DATASEA INC.
CONSOLIDATED BALANCE SHEETS
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash
|
|
$
|
2,804,740
|
|
|
$
|
6,072,637
|
|
Inventory
|
|
|
74,432
|
|
|
|
73,294
|
|
Prepaid expenses and other current assets
|
|
|
253,621
|
|
|
|
105,932
|
|
Total Current Assets
|
|
|
3,132,793
|
|
|
|
6,251,863
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
242,458
|
|
|
|
41,116
|
|
Intangible assets, net
|
|
|
1,951,504
|
|
|
|
555,811
|
|
Prepaid expense - non current
|
|
|
126,396
|
|
|
|
-
|
|
Escrow
|
|
|
600,000
|
|
|
|
600,000
|
|
Right-of-use assets
|
|
|
1,114,892
|
|
|
|
-
|
|
Total Assets
|
|
$
|
7,168,043
|
|
|
$
|
7,448,790
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
52,771
|
|
|
$
|
13,088
|
|
Accrued expenses and other payables
|
|
|
93,996
|
|
|
|
264,684
|
|
Advances from customer
|
|
|
1,300,638
|
|
|
|
1,318,897
|
|
Loan payable-shareholder
|
|
|
-
|
|
|
|
86,733
|
|
Operating lease liabilities
|
|
|
579,475
|
|
|
|
-
|
|
Total Current Liabilities
|
|
|
2,026,880
|
|
|
|
1,683,402
|
|
|
|
|
|
|
|
|
|
|
Other liability
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
|
535,417
|
|
|
|
-
|
|
Total Other Liability
|
|
|
535,417
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
2,562,297
|
|
|
|
1,683,402.0
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 375,000,000 shares authorized, 20,943,846 shares issued and outstanding at December 31, 2019 and June 30, 2019, respectively
|
|
|
20,944
|
|
|
|
20,944
|
|
Additional paid-in capital
|
|
|
11,104,666
|
|
|
|
11,104,666
|
|
Accumulated comprehensive income
|
|
|
178,281
|
|
|
|
189,906
|
|
Deficit
|
|
|
(6,698,145
|
)
|
|
|
(5,550,128
|
)
|
Total Stockholders’ Equity
|
|
|
4,605,746
|
|
|
|
5,765,388
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
7,168,043
|
|
|
$
|
7,448,790
|
|
See accompanying notes to the consolidated
financial statements
DATASEA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(Unaudited)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of goods sold
|
|
|
194
|
|
|
|
-
|
|
|
|
194
|
|
|
|
-
|
|
Gross defict
|
|
|
(194
|
)
|
|
|
-
|
|
|
|
(194
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
58,146
|
|
|
|
71,973
|
|
|
|
109,321
|
|
|
|
148,852
|
|
General and administrative expenses
|
|
|
638,157
|
|
|
|
275,582
|
|
|
|
945,416
|
|
|
|
502,153
|
|
Research and development expenses
|
|
|
69,158
|
|
|
|
41,114
|
|
|
|
120,365
|
|
|
|
103,885
|
|
Total operating expenses:
|
|
|
765,460
|
|
|
|
388,669
|
|
|
|
1,175,102
|
|
|
|
754,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(765,654
|
)
|
|
|
(388,669
|
)
|
|
|
(1,175,296
|
)
|
|
|
(754,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income, net
|
|
|
3,088
|
|
|
|
460
|
|
|
|
(6,416
|
)
|
|
|
(3,465
|
)
|
Interest income
|
|
|
11,534
|
|
|
|
8,497
|
|
|
|
33,694
|
|
|
|
14,418
|
|
Total other income
|
|
|
14,622
|
|
|
|
8,957
|
|
|
|
27,278
|
|
|
|
10,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(751,032
|
)
|
|
|
(379,712
|
)
|
|
|
(1,148,018
|
)
|
|
|
(743,937
|
)
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(18,238
|
)
|
|
|
(7,450
|
)
|
|
|
(11,625
|
)
|
|
|
24,123
|
|
Total comprehensive loss
|
|
$
|
(769,270
|
)
|
|
$
|
(387,162
|
)
|
|
$
|
(1,159,643
|
)
|
|
$
|
(719,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
20,943,846
|
|
|
|
19,445,150
|
|
|
|
20,943,846
|
|
|
|
19,308,455
|
|
See
accompanying notes to the consolidated financial statements
DATASEA INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common
|
|
|
Par
|
|
|
Paid in
|
|
|
|
|
|
Comprehensive
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Equity
|
|
Balance at June 30, 2018(audited)
|
|
|
19,170,846
|
|
|
$
|
19,171
|
|
|
$
|
5,121,102
|
|
|
|
(4,124,947
|
)
|
|
$
|
170,795
|
|
|
$
|
1,186,121
|
|
Sale of common stock
|
|
|
84,000
|
|
|
|
84
|
|
|
|
244,581
|
|
|
|
-
|
|
|
|
-
|
|
|
|
244,665
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(371,659
|
)
|
|
|
-
|
|
|
|
(371,659
|
)
|
Foreign currency translation gain
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,573
|
|
|
|
31,573
|
|
Balance at September 30, 2018(unaudited)
|
|
|
19,254,846
|
|
|
|
19,255
|
|
|
|
5,365,683
|
|
|
|
(4,496,606
|
)
|
|
|
202,368
|
|
|
|
1,090,700
|
|
Sale of common stock
|
|
|
21,500
|
|
|
|
22
|
|
|
|
62,759
|
|
|
|
-
|
|
|
|
-
|
|
|
|
62,781
|
|
Sale of common stock-offering
|
|
|
1,667,500
|
|
|
|
1,668
|
|
|
|
5,676,022
|
|
|
|
|
|
|
|
|
|
|
|
5,677,690
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(372,278
|
)
|
|
|
-
|
|
|
|
(372,278
|
)
|
Foreign currency translation gain
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
(7,450
|
)
|
|
|
(7,450
|
)
|
Balance at December 31, 2018(unaudited)
|
|
|
20,943,846
|
|
|
$
|
20,945
|
|
|
$
|
11,104,464
|
|
|
$
|
(4,868,884
|
)
|
|
$
|
194,918
|
|
|
$
|
6,451,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019(audited)
|
|
|
20,943,846
|
|
|
$
|
20,944
|
|
|
$
|
11,104,666
|
|
|
$
|
(5,550,128
|
)
|
|
$
|
189,906
|
|
|
$
|
5,765,388
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(396,985
|
)
|
|
|
-
|
|
|
|
(396,985
|
)
|
Foreign currency translation gain
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,613
|
|
|
|
6,613
|
|
Balance at September 30, 2019(unaudited)
|
|
|
20,943,846
|
|
|
|
20,944
|
|
|
|
11,104,666
|
|
|
|
(5,947,113
|
)
|
|
|
196,519
|
|
|
|
5,375,016
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(751,032
|
)
|
|
|
-
|
|
|
|
(751,032
|
)
|
Foreign currency translation gain
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(18,238
|
)
|
|
|
(18,238
|
)
|
Balance at December 31, 2019(unaudited)
|
|
|
20,943,846
|
|
|
$
|
20,944
|
|
|
$
|
11,104,666
|
|
|
$
|
(6,698,145
|
)
|
|
$
|
178,281
|
|
|
$
|
4,605,746
|
|
See accompanying notes to the consolidated
financial statements
DATASEA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six Months Ended
|
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,148,018
|
)
|
|
$
|
(743,937
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
13,186
|
|
|
|
19,319
|
|
Changes in current assets and current liabilities:
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
(2,121
|
)
|
|
|
278
|
|
Prepaid expenses and other assets
|
|
|
(271,654
|
)
|
|
|
1,409
|
|
Right-of-use assets
|
|
|
(1,097,886
|
)
|
|
|
-
|
|
Accrued expenses and other payables
|
|
|
(163,636
|
)
|
|
|
(71,915
|
)
|
Operating lease liabilities
|
|
|
1,097,886
|
|
|
|
-
|
|
Net cash used in operating activities
|
|
|
(1,572,243
|
)
|
|
|
(794,846
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of office equipment
|
|
|
(208,538
|
)
|
|
|
(15,754
|
)
|
Acquisition of intangible assets
|
|
|
(1,400,000
|
)
|
|
|
(14,583
|
)
|
Net cash used in investing activities
|
|
|
(1,608,538
|
)
|
|
|
(30,337
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payment of loan payable - shareholder, net
|
|
|
(84,227
|
)
|
|
|
(17,508
|
)
|
Net proceeds from sale of common stock
|
|
|
-
|
|
|
|
4,748,422
|
|
Net proceeds from issuance of common stock
|
|
|
-
|
|
|
|
307,724
|
|
Net cash provided by financing activities
|
|
|
(84,227.00
|
)
|
|
|
5,038,638
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(2,890
|
)
|
|
|
28,567
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in
cash
|
|
|
(3,267,897
|
)
|
|
|
4,242,022
|
|
|
|
|
|
|
|
|
|
|
Cash – beginning of period
|
|
|
6,072,637
|
|
|
|
1,031,486
|
|
|
|
|
|
|
|
|
|
|
Cash – end of period
|
|
$
|
2,804,740
|
|
|
$
|
5,273,508
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for income tax
|
|
$
|
-
|
|
|
$
|
-
|
|
See accompanying notes to the consolidated
financial statements
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.
On October 16, 2019, Shuhai Bejing incorporated
a wholly owned subsidiary, Heilongjiang Xunrui Technology Co. Ltd., which is engaged in developing and marketing 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% ownership 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 purposes of easy access of government funding and private financing in new technology development
and project incubation.
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, and its subsidiaries.
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 and six months ended December 31, 2019 are
not necessarily indicative of the results to be expected for the full year ending June 30, 2020.
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
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 and its subsidiaries. Accordingly, the results of Shuhai Beijing and its subsidiaries
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.
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
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 December 31, 2019 and June 30,
2019 and for the three and six months ended December 31, 2019 and 2018, respectively:
|
|
December 31,
2019
(Unaudited)
|
|
|
June 30,
2019
|
|
Current assets
|
|
$
|
209,493
|
|
|
$
|
1,573,413
|
|
Non-current assets
|
|
|
306,270
|
|
|
|
96,927
|
|
Total assets
|
|
$
|
515,764
|
|
|
$
|
1,670,340
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
5,940,253
|
|
|
$
|
6,232,836
|
|
Non-current liabilities
|
|
|
-
|
|
|
|
-
|
|
Total liabilities
|
|
$
|
5,940,253
|
|
|
$
|
6,232,836
|
|
|
|
For the
Three Months
Ended
December 31,
2019
|
|
|
For the
Three Months
Ended
December 31,
2018
|
|
|
For the
Six Months
Ended
December 31,
2019
|
|
|
For the
Six Months
Ended
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Gross profit (loss)
|
|
$
|
(194
|
)
|
|
$
|
-
|
|
|
$
|
(194
|
)
|
|
$
|
-
|
|
Net loss
|
|
$
|
(512,996
|
)
|
|
$
|
(456,966
|
)
|
|
$
|
(709,076
|
)
|
|
$
|
(823,581
|
)
|
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.
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
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 December 31, 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 December 31, 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.
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
|
|
Lease improvement
|
|
|
3 years
|
|
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
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 the Company’s
short-term financial instruments, such as accounts payable, approximate their fair values due to their short maturities.
As of December 31, 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.
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
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.
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are expensed
in the period when they are incurred. For the three and six months ended December 31, 2019, the Company incurred research
and development expenses of $69,158 and $120,365, respectively. For the three and six months ended December 31, 2018, the
Company incurred research and development expenses of $41,114 and $103,885, 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 ($71,806) 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 $67,806 and $1,395,104 at December 31 and June 30, 2019, respectively, were 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, 2019, the cash balance of approximately $529,493 was maintained at U.S. financial
institutions, of which approximately $279,500 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 December 31,
2019, the cash balance of approximately $2,207,400 was maintained at financial institutions in Hong Kong, of which approximately
$2,143,000 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
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
Period end USD: RMB exchange rate
|
|
|
6.9632
|
|
|
|
6.8764
|
|
|
|
6.8668
|
|
Average USD: RMB exchange rate
|
|
|
7.0711
|
|
|
|
6.8587
|
|
|
|
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 10).
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
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:
|
|
December 31,
2019
(Unaudited)
|
|
|
June 30,
2019
|
|
Furniture and fixtures
|
|
$
|
91,534
|
|
|
$
|
83,437
|
|
Vehicle
|
|
|
2,872
|
|
|
|
2,913
|
|
Lease improvement
|
|
|
126,607
|
|
|
|
-
|
|
Office equipment
|
|
|
129,795
|
|
|
|
54,641
|
|
Subtotal
|
|
|
350,808
|
|
|
|
140,991
|
|
Less: accumulated depreciation
|
|
|
108,350
|
|
|
|
99,875
|
|
Total
|
|
$
|
242,458
|
|
|
$
|
41,116
|
|
Depreciation expense for the three months
ended December 31, 2019 and 2018 was $4,490 and $6,186 respectively.
Depreciation expense for the six months
ended December 31, 2019 and 2018 was $9,707 and $17,631 respectively.
NOTE
4 – intangible assets
Intangible assets are summarized as follows:
|
|
December 31,
2019
(Unaudited)
|
|
|
June 30,
2019
|
|
Software registration right
|
|
$
|
37,319
|
|
|
$
|
37,843
|
|
Patent
|
|
|
15,075
|
|
|
|
15,286
|
|
Technology development
|
|
|
1,900,000
|
|
|
|
500,000
|
|
Value-added telecommunications business license
|
|
|
11,516
|
|
|
|
11,678
|
|
Subtotal
|
|
|
1,963,910
|
|
|
|
564,807
|
|
Less: Accumulated amortization
|
|
|
12,406
|
|
|
|
8,996
|
|
Total
|
|
$
|
1,951,504
|
|
|
$
|
555,811
|
|
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 December 31, 2019, the Company paid SDT $1,000,000 recorded as prepayment. However,
the development has not commenced yet since the Company has not finalized the technology specifications.
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 period ending July 1, 2021. The total payments
to made under the agreement is $1,200,000. As of December 31, 2019, the Company paid HW (HK) Limited $900,000 and the technology
development is in process.
Amortization expense for the three months
ended December 31, 2019 and 2018 were $1,726 and $806, respectively.
Amortization expense for the six months
ended December 31, 2019 and 2018 were $3,479 and $1,618, respectively.
Note
5 – Prepaid expenses and other current assets
Prepaid expenses and other current assets
consisted of the following:
|
|
December 31,
2019
(Unaudited)
|
|
|
June 30,
2019
|
|
Security deposit
|
|
$
|
44,997
|
|
|
$
|
46,933
|
|
Prepaid expenses and advances
|
|
|
194,027
|
|
|
|
34,181
|
|
Others
|
|
|
14,597
|
|
|
|
24,818
|
|
Total
|
|
$
|
253,621
|
|
|
$
|
105,932
|
|
Note
6 – accrued expenses and other payables
Accrued expenses and other payable consisted
of the following:
|
|
December 31,
2019
(Unaudited)
|
|
|
June 30,
2019
|
|
Deposit
|
|
$
|
-
|
|
|
$
|
30,525
|
|
Salary and other payables
|
|
|
93,996
|
|
|
|
234,159
|
|
Total
|
|
$
|
93,996
|
|
|
$
|
264,684
|
|
NOTE
7 – 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 is for five years and will
expire on March 6, 2023 and July 1, 2023, respectively. In accordance with ASU 2016-08, Principal versus Agent Considerations
(ASC 606), the Company determined that it was the principal in these two contracts and as such, the Company recorded the payments
received from the two sales agents as advances. The Company will recognize revenue from these contracts as the sales agents sell
the products and services to third parties.
As of December 31 and June 30, 2019, the
Company recorded $1,300,638 and $1,318,897 of advances from the sales agents, respectively.
Note
8 – related party transactions
The Company’s President, Zhixin Liu,
paid certain operating expenses on behalf of the Company. As of December 31 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 $707. 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 $2,121 and $2,205 for the three months ended December
31, 2019 and 2018, respectively. The rent paid under this agreement was $4,242 and $4,410 for the six months ended December 31,
2019 and 2018, respectively.
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 $2,828. The agreement was renewed and the term was extended to April
30, 2020. The rent paid under this agreement was $707 and $729 for the three months ended December, 2019 and 2018, respectively. The
rent paid under this agreement was $1,414 and $1,458 for the six months ended December, 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
9 – 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 and six months ended December 31, 2018 as the US entity incurred losses. For the three and six months ended December
31, 2019, US entity had $52,522 and $125,395 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 and six months ended
December 31, 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 $751,032 and $379,712 during three months ended December 31, 2019 and 2018,
respectively, $1,148,018 and $743,937 during six months ended December 31, 2019 and 2018, respectively. As of December 31,
2019, the Company has approximately $860,820 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 December 31, 2019 and 2018.
The following table reconciles the U.S.
statutory rates to the Company’s effective tax rate for the three and six months ended December 31, 2019 and 2018
|
|
Three Months
Ended
December 31
(Unaudited),
|
|
|
Six Months
Ended
December 31
(Unaudited),
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Statutory U.S. tax rate
|
|
|
21
|
%
|
|
|
21
|
%
|
|
|
21
|
%
|
|
|
21
|
%
|
Effect of PRC statutory tax rate
|
|
|
-6
|
%
|
|
|
-6
|
%
|
|
|
-6
|
%
|
|
|
-6
|
%
|
Valuation allowance
|
|
|
-15
|
%
|
|
|
-15
|
%
|
|
|
-15
|
%
|
|
|
-15
|
%
|
Effective tax rate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The provisions for income taxes is summarized
as follows:
|
|
Three Months
Ended
December 31
(Unaudited),
|
|
|
Six Months
Ended
December 31
(Unaudited),
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
131,109
|
|
|
|
208,007
|
|
|
|
179,726
|
|
|
|
200,000
|
|
Increase in valuation allowance
|
|
|
(131,109
|
)
|
|
|
(208,007
|
)
|
|
|
(179,726
|
)
|
|
|
(200,000
|
)
|
Provision for income tax
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE 9 – INCOME TAXES
(Continued)
The Company’s net deferred tax asset
as of December 31, 2019 and June 30, 2019 is as follows:
|
|
December 31,
2019
(Unaudited)
|
|
|
June 30,
2019
|
|
Deferred tax asset – net operating loss
|
|
$
|
1,379,598
|
|
|
$
|
1,199,872
|
|
Valuation allowance
|
|
|
(1,379,598
|
)
|
|
|
(1,199,872
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The valuation allowance increased by $131,109
and $208,007 for the three months ended December 31, 2019 and 2018, respectively. The valuation allowance increased by $179,726
and $200,000 for the six months ended December 31, 2019 and 2018, respectively.
NOTE
10 – Commiments
Lease Agreement
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 $735). Future rental payment due under the lease
is RMB 15,600 (or approximately $2,200).
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 $96,000) The Company will receive a six-month
rent abatement. Future rental payment due under the lease is RMB6,099,918 (or approximately $863,000).
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 RMB2,023,520 (or approximately $286,200).
The following table summarizes the impact
of our operating leasing on our consolidated unaudited financial statements:
Consolidated statement of Operations
|
|
Three Months
Ended
December 31,
2019
|
|
|
Six Months
Ended
December 31,
2019
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Operating lease expense
|
|
$
|
126,674
|
|
|
$
|
147,958
|
|
Consolidated Balance Sheet
|
|
December 31,
2019
(Unaudited)
|
|
Right-of-use assets
|
|
$
|
1,114,892
|
|
Lease liabilities
|
|
$
|
579,475
|
|
Lease liabilities-non current
|
|
$
|
535,417
|
|
|
|
|
|
|
Weighted average remaining lease term
|
|
|
2.33 years
|
|
Weighted average discount rate
|
|
|
4.75
|
%
|
NOTE 10
– COMMIMENTS (Continued)
Consolidated Statement of Cash Flows
|
|
Six Months
Ended
December 31,
2019
|
|
|
|
(Unaudited)
|
|
Cash flow from operating activities
|
|
|
|
|
Right-of-use assets recognized in exchange for operating lease liabilities
|
|
$
|
1,097,886
|
|
The total future minimum lease payment
and management fee as of December 31, 2019 are payable as follows:
Twelve months ending December 31,
|
|
Minimum
Lease
Payment
|
|
2020
|
|
$
|
465,868
|
|
2021
|
|
|
485,669
|
|
2022
|
|
|
163,355
|
|
2023
|
|
|
-
|
|
2024
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total minimum payments required
|
|
$
|
1,114,892
|
|
NOTE
11 – Subsequent events
The Company evaluated subsequent events and transactions that occurred
after the balance sheet date up to the date that the financial statements were issued. Based upon this review, the Company did
not identify any subsequent events that would have required adjustment or disclosure in the financial statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements
of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but
not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives
of management for future operations; any statements concerning proposed new services or developments; any statements regarding
future economic conditions of performance; and statements of belief; and any statements of assumptions underlying any of the foregoing.
Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different from any future results, performance or achievements expressed or implied
by such forward-looking statements.
In some cases, you can identify forward
looking statements by terms such as “may,” “intend,” “might,” “will,” “should,”
“could,” “would,” “expect,” “believe,” “anticipate,” “estimate,”
“predict,” “potential,” or the negative of these terms. These terms and similar expressions are intended
to identify forward-looking statements. The forward-looking statements in this report are based upon management’s current
expectations and belief, which management believes are reasonable. However, we cannot assess the impact of each factor on our business
or the extent to which any factor or combination of factors, or factors we are aware of, may cause actual results to differ materially
from those contained in any forward-looking statements. You are cautioned not to place undue reliance on any forward-looking statements.
These statements represent our estimates and assumptions only as of the date of this report. Except to the extent required by federal
securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
You should be aware that our actual results
could differ materially from those contained in the forward-looking statements due to a number of factors, including:
|
●
|
uncertainties relating to our ability to establish and operate our business and generate revenue;
|
|
|
|
|
●
|
uncertainties relating to general economic, political and business conditions in China;
|
|
●
|
industry trends and changes in demand for our products and services;
|
|
●
|
uncertainties relating to customer plans and commitments and the timing of orders received from customers;
|
|
●
|
announcements or changes in our advertising model and related pricing policies or that of our competitors;
|
|
●
|
unanticipated delays in the development, market acceptance or installation of our products and services;
|
|
●
|
changes in Chinese government regulations; and
|
|
●
|
availability, terms and deployment of capital; relationships with third-party equipment suppliers;
|
Overview
We were 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 of the Company 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, Rose Rock Inc. 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 owned 100% of
the ownership rights in Shuhai Skill (HK), transferred all of the issued and outstanding ordinary shares of Shuhai Skill (HK) to
Rose Rock Inc. 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 our wholly-owned subsidiaries, and Shuhai Information
Technology Co., Ltd., also a limited liability company incorporated under the laws of the PRC (“Shuhai Beijing”), to
become our variable interest entity (“VIE”) 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.
After
the Share Exchange, we, through our consolidated subsidiaries and VIE, is engaged in the business of providing Internet security
products and equipment, new media advertising, micro-marketing, and data analysis services in the PRCs.
On
April 12, 2018, our board of directors and stockholders approved a one-for-three reverse stock split of our issued and outstanding
shares of common stock, which became effective on May 1, 2018, decreasing the number of outstanding shares from 57,511,771 to 19,170,827.
Subsequent to the split, the number of our outstanding shares increased from to 19,170,827 to 19,170,846 to accommodate certain
shareholders’ positions due to rounding elections payable at the beneficial owner level. Unless otherwise stated, all shares
and per share amounts in this Report have been retroactively adjusted to give effect to this stock split.
On
August 22, 2018, our board of directors and majority stockholders adopted our 2018 Equity Incentive Plan (the “2018 Plan”)
under which we may award up to a maximum of 4,000,000 shares of common stock to attract and retain personnel, provide additional
incentives to employees, directors and consultants and promote the success of our business. No awards have been granted under the
2018 Plan as of the date of this Report, but our Board 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 our officers and directors.
On
December 21, 2018, we successfully completed a registered, underwritten initial public offering and concurrent listing of our 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. $600,000 of the escrow fund was held and disbursed by the escrow agent pursuant to the terms and conditions
of a certain Indemnification Escrow Agreement between us and the underwriter of the offering. $400,000 of the escrow fund was disbursed
to us in February 2019 when the underwriter confirmed receipt of a written legal opinion from PRC legal counsel in connection with
such offering. We 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. In connection with the offering, Our common stock began trading on the NASDAQ Capital
Market beginning on December 19, 2018 under the symbol “DTSS.”
In
addition, we issued warrants to the representative of the underwriters to purchase 101,500 shares of common stock at an exercise
price of $6.00 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.
We
believe that the increased demand for security equipment and related products in China presents an attractive opportunity for us
to establish and grow its business in the next twelve months.
Recent Developments
On October 16, 2019, Shuahi
Information Technology Co., Ltd. (“Shuhai Beijing”), our variable interest entity, incorporated a wholly owned subsidiary,
Heilongjiang Xunrui Technology Co. Ltd., which is expected to focus on research and development of new technologies and 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% ownership 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 purposes of easy access of government funding and private financing in new technology
development and project incubation.
In January 2020, as described
below, to expeditiously establish new subsidiaries to further expand our business operation, we acquired ownerships in three entities
for no consideration from our management who set up such entities on the Company’s behalf.
On January 3, 2020, Shunhai
Beijing entered into two equity transfer agreements (the “Transfer Agreements”) with Zhixin Liu, President of the Company,
and Fu Liu, a Director of the Company (Fu Liu is the father of Zhixin Liu). Pursuant to the Transfer Agreements, Fu Liu and Zhixin
Liu, each agreed, for no consideration, to (i) transfer their 51% and 49% ownership interest, respectively, in Guozhong Times (Beijing)
Technology Ltd. (“Guozhong Times”) to Shunhai Beijing; and (ii) transfer their 51% and 49% ownership interest, respectively,
in Guohao Century (Beijing) Technology Ltd. (“Guohao Century”) to Shunhai Beijing.
On January 7, 2020, Shunhai
Beijing entered into another equity transfer agreement with Zhixin Liu, Fu Liu and Ze Liu, who is an unrelated third party. Pursuant
to this equity transfer agreement, Fu Liu, Zhixin Liu and Ze Liu each agreed to transfer their 51%, 16%, 33% ownership interests,
respectively, in Guozhong Hoze (Beijing) Technology Ltd. (“Guozhong Hoze”) to Shunhai Beijing for no consideration.
Guozhong Times was formed
to focus on collaborating with third parties as a means of expanding our business. Guohao Century was formed to explore potential
business targets that we could acquire to improve our business model and product offerings. Guozhong Hoze was formed to further
develop and market our smart security system products.
Starting
in December 2019, a strain of novel coronavirus causing respiratory illness emerged in the city of Wuhan in Hubei Province.
The Chinese government has taken certain emergency measures to combat the spread of the virus, including extending the Chinese
Lunar New Year holiday, postponing the spring semesters of schools and universities, and adopting transport restrictions in various
areas. While we recently announced that we are seeking to modify our products and software to assist schools and communities
in addressing the coronavirus outbreak, we may be unable to successfully do so. Moreover, a prolonged slowdown in the Chinese
economy and our target markets as a result of the virus could have a material adverse effect on our business, including an inability
to market and sell our products. As a consequence, we may be unable to generate revenue, could face shortfalls in liquidity
and may be required to reduce or refocus our operations, which may raise substantial doubts about our ability to continue as a
going concern.
Results of Operations
Three and six Months Ended December 31,
2019 and 2018
Revenue
We
did not generate any revenue during three and six months ended December 31, 2019 and 2018.
Cost of Goods and Gross Profit
We
recorded $194 and $0 of cost of goods sold and $194 and $0 of gross deficit for the three and six months ended December 31, 2019
and 2018, respectively.
Selling, General and Administrative Expenses:
Selling
expenses were $58,146 and $71,973 for the three months December 31, 2019 and 2018, respectively. Selling expenses were $109,321
and $148,852 for the six months December 31, 2019 and 2018, respectively. The decrease in selling expenses was primarily attributed
to a decrease in salary expenses.
General
and administration expenses increased $362,575, or 131.6% from $275,582 during the three months ended December 31, 2018 to $638,157
during the same period in 2019. The increases were attributed to increases in rent expenses and approximately $285,000 of capitalized
technology was expensed during three months ended December 31, 2019.
General
and administration expenses increased $443,263, or 88.2% from $502,153 during the six months ended December 31, 2018 to $945,416
during the same period in 2019. The increases were attributed to increases in rent expenses, meal and entertainment and approximately
$285,000 of capitalized technology was expensed during three months ended December 31, 2019.
We
incurred research and development expenses of $69,158 and $120,365 during the three and six months ended December 31, 2019, respectively,
comparing $41,114 and $103,885 during the same period in 2018. The increase was attributed to the increase in salary expense since
we hired more staff in research and development department.
Net Loss
Due to our lack
of recurring revenue, we generated net losses of $751,032 and $1,148,018 for the three and six months ended December 31, 2019,
respectively, $379,712 and $743,937 for the same period in 2018.
Liquidity and Capital Resources
We have funded
our operations to date primarily through the sale of our common stock and shareholder loans. During the six months period ended
December 31, 2019, we paid $1.9 million to two third-party agencies for research and development of our new product, which reduced
our liquidity position. However, based on our current cash level and management’s forecast of operating cash flows, we believe
we have sufficient resources to fund our operations through December 2020.
Our management
recognizes that we must generate sales and additional cash resources in order for our Company to continue our operations. Based
on increased demand for security services in China, our management believes in the potential for growth in our business. On December
18, 2018, we completed a registered underwritten common stock offering with net proceeds $5.7 million after deducting underwriter’s
commission and other offering costs, which will help our cash flow during fiscal 2020.
We
expect to generate revenue through expanding our current Safe Campus business and through product innovation and development,
which is expected to lead to the introduction of new products such as the scenic area and public community security products.
If revenues are not generated or do not reach the level anticipated in the our plan, in order to maintain working capital sufficient
to support our operations and finance the future growth of its business, we expect to fund any cash flow shortfall through financial
support from our majority stockholders (who are also our board members or officers) and public or private issuance of securities.
However, readers are cautioned that additional cash resources may not be available to us on desirable terms, or at all, if and
when needed by us.
As of December
31, 2019, we had a working capital of $1,105,913. Our current assets on December 31, 2019 were $3,132,793 primarily consisting
of cash of $2,804,740, inventory of $74,432 and prepaid expenses and other current assets of $253,621. Our current liabilities
were primarily composed of accounts payable of $52,771, accrued expenses and other payables of $93,996, operating lease liabilities
of $579,475 and advances from customer of $1,300,638.
As of June 30,
2019, we had a working capital of $4,568,461. Our current assets on June 30, 2019 were $6,251,863 primarily consisting of
cash of $6,072,637, inventory of $73,294 and prepaid expenses and other current assets of $105,932. Our current liabilities were
primarily composed of accounts payable of $13,088, accrued expenses and other payables of $264,684, loan payable to shareholder
of $86,733 and advances from customer of $1,318,897.
Cash Flow from Operating Activities
Net cash used in operating activities was
$1,572,243 during the six months ended December 31, 2019, which consisted of our net loss of $1,148,018, offset by depreciation
and amortization of $13,186, a change of prepaid expenses and other current assets of $271,654, and a change of accrued expenses
and other payables of $163,636.
Net cash used in operating activities was
$794,846 during the six months ended December 31, 2018, which consisted of our net loss of $743,937, offset by depreciation and
amortization of $19,319, a change of prepaid expenses and other current assets of $1,409, and a change of accrued expenses and
other payables of $71,915.
Cash Flow from Investing Activities
Net cash used in investing activities totaled
$1,608,538 for the six months ended December 31, 2019, which primarily related to cash paid for the acquisition of office
furniture and equipment of $208,538, and for intangible assets of $1,400,000.
Cash used in investing activities totaled
$30,337 for the six months ended December 31, 2018, which primarily related to cash paid for the acquisition of office furniture,
equipment of $15,754 and for intangible assets of $14,583.
Cash Flow from Financing Activities
Net cash used in financing activities was
$84,227 during the six months ended December 31, 2019, which primarily consisted of payment of a shareholder loan, net of $84,227.
Net cash provided by financing activities was $5,038,638 during
the six months ended December 31, 2018, which primarily consisted of payment of a shareholder loan, net of $17,508, the net proceeds
from issuance of our common stock of $307,724 and the net proceeds from sale of common stock $5,748,422, which is offset by $1,000,000
which was placed in escrow ($400,000 of which was released to us from escrow subsequent to December 31, 2018).
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition,
revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.