DATASEA INC. quarterly report, Q2 FY2021

Business context and reporting period

Datasea Inc. provides smart security products and services in China, including school and community security systems, epidemic-prevention products, intelligent payment services, and 5G messaging development. This Form 10-Q reports the three and six months ended December 31, 2020, compared with the same periods in 2019. The financial statements are unaudited.

Financial performance and position

At December 31, 2020, cash was $674,397 and current assets were $2.35 million against current liabilities of $1.30 million. Management reported working capital of $1.05 million and a current ratio of 1.81, down from $2.61 million and 4.78 at June 30, 2020 (excluding restricted cash). Total liabilities were $2.25 million, including $1.73 million of operating lease liabilities. The balance sheet reports no conventional borrowings.

For the six months, operating cash use was $1.85 million, investing cash use was $99,696, and financing provided $931,000. Cash and restricted cash fell by $991,539 from the beginning of the period; the $600,000 restricted-cash balance was released during the period. The company issued 520,000 shares to Triton for net proceeds of $931,000.

Material changes versus prior periods

• Revenue increased from zero, principally from $115,750 of Safe Campus system and device sales to two schools, along with smaller sales. The company remained at an early revenue scale relative to its operating costs.
• Six-month operating expenses rose 19% to $1.94 million. General and administrative expense increased 51% to $1.43 million, with higher rent, salaries, office costs, and professional fees; selling expense rose 59%. Research and development expense declined to $329,235 from $570,365.
• Six-month net loss attributable to Datasea widened to $1.83 million from $1.60 million. Quarterly attributable net loss improved to $964,037 from $1.00 million, although operating loss remained close to the prior-year quarter.
• Operating cash outflow improved by $1.13 million year over year, primarily because of lower cash paid for prepaid development costs. Cash was also supported by the November equity issuance.
• Intangible assets rose to $878,955, including $850,000 of software development costs transferred from prepaid development expenditure. Right-of-use assets and lease liabilities also increased with new office leases.

Outlook, risks, and unusual items

• Going concern: Management states that accumulated losses, a six-month net loss of $1.83 million, and operating cash use of $1.85 million raise substantial doubt about the company’s ability to continue as a going concern. Management plans to rely on operating revenue and further equity or debt financing, but gives no assurance financing will be available.
• Plans: Management identifies smart security systems, intelligent payment, and 5G messaging as future priorities and intends to invest approximately $10 million in technology development over three years. It describes revenue growth and government subsidies as potential support, not firm guidance.
• Development and customer concentration: The two security systems under development have stated total costs of $2.4 million, of which $1.9 million had been paid. A software development project was delayed, with completion estimated by the company for the end of March 2021.
• Receivable risk: A $563,993 receivable from Heqin remained outstanding at December 31, 2020. Heqin revised its repayment schedule, with payments expected to start in April 2021; two smaller loans were overdue. The receivable is described as secured, but collection remains a risk.
• Other risks: The company operates principally in China, consolidates a PRC variable interest entity through contractual arrangements, and faces risks tied to customer demand, regulation, product development, financing, and currency controls. Management said COVID-19 had not materially affected operations after work resumed in April 2020, while noting ongoing uncertainty.
• Controls and contingencies: Management concluded disclosure controls were ineffective due to weaknesses in segregation of duties, U.S. GAAP expertise, and written accounting and reporting procedures. Remediation efforts are underway. The filing reports no material contingencies, pending legal proceedings, or off-balance-sheet arrangements.

Investor verification priorities

• Verify that new sales can scale beyond the $115,750 school-system order and that the reported revenue is recurring and collectible.
• Assess liquidity and the company’s ability to fund ongoing losses, lease commitments, and stated development plans without further dilution.
• Monitor collection of the $563,993 Heqin receivable and subsequent performance against its revised repayment schedule.
• Review progress and remaining costs for the security and software development projects, including whether the capitalized software amounts meet applicable accounting criteria.
• Track remediation of the disclosed material weaknesses and any subsequent change in management’s assessment of internal controls.
• Reconcile filing inconsistencies: the contents identify the reporting period as ended December 31, while a financial-statement heading refers to September 30; the income statement reports no income tax, while the tax note describes tax benefits offset by valuation allowances. The filing text does not provide a clear reconciliation.