DataSea Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2016 (the first quarter of fiscal 2017; the filing’s cover identifies the quarter-end date). The financial statements are unaudited. Amounts below are U.S. dollars unless noted.
Business context and results
DataSea provides Internet security products, new-media advertising, micro-marketing and data-analysis services in China. It reported no revenue in either the current or prior-year quarter. Its Daqing City government procurement project, worth approximately $162,844, had been installed but was still awaiting customer acceptance; revenue is recognized upon acceptance.
| Metric | Three months ended Sep. 30, 2016 | Three months ended Sep. 30, 2015 |
|---|---|---|
| Revenue | $0 | $0 |
| Selling expenses | $44,718 | $0 |
| General and administrative expenses | $225,176 | $162,307 |
| Operating loss | $269,894 | $162,307 |
| Net loss | $266,834 | $162,301 |
| Basic and diluted loss per share | $0.00 | $0.01 |
| Net cash used in operating activities | $245,202 | $145,574 |
General and administrative costs included research and development and professional fees; prior-year costs were attributed to start-up activity. Net loss increased about 64% year over year. The filing provides no meaningful margin comparison because there was no revenue.
Financial position and liquidity
At September 30, 2016, cash was $93,366, total current assets were $388,706, and current liabilities were $305,113, yielding working capital of $83,593. Current assets included $229,360 of project-in-progress costs and $65,980 of prepaid expenses and other current assets. Total assets were $498,670 and stockholders’ equity was $193,557.
The company had an $84,557 interest-free, unsecured shareholder loan payable on demand, down from $176,621 at June 30, 2016. It used $245,202 in operating cash and $1,795 in investing cash; financing provided $328,641, including $420,900 from common-stock sales and $92,259 paid to a related party. Cash rose from $11,802 at June 30 to $93,366 at quarter-end. The company reported no cash interest or income-tax payments.
Outlook, risks and notable matters
- Management expects to begin generating revenue during the fiscal year ending June 30, 2017, including from the Daqing project after customer acceptance. This is an expectation, not quantified financial guidance.
- The company has generated no revenue since inception, has an accumulated deficit of $1,594,424, and has incurred recurring losses. Management and the filing identify substantial doubt about the company’s ability to continue as a going concern. Additional financing is needed, and there is no assurance it will be available on acceptable terms.
- Management estimated approximately $58,956 in costs for five years of equipment warranty and lifetime software-update warranties tied to the Daqing contract.
- Disclosure controls were deemed ineffective due to material weaknesses, including inadequate segregation of duties and risk assessment, insufficient U.S. GAAP expertise, and a lack of written accounting and reporting procedures. Planned remediation depends partly on obtaining financing.
- Risks cited include establishing and operating the business in China, regulatory changes, customer demand and order timing, access to capital, supplier relationships, and political and economic conditions. The company reported no pending legal proceedings and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the Daqing customer accepted the completed project and when any related revenue and costs will be recognized.
- Current cash needs, subsequent financing, and the terms and availability of additional capital.
- Repayment status and any demand for the shareholder loan payable on demand.
- Whether internal-control weaknesses have been remediated and whether warranty obligations or project costs differ from estimates.