The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
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).