The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND JUNE 30, 2020 (AUDITED)
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. 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 (“Ms. Liu”), an owner 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 (“LLC”) 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
own 100% of Shuhai Skill (HK), transferred all of the issued and outstanding ordinary shares of Shuhai Skill (HK) to the Company
for the issuance of 6,666,667 shares of Common Stock, causing Shuhai Skill (HK) and its wholly owned subsidiaries, Tianjin Information
Sea Information Technology Co., Ltd. (“Tianjin Information”), a LLC incorporated under the laws of the PRC, and Harbin
Information Sea Information Technology Co., Ltd., a LLC incorporated under the laws of the PRC, to become wholly-owned subsidiaries
of the Company; and Shuhai Information Technology Co., Ltd., also a LLC 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, Zhixin Liu and her father, Fu Liu, owned approximately 82% of the Company’s 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 consolidated financial statement (“CFS”)
at June 30, 2018 were retroactively adjusted to reflect the reverse split.
After the Share Exchange, the Company, through its consolidated
subsidiaries and VIE provide smart security solutions primarily to schools, tourist or scenic attractions and public communities
in China.
On October 16, 2019, Shuhai Beijing incorporated a wholly owned
subsidiary, Heilongjiang Xunrui Technology Co. Ltd. (“Xunrui”), which develops and markets the Company’s smart
security system products.
On December 3, 2019, Shuhai Beijing formed Nanjing Shuhai Equity
Investment Fund Management Co. Ltd. (“Shuhai Nanjing”), a joint venture in PRC, in which Shuhai Beijing holds a 99%
ownership interest with the remaining 1% held by Nanjing Fanhan Zhineng Technology Institute Co. Ltd, an unrelated party that was
supported by both Nanjing Municipal Government and Beijing University of Posts and Telecommunications. Shuhai Nanjing was formed
for gaining the easy access to government funding and private financing for the Company’s new technology development and
new project initiation.
In January 2020, as described below, to establish new subsidiaries
to further expand its business and operation, the Company acquired ownership in three entities for no consideration from the Company’s
management which set up such entities on the Company’s behalf.
On January 3, 2020, Shuhai Beijing entered into two equity transfer
agreements (the “Transfer Agreements”) with the President, and a Director of the Company. Pursuant to the Transfer
Agreements, the Director and the President, each agreed, for no consideration, to (i) transfer their 51% and 49% respective ownership
interests, in Guozhong Times (Beijing) Technology Ltd. (“Guozhong Times”) to Shuhai Beijing; and (ii) transfer their
51% and 49% respective ownership interests, in Guohao Century (Beijing) Technology Ltd. (“Guohao Century”) to Shuhai
Beijing. Guozhong Times and Guohao Century were established to develop technology for electronic products, intelligence equipment
and accessories, and provide software and information system consulting, installation and maintenance services.
On January 7, 2020, Shuhai Beijing entered into another equity
transfer agreement with the President, the same Director described above and an unrelated individual. Pursuant to this equity transfer
agreement, the Director, the President and the unrelated individual each agreed to transfer their 51%, 16%, 33% ownership interests,
in Guozhong Haoze (Beijing) Technology Ltd. (“Guozhong Haoze”) to Shuhai Beijing for no consideration. Guozhong Haoze
was formed to further develop and market the smart security system products.
On August 17, 2020, Beijing Shuhai formed a new wholly-owned
subsidiary Shuhai Jingwei (Shenzhen) Information Technology Co., Ltd (“Jingwei”), for expanding the security oriented
systems developing, consulting and marketing business overseas.
On November 16, 2020, Guohao Century formed Hangzhou Zhangqi
Business Management Limited Partnership (“Zhangqi”) with ownership of 99% as an ordinary partner. On November 19, 2020,
Guohao Century formed a 51% owned subsidiary Hangzhou Shuhai Zhangxun Information Technology Co., Ltd (“Zhangxun”)
for research and development of 5G message technology. Zhangqi owns 19% of Zhangxun; according, Guohao Century ultimately owns
69.81% of Zhangxun.
In December 2019, a novel strain of coronavirus (COVID-19) was
reported in China, upon which the World Health Organization declared the outbreak to constitute a “Public Health Emergency
of International Concern.” Based on the epidemic prevention and control system embedded in the Company’s intelligent
security platform, the Company was able to promptly organize the employees at home to develop and upgrade the body temperature
measurement and administration backend of the epidemic prevention and control system, which could meet the needs
of schools and public communities for epidemic prevention, and well addressed the problem of how to integrate the Company’s
security platform and epidemic prevention system. Since April in 2020, the Company has resumed normal work, and the impact of COVID-19
outbreak on the Company’s marketing efforts from January to March of 2020 has been mitigated. Since April 2020, there are
some new Covid-19 cases discovered in a few provinces of China including Beijing as of today, however, the number of new cases
are not significant due to PRC government’s strict control, and the Company does not believe the new cases would have a significant
impact on the Company’s operations.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GOING CONCERN
The accompanying CFS 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 ended December 31, 2020 and 2019, the Company had a net loss of $1.83 million
and $1.60 million, respectively The Company has an accumulated deficit of $9.24 million as of December 31, 2020 and negative cash
flow from operating activities of $1.85 million for the six months ended December 31, 2020. These factors raise substantial doubt
about the Company’s ability to continue as a going concern. There can be no assurance that the Company will become profitable
or obtain necessary financing for its business or that it will be able to continue in business.
The Company modified its products and software to emphasize
the products and services that could assist schools and communities in addressing the coronavirus outbreak to provide remedy and
prevention for the possible future outbreak after school resumes and public community reverts to social activities by promoting
Epidemic Prevention and Control Systems. Management also intends to raise additional funds by way of a private or public offering,
or by obtaining loans from banks or others, which are planned to be used altogether with operating turnover to support Company’s
R&D, procurement, marketing and daily operation, while the Company believes in the viability of its strategy to generate sufficient
revenue and in 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. On
June 25, 2020, the Company’s S-3 registration filing was approved by SEC. The Company may from time to time issue up to $100,000,000
of common stock, debt securities, warrants or units of securities. The Company will describe the plan of distribution for any particular
offering of these securities in the applicable prospectus supplement. There can be no assurance that the Company will be successful
in any future fund raising.
The Company raised $931,000 in equity on November 11, 2020 from
Triton Fund and signed an underwriting agreement with FT Global to prepare for its next round of financing.
BASIS OF PRESENTATION
AND CONSOLIDATION
The accompanying CFS were prepared in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of
the Securities and Exchange Commission (“SEC”) regarding consolidated financial reporting. The accompanying CFS include
the financial statements of the Company and its 100% owned subsidiaries “Shuhai Skill (HK)”, and “Tianjin Information”,
and its VIE, Shuhai Beijing, and Shuhai Beijing’s 100% owned subsidiaries – Xunrui, Guozhong Times, Guohao Century,
Guozhong Haoze, and Jingwei, and Guohao Century’s 69.81% owned subsidiary - Zhangxun. All significant inter-company transactions
and balances were eliminated in consolidation.
The interim consolidated financial information
as of December 31, 2020 and for the six and three-month periods ended December 31, 2020 and 2019 was prepared without audit. Certain
information and footnote disclosures, which are normally included in CFS prepared in accordance with U.S. GAAP were not included.
The interim consolidated financial information should be read in conjunction with the Financial Statements and the notes thereto,
included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020, previously filed with the SEC
on September 28, 2020.
In the opinion of management,
all adjustments (which include all significant normal and recurring adjustments) necessary to present a fair statement of the Company’s
consolidated financial position as of December 31, 2020, its consolidated results of operations and cash flows for the six and
three months ended December 31, 2020 and 2019, as applicable, were made.
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 CFS, 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 and its subsidiaries. Accordingly, the results of Shuhai Beijing and its subsidiaries were included
in the accompanying CFS. 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 was entered on October 20, 2015 and allows Tianjin Information to manage and operate Shuhai Beijing and collect
100% of its 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 entered into a shareholders’ voting rights entrustment agreement (the “Entrustment Agreement”)
on October 27, 2015, under which Zhixin Liu and Fu Liu (collectively the “Shuhai Beijing Shareholders”) 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”) on October
27, 2015, pursuant to which the Shuhai Beijing Shareholders 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 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
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 written notice. The Option Agreement is valid for 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 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 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.
There are no restrictions on assets of the VIE for payment of
dividends to shareholders of the Company. There has been no change in facts and circumstances to consolidate the VIE. The following
financial statement amounts and balances of the VIE were included in the accompanying CFS as of December 31, 2020 and June 30,
2020, and for the six and three months ended December 31, 2020 and 2019, respectively.
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
Current assets
|
|
$
|
888,750
|
|
|
$
|
895,321
|
|
Non-current assets
|
|
|
808,161
|
|
|
|
924,537
|
|
Total assets
|
|
$
|
1,696,911
|
|
|
$
|
1,819,858
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
692,332
|
|
|
$
|
618,663
|
|
Non-current liabilities
|
|
|
255,800
|
|
|
|
341,273
|
|
Total liabilities
|
|
$
|
948,132
|
|
|
$
|
959,936
|
|
|
|
For the
Six Months
Ended
December 31,
2020
|
|
|
For the
Six Months
Ended
December 31,
2019
|
|
Revenues
|
|
$
|
135,239
|
|
|
$
|
-
|
|
Gross profit
|
|
$
|
78,226
|
|
|
$
|
(194
|
)
|
Net loss
|
|
$
|
(1,096,259
|
)
|
|
$
|
(709,076
|
)
|
|
|
For the
Three Months
Ended
December 31,
2020
|
|
|
For the
Three Months
Ended
December 31,
2019
|
|
Revenues
|
|
$
|
126,504
|
|
|
$
|
-
|
|
Gross profit
|
|
$
|
73,613
|
|
|
$
|
(194
|
)
|
Net loss
|
|
$
|
564,944
|
|
|
$
|
(512,996
|
)
|
USE OF ESTIMATES
The preparation of CFS in conformity
with US GAPP 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 the consolidated
financial statements.
CONTINGENCIES
Certain conditions may exist as of
the date the CFS 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 CFS.
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 December 31, 2020 and June
30, 2020, 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.
RESTRICTED CASH /
ESCROW
Restricted cash is cash held in an indemnification escrow account
under requirements of the financing agreement signed with the underwriter of the Company’s initial public offering for 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. The restricted cash was released during the six months ended December 31, 2020.
INVENTORY
Inventory comprised principally of smart student identification
cards related to the Company’s “Safe Campus” security products, 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 $47,593 and $44,237 allowances for slow-moving
and obsolete inventory as of December 31, 2020 and June 30, 2020, respectively.
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
|
|
|
3-5 years
|
|
Office equipment
|
|
|
3-5 years
|
|
Vehicles
|
|
|
5 years
|
|
Lease improvement
|
|
|
3 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 date.
Intangible assets include licenses, certificates, patents and
other technology and are amortized over their useful life of three years.
FAIR VALUE (“FV”) OF FINANCIAL INSTRUMENTS
The carrying amounts of certain of the Company’s financial
instruments, including cash and equivalents, accrued liabilities and accounts payable, approximate their FV due to their short
maturities. FASB ASC Topic 825, “Financial Instruments,” requires disclosure of the FV of financial instruments held
by the Company. The carrying amounts reported in the balance sheets for current liabilities qualify as financial instruments and
are a reasonable estimate of their FV because of the short period of time between the origination of such instruments and their
expected realization and the current market rate of interest.
FAIR VALUE MEASUREMENTS AND DISCLOSURES
FASB ASC Topic 820, “Fair Value Measurements,” defines
FV, and establishes a three-level valuation hierarchy for disclosures that enhances disclosure requirements for FV 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 FV measurement.
|
The carrying value of the Company’s short-term financial
instruments, such as accounts payable, approximate their FV due to their short maturities.
As of December 31, 2020 and June 30, 2020, the Company did not
identify any assets or liabilities required to be presented on the balance sheet at FV.
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 impaired, the impairment to be
recognized is measured as the amount by which the carrying amount of the asset exceeds its FV. FV generally is determined using
the asset’s expected future discounted cash flows or market value, if readily determinable. Assets to be disposed of
are reported at the lower of the carrying amount or FV less cost to sell. For the six and three months ended December 31, 2020
and 2019, there was no impairment loss recognized on long-lived assets.
DEFERRED REVENUE
Deferred revenue consists primarily of local government’s
financial support under “2020 Harbin Eyas Plan” to Xunrui for technology innovation of developing the Intelligent Campus
Security Management Platform. The Company will record the grant as income when it passes local government’s inspection of
the project.
LEASES
On July 1, 2019, the Company adopted FASB ASC Topic 842 using
the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application.
Results and disclosure requirements for reporting periods beginning after July 1, 2019 are presented under FASB ASC Topic 842,
while prior period amounts have not been adjusted and continue to be reported in accordance with its historical accounting under
FASB ASC Topic 840.
The Company elected the package of practical expedients permitted
under the transition guidance, which allowed it to carry forward its historical lease classification, its assessment on whether
a contract was or contains a lease, and its initial direct costs for any leases that existed prior to July 1, 2019. The Company
also elected to keep leases with an initial term of 12 months or less off its balance sheet and recognize the associated lease
payments in the consolidated statements of operations on a straight-line basis over the lease term.
The adoption did not impact its beginning accumulated deficit,
or its prior year consolidated statement of operations and statement of cash flows.
Under FASB ASC Topic 842, the Company determines if an arrangement
is a lease at inception. Right of Use Assets (“ROU”) and lease liabilities are recognized at commencement date based
on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments that
are fixed and determinable at the time of commencement. As most of its leases do not provide an implicit rate, it uses its incremental
borrowing rate based on the information available at commencement date in determining the present value of lease payments. The
Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be.
The ROU assets include adjustments for prepayments and accrued lease payments. The ROU asset also includes any lease payments made
prior to commencement and is recorded net of any lease incentives received. The Company’s lease terms may include options
to extend or terminate the lease when it is reasonably certain that it will exercise such options.
Operating leases are included in operating lease right-of-use
assets and operating lease liabilities (current and non-current), on the consolidated balance sheets. At December 31, 2020,
the net ROU was $1,736,937 for the operating leases of the Company’s offices in various cities of China and senior officers’
dormitory in Beijing. At December 31, 2020, total operating lease liabilities (includes current and noncurrent) was $1,726,190,
which was for the operating leases of the Company’s offices in various cities of China and senior officers’ dormitory
in Beijing.
REVENUE RECOGNITION
On July 1, 2018, the Company adopted Accounting Standards Update
(“ASU”) 2014-09 (and related amendments subsequently issued in 2016), Revenue from Contracts with Customers (ASC 606),
by using the modified retrospective method for contracts that were not completed as of July 1, 2018. This did not result
in an adjustment to accumulated deficit 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 FASB 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 when control of goods and services transfers
to a customer.
FASB ASC Topic 606 requires use of a new five-step model to
recognize revenue from customer contracts. The five-step model requires 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 FASB 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 derives its revenues from product sales and professional
service contracts with its customers, with revenues 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. Revenue is recognized net of returns and value-added tax charged to customers.
INCOME TAXES
The Company uses the asset and liability method of accounting
for income taxes in accordance with FASB 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.
The Company follows FASB ASC Topic 740, which prescribes a more-likely-than-not
threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
FASB ASC Topic 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred
income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes
in interim periods, and income tax disclosures.
Under the provisions of FASB ASC Topic 740, when tax returns
are filed, it is likely some positions taken would be sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit
of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management
believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or
litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely
of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions
taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying
balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Interest associated with unrecognized tax benefits is classified as interest expense and penalties are classified in selling, general
and administrative expenses in the statement of income. As of July 1, 2020, the Company had no unrecognized tax benefits
and no charges during the six and three months ended December 31, 2020, and accordingly, the Company did not recognize any interest
or penalties related to unrecognized tax benefits. There was no accrual for uncertain tax positions as of December 31, 2020. The
Company files U.S. income tax return. With few exceptions, the Company’s U.S. income tax returns filed for the years ending
on June 30, 2017 and thereafter are subject to examination by the relevant taxing authorities.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are expensed in the period
when incurred. These costs primarily consist of cost of materials used, salaries paid for the Company’s development
department, and fees paid to third parties.
NONCONTROLLING INTERESTS
The Company follows FASB ASC Topic 810, “Consolidation,” governing
the accounting for and reporting of noncontrolling interests (“NCIs”) in partially owned consolidated subsidiaries
and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCI (previously
referred to as minority interests) be treated as a separate component of equity, not as a liability, that increases and decreases
in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions
or dilution gains or losses, and that losses of a partially-owned consolidated subsidiary be allocated to non-controlling interests
even when such allocation might result in a deficit balance.
The net income (loss) attributed to NCI was separately
designated in the accompanying statements of operations and comprehensive income (loss). Losses attributable to NCI in a subsidiary
may exceed an non-controlling interest’s interests in the subsidiary’s equity. The excess attributable to NCIs is attributed
to those interests. NCIs shall continue to be attributed their share of losses even if that attribution results in a deficit NCIs
balance.
As of December 31, 2020, Zhangxun was 30.19% owned
by noncontolling interest, and Shuhai Nanjing was 1% owned by noncontrolling interest. During the six and three months ended December
31, 2020, the Company had loss of $36,555 and $36,555 attributable to the noncontrolling interest, 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 ($76,000) is covered by insurance. Should any institution 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 $439,678
and $733,849 at December 31, 2020 and June 30, 2020, respectively, was held in accounts at financial institutions located in the
PRC‚ which is not freely convertible into foreign currencies. 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 December 31, 2020, cash of $210,595 was maintained at U.S. financial institutions. 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 ($64,000).
As of December 31, 2020, the cash balance of $24,123 was maintained at financial institutions in Hong Kong.
For the three months ended December 31, 2020, the Company sold
$115,750 safe campus intelligence control systems and related devices to two schools.
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 dollar (“USD”) The accounts of the
Chinese entities were translated into USD in accordance with FASB 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 FASB 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 CFS were as follows
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
Period end USD: RMB exchange rate
|
|
|
6.5249
|
|
|
|
6.9632
|
|
|
|
7.0795
|
|
Average USD: RMB exchange rate
|
|
|
6.7729
|
|
|
|
7.0711
|
|
|
|
7.0199
|
|
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE (EPS)
Basic EPS is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similarly, except
that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive. Diluted EPS are based on the assumption that all
dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, options and warrants are assumed to have been exercised at the beginning of the period (or at the time
of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during
the period. For the six and three months ended December 31, 2020 and 2019, the Company’s basic and diluted loss per share
are the same due to the outstanding warrants being anti-dilutive as a result of the Company’s net loss. For the six months
ended December 31, 2020 and 2019, the Company’s basic and diluted loss per share were $0.09 and $0.08, respectively; for
the three months ended December 31, 2020 and 2019, the Company’s basic and diluted loss per share were $0.05 and $0.05, respectively.
STATEMENT OF CASH FLOWS
In accordance with FASB ASC Topic 230, “Statement
of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies. As a
result, amounts shown on the statement of cash flows may not necessarily agree with changes in the corresponding asset and liability
on the balance sheet.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company is an emerging growth company and has elected not
to use the extended transition period for complying with any new or revised financial accounting standards.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit
Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date
based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred
loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance
is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early application
will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2018. The Company is currently evaluating the impact that the standard will have on its CFS.
In December 2019, the FASB issued ASU 2019-12, Simplifying
the Accounting for Income Taxes, which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740,
Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application among reporting entities.
The guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years,
with early adoption permitted. Upon adoption, the Company must apply certain aspects of this standard retrospectively for all periods
presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained
earnings as of the beginning of the fiscal year of adoption. The Company is evaluating the impact of this update on its CFS.
NOTE 3 – PROPERTY
AND EQUIPMENT
Property and equipment are summarized as follows:
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
Furniture and fixtures
|
|
$
|
109,180
|
|
|
$
|
71,778
|
|
Vehicle
|
|
|
3,065
|
|
|
|
2,825
|
|
Leasehold improvement
|
|
|
239,461
|
|
|
|
203,751
|
|
Office equipment
|
|
|
234,053
|
|
|
|
174,253
|
|
Subtotal
|
|
|
585,759
|
|
|
|
452,607
|
|
Less: accumulated depreciation
|
|
|
243,841
|
|
|
|
161,576
|
|
Total
|
|
$
|
341,918
|
|
|
$
|
291,031
|
|
Depreciation for the six months ended December 31, 2020 and
2019 was $66,022 and $9,707, respectively. Depreciation for the three months ended December 31, 2020 and 2019 was $29,801 and $4,490,
respectively.
NOTE 4 – INTANGIBLE
ASSETS
Intangible assets are summarized as follows:
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
Software registration right
|
|
$
|
39,826
|
|
|
$
|
36,705
|
|
Patent
|
|
|
33,300
|
|
|
|
22,578
|
|
Software development (see Note 5)
|
|
|
850,000
|
|
|
|
-
|
|
Value-added telecommunications business license
|
|
|
16,087
|
|
|
|
14,827
|
|
Subtotal
|
|
|
939,214
|
|
|
|
74,110
|
|
Less: Accumulated amortization
|
|
|
60,259
|
|
|
|
53,416
|
|
Total
|
|
$
|
878,955
|
|
|
$
|
20,694
|
|
Amortization for the six months ended December 31, 2020 and
2019 were $2,217 and $3,479, respectively. Amortization for the three months ended December 31, 2020 and 2019 were $0 and
$1,726, respectively.
NOTE 5 – PREPAID
EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
Security deposit
|
|
$
|
254,895
|
|
|
$
|
156,023
|
|
Prepaid software development
|
|
|
300,000
|
|
|
|
1,200,000
|
|
Prepaid insurance
|
|
|
99,671
|
|
|
|
-
|
|
Prepayment for inventory from Heqin
|
|
|
-
|
|
|
|
101,252
|
|
Other receivables - Heqin
|
|
|
563,993
|
|
|
|
522,636
|
|
Others
|
|
|
59,680
|
|
|
|
76,572
|
|
Total
|
|
$
|
1,278,239
|
|
|
$
|
2,056,483
|
|
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
for the Company’s security-related software and systems. Pursuant to the agreement, SDT will complete certain development
work within 12 months and thereafter maintain the system for 36 months. The amount to be paid under the agreement is $1,200,000.
As of December 31, 2020, the Company paid SDT $1,000,000, of which, $400,000 was recorded as R&D expenses as the costs were
incurred before the establishment of technological feasibility, $600,000 cost incurred after the technological feasibility was
established and a working model was produced was recorded as intangible asset – software development (Note 4). The progress
of the development work was affected by Covid-19 and the estimated completion date is the end March 2021.
On July 2, 2019, the Company entered into a technology development
service agreement with HW (HK) Limited (“HW”), 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, and thereafter maintain
the system for 36 months. The total payments to be made under the agreement is $1,200,000. As of December 31, 2020, the Company
paid HW (HK) Limited $900,000, of which, $350,000 was recorded as R&D expenses as the costs were incurred before the establishment
of technological feasibility, which included a working model; $250,000 costed incurred after the technological feasibility was
recorded as intangible asset – software development (Note 4), and $300,000 was recorded as prepaid software development expenses.
On February 20, 2020, Guozhong Times entered an Operation Cooperation
Agreement with an unrelated company, Heqin (Beijing) Technology Co, Ltd. (“Heqin”) for marketing and promoting the
sale of Face Recognition Payment Processing equipment and related technical support, and other products of the Company including
Epidemic Prevention and Control Systems. Heqin has a sales team which used to work with Fortune 500 companies and specializes in
business marketing and sales channel establishment and expansion, especially in education industry and public area. It has had
successful experience of organizing multiple business matchmaking meetings with customers, distributors and retailers.
The cooperation term is from February 20, 2020 through March
1, 2023; however, Heqin is the exclusive distributor of the Company’s face Recognition Payment Processing products for the
period to July 30, 2020. During March and April 2020, Guozhong Times provided operating funds to Heqin, together with a credit
line provided by Guozhong Times to Heqin from May 2020 through August 2020, for a total borrowing of RMB 10 million ($1.41 million)
for Heqin’s operating needs. As of December 31, 2020, Guozhong Times had an outstanding receivable of RMB 3.68 million ($563,993)
from Heqin and was recorded as other receivable. The Company would not charge Heqin any interest, except for two loans with RMB
200,000 ($28,250) each, due on June 30, 2020 and August 15, 2020, respectively, for which the Company will charge 15% interest
if Heqin did not repay by the due date. As of this report date, Heqin did not repay these two loans. All the loans to Heqin are
secured against the assets of Heqin, and Heqin’s shareholders are jointly responsible for the timely repayment of the loan.
On August 26, 2020, Heqin provided a repayment plan to the Company
that the loan would be settled by February 2021; however, due to Covid-19 impact to Heqin’s business, Heqin adjusted the
repayment plan based on expected monthly cash collection from its customers, the revised monthly payment starting from April 2021
as follows:
April 2021: repay RMB 1,200,000 ($183,911)
May 2021: repay RMB 800,000 ($122,607)
June 2021: repay RMB 1,000,000 ($153,259)
July 2021: repay RMB 600,000 ($91,955)
August 2021: repay RMB 80,000 ($12,261)
No profits will be allocated and distributed before full repayment
of the borrowing. After Heqin pays in full the borrowing, Guozhong Times and Heqin will distribute profits of sale of Face Recognition
Payment Processing equipment and related technical support at 30% and 70% of the net income, respectively. The profit allocation
for the sale of other products of the Company are to be negotiated. Heqin will receive certain stock reward when it reaches the
preset sales target under the performance compensation mechanism.
In addition, at June 30, 2020, the Company prepaid $101,252
for goods to be purchased from Heqin, which was received during the six months ended December 31, 2020.
NOTE 6 – ACCRUED
EXPENSES AND OTHER PAYABLES
Accrued expenses and other payables consisted of the following:
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
Other payables
|
|
$
|
66,223
|
|
|
$
|
97,119
|
|
Senior officer’s salary payable
|
|
|
151,726
|
|
|
|
93,227
|
|
Salary payable - employees
|
|
|
162,259
|
|
|
|
84,588
|
|
Total
|
|
$
|
380,208
|
|
|
$
|
274,934
|
|
NOTE 7 – RELATED
PARTY TRANSACTIONS
On January 1, 2019, the Company’s President entered into
a car rental agreement with the Company for two years. Pursuant to the agreement, the Company rents a car from the Company’s
President for a monthly rent of approximately $700. The agreement was replaced by a new agreement on November 30, 2019 from December
1, 2019 through December 31, 2020, with monthly rent of approximately $1,700, or total payment of $22,288, which was paid in full
in advance as required by the agreement, and was recorded under right of use asset; at December 31, 2020, the net right of use
asset for auto leasing was $0.
On January 1, 2020, the Company’s President entered into
a car rental agreement with the Company for one year. Pursuant to the agreement, the Company rents a car from the Company’s
President for a monthly rent of RMB 20,000 ($2,849), or total payment of $34,188, which was paid in full in advance as required
by the agreement, and was recorded as prepaid expense since the lease term was not over one year, and not required to be accounted
for as a right-of-use asset. This rental agreement was canceled in June 2020 and the unused rents of RMB 120,000 ($17,620) was
returned to the Company.
The Company recorded car lease expense to the Company’s
President of $10,631 and $4,242 for the six months ended December 31, 2020 and 2019. The Company recorded car lease expense to
the Company’s President of $5,429 and $2,121 for the three months ended December 31, 2020 and 2019.
In April 2020, the Company’s President entered into a
one-year apartment rental agreement with the Company for an apartment located in Harbin city as the Company’s branch office
with an annual rent of RMB 75,000 ($11,000). The term was from May 1, 2020 through April 30, 2021. The rent expense for this agreement
was $5,537 and $1,414 for the six months ended December 31, 2020 and 2019, respectively. The rent expense for this agreement
was $2,828 and $707 for the three months ended December 31, 2020 and 2019, respectively.
On October 1, 2020, the Company’s President entered into
an office rental agreement with Xunrui. Pursuant to the agreement, the Company rents an office in Harbin city with a total payment
of RMB 163,800 ($24,050) from October 1, 2020 through September 30, 2021.
NOTE 8 – COMMON
STOCK AND WARRANTS
On December 21, 2018, the Company completed a registered, underwritten
initial public offering and concurrent listing of the Company’s Common Stock on the NASDAQ Capital Market, which 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, The Company sold 1,667,500 shares of Common Stock (including shares issued pursuant to the underwriter’s
over-allotment option) at $4 per share.
In addition, the Company issued warrants to the representative
of the underwriters to purchase 101,500 shares of Common Stock at $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. The warrants issued in
this financing were classified as equity instruments. The Company accounted for the warrants issued in this financing based on
the FV method under FASB ASC Topic 505, and the FV of the warrants was calculated using the Black-Scholes model under the following
assumptions: life of 5 years, volatility of 168%, risk-free interest rate of 2.64% and dividend yield of 0%. The FV of the warrants
issued at grant date was $387,727, and was recorded as offering costs. Following is a summary of the activities of warrants for
the six months ended December 31, 2020:
|
|
Number
of
Warrants
|
|
|
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term in
Years
|
|
Outstanding at July 1, 2020
|
|
|
101,500
|
|
|
$
|
6.00
|
|
|
|
3.47
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2020
|
|
|
101,500
|
|
|
$
|
6.00
|
|
|
|
2.97
|
|
Exercisable at December 31, 2020
|
|
|
101,500
|
|
|
$
|
6.00
|
|
|
|
2.97
|
|
On October 22, 2020, the Company entered into a common stock
purchase agreement with Triton Funds LP (“Triton”). Pursuant to the Purchase Agreement, subject to certain conditions
set forth in the Purchase Agreement, Triton was obligated, pursuant to a purchase notice by the Company, to purchase up to $2 million of the Company’s common stock from
time to time through December 31, 2020. The
Company is precluded from submitting a purchase notice to Triton if the closing price is less than $1.65 per share as reported
on the Nasdaq Stock Market.
The total number of the shares to be purchased under the Agreement
shall not exceed 523,596, or 2.5% of the Company’s outstanding shares of common stock on the Agreement’s execution
date, subject to the 9.9% beneficial ownership limitation of the Company’s shares of common stock outstanding by Triton.
Closing for sales of common stock will occur no later than three business days following the date on which the Purchased Shares
are received by Triton’s custodian. In addition, the Company agreed to (i) at the time of the purchase agreement execution
remit $10,000 to Triton, and (ii) at the initial closing pay $5,000 to Triton, to reimburse Triton’s expenses related to
the transaction.
On October 29, 2020, the Company issued a notice to sell 520,000
shares to Triton. On November 11, 2020, the Company and Triton closed the equity financing for the issuance of 520,000 shares of
the Company’s common stock at $1.80 per share, the Company received $931,000 proceeds from the financing after deducting
$5,000 expenses. There was substantial delay from the notice date to the closing date, which resulted in the Company getting a
lower per share price.
NOTE
9 – INCOME TAXES
The Company is subject to income taxes by entity on income arising
in or derived from the tax jurisdiction in which each entity is domiciled. The Company’s PRC subsidiaries file their
income tax returns online with PRC tax authorities. The Company conducts all of its businesses through its subsidiaries and affiliated
entities, principally in the PRC.
The Company’s U.S. parent company is subject to U.S. income
tax rate of 21% and files U.S. federal income tax return. As of December 31, 2020, the U.S. entity had net operating loss
(“NOL”) carry forwards for income tax purposes of $567,133. The NOL arising in tax years beginning after 2017 may reduce
80% of a taxpayer’s taxable income, and be carried forward indefinitely. However, the coronavirus Aid, Relief and Economic
Security Act (“the CARES Act”) issued in March 2020, provides tax relief to both corporate and noncorporate taxpayers
by adding a five-year carryback period and temporarily repealing the 80% limitation for NOLs arising in 2018, 2019 and 2020. Management
believes the realization of benefits from these losses remains uncertain due to the parent Company’s limited operating history
and continuing losses. Accordingly, a 100% deferred tax asset valuation allowance was provided.
The Company’s offshore subsidiary, Shuhai Skill (HK),
a HK holding company is subject to 16.5% corporate income tax in HK. Shuhai Beijing received a tax holiday with a 15% corporate
income tax rate since it qualified as a high-tech company. Tianjin Information, Xunrui, Guozhong Times, Guozhong Haoze, Guohao
Century, Jingwei, Shuhai Nanjing, Zhangxun are subject to the regular 25% PRC income tax rate.
As of December 31, 2020, the Company has approximately $6.62
million of NOL from its HK holding company, PRC subsidiaries and VIEs that expire in calendar years 2020 through 2024. 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 depends 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 December 31, 2020 and June 30, 2020.
The following table reconciles the U.S. statutory rates to the
Company’s effective tax rate for the six months ended December 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
US federal statutory rates
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
Tax rate difference – current provision
|
|
|
(3.3
|
)%
|
|
|
(4.0
|
)%
|
Permanent difference
|
|
|
|
%
|
|
|
-
|
%
|
Effect of PRC tax holiday
|
|
|
3.3
|
%
|
|
|
10.0
|
%
|
Valuation allowance
|
|
|
21.0
|
%
|
|
|
15.0
|
%
|
Effective tax rate
|
|
|
-
|
%
|
|
|
-
|
%
|
The following table reconciles the U.S. statutory rates to the
Company’s effective tax rate for the three months ended December 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
US federal statutory rates
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
Tax rate difference – current provision
|
|
|
(3.6
|
)%
|
|
|
(4.0
|
)%
|
Permanent difference
|
|
|
|
%
|
|
|
-
|
%
|
Effect of PRC tax holiday
|
|
|
1.9
|
%
|
|
|
10.0
|
%
|
Valuation allowance
|
|
|
22.7
|
%
|
|
|
15.0
|
%
|
Effective tax rate
|
|
|
-
|
%
|
|
|
-
|
%
|
The income tax benefit for the six months ended December 31,
2020 and 2019 were approximately $330,600 and $179,700, respectively; the income tax benefit for the three months ended December
31, 2020 and 2019 were approximately $203,300 and $131,100, respectively; the income tax benefit was primarily related to losses
generated from U.S. and PRC operations, but were offset by valuation allowance provided against its deferred tax assets.
NOTE 10 – COMMIMENTS
Leases
On March 20, 2019, the Company entered into the one-year operating
lease for senior management’s dormitory. The lease expired on March 22, 2020 and had a monthly rent of RMB 5,200 (or $735).
The Company did not renew the lease upon expiration.
On July 30, 2019, the Company entered into an operating lease
for its office in Beijing. Pursuant to the lease, the delivery date of the property was August 8, 2019 but the lease term started
on October 8, 2019 and expires on October 7, 2022, and has a monthly rent of RMB 207,269 without value added tax (“VAT”)
(or $29,250). The lease required a security deposit of three months’ rent of RMB 677,769 (or $96,000). The Company will receive
a six-month rent abatement, which was considered in calculating the present value of the lease payments to determine the right
of use asset which is being amortized over the term of the lease.
On July 30, 2019, the Company entered into a property service
agreement for its office in Beijing (described above). 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 $29,000). The deposit was RMB 202,352 (or
$29,000).
On August 28, 2019, the Company entered an operating lease for
senior officers’ dormitory in Beijing. The lease has a term of two years with expiration on August 31, 2021, the monthly
rent is RMB 14,500 ($2,045), payable every six months in advance.
In August 2020, the Company entered into a lease for an office
in Shenzhen City, China for three years from August 8, 2020 through August 7, 2023, with a monthly rent of RMB 209,911 ($29,651)
for the first year. The rent will increase by 3% each year starting from the second year.
On August 26, 2020, Tianjin Information entered into a lease
for the office in Hangzhou City, China from September 11, 2020 to October 5, 2022. The first year rent is RMB 1,383,970 ($207,000).
The second year rent is RMB 1,425,909 ($202,800). The security deposit is RMB 115,311($16,400). The total rent for the lease period
is to be paid in four installments.
The Company adopted FASB ASC Topic 842 on July 1, 2019. The
components of lease costs, lease term and discount rate with respect of the Company’s office lease and the senior officers’
dormitory lease with an initial term of more than 12 months are as follows:
|
|
Six Months
Ended
December 31,
2020
|
|
|
Six Months
Ended
December 31,
2019
|
|
Operating lease expense
|
|
$
|
359,179
|
|
|
$
|
147,958
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
December 31,
2020
|
|
|
Three Months
Ended
December 31,
2019
|
|
Operating lease expense
|
|
$
|
213,905
|
|
|
$
|
126,674
|
|
|
|
December 31,
2020
|
|
Right-of-use assets
|
|
$
|
1,736,937
|
|
Lease liabilities - current
|
|
|
776,751
|
|
Lease liabilities - noncurrent
|
|
|
949,439
|
|
Weighted average remaining lease term
|
|
|
2.17 years
|
|
Weighted average discount rate
|
|
|
5.00
|
%
|
The following is a schedule, by years, of maturities of the
operating lease liabilities as of December 31, 2020:
12 Months Ending December 31,
|
|
Minimum
Lease
Payment
|
|
2021
|
|
$
|
837,263
|
|
2022
|
|
|
769,566
|
|
2023
|
|
|
227,533
|
|
Total undiscounted cash flows
|
|
|
1,834,362
|
|
Less: imputed interest
|
|
|
(108,172
|
)
|
Present value of lease liabilities
|
|
$
|
1,726,190
|
|
NOTE 11 – SUBSEQUENT EVENTs
The Company evaluated all events that
occurred subsequent to December 31, 2020 through the date the CFS was issued, and no material subsequent event was identified.