Datasea Inc. — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2018; comparisons are with the year ended June 30, 2017. This is an annual report, not a separate fourth-quarter filing. The company is a China-focused technology business whose operations are conducted through subsidiaries and a variable interest entity (VIE).
Business context and strategy
Datasea has shifted its focus from cybersecurity equipment toward its Safe Campus and Smart Elevator systems, related marketing services, and prospective data-processing services. Its Xin Platform supports these offerings and is intended to monetize users through advertising, online commerce, education services, and financial-product referrals.
- Safe Campus remained in a trial phase and had not generated revenue by the filing date. The company reported about 480,000 mobile-app users, agreements with 30 schools across 10 provinces covering about 9,000 students, and provided equipment and services to schools for free.
- Smart Elevator testing was expected to finish by the end of 2018, with market entry planned for 2019. Data analytics remained under development.
- The company entered a two-year cooperation agreement with China Minsheng Bank in March 2018 to refer platform users to the bank’s financial products for service fees.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $10,571 | $140,774 |
| Gross profit | $5,752 | $55,377 |
| Gross margin | 54.4% | 39.3% |
| Operating expenses | $1,667,179 | $1,308,967 |
| Loss from operations | ($1,661,427) | ($1,253,590) |
| Net loss | ($1,604,141) | ($1,193,216) |
| Net loss per share | ($0.08) | ($0.06) |
| Cash used in operating activities | $1,484,730 | $1,061,538 |
At June 30, 2018, cash was $1,031,486, working capital was $1,044,432, and current assets and current liabilities were $1,235,276 and $190,844, respectively. Total assets were $1,376,965. Current liabilities included $27,058 owed to a shareholder; the filing reports no material long-term debt. The shareholder loan was interest-free, unsecured, and due on demand.
FY2018 financing cash flow was $1,235,870, including $1,432,128 net proceeds from common-stock issuance, offset in part by shareholder-loan repayments and deferred registration costs. Cash declined by $143,464 during the year. The accumulated deficit was $4,124,947.
Changes, outlook, risks, and unusual items
- Revenue fell about 92.5% as the prior-year Daqing public-security contract wound down and the company suspended active cybersecurity marketing. One customer accounted for 85.1% of FY2018 revenue, compared with 100% in FY2017.
- Net loss increased about 34.4%; operating expenses rose about 27.4%, including research and development spending of $361,616 versus $203,600 and higher general and administrative costs, primarily associated with staffing for new programs.
- Management said available resources were expected to fund operations through December 2018 and estimated it would need RMB 50–80 million (approximately $8.5–12 million) for January–June 2019. It planned to seek debt or equity financing; availability and terms were not assured. Management expected revenue in FY2019, but gave no quantified revenue guidance.
- The auditor’s opinion on the financial statements was unmodified, but included a going-concern emphasis: recurring losses and the accumulated deficit raised substantial doubt about the company’s ability to continue. The statements include no adjustments for the outcome of this uncertainty.
- Disclosure controls and internal control over financial reporting were deemed ineffective. Material weaknesses included inadequate segregation of duties and risk assessment, insufficient U.S. GAAP expertise, and inadequate written accounting and reporting procedures. Remediation plans depended in part on obtaining financing.
- Investors face material China and VIE risks: the company does not directly own its operating VIE, and enforcement or regulatory changes could undermine contractual control or access to its economics. Other disclosed risks include financing needs, customer concentration, product-market acceptance, supplier dependence, currency and cash-transfer restrictions, and difficulty enforcing U.S. judgments in China.
- A one-for-three reverse stock split became effective May 1, 2018. In August 2018, the company adopted an equity plan authorizing up to 4,000,000 shares; no awards had been granted as of the report date. The company reported no material pending legal proceedings or off-balance-sheet arrangements and did not expect to pay dividends in the foreseeable future.
Important facts for investors to verify
- Whether Datasea obtained the financing needed for 2019 operations, and whether its cash runway and funding estimates were realized.
- Whether Safe Campus and Smart Elevator moved from trials and planned launches to paying deployments, and whether the reported app-user and school counts translate into monetizable activity.
- Whether the Minsheng Bank arrangement and other marketing channels generated material, recurring revenue.
- Whether customer concentration declined and revenue diversified beyond the legacy Daqing project.
- Whether the company remediated its material control weaknesses and improved disclosure controls.
- Whether VIE arrangements remain enforceable and whether funds generated in China can be transferred to the parent company.
- The potential dilution from future equity financing and grants under the 4,000,000-share incentive plan.