ZW Data Action Technologies Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
ZW Data Action Technologies Inc. is a Nevada holding company whose operations are conducted primarily through PRC subsidiaries and variable interest entities. The company provides Internet advertising, precision marketing, search-engine marketing distribution, e-commerce O2O advertising and related data and technical services to small and medium-sized enterprises in China. This report covers the three months ended March 31, 2022, and was filed May 16, 2022. Financial statements are unaudited and presented under U.S. GAAP. The company had 35,427,677 common shares outstanding as of May 16, 2022.
Key financial metrics
Amounts below are in thousands of U.S. dollars, except per-share data and percentages.
| Metric | Q1 2022 | Q1 2021 | Change or commentary |
|---|---|---|---|
| Revenue | $7,652 | $8,396 | Down approximately 9% |
| Cost of revenue | $7,518 | $9,113 | Down approximately 17% |
| Gross profit/(loss) | $134 | $(717) | Gross margin improved to 2% from negative 9% |
| Operating expenses | $1,685 | $1,098 | Up approximately 53%; G&A was the primary driver |
| Operating loss | $(1,551) | $(1,815) | Operating loss narrowed |
| Warrant fair-value gain | $795 | $2,507 | Non-cash gain, substantially lower year over year |
| Net income/(loss) attributable to the company | $(717) | $685 | Returned to a net loss |
| Basic and diluted EPS | $(0.02) | $0.02 | Warrants excluded as anti-dilutive |
| Net cash used in operating activities | $(890) | $(3,706) | Operating cash burn improved |
| Net cash used in investing activities | $(1,458) | $(1,865) | Included a $2,500 short-term loan to an unrelated party |
| Net cash from financing activities | $0 | $17,111 | Prior-year period included an equity offering |
| Cash and cash equivalents | $4,824 | $15,785 | March 31, 2022 versus March 31, 2021 |
Revenue and operating performance
- Search-engine marketing service distribution revenue was $6.594 million, or 86.2% of total revenue, versus $6.865 million in Q1 2021.
- Internet advertising and related data-service revenue was $1.058 million versus $1.402 million. E-commerce O2O revenue was zero versus $129 thousand, as the company terminated its outdoor-billboard business by the end of 2021.
- Management attributed the revenue decline primarily to COVID-19 rebounds, regional quarantines and temporary business shutdowns affecting Chinese SME customers.
- The search-engine marketing gross margin improved to 1% from negative 9%, while Internet advertising gross margin was 8% versus 9%.
- General and administrative expense increased to $1.548 million from $996 thousand, primarily due to higher amortization of administrative assets. Research and development expense was approximately $68 thousand versus $74 thousand.
Liquidity, balance sheet and obligations
- Total assets were $30.413 million at March 31, 2022, down from $32.631 million at December 31, 2021. Total liabilities were $9.370 million, down from $10.865 million.
- Current assets were $18.299 million and current liabilities were $7.379 million. Accounts receivable, net, was $3.611 million after a $2.245 million allowance for doubtful accounts.
- Cash declined by $2.349 million during the quarter, to $4.824 million. The company states that it has historically financed liquidity needs primarily through financing activities.
- Other current assets included approximately $3.12 million of unsecured working-capital loans to unrelated parties. The company collected $1.02 million in April 2022 and expected the remaining balances to be repaid before December 31, 2022.
- Investing cash outflows included a $2.5 million short-term loan to an unrelated party, partly offset by $1.029 million of loan repayments.
- Warrant liabilities were $1.244 million at March 31, 2022, down from $2.039 million at year-end 2021. The quarter included a $795 thousand fair-value gain based on Level 3 valuation inputs, including stock-price volatility.
- Long-term borrowing from a related party was $138 thousand and non-interest bearing. Operating lease liabilities totaled approximately $2.063 million, including $210 thousand current and $1.853 million non-current.
- Approximately $15.2 million of net assets of PRC subsidiaries and VIEs were restricted from transfer as of March 31, 2022. Dividend and fund-transfer capacity is subject to PRC statutory reserves, foreign-exchange rules and other regulatory restrictions.
Material changes versus the prior comparable period
- Revenue declined 9%, but lower direct costs moved the company from a $717 thousand gross loss to a $134 thousand gross profit.
- Operating expenses increased 53%, limiting the benefit of improved gross margin.
- The company shifted from $685 thousand of attributable net income to a $717 thousand attributable net loss, partly because the warrant-liability gain fell from $2.507 million to $795 thousand.
- Operating cash use improved by $2.816 million, but the company remained cash-flow negative and received no financing cash during the quarter.
- Weighted-average shares increased to 35.355 million from 28.505 million, reflecting the prior-year equity financing and subsequent share issuances.
- In March 2022, the company issued 95,000 fully vested restricted shares to two executive officers for services, recording approximately $56 thousand of share-based compensation during the quarter.
Outlook, commentary, risks and unusual items
- Management expected Internet advertising gross margin to remain around 8% and search-engine marketing gross margin to improve slightly during subsequent 2022 quarters. The filing does not provide quantitative revenue or earnings guidance.
- COVID-19-related restrictions and reduced SME advertising spending remain material risks to revenue growth and operating performance.
- Customer and supplier concentration is significant: one customer represented 13% of Q1 2022 revenue; two suppliers represented 60% and 22% of cost of revenue.
- Accounts receivable concentration increased, with two customers representing 44% and 29% of accounts receivable at March 31, 2022. The allowance for doubtful accounts was approximately 38% of gross accounts receivable.
- Approximately $470 thousand remains committed under the Global Best Products investment contract and is expected to be invested by December 31, 2022.
- Future amortization of finite-lived intangible assets was estimated at approximately $1.59 million for the remainder of 2022 and $2.12 million in each of 2023 and 2024, assuming no further impairment.
- The company reported no material legal or administrative proceedings. Management concluded that disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $4.824 million cash balance and expected loan repayments are sufficient to fund continuing operating cash outflows and committed investments.
- The collectability and timing of repayment of the $3.12 million in unsecured loans and the concentration of accounts receivable.
- Whether search-engine marketing margins can improve without further reducing customer demand or revenue.
- The valuation sensitivity of the $1.244 million Level 3 warrant liability and the potential effect of future stock-price changes on earnings.
- The impact of COVID-19 restrictions, Chinese regulatory and foreign-exchange controls, VIE contractual arrangements and restrictions on transferring PRC operating cash to the holding company.
- The company’s ability to replace the discontinued e-commerce O2O revenue and reduce reliance on search-engine marketing distribution.