Datasea(DTSS) - 2019 Q3 - Quarterly Report

Part I – Financial Information Item 1 Financial Statements Financial statements for the period ended March 31, 2019, reflect increased assets from a public offering, zero revenue, and a higher net loss, raising going concern doubts Condensed Consolidated Balance Sheets As of March 31, 2019, total assets significantly increased to $6.24 million, driven by a rise in cash from financing activities, while liabilities decreased and equity grew to $6.11 million Condensed Consolidated Balance Sheet Highlights (in USD) | Balance Sheet Item | March 31, 2019 (Unaudited) | June 30, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash | $5,341,969 | $1,031,486 | | Total Current Assets | $5,531,443 | $1,235,276 | | Total Assets | $6,236,881 | $1,376,965 | | Liabilities & Equity | | | | Total Current Liabilities | $128,026 | $190,844 | | Total Stockholders' Equity | $6,108,855 | $1,186,121 | | Total Liabilities and Stockholders' Equity | $6,236,881 | $1,376,965 | Condensed Consolidated Statements of Operations and Comprehensive Loss The company reported zero revenue for the three and nine months ended March 31, 2019, with increased operating expenses leading to a higher net loss of $540,999 for the quarter Statement of Operations Summary (in USD) | Metric | Three Months Ended Mar 31, 2019 | Three Months Ended Mar 31, 2018 | Nine Months Ended Mar 31, 2019 | Nine Months Ended Mar 31, 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $0 | $6,468 | $0 | $15,502 | | Gross Profit | $0 | $6,398 | $0 | $15,411 | | Total Operating Expenses | $574,589 | $451,373 | $1,329,479 | $1,291,824 | | Loss from Operations | ($574,589) | ($444,975) | ($1,329,479) | ($1,276,413) | | Net Loss | ($540,999) | ($438,937) | ($1,284,936) | ($1,238,935) | | Net Loss Per Share | ($0.03) | ($0.02) | ($0.06) | ($0.06) | Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity increased from $1.19 million to $6.11 million primarily due to $5.68 million from a public offering and a private sale, partially offset by a $1.28 million net loss - The company's total stockholders' equity increased to $6,108,855 as of March 31, 2019, primarily due to proceeds from the sale of common stock[19] - Key activities affecting equity included the sale of common stock from an offering, resulting in proceeds of $5,677,892, and a net loss of $1,284,936 for the nine-month period[19] Condensed Consolidated Statements of Cash Flows For the nine months ended March 31, 2019, net cash used in operations was $1.29 million, while financing activities provided a significant $5.53 million inflow, primarily from a stock offering, resulting in a $4.31 million net increase in cash to $5.34 million Cash Flow Summary (Nine Months Ended, in USD) | Cash Flow Activity | March 31, 2019 | March 31, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | ($1,289,063) | ($1,256,211) | | Net cash used in investing activities | ($64,531) | ($14,288) | | Net cash provided by financing activities | $5,534,355 | $1,319,993 | | Net increase in cash | $4,310,483 | $373,778 | | Cash – end of period | $5,341,969 | $1,548,728 | - The primary source of cash was from financing activities, with net proceeds from a common stock offering amounting to $5,240,889[22] Notes to Condensed Consolidated Financial Statements The notes highlight a 'Going Concern' issue due to zero revenues and losses, mitigated by $5.7 million IPO proceeds, detail the PRC VIE structure, and note a full valuation allowance against deferred tax assets - The company's ability to continue as a going concern is in substantial doubt due to generating no revenues and incurring significant losses, though management plans to use $5.2 million net proceeds from its December 2018 IPO to fund operations[27][28] - The company operates in the PRC through a Variable Interest Entity (VIE), Shuhai Beijing, which is consolidated into its financial statements through a series of contractual agreements[25][32] - On December 21, 2018, the company completed an initial public offering on the NASDAQ Capital Market, selling 1,667,500 shares at $4.00 per share, resulting in net proceeds of approximately $5.7 million[82] - The company has significant net operating loss carryforwards but has recorded a 100% valuation allowance, resulting in no net deferred tax asset, as it is more likely than not that the benefit will not be realized[85][87] Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operation Management discusses the company's shift to 'Safe Campus' and 'Smart Elevator' programs, resulting in zero revenue and increased net loss, while liquidity significantly improved due to a December 2018 IPO, funding operations through March 2020 Overview The company, operating through subsidiaries and a VIE in the PRC, focuses on IT systems and network security solutions, with key events including a 2015 reverse merger and a December 2018 NASDAQ IPO raising $6.7 million gross proceeds - The company is a technology firm in the PRC engaged in developing IT systems and network security solutions, operating through consolidated subsidiaries and a VIE[99] - In December 2018, the company completed a registered underwritten public offering, raising gross proceeds of $6.7 million and began trading on the NASDAQ Capital Market under the symbol 'DTSS'[104] Results of Operations For the three and nine months ended March 31, 2019, the company generated no revenue due to a strategic shift, leading to increased selling, general, and administrative expenses, and a widened net loss - The company generated no revenue for the three and nine months ended March 31, 2019, because it suspended marketing for its cybersecurity program to focus resources on the 'Safe Campus' and 'Smart Elevator' programs[105] Operating Expenses Comparison (in USD) | Expense Category | Three Months Ended Mar 31, 2019 | Three Months Ended Mar 31, 2018 | Nine Months Ended Mar 31, 2019 | Nine Months Ended Mar 31, 2018 | | :--- | :--- | :--- | :--- | :--- | | Selling expenses | $34,388 | $82,946 | $183,240 | $148,607 | | General and administrative | $510,983 | $290,560 | $1,013,136 | $891,335 | | R&D expenses | $29,218 | $77,867 | $133,103 | $251,882 | - Net loss increased to $540,999 for the three months and $1,284,936 for the nine months ended March 31, 2019, primarily due to the lack of revenue and increased operating expenses[109] Liquidity and Capital Resources Liquidity is primarily funded by stock sales and shareholder loans, with a December 2018 IPO providing $5.7 million net proceeds, improving working capital to $5.4 million and expected to fund operations through March 2020 - The company completed a common stock offering in December 2018 with net proceeds of $5.7 million, which is expected to fund operations through March 2020[110] Working Capital Comparison (in USD) | Metric | March 31, 2019 | June 30, 2018 | | :--- | :--- | :--- | | Current Assets | $5,531,443 | $1,235,276 | | Current Liabilities | $128,026 | $190,844 | | Working Capital | $5,403,418 | $1,044,432 | - Net cash from financing activities was $5.53 million for the nine months ended March 31, 2019, primarily from the public offering, which significantly boosted the company's cash position[114] Off-Balance Sheet Arrangements The company reports no off-balance sheet arrangements reasonably likely to have a material effect on its financial condition or results of operations - The company has no off-balance sheet arrangements[116] Item 3 Quantitative and Qualitative Disclosures about Market Risk This item is not applicable as the company is classified as a smaller reporting company - As a smaller reporting company, Datasea Inc. is not required to provide disclosures about market risk[117] Item 4 Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of March 31, 2019, due to material weaknesses, with remediation efforts including a new CFO, audit committee, and plans for improved personnel and policies - The CEO and CFO concluded that disclosure controls and procedures were not effective as of the end of the reporting period[118] - Material weaknesses identified include: (i) inadequate segregation of duties and risk assessment, (ii) lack of personnel adequately trained in U.S. GAAP, and (iii) insufficient written accounting policies and procedures[118] - Remediation steps taken include appointing a new CFO and establishing an audit committee, with future plans involving hiring more qualified personnel and adopting formal written policies, subject to obtaining additional financing or revenue[119] Part II – Other Information Item 1 Legal Proceedings The company is not a party to any pending legal proceedings, and none are known to be contemplated - The company reports no pending legal proceedings[123] 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[124] Item 2 Unregistered Sales Of Equity Securities And Use Of Proceeds The company reported no unregistered sales of equity securities during the period - The company reports no unregistered sales of equity securities[124] Item 5 Other Information The company reported no other information for this item - There is no information to report under this item[124] Item 6 Exhibits This section lists the exhibits filed with the report, including Sarbanes-Oxley certifications by the CEO and CFO, and XBRL data files - Exhibits filed include CEO and CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 18 U.S.C. Section 1350, as well as XBRL Instance Documents[125]