Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. All statements
other than statements of historical fact are "forward-looking statements" for
purposes of federal and state securities laws, including, but not limited to,
any projections of earnings, revenue or other financial items; any statements of
the plans, strategies and objectives of management for future operations; any
statements concerning proposed new services or developments; any statements
regarding future economic conditions of performance; and statements of belief;
and any statements of assumptions underlying any of the foregoing. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, performance or achievements to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements.
In some cases, you can identify forward looking statements by terms such as
"may," "intend," "might," "will," "should," "could," "would," "expect,"
"believe," "anticipate," "estimate," "predict," "potential," or the negative of
these terms. These terms and similar expressions are intended to identify
forward-looking statements. The forward-looking statements in this report are
based upon management's current expectations and belief, which management
believes are reasonable. However, we cannot assess the impact of each factor on
our business or the extent to which any factor or combination of factors, or
factors we are aware of, may cause actual results to differ materially from
those contained in any forward-looking statements. You are cautioned not to
place undue reliance on any forward-looking statements. These statements
represent our estimates and assumptions only as of the date of this report.
Except to the extent required by federal securities laws, we undertake no
obligation to update any forward-looking statement to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
You should be aware that our actual results could differ materially from those
contained in the forward-looking statements due to a number of factors,
including:
? uncertainties relating to our ability to establish and operate our business
and generate revenue;
? uncertainties relating to general economic, political and business conditions
in China;
? industry trends and changes in demand for our products and services;
? uncertainties relating to customer plans and commitments and the timing of
orders received from customers;
? announcements or changes in our advertising model and related pricing policies
or that of our competitors;
? unanticipated delays in the development, market acceptance or installation of
our products and services;
? changes in Chinese government regulations; and
? availability, terms and deployment of capital; relationships with third-party
equipment suppliers;
Overview
We were incorporated in the State of Nevada on September 26, 2014 under the name
Rose Rock Inc. and changed its name to Datasea Inc. on May 27, 2015 by amending
its articles of incorporation. On May 26, 2015, the Company's founder, Xingzhong
Sun, sold 6,666,667 shares of common stock of the Company to Zhixin Liu, one of
the owners of Shuhai Skill (HK) as defined below. On October 27, 2016, Mr. Sun
sold his remaining 1,666,667 shares of common stock of the Company to Ms. Liu.
19
On October 29, 2015, Rose Rock Inc. entered into a share exchange agreement (the
"Exchange Agreement") with the shareholders (the "Shareholders") of Shuhai
Information Skill (HK) Limited ("Shuhai Skill (HK)"), a limited liability
company incorporated on May 15, 2015 under the laws of the Hong Kong Special
Administrative Region of the People's Republic of China (the "PRC"). Pursuant to
the terms of the Exchange Agreement, the Shareholders, who together owned 100%
of the ownership rights in Shuhai Skill (HK), transferred all of the issued and
outstanding ordinary shares of Shuhai Skill (HK) to Rose Rock Inc. in exchange
for the issuance of an aggregate of 6,666,667 shares of common stock, thereby
causing Shuhai Skill (HK) and its wholly owned subsidiaries, Tianjin Information
Sea Information Technology Co., Ltd. ("Tianjin Information"), a limited
liability company incorporated under the laws of the PRC, and Harbin Information
Sea Information Technology Co., Ltd., a limited liability company incorporated
under the laws of the PRC, to become our wholly-owned subsidiaries, and Shuhai
Information Technology Co., Ltd., also a limited liability company incorporated
under the laws of the PRC ("Shuhai Beijing"), to become our variable interest
entity ("VIE") through a series of contractual agreements between Shuhai Beijing
and Tianjin Information. The transaction was accounted for as a reverse merger,
with Shuhai Skill (HK) and its subsidiaries being the accounting survivor.
Accordingly, the historical financial statements presented are those of Shuhai
Skill (HK) and its consolidated subsidiaries and VIE.
Following the Share Exchange, the Shareholders, being Zhixin Liu and her father,
Fu Liu, owned approximately 82% of the outstanding shares of common stock. As of
October 29, 2015, there were 18,333,333 shares of common stock issued and
outstanding, 15,000,000 of which were beneficially owned by Zhixin Liu and Fu
Liu.
After the Share Exchange, we, through our consolidated subsidiaries and VIE, is
engaged in the business of providing Internet security products and equipment,
new media advertising, micro-marketing, and data analysis services in the PRCs.
On April 12, 2018, our board of directors and stockholders approved a
one-for-three reverse stock split of our issued and outstanding shares of common
stock, which became effective on May 1, 2018, decreasing the number of
outstanding shares from 57,511,771 to 19,170,827. Subsequent to the split, the
number of our outstanding shares increased from to 19,170,827 to 19,170,846 to
accommodate certain shareholders' positions due to rounding elections payable at
the beneficial owner level. Unless otherwise stated, all shares and per share
amounts in this Report have been retroactively adjusted to give effect to this
stock split.
On August 22, 2018, our board of directors and majority stockholders adopted our
2018 Equity Incentive Plan (the "2018 Plan") under which we may award up to a
maximum of 4,000,000 shares of common stock to attract and retain personnel,
provide additional incentives to employees, directors and consultants and
promote the success of our business. No awards have been granted under the 2018
Plan as of the date of this Report, but our Board or a designated committee
thereof will have the ability in its discretion from time to time to make awards
under the 2018 Plan, including to our officers and directors.
On December 21, 2018, we successfully completed a registered, underwritten
initial public offering and concurrent listing of our common stock on the NASDAQ
Capital Market, which offering generated gross proceeds of $6.7 million before
deducting underwriter's commissions and other offering costs, resulting in net
proceeds of approximately $5.7 million, of which $1,000,000 was placed in an
escrow account. $600,000 of the escrow fund was held and disbursed by the escrow
agent pursuant to the terms and conditions of a certain Indemnification Escrow
Agreement between us and the underwriter of the offering. $400,000 of the escrow
fund was disbursed to us in February 2019 when the underwriter confirmed receipt
of a written legal opinion from PRC legal counsel in connection with such
offering. We sold 1,667,500 shares of common stock (including shares issued
pursuant to the underwriter's over-allotment option) at an offering price of $4
per share. In connection with the offering, Our common stock began trading on
the NASDAQ Capital Market beginning on December 19, 2018 under the symbol
"DTSS."
In addition, we issued warrants to the representative of the underwriters to
purchase 101,500 shares of common stock at an exercise price of $6.00 per share.
These warrants may be purchased in cash or via cashless exercise, will be
exercisable for five years from December 21, 2018 through December 17, 2023.
20
We believe that the increased demand for security equipment and related products
in China presents an attractive opportunity for us to establish and grow its
business in the next twelve months.
Recent Developments
On October 16, 2019, Shuahi Information Technology Co., Ltd. ("Shuhai Beijing"),
our variable interest entity, incorporated a wholly owned subsidiary,
Heilongjiang Xunrui Technology Co. Ltd., which is expected to focus on research
and development of new technologies and products.
On December 3, 2019, Shuhai Beijing formed Nanjing Shuhai Equity Investment Fund
Management Co. Ltd. ("Shuhai Nanjing"), a joint venture in PRC, in which Shuhai
Beijing holds a 99% ownership interest with the remaining 1% ownership held by
Nanjing Fanhan Zhineng Technology Institute Co. Ltd, an unrelated party that was
supported by both Nanjing Municipal Government and Beijing University of Posts
and Telecommunications. Shuhai Nanjing was formed for purposes of easy access of
government funding and private financing in new technology development and
project incubation.
In January 2020, as described below, to expeditiously establish new subsidiaries
to further expand our business operation, we acquired ownerships in three
entities for no consideration from our management who set up such entities on
the Company's behalf.
On January 3, 2020, Shunhai Beijing entered into two equity transfer agreements
(the "Transfer Agreements") with Zhixin Liu, President of the Company, and Fu
Liu, a Director of the Company (Fu Liu is the father of Zhixin Liu). Pursuant to
the Transfer Agreements, Fu Liu and Zhixin Liu, each agreed, for no
consideration, to (i) transfer their 51% and 49% ownership interest,
respectively, in Guozhong Times (Beijing) Technology Ltd. ("Guozhong Times") to
Shunhai Beijing; and (ii) transfer their 51% and 49% ownership interest,
respectively, in Guohao Century (Beijing) Technology Ltd. ("Guohao Century") to
Shunhai Beijing.
On January 7, 2020, Shunhai Beijing entered into another equity transfer
agreement with Zhixin Liu, Fu Liu and Ze Liu, who is an unrelated third party.
Pursuant to this equity transfer agreement, Fu Liu, Zhixin Liu and Ze Liu each
agreed to transfer their 51%, 16%, 33% ownership interests, respectively, in
Guozhong Hoze (Beijing) Technology Ltd. ("Guozhong Hoze") to Shunhai Beijing for
no consideration.
Guozhong Times was formed to focus on collaborating with third parties as a
means of expanding our business. Guohao Century was formed to explore potential
business targets that we could acquire to improve our business model and product
offerings. Guozhong Hoze was formed to further develop and market our smart
security system products.
Starting in December 2019, a strain of novel coronavirus causing respiratory
illness emerged in the city of Wuhan in Hubei Province. The Chinese government
has taken certain emergency measures to combat the spread of the virus,
including extending the Chinese Lunar New Year holiday, postponing the spring
semesters of schools and universities, and adopting transport restrictions in
various areas. While we recently announced that we are seeking to modify our
products and software to assist schools and communities in addressing the
coronavirus outbreak, we may be unable to successfully do so. Moreover, a
prolonged slowdown in the Chinese economy and our target markets as a result of
the virus could have a material adverse effect on our business, including an
inability to market and sell our products. As a consequence, we may be unable
to generate revenue, could face shortfalls in liquidity and may be required to
reduce or refocus our operations, which may raise substantial doubts about our
ability to continue as a going concern.
Results of Operations
Three and six Months Ended December 31, 2019 and 2018
Revenue
We did not generate any revenue during three and six months ended December 31,
2019 and 2018.
Cost of Goods and Gross Profit
We recorded $194 and $0 of cost of goods sold and $194 and $0 of gross deficit
for the three and six months ended December 31, 2019 and 2018, respectively.
Selling, General and Administrative Expenses:
Selling expenses were $58,146 and $71,973 for the three months December 31, 2019
and 2018, respectively. Selling expenses were $109,321 and $148,852 for the six
months December 31, 2019 and 2018, respectively. The decrease in selling
expenses was primarily attributed to a decrease in salary expenses.
General and administration expenses increased $362,575, or 131.6% from $275,582
during the three months ended December 31, 2018 to $638,157 during the same
period in 2019. The increases were attributed to increases in rent expenses and
approximately $285,000 of capitalized technology was expensed during three
months ended December 31, 2019.
General and administration expenses increased $443,263, or 88.2% from $502,153
during the six months ended December 31, 2018 to $945,416 during the same period
in 2019. The increases were attributed to increases in rent expenses, meal and
entertainment and approximately $285,000 of capitalized technology was expensed
during three months ended December 31, 2019.
21
We incurred research and development expenses of $69,158 and $120,365 during the
three and six months ended December 31, 2019, respectively, comparing $41,114
and $103,885 during the same period in 2018. The increase was attributed to the
increase in salary expense since we hired more staff in research and development
department.
Net Loss
Due to our lack of recurring revenue, we generated net losses of $751,032 and
$1,148,018 for the three and six months ended December 31, 2019, respectively,
$379,712 and $743,937 for the same period in 2018.
Liquidity and Capital Resources
We have funded our operations to date primarily through the sale of our common
stock and shareholder loans. During the six months period ended December 31,
2019, we paid $1.9 million to two third-party agencies for research and
development of our new product, which reduced our liquidity position. However,
based on our current cash level and management's forecast of operating cash
flows, we believe we have sufficient resources to fund our operations through
December 2020.
Our management recognizes that we must generate sales and additional cash
resources in order for our Company to continue our operations. Based on
increased demand for security services in China, our management believes in the
potential for growth in our business. On December 18, 2018, we completed a
registered underwritten common stock offering with net proceeds $5.7 million
after deducting underwriter's commission and other offering costs, which will
help our cash flow during fiscal 2020.
We expect to generate revenue through expanding our current Safe Campus business
and through product innovation and development, which is expected to lead to the
introduction of new products such as the scenic area and public community
security products. If revenues are not generated or do not reach the level
anticipated in the our plan, in order to maintain working capital sufficient to
support our operations and finance the future growth of its business, we expect
to fund any cash flow shortfall through financial support from our majority
stockholders (who are also our board members or officers) and public or private
issuance of securities. However, readers are cautioned that additional cash
resources may not be available to us on desirable terms, or at all, if and when
needed by us.
As of December 31, 2019, we had a working capital of $1,105,913. Our current
assets on December 31, 2019 were $3,132,793 primarily consisting of cash of
$2,804,740, inventory of $74,432 and prepaid expenses and other current assets
of $253,621. Our current liabilities were primarily composed of accounts payable
of $52,771, accrued expenses and other payables of $93,996, operating lease
liabilities of $579,475 and advances from customer of $1,300,638.
As of June 30, 2019, we had a working capital of $4,568,461. Our current assets
on June 30, 2019 were $6,251,863 primarily consisting of cash of $6,072,637,
inventory of $73,294 and prepaid expenses and other current assets of $105,932.
Our current liabilities were primarily composed of accounts payable of $13,088,
accrued expenses and other payables of $264,684, loan payable to shareholder of
$86,733 and advances from customer of $1,318,897.
Cash Flow from Operating Activities
Net cash used in operating activities was $1,572,243 during the six months ended
December 31, 2019, which consisted of our net loss of $1,148,018, offset by
depreciation and amortization of $13,186, a change of prepaid expenses and other
current assets of $271,654, and a change of accrued expenses and other payables
of $163,636.
22
Net cash used in operating activities was $794,846 during the six months ended
December 31, 2018, which consisted of our net loss of $743,937, offset by
depreciation and amortization of $19,319, a change of prepaid expenses and other
current assets of $1,409, and a change of accrued expenses and other payables of
$71,915.
Cash Flow from Investing Activities
Net cash used in investing activities totaled $1,608,538 for the six months
ended December 31, 2019, which primarily related to cash paid for the
acquisition of office furniture and equipment of $208,538, and for intangible
assets of $1,400,000.
Cash used in investing activities totaled $30,337 for the six months ended
December 31, 2018, which primarily related to cash paid for the acquisition of
office furniture, equipment of $15,754 and for intangible assets of $14,583.
Cash Flow from Financing Activities
Net cash used in financing activities was $84,227 during the six months ended
December 31, 2019, which primarily consisted of payment of a shareholder loan,
net of $84,227.
Net cash provided by financing activities was $5,038,638 during the six months
ended December 31, 2018, which primarily consisted of payment of a shareholder
loan, net of $17,508, the net proceeds from issuance of our common stock of
$307,724 and the net proceeds from sale of common stock $5,748,422, which is
offset by $1,000,000 which was placed in escrow ($400,000 of which was released
to us from escrow subsequent to December 31, 2018).
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues, expenses, results of operations, liquidity,
capital expenditures or capital resources.
23
© Edgar Online, source Glimpses
DATASEA INC. 
