Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements of historical fact are "forward-looking statements" for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions of performance; and statements of belief; and any statements of assumptions underlying any of the foregoing. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward looking statements by terms such as "may," "intend," "might," "will," "should," "could," "would," "expect," "believe," "anticipate," "estimate," "predict," "potential," or the negative of these terms. These terms and similar expressions are intended to identify forward-looking statements. The forward-looking statements in this report are based upon management's current expectations and belief, which management believes are reasonable. However, we cannot assess the impact of each factor on our business or the extent to which any factor or combination of factors, or factors we are aware of, may cause actual results to differ materially from those contained in any forward-looking statements. You are cautioned not to place undue reliance on any forward-looking statements. These statements represent our estimates and assumptions only as of the date of this report. Except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
You should be aware that our actual results could differ materially from those
contained in the forward-looking statements due to a number of factors,
including:
? uncertainties relating to our ability to establish and operate our business and
generate revenue;
? uncertainties relating to general economic, political and business conditions
inChina ;
? industry trends and changes in demand for our products and services;
? uncertainties relating to customer plans and commitments and the timing of
orders received from customers;
? announcements or changes in our advertising model and related pricing policies
or that of our competitors;
? unanticipated delays in the development, market acceptance or installation of
our products and services;
? changes in Chinese government regulations;
? availability, terms and deployment of capital, relationships with third-party
equipment suppliers; and
? influences of COVID-19 on
Overview
Datasea Inc. (the "Company" or "Datasea") is a publicly traded entity with the ticker symbol DTSS on the Nasdaq Capital Market. It was incorporated inNevada onSeptember 26, 2014 . As a holding company with no material operations, the Company conducts a majority of business through the organizations established inthe People's Republic of China , or the PRC, primarily by variable interest entity (the "VIE"). The Company does not have any equity ownership of its VIE, instead it controls and receives economic benefits of the VIE's business operations through certain contractual arrangements. 24
The vision of
through the mission of innovating and providing advanced technology to business
and retail customers.
Shuhai Information Technology Co., Ltd. ("Shuhai Beijing"), the VIE that holds its six subsidiaries, possesses cutting-edge products and solutions in three industries: 5G messaging, acoustic intelligence and smart city. Up to date, Shuhai Beijing and its subsidiaries own 9 Patents and 47 Software Copyrights, with 12 patents applications pending in core technologies to empower and grow our business.
5G Messaging: With the wide acceptance of 5G applications in the nation, in addition to the competitive products and services, well-constructed business model and abundant external resources, Shuhai Beijing's 5G messaging sales revenue increased more than 900% this quarter, compared with the immediate prior quarter endedSeptember 30, 2021 , representing nine-month consecutive growth. The message marketing cloud platform ("5G MMCP") invented and developed internally is based on big data management with the function of one-stop feature provider through precise SAAS value-added service, Chatbot, data monetization, and message marketing to solve the pain points of industry development and to meet the diversified needs of customers. Since 2021, as a leading service provider in the field of 5G messaging domestically, Shuhai Beijing has been engaged by 100+ institutional clients for services from express delivery, catering, tourism, e-commerce, financing, and technology industry to establish 5G MMCP. They demonstrate Shuhai Beijing's business capabilities and the recognition of the 5G messaging cloud platform by the market. Shuhai Beijing not only provides 5G messaging services to a broad range of institutional customers but also has begun to become one of the core suppliers to assist clients to reach hundreds of millions of mobile phone terminal users inChina . According to the news published by Dao Insights onOctober 4, 2021 , the 5G messaging market size ofChina is estimated to be300 billion RMB ($46.54 billion ) over the next 5 to 7 years. Management believes this is due to the central-government-level policy such as 14th Five Year Plan or Notice of theMinistry of Industry and Information Technology on Promoting and Accelerating the Application of 5G for the purpose of reaching the goal of Industry 4.0. Shuhai Beijing cooperates with theNational Engineering Laboratory for Logistics Information Technology ("National Engineering Laboratory "), being led by YTO Express , to jointly promote the formulation of 5G Messaging standards in the express industry and draft General Technical Requirements for 5G Messaging Application in Express Industry inChina . Shuhai Beijing becomes a key player in the 5G messaging business and is one of the directors in the 5GMessage Working Group of theAcademy of Information and Communications of theMinistry of Industry and Information Technology , a CSP partner of the three major operators, a member of theChina Communications Enterprise Association , a provider of theTencent Enterprise Microservice, third place in the 4th National "Blooming Cup" 5GApplication Competition , and a member ofChina Express Association . Being a key player in the 5G messaging business and having the wide product suitability for businesses in different industries may help Shuhai Beijing to continue
its growth. Acoustic Intelligence: Compared with the wide recognition of 5G messaging market potential, Shuhai Beijing and its wholly-owned subsidiary,Shuhai Jingwei (Shenzhen) Information Technology Co., Ltd. ("Shuhai Jingwei"), demonstrates its vision and ability to stay ahead of the emerging market trends in acoustic intelligence. Shuhai Jingwei commits to tap acoustic intelligence's full business potential and wields acoustic intelligence across industries in meaningful ways. It sets the goal to become a leading technology and product provider in the field of acoustic intelligence inChina and worldwide. Shuhai Beijing has entered into partnerships with top notch institutions in this area and equipped itself with solid R&D capability. Recently, Shuhai Beijing releasedChina's inaugural white paper "Industry Development and Technology Application of Acoustic Intelligence inChina ," with co-authors,Institute of Cloud Computing and Big Data , China Academy of Information and Communications Technology. The white paper dives into the current and future application cases of acoustic intelligence inChina and outlines the introduction of acoustic intelligence, technology development, commercial applications and industrial outlook to provide technical insights and guide industry development. According to the "Feasibility Study Report onChina's Acoustic Device Market 2021-2025" released byNewsijie Research Center ,China's acoustic device market is expected to grow at a compound annual growth rate of 15.6% and reachRMB 46 billion (approximately$7.23 billion ) by 2025. 25 Shuhai Jingwei, a wholly owned subsidiary of Shuhai Beijing, runs the acoustic intelligence business in theBay Area of Canton-Hong Kong -Macao where is an industry cluster for the benefit of improving the core technology, production, marketing, and logistic. To date, Shuhai Jingwei has completed the technology development, product design, supply chain management and promotion plans for a series of acoustic hardware products in six major industries and application areas, including but not limited to healthcare, medical beauty, environmental protection and agriculture. The four flagship products, including Tianer voice recognition alarm, Ultrasonic sound sterilization and antivirus equipment, Directional sound recognizer, and Brain refreshing acoustic equipment, are expected to be introduced to the market in fiscal year of 2022. Digital Smart City: Shuhai Beijing possesses acoustic, non-visual, and visual intelligent algorithms (face recognition). The artificial intelligence, machine learning, and data analysis capabilities are combined, so the solutions are not only providing visibility but also identifying behavioral patterns. In addition, Shuhai Beijing and its subsidiary,Guozhong Haoze (Beijing) Technology Ltd. ("Guozhong Haoze") establish five major business service systems which are digital economy, digital government, digital culture, digital society, and digital ecology and using the three major middle-end platforms to support modern digital city business: big data platform, IoT platform and digital twin. It has realized the three-dimensional perception of urban full-time space elements, the application support of full-service systems, and the intelligent coordinated command of all scenarios, achieving refined urban governance, scientific auxiliary decision-making, and digital industrial development. Shuhai Beijing and Guozhong Haoze facilitates the construction ofChina's digital smart city by providing a digital smart city application platform that meets the needs of residential communities, schools, and commercial enterprises in the Chinese
market.
Recent Developments
1. 5G Messaging Business
Shuhai Beijing's flagship product in 5G messaging is an intelligent and
all-in-one 5G MMCP. This comprehensive and integrated message-marketing platform
includes messaging channels, different industry and business templates,
marketing tools and analytics builders. Relying on the operator's SMS channel
and information flow on the internet, the 5G MMCP aims to unify customer and
prospect marketing signals in a single view with functions like precise SaaS
value-added services, data monetization and message-marketing. By leveraging big
data and artificial intelligence technology, the platform uses real-time
data-driven insights and targeted 5G messaging to engage, convert, and nurture
buyer relationships. The recent product upgrade has enabled users in different
channels including SMS, email, WeChat, applet, APP Push, and third-party tools
can all be reached out and managed through an Integrated 5G message marketing
cloud platform ("5G IMMCP").
1.A. Business developments:
The recent business developments indicate the Company’s progress in client
acquisition, product upgrade, marketing and sales efforts and industry
recognition.
InOctober 2021 , Shuhai Beijing, along with the controlled subsidiaryShuhai Zhangxun Information Technology Co., Ltd. ("Shuhai Zhangxun"), signed a$3.87 million procurement contract for Short Message Services ("SMS") withLiangzi Xuntong Technology Co., Ltd. ("Liangzi Xuntong"), and a$4.67 million contract withJiangxi Zhouwang Network Technology Co., Ltd. ("Jiangxi Zhouwang"). The above deals not only show the promising prospect of Shuhai Beijing's 5G messaging business strategy but also strengthen our core business and positionDatasea for long-term sustainable growth. InNovember 2021 , Shuhai Zhangxun entered into a$378,000 procurement contract for Cloud Transformation Services (the "Cloud Services or Value-added service ") withChina Mobile Communications Group Guangdong Co., Ltd. Guangzhou Branch ("China Mobile Guangzhou Branch"). The service will last untilSeptember 2022 . It shows that we can provide cloud-based enterprise solutions based on our 5G technologies, and the synergies effect among our three business units will be more apparent. Leveraging the Shuhai Beijing's proprietary technologies in smart security and big data, we'll expand product coverage in Information and Communications Technology projects and 5G messaging-related fields. We could help more companies make great use of 5G technologies with our solutions and empower their business developments in the long run. 26 InNovember 2021 , Tianyi Video Media ("Tianyi"), one of China Telecom's subsidiaries with industry leading video content aggregation and distribution platform, became Shuhai Zhangxun's customer. The amount of agreement reached$1.5 million . Tianyi forms a video content subscription based, video live broadcast, video cloud service, and video data consulting business model for collaborative development of multiple businesses. To promote the Tianyi membership service and increase the subscription, Shuhai Zhangxuncustomizes the 5G messaging services to meet its needs. Services include product design & planning, user experience optimization, client targeting, personalized communication, and customer reach expansion. This is another demonstration, which shows that the Shuhai Zhangxun's business capabilities and recognition of the 5G messaging cloud platform by the market. Shuhai Zhangxun not only provides 5G messaging services to a broad range of institutional customers but also has begun to become one of the core suppliers to assist companies to reach hundreds of millions of mobile phone users inChina via 5G messaging. InDecember 2021 , Shuhai Beijing and Shuhai Zhangxun assisted ZTO Express ("ZTO"), one of the leading logistics companies inChina to complete the first placement order through 5G messaging services in express delivery industry. The order marked the readiness for commercial use of the 5G messaging services Shuhai Zhangxun developed for ZTO. Shuhai Zhangxun has sent out 5 million 5G messages to customers inJiangsu Province since the pilot service launch. InJanuary 2022 , Shuhai Zhangxun signed a$111,000 agreement withChina Mobile Communications Group Jiangsu Co. Ltd. ,Nanjing Branch ("CMCG"). The Company will provide 5G messaging services for the financial data middle-office project ofBeijing Datang Gaohong Data Network Technology Co., Ltd. , including 5G IMMCP and private cloud platform integrated financial big data middle-office. The contract period is one year. Approximately$1 million (RMB6.59 million ) has been received as ofJanuary 27, 2022 . This order not only is an important project in the Company's 5G messaging financial sector, but also heralds the approach of full commercialization of 5G messaging. 1.B. Product upgrades: The recent product upgrades were mainly focused on: 1) Upgraded the 5G message marketing cloud platform ("5G MMCP") to an Integrated 5G message marketing cloud platform ("5G IMMCP"), expanding connection with existing clients through accesses such as SMS, email, WeChat, applet, APP Push and third-party tools and manage users from different platforms all in one 5G IMMCP; 2) Optimizing the system and communication and enhancing the customer experiences by adding functions in 5G IMMCP including CRM iteration, configuration center, open center iteration, and message center iteration;3) deliver customized solutions to over 20 institutional clients spanning across industries including e-commerce, tourism and hospitality and manufacturing.
1.C. Marketing and sales expansion:
? From
Zhangxun were engaged in various contracts that were related to SMS, 5G IMMCP
and value-added services, involving a total contract value of approximately
delivered.
? Major customers include:
Co., Ltd.,
Those continuing demonstration shows Shuhai Beijing and Shuhai Zhangxun’s
business capabilities and recognition of the 5G messaging business by the
market. It not only provides 5G messaging services to a broad range of
institutional customers but also has begun to become one of the core suppliers
to assist companies to reach hundreds of millions of mobile phone users
in
27
1.D. Industry recognition:
Shuhai Beijing and Shuhai Zhangxun is becoming a key player in the 5G messaging
and initiating the industry efforts to promote 5G messaging R&D and application.
Examples include: 1) Shuhai Beijing added more prestigious companies, such as
Zhejiang Cainiao Supply Chain Management Co., Ltd ,. ("Cainiao"), Alibaba
logistics arm, jointly in the formulation of the 5G Messaging standards in the
express industry. 2) Shuhai Zhangxun speeded up the introduction of 5G messaging
application standards in the express industry and co-hosted the first workshop
with leading Top 10 Chinese express companies and three major operators.
Participants drafted the "General Technical Requirements for 5G Messaging
Application in Express Industry" version 1.0; 3) Shuhai Zhangxun's 5G messaging
solution was promoted by China Mobile as a top ten 5G messaging application and
conducts an online promotion.
2. Acoustic Intelligence
Shuhai Beijing and Shuhai Jingwei commit to tap acoustic intelligence's full
business potential and wield acoustic intelligence across industries in
meaningful ways. We are determined to become a leading technology and product
provider in the field of acoustic intelligence in China and worldwide. The
research and development of technology play a vital role for us and are what
make us different.
2.A. Business developments:
As the core platform of the acoustic intelligence business, Shenzhen Jingwei , a
wholly-owned subsidiary of Shuhai Beijing, strengthens the research, product,
and marketing areas in addition to taking advantage of the well-developed
industrial chain atmosphere in the Canton so called Greater Bay Area where sits
the hub of technology development, product finalization, supply chain
construction, and marketing planning of a series of acoustic hardware smart
products. The first batch of four core products including sound-effect
sterilization, anti-virus (acoustic health) , and Tianer voice recognition alarm
(acoustic security) will be introduced to the market right after completing
laboratory test and user (Qingdao Port, Beijing Free Trade Zone , etc.) pilot
experience, then mass production will be followed.
2.B. Product updates:
To date, Shuhai Beijing and Shuhai Jingwei prepared four flagship products to unfold the commercial possibilities of acoustic intelligence in the most wanted areas like health, security, and environment protection. The four flagship products are 1) ultrasonic sound sterilization and antivirus equipment, the first-ever sterilization and antivirus equipment that combines ultrasonic sound effects with optics to address the Covid-19 sparked disinfecting needs; 2) shuhai Jingwei Tianer voice recognition alarm, a product processing real-time sound data necessary to conduct early warning analysis, and actively respond to the emergency incidents and threats; 3) Shuhai Jingwei directional sound recognizer, a product tackle with noise pollution and can be applied in personal and public situations; and 4) sound effect refreshing directional sound device, a product help integrating ultrasound, low frequency, electromagnetic waves, music, and voice interaction to deliver customizable experience good for well-being. The four flagship products have produced samples, completed laboratory tests and user pilot tests, entered mass production to varying degrees, and are expected to be introduced to the market in the fiscal year
of 2022. 2.C. Industry recognition: In January, Shuhai Beijing releasedChina's inaugural white paper with co-authors,Institute of Cloud Computing and Big Data , China Academy of Information and Communications Technology to uncover detailed facts and compelling analyses of the acoustic-intelligence technology, commercial applications, and the industry outlook. Shuhai Beijing dives deeply into the current and future use cases of acoustic intelligence inChina and outlines the introduction of acoustic intelligence, technology development, commercial applications and industry outlook to provide technical insights and guide industry development. In addition,China's acoustic-intelligent industry is under rapid expansion. In the future, acoustic intelligence will be more mature with extensive applications. With the integration of acoustic intelligence, scenario-based solutions will be enhanced. Technological progress will unlock tremendous business opportunities and potentials in real economy. 28 3. Smart City business Shuhai Beijing and Guozhong Haoze have visual intelligent algorithms such as face recognition, as well as cutting-edge acoustic and non-visual intelligent algorithms. It combines artificial intelligence, machine learning and data analysis capabilities so that its solutions not only provide visibility but also identify behavioral patterns. In addition, Shuhai Beijing and Guozhong Haoze have established three major middle-end platforms that support modern digital smart city business: big data platform, IoT platform, and digital twin. It has realized the three-dimensional perception of urban full-time and space elements, the application support of full-service systems; the intelligent coordinated command of all scenarios, achieving refined urban governance, scientific auxiliary decision-making, and digital industrial development. Shuhai Beijing and Guozhong Haoze will help the construction ofChina's digital smart city and continue to provide a digital smart city application platform that meets the needs of residential communities, schools and commercial enterprises in the
Chinese market. 3.A. Recent Developments: OnOctober 28, 2021 , Shuhai Beijing and its wholly-owned subsidiary,Guozhong Haoze (Beijing) Technology Ltd. ("Guozhong Haoze") signed a purchase order with Eastcom Smart Chain for the food safety supervision system of the Smart Canteen of Heze No. 1Middle School inShandong Province with an amount of approximately$2,900 (RMB 18,670 ). So far, all payment has been received, hardware has been installed, and the follow-up is the deployment & training of the software. OnDecember 2021 , Shuhai Beijing and Guozhong Haoze executed two sales contracts withTianjin Youwei Electronic Engineering Co., Ltd andYucang Technology (Beijing) Co., Ltd. for smart community solutions with an amount of approximately$30,928 (RMB 204,124.99 ). So far, all payments have been received, hardware has been installed, and the follow-up is the deployment & training of the software. We will continue to provide more services for community intelligence and epidemic prevention and control. 3.B. Product updates: Shuhai Beijing and its subsidiaries laid out a series of upgrades in: 1) providing an integrated smart system, Smart Canteen and Food safety supervision system for schools, consisting of hardware and software, to monitor real-time food preparation, enhance the nutrition analysis and tracking, improve communication with parents and eventually help schools promote food safety; 2) improving smart security system for Harbin No. 73Middle School and adding functions like real-time monitoring, personnel screening, and epidemic prevention etc. on the basis of the original system and modules, supplemented by the self-developed IOT technology and structural model of the Internet of Things, the smart security application of the unified cloud of terminal equipment information is realized.; 3) establishing an online office smart OA system forChina Chongqing Construction Engineering Group with China United Network Communications Group to improve efficiency and promote team collaboration.
During the quarter ended
newly-registered software copyrights and patents were as follows:
Certification Certificate No.
Softcopy Ruan Zhu Deng Zi
Campus intelligent acoustic warning system V2.0 No.8580724
Intelligent acoustic warning system V2.0 in healthcare
No.8580553
Intelligent acoustic warning system for public places V2.0
No.8580552
Natatorium intelligent acoustic warning system V2.0 Ruan Zhu Deng
Zi
No.8580686
Home Intelligent acoustic warning system V2.0 Ruan Zhu Deng
Zi
No.8580685
Hotel intelligent acoustic warning system V2.0 Ruan Zhu Deng
Zi
No.8580725
Patent
A multi-role login method of Android program based on Patent No.4842116
SQlite database
The invention discloses an adaptive distributed audio alarm Patent No.4869071
method and system
29
Going Concern
The accompanying unaudited condensed consolidated financial statements were prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. For the six months endedDecember 31, 2021 and 2020, the Company had a net loss of approximately$3.11 million and$1.83 million , respectively. For the three months endedDecember 31, 2021 and 2020, the Company had a net loss of approximately$1.68 million and$0.96 million , respectively. The Company had an accumulated deficit of approximately$15.18 million as ofDecember 31, 2021 , and negative cash flow from operating activities of approximately$3.82 million and$1.85 million for the six months endedDecember 31, 2021 and 2020, respectively. The historical operating results indicate the Company has recurring losses from operations which raise the question related to the Company's ability to continue as a going concern. There can be no assurance the Company will become profitable or obtain necessary financing for its business or that it will be able to continue in business. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. OnJuly 20, 2021 , the Company sold 2,436,904 shares of common stock at$3.48 per share. The net proceeds from the transactions were approximately$7,640,000 , after deducting offering costs, which mitigates the liquidity concern and the initial doubt about the Company's ability to continue as a going concern. In addition, the Company's continued promotion of the customers and revenues increase brought about by the 5G messaging business will also provide a stable cash flow guarantee for the Company's subsequent development to a large extent. If deemed necessary, management could raise additional funds by way of private or public offerings, or by obtaining loans from banks or others, to support the Company's research and development ("R&D"), procurement, marketing and daily operation. While management of the Company believes in the viability of its strategy to generate sufficient revenues and its ability to raise additional funds on reasonable terms and conditions, there can be no assurances to that effect. The ability of the Company to continue as a going concern depends upon the Company's ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of a public or private offering. There can be no assurance the Company will be successful in any future fund raising. In the event that the Company requires additional funding to finance its operations, the Company's major shareholders have indicated their intent and ability to provide such financial support. Based on the Company's most recent cash flows projection and working capital requirements, management of the Company believes that the Company will be able to continue to operate as a going concern in the foreseeable future and it will have sufficient working capital to meet its operating needs for at least the next 12 months. Results of Operations
Comparison of the six months ended
The following table sets forth the results of our operations for the six months endedDecember 31, 2021 and 2020, respectively, indicated as a percentage of net sales. Certain columns may not add up due to rounding. % of % of 2021 Revenues 2020 Revenues Revenues$ 9,650,609 $ 135,239 Cost of revenues 9,340,715 97 % 57,013 42 % Gross profit 309,894 3 % 78,226 58 % Selling expenses 386,991 4 % 174,036 129 %
Research and development 719,571 7 % 329,235 243 % General and administrative expenses 2,618,280 27 % 1,431,972 1,059 % Total operating expenses 3,724,842 39 % 1,935,243 1,431 % Loss from operations (3,414,948 ) (35 )% (1,857,017 ) (1,373 )% Non-operating income (expense), net 38,140 0.4 % (10,398 ) (8 )% Loss before income taxes (3,376,808 ) (35 )% (1,867,415 ) (1,381 )% Income tax expense - - % - - % Loss before noncontrolling interest (3,376,808 ) (35 )% (1,867,415 ) (1,381 )% Less: loss attributable to noncontrolling interest (258,281 ) (3 )% (36,555 ) (27 )% Net loss to the Company$ (3,118,527 ) (32 )%
(1,830,860 ) (1,354 )% Revenues The total revenue of$9,650,609 and$135,239 was generated for the six months endedDecember 31, 2021 and 2020, respectively. The increase in the revenue for the six months endedDecember 31, 2021 was mainly due to the expansion of 5G messaging business, especially 5G SMS, integrated 5G IMMCP and 5G multi-media video messaging technology system ("Value-added service"). The income is based on the fee to charge on number of messages have been sent. In the same period of the last fiscal year, sales were solely from smart city business including face recognition terminals and related devices to schools or residential communities inChina . 30 FromJuly 2021 toDecember 2021 , the Company generated a revenue of$9,650,609 , consisting of 5G business with an amount of$9,616,811.12 , including$7,786,104.56 from 5G SMS,$1,830,706.56 from 5G IMMCP mobile projects on the cloud as value-added service, and$33,797.88 from smart city projects. The Company's three major business lines have started full operations and the 5G messaging business is developing rapidly with a growth rate of more than 900 % compared to the immediate prior quarter endedSeptember 30, 2021 . Cost of Revenues
Datasea recorded$9,340,715 and$57,013 cost of revenues for the six months endedDecember 31, 2021 and 2020 respectively. For the six months endedDecember 31, 2021 , cost of revenues was mainly the SMS service platform fees to suppliers. For the six months endedDecember 31, 2020 , cost of revenues was the inventory purchase for the products sold. The increase in cost of revenues was mainly due to the expansion into the 5G messaging business and the delivery of services related to the SMS service platform in 2021. Operating costs incurred fromJuly 2021 toDecember 2021 were$9,340,715 , and cost of 5G messaging service was$9,321,224.15 including$7,517,733.48 for 5G SMS,$1,803,490.67 for 5G IMMCP and mobile on cloud projects, and$19,490.85 for smart city projects. These costs were the service procurement costs corresponding to the full operation of the three business lines of the Company. Among them, 5G messaging business has entered a period of rapid growth, and cost of procurement accounts for 80% of the overall procurement cost. Gross Profit Gross profit for the six months endedDecember 31, 2021 was$309,894 compared to gross loss of$78,226 for the six months endedDecember 31, 2020 , respectively. The generation of gross profit was mainly due to the delivery of services related to the SMS service in 2021. From July toDecember 2021 , the overall gross profit margin was 3.22%, including 3.07% for 5G SMS, 5G IMMCP and mobile projects on cloud, and 42.33% for smart community projects. The Company's smart city business continues to develop. It generates revenue and maintains relatively stable gross profit level.
Currently, the overall gross profit margin of the Company is low due to the
following reasons:
The majority revenue of the Company from July toDecember 2021 was mainly generated by 5G SMS and 5G IMMCP value-added services. The sales of digital smart city service was only accounted for a very tiny portion while the acoustic intelligence segment is still in the process of product development which hasn't contributed any income this quarter. 31 For 5G SMS and 5G IMMCP and value-added services, the Company formally entered the 5G messaging and its related business market last fiscal year. As the 5G messaging industry is still in an early stage, to attract the initial users, undercut competitions and gain market share as early as possible, the Company adopted a competitive pricing strategy to expand the first-mover advantage. As a result, Shuhai Beijing has been engaged by 100+ institutional clients for services, including establishing cooperation relationships with industry-leading customers such as the top three tech giantsChina mobile, andChina telecom subsidiary. As the Company proceeds into the later stage of the 5G messaging business, three factors will help equip the Company with more flexibility in pricing and improving the gross margin: 1) costs will be spread over a larger number of products as the Company keeps scaling the customers and increasing the productivity; 2) growing brand recognition and technology capabilities to serve clients with complex needs will help strengthen the Company's pricing power; 3) after the commercialization of 5G messaging in the Chinese market (expected in the first quarter of 2022), the target customers and product forms will be expanded. For example, the Company will provide the 5G IMMCP as SaaS software, customization and value-added services to improve profit margin. Selling, General and Administrative, and Research and Development Expenses Selling expenses were$386,991 and$174,036 for the six months endedDecember 31, 2021 and 2020, respectively. The increase of$212,955 was mainly due to increase in payroll expense related to salespersons of$129,700 , increase in technology service fees of$96,100 , partly offset by a decrease in meals and entertainment expenses by$9,400 and a decrease in travel expense of$3,500 . As mentioned, during past two quarters, the majority of revenue was generated by 5G Messaging with the strategy of sharing a higher portion of income with partners from the fee charged through each message has been sent Indeed, in order to expand the sales channel especially acoustic intelligence domestically & internationally, the investment on promotions, distributors, global exhibitions, and related activities will be increased. As the result, the selling expense to total sales is expected to be around the mid-range of industry average for high-growth technology business. The Research & Development cost mainly consists of innovation & creation in both software and hardware to assist communities for addressing safety issues with public health concerns during the COVID-19 pandemic, expanding the Company's leading acoustic intelligent application technologies, and continuing to develop 5G-related products. We incurred R&D expenses of$719,571 and$329,235 during the six months endedDecember 31, 2021 and 2020, respectively; a 118% increase on R&D investment. Due to the corporate and business strategies of establishing a spearhead position in the acoustic intelligence segment worldwide, the proper amount of capital budgeting on technological development will be invested over the next three years.Datasea aims to become one of the companies inChina to obtain more patents than the research institutions and universities for solving the problems about lacking efficiency transferring intangible assets to economic values. By doing so, the joint research hubs with enterprises possess advanced R&D team both onshore and offshore will be setting up. In addition, the patents thatDatasea is pursuing fall into the categories of "innovation" and PCT (Patent Cooperation Treaty) which are administered byWorld Intellectual Property Organization and are recognized globally.
The 4.0 version of 5G MMCP, which is Integrated 5G IMMCP, has been developed in
three phases so far. The development cost paid was
5G IMMCP connects with existing client promotion access such as SMS, email,
WeChat, applet, APP Push and third-party tools, provides unified messaging and
manages aggregated messaging business capabilities.
5G IMMCP mainly targets at: Customers with three or more reach channels, membership system, annual marketing budget of more thanRMB50,000 (approximately$7,860 ) and private operating needs, mainly including government agencies, hospitals, universities and other public institutions with a large demand for notification. 5G IMMCP also aims to meet a large number of marketing needs, private domain operation needs with three to ten stores in the midstream sector (such as eating and drinking physical store chain merchants), online and offline multi-channel operation of brand merchants. General and administration ("G&A") expenses increased$1,186,308 , or 83% from$1,431,972 during the six months endedDecember 31, 2020 to$2,618,280 , during the six months endedDecember 31, 2021 . The increase is attributed to increase in rental expenses by$199,100 , increase in payroll expenses by$49,140 and increase in professional fees by$960,200 , partly offset by a decrease in office expenses by$23,500 . The company's setting up subsidiaries inHangzhou andShenzhen increased rent and personnel expenses. In addition, for financing and business expansion, the Company has invested in legal, investment and other professional services to meet the compliance requirements of theSEC , so as to ensure the realization of the Company's strategic goals. 32
Non-operating Income (Expenses), net
Non-operating income was$38,140 for the six months endedDecember 31, 2021 , consisted mainly of interest income$32,893 and other income$5,247 . For the six months endedDecember 31, 2020 , non-operating expense was$10,398 , consisted mainly of other expense$12,202 , partially offset by interest income$1,804 . Net Loss We generated net losses of$3,118,527 and$1,830,860 for the six months endedDecember 31, 2021 and 2020, respectively. The increase in net loss was due mainly to the increase in G&A expenses which partly offset by increase in gross profit as explained above. During the fiscal year endingJune 30, 2022 , the Company will continue to improve the market expansion of its main business, based on existing contracts including smart campuses/canteen systems, smart community systems, 5G messaging, and the market launch of acoustic smart hardware products. The Company's objective is to expand our revenue streams and achieve annual profit in the
new fiscal year. At present, the Company has completed the new strategic positioning and business layout by 2021, forming three main businesses and long-term development plans in smart city, acoustic intelligence and 5G messaging. According to the plan, in 2022, with the introduction of acoustic intelligent hardware products and solutions into the market, and the comprehensive commercialization ofChina's 5G messaging services in the Chinese market (the Company has signed service agreements with mobile operators, and the development of 5G messaging applications by leading companies in express delivery, catering, medical and tourism industries). More than$17.05 million worth of 5G messaging business contracts have been signed, which will support the Company to achieve break-even and profitability in 2022. The Company's operations will be in a virtuous circle.
Comparison of the three months ended
The following table sets forth the results of our operations for the three
months ended
of net sales. Certain columns may not add up due to rounding.
% of % of
2021 Revenues 2020 Revenues
Revenues $ 8,979,479 $ 126,184
Cost of revenues 8,733,180 97 % 40,114 32 %
Gross profit 246,299 3 % 86,070 68 %
Selling expenses 156,192 2 % 119,971 95 %
Research and development 432,355 5 % 134,509 107 % General and administrative expenses 1,498,809 16 % 812,536 644 % Total operating expenses 2,087,356 23 % 1,067,016 846 % Loss from operations (1,841,057 ) (21 )% (980,946 ) (777 )% Non-operating income (expense), net 17,583 0.2 % (19,646 ) (16 )% Loss before income taxes (1,823,474 ) (21 )% (1,000,592 ) (793 )% Income tax expense - - % - - % Loss before noncontrolling interest (1,823,474 ) (21 )% (1,000,592 ) (793 )% Less: loss attributable to noncontrolling interest (146,181 ) (2 )% (36,555 ) (29 )% Net loss to the Company$ (1,677,293 ) (19 )%
(964,037 ) (764 )% Revenues We had revenues of$8,979,479 and$126,184 for the three months endedDecember 31, 2021 and 2020, respectively. The increase in revenues was mainly due to the expansion of the Company's business towards 5G messaging in fiscal year 2021. For the three months endedDecember 31, 2021 , revenues mainly consisted of service fees from our 5G SMS service platform. For the three months endedDecember 31, 2020 , revenues mainly consisted of sales of face recognition terminals and related devices to schools and residential communities inChina . 33 Cost of Revenues We recorded$8,733,180 and$40,114 cost of revenues for the three months endedDecember 31, 2021 and 2020, respectively. For the three months endedDecember 31, 2021 , cost of revenues was mainly the 5G SMS service platform fees to suppliers. For the three months endedDecember 31, 2020 , cost of revenues was inventory purchase cost for the products sold. The increase in cost of revenues was due mainly to the expansion into the 5G messaging business and the delivery of services related to the 5G SMS service platform in 2021. Gross Profit Gross profit for the three months endedDecember 31, 2021 was$246,299 compared to$86,070 for the three months endedDecember 31, 2020 , respectively. The increase in gross profit was mainly due to the delivery of services related to the 5G SMS service platform in 2021. Selling, General and Administrative, and Research and Development Expenses Selling expenses were$156,192 and$119,971 for the three months endedDecember 31, 2021 and 2020, respectively, representing an increase of$36,221 or 30%. The increase was mainly due to the increase in payroll expense of salespersons by$59,400 , partly offset by a decrease in meals and entertainment expenses by$12,900 , decrease in travel expenses by$2,200 , and decrease in other selling expense by$4,900 . Currently, we are focusing on developing products and software to assist schools and communities in addressing safety issues and public health issues during the pandemic, expanding the Company's leading acoustic intelligent application technologies and products, and continuing to develop 5G-related applications. We incurred R&D expenses of$432,355 and$134,509 during the three months endedDecember 31, 2021 and 2020, respectively. We intend to invest approximately$10 million in technological product development over the next three years. General and administration expenses increased$686,273 , or 84% from$812,536 during the three months endedDecember 31, 2020 to$1,498,809 during the three months endedDecember 31, 2021 . The increase was mainly attributed to the increase in professional fees by$685,980 .
Non-operating Income (Expenses), net
Non-operating income was$17,583 for the three months endedDecember 31, 2021 , consisting mainly of interest income of$12,359 and other income of$5,224 . For the three months endedDecember 31, 2020 , non-operating expense of$19,646 is consisted of other expense$19,854 , partially offset by interest income of
$208 . Net Loss We generated net losses of$1,677,293 and$964,037 for the three months endedDecember 31, 2021 and 2020, respectively. The increase in net loss was mainly due to the increase in G&A expenses, partly offset by increased gross profit as explained above.
Liquidity and Capital Resources
Historically, we have funded our operations primarily through the sale of our common stock and shareholder loans. To enhance our ability to continue to operate as a going concern, we are dedicating resources to generate recurring revenues and sustainable operating cash flows. Given the development of 5G technology inChina , we believe there is great demand for our acoustic intelligent technology and products. We believe our business will benefit from the increasing demand for public safety and COVID-19 prevention and control inChina , as well as increasing demand for our smart community, safe campus, and smart payment solutions. 34
We expect to generate revenues through expanding our current smart city, 5G messaging and acoustic intelligence business, and through continuous product innovation and development as well as various types of value-added services. In order to maintain working capital sufficient to support our operations and finance the future growth of our business, we expect to fund any cash flow shortfall through financial support from our majority stockholders (who are also our board members or officers) and public or private issuance of securities. However, such additional cash resources may not be available to us on desirable terms, or at all, if and when needed by us. As ofDecember 31, 2021 , we had working capital of$2,555,924 or a current ratio of 1.39:1. Our current assets were$9,129,063 . As ofJune 30, 2021 , we had a working capital deficit of$2,372,682 or a current ratio of 0.27:1. Our current assets were$885,985 . We expect the Company to continue to support its ongoing operations and financing through revenue growth and increased financing activities in business areas such as 5G messaging. However, there is no assurance that the Company will be able to secure such additional working capital on commercially viable terms or at all.
The following is a summary of cash provided by or used in each of the indicated
types of activities during the six months ended
respectively.
2021 2020
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Cash Flow from Operating Activities
Net cash used in operating activities was$3,824,622 during the six months endedDecember 31, 2021 , compared to net cash used in operating activities of$1,846,292 during the six months endedDecember 31, 2020 , an increase in cash outflow of$1,978,330 . The increase in cash outflow was mainly due to increased cash outflow on accounts receivable by$5,175,377 , and increased cash outflow on prepaid expenses and other current assets by$1,042,347 . These increases were partly offset by increased cash inflow from accounts payable by$4,780,276 , increased cash inflow from advance from customers by$63,507 , and increased cash inflow from accrued expenses and other payables by$101,527 .
Cash Flow from Investing Activities
Net cash used in investing activities totaled$284,124 for the six months endedDecember 31, 2021 , which consists of cash paid for the acquisition of office furniture and equipment of$23,787 , cash paid for acquisition of intangible assets of$198,151 and long-term investment into two high-tech companies of$62,186 . Net cash used in investing activities totaled$99,696 for the six months endedDecember 31, 2020 , which primarily related to cash paid for the acquisition of office furniture and equipment and leasehold improvements of$91,214 , and for intangible assets of$8,482 . For the purpose of better positioning the comparative advantages on research & development, product differentiation, and market channels, the strategic investment, merge & acquisition, and joint venture will be executed more aggressively next fiscal year, so the cash outflow from investing activities is expected to increase rapidly.
Cash Flow from Financing Activities
Net cash provided by financing activities was$6,237,354 during the six months endedDecember 31, 2021 , which was the net proceeds from sale of our common stock through an equity financing of$7,681,796 and proceeds from capital contribution from a major shareholder of$62,186 , but offset by decrease in due to related parties of$13,391 , and repayment of loans payable of$1,493,237 . Net cash used in financing activities was$931,000 during the six months endedDecember 31, 2020 , which was the net proceeds from sales of our common stock through an equity financing. 35 Going forward
cutting-edge artificial intelligence globally to better build the digital world.
To achieve this objective, management of the Company plans to:
? Continue to promote its 5G messaging business aggressively;
? Establish comparative advantage on its acoustic intelligence segment through
innovation and product differentiation;
? Team up with domestic and international technology institutions to strengthen
its research and development capabilities for the purpose of developing next
generation products
? Expand its sales into overseas markets such as western countries with abundant
consumption rate and South East Asian countries with fast-growing GDP; ? Optimize its capital structure and lower its financing costs;
? Create strategic alliance with potential partners to create mutual synergy in
the form of merger and acquisition or joint venture; ? Enhance brand awareness and awareness of its intellectual properties;
? Maintain clients’ loyalty by providing outstanding customer service, exclusive
service experience, and appropriate transparency and publicity.Datasea's major revenues generates fromChina's policy-driven market. Management believes that the supporting documents released by the central government:14th Five Year Technology Innovation Plan, Notice of theMinistry of Industry and Information Technology on Promoting and Accelerating the Application of 5G, New Generation Artificial Intelligence Development Plan are favorable to all the business segments of the Company because these are also the cores for the nation to conduct industry upgrading and economic transition for sustaining 5%-6% target GDP growth rate. Therefore, it is expected that market expansion will be across the board domestically by the promotion of both state and local officials. Lower cost of capital in term of fixed income security could be obtained to support working capital or long-term operation. Equity investors will be chasing related assets for certain percentage of stake, and highly possible that a subsidy or tax credit will be distributed to facilitate innovation & production. Management of the Company is optimistic about the industry outlook based on the tremendous demand from various types of application layers caused by the highest population rate among the world. According to the statistic released by Dao Insight, the market size of smart cites, 5G messaging, and acoustic intelligence in 2025 will beRMB400 billion (approximately$62.88 billion ),RMB300 billion (approximately$47.16 billion ), andRMB1.1trillion (approximately$172.93 billion ) respectively with an average compounded annual growth rate above 25%, which is outpacing the general economy and most of other industries.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues, expenses, results of operations, liquidity,
capital expenditures or capital resources.
36
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