Datasea(DTSS) - 2024 Q1 - Quarterly Report

Part I Financial Statements For Q3 2023, the company reported $6.88 million in revenue, significantly reducing its net loss to $22,056 from $1.34 million year-over-year, driven by 5G messaging and improved by a one-time gain, with recent financing improving its balance sheet Consolidated Balance Sheets As of September 30, 2023, total assets increased to $8.82 million from $2.75 million, driven by cash and prepaid expenses from financing, while liabilities decreased to $4.51 million, shifting total equity from a $3.58 million deficit to a $4.31 million surplus Consolidated Balance Sheet Highlights (in USD) | Balance Sheet Item | September 30, 2023 | June 30, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash | $1,218,748 | $19,728 | | Prepaid expenses and other current assets | $6,358,043 | $701,423 | | Total Current Assets | $7,911,853 | $1,289,517 | | Total Assets | $8,816,199 | $2,754,448 | | Liabilities & Equity | | | | Total Current Liabilities | $4,469,781 | $4,906,575 | | Total Liabilities | $4,508,122 | $6,334,545 | | Total Equity (Deficit) | $4,308,077 | $(3,580,097) | Consolidated Statements of Operations and Comprehensive Loss For the three months ended September 30, 2023, the company generated $6.88 million in revenue, compared to zero in the prior-year period, with a minimal gross profit of $74,735, and a net loss attributable to the company of $22,056, a significant improvement from a $1.34 million loss in the prior-year quarter, largely due to an $833,546 gain from a discontinued operation Statement of Operations Summary (in USD) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Revenues | $6,880,743 | $0 | | Gross Profit | $74,735 | $0 | | Loss from Operations | $(857,776) | $(1,095,702) | | Net loss to the Company | $(22,056) | $(1,337,323) | | Basic and diluted net loss per share | $(0.00) | $(0.05) | Consolidated Statements of Cash Flows For the three months ended September 30, 2023, net cash used in operating activities was $6.74 million, a significant increase from $0.75 million in the prior-year period, while net cash provided by financing activities was $8.08 million, primarily from common stock issuance, resulting in a net cash increase of $1.20 million for the quarter Cash Flow Summary (in USD) | Cash Flow Activity | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(6,744,413) | $(752,697) | | Net cash used in investing activities | $(365) | $(102,845) | | Net cash provided by financing activities | $8,080,455 | $790,302 | | Net increase (decrease) in cash | $1,199,020 | $(71,143) | Notes to Consolidated Financial Statements The notes detail the company's essential VIE structure in the PRC, highlight a 'Going Concern' risk due to historical losses and negative operating cash flow mitigated by recent equity financings, and elaborate on key accounting policies, a significant increase in prepaid marketing expenses, recent equity offerings, and a one-time gain from the disposal of the subsidiary Zhangxun - The company operates primarily through a Variable Interest Entity (VIE) structure in the People's Republic of China (PRC), controlling the entity through contractual arrangements rather than direct equity ownership[18][37] - A 'Going Concern' uncertainty exists due to a history of net losses (approx. $22,056 for the quarter), an accumulated deficit of $28.09 million, and negative operating cash flow of $6.74 million; management is addressing this through recent equity financings, including raising approximately $5.71 million, $0.71 million, and $1.6 million net proceeds from separate offerings in August and September 2023[29][30][31] - Prepaid expenses increased significantly to $6.06 million, mainly due to large prepayments for marketing and promotion agreements with third parties to drive sales of 5G messaging and acoustic intelligence products[105][106][107] - On July 20, 2023, the company disposed of its subsidiary Zhangxun for a nominal amount, resulting in a recorded gain on disposal of $0.83 million due to the derecognition of the subsidiary's negative net assets[157] Revenue by Source (Three Months Ended Sep 30, 2023) | Revenue Source | Amount (USD) | | :--- | :--- | | 5G Messaging | $6,880,463 | | Acoustic Intelligence Business | $280 | | Total Revenue | $6,880,743 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's transition into a global technology firm focusing on intelligent acoustics and 5G messaging, with a strategic emphasis on international expansion, attributing the significant revenue increase to $6.88 million in Q1 FY2024 to rapid 5G messaging growth in China, and noting improved liquidity from recent equity financings despite a low gross margin of 1.1% Overview and Strategy Datasea, a Nevada-based holding company operating through a VIE in China and a US subsidiary, focuses on intelligent acoustics and 5G messaging, with a strategy emphasizing revenue growth, technological innovation, international expansion into the U.S., and pursuing strategic partnerships and M&A opportunities - The company is positioning itself as a global technology company focused on intelligent acoustics and 5G messaging, with a key strategy of international expansion into the U.S. market through its Delaware subsidiary, Datasea Acoustics LLC[168][170] - Key operational goals include driving revenue growth, technological innovation in acoustics, achieving customer satisfaction, international expansion, and generating shareholder returns[175] - The business strategy emphasizes U.S. patent acquisition, technology collaboration with research institutions like the Chinese Academy of Sciences, and potential Mergers & Acquisitions (M&A) to expand its product portfolio and market presence[173][181][182] Results of Operations For the three months ended September 30, 2023, revenue surged to $6.88 million from zero, driven by the new 5G messaging business, resulting in a slim gross profit of $74,735 and a gross margin of 1.1%, while operating expenses decreased by 15% to $0.93 million, contributing to a reduced net loss from continuing operations of $0.86 million Comparison of Operations (Three Months Ended Sep 30) | Metric | 2023 | 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $6,880,743 | $0 | N/A | | Gross Profit | $74,735 | $0 | N/A | | Gross Margin | 1.1% | N/A | N/A | | Total Operating Expenses | $932,511 | $1,095,702 | (15.0)% | | Loss from Operations | $(857,776) | $(1,095,702) | (21.7)% | - The increase in revenue was mainly due to the rapid growth of the 5G messaging business in China, specifically from service fees for 5G SMS service[228] - General and administrative expenses decreased by 21.7% to $693,060, primarily due to lower rent expense and reduced consulting and director compensation[240] Liquidity and Capital Resources The company's liquidity dramatically improved, shifting from a working capital deficit of $3.62 million to a surplus of $3.44 million at September 30, 2023, driven by $8.08 million in net cash from financing activities, which offset a high cash burn from operations of $6.74 million, resulting in a net cash increase of $1.2 million for the quarter - The company's working capital improved from a deficit of $3.6 million as of June 30, 2023, to a surplus of $3.4 million as of September 30, 2023[247] - Net cash used in operating activities increased to $6.74 million for the quarter, compared to $0.75 million in the prior-year period, mainly due to a large increase in prepaid expenses[249] - Net cash provided by financing activities was $8.08 million, primarily from the net proceeds of common stock issuance, a significant increase from $0.79 million in the same period last year[251] Quantitative and Qualitative Disclosures about Market Risk This section is not applicable as the company qualifies as a smaller reporting company - The company is not required to provide this disclosure as it is a smaller reporting company[261] Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of September 30, 2023, due to identified material weaknesses including inadequate segregation of duties, lack of U.S. GAAP trained personnel, and insufficient written accounting policies, for which remediation strategies are outlined - The CEO and CFO concluded that the company's disclosure controls and procedures were not effective as of the end of the reporting period[263] - 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 and procedures for accounting and financial reporting[263] - Management has implemented and is continuing to enhance its internal control framework, including refining procedures, establishing a collaborative oversight mechanism with the legal department, and providing personnel training[264][265][267] Part II Legal Proceedings, Risk Factors, and Other Disclosures The company reports no pending legal proceedings, is not required to disclose risk factors as a smaller reporting company, and had no unregistered sales of equity securities, defaults upon senior securities, or mine safety disclosures during the period - The company is not a party to any pending legal proceedings[275] - Disclosure of Risk Factors is not required as the company is a smaller reporting company[275] - There were no unregistered sales of equity securities, defaults on senior securities, or mine safety issues to report[275] Exhibits This section lists the exhibits filed with the Form 10-Q, including officer certifications pursuant to the Sarbanes-Oxley Act and XBRL data files - The report includes a list of filed exhibits, such as CEO/CFO certifications (31.1, 31.2, 32.1, 32.2) and Inline XBRL documents[276]