DATASEA INC. quarterly report, Q2 FY2015

Business context and reporting period

Datasea Inc. (formerly Rose Rock Inc.) filed this unaudited Form 10-Q for the quarter ended June 30, 2015. Incorporated in September 2014, the development-stage company reported that it was seeking business opportunities and had not begun generating revenue. It changed its name on May 27, 2015.

Financial results and liquidity

At June 30, 2015, cash and total assets were $22,923; current liabilities were $3,691, comprising accrued expenses. The $224 shareholder loan reported at December 31, 2014 had been repaid. Stockholders’ equity was $19,232, including an accumulated deficit of $20,768. No revenue or profit margins were reported.

For the six months, operating activities used $3,853 of cash. Financing activities provided $19,776, including $20,000 from issuing 2,000,000 shares and repayment of the $224 shareholder loan. Cash increased by $15,923 from $7,000 at year-end to $22,923. The MD&A mistakenly describes the $19,776 as cash from investing activities; the cash flow statement classifies it as financing.

Changes, outlook, and risks

• The filing says comparable operating results are unavailable because the company was formed in September 2014. The balance sheet compares June 30, 2015 with December 31, 2014.
• During the six months, the company issued 2,000,000 shares to unaffiliated investors for $20,000. Separately, Zhixin Liu purchased 4,000,000 existing shares from Xingzhong Sun, representing 57.14% of outstanding shares; Liu became board chairman on May 26. This secondary transaction did not provide proceeds to the company.
• Management said existing cash was expected to fund operations into the coming months, but additional funding would be needed thereafter. The company might seek equity or debt financing or reduce spending; there is no assurance financing will be available on acceptable terms.
• The filing identifies substantial doubt about the company’s ability to continue as a going concern, citing no revenue and the accumulated deficit. Continued operations depend in part on generating revenue and obtaining capital; no assurance is given.
• Disclosure controls and procedures were deemed ineffective due to inadequate segregation of duties and risk assessment, and insufficient written accounting and reporting policies. Planned remediation depended on obtaining additional financing and had not yet occurred.
• Management reported no material subsequent events, no pending or known contemplated legal proceedings, and no off-balance-sheet arrangements. Inflation had not materially affected the business. The filing provided no specific revenue or earnings guidance.

Key facts for investors to verify

• Whether the company obtained financing or generated revenue after June 30, given its limited cash and going-concern uncertainty.
• The cash-flow classification discrepancy between the statement and MD&A.
• The reported share issuance and ownership-control change, including that Liu’s share purchase was a secondary sale rather than company financing.
• Whether management remediated the identified internal-control weaknesses and secured funding for the planned improvements.