Datasea Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended June 30, 2021; comparison is with the year ended June 30, 2020. Although the request metadata says “2020 Q4,” this filing reports FY2021, not a standalone quarter. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Datasea is a Nevada holding company whose operations are primarily conducted in China through subsidiaries and a variable interest entity (VIE), Shuhai Beijing, controlled through contractual arrangements rather than equity ownership. Its businesses include smart-city/security systems, acoustic intelligence, 5G messaging, and smart payment. FY2021 revenue was primarily from smart-campus systems and related devices; the newer 5G messaging and payment businesses were still developing.
Financial results and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $175,138 | $1,414,781 |
| Gross profit | $94,003 | $1,268,400 |
| Gross margin | Approximately 54% | Approximately 90% |
| Operating expenses | $4,955,289 | $3,173,453 |
| Operating loss | $(4,861,286) | $(1,905,053) |
| Net loss attributable to Datasea | $(4,648,477) | $(1,863,253) |
| Basic and diluted loss per share | $(0.22) | $(0.09) |
| Net cash used in operating activities | $(3,948,349) | $(4,573,352) |
| Net cash used in investing activities | $(168,685) | $(306,813) |
| Net cash from (used in) financing activities | $2,448,847 | $(84,842) |
- Cash at June 30, 2021 was $49,676, down from $1,065,936 a year earlier; current assets were $885,985. Working capital was negative $2,372,682 and the current ratio was 0.27.
- Total liabilities were $3,817,406, including $1,486,819 of loans payable and $1,288,924 of operating lease liabilities. The loans were non-interest-bearing and repayable by December 31, 2021. Accumulated deficit was $12,061,858.
- Cash and restricted cash decreased by $1,616,260 during FY2021. The filing separately reports operating cash outflow of $3,948,349.
Material changes and developments
- Revenue fell about 88% year over year. Management attributed the decline to the transition toward 5G messaging and smart payment, which had not yet generated significant revenue, and a lower contribution from prior-year software sales. FY2021 hardware sales also faced limited markup, reducing gross margin.
- Operating expenses increased about 56%. General and administrative expense more than doubled to $3,535,416, with increases including rent, payroll, professional fees, bad-debt expense, and social insurance. Selling expense rose to $568,034; R&D expense declined to $851,839 from $1,114,486.
- In November 2020, Datasea issued 520,000 shares to Triton for net proceeds of $931,000 and subsequently terminated the purchase agreement. In July 2021, after year-end, it issued 2,436,904 shares and warrants for net proceeds of approximately $7.64 million, intended for working capital, general corporate purposes, and debt repayment.
- At year-end, 5G messaging partners represented reported FY2021 contract value of $316,718 and cash receipts exceeding $239,938. Subsequent agreements with Hubei Kuanyun and Quantum Communications totaled approximately $8.2 million. A post-year-end strategic agreement covering canteens and restaurants at at least 200 schools and institutions was stated to have a minimum value of approximately $14.76 million over two years.
Outlook, risks, and unusual items
- Going concern: The auditor’s report and notes identify substantial doubt about Datasea’s ability to continue as a going concern, reflecting recurring losses, operating cash outflows, and limited liquidity. The filing says the July 2021 financing mitigated the liquidity concern, but does not eliminate the need for successful execution or potential further financing.
- Management plans: The company expects growth from smart-city, acoustic-intelligence, 5G messaging, and payment offerings. It plans approximately $10 million of technology-product development investment over three years. Longer-term aspirations include coverage of 28 Chinese provinces and more than 10,000 campus/community projects by 2025; these are company targets, not assured results.
- Regulatory and structure risks: The company depends on PRC VIE contractual arrangements and warns that authorities could challenge the structure or affect offshore listings, operations, or foreign investment. It also highlights evolving Chinese cybersecurity, data security, and personal-information rules; currency controls and restrictions on moving funds from China; and difficulty enforcing U.S. judgments in China.
- Other risks: Dependence on contract manufacturers, product acceptance and quality, competition, key personnel, dilution or additional borrowing, thinly traded stock, and COVID-19-related demand effects. No material pending legal proceedings or material contingencies were reported.
- Controls and audit: Management concluded disclosure controls and internal control over financial reporting were ineffective at June 30, 2021, citing unclear segregation of duties, insufficiently frequent control testing, and a shortage of personnel trained in U.S. GAAP. Management described remediation steps. The financial statement audit opinion was unqualified; the auditor identified going concern as a critical audit matter.
- Unusual receivable: A $569,651 receivable from Heqin was reported net of a $284,825 allowance; the company said Heqin had not repaid by the report date and had revised its repayment schedule.
Important facts for investors to verify
- Whether the July 2021 financing proceeds were received and how much debt was repaid; review dilution from the shares and warrants issued.
- Whether the approximately $8.2 million 5G messaging agreements and $14.76 million school-services agreement are binding, funded, being performed, and converting into recognized revenue and cash collections.
- Current cash, working capital, loan balances and maturities, lease obligations, and the company’s ability to fund operations after the financing.
- Recovery prospects for the Heqin receivable and support for the recorded allowance.
- Progress on internal-control remediation and any subsequent auditor or financial-reporting developments.
- Compliance with PRC VIE, cybersecurity, data-protection, offshore-listing, and cross-border cash-transfer requirements.