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. ? uncertainties relating to our ability to establish and operate our business and generate revenue; ? uncertainties relating to general economic, political and business conditions inChina ; ? 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; 20 Overview We are an emerging technology company inChina engaged in (i) providing smart security solutions primarily to schools, scenic areas and public communities and (ii) developing education-related technologies. We leverage our proprietary technologies, intellectual property, innovative products and market intelligence to provide comprehensive and optimized security solutions and education-related technologies to our clients. We have been certified as one of theZhongguancun High Tech Enterprises (issued by the Zhongguancun Science Park Administrative Committee) in recognition of our achievement in high technology products. Our security and technology engineers and experts create, design, build and run an intelligent 3D security system through visual and non-visual Perception algorithms, and hardware products such as face recognition cameras, Infra-red Emissions and smoke detectors. Our mission is to offer products and services to users ranging from businesses to individuals. Empowered by data, our company strives to provide comprehensive smart security solutions applied in a variety of matters, such as campus safety and public space surveillance. Our customers include but are not limited to, schools, public communities, and scenic areas nationwide inChina . We have developed three smart security products: the safe campus security system, the scenic area security system, and the public community security system. As of the date of this report, the safe campus security system has entered the market and is used by many schools inChina . Notwithstanding the impact of the COVID-19 outbreak, the the Company continues its work developing of safe campus security system continues. The scenic area security system is in the testing phase and is expected to enter the market during calendar year 2020. Our public community security system is also in the testing phase; we cannot provide an estimate when this system is expected to enter the market. For the time being, however, the Company has focused on developing a detection system designed to assist in monitoring and detecting effects of future outbreaks (discussed below), as a special version of the public community security system, and has already installed it across a large number of public communities. We market and sell our smart security products, services and solutions to enterprises, institutions, families and individuals through our distributors and city partners. Although we have generated very little revenues to date, we expect to generate revenues from sales of software systems, installation of the systems, including its software and hardware, upgrades of hardware, and support and maintenance services. In addition, as a 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. We expect to generate revenues from sales of software sales, installation of the systems, including software and hardware, and supporting and maintenance services. 21
We were incorporated in theState of Nevada onSeptember 26, 2014 under the nameRose Rock Inc. and changed its name toDatasea Inc. onMay 27, 2015 by amending its articles of incorporation. OnDecember 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 , of which$1,000,000 was placed in an escrow account and subsequently released to the Company of$400,000 . 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 onDecember 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 fromDecember 21, 2018 throughDecember 17, 2023 . InDecember 2019 , a novel strain of coronavirus (COVID-19) was reported inChina , upon which theWorld Health Organization has declared the outbreak to constitute a "Public Health Emergency of International Concern." During the period from January toMarch 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 onthe 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 significantly longer period of time, we may need to raise capital in the future. Recent Business Developments
On
OnDecember 3, 2019 , Shuhai Beijing formedNanjing Shuhai Equity Investment Fund Management Co. Ltd. ("Shuhai Nanjing"), a joint venture in PRC, in which ShuhaiBeijing holds a 99% ownership interest with the remaining 1% ownership held byNanjing Fanhan Zhineng Technology Institute Co. Ltd , an unrelated party that was supported by bothNanjing 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. 22
In
OnJanuary 3, 2020 , Shuhai Beijing entered into two equity transfer agreements (the "Transfer Agreements") withZhixin Liu , President of the Company, andFu Liu , a Director of the Company (Fu Liu is the father ofZhixin Liu ). Pursuant to the Transfer Agreements,Fu Liu andZhixin Liu , each agreed, for no consideration, to (i) transfer their 51% and 49% ownership interest, respectively, inGuozhong Times (Beijing) Technology Ltd. ("Guozhong Times") to Shuhai Beijing; and (ii) transfer their 51% and 49% ownership interest, respectively, inGuohao Century (Beijing) Technology Ltd. ("Guohao Century") to Shuhai Beijing. OnJanuary 7, 2020 , Shuhai Beijing entered into another equity transfer agreement withZhixin Liu ,Fu Liu andZe Liu , who is an unrelated third party. Pursuant to this equity transfer agreement,Fu Liu ,Zhixin Liu andZe Liu each agreed to transfer their 51%, 16%, 33% ownership interests, respectively, inGuozhong Haoze (Beijing) Technology Ltd. ("Guozhong Haoze") to Shuhai 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 Haoze was formed to further develop and market our smart security system products.
The accompanying unaudited condensed consolidated financial statements were prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. For the nine months endedMarch 31, 2020 and 2019, we had a net loss of$1.71 million and$1.28 million , respectively. We had an accumulated deficit of$7.26 million as ofMarch 31, 2020 . This raise substantial doubt about our ability to continue as a going concern. There can be no assurance that we will become profitable or obtain necessary financing for its business or that it will be able to continue in business. We are currently seeking to modify its products and software to assist schools and communities in addressing the coronavirus outbreak, providing potential monitoring and control tools for possible future outbreaks. Namely,Datasea has completed Installation of Epidemic Prevention and Control Systems in several K-12 schools and public communities. Its system includes a data-based management platform and the front-end equipment, 7-inch facial recognition and temperature measurement terminals and the security turnstiles. These systems have 3 core functions: non-contact and accurate temperature measurement, mask recognition and face comparison. In addition, these systems can be seamlessly integrated with the Company's safe campus security system to record students' arrival and departure and issue various notices. The company expanded its market partners to facilitate market development. Among them,Heqin Company works for marketing and promoting the sale of Face Recognition Payment Processing equipment and other products of the Company including Epidemic Prevention and Control Systems. In addition, the Company has newly established two sales teams for promoting school clients and smart city project expansion. 23 Results of Operations
Comparison of the nine months ended
The following table sets forth the results of our operations for the periods indicated as a percentage of net sales. Certain columns may not add due to rounding. 2020 % of Sales 2019 % of Sales Sales $ - $ - Cost of goods sold - - % - - % Gross profit - - % - % Selling expenses 142,605 - % 183,240 - %
Research and development 229,511 - % 133,103 - General and administrative expenses 1,373,837 - %
1,013,136 - % Operating expenses 1,745,953 - % 1,329,479 - % Loss from operations (1,745,953 ) - % (1,329,479 ) - % Non-operating income, net 40,196 - % 44,543 - % Loss before income taxes (1,705,757 ) - % (1,284,936 ) - % Income tax expense - - % - - % Net loss$ (1,705,757 ) - % (1,284,936 ) - % Revenue
We did not generate any revenue for the nine months ended
OnMarch 5, 2018 , we entered into separate agreements with two sales agents. 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 onMarch 6, 2023 andJuly 1, 2023 , respectively. In accordance with ASU 2016-08, Principal versus Agent Considerations (ASC 606), we determined that it was the principal in these two contracts and as such, we recorded the payments received from the two sales agents as advances. We will recognize revenue from these contracts as the sales agents sell the products and services to third parties. As ofMarch 31, 2020 , we had$1.28 million advances from
the sales agents. As ofMarch 31, 2020 , Guozhong Times has received 33 purchase orders from development and construction companies fromAnhui andFujian province,China for customized hardware and software solutions to detect and control the novel coronavirus outbreak in public areas.Datasea's systems sold in these orders are utilized in 33 public places, including campuses, shopping malls, scenic areas, residential areas and factory areas. The value of a single purchase order ranges from$1,620 to$2,620 (RMB 11,500 toRMB 18,600 ). The total value of the 33 agreements is$84,000 (RMB 596,520 ). Pursuant to the purchase orders, customers shall pay the full amount within 15 days after the purchase order is signed. As ofMarch 30, 2020 , Guozhong Times has received$69,500 (RMB493,500 ). Cost of Goods
We recorded
Gross Profit
The gross profit for the nine months ended
Selling, General and Administrative Expenses
Selling expenses were$142,605 and$183,240 for the nine monthsMarch 31, 2020 and 2019, respectively, a decrease of$40,635 or 22%. The decrease in selling expenses was primarily attributed to a decrease in salary expenses by$43,803 of Shuhai Beijing, which was partly offset by increased travel expense by$1,912 and meal and entertainment by$1,932 of Shuhai Beijing. As we are currently modifying 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$96,408 or 72%, we had$229,511 and$133,103 R&D expense during the nine months endedMarch 31, 2020 and 2019, respectively. The increase was mainly from increased salary expense by$58,000 as a result of hiring more staffs in research and development department, and other related expenses by$30,000 . General and administration expenses increased$360,701 , or 36% from$1,013,136 during the nine months endedMarch 31, 2019 to$1,373,837 during the same period in 2020. The increases were attributed to increases in rent expenses by$101,188 , and increased professional fee by$247,825 . 24 Non-operating income, net Non-operating income were$40,196 and$44,543 for the nine months endedMarch 31, 2020 and 2019. For the nine months endedMarch 31, 2020 , we had interest income$43,828 and other expense$3,632 . For the nine months endedMarch 31, 2019 , we had interest income$47,114 and other expense$2,571 . Net Loss Due to our lack of revenue, we generated net losses of$1,705,757 and$1,284,936 for the nine months endedMarch 31, 2020 and 2019, respectively, the increased net loss mainly due to increased operating expense as describe above.
Comparison of the three months ended
The following table sets forth the results of our operations for the periods indicated as a percentage of net sales. Certain columns may not add due to rounding. 2020 % of Sales 2019 % of Sales Sales $ - $ - Cost of goods sold - - % - - % Gross profit - - % - - % Selling expenses 33,284 - % 34,388 - % Research and development 109,146 - % 29,218 -
General and administrative expenses 428,227 - %
510,983 - % Operating expenses 570,657 - % 574,589 - % Loss from operations (570,657 ) - % (574,589 ) - % Non-operating income 12,918 - % 33,590 - % Loss before income taxes (557,739 ) - % (540,999 ) - % Income tax expense - - % - - % Net loss$ (557,739 ) - % (540,999 ) - % Revenue
We did not generate any revenue for the three months ended
OnMarch 5, 2018 , we entered into separate agreements with two sales agents. 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 onMarch 6, 2023 andJuly 1, 2023 , respectively. In accordance with ASU 2016-08, Principal versus Agent Considerations (ASC 606), we determined that it was the principal in these two contracts and as such, we recorded the payments received from the two sales agents as advances. We will recognize revenue from these contracts as the sales agents sell the products and services to third parties. As ofMarch 31, 2020 , we had$1.28 million advances from
the sales agents. As ofMarch 31, 2020 , Guozhong Times has received 33 purchase orders from development and construction companies fromAnhui andFujian province,China for customized hardware and software solutions to detect and control the novel coronavirus outbreak in public areas.Datasea's systems sold in these orders are utilized in 33 public places, including campuses, shopping malls, scenic areas, residential areas and factory areas. The value of a single purchase order ranges from$1,620 to$2,620 (RMB 11,500 toRMB 18,600 ). The total value of the 33 agreements is$84,000 (RMB 596,520 ). Pursuant to the purchase orders, customers shall pay the full amount within 15 days after the purchase order is signed. As ofMarch 30, 2020 , Guozhong Times has received$69,500 (RMB493,500 ). Cost of Goods
We recorded
Gross Profit
The gross profit for the three months ended
Selling, General and Administrative Expenses
Selling expenses were$33,284 and$34,388 for the three monthsMarch 31, 2020 and 2019, respectively, a slight decrease of$1,104 or 3%. The decrease in selling expenses was primarily attributed to a decrease in salary expenses by$2,450 of Shuhai Beijing, which was partly offset by increased travel expense by$1,336 of Shuhai Beijing.
As we are developing the new products like Epidemic Prevention and Control Systems for schools and communities, which are featuring non-contact temperature measurement, mask recognition and facial comparison, and other artificial intelligence application and products like face-recognition payment processing products, we incurred increased R&D expense of$79,928 or 274%; we had research and development expenses of$109,146 and$29,218 during the three months endedMarch 31, 2020 and 2019, respectively. The increase was attributed to the increase in salary expense by$65,471 as a result of hiring more staffs in research and development department, and other related research expense by
$14,000 . 25
General and administration expenses decreased$82,756 , or 16% from$510,983 during the three months endedMarch 31, 2019 to$428,227 during the same period in 2020. As our R&D expense increased significantly, we tried our best to cost control on other general and administrative expenses to keep our overall operating expenses under the budget. Non-operating income, net Non-operating income were$12,918 and$33,590 for the three months endedMarch 31, 2020 and 2019, respectively. For the three months endedMarch 31, 2020 , we had interest income$10,134 and other income$2,784 . For the three months endedMarch 31, 2019 , we had interest income$32,696 and other income$894 . Net Loss Due to our lack of revenue, we generated net losses of$557,739 and$540,999 for the three months endedMarch 31,2020 and 2019, respectively. The slight increase in net loss mainly due to decreased non-operating income as describe above.
Liquidity and Capital Resources
We have funded our operations to date primarily through the sale of our common stock and shareholder loans. 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 inChina , our management believes in the potential for growth in our business. In addition, following ourDecember 2018 IPO, we received net proceeds$5.7 million , which, we expect, along with expected growth in revenue, we will sufficient cash resources for our operations for the next 12 months from this report date. We expect to generate revenue through expanding our current Safe Campus business, promoting Epidemic Prevention and Control Systems, scenic area and public community security products, and other artificial intelligence application and products such as face recognition products, and through continuous product innovation and development. If revenues are not generated or do not reach the level anticipated in our plan, in order to maintain working capital sufficient to support our operations and finance the future growth of its business, we expect to fund any cash flow shortfall through financial support from our majority stockholders (who are also our board members or officers) and public or private issuance of securities. However, such additional cash resources may not be available to us on desirable terms, or at all, if
and when needed by us.
As of
The following is a summary of cash provided by or used in each of the indicated
types of activities during the nine months ended
2020
2019
Net cash used in operating activities$ (2,285,214 ) $ (1,289,063 ) Net cash used in investing activities$ (1,648,333 ) $
(64,531 )
Net cash provided by (used in) financing activities
Cash Flow from Operating Activities
Net cash used in operating activities was$2,285,214 during the nine months endedMarch 31, 2020 , comparing with net cash used in operating activities of$1,289,063 during the nine months endedMarch 31, 2019 , an increase of cash outflow by$996,151 . The increase in cash outflow was mainly due to increased net loss by$420,821 , increased cash outflow on inventory by$204,465 , increased cash outflow on prepaid expenses by$406,116 , and increased cash outflow on taxes payable by$105,098 , despite we had cash inflow from account payable by$34,500 and cash inflow from advance from customers by$83,889 .
Cash Flow from Investing Activities
Net cash used in investing activities totaled$1,648,333 for the nine months endedMarch 31, 2020 , which primarily related to cash paid for the acquisition of office furniture and equipment of$248,333 , and for intangible assets of$1,400,000 . Net cash used in investing activities totaled$64,531 for the nine months endedMarch 31, 2019 , which primarily related to cash paid for the acquisition of office furniture, equipment and patents. 26
Cash Flow from Financing Activities
Net cash used in financing activities was$85,091 during the nine months endedMarch 31, 2019 , which primarily consisted of repayment of a shareholder loan of$85,091 . Net cash provided by financing activities was$5,534,355 during the nine months endedMarch 31, 2019 , which primarily consisted of repayment of a shareholder loan of$15,392 , net proceeds from issuance of our Common Stock of$308,858 , and net proceeds from our public offering of$5,840,889 , which is offset by$600,000 which is currently held in escrow.
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.
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