ZW Data Action Technologies Inc. — 2021 Form 10-K Summary
Business Context and Reporting Period
The filing is an annual report for the fiscal year ended December 31, 2021, rather than a standalone fourth-quarter filing. ZW Data Action Technologies Inc. is a Nevada holding company whose operations are conducted primarily in China through subsidiaries and contractual variable interest entities (VIEs). Its principal businesses are Internet advertising, search-engine marketing, precision marketing, data services, e-commerce O2O advertising and emerging blockchain-related services.
Investors purchase equity in the Nevada holding company, not direct equity in the Chinese operating entities. The company consolidates its VIEs through exclusive business cooperation, equity pledge, option and power-of-attorney agreements.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $47.33 million | $38.41 million | 23.2% increase |
| Gross profit | $0.10 million | $0.63 million | Declined |
| Gross margin | 0.2% | 2.0% | Down 1.8 percentage points |
| Operating loss | $13.59 million | $5.70 million | Loss widened |
| Net loss | $2.69 million | $5.22 million | Loss narrowed |
| Net loss attributable to shareholders | $2.75 million | $5.22 million | Loss narrowed |
| Basic and diluted loss per share | $0.08 loss | $0.24 loss | Improved |
| Cash flow from operations | $8.84 million used | $0.33 million provided | Material deterioration |
| Cash flow from investing | $5.47 million used | $3.47 million used | Higher investment outflow |
| Cash flow from financing | $17.11 million provided | $5.82 million provided | Higher capital raised |
| Cash and cash equivalents | $7.17 million | $4.30 million | Increased |
Revenue was highly concentrated in Internet advertising and related services, which generated $46.67 million, or 98.6% of total revenue. Search-engine marketing distribution revenue increased to $39.22 million from $26.00 million, while online advertising portal revenue declined to $7.44 million from $8.42 million. E-commerce O2O advertising revenue fell to $0.66 million from $1.55 million, and no technical solution revenue was reported in 2021.
Operating expenses increased to $13.69 million from $6.33 million. General and administrative expense rose to $12.63 million, primarily because of approximately $7.03 million of share-based compensation, higher office and administrative costs, and a non-recurring loss related to termination of an O2O resource purchase contract.
The company recorded an $11.33 million gain from the change in fair value of warrant liabilities, compared with a $0.65 million gain in 2020. This non-cash accounting gain substantially reduced the reported net loss; the company remained deeply loss-making at the operating level.
Financial Position, Debt and Liquidity
- Total assets were $32.63 million at December 31, 2021, compared with $20.67 million at December 31, 2020.
- Total liabilities were $10.87 million, including $2.04 million of warrant liabilities, $2.11 million of operating lease liabilities and $0.14 million of related-party long-term borrowing.
- The filing does not report material conventional bank debt at year-end. Liquidity was supported primarily by equity financing rather than operating cash generation.
- Current assets were $19.92 million versus current liabilities of $8.82 million; however, cash was only $7.17 million and $7.56 million was tied up in supplier prepayments and deposits.
- Accounts receivable were $3.44 million net of a $2.24 million allowance. Gross receivables were $5.68 million, and approximately $2.09 million of receivables were charged off during 2021 as collection was considered remote.
- Net assets of PRC subsidiaries and VIEs subject to restrictions on transfer were approximately $13.2 million at year-end, up from $8.2 million. No dividends or distributions were made to the Nevada parent in 2021 or 2020.
- Management and the auditor stated that existing working capital, expected operating inflows and financing activities were expected to fund operations for at least one year from issuance of the financial statements.
Material Changes Versus 2020
- Revenue increased 23.2%, principally because customers shifted spending toward search-engine marketing during the continuing COVID-19 environment.
- Despite higher revenue, gross profit fell because the company operated at very low margins and experienced weaker portal advertising and O2O performance.
- Operating expenses more than doubled, largely due to share-based compensation and increased corporate and administrative costs.
- Operating cash flow shifted from a $0.33 million inflow to an $8.84 million outflow, driven in part by higher supplier prepayments, accounts receivable growth and other working-capital requirements.
- The company raised approximately $18.7 million gross, or $17.11 million net, through an offering of 5.21 million shares and warrants in February 2021. Shares outstanding increased to 35.33 million from 26.06 million.
- Approximately 3.99 million fully vested restricted shares were granted to management and employees in May 2021, generating approximately $6.66 million of compensation expense.
- Blockchain development costs were reclassified into intangible assets. At year-end, the Blockchain Integrated Framework platform and Bo!News application had carrying values of approximately $4.04 million and $0.38 million, respectively.
Guidance, Outlook, Risks and Unusual Items
Management described 2022 as a critical transition year for blockchain-related services. The company plans to develop BIF into an open-core SaaS platform with subscription, transaction and data-storage fees and intends to expand NFT-related functionality. The filing does not provide quantitative revenue, earnings or margin guidance.
- COVID-19 restrictions and economic weakness may reduce advertising spending, impair customer collections and disrupt operations. Rebound cases and lockdowns in China were noted after February 2022.
- The company relies on a VIE structure because PRC foreign-ownership restrictions apply to Internet content and value-added telecommunications services. Changes in PRC law or enforcement could invalidate or impair the contractual arrangements.
- PRC authorities may require additional approvals or filings for overseas offerings, cybersecurity reviews or data-related activities. The company stated that, as of the filing date, it had not been required to obtain CSRC or CAC permissions for its prior issuance.
- The auditor is based in Hong Kong and was not subject to PCAOB inspection as of the filing. The company disclosed potential HFCAA delisting risk, with delisting potentially occurring in 2024 under the law then in effect, or earlier if proposed legislation became law.
- Nasdaq notified the company in February 2022 that its stock failed the $1.00 minimum bid-price requirement. The company had until August 12, 2022 to regain compliance, with no assurance of continued listing.
- The company depends heavily on a single supplier, which represented approximately 73% of 2021 cost of revenues, compared with 78% in 2020.
- Four customers represented 95% of accounts receivable at December 31, 2021, based on disclosed concentrations of 33%, 32%, 19% and 11%.
- The company canceled a cryptocurrency mining-machine purchase agreement after PRC restrictions on cryptocurrency mining. Of $1.5 million prepaid, $1.0 million was refunded and $0.5 million was charged off.
- A $1.0 million refundable deposit for a potential acquisition remained outstanding at year-end and was expected to be refunded if no definitive agreement was reached by May 31, 2022.
- In January 2022, the company provided an unsecured $2.5 million working-capital loan to an unrelated party at a fixed annual interest rate of 7.5%, maturing May 5, 2022.
Most Important Facts for Investors to Verify
- Whether the company can generate positive operating cash flow without repeated equity financings.
- The collectability and aging of the $5.68 million gross accounts receivable balance and the adequacy of the $2.24 million allowance.
- The sustainability of revenue growth in search-engine marketing and the company’s ability to improve its approximately 0.2% gross margin.
- The commercial adoption, regulatory compliance and revenue contribution of the BIF, Bo!News and planned NFT/SaaS offerings.
- The enforceability and continued regulatory acceptance of the VIE contractual structure in China.
- The company’s ability to meet Nasdaq listing requirements and address HFCAA/PCAOB inspection risks.
- The dilution and future cash impact associated with 5.00 million outstanding warrants, with weighted-average exercise price of approximately $3.02 and expiration dates in 2023 and 2024.
- The use and location of cash raised in 2021, including restrictions on transferring funds from PRC entities to the Nevada parent.