ZW Data Action Technologies Inc. — Q3 2022 Form 10-Q Summary
Business Context and Reporting Period
ZW Data Action Technologies Inc. is a Nevada holding company conducting substantially all operations in China through PRC subsidiaries and contractual variable interest entities. The company provides Internet advertising, search-engine marketing distribution, precision marketing, e-commerce O2O marketing, and related data and technical services to Chinese small and medium-sized enterprises. It began introducing blockchain-based Software-as-a-Service offerings through its Blockchain Integrated Framework platform in 2022.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, with comparisons to the corresponding 2021 periods. The company’s common stock trades on Nasdaq under the symbol CNET. As of November 18, 2022, 35,827,677 common shares were outstanding.
Financial Results and Key Metrics
| Metric | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 |
|---|---|---|---|---|
| Total revenue | $7.216 million | $11.900 million | $21.813 million | $34.847 million |
| Gross profit/(loss) | $(0.051) million | $0.043 million | $0.002 million | $(0.892) million |
| Gross margin | (0.7%) | 0.4% | 0.01% | (3.0%) |
| Operating expenses | $1.780 million | $1.617 million | $6.097 million | $10.776 million |
| Loss from operations | $(1.831) million | $(1.574) million | $(6.095) million | $(11.668) million |
| Net income/(loss) attributable to the company | $(2.840) million | $1.375 million | $(5.271) million | $(1.586) million |
| Basic and diluted EPS | $(0.08) | $0.04 | $(0.15) | $(0.05) |
Revenue was generated almost entirely from Internet advertising and related services. For the nine-month period, search-engine marketing distribution revenue was $18.605 million and online advertising placement revenue was $3.208 million. E-commerce O2O revenue was zero in 2022 after the company terminated that business in the fourth quarter of 2021. No SaaS revenue was recognized during the three or nine months ended September 30, 2022.
The nine-month operating loss improved primarily because of lower general and administrative expenses, including a $6.81 million reduction in share-based compensation expense. This benefit was partly offset by higher amortization and approximately $0.95 million of additional doubtful-account provisions. The quarterly operating loss increased despite lower revenue.
The company recorded a $0.759 million gain from the change in fair value of warrant liabilities for the nine months, compared with a $9.682 million gain in the prior-year period. The third quarter included a $1.023 million warrant-liability loss, compared with a $2.853 million gain in the third quarter of 2021. These non-cash fair-value changes materially affected reported earnings.
Balance Sheet, Cash Flow, Debt, and Liquidity
| Balance Sheet Metric | September 30, 2022 | December 31, 2021 |
|---|---|---|
| Cash and cash equivalents | $2.154 million | $7.173 million |
| Total current assets | $14.384 million | $19.918 million |
| Total assets | $25.000 million | $32.631 million |
| Total current liabilities | $6.561 million | $8.821 million |
| Total liabilities | $8.241 million | $10.856 million |
| Stockholders’ equity | $16.759 million | $21.766 million |
- Working capital was approximately $7.82 million at September 30, 2022.
- Operating cash flow was negative $4.409 million for the first nine months of 2022, compared with negative $6.600 million in 2021.
- Investing cash flow was negative $0.479 million, primarily reflecting $2.600 million of short-term loans to unrelated parties offset by loan repayments.
- Financing cash flow was zero in 2022. The comparable 2021 period included $17.111 million of net proceeds from an equity and warrant offering.
- Cash declined by $5.019 million during the first nine months, ending at $2.154 million. Management stated that cash increased approximately 13% by October 31, 2022 after post-holiday customer collections and additional customer advances.
- Debt was limited to $0.123 million of non-interest-bearing long-term borrowing from a related party. Operating lease liabilities totaled approximately $1.946 million.
- Warrant liabilities were $1.280 million at September 30, 2022, down from $2.039 million at December 31, 2021. Approximately 5.002 million warrant shares remained outstanding, with a weighted-average exercise price of $3.02.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue declined 37.4% to $21.813 million, while third-quarter revenue declined 39.4% to $7.216 million.
- The decline was primarily caused by reduced SME advertising demand during repeated COVID-19 outbreaks, quarantines, and business shutdowns in China.
- Nine-month gross results improved from a $0.892 million loss to essentially break-even, but third-quarter gross results deteriorated from a $0.043 million profit to a $0.051 million loss.
- Nine-month operating losses narrowed by $5.573 million, largely due to lower share-based compensation, while quarterly operating losses widened by $0.257 million.
- The company shifted away from e-commerce O2O advertising and began pursuing blockchain-based SaaS services, but the new business had not produced recognized revenue through September 30, 2022.
- Accounts receivable, net, decreased to $2.999 million from $3.439 million, but the allowance for doubtful accounts increased to $2.337 million from $2.236 million.
- Intangible assets declined to $5.896 million from $7.523 million, primarily reflecting amortization and impairment-related changes.
Guidance, Outlook, Commentary, and Risks
- Management projected approximately $0.50 million of SaaS revenue during the next six months, although prior SaaS contracts were cancelled or delayed and actual performance had not met expectations.
- Management expects SaaS services to require limited incremental third-party cash outflows and potentially contribute positive operating cash flow.
- Planned liquidity measures include negotiating improved supplier payment terms, reducing personnel and office costs, collecting short-term loans, and seeking revolving credit facilities from PRC banks.
- Management believes existing cash, anticipated operating and financing inflows, and planned liquidity measures will be sufficient to meet obligations during the next 12 months. The company nevertheless continued to report negative operating cash flow and relied on financing proceeds for liquidity in 2022.
- The company is evaluating potential acquisitions or joint ventures involving online marketing resources. A $1.0 million refundable deposit was recorded for a potential acquisition; no definitive agreement had been reached as of the filing.
- The company has unsecured loans to unrelated parties, including a $1.48 million loan extended to April 30, 2023 and a $0.62 million defaulted Digital Sun loan balance that was fully reserved. The company may pursue legal remedies to collect the Digital Sun balance.
- Under the Holding Foreign Companies Accountable Act, the company was identified by the SEC as a Commission-Identified Issuer because its Hong Kong-based auditor was subject to PCAOB inspection restrictions. The filing stated that delisting or prohibition from U.S. over-the-counter trading could occur in 2024 under then-current law, or potentially in 2023 if proposed changes became effective. The PCAOB-China/Hong Kong inspection protocol signed in August 2022 had not eliminated uncertainty.
- The company operates through VIE contractual arrangements rather than direct equity ownership of its PRC operating entities. PRC regulatory, tax, currency-conversion, capital-control, and VIE-enforcement risks could restrict cash transfers to the Nevada holding company.
- Approximately $15.2 million of net assets of PRC subsidiaries, VIEs, and their subsidiaries were restricted as of September 30, 2022. The company has no present plan to pay dividends.
- Customer and supplier concentration remains significant. One customer accounted for 10% of third-quarter revenue, while four customers collectively represented 95% of accounts receivable at September 30, 2022. One supplier represented 53% of nine-month cost of revenue and 63% of third-quarter cost of revenue.
- The company reported no material pending legal or administrative proceedings and stated that disclosure controls were effective as of September 30, 2022.
Important Facts for Investors to Verify
- Whether the company can stabilize advertising revenue and generate positive operating cash flow without another equity financing.
- Actual SaaS customer conversions, recognized revenue, margins, collections, and the feasibility of the $0.50 million six-month projection.
- Availability and terms of proposed PRC revolving credit facilities and any changes to supplier payment terms.
- Collectability of short-term loans and the defaulted Digital Sun balance, including any legal action or additional impairments.
- Status of PCAOB inspections, HFCAA identification, and any potential Nasdaq delisting or U.S. trading restrictions.
- Ability to move cash from PRC subsidiaries and VIEs to the holding company, including the effect of restricted net assets, tax withholding, and RMB conversion controls.
- Potential dilution from outstanding warrants, future equity financing, and share-based compensation.
- Customer and supplier concentration, accounts-receivable aging, and the adequacy of the $2.337 million doubtful-account allowance.