ZW Data Action Technologies Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three months ended March 31, 2021, compared with the three months ended March 31, 2020. ZW Data provides Internet advertising, precision marketing, e-commerce O2O advertising and marketing, and related data and technical services to small and medium-sized enterprises in China. The Company is also developing blockchain platform applications and conducts substantially all PRC operations through subsidiaries and variable interest entities.
The Company reported 31,304,915 common shares outstanding as of May 19, 2021 and is listed on Nasdaq under the symbol CNET.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $8.396 million | $4.384 million |
| Cost of revenue | $9.113 million | $3.485 million |
| Gross profit/(loss) | $(0.717) million | $0.899 million |
| Gross margin | (9%) | 21% |
| Operating expenses | $1.098 million | $3.175 million |
| Loss from operations | $(1.815) million | $(2.276) million |
| Net income/(loss) | $0.687 million | $(2.310) million |
| Net income/(loss) attributable to ZW Data | $0.685 million | $(2.310) million |
| Basic and diluted EPS | $0.02 | $(0.11) |
| Net cash used in operating activities | $(3.706) million | $1.518 million provided |
| Net cash used in investing activities | $(1.865) million | $(1.117) million |
| Net cash provided by/(used in) financing activities | $17.111 million | $(0.430) million |
Cash and cash equivalents were $15.785 million at March 31, 2021, compared with $4.297 million at December 31, 2020. Total assets were $38.627 million and total liabilities were $20.267 million. Current liabilities included $10.919 million of warrant liabilities, compared with $1.505 million at year-end 2020. Long-term borrowing from a director was $0.133 million; the filing does not report material conventional bank debt outstanding at March 31, 2021.
Revenue was concentrated in Internet advertising and related services, which generated $8.267 million, or 98.5% of total revenue. Distribution of the right to use search engine marketing services generated $6.865 million, but had a negative 9% gross margin. Accounts receivable, net, was $1.694 million, after a $4.217 million allowance for doubtful accounts. Prepayments and deposits to suppliers were $7.194 million.
Material changes versus the prior comparable period
- Revenue increased 91.4% to $8.396 million, primarily due to recovery in Chinese business activity after the COVID-19 disruption and increased search engine marketing revenue.
- Cost of revenue increased substantially faster than revenue, producing a $0.717 million gross loss versus a $0.899 million gross profit in Q1 2020. Management attributed the deterioration primarily to higher search engine resource costs that were not fully passed through to customers.
- Operating expenses declined 65.4%, principally because share-based compensation fell to $0.100 million from $1.919 million and the allowance for doubtful accounts declined to zero from $0.410 million.
- The Company reported net income of $0.687 million, but this result included a $2.507 million non-cash gain from the change in fair value of warrant liabilities. Excluding this item, the Company remained loss-making at the operating level.
- Operating cash flow changed from $1.518 million provided in Q1 2020 to $3.706 million used in Q1 2021, primarily because of $2.630 million in increased supplier prepayments and $0.794 million in long-term deposits and prepayments.
- Financing provided $17.111 million in Q1 2021 through a registered direct offering of 5.212 million shares at $3.59 per share, together with warrants to purchase up to 2.606 million shares for investors and 364,840 shares for the placement agent.
- Warrant liabilities increased to $10.919 million at March 31, 2021. Total warrants outstanding were 5.131 million underlying shares, including 2.735 million exercisable shares.
- Shares outstanding increased from 26.063 million at December 31, 2020 to 31.305 million at March 31, 2021, resulting in dilution for existing shareholders.
Guidance, outlook, commentary, risks and unusual items
- Management expected Internet advertising and data service gross margins to improve in subsequent 2021 quarters as revenue volume increased.
- Management expected the negative margin on search engine marketing services to improve as higher volumes could strengthen negotiations with suppliers, although no quantified guidance was provided.
- The Company planned to complete integration of its BO!News and OMG blockchain applications into its Blockchain Integrated Framework by the first half of 2021 and launch the framework to retail users before the end of the third fiscal quarter of 2021. The filing provides no subsequent progress assessment.
- Blockchain platform development costs capitalized totaled approximately $4.403 million at March 31, 2021. Approximately $0.56 million remained payable under development contracts and was expected to be paid during 2021.
- COVID-19 continued to present a risk to advertising spending and growth, although management stated that the outbreak in China had been largely controlled since Q2 2020.
- Approximately $13.2 million of PRC subsidiary and VIE net assets were restricted from distribution as of March 31, 2021. Dividend and fund-transfer capacity is subject to PRC statutory reserves, foreign-exchange controls and other regulatory requirements.
- The Company had $2.220 million of operating lease liabilities, including $1.953 million classified as noncurrent, and entered into new leases reflected in $2.249 million of right-of-use assets.
- Two customers represented 38% and 34% of accounts receivable at March 31, 2021. Two suppliers represented 52% and 30% of Q1 2021 cost of revenue, creating customer and supplier concentration risk.
- The Company reported no material pending legal or administrative proceedings, no off-balance-sheet arrangements and no material changes affecting internal control over financial reporting. The filing states that disclosure controls were effective.
Most important facts for investors to verify
- Whether search engine marketing revenue can become consistently profitable after supplier cost increases and competitive pricing pressures.
- Whether reported earnings can be sustained without recurring non-cash gains from warrant-liability remeasurement.
- Collection of the $4.217 million doubtful-account allowance exposure and the concentration of receivables among two customers.
- Use and sufficiency of the $17.1 million financing proceeds given negative operating cash flow and planned technology investments.
- Potential dilution from 5.131 million outstanding warrants and 277,976 outstanding options.
- Commercial progress and return potential of the $4.403 million capitalized blockchain development costs.
- Ability to transfer cash from PRC subsidiaries and VIEs to the parent despite $13.2 million of restricted net assets and PRC currency controls.
- Whether management’s stated margin improvements and 2021 blockchain launch objectives were achieved; the filing provides no quantified full-year financial guidance.