ZW Data Action Technologies Inc. annual report, FY2022

ZW Data Action Technologies Inc. — FY2022 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2022. The filing is an annual Form 10-K, not a standalone fourth-quarter report. Financial statements are prepared under U.S. GAAP and consolidate PRC subsidiaries and variable interest entities (VIEs).

Business context

ZW Data Action Technologies Inc. is a Nevada holding company whose operations are conducted primarily in China through subsidiaries and contractual VIE arrangements. The company provides Internet advertising, precision marketing, search-engine marketing resource distribution, related data and technical services, and blockchain-based SaaS services through its Blockchain Integrated Framework platform. The company had approximately 760 Internet advertising and marketing clients at year-end, compared with 800 in 2021, and 64 full-time employees.

Key financial metrics

US$ in millions, except per-share data	2022	2021	Change
Revenue	26.24	47.33	Down 44.6%
Gross profit/(loss)	(0.19)	0.10	Margin declined to -1.0% from 0.2%
Operating loss	(11.12)	(13.59)	Improved by 2.47
Net loss attributable to shareholders	(9.79)	(2.75)	Loss increased by 7.04
Basic and diluted loss per share	(1.37)	(0.42)	Restated for 1-for-5 reverse split
Operating cash flow	(3.19)	(8.84)	Outflow improved by 5.65
Cash flow from investing activities	0.55	(5.47)	Improved by 6.02
Cash flow from financing activities	—	17.11	No 2022 financing inflow
Cash and cash equivalents at year-end	4.39	7.17	Down 2.78
Total assets	19.66	32.63	Down 39.8%
Total liabilities	7.36	10.87	Down 3.50
Stockholders’ equity	12.30	21.77	Down 9.47

Revenue and profitability

Internet advertising and related services generated $25.81 million, or 98.4% of revenue, versus $46.67 million, or 98.6%, in 2021.
Search-engine marketing resource distribution revenue was approximately $22.26 million, down from $39.22 million. Management stated that resources were sold at a loss in 2022 to retain customers and meet working-capital needs.
Online advertising and related data revenue declined to $3.55 million from $7.44 million.
Blockchain-based SaaS revenue was approximately $0.43 million, including $0.03 million of platform subscription revenue and $0.40 million of NFT-generation revenue. The company had no comparable SaaS revenue in 2021.
Cost of revenues declined to $26.43 million from $47.23 million, but remained above revenue. The advertising segment’s gross margin fell to negative 1% from 2%.
Operating expenses declined to $10.93 million from $13.69 million, primarily because 2021 included substantially higher share-based compensation. General and administrative expense was $8.30 million, including higher bad-debt provisions.
The company recorded $2.12 million of intangible-asset impairment and $0.60 million of long-term investment impairment.
A $1.85 million non-cash gain from the change in fair value of warrant liabilities reduced the reported net loss; the comparable 2021 gain was $11.33 million.

Liquidity, cash flow and debt

Year-end working capital was approximately $6.61 million, with $4.39 million of cash and cash equivalents. Approximately $2.73 million of cash was held in PRC accounts and $1.66 million in U.S. accounts.
Operating cash outflow improved but remained negative at $3.19 million. The company did not generate positive cash flow from its core advertising business.
Investing cash inflow of $0.55 million included $2.60 million of short-term loans to unrelated parties, $2.05 million of loan repayments, and a $1.00 million refund of a deposit for a potential acquisition.
The company had no financing cash inflow in 2022, compared with $17.11 million of net proceeds from a 2021 equity and warrant offering.
Debt was limited, but the balance sheet included $1.88 million of operating lease liabilities and $0.13 million of long-term related-party borrowing. Warrant liabilities were $0.19 million at year-end.
Accounts receivable were $5.51 million before a $3.76 million allowance, leaving $1.75 million net. The filing identifies collectability of receivables as a critical audit matter.
The company had $2.20 million of short-term loans and interest receivables to unrelated parties before a $0.62 million allowance. One $1.48 million loan was extended to April 30, 2023; subsequent collections should be verified.

Material changes versus 2021

Revenue fell sharply because COVID-19 restrictions and business shutdowns reduced SME advertising demand and budgets.
Gross profitability deteriorated from a $0.10 million profit to a $0.19 million loss, primarily because search-engine marketing resources were sold below cost.
Net loss attributable to shareholders increased to $9.79 million from $2.75 million despite lower operating expenses, partly because the prior year benefited from a much larger warrant-liability fair-value gain.
Bad-debt provisions increased significantly, reflecting weaker liquidity among SME customers. The filing also reports a $1.76 million 2022 allowance provision against accounts receivable.
Intangible assets declined to $3.26 million from $7.52 million due to amortization and $2.12 million of impairment. The company terminated promotion of the Bo!News application and is concentrating blockchain resources on the BIF platform.
Prepayments and supplier deposits declined to $4.57 million from $7.56 million, primarily as prior deposits were consumed and a $1.00 million potential-acquisition deposit was refunded.
The company did not transfer cash to operating subsidiaries in 2022, compared with $16.33 million transferred in 2021. Operating subsidiaries transferred $0.34 million to VIEs in 2022, compared with $4.25 million in 2021.

Guidance, outlook and unusual items

Management expects a slow recovery in China following the December 2022 termination of the zero-COVID policy and anticipates improving advertising performance and cash flow over the next 12 months.
Management expects approximately $0.90 million of SaaS revenue over the next 12 months, compared with $0.43 million in 2022. This is an expectation, not contractual guidance.
Strategic priorities include rebuilding the core advertising business, negotiating better supplier terms, promoting BIF and NFT-generation services, reducing personnel and office costs if needed, and pursuing acquisitions or joint ventures involving complementary marketing resources.
Management states that current cash, anticipated operating and investing cash flows, potential bank credit facilities, loan collections and cost-reduction measures should fund obligations for at least the next 12 months. This assessment depends on improving operations and access to expected cash inflows.
The company expects no cash dividends in the foreseeable future. Approximately $13.31 million of PRC subsidiary and VIE net assets were restricted at December 31, 2022.
A 1-for-5 reverse stock split became effective January 18, 2023. Nasdaq subsequently confirmed that the company regained compliance with the $1.00 minimum bid-price requirement on February 3, 2023.
The PCAOB reported complete access to inspect the company’s Hong Kong auditor in 2022, so management did not expect the company to be identified as a Commission-Identified Issuer after this filing. Continued access remains uncertain under the HFCAA.
The company’s auditor issued an unqualified opinion on the consolidated financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective; the auditor was not required to provide an internal-control attestation because the company is a smaller reporting company.

Principal risks and contingencies

Substantially all operations are conducted through PRC subsidiaries and VIEs that the Nevada holding company does not own directly. If PRC authorities challenge the contractual arrangements, the company could lose control of or be required to restructure the operating entities.
PRC regulatory risks include evolving rules on foreign investment, Internet content, advertising, cybersecurity, data privacy, anti-monopoly matters, overseas offerings and CSRC filings.
Future inability of the PCAOB to inspect the Hong Kong auditor could result in HFCAA identification, Nasdaq delisting or a U.S. trading prohibition.
COVID-19 effects, economic weakness, SME customer defaults, advertising-spending reductions and customer concentration remain significant operating risks.
Two suppliers represented approximately 77% of 2022 cost of revenues, creating supplier concentration risk. Four customers each represented at least 10% of year-end accounts receivable, collectively accounting for 89% of gross receivables.
The blockchain business remains early-stage, with limited operating history and technology, cybersecurity, platform-dependence and regulatory risks.
The company has approximately 1.00 million warrants outstanding with a weighted-average exercise price of $15.11 and remaining weighted-average contractual life of 1.36 years, creating potential dilution and future fair-value volatility.
The filing reports no material pending legal or administrative proceedings and no off-balance-sheet arrangements. It also discloses contractual commitments of approximately RMB6.73 million and RMB0.09 million for investments in two entities, payable by 2065 and 2040, respectively.

Important facts for investors to verify

Whether advertising revenue, client counts and gross margins recover after the end of China’s zero-COVID policy, particularly the profitability of search-engine marketing resource distribution.
Actual collections of the $5.51 million gross accounts receivable balance and the adequacy of the $3.76 million allowance.
Repayment status of short-term loans, including the $1.48 million loan extended to April 2023 and the $0.62 million defaulted Digital Sun balance.
Whether the BIF platform can produce the projected $0.90 million of SaaS revenue and positive cash flow.
Availability and terms of any PRC revolving credit facilities or other financing needed to address continuing operating cash outflows.
Future PCAOB inspection access, HFCAA status and continued Nasdaq compliance.
PRC regulatory developments affecting the VIE structure, cybersecurity, data transfers and future CSRC filing requirements.
Potential dilution and cash-flow effects from the outstanding warrants and any future equity financing.