ZW Data Action Technologies Inc. — Form 10-Q Summary
Business Context and Reporting Period
ZW Data Action Technologies Inc. is a Nevada holding company whose PRC subsidiaries and variable interest entities provide Internet advertising, precision marketing, e-commerce O2O advertising and marketing, data, and technical services to small and medium-sized enterprises in China. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021, with comparisons to the corresponding 2020 periods. The company reported 35.29 million shares outstanding at June 30, 2021 and 35.33 million as of August 16, 2021.
Financial Results and Key Metrics
| US$ in thousands, except per-share data | Six Months 2021 | Six Months 2020 | Three Months 2021 | Three Months 2020 |
|---|
| Revenue | 22,947 | 14,800 | 14,551 | 10,416 |
| Gross profit/(loss) | (935) | 1,197 | (218) | 298 |
| Gross margin | (4%) | 8% | (1%) | 3% |
| Operating loss | (10,094) | (3,296) | (8,279) | (1,020) |
| Net loss | (2,959) | (3,280) | (3,646) | (970) |
| Net loss attributable to the company | (2,961) | (3,278) | (3,646) | (968) |
| Basic and diluted loss per share | (0.10) | (0.16) | (0.11) | (0.04) |
- Six-month revenue increased approximately 55% year over year; second-quarter revenue increased approximately 40%.
- Distribution of search-engine marketing rights generated US$18.97 million in six-month revenue and US$12.10 million in second-quarter revenue, representing approximately 83% of total revenue in each period.
- Internet advertising and related services generated US$3.60 million for the six months, while e-commerce O2O revenue declined to US$0.39 million from US$1.01 million.
- Cost of revenue increased faster than revenue, producing gross losses. Search-engine marketing services had negative gross margins of approximately 5% for the six months and 3% for the quarter.
- Operating expenses rose to US$9.16 million for the six months and US$8.06 million for the quarter, primarily because of share-based compensation and higher general and administrative expenses.
- Share-based compensation was US$6.86 million for the six months and US$6.76 million for the quarter, including approximately US$6.66 million related to 3.99 million fully vested restricted shares issued to management and employees in May 2021.
- A US$6.83 million gain from the change in fair value of warrant liabilities materially reduced the reported net loss. This non-cash gain increased from US$0.07 million in the prior-year six-month period.
- Cash and cash equivalents were US$11.75 million at June 30, 2021, compared with US$4.30 million at December 31, 2020.
- Net cash used in operating activities was US$5.33 million, compared with US$1.17 million provided by operations in the prior-year period.
- Net cash used in investing activities was US$4.36 million, including software purchases, investments, loans, deposits, and other prepayments.
- Net cash provided by financing activities was US$17.11 million from a February 2021 registered direct offering, net of cash offering costs.
Balance Sheet, Debt, and Liquidity
| US$ in thousands | June 30, 2021 | December 31, 2020 |
|---|
| Total assets | 36,948 | 20,667 |
| Total current assets | 24,060 | 12,884 |
| Total liabilities | 15,558 | 8,188 |
| Total equity | 21,390 | 12,479 |
| Warrant liabilities | 6,597 | 1,505 |
| Accounts receivable, net | 3,707 | 2,407 |
| Prepayments and supplier deposits | 8,035 | 4,657 |
- The filing reports a US$0.14 million long-term borrowing from a director, along with approximately US$2.17 million of operating lease liabilities. It does not report conventional bank debt outstanding at June 30, 2021.
- Current liabilities included US$3.41 million of taxes payable and US$6.60 million of warrant liabilities.
- Liquidity improved because of the equity offering, but operating cash burn and negative gross margins continued.
- Accounts receivable were subject to a US$2.21 million allowance for doubtful accounts. The company charged off approximately US$2.08 million of receivables during the second quarter after concluding collection was unlikely.
- Approximately US$13.2 million of PRC subsidiary and VIE net assets were restricted from transfer to the company as of June 30, 2021.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by recovery in search-engine marketing activity following the earlier COVID-19 disruption in China.
- Profitability deteriorated despite higher revenue: the company shifted from gross profit to gross loss and operating losses expanded substantially.
- General and administrative expense increased to US$8.90 million for the six months from US$3.93 million, largely due to higher share-based compensation and office-related expenses.
- Operating cash flow shifted from a US$1.17 million inflow to a US$5.33 million outflow, partly because accounts receivable, supplier prepayments, and long-term deposits increased.
- Common shares outstanding increased from 26.06 million at December 31, 2020 to 35.29 million at June 30, 2021, reflecting the February financing and equity compensation.
- Warrant liabilities increased to US$6.60 million from US$1.51 million at year-end, although their fair value declined during the quarter and produced a non-cash gain.
Guidance, Outlook, Risks, and Unusual Items
- Management expected Internet advertising service revenue to show no significant fluctuation in the second half of 2021 versus the comparable 2020 period.
- Management expected search-engine marketing revenue to remain stable in the second half of 2021, while noting renewed COVID-19 cases and uncertainty in China.
- Management expected Internet advertising gross margins to improve and search-engine marketing margins to continue improving through higher volume and supplier negotiations; no formal quantitative earnings guidance was provided.
- The company planned to launch an upgraded Bo!News application by the end of the third quarter and its Blockchain Integrated Framework before year-end. Approximately US$4.41 million of blockchain development costs were capitalized, with approximately US$0.55 million remaining under related contracts.
- A US$1.5 million prepayment for cryptocurrency mining machines was expected to be refunded after the agreement was cancelled in response to Chinese government policies banning cryptocurrency mining beginning in May 2021.
- The company had a US$1.0 million refundable deposit for a potential merger and acquisition transaction, refundable if no definitive agreement was reached by September 30, 2021. It also had a US$1.0 million prepayment for a planned 15.38% investment related to blockchain, e-sports, and digital content activities.
- Operations depend substantially on PRC subsidiaries and VIE contractual arrangements. PRC restrictions on currency conversion, dividends, and transfers of funds may limit access to operating cash.
- Revenue and costs were concentrated: two customers accounted for 25% of six-month revenue, while one supplier accounted for 73% of six-month cost of revenue and 86% of second-quarter cost of revenue.
- The filing identifies COVID-19, customer collectability, supplier concentration, PRC regulatory restrictions, foreign-exchange controls, warrant valuation volatility, and the company’s reliance on financing activities as material risks.
- The company reported no material legal or administrative proceedings, no off-balance-sheet arrangements, and effective disclosure controls as of June 30, 2021. The filing omits a separate risk-factor discussion because the company is a smaller reporting company.
- In July 2021, the company issued approximately 40,000 shares in a cashless settlement of 129,000 placement-agent warrants.
Most Important Facts for Investors to Verify
- Whether search-engine marketing revenue can remain stable while its gross margin remains negative or improves as management expects.
- Whether operating cash flow improves and whether the US$11.75 million cash balance is sufficient without additional equity financing.
- The terms, potential dilution, and future fair-value volatility of approximately 5.13 million outstanding warrants and 0.28 million options.
- The collectability of remaining accounts receivable and the impact of the US$2.08 million second-quarter charge-off.
- The status and recoverability of the US$1.5 million cryptocurrency-mining prepayment, the US$1.0 million potential M&A deposit, and the US$1.0 million planned investment prepayment.
- The company’s dependence on PRC VIE structures, restricted net assets, foreign-exchange controls, and evolving Chinese regulation.
- The sustainability and economic cost of issuing approximately US$6.86 million of share-based compensation in the first half of 2021.
