Datasea Inc. — Form 10-K summary
Reporting period: Fiscal year ended June 30, 2020, filed September 28, 2020. Although the request specifies “2019 Q4,” this filing reports fiscal 2020 and compares it with fiscal 2019; it is not a standalone quarterly report. Datasea is a China-based smart-security and technology provider whose operations are conducted through subsidiaries and a variable interest entity (VIE).
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $1,414,780 | $0 |
| Gross profit / gross margin | $1,268,400 / about 90% | $0 |
| Operating expenses | $3,173,453 | $1,499,308 |
| Operating loss | $(1,905,053) | $(1,499,308) |
| Net loss | $(1,863,253) | $(1,425,181) |
| Net loss per share | $(0.09) | $(0.07) |
| Cash used in operating activities | $(4,573,352) | $(424,048) |
- Revenue included approximately $1.29 million from Safe Campus contracts recognized after agents fulfilled contractual obligations, and approximately $124,000 from COVID-related system orders. The filing also describes the latter revenue as approximately $120,000.
- R&D expense increased to $1,114,486 from $168,248; selling expense rose to $438,621 from $199,485; and general and administrative expense rose to $1,620,346 from $1,131,575. The company attributes the higher loss mainly to these increased expenses.
- At June 30, 2020, cash was $1,065,936 and restricted cash was $600,000, down from cash of $6,072,637 in 2019. Total current assets were $3,898,523, including restricted cash; the company reports working capital of $2,609,032 and a 4.78:1 current ratio excluding restricted cash.
- Total liabilities were $1,030,764. No shareholder loan was outstanding at year-end; operating lease liabilities totaled $687,902. Accumulated deficit was $7,413,381.
- Net cash used in investing activities was $306,813; financing activities used $84,842, primarily repayment of a shareholder loan. The year-end cash and restricted-cash total was $1,665,936.
Changes, outlook, and material matters
- The company moved from no reported revenue in FY2019 to $1.41 million in FY2020, but its net loss increased by about $438,000 and operating cash outflow increased by about $4.15 million.
- COVID-19 disrupted marketing and business development from January to March 2020; operations resumed in April. The company developed epidemic-prevention systems and reported installations for 62 communities and 22 schools by August 2020. Management warned that a prolonged pandemic or effects on global demand could adversely affect business and might require additional capital.
- Management intends to expand campus, community, scenic-area and value-added services, and stated an intention to invest approximately $10 million in technology and product development over the next three years. The scenic-area system was planned for market launch in 2021. The filing gives no quantified revenue or profit guidance.
- The auditor’s report and financial-statement note state that recurring losses, accumulated deficit and negative operating cash flow raise substantial doubt about the company’s ability to continue as a going concern. Management believed available resources and planned financing could support operations, but provided no assurance of obtaining funding or achieving profitability.
- The company disclosed that its unaudited quarterly reports for September 30, December 31, 2019 and March 31, 2020 should no longer be relied upon. Certain pre-technological-feasibility software development costs had been improperly capitalized; quarterly R&D expense increases were specified as $200,000, $250,000 and $120,000, respectively, with related asset reclassifications and reductions. The annual report states disclosure controls and internal control over financial reporting were not effective; remediation was planned by June 30, 2021.
- A $519,811 receivable from distributor Heqin arose from operating advances and a credit line. Heqin had not repaid two specified loans by the report date and provided a repayment plan extending through February 2021. The company also reported a $101,252 prepayment to Heqin.
- Datasea relies on contractual VIE arrangements rather than direct ownership of its principal operating entity. It identifies risks relating to enforceability of those agreements, PRC regulation, currency controls, data privacy, third-party manufacturing, and access to capital. The company reported no material pending legal proceedings.
- Nasdaq notified the company in July 2020 that it was out of compliance for not holding an annual shareholder meeting within the required period. Nasdaq approved its compliance plan; the company said it was preparing a meeting.
Key facts for investors to verify
- Review the audited financial statements and subsequent filings for the effects of the quarterly non-reliance corrections, particularly R&D expense, intangible assets and prepaid expenses.
- Assess cash burn, financing needs, and whether new equity or debt funding is available; the filing includes a shelf registration for up to $100 million of securities but does not establish that funds will be raised.
- Track collection of the Heqin receivable and prepayment, and confirm performance and revenue recognition for service contracts whose fees had not yet been recognized.
- Evaluate the sustainability and margins of the new revenue base, which was concentrated in school and COVID-related security-system contracts.
- Monitor remediation of material weaknesses, Nasdaq shareholder-meeting compliance, and the legal and operational risks of the VIE structure and PRC cash-transfer restrictions.