DataSea Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2021; filed February 11, 2022. Amounts are in U.S. dollars unless stated otherwise. DataSea is a Nevada holding company whose China operations are conducted primarily through a variable interest entity (VIE) controlled by contractual arrangements, not equity ownership.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2021 | Six months ended Dec. 31, 2021 | Comparable 2020 period |
|---|---|---|---|
| Revenue | $8.98 million | $9.65 million | $126,184 quarter; $135,239 six months |
| Gross profit | $246,299 | $309,894 | $86,070 quarter; $78,226 six months |
| Gross margin | 2.7% | 3.2% | 68.2% quarter; 57.8% six months |
| Operating expenses | $2.09 million | $3.72 million | $1.07 million quarter; $1.94 million six months |
| Net loss attributable to DataSea | $1.68 million | $3.12 million | $964,037 quarter; $1.83 million six months |
| Operating cash flow | Not separately presented | $(3.82) million | $(1.85) million six months |
- Revenue growth primarily reflected the expansion of 5G messaging services. For the six months, management reported $9.62 million from 5G-related business and approximately $33,800 from smart-city projects. SMS and 5G messaging platform services generated most revenue.
- Despite sharply higher sales, cost of revenue was 97% of revenue in the six-month period; management cited competitive pricing and high third-party messaging-platform procurement costs. The resulting 3.2% gross margin was much lower than the prior-year period.
- Operating expenses rose to $3.72 million for six months, including $2.62 million in general and administrative expenses, $720,000 in R&D, and $387,000 in selling expenses. Management attributed G&A growth principally to professional fees, rent, and payroll.
- At December 31, cash was $2.24 million, current assets $9.13 million, and current liabilities $6.57 million, yielding working capital of $2.56 million and a 1.39 current ratio. At June 30, 2021, the company had a $2.37 million working-capital deficit and a 0.27 current ratio.
- Accounts receivable increased to $5.22 million from $1,856 at June 30; accounts payable rose to $5.02 million from $175,000. Prepaid expenses and other current assets included $1.20 million prepaid for inventory. A $577,191 receivable from Heqin was fully reserved as uncollectible.
- Operating cash outflow was partly funded by $6.24 million net financing cash flow, including $7.68 million net proceeds from the July 2021 equity financing. The company repaid $1.49 million of loans payable; no loans payable remained at period-end. Operating lease liabilities totaled $918,000.
Changes, outlook, and risks
- Six-month revenue increased from $135,239 to $9.65 million, while attributable net loss widened from $1.83 million to $3.12 million. Six-month operating cash outflow more than doubled year over year.
- Shares outstanding increased from 21.47 million at June 30 to 24.24 million at December 31. The July offering sold 2.44 million shares and warrants for gross proceeds of approximately $8.48 million and net proceeds of about $7.64 million. The company also issued shares for compensation and accrued officer salary.
- Management said 5G messaging revenue grew more than 900% versus the immediately preceding quarter and reported more than $17.05 million of 5G messaging contracts signed. It expects 2022 commercialization and new acoustic-intelligence products to support break-even or profitability in 2022. These are forward-looking expectations, not reported results. Management also plans approximately $10 million of technology-product development investment over three years.
- A January 2022 subsequent event describes a contract with China Mobile’s Nanjing Branch. The financial-statement note calls it a $1.11 million agreement; MD&A describes a $111,000 agreement and separately says approximately $1 million had been received. The filing does not provide a clear reconciliation.
- Management cited recurring losses, a $15.18 million accumulated deficit, and negative operating cash flow as going-concern concerns. It believes available working capital and potential shareholder support will fund at least the next 12 months, but acknowledges financing and profitability are not assured.
- Key risks include reliance on the China-based VIE contractual structure, uncertainty in PRC law and regulation, customer payment and receivable collection, dependence on third-party messaging suppliers, and the RMB cash held in China that is not freely convertible. Management did not expect COVID-19 to materially affect the remainder of fiscal 2022.
- Disclosure controls were reported ineffective, with material weaknesses involving segregation of duties and risk assessment, U.S. GAAP expertise, and written accounting and SEC-reporting procedures. Remediation efforts were underway. The company reported no pending legal proceedings and no disclosed contingencies at December 31.
Important facts for investors to verify
- Reconcile the January China Mobile contract amount ($1.11 million versus $111,000) and the reported approximately $1 million receipt.
- Confirm collection of the $5.22 million accounts receivable balance, the related customer concentration, and the recoverability of prepaid inventory and other assets.
- Assess whether reported contract values translate into delivered services, recognized revenue, cash receipts, and improved gross margins.
- Evaluate the company’s ability to fund continued operating cash outflows and planned R&D and investment without additional dilutive financing.
- Monitor remediation of material weaknesses and the legal and operational risks arising from the VIE structure and PRC regulatory environment.