ZW Data Action Technologies Inc. — Form 10-Q Summary
Business context and reporting period
ZW Data Action Technologies Inc. is a Nevada holding company operating primarily in China through PRC subsidiaries and contractual variable interest entities. Its businesses include Internet advertising and precision marketing, search-engine marketing resource distribution, e-commerce O2O marketing, blockchain-enabled SaaS services, and related data and technical services. The filing covers the three and six months ended June 30, 2023; interim financial statements are unaudited and prepared under U.S. GAAP.
- Common stock trades on Nasdaq under ticker CNET.
- Shares outstanding as of August 21, 2023: 7,204,506.
- A 1-for-5 reverse stock split became effective January 18, 2023; prior share and per-share data were retrospectively adjusted.
Financial performance and key metrics
| US$ in thousands, except per-share data | Six months 2023 | Six months 2022 | Three months 2023 | Three months 2022 |
|---|---|---|---|---|
| Revenue | 16,136 | 14,597 | 9,820 | 6,945 |
| Gross profit/(loss) | (425) | 53 | (111) | (81) |
| Gross margin | (2.6%) | 0.4% | (1.1%) | (1.2%) |
| Operating expenses | 2,223 | 4,317 | 1,225 | 2,632 |
| Loss from operations | (2,648) | (4,264) | (1,336) | (2,713) |
| Net loss | (2,546) | (2,431) | (1,403) | (1,714) |
| Basic and diluted loss per share | (0.35) | (0.34) | (0.19) | (0.24) |
- Six-month revenue increased 10.5% year over year; second-quarter revenue increased 41.4%.
- Revenue was concentrated in distribution of rights to use search-engine marketing services: $15.80 million for the six months and $9.64 million for the quarter. Traditional online advertising placements declined to $0.28 million and $0.15 million, respectively.
- Blockchain-based SaaS revenue was $50,000 for the six months and $25,000 for the quarter, versus none in the comparable periods.
- Gross profitability remained weak. Search-engine marketing gross margin improved to negative 0.7% for the six months and positive 0.5% for the quarter, but SaaS services generated a negative gross margin because of platform amortization.
- Operating expenses declined 48.5% for the six months and 53.5% for the quarter, primarily from lower general and administrative expenses, reduced credit-loss provisions, lower amortization, and cost controls.
- The company remained loss-making despite higher revenue and lower operating expenses. The six-month net loss increased modestly, mainly because the prior-year period benefited from a larger non-cash warrant-liability gain.
Cash flow, liquidity, assets and obligations
- Cash and cash equivalents were $2.00 million at June 30, 2023, down from $4.39 million at December 31, 2022.
- Working capital was approximately $5.47 million.
- Net cash used in operating activities was $0.86 million, compared with $2.14 million in the prior-year period.
- Net cash used in investing activities was $1.46 million, including a $2.00 million unsecured short-term loan to an unrelated party. Financing activities generated or used no cash.
- Total assets were $16.25 million, down from $19.66 million at year-end 2022. Stockholders’ equity was $9.79 million, down from $12.30 million.
- Total liabilities were $6.46 million, including $3.13 million of taxes payable, $1.63 million of operating lease liabilities, and $121,000 of long-term related-party borrowing. The filing does not report conventional bank debt.
- Other current assets included $4.10 million of short-term loans to unrelated parties and related interest receivables, offset by a $1.19 million credit-loss allowance.
- A $1.48 million loan was extended to October 31, 2023, and a separate $2.00 million loan was extended to January 18, 2024. Both loans are unsecured.
- Management believes available cash, anticipated operating cash flows, loan collections, potential bank credit facilities, supplier payment terms, and cost reductions will provide sufficient liquidity for the next 12 months. This conclusion depends partly on forward-looking assumptions.
Material changes, outlook and unusual items
- Management attributes improved second-quarter revenue and core-business cash flow to the lifting of COVID-19 restrictions and recovery of economic activity in China.
- The company plans to expand its blockchain SaaS platform, although revenue and profitability have not met expectations.
- In July 2023, the company incorporated a 51%-owned subsidiary focused on livestream operations, online content production and distribution, e-commerce-related livestream services, and streamer training and management. Management expects operating profits and additional cash inflows within the next 12 months, but the subsidiary was still in its start-up period as of the filing date.
- The company acquired a 9.9% interest in Wuhan Ju Liang Media in June 2023, an entity engaged in livestream operation services, and recognized a $209,000 impairment loss on another long-term investment.
- The company adopted the current expected credit-loss standard on January 1, 2023, increasing opening accumulated deficit by $191,000.
- Warrant-liability fair-value gains were $172,000 for the six months and $71,000 for the quarter, compared with $1.78 million and $987,000, respectively, in the prior-year periods. These gains are non-cash and subject to market-based valuation inputs.
- Accounts receivable, net, declined to $1.05 million from $1.75 million at year-end, while the allowance for credit losses remained substantial at $3.72 million.
- Supplier concentration increased: one supplier represented 74% of six-month cost of revenues and 71% of quarterly cost of revenues; a second supplier represented 13% and 22%, respectively.
- The filing reports no material pending legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls as of June 30, 2023.
Principal risks and contingencies
- The company is a Nevada holding company dependent on PRC subsidiaries and VIE contractual arrangements. It has no equity ownership in the VIEs, and liabilities consolidated from the VIEs do not represent additional claims on the holding company’s general assets.
- Approximately $13.58 million of net assets were restricted within PRC subsidiaries and VIEs. PRC currency controls, tax rules, dividend restrictions, or challenges to the VIE arrangements could limit transfers to the holding company.
- The company has never paid cash dividends and does not expect to do so in the foreseeable future.
- Although the PCAOB obtained inspection access in China mainland and Hong Kong in 2022, future access remains uncertain. A renewed HFCAA determination could result in Nasdaq delisting or a U.S. trading prohibition.
- Liquidity risk remains significant given $2.00 million of cash, recurring operating losses, negative gross margins, unsecured loans to unrelated parties, substantial taxes payable, and reliance on anticipated cash collections and financing.
- Advertising revenue depends heavily on search-engine marketing services, while traditional portal advertising is declining. The business is exposed to economic conditions, changing consumer behavior, competition from short-form video platforms, customer concentration, supplier concentration, and the possibility of renewed pandemic-related disruption.
- The company is pursuing potential acquisitions or joint ventures but had not entered into binding agreements as of the filing date. Future equity financing could dilute existing shareholders.
Facts investors should verify
- Whether the two unsecured short-term loans are collected when due and whether additional credit-loss provisions are required.
- Whether core search-engine marketing services can sustain positive gross margins and whether the company can reduce dependence on a small number of suppliers.
- Actual revenue, cash flow and profitability contribution from the new livestream subsidiary and blockchain SaaS business.
- The company’s ability to reduce operating losses while maintaining sufficient cash to fund supplier deposits, taxes, leases and other obligations.
- Whether PCAOB inspection access remains effective and whether the company’s Nasdaq listing remains compliant with HFCAA requirements.
- The enforceability and practical operation of the PRC VIE arrangements, restrictions on cash transfers, and the status of the Digital Sun defaulted loan and related collection efforts.