ZW Data Action Technologies Inc. — 2020 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2020; it is an annual report rather than a standalone fourth-quarter filing. ZW Data Action Technologies Inc. is a Nevada holding company whose primary operations are conducted through PRC subsidiaries and variable interest entities. The company provides Internet advertising, precision marketing, search-engine marketing distribution, data and technical services, and e-commerce O2O marketing to small and medium-sized enterprises in China.
The company changed its name from ChinaNet Online Holdings, Inc. to ZW Data Action Technologies Inc. in October 2020. It is developing blockchain-related products, including BO!News, OMG and the Blockchain Integrated Framework, while also expanding into livestreaming e-commerce and related services.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $38.41 million | $58.08 million | Down 33.9% |
| Gross profit | $0.63 million | $5.50 million | Down 88.5% |
| Gross margin | 2% | 9% | Down 7 percentage points |
| Operating loss | $5.70 million | $1.69 million | Higher loss |
| Net loss attributable to shareholders | $5.22 million | $1.26 million | Higher loss |
| Basic and diluted loss per share | $0.24 loss | $0.07 loss | Loss increased |
| Cash flow from operations | $0.33 million provided | $4.31 million used | Improved |
| Cash flow from investing | $3.47 million used | $2.16 million used | Higher use |
| Cash flow from financing | $5.82 million provided | $4.35 million provided | Higher proceeds |
| Cash and cash equivalents | $4.30 million | $1.60 million | Increased |
Internet advertising, precision marketing and related data and technical services generated $35.62 million, or 92.7% of revenue, compared with $56.88 million, or 97.9%, in 2019. Search-engine marketing distribution revenue declined to $26.00 million from $41.36 million and carried a negative 8% gross margin, compared with a 6% margin in 2019. Internet advertising and related data services generated $8.42 million, with a 21% gross margin.
Other 2020 revenue included $1.55 million from e-commerce O2O advertising and marketing services and $1.25 million from technical solution services. The company had approximately 660 advertising and marketing clients, compared with approximately 1,100 in 2019.
Operating expenses were $6.33 million, compared with $7.19 million in 2019. General and administrative expense was $5.43 million, including substantial share-based compensation. Share-based compensation expense increased to $2.15 million from $0.39 million. The company also recorded a $0.65 million gain from changes in the fair value of warrant liabilities.
At December 31, 2020, total assets were $20.67 million and total liabilities were $8.19 million. The company had no short-term bank loan outstanding, but reported $1.51 million of warrant liabilities and $0.13 million of long-term borrowing from a director. Accounts receivable were $2.41 million net of a $4.25 million allowance against $6.65 million of gross receivables. Restricted net assets of PRC subsidiaries and VIEs were approximately $8.2 million.
Material changes versus 2019
- Revenue fell by approximately $19.67 million, primarily because COVID-19 shutdowns, travel restrictions and weaker SME advertising budgets reduced activity.
- Gross profit declined by approximately $4.87 million, and gross margin fell to 2% from 9%.
- Search-engine marketing distribution was sold at a loss to meet working-capital needs before the December 2020 financing.
- Net loss attributable to shareholders increased to $5.22 million from $1.26 million.
- Operating cash flow improved to a $0.33 million inflow, primarily due to reductions in supplier prepayments and non-cash expenses.
- The company raised approximately $7.0 million in gross proceeds in December 2020 through common stock and warrants, receiving approximately $6.25 million of net cash proceeds.
- Common shares outstanding increased to 26.06 million at December 31, 2020 from 19.63 million at December 31, 2019; the weighted-average share count increased to 21.60 million from 17.13 million.
- Blockchain platform development costs increased to $4.41 million from $3.88 million. The company also invested $1.50 million in livestreaming technology and provided a $1.44 million unsecured, interest-free short-term loan to an unrelated party.
Guidance, outlook, risks and unusual items
Management expected Internet advertising and search-engine marketing performance to continue improving in fiscal 2021 as business conditions recovered. It planned to complete integration of BO!News and OMG onto BIF in the first half of 2021 and launch BIF to retail business users before the end of the third quarter of 2021. The filing does not provide quantified revenue or earnings guidance.
Remaining contractual development costs for the blockchain applications were approximately $0.55 million at December 31, 2020, including $0.30 million expected in the third quarter of 2021 and $0.25 million in the fourth quarter of 2021. The company stated that its blockchain revenue opportunity remains unproven and that reward points planned for its applications are not cryptocurrency, are not transferable and are not intended to be listed on an exchange.
Subsequent to year-end, the company completed a February 2021 offering that generated approximately $18.7 million of gross proceeds from common stock and warrants. Management and the auditor concluded that available working capital, operating cash flows and financing proceeds were expected to fund operations and obligations for at least one year from issuance of the financial statements.
- COVID-19 remains a material operating risk, including reduced advertising spending, delayed customer payments, workforce disruption and potential customer or supplier failures.
- The company relies on PRC VIE contractual arrangements rather than direct ownership for restricted Internet-content and related operations. Changes in PRC law or enforcement could invalidate or restrict these arrangements.
- PRC foreign-exchange controls, dividend restrictions and approximately $8.2 million of restricted net assets may limit transfers of cash to the parent company.
- The blockchain business faces technology, cybersecurity, infrastructure, regulatory and commercialization risks, including dependence on Ethereum and evolving PRC blockchain rules.
- Customer receivables are exposed to collection risk, and the allowance for doubtful accounts represented a substantial portion of gross receivables.
- The company’s auditor is located in China and was not subject to PCAOB inspection at the filing date, creating potential risks under the Holding Foreign Companies Accountable Act and related listing rules.
- The company regained compliance with Nasdaq’s $1.00 minimum bid-price requirement in June 2020, but continued listing compliance remains a risk.
- Outstanding options and warrants could dilute shareholders. The filing reports 277,976 options and approximately 5.13 million warrants outstanding, subject to the terms described in the filing.
Important facts for investors to verify
- Whether revenue, client counts and gross margins recovered during 2021, particularly in search-engine marketing distribution.
- Actual cash balances, operating cash flow, use of the February 2021 financing proceeds and repayment of the $1.44 million short-term loan.
- Commercial launch timing, user adoption and revenue generation for BO!News, OMG, BIF and livestreaming initiatives.
- Recoverability of the $4.25 million receivable allowance and the company’s exposure to overdue customer balances.
- Compliance and enforceability of the PRC VIE structure under evolving foreign-investment and telecommunications regulations.
- Current warrant, option and common-share counts, including dilution from the 2020 and February 2021 financings.
- Nasdaq listing status and the effect of PCAOB inspection limitations on continued U.S. market access.