UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the quarterly period ended September 30,
2021
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission
file number 333-202071
DATASEA INC.
(Exact
name of registrant as specified in its charter)
|
|
Nevada
|
|
45-2019013
|
(State
or other jurisdiction of |
|
(I.R.S.
Employer |
incorporation
or organization) |
|
Identification
No.) |
|
|
|
20th
Floor, Tower B, Guorui Plaza
|
|
|
1
Ronghua South Road,
Technological Development Zone
Beijing,
People’s Republic of China
|
|
100176 |
(Address
of principal executive offices) |
|
(Zip
Code) |
+86
10-56145240
|
(Registrant’s
telephone number, including area code) |
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class |
|
Trading
Symbol |
|
Name
of each exchange
on which registered |
Common
Stock, $0.001 par value |
|
DTSS |
|
NASDAQ
Capital Market |
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
☐ |
Large
accelerated filer |
☐ |
Accelerated
filer |
☒ |
Non-accelerated
filer |
☒ |
Smaller
reporting company |
|
|
☐ |
Emerging
growth company |
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of
November 10, 2021, 23,991,304 shares of common stock, $0.001 par
value per share, were outstanding.
DATASEA INC.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
DATASEA INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021
DATASEA INC.
CONSOLIDATED BALANCE SHEETS
|
|
SEPTEMBER 30,
2021 |
|
|
JUNE 30,
2021 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
CURRENT
ASSETS |
|
|
|
|
|
|
Cash |
|
$ |
5,805,362 |
|
|
$ |
49,676 |
|
Accounts receivable |
|
|
711,638 |
|
|
|
1,856 |
|
Inventory |
|
|
204,663 |
|
|
|
194,264 |
|
Value-added tax prepayment |
|
|
173,769 |
|
|
|
171,574 |
|
Prepaid expenses and other current assets |
|
|
498,537 |
|
|
|
468,615 |
|
Total current assets |
|
|
7,393,969 |
|
|
|
885,985 |
|
|
|
|
|
|
|
|
|
|
NONCURRENT ASSETS |
|
|
|
|
|
|
|
|
Security deposit for rents |
|
|
263,222 |
|
|
|
256,987 |
|
Property and equipment, net |
|
|
276,191 |
|
|
|
309,408 |
|
Intangible assets, net |
|
|
1,090,233 |
|
|
|
1,092,147 |
|
Right-of-use assets, net |
|
|
1,144,999 |
|
|
|
1,350,590 |
|
Total noncurrent assets |
|
|
2,774,645 |
|
|
|
3,009,132 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
10,168,614 |
|
|
$ |
3,895,117 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
749,866 |
|
|
$ |
174,718 |
|
Unearned revenue |
|
|
251,990 |
|
|
|
189,527 |
|
Deferred revenue |
|
|
46,257 |
|
|
|
46,439 |
|
Accrued expenses and other payables |
|
|
613,283 |
|
|
|
561,674 |
|
Due
to related party |
|
|
57,414 |
|
|
|
69,305 |
|
Loans payable |
|
|
984,519 |
|
|
|
1,486,819 |
|
Operating lease liabilities |
|
|
759,114 |
|
|
|
730,185 |
|
Total current liabilities |
|
|
3,462,443 |
|
|
|
3,258,667 |
|
|
|
|
|
|
|
|
|
|
NONCURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Operating lease liabilities |
|
|
340,699 |
|
|
|
558,739 |
|
Total noncurrent liabilities |
|
|
340,699 |
|
|
|
558,739 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
|
3,803,142 |
|
|
|
3,817,406 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 375,000,000 shares authorized,
23,916,304 and 21,474,138 shares issued and outstanding,
respectively |
|
|
23,916 |
|
|
|
21,474 |
|
Additional paid-in capital |
|
|
19,930,392 |
|
|
|
12,086,788 |
|
Accumulated comprehensive income |
|
|
268,553 |
|
|
|
273,250 |
|
Accumulated deficit |
|
|
(13,503,092 |
) |
|
|
(12,061,858 |
) |
TOTAL COMPANY STOCKHOLDERS' EQUITY |
|
|
6,719,769 |
|
|
|
319,654 |
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest |
|
|
(354,297 |
) |
|
|
(241,943 |
) |
|
|
|
|
|
|
|
|
|
TOTAL EQUITY |
|
|
6,365,472 |
|
|
|
77,711 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY |
|
$ |
10,168,614 |
|
|
$ |
3,895,117 |
|
The accompanying notes are an integral part of these consolidated
financial statements.
DATASEA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
(UNAUDITED)
|
|
THREE MONTHS ENDED
SEPTEMBER 30, |
|
|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
671,130 |
|
|
$ |
9,055 |
|
Cost of goods sold |
|
|
607,535 |
|
|
|
16,899 |
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
63,595 |
|
|
|
(7,844 |
) |
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
Selling |
|
|
230,799 |
|
|
|
54,065 |
|
General and administrative |
|
|
1,119,471 |
|
|
|
619,436 |
|
Research and development |
|
|
287,216 |
|
|
|
194,726 |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,637,486 |
|
|
|
868,227 |
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(1,573,891 |
) |
|
|
(876,071 |
) |
|
|
|
|
|
|
|
|
|
Non-operating income (expenses) |
|
|
|
|
|
|
|
|
Other income |
|
|
23 |
|
|
|
7,652 |
|
Interest income |
|
|
20,534 |
|
|
|
1,596 |
|
|
|
|
|
|
|
|
|
|
Total non-operating income, net |
|
|
20,557 |
|
|
|
9,248 |
|
|
|
|
|
|
|
|
|
|
Loss before income tax |
|
|
(1,553,334 |
) |
|
|
(866,823 |
) |
|
|
|
|
|
|
|
|
|
Income tax |
|
|
-
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Loss before noncontrolling interest |
|
|
(1,553,334 |
) |
|
|
(866,823 |
) |
|
|
|
|
|
|
|
|
|
Less: loss attributable to noncontrolling interest |
|
|
(112,100 |
) |
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss to the Company |
|
|
(1,441,234 |
) |
|
|
(866,823 |
) |
|
|
|
|
|
|
|
|
|
Other comprehensive item |
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss) attributable to the
Company |
|
|
(4,697 |
) |
|
|
58,479 |
|
Foreign currency translation loss attributable to noncontrolling
interest |
|
|
(254 |
) |
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to the Company |
|
$ |
(1,445,931 |
) |
|
$ |
(808,344 |
) |
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to noncontrolling interest |
|
$ |
(112,354 |
) |
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(0.06 |
) |
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
Weighted average shares used for computing basic and diluted loss
per share |
|
|
23,355,993 |
|
|
|
20,943,846 |
|
The accompanying notes are an integral part of these consolidated
financial statements.
DATASEA INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Unaudited)
|
|
Common
Stock |
|
|
Additional
paid-in |
|
|
Statutory |
|
|
Accumulated |
|
|
Accumulated other
comprehensive |
|
|
|
|
|
Noncontrolling |
|
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
reserves |
|
|
deficit |
|
|
income |
|
|
Total |
|
|
interest |
|
Balance at July 1, 2021 |
|
|
21,474,138 |
|
|
$ |
21,474 |
|
|
$ |
12,086,788 |
|
|
$ |
- |
|
|
$ |
(12,061,858 |
) |
|
$ |
273,250 |
|
|
$ |
319,654 |
|
|
$ |
(241,943 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
- |
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,441,234 |
) |
|
|
-
|
|
|
|
(1,441,234 |
) |
|
|
(112,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation loss |
|
|
- |
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,697 |
) |
|
|
(4,697 |
) |
|
|
(254 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for equity financing |
|
|
2,436,904 |
|
|
|
2,437 |
|
|
|
7,679,359 |
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,681,796 |
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for stock compensation expense |
|
|
5,262 |
|
|
|
5 |
|
|
|
164,245 |
|
|
|
-
|
|
|
|
-
|
|
|
|
- |
|
|
|
164,250 |
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2021 |
|
|
23,916,304 |
|
|
$ |
23,916 |
|
|
$ |
19,930,392 |
|
|
$ |
-
|
|
|
$ |
(13,503,092 |
) |
|
$ |
268,553 |
|
|
$ |
6,719,769 |
|
|
$ |
(354,297 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 1, 2020 |
|
|
20,943,846 |
|
|
$ |
20,944 |
|
|
$ |
11,104,666 |
|
|
$ |
-
|
|
|
$ |
(7,413,381 |
) |
|
$ |
170,207 |
|
|
$ |
3,882,436 |
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
- |
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(866,823 |
) |
|
|
-
|
|
|
|
(866,823 |
) |
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
Foreign currency translation loss |
|
|
- |
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
- |
|
|
|
58,479 |
|
|
|
58,479 |
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2020 |
|
|
20,943,846 |
|
|
$ |
20,944 |
|
|
$ |
11,104,666 |
|
|
$ |
- |
|
|
$ |
(8,280,204 |
) |
|
$ |
228,686 |
|
|
$ |
3,074,092 |
|
|
$ |
-
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
DATASEA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
THREE MONTHS ENDED
SEPTEMBER 30 |
|
|
|
2021 |
|
|
2020 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
Loss including noncontrolling interest |
|
$ |
(1,553,334 |
) |
|
$ |
(866,823 |
) |
Adjustments to reconcile loss including noncontrolling interest to
net cash used in operating activities: |
|
|
|
|
|
|
|
|
Loss on disposal on fixed assets |
|
|
457 |
|
|
|
-
|
|
Depreciation and amortization |
|
|
92,022 |
|
|
|
42,660 |
|
Operating lease expense |
|
|
218,829 |
|
|
|
150,475 |
|
Stock compensation expense |
|
|
164,250 |
|
|
|
-
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(913,091 |
) |
|
|
(5,057 |
) |
Inventory |
|
|
(11,183 |
) |
|
|
(16,254 |
) |
Value-added tax prepayment |
|
|
(2,871 |
) |
|
|
(35,177 |
) |
Prepaid expenses and other current assets |
|
|
(88,253 |
) |
|
|
(84,869 |
) |
Accounts payable |
|
|
608,496 |
|
|
|
12,969 |
|
Advance from customers |
|
|
63,345 |
|
|
|
-
|
|
Accrued expenses and other payables |
|
|
223,916 |
|
|
|
128,479 |
|
Payment on operating lease liabilities |
|
|
(202,552 |
) |
|
|
(235,933 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(1,399,969 |
) |
|
|
(909,530 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of property and equipment |
|
|
(9,156 |
) |
|
|
(43,838 |
) |
Acquisition of intangible assets |
|
|
-
|
|
|
|
(8,301 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(9,156 |
) |
|
|
(52,139 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Due to related parties |
|
|
(11,712 |
) |
|
|
-
|
|
Payment of loan payable |
|
|
(497,625 |
) |
|
|
-
|
|
Net proceeds from issuance of common stock |
|
|
7,681,796 |
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
7,172,459 |
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(7,648 |
) |
|
|
15,769 |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
5,755,686 |
|
|
|
(945,900 |
) |
|
|
|
|
|
|
|
|
|
Cash, beginning of period |
|
|
49,676 |
|
|
|
1,665,936 |
|
|
|
|
|
|
|
|
|
|
Cash, end of period |
|
$ |
5,805,362 |
|
|
$ |
720,036 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
-
|
|
|
$ |
-
|
|
Cash paid for income tax |
|
$ |
-
|
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and financing
activities: |
|
|
|
|
|
|
|
|
Transfer of prepaid software development expenditure to intangible
assets |
|
$ |
50,000 |
|
|
$ |
-
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
DATASEA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 AND JUNE 30, 2021
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Datasea Inc. (the “Company” or “Datasea”) was incorporated in
Nevada on September 26, 2014. As a holding company with no material
operations of its own, Datasea conducts a majority of its
operations through its operating entities established in the
People’s Republic of China (the “PRC” or “China”), primarily
through its variable interest entity (the “VIE”) and its
subsidiaries. The Company does not have any equity ownership of its
VIE, instead Datasea controls and receives the economic benefits of
its VIE’s business operations through certain contractual
arrangements. The Company’s common stock that is currently listed
on the Nasdaq Capital Markets are shares of its Nevada holding
company that maintains service agreements with the associated VIE
and its subsidiaries. For a description of the Company’s corporate
structure and contractual arrangements, please refer to the
Company’s annual report on Form 10-K for the year ended June 30,
2021, filed with the Securities and Exchange Commission (the “SEC”)
on September 28, 2021.
The Company, through its subsidiaries and VIE, Shuhai Information
Technology Co., Ltd. (“Shuhai Beijing”) that is based in the PRC,
engaged in three converging and innovative industries: smart city,
acoustic intelligence and 5G messaging. We Leverage facial
recognition technology and other visual intelligence algorithms,
combined with cutting-edge acoustic and non-visual intelligence
algorithms, to provide smart city solutions that meet the security
needs of residential communities, schools and commercial
enterprises. Most recently, in response to the growing utilization
of 5G technologies and the overall initiative to utilize Datasea’s
technology capabilities to achieve the expansion of business
coverage and revenue resources, China's mainstream telecom
operators jointly launched the 5G Rich Communication Service
industry, and we have also strategically expanded our business
coverage to 5G messaging and smart payment solutions.
Impact of Coronavirus Outbreak
In December 2019, a novel strain of coronavirus (COVID-19) was
reported and the World Health Organization declared the outbreak to
constitute a “Public Health Emergency of International Concern.”
The COVID-19 pandemic has prompted the Company to focus on
developing epidemic related products to pursue new business
opportunities such as integrating the Company’s security platform
and epidemic prevention system for schools and public communities
for epidemic prevention. In April 2020, the Company
resumed normal work flow. Since April 2020, while some new COVID-19
cases were discovered in a few provinces of China including
Beijing, the number of new cases is no longer significant as a
result of strict control measures enacted by PRC government. Based
on available information, management of the Company does not
believe that COVID-19 would have a significant impact on the
Company’s operations for the rest of fiscal 2022; and does not
anticipate any impairment of its assets. Management of the Company
believes that its financial resources will be sufficient to handle
the challenges associated with COVID-19.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GOING
CONCERN
The
accompanying unaudited consolidated financial statements (“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 three months ended September 30, 2021 and 2020,
the Company had a net loss of approximately $1.44 million and $0.87
million, respectively. The Company had an accumulated deficit of
approximately $13.50 million as of September 30, 2021, and negative
cash flow from operating activities of approximately $1.40 million
and $0.91 million for the three months ended September 30, 2021 and
2020, respectively. The historical operating results indicate the
Company has recurring losses from operations which raise the
question related to the Company’s ability to continue as a going
concern. There can be no assurance the Company will become
profitable or obtain necessary financing for its business or that
it will be able to continue in business. The unaudited consolidated
financial statements do not include any adjustments that might
result from the outcome of these uncertainties. On July 20, 2021,
the Company sold 2,436,904 shares of common stock at $3.48 per
share. The net proceeds from the transactions were approximately
$7,640,000, after deducting offering costs, which mitigates the
liquidity concern and the initial doubt about the Company’s ability
to continue as a going concern.
If deemed necessary, management could raise additional funds by way
of private or public offerings, or by obtaining loans from banks or
others, to support the Company’s research and development
(“R&D”), procurement, marketing and daily operation. While
management of the Company believes in the viability of its strategy
to generate sufficient revenues and its ability to raise additional
funds on reasonable terms and conditions, there can be no
assurances to that effect. The ability of the Company to
continue as a going concern depends upon the Company’s ability to
further implement its business plan and generate sufficient revenue
and its ability to raise additional funds by way of a public or
private offering. There can be no assurance the Company will be
successful in any future fund raising.
BASIS OF PRESENTATION
AND CONSOLIDATION
The accompanying unaudited 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
SEC regarding consolidated financial reporting. The accompanying
CFS include the financial statements of the Company and its 100%
owned subsidiaries Shuhai Information Skill (HK) Limited (“Shuhai
Skill (HK)”), and Shuhai Information Technology Co., Ltd. (“Tianjin
Information”), and its VIE, Shuhai Beijing, and Shuhai Beijing’s
100% owned subsidiaries – Heilongjiang Xunrui Technology Co. Ltd.
(“Xunrui”), Guozhong Times (Beijing) Technology Ltd. (“Guozhong
Times”), Guohao Century (Beijing) Technology Ltd. (“Guohao
Century”), Guozhong Haoze, and Shuhai Jingwei (Shenzhen)
Information Technology Co., Ltd. (“Jingwei”), and Guohao Century’s
69.81% owned subsidiary – Hangzhou Shuhai Zhangxun Information
Technology Co., Ltd. (“Zhangxun”), and Shuhai Beijing’s 99% owned
subsidiary - Nanjing Shuhai Equity Investment Fund Management Co.
Ltd. (“Shuhai Nanjing”). All significant inter-company transactions
and balances were eliminated in consolidation. The chart below
depicts the corporate structure of the Company as of the date of
this report.
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 RMB
1.00. 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 RMB 1.00 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 guarantees 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 pledged
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.
Risk Factors relating to VIE Structure
The Company’s US parent company is a holding company with no
material operations of its own, the Company conducts its operations
in China through its VIE - Shuhai Beijing and its subsidiaries. The
investors are not investing in the VIE. Neither the US Parent
company nor its subsidiaries actually own any share in Shuhai
Beijing. Instead, the US parent company controls and receives the
economic benefits of Shuhai Beijing business operation through a
series of contractual agreements. The Company is subject to certain
legal and operational risks associated with being based in China
and having a majority of the operations in through the contractual
arrangements with the VIE. PRC laws and regulations governing the
Company’s current business operations are sometimes vague and
uncertain, and therefore, these risks may result in a material
change in the Company’s operations, The VIE structure is used
to replicate foreign investment in Chinese-based companies where
Chinese law prohibits direct foreign investment in the operating
companies, and that investors may never directly hold equity
interests in the Chinese operating entities.
In addition, due to the Company’s corporate structure, the Company
is subject to risks due to uncertainty of the interpretation and
the application of the PRC laws and regulations, including but not
limited to limitation on foreign ownership of internet technology
companies, and regulatory review of oversea listing of PRC
companies through a special purpose vehicle, and the validity and
enforcement of the VIE Agreements.
As of this report date, there was no dividends paid from the VIE to
the US parent company or the 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 September 30, 2021 and
June 30, 2021, and for the three months ended September 30, 2021
and 2020, respectively.
|
|
September 30,
2021 |
|
|
June 30,
2021 |
|
Cash |
|
$ |
25,466 |
|
|
$ |
26,916 |
|
Accounts receivable |
|
|
711,638 |
|
|
|
1,856 |
|
Inventory |
|
|
11,626 |
|
|
|
9,522 |
|
Other receivables |
|
|
517,495 |
|
|
|
489,780 |
|
Other current
assets |
|
|
28,380 |
|
|
|
139,295 |
|
Total current
assets |
|
|
1,294,605 |
|
|
|
667,369 |
|
Property and equipment, net |
|
|
150,530 |
|
|
|
167,194 |
|
Intangible asset, net |
|
|
8,046 |
|
|
|
10,984 |
|
Right-of-use asset, net |
|
|
361,443 |
|
|
|
442,441 |
|
Other
non-current assets |
|
|
23,619 |
|
|
|
16,816 |
|
Total
non-current assets |
|
|
543,638 |
|
|
|
637,435 |
|
Total assets |
|
$ |
1,838,243 |
|
|
$ |
1,304,804 |
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
620,828 |
|
|
$ |
12,887 |
|
Accrued liabilities and other
payables |
|
|
614,296 |
|
|
|
559,389 |
|
Lease liability |
|
|
207,585 |
|
|
|
256,676 |
|
Loans payable |
|
|
984,519 |
|
|
|
1,455,860 |
|
Other current
liabilities |
|
|
366,147 |
|
|
|
268,527 |
|
Total current
liabilities |
|
|
2,793,375 |
|
|
|
2,553,339 |
|
Lease liability
- noncurrent |
|
|
21,043 |
|
|
|
79,676 |
|
Total
non-current liabilities |
|
|
21,043 |
|
|
|
79,676 |
|
Total
liabilities |
|
$ |
2,814,418 |
|
|
$ |
2,633,015 |
|
|
|
For the three
months
Ended
September 30,
2021 |
|
|
For the three
months
Ended
September 30,
2020 |
|
Revenues |
|
$ |
671,130 |
|
|
$ |
8,735 |
|
Gross profit |
|
$ |
56,008 |
|
|
$ |
4,613 |
|
Net loss |
|
$ |
(870,189 |
) |
|
$ |
(531,315 |
) |
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 September
30, 2021 and June 30, 2021, the Company has no such
contingencies.
CASH AND
EQUIVALENTS
Cash and equivalents include cash on hand, demand deposits and
short-term cash investments that are highly liquid in nature and
have original maturities when purchased of three months or
less.
INVENTORY
Inventory is comprised principally of intelligent temperature
measurement face recognition terminal and identity information
recognition products, and 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 $58,956 and $59,187 allowances for slow-moving and
obsolete inventory (mainly for Smart-Student Identification cards)
as of September 30, 2021 and June 30, 2021, 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 cash, accounts receivable, prepaid expenses,
accounts payable, advance from customers, accrued expenses and
other payables approximate their FV due to their short
maturities.
As of September 30, 2021 and June 30, 2021, 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 expected 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
three months ended September 30, 2021 and 2020, there was no
impairment loss recognized on long-lived assets.
UNEARNED REVENUE
The Company records payments received in advance from its
customers or sales agents for the Company’s products as unearned
revenue, mainly consisting of deposits or prepayment for 5G
products from the Company’s sales agencies. These orders normally
are delivered based upon contract terms and customer demand, and
will recognize as revenue when the products are delivered to the
end customers.
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
The Company determines if an arrangement is a lease at inception
under FASB ASC Topic 842,. 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.
ROU assets are reviewed for impairment when indicators of
impairment are present. ROU assets from operating and finance
leases are subject to the impairment guidance in ASC 360, Property,
Plant, and Equipment, as ROU assets are long-lived nonfinancial
assets.
ROU assets are tested for impairment individually or as part of an
asset group if the cash flows related to the ROU asset are not
independent from the cash flows of other assets and liabilities. An
asset group is the unit of accounting for long-lived assets to be
held and used, which represents the lowest level for which
identifiable cash flows are largely independent of the cash flows
of other groups of assets and liabilities. The Company recognized
no impairment of ROU assets as of September 30, 2021 and June 30,
2021.
Operating leases are included in operating lease ROU and operating
lease liabilities (current and non-current), on the consolidated
balance sheets. At September 30, 2021, the net ROU was
$1,144,999 for the operating leases of the Company’s offices in
various cities of China and senior officers’ dormitory in Beijing.
At September 30, 2021, total operating lease liabilities (includes
current and noncurrent) was $1,099,813, which was for the operating
leases of the Company’s offices in various cities of China and
senior officers’ dormitory in Beijing.
REVENUE RECOGNITION
The
Company follows Accounting Standards Codification Topic 606,
Revenue from Contracts with Customers (ASC 606).
The
Company follows Accounting Standards Codification Topic 606,
Revenue from Contracts with Customers (ASC 606).
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
identified when possession of goods and services is transferred to
a customer.
FASB ASC Topic 606 requires the 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 Company derives its revenues from product sales and 5G
messaging service contracts with its customers, with revenues
recognized upon delivery of services and products. Persuasive
evidence of an arrangement is demonstrated via product sale
contracts and professional service contracts, and invoices. The
product selling price and the service price to the customer are
fixed upon acceptance of the agreement. The Company recognizes
revenue when the customer receives the products and passes the
inspection and when professional service is rendered to the
customer, collectability of payment is probable. These revenues are
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.
During
the three months ended September 30, 2021, the Company’s revenue of
$0.67 million was from 5G messaging/SMS services that
Shuhai Beijing and its subsidiary, Hangzhou zhangxun provided to a
large-scale internet service enterprise. The related cost for such
services provided was $0.61 million, mainly was for the SMS service
platform using fee that was provided from a third-party supplier
like mobile virtual network operator (MVNO) , who obtains
bulk access to network services at wholesale rates from its
upstream suppliers or ultimate three major telecommunication and
network operators in China, and sell it to downstream customers
like Shuhai Beijing and its subsidiary, Hangzhou zhangxun.
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 September 30, 2021, the Company had no
unrecognized tax benefits and no charges during the three months
ended September 30, 2021, 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
September 30, 2021. The Company files a U.S. and PRC 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; the
Company uses calendar year-end for its PRC income tax return
filing, PRC income tax returns filed for the years ending on
December 31, 2015 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 NCI
balance.
As of September 30, 2021, Zhangxun was 30.19% owned by
noncontrolling interest, and Shuhai Nanjing was 1% owned by
noncontrolling interest. During the three months ended September
30, 2021, the Company had loss of $112,100 and $0 attributable to
the noncontrolling interest for the three months ended September
30, 2021 and 2020, 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 $5,435,640 and $32,687 at September 30,
2021 and June 30, 2021, respectively, was held in accounts at
financial institutions located in the PRC‚ which is not freely
convertible into foreign currencies.
Cash held in accounts at U.S. financial institutions are insured by
the Federal Deposit Insurance Corporation or other programs subject
to certain limitations up to $250,000 per depositor. As of
September 30, 2021, cash of $361,609 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 September 30, 2021, the cash balance of $8,112 was maintained at
financial institutions in Hong Kong. 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.
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:
|
|
September 30, |
|
|
September 30, |
|
|
June 30, |
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
Period-end date USD: RMB
exchange rate |
|
|
6.4854 |
|
|
|
6.8101 |
|
|
|
6.4601 |
|
Average USD for the reporting period:
RMB exchange rate |
|
|
6.4707 |
|
|
|
6.9205 |
|
|
|
6.6273 |
|
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 is 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 three months ended September 30,
2021 and 2020, the Company’s basic and diluted loss per share are
the same as a result of the Company’s net loss. 1,319,953 and
101,500 warrants were anti-dilutive for the three months ended
September 30, 2021 and 2020.
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
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 August 2020, the FASB issued ASU 2020-06, Debt — Debt with
Conversion and Other Options (Subtopic 470-20) and Derivatives and
Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):
Accounting for Convertible Instruments and Contracts in an Entity’s
Own Equity (“ASU 2020-06”). ASU 2020-06 simplifies the accounting
for convertible debt by eliminating the beneficial conversion and
cash conversion accounting models. Upon adoption of ASU 2020-06,
convertible debt, unless issued with a substantial premium or an
embedded conversion feature that is not clearly and closely related
to the host contract, will no longer be allocated between debt and
equity components. This modification will reduce the issue discount
and result in less non-cash interest expense in financial
statements. ASU 2020-06 also updates the earnings per share
calculation and requires entities to assume share settlement when
the convertible debt can be settled in cash or shares. For
contracts in an entity’s own equity, the type of contracts
primarily affected by ASU 2020-06 are freestanding and embedded
features that are accounted for as derivatives under the current
guidance due to a failure to meet the settlement assessment by
removing the requirements to (i) consider whether the contract
would be settled in registered shares, (ii) consider whether
collateral is required to be posted, and (iii) assess shareholder
rights. ASU 2020-06 is effective for fiscal years beginning after
December 15, 2023. Early adoption is permitted, but no earlier than
fiscal years beginning after December 15, 2020, and only if adopted
as of the beginning of such fiscal year. The Company adopted ASU
2020-06 effective July 1, 2021. The adoption of ASU 2020-06 did not
have any impact on the Company’s CFS presentation or
disclosures.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic
260), Debt — Modifications and Extinguishments (Subtopic 470-50),
Compensation — Stock Compensation (Topic 718), and Derivatives and
Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40):
Issuer’s Accounting for Certain Modifications or Exchanges of
Freestanding Equity-Classified Written Call Options (“ASU
2021-04”). ASU 2021-04 provides guidance as to how an issuer
should account for a modification of the terms or conditions or an
exchange of a freestanding equity-classified written call option
(i.e., a warrant) that remains classified after modification or
exchange as an exchange of the original instrument for a new
instrument. An issuer should measure the effect of a
modification or exchange as the difference between the fair value
of the modified or exchanged warrant and the fair value of that
warrant immediately before modification or exchange and then apply
a recognition model that comprises four categories of transactions
and the corresponding accounting treatment for each category
(equity issuance, debt origination, debt modification, and
modifications unrelated to equity issuance and debt origination or
modification). ASU 2021-04 is effective for all entities for fiscal
years beginning after December 15, 2021, including interim periods
within those fiscal years. An entity should apply the guidance
provided in ASU 2021-04 prospectively to modifications or exchanges
occurring on or after the effective date. Early adoption is
permitted for all entities, including adoption in an interim
period. If an entity elects to early adopt ASU 2021-04 in an
interim period, the guidance should be applied as of the beginning
of the fiscal year that includes that interim period. The
adoption of ASU 2021-04 is not expected to have any impact on the
Company’s CFS presentation or disclosures.
The Company’s management does not believe that any other recently
issued, but not yet effective, authoritative guidance, if currently
adopted, would have a material impact on the Company’s financial
statement presentation or disclosures.
NOTE 3 – PROPERTY AND
EQUIPMENT
Property
and equipment are summarized as follows:
|
|
September 30,
2021 |
|
|
June 30,
2021 |
|
Furniture and
fixtures |
|
$ |
115,057 |
|
|
$ |
115,507 |
|
Vehicle |
|
|
540 |
|
|
|
3,096 |
|
Leasehold improvement |
|
|
241,697 |
|
|
|
242,643 |
|
Office
equipment |
|
|
254,542 |
|
|
|
246,910 |
|
Subtotal |
|
|
611,836 |
|
|
|
608,156 |
|
Less:
accumulated depreciation |
|
|
335,645 |
|
|
|
298,748 |
|
Total |
|
$ |
276,191 |
|
|
$ |
309,408 |
|
Depreciation for the three months ended September 30, 2021 and 2020
was $40,253 and $36,221, respectively.
NOTE 4 – INTANGIBLE
ASSETS
Intangible assets are summarized as follows:
|
|
September 30,
2021 |
|
|
June 30,
2021 |
|
Software registration
right |
|
$ |
57,930 |
|
|
$ |
58,157 |
|
Patent |
|
|
33,503 |
|
|
|
33,634 |
|
Software development (see Note 5) |
|
|
1,150,000 |
|
|
|
1,100,000 |
|
Value-added
telecommunications business license |
|
|
16,186 |
|
|
|
16,249 |
|
Subtotal |
|
|
1,257,619 |
|
|
|
1,208,040 |
|
Less:
Accumulated amortization |
|
|
167,386 |
|
|
|
115,893 |
|
Total |
|
$ |
1,090,233 |
|
|
$ |
1,092,147 |
|
Amortization for the three months ended September 30, 2021 and 2020
were $51,769 and $6,440, respectively.
NOTE 5 – PREPAID
EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets consisted of the following:
|
|
September 30,
2021 |
|
|
June 30,
2021 |
|
Security deposit |
|
$ |
-
|
|
|
$ |
6,956 |
|
Prepaid expenses |
|
|
47,041 |
|
|
|
53,944 |
|
Prepaid software development |
|
|
-
|
|
|
|
50,000 |
|
Prepaid insurance |
|
|
84,493 |
|
|
|
39,868 |
|
Other receivables - Heqin |
|
|
567,428 |
|
|
|
569,651 |
|
Others |
|
|
83,289 |
|
|
|
33,021 |
|
Total |
|
|
782,251 |
|
|
|
753,440 |
|
Less: allowance
for other receivables - Heqin |
|
|
283,714 |
|
|
|
284,825 |
|
Total |
|
$ |
498,537 |
|
|
$ |
468,615 |
|
Prepaid software
development
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 June 30, 2021,
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). On April 23, 2021, the Company and SDT
entered a project contract termination agreement due to
functionality issues of the software; the Company and SDT will not
pursue any further demands to each other regarding the software
development project, and the Company is not obligated to pay the
remaining payment of $0.20 million to SDT. However, the Company and
the developer later reached the agreement to fix the functionality
issues without any additional costs, and as of this report date,
the software was completed and is working as designed.
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 face and 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 September 30, 2021 and June 30,
2021, 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; $550,000 cost incurred after the technological
feasibility was recorded as intangible asset – software development
(Note 4). On September 28, 2021, the Company and HW entered a
Cancellation Agreement for developing Face and Eye protection
technical system due to certain of the facial recognition functions
cannot fully satisfy the Company’s needs, and the Company was not
required to pay the remaining $300,000 balance.
Other receivables -
Heqin
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 September 30, 2021, Guozhong Times had an
outstanding receivable of RMB 3.68 million ($567,428) from Heqin
and was recorded as other receivables. As of June 30, 2021,
Guozhong Times had an outstanding receivable of RMB 3.68 million
($560,011) 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 charges 15% interest
if Heqin did not repay by the due date. 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 October 2021 as
follows:
October
2021: repay RMB 400,000 ($61,900)
November
2021: repay RMB 800,000 ($123,840)
December
2021: repay RMB 800,000 ($123,840)
January
2022: repay RMB 1,000,000 ($154,800)
February
2022: repay RMB 600,000 ($92,900)
March
2022: repay RMB 80,000 ($12,400)
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. As of
report date, Heqin did not make any repayment to the Company, and
the Company made a bad debt allowance of $284,825 at June 30,
2021.
NOTE 6 – ACCRUED
EXPENSES AND OTHER PAYABLES
Accrued
expenses and other payables consisted of the following:
|
|
September 30,
2021 |
|
|
June 30,
2021 |
|
Other payables |
|
$ |
193,915 |
|
|
$ |
186,954 |
|
Senior officer’s salary payable |
|
|
228,976 |
|
|
|
204,332 |
|
Salary payable
- employees |
|
|
190,392 |
|
|
|
170,388 |
|
Total |
|
$ |
613,283 |
|
|
$ |
561,674 |
|
Other
payables mainly consisted of social security and insurance
payable.
NOTE 7 – LOANS
PAYABLE
As of June 30, 2021, the Company had several loan agreements with
an unrelated party for $1,486,819, these loans bear no interest,
and are required to be repaid any time before December 31, 2021.
During the three months ended September 30, 2021, the Company
repaid approximate $500,000 to the unrelated party, and had
$984,519 remaining balance outstanding at September 30, 2021.
NOTE 8 – RELATED PARTY
TRANSACTIONS
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. On April 30, 2021, Xunrui entered a new
one-year lease for this location with the Company’s President for
an annual rent of RMB 75,000 ($11,000), The rental expense for this
agreement was $2,898 and $2,709 for the three months ended
September 30, 2021 and 2020, 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.
The rental expense for this agreement was $6,329 for the three
months ended September 30, 2021.
On July 1, 2021, the Company’s CEO 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 CEO for a monthly rent
of RMB 18,000 ($2,800), or total payment of $33,400, to be paid in
full at once.
On September 1, 2021, the Company renewed an one-year lease for
senior officers’ dormitory in Beijing, the monthly rent is RMB
15,200 ($2,439), payable every six months in advance. The rental
expense for this agreement was $7,047 for the three months ended
September 30, 2021.
Due to related
parties
As of September 30, 2021 and June 30, 2021, the Company had due to
related parties of $57,414 and $69,305, mainly was for the payable
of an office leasing from the Company’s CEO, and certain expenses
of the Company that were paid by the CEO and her father (one of the
Company’s director), due to related parties bore no interest and
payable upon demand.
NOTE 9 – COMMON STOCK
AND WARRANTS
Private Placement in October 2020
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 market price on
November 11, 2020 was $1.81 per share, the Company received
$931,000 proceeds from the financing after deducting $5,000
expenses.
Registered Direct Offering and Concurrent Private Placement
in July 2021
On
July 20, 2021, the Company entered into a securities purchase
agreement with certain institutional investors, pursuant to which
the Company agreed to sell to such investors an aggregate of
2,436,904 shares of the common stock of the Company at a purchase
price of $3.48 per share. The offering of the common stock is
pursuant to a shelf registration statement on Form S-3 (File No.
333-239183), which was declared effective by the SEC on June 25,
2020.
Concurrently with the sale of the shares of the common stock, the
Company also sold warrants to purchase 1,096,608 shares of common
stock to such investors. The Company sold the shares of the common
stock and the Warrants for aggregate gross proceeds of
approximately $8,480,426, before commissions and expenses. Subject
to certain beneficial ownership limitations, the Warrants were
immediately exercisable at an exercise price equal to $4.48 per
share, and will terminate on the two and one-half year anniversary
following the initial exercise date of the Warrants. The warrants
issued in this financing was 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 2.5 years, volatility of 150%,
risk-free interest rate of 0.37% and dividend yield of 0%. The FV
of the warrants issued at grant date was $1,986,880.
In
addition, the Company has also agreed to issue to its placement
agent for offering above warrants to purchase a number of shares of
the common stock equal to 5.0% of the aggregate number of shares of
the common stock sold in this offering (121,845 shares of
warrants), the warrants have an exercise price of $3.96 per share
and will terminate on the two and one-half-year anniversary of the
closing of the offering. The Company accounted for the
warrants issued 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 2.5 years,
volatility of 150%, risk-free interest rate of 0.37% and dividend
yield of 0%. The FV of the warrants issued at grant date was
$225,964. The warrants issued in this financing was classified as
equity instruments.
The
closing of the sales of these securities under the securites
purchase agreement took place on July 22, 2021. The net proceeds
from the transactions were approximately $7,640,000, after
deducting certain fees due to the placement agent and the Company’s
estimated transaction expenses, and will be used for working
capital and general corporate purposes, and for the repayment of
debt.
Following is a summary of the activities of warrants for the period
ended September 30, 2021:
|
|
Number
of
Warrants |
|
|
Average
Exercise
Price |
|
|
Weighted
Average
Remaining
Contractual
Term in
Years |
|
Outstanding at June 30, 2021 |
|
|
101,500 |
|
|
|
6.00 |
|
|
|
3.47 |
|
Exercisable at June 30, 2021 |
|
|
101,500 |
|
|
|
6.00 |
|
|
|
3.47 |
|
Granted |
|
|
1,218,453 |
|
|
|
4.43 |
|
|
|
2.50 |
|
Exercised |
|
|
-
|
|
|
|
-
|
|
|
|
- |
|
Forfeited |
|
|
-
|
|
|
|
-
|
|
|
|
- |
|
Expired |
|
|
-
|
|
|
|
-
|
|
|
|
- |
|
Outstanding at September 30,
2021 |
|
|
1,319,953 |
|
|
$ |
4.55 |
|
|
|
2.38 |
|
Exercisable at September 30,
2021 |
|
|
1,319,953 |
|
|
$ |
4.55 |
|
|
|
2.38 |
|
Shares to Directors
During the three months ended September 30, 2021, the Company
recorded $6,000 stock compensation expense to two independent
directors through the issuance of 5,262 shares of the Company’s
common stock.
Shares to Officers
On September 24, 2021, under the 2018 Equity Inventive plan, the
Company’s Board of Directors granted 15,000 shares of the Company’s
common stock to its CEO each month and 10,000 shares to one of the
board members each month staring from July 1, 2021, payable
quarterly with the aggregate number of shares for each quarter
being issued on the first day of the next quarter at a per share
price of the closing price of the day prior to the issuance. During
the three months ended September 30, 2021, the Company recorded the
fair value of $158,250 stock compensation expense for the shares
that are required to be issued to the Company’s CEO and one of the
board member for the quarter.
NOTE 10 – 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
September 30, 2021 and June 30, 2021, the U.S. entity had net
operating loss (“NOL”) carry forwards for income tax purposes of
$1.29 million and $0.94 million. 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”) passed 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 September 30, 2021 and June 30, 2021, the Company has
approximately $10.32 million and $9.04 million of NOL from its HK
holding company, PRC subsidiaries and VIEs that expire in calendar
years 2021 through 2025. 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 September
30, 2021 and June 30, 2021.
The following table reconciles the U.S. statutory rates to the
Company’s effective tax rate for the three months ended September
30, 2021 and 2020:
|
|
2021 |
|
|
2020 |
|
US federal statutory
rates |
|
|
(21.0 |
)% |
|
|
(21.0 |
)% |
Tax rate difference – current
provision |
|
|
(2.8 |
)% |
|
|
(3.0 |
)% |
Permanent difference |
|
|
|
% |
|
|
-
|
% |
Effect of PRC tax holiday |
|
|
(2.5 |
)% |
|
|
4.9 |
% |
Valuation allowance |
|
|
26.3 |
% |
|
|
19.1 |
% |
Under accrual
of prior year income tax of parent company |
|
|
-
|
% |
|
|
|
% |
Effective tax
rate |
|
|
-
|
% |
|
|
-
|
% |
The
Company’s net deferred tax assets as of September 30, 2021 and June
30, 2021 is as follows:
|
|
September 30,
2021 |
|
|
June 30,
2021 |
|
Deferred tax asset |
|
|
|
|
|
|
Net
operating loss |
|
$ |
2,250,808 |
|
|
$ |
1,841,786 |
|
R&D
expense |
|
|
123,750 |
|
|
|
123,750 |
|
Accrued expense of
officers’ salary |
|
|
34,424 |
|
|
|
29,876 |
|
Depreciation and
amortization |
|
|
1,839 |
|
|
|
3,502 |
|
Bad debt
expense |
|
|
71,089 |
|
|
|
69,410 |
|
Social security and
insurance |
|
|
30,674 |
|
|
|
29,949 |
|
Inventory
impairment |
|
|
14,772 |
|
|
|
14,423 |
|
ROU,
net of lease liabilities |
|
|
(17,152 |
) |
|
|
4,686 |
|
Total |
|
|
2,510,204 |
|
|
|
2,117,382 |
|
Less: valuation
allowance |
|
|
(2,510,204 |
) |
|
|
(2,117,382 |
) |
Net deferred tax
asset |
|
$ |
-
|
|
|
$ |
-
|
|
NOTE 11
– COMMITMENTS
Leases
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 received a six-month rent
abatement, which was considered in calculating the present value of
the lease payments to determine the ROU 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 was RMB
14,500 ($2,045), payable every six months in advance. The lease was
renewed for another year from September 1, 2021 to August 31, 2022
at a monthly rent of RMB 15,200 ($2,350), 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:
|
|
Three Months
Ended
September 30,
2021 |
|
|
Three Months
Ended
September 30,
2020 |
|
Operating lease
expense |
|
$ |
218,829 |
|
|
$ |
150,475 |
|
|
|
September 30,
2021 |
|
Right-of-use
assets |
|
$ |
1,144,999 |
|
Lease
liabilities - current |
|
|
759,114 |
|
Lease
liabilities - noncurrent |
|
|
340,699 |
|
Weighted
average remaining lease term |
|
|
1.48 years |
|
Weighted
average discount rate |
|
|
5.00 |
% |
The
following is a schedule, by years, of maturities of the operating
lease liabilities as of September 30, 2021:
12
Months Ending September 30, |
|
Minimum
Lease
Payment |
|
2022 |
|
$ |
759,114 |
|
2023 |
|
|
348,333 |
|
2024 |
|
|
-
|
|
Total undiscounted cash flows |
|
|
1,208,307 |
|
Less: imputed
interest |
|
|
(7,634 |
) |
Present value of lease
liabilities |
|
$ |
1,099,813 |
|
NOTE
12 – SUBSEQUENT EVENTS
The Company follows the guidance in FASB ASC 855-10 for the
disclosure of subsequent events. The Company evaluated subsequent
events through the date the unaudited financial
statements were issued and determined the Company had the following
major subsequent event:
On October 9, 2021, Zhangxun entered into an Cooperation Agreement
with an internet technology company in Jiangxi Province for
providing them the 5G messaging services with total revenue not
less than RMB 30 million ($4.63 million).
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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; |
|
● |
availability,
terms and deployment of capital, relationships with third-party
equipment suppliers; and |
|
● |
influences
of COVID-19 on China’s economy and society. |
Overview
Datasea, Inc. (the “Company” or “Datasea”) was incorporated in
Nevada on September 26, 2014. As a holding company with no material
operations of our own, we conduct a substantial majority of our
operations through our operating entities established in the
People’s Republic of China, or the PRC, primarily our variable
interest entity (the “VIE”). We do not have any equity ownership of
our VIE, instead we control and receive the economic benefits of
our VIE’s business operations through certain contractual
arrangements. The Company’s common stock that is currently listed
on the Nasdaq Capital Markets are shares of a Nevada holding
company that maintains service agreements with the associated
operating companies.
In addition, due to our corporate structure and nature of the
business, we are also subject to risks due to uncertainty of the
interpretation and the application of the PRC’s laws and
regulations, including but not limited to limitation on foreign
ownership of internet technology companies, regulatory review of
oversea listing of PRC companies through a special purpose vehicle,
and the validity and enforcement of the VIE Agreements.
We are a
digital technology company engaged in three converging and
innovative industries: smart city, acoustic intelligence and 5G
messaging. We Leverage facial recognition technology and other
visual intelligence algorithms, combined with cutting-edge acoustic
and non-visual intelligence algorithms, to provide smart city
solutions that meet the security needs of residential communities,
schools and commercial enterprises. Most recently, in response to
the growing utilization of 5G technologies and the overall
initiative to utilize Datasea’s technology capabilities to achieve
the expansion of business coverage and revenue resources, China's
mainstream telecom operators jointly launched the 5G Rich
Communication Service industry, and we have also strategically
expanded our business coverage to 5G messaging and smart payment
solutions.
The research and development of technology plays a vital role for
the Company and is what makes us different. The Company does not
only have visual intelligent algorithms such as facial recognition
technology, but also develops non-visual intelligent algorithms
like acoustic intelligence. Together with artificial intelligence,
machine learning and data analytics capability, our solutions not
only provide visibility, but also identify behavioral patterns and
then use alerts to manage situations actively. We create new
opportunities for everything from intelligent detection to
proactive optimization. The non-visual intelligent algorithms such
as acoustic intelligence are the future of the smart city
industry.
As our smart city technologies share connectivity of their
underlying logic with 5G messaging and smart payment solutions, the
demand for user value-added services, as well as the rapid rise of
China’s 5G application market, has provided a comprehensive
intelligent system for people and machines to meet the business,
social and transactional needs of countries, enterprises and
individuals, and it has supported the company’s rapid start and
development of its 5G messaging business and has effectively
improved the company’s competitiveness. The Company creates new
sources of revenue and profit and brings benefits for all
shareholders.
Recent
Developments
In July 2021, Datasea and its wholly-owned subsidiary, Heilongjiang
Xunrui Technology Ltd. (“Xunrui”) completed the implementation of
customized access controls, monitoring and reporting mechanism for
the office building of the Heilongjiang Branch of China Pacific
Life Insurance.
In September 2021, Datasea and its wholly-owned subsidiary,
Guozhong Haoze (Beijing) Technology Ltd. (“Guozhong Haoze”)
executed a strategic agreement with Eastcom Smart Chain (Beijing)
Network Technology Co., Ltd. to provide smart systems for canteens
and restaurants in approximately 200 schools and institutions over
the next two years. According to the agreement, the Company mainly
provides smart systems and smart payment services for school
restaurants. Through our smart system, it can realize the
traceability of food (food source safety monitoring), see-through
kitchens (cooking processing safety monitoring), and contactless
payment (smart payment).
On October 28, 2021, Guozhong Haoze signed a purchase order with
Eastcom Smart Chain for the food safety supervision system of the
Smart Canteen of Heze No. 1 Middle School in Shandong province with
an amount of approximately $2,900 (RMB 18,670). So far,
approximately $1,300 (RMB 8350) has been received, and hardware has
been installed, and the follow-up is the deployment and training of
the software.
Product updates:
In response to changing market demands, the technical team of
Datasea has developed an all-in-one machine to provide functions
including face recognition, temperature measurement and health code
reading that can be widely used in public areas with public health
management needs such as office buildings, communities, parks,
construction sites, hospitals, subway stations and more. In
addition to the standard temperature measurement, functions include
face recognition, records export and abnormal measurement alarm.
The new all-in-one machine has been connected with the national
health QR codes, which can realize the linkage of prevention and
control information from time to time, including National General
Code-Guokang Code, Guangdong-Yuekang Code, Sichuan-Tianfutong,
Jiangsu-Sukang Code, Inner Mongolia-Inner Mongolia Code,
Shanghai-Sui Shen Code, Hubei-Hubei Code, Anhui-Anhui Code,
Fujian-Bamin Code, Hebei-Health Code, Yunnan-Yunnan Code,
Hunan-Hunan Code, Shandong-Shandong Code, Guangzhou-Suikang Code,
Qinghai Health Code and many other provinces and cities. The
products will be introduced to the market according to market
conditions.
The company continues to develop acoustic intelligence to enhance
our smart city solutions and products. During the reporting period,
the team was further expanded, and the introduction of ISO9001 and
CMMI management standards was initiated. The OKR performance
management system, employee stock ownership, qualifications and
full-cycle talent training system are being prepared to ensure the
stability and continuous growth of talent. At the same time, based
on the establishment of strategic partnerships with the Noise
Laboratory, Ultrasound Laboratory, and Intelligent Speech
Laboratory of the Institute of Acoustics of the Chinese Academy of
Sciences, the company has established a think tank based on five
top domestic acoustic experts. In addition, in the construction of
acoustic intelligent ecology: establish strategic partnerships with
Anhui China Sound Valley, Suzhou Industrialization Base of
Institute of Acoustics, Chinese Academy of Sciences, and Changshu
China Acoustic Innovation Valley.
The company has developed two acoustic smart hardware products,
which will soon be introduced to the market.
a. Datasea Tianer Voice Recognition Alarm is one of the Company's
utterly self-developed acoustic security products. Through the
collection, recognition, calculation and analysis of sound data,
the product can restore non-visual scenes, monitor situations,
conduct early warning analysis, and actively intervene or start to
generate deterrence effect to reduce the possibility of incidence
and danger. The product has the characteristics of solid anti-noise
ability, wide recognition range, high precision, and customizable
services and is in a leading position in the industry. The product
can be applied in scenarios such as communities, campuses, nursing
homes, families, and public places that require high privacy
protection but exist in dangerous situations. The research and
development has been completed, and the product samples are
undergoing pilot testing. The product launch is expected to be in
March 2022.
b. Datasea directional sound recognizer is one of the company's
environmental protection products, and directional sound technology
is currently one of the core technologies to solve noise problems.
The product's main function allows the sound to be transmitted
along a certain path, which can effectively control noise
pollution. It has the characteristics of super directivity, clear
sound without attenuation, wider frequency response, compactness
and lightness. Product target customers include exhibitions,
science and technology museums, exhibition halls, supermarkets,
hospitals and more. At present, the joint research and development
have been completed, and the trial production samples will be
prepared and will be piloted. It is expected to be officially
launched in the market in 2022.
In order to better demonstrate the unique characteristics of
Datasea in the development of acoustic intelligent technology as
well as leading role in the acoustic intelligent industry, it is
expected that in the first quarter of fiscal year 2022, the company
plans to jointly release the "White Paper on the Development of
Acoustic Intelligence Industry and Technology Application" at
Hangzhou with the Institute of Information and Communications
Technology, which is one of the National Industry Standards
Department. The white papers, by combing and explaining the
development status and trends of the acoustic intelligence
industry, can better point out the direction for the company's
acoustic industry development, and also help the company's acoustic
intelligence strategy and the establishment of the industry's
leading position.
2. 5G Messaging Business
The
company continues to promote the 5G messaging business to improve
the company’s competitiveness and create new sources of revenue and
profits. 5G Message marketing cloud platform is an intelligent and
all-in-one message-marketing cloud platform (“5G MMCP”). This
comprehensive and integrated message-marketing platform includes
messaging channels, different industry and business templates,
marketing tools and analytics builders. Relying on the operator’s
SMS channel and information flow on the internet, the
message-marketing cloud platform aims to unify customer and
prospect marketing signals in a single view with functions like
precise SaaS value-added services, data monetization and
message-marketing. By leveraging big data and artificial
intelligence technology, the platform uses real-time data-driven
insights and targeted 5G messaging to engage, convert, and nurture
buyer relationships. Datasea provides multiple industry templates
including logistics, Internet, catering, e-commerce,
finance and property management etc.
Business developments: 1). In September 2021, Hangzhou
Zhangxun and Hubei Kuanyun Network Technology Co., Ltd. signed a
cooperation agreement on SMS business sales, with a contract amount
of approximately $4.33 million (RMB 28 million). The contract
period is one year, the billing cycle is one calendar month, and
the customer will issue invoices every month. The Company has
provided customers with related SMS sending services since
September and achieved a monthly operating income of approximately
US$680,000 (RMB 4.342 million); up to now, it is expected to
achieve a monthly operating income of approximately US$700,000 (RMB
4.55 million). The service will last until September 2022.
2). In September 2021, Hangzhou Zhangxun and Quantum Communication
(Beijing) Technology Co., Ltd. signed the cooperation agreement on
SMS service sales, with the contract amount of approximately $3.87
million (RMB 25 million).
3). In October 2021, Hangzhou Zhangxun and Jiangxi Zhouwang Network
Technology Co., Ltd. ("Jiangxi Zhouwang") signed a value of $4.67
million (RMB 30 million). The procurement contract for SMS and 5G
MMS services. The contract period is one year, the billing cycle is
one calendar month, and the customer will issue invoices monthly.
In addition, Hangzhou zhangxun has provided relevant MMS and SMS
sending services in October and is expected to contribute about
770,000 US dollars (RMB 5 million) to the Company every month. The
service will continue until October 2022.
According to those contracts, Hangzhou Zhangxun helps the customers
mentioned above to provide value-added telecommunication
information services of 5G. Messaging services include, but are not
limited to, granting to the customers as mentioned above 1) access
to Zhangxun’s Short Message and 5G Multimedia Message platforms; 2)
an access code issued by the Ministry of Industry and Information
Technology to adopt the above services, and 3) the
telecommunication gateways of the three major Chinese mobile
operators to allow data to flow from one discrete network to
another.
Product updates: 1) Datasea continues to upgrade the 5G
message marketing cloud platform to meet with customers in
different industries: a. During the reporting period, the Company
provided 5G MMS/SMS services for large-scale Internet services
enterprise customers such as Hubei Kuanyun and Jiangxi Zhouwang and
generated revenue; b. Meanwhile, Datasea developed ZTO Express 5G
messaging application in the logistics industry; and also c.
Expanded the 5G messaging business to food and beverage service
market. For example, the Company developed 5G messaging services
for Hangzhou Aila Catering Co., Ltd. (a company managing a total of
more than 70 restaurants across China including Hangzhou, Nanjing,
and other cities). The business combines 5G messaging, SMS, video
messaging, AI voice and telephone to reach and interact with
customers while providing functions like smart payment solutions.
Datasea’s 5G message marketing platform proved its great potential
to be applied in industries with marketing needs.
2) Otherwise, three new modules have been added in the 5G message
marketing cloud platform: a. All-in-one integrated messaging cloud
platform with access to all types of messages such as SMS, video
SMS, 5G messages, APP system notifications, WeChat message
notifications, DingTalk message notifications, smart voice calls,
etc., and can be combined and used according to user needs while
reducing costs and increasing efficiency; b. Middle office
Operation: industry-specific SOP library, precise operation plan,
general material library, etc., so that users can quickly get
started with private domain operations with efficiency; c. Digital
employees: RPA+NLP technology realizes automated private domain
operations.
Marketing and sales
expansion: 1) The Company continues to strengthen its marketing
and sales team. The sales team of Hangzhou Zhangxun has increased
to 14 people in this quarter, while the team of Shuhai Beijing has
established a 5G message sales team of 3 people, which will
continue to expand in the future. In addition, we
continue to expand the marketing to key customers in the 5G
messaging market. The core subsidiaries of Datasea, including
Shenzhen Jingwei and Heilongjiang Xunrui, began to focus on
promotion and acquire local key customers, hoping to improve the
Company's 5G messaging business influence, and eventually acquire
customers and generate revenue.
Industry
recognition: 1) Since April 2021, Hangzhou Zhangxun and YTO
National Engineering Laboratory are in agreement to jointly promote
the formulation of 5G messaging standards for the express delivery
industry. During Q1, we have completed the drafting of the
above-mentioned industry standards for the express delivery
industry and have submitted it to the China Express Association
(VEA)for approval. Once this industry standard is passed, it will
be a milestone for 5G messaging to empower the express delivery
industry and promote the formulation of 5G messaging standards for
the express delivery industry. 2) In September 2021,
Datasea was awarded third place in the 4th National "Blooming Cup"
5G Application Competition, which is an industry business
application competition. With the theme of "New 5G Messaging
Formats, New Development of Industry Convergence", the 5G Messaging
business application competition aims to showcase the achievements
of 5G Messaging, promote the commercial applications, and guide
many industries to use 5G Messaging to improve functionalities and
services. Since the start of the competition in July 2021, a total
of 400 applications joined the contest, covering various fields
such as government affairs, education, medical care, travel,
express delivery, media, cultural tourism, finance, and
consumption, from which 90 projects were selected through the
preliminary competition. In the semi-finals, 20 projects joined the
finals. The finalists presented the project's product solutions,
capabilities, innovations, and commercial value through
presentation and Q&A. After the fierce competition, Datasea's
5G messaging solution of ZTO in express delivery was awarded third
place, another recognition from the experts in the
industry.
3. Smart payment business
Our smart payment service adopts face recognition and big data
analysis technology to provide customers with comprehensive
contactless payment and settlement services. At the same time,
smart payment, as a functional module, provides online settlement
and payment services for the e-commerce platform of the Company's
smart city solutions for residential communities, and provides
support for the ongoing school projects and support for the
development of value-added services of the company's 5G messaging
business. It can enhance the overall service ecosystem composed of
various systems and products of the Company and strengthen the
connection between products. The Company has initially formed the
"intelligent security ecology".
Going
Concern
The accompanying unaudited condensed consolidated financial
statements were prepared assuming the Company will continue as
a going concern, which contemplates continuity of operations,
realization of assets, and liquidation of liabilities in the normal
course of business. For the three months ended September 30, 2021
and 2020, the Company had a net loss of approximately $1.44 million
and $0.87 million, respectively. The Company had an accumulated
deficit of approximately $13.50 million as of September 30, 2021,
and negative cash flow from operating activities of approximately
$1.40 million and $0.91 million for the three months ended
September 30, 2021 and 2020, respectively. The historical operating
results indicate the Company has recurring losses from operations
which raise the question related to the Company’s ability to
continue as a going concern. There can be no assurance the Company
will become profitable or obtain necessary financing for its
business or that it will be able to continue in business. The
unaudited condensed consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties. On July 20, 2021, the Company sold 2,436,904 shares
of common stock at $3.48 per share. The net proceeds from the
transactions were approximately $7,640,000, after deducting
offering costs, which mitigates the liquidity concern and the
initial doubt about the Company’s ability to continue as a going
concern. In addition, the company's continued promotion of the
customers and revenues increase brought about by the 5G messaging
business will also provide a stable cash flow guarantee for the
company's subsequent development to a large extent.
If deemed necessary, management could raise additional funds by way
of private or public offerings, or by obtaining loans from banks or
others, to support the Company’s research and development
(“R&D”), procurement, marketing and daily operation. While
management of the Company believes in the viability of its strategy
to generate sufficient revenues and its ability to raise additional
funds on reasonable terms and conditions, there can be no
assurances to that effect. The ability of the Company to
continue as a going concern depends upon the Company’s ability to
further implement its business plan and generate sufficient revenue
and its ability to raise additional funds by way of a public or
private offering. There can be no assurance the Company will be
successful in any future fund raising.
Results of Operations
Comparison of the three months ended September 30, 2021 and
2020
The following table sets forth the results of our operations for
the three months ended September 30, 2021 and 2020, respectively,
indicated as a percentage of net sales. Certain columns may not add
up due to rounding.
|
|
2021 |
|
|
% of
Revenues |
|
|
2020 |
|
|
% of
Revenues |
|
Revenues |
|
$ |
671,130 |
|
|
|
|
|
|
$ |
9,055 |
|
|
|
|
|
Cost of goods
sold |
|
|
607,535 |
|
|
|
91 |
% |
|
|
16,899 |
|
|
|
187 |
% |
Gross profit (loss) |
|
|
63,595 |
|
|
|
9 |
% |
|
|
(7,844 |
) |
|
|
(87 |
)% |
Selling expenses |
|
|
230,799 |
|
|
|
34 |
% |
|
|
54,065 |
|
|
|
597 |
% |
Research and development |
|
|
287,216 |
|
|
|
43 |
% |
|
|
194,726 |
|
|
|
2,150 |
% |
General and
administrative expenses |
|
|
1,119,471 |
|
|
|
167 |
% |
|
|
619,436 |
|
|
|
6,841 |
% |
Total operating expenses |
|
|
1,637,486 |
|
|
|
244 |
% |
|
|
868,227 |
|
|
|
9,588 |
% |
Loss from operations |
|
|
(1,573,891 |
) |
|
|
(235 |
)% |
|
|
(876,071 |
) |
|
|
(9,675 |
)% |
Non-operating
income, net |
|
|
20,557 |
|
|
|
3 |
% |
|
|
9,248 |
|
|
|
102 |
% |
Loss before
income taxes |
|
|
(1,553,334 |
) |
|
|
(231 |
)% |
|
|
(866,823 |
) |
|
|
(9,573 |
)% |
Income tax
expense |
|
|
- |
|
|
|
- |
% |
|
|
- |
|
|
|
- |
% |
Loss before noncontrolling
interest |
|
|
(1,553,334 |
) |
|
|
(231 |
)% |
|
|
(866,823 |
) |
|
|
(9,573 |
)% |
Less: loss
attributable to noncontrolling interest |
|
|
(112,100 |
) |
|
|
(17 |
)% |
|
|
- |
|
|
|
- |
% |
Net loss to the
Company |
|
$ |
(1,441,234 |
) |
|
|
(214 |
)% |
|
|
(866,823 |
) |
|
|
(9,573 |
)% |
Revenues
We had revenues of $671,130 and $9,055 for the three months ended
September 30, 2021 and 2020, respectively. For the three months
ended in September 30, 2021, revenues mainly consisted of providing
short-messaging and 5G multi-media video and messaging technology
and system platform to one customer for its messaging marketing
needs, the service fee is charged based on number of messages sent.
For the three months ended in September 30, 2020, revenues mainly
consisted of sales of face recognition terminals and related
devices to schools and residential communities in China.
The increase in revenue was majorly due to the expansion of the
Company’s business towards 5G messaging in fiscal year 2021. We
believe that our business development is on track and it is
supported by a strong product portfolio recognized by the
market.
Advance from customers
The Company obtained cash prepayment for 5G messaging products and
service and intelligence products sale of $251,990 and $189,527 as
of September 30, 2021 and June 30 2021.
In September 2021, Hangzhou Shuhai Zhangxun and Hubei Kuanyun
Network Technology Co., Ltd. signed a cooperation agreement on SMS
business sales, with a contract amount of approximately $4.33
million (RMB 28 million).
In September 2021, Hangzhou Shuhai Zhangxun and Quantum
Communication (Beijing) Technology Co., Ltd. signed the cooperation
agreement on SMS service sales, with the contract amount of
approximately $3.87 million (RMB 25 million).
In addition, as a significant post-term matter, Guozhong Haoze
signed a strategical agreement with Eastcom Smart Chain (Beijing)
Network Technology Co., Ltd. to provide smart systems and services
for Canteens and restaurants in at least 200 schools and
institutions in the next two years, with a total contract amount of
not less than US$14,758,359 (RMB 95,339,000).
During October 2021, Hangzhou Zhangxun SMS business generated sales
revenue of US$787,617 (RMB 5,095,885), including US$576,271 (RMB
3,728,475) from Hubei Kuanyun Network Technology Co., LTD and
US$211,346(RMB 1,367,410) from Quantum Information technology
(Beijing) Co., LTD.
Cost of Goods Sold
We recorded $607,535 and $16,899 cost of goods sold for the three
months ended September 30, 2021 and 2020, respectively. For the
three months ended September 30, 2021, the cost of goods sold was
mainly for the SMS service platform fee to suppliers. For the three
months ended September 30, 2020, the cost of goods sold was the
inventory purchase cost for the products sold.
Gross Profit (Loss)
Gross profit for the three months ended September 30, 2021 was
$63,595 compared to gross loss of $7,844 for the three months ended
September 30, 2020, respectively. The increase in gross profit was
mainly due to the delivery of short-messaging and 5G multi-media
video and messaging technology and system platform in 2021.
Selling, General and Administrative, and Research and
Development Expenses
Selling expenses were $230,799 and $54,065 for the three months
ended September 30, 2021 and 2020, respectively; an increase of
$176,734 or 327%. The increase was mainly due to increased payroll
expense of salespersons by $77,800, increased technology service
see by $89,900 and increased social insurance expense by
$10,060.
Currently, we are focusing on the development of products and
software (" R&D ") to assist schools and communities in
addressing safety issues and public health issues during the
pandemic, expanding the company's leading acoustic intelligent
application technologies and products, and continuing to develop
5G-related applications. We incurred R&D expenses of $287,216
and $194,726 during the three months ended September 30, 2021 and
2020, respectively. We intend to invest approximately $10 million
in technological product development over the next three
years.
General and administration (“G&A”) expenses increased $500,035,
or 81% from $619,436 during the three months ended September 30,
2020 to $1,119,471 during the three months ended September 30,
2021. The increases were attributed to increases in rental expenses
by $79,300, increased payroll expenses by $78,700, increased
professional fees by $274,200, increased utility fee by $10,300,
increased meal and entertainment expense by $60,900.
Non-operating Income (expenses), net
Non-operating income was $20,557 and $9,248 for the three months
ended September 30, 2021 and 2020, respectively. For the three
months ended September 30, 2021, we had interest income $20,534 and
other income $23. For the three months ended September 30, 2020, we
had interest income $1,596 and other income $7,652.
Net Loss
We generated net losses of $1,553,334 and $866,823 for the three
months ended September 30, 2021 and 2020, respectively, mainly due
to the reasons explained above.
In the new fiscal year, the company will continue to improve the
market expansion of its main business, based on existing contracts
including smart campuses/canteen systems, smart community systems,
5G messaging, and the market launch of acoustic smart hardware
products, etc., to expand revenue sources and increase Revenue
scale. We will strive to achieve annual profit in the new fiscal
year.
Liquidity and Capital Resources
We have funded our operations to date primarily through the sales
of our common stock and shareholder loans. Our management
recognizes that we must generate sales and additional cash
resources for our Company to continue our operations. Given the
market space for the industry chain brought by the booming
development of 5G technology in China, the broad prospects of the
company's acoustic intelligent technology and products, and the
increasing demand for Public safety and COVID-19 prevention and
control in different scenarios in China, as well as increased
demand for our smart community, safe Campus, smart Payments and
other initiatives, our management believes our business has the
potential to continue to grow.
We expect to generate revenue through expanding our current smart
city, 5G message and acoustic intelligence, and through continuous
product innovation and development as well as various types of
value-added services. In order to maintain working capital
sufficient to support our operations and finance the future growth
of 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, such additional cash resources may not be
available to us on desirable terms, or at all, if and when needed
by us. We will also generate cash flow through cash income and
government subsidies to support future operations.
As of September 30, 2021, we had working capital of $3,931,526 or a
current ratio of 2.14:1. Our current assets were $7,393,969. As of
June 30, 2021, we had a working capital deficit of $2,372,682 or a
current ratio of 0.27:1. Our current assets were $885,985.
We expect the company to continue to support its ongoing operations
and financing through revenue growth and increased financing
activities in business areas such as 5G messaging. However, there
is no assurance that the Company will be able to secure such
additional working capital on commercially viable terms or at
all.
The following is a summary of cash provided by or used in each of
the indicated types of activities during the three months ended
September 30, 2021 and 2020, respectively.
|
|
2021 |
|
|
2020 |
|
Net cash used in operating
activities |
|
$ |
(1,399,969 |
) |
|
$ |
(909,530 |
) |
Net cash used in investing
activities |
|
$ |
(9,156 |
) |
|
$ |
(52,139 |
) |
Net cash provided by financing
activities |
|
$ |
7,172,459 |
|
|
$ |
- |
|
Cash
Flow from Operating Activities
Net cash used in operating activities was $1,399,969 during
the three months ended September 30, 2021, compared to net cash
used in operating activities of $909,530 during the three months
ended September 30, 2020, an increase of cash outflow by $490,439.
The increase in cash outflow was mainly due to 1) increased net
loss by $686,511 but offset by non-cash adjustments including
depreciation expense and stock compensation expense of $282,423,
and 2) increased cash outflow on accounts receivable by $908,034;
these increase in cash outflow were partly offset by 1) increased
cash inflow from accounts payable by $595,527, 2) increased cash
inflow from advance from customers by $63,345, 3) increased cash
inflow from accrued expenses and other payables by $95,437, and 4)
decreased cash outflow from VAT prepayment by $32,306.
Cash Flow from Investing Activities
Net cash used in investing activities totaled $9,156 for the three
months ended September 30, 2021, which primarily was for cash
paid for the acquisition of office furniture and equipment. Net
cash used in investing activities totaled $52,139 for the three
months ended September 30, 2020, which primarily related to
cash paid for the acquisition of office furniture and equipment and
leasehold improvements of $43,838, and for intangible assets of
$8,301.
Cash Flow from Financing Activities
Net cash provided by financing activities was $7,172,459 during the
three months ended September 30, 2021, which was the net proceeds
from sale of our common stock through an equity financing of
$7,681,796, but offset by decrease in due to related parties of
$11,712 and repayment of loans payable of $497,625. Net cash used
in financing activities was $0 during the three months ended
September 30, 2020.
Going
forward
The Company has been focusing on the long-term establishment of
leading advantages of high technology, high talent and large market
sales system through technological development and strategy
deployment, helping the Company to achieve sustainable development
and unlock enormous potential in our brands. From the combination
of visual perception technology and artificial intelligence big
data technology at the very beginning, our products were active in
identification and analysis, and effectively conduct intervention
to do safety management, change the traditional passive monitoring
to proactive prevention and create the comprehensive smart city
services. Since then, we have seen that the integration of multiple
sensing technologies can enhance the effectiveness of smart city
solutions and enhance the applicability of products, and the
Company has strategically started to develop and integrate acoustic
intelligent technologies. At present, Datasea Acoustic Intelligent
Technology has achieved stage 1.0, and has achieved certain results
in the market application demonstration, indicating that Datasea
has the ability to implement the acoustic intelligent landing
project in the field of visual and non-perceptual fusion
perception. It is expected that in the first quarter of fiscal year
2022, the company will jointly release a White Paper on the
Development and Technology Application of Acoustic Intelligent
Industry with the National industry standards department, The
Information and Communication Institute, in Hangzhou. In the white
paper, the status and trend of the acoustic intelligence industry
are sorted out and elaborated, which can better point out the
direction for the development of the acoustic industry of the
company, and also help the company establish its acoustic
intelligence strategy and leading position in the industry.
Furthermore, combined with the common and similar underlying
technologies , the Company decided to tap into 5G messaging and
smart payment markets. In the future development, each sector will
not only contribute to Company’s profits independently, but also
work together to reinforcing company’s offerings, which can assist
company to achieve sustainable development , form the "smart city
ecology" and unlock enormous potential in our brands.
Looking into the future, the company's management is working hard
to improve the strategic planning, strengthen the company's core
business, improve the business model; expand the company's
operating revenue and improve profitability; minimize its overhead
and reduce its operating losses; and re-position the Company’s core
business to a rapid and sustainable development as follows:
1. technology and intellectual property rights, acoustic
intelligence technology: (a) in our independent research and
development on the basis of the core algorithm and precision of
sensor, continue to work with Shenzhen Advanced Research Institute
of Chinese Academy of Sciences, Institute of Acoustics, Nanjing
University and other research institutes to carry out various top
design, further continuous development and innovation, to maintain
the leading position of technological competition. (b) In terms of
value-added services such as 5G messaging, develop and design
multiple application scenarios and multi-functional application
systems such as finance, political information and power based on
express delivery and logistics, catering, cultural and tourist
attractions and e-commerce, etc. (c) Increase the patents of core
technologies independently developed by us, and do a good job in
the distribution, registration and protection of intellectual
property rights such as patents and trademarks of technologies and
products at home and abroad, and do a good job in technology export
management.
2. In terms of products, we lead the development of national
application standards such as acoustic intelligence and 5G
messaging. Through our independent research and development and OEM
production, we will launch a series of acoustic intelligent
products, including chips, sensors, acoustic health care, acoustic
medical cosmetology, acoustic detection, acoustic agriculture, and
infrasound safety detection product system.
3, Market sales aspects: continue to use our big data precision
marketing system and the internal cause and affordable marketing
incentive and reward mechanism and external cooperation into system
sales strategies and methods, to attract and supplement the
execution of the excellent sales team, the business at home and
abroad, to increase revenue, expand product market share.
4. Management and talent: Our company will develop and implement
two integrated resource management and control modes, namely,
collectivized strategic management and control and matrix
management of regional headquarters and division. Adhere to the
international talent strategy.
5. Mergers & Acquisition: Through our targeted financing plan,
we will target mature 5G application companies and excellent
acoustic intelligent subdivision companies to rapidly improve the
overall strength and operating income scale of the company.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
This item is not applicable as we are currently considered a
smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15 of the Securities Exchange Act of 1934,
our principal executive officer and principal financial officer
evaluated our disclosure controls and procedures (as defined in
Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of
1934, as amended) as of the end of the period covered by this
report. Based on this evaluation, our principal executive officer
and principal financial officer concluded that as of the end of the
period covered by this report, the Company’s disclosure controls
and procedures were not effective. This conclusion was reached in
light of the following material weaknesses in internal control over
financial reporting:
(i) inadequate segregation of duties and effective risk
assessment;
(ii) lack of personnel adequately trained in U.S. GAAP; and
(iii) insufficient written policies and procedures for accounting
and financial reporting with respect to the requirements and
application of both U.S. GAAP and SEC guidelines.
In order to remediate the foregoing weaknesses, the Company has
undertaken the following steps:
|
● |
Continuing improve internal control
charts, including, but not limited to, budget approval process,
procurement and assets control, credit control, internal auditing
and a cost accounting, and review of the accounting professional
duties and responsibilities handbook. |
The
company has prepared a compilation of internal control policies.
Policies on internal procurement control, and inventory management
and control to prevent and detect fraud have been put in place.
The
internal control department and the legal department have
established a joint working mechanism to review and spot check the
implementation of the internal control system. Specific measures
include interviews with the heads of relevant departments, and
timely requests of the responsible persons to evaluate risks and
corrective measures.
|
● |
We are hiring financing underwriters to
work with the international department to promote the financing of
the company, strengthen the understanding and screening of
investors backgrounds, and ensure the most suitable financing
methods are chosen. |
|
● |
We are strengthening the joint working
mechanism between internal and external lawyers to effectively
prevent risks. |
In addition, we have adopted internal control policies, including
but not limited to, review of the accounting personnel duties and
responsibilities handbook, a travel allowance policy, a
reimbursement policy, a receivables policy, an asset control
policy, an internal auditing policy and a cost accounting policy.
In addition, we established an internal audit department led by the
director of internal audit, and a legal team to ensure proper
compliance and risk management.
|
● |
To train the related personnel to
execute the internal control policies and procedures; |
|
● |
To summarize the internal control
/audit reports quarterly to the Audit Committee; and |
|
● |
All entities use the same set of
accounting subjects in the financial software from January 1,
2021 |
[We expect to further implement all measures in the fiscal year
ending June 30, 2021.] The remediation efforts set out above are
largely dependent upon our generating more revenue to cover the
costs of implementing the changes required.
Changes in Internal Control over Financial Reporting
Other than as described above, there were no changes in our
internal control over financial reporting during the quarter ending
September 30, 2021 that have materially affected or are reasonably
likely to materially affect, our internal control over financial
reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings and no such
proceedings are known to be contemplated.
ITEM 1A. RISK FACTORS
A smaller reporting company is not required to provide the
information required by this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
DATASEA
INC. |
|
|
|
Date: November 12,
2021 |
By: |
/s/ Zhixin Liu |
|
Name: |
Zhixin Liu |
|
Title: |
Chief Executive
Officer
(principal executive officer) |
Date: November 12, 2021 |
By: |
/s/ Mingzhou Sun |
|
Name: |
Mingzhou
Sun |
|
Title: |
Chief
Financial Officer
(principal financial officer and principal accounting
officer) |
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