Datasea Inc. (DTSS) — Form 10-Q Summary
Reporting period: Three months ended September 30, 2022 (the first quarter of fiscal 2023, not calendar 2022 Q1). Filed November 14, 2022. Datasea is a Nevada holding company whose business is conducted principally in China through subsidiaries and a contractually controlled variable interest entity (VIE). Its activities include 5G messaging, acoustic-intelligence products, and smart-city solutions.
Financial performance and position
| Metric | Three months ended September 30, 2022 | Prior-year comparable period / balance-sheet comparison |
|---|---|---|
| Revenue | $1.164 million | $671,130; up 73% |
| Gross profit and margin | $150,197; 12.9% | $63,595; 9.5% |
| Operating expenses | $1.607 million | $1.637 million |
| Operating loss | $(1.457) million | $(1.574) million |
| Net loss attributable to Datasea | $(1.337) million; $(0.05) per share | $(1.441) million; $(0.06) per share |
| Operating cash flow | $(752,697) | $(1.400) million |
| Investing cash flow | $(102,845) | $(9,156) |
| Financing cash flow | $790,302 | $7.172 million |
| Cash | $93,074 at September 30 | $164,217 at June 30, 2022 |
| Current assets / liabilities | $979,033 / $2.802 million | Working-capital deficit widened to $1.822 million from $867,774; current ratio fell to 0.35 from 0.59 |
| Total liabilities / equity | $2.802 million / $290,583 | Liabilities increased from $2.156 million; total equity fell from $1.600 million |
Cost of revenue was $1.014 million, or 87% of revenue, compared with 91% a year earlier. Selling expense rose 27% to $293,064; general and administrative expense declined 6% to $1.050 million; research and development expense declined 8% to $263,332. The filing reports no cash interest paid. Loans payable were $866,644, up from $81,950 at June 30; the disclosed loans were interest-free and due by December 31, 2022. Current operating-lease liabilities were $320,826.
Changes and operating developments
- Revenue growth was attributed mainly to 5G messaging expansion. The filing identifies approximately $1.039 million from 5G messaging and $124,544 from smart public-broadcasting projects; the 5G messaging figure is further described as including $21,762 from 5G SMS and $1,017,998 from 5G IMMCP.
- Management attributed improved gross margin to a larger contribution from higher-margin value-added services. Net loss narrowed by about 7%, while operating expenses declined slightly.
- Operating cash outflow improved year over year, but cash declined during the quarter. The company relied on financing inflows, principally new loans, while investing $73,154 in intangible assets and $29,288 in a long-term investment.
- Management reported 5G messaging sales agreements announced in July and August 2022, including agreements valued at $22.3 million and $4.47 million. It also described a 2022 agreement to supply at least 10,000 air-disinfection units for at least RMB 35 million, and an October 2022 agreement for at least 100,000 air purifiers valued at at least RMB 150 million. These are stated contract values, not recognized quarterly revenue; fulfillment, collection, and customer performance are not established by the reported quarter.
Outlook, risks, and unusual items
- Going concern: The company reported recurring losses, a $19.92 million accumulated deficit, negative operating cash flow, and a substantial working-capital deficit. Management said projected resources should support operations for at least 12 months, but acknowledged that additional financing may be needed and is not assured.
- Liquidity and financing: Cash was $93,074 at quarter-end, while current liabilities substantially exceeded current assets. Management anticipates funding needs through revenue growth, shareholder support, or public or private financing; equity financing could dilute shareholders.
- Receivable exposure: A $518,324 receivable from Heqin was fully provided for as doubtful. The filing says Heqin had made no repayment by September 30, 2022.
- VIE and China exposure: The company has no equity ownership in its principal VIE and depends on contractual arrangements to control it and receive economic benefits. Operations, customers, and identifiable assets are in China. Most cash is held in RMB in China and is not freely convertible into foreign currencies.
- Internal controls: Management concluded disclosure controls were not effective, citing inadequate segregation of duties and risk assessment, insufficient U.S. GAAP expertise, and inadequate written accounting and reporting procedures. Remediation was ongoing.
- Other matters: The company reported no material legal proceedings, no disclosed contingencies, and no major subsequent event. Management described COVID-19 and China’s economic, regulatory, and market conditions as uncertainties. No formal numerical revenue or earnings guidance was provided.
Most important facts for investors to verify
- Whether announced 5G and air-purifier agreements are binding, funded, fulfilled, collected, and capable of generating the stated sales and margins.
- How the company will meet near-term obligations, including the loans due by December 31, 2022, and whether it can obtain additional financing without unfavorable terms or dilution.
- Progress on collections from customers and the recovery prospects for the fully reserved Heqin receivable.
- Whether operating cash flow and gross margins can improve sustainably, rather than relying on short-term borrowing or working-capital movements.
- Remediation of material weaknesses in internal controls, and risks arising from dependence on the China-based VIE and restrictions on moving RMB funds.
- Reported-data inconsistency: The cash-flow statement reports $790,302 of financing cash flow for the quarter, but the MD&A later says $79,302. Verify the correct amount; the financial statements report $790,302.