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 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;




                                       20





Overview



We are an emerging technology company in China 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 the Zhongguancun
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 in China.



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 in China. 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 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 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, 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 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.



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 significantly longer period of time, we may
need to raise capital in the future.



Recent Business Developments


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 funding and private financing in new technology development and

project incubation.



                                       22




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 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 ended March
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 of March 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 March 31, 2020 and 2019





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 March 31, 2020 and 2019.





On March 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 on March 6, 2023 and July 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 of March 31, 2020, we had $1.28 million advances from

the
sales agents.



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. 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 to RMB 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
of March 30, 2020, Guozhong Times has received $69,500 (RMB493,500).



Cost of Goods


We recorded $0 of cost of goods sold for both the nine months ended March 31, 2020 and 2019.





Gross Profit


The gross profit for the nine months ended March 31, 2020 and 2019 were $0.

Selling, General and Administrative Expenses





Selling expenses were $142,605 and $183,240 for the nine months March 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 ended March 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 ended March 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 ended March
31, 2020 and 2019. For the nine months ended March 31, 2020, we had interest
income $43,828 and other expense $3,632. For the nine months ended March 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 ended March 31, 2020 and 2019, respectively, the increased
net loss mainly due to increased operating expense as describe above.



Comparison of the three months ended March 31, 2020 and 2019





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 March 31, 2020 and 2019.





On March 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 on March 6, 2023 and July 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 of March 31, 2020, we had $1.28 million advances from

the
sales agents.



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. 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 to RMB 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
of March 30, 2020, Guozhong Times has received $69,500 (RMB493,500).



Cost of Goods


We recorded $0 of cost of goods sold for both the three months ended March 31, 2020 and 2019.





Gross Profit


The gross profit for the three months ended March 31, 2020 and 2019 were $0.

Selling, General and Administrative Expenses





Selling expenses were $33,284 and $34,388 for the three months March 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 ended
March 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 ended March 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 ended March
31, 2020 and 2019, respectively. For the three months ended March 31, 2020, we
had interest income $10,134 and other income $2,784. For the three months ended
March 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 ended March 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 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, 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 March 31, 2020, we had a working capital of $1,510,925 (or a current liquidity ratio of 1.78:1). Our current assets on March 31, 2020 were $3,446,007. 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 2019 IPO.

The following is a summary of cash provided by or used in each of the indicated types of activities during the nine months ended March 31, 2020 and 2019, respectively.





                                                          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 $ (85,901 ) $ 5,534,355

Cash Flow from Operating Activities


Net cash used in operating activities was $2,285,214 during the nine months
ended March 31, 2020, comparing with net cash used in operating activities of
$1,289,063 during the nine months ended March 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
ended March 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 ended March 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 ended
March 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 ended March 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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