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10-K 1 s112591_10k.htm 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2018
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 333-202071
DATASEA INC.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of
incorporation or organization)
1 Xinghuo Rd. Changning Building, Suite 11D2E
Fengtai District, Beijing, People’s Republic of China
(Address of principal executive offices)
45-2019013
(I.R.S. Employer
Identification No.)
215200
(Zip Code)
+86 10-58401996
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ☐ No ☒
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 and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files) Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller
reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
Non-accelerated filer
☐
☐
Accelerated filer
Smaller reporting company
(Do not check if a 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 ☒
The aggregate market value of the shares of common stock outstanding, other than shares held by persons who may be deemed
affiliates of the Registrant, computed by reference to the closing sales price for the Registrant’s common stock on December 29, 2017,
as reported on OTCQB, was $89,459,163.
As of September 13, 2018, 19,170,846 shares of common stock, $0.001 par value per share, were outstanding.
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DATASEA INC.
Annual Report on Form 10-K
For the Fiscal Year Ended June 30, 2018
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements
Item 1. Description of Business
Item 1A.Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosure
PART I
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits, Financial Statement Schedules
PART IV
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All references to “we,” “us,” “our,” “Company,” “Registrant” or similar terms used in this report refer to Datasea Inc., a Nevada
corporation, including its consolidated subsidiaries and variable interest entity (“VIE”), unless the context otherwise indicates.
“PRC” or “China” refers to the People’s Republic of China, excluding, for the purpose of this report, Taiwan, Hong Kong and Macau.
“RMB” or “Renminbi” refers to the legal currency of China and “$”, “US$” or “U.S. Dollars” refers to the legal currency of the
United States.
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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 (some of which may be beyond our control), including:
● uncertainties relating to our ability to establish and operate our business in China;
● our ability to operate our company as a U.S. publicly-reporting and listed enterprise;
● uncertainties relating to general economic and business conditions in China and worldwide;
● 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 pricing policies or that of our competitors;
● unanticipated delays in the development, commercialization or market acceptance of our products and services;
● changes in Chinese government regulations;
● availability, terms and deployment of capital; relationships with third-party equipment suppliers; and
● political stability and economic growth in China.
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Item 1. Description of Business.
Overview
PART I
We are an emerging technology company in China engaged in the development of information technology (or IT) systems and
network security solutions. We primarily focus on IT system security and leverage our proprietary technologies, intellectual property
and market intelligence to provide comprehensive and optimized security solutions to our clients. We have been certified as one of the
High Tech Enterprises (jointly issued by the Beijing Science and Technology Commission, Beijing Finance Bureau, Beijing State
Taxation Bureau and Beijing Local Taxation Bureau) and one of the Zhongguancun High Tech Enterprises (issued by the
Zhongguancun Science Park Administrative Committee) in recognition of our achievement in high technology products. Our cyber
security engineers and experts create, design, build and run various security programs tailored to our clients. Through our professional
team and strong expertise in the system security field, we offer our clients a broad portfolio of system security solutions or services,
along with strategic advice and ongoing management of their security infrastructure.
We have generated very limited revenues to date, and as such we have been shifting our business focus over the past 12
months from cybersecurity to our “Safe Campus” and “Smart Elevator” security and related marketing solutions as described further
below.
In order to provide efficient and targeted marketing services, we have independently developed the “Xin Platform,” an online
platform that can identify potential customers and market products and services to targeted groups based on the data we collect through
our security systems. The Xin Platform also serves as our office to office (or O2O) management platform, which can provide
marketing services to traditional merchants such as supermarkets, hotels, shopping malls and restaurants. It also provides support for
various other security programs that we develop and/or provide, including our “Safe Campus” security system and “Smart Elevator”
security system.
Based on the Xin Platform, coupled with the Internet of Things (or IoT) technology and cloud computing, we developed our
“Safe Campus” system as an advanced and simple solution to campus security, which has been a rising concern in China. Our “Safe
Campus” system consists of student ID card terminals, radio-frequency identification (or RFID readers), campus information
management platform, partner management platform and cellphone application terminals, utilizing technologies such as RFID, global
positioning system (or GPS), location based services (or LBS), and cloud based calculation.
While we have in the past sold and may in the future sell our security solutions as a stand-alone aspect of our business, our
current primary business plan anticipates generating most of our revenues from online and offline marketing services, targeted at users
of our security solutions in China. For example, users of our “Safe Campus” security system will receive advertisements through our
mobile application installed on their smart phones. Advertisements may also be displayed on the hardware of our “Safe Campus”
security system, including on the lanyards of our smart student ID cards. Utilizing our security systems and the data collected from
users of our security systems and our online platform, we will seek to provide targeted, one stop marketing solutions to businesses.
In the elevator security space, our “Smart Elevator” security and management system provides a solution to lower the
operation cost of elevators and promote the safety of passengers. The system will include an emergency and rescue terminal and a data
collection system. Once installed, our terminals will collect data of the elevator’s operation, regular maintenance services, annual
inspections and any malfunctions which enables faster and more efficient error detection and repairs.
We also plan to become a national provider of big data processing services in China. We are in the process of developing
systems to analyze industry trends, market and customer data, supply chain, financial information, risk detection and management.
Recent Developments
On March 15, 2018, we entered into a banking service direct sales cooperation agreement (or the Minsheng Agreement) with
China Minsheng Banking Corp., Ltd, Tianjin Branch (or Minsheng Bank). Pursuant to the Minsheng Agreement, we will establish a
portal on our “Xin Platform” through which the platform users may purchase financial products offered by Minsheng Bank. In
consideration, Minsheng Bank will pay us service fees calculated based on the amount of the financial products the platform users
purchase and hold. For each specific product, the service fee will be calculated according to the following formula:
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T-days service fee = annual rate (0.12%) × the amount of the financial products the platform users maintain as of day (T-1) ×
net value of the financial product ÷ 365
The Minsheng Agreement has a term of two years and will be automatically extended one more year if neither party
terminates the Minsheng Agreement within the last month of the initial two-year term.
On March 19, 2018, we entered into agency agreements with seven stockholders of our company. Pursuant to the agreement,
such stockholders are authorized as agents to market Xin Platform APP in specific areas of China. Each agent is required to pay a Xin
Platform APP usage fee of $764 and deposit $764 in financial products offered by China Minsheng Bank via Xin Platform APP. Each
agent will receive $8 for each customer that applies for a credit card of China Minsheng Bank via Xin Platform APP.
On April 12, 2018, our board of directors and stockholders approved a one-for-three reverse stock split of our issued and
outstanding shares of common stock, which became effective on May 1, 2018, decreasing the number of outstanding shares from
57,511,771 to 19,170,827.
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History
We were incorporated under the laws of the State of Nevada on September 26, 2014 under the name Rose Rock, Inc. On May
26, 2015, we amended our articles of incorporation to change our name to Datasea Inc. Up until October 2015, our primary business
activities have been providing consulting services to various U.S. companies seeking to do business in China as well as Chinese
companies looking to enter the U.S. markets. Nonetheless, we were considered a shell company as defined in Rule 12b-2 under the
Securities Act, as we had no or nominal business operations, employees and/or assets.
On May 26, 2015, pursuant to the terms of a stock purchase agreement, Ms. Zhixin Liu purchased 20,000,000 shares, or
57.14%, of the issued and outstanding shares of our common stock from Mr. Xingzhong Sun, who was our sole officer, director and
majority shareholder at the time of the transaction. As part of the transaction, Zhixin Liu was elected as the Chairperson of our Board
of Directors (the “Board”).
On October 29, 2015, we entered into a share exchange agreement (the “Exchange Agreement”) with Ms. Zhixin Liu and Mr.
Fu Liu, the members (“Members”) of Shuhai Information Skill (HK) Limited (“Shuhai Skill (HK)”), a limited liability company
incorporated under the laws of the Hong Kong Special Administrative Region of the PRC, whereby the Members transferred all of
their membership interests of Shuhai Skill (HK) to us in exchange for the issuance of an aggregate of 20,000,000 shares of our
common stock (the transaction, hereinafter referred to as the “Share Exchange”). Upon consummation of the Share Exchange, Shuhai
Skill (HK) and its consolidated subsidiaries, Tianjin Information Sea Information Technology Co., Ltd., a limited liability company
incorporated under the laws of the PRC (“Tianjin Information”), became our wholly-owned subsidiary, and Shuahi Information
Technology Co., Ltd., also a limited liability company incorporated under the laws of the PRC (“Shuhai Beijing”), through its existing
contractual relationship with Tianjin Information, became our variable interest entity (“VIE”). In addition, Xinzhong Sun resigned from
the positions as our director, President, Secretary and Treasurer. Ms. Liu was appointed as our Chief Executive Officer, President,
Interim Chief Financial Officer, Treasurer and Secretary and Mr. Liu was appointed as a director. Mr. Liu is the father of Ms. Liu.
As a result of the Share Exchange, we, through our consolidated subsidiaries, are engaged in the business of providing Internet
security products, new media advertising, micro-marketing, data analysis services in the PRC. All business operations are conducted
through our wholly-owned subsidiary, Tianjin Information, and through Shuhai Beijing, our VIE. Shuhai Beijing is considered to be a
VIE because we do not have any direct ownership interest in it, but, as a result of a series of contractual agreements (the “VIE
Contractual Agreements”) between Tianjin Information, its wholly-owned subsidiary, Shuhai Beijing and its shareholders, we are able
to exert effective control over Shuhai Beijing and receive 100% of the net profits or net losses derived from the business operations of
Shuhai Beijing. The VIE Contractual Agreements are more fully described below.
VIE Agreements
Operation and Intellectual Property Service Agreement – This agreement allows Tianjin Information to manage and operate
Shuhai Beijing and collect 100% of the net profits of Shuhai Beijing. Under the terms of the Management and Intellectual Property
Service Agreement, Shuhai Beijing entrusts Tianjin Information to manage its operations and provide intellectual property service to
Shuhai Beijing. Tianjin Information owns all intellectual property rights arising from its performance under the Management and
Intellectual Property Service Agreement.
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Shareholders’ Voting Rights Entrustment Agreement – Tianjin Information has entered into a shareholders’ voting rights
entrustment agreement (the “Entrustment Agreement”) under which Zhixin Liu and Fu Liu (collectively the “Shuhai Beijing
Shareholders”) have vested their voting power in Shuhai Beijing with Tianjin Information or its designee(s). The Entrustment
Agreement does not have an expiration date.
Option Agreement – Zhixin Liu and Fu Liu, who together are the sole shareholders of Shuhai Beijing (collectively the “Shuhai
Beijing Shareholders”) and Tianjin Information entered into an exclusive option agreement (the “Option Agreement”), pursuant to
which the Shuhai Beijing Shareholders have granted Tianjin Information or its designee(s) the irrevocable right and option to acquire
all or a portion of such shareholders’ equity interests in Shuhai Beijing. Pursuant to the terms of the agreement, Tianjin Information and
the Shuhai Beijing Shareholders have agreed to certain restrictive covenants to safeguard the rights of Tianjin Information under the
Option Agreement. Tianjin Information may terminate the Exclusive Option Agreement upon prior written notice. The Option
Agreement is valid for a period of 10 years from the effective date.
Equity Pledge Agreement – Tianjin Information and the Shuhai Beijing Shareholders entered into an Equity Pledge Agreement
on October 27, 2015. Pursuant to the Equity Pledge Agreement, Shuhai Beijing Shareholders have pledged all of their equity interests
in Shuhai Beijing to Tianjin Information. The Equity Pledge Agreement serves to guarantee the performance by Shuhai Beijing of its
obligations under the Operation and Intellectual Property Service Agreement. Tianjin Information has the right to collect any and all
dividends paid on the pledged equity interests. Pursuant to the terms of the Equity Pledge Agreement, the Shuhai Beijing Shareholders
have agreed to certain restrictive covenants to safeguard the rights of Tianjin Information. Upon an event of default under the
agreement, Tianjin Information may foreclose on the pledged equity interests.
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Corporate Structure
The chart below depicts the corporate structure of the Company as of the date of this report.
* Harbin Information Sea Information Technology Co., Ltd. is in the process of dissolution due to no operation since its
inception.
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“Safe Campus” Security System
Overview
We are currently focusing our efforts on the promotion of our Shuhai Smart Campus Safety Management System, or “Safe
Campus” security system, which provides a comprehensive campus information platform that is accessible online or via a smartphone
application for teachers, students and their families to enhance the communications between them. Our “Safe Campus” users to date
have included mostly elementary and middle schools, which are our target markets.
The Safe Campus system consists of both hardware products and service platform, including student ID card terminals RFID
readers, campus information management platform, partner management platform and mobile applications on teachers’ and parents’
cellphones, utilizing technologies such as RFID, GPS, LBS, and cloud based calculation. Through our smart student ID cards, schools
can manage the profiles of all teachers and students and send campus-wide notifications. They are also able to grant and manage
authority of teachers on the school platform. Through our platform, teachers are able to communicate with students via messages and
calls; communicate with parents regarding their children; review daily and weekly class schedules; send out assignments and
homework to students; notify parents of any class activities; receive notifications from school and any other school activities; and
publish online education videos.
Through our platform, parents are able to communicate with teachers, locate and track the movement of their children; review
class schedules and check-in record of their children; notify teachers/schools of any absence of their children; and review school news
and online education videos. Parents can also block unauthorized numbers from reaching their children on their ID cards and set access
limits for their children using our smart student ID cards. Our student ID cards automatically alarm parents in the event that their
children enter any limited areas or take off their student ID cards. Through the parent terminals, parents can also purchase stationary,
toys and food for their children in our online student shopping mall. Students are able to check in and out of school using their ID cards
as well as send alarms in case of emergency.
Our student ID cards are worn by students every day. In addition, we estimate three mobile application users per student ID
card (parents, guardians and other family members) and daily use of our mobile application at least twice a day per mobile application
user. Our “Safe Campus” system is expected to generate revenue through advertisement display on student ID cards, all computer
terminals and WeChat platform, and eight rotating banner spots reserved for advertisement publishers in our cellphone application.
Other than advertisement placement, we also plan to generate revenue through (i) fee arrangements with O2O merchants selling
through our online platform to our users; (ii) paid online education services for student users; and (iii) arrangements with financial
institutions to offer financial services through our mobile application and terminals.
As of June 30, 2018, we had approximately 480,000 users on our cellphone application. We continue marketing our products
primarily in key schools in big cities and engaging in negotiations with O2O product and service providers.
Campus Security Background and Potential Market
On-campus security and the safety of children in general is of great importance and has been increasingly gaining attention in
PRC in the recent years. In March 2015, the PRC Office of the Ministry of Public Security and the Office of the Ministry of Education
jointly issued Order No. 168, which provides that schools are obligated to ensure the security on campus and in certain circumstances,
school administrators can be held responsible for major accidents and subject to administrative penalties or criminal penalties. At the
PRC State Conference held on April 12, 2017, the Prime Minister of China emphasized that the measures should be taken to further
ensure the security and risk control system on campus, including installation of on campus security systems.
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According to the 2016-2022 Security Industry Market Prediction and Investment Strategy Analysis Report published by
Prospective Industrial Research Institute, a comprehensive security system for a kindergarten is estimated to cost RMB 50,000 to RMB
200,000 (US$7,500 to US$30,000). Elementary, middle and high schools will cost approximately RMB 500,000 to RMB 1.5 million
per school (US$75,000 to US$225,000). Average colleges and universities can cost between RMB 3 million to RMB 5 million
(US$450,000 to US$755,000), with certain schools reach over RMB 10 million (US$1,506,000). Based on the number of schools in
PRC published by the Ministry of Education in 2016, we believe the potential on-campus security market in China can reach between
RMB 35 billion to RMB 230 billion (US$5 to 35 billion).
Our “Safe Campus” security system targets elementary and middle schools, which accounts for 85% of the entire campus
security market in China and where students are more vulnerable. Our current distribution model prioritizes elementary schools and
schools in the urban areas.
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To date, the “Safe Campus” security system is still in trial period and has not generated any revenues. We expect our “Safe
Campus” security system to generate revenues through advertisements placed on the terminals as well as advertisements displayed on
the online platform. We also expect to generate revenues through the O2O shopping mall, other O2O business (including student meal
and online education program providers), where we will receive 5% of the revenues for business generated through our platform. We
are currently in negotiation with several O2O product and service providers for our platform.
“Smart Elevator” Security and Management System
With our “Smart Elevator” security and management system, we are aiming to provide a solution to lower the operation cost
of elevators and promote the safety of passengers. The system will include an emergency and rescue terminal and a data collection
system. Once installed, our terminals will collect data of the elevator operation, regular maintenance services, annual inspections and
any malfunctions which enables faster and more efficient error detection and repairs. If any irregular data is detected on a particular
elevator by the black box in our terminal, the distant surveillance system will automatically alarm the building and other responsible
parties as a means of preventing major accidents. In case of sudden power loss, our system will immediately start the backup power
and alarm the maintenance team. Our system can also enable passengers to alarm the building management in case of any emergency
and facilitate their communication throughout the entire rescue process.
Through our Xin Platform, our “Smart Elevator” system also has the ability to locate the nearest maintenance crew and notify
him/her of the emergency through text messages.
We plan to launch our “Smart Elevator” system once we complete our testing. We expect to complete testing by the end of
2018 and enter the market in 2019. Once launched, we expect to generate revenue through advertisements displayed on our system on
the elevators as well as targeted marketing of elevator maintenance services once any potential safety concern is detected.
“Big Data” Processing Services
We also aim to become a national provider of big data processing services in China’s education industry. Currently, we are in
the process of developing systems to analyze industry trends, market and customer data, supply chain, financial information, risk
detection and management. We believe such processing services will be of use to businesses in a wide range of industries. In order to
have the technical capacity to provide such services, our research and development process has two phases: data collection and data
analysis. Through our “Safe Campus” platform, we obtain raw data on students, parents, teachers and schools. Since 2017, we have
focused on collecting data from these platform end users to establish our database. We completed screening and cleaning the data by
storing them into various categories based on marketplace needs in June 2018. We are in the process of analyzing the data by using
mathematical formulas or algorithms to identify relationships among the variables, such as correlation or causation, and in particular, to
investigate the behavioral tendencies of the students, parents, teachers and school administrations. Our goal is by the end of 2018 to
have a clean and robust database on students, parents, teachers and schools and to have a deeper plan of collection and application in
connection with our “Safe Campus” products. As of the date of this report, we are in the data collection phase.
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Cybersecurity System and Equipment
We offer cybersecurity solution based on our Xin Platform to provide cybersecurity and online surveillance services by
recording activities of the terminal users, including application/software usages and access to certain individualized websites and
software. It can also limit access to software and websites of the terminal users. Our cybersecurity system meets the technical standards
prescribed by the Ministry of Public Security of the PRC but also aims to satisfy market demands for commercial cybersecurity
products. We have developed three types of indoor equipment designed for facilities of different sizes and one type of outdoor
equipment primarily for use by local branches of the Ministry of Public Security. In January 2016, we secured a government
procurement contract with the Bureau of Public Security of Daqing City in Heilongjiang Province, pursuant to which we installed
wireless internet terminal collection equipment and 3G wireless network cards, as well as provided training services related to the use
of the equipment. The project was completed and accepted by the customer in the quarter ended December 31, 2016, generating
$140,774 of revenue during year ended June 30, 2017. Because of the relatively low profit margin of our cybersecurity program, our
business focus has shifted over the past 12 months from cybersecurity systems to our “Safe Campus “and “Smart Elevator” and related
marketing programs. Our management has decided not to actively promote or internally advance our cybersecurity project for the time
being. However, we are still maintaining our developed market and our products and may resume marketing activities for our
cybersecurity system if market conditions are favorable.
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Internet Service Provider Connecting Service
We have the technical capacity to provide ISP connecting service and also obtained the Value-Added Telecommunication
Business Operating License in August 2015 from the PRC government to provide ISP connecting service. The major target consumers
of ISP connecting services are merchants and public institutions that are users of Internet security equipment.
Competitive Strengths
We believe that our quality control and marketing teams have core management experience in technology programs such as
IDC and ISP. Unlike most of the security systems provided by our competitors, our “Safe Campus” security system offers
comprehensive logins and user friendly interfaces and allow communication between schools, teachers, parents and students. Our
“Smart Elevator” security and management system is in line with the Guidelines on Elevator Emergency Response Platform
Development promulgated by the PRC General Administration of Quality Supervision, Inspection and Quarantine in April 2014.
Growth Strategy
We plan to vigorously market our “Safe Campus” system and “Smart Elevator” systems through different channels such as
charities, industry conferences and forums, online platforms and social media such as Weibo and free trials. Our plan anticipates that
with the increase in user base of our security solutions, we will generate revenues from advertising placements on our platforms and
hardware as well as revenue sharing with other product and service providers utilizing our platforms.
Additionally, we hope to become a national provider of big data processing services in the PRC. To this end, we are
developing systems to analyze industry trends, market and customer data, supply chain, financial information, risk detection and
management. Such processing services can be used by businesses in a wide range of industries. In order to have the technical capacity
to provide such service, our research and development process has two phases: data collection and data analysis. As the user base of
our security solutions increase, we will have access to more data to support the development of our big data processing service.
Research and Development
Our research and development effort is focused on developing new hardware and software and on enhancing and improving
our existing products and services. Our engineering team has deep networking and security expertise and works closely with end-
customers to identify their current and future needs. We believe that innovation and timely development of new features and products
is essential to meeting the needs of our end-customer and improving our competitive position. We test our products thoroughly to
certify and ensure their quality and interoperability with third-party hardware and software products.
For the fiscal year ended June 30, 2018 and 2017, our research and development expenses were approximately $361,616 and
$203,600. We plan to continue to invest in resources to conduct our research and development efforts.
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Product Manufacturing
For cost savings purposes, we have outsourced the manufacture of hardware for our “Safe Campus” program to Shenzhen
Yanze Technology Co., Ltd. (“Yanze”), a third party located in Guangdong Province. We have entered into three product purchase
agreements – one dated September 6, 2016 and two dated April 1, 2017, respectively (collectively the “Yanze Agreement”). Pursuant
to the Yanze Agreement, we agreed to purchase 4s electronic student cards, attendance machines and point-of-sale machines. We also
agreed to pay 30% of the total price upon the execution of such agreement and another 70% within 10 days upon Yanze’s request when
the products are ready. Yanze has the obligation to deliver the products within 30 days upon the receipt of first payment and meet the
technical standards set forth by us and offers a warranty of 13 months.
Historically, we outsourced the production of Internet security equipment to Shenzhen Shunxin Technology Co., Ltd.
(“Shunxin”), a third-party entity in Guangdong Province, China. Shunxin has a permit issued by the Ministry of Public Security for
manufacturing Internet security products. We entered into a framework agreement dated October 12, 2015, pursuant to which we
authorized Shunxin to use our trademark and logo on its Internet security equipment that meets both the standard issued by the PRC
Public Security Bureau and requirements set by us. If the demands for our products increase in the future, we would need to negotiate
agreements with new manufacturing contractors or build our own manufacturing facilities to meet increasing customer demands for our
equipment. There has been no further substantive action taken by Shunxin or us under such letter of intent.
We are exploring corporative opportunities with other manufacturers and may change our suppliers from time to time.
Marketing
We currently focus on the marketing of our “Safe Campus” security program. We promote our products and services through
both traditional and new media marketing channels. We are partnering with various organizations, including China Council for the
Promotion of National Trade, the Next Generation Foundation and other charitable foundations focused on the welfare of children to
promote our “Safe Campus” system. We are in the process of establishing a nationwide distribution network consisting of agents in
different regions for our “Safe Campus” security system and also plan to utilize social media, online commercials, industry forums and
trade conferences to market the “Safe Campus” system. As of the date of this report, we have signed agreements with 30 schools in 10
provinces covering approximately 9,000 students, to use our “Safe Campus” program.
In addition, we maintain 12 full-time employees who focus on sales and marketing efforts relating to the promotion of our
products and services. The marketing employees arrange for advertising events and prepare corporate literature for distribution to
promote our products and services. By leveraging our technological expertise in new media marketing, we also target our potential
customers through the social media application WeChat and our own Xin Platform.
Customers
During the years ended June 30, 2018 and 2017, 85.1% and 100% of our revenue was generated through our historical
cybersecurity business under a government procurement contract with the Bureau of Public Security of Daqing City in Heilongjiang
Province, China, respectively.
Competition
For our campus security solutions, we compete with Guozeweiye Technology and Culture Co., Ltd., Shanghai Woqi
Information Technoloy Co., Ltd., Shenzhen Youjiao Software Co., Ltd., all of which offer their own campus electronic management
solutions.
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The cybersecurity industry in the PRC is highly competitive. With the rapid development of the Internet over the past two
decades, new cybersecurity technology has been continuously developing and new cybersecurity products have been continuously
entering the market. We have several competitors in both the cybersecurity equipment and new media advertising markets. In this area,
our three largest competitors in China are Guangzhou Xunqi Digital Technology Co., Ltd., Shenzhen RenZixing Network Technology
Co., Ltd. and Zhuhai Jilangling Network Technology Co., Ltd. Our competitors in the ISP connecting service market are primarily
China Telecom and China Unicom, both are state own enterprises with over 70% market share collectively.
We also generally compete with Dalian Aoyuan Electronic Co., Ltd. which offers cloud based calculation and related services
as well as Zhongyuan Intelligence Technology Co., Ltd., which offers life recognition, internet, big data, smart office and security
systems.
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Intellectual Property
We currently hold a broad collection of intellectual property rights relating to certain aspects of our software and
services. This includes patents, software copyrights and trademarks in China. Although we believe the ownership of such intellectual
property rights is an important factor in our business and that our success does depend in part on such ownership, we rely primarily on
the innovative skills, technical competence and marketing abilities of our personnel.
As of the date of this report, we have obtained 20 copyright registrations in China for our software, including Shuhai
Information Platform Internet Behavior Auditing Security Management System, Shuhai Information Micro Mall System, Shuhai
Information Platform Micro Marketing System, Shuhai Media Advertising System, Shuhai Information Platform 3G Web Content
Management System, Shuhai Information Platform SMS Platform System, Shuhai Information Platform Wireless Terminal
Characteristic Collection Management System, Shuhai Safe Campus Security Management System v2.0, Shuhai Safe Campus
Terminal – Security Management System v2.0, Shuhai Xin Platform Smart Elevator Detection Terminal Control System v2.0, Shuhai
Xin Platform Smart Elevator Detect and Alarm Management Platform v2.0, Shuhai Xin Platform Smart Elevator Real Time
Surveillance and Alarm Management Platform v2.0, Shuhai Xin Platform Smart Elevator Display Equipment Control System v2.0,
Shuhai Xin Platform Intelligent Advertisement Placement System v.2.0, Shuhai Information Smart Safe Campus Management System
v1.0, Shuhai Information Platform Security Management System (IOS Version) v2.2.1, Shuhai Information Platform Security
Management System (Android Version) v2.2.1, Shuhai Information College Big-data Innovative Laboratory Platform v1.0, Shuhai
Information Administrative Affairs Big-data Smart Decision-making Platform v1.0, and Shuhai Information Smart Campus
Information Management Platform v1.0.
In addition, we have also obtained 3 patents in China. These patents relate to mobile device configuration based on different
conditions, and a smart photo-taking assistance system on mobile devices.
We own the Chinese registered trademark for our Xin Platform.
Readers are advised that there may be patents issued or pending that are held by others and cover significant parts of our
products or services, which may hinder our ability to obtain intellectual property protection for some of our products and services.
Government Regulation; Licenses
Our operations are subject to and affected by PRC laws and regulations. The primary governmental regulation regulating the
Internet security equipment industry in the PRC is the Cybersecurity Law, which governs entities providing “critical information
infrastructure.” This statute provides basic protections for Internet users, such as not selling individual’s data to other companies
without the user’s permission and not knowingly distributing malware. This law at present is only in draft form, but is expected to be
adopted in the near future. Major PRC regulations applicable to our products and services and the Internet security industry include
Computer Information System Security Specific Product Testing and Sales License Management Method (Ministry of Public Security
Order No. 32) (“Order 32”) and Internet Security Protection Technology Measures Provision (Ministry of Public Security Order No.
82) (“Order 82”). Order 32 sets forth the license requirement for Internet security products providers and related approval procedures
of license applications. Order 82 specifies certain security measures Internet service providers shall take to ensure Internet security.
Providers of ISP connecting service and Internet-based data processing service are within the scope of Order 82.
The primary governmental regulations applicable to our “Safe Campus” system are (i) Security Management Regulations on
Kindergartens, Elementary Schools, Middle Schools and High Schools promulgated by the Ministry of Education which requires the
school management to comply with its specific requirements; (ii) The Twelfth Five Year Plan of National Education XI promulgated by
the Ministry of Education in 2012 urging schools to increase investment in key areas and weak links, and constantly improve school
information, modernization, and enhance the development of education system; (iii) “Notice from the Ministry of Education and Other
Nine Ministries and Commissions on Accelerating the Advancement of Educational Information on a Number of Key Work “
(Teaching [2012]); (iv) Ministry of Public Security, General Office of the Ministry of Public Security (2015) No. 168 “On the Issuance
of Security Regulations of Kindergartens, Elementary Schools, Middle Schools and High Schools (Trial) Notice” which allows the
installation of electronic surveillance systems on campus; (v) Office of the State Council Education Steering Committee (National
Education Supervision letter [2016] No. 22) “On the Implementation of the Campus Bullying Prevention Governance;” and (vi)
“Opinions of the General Office of the State Council on Strengthening the Construction of Safety Risk Prevention and Control System
for Kindergartens, Elementary Schools, Middle Schools and High Schools (Trial) Notice ” (Guo Ban Fa [2017] No. 35).
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The primary governmental regulations applicable to our “Smart Elevator” system is the “AQSIQ on the Promotion of Elevator
Emergency Service Platform Construction Guidance” (State Quality Inspection [2014] No. 433) which requires the establishment of
elevator emergency service platform.
Shuhai Beijing currently maintains the following licenses issued by the PRC government:
● Business License issued by Beijing Municipal Industry and Commerce Administration;
● Beijing Statistics Registration Certificate issuing by Beijing Municipal Bureau of Statistics;
● Zhongguancun High Tech Enterprises Certificate issued by Zhongguancun Science Park Administrative Committee; and
● Value-Added Telecommunications Business Operating License issued by Ministry of Industry and Information Technology.
Employees
As of the date of this report, we have a total of 51 full time employees. The following table sets forth the number of our
employees categorized by function as of that date:
Function
Management
Marketing and Sales
Research & Development
Human Resource
Finance & Accounting
Operations
Administrative
Legal
Capital Market Strategy
Corporate Strategy Planning
Total
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Total Number
of Employees
2
12
17
3
3
6
4
1
2
1
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Item 1A. Risk Factors
An investment in our common stock is very speculative and involves a high degree of risk. You should carefully consider the
following risk factors in evaluating our business before purchasing any shares of our common stock. No purchase of our common stock
should be made by any person who is not in a position to lose the entire amount of his or her investment. The order of the following risk
factors is presented arbitrarily. You should not conclude the significance of a risk factor because of the order of presentation. Our
business and operations could be seriously harmed as a result of any of these risks.
Risks Relating to Our Business and Industry
We are an early stage company with a very limited operating history as a developer of Internet security solutions and products, new
media advertising and data processing services. Our limited operating history may not provide an adequate basis to judge our future
prospects and results of operations.
We have a very limited operating history. Our operating entity, Shuhai Beijing, was formed in February 2015 and has yet to
generate material revenues and it may not generate material revenue or any profit for the foreseeable future. We are still in the process
of developing, marketing and expansion of our business. We expect that our new media advertising, micro marketing and big data
processing services supported by our security solutions will be our core business and main revenue producing sectors in the future. We
have limited experience and operating history in developing and marketing our products and services. In addition, the market for our
products and services is highly competitive. If we fail to successfully develop and offer our products and services in an increasingly
competitive market, we may not be able to capture the potential growth opportunities associated with our products and services or
recover our development and marketing costs, and our future results of operations and growth strategies could be adversely affected.
Our limited history may not provide a meaningful basis for investors to evaluate our business, financial performance and prospects.
Our independent registered public accounting firm’s auditors’ report includes an explanatory paragraph stating that there is
substantial doubt about our ability to continue as a going concern.
We are an early and development stage company and have limited financial resources. We had cash balances of $1,031, 486
and $1,174,950 as of June 30, 2018 and June 30, 2017, respectively. We have generated revenues of $10,571 during the year ended
June 30, 2018, and had a deficit of approximately $4,124,000 at June 30, 2018. Our independent registered public accounting firm
included an explanatory paragraph in its audit opinion on our financial statements as of and for the year ended June 30, 2018 that states
that our current financial position and losses from operations raise substantial doubt about our ability to continue as a going concern.
Our current resources and source of funds primarily consist of loans and capital contributions from shareholders and funds
raised from equity financing. We believe these are sufficient to keep our business operations functioning for the next twelve months.
We have generated little revenues from our business, and our expenses will be accrued until sufficient financing is obtained or our
shareholders loan us the necessary funds to pay for these expenses. No assurances can be given that we will be able to obtain funds
from our shareholders or others to continue our operations. We may need to seek additional financing. The financing sought may be in
the form of equity or debt financing or a combination of both from various sources as yet unidentified. No assurances can be given that
we will generate sufficient revenue or obtain the necessary financing to continue as a going concern and the failure to do so could
cause us to cease our operations.
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Supply chain issues, including financial problems of contract manufacturers or component suppliers, or a shortage of adequate
component supply or manufacturing capacity that increased our costs or caused a delay in our ability to fulfill orders, could have
an adverse impact on our business and operating results, and our failure to estimate customer demand properly may result in
excess or obsolete component supply, which could adversely affect our gross margins.
Currently, we do not own or operate our manufacturing facilities but instead rely on a third party contractor to manufacturer
our products, and we expect that we will continue to rely on existing and new contractual manufacturers for the foreseeable future.
Such reliance could have adverse impact on the supply of our products and on our business and operating results:
● Any financial problems of either contract manufacturers or component suppliers could either limit supply or increase costs;
● Reservation of manufacturing capacity at our contract manufacturers by other companies, inside or outside of our industry,
could either limit supply or increase costs; and
● Industry consolidation occurring within one or more component supplier markets could limit supply or increase costs.
In addition, the following supply chain-related issues could adversely affect our customer relationship, operating results and
financial condition:
● a reduction or interruption in supply of one or more components;
● a significant increase in the price of one or more components;
● a failure to adequately authorize procurement of inventory by our contract manufacturers; and
● a failure to appropriately cancel, reschedule or adjust our requirements based on our business needs.
Over the long term, we intend to invest in engineering, sales, service and marketing activities, and these investments may achieve
delayed, or lower than expected, benefits which could harm our operating results.
While we intend to focus on managing our costs and expenses, over the long term, we also intend to invest in personnel and
other resources related to our engineering, sales, service and marketing functions as we realign and dedicate resources on key growth
areas, such as Internet security products and services. We are likely to recognize the costs and expenses associated with these
investments earlier than some of the anticipated benefits, and the return on these investments may be lower, or may develop more
slowly, than we expect. If we do not achieve the benefits anticipated from these investments, or if the achievement of these benefits is
delayed, our operating results may be adversely affected.
Our business substantially depends upon the continued growth of the internet and internet-based systems.
A substantial portion of our business and revenue depends on growth and evolution of the Internet in the PRC and globally,
including the continued development of the Internet. To the extent that an economic slowdown or economic uncertainty and any related
reductions in capital spending adversely affect spending on Internet infrastructure, we could experience material harm to our business,
operating results and financial condition.
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Because of the rapid introduction of new products and changing customer requirements related to matters such as cost-
effectiveness and security, we believe that there could be performance problems with Internet communications in the future, which
could receive a high degree of publicity and visibility. Because Internet security equipment is our major product, our business,
operating results and financial condition may be materially adversely affected, regardless of whether or not these problems are due to
the performance of our own products. Such an event could also result in a material adverse effect on the market price of our common
stock independent of direct effects on our business.
Product quality problems could lead to reduced revenue, gross margins, and net income.
The Internet security equipment we provide is highly complex as the products incorporate both hardware and software
technologies. Neither we nor our contract manufacturer have developed a sophisticated product testing program. There can be no
assurance that the pre-shipment testing programs we develop in the future will be adequate to detect all defects, including defects in
individual products or defects affecting numerous shipments. Such potential defects might interfere with customer satisfaction, reduce
sales opportunities or affect gross margins. As an example, software typically contains bugs that can unexpectedly interfere with
expected operations. From time to time, we will have to replace certain components and provide remediation in response to the
discovery of defects or bugs in our products. There can be no assurance that such remediation, depending on the product involved,
would not have a material impact. An inability to cure a product defect could result in the failure of a product line, temporary or
permanent withdrawal from a product or market, damage to our reputation, inventory costs, or product reengineering expenses, any of
which could have material impact on our revenue, margins and net income.
Because of the capital-intensive nature of our business, we will likely have to incur indebtedness or issue new equity securities. If
we are not able to obtain additional capital, our ability to operate or expand our business may be impaired and our results of
operations could be adversely affected.
Our business requires significant levels of capital to finance the research and development of new products and service
platforms that meet the constantly evolving industry standards and consumer demands. As such, we expect that we will need additional
capital to fund our future growth. We currently primarily depend on loans and capital contributions from our founders, Ms. Zhixin Liu
and Mr. Fu Liu, who currently serve as our only officers and directors. If cash from such available sources is insufficient or
unavailable, or if cash is used for unanticipated needs, we may require additional capital sooner than anticipated. Our ability to obtain
additional capital on acceptable terms or at all is subject to a variety of uncertainties, including:
● investors’ perceptions of, and demand for, companies operating in China;
● conditions of the U.S. and other capital markets in which we may seek to raise funds;
● our future results of operations, financial condition and cash flows;
● governmental regulation of foreign investment in China;
● economic, political and other conditions in the United States, China and other countries; and
● governmental policies relating to foreign currency borrowings.
The sale of additional equity securities would result in dilution of our existing shareholders. In addition, the incurrence of
indebtedness would result in increased debt service obligations and could result in operating and financial covenants that would restrict
our operations. It is highly uncertain whether financing will be available in amounts or on terms acceptable to us, if at all.
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Our success is dependent on retaining key personnel who would be difficult to replace.
Our success depends largely on the continued services of our key management and technical staff. In particular, our success
depends on the continued efforts of Ms. Zhixin Liu, our Chairman of the Board of Directors, Chief Executive Officer, Interim Chief
Financial Officer, Treasurer and Secretary, and Mr. Fu Liu, our director. Ms. Liu and Mr. Liu (who are daughter and father) have been
instrumental in developing our business model and are crucial to our business development. There can be no assurance that they will
continue in their present capacities for any particular period of time. The loss of the services of Ms. Liu and Mr. Liu could materially
and adversely affect our business development.
The various service industries we are in are characterized by constant and rapid technological change and evolving standards. If we
fail to anticipate and adapt to these changes and evolutions, our sales, gross margins and profitability will be adversely affected.
Technologies change rapidly in the security solution, new media advertising, micro marketing and data processing industries
with frequent new product and service developments and evolving industry standards. Companies operating within these industries are
continuously developing new products and services with heightened performance and functionality, putting pricing pressure on existing
products. Accordingly, we believe that our future success will depend on our ability to continue to anticipate technological changes and
to offer additional products and service opportunities that meet evolving standards on a timely and cost-effective basis. Our failure to
accurately anticipate the introduction of new technologies or adapt to changes in the industry could lead to our having significant
amounts of obsolete inventory that can only be sold at substantially lower prices and profit margins than anticipated. In addition, if we
are unable to develop planned new technologies, we may be unable to compete effectively due to our failure to offer products or
services most demanded by the marketplace. Products and services that our competitors develop or introduce may also render our
products and services noncompetitive or obsolete. If any of these failures occur, our business and results of operations would be
adversely affected.
We may face heightened competition from existing mature competitors as well as new entrants into the security equipment and
service industries in which we compete within the PRC. If we are unable to compete effectively, we may lose customers and our
financial results will be negatively affected.
The security and marketing industries in the PRC are highly competitive. Currently, Shuhai Beijing’s primary competitors for
security solutions and ISP connecting services are mature companies with longer operating histories, more engineering resources,
relatively sophisticated distribution channels and existing customer bases. For our campus and elevator security solutions, we compete
with others who also offer their own campus electronic management solutions and elevator emergency service systems. Further, there
are new competitors entering our industries. As a result, we could experience difficulties in obtaining customers, capturing market
share, and generating revenue from our major products and services.
We depend on contract manufacturers, and our production and products could be harmed if they are unable to meet our volume
and quality requirements and alternative sources are not available.
We rely on third party contract manufacturers to agreements provide manufacturing services for our products. If these services
become unavailable, we would be required to identify and enter into agreements with a new contract manufacturers or take the
manufacturing in-house. The loss of our contract manufacturers could significantly disrupt production as well as increase the cost of
production. These changes could have a material adverse effect on our business and results of operations.
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Our “Safe Campus” and “Smart Elevator” programs may not be accepted by the intended users of our products, which could harm
our future financial performance.
There can be no assurance that our “Safe Campus” and “Smart Elevator” systems will achieve wide acceptance by our
intended users. The degree of market acceptance for products and services based on our technology will also depend upon a number of
factors, including the establishment and demonstration of the ability of our proposed solutions to provide an acceptable level of
security in an efficient manner. Long-term market acceptance of our products and services will depend, in part, on the capabilities and
operating features of our products and technologies as compared to those of other available products and services. As a result, there can
be no assurance that currently available products, or products under development for commercialization, will be able to achieve market
penetration, revenue growth or profitability.
Changes to existing regulations may present technical, regulatory and economic barriers to the provision of our product, which
may significantly increase our costs and adversely affect the results of our operations.
The cybersecurity industry in China is highly regulated by the PRC Ministry of Public Security. In particular, Computer
Information System Security Specific Product Testing and Sales License Management Method (Ministry of Public Security Order No.
32) sets forth the technical standards for Internet security products as well as the procedures for applying for and maintaining permits
for selling such products. The PRC Ministry of Public Security might change the regulatory framework or impose higher technical
standards in the future. As a result, we would have to incur extra costs in connection with engaging new technical staff, improving our
existing products, and renewing our permit.
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The legal requirements associated with being a public company, including those contained in and issued under the Sarbanes-Oxley
Act, may make it difficult for us to retain or attract qualified officers and directors, which could adversely affect the management of
our business and our ability to maintain listing of our common stock.
We may be unable to attract and retain qualified officers and directors required to provide for our effective management
because of the rules and regulations that govern publicly listed companies, including, but not limited to, certifications by principal
executive officers. Currently, none of our officers or directors have experience in operating a U.S. public company. Moreover, the
actual and perceived personal risks associated with compliance with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and
other public company requirements may deter qualified individuals from accepting roles as directors and executive officers. At present,
we do not maintain an independent board and do not have any board members who would meet the independence requirements of the
various exchanges. Further, the requirements for board or committee membership, particularly with respect to an individual’s
independence and level of experience in finance and accounting matters, may make it difficult to attract and retain qualified board
members going forward. If we are unable to attract and retain qualified officers and directors, the management of our business and our
ability to retain the listing of our common stock on any stock exchange or quotation system could be adversely affected.
If we fail to establish and maintain an effective system of internal controls, we may not be able to report our financial results
accurately or prevent fraud. Any inability to report and file our financial results accurately and timely could harm our business
and adversely impact the trading price of our common stock.
We are required to establish and maintain internal controls over financial reporting, disclosure controls and to comply with
other requirements of the Sarbanes-Oxley Act and the rules promulgated by the U.S. Securities and Exchange Commission (the
“SEC”) thereunder. Our senior management, which currently consists solely of Ms. Zhixin Liu, cannot guarantee that our internal
controls and disclosure controls will prevent all possible errors or all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design
of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs.
Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Further, controls can be
circumvented by individual acts of some persons, by collusion of two or more persons, or by management’s override of the controls.
The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may
become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Because
of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
We may be unable to complete our analysis of our internal controls over financial reporting in a timely manner, or these internal
controls may not be determined to be effective, which may adversely affect investor confidence in our Company and, as a result, the
value of our common stock.
We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by our management on, among
other things, the effectiveness of our internal control over financial reporting for the first fiscal year ending June 30, 2018. This
assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over
financial reporting.
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We are in the very early stages of the costly and challenging process of compiling a system and processing documentation
necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and
any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses
in our internal control over financial reporting, we will be unable to assert that our internal controls are effective.
If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public
accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the
accuracy and completeness of our financial reports, which would cause the price of our common stock shares to decline, and we may
be subject to investigation or sanctions by the SEC.
We will also be required to disclose changes made in our internal control and procedures on a quarterly basis. However, our
independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over
financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC,
or the date we are no longer an “emerging growth company” as defined in the recently enacted JOBS Act (as defined below), if we take
advantage (as we expect to do) of the exemptions contained in the JOBS Act. We will remain an “emerging growth company” for up to
five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30
before that time and subject to other conditions being met, we would cease to be an “emerging growth company” as of the following
December 31.
Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control
over financial reporting until the later of the year following our first annual report required to be filed with the SEC or the date we are
no longer an “emerging growth company.” At such time, our independent registered public accounting firm may issue a report that is
adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation
efforts may not enable us to avoid a material weakness in the future. Any of the foregoing occurrences, should they come to pass, could
negatively impact the public perception of our company, which could have a negative impact on our stock price.
Our compliance with complicated U.S. regulations concerning corporate governance and public disclosure will result in additional
expenses. Moreover, our ability to comply with all applicable laws, rules and regulations is uncertain given our management’s
relative inexperience with operating U.S. public companies.
As a new public company, we will be faced with expensive, complicated and evolving disclosure, governance and compliance
laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and the
Dodd–Frank Wall Street Reform and Consumer Protection Act. New or changing laws, regulations and standards are subject to varying
interpretations in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new
guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters
and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with
evolving laws, regulations and standards of a U.S. public company are likely to continue to result in increased general and
administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
Moreover, our executive officers have little experience in operating a U.S. public company, which makes our ability to comply
with applicable laws, rules and regulations uncertain. Our failure to comply with all laws, rules and regulations applicable to U.S.
public companies could subject us or our management to regulatory scrutiny or sanction, which could harm our reputation and stock
price.
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Risks Relating to the Our Corporate Structure
Our corporate structure, in particular, our “VIE Contractual Agreements are subject to significant risks, as set forth in the
following risk factors.
We are a holding company that depends on cash flow from Shuhai Skill (HK), its subsidiary and Shuhai Beijing to meet our
obligations.
After the consummation of the Share Exchange, we became a holding company with no material assets other than the stock of
Shuhai Skill (HK). Accordingly, all of our operations are conducted through Shuhai Skill (HK), its direct subsidiary Tianjin
Information and its variable interest entity Shuhai Beijing. We currently expect that the earnings and cash flow of our subsidiaries will
primarily be retained and used in their operations.
We depend upon the VIE Contractual Agreements in conducting our business in the PRC, which may not be as effective as direct
ownership.
Our affiliation with Shuhai Beijing is managed through the VIE Contractual Agreements, which agreements may not be as
effective in providing us with control over Shuhai Beijing as direct ownership. The VIE Contractual Agreements are governed by and
would be interpreted in accordance with the PRC laws. They also provide for the resolution of disputes through arbitration pursuant to
PRC laws. If Shuhai Beijing fails to perform the obligations under the VIE Contractual Agreements, we may have to rely on legal
remedies under the PRC law, including seeking specific performance or injunctive relief, and claiming damages. There is a risk that we
may be unable to obtain any of these remedies. The legal environment in China is not as developed as in other jurisdictions. As a
result, uncertainties in the PRC legal system could limit our ability to enforce the VIE Contractual Agreements.
We may not be able to consolidate the financial results of some of our affiliated companies or such consolidation could materially
adversely affect our operating results and financial condition.
All of our business is conducted through Shuhai Beijing, which currently is considered a VIE for accounting purposes, and we
are considered the primary beneficiary, thus enabling us to consolidate our financial results in our consolidated financial statements. In
the event that in the future a company we hold as a VIE no longer meets the definition of a VIE, or we are deemed not to be the
primary beneficiary, we would not be able to consolidate line by line that entity’s financial results in our consolidated financial
statements for reporting purposes. Also, if in the future an affiliate company becomes a VIE and we become the primary beneficiary,
we would be required to consolidate that entity’s financial results in our consolidated financial statements for reporting purposes. If
such entity’s financial results were negative, this could have a corresponding negative impact on our operating results for reporting
purposes.
Because we rely on the Operation and Intellectual Property Service Agreement with Shuhai Beijing for our revenue, the
termination of this agreement would severely and detrimentally affect our continuing business viability under our current corporate
structure.
We are a holding company and all of our business operations are conducted through the VIE Contractual Agreements. As a
result, our revenues rely on dividend payments from Tianjin Information after it receives payments from Shuhai Beijing pursuant to the
Operation and Intellectual Property Service Agreement. Shuhai Beijing may terminate the Operation and Intellectual Property Service
Agreement without cause. Because neither we, nor our subsidiaries, own equity interests of Shuhai Beijing, the termination of the
Operation and Intellectual Property Service Agreement would sever our ability to continue receiving payments from Shuhai Beijing
under our current holding company structure. While we are currently not aware of any event or reason that may cause the Operation
and Intellectual Property Service Agreement to terminate, we cannot assure you that such an event or reason will not occur in the
future. In the event that the Operation and Intellectual Property Service Agreement is terminated, this may have a severe and
detrimental effect on our continuing business viability under our current corporate structure, which, in turn, may affect the value of
your investment.
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Contractual arrangements entered into by our subsidiary and our PRC operating affiliate may be subject to scrutiny by the PRC tax
authorities. Such scrutiny may lead to additional tax liability and fines, which would hinder our ability to achieve or maintain
profitability.
Under PRC law, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax
authorities. If any of the transactions entered into by our subsidiary and our PRC operating affiliate are found not to have been
conducted on an arm’s-length basis or to result in an unreasonable reduction in tax under PRC law, the PRC tax authorities have the
authority to disallow tax savings, adjust the profits and losses of our respective PRC entities and assess late payment interest and
penalties.
We conduct our business through Shuhai Beijing by means of contractual arrangements. If the PRC courts or administrative
authorities determine that these contractual arrangements do not comply with applicable regulations, we could be subject to severe
penalties and our business could be adversely affected. In addition, changes in such Chinese laws and regulations may materially
and adversely affect our business.
There are uncertainties regarding the interpretation and application of PRC laws, rules and regulations, including but not
limited to the laws, rules and regulations governing the validity and enforcement of the contractual arrangements between Tianjin
Shuhai and Shuhai Beijing. Although we have been advised by our PRC counsel, Zhongyin Law Offices, that based on their
understanding of the current PRC laws, rules and regulations, the structure for operating our business in China (including our corporate
structure and contractual arrangements with Shuhai Beijing and its stockholders) comply with all applicable PRC laws, rules and
regulations, and do not violate, breach, contravene or otherwise conflict with any applicable PRC laws, rules or regulations, the PRC
courts or regulatory authorities may determine that our corporate structure and contractual arrangements violate PRC laws, rules or
regulations. We are aware of a case involving Chinachem Financial Services where certain contractual arrangements for a Hong Kong
Company to gain economic control over a PRC Company were declared to be void by the PRC Supreme People’s Court. If the PRC
courts or regulatory authorities determine that our contractual arrangements are in violation of applicable PRC laws, rules or
regulations, our contractual arrangements will become invalid or unenforceable.
If any of our PRC entities or their ownership structure or the contractual arrangements are determined to be in violation of any
existing or future PRC laws, rules or regulations, or any of our PRC entities fail to obtain or maintain any of the required governmental
permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:
● revoking the business and operating licenses;
● discontinuing or restricting the operations;
● imposing conditions or requirements with which the PRC entities may not be able to comply;
● requiring us and our PRC entities to restructure the relevant ownership structure or operations;
● restricting or prohibiting our use of the proceeds from this offering to finance our business and operations in China; or
● imposing fines.
The imposition of any of these penalties would severely disrupt our ability to conduct business and have a material adverse
effect on our financial condition, results of operations and prospects.
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On or around September 2011, various media sources reported that the China Securities Regulatory Commission (the
“CSRC”) had prepared a report proposing pre-approval by a competent central government authority of offshore listings by China-
based companies with variable interest entity structures, such as ours, that operate in industry sectors subject to foreign investment
restrictions. However, it is unclear whether the CSRC officially issued or submitted such a report to a higher level government
authority or what any such report provides, or whether any new PRC laws or regulations relating to variable interest entity structures
will be adopted or what they would provide. If our ownership structure, contractual arrangements or businesses of Shuhai Beijing are
found to be in violation of any existing or future PRC laws or regulations, the relevant governmental authorities, including the CSRC,
would have broad discretion in dealing with such violation, including levying fines, confiscating our income or the income of Shuhai
Beijing, revoking the business licenses or operating licenses of Shuhai Beijing, discontinuing or placing restrictions or onerous
conditions on our operations, requiring us to undergo a costly and disruptive restructuring, restricting or prohibiting our use of proceeds
from this offering to finance our business and operations in China, and taking other regulatory or enforcement actions that could be
harmful to our business. Any of these actions could cause significant disruption to our business operations and severely damage our
reputation, which would in turn materially and adversely affect our business, financial condition and results of operations.
The draft Foreign Investment Law proposes sweeping changes to the PRC foreign investment legal regime and will likely to have a
significant impact on businesses in China controlled by foreign invested enterprises primarily through contractual arrangements,
such as our business.
On January 19, 2015, the PRC Ministry of Finance (“MOFCOM”) published a draft of the PRC Law on Foreign Investment
(Draft for Comment), or the Foreign Investment Law, which is open for public comments until February 17, 2015. At the same time,
MOFCOM published an accompanying explanatory note of the draft Foreign Investment Law, or the Explanatory Note, which contains
important information about the draft Foreign Investment Law, including its drafting philosophy and principles, main content, plans to
transition to the new legal regime and treatment of business in China controlled by foreign invested enterprises, or FIEs, primarily
through contractual arrangements. The draft Foreign Investment Law is intended to replace the current foreign investment legal regime
consisting of three laws: the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise
Law and the Wholly Foreign-Invested Enterprise Law, as well as detailed implementing rules. The draft Foreign Investment Law
proposes significant changes to the PRC foreign investment legal regime and may have a material impact on Chinese companies listed
or to be listed overseas. The proposed Foreign Investment Law is to regulate FIEs the same way as PRC domestic entities, except for
those FIEs that operate in industries deemed to be either “restricted” or “prohibited” in a “Negative List.” Because the Negative List
has yet to be published, it is unclear whether it will differ from the current list of industries subject to restrictions or prohibitions on
foreign investment (including our industry). The draft Foreign Investment Law also provides that only FIEs operating in industries on
the Negative List will require entry clearance and other approvals that are not required of PRC domestic entities. As a result of the
entry clearance and approvals, certain FIE’s operating in industries on the Negative List may not be able to continue to conduct their
operations through contractual arrangements.
The specifics of the draft Foreign Investment Law’s application to variable entity structures have yet to be proposed, but it is
anticipated that the draft Foreign Investment Law will regulate variable interest entities. MOFCOM suggests both registration and
approval as potential options for the regulation of variable entity structures, depending on whether they are “Chinese” or “foreign-
controlled.” One of the core concepts of the draft Foreign Investment Law is “de facto control,” which emphasizes substance over form
in determining whether an entity is “Chinese” or “foreign-controlled.” This determination requires considering the nature of the
investors that exercise control over the entity. “Chinese investors” are natural persons who are Chinese nationals, Chinese government
agencies and any domestic enterprise controlled by Chinese nationals or government agencies. “Foreign investors” are foreign citizens,
foreign governments, international organizations and entities controlled by foreign citizens and entities. We are majority controlled by
Mr. and Ms. Liu, both of whom are PRC nationals, therefore, it increases the likelihood that our company may be deemed “Chinese”
controlled. In its current form, the draft Foreign Investment Law will make it difficult for foreign financial investors, including private
equity and venture capital firms, to obtain a controlling interest of a Chinese enterprise in a foreign restricted industry. However, under
the proposed new law, we may no longer need to hold interests in our operating affiliate through contractual arrangements and may be
able to have control through direct equity ownership.
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There is substantial uncertainty regarding the draft Foreign Investment Law, including, among others, what the actual content
of the law will be as well as the adoption timeline or effective date of the final form of the law. While such uncertainty exists, we
cannot determine whether the new foreign investment law, when it is adopted and becomes effective, will not have a material positive
or negative impact on our corporate structure and business.
The contractual agreements that we have with our PRC operating affiliate may be determined to be a mechanism to circumvent the
restriction of foreign ownership of a business in the PRC, and therefore could be determined to be unenforceable because they are
against public policy.
We do not have a direct ownership interest in Shuhai Beijing, our PRC operating affiliate. Instead, through a series of
contractual arrangements entered into between Shuhai Beijing and our subsidiary, Tianjin Information, we are able to: (i) exert
effective control over our PRC operating affiliate; (ii) receive substantially all of the economic benefits derived from the business
operations of our PRC operating affiliate; and (iii) have an exclusive option to purchase all or part of the equity interests in our PRC
operating affiliate. Notwithstanding the foregoing, there is a risk that these contractual agreements between Shuhai Beijing and our
subsidiary, Tianjin Information, may be determined by a government agency in the PRC to be a mechanism to circumvent the
restrictions on foreign ownership of a PRC business and therefore could be determined to be unenforceable because they are against
public policy in the PRC. If the agreements were determined to be void as against public policy, we would have no right to the
economic benefits from the operations of our PRC affiliate and we would have no other means of generating revenue.
If any of our affiliated entities becomes the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and
enjoy assets held by such entity, which could materially and adversely affect our business, financial condition and results of
operations.
We currently conduct our operations in China through contractual arrangements with our affiliated entities. As part of these
arrangements, substantially all of our assets that are important to the operation of our business are held by our affiliated entities. If any
of these entities goes bankrupt and all or part of their assets become subject to liens or rights of third-party creditors, we may be unable
to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and
results of operations. If any of our affiliated entities undergoes a voluntary or involuntary liquidation proceeding, its equity owner or
unrelated third-party creditors may claim rights relating to some or all of these assets, which would hinder our ability to operate our
business and could materially and adversely affect our business, our ability to generate revenue and the market price of our common
stock.
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Risks Associated With Doing Business in China
Changes in the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the
PRC and the profitability of our business.
The PRC’s economy is in a transition from a planned economy to a market oriented economy subject to five-year and annual
plans adopted by the government that set national economic development goals. Policies of the PRC government can have significant
effects on the economic conditions within the PRC. The PRC government has confirmed that economic development will follow the
model of a market economy. Under this direction, we believe that the PRC will continue to strengthen its economic and trading
relationships with foreign countries and business development in the PRC will follow market forces. While we believe that this trend
will continue, there can be no assurance that this will be the case. A change in policies by the PRC government could adversely affect
our interests by, among other factors: changes in laws, regulations or the interpretation thereof, confiscatory taxation, restrictions on
currency conversion, imports or sources of supplies, or the expropriation or nationalization of private enterprises. Although the PRC
government has been pursuing economic reform policies for more than two decades, there is no assurance that the government will
continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership,
social or political disruption, or other circumstances affecting the PRC’s political, economic and social environment.
A slowdown or other adverse developments in the PRC economy may harm our customers and the demand for our services and our
products.
All of our operations are conducted in the PRC. Although the PRC economy has grown significantly in recent years, there is
no assurance that this growth will continue. A slowdown in overall economic growth, an economic downturn, a recession or other
adverse economic developments in the PRC could significantly reduce the demand for our product and services.
If relations between the United States and China worsen, investors may be unwilling to hold or buy our stock and our stock price
may decrease.
At various times during recent years, the United States and China have had significant disagreements over political and
economic issues. Controversies may arise in the future between these two countries that may affect our economic outlook both in the
United States and in China. Any political or trade controversies between the United States and China, whether or not directly related to
our business, could reduce the price of our common stock.
Future inflation in China may inhibit the profitability of our business in China.
In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. Rapid economic
growth can lead to growth in the money supply and rising inflation. If prices for our services and products rise at a rate that is
insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. These factors have led to
the adoption by Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or
regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit
and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our services
and products.
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The fluctuation of the Renminbi may have a material adverse effect on your investment.
The change in value of the Renminbi against the U.S. dollar and other currencies is affected by, various factors, such as
changes in China’s political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of
pegging the value of the Renminbi to the U.S. dollar. Under such policy, the Renminbi was permitted to fluctuate within a narrow and
managed band against a basket of certain foreign currencies. Later on, the People’s Bank of China has decided to further implement the
reform of the RMB exchange regime and to enhance the flexibility of RMB exchange rates. Such changes in policy have resulted in a
significant appreciation of the Renminbi against the U.S. dollar since 2005. There remains significant international pressure on the
PRC government to adopt a more flexible currency policy, which could result in a further and more significant adjustment of the
Renminbi against the U.S. dollar.
Any significant appreciation or revaluation of the Renminbi may have a material adverse effect on the value of, and any
dividends payable on, shares of our common stock in foreign currency terms. More specifically, if we decide to convert our Renminbi
into U.S. dollars, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available
to us. To the extent that we need to convert U.S. dollars we receive from our initial public offering into Renminbi for our operations,
appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the
conversion. In addition, appreciation or depreciation in the exchange rate of the Renminbi to the U.S. dollar could materially and
adversely affect the price of shares of our common stock in U.S. dollars without giving effect to any underlying change in our business
or results of operations.
Restrictions on currency exchange may limit our ability to receive and use our revenue effectively.
Substantially all of our revenue is denominated in Renminbi. As a result, restrictions on currency exchange may limit our
ability to use revenue generated in Renminbi to fund any business activities we may have outside China in the future or to make
dividend payments to our shareholders in U.S. dollars. Under current PRC laws and regulations, Renminbi is freely convertible for
current account items, such as trade and service-related foreign exchange transactions and dividend distributions. However, Renminbi
is not freely convertible for direct investment or loans or investments in securities outside China, unless such use is approved by SAFE.
For example, foreign exchange transactions under our subsidiary’s capital account, including principal payments in respect of foreign
currency-denominated obligations, remain subject to significant foreign exchange controls and the approval requirement of SAFE.
These limitations could affect our ability to obtain foreign exchange for capital expenditures.
Our subsidiaries and affiliated entities in China are subject to restrictions on making dividends and other payments to us.
We are a holding company and rely principally on dividends paid by our subsidiary in China for our cash needs, including
paying dividends and other cash distributions to our shareholders to the extent we choose to do so, servicing any debt we may incur
and paying our operating expenses. Shuhai Skill (HK)’s income in turn depends on the service fees paid by our affiliated entities.
Current PRC regulations permit our subsidiary in China to pay dividends to us only out of its accumulated profits, if any, determined in
accordance with Chinese accounting standards and regulations. Under the applicable requirements of PRC law, Shuhai Skill (HK) may
only distribute dividends after it has made allowances to fund certain statutory reserves. These reserves are not distributable as cash
dividends. In addition, at the end of each fiscal year, our school as a private school in China is required to allocate a certain amount to
its development fund for the construction or maintenance of the school properties or purchase or upgrade of school facilities. In
addition, if our subsidiaries or our affiliated entities in China incur debt on their own behalf in the future, the instruments governing the
debt may restrict their ability to pay dividends or make other payments to us. Any such restrictions may materially affect such entities’
ability to make dividends or make payments, in service fees or otherwise, to us, which may materially and adversely affect our
business, financial condition and results of operations.
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We must comply with the Foreign Corrupt Practices Act.
We are required to comply with the United States Foreign Corrupt Practices Act, which prohibits U.S. companies from
engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign
companies, including some of our competitors, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and
other fraudulent practices occur from time-to-time in mainland China. If our competitors engage in these practices, they may receive
preferential treatment from personnel of other companies or government agencies, giving our competitors an advantage in securing
business or from government officials who might give them priority in obtaining new licenses, which would put us at a
disadvantage. Although we inform our personnel that such practices are illegal, we cannot assure you that our employees or other
agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have
engaged in such practices, we could suffer severe penalties.
Uncertainties with respect to the PRC legal system could have a material adverse effect on us.
The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions in
a civil law system may be cited as reference but have limited precedential value. Since 1979, newly introduced PRC laws and
regulations have significantly enhanced the protections of interest relating to foreign investments in China. However, since these laws
and regulations are relatively new and the PRC legal system continues to evolve rapidly, the interpretations of such laws and
regulations may not always be consistent, and enforcement of these laws and regulations involves significant uncertainties, any of
which could limit the available legal protections.
In addition, the PRC administrative and judicial authorities have significant discretion in interpreting, implementing or
enforcing statutory rules and contractual terms, and it may be more difficult to predict the outcome of administrative and judicial
proceedings and the level of legal protection we may enjoy in the PRC than under some more developed legal systems. These
uncertainties may affect our decisions on the policies and actions to be taken to comply with PRC laws and regulations, and may affect
our ability to enforce our contractual or tort rights. In addition, the regulatory uncertainties may be exploited through unmerited legal
actions or threats in an attempt to extract payments or benefits from us. Such uncertainties may therefore increase our operating
expenses and costs, and materially and adversely affect our business and results of operations.
The PRC’s legal and judicial system may not adequately protect our business and operations and the rights of foreign investors.
The PRC legal and judicial system may negatively impact foreign investors. In 1982, the National People’s Congress amended
the Constitution of China to authorize foreign investment and guarantee the “lawful rights and interests” of foreign investors in the
PRC. However, the PRC’s system of laws is not yet comprehensive. The legal and judicial systems in the PRC are still rudimentary,
and enforcement of existing laws is inconsistent. As a result, it may be impossible to obtain swift and equitable enforcement of laws
that do exist, or to obtain enforcement of the judgment of one court by a court of another jurisdiction. The PRC’s legal system is based
on the civil law regime, that is, it is based on written statutes. A decision by one judge does not set a legal precedent that is required to
be followed by judges in other cases. In addition, the interpretation of Chinese laws may be varied to reflect domestic political changes.
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The promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may
adversely affect foreign investors. There can be no assurance that a change in leadership, social or political disruption, or unforeseen
circumstances affecting the PRC’s political, economic or social life, will not affect the PRC government’s ability to continue to support
and pursue these reforms. Such a shift could have a material adverse effect on our business and prospects.
Because our principal assets are located outside of the United States and all of our directors and officers reside outside the United
States, it may be difficult for you to enforce your rights based on U.S. federal securities laws against us and our officers and
directors in the U.S. or to enforce a U.S. court judgment against us or them in the PRC.
Our directors and officers reside outside the United States. In addition, our operating subsidiaries are located in the PRC and
substantially all of their assets are located outside of the United States. It may therefore be difficult for investors in the United States to
enforce their legal rights against us based on the civil liability provisions of the U.S. federal securities laws against us in the courts of
either the U.S. or the PRC and, even if civil judgments are obtained in U.S. courts, it may be difficult to enforce such judgments in
PRC courts. Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective
enforcement of criminal penalties against us or our officers and directors under the U.S. federal securities laws or otherwise.
We may be required to obtain prior approval of the China Securities Regulatory Commission, or CSRC, of the listing and trading of
our common stock.
On August 8, 2006, six PRC regulatory authorities, including the MOFCOM, the State Assets Supervision and Administration
Commission, the State Administration of Taxation, State Administration for Industry and Commerce of PRC, or SAIC, CSRC and
SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules.
This regulation, among other things, requires that the listing and trading on an overseas stock exchange of securities in an offshore
special purpose vehicle formed for purposes of holding direct or indirect equity interests in PRC companies and controlled directly or
indirectly by PRC companies or individuals be approved by the CSRC. On September 21, 2006, the CSRC published on its official
website the procedures for such approval process. In particular, certain documents are required to be filed with the CSRC as part of the
approval procedures and it could take several months to complete the approval process.
While the implementation and interpretation of the M&A Rules remains unclear, we believe, based on the advice of our PRC
counsel, that approval by the CSRC is not required because we are not a special purpose vehicle formed or controlled by PRC
companies or PRC individuals as defined under the M&A Rules. However, we cannot assure you that the relevant PRC regulatory
authorities, including the CSRC, would reach the same conclusion as our PRC counsel. If the CSRC or other PRC regulatory authority
subsequently determines that we need to obtain the CSRC’s approval for this resale registration, we may face sanctions by the CSRC or
other PRC regulatory authorities. In such event, these regulatory authorities may, among other things, impose fines and penalties on or
otherwise restrict our operations in the PRC or delay or restrict any remittance of the proceeds from this resale registration into the
PRC. Any such or other actions taken could have a material adverse effect on our business, financial condition, results of operations,
reputation and prospects, and the trading price of our common stock.
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Certain PRC regulations, including the M&A Rules and national security regulations, may require a complicated review and
approval process which could make it more difficult for us to pursue growth through acquisitions in China.
The M&A Rules established additional procedures and requirements that could make merger and acquisition activities in
China by foreign investors more time-consuming and complex. For example, the MOFCOM must be notified in the event a foreign
investor takes control of a PRC domestic enterprise. In addition, certain acquisitions of domestic companies by offshore companies that
are related to or affiliated with the same entities or individuals of the domestic companies, are subject to approval by the MOFCOM. In
addition, the Implementing Rules Concerning Security Review on Mergers and Acquisitions by Foreign Investors of Domestic
Enterprises, issued by the MOFCOM in August 2011, require that mergers and acquisitions by foreign investors in “any industry with
national security concerns” be subject to national security review by the MOFCOM. In addition, any activities attempting to
circumvent such review process, including structuring the transaction through a proxy or contractual control arrangement, are strictly
prohibited.
There is significant uncertainty regarding the interpretation and implementation of these regulations relating to merger and
acquisition activities in China. In addition, complying with these requirements could be time-consuming, and the required notification,
review or approval process may materially delay or affect our ability to complete merger and acquisition transactions in China. As a
result, our ability to seek growth through acquisitions may be materially and adversely affected.
In addition, if the MOFCOM determines that we should have obtained its approval for our entry into contractual arrangements
with our affiliated entities, we may be required to file for remedial approvals. There is no assurance that we would be able to obtain
such approval from the MOFCOM. We may also be subject to administrative fines or penalties by the MOFCOM that may require us
to limit our business operations in the PRC, delay or restrict the conversion and remittance of our funds in foreign currencies into the
PRC or take other actions that could have material and adverse effect on our business, financial condition and results of operations.
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from make
loans or additional capital contributions to our PRC subsidiary and affiliated entities, which could harm our liquidity and our
ability to fund and expand our business.
As an offshore holding company of our PRC subsidiary, we may (i) make loans to our PRC subsidiary and affiliated entities,
(ii) make additional capital contributions to our PRC subsidiary, (iii) establish new PRC subsidiaries and make capital contributions to
these new PRC subsidiaries, and (iv) acquire offshore entities with business operations in China in an offshore transaction. However,
most of these uses are subject to PRC regulations and approvals. For example:
● loans by us to our wholly-owned subsidiary in China, which is a foreign-invested enterprise, cannot exceed statutory limits
and must be registered with the State Administration of Foreign Exchange of the PRC, or SAFE, or its local counterparts;
● loans by us to our affiliated entities, which are domestic PRC entities, over a certain threshold must be approved by the
relevant government authorities and must also be registered with SAFE or its local counterparts; and
● capital contributions to our wholly-owned subsidiary must be approved by the MOFCOM or its local counterparts.
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On August 29, 2008, State Administration of Foreign Exchange (SAFE) promulgated Circular 142, a notice regulating the
conversion by a foreign-invested company of its capital contribution in foreign currency into Renminbi. The notice requires that the
capital of a foreign-invested company settled in Renminbi converted from foreign currencies shall be used only for purposes within the
business scope as approved by the applicable governmental authorities. Such loan may not be used for equity investments within the
PRC unless such activity is set forth in the business scope or is otherwise permissible under PRC laws or regulations. In addition,
SAFE strengthened its oversight of the flow and use of such capital of a foreign-invested company settled in Renminbi converted from
foreign currencies. The use of such Renminbi capital may not be changed without SAFE’s approval, and may not in any case be used to
repay Renminbi loans if the proceeds of such loans have not otherwise been used. Violations of Circular 142 will result in severe
penalties including heavy fines. As a result, Circular 142 may significantly limit our ability to transfer funds to our operations in China
through our PRC subsidiary, which may adversely affect our ability to expand our business.
SAFE also promulgated Circular 59 on November 9, 2010, which, among other things, requires the authenticity of settlement
of net proceeds from offshore offerings to be closely examined and the net proceeds to be settled in the manner described in the
offering documents, or otherwise approved by the board of directors. Accordingly, as we apply with SAFE to convert foreign
currencies into Renminbi funds for use of such funds in the PRC, they need to be used in accordance with the section entitled “Use of
Proceeds,” or when the proposed use of the proceeds is inconsistent with what is set forth in the section entitled “Use of Proceeds,” we
need to submit a board resolution in relation to such proposed use of proceeds to SAFE and the settlement of foreign exchange for such
use of proceeds must comply with PRC regulations in relation to foreign exchange.
In addition, SAFE issued an internal guideline to its local counterparts, referred to as Circular 45, in November 2011. Based
on the version of Circular 45 made publicly available by certain local governmental authorities on their websites, we understand that
Circular 45 requires SAFE’s local counterparts to strengthen the control imposed by Circulars 142 and 59 over the conversion of a
foreign-invested company’s capital contributed in foreign currency into RMB. Circular 45 stipulates that a foreign-invested company’s
RMB funds, if converted from such company’s capital contributed in foreign currency, may not be used by such company to (i) extend
loans (in the form of entrusted loans), (ii) repay borrowings between enterprises, or (iii) repay bank loans it has obtained.
We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all,
with respect to future loans or capital contributions by us to our entities in China. If we fail to receive such registrations or approvals,
our ability to use capital raised and to capitalize our PRC operations may be negatively affected, which could adversely affect our
liquidity and our ability to fund and expand our business.
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A failure by the beneficial owners of our shares who are PRC residents to comply with certain PRC foreign exchange regulations
could restrict our ability to distribute profits, restrict our overseas and cross-border investment activities and subject us to liability
under PRC law.
SAFE has promulgated regulations, including the Notice on Relevant Issues Relating to Domestic Residents’ Investment and
Financing and Round-Trip Investment through Special Purpose Vehicles, or SAFE Circular No. 37, effective on July 4, 2014, and its
appendices, that require PRC residents, including PRC institutions and individuals, to register with local branches of SAFE in
connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and
financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests,
referred to in SAFE Circular No. 37 as a “special purpose vehicle.” SAFE Circular No. 37 further requires amendment to the
registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital
contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC
shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that
special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent
cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital
into its PRC subsidiary. Further, failure to comply with the various SAFE registration requirements described above could result in
liability under PRC law for foreign exchange evasion.
These regulations apply to our direct and indirect shareholders who are PRC residents and may apply to any offshore
acquisitions or share transfers that we make in the future if our shares are issued to PRC residents. However, in practice, different local
SAFE branches may have different views and procedures on the application and implementation of SAFE regulations, and since SAFE
Circular No. 37 was issued a year ago, there remains uncertainty with respect to its implementation. We have requested PRC residents
who we know currently hold direct or indirect interests in our company to make the necessary applications, filings and amendments as
required under SAFE Circular No. 37 and other related rules. However, we cannot assure you that these individuals or any other direct
or indirect shareholders or beneficial owners of our company who are PRC residents will be able to successfully complete the
registration or update the registration of their direct and indirect equity interest as required in the future. If they fail to make or update
the registration, our PRC subsidiary could be subject to fines and legal penalties, and SAFE could restrict our cross-border investment
activities and our foreign exchange activities, including restricting our PRC subsidiary’s ability to distribute dividends to, or obtain
loans denominated in foreign currencies from, our company, or prevent us from paying dividends. As a result, our business operations
and our ability to make distributions to you could be materially and adversely affected.
You may face difficulties in protecting your interests and exercising your rights as a stockholder of ours since we conduct
substantially all of our operations in China and all of our officers and directors reside in China.
We conduct substantially all of our operations in China through Shuhai Beijing, our consolidated VIE in China. All of our
current officers and directors reside outside the United States and substantially all of the assets of those persons are located outside of
the United States. Because of this factor, it may be difficult for you to conduct due diligence on the Company, our executive officers or
directors and attend stockholders meetings if the meetings are held in China. As a result, our public stockholders may have more
difficulty in protecting their interests through actions against our management, directors or major stockholders than would stockholders
of a corporation doing business entirely or predominantly within the United States.
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You may experience difficulties in protecting your rights through the United States courts.
Currently, substantially all of our operations are conducted in China and substantially all of our assets are located in China. All
of our officers are nationals or residents of the PRC and a substantial portion of their assets are located outside the United States. As a
result, it may be difficult for a stockholder to effect service of process within the United States upon these persons, or to enforce
judgments against us which are obtained in United States courts, including judgments predicated upon the civil liability provisions of
the securities laws of the United States or any state in the United States.
In addition, it may be difficult or impossible for you to effect service of process within the United States upon us our directors
and officers in the event that you believe that your rights have been violated under United States securities laws or otherwise. Even if
you are successful in effecting service of process and bringing an action of this kind, the laws of China may render you unable to
enforce a judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the PRC of
judgments obtained in the United States.
Labor contract laws in China may adversely affect our results of operations.
On June 29, 2007, the PRC government promulgated the Labor Contract Law of the PRC, or the Labor Contract Law, which
became effective on January 1, 2008. The Labor Contract Law imposes greater liabilities on employers and significantly affects the
cost of an employer’s decision to reduce its workforce. Further, it requires certain terminations be based on the mandatory requirement
age. In the event we decide to significantly change or decrease our workforce, the Labor Contract Law could adversely affect our
ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus
materially and adversely affecting our financial condition and results of operations.
Increases in labor costs in the PRC may adversely affect our business and our profitability.
The economy of China has been experiencing significant growth, leading to inflation and increased labor costs. China’s
overall economy and the average wage in the PRC are expected to continue to grow. Future increases in China’s inflation and material
increases in the cost of labor may materially and adversely affect our profitability and results of operations unless we are able pass on
these costs to our students by increasing tuition.
Our independent registered public accounting firm’s audit documentation related to their audit reports included in this report
include audit documentation located in China. PCAOB currently cannot inspect audit documentation located in China and, as
such, you may be deprived of the benefits of such inspection.
Our independent registered public accounting firm issued an audit opinion on the financial statements included in this report
filed with the SEC. As auditors of companies that are traded publicly in the United States and a firm registered with the PCAOB, our
auditor is required by the laws of the United States to undergo regular inspections by the PCAOB. However, work papers located in
China are not currently inspected by the PCAOB because the PCAOB is currently unable to conduct inspections without the approval
of the Chinese authorities.
Inspections of certain other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’
audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit
quality. However, the PCAOB is currently unable to inspect an auditor’s audit work related to a company’s operations in China and
where such documentation of the audit work is located in China. As a result, our investors may be deprived of the benefits of PCAOB’s
oversight of our auditors through such inspections.
The inability of the PCAOB to conduct inspections of our auditors’ work papers in China makes it more difficult to evaluate
the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are
subject to PCAOB inspections. Investors may consequently lose confidence in our reported financial information and procedures and
the quality of our financial statements.
We may be subject to intellectual property infringement claims, which may force us to incur substantial legal expenses and, if
determined adversely to us, materially disrupt our business.
Internet and technology companies are frequently involved in litigation based on allegations of infringement of intellectual
property rights, unfair competition, invasion of privacy, defamation and other violations of third-party rights. The validity,
enforceability and scope of protection of intellectual property in Internet-related industries, particularly in China, are uncertain and still
evolving. In addition, many parties are actively developing and seeking protection for Internet-related technologies, including seeking
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patent protection. There may be patents issued or pending that are held by others that cover significant aspects of our technologies,
products, business methods or services. As we face increasing competition and as litigation becomes more common in China in
resolving commercial disputes, we face a higher risk of being the subject of intellectual property infringement claims.
In particular, if we are found to have violated the intellectual property rights of others, we may be enjoined from using such
intellectual property, may be ordered to pay damages or fines, and may incur licensing fees or be forced to develop alternatives. We
may incur substantial expense in defending against third party infringement claims, regardless of their merit. Successful infringement
claims against us may result in substantial monetary liability or may materially disrupt the conduct of our business by restricting or
prohibiting our use of the intellectual property in question. Any intellectual property litigation could have a material adverse effect on
our business, financial condition or results of operations.
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Risks Relating to Our Common Stock
Our majority stockholders will control our company for the foreseeable future, including the outcome of matters requiring
shareholder approval.
Our officers and directors collectively have over 78% beneficial ownership of our Company. This is particularly the case as
our two directors are members of the same family. As a result, such individuals will have the ability, acting together, to control the
election of our directors and the outcome of corporate actions requiring shareholder approval, such as: (i) a merger or a sale of our
Company, (ii) a sale of all or substantially all of our assets, and (iii) amendments to our articles of incorporation and bylaws. This
concentration of voting power and control could have a significant effect in delaying, deferring or preventing an action that might
otherwise be beneficial to our other shareholders and be disadvantageous to our shareholders with interests different from those
individuals. Certain of these individuals also have significant control over our business, policies and affairs as officers or directors of
our company. Therefore, you should not invest in reliance on your ability to have any control over our company.
An active and visible trading market for our common stock may not develop.
We cannot predict whether an active market for our common stock will develop in the future. In the absence of an active
trading market:
● Investors may have difficulty buying and selling or obtaining market quotations;
● Market visibility for our common stock may be limited; and
● A lack of visibility for our common stock may have a depressive effect on the market price for our common stock.
The trading price of the common stock is subject to significant fluctuations in response to variations in quarterly operating
results, changes in analysts’ earnings estimates, announcements of innovations by us or our competitors, general conditions in the
industry in which we operate and other factors. These fluctuations, as well as general economic and market conditions, may have a
material or adverse effect on the market price of our common stock.
The market price for our common stock may be volatile.
The market price for our common stock may be volatile and subject to wide fluctuations due to factors such as:
● the perception of U.S. investors and regulators of U.S. listed Chinese companies;
● actual or anticipated fluctuations in our quarterly operating results;
● changes in financial estimates by securities research analysts;
● negative publicity, studies or reports;
● conditions in Chinese and global cybersecurity product markets;
● our capability to match and compete with technology innovations in the industry;
● changes in the economic performance or market valuations of other companies in the same industry;
● announcements by us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments;
● addition or departure of key personnel;
● fluctuations of exchange rates between RMB and the U.S. dollar; and
● general economic or political conditions in or impacting China.
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In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not
related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the
market price of our common stock.
Our common stock is thinly traded and you may be unable to sell at or near ask prices or at all if you need to sell your shares to
raise money or otherwise desire to liquidate your shares.
Our common stock is “thinly-traded,” meaning that the number of persons interested in purchasing our common stock at or
near bid prices at any given time may be relatively small or non-existent. This situation may be attributable to a number of factors,
including the fact that we are relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment
community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-
averse and might be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until
such time as we became more seasoned. As a consequence, there may be periods of several days or more when trading activity in our
shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will
generally support continuous sales without an adverse effect on share price. Broad or active public trading market for our common
stock may not develop or be sustained.
Our common stock may be considered a “penny stock,” and thereby be subject to additional sale and trading regulations that may
make it more difficult to sell.
Our common stock may be considered to be a “penny stock” if it does not qualify for one of the exemptions from the
definition of “penny stock” under Section 3a51-1 of the Exchange Act, as amended. Our common stock may be a “penny stock” if it
meets one or more of the following conditions: (i) the stock trades at a price less than $5.00 per share; (ii) it is NOT traded on a
“recognized” national exchange; (iii) it is not quoted on the Nasdaq Capital Market, or even if so, has a price less than $5.00 per share;
or (iv) is issued by a company that has been in business less than three years with net tangible assets less than $5 million. The principal
result or effect of being designated a “penny stock” is that securities broker-dealers participating in sales of our common stock will be
subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9 promulgated under the Exchange Act. For example,
Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny
stocks and to obtain a manually signed and dated written receipt of the document at least two business days before effecting any
transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the
account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the
broker-dealer to: (i) obtain from the investor information concerning his or her financial situation, investment experience and
investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the
investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny
stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the
determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately
reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may
make it more difficult and time consuming for holders of our common stock to resell their shares to third parties or to otherwise
dispose of them in the market or otherwise.
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FINRA sales practice requirements may also limit your ability to buy and sell shares of our common stock, which could depress the
price of shares of our common stock.
FINRA rules require broker-dealers to have reasonable grounds for believing that an investment is suitable for a customer
before recommending that investment to the customer. Prior to recommending speculative low-priced securities to their non-
institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax
status and investment objectives, among other things. Under interpretations of these rules, FINRA believes that there is a high
probability such speculative low-priced securities will not be suitable for at least some customers. Thus, FINRA requirements make it
more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and
sell shares of our common stock, have an adverse effect on the market for shares of our common stock, and thereby depress price of
our common stock.
Potential future sales under Rule 144 may depress the market price for our common stock.
In general, under Rule 144, a person who has satisfied a minimum holding period of between six months to one-year, as well
as meeting any other applicable requirements of Rule 144, may thereafter sell such shares publicly. Therefore, the possible sale of
unregistered shares may, in the future, have a depressive effect on the price of our common stock in the over-the-counter market.
Volatility in our common stock price may subject us to securities litigation.
The market for our common stock may have, when compared to seasoned issuers, significant price volatility and we expect
that our share price may continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have
often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We
may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert
management’s attention and resources.
We are not likely to pay cash dividends in the foreseeable future.
We currently intend to retain any future earnings for use in the operation and expansion of our business. Accordingly, we do
not expect to pay any cash dividends in the foreseeable future, but will review this policy as circumstances dictate. Should we
determine to pay dividends in the future, our ability to do so will depend upon the receipt of dividends or other payments from Shuhai
Beijing. Shuhai Beijing may, from time to time, be subject to restrictions on its ability to make distributions to us, including restrictions
on the conversion of RMB into U.S. dollars or other hard currency and other regulatory restrictions.
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Item 1B.
Unresolved Staff Comments.
Not applicable.
Item 2.
Description of Property.
We currently do not own any real estate or land use rights. We lease office space of approximately 890 square meters from
Beijing Changning Electromechanical Science & Technology Co. Ltd. for our headquarters in Beijing under a lease agreement. Our
monthly rent is approximately $5,167. The lease agreement expired on February 28, 2018, and we renewed the lease and extended the
expiration date to February 28, 2019. We also lease a small office in Harbin for Harbin Information’s operation under a lease that
expires on April 30, 2019, as amended on May 1, 2018. We pay an annual rent of approximately $3,112 for this space. We believe the
rented space is sufficient for our current operations.
Item 3.
Legal Proceedings.
Neither we nor our subsidiaries are a party to any material pending legal proceedings, and no such proceedings are known to
be contemplated. However, from time to time, we and our subsidiaries may become involved in various lawsuits and legal proceedings,
which arise in the ordinary course of business and an adverse result in these or other matters may arise from time to time that may harm
our business. No director, officer or affiliate of the Company, and no owner of record or beneficial owner of more than 5.0% of the
securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a
material interest adverse to the Company in reference to pending litigation.
Item 4.
Mine Safety Disclosures.
Not applicable.
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PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Market Information
Our common stock started trading on the OTCQB market under the symbol “DTSS” on April 20, 2016. The following table
sets forth the high and low bid prices for the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, mark-
down or commission, and may not represent actual transactions.
Quarter ended
HIGH
LOW
June 30, 2018*
March 31, 2018
December 31, 2017
September 30, 2017
June 30, 2017
$
$
$
$
$
18.00
7.50
7.20
6.00
6.05
$
$
$
$
$
11.00
5.79
6.00
4.50
4.50
*On April 12, 2018, our board of directors and stockholders approved a one-for-three reverse stock split of our issued and outstanding
shares of common stock, which became effective on May 1, 2018. The stock price in this quarter is presented on a post-split basis.
Holders
We had 427 holders of record of our common stock as of September 11, 2018.
Dividends
We do not anticipate paying dividends on our common stock at any time in the foreseeable future. We currently plans to retain
earnings for the development and expansion of our business. Any future determination as to the payment of dividends will be at the
discretion of our board of directors and will depend on a number of factors including future earnings, capital requirements, financial
conditions and such other factors as our board of directors may deem relevant.
In addition, due to various restrictions under PRC laws on the distribution of dividends by WFOE, we may not be able to pay
dividends to our shareholders. The Wholly-Foreign Owned Enterprise Law (1986), as amended, and the Wholly-Foreign Owned
Enterprise Law Implementing Rules (1990), as amended, and the Company Law of the PRC (2006), contain the principal regulations
governing dividend distributions by wholly foreign owned enterprises. Under these regulations, wholly foreign owned enterprises may
pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations.
Additionally, such companies are required to set aside a certain amount of their accumulated profits each year, if any, to fund certain
reserve funds until such time as the accumulated reserve funds reach and remain above 50% of the registered capital amount. These
reserves are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes.
Furthermore, if our subsidiaries and affiliates in China incur debt on their own in the future, the instruments governing the debt may
restrict its ability to pay dividends or make other payments. If we or our subsidiaries and affiliates are unable to receive all of the
revenues from our operations through the current contractual arrangements, we may be unable to pay dividends on our common stock.
Securities Authorized for Issuance under Equity Compensation Plans
On August 22, 2018, our Board of Directors and majority stockholders adopted a 2018 Equity Incentive Plan, or the 2018
Plan, for our company to award up to a maximum of 4,000,000 shares of our common stock, to attract and retain the best available
personnel, provide additional incentives to employees, directors and consultants and promote the success of our business. No awards
have been granted under the 2018 Plan as of the date of this report, but our Board of Directors or a designated committee thereof will
have the ability in its discretion from time to time to make awards under the 2018 Plan, including to our officers and directors.
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Item 6.
Selected Financial Data.
Not applicable.
Item 7.
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 generally;
● uncertainties relating to general economic, political and business conditions in China;
● industry trends and changes in demand for our products and services;
● uncertainties relating to customer plans and commitments and the timing of orders received from customers;
● announcements or changes in our advertising model and related pricing policies or that of our competitors;
● unanticipated delays in the development, market acceptance or installation of our products and services;
● changes in Chinese government regulations; and
● availability, terms and deployment of capital; relationships with third-party equipment suppliers; and
Overview
The Company was incorporated in the State of Nevada on September 26, 2014 under the name Rose Rock Inc. and changed
its name to the current name on May 27, 2015 by amending its articles of incorporation.
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On October 29, 2015, we entered into a share exchange agreement (the “Exchange Agreement”) with the shareholders (the
“Shareholders”) of Shuhai Information Skill (HK) Limited (“Shuhai Skill (HK)”), a limited liability company incorporated on May 15,
2015 under the laws of the Hong Kong Special Administrative Region of the People’s Republic of China (the “PRC”). Pursuant to the
terms of the Exchange Agreement, the Shareholders, who together own 100% of the ownership rights in Shuhai Skill (HK), transferred
all of the issued and outstanding ordinary shares of Shuhai Skill (HK) to the Company in exchange for the issuance of an aggregate of
20,000,000 shares of Common Stock, thereby causing Shuhai Skill (HK) and its wholly owned subsidiaries, Tianjin Information Sea
Information Technology Co., Ltd. (“Tianjin Information”), a limited liability company incorporated under the laws of the PRC, and
Harbin Information Sea Information Technology Co., Ltd., a limited liability company incorporated under the laws of the PRC, to
become wholly-owned subsidiaries of the Company, and Shuhai Information Technology Co., Ltd., also a limited liability company
incorporated under the laws of the PRC (“Shuhai Beijing”), to become a variable interest entity (“VIE”) of the Company through a
series of contractual agreements between Shuhai Beijing and Tianjin Information. The transaction was accounted for as a reverse
merger, with Shuhai Skill (HK) and its subsidiaries being the accounting survivor. Accordingly, the historical financial statements
presented are those of Shuhai Skill (HK) and its consolidated subsidiaries.
On October 29, 2015, the Company’s founder, Xingzhong Sun, sold all his 5,000,000 shares of common stock of the
Company to Zhixin Liu. Following the transaction, Zhixin Liu and her father, Fu Liu, beneficially owned approximately 81.82% of the
outstanding shares of our common stock. As of October 29, 2015, there were 55,000,000 (post-split) shares of common stock issued
and outstanding, 45,000,000 of which were owned by Zhixin Liu and Fu Liu.
On November 12, 2015, we effected a five-for-one forward split (the “Forward Split”) of the common stock, pursuant to
which each shareholder of the Company was issued five shares of common stock in exchange for each share of their then-issued
common stock. In conjunction with the Forward Split, the Company’s authorized shares of common stock increased from 75,000,000
shares to 375,000,000 shares. Immediately following the Forward Split, the Company had a total of 55,000,000 issued and outstanding
shares of common stock.
Following the reverse merger, we, through our consolidated subsidiaries, is in the business of developing and hope to provide
Internet security products, new media advertising, micro-marketing, and data analysis services in the PRC.
In January 2016, the Company secured a government procurement contract with the Bureau of Public Security of Daqing City
in Heilongjiang Province, China. Pursuant to the contract, the Company installed wireless internet terminal collection equipment and
3G wireless network cards, as well as provided training services related to the use of the equipment for a total contract price of
RMB1,050,000 (approximately US$157,499). The project was accepted by the customer in the quarter ended December 31, 2016.
We recognized $9,034 and $131,757 of revenue in connection with the project during the years ended June 30, 2018 and 2017,
respectively.
We believe that the increased demand for security equipment and related services in China, presents a great opportunity for
the Company to establish and grow its business in the next twelve months.
Since 2017, we have focused on the development of “Safe Campus” program that uses the Company’s Xin Platform to
provide teachers, students and families with comprehensive campus information, student safety management and integrated education
information. As of the date of this report, the Company has signed agreements with 30 schools in ten provinces covering approximately
9000 students, to use the “Safe Campus” program. Pursuant to these agreements, the Company provides equipment such as smart
student ID cards, PC terminals, RFID devices and relevant applications and software to the schools for free. In return, the Company has
the right to post advertisements, operate an online shopping space and collect the data stored on the equipment and the platform. All
the equipment is allowed to be used solely for the Company’s designed purpose. The terms of the agreements vary from school to
school. The Company has begun to implement its system as well as to further introduce this program to more schools. With the
increase in user base, the Company hopes to generate revenue from sales of advertisements via its program.
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Recent Developments
On March 15, 2018, we entered into a banking service direct sales cooperation agreement with China Minsheng Bank.
Pursuant to the Minsheng Agreement, we will establish a portal on our “Xin Platform” through which the platform users may purchase
financial products offered by the Minsheng Bank. In consideration, Minsheng Bank will pay us service fees calculated based on the
amount of the financial products the platform users purchase and hold. For each specific product, the service fee will be calculated
according to the following formula:
T-days service fee = annual rate (0.12%) × the amount of the financial products the platform users maintain as of day (T-1) ×
net value of the financial product ÷ 365
The Minsheng Agreement has a term of two years and can be automatically extended one more year if neither party terminates
the Minsheng Agreement within the last month of the two-year term.
On March 19, 2018, we entered into agency agreements with seven shareholders. Pursuant to the agreement, these
shareholders are authorized as agents to market the Xin Platform APP in specific area of China. Each agent is required to pay a Xin
Platform APP usage fee of $750 and deposit $750 in financial products offered by China Minsheng Bank via the Xin Platform APP.
Each agent will receive an $8 reward if a customer applied for a credit card of China Minsheng Bank via the Xin Platform APP.
On April 12, 2018, our board of directors and stockholders approved a one-for-three reverse stock split of our issued and
outstanding shares of common stock, which became effective on May 1, 2018, decreasing the number of outstanding shares from
57,511,771 to 19,170,846. All shares and per share amounts in this report have been retroactively adjusted to give effect to this reverse
stock split.
Results of Operations
Years Ended June 30, 2018 and 2017
Revenue
We recognized $10,571 of revenue during year ended June 30, 2018, as compared to $140,774 for the year ended June 30,
2017, of which $131,757 was from the government procurement contract with the Bureau of Public Security of Daqing City in
Heilongjiang Province, China and $9,017 was from the service rendered to the Daqing project. During 2017, we suspended our
marketing efforts on the cybersecurity program in order to focus our resources on the “Safe Campus” and “Smart Elevator” programs.
As such, until we decide to resume our marketing efforts for the cyber security program, it is unlikely for us to secure additional
government procurement contracts or generate additional revenues under this program.
Cost of Goods and Gross Profit
We recorded $4,819 and $85,397 of cost of goods sold for the years ended June 30, 2018 and 2017, respectively.
We had gross profit of $5,752 and $55,377 for the years ended June 30, 2018 and 2017, respectively.
Selling, General and Administrative Expenses:
Selling expenses were $172,029 and $151,600 for the years ended June 30, 2018 and 2017, respectively.
General and administrative expenses were $1,133,534 and $953,767 for the years ended June 30, 2018 and 2017, respectively.
The increase was primarily due to an increase in salaries since the Company hired more employees to work on the “Safe Campus” and
“Smart Elevator” programs.
We incurred research and development expenses of $361,616 and $203,600 during years ended June 30, 2018 and 2017,
respectively to advance our “Safe Campus” and “Smart Elevator” programs.
Net Loss
As a result of the foregoing, we generated net losses of $1,604,141 and $1,193,216 for the years ended June 30, 2018 and
2017, respectively.
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Liquidity and Capital Resources
We have funded our operations to date primarily through the sale of our common stock and shareholder loans. Based on our
current cash level and management’s forecast of operating cash flows, we expect to be able to fund our operations with our currently
available resources until December 2018 and need to raise another RMB 50 to 80 million (approximately U.S. $8.5 million to U.S. $12
million) to fund our operations from January 2019 to June 2019.
Due to our negative cash flow from operating activities since inception, there is substantial doubt about our ability to continue
as a going concern. The Company’s management recognizes that we must generate sales and obtain additional financial resources to
continue to develop operations. Based on increased demand for internet services in China, including internet security and big data
integration, the Company expects to generate revenue during the year ending June 30, 2019, which will be used to fund its operations.
In addition, the Company intends to raise additional funds through debt increases and/or equity financing or through other means that it
deems necessary. However, there can be no assurance that financing will be available in amounts or on terms acceptable to the
Company, if at all.
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As of June 30, 2018, we had a working capital of $1,044,432. Our current assets on June 30, 2018 were $1,235,276 primarily
consisting of cash of $1,031,486, inventory of $75,910 and prepaid expenses and other current assets of $127,880. Our current
liabilities were primarily composed of accounts payable of $13,503, accrued expenses and other payables of $150,283 and loans
payable to a shareholder of $27,058.
Cash Flow from Operating Activities
Net cash used in operating activities was $1,484,730 during the year ended June 30, 2018, which consisted of our net loss of
$1,604,141, offset by depreciation and amortization of $32,694, expenses paid by our president of $9,000, a change of accounts
receivable of $225, a change of inventory of $27,195, a change of prepaid expenses and other current assets of $31,660, and a change
of accrued expenses and other payables of $81,958.
Net cash used in operating activities was $1,061,538 during the year ended June 30, 2017, which consisted of our net loss of
$1,193,216, offset by depreciation and amortization of $50,097, expenses paid by our president of $88,496, a change of accounts
receivable of $221, a change in project in progress of $213,321, a change in inventory of $90,122, a change of prepaid expenses and
other current assets of $1,479, a change of accrued expenses and other payables of $51,609, and a decrease of accounts payable of
$180,023.
Cash Flow from Investing Activities
Cash used in investing activities totaled $27,454 for the year ended June 30, 2018, which primarily related to cash paid for the
acquisition of office furniture, equipment and patent.
Net cash used in investing activities totaled $10,676 for the year ended June 30, 2017, which primarily related to cash paid for
the acquisition of intangible assets and office equipment.
Cash Flow from Financing Activities
Net cash provided by financing activities was $1,235,870 during the year ended June 30, 2018, which primarily consisted of
payment of a shareholder loan, net of $123,850, the net proceeds from issuance of the Company’s common stock of $2,118,525 offset
by advance for issuance of common stock of $686,397 received in the previous period and deferred registration costs of $72,408.
Net cash provided by financing activities was $2,227,905 during the year ended June 30, 2017, which primarily consisted of
payment of a shareholder loan, net of $131,660, the proceeds from issuance of the Company’s common stock of $1,687,740 and an
advance received for issuance of common stock of $671,825.
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.
Inflation
We do not believe our business and operations have been materially affected by inflation.
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Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8.
Financial Statements and Supplementary Data.
Our consolidated financial statements and notes thereto are set forth on pages F-1 through F-17 of this report.
Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 of the Exchange Act, our principal executive officer and principal financial officer evaluated our
disclosure controls and procedures (as defined in Rules 13a-15 of the Exchange Act) 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, these disclosure controls and procedures were not effective to ensure that the information required to be
disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the SEC and to ensure that such information is accumulated and
communicated to our company’s management, including our principal executive officer and principal financial officer, to allow timely
decisions regarding required disclosure. The conclusion that our disclosure controls and procedures were not effective was due to the
presence of the material weaknesses in our internal control over financial reporting that were described in greater details below.
Inherent Limitations Over Internal Controls
The Company’s goal is to establish and maintain internal controls over financial reporting which are designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with U.S GAAP. The Company is working toward having internal controls over financial reporting which include those
policies and procedures that:
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i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
Company’s assets;
ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with U.S. GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the
Company’s management and directors; and
iii)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the financial statements.
Management, including the Company’s principal executive officer and principal financial officer, does not expect that the
Company’s internal controls (even if properly established) will prevent or detect all errors and all fraud. A control system, no matter
how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can
provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the
effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes
in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management, including our principal executive officer and principal financial officer, has assessed the effectiveness of
our internal control over financial reporting as of June 30, 2018. In making this assessment, management used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Because
of the material weaknesses described in the following paragraphs, management believes that, as of June 30, 2018, our internal control
over financial reporting was not effective due to the presence of the following material weaknesses in internal control over financial
reporting which are indicative of many small companies with a small staff: (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. Management
anticipates that such disclosure controls and procedures will not be effective until the above material weaknesses are remediated.
Management Plan to Remediate Material Weaknesses
We expect to implement the following measures in the fiscal year ending June 30, 2019 to remediate the material weaknesses
identified, subject to obtaining additional financing: (i) appoint additional qualified personnel to address inadequate segregation of
duties and ineffective risk management; and (ii) adopt sufficient written policies and procedures for accounting and financial reporting.
The remediation efforts set out above are largely dependent upon our securing additional financing to cover the costs of
implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected in a
material manner. As of August 2018, we have identified a Chief Financial Officer candidate whose service will begin upon the closing
of our contemplated public offering pursuant to a Registration Statement on Form S-1 originally filed with the SEC on December 5,
2017. In addition, we have adopted internal control policies, including but not limited to a cash flow control policy, review of the
accounting professional’s duties and responsibilities handbook, a travel allowance policy, a budget approval process, a reimbursement
policy, a receivable policies, an asset control policy, an internal auditing policy and a cost accounting policy.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all
control issues, if any, within our company have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2017 that have
materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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Item 9B.
Other Information.
None.
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Item 10.
Directors, Executive Officers and Corporate Governance.
PART III
The following tables set forth the respective positions and ages of the directors and executive officer of the Company as of the
date of this report. Each director of the Company has been elected to hold office until the next annual meeting of shareholders and
thereafter until his successor is elected and has qualified.
Name
Ms. Zhixin Liu
Age
31
Position
Chairman of the Board, CEO, President, Interim-CFO,
Director or Officer Since
October 2015
Secretary and Treasurer
Mr. Fu Liu
52
Director
October 2015
Biographical Information
Ms. Zhixin Liu. Ms. Zhixin Liu currently serves as Chairman of the Board, Chief Executive Officer, Interim Chief Financial
Officer, Treasurer and Secretary of the Company. Prior to founding Shuhai Beijing in February of 2015, from February 2012 to January
2015, Ms. Liu also worked as the General Manager of Harbin Jinfenglvyuan Bio-Technology Co., Ltd. where she was responsible for
implementing the company’s annual work plan, financial budget report, profit distribution, utilization plan, conducting the daily
management of the company, and signing agreements on behalf of the company. From January 2011 to February 2012, Ms. Liu worked
as a board director in Beijing Jinyajianguo Refrigeration Plants Manufacturing Co., Ltd., a private company. From January 2010 to
January 2011, Ms. Liu worked as the Vice General Manager and Director of the Board at Beijing Time Garden Digital Technologies
Co., Ltd where she was responsible for the management of several departments and assisted the General Manager with internal and
external affairs. Ms. Liu has a bachelor’s degree in IT Management from Employee University directly under Heilongjiang Provincial
Governmental Departments. She is presently enrolled in the MBA program of China Agricultural University. As the President and
executive officer of the Company, Ms. Liu brings to the Board an intimate understanding of the industry and the Company’s
operations.
Mr. Fu Liu. Mr. Fu Liu currently serves as a director of the Company. Mr. Liu has served as the chairman of the board of
directors of Shuhai Beijing since February 2015. Prior to his service on the board of Shuhai Beijing, from February 2012 to January
2015, Mr. Liu served as the Chairman of Board of Directors of Harbin Jinfenglvyuan Bio-Technology Co. Ltd. From January 2011 to
January 2015, he served as a director of Beijing Jinyajianguo Refrigeration Equipment Co., Ltd. Prior to that, Mr. Liu was the director
of Kedong County Rural Economic Management Office of Heilongjiang Province from January 2005 to January 2012. Mr. Liu
received a bachelor’s degree in accounting from Heilongjiang Institute of Finance and Economics in June of 1987 and a bachelor’s
degree in law from the CPC Party School Heilongjiang Provincial Committee in 1989. Among other qualifications, Mr. Liu brings to
the Board extensive knowledge of the Company’s business, relevant executive officer experience as well as governmental and political
expertise.
Family Relationships
Mr. Liu, our director, is the father of Ms. Liu, our Chairman, Chief Executive Officer, interim Chief Financial Officer,
Treasurer and Corporate Secretary.
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The Board and Committees
Our Board does not maintain a separate audit, nominating or compensation committee. Functions customarily performed by
such committees are performed by our Board as a whole. Presently, we are not required to maintain such committees under the rules
applicable to companies that do not have securities listed or quoted on a national securities exchange or national quotation system. We
intend to create board committees, including an independent audit committee, in the near future as we prepare to list on a national
securities exchange. If we are successful in listing our common stock on the NYSE or NASDAQ, we would be required to have, prior
to listing, an independent audit committee formed, in compliance with the requirements for such listing and in compliance with Rule
10A-3 of the Exchange Act.
Directors Independence
Our board of directors has determined that it does not presently have a member that is “independent” as the term is defined
under the Exchange Act.
Involvement in Certain Legal Proceedings
No director, person nominated to become a director, executive officer, promoter or control person of the Company has,
during the last ten years: (i) been convicted in or is currently subject to a pending criminal proceeding (excluding traffic violations and
other minor offenses); (ii) been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a
result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or
mandating activities subject to any Federal or state securities or banking or commodities laws including, without limitation, in any way
limiting involvement in any business activity, or finding any violation with respect to such law; (iii) has any bankruptcy petition been
filed by or against the business of which such person was an executive officer or a general partner, whether at the time of the
bankruptcy or for the two years prior thereto; (iv) been the subject of, or a party to, any Federal or State judicial or administrative order,
judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: (a) Any Federal or
State securities or commodities law or regulation; or (b) any law or regulation respecting financial institutions or insurance companies
including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or
temporary or permanent cease-and-desist order, or removal or prohibition order; or (c) Any law or regulation prohibiting mail or wire
fraud or fraud in connection with any business entity; nor (v) been the subject of, or a party to, any sanction or order, not subsequently
reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C.
78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any
equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a
member (covering stock, commodities or derivatives exchanges, or other SROs).
Code of Conduct and Ethics
We currently do not have a Code of Ethics and plan to adopt one as we develop our business.
Section 16 Compliance
As of the date of this report, we are not subject to Section 16(a) of the Exchange Act.
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Compensation Committee Interlocks and Insider Participation
The members of our Board have been serving as the Company’s officers or employees. Our executive officer does not
currently serve, or in the past year has never served, as a member of the compensation committee or director (or other board committee
performing equivalent functions or, in the absence of any such committee, the entire board of directors) of any entity that has one or
more executive officers serving on our Board.
Material Changes to the Procedures by which Security Holders May Recommend Nominees to the Board
There have been no material changes to the procedures by which our shareholders may recommend nominees to the Board.
Item 11.
Executive Compensation.
The following table provides disclosure concerning all compensation paid for services to the Company in all capacities for our
fiscal years ended June 30, 2018 and 2017 for (i) each person serving as our principal executive officer (“PEO”), (ii) each person
serving as our principal financial officer (“PFO”) and (iii) our two most highly compensated executive officers other than our PEO and
PFO whose total compensation exceeded $100,000 (collectively with the PEO, referred to as the “named executive officers” in this
Executive Compensation section).
Summary Compensation Table
Name and
Principal Position
Fiscal
Year
Salary Bonus
($)
($)
Stock
Awards
($)
Option
Awards
($)
Other
Compensation Total
($)
($)
Ms. Zhixin Liu
Chairman, CEO, President, Interim-CFO,
Secretary and Treasurer
2018 $27,642
—
—
—
—
$27,642
2017 $27,642(1) —
—
—
—
$27,642
(1) Since January 1, 2017, the actual monthly salary Ms. Liu received was RMB 20,300 (approximately $3,056). According to the
amendment to the employment agreement, Ms. Liu is entitled to a monthly salary of RMB 20,000 (approximately $3,011)
plus any bonuses, transport allowances and housing allowances. Ms. Liu waived her rights of receiving any allowances or
bonuses that have not been paid in fiscal year 2018 and 2017.
Option Grants in Last Fiscal Year
There were no options granted to our executive officer in the fiscal year ended June 30, 2018.
Employment Agreements
The Company does not have any written employment agreement with its officer other than the agreement described below.
Employment Contract – Zhixin Liu
We had entered into an employment agreement with Ms. Zhixin Liu on February 11, 2018, pursuant to which she serves as our
Chief Executive Officer until February 10, 2021 and receives a base monthly salary of RMB 20,000 (approximately $3,011). Ms. Liu is
also eligible to receive bonuses, transport allowances and housing allowances. The entire package for Ms. Liu is for annual
compensation of RMB 600,000 (approximately $90,340). The employment agreement and its amendment may be terminated in
accordance with the provisions of PRC Labor Law. The employment agreement also contains other customary terms under PRC law.
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Equity Compensation Plan Information
On August 22, 2018, our Board of Directors and majority stockholders adopted a 2018 Equity Incentive Plan, or the 2018
Plan, for our company to award up to a maximum of 4,000,000 shares of our common stock, to attract and retain the best available
personnel, provide additional incentives to employees, directors and consultants and promote the success of our business. No awards
have been granted under the 2018 Plan as of the date of this report, but our Board of Directors or a designated committee thereof will
have the ability in its discretion from time to time to make awards under the 2018 Plan, including to our officers and directors.
The following paragraphs describe the principal terms of the 2018 Plan.
Types of Awards. The 2018 Plan permits the awards of options, stock appreciation rights, restricted stock, restricted stock
units, stock bonus awards and/or performance compensation awards.
Plan Administration. Our Board of Directors or a committee appointed by our Board of Directors will administer the 2018
Plan. Such plan administrator will determine the participants to receive awards, the type and number of awards to be granted to each
participant, and the terms and conditions of each grant.
Award Agreement. Awards granted under the 2018 Plan are evidenced by an award agreement that sets forth the terms,
conditions and limitations for each award, which may include the term of the award, the provisions applicable in the event of the
grantee’s employment or service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind
the award.
Eligibility. We may grant awards to our employees, directors and consultants or prospective employees, directors, officers,
consultants or advisors who have accepted offers of employment or consultancy from our company or our affiliates.
Exercise of Options. The plan administrator determines the expiration date of each award. However, the term of any award
may not exceed ten years from the date of a grant. If any such award is not exercised prior to expiration, the award will be deemed
forfeited.
Transfer Restrictions. Awards may not be transferred in any manner by the recipient other than by will or the laws of descent
and distribution, except as otherwise provided by the plan administrator.
Amendment and Termination of the 2018 Plan. Our Board of Directors has the authority to amend, alter, suspend, discontinue,
or terminate the plan. However, no such action may adversely affect in any material way any awards previously granted unless agreed
by the recipient.
Director Compensation
We did not compensate our directors for their services as members of our board of directors during the year ended June 30,
2018. Directors are generally reimbursed for their reasonable out-of-pocket expenses incurred when attending board or committee
meetings. We do not currently have an established plan or policy with regard to compensation of members of our board of directors.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth information regarding the beneficial ownership of our common stock as of September 10, 2018
by our officers, directors and 5% or greater beneficial owners of common stock. There is no other person or group of affiliated persons,
known by us to beneficially own more than 5% of our common stock.
We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial
ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. The
person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within
60 days. Unless otherwise indicated, the person identified in this table has sole voting and investment power with respect to all shares
shown as beneficially owned by him, subject to applicable community property laws.
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Name and Address of Beneficial Owner (2)
5% Stockholder
Zhixin Liu
Fu Liu
Directors and Executive Officers:
Zhixin Liu
Fu Liu
All officers and directors as a group (two persons)
Number of
Common Stock
Beneficially
Owned
Percent of
Class
Beneficially
Owned
(1)
9,583,335
5,416,668
9,583,335
5,416,668
15,000,003
50.0%
28.3%
50.0%
28.3%
78.6%
(1) Applicable percentage of ownership is based on 19,170,846 shares of common stock outstanding as of September 11, 2018,
together with securities exercisable or convertible into ordinary shares within sixty (60) days as of the date hereof for each
stockholder.
(2) Unless otherwise indicated, the address for the shareholders is 1 Xinghuo Rd. Changning Building, Suite 11D2E,
Fengtai District, Beijing, People’s Republic of China, 215200.
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Item 13.
Certain Relationships and Related Transactions, and Director Independence.
On May 26, 2015, pursuant to the terms of a stock purchase agreement, Zhixin Liu, our President and Chief Executive Officer,
purchased 20,000,000 shares, or 57.14% of our issued and outstanding common stock from Xingzhong Sun, who was our sole officer,
director and majority shareholder at the time of the transaction. As part of the transaction, Ms. Liu was elected as our Chairman of the
Board.
Ms. Liu has paid certain operating expenses on behalf of us for product research and development, market expansion and
general operation. As of June 30, 2018 and June 30, 2017, the amounts due to the President were $27,058 and $129,874, respectively.
These amounts are interest-free, unsecured and due on demand. We have not received any demand for payments.
On January 1, 2016, Ms. Liu entered into a car rental agreement with us. Pursuant to the agreement, we rent a car from Ms.
Liu for a monthly rent of approximately $764. The agreement expired on December 31, 2016 but was extended by the parties to
December 31, 2018. The rent paid under this agreement was $9,000 and $8,808 for the years ended June 30, 2018 and 2017
respectively.
On November 11, 2017, we bought a used car for $3,054 from Harbin Jinfenglvyuan Biotechnology Co., Ltd, a related entity
owned by Mr. Fu Liu.
In April 2017, we entered into an apartment rental agreement with our President. Pursuant to the agreement, we rent an
apartment from our President with an annual rent of approximately $3,054. The agreement was renewed and the term was extended to
April 30, 2019. On March 19, 2018, we entered into agency agreements with seven stockholders of our company. Pursuant to the
agreement, such stockholders are authorized as agents to market our Xin Platform APP in specific areas of China. Each agent is
required to pay a Xin Platform APP usage fee of $764 and deposit $764 in financial products offered by China Minsheng Bank via Xin
Platform APP. Each agent will receive $8 for each customer that applies for a credit card of China Minsheng Bank via Xin Platform
APP.
Item 14.
Principal Accountant Fees and Services.
The following table sets forth fees billed to us by our independent registered public accounting firm Wei, Wei & Co., LLP,
during the fiscal year ended June 30, 2018 and 2017 for: (i) services rendered for the audit of our annual financial statements and the
review of our quarterly financial statements; (ii) services by our independent registered public accounting firms that are reasonably
related to the performance of the audit or review of our financial statements and that are not reported as audit fees; (iii) services
rendered in connection with tax compliance, tax advice and tax planning; and (iv) all other fees for services rendered.
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
TOTAL
Pre-Approval Policies and Procedures
2018
2017
25,000
—
—
—
25,000
$
$
18,000
—
—
—
18,000
$
$
Our Board reviewed and approved all audit and non-audit services provided by our independent registered public accounting
firms, and has determined that their provision of such services to us during fiscal 2018 and 2017 is compatible with and did not impair
their independence.
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Item 15.
Exhibits, Financial Statement Schedules.
(1)Financial Statements
PART IV
Financial Statements and Report of Independent Registered Public Accounting Firms are set forth on pages F-1 through F-16
of this report.
(2) Financial Statement Schedules
Schedules are omitted because the required information is not present or is not present in amounts sufficient to require
submission of the schedule or because the information required is given in the consolidated financial statements or the notes thereto.
(3)Exhibits
Exhibit
2.1
3.1
3.2
3.3
Description
Share Exchange Agreement, dated October 29, 2015, by and among Datasea Inc., Shuhai Information Skill (HK) Limited,
Zhixin Liu and Fu Liu, incorporated herein by reference to Exhibit 10.1 of the Post-Effective Amendment No. 1 to Form
S-1 filed on February 10, 2016
Articles of Incorporation, incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-1 filed on
February 13, 2015.
First Amendment to Articles of Incorporation, dated May 27, 2015, incorporated herein by reference to Exhibit 3.1(ii) of
the Post-Effective Amendment No. 1 to Form S-1 filed on February 10, 2016
Certificate of Change, dated November 12, 2015, incorporated herein by reference to Exhibit 3.1 of Form 8-K filed on
November 19, 2015.
3.4
Amended and Restated Bylaws, adopted on August 20, 2015, incorporated herein by reference to Exhibit 3.2(ii) of the
3.5
10.1
10.2
10.3
10.4
10.5
Post-Effective Amendment No. 1 to Form S-1 filed on February 10, 2016
Certificate of Amendment to Articles of Incorporation of Datasea Inc., incorporated herein by reference to Exhibit 3.1 of
the Form 8-K filed on April 20, 2018
Operation and Intellectual Property Service Agreement, dated October 20, 2015, by and among Tianjin Information Sea
Information Technology Co., Ltd. and Shuhai Information Technology Co. Ltd., Fu Liu and Zhixin Liu, incorporated
herein by reference to Exhibit 10.2 of the Post-Effective Amendment No. 1 to Form S-1 filed on February 10, 2016
Shareholder’s Voting Rights Entrustment Agreement, dated October 27, 2015, by and among Tianjin Information Sea
Information Technology Co., Ltd. and Shuhai Information Technology Co. Ltd., Fu Liu and Zhixin Liu, incorporated
herein by reference to Exhibit 10.3 of the Post-Effective Amendment No. 1 to Form S-1 filed on February 10, 2016
Option Agreement, dated October 27, 2015, by and between Tianjin Information Sea Information Technology Co., Ltd.
and Fu Liu and Zhixin Liu, incorporated herein by reference to Exhibit 10.4 of the Post-Effective Amendment No. 1 to
Form S-1 filed on February 10, 2016
Equity Pledge Agreement, dated October 27, 2015 by and between Tianjin Information Sea Information Technology Co.,
Ltd. and Fu Liu and Zhixin Liu, incorporated herein by reference to Exhibit 10.5 of the Post-Effective Amendment No. 1
to Form S-1 filed on February 10, 2016
Employment Agreement, dated February 11, 2015 by and between Shuhai Information Technology Co., Ltd. and Ms.
Zhixin Liu, incorporated herein by reference to Exhibit 10.6 of the Post-Effective Amendment No. 1 to Form S-1 filed on
February 10, 2016
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10.6
10.7
10.8
10.9
10.10
10.11
Wireless Internet Access In Public Places Security Management and Control Systems Feature Collection Equipment
Purchase Contract, dated January 8, 2016, by and between Shuhai Information Technology Co., Ltd. and Daqing City
Public Security Bureau, incorporated herein by reference to Exhibit 10.7 of the Post-Effective Amendment No. 1 to Form
S-1 filed on February 10, 2016.
Form of Subscription Agreement, incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on
Form 10-Q filed on May 23, 2016.
Translation of the Lease Agreement by and between Shuhai Information Technology Co., Ltd. and Beijing Chang Ning
Machinery Electric Science and Technology Co., Ltd. dated December 29, 2017, incorporated herein by reference to
Exhibit 10.10 of the S-1/A filed on January 31, 2018.
Translation of the Building Property Management Contract by and between Shuhai Information Technology Co., Ltd. and
Zhuozhou City Changning Property Service Co., Ltd. dated December 29, 2017, incorporated herein by reference to
Exhibit 10.11 of the S-1/A filed on January 31, 2018.
Translation of the Lease Agreement by and between Shuhai Information Technology Co., Ltd. and Beijing Chang Ning
Machinery Electric Science and Technology Co., Ltd. dated December 8, 2016, incorporated herein by reference to Exhibit
10.12 of the S-1/A filed on January 31, 2018.
Translation of the Building Property Management Contract by and between Shuhai Information Technology Co., Ltd. and
Beijing Changning Property Service Co., Ltd. dated December 8, 2016, incorporated herein by reference to Exhibit 10.13
of the S-1/A filed on January 31, 2018.
10.12
Employment Agreement, dated February 11, 2018 by and between Shuhai Information Technology Co., Ltd. and Ms.
Zhixin Liu, incorporated herein by reference to Exhibit 10.14 of the S-1/A filed on April 5, 2018.
10.13
Translation of the Banking Service Direct Sales Cooperation Agreement Between China Minsheng Bank Corp. and Shuhai
Information Technology Co., Ltd. dated March 15, 2018, incorporated herein by reference to Exhibit 10.15 of the S-1/A
filed on April 5, 2018.
The 2018 Equity Incentive Plan of Datasea Inc.
Subsidiaries of the Company.
Certification by Chief Executive Officer and Chief Financial Officer pursuant to Sarbanes Oxley Section 302
Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
XBRL Taxonomy Extension Schema Document
10.14*
21.1
31.1*
32.1**
101.INS * XBRL Instance Document
101.SCH
*
101.CAL
*
101.DEF
*
101.LAB
*
101.PRE * XBRL Taxonomy Extension Presentation Linkbase Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document XBRL
* Filed herewith.
**Furnished herewith.
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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.
SIGNATURES
Date: September 13, 2018
DATASEA INC.
/s/ Zhixin Liu
By:
Name: Zhixin Liu
Title: Chief Executive Officer (principal executive officer) and
Interim Chief Financial Officer (principal accounting and
financial officer)
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
Title
Date
/s/ Zhixin Liu
Zhixin Liu
/s/ Fu Liu
Fu Liu
President, Chief Executive Officer (principal executive officer), Interim
September 13, 2018
Chief Financial Officer
(principal accounting and financial officer) and Chairman
Director
September 13, 2018
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DATASEA INC.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018 AND 2017
Table of Contents
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-1
Page
F-2
F-3
F-4
F-5
F-6
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Datasea, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Datasea, Inc. and subsidiaries (the “Company”) as of June 30, 2018 and 2017,
and the related statements of operations, change in stockholders’ equity, and cash flows for the year then ended, and the related notes
(collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of June 30, 2018 and 2017, and the results of their operations and their cash flows for the years
then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part
of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Emphasis of Matter – Going Concern
The accompanying financial statements have been prepared assuming that Datasea, Inc. and subsidiaries will continue as a going
concern. As more fully described in Note 2, the Company has reported net losses of approximately $1,604,000 and $1,193,000 for the
years ended June 30, 2018 and 2017 respectively. At June 30, 2018, the Company has deficit of $4,124,947. These conditions raise
substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also
described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our opinion is not modified with respect to this matter.
/s/ Wei, Wei & Co., LLP
We have served as the Company’s auditor since 2017.
Flushing, New York
September 13, 2018
F-2
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DATASEA INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Current Assets
Cash
Accounts receivable
Inventory
Prepaid expenses and other current assets
Total Current Assets
Property and equipment, net
Intangible assets, net
Deferred registration costs
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable
Accrued expenses and other payables
Advance for sale of common stock
Loan payable-shareholder
Total Current Liabilities
Stockholders’ Equity
June 30,
2018
June 30,
2017
$
$
$
$
$
$
1,031,486
—
75,910
127,880
1,235,276
55,270
13,887
72,532
1,376,965
13,503
150,283
—
27,058
190,844
1,174,950
221
101,300
94,439
1,370,910
59,286
13,783
—
1,443,979
13,261
66,975
675,235
129,874
885,345
Common stock, $0.001 par value, 125,000,000 shares authorized, 19,170,846 and
18,870,327 shares issued and outstanding at June 30, 2018 and 2017, respectively
Additional paid-in capital
Accumulated comprehensive income
Deficit
Total Stockholders’ Equity
19,171
5,121,102
170,795
(4,124,947)
1,186,121
18,870
3,002,878
57,692
(2,520,806)
558,634
Total Liabilities and Stockholders’ Equity
$
1,376,965
$
1,443,979
See accompanying notes to the consolidated financial statements
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DATASEA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Revenues
Cost of goods sold
Gross profit
Operating expenses
Selling expenses
General and administrative expenses
R & D expenses
Total operating expenses
Loss from operations
Other income
Other income, net
Interest expense
Total other income(expense)
Net loss
Other comprehensive loss
Foreign currency translation adjustment
Total comprehensive loss
Net loss per share
Basic and diluted
Weighted average shares outstanding
Basic and dulited
$
$
$
Years Ended
June 30, 2018
June 30, 2017
$
10,571
4,819
5,752
140,774
85,397
55,377
172,029
1,133,534
361,616
1,667,179
151,600
953,767
203,600
1,308,967
(1,661,427)
(1,253,590)
57,560
(274)
57,286
59,368
1,006
60,374
(1,604,141)
(1,193,216)
113,103
(1,491,038)
(0.08)
63,551
(1,129,665)
(0.06)
$
$
19,130,098
18,596,678
See accompanying notes to the consolidated financial statements
F-4
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DATASEA INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Balance at June 30, 2016
Issuance of common stock
Net loss
Foreign currency translation gain
Balance at June 30, 2017
Issuance of common stock
Net loss
Foreign currency translation gain
Balance at June 30, 2018
Common
Shares
Par
Value
Additional
Paid in
Capital
Deficit
Accumulated
Other
Comprehensive
(Loss)Income
Total
Stockholders’
Equity
18,462,680 $ 18,462 $1,315,546 $(1,327,590) $
407,666
—
—
18,870,346
300,500
—
—
408
—
—
18,870
301
—
—
1,687,332
—
—
3,002,878
2,118,224
—
—
—
(1,193,216)
—
-2,520,806
(1,604,141)
—
19,170,846 $ 19,171 $5,121,102 $(4,124,947) $
(5,859) $
—
—
63,551
57,692
—
113,103
170,795 $
559
1,687,740
(1,193,216)
63,551
558,634
2,118,525
(1,604,141)
113,103
1,186,121
See accompanying notes to the consolidated financial statements
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DATASEA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Expenses paid by president
Changes in current assets and current liabilities:
Accounts receivable
Project in progress
Inventory
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other payables
Net cash (used in) operating activities
Cash flows from investing activities:
Acquisition of office equipment and intangible assets
Net cash (used in) investing activities
Cash flows from financing activities:
(Payment) of loan payable - shareholder, net
Net proceeds from issuance of common stock
(Payment)deferred registration costs
Advances for issuance of common stock
Net cash provided by financing activities
Effect of exchange rate changes on cash
Net (decrease)increase in cash
Cash – beginning of year
Cash – ending of year
Supplemental disclosures of cash flow information:
Cash paid for interest
Cash paid for income taxes
Non-cash financing activity:
Expenses paid by president
Years Ended
June 30, 2018
June 30, 2017
$
(1,604,141)
$
(1,193,216)
32,694
9,000
225
—
27,195
(31,660)
—
81,958
(1,484,730)
50,097
88,496
(221)
213,321
(90,122)
(1,479)
(180,023)
51,609
(1,061,538)
(27,454)
(27,454)
(10,676)
(10,676)
(123,850)
1,432,128
(72,408)
—
1,235,870
(131,660)
1,687,740
—
671,825
2,227,905
132,850
7,457
(143,464)
1,163,148
1,174,950
11,802
1,031,486
—
—
9,000
$
$
$
$
1,174,950
—
—
88,496
$
$
$
$
See accompanying notes to the consolidated financial statements
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DATASEA INC.
Notes to Consolidated Financial Statements
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Datasea Inc. (the “Company”) was incorporated in the State of Nevada on September 26, 2014 under the name Rose Rock Inc. and
changed its name to Datasea Inc. on May 27, 2015 by amending its articles of incorporation. On May 26, 2015, the Company’s
founder, Xingzhong Sun, sold 20,000,000 shares of his common stock of the Company (the “Common Stock”) to Zhixin Liu, one of
the owners of Shuhai Skill (HK) as defined below. On October 27, 2016, Mr. Sun sold his remaining 5,000,000 shares of Common
Stock of the Company to Ms. Liu.
On October 29, 2015, the Company entered into a share exchange agreement (the “Exchange Agreement”) with the shareholders (the
“Shareholders”) of Shuhai Information Skill (HK) Limited (“Shuhai Skill (HK)”), a limited liability company incorporated on May 15,
2015 under the laws of the Hong Kong Special Administrative Region of the People’s Republic of China (the “PRC”). Pursuant to the
terms of the Exchange Agreement, the Shareholders, who together own 100% of the ownership rights in Shuhai Skill (HK), transferred
all of the issued and outstanding ordinary shares of Shuhai Skill (HK) to the Company in exchange for the issuance of an aggregate of
20,000,000 shares of Common Stock, thereby causing Shuhai Skill (HK) and its wholly owned subsidiaries, Tianjin Information Sea
Information Technology Co., Ltd. (“Tianjin Information”), a limited liability company incorporated under the laws of the PRC, and
Harbin Information Sea Information Technology Co., Ltd., a limited liability company incorporated under the laws of the PRC, to
become wholly-owned subsidiaries of the Company, and Shuhai Information Technology Co., Ltd., also a limited liability company
incorporated under the laws of the PRC (“Shuhai Beijing”), to become a variable interest entity (“VIE”) of the Company through a
series of contractual agreements between Shuhai Beijing and Tianjin Information. The transaction was accounted for as a reverse
merger, with Shuhai Skill (HK) and its subsidiaries being the accounting survivor. Accordingly, the historical financial statements
presented are those of Shuhai Skill (HK) and its consolidated subsidiaries.
Following the Share Exchange, the Shareholders, being Zhixin Liu and her father, Fu Liu, owned approximately 81.82% of the
outstanding shares of Common Stock. As of October 29, 2015, there were 55,000,000 shares of Common Stock issued and outstanding,
45,000,000 of which were beneficially owned by Zhixin Liu and Fu Liu.
On May 1, 2018, the Company had a 1 of 3 reverse stock split decreasing the shares outstanding from 57,511,711 to 19,170,846. The
consolidated financial statements have been retroactively adjusted to reflect the reverse split.
After the Share Exchange, the Company, through its consolidated subsidiaries and VIE is engaged in the business of providing Internet
security products, new media advertising, micro-marketing, and data analysis services in the PRC.
NOTE 2 – GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As shown in the accompanying consolidated financial statements, the Company has generated losses of ($1,604,141) and ($1,193,216)
during the years ended June 30, 2018 and 2017, has a deficit of approximately ($4,124,000) and ($2,521,000) at June 30, 2018 and
2017, and continues to incur significant losses since inception. These circumstances, among others, raise substantial doubt about the
Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
The Company’s management recognizes that the Company must generate sales and additional resources to enable it to continue to
develop its operations. Based on increased demand for internet services in China, including internet security and big data integration,
the Company’s management team expects healthy growth in its business. The Company’s management intends to raise additional
financing through debt and/or equity financing or through other means that it deems necessary, with a view to moving forward and
sustaining prolonged growth in its initial phases. However, no assurance can be given that the Company will be successful in raising
additional capital or obtaining financing on acceptable terms and ultimately achieving profitable operations to sustain the Company.
BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying consolidated financial statements include the financial statements of the Company and its 100% owned subsidiaries
of Shuhai Skill (HK), Tianjin Information and its VIE, Shuhai Beijing.
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DATASEA INC.
Notes to Consolidated Financial Statements
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
VARIABLE INTEREST ENTITY
Pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Section 810,
“Consolidation” (“ASC 810”), the Company is required to include in its consolidated financial statements, the financial statements of
its variable interest entity (“VIE”). ASC 810 requires a VIE to be consolidated if the company is subject to a majority of the risk of loss
for the VIE or is entitled to receive a majority of the VIE’s residual returns. A VIE is an entity in which a company, through contractual
arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the entity, and therefore the company is
the primary beneficiary of the entity.
Under ASC 810, a reporting entity has a controlling financial interest in a VIE, and must consolidate that VIE, if the reporting entity
has both of the following characteristics: (a) the power to direct the activities of the VIE that most significantly affect the VIE’s
economic performance; and (b) the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to
the VIE. The reporting entity’s determination of whether it has this power is not affected by the existence of kick-out rights or
participating rights, unless a single enterprise, including its related parties and de - facto agents, have the unilateral ability to exercise
those rights. Shuhai Beijing’s actual stockholders do not hold any kick-out rights that affect the consolidation determination.
Through the VIE agreements, the Company is deemed the primary beneficiary of Shuhai Beijing. Accordingly, the results of Shuhai
Beijing have been included in the accompanying consolidated financial statements. Shuhai Beijing has no assets that are collateral for
or restricted solely to settle their obligations. The creditors of Shuhai Beijing do not have recourse to the Company’s general credit.
VIE Agreements
Operation and Intellectual Property Service Agreement – This agreement allows Tianjin Information to manage and operate Shuhai
Beijing and collect 100% of their net profits. Under the terms of the Operation and Intellectual Property Service Agreement, Shuhai
Beijing entrusts Tianjin Information to manage its operations, manage and control its assets and financial matters, and provide
intellectual property services, purchasing management services, marketing management services and inventory management services to
Shuhai Beijing. Shuhai Beijing and its shareholders shall not make any decisions nor direct the activities of Shuhai Beijing without
Tianjin Information’s consent.
Shareholders’ Voting Rights Entrustment Agreement – Tianjin Information has entered into a shareholders’ voting rights entrustment
agreement (the “Entrustment Agreement”) under which Zhixin Liu and Fu Liu (collectively the “Shuhai Beijing Shareholders”) have
vested their voting power in Shuhai Beijing to Tianjin Information or its designee(s). The Entrustment Agreement does not have an
expiration date.
Equity Option Agreement –the Shuhai Beijing Shareholders and Tianjin Information entered into an equity option agreement (the
“Option Agreement”), pursuant to which the Shuhai Beijing Shareholders have granted Tianjin Information or its designee(s) the
irrevocable right and option to acquire all or a portion of Shuhai Beijing Shareholders’ equity interests in Shuhai Beijing for an option
price of RMB0.001 for each capital contribution of RMB1.00. Pursuant to the terms of the Option Agreement, Tianjin Information and
the Shuhai Beijing Shareholders have agreed to certain restrictive covenants to safeguard the rights of Tianjin Information under the
Option Agreement. Tianjin Information agreed to pay RMB1.00 annually to Shuhai Beijing Shareholders to maintain the option rights.
Tianjin Information may terminate the Option Agreement upon prior written notice. The Option Agreement is valid for a period of 10
years from the effective date and renewable at Tianjin Information’s option.
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DATASEA INC.
Notes to Consolidated Financial Statements
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Equity Pledge Agreement – Tianjin Information and the Shuhai Beijing Shareholders entered into an equity pledge agreement on
October 27, 2015 (the “Equity Pledge Agreement”). The Equity Pledge Agreement serves to guarantee the performance by Shuhai
Beijing of its obligations under the Operation and Intellectual Property Service Agreement and the Option Agreement. Pursuant to the
Equity Pledge Agreement, Shuhai Beijing Shareholders have agreed to pledge all of their equity interests in Shuhai Beijing to Tianjin
Information. Tianjin Information has the right to collect any and all dividends paid on the pledged equity interests during the pledge
period. Pursuant to the terms of the Equity Pledge Agreement, the Shuhai Beijing Shareholders have agreed to certain restrictive
covenants to safeguard the rights of Tianjin Information. Upon an event of default or certain other agreed events under the Operation
and Intellectual Property Service Agreement, the Option Agreement and the Equity Pledge Agreement, Tianjin Information may
exercise the right to enforce the pledge.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. 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 and equipment, provision for staff
benefits, recognition and measurement of deferred income taxes and the valuation allowance for deferred tax assets. Although these
estimates are based on management’s knowledge of current events and actions management may undertake in the future, actual results
may ultimately differ from those estimates and such differences may be material to our consolidated financial statements.
CONTINGENCIES
Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company
but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel
assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies
related to legal proceedings that may be 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
consolidated financial statements.
If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but
cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and
material, would be disclosed. As of June 30, 2018 and 2017, the Company has no contingencies.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits and short-term cash investments that are highly liquid in nature and
have original maturities of three months or less. The Company has no cash equivalents as of June 30, 2018 and 2017.
INVENTORY
Inventory, principally purchased routers used in installations and electronic student cards, is valued at the lower of cost or net realizable
value. The value of inventory is determined using the first-in, first-out method. The Company periodically estimates an inventory
allowance for estimated unmarketable inventories when necessary. Inventory amounts are reported net of such allowances. There were
no allowances for inventory as of June 30, 2018 and 2017.
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DATASEA INC.
Notes to Consolidated Financial Statements
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
DEFERRED REGISTRATION COSTS
The Company defers certain legal, accounting and other third-party fees that are directly associated with in-process equity financings
as deferred registration costs until such financings are consummated. After consummation of the equity financing, these costs are
recorded in stockholders’ equity as a reduction of additional paid-in capital generated as a result of the offering. Should the equity
financing for which those costs relate no longer be considered probable of being consummated, all deferred registration costs will be
charged to operating expenses in the statement of operations at such time. The Company had deferred registration costs of $72,532 as
of June 30, 2018.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation. Major repairs and improvements that significantly extend
original useful lives or improve productivity are capitalized and depreciated over the period benefited. Maintenance and repairs are
expensed as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation
are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is
provided using the straight-line method over estimated useful lives as follows:
Furniture and
fixtures
Office equipment
5-10 years
3-5 years
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 our intangible assets are subject to amortization. No impairment of intangible assets has
been identified as of the balance sheet dates.
Intangible assets include licenses and certificates and are amortized over their useful life of ten years.
FAIR VALUE MEASUREMENTS AND DISCLOSURES
FASB ASC Topic 820, “Fair Value Measurements,” defines fair value, and establishes a three-level valuation hierarchy for disclosures
that enhances disclosure requirements for fair value measures. The three levels are defined as follows:
●Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
●Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
●Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The carrying value of cash, accounts receivable, inventory, prepaid expenses and other current assets, accounts payable, accrued
expenses and other payables, advances for issuance of common stock and loan payable-shareholder, approximate their fair values due
to their short maturities.
As of June 30, 2018, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at fair
value on a recurring basis.
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DATASEA INC.
Notes to Consolidated Financial Statements
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, plant 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 industrial changes. The determination of recoverability of assets to be held and used is made by comparing the
carrying amount of an asset to future undiscounted cash flows to be generated by the assets.
If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount
of the asset exceeds its fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to
sell. During the reporting periods there was no impairment loss recognized on long-lived assets.
REVENUE RECOGNITION
The Company recognizes revenues from professional services contracts. Customers are billed, according to individual agreements.
Revenues from professional services are recognized on a completed-contract basis, in accordance with ASC Topic 605, Under the
completed-contract basis, contract costs are recorded to projects in process and billings and/or cash received are recorded to a deferred
revenue liability account during the periods of construction. Costs include direct material, direct labor and subcontract labor. All
revenues, costs, and profits are recognized in operations upon completion of the contract. A contract is considered completed when all
costs except insignificant items have been incurred and final acceptance has been received from the customer. Corporate general and
administrative expenses are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will
recognize the loss as incurred. For uncompleted contracts, the deferred asset (accumulated contract costs) in excess of the deferred
liability (billings and/or cash received) is classified under current assets as costs in excess of billings on uncompleted contracts. The
deferred liability (billings and/or cash received) in excess of the deferred asset (accumulated contract costs) is classified under current
liabilities as billings in excess of costs on uncompleted contracts. Contract retentions are included in accounts receivable.
During the years ended June 30, 2018 and 2017, one customer accounted for 85.1% and 100% of the Company’s total sales,
respectively.
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.”
Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current period and (ii)
deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements
or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is
provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more
likely than not some portion or all of the deferred tax assets will not be realized.
ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and
prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. The Company has no material uncertain tax positions for any of the
reporting years.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are expensed in the period when they are incurred. For the years ended June 30, 2018 and 2017,
the Company incurred research and development expenses of $361,616 and $203,600, respectively.
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DATASEA INC.
Notes to Consolidated Financial Statements
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CONCENTRATION OF CREDIT RISK
The Company maintains cash in accounts with state-owned banks within the PRC. Cash in state-owned banks is not covered by
insurance. Should any of these institutions holding the Company’s cash become insolvent, or if the Company is unable to withdraw
funds for any reason, the Company could lose the cash on deposit with that institution. The Company has not experienced any losses in
such accounts and believes it is not exposed to any risks on its cash in these bank accounts.
FOREIGN CURRENCY TRANSLATION AND COMPREHENSIVE INCOME (LOSS)
The accounts of the Company’s Chinese entities are maintained in RMB and the accounts of the U.S. parent company are maintained in
United States dollars (“USD”) The accounts of the Chinese entities were translated into USD in accordance with 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 in other comprehensive income in accordance with FASB ASC
Topic 220, “Comprehensive Income.” Gains and losses resulting from the foreign currency transactions are reflected in the statements
of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016, the FASB issued ASU 2016-02 Amendments to ASC 842 Leases. This update requires a lessee to recognize the
assets and liability (the lease liability) arising from operating leases on the balance sheet for the lease term. When measuring assets and
liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is
reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Within a twelve months
or less lease term, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. If a lessee
makes this election, it should recognize lease expense on a straight-line basis over the lease term. In transition, this update will be
effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The
Company does not currently expect the adoption of ASU 2016-02 to have a material impact on the Company’s financial statements
unless it enters into a new long-term lease.
In September 2017, the FASB issued ASU 2017-13, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842). The
main objective of this pronouncement is to clarify the effective date of the adoption of ASC Topic 606 and ASC Topic 842 and the
definition of public business entity as stipulated in ASU 2014-09 and ASU 2016-02. ASU 2014-09 provides that a public business
entity and certain other specified entities adopt ASC Topic 606 for annual reporting periods beginning after December 15, 2017,
including interim reporting periods within that reporting period. All other entities are required to adopt ASC Topic 606 for annual
reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after
December 15, 2019. ASU 2016-12 requires that “a public business entity and certain other specified entities adopt ASC Topic 842 for
fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. All other entities are required to adopt
ASC Topic 842 for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December
15, 2020”. ASU 2017-13 clarifies that the SEC would not object to certain public business entities electing to use the non-public
business entities effective dates for applying ASC 606 and ASC 842. ASU 2017-13, however, limits such election to certain public
business entities that “otherwise would not meet the definition of a public business entity except for a requirement to include or
inclusion of its financial statements or financial information in another entity’s filings with the SEC”.
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DATASEA INC.
Notes to Consolidated Financial Statements
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The
amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Basically, these amendments
provide a screen to determine when a set is not a business. If the screen is not met, the amendments in this ASU first, require that to be
considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the
ability to create output and second, remove the evaluation of whether a market participant could replace missing elements. These
amendments take effect for public businesses for fiscal years beginning after December 15, 2017 and interim periods within those
periods, and all other entities should apply these amendments for fiscal years beginning after December 15, 2018, and interim periods
within annual periods beginning after December 15, 2019.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which clarifies the definition of a business
with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or
disposals) of assets or businesses. The Company does not expect the adoption of the amendment in this ASU to have a significant
impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Restricted Cash. The amendments in this update address diversity in practice that
exists in the classification and presentation of changes in restricted cash and require that a statement of cash flows explain the change
during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash
equivalents. ASU 2016-18 is effective for the Company beginning January 1, 2018 and is required to be applied using a retrospective
transition method to each period presented. The Company does not expect the adoption of the amendment in this ASU to have a
significant impact on the Company’s consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would
have a material effect on the accompanying consolidated financial statements.
NOTE 4 – DEFERRED FINANCING COSTS
The Company incurred and deferred registration costs of $72,532 as of June 30, 2018. Such costs consist of professional fees
associated with the Company’s proposed public offering of Common Stock.
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
Office furniture and fixtures
Office equipment
Subtotal
Less: Accumulated depreciation
Total
June 30,
2018
June 30,
2017
$
$
71,027 $
55,041
126,068
70,798
55,270 $
58,064
40,248
98,312
39,026
59,286
Depreciation expense for the years ended June 30, 2018 and 2017 were $31,007 and $48,626, respectively.
NOTE 6 –INTANGIBLE ASSETS
Intangible assets are summarized as follows:
Software registration rights
Patent
June 30,
2018
June 30,
2017
$
4,929 $
1,203
4,508
—
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Value-added telecommunications business license
Subtotal
Less: Accumulated depreciation
Total
12,049
18,181
4,294
13,887 $
11,833
16,341
2,558
13,783
$
Amortization expense for the years ended June 30, 2018 and 2017 were $1,687 and $1,471, respectively.
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DATASEA INC.
Notes to Consolidated Financial Statements
NOTE 7 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
Security deposit
Prepaid expenses and advances
Others
Total
NOTE 8 – ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and other payable consisted of the following:
Deposit
Salaries and other payables
Advances from customers
Total
NOTE 9 – RELATED PARTY TRANSACTIONS
June 30,
2018
June 30,
2017
$
$
55,156 $
65,769
6,955
127,880 $
54,830
32,471
7,138
94,439
June 30,
2018
June 30,
2017
$
$
31,493 $
115,785
3,005
150,283 $
30,515
36,460
—
66,975
The Company’s President, Zhixin Liu, paid certain operating expenses on behalf of the Company. As of June 30, 2018 and 2017, the
amounts due to the President were $27,059 and $129,874, respectively. These amounts are interest-free, unsecured and due on demand.
The Company has not received any demand for payments.
On January 1, 2016, the Company’s President entered into a car rental agreement with the Company. Pursuant to the agreement, the
Company rents a car from the President for a monthly rent of approximately $750. The agreement expired on December 31, 2016. The
agreement was renewed and the term was extended to December 31, 2018. The rent paid under this agreement was $9,000 and $8,808
for the years ended June 30, 2018 and 2017 respectively.
On November 11, 2017, the Company bought a second-hand car for $3,000 from Harbin Jinfenglvyuan Biotechnology Co., Ltd, a
related entity owned by Mr. Fu Liu.
In April 2017, the Company’s President entered into an apartment rental agreement with the Company. Pursuant to the agreement, the
Company rents an apartment from the president with an annual rent of approximately $3,000. The agreement was renewed and the term
was extended to April 30, 2019.
On March 19, 2018, The Company entered into agency agreements with seven shareholders. Pursuant to the agreement, shareholders
are authorized as agents to market Xin Platform APP in a specific area of China. Each agent is required to pay a Xin Platform APP
usage fee of $750 and deposit $750 in financial product of China Minsheng Bank system via Xin Platform APP. Each agent will
receive $8 if a customer applied for a credit card of China Minsheng Bank via Xin Platform APP.
F-14
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DATASEA INC.
Notes to Consolidated Financial Statements
NOTE 10 – INCOME TAXES
The Company was incorporated in the United States of America, is subject to U.S. tax and plans to file U.S. federal income tax returns.
The Company conducts all of its businesses through its subsidiaries and affiliated entities, principally in the PRC. No provision for US
federal income tax was made for the years ended June 30, 2018 and 2017 as the US entity incurred losses.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal
Revenue Code. Changes include, but are not limited to, a U.S. corporate tax rate decrease from 35% to 21% effective for tax years
beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system,
and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.
Additionally, the Tax Act imposes a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries, and
future foreign earnings are subject to U.S. taxation. However, this one-time transition tax has no effect on the Company’s income tax
expense as the Company has no undistributed foreign earnings prior to June 30, 2018, as the Company has cumulative foreign losses as
of June 30, 2018.
The Company’s offshore subsidiary, Shuhai Skill (HK), did not earn any income that was derived in Hong Kong for the years ended
June 30, 2018 and 2017, and therefore did not incur any Hong Kong Profits tax.
Under the Corporate Income Tax Law of the PRC, the corporate income tax rate is 25%.
The Company has net operating losses (“NOL”) of approximately $1,604,000 and $1,193,000 during years ended June 30, 2018 and
2017 respectively. Management believes that it is more likely than not that the benefit from the NOL carryforwards will not be
realized. In recognition of this risk, the Company has provided a 100% valuation allowance as of June 30, 2018 and 2017 and no
deferred tax asset benefit has been recorded.
The reconciliation of income tax expense (benefit) at the PRC statutory rate of 21% to the Company’s effective tax is as follows:
PRC Statutory rate
Change in valuation allowance
Effective tax
The provisions for income taxes are summarized as follows:
Current
Deferred
Change in valuation allowance
Total
Year Ended June 30,
2018
2017
$
$
(401,036)
401,036
—
$
$
(298,305)
298,305
—
Year ended
June 30, 2018
—
$
401,036
(401,036)
—
$
Year ended
June 30, 2017
—
$
298,305
(298,305)
—
$
The valuation allowance increased by $401,036 and $298,305 for the years ended June 30, 2018 and 2017, respectively.
The Company’s net deferred tax asset as of June 30, 2018 and June 30, 2017 is as follows:
Deferred tax asset
Valuation allowance
Net deferred tax asset
June 30, 2018
986,095
$
(986,095)
—
$
June 30, 2017
585,059
$
(585,059)
—
$
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For United States Income tax reporting purposes, the six months ended June 30, 2015 and the years ending June 30, 2017 and 2016
remain open and subject to audit.
As of June 30, 2018, the tax years ended June 30, 2015 through June 30, 2017 for the Company’s PRC subsidiaries remain open for
statutory examination by PRC tax authorities. As of June 30, 2018, the tax years ended June 30, 2015 through June 30, 2017 for the
Company’s PRC subsidiaries remain open for statutory examination by PRC tax authorities.
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DATASEA INC.
Notes to Consolidated Financial Statements
NOTE 11 – COMMIMENTS
Lease Agreement
In December 2017, the Company renewed the one-year operating lease agreement. The lease will expire on February 28, 2019 and has
a monthly rent of RMB 35,192 (or approximately $5,279). Future rental payment due under the lease is RMB 281,536 or
approximately $42,230).
Rent expense for the years ended June 30, 2018 and 2017 was $63,345 and $63,790, respectively.
In December 2017, the Company renewed the one-year property management contract. The contract will expire on February 28,
2019 and has a monthly management fee of RMB 70,384 (or approximately $10,558). Future management fees due under the contract
are RMB 563,072 (or approximately $84,460).
NOTE 12 – SUBSEQUENT EVENTS
On August 22, 2018, the Company’s Board of Directors and majority stockholders adopted a 2018 Equity Incentive Plan, or the 2018
Plan, for the Company to award up to a maximum of 4,000,000 shares of their common stock, to attract and retain the best available
personnel, provide additional incentives to employees, directors and consultants and promote the success of their business. No awards
have been granted under the 2018 Plan as of the date of this report, but the Company’s Board of Directors or a designated committee
thereof will have the ability in its discretion from time to time to make awards under the 2018 Plan, including to their officers and
directors.
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