies
for business opportunities in China, including companies that also distribute the right to use the search engine marketing services provide
by key search engines in China, such as: Media Linkage Technology (Beijing) Co., Ltd., Guangzhou Jiuxing Hudong Technology Co., Ltd.,
and Guangzhou Chengzhi Mingyuan Network Technology Co., Ltd, and companies that operate Internet advertising portals, such as u88.cn,
3158.cn and 78.cn. We compete for clients primarily on the basis of network size and coverage, location, price, the range of services
that we offer and our brand name. We also compete for overall advertising spending with other alternative advertising media companies,
such as wireless telecommunications, street furniture, billboards, frame and public transport advertising companies, and with traditional
advertising media, such as newspapers, magazines and radio.
Government Regulation
The PRC government imposes extensive controls and
regulations over the media industry, including on internet, television, radio, newspapers, magazines, advertising, media content production,
and the market research industry. This section summarizes the principal PRC regulations that are relevant to our lines of business.
Regulations on the Value-added Telecommunication
Services and Advertising Industry in China
Foreign Investments in Value-added Telecommunication
Services
The Negative List restricts foreign investments
in value-added telecommunication services, including providing Internet information services (“ICP”). In accordance with the
Regulations for the Administration of Foreign-Invested Telecommunications Enterprises (“FITE Regulations”), which were issued
by the State Council of the PRC on December 11, 2001, became effective on January 1, 2002 and was subsequently amended on September 10,
2008 and February 6, 2016, respectively. The FITE Regulations stipulate that foreign invested telecommunications enterprises in the
PRC (“FITEs”) must be established as Sino-foreign equity joint ventures. Under the FITE Regulations and in accordance with
WTO-related agreements, the foreign party to a FITE engaging in value-added telecommunications services may hold up to 50% of the equity
of the FITE, with no geographic restrictions on the FITE’s operations. On June 30, 2016, the MIIT issued an Announcement of
the Ministry of Industry and Information Technology (the “MIIT”) on Issues concerning the Provision of Telecommunication Services
in the Mainland by Service Providers from Hong Kong and Macao, which provides that investors from Hong Kong and Macau may hold more than
50% of the equity in FITEs engaging in certain specified categories of value-added telecommunications services.
For a FITE to acquire any equity interest in a
value-added telecommunications business in China, it must satisfy a number of stringent performance and operational experience requirements,
including demonstrating a track record and experience in operating a value-added telecommunications business overseas. FITEs that meet
these requirements must obtain approvals from the MIIT and the MOFCOM or their authorized local counterparts, which retain considerable
discretion in granting approvals.
On July 13, 2006, the Notice of the Ministry
of Information Industry on Intensifying the Administration of Foreign Investment in Value-added Telecommunications Services (the “MIIT
Notice”), which reiterates certain provisions of the FITE Regulations, was issued. Under the MIIT Notice, if a FITE intends to invest
in a PRC value-added telecommunications business, the FITE must be established and must apply for a telecommunications business license
applicable to the business. Under the MIIT Notice, a domestic company that holds a license for the provision of Internet content services,
or an ICP license, is considered to be a type of value-added telecommunications business in China, and is prohibited from leasing, transferring
or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities,
to foreign investors to conduct value-added telecommunications businesses illegally in China. Trademarks and domain names that are used
in the provision of Internet content services must be owned by the ICP license holder or its shareholders. On November 27, 2017,
the MIIT promulgated the Notice Regulating the Use of Domain Names in the Provision of Internet-based Information Services, or the Domain
Names Notice, which became effective on January 1, 2018. Under the Domain Names Notice, a domain name used by a provider of Internet-based
information services must be registered and owned by the provider or, if the provider is an entity, by a shareholder or senior management
of the provider.
Foreign Investments in Advertising
In accordance with the Administrative Provision
on Foreign Investment in the Advertising Industry, jointly promulgated by the SAMR and MOFCOM on August 22, 2008 and became effective
on October 1, 2008, foreign investors can invest in PRC advertising companies either through wholly owned enterprises or joint ventures
with Chinese parties. However, the foreign investor must have at least three years of direct operations outside China in the advertising
industry as its core business. This requirement was reduced to two years if foreign investment in the advertising company is in the form
of a joint venture. The Administrative Provision on Foreign Investment in the Advertising Industry was subsequently repealed by the SAMR
and MOFCOM on June 29, 2015.
In consideration of the above discussed restrictions
on foreign investments in ICP and advertising business, our whole-owned subsidiary in China, Rise King WFOE, is ineligible to apply for
the required licenses for providing Internet information services and was ineligible to apply for the required licenses for providing
advertising services in China before June 29, 2015. Our ICP business and advertising business are operated by Business Opportunity Online
and Beijing CNET Online in China. We have been, and are expected to continue to be, dependent on these companies to operate our ICP business
and advertising business. We do not have any equity interest in our PRC Operating Entities, but Rise King WFOE receives the economic benefits
of the same through the Contractual Arrangements.
We have been advised by our PRC counsel, as of
the date hereof, our current contractual arrangements with our VIEs and their respective shareholders are valid, binding and enforceable.
However, there exist substantial uncertainties regarding the application, interpretation and enforcement of current and future PRC laws
and regulations and their potential effect on our corporate structure and contractual arrangements.
On March
15, 2019, the National People’s Congress of the PRC approved the Foreign Investment Law, which came into effect on January 1, 2020,
replaced the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law,
the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation
rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment
regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements
for both foreign and domestic investments. However, since it is relatively new, uncertainties still exist in relation to its interpretation
and implementation. For instance, under the Foreign Investment Law, “foreign investment” refers to the investment activities
directly or indirectly conducted by foreign individuals, enterprises or other entities in China. Though it does not explicitly classify
contractual arrangements as a form of foreign investment, there is no assurance that foreign investment via contractual arrangements would
not be interpreted as a type of indirect foreign investment activities under the definition in the future. In addition, the definition
contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws or administrative
regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations
or provisions promulgated by the State Council to provide for contractual arrangements as a form of foreign investment. In any of these
cases, it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for
foreign investment under the PRC laws and regulations. Furthermore, if future laws, administrative regulations or provisions prescribed
by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial
uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures
to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure,