Datasea Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2019, for the fiscal year ending June 30, 2019. The filing describes Datasea as a China-focused technology company developing IT systems and network-security solutions, including its Safe Campus and Smart Elevator programs. It consolidates a PRC variable-interest entity (VIE) through contractual arrangements.
Financial results and position
| Metric | Three months ended Mar. 31, 2019 | Nine months ended Mar. 31, 2019 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $574,589 | $1,329,479 |
| Operating loss | $574,589 | $1,329,479 |
| Net loss | $540,999 | $1,284,936 |
| Net loss per share, basic and diluted | $0.03 | $0.06 |
No gross margin was generated in 2019 because there was no revenue. For comparison, revenue was $6,468 in the prior-year quarter and $15,502 in the prior-year nine-month period. Net losses were $438,937 and $1,238,935, respectively. Quarterly G&A increased to $510,983 from $290,560; nine-month G&A increased to $1,013,136 from $891,335. Nine-month selling expense rose to $183,240 from $148,607, while R&D declined to $133,103 from $251,882.
At March 31, 2019, cash was $5,341,969, current assets were $5,531,443, and working capital was $5,403,418. Total assets were $6,236,881 and stockholders’ equity was $6,108,855. Current liabilities totaled $128,026, including an $11,174 interest-free, unsecured shareholder loan due on demand. The company also reported $600,000 in escrow related to its offering; the filing says this amount is subject to an 18-month-or-longer indemnification escrow arrangement.
For the nine months, operating cash use was $1,289,063 and investing cash use was $64,531. Financing provided $5,534,355, primarily from the December 2018 public offering and other common-stock sales. Cash increased by $4,310,483 to $5,341,969. The filing reports no cash paid for interest or income taxes.
Material changes and unusual items
- Datasea completed an underwritten public offering in December 2018, selling 1,667,500 shares at $4 per share. It reported approximately $5.7 million of net proceeds, with escrowed funds partly released in February 2019. Shares began trading on Nasdaq under DTSS.
- Shares issued and outstanding increased from 19,170,846 at June 30, 2018 to 20,943,846 at March 31, 2019. The 2018 equity plan authorizes awards of up to 4 million shares; no awards had been granted as of the report date.
- The Xin Platform project involving China Minsheng Bank was suspended following a change in the bank’s product policy.
- The company reported no pending legal proceedings, no disclosed material contingencies, and no off-balance-sheet arrangements.
Outlook, risks, and controls
Management said it expects to generate Safe Campus revenue during 2019 and identified Smart Elevator as still in research and development. It cited demand for internet security and big-data services in China as a potential growth opportunity, but provided no quantified revenue or earnings guidance. Management estimated available resources would fund operations through March 2020.
The filing nevertheless states that substantial doubt exists about the company’s ability to continue as a going concern: it has generated no revenue in the current quarter or nine-month period, has an accumulated deficit of approximately $5.41 million, and continues to incur losses. Management said future shortfalls may require support from major stockholders or additional securities issuance; such funding may not be available on acceptable terms or at all.
Disclosure controls were deemed ineffective because of material weaknesses involving segregation of duties and risk assessment, U.S. GAAP expertise, and written accounting and reporting procedures. Management described planned remediation, including additional qualified personnel and written policies, but said implementation depends substantially on generating more revenue or obtaining financing. Key risks cited include establishing the business and generating revenue, China’s economic and regulatory environment, product acceptance and installation delays, customer order timing, and access to capital.
Important facts for investors to verify
- Whether Safe Campus generated revenue after the reporting period and whether the Smart Elevator program advanced beyond R&D.
- The company’s cash runway and funding needs, considering ongoing losses, the going-concern warning, and the $600,000 escrow restriction.
- The status and effectiveness of remediation of the disclosed material weaknesses in internal controls.
- The filing reports net public-offering proceeds of $5,240,889 in the cash-flow statement but gives other offering-proceeds figures in its MD&A discussion; reconcile the amounts and escrow treatment.
- The contractual VIE structure and the company’s ability to maintain control over its PRC operations through those arrangements.