NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019 (UNAUDITED) AND
JUNE 30, 2019
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Datasea Inc. (the “Company”, or “we”,
“us”, “our” or similar terminology) was incorporated in the State of Nevada on September 26, 2014 under
the name Rose Rock Inc. and changed its name to Datasea Inc. on May 27, 2015 by amending its articles of incorporation. On May
26, 2015, the Company’s founder, Xingzhong Sun, sold 6,666,667 shares of common stock, par value $0.001 per share, of the
Company (the “Common Stock”) to Zhixin Liu, one of the owners of Shuhai Skill (HK) as defined below. On October 27,
2016, Mr. Sun sold his remaining 1,666,667 shares of Common Stock of the Company to Ms. Liu.
On October 29, 2015, the Company entered into a share exchange
agreement (the “Exchange Agreement”) with the shareholders (the “Shareholders”) of Shuhai Information Skill
(HK) Limited (“Shuhai Skill (HK)”), a limited liability company incorporated on May 15, 2015 under the laws of the
Hong Kong Special Administrative Region of the People’s Republic of China (the “PRC”). Pursuant to the terms
of the Exchange Agreement, the Shareholders, who together own 100% of the ownership rights in Shuhai Skill (HK), transferred all
of the issued and outstanding ordinary shares of Shuhai Skill (HK) to the Company in exchange for the issuance of an aggregate
of 6,666,667 shares of Common Stock, thereby causing Shuhai Skill (HK) and its wholly owned subsidiaries, Tianjin Information Sea
Information Technology Co., Ltd. (“Tianjin Information”), a limited liability company incorporated under the laws of
the PRC, and Harbin Information Sea Information Technology Co., Ltd., a limited liability company incorporated under the laws of
the PRC, to become wholly-owned subsidiaries of the Company, and Shuhai Information Technology Co., Ltd., also a limited liability
company incorporated under the laws of the PRC (“Shuhai Beijing”), to become a variable interest entity (“VIE”)
of the Company through a series of contractual agreements between Shuhai Beijing and Tianjin Information. The transaction was accounted
for as a reverse merger, with Shuhai Skill (HK) and its subsidiaries being the accounting survivor. Accordingly, the historical
financial statements presented are those of Shuhai Skill (HK) and its consolidated subsidiaries and VIE.
Following the Share Exchange, the Shareholders, being Zhixin
Liu and her father, Fu Liu, owned approximately 82% of the outstanding shares of Common Stock. As of October 29, 2015, there were
18,333,333 shares of Common Stock issued and outstanding, 15,000,000 of which were beneficially owned by Zhixin Liu and Fu Liu.
On May 1, 2018, the Company implemented a 1 for 3 reverse stock
split decreasing the shares outstanding from 57,511,711 to 19,170,846. The unaudited condensed consolidated financial statements
have been retroactively adjusted to reflect the reverse split.
After the Share Exchange, the Company, through its consolidated
subsidiaries and VIE is engaged in providing smart security solutions primarily to schools, tourist or scenic attractions
and public communities in China.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
AND CONSOLIDATION
The accompanying unaudited condensed consolidated financial
statements include the financial statements of the Company and its 100% owned subsidiaries of Shuhai Skill (HK), Tianjin Information
and its VIE, Shuhai Beijing.
The accompanying unaudited condensed
consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.
The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments and elimination
of intercompany transactions upon consolidation) which are, in the opinion of management, necessary to fairly present the operating
results for the respective periods. Certain information and footnote disclosures normally present in the annual consolidated financial
statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted
pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes for the year ended June 30, 2019. The results for the three months
ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year ending June 30, 2020.
VARIABLE INTEREST ENTITY
Pursuant to Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Section 810, “Consolidation” (“ASC 810”), the Company
is required to include in its consolidated financial statements, the financial statements of Shuhai Beijing, its VIE. ASC 810 requires
a VIE to be consolidated if the company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority
of the VIE’s residual returns. A VIE is an entity in which a company, through contractual arrangements, bears the risk of,
and enjoys the rewards normally associated with ownership of the entity, and therefore the company is the primary beneficiary of
the entity.
Under ASC 810, a reporting entity has a controlling financial
interest in a VIE, and must consolidate that VIE, if the reporting entity has both of the following characteristics: (a) the power
to direct the activities of the VIE that most significantly affect the VIE’s economic performance; and (b) the obligation
to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE. The reporting entity’s
determination of whether it has this power is not affected by the existence of kick-out rights or participating rights, unless
a single enterprise, including its related parties and de - facto agents, have the unilateral ability to exercise those rights.
Shuhai Beijing’s actual stockholders do not hold any kick-out rights that affect the consolidation determination.
Through the VIE agreements, the Company is deemed the primary
beneficiary of Shuhai Beijing. Accordingly, the results of Shuhai Beijing have been included in the accompanying unaudited condensed
consolidated financial statements. Shuhai Beijing has no assets that are collateral for or restricted solely to settle their obligations.
The creditors of Shuhai Beijing do not have recourse to the Company’s general credit.
VIE Agreements
Operation and Intellectual Property Service Agreement –
This agreement allows Tianjin Information to manage and operate Shuhai Beijing and collect 100% of their net profits. Under the
terms of the Operation and Intellectual Property Service Agreement, Shuhai Beijing entrusts Tianjin Information to manage its operations,
manage and control its assets and financial matters, and provide intellectual property services, purchasing management services,
marketing management services and inventory management services to Shuhai Beijing. Shuhai Beijing and its shareholders shall not
make any decisions nor direct the activities of Shuhai Beijing without Tianjin Information’s consent.
Shareholders’ Voting Rights Entrustment Agreement –
Tianjin Information has entered into a shareholders’ voting rights entrustment agreement (the “Entrustment Agreement”)
under which Zhixin Liu and Fu Liu (collectively the “Shuhai Beijing Shareholders”) have vested their voting power in
Shuhai Beijing to Tianjin Information or its designee(s). The Entrustment Agreement does not have an expiration date.
Equity Option Agreement –the Shuhai
Beijing Shareholders and Tianjin Information entered into an equity option agreement (the “Option Agreement”), pursuant
to which the Shuhai Beijing Shareholders have granted Tianjin.
Information or its designee(s) the irrevocable right and option
to acquire all or a portion of Shuhai Beijing Shareholders’ equity interests in Shuhai Beijing for an option price of RMB
0.001 for each capital contribution of RMB1.00. Pursuant to the terms of the Option Agreement, Tianjin Information and the Shuhai
Beijing shareholders have agreed to certain restrictive covenants to safeguard the rights of Tianjin Information under the
option Agreement. Tianjin Information agreed to pay RMB1.00 annually to Shuhai Beijing Shareholders to maintain the option rights.
Tianjin Information may terminate the Option Agreement upon prior written notice. The Option Agreement is valid for a period of
10 years from the effective date and renewable at Tianjin Information’s option.
Equity Pledge Agreement – Tianjin Information
and the Shuhai Beijing Shareholders entered into an equity pledge agreement on October 27, 2015 (the “Equity Pledge Agreement”).
The Equity Pledge Agreement serves to guarantee the performance by Shuhai Beijing of its obligations under the Operation and Intellectual
Property Service Agreement and the Option Agreement. Pursuant to the Equity Pledge Agreement, Shuhai Beijing Shareholders have
agreed to pledge all of their equity interests in Shuhai Beijing to Tianjin Information. Tianjin Information has the right to collect
any and all dividends paid on the pledged equity interests during the pledge period. Pursuant to the terms of the Equity Pledge
Agreement, the Shuhai Beijing Shareholders have agreed to certain restrictive covenants to safeguard the rights of Tianjin Information.
Upon an event of default or certain other agreed events under the Operation and Intellectual Property Service Agreement, the Option
Agreement and the Equity Pledge Agreement, Tianjin Information may exercise the right to enforce the pledge.
The following financial statement amounts and balances of the
VIE were included in the accompanying consolidated financial statements as of September 30, 2019 and June 30, 2019 and for the
three months ended September 30, 2019 and 2018, respectively:
|
|
September 30,
2019
|
|
|
June 30,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Current assets
|
|
$
|
702,885
|
|
|
$
|
1,573,413
|
|
Non-current assets
|
|
|
309,044
|
|
|
|
96,927
|
|
Total assets
|
|
$
|
1,011,929
|
|
|
$
|
1,670,340
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
5,736,211
|
|
|
$
|
6,232,836
|
|
Non-current liabilities
|
|
|
-
|
|
|
|
-
|
|
Total liabilities
|
|
$
|
5,736,211
|
|
|
$
|
6,232,836
|
|
|
|
Three Months Ended
September 30
(Unaudited)
|
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
$
|
(347,824
|
)
|
|
$
|
(366,615
|
)
|
USE OF ESTIMATES
The preparation of unaudited condensed
consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates. The significant areas requiring the use of management estimates include,
but are not limited to, the estimated useful life and residual value of property, plant and equipment, provision for staff benefits,
recognition and measurement of deferred income taxes and the valuation allowance for deferred tax assets. Although these estimates
are based on management’s knowledge of current events and actions management may undertake in the future, actual results
may ultimately differ from those estimates and such differences may be material to our unaudited condensed consolidated financial
statements.
CONTINGENCIES
Certain conditions may exist as of
the date the unaudited condensed consolidated financial statements are issued, which may result in a loss to the Company but which
will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess
such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies
related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the
Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived
merits of the amount of relief sought or expected to be sought. If the assessment of a contingency indicates that it is probable
that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued
in the Company’s unaudited condensed consolidated financial statements.
If the assessment indicates that a potential material loss contingency
is not probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together
with an estimate of the range of possible loss if determinable and material, would be disclosed. As of September 30, 2019 and June
30, 2019, the Company has no such contingencies.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits
and short-term cash investments that are highly liquid in nature and have original maturities of three months or less.
INVENTORY
Inventory, comprised principally of smart student identification
cards related to the Company’s “Safe Campus” security product, as well as products associated therewith comprised
of routers to be used in installations, is valued at the lower of cost or net realizable value. The value of inventory is determined
using the first-in, first-out method. The Company periodically estimates an inventory allowance for estimated unmarketable inventories
when necessary.
Inventory amounts are reported net of such allowances. There
were no allowances for inventory as of September 30, 2019 and June 30, 2019.
ESCROW
Escrow represents cash held in an indemnification escrow
account related to requirements of the financing agreement signed with the underwriter of the Company’s initial public offering
for a period of 18 months or longer subsequent to the closing of the initial public offering on December 21, 2018, but in no event
it shall be held in escrow for longer than 24 months.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated
depreciation. Major repairs and improvements that significantly extend original useful lives or improve productivity are capitalized
and depreciated over the period benefited. Maintenance and repairs are expensed as incurred. When property and equipment are retired
or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain
or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method over
estimated useful lives as follows:
Furniture and fixtures
|
|
|
5-10 years
|
|
Office equipment
|
|
|
3-5 years
|
|
Vehicles
|
|
|
5 years
|
|
Leasehold improvements are depreciated utilizing the straight-line
method over the shorter of their estimated useful lives or remaining lease term.
INTANGIBLE ASSETS
Intangible assets with finite lives are amortized using the
straight-line method over their estimated period of benefit. Evaluation of the recoverability of intangible assets is made to take
into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All
of the Company’s intangible assets are subject to amortization. No impairment of intangible assets has been identified as
of the balance sheet dates.
Intangible assets include licenses, certificates, patents and
other technology and are amortized over their useful life of five to ten years.
FAIR VALUE MEASUREMENTS AND DISCLOSURES
FASB ASC Topic 820, “Fair Value Measurements,” defines
fair value, and establishes a three-level valuation hierarchy for disclosures that enhances disclosure requirements for fair value
measures. The three levels are defined as follows:
|
●
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
●
|
Level
2 inputs to the valuation methodology include other than those in level 1 quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the
full term of the financial instrument.
|
|
●
|
Level
3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
The carrying value of cash, inventory, prepaid expenses and
other current assets, accounts payable, accrued expenses and other payables, advances from customers, and loan payable-shareholder,
approximate their fair values due to their short maturities.
As of September 30, 2019 and June 30, 2019, the Company did
not identify any assets and liabilities that are required to be presented on the balance sheet at fair value on a recurring basis.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with FASB ASC 360-10, Accounting for the
Impairment or Disposal of Long-Lived Assets, long-lived assets such as property and equipment are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset may not be recoverable, or it is reasonably possible
that these assets could become impaired as a result of technological or other changes. The determination of recoverability of assets
to be held and used is made by comparing the carrying amount of an asset to future undiscounted cash flows to be generated by the
asset.
If such assets are considered to be impaired, the impairment
to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less cost to sell. During the reporting periods there was no
impairment loss recognized on long-lived assets.
REVENUE RECOGNITION
On July 1, 2018, the Company adopted Accounting Standards Update
(“ASU”) 2014-09 Revenue from Contracts with Customers (ASC 606) using the modified retrospective method for contracts
that were not completed as of July 1, 2018. This did not result in an adjustment to retained earnings upon adoption
of this new guidance, as the Company’s revenue was recognized based on the amount of consideration, we expect to receive
in exchange for satisfying the performance obligations.
The core principle underlying the ASC 606 is that the Company
will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration
to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance
obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods
and services transfers to a customer. The Company’s revenue streams are recognized at a point in time, based on when control
of goods and services transfers to a customer.
ASC 606 requires the use of a new five-step model to recognize
revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii)
identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to
the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective
performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies each performance obligation.
The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes
in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition policy for all revenue
streams within the scope of the ASC 606 under previous standards and using the five-step model under the new guidance and confirmed
that there were no differences in the pattern of revenue recognition.
The Company is seeking to derive its revenues from professional
service contracts with its customers, with revenues being recognized upon delivery of services and products. Persuasive evidence
of an arrangement is demonstrated via professional service contracts and invoices; and the service price to the customer is fixed
upon acceptance of the professional services contract. The Company will recognize revenue when professional service is rendered
to the customer by the Company and collectability of payment is reasonably assured. These revenues will be recognized at a point
in time after all performance obligations are satisfied.
INCOME TAXES
The Company uses the asset and liability method of accounting
for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense is recognized
for the amount of: (i) taxes payable or refundable for the current period and (ii) deferred tax consequences of temporary differences
resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets
also include the prior years’ net operating losses carried forward. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations
in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if
based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred
tax assets will not be realized.
ASC Topic 740.10.30 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
ASC Topic 740.10.40 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. The Company has no material uncertain tax positions for any of the reporting periods presented.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are expensed in the period
when they are incurred. For the three months ended September 30, 2019 and 2018, the Company incurred research and development
expenses of $251,207 and $62,771, respectively.
CONCENTRATION OF CREDIT RISK
The Company maintains cash in accounts with state-owned banks
within the PRC. Cash in state-owned banks less than RMB500,000 ($69,946) is covered by insurance. Should any of these institutions
holding the Company’s cash become insolvent, or if the Company is unable to withdraw funds for any reason, the Company could
lose the cash on deposit with that institution. The Company has not experienced any losses in such accounts and believes it is
not exposed to any risks on its cash in these bank accounts.
Cash denominated in RMB with a U.S. dollar equivalent of $117,611
and $1,395,104 at September 30 and June 30, 2019, respectively, were held in accounts at financial institutions located in the
PRC‚ which is not freely convertible into foreign currencies. In addition, as of September 30, 2019, approximately $48,000
of such funds were not covered by insurance in the PRC. While management believes that these financial institutions are of high
credit quality, it also continually monitors their credit worthiness. The Company, its subsidiaries and VIE have not experienced
any losses in such accounts and do not believe the cash is exposed to any significant risk. Cash held in accounts at U.S. financial
institutions are insured by the Federal Deposit Insurance Corporation or other programs subject to certain limitations up to $250,000
per depositor. As of September 30, 2019, the cash balance of approximately $578,684 was maintained at U.S. financial institutions,
of which approximately $329,000 was not insured. Cash was maintained at financial institutions in Hong Kong, and were insured by
the Hong Kong Deposit Protection Board up to a limit of HK $500,000 (approximately $64,000). As of September 30, 2019, the cash
balance of approximately $2,621,860 was maintained at financial institutions in Hong Kong, of which approximately $2,578,000 of
cash balance was not insured.
FOREIGN CURRENCY TRANSLATION AND COMPREHENSIVE INCOME (LOSS)
The accounts of the Company’s Chinese entities are maintained
in RMB and the accounts of the U.S. parent company are maintained in United States dollars(“USD”) The accounts of the
Chinese entities were translated into USD in accordance with ASC Topic 830 “Foreign Currency Matters.” All assets and
liabilities were translated at the exchange rate on the balance sheet date; stockholders’ equity is translated at historical
rates and the statements of operations and cash flows are translated at the weighted average exchange rate for the period. The
resulting translation adjustments are reported under other comprehensive income (loss) in accordance with ASC Topic 220, “Comprehensive
Income.” Gains and losses resulting from foreign currency transactions are reflected in the statements of operations.
The Company follows FASB ASC Topic 220-10, “Comprehensive
Income (loss).” Comprehensive income(loss) comprises net income(loss) and all changes to the statements of changes in stockholders’
equity, except those due to investments by stockholders, changes in additional paid-in capital and distributions to stockholders.
The exchange rates used to translate amounts in RMB to USD for
the purposes of preparing the consolidated financial statements were as follows
|
|
September 30,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
Period end USD: RMB exchange rate
|
|
|
7.1484
|
|
|
|
6.8665
|
|
|
|
6.8668
|
|
Average USD: RMB exchange rate
|
|
|
7.0188
|
|
|
|
6.8031
|
|
|
|
6.8263
|
|
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016, the FASB issued ASU 2016-02 Amendments to
the ASC 842 Leases. This update requires a lessee to recognize the assets and liability (the lease liability) arising from operating
leases on the balance sheet for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor)
should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend
the lease or not to exercise an option to terminate the lease. Within a twelve-month or less lease term, a lessee is permitted
to make an accounting policy election not to recognize lease assets and liabilities. If a lessee makes this election, it should
recognize lease expense on a straight-line basis over the lease term. The Company adopted ASU 2016-02 on July 1, 2019. The Company
adopted the practical expedient that allows lessees to treat the lease and non-lease components a lease as single lease component.
On July 1, 2019, the Company adopted the Topic 842, as of July 1, 2019, the adoption of this standard resulted in the recording
of right-of use assets and operating lease liabilities, (see Note 12).
In February 2018, the FASB issued ASU 2018-02, Income Statement
- Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
The amendments in this ASU affect any entity that is required to apply the provisions of Topic 220, Income Statement – Reporting
Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive
income as required by GAAP. The amendments in this ASU are effective for all entities for fiscal years beginning after December
15, 2018, and interim periods within those fiscal years. Management does not believe the adoption of this ASU would have a material
effect on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value
Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement”
(“ASU 2018-13”). ASU 2018-13 removes, modifies and adds certain disclosure requirements in Topic 820 “Fair Value
Measurement”. ASU 2018-13 eliminates certain disclosures related to transfers and the valuations process, modifies disclosures
for investments that are valued based on net asset value, clarifies the measurement uncertainty disclosure, and requires additional
disclosures for Level 3 fair value measurements. ASU 2018-13 is effective for the Company for annual and interim reporting periods
beginning August 1, 2020. The Company is currently evaluating the impact of this new standard on its consolidated financial statements
and related disclosures.
In May 2019, the FASB issued ASU 2019-05, which is an update
to ASU Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,
which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized
cost basis, replacing the previous incurred loss methodology. The amendments in Update 2016-13 added Topic 326, Financial Instruments—Credit
Losses, and made several consequential amendments to the Codification. Update 2016-13 also modified the accounting for available-for-sale
debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis, in
accordance with Subtopic 326-30, Financial Instruments—Credit Losses—Available-for-Sale Debt Securities. The amendments
in this Update address those stakeholders’ concerns by providing an option to irrevocably elect the fair value option for
certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase
comparability of financial statement information by providing an option to align measurement methodologies for similar financial
assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in
Update 2016-13 while still providing financial statement users with decision-useful information. ASU 2019-05 is effective for the
Company for annual and interim reporting periods beginning August 1, 2020. The Company is currently evaluating the impact of this
new standard on its consolidated financial statements and related disclosures.
Management does not believe that any other recently issued,
but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying consolidated
financial statements.
NOTE 3 – PROPERTY
AND EQUIPMENT
Property and equipment is summarized as follows:
|
|
September 30,
2019
|
|
|
June 30,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Furniture and fixtures
|
|
$
|
77,980
|
|
|
$
|
83,437
|
|
Vehicle
|
|
|
2,798
|
|
|
|
2,913
|
|
Office equipment
|
|
|
56,042
|
|
|
|
54,641
|
|
Subtotal
|
|
|
136,820
|
|
|
|
140,991
|
|
Less: accumulated depreciation
|
|
|
101,063
|
|
|
|
99,875
|
|
Total
|
|
$
|
35,757
|
|
|
$
|
41,116
|
|
Depreciation expense for the three months ended September 30,
2019 and 2018 was $5,217 and $11,445 respectively.
NOTE 4 – INTANGIBLE
ASSETS
Intangible assets are summarized as follows:
|
|
September
30,
2019
|
|
|
June
30,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Software registration right
|
|
$
|
36,352
|
|
|
$
|
37,843
|
|
Patent
|
|
|
14,684
|
|
|
|
15,286
|
|
Value-added telecommunications business license
|
|
|
11,218
|
|
|
|
11,678
|
|
Technology / software development (see Note 5)
|
|
|
283,343
|
|
|
|
500,000
|
|
Subtotal
|
|
|
345,597
|
|
|
|
564,807
|
|
Less: Accumulated amortization
|
|
|
10,363
|
|
|
|
8,996
|
|
Total
|
|
$
|
335,234
|
|
|
$
|
555,811
|
|
Amortization expense for the three months ended September 30,
2019 and 2018 were $1,753 and $717, respectively.
On July 16, 2019, the Company entered into an agreement with
Beijing Chuangyan Zhixing Education Technology Co., Ltd., an unaffiliated party, to develop and promote an essential-qualities-oriented
education (the so-called Suzhi education) platform. The Company plans to introduce this platform to schools across China. Pursuant
to the agreement, the Company will pay RMB 2,000,000 (approximately $285,000) as fund to purchase the product needed. As of September
30, 2019, the Company paid $283,343 recorded as intangible assets.
NOTE 5 – PREPAID
EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
|
|
September 30,
2019
|
|
|
June 30,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Security deposit
|
|
$
|
156,189
|
|
|
$
|
46,933
|
|
Prepaid expenses and advances
|
|
|
582,505
|
|
|
|
34,181
|
|
Others
|
|
|
13,539
|
|
|
|
24,818
|
|
Total
|
|
$
|
752,233
|
|
|
$
|
105,932
|
|
On May 28, 2019, the Company entered into an agreement with
SDT Trade Co., Ltd., an unaffiliated party (“SDT”). SDT will assist the Company with technical development work
related to the Company’s security-related software and systems. Pursuant to the agreement, SDT will complete certain development
work within twelve months and thereafter maintain the system for thirty-six months. The total amount to be paid under the agreement
is $1,200,000. As of September 30, 2019, the Company paid SDT $1,000,000, of which, $50,000 was recorded as research and development
expense in the statement of operations for the three months ended September 30, 2019 as the costs were incurred before the establishment
of technological feasibility, and $950,000 was recorded as prepaid software development expenses, of which, $350,000 was current
and $600,000 was noncurrent.
On July 2, 2019, the Company entered into a technology development
service agreement with HW (HK) Limited, an unaffiliated party. Pursuant to the agreement, the Company appointed HW (HK)
Limited to develop an eye protection technical system for a two-year period ending July 1, 2021. The total payments to be made
under the agreement is $1,200,000. As of September 30, 2019, the Company paid HW (HK) Limited $900,000, of which, $150,000 was
recorded as research and development expense in the statement of operations for the three months ended September 30, 2019 as the
costs were incurred before the establishment of technological feasibility, and $750,000 was recorded as prepaid software development
expenses, of which, $150,000 was current and $600,000 was noncurrent.
NOTE 6 – PREPAID
EXPENSES – NON CURRENT
Prepaid expenses - noncurrent assets consisted of the following
including $1,200,000 prepaid software development expenses (see Note 5) :
|
|
September 30,
2019
|
|
|
June 30,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Prepaid expenses
|
|
$
|
1,325,509
|
|
|
$
|
-
|
|
Lease deposits
|
|
|
95,887
|
|
|
|
-
|
|
Total
|
|
$
|
1,421,396
|
|
|
$
|
-
|
|
NOTE 7 – ACCRUED
EXPENSES AND OTHER PAYABLES
Accrued expenses and other payable consisted of the following:
|
|
September 30,
2019
|
|
|
June 30,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Deposit
|
|
$
|
-
|
|
|
$
|
30,525
|
|
Salary and other payables
|
|
|
78,652
|
|
|
|
234,159
|
|
Total
|
|
$
|
78,652
|
|
|
$
|
264,684
|
|
NOTE 8 – ADVANCES
FROM CUSTOMERS
On March 5, 2018, the Company entered into separate agreements
with two sales agents. Pursuant to the agreements, the Company authorized the agents to market the Company’s Safe Campus
Management System. The term of the agreements are for five years and will expire on March 6, 2023 and July 1, 2023, respectively.
As of September 30 and June 30, 2019, the Company recorded $1,266,941
and $1,318,897 of advances from the sales agents, respectively.
NOTE 9 – RELATED
PARTY TRANSACTIONS
The Company’s President, Zhixin Liu, paid certain operating
expenses on behalf of the Company. As of September 30 and June 30, 2019, the amounts due to the President were $0 and $86,733 respectively.
These amounts were interest-free, unsecured and due on demand.
On January 1, 2016, the Company’s President entered into
a car rental agreement with the Company. Pursuant to the agreement, the Company rents a car from the Company’s President
for a monthly rent of approximately $750. The agreement expired on December 31, 2016. The agreement was renewed and the term was
extended to December 31, 2020. The rent paid under this agreement was $2,137 and $2,205 for the three months ended September 30,
2019 and 2018, respectively.
On November 11, 2017, the Company bought a used car for $3,000
from Harbin Jinfenglvyuan Biotechnology Co., Ltd, a related entity owned by Mr. Fu Liu, a director of the Company.
In April 2017, the Company’s President entered into an
apartment rental agreement with the Company. Pursuant to the agreement, the Company rents an apartment from the Company’s
President with an annual rent of approximately $2,849. The agreement was renewed and the term was extended to April 30, 2020. The
rent paid under this agreement was $712 and $735 for the three months ended September 30, 2019 and 2018, respectively.
On April 22, 2019, the Company borrowed RMB400,000 (or approximately
$57,000) with no interest from the Company’s President to pay operating expenses. The loan was repaid on July 8, 2019.
NOTE 10 – COMMON
STOCK
On August 22, 2018, the Company’s Board of Directors and
majority stockholders adopted the 2018 Equity Incentive Plan (the “2018 Plan”) for the Company to award up to a maximum
of 4,000,000 shares of its Common Stock, to attract and retain the best available personnel, provide additional incentives to employees,
directors and consultants and promote the success of its business. No awards have been granted under the 2018 Plan as of the date
of this report, but the Company’s Board of Directors or a designated committee thereof will have the ability in its discretion
from time to time to make awards under the 2018 Plan, including to its officers and directors of the Company.
In September 2018, the Company sold 84,000 shares of Common
Stock to third party investors at RMB 20 (approximately $2.94) per share and received proceeds of RMB 1,680,000 (approximately
$244,666).
In November 2018, the Company sold 21,500 shares of Common Stock
to third party investors at $2.92 per share and received proceeds of $62,780.
On December 21, 2018, the Company successfully completed a registered,
underwritten initial public offering and concurrent listing of the Company’s Common Stock on the NASDAQ Capital Market, which
offering generated gross proceeds of $6.7 million before deducting underwriter’s commissions and other offering costs, resulting
in net proceeds of approximately $5.7 million, of which $1,000,000 was placed in an escrow account. The escrow fund is being held
and disbursed by the escrow agent pursuant to the terms and conditions of a certain Indemnification Escrow Agreement between the
Company and the underwriter of the offering. $400,000 of the escrow fund was disbursed to the Company in February 2019 when the
underwriter confirmed receipt of a written legal opinion from PRC legal counsel in connection with such offering. The Company sold
1,667,500 shares of Common Stock (including shares issued pursuant to the underwriter’s over-allotment option) at an offering
price of $4 per share. The Company’s Common Stock began trading on the NASDAQ Capital Market beginning on December 19, 2018
under the symbol “DTSS.”
In addition, the Company issued warrants to the representative
of the underwriters to purchase 101,500 shares of Common Stock at an exercise price of $6 per share. These warrants may be purchased
in cash or via cashless exercise, will be exercisable for five years from December 21, 2018 through December 17, 2023.
NOTE 11 – INCOME
TAXES
The Company was incorporated in the United States of America,
is subject to U.S. tax and plans to file U.S. federal income tax returns. The Company conducts all of its businesses through its
subsidiaries and affiliated entities, principally in the PRC. No provision for US federal income tax was made for the three
months ended September 30, 2018 as the US entity incurred losses. For the three months ended September 30, 2019, US entity had
$72,873 of net loss.
The Company’s offshore subsidiary, Shuhai Skill (HK),
did not earn any income that was derived in Hong Kong for the three months ended September 30, 2019 and 2018 and therefore did
not incur any Hong Kong Profits tax.
Under the Corporate Income Tax Law of the PRC, the corporate
income tax rate is 25%. The Company received a tax holiday with a 15% corporate income tax rate since it qualified as a high-tech
company.
The Company has generated net operating losses (“NOL”)
of $396,985 and $371,659 during three months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, the Company
has approximately $369,870 of NOL related to its PRC subsidiaries and VIEs that expire in years 2019 through 2023. In assessing
the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the Company’s
future generation of taxable income during the periods in which temporary differences representing net future deductible amounts
become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and
tax planning strategies in making this assessment. After consideration of all the information available, management believes that
significant uncertainty exists with respect to future realization of the deferred tax assets and has therefore established a full
valuation allowance as of September 30, 2019 and 2018.
The following table reconciles the U.S. statutory rates to the
Company’s effective tax rate for the three months ended September 30, 2019 and 2018:
|
|
Three Months ended
September 30,
(Unaudited)
|
|
|
|
2019
|
|
|
2018
|
|
Statutory PRC. tax rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Effect of PRC tax rate holiday
|
|
|
-10.0
|
%
|
|
|
-10.0
|
%
|
Valuation allowance
|
|
|
15.0
|
%
|
|
|
15.0
|
%
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The provisions for income taxes is summarized as follows:
|
|
Three months ended
September 30,
2019
|
|
|
Three months ended
September 30,
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
48,617
|
|
|
|
92,915
|
|
Increase in valuation allowance
|
|
|
(48,617
|
)
|
|
|
(92,915
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company’s net deferred tax asset as of September 30,
2019 and June 30, 2019 is as follows:
|
|
September 30,
2019
|
|
|
June 30,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Deferred tax asset – net operating loss
|
|
$
|
1,248,489
|
|
|
$
|
1,199,872
|
|
Valuation allowance
|
|
|
(1,248,489
|
)
|
|
|
(1,199,872
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The valuation allowance increased by $48,617 and $92,915 for
the three months ended September 30, 2019 and 2018, respectively.
NOTE 12 – COMMIMENTS
Lease Agreement
In December 2017, the Company renewed a one-year operating lease
agreement for its office in Beijing. The lease was to expire on February 28, 2019 and has a monthly rent of RMB 35,192 (or approximately
$5,000). The lease was renewed and expired on August 31, 2019.
In December 2017, the Company renewed the one-year property
management contract. The contract was to expire on February 28, 2019 and has a monthly management fee of RMB 70,384 (or approximately
$10,000). The contract was renewed and expired to August 31, 2019.
On March 20, 2019, the Company entered into the one-year operating
lease agreement for a senior management’s dormitory. Pursuant to the lease agreement, the lease expires on March 22, 2020
and has a monthly rent of RMB 5,200 (or approximately $760). Future rental payment due under the lease is RMB 30,781 (or approximately
$4,400).
On July 30, 2019, the Company entered into an operating lease
agreement for its office in Beijing. Pursuant to the lease agreement, the lease will start on October 8, 2019 and expire on October
7, 2022 and has a monthly rent of RMB 225,923 (or approximately $32,000). The lease required a security deposit of three months’
rent of RMB677,769 (or approximately $97,000) The Company will receive a six-month rent abatement. Future rental payment due under
the lease is RMB6,386,935 (or approximately $910,000).
On July 30, 2019, the Company entered into a property service
agreement for its office in Beijing. Pursuant to the property service agreement, the agreement commenced on August 9, 2019 and
will expire on October 8, 2022, and has a quarterly fee of RMB 202,352 (or approximately $29,000). The deposit was RMB202,352 (or
approximately $29,000). Future payment due under the agreement is RMB2,144,777 (or approximately $305,500).
The following table summarizes the impact of our operating leasing
on our consolidated unaudited financial statements:
Consolidated statement of Operations
|
|
Three Months Ended September 30,
|
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
Operating lease expense
|
|
$
|
32,306
|
|
Consolidated Balance Sheet
|
|
September
30,
2019
|
|
|
|
(Unaudited)
|
|
Right-of-use assets
|
|
$
|
1,197,819
|
|
Lease liabilities
|
|
$
|
358,938
|
|
Lease liabilities-non current
|
|
$
|
838,881
|
|
|
|
|
|
|
Weighted average remaining lease term
|
|
|
2.95 years
|
|
Weighted average discount rate
|
|
|
4.75
|
%
|
Consolidated Statement of Cash Flows
|
|
Three Months Ended September 30,
|
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
Cash flow from operating activities
|
|
|
|
|
Right-of-use assets recognized in exchange for operating lease liabilities
|
|
$
|
1,219,937
|
|
The total future minimum lease payment and management fee as
of September 30, 2019 are payable as follows:
Twelve months ending September 30,
|
|
Minimum Lease Payment
|
|
2020
|
|
$
|
450,730
|
|
2021
|
|
|
467,630
|
|
2022
|
|
|
279,459
|
|
2023
|
|
|
-
|
|
2024
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total minimum payments required
|
|
$
|
1,197,819
|
|
NOTE 13 – PARENT
COMPANY FINANCIAL INFORMATION
The following schedules present the balance sheets of Datasea,
Inc. (the parent company) as of September 30 and June 30, 2019, and the income statements for the three months ended September
30, 2019 and 2018.
|
|
September 30,
2019
|
|
|
June 30,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Cash
|
|
$
|
578,684
|
|
|
$
|
6,751,557
|
|
Long term investment
|
|
|
4,500,480
|
|
|
|
4,500,480
|
|
Other receivable and prepaid expense
|
|
|
20,000
|
|
|
|
-
|
|
Escrow
|
|
|
600,000
|
|
|
|
600,000
|
|
Total Assets
|
|
$
|
5,699,164
|
|
|
$
|
5,772,037
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other payables
|
|
$
|
750
|
|
|
$
|
750
|
|
Total liabilities
|
|
|
750
|
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
20,944
|
|
|
|
20,944
|
|
Additional paid-in capital
|
|
|
5,739,948
|
|
|
|
5,739,948
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
(62,478
|
)
|
|
|
(10,395
|
)
|
Total Stockholders’ Equity
|
|
|
5,698,414
|
|
|
|
5,771,287
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
5,699,164
|
|
|
$
|
5,772,037
|
|
|
|
Three Months Ended
September 30,
(Unaudited)
|
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
-
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
-
|
|
|
|
-
|
|
General and administrative expenses
|
|
|
75,458
|
|
|
|
-
|
|
Total operating expenses:
|
|
|
75,458
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Other income(expense):
|
|
|
|
|
|
|
|
|
Other (expense)
|
|
|
(165
|
)
|
|
|
|
|
Interest income
|
|
|
2,750
|
|
|
|
-
|
|
Total other income
|
|
|
2,585
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(72,873
|
)
|
|
$
|
-
|
|
NOTE 14 – SUBSEQUENT
EVENTS
The Company has reviewed its subsequent events through November
14, 2019, the date these financial statements were issued and has determined that no material subsequent events have occurred that
require recognition in or disclosure to the financial statements.
NOTE 15 –
RESTATEMENT
In May and July 2019, the Company entered into two technology
development service agreements with two companies to develop security-related systems and eye protection technical systems for
the Company for $1,200,000 each. As of September 30, 2019, the Company paid $1,900,000 in total and was originally recorded as
intangible assets. However, under FASB ASC Topic 985 ”Costs of Software to Be sold, Leased or Marked”, research and development
costs that are incurred prior to the point where the project has demonstrated technological feasibility are to be expensed as
they are incurred. Accordingly, the Company is restating its consolidated financial statements to increase the research and
development expense by $200,000 for the quarter ended September 30, 2019, and to decrease intangible assets by $200,000 as of
September 30, 2019. In addition, the Company is reclassifying the adjusted net intangible assets of $1,700,000 at September 30,
2019 to prepaid expenses. These prepaid expenses will either be expensed to research and development expense when incurred or
capitalized as an intangible asset if the expenditures met the criteria established by FASB ASC Topic 985.
The following table presents the effects of the restatement
on the accompanying consolidated balance sheet at September 30, 2019:
|
|
As Previously Reported
|
|
|
Restated
|
|
|
Net adjustment
|
|
Prepaid expense and other current assets
|
|
$
|
252,233
|
|
|
$
|
752,233
|
|
|
$
|
500,000
|
|
Total current assets
|
|
|
3,640,794
|
|
|
|
4,140,794
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
2,235,234
|
|
|
|
335,234
|
|
|
|
(1,900,000
|
)
|
Prepaid expense - noncurrent
|
|
|
221,396
|
|
|
|
1,421,396
|
|
|
|
1,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
4,290,206
|
|
|
|
3,590,206
|
|
|
|
(700,000
|
)
|
Total assets
|
|
$
|
7,931,000
|
|
|
$
|
7,731,000
|
|
|
$
|
(200,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(5,947,113
|
)
|
|
$
|
(6,147,113
|
)
|
|
$
|
(200,000
|
)
|
Total stockholders' equity
|
|
|
5,375,016
|
|
|
|
5,175,016
|
|
|
|
(200,000
|
)
|
Total liabilities and equity
|
|
$
|
7,931,000
|
|
|
$
|
7,731,000
|
|
|
$
|
(200,000
|
)
|
The following table presents the effects of the restatement
on the accompanying consolidated statement of operations and comprehensive loss for the three months ended September 30, 2019:
|
|
As Previously Reported
|
|
|
Restated
|
|
|
Net adjustment
|
|
Research and development
|
|
$
|
51,207
|
|
|
$
|
251,207
|
|
|
$
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
409,641
|
|
|
|
609,641
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(396,985
|
)
|
|
|
(596,985
|
)
|
|
|
(200,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
$
|
(390,372
|
)
|
|
$
|
(590,372
|
)
|
|
$
|
(200,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
The following table presents the effects of the restatement
on the accompanying consolidated statement of cash flows for the three months ended September 30, 2019:
|
|
As Previously Reported
|
|
|
Restated
|
|
|
Net adjustment
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(396,985
|
)
|
|
$
|
(596,985
|
)
|
|
$
|
(200,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(378,368
|
)
|
|
|
(1,578,368
|
)
|
|
|
(1,200,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(944,384
|
)
|
|
|
(2,344,384
|
)
|
|
|
(1,400,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of intangible assets
|
|
|
(1,688,575
|
)
|
|
|
(288,575
|
)
|
|
|
1,400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
$
|
(1,689,983
|
)
|
|
$
|
(289,983
|
)
|
|
$
|
1,400,000
|
|