ZW Data Action Technologies Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and nine months ended September 30, 2020, filed November 13, 2020. The company operates primarily in China through subsidiaries and variable interest entities, providing internet advertising, precision marketing, ecommerce O2O marketing, data and technical services to small and medium-sized enterprises. It is also developing blockchain-platform applications. The company changed its name from ChinaNet Online Holdings, Inc. effective October 14, 2020.
Financial Metrics
| US$ in thousands, except per-share data | Nine months 2020 | Nine months 2019 | Three months 2020 | Three months 2019 |
|---|---|---|---|---|
| Revenue | 27,104 | 39,528 | 12,304 | 15,508 |
| Gross profit/(loss) | 556 | 1,700 | (641) | 892 |
| Gross margin | 2% | 4% | (5%) | 6% |
| Operating expenses | 5,256 | 3,935 | 763 | 1,167 |
| Loss from operations | (4,700) | (2,235) | (1,404) | (275) |
| Net loss attributable to the company | (4,611) | (1,905) | (1,333) | (388) |
| Loss per share, basic and diluted | (0.22) | (0.12) | (0.06) | (0.02) |
- Revenue was concentrated in internet advertising and related services: $24.6 million, or 90.7% of nine-month revenue. Search-engine marketing resource distribution generated $18.0 million, or 66.4% of total revenue.
- Newer activities contributed $1.3 million from ecommerce O2O advertising and marketing services and $1.2 million from technical solution services during the nine months.
- Cash provided by operating activities was $595,000 versus cash used of $4.055 million in the prior-year period. Investing cash outflow was $1.273 million, including a $944,000 short-term loan to an unrelated party and $302,000 of blockchain development expenditures.
- Financing cash outflow was $429,000, reflecting repayment of a short-term bank loan. Cash and cash equivalents declined to $500,000 at September 30, 2020 from $1.603 million at December 31, 2019.
- Total assets were $17.010 million and total liabilities were $7.885 million at September 30, 2020. Current liabilities were $7.756 million, including $3.290 million of taxes payable and $2.822 million of advances from customers.
- Debt consisted of a $129,000 long-term, non-interest-bearing borrowing from a director. The $430,000 short-term bank loan outstanding at December 31, 2019 was repaid in January 2020.
- Accounts receivable, net, was $2.282 million against gross receivables of $6.278 million and an allowance for doubtful accounts of $3.996 million.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue declined 31.4% year over year; third-quarter revenue declined 20.7%. Management attributed the decline primarily to COVID-19-related shutdowns, reduced advertising spending and a slow economic recovery in China.
- Search-engine marketing distribution produced negative gross margins of 6% for the nine months and 12% for the third quarter, compared with positive margins of 4% and 5% in the prior-year periods. Management stated that resources were sold at a loss to meet working-capital needs and retain customers.
- Overall gross margin fell to 2% from 4% for the nine months and to negative 5% from 6% for the quarter.
- General and administrative expense increased to $4.520 million from $2.875 million for the nine months, primarily due to $1.798 million of share-based compensation and higher doubtful-account provisions. Total share-based compensation was $2.066 million versus $307,000.
- Operating loss more than doubled for the nine months and increased materially for the quarter. The company reported a nine-month net loss attributable to shareholders of $4.611 million, compared with $1.905 million in 2019.
- Shares outstanding increased to 21.742 million at September 30, 2020 from 19.629 million at December 31, 2019, primarily reflecting share-based compensation issuances.
- Investor warrants for 645,000 underlying shares expired during the quarter. Placement-agent warrants for 129,000 shares remained outstanding at September 30, 2020, with a $103,000 liability.
Guidance, Outlook, Risks and Unusual Items
- Management provided no quantitative revenue or earnings guidance. It expects some improvement in search-engine marketing margins through supplier negotiations and plans to improve cash flow through cost optimization, receivables collection and more favorable vendor payment terms.
- The filing states that substantial doubt exists about the company’s ability to continue as a going concern within one year after issuance of the financial statements. Management said existing cash and financing commitments are insufficient to sustain operations for the following twelve months.
- The company may require additional financing, but it cannot predict whether financing would be debt, equity or another form, and may be unable to obtain financing on acceptable terms or at all.
- COVID-19 caused operating-office shutdowns of approximately one to two months in early 2020 and continues to create risks to advertising demand, revenue recovery and cash flows.
- Blockchain application development costs capitalized totaled $4.189 million at September 30, 2020. Commercial release of the OMG and Bo!News applications was expected to be postponed because of COVID-19. Approximately $750,000 remained payable under the development contracts and was expected to be paid during 2020.
- Customer and supplier concentration is significant. One customer represented 16% of nine-month revenue and 21% of third-quarter revenue; one supplier represented 78% of cost of revenues in both periods.
- Approximately $6.21 million of net assets held by PRC subsidiaries and VIEs was restricted from distribution. PRC currency-conversion, dividend and VIE-related regulatory restrictions may limit access to operating cash.
- In October 2020, the company incorporated Qiweilian, a 51%-owned subsidiary intended to develop WeChat-based digital business promotion services.
- The company reported no material pending legal proceedings, no off-balance-sheet arrangements and effective disclosure controls as of September 30, 2020.
Important Facts for Investors to Verify
- Whether the company can secure sufficient financing or achieve positive operating cash flow before available cash is exhausted.
- Whether search-engine marketing margins can return to positive levels without sacrificing customer retention or revenue.
- The collectability of receivables, given the $3.996 million allowance against $6.278 million of gross accounts receivable.
- The timing, remaining funding requirements and commercial viability of the blockchain applications, including the $4.189 million capitalized balance.
- The extent and duration of COVID-19 effects on customer advertising budgets and operating activity.
- The ability to repatriate cash from PRC subsidiaries and VIEs despite restricted net assets and foreign-exchange controls.
- The impact of substantial share-based compensation and the resulting increase in shares outstanding on future dilution and earnings per share.