Filing Overview
Registrant: ChinaNet Online Holdings, Inc. (the supplied company metadata identifies ZW Data Action Technologies Inc.; the filing itself names ChinaNet Online Holdings, Inc.). This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020, and was filed August 14, 2020.
The company operates primarily in China through subsidiaries and variable interest entities, providing online advertising, precision marketing, O2O channel expansion, data and technical services to small and medium-sized businesses. It is also developing blockchain platform applications.
Financial Results and Position
| Metric | Six months ended June 30, 2020 | Six months ended June 30, 2019 | Three months ended June 30, 2020 | Three months ended June 30, 2019 |
|---|---|---|---|---|
| Revenue | $14.80 million | $24.02 million | $10.42 million | $15.45 million |
| Gross profit | $1.20 million | $0.81 million | $0.30 million | $0.37 million |
| Gross margin | 8% | 3% | 3% | 2% |
| Operating loss | $3.30 million | $1.96 million | $1.02 million | $1.22 million |
| Net loss attributable to shareholders | $3.28 million | $1.52 million | $0.97 million | $0.38 million |
| Loss per share, basic and diluted | $0.16 loss | $0.09 loss | $0.04 loss | $0.02 loss |
Amounts are in U.S. dollars; losses are shown as negative results. Revenue declined approximately 38% year over year for the six-month period and 33% for the quarter. Gross profit increased for the six-month period despite lower revenue, primarily because of improved margins in internet advertising and the addition of O2O and technical solution revenue.
- Internet advertising and related services generated $13.15 million of six-month revenue, down from $24.02 million.
- O2O advertising and marketing services contributed $1.01 million of six-month revenue and $0.50 million for the quarter; there was no comparable 2019 revenue.
- Technical solution services contributed $0.65 million in the first half of 2020 and no comparable 2019 revenue.
- General and administrative expense rose to $3.93 million from $2.06 million for the six-month period, largely due to $1.99 million of share-based compensation and higher doubtful-account provisions.
- A $68,000 gain from the change in fair value of warrant liabilities was recorded for the first half, compared with a $471,000 gain in 2019.
Cash Flow, Liquidity and Debt
- Cash and cash equivalents were $1.06 million at June 30, 2020, compared with $1.60 million at December 31, 2019.
- Operating activities provided $1.17 million of cash, compared with $2.33 million used in the prior-year period. The improvement was driven substantially by the use of supplier prepayments, noncash share compensation, and changes in working capital.
- Investing activities used $1.27 million, including a $944,000 unsecured, interest-free, demand loan to an unrelated party, $302,000 of blockchain development payments, and a $27,000 investment in investee entities.
- Financing activities used $427,000 to repay the short-term bank loan that matured in January 2020. No short-term bank loan remained outstanding at June 30, 2020.
- Other liabilities included $124,000 of long-term borrowing from a director, $3.26 million of taxes payable, and $1.62 million of customer advances.
- Net accounts receivable were $2.52 million against gross receivables of $6.36 million and an allowance for doubtful accounts of $3.84 million. The allowance increased from $3.15 million at year-end 2019.
- Current assets were $9.66 million and current liabilities were $6.37 million. Approximately $6.34 million of net assets of PRC subsidiaries and VIEs were restricted from distribution.
Material Changes Versus the Prior Comparable Period
- Revenue contracted materially because COVID-19-related closures and weaker customer advertising spending affected the first quarter, with only a gradual recovery in the second quarter.
- Management reported that the second-quarter decline in internet advertising narrowed to 36% year over year from 48% in the first quarter. The decline in search-engine marketing service revenue narrowed to 38% in the second quarter from 70% in the first quarter.
- Search-engine marketing services produced a negative 1% gross margin in both the six-month and quarterly periods, as the company sold prepaid resources with no profit to support working capital needs during the pandemic.
- Internet advertising gross margin improved to 11% for the six-month period and 10% for the quarter, compared with 4% and 3%, respectively, in 2019.
- Approximately 1.60 million fully vested restricted shares were issued to management and employees in February 2020, producing approximately $1.89 million of compensation expense. An additional 430,000 restricted shares issued to a consultant were valued at approximately $478,000 and are being amortized over the service period.
- Total assets declined to $17.07 million from $18.55 million at December 31, 2019, while total equity declined to $10.59 million from $11.41 million.
- The company established a wholly owned Guangdong technology subsidiary in May 2020; it commenced operations in July 2020. It also acquired a 19% interest in Business Opportunity Chain Guangzhou for approximately $27,000.
Outlook, Risks and Unusual Items
- Management stated that the company does not currently have sufficient cash or financing commitments to sustain operations for the twelve months following issuance of the financial statements. The filing therefore identifies substantial doubt about the company’s ability to continue as a going concern.
- Management plans to improve liquidity by optimizing internet-resource costs, increasing gross margins, strengthening receivables collection, negotiating more favorable vendor payment terms, and seeking additional financing or credit facilities. No assurance is provided that financing will be available on acceptable terms or at all.
- COVID-19 caused operating-office closures, particularly in Hubei, for approximately one to two months and reduced or delayed customer advertising spending. Further pandemic-related effects remain uncertain.
- The company had $4.18 million capitalized in blockchain platform development costs at June 30, 2020, under contracts totaling approximately $4.92 million. The remaining unpaid amount is expected to be paid during 2020. The planned commercial release was expected to be delayed by approximately three months because of COVID-19.
- Supplier concentration is significant: one supplier represented 78% of cost of revenues for the first half and 81% for the quarter. Customer concentration also exists, with individual customers representing 16% to 27% of accounts receivable at June 30, 2020.
- The company uses contractual arrangements with PRC VIEs and is exposed to restrictions on transferring funds out of China, foreign-exchange controls, PRC regulatory changes, and limitations on dividend distributions.
- The filing reports no material legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls as of June 30, 2020.
- Subsequent events included deregistration of two previously impaired investee entities and issuance in August 2020 of approximately 50,000 restricted shares for technical consulting services.
Investor Verification Checklist
- Verify the registrant’s legal name and ticker against the supplied company metadata, because the filing identifies ChinaNet Online Holdings, Inc. rather than ZW Data Action Technologies Inc.
- Assess the going-concern risk, available financing, cash burn, and whether management obtained additional capital after the filing date.
- Review the collectability and aging of the $6.36 million gross accounts receivable and the adequacy of the $3.84 million allowance.
- Confirm the commercial status, remaining funding requirements, impairment risk, and revenue prospects of the $4.18 million blockchain development asset.
- Evaluate the sustainability of the reported gross-margin improvement, particularly the negative-margin search-engine marketing business.
- Monitor COVID-19 effects on customer demand, operating capacity, and second-half revenue recovery.
- Review related-party balances, the $944,000 unsecured loan to an unrelated party, restricted PRC net assets, VIE contractual arrangements, and the ability to repatriate cash.
- Account for dilution from 21.69 million shares outstanding at June 30, 2020, additional restricted-share issuances, 774,000 warrants, and 755,216 options.