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10-K 1 f10k2020_dataseainc.htm ANNUAL REPORT
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, 2020
☐ 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)
20th Floor, Tower B, Guorui Plaza
1 Ronghua South Road, Technological
Development Zone
Beijing, People’s Republic of China
(Address of principal executive offices)
45-2019013
(I.R.S. Employer
Identification No.)
100176
(Zip Code)
+86 10-56145240
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value
Trading
Symbol
DTSS
Name of each exchange
on which registered
NASDAQ Capital Market
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of
the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☒
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
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 price for the Registrant’s common stock on June 30, 2020, as reported on Nasdaq Capital Market, was $43,563,199.
As of September 16, 2020, 20,943,846 shares of common stock, $0.001 par value per share, were issued and outstanding.
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DATASEA INC.
Annual Report on Form 10-K
For the Fiscal Year Ended June 30, 2020
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Description of Business
Risk Factors
Unresolved Staff Comments
Description of Property
Legal Proceedings
Mine Safety Disclosure
PART I
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for Common Equity and Related Stockholder Matters
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
PART IV
ii
1
21
41
42
42
42
43
43
44
49
49
49
50
52
53
58
61
63
64
65
All references to “we,” “us,” “our,” “Company,” “Registrant” or similar terms used in this report refer to Datasea Inc., a Nevada corporation, including its
consolidated subsidiaries and variable interest entity (“VIE”), unless the context otherwise indicates.
“PRC” or “China” refers to the People’s Republic of China, excluding, for the purpose of this report, Taiwan, Hong Kong and Macau. “RMB” or “Renminbi”
refers to the legal currency of China and “$”, “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 and a smart security systems provider with proprietary technologies, based in Beijing, China. We focus on visual
and non-visual fusion perception algorithms and big data analytics technologies, with the goal of providing customers with smart security solutions, smart hardware
and education-related technologies applicable across multiple scenarios and industries.
We are committed to building a smart security ecosystem driven by overall needs for security. The Company has managed to commercialize its products to
schools, public communities, governmental authorities, retail outlets, healthcare and scenic areas all over China. Additionally, the Company has built up partnerships
with many world-famous enterprises and institutions, including Alibaba, Tencent, Baidu and so on.
We generate revenue by selling its smart security system products and smart hardware products to our customers. Presently, the Company mainly leverages
its independently-developed big data security platform and smart 3D security platform to provide standardized or customized smart security systems towards
schools, public communities and scenic areas. The systems feature specific functions, which include technical protection, networked alarming operation, cloud
alarming and epidemic prevention. The Company has developed a one-stop turnkey solution that covers the entire public safety process including designing,
developing, implementing and performing operation & maintenance. With respect to its smart hardware products, the Company utilizes the “basing purchase on
sales” business model where we complete all the designing tasks in-house, then outsource the manufacturing to experienced third parties, while exercising quality
control over the final work product.
We market and sell our smart security products, and solutions to customers through our own sales teams, partner agents and newly-founded operating
entities to achieve internal sales goals. For the year ended June 30, 2020, we experienced a growth in our revenue. In addition to direct sales and providence of
operation & maintenance service, we are also generating incremental revenue through various recurring services and platform-based value-added services.
Furthermore, as an extended value-added service to our safe campus security system, we develop and offer education-related technologies to build campus
networks, education management systems, education cloud platforms, science education platform and other education systems used in schools.
The Company keeps exploring opportunities related to new value-added services that extend from the combination of smart security platforms and big data
platform. We have also recently started to provide a series of value-added services such as smart consumptive payment in retail, 5G value-added services through
synergies with operators, and e-commerce platform interfaces through the mobile version of Datasea's security systems, which have widened the Company's
business coverage and brought about new sources of revenue and profit.
We have recently expanded our business and customer development to 13 provinces in China, such that our products are sold in about 40% of the
provincial administrative regions in China; moreover, we have initiated marketing in Uganda, the Democratic Republic of Congo and other countries in Africa.
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Impact of coronavirus outbreak
In December 2019, a novel strain of coronavirus (COVID-19) was reported in China, upon which the World Health Organization has declared the outbreak
to constitute a “Public Health Emergency of International Concern.” During the period from January to March 2020, the Company’s marketing and business
developments efforts have been materially adversely affected since, among other reasons, the Company’s employees were not able to return to our offices to resume
their duties. The Company resumed its operations in April. As a recipient of the PRC government support programs intended to mitigate the adverse economic
impact of the pandemic, the Company expects that its business operations would recover and not be materially affected going forward. Its intelligent security
platform has enabled the Company’s R&D team to continue working in online mode during the pandemic, which the Company believes would facilitate and support
the Company’s recovery. In addition, the Company believes its efforts to move its functions online were sufficiently prompt and effective to minimize adverse
effects on the Company’s financial reporting and internal control over financing reporting systems. The Company does not anticipate any impairments of its assets.
However, the Company expects that the impact of the COVID-19 outbreak on the United States and world economies may have a material adverse affect on the
demand for the Company’s services. We currently believe that our financial resources will be adequate to see us through the outbreak. However, in the event that the
pandemic continues on for a longer period of time, we may need to raise capital in the future.
The COVID-19 pandemic has prompted the Company to focus on developing epidemic related products to pursue new business opportunities. The smart
epidemic system designed and developed by the Company in February of 2020 has been placed with 22 schools and 62 communities across a number of provinces
in China.
Recent Developments
On December 21, 2018, we completed a registered, underwritten initial public offering and concurrent listing of our common stock on the NASDAQ
Capital Market, which offering generated gross proceeds of $6.7 million before deducting underwriter’s commissions and other offering costs, resulting in net
proceeds of approximately $5.7 million (the “2018 Offering”), of which $1,000,000 was placed in an escrow account. $600,000 of the escrow fund is being held by
the escrow agent pursuant to the terms and conditions of a certain Indemnification Escrow Agreement between us and the underwriter of the offering. $400,000 of
the escrow fund was disbursed to the Company in February 2019 when the underwriter confirmed receipt of a written legal opinion from PRC legal counsel in
connection with such offering. In the 2018 Offering, we sold 1,667,500 shares of common stock (including shares issued pursuant to the underwriter’s over-
allotment option) at an offering price of $4 per share. In connection with the 2018 Offering, our common stock began trading on the NASDAQ Capital Market
beginning on December 19, 2018 under the symbol “DTSS.”
On October 16, 2019, Shuhai Information Technology Co., Ltd. (“Shuhai Beijing”), our variable interest entity, incorporated a wholly owned subsidiary,
Heilongjiang Xunrui Technology Co. Ltd., which to focus on research and development of new technologies and products.
On December 3, 2019, Shuhai Beijing formed Nanjing Shuhai Equity Investment Fund Management Co. Ltd. (“Shuhai Nanjing”), a joint venture in PRC,
in which Shuhai Beijing holds a 99% ownership interest with the remaining 1% ownership held by Nanjing Fanhan Zhineng Technology Institute Co. Ltd, an
unrelated party that was supported by both Nanjing Municipal Government and Beijing University of Posts and Telecommunications. Shuhai Nanjing was formed
for purposes of easy access of government support and private financing in new technology development and project incubation.
In January 2020, as described below, to expand our business operation, we acquired ownerships in three entities for no consideration from our management
who set up such entities on the Company’s behalf.
On January 3, 2020, Shuhai Beijing entered into two equity transfer agreements (the “Transfer Agreements”) with Zhixin Liu, President of the Company,
and Fu Liu, a Director of the Company (Fu Liu is the father of Zhixin Liu). Pursuant to the Transfer Agreements, Fu Liu and Zhixin Liu, each agreed, for no
consideration, to (i) transfer their 51% and 49% ownership interest, respectively, in Guozhong Times (Beijing) Technology Ltd. (“Guozhong Times”) to Shuhai
Beijing; and (ii) transfer their 51% and 49% ownership interest, respectively, in Guohao Century (Beijing) Technology Ltd. (“Guohao Century”) to Shuhai Beijing.
On January 7, 2020, Shuhai Beijing entered into another equity transfer agreement with Zhixin Liu, Fu Liu and Ze Liu, who is an unrelated third party.
Pursuant to this equity transfer agreement, Fu Liu, Zhixin Liu and Ze Liu each agreed to transfer their 51%, 16%, 33% ownership interests, respectively, in
Guozhong Haoze (Beijing) Technology Ltd. (“Guozhong Haoze”) to Shuhai Beijing for no consideration.
Guozhong Times, currently focusing on marketing and selling of Shuhai’s product portfolios, as well as valu-added services such as big data and
consumptive payment, has obtained certain orders and earnings; Guohao Century, focusing on exploring telecommunication (e.g. 5G messaging) partnerships with
major telecom operators in China to continuously improve our range of service, business model and product offerings, is currently under preparation. Guozhong
Haoze is mainly formed for further development and marketing of our smart security hardware products as well as penetration in the fireproofing market, whose
non-visual hardware products have been demonstrated in laboratories.
On August 17, 2020, Shuhai Information Technology Co., Ltd. (hereinafter referred to as Shuhai Beijing), the VIE of Datasea Inc., registered and founded a
wholly-owned subsidiary in Shenzhen, Guangdong —- Shuhai Jingwei (Shenzhen) Information Technology Co., Ltd., which is intended for carrying out smart
security business in the Guangdong-Hong Kong-Macao Greater Bay Area as well as international import and export in a timely manner.
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In June 2020, the Company filed a Registration Statement on Form S-8 to register 4,000,000 shares issuable pursuant to the 2018 Plan. The 2018 Plan was
intended to attract and retain the best available personnel and provide additional incentives to employees, directors and consultants. No awards have been granted
under the 2018 Plan as of the date of this report.
In June 2020, we filed a “shelf” registration statement on Form S-3 to from time to time issue and offer up to $100,000,000 aggregate dollar amount of
common stock, debt securities, warrants or units of securities.
On July 2, 2020, the Company received a notification from the Nasdaq Listing Qualifications staff (the “Staff’) stating that since the Company has not held
an annual meeting of shareholders within 12 months of the end of its fiscal year end, it no longer complied with Nasdaq continued listing rules 5620(a) and 5810(c)
(2)(G). As such, the Company is afforded 45 calendar days to submit a plan to regain compliance with the foregoing requirement and, if the Staff accepts the plan,
the Company will be granted an exception of up to 180 calendar days from the fiscal year end, or until December 28, 2020, to regain compliance. The Company was
added to a list of all non-compliant companies, which is posted on our website at listingcenter.nasdaq.com. Subsequently, the Company submitted a plan of
compliance which was approved by the Staff. The Company is in the process of preparing for its Annual Meeting of Shareholders in 2020.
Operational Developments
The independently-developed big data security platforms and smart 3D security platforms, altogether with the integration with high-precision hardware
products, has enabled us to build smart 3D security systems for users across multiple fields, including safe campus security systems, public community security
systems and smart scenic area security system. As of the reporting date, the safe campus security systems have been used in many schools in Liaoning, Jilin,
Jiangsu, Shanxi and other regions in China. Despite the impact of coronavirus pandemic in early 2020, the Company is still actively expanding the safe campus
market and has signed contracts with new customer from Heilongjiang and other places. Our public community security system has been utilized and promoted in
community projects in Beijing, Anhui, Fujian and other places. We plan to promote this public community security system throughout China. As for the smart scenic
area security system, we have finished development and testing of the 1.0 version and plan to put it onto the market in 2021.
The Company has been taking great efforts to upgrade and improve our smart security systems. After the COVID-19 outbreak, our R&D team was able to
complete development of the Datasea epidemic related system within two months, which was based on our smart security system, thus enabling us to provide
schools and public communities with epidemic monitoring and control systems. As of August 21, 2020, the Company has completed installation of epidemic
prevention and control systems in 62 public communities and 22 schools from Beijing, Tianjin, Anhui, Fujian, Heilongjiang and other places.
As part of Datasea’s Epidemic Control System (Campus Version), the Company's R&D team has developed an applet called Datasea Cloud School enabled
by WeChat applet, with basic functions including epidemic reporting (from student, teacher and campus side, respectively), student information collection,
assignment review, guest management, student attendance management, campus activity, notification release and so on.
Besides, Datasea has successfully achieved upgraded integration between its epidemic control system and Datasea 3D security system. At present, in
addition to basic functions such as intelligent video surveillance, dynamic video identification, personnel identification, staff function management and e-map
management, Datasea has also achieved upgrading of the epidemic prevention and control sub-system to provide users with comprehensive tools for epidemic
monitoring and control.
The Company is taking great efforts to expand market network and strengthen sales team. It has gradually built up a sales team with experience of serving
the Fortune 500 companies, which is divided by five major regions in terms of domestic market development: the three northeastern provinces, Beijing-Tianjin-
Hebei, the Yangtze River Delta, the central and western regions, and the Guangdong-Hong Kong-Macao Greater Bay Area; at the same time, it also continues to
develop agent channels all over China, so as to leverage agent corporate marketing resources and experience in education and public sectors to win both customers
and orders. As of August 21, 2020, the Company has completed obligations concerning epidemic related system contracts with 62 public communities and 22
school, among which the Company has obtained customers in Beijing, Tianjin, Anhui and Fujian for the first time, resulting in the Company's products being sold in
40% of China's provincial administrative regions.
The business development and financial performance for the last fiscal year has demonstrated the Company's capability of sustaining normal operations.
The accompanying audited consolidated financial statements were prepared assuming the Company will continue as a going concern, which contemplates continuity
of operations, realization of assets, and liquidation of liabilities in the normal course of business. As discussed below, for the fiscal year ended June 30, 2020, we had
a revenue of $1,414,780 and a gross profit $1,268,400, representing an increase as compared with the prior year.
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History and Background
We were incorporated under the laws of the State of Nevada on September 26, 2014 under the name Rose Rock Inc. On May 27, 2015, we amended our
articles of incorporation to change our name to Datasea Inc. Up until October 2015, our primary business activities were 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 (without giving effect to our one-for-
three reverse stock split that became effective on May 1, 2018), 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 appointed as the Chairman 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 Datasea 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 6,666,667 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 Shuhai 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 Chairman of the
Board, 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”) among Tianjin Information, 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.
On April 12, 2018, our Board of Directors and stockholders approved a one-for-three reverse stock split of our issued and outstanding shares of common
stock, which became effective on May 1, 2018, decreasing the number of outstanding shares from 57,511,771 to 19,170,827. Subsequent to the split, the number of
our outstanding shares of our common stock increased from to 19,170,827 to 19,170,846 to accommodate certain shareholders’ positions due to rounding elections
payable at the beneficial owner level. Unless otherwise stated, all shares and per share amounts in this report have been retroactively adjusted to give effect to this
stock split.
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VIE Agreements
Operation and Intellectual Property Service Agreement – The Operation and Intellectual Property Service 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, but the parties can agree in writing to terminate the Entrustment
Agreement.
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.
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, bonuses and other forms of
investment returns 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.
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Corporate Structure
The chart below depicts the corporate structure of the Company as of the date of this report.
Corporate business
Big data security platform
With reliance on Internet platforms, the Company's big data security analysis system is enabled to integrate video surveillance resources and make analysis
based on AI and big data technologies, so as to meet the application needs of different security scenarios across industries.
Smart 3D security platform
The Company leverages advanced computer visual algorithms, the fusion of visual and non-visual perception algorithms, and the big data analysis engine
to build smart 3D security holographic perceptions to facilitate global monitoring and real-time decision-making. Moreover, it is also capable of building up a cloud-
based smart 3D security system.
The Company was able to integrate a series of smart hardware products including high-precision face recognition temperature measurement devices, double
spectrum infrared temperature measurement cameras and various sensing detectors based on the above-mentioned core platforms, which was helpful to establish
smart 3D security systems at the user side. For this reason, we have specifically developed three types of smart 3D security systems according to industrial
application scenarios, i.e. Safe Campus security system, public community security system and scenic area security system, so as to cater to customers’ ever-
increasing requirements.
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Safe Campus Security System
Relying on the integration of visual and non-visual perception algorithms, our Safe Campus security system is developed based on our big data security
platform and smart 3D security platform, for the purpose of ensuring personal safety of teachers and students, improving campus security system, and enhancing
overall prevention and control capacity throughout campus. We offer different options to fit the different requirements of kindergartens, primary schools, middle
schools and colleges. Users can either buy the standard version (including basic function modules) or buy tailor-made system according to their specific needs.
Information-based smart management all over the campus can now be implemented through data processing by such security system. So far, through systematic and
statistical analysis of information, this system has been used for personnel identification management, alarm receipt and response management as well as file
management so as to achieve intelligent data-based management of key targets (including people, location, object, matter, organization) as well as plans,
contingencies and measures for prevention and control across the campus. In addition, with the increase in the number and frequency of individual users
downloading and using the safe campus security system through their mobile devices, the Company has managed to explore the business model of providing
individual users with value-added services like e-commerce platform interface.
According to the Report of Market Prospective and Investment Strategy Planning on China Security Industry (2018-2023) by China Qianzhan Industry
Research Institute, alongside with the speeding-up of AI industrialization, smart security products are expected to see a high-speed development, and the security
market size in China is forecasted to reach the trillion (RMB) level. To capitalize the market opportunity, we plan to establish a nationwide sales network in China
through our sales team and strategic partners. So far, our Safe Campus security system have been applied in schools of Liaoning, Jilin, Jiangsu, Shanx, and
Heilongjiang provinces. We intend to continue to increase R&D investment to improve Safe Campus solutions, enhance campus security, and ensure campus a safe
place with excellent services.
Public Community Security System
Our public community security system has security functions of video surveillance, property management, vehicle analysis, electronic tour inspection and
so on. Through real-time video monitoring, face recognition and other security functions, anomalies can be detected for risk control, and the application value of
video can be improved in an efficient and simple way by transforming passive surveillance into active prevention, thus comprehensively improving the security
prevention capacity throughout the community. The newly-designed module of smart community security system has been used in residential communities in
Beijing Anhui, Fujian and other provinces. In order to satisfy diversified operational management requirements, the team has also developed different versions
(WeChat applet, APP) mobile applications to meet the needs of households, property management and the whole community. Such system is designed to improve
the efficiency of public community management and provide convenience for people in the community. We plan to promote this public community security system
nationwide in the near future.
Scenic Area Security System
Based on our big data security platform and smart 3D security platform, our scenic area security system, is developed as an all-round smart security
solution towards users. Featuring a combination of functions (e.g. HD video surveillance, behavior and status analysis, electronic tour inspection system, statistical
analysis of passenger flow and flow limiting system) and a number of systems like GIS map, comprehensive security management all over scenic area can be well
implemented. Customers can either choose among different options according to the type of scenic areas or buy tailor-made systems according to their specific
needs. Currently, the smart management system of scenic areas has realized data sharing through integration of multiple resources, and better ensured the orderly
and secure operation of scenic areas through the visualized security management empowered by big data. We have finished development and testing of the 1.0
version of our smart scenic area security system and plan to put it onto the market in 2021.
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Datasea epidemic system
In the context of the COVID-19 pandemic, we made efforts to leverage our technological capabilities to develop an epidemic control system by using our
big data security management platform and smart 3D security platform in a short period of time. Such system is mainly designed to provide public health data
monitoring service for various end-users, including schools and public communities.
Characteristics - campus version
As part of Datasea’s Epidemic Control System (Campus Version), the Company's R&D team has specifically developed an applet called Datasea Cloud
School enabled by WeChat (student version and teacher version). This system can be integrated with functions like abnormal temperature reporting, health kick,
real-time data uploading, anomaly alarming, assignment management, academic performance management, face recognition and so forth, thus helping schools carry
out efficient epidemic control and ensure normal reaching and research operation.
Characteristics - public community version
Needs on security are more complicated in public places with dense population, such as residential communities, shopping malls and factories. Compared
with the campus version, the community version also has functions of code scanning registration via mobile phones, thermal imaging temperature measurement,
mask detection, home quarantine visits, etc., which has addressed the challenges of temperature detection of large passenger flows and low efficiency of epidemic
detection that usually occurred in public places and has effectively cut off the spreading channels of the epidemic.
Expanding our business model
During the reporting period, the Company expanded its business model by charging service fees in addition to selling hardware or software products.
From April to May 2020, we have signed new agreements that entailed service fees with various K-12 schools. Generally, the term of these agreements is
three to five years. According to these agreements, we will provide epidemic systems to these schools free of charge, while the schools collect service fees from
students and pay us for each semester. No service fees from these agreements were recorded in the year ended June 30, 2020 as services have not been provided yet.
With the gradual provision of relevant services, the corresponding revenue will then be recognized. We believe that providing services to these schools will be a
significant step in our development which we anticipate will allow us to expand and build long-term relationships with customers.
From late August to September 2020, the Company signed agreements with 6 institutions (including 4 gas stations) in Shenzhen, a city of Guangdong
Province, to provide big data value-added services to the above-mentioned customers, e.g. big data smart information software platform and hardware utilization,
payment and interface maintenance, etc., so as to collect service fees. Datasea’s Smart System is designed to service the needs of retail industry vendors and utilizes
big data analytics and facial recognition technology. The system allows retailers to employ facial recognition technology to charge customers to be used at the point
of sale. The Company will install hardware equipment for the clients, perform regular maintenance, and provide the Smart System in exchange for 0.38% of
transaction value of each transaction utilizing the Company’s technology. The term of each of the service agreement is one year.
In addition, with the increase in the number and frequency of individual users downloading and using the safe campus security system through their mobile
devices, the Company has managed to explore the business model of providing individual users with value-added services like e-commerce platform interface.
For the fiscal year ended June 30, 2020, the Company achieved a total revenue of $1.41 million, including $1.29 million generated by 20 schools through
Safe Campus security systems sold by agents, as well as around $120,000 generated by 62 epidemic related system contracts.
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Competitive Strengths
We believe our market position and potential future growth can be attributed to the following key factors and competitive strengths:
1. Talents
The current R&D team consists of 26 technical engineers from Chinese Academy of Social Sciences, Tsinghua University, Harbin Institute of Technology,
Huawei and other well-known universities and hi-tech enterprises. The Company has organized its sales team with experience in serving the Fortune 500 enterprises,
and has attracted professionals from well-known enterprises and listed companies at home and abroad to take charge of finance, risk control, strategy and capital
departments.
2. Technological R&D
Attaching great importance to R&D and innovation, the Company has built up 2 innovation research institutes, established an R&D team with backgrounds
from well-known universities such as the Chinese Academy of Social Sciences and Tsinghua University, who are integrating visual and non-visual perception
technologies to enable the transition of functions like full scene, dead-angle free and full perception and high-speed early-warning linkage towards the stage of
multi-dimensional cognition of the whole scene. It has been certified as one of the National Hi-tech Enterprises and Zhongguancun Hi-tech Enterprises. Up to now,
the Company has obtained 30 copyright registrations in China for our software and 3 independent patents in China. In addition, we filed 13 patent applications,
which are currently under review.
3. Quality excellence
The Company has been certified (passed respective examinations and tests) by MPS (Ministry of Public Security) Quality Supervision and Testing Center
of Security Products for Computer Information Systems, ISO9001, ISO27001, ISO14001 and ISO18001, as well as Security Engineering Qualification Certificate
issued by China Security Technology Prevention Industry Association, Membership Certificate issued by China Security Technology Prevention Industry
Association, and CCC (China Compulsory Certification) issued by China Quality Certification Center, which turn out to be powerful assurance of our product
quality.
4. Market opportunity
The security market size in China is under sustained growth, from RMB 328 billion in 2012 to RMB 620 billion in 2017, at an annual compound growth
rate of 14%. According to the “13th Five-year (2016-2020) Development Plan of Security Industry in China” released by China Security Technology Prevention
Industry Association (CSTPIA), security industry will transform and upgrade in the direction of large-scale, automation and intelligence during the “13th Five-year”
period. By 2020, the total revenue of security enterprises is forecasted to reach RMB 800 billion with an annual growth rate of 10%+.According to the Report of
Market Prospective and Investment Strategy Planning on China Security Industry (2018-2023) by China Qianzhan Industry Research Institute, alongside with the
speeding-up of AI industrialization, smart security products are expected to see a high-speed development, and the security market size in China is forecasted to
reach the trillion (RMB) level. To capitalize the market opportunity, we plan to develop our business in a more vigorous manner across China.
5. Customer resource and location advantage
Products with stable performance, service and after-sales support have won the Company consistent praise among customers, especially those under
cooperation in Beijing, Liaoning, Jilin, Heilongjiang, Jiangsu, Shanxi, Zhejiang, Guangdong and other provinces. Thanks to the already-established distributed sales
channel nationwide, our products can be sold in about 40% of China's provincial administrative regions. The wide coverage of market, as well as expertise,
performance and reputation in the industry are all conducive to wining more opportunities.
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Growth Strategy
Driven by new technologies and new products
Datasea’s R&D team, with support of the Company's two innovation research institutes, (please refer to section R&D Capacity) integrates visual and non-
visual perception technologies to enable the functions such as full scene, dead-angle free and full perception and high-speed early-warning linkage. It will leverage
its technology reserves to create unique technological advantages across the industry, by implementing constantly ehanced improvements and to ultimately attract
customers and guide them to develop new user habits and needs with technological innovations and new products that can better meet customers’ needs.
Driven by market needs
The global COVID-19 outbreak not only altered the daily life habits and corresponding security requirements across countries and communities, but also
created new opportunities for smart security industry. Meanwhile, the over one trillion yuan demand driven by China's "new infrastructure" on the domestic market
is expected to usher in a new round of iteration in the industrial structure, technology and products of China's smart security industry. For competitive purposes, the
Company recognizes the need to quickly respond to the market changes and the increase in new customer demand. Datasea has made (development of its epidemic
prevention and control system) and will continue to make the appropriate adjustments necessary to position itself in the best situation possible.
Driven by sales system
The Company looks to grow and further establish a multi-channel sales system. First, through in-depth market research, Datasea was able to understand and
comprehend the demand from its customers. Second, through a growing sales team, developing set of channel agents, and additional sales team of new operating
entities, the Company was able to locate potential customers, and provide current customers with system developments or products in a targeted manner to address
their needs. Third, as a result of participating in industry summits and carrying out online marketing and building strategic partnerships, Datasea was able to enhance
the Company's brand awareness and market presence. Finally, we are able to provide sales support. Going forward, the mature and efficient operations of the
Company's sales system will bring continuous improvement of customers and orders, in conjunction with a robust sales force to improve the core business. Datasea
has witnessed an increase in the number of orders and customers thanks to the ever-maturing sales system and highly efficient operation.
Driven by talents
The Company continues to strengthen talent building and has established an R&D team consisting of 22 technical engineers from Chinese Academy of
Social Sciences, Tsinghua University, Harbin Institute of Technology and other prominent universities and hi-tech enterprises, has organized a sales team with
experience in serving the Fortune 500 enterprises, and has attracted professionals from well-known enterprises and listed companies domestically and internationally
within its finance, risk control, strategy and capital departments. We will also keep enrolling high-end technical talents with positive corporate culture, stock
incentive plan and other means.
Driven by management
We have set up a series of management systems that cover the Company’s operation management, financial management, internal control management,
sales management, brand management, commissioned processing management, talent management and investment management, which are effectively assessed,
then implemented. For example, the Company will assess the quality and effectiveness of management’s execution and will correspondingly reward and incentivize
the manager as seen fit. Datasea has witnessed this method being the most effective and efficient for its operations.
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Driven by incentives
For the purpose of attracting and retaining high-end talents and maximizing the effectiveness of the system building and management models, the Company
continues to promote the equity incentive system. Employees such as the management team, R&D team, market and operation team, directors and consultants, as
well as external partners who have contributed to the Company’s development, shall be motivated in various forms, for example, stock incentive plan of listed
companies.
Driven by data
Data analysis and processing is the basis for providing customers with more optimized security solutions. The collection and analysis of data provides the
most direct and effective support towards the Company's new product R&D positioning, market trend and customer demand analysis, as well as the basis for the
Company to make new product development decisions. Moreover, the decisions based on data analysis will endow our team with capacity of providing better data
services to customers and collecting secure desensitized data. Going forward, the Company will further accelerate the collection of security data and improve its data
analytic capabilities, and speed up the offering of value-added services concerning scenario-based big data applications, with the goal of achieving sustainable
growth.
Exploration of Additional Business Opportunities
Exploring new business under the guidance of new technology and new products is the core force driving development of Datasea. In 2020, the Company
keeps exploring new value-added service opportunities brought by the combination and extension of smart security platform and big data platform, and has achieved
certain results. Also, we have started to provide a series of value-added service such as smart consumptive payment in retailing, 5G value-added services through
synergies with operators, and e-commerce platform interfaces based on the mobile version of Datasea's security systems, which have widened the Company's
business coverage and brought about new sources of revenue and profit.
Global expansion
We have initiated global market expansion according to our development strategy. Specifically, we have launched marketing campaigns in African
countries, including, among others, Uganda and the Democratic Republic of Congo.
Research and Development
Our Board of Directors and management attaches great importance to the building of technological and product innovation and R&D system. The
Technological Innovation Research Institute, headed by a doctor majoring in innovation from the Chinese Academy of Social Sciences, is mainly responsible for
building the technology and product innovation system based on the integration of visual and non-visual perception algorithms, so as to provide powerful support to
our technological and product R&D.
Institute of Technology Innovation is mainly responsible for the visual and non-visual fusion perception algorithm as the core of technology and product
innovation system, providing support for the specific R&D of products, with the Doctor focus on innovation of Chinese Academy of Social Sciences as the first
dean.
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The R&D team focuses on hardware. The leader is a postdoctoral fellow from the Shanghai Institute of Microsystems and Information Technology of
Chinese Academy of Social Sciences, who has done extensive research on microwave antennas and Large Scale High Speed Integrated Circuit Signal Integrity. The
research results have been published in the core journals at home and abroad. He is mainly responsible for core technical research and development of intelligent
security hardware-related products.
The R&D team focuses on Software. The Chief Technology Officer got bachelor degree from Harbin University of Technology and master degree from
Harbin University of Science and Technology. Mr. Jiao was the technical director of Beijing Tianxing Interconnection Information Technology Co. Ltd. and the
technical director of Heilongjiang Beidou Tianyu Satellite Co., Ltd. Now he is mainly responsible for the product development of intelligent security software
system.
1. Core technologies
The Company has set up the main direction of technical innovation and application with visual and nonvisual fusion perception algorithm as the core. In
2020 fiscal year, the Company has made the following achievements in patent application:
No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Publication
Number
CN108922101A
CN109033874A
CN109146406A
Description
An smart security campus management system of Shuhai Information
A multi-role login method of Android program based on SQlite database of Shuhai Information
The attendance system of Shuhai Information based on GPS positioning information supported
RFID technologies
CN108985423A
CN108961661A
CN108961661B
CN108922101B
CN111191540A
CN111243623A
CN111179527A
CN111179546A
CN111191656A
CN2019113640070
CN111212445A
CN111179969A
CN110374479 B
An electronic student card system of Shuhai Information
Shuhai security intelligent sensor system
Three-dimensional smart security alarm linkage system
A smart security campus management system of Shuhai Information
An object status analysis method and system based on thermal gradient
A method, device and system concerning progressive audio alarm
An alarm method, device, system and storage medium based on dynamic audio information
An adaptive distributed audio alarm method and system
Behavior recognition method and system based on multi-spectral image information
An S-AIOT information management method and system based on consensus mechanism
An S-AIOT information processing method and system based on neural network
An alarm method, device, system and storage medium based on audio information
A type of intelligent security equipment
Application
Type
Invention
Invention
Invention
Invention
Invention
Invention
Invention
Invention
Invention
Invention
Invention
Invention
Invention
Invention
Invention
Invention
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2. Major products
The Company mainly focuses on developing the following two categories of products: software systems and smart hardware devices.
1) Software system - mainly refers to software system in connection with smart security. As a result of the Company's increased investment in R&D and the
onboarding of technical talents, the Company has totally obtained 30 copyright registrations in China for our software, which are shown in the table below:
No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Certification
Shuhai XIN Platform internet activity audit security management system V1.0
Shuhai XIN Platform WIFI device feature collection management system V1.0
Shuhai XIN Platform micro mall system V1.0
Shuhai XIN Platform SMS platform system V1.0
Shuhai XIN platform 3G website content management system V1.0
Shuhai media advertising system V1.0
Shuhai XIN platform micro marketing system V1.0
“Shuhai Safe Campus" mobile end - security management system V2.0
"Shuhai Safe Campus" security management system V2.0
"Shuhai XIN Platform" front-end equipment control system for smart elevator detection V2.0
"Shuhai XIN Platform" smart elevator inspection & pre-alarm management platformV2.0
"Shuhai XIN Platform" smart elevator real-time monitoring and alarm management platform V2.0
"Shuhai XIN Platform" smart elevator screen equipment monitoring system V2.0
"Shuhai XIN Platform" smart advertisement launching system V2.0
Shuhai Information smart safe campus management system V1.0
Shuhai Information XIN Platform security management system (Android Version) V2.21
Shuhai information XIN platform security management system (IOS version) V2.21
Shuhai Information big data smart decision-making platform for governmental affairs V1.0
Shuhai Information campus smart brain information management platform V1.0
Shuhai Information university big data innovation laboratory platform V1.0
Xunrui smart security integrated management platform v1.0
Xunrui big data visual analytics platform v1.0
Xunrui visual recognition algorithm platform v1.0
Xunrui non-visual recognition algorithm platform v1.0
Xunrui epidemic prevention and control linkage early warning system v1.0
Xunrui smart campus security management system v1.0
Xunrui smart scenic area security management system v1.0
Xunrui smart community security management system v1.0
Xunrui smart one-key alarm management system v1.0
Xunrui smart guest management system v1.0
Certificate No.
Ruan Zhu Deng Zi No.1054520
Ruan Zhu Deng Zi No.1111383
Ruan Zhu Deng Zi No.1111535
Ruan Zhu Deng Zi No.1111683
Ruan Zhu Deng Zi No.1111690
Ruan Zhu Deng Zi No.1111694
Ruan Zhu Deng Zi No.1111700
Ruan Zhu Deng Zi No.1575317
Ruan Zhu Deng Zi No.1575313
Ruan Zhu Deng Zi No.1574419
Ruan Zhu Deng Zi No.1575648
Ruan Zhu Deng Zi No.1575758
Ruan Zhu Deng Zi No.1575665
Ruan Zhu Deng Zi No.1575670
Ruan Zhu Deng Zi No.2888248
Ruan Zhu Deng Zi No.2918496
Ruan Zhu Deng Zi No.2918467
Ruan Zhu Deng Zi No.2962930
Ruan Zhu Deng Zi No.2961899
Ruan Zhu Deng Zi No.2962919
Ruan Zhu Deng Zi No.5201855
Ruan Zhu Deng Zi No.5201772
Ruan Zhu Deng Zi No.5201824
Ruan Zhu Deng Zi No.5201861
Ruan Zhu Deng Zi No.5201704
Ruan Zhu Deng Zi No.5201776
Ruan Zhu Deng Zi No.5201574
Ruan Zhu Deng Zi No.5201869
Ruan Zhu Deng Zi No.5201784
Ruan Zhu Deng Zi No.5201780
During this fiscal year, we independently developed a non-visual perception system and a face recognition and temperature measuring machine. The latter,
featuring an integration between face identity recognition and body temperature measurement, is widely applied in highly-populated public places in the current
context of coronavirus pandemic, so as to provide strong technical support to stop the widening of the epidemic through rapid screening and targeting of individuals
with fever symptoms. The non-visual perception system is mainly composed of front-end data acquisition device and back-end software platform. The front-end
device is composed of various smart sensors to collect all kinds of information under various scenarios. The platform is the basis for data analysis, computing and
AI computing. Through continuous accumulation and iterative learning, it enables managers to be more efficient in event processing.
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3. Intellectual property rights
As of the date of this report, we have obtained 30 copyright registrations in China for our software and 3 independent patents in China. In addition, we filed
13 patent applications, which are currently under review.
4. Planning for innovation
The Company's innovation planning focuses on the following two aspects:
1. Continue to strengthen the innovation of existing technologies. Mainly strengthen the non-visual perception system audio pre-alarm, blockchain in a
safe state, infrared night vision, binocular monitoring system, visual perception infrared temperature measurement, face recognition + voiceprint
recognition, video recognition and audio recognition fusion. With the special scenes under the abnormal sound recognition and other aspects, more
independent innovations have been formed.
2. Quickly promote the transformation of technological achievements into application products. Based on the existing 18 technical achievements, the
focus is on the realization of functions of visual and non-visual fusion perception algorithms in intelligent security systems and intelligent hardware.
5. R&D investment
As for the fiscal year ended June 30, 2019 and 2020, we spent $168,248 and $1,114,486 in research and development, respectively. We intend to invest
approximately $10 million in technological product development over the next three years.
No.
1
2
3
4
5
6
7
Item
Salary of R&D personnel (incl. the introduction of high-end talents)
Procurement of scientific research facilities
Procurement of testing devices
Intermediate testing and tooling
Establishment of new technical schedule
Appointment of external technical experts
Others
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% in budget
60%
18%
6%
5%
4%
5%
2%
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Product Manufacture
1. Mode of production
In order to save costs and based on a comprehensive understanding of the industry and market, the Company has adopted the mode of outsourcing in
manufacturing, but carried out the mode of independent or joint design in technological R&D and product appearance.
2. Control over manufacturing process and quality
1. The Company has the following requirements on outsourcing partners: independent production facilities, advanced manufacturing equipment, smart
production lines, abundant outsourcing cooperation cases and a good reputation in the industry.
2. Outsourcing partners shall pass through ISO9001:2008, ISO14001:2004, OHSAS18001:2007 and CCC certification, and meet our production and
manufacturing standards.
3. Outsourcing partners should have a separate quality management department to take charge of the overall quality management system including
establishment, maintenance and continuous improvement.
4. Outsourcing partners should have built up a relatively-complete quality management system;
SQA: control over supplier quality system, quality standard formulation, quality assurance capability improvement and guidance, material quality
confirmation;
IPQC: responsible for quality control of the manufacturing process, to make sure that the manufacturing process meets relevant technical and quality
requirements, and problems are timely identified, back-fed and addressed;
QC: responsible for overall inspection and delivery inspection of finished products;
5. The Company checks whether the manufacturing quality of outsourcing partners meets the Company’s requirements by assigning resident personnel to
do sample testing of manufactured goods and collecting feedback on customers' actual use experience.
3、 Outsourcing partner and outsourced products
During the year ended June 30, 2020, we built partnerships with several outsourcing partners, including Shenzhen Guangan Shixun Technology Co., Ltd.
We are currently working with other outsourcing partners on new opportunities to reserve and optimize our outsourcing resource pool.
No.
1
2
3
Major Outsourcing Partner
Outsourced Product
Hangzhou Tuya Technology Co., Ltd.
Hangzhou Yufan Intelligent Technology Co., Ltd.
Shenzhen Zhongyang Communications Co., Ltd.
Temperature measurement + face recognition smart device
Face recognition device
Face recognition temperature measurement device, intelligent thermometer
Market operation
By the end of the reporting period, the Company has built up a marketing system, expanded regional markets of smart security products and projects at
home and abroad, and achieved better marketing performance in contrast to that of last year.
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1、Progress of regional market development
We have recently expanded our business and customer development to 13 provinces in China, such that our products are sold in about 40% of the
provincial administrative regions in China.
China (by administrative region)
Progress of regional market development
1
2
3
4
5
6
7
8
9
10
11
12
13
China (by regional economic belt)
1
2
3
4
5
2、Contract execution (as of the reporting date)
Beijing (Municipality)
Tianjin (Municipality)
Hebei Province
Anhui Province
Fujian Province
Guangdong Province
Jiangsu Province
Shanxi Province
Henan Province
Inner Mongolia Autonomous Region
Liaoning Province
Jilin Province
Heilongjiang Province
Three Northeastern Provinces
Beijing-Tianjin-Hebei
Yangtze River Delta
Central and Western Regions
Guangdong-Hong Kong-Macao Greater Bay Area
As of August 21, 2020, the Company has signed epidemic related system contracts with 62 public communities and 22 schools in Beijing, Tianjin, Anhui,
Fujian, and Heilongjiang and completed installation and commissioning, resulting in the Company's products being sold in 40% of China's provincial administrative
regions.
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3、Revenue-cost structure
Operating revenue
Operating cost
Gross margin
$
1,414,780 $
146,380.00 $
1,268,400
As of June 30, 2020, the Company achieved operating revenue of US$1,414,780 and operating costs of US$146,380, with an average gross ratio at 90%.
The main sources of income included 22 safe campus clients and 62 public community clients. All the sales revenue is generated within China. In 2020, we
commenced marketing efforts in certain African countries, including Uganda, The Democratic Republic of Congo and others.
4、Operation of holding entities and affiliated companies
Following the development direction of the company, we adopt the parent-subsidiary corporate management mode, with headquarters as the strategic and
investment decision-making center, and the subsidiaries and VIEs as entities for market and project operation. The preliminary layout for the present stage has been
finished.
The Company has five holding entities and affiliates, including: Heilongjiang Xunrui Technology Co., Ltd., Guozhong Times (Beijing) Technology Co.,
Ltd., Guohao Century (Beijing) Technology Co., Ltd.,Guozhong Hoze (Beijing) Technology Co., Ltd., and Shuhai Jingwei (Shenzhen) Information Technology Co.,
Ltd. Guozhohg Times (Beijing) Technology Co., Ltd. achieved a sales revenue at $120,000. Heilongjiang Xungrui Technology Co., Ltd. signed sales contracts in
this July 2020 and obtained nearly $113,800 sales.
Customers
Schools and public communities are our major customer groups. As of the reporting date, we have signed contracts with 22 schools and 62 public
communities, in our key markets.
We provide smart security products and solutions according to the needs of customers across various sectors, including government, schools, communities,
scenic areas, industrial parks, shopping malls, hospitals, subway stations, high-speed rail stations, bus stations and airports. The Company signed agreements with 6
institutions (including 4 gas stations) in Shenzhen, a city of Guangdong Province in early September, to provide big data value-added services to the above-
mentioned customers, e.g. big data smart information software platform and hardware utilization, payment and interface maintenance, etc., and collect service fees.
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Competition
1、 The Company is engaged in the trillion-level security industry
According to the Report of Market Prospective and Investment Strategy Planning on China Security Industry (2018-2023) by China Qianzhan Industry
Research Institute, alongside with the speeding-up of AI industrialization, smart security products are expected to see a high-speed development, and the security
market size in China is forecasted to reach the trillion (RMB) level.
2、The Company has been in the stage of intelligent security
With the progress of technology and the deepening of application form, the industrial upgrading of security industry follows the development path of
"traditional security -> digital security -> network security -> intelligent security", and the technological innovation and industrial application of the Company has
fully achieved in the stage of intelligent security.
3、The Company enjoys outstanding advantages in technological innovation capabilities
The Company's outstanding advantages in technological innovation capabilities are in algorithms, front-end perception and system integration.
● The algorithm mainly revolves around the innovation of visual and non-visual fusion perception algorithms.
● Front-end perception is mainly regarding the integration and productization of the Company's algorithm technology into intelligent perception
hardware.
● System integration is mainly reflected in the Company's intelligent security management system interconnecting various front-end intelligent
perception hardware to form the Internet of Things, and collecting various real-time data combined with visual and non-visual fusion perception
algorithms to analyze and process the data to establish our big data analysis and decision-making Management platform.
4、Peer comparison of the Company’s core technologies
The principal direction guiding our innovation and R&D are hi-tech products based on fusion of visual and non-visual perceptions. In contrast to peer
competitors in the industry, the following shall be taken as our advantages:
Item
Identity recognition
Face recognition
Face recognition + voiceprint recognition
Peer
Datasea
Security anomaly recognition
Video/audio recognition
Fusion of video recognition and audio recognition
Site-specific monitoring
None
Abnormal sound recognition
Note: The above products are currently under laboratory development with periodic breakthroughs. The application for relevant invention patent is now
under substantive examination.
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5、Strategy for building competitive barriers in the direction of security intelligence
The overall construction principle. In the R&D of new technologies and solutions, the basic technical links or modules are customized based on certain
standardization to achieve cost reduction and efficiency enhancement; Continuing to explore the actual needs of the AI + security market, and improve market
responses and expectations of security intelligence.
The Company is building up our overall competition barriers by implementing four comprehensive deployments as follows:
● Frontier core technology R&D investment and innovation development
● Large-scale deployment and implementation capacity of smart security engineering projects
● Manufacturing supply chain system
● Market operation system
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.
1. The primary governmental regulations applicable to our “Safe Campus” security 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).
2. The primary governmental regulations applicable to our “Scenic Area” system are:
Notice on Securing Epidemic Control and Orderly Resumption of Scenic Areas (Wenlvfadian [2020] No. 71) by the Ministry of Culture and Tourism as
well as National Health Commission of emphasizes the role of the "Internet + tourism" service platform and the adoption of big data analysis and other new
technological means to promote smart tourism and passenger flow management; On Revising and Printing Implementation Measures for Inspection, Qualification
and Management of National Sample Tourism Areas (Trial Version), and Notice on Inspection Standards for National Sample Tourism Areas (Trial Version)
(Banziyuanfa [2020] No. 30) by the General Office of the Ministry of Culture and Tourism clarifies the inspection standards for building of information platform of
smart scenic areas and building of smart security software/hardware infrastructure.
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3. The primary governmental regulations applicable to our “Smart Community” system are:
Notice on printing and releasing the Smart Community Construction Guideline (Trial Version) (Jianbanke [2014] No. 22) by the General Office of Ministry
of Housing and Urban-Rural Development clearly states that smart community construction is an essential part of smart city construction.
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 issued by Beijing Municipal Bureau of Statistics;
● National High Tech Enterprises Certificate jointly issued by Beijing Municipal Science & Technology Commission, Beijing Municipal Finance
Bureau, and Beijing Municipal Tax Service, State Taxation Administration;
● Zhongguancun High Tech Enterprises Certificate issued by Zhongguancun Science Park Administrative Committee;
● Value-Added Telecommunications Business Operating License issued by Ministry of Industry and Information Technology;
● Security Engineering Qualification Certificate issued by China Security Technology Prevention Industry Association;
● Membership Certificate issued by China Security Technology Prevention Industry Association;
● CCC (China Compulsory Certification) by China Quality Certification Center;
● Information Security Management System Certificate issued by Beijing Inspection and Certification Limited Company; and
● Environmental Management System Certificate issued by Huaxinchuang (Beijing) Certification Center Co., Ltd.
Employees
As of the date of this report, we have a total of 58 full time employees. The following table sets forth the number of our employees categorized by function
as of that date:
Function
Management
Human Resources Administrative Management
Internal Controls
Capital Operation
Purchase
Marketing and Sales
Research & Development
Finance & Accounting
Total
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Total
Number of
Employees
7
3
3
1
2
1
11
26
4
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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 have a limited operating history as a developer of smart security solutions and education technologies. Our limited operating history may not provide an
adequate basis to judge our future prospects and results of operations.
We have a 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 safe campus, scenic area and public community security systems supported by our smart security solutions will be our core business 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 $1,065,936 and $6,072,637 as of June 30,
2020 and June 30, 2019, respectively. We generated revenues of $1,414,780 during the year ended June 30, 2020. We had a net cash outflow of approximately $5
million during fiscal year ended June 30, 2020. We had a deficit of approximately $7,413,381 at June 30, 2020.
Our resources and source of funds have primarily consisted 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 revenue of $1,414,780 from our business
during the year ended June 30, 2020, 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
assurance 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 that increase our costs or cause 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 rely on third-party contractors to manufacture our products, and expect that we will
continue to rely on existing and new contractual manufacturers for the foreseeable future. The following reliance issues could have an adverse impact on the supply
of our products and on our business and operating results:
● Any financial problems of our contract manufacturers or component suppliers could limit supply or increase costs;
● Reservation of manufacturing capacity at our contract manufacturers by other companies, inside or outside of our industry, could 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 relationships, 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 to key growth areas, such as smart 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.
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Our business substantially depends upon the continued growth of the security, security-based systems, and education technologies, the decrease of which could
have a negative impact on our business.
A substantial portion of our business and revenue depends on growth and evolution of the security system and education technologies in the PRC and
globally, including the continued development and expansion 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.
Because of the rapid introduction of new products and changing customer requirements related, we believe that we could receive a high degree of publicity
and visibility. Because smart security systems are our major products and resources, 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 or services. 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 smart security system we provide is highly complex as the products incorporate both hardware and software technologies. Neither we nor our contract
manufacturers have developed a sophisticated product testing program due to the limit of available technologies. 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
adverse impact on our business. 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, additional inventory costs, or product reengineering expenses, any of which could have a material adverse impact on our
revenue, margins and net income.
We will likely have to incur indebtedness or issue new equity securities to fund future growth. 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. For the time being, we are
primarily depending on contribution from shareholders, equity financing and cash income. If cash from such 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. 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.
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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 and Chief Executive Officer, and Mr. Fu Liu, one of our directors and Ms. Liu’s father. Ms. Liu
and Mr. Liu 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/or Mr. Liu could materially and adversely affect our business
development.
The various 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 products
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 product 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 fluctuations 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
education-related technologies are mature companies with longer operating histories, more engineering resources, relatively sophisticated distribution channels and
existing customer bases. For our safe campus security solutions, we compete with others who also offer their own campus electronic management solutions. 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 provide manufacturing services for our products. If these services become unavailable, we would be
required to identify and enter into new agreements with other contract manufacturer 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.
Our smart security systems 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 smart security 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, which would harm our future financial performance.
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Changes to existing regulations may present technical, regulatory and economic barriers to the provision of our products and services, which may significantly
increase our costs and adversely affect the results of our operations.
The smart security industry in China is highly regulated by the PRC Ministry of Public Security and Ministry of Industry and Information Technology. The
PRC Ministry of Public Security and the Ministry of Industry and Information Technology might change the regulatory framework or impose higher technical
standards in the future. As a result of this significant regulation, we may be unable to comply with existing or new laws, rules and regulations, and may have to incur
extra costs in connection with engaging new technical staff, improving our existing products, and renewing our licenses.
The control deficiencies in our internal control over financial reporting may, until remedied, cause errors in our financial statements or cause our filings with
the SEC to not be timely.
Our disclosure controls and procedures were not effective or the period covered by this Annual Report as described in Item 9A. Controls and Procedures.
Ineffective internal control over financial reporting or disclosure controls and procedures may result in errors in our financial statements that could require a
restatement, or our filings may not be timely made with the SEC. We intend to implement additional corporate governance and control measures to strengthen our
control environment as we are able, but it takes management time and resources to achieve, and we may not achieve our desired objectives. Moreover, no control
environment, no matter how well designed and operated, can prevent or detect all errors or fraud. We may identify material weaknesses and control deficiencies in
our internal control over financial reporting in the future that may require remediation and could lead investors losing confidence in our reported financial
information, which could lead to a decline in our stock price.
We have seen a substantial improvement and progress in our internal control over financial reporting. If no improvement measures are taken, or if we
experience additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to
accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of
our common stock.
Our management has assessed the effectiveness of our internal control over financial reporting with an assessment report as of June 30, 2020, and plans to
shorten the cycle and increase the frequency concerning the testing cycle for the effectiveness of internal control measures. The annual risk control assessment
reporting system will be improved to a quarterly risk control assessment system
Our efforts in the building of internal control system is not limited to the formulation and implementation of financial management and control measures,
but focuses on the combination of comprehensive and targeted control to build up an internal control system that best fits us. According to the management system
imperfections concerning job responsibilities, departmental processes and so on that are identified through self-examination, the Company, by highlighting six
elements of "internal environment, risk assessment, control activities, information and communication, and internal supervision" and seven control measures
of"separate control of incompatible functions, authorization and approval control, accounting system control, property protection control, budget control, operation
analysis control and performance appraisal control", is gradually establishing and improving an internal control system featuring organizational structure,
development strategy, human resources, social responsibility, corporate culture, financial activities, procurement business sales business, research and development,
financial reports, comprehensive budget, contract management, internal information transfer and information system and other contents, and it is formulating the
internal control system applicable to the whole company and organizing related implementation in accordance with relevant laws and regulations and supporting
measures..
By the end of the fiscal year ending June 30, 2020, we have established a Risk Control Department led by the internal control director and a team of legal
counsels to ensure the Company’s compliance with relevant regulations and risk management requirements; we also formulated new policies or integrate a series of
internal control policies, including but not limited to the process from procurement to payment, the process from payment to the sales, cash management, cost
management, budget process, accounts receivable policy, assets and inventory management, internal audit policy and cost accounting, etc., and we provided training
for our employees, such as the Finance Department, Marketing Department, and senior executives; we set the International Affair Department to strengthen our
compliance and financing management on the international capital market; and we also employed a new legal counsel in China to enhance the Company's
operational compliance on the Chinese market.
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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 public company, we are facing 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.
Failure to comply with the Foreign Corrupt Practices Act could adversely affect our business.
We are required to comply with the United States Foreign Corrupt Practices Act (or FCPA), 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.
We have operations, agreements with third parties, and make sales in China. Companies with operations in China have been accused and found guilty of
sales practices that involve unlawful activity, including violations of the FCPA. We believe to date we have complied in all material respects with the provisions of
the FCPA. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants and/or distributors of
our Company may engage in conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may
be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the government may seek to hold our
Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
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We may be subject to liability if private information that we receive is not secure or if we violate privacy laws and regulations.
Because we store, process and use data, some of which contain personal information, we are subject to complex and evolving federal, state and foreign laws
and regulations regarding privacy, data protection and other matters. Many of these laws and regulations are subject to constant evolvement and change and
uncertain interpretation. Any violation of these laws could result in investigations, claims, changes to our business practices, increased cost of operations and
declines in user growth, retention or engagement, any of which could materially adversely affect our business, results of operations and financial condition.
In November 2016, the Standing Committee of the National People’s Congress passed China’s first cybersecurity law, or CSL, which took effect in June
2017. The CSL systematically lays out cybersecurity and data protection regulatory requirements and subjects many previously under-regulated or unregulated
activities in cyberspace and data management to government scrutiny. The costs of compliance with and other burdens imposed by CSL may limit the use and
adoption of our products and services and could have an adverse impact on our business.
The European Union General Data Protection Regulation 2016/679 (“GDPR”), which came into effect on May 25, 2018, includes operational requirements
for companies that receive or process personal data of residents of the European Economic Area. The GDPR establishes new requirements applicable to the
processing of personal data (i.e., data which identifies an individual or from which an individual is identifiable), affords new data protection rights to individuals
(e.g., the right to erasure of personal data) and imposes penalties for serious data breaches. Individuals also have a right to compensation under the GDPR for
financial or non-financial losses. Although we do not conduct any business in the European Economic Area, in the event that residents of the European Economic
Area access our website and input protected information, we may become subject to provisions of the GDPR. Compliance with the GDPR will impose additional
responsibilities and liabilities in relation to our processing of personal data. The GDPR may require us to change our policies and procedures and, if we are not
compliant, could materially adversely affect our business, results of operations and financial condition.
We are also subject to laws restricting disclosure of information relating to our employees. We strive to comply with all applicable laws, policies, legal
obligations, and industry codes of conduct relating to privacy, data security, cybersecurity and data protection. However, given that the scope, interpretation, and
application of these laws and regulations are often uncertain and may be conflicting, it is possible that these obligations may be interpreted and applied in a manner
that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure or perceived failure by us or our third-party
service-providers to comply with our privacy or security policies or privacy-related legal obligations, or any compromise of security that results in the unauthorized
release or transfer of personally identifiable information or other user data, may result in governmental enforcement actions, litigation, or negative publicity, and
could have an adverse effect on our business and operating results.
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Risks Relating to Our Corporate Structure
Our corporate structure, in particular, our Variable Interest Entities (or VIE), and their Agreements (or VIE Agreements), are subject to significant risks, as
set forth in the following risk factors.
We depend upon the VIE 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 Agreements, which agreements may not be as effective in providing us with control over
Shuhai Beijing as direct ownership. The VIE 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 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 uncertainties in the PRC laws concerning VIE structure could limit our ability to enforce the VIE Agreements, or could effect the
validity of the VIE 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 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 under applicable accounting rules, 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 accounting
purposes. If such entity’s financial results were negative, this would 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 Agreements. As a result, our revenues mainly 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 for any or no reason at all. 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 would 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 VIE Agreements. 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 PRC 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 Information and Shuhai Beijing. We have been advised by our
PRC counsel, Jingtian & Gongcheng, based on their understanding of the current PRC laws, rules and regulations, that (i) the structure for operating our business in
China (including our corporate structure and contractual arrangements with Shuhai Beijing and its shareholders) will not result in any violation of PRC laws or
regulations currently in effect; and (ii) the contractual arrangements among Tianjin Information and Shuhai Beijing and its shareholders governed by PRC law are
valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect. However, there are substantial uncertainties
regarding the interpretation and application of current or future PRC laws and regulations concerning foreign investment in the PRC, and their application to and
effect on the legality, binding effect and enforceability of the contractual arrangements. In particular, we cannot rule out the possibility that PRC regulatory
authorities, courts or arbitral tribunals may in the future adopt a different or contrary interpretation or take a view that is inconsistent with the opinion of our PRC
legal counsel.
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 our 2018 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.
Although the content about VIE structure has been deleted from the Foreign Investment Law implemented since January 1, 2020, the disputes over VIE
structure still exists and are left to be settled through legislative authorization. After that, the nature and attributes of VIE structure may still be brought into the
supervision category of "foreign investment" in future through other specific laws, administrative regulations and normative documents formulated by the State
Council. Moreover, relevant supervision will be strengthened while the pre-establishment national treatment & negative list system would not be excluded for
foreign investment, which is expected to cast significant impact upon our operation and management.
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The shareholders of our VIE may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
Ms. Zhixin Liu and Mr. Fu Liu are majority shareholders of our Company and the shareholders of our VIE, Shuhai Beijing. Ms. Liu is our Chairman, Chief
Executive Officer, President, Interim-CFO, Secretary and Treasurer, while Mr. Liu is one of our directors. They may have potential conflicts of interest with us.
These shareholders may breach, or cause our VIE to breach, or refuse to renew, the existing contractual arrangements we have with them and our VIE, which would
have a material and adverse effect on our ability to effectively control our VIE and receive substantially all the economic benefits from it. For example, the
shareholders may be able to cause our agreements with Shuhai Beijing to be performed in a manner adverse to us by, among other things, failing to remit payments
due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act in
the best interests of our company or such conflicts will be resolved in our favor.
Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company. We rely on Ms. Liu and
Mr. Liu to abide by the laws of the State of Nevada and China, which provide that directors owe a fiduciary duty to the Company that requires them to act in good
faith and in what they believe to be the best interests of the Company and not to use their position for personal gains. If we cannot resolve any conflict of interest or
dispute between us and the shareholders of Shuhai Beijing, we would have to rely on legal proceedings, which could result in disruption of our business and subject
us to substantial uncertainty as to the outcome of any such legal proceedings.
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.
We are a “controlled company” within the meaning of the NASDAQ Stock Market Rules and, as a result, may rely on exemptions from certain corporate
governance requirements that provide protection to shareholders of other companies.
We are a “controlled company” as defined under the NASDAQ Stock Market Rules because Mr. Liu and Ms. Liu hold more than 50% of our voting power.
For so long as we remain a controlled company under that definition, we are permitted to elect to rely, and will rely, on certain exemptions from the obligation to
comply with certain corporate governance requirements, including:
● the requirement that our director nominees must be selected or recommended solely by independent directors; and
● the requirement that we have a corporate governance and nominating committee that is composed entirely of independent directors with a written
charter addressing the committee’s purpose and responsibilities.
As a result, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of
the NASDAQ Stock Market.
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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 products 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 2018 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
convert Renminbi into foreign currency 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. Tianjin Information’s income
in turn depends on the service fees paid by our affiliated entities in China. 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, Tianjin
Information may only distribute dividends after it has made allowances to fund certain statutory reserves. These reserves are not distributable as cash dividends. 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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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 legal and judicial systems in the PRC are still rudimentary, and enforcement of existing laws is uncertain. 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.
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.
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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 making 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 file a record with the MOFCOM or its local counterparts and shall also be limited to the
difference between the registered capital and the total investment amount.
We cannot assure you that we will be able to obtain these government registrations or filings on a timely basis, or at all. If we fail to finish such
registrations or filings, our ability to use the proceeds from our 2018 offering and to capitalize our PRC subsidiary’s operations may be adversely affected, which
could adversely affect our liquidity and our ability to fund and expand our business.
On March 30, 2015, the State Administration of Foreign Exchange (SAFE) promulgated a notice relating to the administration of foreign-invested company
of its capital contribution in foreign currency into Renminbi (Hui Fa [2015]19) (or Circular 19). Although Circular 19 has fastened the administration relating to the
settlement of exchange of foreign-investment, allows the foreign-invested company to settle the exchange on a voluntary basis, it still requires that the bank review
the authenticity and compliance of a foreign-invested company’s settlement of exchange in previous time, and the settled in Renminbi converted from foreign
currencies shall deposit on the foreign exchange settlement account, and shall not be used for several purposes as listed in the “negative list”. As a result, the notice
may limit our ability to transfer funds to our operations in China through our PRC subsidiary, which may affect our ability to expand our business. Meanwhile, the
foreign exchange policy is unpredictable in China, it shall be various with the nationwide economic pattern, the strict foreign exchange policy may have an adverse
impact in our capital cash and may limit our business expansion.
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Governmental control of the convertibility of Renminbi and restrictions on the transfer of cash into and out of China may constrain our liquidity and adversely
affect our ability to use cash in our operation.
The PRC government also imposes controls on the convertibility of the Renminbi into foreign currencies. Under existing PRC foreign exchange
regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in
foreign currencies without prior approval from SAFE, by complying with certain procedural requirements. Approvals from appropriate government authorities is
required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in
foreign currencies. The PRC government may, at its discretion, impose any restriction on access of foreign currencies for current account transactions.
As an offshore holding company of our PRC subsidiary, the majority of our income is received in Renminbi. If the PRC government imposes restrictions on
access of foreign currencies for current account transactions, we may not be able to pay dividends in foreign currencies to our shareholders.
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 relatively new, there remains uncertainty with respect to its
implementation. As of the date of this report, all PRC residents known to us that currently hold direct or indirect interests in our company have completed the
necessary registrations with SAFE as required by SAFE Circular 37. However, we may not be informed of the identities of all the PRC residents or entities holding
direct or indirect interest in our company, nor can we compel our beneficial owners to comply with the requirements of SAFE Circular 37. 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 shareholders 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.
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We may be subject to fine due to our insufficient payment of the social insurance and housing fund of the employees.
Pursuant to the Social Insurance Law of the PRC, as amended on December 29, 2018,and the Regulation on the Administration of Housing Accumulation
Funds, as amended on March 24, 2019, employers in China shall register with relevant social insurance agency and relevant housing provident fund management
center and open special housing provident fund accounts for each of their employees, and pay contributions to the social insurance plan and the housing provident
fund for their employees, such contribution amount payable shall be calculated based on the employee’s actual salary in accordance with the relevant regulations. In
case the employer failed to make sufficient payment of the social insurance, it may be subject to fine up to 3 times of the insufficient amount. If the employer failed
to register with relevant housing provident fund management center or failed to open special housing provident fund accounts for the employees within the ordered
time limit, a fine of not less than RMB10,000 nor more than RMB50,000 may be imposed. In addition, if the employer fails to pay sufficient contributions to
housing provident fund as required, the housing provident fund management center shall order it to make the payment and deposit within a prescribed time limit;
where the payment has not been made after the expiration of the time limit, the housing provident fund management center may request the people’s court for
compulsory enforcement. On July 20, 2018, the General Office of the Communist Party of China and the General Office of the State Council jointly issued the
Reform Plan on Tax Collection and Administration Systems for Local Offices of the State Administration of Taxation and Local Taxation Bureaus, according to
which the collection and administration of social insurance will be transferred from the social insurance departments to competent tax authorities, and the
supervision over the payment of social insurance will be significantly strengthened in the way that an enterprise must pay social insurance for its employees based
on their overall salary at certain legally required rates. If we are fined due to insufficient payment of the social insurance and housing fund of the employees, our
business operations 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 our company, our executive officers or directors and attend stockholder 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.
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.
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.
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To the extent that our independent registered public accounting firm’s audit documentation related to their audit reports for our company are located in China,
the PCAOB may not be able inspect such audit documentation 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 and will
issue audit reports related to our company in the future. 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, to the extent that our auditor’s work
papers are or become located in China, such work papers will not be subject to inspection 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. The inability of the PCAOB to conduct inspections of our auditors’ work papers in China would make 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. As a result, our investors may be
deprived of the benefits of PCAOB’s oversight of our auditors through such inspections.
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 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 an Investment in 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 hold approximately 71.6% beneficial ownership of our Company. 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. These individuals also have
significant control over our business, policies and affairs as officers and 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 our 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.
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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.
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.
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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.
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.
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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.
Item 1B. Unresolved Staff Comments.
Not applicable.
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Item 2. Description of Property.
We currently do not own any real estate or land use rights. We lease office space of approximately 2,007.46 square meters from Beijing Kaipeng
Technology Co., Ltd. for our headquarters in Beijing under a lease agreement. Our monthly rent is approximately $33,100 (RMB225,922.89). The lease agreement
expired on October 7, 2022, we received a six-month rent free (two months for each year) discount, We also lease a small office in Harbin for Harbin Information’s
operation under a lease that expires on April 30, 2020, as amended on May 1, 2019. We pay an annual rent of approximately $2,930 for this space. This lease
agreement was renewed for one year on May 1, 2020 and will expire on April 30, 2021, with an annual rent at approximately $10,665.68. Due the business
expansion of the Company, a new office was rented on October 1, 2019 to support operation of Heilongjiang Xungrui Technology Co., Ltd. The lease term is from
October 1, 2019 to September 30, 2021 and the annual rent is approximately $23,293.85. We believe the rented space is sufficient for our current operations.
Tianjin Information Sea Information Technology Co., Ltd. signed a lease contract with Shenzhen Lvjing Real Estate Development Co., Ltd. on August 11,
2020. The building covers an area of 395.15 square meters and will be leased from August 8, 2020 to August 7, 2023 with a three months and ten days’ rent-free
period. The monthly rent is approximately $29,851.22 (RMB 20,9910.80). The rental will be increased by 3% per year from the second year on the basis of the
previous year’s rental standard.
Tianjin Information Sea Information Technology Co., Ltd. signed a house lease contract with Hangzhou Zhexin Information Technology Co., Ltd. on
August 26, 2020. The house is located at Room 902-910, No.2 West Building, Xixi Yintai Commercial Center, Xihu District, Hangzhou, with a construction area of
1149 square meters. The lease term starts from September 11, 2020 to October 5, 2022, with a 25-day rent-free period. The rental for the first year rental is RMB
3.3/m2 / day, and the total rental is RMB 13,83970.50, equivalent to $19,813.17. The rental for the second year is RMB 3.4 yuan/m2 / day, with a total rental of
RMB1,425,909, equivalent to $202,777.20. The house security deposit is RMB 115,311.
In August 2019, we moved our headquarters from 1 Xinghuo Rd. Changning Building, Suite 11D2E, Fengtai District, Beijing, China, to the current
address.
Item 3. Legal Proceedings.
Neither we nor our subsidiaries are a party to any material pending legal proceedings. 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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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
PART II
Our common stock started trading on the NASDAQ Capital Market under the symbol “DTSS” on December 18, 2018. 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
June 30, 2020
March 31, 2020
December 31, 2019
September 30, 2019
June 30, 2019
Holders
HIGH
LOW
2.44 $
3.93 $
7.39 $
1.39 $
3.14 $
1.75
1.35
0.80
0.86
1.45
$
$
$
$
$
We had 439 holders of record of our common stock as of June 30 2020.
Dividends
We do not anticipate paying dividends on our common stock at any time in the foreseeable future. We currently plan 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 Plan
On August 22, 2018, our Board of Directors and stockholders adopted the 2018 Equity Incentive Plan, or the 2018 Plan, 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 or a Board committee will
determine, in its discretion, from time to time to make awards under the 2018 Plan, including to our officers and directors. Subsequently, the Company filed a
registration statement on Form S-8 to register the shares underlying the 2018 Plan.
Item 6. Selected Financial Data.
Not applicable.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Current Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These include statements about
our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,”
“we believe,” “management believes” and similar language. Except for the historical information contained herein, the matters discussed in this “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Current Report are forward-looking statements that involve risks
and uncertainties. The cautionary language in this Current Report, provide examples of risks, uncertainties and events that may cause our actual results to differ
materially from those projected. Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events after the
date of this Annual Report on Form 10-K.
Overview
We were incorporated in the State of Nevada on September 26, 2014 under the name Rose Rock Inc. and changed its name to Datasea Inc. on May 27, 2015
by amending its articles of incorporation. On May 26, 2015, the Company’s founder, Xingzhong Sun, sold 6,666,667 shares of common stock of the Company to
Zhixin Liu, one of the owners of Shuhai Skill (HK) as defined below. On October 27, 2016, Mr. Sun sold his remaining 1,666,667 shares of common stock of the
Company to Ms. Liu.
On October 29, 2015, 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 owned
100% of the ownership rights in Shuhai Skill (HK), transferred all of the issued and outstanding ordinary shares of Shuhai Skill (HK) to the Company in exchange
for the issuance of an aggregate of 6,666,667 shares of common stock, thereby causing Shuhai Skill (HK) and its wholly owned subsidiaries, Tianjin Information
Sea Information Technology Co., Ltd. (“Tianjin Information”), a limited liability company incorporated under the laws of the PRC, and Harbin Information Sea
Information Technology Co., Ltd., a limited liability company incorporated under the laws of the PRC, to become wholly-owned subsidiaries of the Company, and
Shuhai Information Technology Co., Ltd., also a limited liability company incorporated under the laws of the PRC (“Shuhai Beijing”), to become a variable interest
entity (“VIE”) of the Company through a series of contractual agreements between Shuhai Beijing and Tianjin Information. The transaction was accounted for as a
reverse merger, with Shuhai Skill (HK) and its subsidiaries being the accounting survivor. Accordingly, the historical financial statements presented are those of
Shuhai Skill (HK) and its consolidated subsidiaries and VIE.
Following the Share Exchange, the Shareholders, being Zhixin Liu and her father, Fu Liu, owned approximately 82% of the outstanding shares of common
stock. As of October 29, 2015, there were 18,333,333 shares of common stock issued and outstanding, 15,000,000 of which were beneficially owned by Zhixin Liu
and Fu Liu. After the Share Exchange, the Company, through its consolidated subsidiaries and VIE, is engaged in the business of providing Internet security
products and equipment, new media advertising, micro-marketing, and data analysis services in the PRCs.
On April 12, 2018, our Board of Directors and stockholders approved a one-for-three reverse stock split of our issued and outstanding shares of common
stock, which became effective on May 1, 2018, decreasing the number of outstanding shares from 57,511,771 to 19,170,827. Subsequent to the split, the number of
our outstanding shares increased from to 19,170,827 to 19,170,846 to accommodate certain shareholders’ positions due to rounding elections payable at the
beneficial owner level. Unless otherwise stated, all shares and per share amounts in this form 10K have been retroactively adjusted to give effect to this stock split.
On December 21, 2018, the Company successfully completed a registered, underwritten initial public offering and concurrent listing of the Company’s
common stock on the NASDAQ Capital Market, which generated gross proceeds of $6.7 million before deducting underwriter’s commissions and other offering
costs, resulting in net proceeds of approximately $5.7 million, of which $1,000,000 was placed in an escrow account. $600,000 of the escrow fund was held and will
be disbursed by the escrow agent pursuant to the terms and conditions of a certain Indemnification Escrow Agreement between the Company and the underwriter of
the offering. $400,000 of the escrow fund was disbursed to the Company in February 2019 when the underwriter confirmed receipt of a written legal opinion from
PRC legal counsel in connection with such offering. The Company sold 1,667,500 shares of common stock (including shares issued pursuant to the underwriter’s
over-allotment option) at an offering price of $4 per share. In connection with the offering, the Company’s common stock began trading on the NASDAQ Capital
Market beginning on December 19, 2018 under the symbol “DTSS.”
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Results of Operations
Comparison of the years ended June 30, 2020 and 2019
The following table sets forth the results of our operations for the years ended June 30, 2020 and 2019, respectively, indicated as a percentage of net sales.
Certain columns may not add up due to rounding.
Sale
Cost of goods sold
Gross profit
Selling expenses
Research and development
General and administrative expenses
Operating expenses
Loss from operations
Non-operating income, net
Loss before income taxes
Income tax expense
Net loss
Revenue
$
$
% of Sales
2020
1,414,780
146,380
1,268,400
438,621
1,114,486
1,620,346
3,173,453
(1,905,053)
46,958
(1,858,095)
5,158
(1,863,253)
$
10%
90%
31%
79%
114%
224%
(134)%
3%
(131)%
0.4%
(132)%
2019
% of Sales
-
-
199,485
168,248
1,131,575
1,499,308
(1,499,308)
74,127
(1,425,181)
-
(1,425,181)
-%
-%
-%
-%
-%
-%
-%
-%
-%
-%
-%
We had revenues of $1.41 million and $0 in the years ended June 30, 2020 and 2019, respectively.
On March 5, 2018 and June 28, 2018, we entered into separate agreements with two sales agents for our Safe Campus security system, respectively.
Pursuant to the agreements, we authorized the agents to market the Company’s Safe Campus Management System. The term of the agreements is for five years and
will expire on March 6, 2023 and July 1, 2023, respectively. As of June 30, 2019, we recorded the $1.29 million payments received from the two sales agents as
advances from customers; in the fourth quarter of 2020, we recognized revenue of $1.29 million from these contracts as the sales agents sold the products and
services to third parties in the same period and the Company has provided the required services and fulfilled all its obligations under these contracts.
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In addition, during the year ended June 30, 2020, Guozhong Times executed 62 CRI purchase orders from development and construction companies from
Anhui and Fujian province in China for an aggregate contract value (excluding value-add tax) of approximately $124,000 for customized hardware and software
solutions to detect and control the novel coronavirus outbreak in public areas. Our systems sold in these orders are utilized in public places including campuses,
shopping malls, scenic areas, residential areas and factory areas. A revenue of the same amount was recorded in the year ended June 30, 2020. We have recently
expanded our business and customer development to 13 provinces in China, such that its products are sold in about 40% of the provincial administrative regions in
China. Moreover, we have initiated marketing in Uganda, the Democratic Republic of Congo and other countries in Africa.
The increase in performance is based on the improvement of the Company’s sales system. We will take sales approaches including implementing market
research, expanding sales team, developing channels and agents, establishing new operating entities, and at the same time we will take efforts to improve our after-
sales service. We will continue to strengthen the building of our sales system.
Cost of Goods
We recorded $146,380 and $0 of cost of goods sold for the years ended June 30, 2020 and 2019, respectively. The cost of goods sold was mainly for the
CRI orders of Guozhong Times. No significant cost of goods sold was recorded for our sale of the Safe Campus Security systems as a substantial portion of the costs
were related to research and development costs which were expensed as and when they were incurred.
Gross Profit
The gross profit for the years ended June 30, 2020 and 2019 were $1,268,400 and $0, respectively.
Selling, General and Administrative, and Research and Development Expenses
Selling expenses were $438,621 and $199,485 for the years June 30, 2020 and 2019, respectively, an increase of $239,136 or 120%. The increase in selling
expenses was primarily attributed to a $284,906 payment Shuhai Beijing made to a service provider, Beijing R&D Education Technology to develop and market an
education platform for teachers and students, but was partly offset by decreased payroll expense by $30,825 and decreased travel expense by $5,668 of Shuhai
Beijing. The Company will continue to enroll more sales professionals, develop channels and agents nationwide, and increase marketing expenses to obtain more
orders.
As we are currently focusing our effort in the research and development (“R&D”) of our products and software to assist schools and communities in
addressing the coronavirus outbreak, providing possible remedy and prevention for the future outbreak, and expanding the artificial intelligence application and
products, we incurred increased research and development expenses by $946,238 or 562%, in the years ended June 30 2020 compared to $168,248 R&D expense
recorded during the years ended June 30, 2019, respectively. The increase was mainly due to increased salary expense as a result of hiring more staffs in research
and development department, and $700,000 R&D expenses for the Tour Site Security system, and the Facial Recognition and Eye Protection system. Total costs of
these two systems are $2.4 million, out of which $1.9 million was paid as of June 30, 2020. We intend to invest approximately $10 million in technological product
development over the next three years.
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General and administration (“G&A”) expenses increased $488,771, or 43% from $1,131,575 during the year ended June 30, 2019 to $1,620,346 during the
same period in 2020. The increases were attributed to increases in rent expenses by $126,873, increased property management fee by $38,400, increased office
improvement depreciation by $22,120, increased salary expense of the Company’s President and Chairman by $94,019, increased conference expense by $30,282,
fees to Nasdaq of $150,000 incurred in the year ended June 30, 2020, and increased professional fee by $41,552.
Non-operating income, net
Non-operating income were $46,958 and $74,127 for the years ended June 30, 2020 and 2019. For the year ended June 30, 2020, we had interest income
$49,455 and other expense $2,497. For the years ended June 30, 2019, we had interest income $75,859 and other expense $1,732.
Net Loss
We generated net losses of $1,863,253 and $1,425,181 for the years ended June 30, 2020 and 2019, respectively, mainly due to increased research and
development expenses, selling expenses and G&A expenses as describe above, despite we had increased revenue for the year ended June 30, 2020.
Liquidity and Capital Resources
We have funded our operations to date primarily through the sale of our common stock, shareholder loans and cash income. Our management recognizes
that we must generate sales and additional cash resources in order for our Company to continue our operations. Based on increased demand for security services in
China, our management believes in the potential for growth in our business. In addition, following our December 2018 IPO, we received net proceeds $5.7 million.
We expect to generate revenue through expanding our current Safe Campus business, promoting Epidemic Prevention and Control Systems, scenic area and
public community security products, and other artificial intelligence application and products such as face recognition products, and through continuous product
innovation and development as well as various types of value-added services. If revenues are not generated or do not reach the level anticipated in our plan, in order
to maintain working capital sufficient to support our operations and finance the future growth of its business, we expect to fund any cash flow shortfall through
financial support from our majority stockholders (who are also our board members or officers) and public or private issuance of securities. However, such additional
cash resources may not be available to us on desirable terms, or at all, if and when needed by us. We will also generate cash flow through cash income and
governmental subsidies to support future operations
As of June 30, 2020, we had a working capital of $2,609,032 excluding the restricted cash of $600,000 (or a current liquidity ratio of 4.78:1). Our current
assets on June 30, 2020 were $3,298,523 excluding the restricted cash of $600,000. As of June 30, 2019, we had a working capital of $4,568,461 excluding the
restricted cash of $600,000 (or current liquidity ratio of 3.71:1). Our current assets on June 30, 2019 were $6,251,863 excluding the restricted cash of $600,000,
which will be released to the Company following the termination of the Indemnification Escrow Agreement originally executed in connection with our 2018 IPO.
It is expected that the Company will continue to support its operations and investment plans through its financing activities.
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The following is a summary of cash provided by or used in each of the indicated types of activities during the years ended June 30, 2020 and 2019,
respectively.
Net cash used in operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Cash Flow from Operating Activities
2020
(4,573,352) $
(306,813) $
(84,842) $
2019
(424,048)
(66,385)
5,609,222
$
$
$
Net cash used in operating activities was $4,573,352 during the year ended June 30, 2020, comparing with net cash used in operating activities of $424,048
during the year ended June 30, 2019, an increase of cash outflow by $4,149,304. The increase in cash outflow was mainly due to increased net loss by $438,072,
increased cash outflow on prepaid expenses including prepayment for developing the Tour Site Security system and the Facial Recognition and Eye Protection
system by $978,256, and decreased cash inflow from advance from customers by $2,592,802.
Cash Flow from Investing Activities
Net cash used in investing activities totaled $306,813 for the year ended June 30, 2020, which primarily related to cash paid for the acquisition of office
furniture and equipment and leasehold improvements of $295,467, and for intangible assets of $11,346. Net cash used in investing activities totaled $66,385 for the
year ended June 30, 2019, which primarily related to $18,918 cash paid for the acquisition of office furniture, equipment and patents, and $47,467 for intangible
asset.
Cash Flow from Financing Activities
Net cash used in financing activities was $84,842 during the year ended June 30, 2020, which primarily consisted of repayment of a shareholder loan of
$84,842. Net cash provided by financing activities was $5,609,222 during the year ended June 30, 2019, which primarily consisted of proceeds of a shareholder
loan, net of $60,867, the net proceeds from sale of the Company’s common stock of $307,466, the net proceeds of $4,840,889 from a public offering plus $400,000
offering proceeds released from escrow account. It is expected that the Company will continue to support its operations and investment plans through its financing
activities.
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Going Forward
As a provider of smart security system with proprietary technologies, Datasea intends to strengthen and expand its development efforts concerning smart
security systems and value-added services in key industries such as public communities and schools according to the needs of customers.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in
financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
Item 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-31 of this report.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
Effective January 10, 2020, Wei, Wei & Co., LLP (“WWC”) resigned as the Company’s independent registered public accounting firm. WWC’s reports on
the Company’s financial statements for the fiscal years ended June 30, 2019 and 2018 did not contain an adverse opinion or a disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope, or accounting principle. For the fiscal years ended June 30, 2019 and 2018 and during the subsequent interim
periods through the date of this report, there were no disagreements (as that term is defined in Item 304(a)(1)(iv) of Regulation S-K) between the Company and
WWC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of WWC, would have caused WWC to make reference to the subject matter of the disagreements in connection with WWC’s report on the Company’s
financial statements for such fiscal year. For the fiscal years ended June 30, 2019 and 2018 and during the subsequent interim periods through the date of this report,
there were no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K).
On January 14, 2020, the Audit Committee of the Company’s Board of Directors appointed Morison Cogen LLP (“Morison”) as the Company’s new
independent registered public accounting firm, effective immediately. For the fiscal years ended June 30, 2019 and 2018 and during the subsequent interim periods
through January 10, 2020, neither the Company nor anyone acting on behalf of the Company had consulted Morison regarding either: (i) the application of
accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial
statements, nor did Morison provide a written report or oral advice to the Company that Morison concluded was an important factor considered by the Company in
reaching a decision as to the accounting, auditing or financial reporting issues; or (ii) any matter that was either the subject of a disagreement (as defined in Item
304(a)(1)(iv) of Regulation S-K and the related instructions) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).
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Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Report, our management conducted an evaluation, under the supervision and with the participation of the Chief
Executive Officer and Chief Financial Officer (the “Evaluating Officers”), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-
15(e) and Rule 15d-15(e) of the Exchange Act). Based on that evaluation, the Evaluating Officers concluded that our disclosure controls and procedures were not
effective as of the period covered by this Report. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting
such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected and
corrected on a timely basis. The foregoing conclusion was due to the following circumstance:
On September 7, 2020, the Audit Committee of the Board of Directors of the Company and executive management, in consultation with the Board and the
Company’s independent registered public accounting firm, Morison Cogen LLP, has concluded that the previously filed unaudited financial statements on Form 10-
Q for the quarterly periods ended September 30, 2019, December 31, 2019, and March 31, 2020 (the “Affected Quarterly Reports”) should not be relied upon.
Similarly, any press releases, earnings releases, and investor communications describing the Company’s financial statements for the above-referenced periods should
no longer be relied upon. The non-reliance conclusion with respect to interim financial statements included in the Affected Quarterly Reports resulted from the
determination that part of the research and developments costs capitalized in the intangible assets should be recognized as research and development expenses to be
in compliance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 985 (Costs of software to be sold, leased, or
marketed). Specifically, pursuant to this guidance, such development costs that are incurred prior to the point where the project has demonstrated technological
feasibility are to be expensed as they are incurred. In the Affected Quarterly Reports, the Company recorded such development cost as intangible assets. The
adjustments required to correct the foregoing erroneous treatment of such costs will result in an increase of research & development (“R&D”) expense of $200,000
for the quarter ended September 30, 2019, an increase of R&D expense by $250,000 for the quarter ended December 31, 2019 and an increase of R&D expense by
$120,000 for the quarter ended March 31, 2020; and a decrease of intangible assets by $200,000 as of September 30, 2019, a decrease of intangible assets by
$450,000 as of December 31, 2019 and a decrease of intangible assets by $570,000 as of March 31, 2020. In addition, the Company will reclassify the adjusted net
intangible asset cost of $1,700,000 at September 30, 2019, $1,450,000 at December 31, 2019 and $1,330,000 as of March 31, 2020 to prepaid expenses. These
prepaid expenses will either be expensed to R&D expense when incurred or capitalized as an intangible asset if the expenditures met the criteria established by
FASB ASC Topic 985.
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In order to remediate the foregoing weakness, the Company intends to implement the following steps:
● To standardize the archiving of accounting files of the Company’s Finance Department
● To ensure that the Financial Department during the course of preparing the consolidated financial reports the authenticity and integrity of consolidated
and offsetting entries through cross-checking;
● In addition to completing the preparation of quarterly, semi-annual and annual financial reports as scheduled, the Finance Department will be tasked to
prepare financial analysis reports on a regular basis to be submitted to the management for operation and management analysis on meetings before the
18th of each month;
● To ensure the timely and accurate generation of report data through the computerized accounting process and accounting system;
● For each subsidiary to be required to prepare financial reports in strict accordance with accounting standards, carefully analyze the significant impact
of major events and non-routine events, and deal with such events according to relevant financial regulations;
● To monitor non-conventional and non-routine matters, as well as performing necessary approval procedures and accounting operations;
● To improve specific and enforceable plans for inventory checking and credit/debt validation; and
● To identify possible assets impairments and calculate the asset impairment provisions based on external and internal information.
The Company intends to complete these remedial steps by June 30, 2021. The Company’s management is in the process of reviewing and, where necessary,
modifying and improving controls and procedures throughout the Company, as resources permit.
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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, 2020. 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 weaknesses described in the following paragraphs, management believes
that, as of June 30, 2020, our internal control over financial reporting was not effective due to the presence of the following weaknesses in internal control over
financial reporting which are indicative of many small companies with a small staff: (i) the segregation of duties in several departments is not clear enough; (ii) the
testing cycle for the effectiveness of internal control measures should be shortened and the frequency be increased; (iii) lack of accounting personal trained in the
Generally Accepted Accounting Principle of United States.
Management Plan to Remediate Material Weaknesses
We have taken steps to enhance and improve the design of our internal control over financial reporting, mainly including that:
● we established a Risk Control Department led by the internal control director and a team of legal counsels to ensure the Company’s compliance with
relevant regulations and risk management requirements;
● we also formulated new policies or integrate a series of internal control policies, including but not limited to the process from procurement to payment,
the process from payment to the sales, cash management, cost management, budget process, accounts receivable policy, assets and inventory
management, internal audit policy and cost accounting, etc.;
● we set the International Affair Department to strengthen our compliance and financing management on the international capital market;
● we employed a new legal counsel in China to enhance the Company’s operational compliance on the Chinese market. We arrange for all financial
personnel to take part in the training and study of US GAAP.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer
Protection Act, which permits us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the year ended June 30, 2020 that have materially affected or are reasonably
likely to materially affect our internal control over financial reporting.
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
Zhixin Liu
Jijin Zhang
Fu Liu
Tongjun Si
Stephen (Chun Kwok) Wong
Ling Wang
Chunqi Jiao
Biographical Information
Age
34
51
55
79
38
64
48
Position
Chairman of the Board, CEO
Chief Financial Officer
Director
Independent Director
Independent Director
Independent Director
Chief Technology Officer
Ms. Zhixin Liu. Ms. Liu currently serves as our Chairman of the Board, Chief Executive Officer, President. 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. Ms. Liu studied IT Management at Employee University directly under Heilongjiang Provincial
Governmental Departments. She also had business administration courses at China Agricultural University. As our President and Chief Executive Officer, Ms. Liu
brings to the Board an intimate understanding of the industry and our operations. We believe Ms. Liu’s experience qualifies her to serve on our Board of Directors.
Mr. Jijin Zhang. Mr. Zhang has served as our Chief Financial Officer since December 21, 2018. Prior to joining our company, Mr. Zhang was the member
of the Board of Supervisors of Beijing Tongfang Shenhuo Co., Ltd. overseeing its internal accounting practice, and the Chief Financial Officer of Hebei Tsinghua
Tongfang Electronics Co., Ltd. from 2005 to August 2018. He served as Chief Financial Officer of Beijing Hede Group Co., Ltd. from 1995 to 2005. Mr. Zhang
received his Bachelor’s degree in accounting from North China University of Technology in 1995.
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Mr. Fu Liu. Mr. Liu currently serves as a member of our Board of Directors. 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 in Qiqihar City in Heilongjiang Province from
January 2005 to January 2012. Mr. Liu studied accounting at Heilongjiang Institute of Finance and Economics in June 1987 and completed legal studies at the CPC
Party School Heilongjiang Provincial Committee in 1989. Among other qualifications, Mr. Liu brings to the Board extensive knowledge of our business, relevant
executive officer experience as well as governmental and political expertise. We believe Mr. Liu’s experience qualifies him to serve on our Board of Directors.
Mr. Stephen (Chun Kwok) Wong. Mr. Wong has served as a member of our Board of Directors since December 21, 2018. Mr. Wong currently serves as the
chief executive officer of Splendid Holding Limited, an interior design company incorporated in Hong Kong. Mr. Wong served as the group financial controller for
Fitness World (Group) Limited and MJ Medical Beauty Limited from February 2017 to August 2018. He was a senior associate at Pricewaterhouse Coopers Limited
(PwC) from January 2016 to January 2017. He worked at Moore Stephens Associates Limited (Hong Kong) as a senior associate from October 2010 to December
2015. He was a supervisor at KLC Kennic Lui & Co. from July 2009 to August 2010 and an auditor at KLC CPA Limited from October 2005 to June 2008. Mr.
Wong studied accounting and received his Bachelor of Commerce degree in Accounting from Macquarie University in Sydney, Australia in 2005. We believe Mr.
Wong’s experience qualifies him to serve on our Board of Directors.
Mr. Tongjun Si. Mr. Si has served as a member of our Board of Directors since December 21, 2018. Since January 1998, Mr. Si served as the commissioner
of 12th precinct, the chief of the technology bureau and the director of the Police Association of China of the Ministry of Public Security. After retiring in 2002, he
has been serving as the vice Chairman of China Security& protection Industry Association. Mr. Si graduated from Xi’an Military Telecommunication Engineering
Institute (now Xidian University) in 1960. We believe Mr. Si’s experience qualifies him to serve on our Board of Directors.
Ms. Ling Wang. Ms. Ling Wang has served as a member of our Board of Directors since December 21, 2018. Ms. Wang served as the Secretary of Party
Committee at University of International Business and Economics from 2004 to 2016. She also worked at Consulate General of the People’s Republic of China in
San Francisco from 1999 to 2003. From 1987 to 1999, she served various positions at the Ministry of Education of the People’s Republic of China. Ms. Wang
received a Master’s degree in law from Renmin University of China in 1983. We believe Ms. Wang’s experience qualifies her to serve on our Board of Directors.
Mr. Chunqi Jiao: Mr. Jiao has served as our Chief Technology Officer since October of 2019. Prior to joining our company, Mr. Jiao once served as the
Technical Director of Beijing Tianxinghulian Information Technology Co., Ltd.; from January 2015 to May 2017, he worked as the Technical Director of
Heilongjiang Beidoutianyu Satellite Co., Ltd.; from July 2010 to October 2014, head of Shenzhen Century Lianchuang Technology Development Co.,
Ltd. Heilongjiang Branch; from August 2008 to June 2010, Chief Technical Officer of Heilongjiang Tianwu Technology Co., Ltd.; from March 2003 to June 2008,
R&D Manager of Harbin Longwei Electronic Development Co., Ltd.; from January 2001 to June 2002, Senior Software Engineer at Shanghai Huawei Technology
Co., Ltd. Mr. Jiao graduated from Harbin University of Science and Technology with a master’s degree in communication engineering in 2008 and graduated from
Harbin Institute of technology with a bachelor’s degree in automotive engineering in 1996.
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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.
The Board and Committees
Our Board has an Audit Committee, Compensation Committee, and Nomination and Corporate Governance Committee.
Our Audit Committee, Compensation Committee, and Nomination and Corporate Governance Committee each complies with the listing requirements of
the Nasdaq Marketplace Rules. At least one member of the Audit Committee is an “audit committee financial expert,” as that term is defined in Item 407(d)(5)(ii) of
Regulation S-K, and each member is “independent” as that term is defined in Rule 5605(a) of the Nasdaq Marketplace Rules. Our board has determined that Stephen
Wong meets those requirements.
Audit Committee
Stephen Wong, Tongjun Si and Ling Wang are the members of our Audit Committee and Stephen Wong serves as the chairperson. All members of our
Audit Committee meet the independence standards promulgated by the SEC and by NASDAQ as such standards apply specifically to members of audit committees.
We adopted and approved a charter for the Audit Committee. In accordance with our Audit Committee Charter, our Audit Committee shall perform several
functions, including:
● evaluate the independence and performance of, and assesses the qualifications of, our independent auditor, and engages such independent auditor;
● approve the plan and fees for the annual audit, quarterly reviews, tax and other audit-related services, and approves in advance any non-audit service to
be provided by the independent auditor;
● monitor the independence of the independent auditor and the rotation of partners of the independent auditor on our engagement team as required by
law;
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● review the financial statements to be included in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and reviews with management
and the independent auditors the results of the annual audit and reviews of our quarterly financial statements;
● oversee all aspects our systems of internal accounting control and corporate governance functions on behalf of the board;
● review and approves in advance any proposed related-party transactions and report to the full Board of Directors on any approved transactions; and
● provide oversight assistance in connection with legal, ethical and risk management compliance programs established by management and the Board of
Directors, including Sarbanes-Oxley Act implementation, and makes recommendations to the Board of Directors regarding corporate governance
issues and policy decisions.
It is determined that Stephen Wong possesses accounting or related financial management experience that qualifies him as an “audit committee financial
expert” as defined by the rules and regulations of the SEC.
Compensation Committee
Ling Wang, Stephen Wong and Tongjun Si are the members of our Compensation Committee and Ling Wang is the chairperson. All members of our
Compensation Committee are qualified as independent under the current definition promulgated by NASDAQ. The board adopted and approved a charter for the
Compensation Committee. In accordance with the Compensation Committee’s Charter, the Compensation Committee shall be responsible for overseeing and
making recommendations to the Board of Directors regarding the salaries and other compensation of our executive officers and general employees and providing
assistance and recommendations with respect to our compensation policies and practices.
Nomination and Corporate Governance Committee
Tongjun Si, Ling Wang and Stephen Wong are the members of our Nomination and Corporate Governance Committee and Tongjun Si serves as the
chairperson. All members of our Nomination and Corporate Governance Committee are qualified as independent under the current definition promulgated by
NASDAQ. The board adopted and approved a charter for the Nomination and Corporate Governance Committee prior to consummation of this offering. In
accordance with the Nomination and Corporate Governance Committee’s Charter, the Nomination and Corporate Governance Committee shall be responsible to
identity and propose new potential director nominees to the Board of Directors for consideration and review our corporate governance policies.
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Independence of the Board
As required under the Nasdaq Stock Market listing standards, a majority of the members of a listed company’s Board of Directors must qualify as
“independent,” as affirmatively determined by the Board of Directors. Our Board has undertaken a review of the independence of each director. Based on
information provided by each director concerning her or his background, employment, and affiliations, our board has determined that Stephen Wong, Tongjun Si and
Ling Wang do not have relationships that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of
these directors is “independent” as that term is defined under the listing requirements and rules of Nasdaq.
In making this determination, the Board found that none of these directors had a material or other disqualifying relationship with the Company.
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).
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Code of Conduct and Ethics
We have adopted a written code of ethics that applies to all of our directors, officers and employees in accordance with the rules of the NASDAQ Stock
Market and the SEC. We have filed a copy of our code of ethics as an exhibit to the Registration Statement on Form S-1 (No. 333-221906). You will be able to
review these documents by accessing our public filings at the SEC’s web site at www.sec.gov. In addition, a copy of the code of ethics will be provided without
charge upon request from us. We intend to disclose any amendments to or waivers of certain provisions of our code of ethics in a Current Report on Form 8-K.
Section 16 Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers, directors and persons who own more than ten percent of a registered class of our
equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and ten percent
shareholders are required by regulation to furnish us with copies of all Section 16(a) forms they file. We believe that, during the fiscal year ended June 30, 2020, all
filing requirements applicable to our officers, directors and greater than ten percent beneficial owners were complied with.
Compensation Committee Interlocks and Insider Participation
The members of our Board have been serving as the Company’s officers or employees. None of our executive officers currently or in the past year 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,
2020 and 2019, respectively, 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 $100,000 (collectively with the PEO,
referred to as the “named executive officers” in this Executive Compensation section).
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Summary Compensation Table
Name and
Principal Position
Ms. Zhixin Liu
Chairman, CEO
Jijin Zhang
CFO
Chunqi Jiao CTO
Fiscal
Year
2020
2019
2020
2019
2020
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards
($)
Other
Compensation
($)
Total
($)
$
$
$
$
$
43,174
35,686
4,397
15,506
19,924
—
—
—
—
—
—
— $
— $
$
$
$
43,174
35,686
4,397
15,506
19,924
(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 years 2018 and 2017. Starting from July 1, 2019, Liu's monthly
salary will be adjusted to 25,300 yuan (about $3,598), with a bonus of 300,000 yuan ($42,662.72) to be paid under the contract.
Option Grants in Last Fiscal Year
There were no options granted to our executive officer in the fiscal year ended June 30, 2020.
Employment Agreements
The Company does not have any written employment agreements with its officers other than the agreement described below.
Employment Contract – Zhixin Liu
We 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 June 15, 2020, the Company filed a registration statement on Form S-8 to register the shares in connection with the Company’s 2018 Plan adopted by
the Board of Directors.
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.
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Director Compensation
The following table shows for the fiscal year ended June 30, 2020, certain information with respect to the compensation of our directors.
Fiscal Year 2020 Director Compensation Table
Name
Zhixin Liu*
Fu Liu
Tongjun Si
Stephen (Chun Kwok) Wong
Ling Wong
Fees
Earned
or Paid
in Cash
($)
—
34,642
-
5972
7110
Option
Awards
($)
—
Total
($)
—
34,642
-
5972
7110
* Ms. Liu, our Chief Executive Officer, is also the chair of our Board but does not receive any additional compensation for her service as a director. See the section
titled “Executive Compensation” for more information regarding the compensation of Ms. Liu.
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 16, 2020 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.
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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.
Name and Address of Beneficial Owner (2)
5% or more stockholders
Zhixin Liu (4)
Fu Liu (3)
Directors and Executive Officers:
Jijin Zhang
Tongjun Si
Stephen (Chun Kwok) Wong
Ling Wang
Chunqi Jiao
All officers and directors as a group (seven persons)
Number of
Common
Stock
Beneficially
Owned
Percent of
Class
Beneficially
Owned
(1)
9,583,335
5,416,668
—
—
—
—
—
15,000,003
45.75%
25.86%
—
—
—
—
—
71.6%
(1) Applicable percentage of ownership is based on 20,943,846 shares of common stock outstanding as of September 16, 2020, together with securities exercisable
or convertible into ordinary shares within 60 days as of the date hereof for each stockholder.
(2) Unless otherwise indicated, the address for the shareholders is 20th Floor, Tower B of Guorui Plaza, No.1 South Ronghua Road, Technological Development
Zone, Beijing, People’s Republic of China,100176.
(3) Director of the Company. 20th Floor, Tower B of Guorui Plaza, No.1 South Ronghua Road, Technological Development Zone, Beijing, People’s Republic of
China,100176.
(4) Chairman of the Board, CEO.
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Item 13. Certain Relationships and Related Transactions, and Director Independence.
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,
2019, the amounts due to Ms. Liu were $86,733. These amounts have been settled by June 30, 2020.
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, 2018 but was extended by the parties to December 31, 2020. The rent paid under this agreement was
$13,184 and $9,000 for the years ended June 30, 2019 and 2018 respectively.
The car rental agreement, dated from January 2019 to December 31, 2020, by and between Ms. Zhixin Liu and Shuhai Information Technology Co., Ltd.,
has been agreed to terminate on November 30, 2019 due to market price.
Ms. Zhixin Liu entered into a car rental agreement with Tianjin Information Sea Information Technology Co., Ltd. on November 30, 2019. The license
plate number is QL17B9. The rental period is from December 1, 2019 to December 31, 2020 for a total of 13 months. The monthly rent is RMB 12,000 (or 1,706 in
US dollars).
Ms. Zhixin Liu entered into a car rental agreement with Tianjin Information Sea Information Technology Co., Ltd. on January 1, 2020. The rental period is
from January 1, 2020 to December 31, 2020 for a total of 12 months. The monthly rent is RMB 20,000 (or 2,844 in US dollars).
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 Ms. Liu. Pursuant to the agreement, we rent an apartment from Ms. Liu with an annual
rent of approximately $2,930. The agreement was renewed and the term was extended to April 30, 2020.
This rental agreement was renewed for another year on May 1, 2020 and will expire on April 30, 2021. The annual rent is approximately $2,828.
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For purpose of business expansion, Heilongjiang Xungrui signed a new rental agreement with Ms. Liu on October 1, 2019 to meet the Company's
operational needs. The rental term is from October 1, 2019 to September 30, 2021 with an annual rent around $23,293.85. According to our knowledge, the office
space that has been rent is sufficient to meet our current operational needs.
Item 14. Principal Accountant Fees and Services.
The following table sets forth fees billed to us by our independent registered public accounting firm Morison Cogen LLP and previous auditor Wei, Wei &
Co., LLP, for the fiscal years ended June 30, 2020 and 2019, respectively, 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
2020
2019
50,000 $
17,000
—
—
67,000 $
58,000
—
—
—
58,000
$
$
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 2020 and 2019 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-31 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
Description
Share Exchange Agreement, dated October 29, 2015, by and among Datasea Inc., Shuhai Information Skill (HK) Limited, Zhixin Liu and Fu Liu,
3.1
3.2
3.3
3.4
3.5
4.1
10.1
10.2
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 herein 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.
Amended and Restated Bylaws, adopted on August 20, 2015, incorporated herein by reference to Exhibit 3.2(ii) of the 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
Form of Underwriter’s Warrant, incorporated herein by reference to Exhibit 4.1 of the S-1/A filed on October 16, 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
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10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
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
Translation of the Amendment to the Employment Agreement by and between Shuhai Information Technology Co., Ltd. and Ms. Zhixin Liu dated
January 1, 2017, incorporated herein by reference to Exhibit 10.6 of the S-1/A filed on January 31, 2018.
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.
The 2018 Equity Incentive Plan of Datasea Inc., incorporated herein by reference to Exhibit 10.14 of the Form 10-K for the year ended June 30,
2018 filed on September 13, 2018.
Form of Indemnification Escrow Agreement, incorporated herein by reference to Exhibit 10.9 of the S-1/A filed on October 16, 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 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.
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.
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10.15
10.16
10.17
14.1
21.1*
23.1*
23.2*
23.3*
31.1*
31.2*
32.1*
101.INS *
101.SCH *
101.CAL *
101.DEF *
101.LAB *
101.PRE *
Translation of the Banking Service Direct Sales Cooperation Agreement Between China Minsheng Bank Co. 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.
Form of Director Offer Letter, incorporated herein by reference to Exhibit 10.18 of the S-1/A filed on October 16, 2018.
Translation of the Lease Agreement, dated July 30, 2019, by and between Shuhai Information Technology Co., Ltd. and Beijing Kaipeng
Technology Co., Ltd.
Code of Ethics, incorporated herein by reference to Exhibit 14.1 of the S-1/A filed on October 16, 2018.
Subsidiaries of the Company.
Wei Wei & Co. LLP S-8 Consent.
Wei Wei & Co. LLP S-3 Consent.
Morison Cogen LLP Consent.
Certification by Chief Executive Officer pursuant to Sarbanes Oxley Section 302
Certification by 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 Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document XBRL
XBRL Taxonomy Extension Presentation Linkbase Document
*
Filed 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 28, 2020
DATASEA INC.
/s/ Zhixin Liu
By:
Name: Zhixin Liu
Title: Chief Executive 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
/s/ Zhixin Liu
Zhixin Liu
/s/ Jijin Zhang
Jijin Zhang
/s/ Fu Liu
Fu Liu
/s/ Tongjun Si
Tongjun Si
/s/ Chun Kwok Wong
Chun Kwok Wong
/s/ Ling Wang
Ling Wang
Title
Date
Chief Executive Officer and Chair
September 28, 2020
Chief Financial Officer
(principal accounting and financial officer)
Director
September 28, 2020
September 28, 2020
Independent Director
September 28, 2020
Independent Director
September 28, 2020
Independent Director
September 28, 2020
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DATASEA INC.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019
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DATASEA INC.
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
Page
F-1 - 2
F-3
F-4
F-5
F-6
F-7 - 31
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Datasea Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Datasea Inc. and subsidiaries (the Company) as of June 30, 2020, and the related consolidated
statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred
to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of June 30, 2020, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has net losses, accumulated deficit and negative cash flows from operations. These factors raise substantial doubt
about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audit. 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 audit 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 consolidated 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 audit included performing procedures to assess the risks of material misstatement of the consolidated 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
consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Morison Cogen LLP
We have served as the Company’s auditor since 2020.
Blue Bell, Pennsylvania
September 28, 2020
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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 consolidated balance sheet of Datasea, Inc. and subsidiaries (the “Company”) as of June 30, 2019, and the related consolidated
statements of operation and comprehensive loss, change in stockholder’s equity, and cash flow 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, 2019,
and the results of their operation and their cash flow for the year 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 audit. 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 audit 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.
/s/ Wei, Wei & Co., LLP
We have served as the Company’s auditor since 2017.
Flushing, New York
October 15, 2019
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DATASEA INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
CURRENT ASSETS
Cash
Restricted cash
Accounts receivable
Inventory
Value-added tax prepayment
Prepaid expenses and other current assets
Total current assets
NONCURRENT ASSETS
Property and equipment, net
Intangible assets, net
Escrow
Prepaid expense
Right-of-use assets, net
Total noncurrent assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable
Advances from customers
Accrued expenses and other payables
Loan payable to stockholder
Operating lease liabilities
Total current liabilities
NONCURRENT LIABILITIES
Operating lease liabilities
Total noncurrent liabilities
TOTAL LIABILITIES
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 375,000,000 shares authorized, 20,943,846 shares issued and outstanding at June 30,
2020 and June 30, 2019
Additional paid-in capital
Accumulated comprehensive income
Accumulated deficit
TOTAL STOCKHOLDERS' EQUITY
June 30,
2020
June 30,
2019
$
1,065,936 $
600,000
1,119
105,210
69,775
2,056,483
6,072,637
-
-
73,294
-
105,932
3,898,523
6,251,863
291,031
20,694
-
-
702,952
41,116
55,811
600,000
500,000
-
1,014,677
1,196,927
$
4,913,200 $
7,448,790
$
46,975 $
20,953
274,934
-
346,629
13,088
1,318,897
264,684
86,733
-
689,491
1,683,402
341,273
341,273
-
-
1,030,764
1,683,402
20,944
11,104,666
170,207
(7,413,381)
20,944
11,104,666
189,906
(5,550,128)
3,882,436
5,765,388
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
4,913,200 $
7,448,790
The accompanying notes are an integral part of these 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
General and administrative
Research and development
Total operating expenses
Loss from operations
Non-operating income (expenses)
Other expenses
Interest income
Total non-operating income, net
Loss before income tax
Income tax
Net loss
Other comprehensive item
Foreign currency translation gain (loss)
Total comprehensive loss
Net loss per share
Basic and diluted
Weighted average shares outstanding
Basic and diluted
YEARS ENDED
June 30,
2020
June 30,
2019
$
1,414,780 $
146,380
1,268,400
-
-
-
438,621
1,620,346
1,114,486
199,485
1,131,575
168,248
3,173,453
1,499,308
(1,905,053)
(1,499,308)
(2,497)
49,455
(1,732)
75,859
46,958
74,127
(1,858,095)
(1,425,181)
5,158
-
(1,863,253)
(1,425,181)
(19,699)
19,111
$
(1,882,952) $
(1,406,070)
$
(0.09) $
(0.07)
20,943,846
20,119,430
The accompanying notes are an integral part of these consolidated financial statements.
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DATASEA INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2020 AND 2019
Common Stock
Additional
paid-in
capital
Accumulated
Accumulated other
comprehensive
Balance at July 1, 2018
Shares
19,170,846 $
Amount
19,171 $
5,121,102 $
Sale of common stock
105,500
106
307,340
Net proceeds from public offering
1,667,500
1,667
5,676,224
deficit
(4,124,947) $
income (loss)
170,795 $
Total
1,186,121
-
-
-
307,446
-
5,677,891
Net loss
Foreign currency translation gain
-
-
-
-
-
(1,425,181)
-
(1,425,181)
-
-
19,111
19,111
Balance at June 30, 2019
20,943,846
20,944
11,104,666
(5,550,128)
189,906
5,765,388
Net loss
Foreign currency translation loss
-
-
-
-
-
(1,863,253)
-
(1,863,253)
-
-
(19,699)
(19,699)
Balance at June 30, 2020
20,943,846 $
20,944 $
11,104,666 $
(7,413,381) $
170,207 $
3,882,436
The accompanying notes are an integral part of these 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 provided by (used in) operating activities:
Depreciation and amortization
Inventory impairment
Operating lease expense
Changes in assets and liabilities:
Inventory
Accounts receivable
Value-added tax prepayment
Prepaid expenses and other current assets
Accounts payable
Advance from customers
Accrued expenses and other payables
Payment on operating lease liabilities
Net cash used in operating activities
Cash flows from investing activities:
Acquisition of property and equipment
Acquisition of intangible assets
Net cash used in investing activities
Cash flows from financing activities:
Proceeds (repayment) of loan payable - stockholder
Net proceeds from sale of common stock - public offering
Release from escrow account
Net proceeds from issuance of common stock
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash
Net (decrease) increase in cash and restricted cash
Cash and restricted cash, beginning of year
Cash and restricted cash, end of year
Supplemental disclosures of cash flow information:
Cash paid for interest
Cash paid for income tax
Supplemental disclosures of non-cash investing and financing activities:
Proceeds from public offering held in escrow
Right-of-use assets obtained in exchange for new operating lease liabilities
Years Ended
June 30,
2020
June 30,
2019
$
(1,863,253) $
(1,425,181)
110,322
44,237
204,858
(78,644)
(1,129)
(70,368)
(1,460,140)
34,570
(1,269,010)
24,766
(249,561)
36,306
-
-
279
-
-
(481,884)
-
1,323,792
122,640
-
(4,573,352)
(424,048)
(295,467)
(11,346)
(18,918)
(47,467)
(306,813)
(66,385)
(84,842)
-
-
-
60,867
4,840,889
400,000
307,446
(84,842)
5,609,202
(41,694)
(77,618)
(5,006,701)
5,041,151
6,672,637
1,031,486
$
1,665,936 $
6,072,637
$
$
$
$
- $
5,158 $
-
-
- $
872,804 $
600,000
-
The accompanying notes are an integral part of these consolidated financial statements.
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DATASEA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Datasea Inc. (the “Company”, or “we”, “us”, “our” or similar terminology) was incorporated in the State of Nevada on September 26, 2014 under the name Rose
Rock Inc. and changed its name to Datasea Inc. on May 27, 2015. On May 26, 2015, the Company’s founder, Xingzhong Sun, sold 6,666,667 shares of common
stock, par value $0.001 per share, of the Company (the “Common Stock”) to Zhixin Liu (“Ms. Liu”), one of the owners of Shuhai Skill (HK) as defined below. On
October 27, 2016, Mr. Sun sold his remaining 1,666,667 shares of Common Stock of the Company to Ms. Liu.
On October 29, 2015, the Company entered into a share exchange agreement (the “Exchange Agreement”) with the shareholders (the “Shareholders”) of Shuhai
Information Skill (HK) Limited (“Shuhai Skill (HK)”), a limited liability company incorporated on May 15, 2015 under the laws of the Hong Kong Special
Administrative Region of the People’s Republic of China (the “PRC”). Pursuant to the terms of the Exchange Agreement, the Shareholders, who together own 100%
of the ownership rights in Shuhai Skill (HK), transferred all of the issued and outstanding ordinary shares of Shuhai Skill (HK) to the Company in exchange for the
issuance of an aggregate of 6,666,667 shares of Common Stock, thereby causing Shuhai Skill (HK) and its wholly owned subsidiaries, Tianjin Information Sea
Information Technology Co., Ltd. (“Tianjin Information”), a limited liability company incorporated under the laws of the PRC, and Harbin Information Sea
Information Technology Co., Ltd., a limited liability company incorporated under the laws of the PRC, to become wholly-owned subsidiaries of the Company; and
Shuhai Information Technology Co., Ltd., also a limited liability company incorporated under the laws of the PRC (“Shuhai Beijing”), to become a variable interest
entity (“VIE”) of the Company through a series of contractual agreements between Shuhai Beijing and Tianjin Information. The transaction was accounted for as a
reverse merger, with Shuhai Skill (HK) and its subsidiaries being the accounting survivor. Accordingly, the historical financial statements presented are those of
Shuhai Skill (HK) and its consolidated subsidiaries and VIE.
Following the Share Exchange, the Shareholders, being Zhixin Liu and her father, Fu Liu, owned approximately 82% of the outstanding shares of Common Stock.
As of October 29, 2015, there were 18,333,333 shares of Common Stock issued and outstanding, 15,000,000 of which were beneficially owned by Zhixin Liu and
Fu Liu.
On May 1, 2018, the Company implemented a 1 for 3 reverse stock split decreasing the shares outstanding from 57,511,711 to 19,170,846. The consolidated
financial statements at June 30, 2018 have been retroactively adjusted to reflect the reverse split.
After the Share Exchange, the Company, through its consolidated subsidiaries and VIE is engaged in providing smart security solutions primarily to schools, tourist
or scenic attractions and public communities in China.
On October 16, 2019, Shuhai Beijing incorporated a wholly owned subsidiary, Heilongjiang Xunrui Technology Co. Ltd. (“Xunrui”), which is engaged in
developing and marketing the Company’s smart security system products.
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On December 3, 2019, Shuhai Beijing formed Nanjing Shuhai Equity Investment Fund Management Co. Ltd. (“Shuhai Nanjing”), a joint venture in PRC, in which
Shuhai Beijing holds a 99% ownership interest with the remaining 1% ownership held by Nanjing Fanhan Zhineng Technology Institute Co. Ltd, an unrelated party
that was supported by both Nanjing Municipal Government and Beijing University of Posts and Telecommunications. Shuhai Nanjing was formed for purposes of
easy access of government funding and private financing in new technology development and project incubation. As of this report date, Shuhai Nanjing has no
operations yet.
In January 2020, as described below, to expeditiously establish new subsidiaries to further expand the business and operation, the Company acquired ownerships in
three entities for no consideration from the Company’s management who set up such entities on the Company’s behalf.
On January 3, 2020, Shuhai Beijing entered into two equity transfer agreements (the “Transfer Agreements”) with President of the Company, and a Director of the
Company. Pursuant to the Transfer Agreements, the Director and the President, each agreed, for no consideration, to (i) transfer their 51% and 49% ownership
interest, respectively, in Guozhong Times (Beijing) Technology Ltd. (“Guozhong Times”) to Shuhai Beijing; and (ii) transfer their 51% and 49% ownership interest,
respectively, in Guohao Century (Beijing) Technology Ltd. (“Guohao Century”) to Shuhai Beijing. Guozhong Times and Guohao Century were established for
developing technology for electronic products, intelligence equipment and accessories, and providing software and information system consulting, installation and
maintenance services. Guozhong Times commenced operations in January 2020, whereas Guohao Century has not yet commenced operation as of this report date.
On January 7, 2020, Shuhai Beijing entered into another equity transfer agreement with the President, the same Director described above and an unrelated
individual. Pursuant to this equity transfer agreement, the Director, the President and the unrelated each agreed to transfer their 51%, 16%, 33% ownership interests,
respectively, in Guozhong Haoze (Beijing) Technology Ltd. (“Guozhong Haoze”) to Shuhai Beijing for no consideration. Guozhong Haoze was formed to further
develop and market the smart security system products. However, as of June 30, 2020, it has not commenced operations.
In December 2019, a novel strain of coronavirus (COVID-19) was reported in China, upon which the World Health Organization has declared the outbreak to
constitute a “Public Health Emergency of International Concern.” Based on the epidemic prevention and control system embedded in the Company’s intelligent
security platform, the Company was able to promptly organize the employees at home to develop and upgrade the body temperature measurement
and administration backend of the epidemic prevention and control system, which could meet the needs of schools and public communities for epidemic prevention,
and well addressed the problem of how to integrate the Company’s security platform and epidemic prevention system. Since April in 2020, the Company has
resumed normal work, and the impact of COVID-19 outbreak on the Company’s marketing efforts from January to March of 2020 has been mitigated. There are
some new Covid-19 cases discovered in a few provinces of China including Beijing as of today, however, the number of new cases are not significant due to PRC
government’s strict control, and the Company does not believe the new cases would have a significant impact on the Company’s operations.
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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GOING CONCERN
The accompanying consolidated financial statements were prepared assuming the Company will continue as a going concern, which contemplates continuity of
operations, realization of assets, and liquidation of liabilities in the normal course of business. For the years ended June 30, 2020 and 2019, the Company had a net
loss of $1.86 million and $1.43 million, respectively. The Company has an accumulated deficit of $7.41 million as of June 30, 2020 and negative cash inflow from
operations of $4.57 million for the year ended June 30, 2020. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
There can be no assurance that the Company will become profitable or obtain necessary financing for its business or that it will be able to continue in business.
The Company modified its products and software to emphasize the products and services that could assist schools and communities in addressing the coronavirus
outbreak, providing possible remedy and prevention for the future outbreak after school resumes and public community reverts to social activities by promoting
Epidemic Prevention and Control Systems. Management also intends to raise additional funds by way of a private or public offering, or by obtaining loans from
banks or others, which are planned to be used altogether with operating turnover to support Company’s R&D, procurement, marketing and daily operation, while the
Company believes in the viability of its strategy to generate sufficient revenue and in its ability to raise additional funds on reasonable terms and conditions, there
can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its
business plan and generate sufficient revenue and its ability to raise additional funds by way of a public or private offering.
On June 25, 2020, the Company’s S-3 registration filing was successfully approved by SEC. The Company may from time to time issue up to $100,000,000
aggregate dollar amount of common stock, debt securities, warrants or units of securities. The Company will describe the plan of distribution for any particular
offering of these securities in the applicable prospectus supplement. There can be no assurance that the Company will be successful in any future fund raising.
BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding consolidated financial reporting. The
accompanying consolidated financial statements include the financial statements of the Company and its 100% owned subsidiaries “Shuhai Skill (HK)”, and
“Tianjin Information”, and its VIE, Shuhai Beijing, and Shuhai Beijing’s 100% owned subsidiaries – Xunrui and Guozhong Times. All significant inter-company
transactions and balances have been eliminated in consolidation.
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VARIABLE INTEREST ENTITY
Pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Section 810, “Consolidation” (“ASC 810”), the Company
is required to include in its consolidated financial statements, the financial statements of Shuhai Beijing, its VIE. ASC 810 requires a VIE to be consolidated if the
Company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. A VIE is an entity in which a
company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the entity, and therefore the Company
is the primary beneficiary of the entity.
Under ASC 810, a reporting entity has a controlling financial interest in a VIE, and must consolidate that VIE, if the reporting entity has both of the following
characteristics: (a) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance; and (b) the obligation to absorb
losses, or the right to receive benefits, that could potentially be significant to the VIE. The reporting entity’s determination of whether it has this power is not
affected by the existence of kick-out rights or participating rights, unless a single enterprise, including its related parties and de - facto agents, have the unilateral
ability to exercise those rights. Shuhai Beijing’s actual stockholders do not hold any kick-out rights that affect the consolidation determination.
Through the VIE agreements, the Company is deemed the primary beneficiary of Shuhai Beijing and its subsidiaries. Accordingly, the results of Shuhai Beijing and
its subsidiaries have been included in the accompanying 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.
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Information or its designee(s) the irrevocable right and option to acquire all or a portion of Shuhai Beijing Shareholders’ equity interests in Shuhai Beijing for an
option price of RMB 0.001 for each capital contribution of RMB1.00. Pursuant to the terms of the Option Agreement, Tianjin Information and the Shuhai
Beijing shareholders have agreed to certain restrictive covenants to safeguard the rights of Tianjin Information under the option Agreement. Tianjin Information
agreed to pay RMB1.00 annually to Shuhai Beijing Shareholders to maintain the option rights. Tianjin Information may terminate the Option Agreement upon prior
written notice. The Option Agreement is valid for a period of 10 years from the effective date and renewable at Tianjin Information’s option.
Equity Pledge Agreement – Tianjin Information and the Shuhai Beijing Shareholders entered into an equity pledge agreement on October 27, 2015 (the “Equity
Pledge Agreement”). The Equity Pledge Agreement serves to guarantee the performance by Shuhai Beijing of its obligations under the Operation and Intellectual
Property Service Agreement and the Option Agreement. Pursuant to the Equity Pledge Agreement, Shuhai Beijing Shareholders have agreed to pledge all of their
equity interests in Shuhai Beijing to Tianjin Information. Tianjin Information has the right to collect any and all dividends paid on the pledged equity interests during
the pledge period. Pursuant to the terms of the Equity Pledge Agreement, the Shuhai Beijing Shareholders have agreed to certain restrictive covenants to safeguard
the rights of Tianjin Information. Upon an event of default or certain other agreed events under the Operation and Intellectual Property Service Agreement, the
Option Agreement and the Equity Pledge Agreement, Tianjin Information may exercise the right to enforce the pledge.
The following financial statement amounts and balances of the VIE were included in the accompanying consolidated financial statements as of June 30, 2020 and
2019 and for the years ended June 30, 2020 and 2019, respectively:
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Revenues
Gross profit
Net loss
June 30,
2020
895,321 $
924,537
1,819,858 $
June 30,
2019
1,573,413
96,927
1,670,340
618,663 $
341,273
959,936 $
6,232,836
-
6,232,836
$
$
$
$
For the
Year
Ended
June 30,
2020
For the
Year
Ended
June 30,
2019
$
$
$
1,414,781 $
1,312,638 $
(580,767) $
-
-
(1,432,372)
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RECLASSIFICATION
Certain prior period accounts have been reclassified in conformity with current period’s presentation, including the reclassification of $500,000 intangible asset to
non-current prepaid expense at June 30, 2019.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with US GAPP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those estimates. The significant areas requiring the use of management estimates include, but
are not limited to, the estimated useful life and residual value of property, plant and equipment, provision for staff benefits, recognition and measurement of deferred
income taxes and the valuation allowance for deferred tax assets. Although these estimates are based on management’s knowledge of current events and actions
management may undertake in the future, actual results may ultimately differ from those estimates and such differences may be material to the consolidated
financial statements.
CONTINGENCIES
Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be
resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and
such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or
unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as
well as the perceived merits of the amount of relief sought or expected to be sought. If the assessment of a contingency indicates that it is probable that a material
loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the Company’s 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, 2020 and 2019, the
Company has no such contingencies.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits and short-term cash investments that are highly liquid in nature and have original maturities of
three months or less.
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RESTRICTED CASH / ESCROW
Restricted cash represents cash held in an indemnification escrow account related to requirements of the financing agreement signed with the underwriter of the
Company’s initial public offering for a period of 18 months or longer subsequent to the closing of the initial public offering on December 21, 2018, but in no event it
shall be held in escrow for longer than 24 months.
INVENTORY
Inventory comprised principally of smart student identification cards related to the Company’s “Safe Campus” security products, as well as products associated
therewith comprised of routers to be used in installations, is valued at the lower of cost or net realizable value. The value of inventory is determined using the first-
in, first-out method. The Company periodically estimates an inventory allowance for estimated unmarketable inventories when necessary. Inventory amounts are
reported net of such allowances. There were $44,237 and $0 allowances for slow-moving and obsolete inventory as of June 30, 2020 and 2019, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation. Major repairs and improvements that significantly extend original useful lives or improve
productivity are capitalized and depreciated over the period benefited. Maintenance and repairs are expensed as incurred. When property and equipment are retired
or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in
operations. Depreciation of property and equipment is provided using the straight-line method over estimated useful lives as follows:
Furniture and fixtures
Office equipment
Vehicles
Lease improvement
3-5 years
3-5 years
5 years
3 years
Leasehold improvements are depreciated utilizing the straight-line method over the shorter of their estimated useful lives or remaining lease term.
INTANGIBLE ASSETS
Intangible assets with finite lives are amortized using the straight-line method over their estimated period of benefit. Evaluation of the recoverability of intangible
assets is made to take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of the
Company’s intangible assets are subject to amortization. No impairment of intangible assets has been identified as of the balance sheet date.
Intangible assets include licenses, certificates, patents and other technology and are amortized over their useful life of three years.
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FAIR VALUE (“FV”) OF FINANCIAL INSTRUMENTS
The carrying amounts of certain of the Company’s financial instruments, including cash and equivalents, accrued liabilities and accounts payable, approximate their
FV due to their short maturities. FASB ASC Topic 825, “Financial Instruments,” requires disclosure of the FV of financial instruments held by the Company. The
carrying amounts reported in the balance sheets for current liabilities qualify as financial instruments and are a reasonable estimate of their FV because of the short
period of time between the origination of such instruments and their expected realization and the current market rate of interest.
FAIR VALUE MEASUREMENTS AND DISCLOSURES
FASB ASC Topic 820, “Fair Value Measurements,” defines fair value, and establishes a three-level valuation hierarchy for disclosures that enhances disclosure
requirements for fair value measures. The three levels are defined as follows:
● Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
● Level 2 inputs to the valuation methodology include other than those in level 1 quoted prices for similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
● Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The carrying value of the Company’s short-term financial instruments, such as accounts payable, approximate their fair values due to their short maturities.
As of June 30, 2020 and 2019, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at fair value on a
recurring basis.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with FASB ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets such as property and equipment are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable, or it is reasonably
possible that these assets could become impaired as a result of technological or other changes. The determination of recoverability of assets to be held and used is
made by comparing the carrying amount of an asset to future undiscounted cash flows to be generated by the asset.
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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. Fair value generally is determined using the asset’s expected future discounted cash flows or market value, if readily determinable. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less cost to sell. For the years ended June 30, 2020 and 2019, there was no impairment loss recognized
on long-lived assets.
LEASES
On July 1, 2019, the Company adopted Topic 842 using the modified retrospective transition approach by applying the new standard to all leases existing at the date
of initial application. Results and disclosure requirements for reporting periods beginning after July 1, 2019 are presented under Topic 842, while prior period
amounts have not been adjusted and continue to be reported in accordance with its historical accounting under Topic 840.
The Company elected the package of practical expedients permitted under the transition guidance, which allowed it to carry forward its historical lease
classification, its assessment on whether a contract was or contains a lease, and its initial direct costs for any leases that existed prior to July 1, 2019. The Company
also elected to combine its lease and non-lease components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the
associated lease payments in the consolidated statements of income on a straight-line basis over the lease term.
The adoption did not impact its beginning accumulated deficit, or its prior year consolidated statement of operations and statement of cash flows.
Under Topic 842, the Company determines if an arrangement is a lease at inception. Right of Use Assets (“ROU”) and lease liabilities are recognized at
commencement date based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments that are
fixed and determinable at the time of commencement. As most of its leases do not provide an implicit rate, it uses its incremental borrowing rate based on the
information available at commencement date in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate
based on its understanding of what its credit rating would be. The ROU assets include adjustments for prepayments and accrued lease payments. The ROU asset also
includes any lease payments made prior to commencement and is recorded net of any lease incentives received. The Company’s lease terms may include options to
extend or terminate the lease when it is reasonably certain that it will exercise such options.
Operating leases are included in operating lease right-of-use assets and operating lease liabilities (current and non-current), on the consolidated balance sheets. At
June 30, 2020, the net ROU was $702,952, of which $10,171 was for the car lease from the Company’s president, and $692,781 was for the operating lease of the
Company’s office and senior officers’ dormitory in Beijing. At June 30, 2020, total operating lease liabilities (includes current and noncurrent) was $687,902, which
was for the operating lease of the Company’s office and senior officers’ dormitory in Beijing.
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REVENUE RECOGNITION
On July 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 (and related amendments subsequently issued in 2016), Revenue from
Contracts with Customers (ASC 606), by using the modified retrospective method for contracts that were not completed as of July 1, 2018. This did not result in an
adjustment to retained earnings upon adoption of this new guidance, as the Company’s revenue was recognized based on the amount of consideration we expect to
receive in exchange for satisfying the performance obligations.
The core principle underlying the ASC 606 is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount
that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance
obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a
customer. The Company’s revenue streams are recognized at a point in time, based on when control of goods and services transfers to a customer.
ASC 606 requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the
contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the
extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract,
and (v) recognize revenue when (or as) the Company satisfies each performance obligation. The application of the five-step model to the revenue streams compared
to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue
recognition policy for all revenue streams within the scope of the ASC 606 under previous standards and using the five-step model under the new guidance and
confirmed that there were no differences in the pattern of revenue recognition.
The Company derives its revenues from products sales and professional service contracts with its customers, with revenues being recognized upon delivery of
services and products. Persuasive evidence of an arrangement is demonstrated via professional service contracts and invoices; and the service price to the customer
is fixed upon acceptance of the professional services contract. The Company will recognize revenue when professional service is rendered to the customer by the
Company and collectability of payment is reasonably assured. These revenues will be recognized at a point in time after all performance obligations are satisfied.
Revenue is recognized net of returns and value-added tax charged to customers.
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INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income
tax expense is recognized for the amount of: (i) taxes payable or refundable for the current period and (ii) deferred tax consequences of temporary differences
resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets also include the prior years’ net operating
losses carried forward. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of
operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the
available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.
The Company follows ASC Topic 740, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and
deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and
income tax disclosures.
Under the provisions of ASC Topic 740, when tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing
authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit
of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not
that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more
than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that
exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any
associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits is classified as
interest expense and penalties are classified in selling, general and administrative expenses in the statement of income. As of July 1, 2019, the Company had no
unrecognized tax benefits and no charges during fiscal year 2020, and accordingly, the Company did not recognize any interest or penalties related to unrecognized
tax benefits. There was no accrual for uncertain tax position as of June 30, 2020. The Company files U.S. income tax return. With few exceptions, the US income
tax return filed for the years ending on June 30, 2017 and thereafter are subject to examination by the relevant taxing authorities.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are expensed in the period when they are incurred. For the years ended June 30, 2019 and 2020, the Company incurred research
and development expenses of $1,114,486 and $168,248, respectively.
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CONCENTRATION OF CREDIT RISK
The Company maintains cash in accounts with state-owned banks within the PRC. Cash in state-owned banks less than RMB500,000 ($71,806) is covered by
insurance. Should any of these institutions holding the Company’s cash become insolvent, or if the Company is unable to withdraw funds for any reason, the
Company could lose the cash on deposit with that institution. The Company has not experienced any losses in such accounts and believes it is not exposed to any
risks on its cash in these bank accounts.
Cash denominated in RMB with a U.S. dollar equivalent of $733,849 and $1,395,104 at June 30, 2020 and 2019, respectively, were held in accounts at financial
institutions located in the PRC‚ which is not freely convertible into foreign currencies. The Company, its subsidiaries and VIE have not experienced any losses in
such accounts and do not believe the cash is exposed to any significant risk. Cash held in accounts at U.S. financial institutions are insured by the Federal Deposit
Insurance Corporation or other programs subject to certain limitations up to $250,000 per depositor. As of June 30, 2020, the cash balance of approximately
$315,735 was maintained at U.S. financial institutions, of which approximately $65,000 was not insured. Cash was maintained at financial institutions in Hong
Kong, and were insured by the Hong Kong Deposit Protection Board up to a limit of HK $500,000 (approximately $64,000). As of June 30, 2020, the cash balance
of approximately $16,352 was maintained at financial institutions in Hong Kong.
FOREIGN CURRENCY TRANSLATION AND COMPREHENSIVE INCOME (LOSS)
The accounts of the Company’s Chinese entities are maintained in RMB and the accounts of the U.S. parent company are maintained in United States
dollars(“USD”) The accounts of the Chinese entities were translated into USD in accordance with ASC Topic 830 “Foreign Currency Matters.” All assets and
liabilities were translated at the exchange rate on the balance sheet date; stockholders’ equity is translated at historical rates and the statements of operations and
cash flows are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income
(loss) in accordance with ASC Topic 220, “Comprehensive Income.” Gains and losses resulting from foreign currency transactions are reflected in the statements of
operations.
The Company follows FASB ASC Topic 220-10, “Comprehensive Income (loss).” Comprehensive income (loss) comprises net income(loss) and all changes to the
statements of changes in stockholders’ equity, except those due to investments by stockholders, changes in additional paid-in capital and distributions to
stockholders.
The exchange rates used to translate amounts in RMB to USD for the purposes of preparing the consolidated financial statements were as follows
Period end USD: RMB exchange rate
Average USD: RMB exchange rate
F-18
June 30,
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June 30,
2019
7.0795
7.0199
6.8668
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BASIC AND DILUTED EARNINGS (LOSS) PER SHARE (EPS)
Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period.
Diluted EPS is computed similarly, except that the denominator is increased to include the number of additional common shares that would have been outstanding if
the potential common shares had been issued and if the additional common shares were dilutive. Diluted EPS are based on the assumption that all dilutive
convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and
warrants are assumed to have been exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to
purchase common stock at the average market price during the period. For the years ended June 30, 2020 and 2019, the Company’s basic and diluted loss per share
are the same due to the outstanding warrants being anti-dilutive as a result of the Company’s net loss.
STATEMENT OF CASH FLOWS
In accordance with FASB ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies. As
a result, amounts shown on the statement of cash flows may not necessarily agree with changes in the corresponding asset and liability on the balance sheet.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company is an emerging growth company and has elected not to use the extended transition period for complying with any new or revised financial accounting
standards.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair
Value Measurement, which modifies the disclosure requirements for Level 1, Level 2 and Level 3 instruments in the fair value hierarchy. The guidance is effective
for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for any eliminated or modified
disclosures. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements or disclosures.
In November 2019, the FASB issued ASU No. 2019-08, Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic
606), Codification Improvements – Share-Based Consideration Payable to a Customer. The amendments in this Update require that an entity measure and classify
share-based payment awards granted to a customer by applying the guidance in Topic 718. The amount recorded as a reduction of the transaction price is required to
be measured on the basis of the grant-date fair value of the share-based payment award in accordance with Topic 718. The grant date is the date at which a grantor
(supplier) and a grantee (customer) reach a mutual understanding of the key terms and conditions of a share-based payment award. For entities that have not yet
adopted the amendments in Update 2018-07, the amendments in this Update are effective for (1) public business entities in fiscal years beginning after December
15, 2019, and interim periods within those fiscal years, and (2) other than public business entities in fiscal years beginning after December 15, 2019, and interim
periods within fiscal years beginning after December 15, 2020. The Company is evaluating the impact of this on its consolidated financial statements.
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In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes, eliminates
certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application among reporting entities.
The guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. Upon
adoption, the Company must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified
retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company is evaluating the
impact this update will have on its Consolidated Financial Statements.
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
Furniture and fixtures
Vehicle
Leasehold improvement
Office equipment
Subtotal
Less: accumulated depreciation
Total
Depreciation expense for the years ended June 30, 2020 and 2019 was $65,252 and $31,442 respectively.
F-20
June 30,
2020
June 30,
2019
71,778 $
2,825
203,751
174,253
452,607
161,576
291,031 $
83,437
2,913
-
54,641
140,991
99,875
41,116
$
$
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NOTE 4 – INTANGIBLE ASSETS
Intangible assets are summarized as follows:
Software registration right
Patent
Value-added telecommunications business license
Subtotal
Less: Accumulated amortization
Total
Amortization expense for the years ended June 30, 2020 and 2019 were $45,070 and $4,864, respectively.
NOTE 5 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
Security deposit
Prepaid software development expenses
Other prepaid expenses and advances
Prepayment for inventory from Heqin
Other receivables
Others
Total
June 30,
2020
June 30,
2019
36,705 $
22,578
14,827
74,110
53,416
20,694 $
37,843
15,286
11,678
64,807
8,996
55,811
June 30,
2020
June 30,
2019
156,023 $
1,200,000
47,182
101,252
522,636
29,390
2,056,483 $
46,933
-
34,181
-
-
24,818
105,932
$
$
$
$
On May 28, 2019, the Company entered into an agreement with SDT Trade Co., Ltd., an unaffiliated party (“SDT”). SDT will assist the Company with technical
development work related to the Company’s security-related software and systems. Pursuant to the agreement, SDT will complete certain development work within
twelve months and thereafter maintain the system for thirty-six months. The total amount to be paid under the agreement is $1,200,000. As of June 30, 2020, the
Company paid SDT $1,000,000, of which, $400,000 was recorded as R&D expenses as the costs were incurred before the establishment of technological feasibility,
and $600,000 was recorded as prepaid software development expenses. The progress of the development work was affected by Covid-19 and the estimated
completion date was estimated to be December 2020.
On July 2, 2019, the Company entered into a technology development service agreement with HW (HK) Limited (“HW”), an unaffiliated party. Pursuant to the
agreement, the Company appointed HW (HK) Limited to develop an eye protection technical system for a two-year period ending July 1, 2021, and thereafter
maintain the system for thirty-six months. The total payments to be made under the agreement is $1,200,000. As of June 30, 2020, the Company paid HW (HK)
Limited $900,000, of which, $300,000 was recorded as R&D expenses as the costs were incurred before the establishment of technological feasibility, and $600,000
was recorded as prepaid software development expenses.
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At June 30, 2019, the Company paid $500,000 to SDT, and was recorded as noncurrent prepaid expense.
On February 20, 2020, Guozhong Times entered an Operation Cooperation Agreement with an unrelated company, Heqin (Beijing) Technology Co, Ltd. (“Heqin”)
for marketing and promoting the sale of Face Recognition Payment Processing equipment and related technical support, and other products of the Company
including Epidemic Prevention and Control Systems. Heqin has a strong sales team who used to work shoulder by shoulder with fortune 500 companies and
specializes in business marketing and sales channel establishment and expansion, especially in education industry and public area. They have had successful
experience of organizing multiple business matchmaking meetings with customers, distributors and retailers.
The cooperation term is from February 20, 2020 through March 1, 2023; however, Heqin is the exclusive distributor of the Company’s face Recognition Payment
Processing products for the period up to July 30, 2020. During the period of March and April 2020, Guozhong Times provided the operating fund to Heqin, together
with a credit line provided by Guozhong Times to Heqin for the period from May 2020 through August 2020, for a total borrowing amount of RMB 10 million
($1.41 million) for Heqin’s operating needs. As of June 30, 2020, Guozhong Times had an outstanding receivable of RMB 3.68 million ($519,811) from Heqin and
was recorded as other receivable. The Company would not charge Heqin any interest, except for two loans with RMB 200,000 ($28,250) each, due on June 30, 2020
and August 15, 2020, respectively, for which the Company will charge 15% interest rate per annum if Heqin did not repay by the due date. As of this report date,
Heqin did not repay these two loans. All the loans to Heqin are secured against the assets of Heqin, and Heqin’s shareholders are jointly responsible for the timely
repayment of the loan.
On August 26, 2020, Heqin provided a repayment plan to the Company that the $519,811 loan would be fully settled by February 2021 with a monthly payment
starting from October 2020 as follows:
October 2020: repay RMB 1,200,000 ($169,504)
November 2020: repay RMB 800,000 ($113,002)
December 2020: repay RMB 1,000,000 ($141,253)
January 2021: repay RMB 600,000 ($84,752)
February 2021: repay RMB 80,000 ($11,300)
No profits will be allocated and distributed before the full repayment of the borrowing. After Heqin pays in full the borrowing amount, Guozhong Times and Heqin
will start to distribute from the profits of sale of Face Recognition Payment Processing equipment and related technical support at 30% and 70% of the net income,
respectively. The profit allocation for the sale of other products of the Company are to be negotiated. Heqin will receive certain stock reward when it reaches the
preset sales target under the performance compensation mechanism.
In addition, at June 30, 2020, the Company prepaid $101,252 for goods purchased from Heqin.
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NOTE 6 – ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and other payable consisted of the following:
Deposit
Salary and other payables
Total
June 30,
2020
June 30,
2019
$
$
- $
274,934
274,934 $
30,525
234,159
264,684
As of June 30, 2020, accrued expenses and other payables mainly consisted of salary payable of $84,588, and accrued labilities and other payables of $190,346. As
of June 30, 2019, salary and other payables mainly consist of salary payable of $52,551 and other payables of $181,608.
NOTE 7 – ADVANCES FROM CUSTOMERS
On March 5, 2018 and June 28, 2018, the Company entered into separate agreements with two sales agents. Pursuant to the agreements, the Company authorized the
agents to market the Company’s Safe Campus Management System. The term of the agreements is for five years and will expire on March 6, 2023 and July 1, 2023,
respectively. In accordance with ASU 2016-08, Principal versus Agent Considerations (ASC 606), the Company determined that it was the principal in these two
contracts and as such, the Company recorded the payments received from the two sales agents as advances in the amounts of RMB 9,056,604 ($1,318,897) as of
June 20, 2019. The Company followed the five-step process under ASC 606 and recognized revenue of RMB 9,056,604 ($1,290,142 ) from these contracts in June
2020 as the sales agents had delivered all the products and services to third parties and both the Company and agents had fulfilled its obligations including the
installation of the system, training and technical support required under the contracts in the year ended June 30, 2020.
As of March 31, 2020, Guozhong Times has received 33 purchase orders from development and construction companies from Anhui and Fujian province, China for
customized hardware and software solutions to detect and control the novel coronavirus outbreak in public areas and an advance totaling $69,500. Datasea’s systems
sold in these orders are utilized in public places, including campuses, shopping malls, scenic areas, residential areas and factory areas. During the quarter ended June
30, 2020, the Company received more orders of this product. Revenue was recognized for all these orders in which delivery and services required were completed in
the year ended June 30, 2020.
As of June 30, 2020, the Company had advances from customers of $20,953. As of June 30, 2019, the Company had advances from customers of $1,318,897 related
to the advances from the sales agents and was recognized as revenue in June 2020.
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NOTE 8 – RELATED PARTY TRANSACTIONS
The Company’s President, Zhixin Liu, paid certain operating expenses on behalf of the Company. As of June 30, 2020 and 2019, the amounts due to the President
were $0 and $86,733, respectively. These amounts were interest-free, unsecured and due on demand.
On January 1, 2019, the Company’s President entered into a car rental agreement with the Company for a term of two years. Pursuant to the agreement, the
Company rents a car from the Company’s President for a monthly rent of approximately $700. The agreement was replaced by a new agreement entered on
November 30, 2019 for the leasing period from December 1, 2019 through December 31, 2020, with monthly rent of approximately $1,700, or total payment of
$22,288, which was paid in full in advance as required by the agreement, and was recorded under right of use asset; at June 30, 2020, the net right of use asset for
auto leasing was $10,170.
On January 1, 2020, the Company’s President entered into a car rental agreement with the Company for a term of one year. Pursuant to the agreement, the Company
rents a car from the Company’s President for a monthly rent of RMB 20,000 ($2,849), or total payment of $34,188, which was paid in full in advance as required by
the agreement, and was recorded as prepaid expense since the lease term was not over one year, and hence not required to be accounted for as a right-of-use asset.
The Company recorded car lease expense to the Company’s President of $29,060 and $13,184 for the years ended June 30, 2020 and 2019.
In April 2019, the Company’s President entered into an apartment rental agreement with the Company. Pursuant to the agreement, the Company rents an apartment
located in Harbin city as the Company’s branch office from the Company’s President with an annual rent of approximately $2,828. The term was from May 1, 2019
through April 30, 2020. The rent paid under this agreement was $2,374 and $2,930 for the years ended June 30, 2020 and 2019, respectively.
On April 22, 2019, the Company borrowed RMB 400,000 (or approximately $57,000) with no interest from the Company’s President to pay operating expenses.
The loan was repaid on July 8, 2019.
NOTE 9 – COMMON STOCK AND WARRANTS
On August 22, 2018, the Company’s Board of Directors and majority stockholders adopted the 2018 Equity Incentive Plan (the “2018 Plan”) for the Company to
award up to a maximum of 4,000,000 shares of its Common Stock, to attract and retain the best available personnel, provide additional incentives to employees,
directors and consultants and promote the success of its business. In June of 2020, the Company filed a Registration Statement on Form S-8 to register these shares
issuable pursuant to the 2018 Plan adopted by the Board of Directors. 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 its officers and directors of the Company.
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During September 2018, the Company sold 84,000 shares of Common Stock to third party investors at RMB 20 (approximately $2.94) per share and received
proceeds of RMB 1,680,000 (approximately $244,666).
During November 2018, the Company sold 21,500 shares of Common Stock to third party investors at $2.92 per share and received proceeds of $62,780.
On December 21, 2018, the Company completed a registered, underwritten initial public offering and concurrent listing of the Company’s Common Stock on the
NASDAQ Capital Market, which offering generated gross proceeds of $6.7 million before deducting underwriter’s commissions and other offering costs, resulting
in net proceeds of approximately $5.7 million, of which $1,000,000 was placed in an escrow account. The escrow fund is being held and disbursed by the escrow
agent pursuant to the terms and conditions of a certain Indemnification Escrow Agreement between the Company and the underwriter of the offering. $400,000 of
the escrow fund was disbursed to the Company in February 2019 when the underwriter confirmed receipt of a written legal opinion from PRC legal counsel in
connection with such offering. The Company sold 1,667,500 shares of Common Stock (including shares issued pursuant to the underwriter’s over-allotment option)
at an offering price of $4 per share.
In addition, the Company issued warrants to the representative of the underwriters to purchase 101,500 shares of Common Stock at an exercise price of $6 per share.
These warrants may be purchased in cash or via cashless exercise, will be exercisable for five years from December 21, 2018 through December 17, 2023. The
warrants issued in this financing were classified as equity instruments. The Company accounted for the warrants issued in this financing based on the fair value
method under ASC Topic 505, and the FV of the warrants was calculated using the Black-Scholes model under the following assumptions: life of 5 years, volatility
of 168%, risk-free interest rate of 2.64% and dividend yield of 0%. The FV of the warrants issued at grant date was $387,727, and was recorded as offering costs.
Following is a summary of the activities of warrants for the years ended June 30, 2020 and 2019:
Outstanding at July 1, 2018
Warrants issued
Outstanding at June 30, 2019
Granted
Exercised
Forfeited
Expired
Outstanding at June 30, 2020
Exercisable at June 30, 2020
Number
of
Warrants
Average
Exercise
Price
- $
101,500
101,500
-
-
-
-
101,500 $
101,500 $
-
6.00
6.00
-
-
-
-
6.00
6.00
Weighted
Average
Remaining
Contractual
Term in
Years
-
5
4.47
-
-
-
-
3.47
3.47
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The aggregate intrinsic value was $0 as of June 30, 2020 and 2019 and was calculated as the difference between the exercise price of the underlying awards and the
closing stock price of $1.30 and $2.10 for Company’s common stock on June 30, 2020 and 2019, respectively.
In June 2020, the Company filed a “shelf” registration statement on Form S-3 to from time to time issue and offer up to $100,000,000 aggregate dollar amount of
common stock, debt securities, warrants or units of securities.
NOTE 10 – INCOME TAXES
The Company is subject to income taxes by entity on income arising in or derived from the tax jurisdiction in which each entity is domiciled. The Company’s PRC
subsidiaries file their income tax returns online with PRC tax authorities. The Company conducts all of its businesses through its subsidiaries and affiliated entities,
principally in the PRC.
The Company’s US parent company was incorporated in the US and is subject to U.S. income tax rate of 21% and files U.S. federal income tax return. As of June
30, 2020, the US entity had net operating loss (“NOL”) carry forwards for income tax purpose of $353,664. The NOL arising in tax years beginning after 2017 may
reduce 80% of a taxpayer’s taxable income, and be carried forward indefinitely. Management believes the realization of benefits from these losses remains uncertain
due to the parent Company’s limited operating history and continuing losses. Accordingly, a 100% deferred tax asset valuation allowance was provided.
The Company’s offshore subsidiary, Shuhai Skill (HK), a HK holding company is subject to 16.5% corporate income tax in HK. Shuhai Beijing received a tax
holiday with a 15% corporate income tax rate since it qualified as a high-tech company. Tianjin Information, Xunrui, and Guozhong Times are subject to the regular
25% PRC income tax rate.
As of June 30, 2020, the Company has approximately $5.68 million of NOL related to its HK holding company, PRC subsidiaries and VIEs that expire in calendar
years 2020 through 2024. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the Company’s future generation of taxable income during
the periods in which temporary differences representing net future deductible amounts become deductible. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all the information available,
management believes that significant uncertainty exists with respect to future realization of the deferred tax assets and has therefore established a full valuation
allowance as of June 30, 2020 and 2019.
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The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the years ended June 30, 2020 and 2019:
US federal statutory rates
Tax rate difference – current provision
Permanent difference
Effect of PRC tax holiday
Valuation allowance
Under accrual of prior year income tax of parent company
Effective tax rate
The provision for income tax expense (benefit) for the years ended June 30, 2020 and 2019 consisted of the following:
Income tax expense – current
Income tax expense – deferred
Increase (decrease) in valuation allowance
Total income tax expense
The Company’s net deferred tax asset as of June 30, 2020 and 2019 is as follows:
Deferred tax asset
Net operating loss
R&D expense
Accrued expense of officers’ salary
Depreciation and amortization
Inventory impairment
Total
Less: valuation allowance
Net deferred tax asset
F-27
Years
Ended
June 30,
2020
2019
(21.0)%
(0.2)%
(0.3)%
(1.4)%
23.2%
(0.3)%
-%
(21.0)%
7.0%
-%
-%
14.0%
-%
-%
2020
2019
5,158 $
2,610
(2,610)
5,158 $
-
(213,777)
213,777
-
June 30,
2020
June 30,
2019
1,048,593 $
115,500
13,984
8,219
10,966
1,197,262
(1,197,262)
- $
1,199,872
-
-
-
-
1,199,872
(1,199,872)
-
$
$
$
$
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NOTE 11 – COMMIMENTS
Lease Agreement
On March 20, 2019, the Company entered into the one-year operating lease agreement for a senior management’s dormitory. Pursuant to the lease agreement, the
lease expires on March 22, 2020 and has a monthly rent of RMB 5,200 (or approximately $735). The Company did not renew the lease upon lease expiration.
On July 30, 2019, the Company entered into an operating lease agreement for its office in Beijing. Pursuant to the lease agreement, the delivery date of the property
was August 8, 2019 but the lease term started on October 8, 2019 and expires on October 7, 2022, and has a monthly rent of RMB 207,269 without value added tax
(“VAT”) (or approximately $29,250). The lease required a security deposit of three months’ rent of RMB 677,769 (or approximately $96,000). The Company will
receive a six-month rent abatement.
On July 30, 2019, the Company entered into a property service agreement for its office in Beijing (described above). Pursuant to the property service agreement, the
agreement commenced on August 9, 2019 and will expire on October 8, 2022, and has a quarterly fee of RMB 202,352 (or approximately $29,000). The deposit was
RMB202,352 (or approximately $29,000).
On August 28, 2019, the Company entered an operating lease agreement for senior officers’ dormitory in Beijing. The lease has a term of two years with expiration
date on August 31, 2021, the monthly rent is RMB 14,500 ($2,045), payable every six months in advance.
The Company adopted ASC 842 on July 1, 2019. The components of lease costs, lease term and discount rate with respect of the Company’s office lease and the
senior officers’ dormitory lease with an initial term of more than 12 months are as follows:
Operating lease expense
The rental expense for the year ended June 30, 2019 was $61,864.
Right-of-use assets
Lease liabilities
Lease liabilities - noncurrent
Weighted average remaining lease term
Weighted average discount rate
F-28
Year
Ended
June 30,
2020
$
192,891
June 30,
2020
$
$
$
692,781
346,629
341,273
2.22 years
5.00%
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The following is a schedule, by years, of maturities of the operating lease liabilities as of June 30, 2020:
Twelve months ending June 30,
2021
2022
2023
Total undiscounted cash flows
Less: imputed interest
Present value of lease liabilities
NOTE 12 – PARENT COMPANY FINANCIALS
$
Minimum
Lease
Payment
346,629
296,870
87,832
731,331
(43,429)
687,902
The following schedules present the parent company’s balance sheets as of June 30, 2020 and 2019, the statements of operations, and the statement of cash flows for
the years ended June 30, 2020 and 2019:
Cash
Long term investment in subsidiaries
Restricted cash / escrow
Total Assets
Accrued expenses and other payables
Total liabilities
Common stock
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings (accumulated deficit)
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
F-29
$
$
$
$
June 30,
2020
June 30,
2019
315,735 $
2,970,453
600,000
3,886,188 $
671,557
4,500,480
600,000
5,772,037
3,752 $
3,752
750
750
20,944 $
11,104,666
170,207
(7,413,381)
3,882,436
20,944
5,739,948
-
10,395
5,711,287
$
3,886,188 $
5,772,037
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Revenue
Cost of goods sold
Gross profit
Selling expenses
General and administrative expenses
Total operating expenses
Other income (expenses):
Equity loss in subsidiaries
Other expense
Interest income
Total other (expenses) income
Income tax
Net income (loss)
CASH FLOW FROM OPERATIONG ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Investment loss from subsidiaries
Changes in assets and liabilities:
Accrued expenses and other payables
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Investment into subsidiary
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock
Increase in escrow
Net cash provided by financing activities
Net (decrease) increase in cash and restricted cash
Cash and restricted cash, beginning of period
Cash and restricted cash, end of period
Supplemental disclosures of cash flow information:
Cash paid for interest
Cash paid for income tax
For the Years Ended
June 30,
2020
2019
$
- $
-
-
-
361,855
361,855
(1,504,430)
(805)
8,995
(1,496,240)
5,158
(1,863,253) $
$
-
-
-
-
22,899
22,899
-
(520)
47,182
46,662
-
23,764
For the Years Ended
June 30,
2020
2019
$
(1,863,253) $
23,764
1,504,430
3,001
-
-
(355,822)
23,764
-
(4,500,480)
-
(4,500,480)
-
-
5,748,273
(600,000)
-
5,148,273
(355,822)
671,557
1,271,557
-
915,735 $
671,557
- $
- $
-
-
$
$
$
Investment in subsidiaries in the parent company’s balance sheet at June 30, 2020 is stated at cost plus equity in undistributed earnings of subsidiaries and VIE. The
parent company’s share of net income and net loss of its subsidiaries and VIE is included in the statement of operations of the parent company for the year ended
June 30, 2020 using the equity method.
As of June 30, 2020, the parent company has no purchase commitment, capital commitment and operating lease commitment.
The ability of the parent company’s Chinese operating subsidiaries to pay dividends may be restricted due to the foreign exchange control policies and availability of
cash balances of the Chinese operating subsidiaries. As a significant portion of the Company’s operations and revenues are conducted and generated in the PRC, a
significant portion of the revenues being earned and currency received are denominated in RMB. RMB is subject to the exchange control regulation in the PRC and,
as a result, the Company may be unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict the Company’s ability to
convert RMB into US Dollars.
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NOTE 13 – SUBSEQUENT EVENTS
On August 17, 2020, Beijing Shuhai formed a new wholly-owned subsidiary Shuhai Jingwei (Shenzhen) Information Technology Co., Ltd (“Jingwei”), for
expanding the security oriented systems developing, consulting and marketing business overseas.
In August 2020, the Company entered into a lease agreement for an office unit in Shenzhen City, China for a term of three years from August 8, 2020 through
August 7, 2023, with a monthly rent of RMB 209,911 ($29,651) for the first year. The rent will increase by 3% each year starting from the second year.
On August 26, 2020, Tianjin Information entered into a lease agreement for the office in Hangzhou City, China for a lease term from September 11, 2020 to October
5, 2022. The first year rent is RMB 1,383,970 ($19,813). The second year rent is RMB 1,425,909 ($202,777). The security deposit is RMB 115,311. The total rent
for the lease period is to be paid in four installments.
On July 2, 2020, the Company received a notification from the Nasdaq Listing Qualifications staff (the “Staff’) stating that since the Company has not held an
annual meeting of shareholders within 12 months of the end of its fiscal year end, it no longer complied with Nasdaq continued listing rules 5620(a) and 5810(c)(2)
(G). As such, the Company is afforded 45 calendar days to submit a plan to regain compliance with the foregoing requirement and, if the Staff accepts the plan, the
Company will be granted an exception of up to 180 calendar days from the fiscal year end, or until December 28, 2020, to regain compliance. The Company was
added to a list of all non-compliant companies, which is posted on our websit at listingcenter.nasdaq.com. Subsequently, the Company submitted a plan of
compliance which was approved by the Staff. The Company is in the process of preparing for its Annual Meeting of Shareholders in 2020.
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