ZW Data Action Technologies Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
ZW Data Action Technologies Inc. is a Nevada holding company whose operations are conducted primarily through PRC subsidiaries and contractual variable interest entities. The company provides Internet advertising, search-engine marketing, precision marketing, e-commerce O2O advertising and marketing, related data and technical services, and blockchain-based SaaS solutions to small and medium-sized enterprises in China.
The filing covers the unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022. The company reported 7,204,506 common shares outstanding as of May 22, 2023. A 1-for-5 reverse stock split became effective January 18, 2023; historical share and per-share data were generally retrospectively adjusted.
Financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $6.316 million | $7.652 million | Down 17.5% |
| Cost of revenues | $6.630 million | $7.518 million | Down 11.8% |
| Gross profit/(loss) | $(0.314) million | $0.134 million | Turned to loss |
| Gross margin | (5%) | 2% | Down 7 percentage points |
| Operating expenses | $0.998 million | $1.685 million | Down 40.8% |
| Loss from operations | $(1.312) million | $(1.551) million | Improved 15.4% |
| Net loss | $(1.143) million | $(0.717) million | Loss increased 59.4% |
| Comprehensive loss | $(1.224) million | $(0.739) million | Loss increased |
| Basic and diluted loss per share | $(0.16) | $(0.10) | Loss per share increased |
Revenue was concentrated in search-engine marketing resource distribution, which generated $6.161 million, or 97.5% of total revenue. Traditional Internet advertising and related data services generated $0.130 million, compared with $1.058 million in the prior-year quarter. Blockchain-based SaaS revenue was $0.025 million, compared with no reported revenue in Q1 2022.
The search-engine marketing service had a negative 3% gross margin, compared with a 1% margin in Q1 2022. Management stated that weaker client demand forced the company to sell previously purchased search-engine resources at a loss. SaaS services had $0.025 million of revenue and approximately $0.210 million of cost, primarily amortization of the internally developed blockchain platform.
Operating expenses declined primarily because of lower general and administrative, sales and marketing, and research and development expenses. General and administrative expense included approximately $0.301 million of provisions for expected credit losses. The company also recorded $0.101 million of non-cash income from the change in fair value of warrant liabilities, compared with $0.795 million in Q1 2022.
Cash flow, liquidity, debt and balance sheet
- Cash and cash equivalents were $1.592 million at March 31, 2023, down from $4.391 million at December 31, 2022.
- Working capital was approximately $5.55 million.
- Net cash used in operating activities was $0.916 million, compared with $0.890 million in Q1 2022.
- Net cash used in investing activities was $1.877 million, including a $2.000 million unsecured short-term loan to an unrelated party.
- No cash was provided by or used in financing activities during either comparative quarter.
- Net cash decreased by $2.799 million during Q1 2023, compared with a $2.349 million decrease in Q1 2022.
- Total liabilities were $6.949 million and stockholders’ equity was $10.882 million at March 31, 2023.
- Debt consisted primarily of a $0.127 million non-interest-bearing long-term borrowing from a related party. The company also had $1.810 million of operating lease liabilities and $0.084 million of warrant liabilities.
- Current liabilities included $3.280 million of taxes payable and $0.720 million of advances from customers.
- Short-term loans to unrelated parties totaled $4.097 million before an $0.850 million allowance for credit losses. One $2.000 million loan bears 12% annual interest and matures July 17, 2023. A separate remaining loan was extended to October 31, 2023.
Management stated that current cash, anticipated operating and investing cash flows, potential financing, supplier payment-term negotiations, cost reductions, and possible PRC bank credit facilities should provide sufficient liquidity for obligations due within the next 12 months. However, the company reported continuing operating losses and negative operating cash flow and noted that it has historically relied on financing activities for liquidity.
Material changes versus the prior comparable period
- Revenue declined $1.336 million, primarily due to lower traditional Internet advertising and delayed or reduced advertising spending by SME customers.
- Gross profit of $0.134 million became a gross loss of $0.314 million as the main search-engine marketing service moved from a 1% gross margin to a negative 3% margin.
- Operating expenses decreased $0.687 million, led by lower amortization, personnel-related costs, and other administrative expenses.
- Net loss increased despite the lower operating loss because the prior-year quarter benefited from a substantially larger warrant-liability fair-value gain.
- Cash declined $2.799 million during the quarter, principally from operating cash burn and the $2.000 million short-term loan to an unrelated party.
- The company adopted the current expected credit loss standard on January 1, 2023, recording a $0.191 million cumulative-effect increase to accumulated deficit. Additional Q1 provisions included approximately $0.223 million for accounts receivable and $0.078 million for other current assets.
- Customer concentration shifted toward receivables: five customers represented 10%, 40%, 25%, 14%, and 10% of accounts receivable at March 31, 2023. One supplier represented 78% of cost of revenues.
Guidance, outlook, risks and unusual items
- Management expects a slow recovery in core advertising performance and cash flow over the next 12 months as the effects of China’s COVID-19 disruptions subside.
- The company expects blockchain-based SaaS services to produce positive cash flow over time, although revenue and profitability have not met expectations.
- Planned liquidity measures include negotiating more favorable supplier terms, reducing personnel and office costs, collecting outstanding loans, and seeking revolving credit facilities from PRC banks. Potential credit facilities would create interest expense and fixed obligations.
- Management is evaluating acquisitions or joint ventures involving complementary online marketing resources, but no binding agreement had been entered into. Any transaction could materially reduce short-term liquidity.
- The company is a Nevada holding company with no equity ownership in its PRC VIEs; its ability to access operating-company assets depends on contractual arrangements. Restricted net assets in China totaled approximately $13.68 million at March 31, 2023.
- PRC currency controls, dividend restrictions, withholding taxes, and potential regulatory challenges to VIE arrangements may limit transfers of cash to the U.S. holding company. The company has not paid dividends and does not currently plan to do so.
- The company’s auditor is located in Hong Kong. Although the PCAOB reported complete inspection access in 2022 and vacated its prior adverse determination, future access remains uncertain. A renewed HFCAA determination could result in Commission-Identified Issuer status, Nasdaq delisting, or a prohibition on U.S. trading.
- Accounts receivable were $5.637 million before a $4.070 million allowance for credit losses. The company is also pursuing collection of a fully reserved $0.620 million defaulted loan to Digital Sun Ventures Limited and may file litigation after other collection efforts.
- The filing reports no material pending legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2023.
Most important facts for investors to verify
- Whether advertising demand and search-engine marketing margins recover after the reported COVID-19-related disruption.
- Whether the company can generate positive operating cash flow without new equity, debt, or bank financing.
- Collection and credit quality of the $4.097 million gross short-term loan portfolio and $5.637 million gross accounts receivable balance.
- Repayment of the $2.000 million loan due July 17, 2023 and the separately extended loan due October 31, 2023.
- Whether SaaS revenue scales beyond the reported $0.025 million and becomes cash-flow positive.
- Ongoing PCAOB inspection access and potential HFCAA or Nasdaq listing consequences.
- PRC restrictions on VIE contractual arrangements, currency conversion, cash transfers, and dividends.
- Impact of the company’s 78% supplier concentration and substantial tax and lease obligations on liquidity.