Datasea Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2021; the filing is for fiscal 2021’s third quarter, despite the request metadata specifying “2020 Q3.” Financial statements are unaudited. The company provides smart security and related technology products and services in China, with initiatives in smart campus and community systems, payment services, and 5G messaging.
Key financial metrics
| Metric | Three months ended March 31, 2021 | Nine months ended March 31, 2021 | Comparison |
|---|---|---|---|
| Revenue | $17,686 | $152,925 | $0 in the comparable 2020 periods |
| Gross profit (margin) | $7,774 (44%) | $86,000 (56%) | $0 in 2020 |
| Operating expenses | $1,274,275 | $3,209,518 | 2020: $690,657 and $2,315,953, respectively |
| Net loss attributable to Datasea | $1,219,000; $0.06 per share | $3,049,860; $0.14 per share | 2020 losses: $677,739 and $2,275,757, respectively |
| Operating cash flow | Not presented separately | $(3,061,955) | 2020: $(3,685,213) |
| Cash and restricted cash at period end | $171,177 cash; no restricted cash | June 30, 2020: $1,065,936 cash plus $600,000 restricted cash |
At March 31, 2021, reported total assets were $4.58 million, total liabilities $2.77 million, and total equity $1.82 million. The balance sheet included $741,101 of non-interest-bearing loans payable, due no later than December 31, 2021, and $1,436,735 of operating lease liabilities. The company raised $931,000 net from an equity issuance during the nine-month period. Its accumulated deficit was $10.46 million.
Changes and operating performance
- Revenue began to be reported in fiscal 2021, primarily from smart-campus systems and devices, temperature-measurement access-control products, and smaller sales to residential communities. The filing reports nine-month sales of $117,325 to two schools and quarterly sales of $17,905 to one customer; these customer-level amounts do not exactly match the statement totals.
- Nine-month operating expenses rose 39% year over year, while net loss attributable to Datasea increased about 34%. General and administrative expense increased 73% to $2.38 million, which management attributed to higher rent, salaries, professional fees, and costs associated with new subsidiaries. Selling expense more than doubled; research and development expense declined to $537,009 from $799,511.
- Cash used in operations remained substantial despite improving by about $623,000 year over year. Investing used $128,988, while financing provided $1,659,824, principally from the stock issuance and loan proceeds. Cash and restricted cash declined by $1,494,759 over the nine months.
- Inventory was $254,960, including an allowance of $47,257 for slow-moving or obsolete inventory. Other receivables included $560,011 due from Heqin; the filing gives a revised repayment schedule beginning May 2021.
Liquidity, outlook, and risks
Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing the nine-month net loss of $3.05 million, operating cash outflow of $3.06 million, and accumulated deficit of $10.46 million. Management expects to fund operations through revenue growth, financing, and potentially support from major shareholders, but states that additional funding may not be available on acceptable terms or at all. The company reported a $274,760 working-capital deficit and a current ratio of 0.86.
The filing contains inconsistent current-asset figures: the balance sheet reports $1,493,151, while MD&A states $1,714,328. The reported working-capital deficit is consistent with the MD&A figure rather than the balance-sheet total. Investors should verify the correct amount and calculation.
- Management described plans to expand safe-campus and smart-community products, AI-based payment and value-added services, and 5G messaging. It intends to invest approximately $10 million in technology development over the next three years; this is a stated intention, not committed funding or formal financial guidance.
- Management cited risks including uncertain customer demand and order timing, product development and adoption, China’s economic and regulatory conditions, third-party suppliers, COVID-19, and the availability of capital.
- Disclosure controls and procedures were reported as ineffective. Identified material weaknesses included inadequate segregation of duties and risk assessment, insufficient U.S. GAAP expertise, and insufficient written accounting and reporting procedures. Remediation was ongoing.
- The company terminated its SDT software-development project on April 23, 2021, stating certain functions did not meet its needs and that it would not owe the remaining $200,000. At March 31, it had recorded $600,000 related to software development as an intangible asset and reported no impairment. The subsequent-events note states no material subsequent event was identified.
- The filing reported no pending legal proceedings or disclosed contingencies as of March 31, 2021. The company’s operations include a PRC variable interest entity consolidated through contractual arrangements; the filing describes the VIE structure and associated agreements.
Important facts for investors to verify
- Confirm the correct current-assets and working-capital figures, given the discrepancy between the balance sheet and MD&A.
- Assess cash runway, the repayment of the $741,101 loans, and the company’s ability to obtain financing; management itself disclosed substantial going-concern doubt.
- Monitor collection of Heqin’s $560,011 receivable against the revised repayment schedule.
- Review the accounting and recoverability of software-development assets following the SDT contract termination, including the apparent tension with the no-material-subsequent-event disclosure.
- Evaluate whether reported customer wins and proposed investments in 5G and other products translate into recurring revenue and improved margins.