Datasea(DTSS) - 2019 Q2 - Quarterly Report

Part I – Financial Information Item 1 Financial Statements Unaudited financial statements for December 31, 2018, reflect improved liquidity from a stock offering despite zero revenue and ongoing net losses, with going concern uncertainty noted Condensed Consolidated Balance Sheets As of December 31, 2018, the company's financial position significantly strengthened, with cash and total assets increasing due to a stock offering Consolidated Balance Sheet Highlights (as of Dec 31, 2018 vs. Jun 30, 2018) | Financial Metric | Dec 31, 2018 (Unaudited) | Jun 30, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash | $5,273,508 | $1,031,486 | | Total Current Assets | $5,469,064 | $1,235,276 | | Total Assets | $6,546,986 | $1,376,965 | | Liabilities & Equity | | | | Total Current Liabilities | $95,543 | $190,844 | | Total Stockholders' Equity | $6,451,443 | $1,186,121 | | Total Liabilities and Stockholders' Equity | $6,546,986 | $1,376,965 | Condensed Consolidated Statements of Operations and Comprehensive Loss For the six months ended December 31, 2018, the company reported zero revenue and a net loss, which slightly improved year-over-year due to reduced operating expenses Statement of Operations Summary (Six Months Ended Dec 31) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Revenues | $0 | $9,034 | | Gross Profit | $0 | $9,013 | | Total Operating Expenses | $754,890 | $840,451 | | Loss from Operations | ($754,890) | ($831,438) | | Net Loss | ($743,937) | ($799,998) | | Net Loss Per Share (Basic and Diluted) | ($0.04) | ($0.04) | Condensed Consolidated Statements of Cash Flows For the six months ended December 31, 2018, operating activities used cash, while financing activities, primarily from common stock sales, provided a significant inflow, resulting in a net increase in cash Cash Flow Summary (Six Months Ended Dec 31) | Cash Flow Activity | 2018 | 2017 | | :--- | :--- | :--- | | Net cash used in operating activities | ($794,846) | ($856,123) | | Net cash used in investing activities | ($30,337) | ($13,301) | | Net cash provided by financing activities | $5,038,638 | $1,331,246 | | Net increase in cash | $4,242,022 | $724,773 | | Cash – end of period | $5,273,508 | $1,899,723 | Notes to Condensed Consolidated Financial Statements The notes detail the company's VIE structure, a going concern warning due to zero revenue and losses, and a December 2018 NASDAQ stock offering that raised $5.7 million to fund operations - The company operates in the PRC through a Variable Interest Entity (VIE) structure, with contractual agreements giving it control over Shuhai Beijing[21][29] - Management has identified a substantial doubt about the company's ability to continue as a going concern due to zero revenue and significant losses. However, a December 2018 common stock offering raised net proceeds of $5.7 million, which is expected to support operations in 2019[23][24] - On December 21, 2018, the company completed a registered offering and listed on the NASDAQ Capital Market under the symbol "DTSS", selling 1,667,500 shares at $4.00 per share and generating net proceeds of approximately $5.7 million[85] - Subsequent to the quarter end, on February 11, 2019, $400,000 held in escrow from the stock offering was released to the company[94] Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operation Management discusses the company's strategic shift to new programs, resulting in zero revenue but a slight decrease in net loss, with liquidity significantly bolstered by a $5.7 million NASDAQ offering Results of Operations For the six months ended December 31, 2018, the company reported no revenue due to a strategic shift, while net loss slightly narrowed due to decreased G&A and R&D expenses - The company generated no revenue for the six months ended Dec 31, 2018, because it suspended marketing for its cybersecurity program to focus resources on the "Safe Campus" and "Smart Elevator" programs. Revenue from the "Safe Campus" program is expected in 2019[110] Expense Comparison (Six Months Ended Dec 31) | Expense Category | 2018 | 2017 | | :--- | :--- | :--- | | Selling Expenses | $148,852 | $65,661 | | General & Administrative | $502,153 | $603,228 | | R&D Expenses | $103,885 | $171,562 | - Net loss for the six months ended December 31, 2018, was $743,937, compared to a net loss of $799,998 for the same period in 2017[114] Liquidity and Capital Resources The company's liquidity dramatically improved following a December 2018 stock offering that yielded $5.7 million in net proceeds, expected to fund operations through 2019 - The company has historically funded operations through stock sales and shareholder loans. A December 2018 registered offering provided net proceeds of $5.7 million, which management believes is sufficient to fund operations through December 2019[115] Working Capital Comparison | Date | Working Capital | | :--- | :--- | | Dec 31, 2018 | $5,373,521 | | Jun 30, 2018 | $1,044,432 | - For the six months ended Dec 31, 2018, net cash provided by financing activities was $5,038,638, primarily from the stock offering, while operating activities used $794,846[118][119] Item 3 Quantitative and Qualitative Disclosures about Market Risk This disclosure is not required as the company is classified as a smaller reporting company - The company is a smaller reporting company and is therefore not required to provide information for this item[122] Item 4 Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2018, due to material weaknesses, with remediation efforts underway - The principal executive and financial officers concluded that disclosure controls and procedures were not effective as of the end of the reporting period[123] - Identified material weaknesses include: (i) inadequate segregation of duties and risk assessment, (ii) lack of personnel adequately trained in U.S. GAAP, and (iii) insufficient written policies for accounting and financial reporting[123] - Remediation steps taken or planned include appointing a new CFO, establishing an audit committee, and intending to hire additional qualified personnel and adopt formal written policies[124] Part II – Other Information Item 1 Legal Proceedings The company reports no pending or contemplated legal proceedings - The company is not currently involved in any pending legal proceedings[129] Item 1A Risk Factors Disclosure of risk factors is not required as the company is a smaller reporting company - Disclosure of risk factors is not required as the company is a smaller reporting company[130] Item 2 Unregistered Sales Of Equity Securities And Use Of Proceeds In November 2018, the company sold 21,500 common shares to PRC investors, raising $62,780 in cash proceeds - In November 2018, the company sold 21,500 shares of common stock for total cash proceeds of $62,780 to investors in the PRC[131] Item 6 Exhibits This section lists exhibits filed with the quarterly report, including CEO and CFO certifications and XBRL data files - Exhibits filed include CEO/CFO certifications and XBRL Instance Documents[132]