DataSea Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2017, the company’s fiscal first quarter of fiscal 2018. The unaudited consolidated statements include its subsidiaries and a China-based variable interest entity (VIE). Unless otherwise stated, amounts are U.S. dollars.
Financial performance and position
- Revenue: $8,994, versus none in the prior-year quarter. The filing attributes all revenue to services for the Daqing City Bureau of Public Security project; one customer accounted for 100% of sales.
- Gross profit and margin: Gross profit was $8,973 on $21 of cost of goods sold, a reported-period gross margin of approximately 99.8%; the small revenue base limits its significance.
- Expenses and loss: Operating expenses were $441,491, including $34,379 in selling expenses and $407,112 in general and administrative expenses. Operating loss was $432,518 and net loss was $408,537, compared with $269,894 and $266,834, respectively, in the prior-year quarter. Basic and diluted loss per share was $0.01, versus $0.00.
- Comprehensive loss: $243,974, after a positive foreign-currency translation adjustment of $164,563.
- Cash flow: Operating cash use was $458,861, versus $245,202 a year earlier. Investing cash use was $4,753. Financing provided $1,434,799, chiefly from common-stock sales, partly offset by the use of a prior-period stock-sale advance. Cash rose by $1,145,260 to $2,320,210; the filing also reports a positive $174,075 exchange-rate effect on cash.
- Liquidity and balance sheet: Current assets were $2,589,876 and current liabilities $228,768, yielding reported working capital of $2,361,108. Total assets were $2,661,953; stockholders’ equity was $2,433,185. Current liabilities included a $134,517 interest-free, unsecured shareholder loan due on demand. The filing reports no bank debt.
- Equity financing: The company issued 901,500 shares at $2.35 per share for stated proceeds of $2,118,525 during the quarter. Period-end shares outstanding were 57,511,771.
Material changes versus the prior-year quarter
- Revenue began at $8,994, but the company said it had no procurement contracts executed as of the report date.
- Net loss widened by $141,703. General and administrative expense increased by $181,936 (80.8%), which management attributed mainly to professional fees related to a proposed exchange uplisting and seminars to obtain financial resources. Selling expense decreased, which management linked to lower staffing costs after work on the Daqing contract.
- Operating cash use increased by $213,659. Cash increased substantially, primarily because of equity financing; working capital rose from $485,565 at June 30, 2017.
Outlook, risks, and other notable items
- Going concern: The filing says recurring losses, a cumulative deficit of approximately $2.93 million, and limited revenue raise substantial doubt about the company’s ability to continue as a going concern. Management expects to need additional funds for planned operations over the next 12 months and intends to seek debt or equity financing, but gives no assurance financing will be available or that operations will become profitable.
- Business plans: Management cited expected demand in China for internet services, security, and big-data integration, and said it expected to generate revenue during 2018. It reported agreements with 30 schools in ten provinces covering approximately 3,000 students for its “Safe Campus” program and was also developing a “Smart Elevator” program. These are expectations and reported agreements, not assured revenue or results. The company had suspended marketing of its cybersecurity program, making additional contracts under that program unlikely until marketing resumes.
- Concentration and structure: Revenue depended entirely on one customer in the quarter. The company operates in China through subsidiaries and contractual VIE arrangements; it states that VIE creditors have no recourse to the parent’s general credit. Cash is held at PRC state-owned banks and is not insured, according to the filing.
- Controls: Management concluded disclosure controls were ineffective and identified material weaknesses involving segregation of duties and risk assessment, U.S. GAAP expertise, and written accounting and reporting procedures. Remediation was planned for fiscal 2018 and was dependent in part on obtaining financing.
- Commitments and contingencies: The office lease and property-management contract run through February 28, 2018, with stated future payments of approximately $42,204 and $84,408, respectively. The company reported no pending legal proceedings and no material subsequent events through November 13, 2017.
- Other: The filing reports no off-balance-sheet arrangements. It lists risks including Chinese regulatory and economic conditions, customer demand and order timing, access to capital, and relationships with equipment suppliers.
Important facts for investors to verify
- Whether the company secured additional financing or contracts after the reporting date, and whether the going-concern uncertainty was addressed.
- Whether the Safe Campus and Smart Elevator programs generated paying customers and meaningful recurring revenue, and whether customer concentration changed.
- The filing’s reconciliation of equity proceeds and cash flows: the financial statements report $2,118,525 in stock-sale proceeds, while financing cash flow reflects an offset for a prior-period advance; the MD&A describes the offset as $685,975.
- The filing contains a selling-expense inconsistency: the statements report $44,718 for the prior-year quarter, while MD&A says $44,178.
- Progress on remediation of the disclosed material weaknesses and any changes in cash access, VIE arrangements, or related-party balances.