DATASEA INC. - Quarter Report: 2022 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-38767

DATASEA INC.

(Exact name of registrant as specified in its charter)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

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, a 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.

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 ☒

As of May 16, 2022, 24,324,633 shares of common stock, $0.001 par value per share, were outstanding.

DATASEA INC.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

DATASEA INC.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTERLY PERIOD ENDED MARH 31, 2022

DATASEA INC.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

DATASEA INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements.

DATASEA INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

NINE AND THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

DATASEA INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements.

DATASEA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2022 AND JUNE 30, 2021

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

Datasea, Inc. (the “Company” or “Datasea”) is a publicly traded entity with the ticker symbol DTSS on the Nasdaq Capital Market and it was incorporated in Nevada on September 26, 2014. As a holding company with no material operations, the Company conducts a majority of its business activities through organizations established in the People’s Republic of China, or the PRC, primarily by variable interest entity (the “VIE”). The Company does not have any equity ownership of its VIE, instead it controls and receives economic benefits of the VIE’s business operations through certain contractual arrangements. For a description of the Company’s contractual arrangements, please refer to the Company’s annual report on Form 10-K for the year ended June 30, 2021, filed with the Securities and Exchange Commission (the “SEC”) on September 28, 2021.

The vision of Datasea is dedicated in providing advanced technology to business and retail customers. Shuhai Information Technology Co., Ltd. (“Shuhai Beijing”), the VIE that through its various subsidiaries, has cutting-edge technology products and solutions in three industries: 5G messaging, acoustic intelligence and smart city are provided. As of the date of this report, Shuhai Beijing and its subsidiaries own 9 Patents and 53 Software Copyrights, with 12 patent applications pending in core technologies to empower and grow the business.

Impact of Coronavirus Outbreak

In December 2019, a novel strain of coronavirus (COVID-19) was reported, and the World Health Organization declared the outbreak to constitute a “Public Health Emergency of International Concern.” The COVID-19 pandemic has prompted the Company to focus on developing epidemic related products to pursue new business opportunities such as integrating the Company’s security platform and epidemic prevention system for schools and public communities for epidemic prevention.  Starting April 2020, the Company resumed normal workflow. Since April 2020 to January 2022, there were some new COVID-19 cases discovered in a few provinces of China, but the number of new cases are not significant due to PRC government’s strict control. Since February 2022, COVID-19 variants cases increased in many cities of China; however, based on available information, management of the Company does not believe that COVID-19 new cases would have a significant impact on the Company’s operations for the rest of fiscal 2022; and does not anticipate any impairment of its assets. Management of the Company believes that its financial resources will be sufficient to handle the challenges associated with COVID-19.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GOING CONCERN

The accompanying unaudited consolidated financial statements (“CFS”) 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, 2022 and 2021, the Company had a net loss of approximately $4.40 million and $3.05 million, respectively. For the three months ended March 31, 2022 and 2021, the Company had a net loss of approximately $1.28 million and $1.22 million, respectively. The Company had an accumulated deficit of approximately $16.46 million as of March 31, 2022, and negative cash flow from operating activities of approximately $4.22 million and $3.06 million for the nine months ended March 31, 2022 and 2021, respectively. The historical operating results indicate the Company has recurring losses from operations which raise the question related to the substantial doubt about the Company’s ability to continue as a going concern. There can be no assurance the Company will become profitable or obtain necessary financing for its business or that it will be able to continue in business. The unaudited consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. On July 20, 2021, the Company sold 2,436,904 shares of common stock at $3.48 per share. The net proceeds from the transactions were approximately $7,640,000, after deducting offering costs.

If deemed necessary, management could seek to raise additional funds by way of private or public offerings, or by seeking to obtain loans from banks or others, to support the Company’s research and development (“R&D”), procurement, marketing and daily operation. While management of the Company believes in the viability of its strategy to generate sufficient revenues and 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 depends 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. There can be no assurance the Company will be successful in any future fund raising.  Based on the Company’s most recent cash flows projection and working capital requirements, management of the Company believes that the Company will be able to continue to operate as a going concern in the foreseeable future and it will have sufficient working capital to meet its operating needs for at least the next 12 months.

BASIS OF PRESENTATION AND CONSOLIDATION

The accompanying unaudited consolidated financial statements (“CFS”) were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the SEC regarding CFS. The accompanying CFS include the financial statements of the Company and its 100% owned subsidiaries Shuhai Information Skill (HK) Limited (“Shuhai Skill (HK)”), and Shuhai Information Technology Co., Ltd. (“Tianjin Information”), and its VIE, Shuhai Beijing, and Shuhai Beijing’s 100% owned subsidiaries – Heilongjiang Xunrui Technology Co. Ltd. (“Xunrui”), Guozhong Times (Beijing) Technology Ltd. (“Guozhong Times”), Guohao Century (Beijing) Technology Ltd. (“Guohao Century”), Guozhong Haoze, and Shuhai Jingwei (Shenzhen) Information Technology Co., Ltd. (“Jingwei”), and Guohao Century’s 99% owned subsidiary – Hangzhou Zhangqi Business Management Partnership (“Zhangqi”, a limited partnership) and 69.81% owned subsidiary – Hangzhou Shuhai Zhangxun Information Technology Co., Ltd. (“Zhangxun”) which consisted of 51% ownership from Guohao Century and 19% ownership from Zhangqi, and Shuhai Beijing’s 99% owned subsidiary - Nanjing Shuhai Equity Investment Fund Management Co. Ltd. (“Shuhai Nanjing”). During the quarter ended March 31, 2022, the Company incorporated two new subsidiaries Shuhai (Shenzhen) Acoustic Effect Technology Co., Ltd (“Shuhai Acoustic”) and Shenzhen Acoustic Effect Management Partnership (“Shenzhen Acoustic MP”). All significant inter-company transactions and balances were eliminated in consolidation. The chart below depicts the corporate structure of the Company as of the date of this report.

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 CFS, 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 were included in the accompanying CFS. 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 was entered on October 20, 2015 and allows Tianjin Information to manage and operate Shuhai Beijing and collect 100% of its 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 entered into a shareholders’ voting rights entrustment agreement (the “Entrustment Agreement”) on October 27, 2015, under which Zhixin Liu and Fu Liu (collectively the “Shuhai Beijing Shareholders”) 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”) on October 27, 2015, pursuant to which the Shuhai Beijing Shareholders 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 RMB 0.001 for each capital contribution of RMB 1.00. Pursuant to the terms of the Option Agreement, Tianjin Information and the Shuhai Beijing shareholders agreed to certain restrictive covenants to safeguard the rights of Tianjin Information under the option Agreement. Tianjin Information agreed to pay RMB 1.00 annually to Shuhai Beijing Shareholders to maintain the option rights. Tianjin Information may terminate the Option Agreement upon written notice. The Option Agreement is valid for 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 guarantees 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 pledged 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 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.

Risk Factors relating to VIE Structure

Datasea Inc., the U.S. parent company, is a holding company with no material operations of its own. The Company conducts its operations in China through its VIE - Shuhai Beijing and its subsidiaries. Investors are not investing in the VIE. Neither the U.S. parent company nor its subsidiaries actually own any share in Shuhai Beijing. Instead, the U.S. parent company controls and receives the economic benefits of Shuhai Beijing business operation through a series of contractual agreements. The Company is subject to certain legal and operational risks associated with being based in China and having a majority of the operations through the contractual arrangements with the VIE. PRC laws and regulations governing the Company’s current business operations are sometimes vague and uncertain, and therefore, these risks may result in a material change in the Company’s operations. The VIE structure is used to replicate foreign investment in Chinese-based companies where Chinese law prohibits direct foreign investment in the operating companies, and that investors may never directly hold equity interests in the Chinese operating entities.  

In addition, due to the Company’s corporate structure, the Company is subject to risks due to uncertainty of the interpretation and the application of the PRC laws and regulations, including but not limited to limitation on foreign ownership of internet technology companies, and regulatory review of oversea listing of PRC companies through a special purpose vehicle, and the validity and enforcement of the VIE Agreements.

As of this report date, there was no dividends paid from the VIE to the U.S. parent company or the shareholders of the Company. There has been no change in facts and circumstances to consolidate the VIE. The following financial statement amounts and balances of the VIE were included in the accompanying CFS as of March 31, 2022 and June 30, 2021, and for the nine and three months ended March 31, 2022 and 2021, respectively.

USE OF ESTIMATES 

The preparation of CFS in conformity with U.S. GAAP 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 CFS. 

CONTINGENCIES

Certain conditions may exist as of the date the CFS 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 CFS.

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 March 31, 2022 and June 30, 2021, the Company has no such contingencies.

CASH AND EQUIVALENTS

Cash and equivalents include cash on hand, demand deposits and short-term cash investments that are highly liquid in nature and have original maturities when purchased of three months or less.  

INVENTORY

Inventory is comprised principally of intelligent temperature measurement face recognition terminal and identity information recognition products, and 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 $60,230 and $59,187 allowances for slow-moving and obsolete inventory (mainly for Smart-Student Identification cards) as of March 31, 2022 and June 30, 2021, 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:

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.

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 FV, and establishes a three-level valuation hierarchy for disclosures that enhances disclosure requirements for FV measures. The three levels are defined as follows:

The carrying value of the Company’s short-term financial instruments, such as cash, accounts receivable, prepaid expenses, accounts payable, advance from customers, accrued expenses and other payables approximates their FV due to their short maturities.

As of March 31, 2022 and June 30, 2021, the Company did not identify any assets or liabilities required to be presented on the balance sheet at FV 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 expected to be generated by the asset.

If such assets are considered impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its FV. FV generally is determined using the asset’s expected future undiscounted cash flows or market value, if readily determinable. Assets to be disposed of are reported at the lower of the carrying amount or FV less cost to sell. For the nine and three months ended March 31, 2022 and 2021, there was no impairment loss recognized on long-lived assets.

UNEARNED REVENUE

The Company records payments received in advance from its customers or sales agents for the Company’s products as unearned revenue, mainly consisting of deposits or prepayment for 5G products from the Company’s sales agencies. These orders normally are delivered based upon contract terms and customer demand, and will recognize as revenue when the products are delivered to the end customers.

DEFERRED REVENUE

Deferred revenue consists primarily of local government’s financial support under “2020 Harbin Eyas Plan” to Xunrui for technology innovation of developing the Intelligent Campus Security Management Platform. The Company will record the grant as income when it passes local government’s inspection of the project. 

LEASES

The Company determines if an arrangement is a lease at inception under FASB ASC Topic 842. 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.

ROU assets are reviewed for impairment when indicators of impairment are present. ROU assets from operating and finance leases are subject to the impairment guidance in ASC 360, Property, Plant, and Equipment, as ROU assets are long-lived nonfinancial assets.

ROU assets are tested for impairment individually or as part of an asset group if the cash flows related to the ROU asset are not independent from the cash flows of other assets and liabilities. An asset group is the unit of accounting for long-lived assets to be held and used, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The Company recognized no impairment of ROU assets as of March 31, 2022 and June 30, 2021.

Operating leases are included in operating lease ROU and operating lease liabilities (current and non-current), on the consolidated balance sheets. As of March 31, 2022, the net ROU was $760,957 for the operating leases of the Company’s offices in various cities of China and senior officers’ dormitory in Beijing. As of March 31, 2022, total operating lease liabilities (includes current and noncurrent) were $638,956, which was for the operating leases of the Company’s offices in various cities of China and senior officers’ dormitory in Beijing.  

REVENUE RECOGNITION

The Company follows Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606).

The core principle underlying FASB 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 identified when possession of goods and services is transferred to a customer.

FASB ASC Topic 606 requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires 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 Company derives its revenues from product sales and 5G messaging service contracts with its customers, with revenues recognized upon delivery of services and products. Persuasive evidence of an arrangement is demonstrated via product sale contracts and professional service contracts, and invoices. The product selling price and the service price to the customer are fixed upon acceptance of the agreement. The Company recognizes revenue when the customer receives the products and passes the inspection and when professional service is rendered to the customer, collectability of payment is probable. These revenues are 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.

During the nine and three months ended March 31, 2022, the Company’s revenue of $15.15 million and $5.54 million, respectively, was mainly from 5G messaging services including 5G Short Message Services (“SMS”), 5G integrated message marketing cloud platform (“5G MMCP”) and 5G multi-media video messaging (a value-added service). The related cost for such services provided of $14.38 million and $5.00 million for the nine and three months ended March 31, 2022, respectively, was mainly for the SMS service platform using fee that was provided from third-party mobile virtual network operators (MVNO) that obtains bulk access to network services at wholesale rates from its upstream suppliers or ultimate three major telecommunication and network operators in China, and sell it to downstream customers like Shuhai Beijing and its subsidiary, Hangzhou Zhangxun; and 5G MMCP project development cost. In addition, during the nine and three months ended March 31, 2022, the Company’s revenue of $36,537 and $2,437, respectively, was from Smart City projects which were mainly for the comprehensive security needs of residential communities, schools and commercial enterprises, the related cost for such services provided was $21,360 and $1,860; and $1.10 million was from advertising service with related cost of $1.0 million for the nine and three months ended March 31, 2022.

SEGMENT INFORMATION

FASB ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the method a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manners in which management disaggregates a company. Management determining the Company’s current operations constitutes a single reportable segment in accordance with ASC 280. The Company’s only business and industry segment is high technology and advanced information systems (“TAIS”). TAIS include smart city solutions that meet the security needs of residential communities, schools and commercial enterprises, and 5G messaging services including 5G SMS, 5G MMCP and 5G multi-media video messaging.

All of the Company’s customers are in the PRC and all revenues for the nine and three months ended March 31, 2022 and 2021 were generated from the PRC. All identifiable assets of the Company are located in the PRC. Accordingly, no geographical segments are presented.

INCOME TAXES

The Company uses the asset and liability method of accounting for income taxes in accordance with FASB 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 FASB 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. FASB 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 FASB ASC Topic 740, when tax returns are filed, it is likely 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 March 31, 2022, the Company had no unrecognized tax benefits and no charges during the nine and three months ended March 31, 2022, and accordingly, the Company did not recognize any interest or penalties related to unrecognized tax benefits. There was no accrual for uncertain tax positions as of March 31, 2022. The Company files a U.S. and PRC income tax return. With few exceptions, the Company’s U.S. income tax returns filed for the years ending on June 30, 2018 and thereafter are subject to examination by the relevant taxing authorities; the Company uses calendar year-end for its PRC income tax return filing, PRC income tax returns filed for the years ending on December 31, 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 incurred. These costs primarily consist of cost of materials used, salaries paid for the Company’s development department, and fees paid to third parties.

NONCONTROLLING INTERESTS

The Company follows FASB ASC Topic 810, “Consolidation,” governing the accounting for and reporting of noncontrolling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCI (previously referred to as minority interests) be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially-owned consolidated subsidiary be allocated to non-controlling interests even when such allocation might result in a deficit balance. 

The net income (loss) attributed to NCI was separately designated in the accompanying statements of operations and comprehensive income (loss). Losses attributable to NCI in a subsidiary may exceed a non-controlling interest’s interests in the subsidiary’s equity. The excess attributable to NCIs is attributed to those interests. NCIs shall continue to be attributed their share of losses even if that attribution results in a deficit NCI balance.

As of March 31, 2022, Zhangxun was 30.19% owned by noncontrolling interest, Zhangqi was 1% owned by noncontrolling interest, and Shuhai Nanjing was 1% owned by noncontrolling interest, Shenzhen Acoustic MP was 1% owned by noncontrolling interest, Shenzhen Acoustic was 30.1% owned by noncontrolling interest. During the nine months ended March 31, 2022 and 2021, the Company had loss of $226,561 and $93,902 attributable to the noncontrolling interest, respectively. During the three months ended March 31, 2022 and 2021, the Company had income of $31,720 and net loss of $57,347 attributable to the noncontrolling interest, respectively. 

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 ($76,000) is covered by insurance. Should any institution 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 $1,549,718 and $32,687 as of March 31, 2022 and June 30, 2021, respectively, was held in accounts at financial institutions located in the PRC‚ which is not freely convertible into foreign currencies.

Cash held in accounts at U.S. financial institutions is insured by the Federal Deposit Insurance Corporation or other programs subject to certain limitations up to $250,000 per depositor. As of March 31, 2022, cash of $72,651 was maintained at U.S. financial institutions. Cash was maintained at financial institutions in Hong Kong, and was insured by the Hong Kong Deposit Protection Board up to a limit of HK $500,000 ($64,000). As of March 31, 2022, the cash balance of $6,381 was maintained at financial institutions in Hong Kong. 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.

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 dollar (“USD”). The accounts of the Chinese entities were translated into USD in accordance with FASB ASC Topic 830 “Foreign Currency Matters.” All assets and liabilities were translated at the exchange rate on the balance sheet date; stockholders’ equity is translated at historical rates and the statements of operations and cash flows are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income (loss) in accordance with FASB 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 CFS were as follows:

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 is 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 nine and three months ended March 31, 2021 and 2020, the Company’s basic and diluted loss per share are the same as a result of the Company’s net loss. 1,319,953 and 101,500 warrants were anti-dilutive for the nine months ended March 31, 2022 and 2021, respectively. 1,319,953 and 101,500 warrants were anti-dilutive for the three months ended March 31, 2022 and 2021, respectively.

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

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact that the standard will have on its CFS.

In August 2020, the FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for convertible debt by eliminating the beneficial conversion and cash conversion accounting models. Upon adoption of ASU 2020-06, convertible debt, unless issued with a substantial premium or an embedded conversion feature that is not clearly and closely related to the host contract, will no longer be allocated between debt and equity components. This modification will reduce the issue discount and result in less non-cash interest expense in financial statements. ASU 2020-06 also updates the earnings per share calculation and requires entities to assume share settlement when the convertible debt can be settled in cash or shares. For contracts in an entity’s own equity, the type of contracts primarily affected by ASU 2020-06 are freestanding and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement assessment by removing the requirements to (i) consider whether the contract will be settled in registered shares, (ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, and only if adopted as of the beginning of such fiscal year. The Company adopted ASU 2020-06 effective July 1, 2021. The adoption of ASU 2020-06 did not have any impact on the Company’s CFS presentation or disclosures.

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”).  ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains classified after modification or exchange as an exchange of the original instrument for a new instrument.  An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt ASU 2021-04 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period.  The adoption of ASU 2021-04 is not expected to have any impact on the Company’s CFS presentation or disclosures. 

The Company’s management does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s financial statement presentation or disclosures.

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows:

Depreciation for the nine months ended March 31, 2022 and 2021 was $127,847 and $104,841, respectively.

Depreciation for the three months ended March 31, 2022 and 2021 was $41,506 and $38,819, respectively.

NOTE 4 – INTANGIBLE ASSETS

Intangible assets are summarized as follows:

Software registration right represented the purchase cost of customized software with its source code from third party software developer.

Software development cost represented R&D costs incurred internally after the technological feasibility was established and a working model was produced and was recorded as intangible asset.

Amortization for the nine months ended March 31, 2022 and 2021 was $284,924 and $7,509, respectively.

Amortization for the three months ended March 31, 2022 and 2021 was $137,720 and $5,292, respectively.

NOTE 5 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following:

Other receivables - Heqin

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 sales team which used to work with Fortune 500 companies and specializes in business marketing and sales channel establishment and expansion, especially in education industry and public area. It has 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 to July 30, 2020. During March and April 2020, Guozhong Times provided operating funds to Heqin, together with a credit line provided by Guozhong Times to Heqin from May 2020 through August 2020, for a total borrowing of RMB 10 million ($1.41 million) for Heqin’s operating needs. As of December 31, 2021, Guozhong Times had an outstanding receivable of RMB 3.68 million ($577,191) from Heqin and was recorded as other receivables. As of June 30, 2021, Guozhong Times had an outstanding receivable of RMB 3.68 million ($577,191) 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 charges 15% interest if Heqin did not repay by the due date.

No profits will be allocated and distributed before full repayment of the borrowing. After Heqin pays in full the borrowing, Guozhong Times and Heqin will distribute 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.

As of March 31, 2022 and June 30, 2021, Heqin did not make any repayment to the Company, and the Company made a bad debt allowance of $579,692 and $284,825 as of March 31, 2022 and June 30, 2021, respectively.

NOTE 6 – LONG TERM INVESTMENT

In November, 2021, Shuhai Nanjing invested RMB 200,000 ($31,500) for 6.21% stock ownership of a high-tech company in Nanjing City specializing on internet security equipment; Shuhai Nanjing also agreed to invest RMB 300,000 ($47,300) for 3% stock ownership of another high-tech company in Nanjing City specializing on digital market monitoring solutions, and Shuhai Nanjing paid RMB 200,000 ($31,500) as of March 31, 2022. These investments are recorded at cost. As of March 31, 2022, there is no impairment on these investments.

NOTE 7 – ACCRUED EXPENSES AND OTHER PAYABLES

Accrued expenses and other payables consisted of the following:

Other payables mainly consisted of social security and insurance payable.

NOTE 8 – LOANS PAYABLE

As of June 30, 2021, the Company had several loan agreements with an unrelated party for $1,486,819, these loans bear no interest, and are required to be repaid any time before December 31, 2021. The Company repaid the loan in full to the unrelated party by December 31, 2021.

NOTE 9 – RELATED PARTY TRANSACTIONS

In April 2020, the Company’s CEO entered into a one-year apartment rental agreement with the Company for an apartment located in Harbin city as the Company’s branch office with an annual rent of RMB 75,000 ($11,000). The term was from May 1, 2020 through April 30, 2021. On April 30, 2021, Xunrui entered a new one-year lease for this location with the Company’s President for an annual rent of RMB 75,000 ($11,000), The rental expense for this agreement was $8,780 and $8,418 for the nine months ended March 31, 2022 and 2021, respectively. The rental expense for this agreement was $2,950 and $2,881 for the three months ended March 31, 2022 and 2021, respectively. 

On October 1, 2020, the Company’s CEO entered into an office rental agreement with Xunrui. Pursuant to the agreement, the Company rents an office in Harbin city with a total payment of RMB 163,800 ($24,050) from October 1, 2020 through September 30, 2021. On October 1, 2021, Xunrui entered a new seven-month lease for this location with the Company’s President for total rent of RMB 94,500 ($14,690). The rental expense for this agreement was $19,036 and $6,373, respectively, for the nine and three months ended March 31, 2022.  

On July 1, 2021, the Company’s CEO entered into a car rental agreement with the Company for one year. Pursuant to the agreement, the Company rents a car from the Company’s CEO for a monthly rent of RMB 18,000 ($2,800), or total payment of $33,400, to be paid in full at once.

On September 1, 2021, the Company renewed a one-year lease for senior officers’ dormitory in Beijing, the monthly rent is RMB 15,200 ($2,439), payable every six months in advance. The rental expense for this lease was $16,608 and $7,117 for the nine and three months ended March 31, 2022.

On December 24, 2021, the Company’s CEO (also the major shareholder of the Company) contributed RMB 400,000 ($62,802) as capital contribution to Shuhai Beijing.

Due to related parties

As of March 31, 2022 and June 30, 2021, the Company had due to related parties of $29,063 and $69,305, mainly was for the payable of an office leasing from the Company’s CEO, and certain expenses of the Company that were paid by the CEO and her father (one of the Company’s directors), due to related parties bore no interest and payable upon demand.

NOTE 10 – COMMON STOCK AND WARRANTS

Private Placement in October 2020

On October 22, 2020, the Company entered into a common stock purchase agreement with Triton Funds LP (“Triton”). Pursuant to the Purchase Agreement, subject to certain conditions set forth in the Purchase Agreement, Triton was obligated, pursuant to a purchase notice by the Company, to purchase up to $2 million of the Company’s common stock from time to time through December 31, 2020. The Company is precluded from submitting a purchase notice to Triton if the closing price is less than $1.65 per share as reported on the Nasdaq Stock Market.

The total number of the shares to be purchased under the Agreement shall not exceed 523,596, or 2.5% of the Company’s outstanding shares of common stock on the Agreement’s execution date, subject to the 9.9% beneficial ownership limitation of the Company’s shares of common stock outstanding by Triton. Closing for sales of common stock will occur no later than three business days following the date on which the Purchased Shares are received by Triton’s custodian. In addition, the Company agreed to (i) at the time of the purchase agreement execution remit $10,000 to Triton, and (ii) at the initial closing pay $5,000 to Triton, to reimburse Triton’s expenses related to the transaction.

On October 29, 2020, the Company issued a notice to sell 520,000 shares to Triton. On November 11, 2020, the Company and Triton closed the equity financing for the issuance of 520,000 shares of the Company’s common stock at $1.80 per share, the market price on November 11, 2020 was $1.81 per share, the Company received $931,000 proceeds from the financing after deducting $5,000 expenses.

Registered Direct Offering and Concurrent Private Placement in July 2021

On July 20, 2021, the Company entered into a securities purchase agreement with certain institutional investors, pursuant to which the Company agreed to sell to such investors an aggregate of 2,436,904 shares of the common stock of the Company at a purchase price of $3.48 per share. The offering of the common stock is pursuant to a shelf registration statement on Form S-3 (File No. 333-239183), which was declared effective by the SEC on June 25, 2020. 

Concurrently with the sale of the shares of the common stock, the Company also sold warrants to purchase 1,096,608 shares of common stock to such investors. The Company sold the shares of the common stock and the warrants for aggregate gross proceeds of approximately $8,480,426, before commissions and expenses. Subject to certain beneficial ownership limitations, the warrants were immediately exercisable at an exercise price equal to $4.48 per share, and will terminate on the two- and one-half-year anniversary following the initial exercise date of the warrants. The warrants issued in this financing was classified as equity instruments. The Company accounted for the warrants issued in this financing based on the FV method under FASB ASC Topic 505, and the FV of the warrants was calculated using the Black-Scholes model under the following assumptions: life of 2.5 years, volatility of 150%, risk-free interest rate of 0.37% and dividend yield of 0%. The FV of the warrants issued at grant date was $1,986,880.

In addition, the Company has also agreed to issue to its placement agent for offering above warrants to purchase a number of shares of the common stock equal to 5.0% of the aggregate number of shares of the common stock sold in this offering (121,845 shares of warrants), the warrants have an exercise price of $3.96 per share and will terminate on the two and one-half-year anniversary of the closing of the offering. The Company accounted for the warrants issued based on the FV method under FASB ASC Topic 505, and the FV of the warrants was calculated using the Black-Scholes model under the following assumptions: life of 2.5 years, volatility of 150%, risk-free interest rate of 0.37% and dividend yield of 0%. The FV of the warrants issued at grant date was $225,964. The warrants issued in this financing was classified as equity instruments.

The closing of the sales of these securities under the securities purchase agreement took place on July 22, 2021. The net proceeds from the transactions were approximately $7,640,000, after deducting certain fees due to the placement agent and the Company’s estimated transaction expenses, and has been used for working capital and general corporate purposes, and for the repayment of debt.

Following is a summary of the activities of warrants for the period ended March 31, 2022:

Shares to Independent Directors as Compensation

During the nine months ended March 31, 2022 and 2021, the Company recorded $15,000 and $12,000 stock compensation expense to two independent directors through the issuance of 10,132 and 3,692 shares of the Company’s common stock at market price of the stock issuance date, respectively. During the three months ended March 31, 2022 and 2021, the Company recorded $4,500 and $12,000 stock compensation expense to two independent directors through the issuance of 0 and 3,692 shares of the Company’s common stock at market price of the stock issuance date.

Shares to Officers as Compensation

On September 24, 2021, under the 2018 Equity Inventive plan, the Company’s Board of Directors granted 15,000 shares of the Company’s common stock to its CEO each month and 10,000 shares to one of the board members each month staring from July 1, 2021, payable quarterly with the aggregate number of shares for each quarter being issued on the first day of the next quarter at a per share price of the closing price of the day prior to the issuance. During the nine and three months ended March 31, 2022, the Company recorded the fair value of $485,250 and $210,000 stock compensation expense for the shares that are issued to the Company’s CEO and one of the board members for the quarter.

Shares to a Consultant as Compensation

On October 1, 2021, the Company entered into a one-year advisory agreement with a consultant for a monthly compensation of $3,000, payable on a quarterly basis by the issuance of the Company’s shares. The Company issued the consultant 5,844 shares of the Company’s common stock during the nine months ended March 31, 2022. This agreement was terminated on Feb 28 2022.

Shares to Officers in Lieu of Salary Payable

On December 30, 2021, the Board of Directors approved to issue 167,112  shares to the Company’s CEO and one of the board members in lieu of payment for salary payable of $259,023, the market price of the Company’s shares at December 30, 2021 was $1.55 per share.

Amendment for Shares Reserved Under 2018 Equity Incentive Plan

On March 17, 2022, the Board of Directors approved the amendment to the Company’s 2018 Equity Incentive Plan to increase the number of the Company’s Common Stock to be reserved from 4,000,000 shares to 14,000,000 shares, such amendment has been approved by the stockholders at the Company’s annual meeting held on April 28, 2022.

NOTE 11 – 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 U.S. parent company is subject to U.S. income tax rate of 21% and files U.S. federal income tax return.  As of March 31, 2022 and June 30, 2021, the U.S. entity had net operating loss (“NOL”) carry forwards for income tax purposes of $1.98 million and $0.94 million. The NOL arising in tax years beginning after 2017 may reduce 80% of a taxpayer’s taxable income, and be carried forward indefinitely. However, the Coronavirus Aid, Relief and Economic Security Act (“the CARES Act”) passed in March 2020, provides tax relief to both corporate and noncorporate taxpayers by adding a five-year carryback period and temporarily repealing the 80% limitation for NOLs arising in 2018, 2019 and 2020. 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, Guozhong Times, Guozhong Haoze, Guohao Century, Jingwei, Shuhai Nanjing, Zhangxun are subject to the regular 25% PRC income tax rate.

As of March 31, 2022 and June 30, 2021, the Company has approximately $13.16 million and $9.04 million of NOL from its HK holding company, PRC subsidiaries and VIEs that expire in calendar years 2021 through 2025. 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 depends 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 March 31, 2022 and June 30, 2021.

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the nine months ended March 31, 2022 and 2021:

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended March 31, 2022 and 2021:

The Company’s net deferred tax assets as of March 31, 2022 and June 30, 2021 is as follows:

NOTE 12 – COMMITMENTS

Leases

On July 30, 2019, the Company entered into an operating lease for its office in Beijing. Pursuant to the lease, 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 $29,250). The lease required a security deposit of three months’ rent of RMB 677,769 (or $96,000). The Company received a six-month rent abatement, which was considered in calculating the present value of the lease payments to determine the ROU which is being amortized over the term of the lease.

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 $29,000). The deposit was RMB 202,352 (or $29,000).

On August 28, 2019, the Company entered an operating lease for senior officers’ dormitory in Beijing. The lease has a term of two years with expiration on August 31, 2021, the monthly rent was RMB 14,500 ($2,045), payable every six months in advance. The lease was renewed for another year from September 1, 2021 to August 31, 2022 at a monthly rent of RMB 15,200 ($2,350), payable every six months in advance.

In August 2020, the Company entered into a lease for an office in Shenzhen City, China for 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 for the office in Hangzhou City, China from September 11, 2020 to October 5, 2022. The first year-rent is RMB 1,383,970 ($207,000). The second-year rent is RMB 1,425,909 ($202,800). The security deposit is RMB 115,311 ($16,400). The total rent for the lease period is to be paid in four installments.

The Company adopted FASB ASC Topic 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:

The following is a schedule, by years, of maturities of the operating lease liabilities as of March 31, 2022:

NOTE 13 – SUBSEQUENT EVENTS

The Company follows the guidance in FASB ASC 855-10 for the disclosure of subsequent events. The Company evaluated subsequent events through the date the unaudited financial statements were issued and determined the Company had no major subsequent event need to be disclosed.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions of performance; and statements of belief; and any statements of assumptions underlying any of the foregoing. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

In some cases, you can identify forward looking statements by terms such as “may,” “intend,” “might,” “will,” “should,” “could,” “would,” “expect,” “believe,” “anticipate,” “estimate,” “predict,” “potential,” or the negative of these terms. These terms and similar expressions are intended to identify forward-looking statements. The forward-looking statements in this report are based upon management’s current expectations and belief, which management believes are reasonable. However, we cannot assess the impact of each factor on our business or the extent to which any factor or combination of factors, or factors we are aware of, may cause actual results to differ materially from those contained in any forward-looking statements. You are cautioned not to place undue reliance on any forward-looking statements. These statements represent our estimates and assumptions only as of the date of this report. Except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including:

Overview

Datasea Inc. (the “Company” or “Datasea”) is a publicly traded entity with the ticker symbol DTSS on the Nasdaq Capital Market. It was incorporated in Nevada on September 26, 2014. As a holding company with no material operations, the Company conducts a majority of business through the organizations established in the People’s Republic of China, or the PRC, primarily by variable interest entity (the “VIE”). The Company does not have any equity ownership of its VIE, instead it controls and receives economic benefits of the VIE’s business operations through certain contractual arrangements. 

The vision of Datasea is to become a multinational conglomerate in a decade through the mission of innovating and providing advanced technology to a wide range of business customers.  

Shuhai Information Technology Co., Ltd. (“Shuhai Beijing”), the VIE that holds its seven subsidiaries, possesses cutting-edge products and solutions in three industries: 5G messaging, acoustic intelligence and smart city. Up to date, Shuhai Beijing and its subsidiaries own 9 Patents and 53 Software Copyrights, with 12 patents applications pending in core technologies to empower and grow our business.

The primary operational goals are to: (i) Provide best-in-class products and solutions in 5G messaging, acoustic intelligence and smart city; (ii) maximize long-term sustainable growth of earnings and operating funds; (iii) generate cash flows and returns to the shareholders. Such objectives will be accomplished by diversifying product portfolio, improving operating efficiency, achieving superior risk-adjusted returns, prudently allocating capital, accelerating market reach and client acquisition.

The metrics for promoting long-term sustainable growth and comparative advantages: (i) leveraging innovation to provide convenience and choice to customers and commit to staying ahead of the emerging market trends. The R&D will be invested consistently and work with the best-in-class research institutes to match the innovative drive with the highest standards of product research and quality. These efforts have been taken into fruition that new launches and upgrades of products in 5G messaging, acoustic intelligence and smart city;(ii) being fast market-movers with great execution, Datasea’s strategic business expansion to 5G messaging and acoustic intelligence all prove the Company is able to identify great opportunities in the market and grasp them with execution;(iii) generating diversified revenue resources and continuous business model improvements. Similar to the importance of diversification to investors, having a diversified product solution can also offset risks and make the company more resilient. Datasea tapped into three different business areas but with great synergies among them. Meanwhile, the Company provides a combination of software and hardware products and solutions which have the flexibility to meet with clients of different needs, but also have the abilities to serve customers at scale. Datasea also keeps improving the business model for having more resources to generate recurring revenues and improve profit margin.  

5G Messaging: Fueled by the promising market landscape and sound execution, 5G messaging business sales revenue achieved continuous breakthrough growth in the quarter compared to the same period in fiscal 2021, representing a 12th consecutive month of growth. With the wide acceptance of 5G applications in the nation, especially as China’s three major telecom operators have gradually launched preparations for the commercialization of 5G messaging applications since the beginning of 2022, the popularity of 5G messaging-related services in the Chinese market has gradually increased. According to the news published by Dao Insights on October 4, 2021, the 5G messaging market size of China is estimated to be 300 billion RMB ($46.54 billion) over the next 5 to 7 years.

Enhancements are seen in the product development, customer acquisition, and business model. At present, the Company mainly provides institution customers with three types of services: 5G SMS,5G Integrated message marketing cloud platform (5G IMMCP) and value-added services (5G multimedia video SMS technology system, etc.).The 5G Integrated message marketing cloud platform (“5G IMMCP”), based on 5G message marketing cloud platform (5G MMCP) and the current demand in the Chinese market, expands connection with existing clients through accesses such as SMS, email, WeChat, applet, APP Push and third-party tools and manages users from different platforms all in one 5G IMMCP to form the company’s unique product service capabilities and competitive advantages. As a leading service provider in the field of 5G messaging in China, the number of companies that Datasea provides authorized development of 5G messaging for express delivery, catering, tourism, e-commerce, finance, technology and other industries has increased from about 100 to nearly 200. Datasea’s Business model is built on the seamless and efficient technical support for institutional customers assisting reach to end customers that resulting marketplace effect. This platform, combined with a strong financial position, has continued to drive new customer growth among different regions in China.

As the leader in the field of 5G messaging technical supporter in China’s express industry, the Company keeps building momentum and reinforce leadership in the 5G messaging business. Shuhai Beijing cooperated with the National Engineering Laboratory for Logistics Information Technology (“National Engineering Laboratory”) and drafted General Technical Requirements for 5G Messaging Application in Express Industry in China; Shuhai Beijing is one of the directors in the 5G Message Working Group of the Academy of Information and Communications of the Ministry of Industry and Information Technology, a CSP partner of the three major operators, a member of the China Communications Enterprise Association, a member of China Express Association, and a provider of the Tencent Enterprise Microservice. Market recognitions include: Shuhai Beijing assisted ZTO Express and completed the first order of 5G messaging service delivery in China’s express delivery industry; awarded the third place in the 4th National “Blooming Cup” 5G Application Competition and the “Top 10 Enterprises of 5G Messaging in 2021” by New 5G Messaging (New Media) and 5G New Business Center. Being a key player in the 5G messaging business and having the wide product suitability for businesses in different industries may help Shuhai Beijing to continue its growth.

Acoustic Intelligence: Compared with the wide recognition of 5G messaging market potential, Shuhai Beijing and its wholly-owned subsidiary, Shuhai Jingwei (Shenzhen) Information Technology Co., Ltd. (“Shuhai Jingwei”), demonstrates its vision and ability to stay ahead of the emerging market trends in acoustic intelligence. In this quarter, the Company unfolds the acoustic intelligence’s commercial potential and exemplifies how to maximize usage of this technology alone or to upgrade products and solutions in various business areas Shuhai Jingwei commits to tap acoustic intelligence’s full business potential and wields acoustic intelligence across industries in meaningful ways. It sets the goal to become a leading technology and product provider in the field of acoustic intelligence in China and worldwide.

Shuhai Beijing has entered into partnerships with top notch institutions in this area and equipped itself with solid R&D capability. Recently, Shuhai Beijing released China’s inaugural white paper “Industry Development and Technology Application of Acoustic Intelligence in China,” with co-authors, Institute of Cloud Computing and Big Data, China Academy of Information and Communications Technology. The white paper dives into the current and future application cases of acoustic intelligence in China and outlines the introduction of acoustic intelligence, technology development, commercial applications and industrial outlook to provide technical insights and guide industry development. According to the “Feasibility Study Report on China’s Acoustic Device Market 2021-2025” released by Newsijie Research Center, China’s acoustic device market is expected to grow at a compound annual growth rate of 15.6% and reach RMB 46 billion (approximately $7.23 billion) by 2025. 

Shuhai Jingwei, a wholly owned subsidiary of Shuhai Beijing, runs the acoustic intelligence business in the Bay Area of Canton-Hong Kong-Macao where is an industry cluster for the benefit of improving the core technology, production, marketing, and logistics. To date, Shuhai Jingwei has completed the technology development, product design, supply chain management and promotion plans for a series of acoustic hardware products in six major industries and application areas, including but not limited to healthcare, medical beauty, environmental protection and agriculture. The four flagship products, including Tianer voice recognition alarm, Ultrasonic sound sterilization and antivirus equipment, Directional sound recognizer, and Brain refreshing acoustic equipment, are expected to be introduced to the market in fiscal year of 2022. Among them, a new JV---Shuhai acoustic effect has jointly launched a logistics virus disinfection channel (the company provides the core ultrasonic sterilization and antivirus components) with its partner institutions 99.99%, reaching the world advanced level.

In order to access the top tier artificial intelligence technology and establish a world class branding, Datasea, the Nevada incorporated company, will be localized in the US for multiple business functions such as design, creation, supply chain management, marketing, sales, and capitalization. By doing so, it will be more efficient to connect with the R&D institutions or to team up with engineering talents in Silicon Valley where the global innovation hub is for developing the most advanced products associated with the Patent Cooperation Treaty to better solve clients’ demand. Also, America has the largest group of abundant consumers with the highest adoption rate of new technology among the world which not only could boost up the revenue, but also can stimulate the value of intangible assets that can help sales expansion all over the world in the coming future. More importantly, the management team strongly believes developing international markets, including the United States, and building a global business structure can change the current single structure in which business revenue is entirely derived from the Chinese market, and improve the single market’s ability to resist risks due to changes and impacts such as policies, epidemics, and inflation, as well as investor information transparency and effective compliance risk reduction. Datasea’s plan to enter the U.S market is pursuant to the growth strategy and commitment to tap acoustic intelligence’s full business potential. The Company plans to introduce in the U.S. the Ultrasonic Sound Sterilization and Antivirus Equipment acoustic intelligence products in agriculture as the first step of the global footprint expansion. The sterilization equipment market is expected to grow at a CAGR of 12% from 2020 to reach 2027 for reaching $23.73 billion. The global smart agricultural market is expected to grow from USD12.9 billion in 2021 to USD 20.8 billion by 2026 at a CAGR of 10.1% according to MarketandMarkets.

Digital Smart City: Shuhai Beijing possesses acoustic, non-visual, and visual intelligent algorithms (face recognition). The artificial intelligence, machine learning, and data analysis capabilities are combined, so the solutions are not only providing visibility but also identifying behavioral patterns. In addition, Shuhai Beijing and its subsidiary, Guozhong Haoze (Beijing) Technology Ltd. (“Guozhong Haoze”) and Heilongjiang Xunrui Technology Co., Ltd (Heilongjiang Xunrui) establish five major business service systems which are digital economy, digital government, digital culture, digital society, and digital ecology and using the three major middle-end platforms to support modern digital city business. It has realized the three-dimensional perception of urban full-time space elements, the application support of full-service systems, and the intelligent coordinated command of all scenarios, achieving refined urban governance, scientific auxiliary decision-making, and digital industrial development. Shuhai Beijing, Guozhong Haoze and Heilongjiang Xunrui facilitates the construction of China’s digital smart city by providing a digital smart city application platform that meets the needs of residential communities, schools, and commercial enterprises in the Chinese market.

Recent Developments

The recent business developments indicate the Company’s progress in general business developments, contracts acquisition, product upgrade, marketing efforts and industry recognition.

1.A. Business developments:

As the leader in the field of 5G messaging technical supporter in China market, Shuhai Beijing generates its revenue from 5G SMS, 5G integrated message marketing cloud platform (“5G IMMCP”) and 5G Value-added service such as multi-media video messaging technology system and advertisement. The business is based on an recurring revenue model, such as 5G SMS which is based on the fee to charge on number of promotion messages have been sent in at least one year, as customers are generally billed on a fixed basis each month for the duration of the signed contract （one to three years in length. As a result, the recurring sales accounted for about 73% of the total 5G SMS income. Institutional customers in the 5G messaging business grew rapidly during the quarter. Among them, 5G SMS service added 12 new institutional customers, who are mainly from Guangdong Province and Guangdong Province; and the 5G integrated Message Platform (5G IMMCP) business added two institutional customers and completed two important industry applications in finance and healthcare respectively. At the same time, the value-added service business continued to be good, including the development of financial middle-office and advertising business.

Shuhai Beijing and Shuhai Zhangxun are positioned to provide 5G marketing services in express and logistics, internet, catering, e-commerce, finance, property management, and other industries in the Chinese market. Recently, the number of enterprises that engaged with Datasea’s 5G message authorization development increased from about 100 to nearly 200 which directly resulted in the Company becoming a leading service provider in China. Blue chips customers included Zhongtong, Yuantong, Shentong, Shunfeng, Yunda and Rookie. Among that, Zhongtong express was the one that completed the first delivery order placed through 5G messaging in China’s express industry. At the same time, the Company led the major players in China’s express industry to jointly launch the formulation of 5G messaging standard for the sector. Therefore, Datasea became the  leader in the field of 5G messaging technical support in China’s express industry. In addition, in the medical sector, during this quarter, the Company provided 5G information aggregation platform services to Huizhou Huiyang Dongfeng general hospital, and assisted Dongfeng for reaching and transforming high-quality leads, maintained customer relations, as a great example of 5G messaging application.

To better promote business development and meet with the demand of customers, Shuhai Beijing and Shuhai Zhangxun have a unique sales model which including 1) increasing professional sales team, focusing on expanding and maintaining the Company’s existing potential customer needs and transforming them into deal transaction ; 2) Partner / broker mode, use the resources and contacts of partners to import more potential demand and promote the order transformation of 5G messaging service of the company; 3) Joint marketing mode, using partner resources to invite agents and end customers to participate in the promotion meeting led by the company’s business team to reach the signing of agents or direct customers; 4) The enterprise key customer project cooperation mode promotes cooperation by cultivating enterprise key customers and developing many projects that can be implemented by enterprise key customers, and can introduce the synergy of other products or services of the company except 5G message service. The above business models have developed standard business processes to effectively promote business progress.

In terms of marketing and sales channel development, business partners and subsidiaries have been fully utilized to promote across the country. In addition, long term cooperative relationship with major telecom operators and a number of provincial & municipal companies to expand product applicability  and customer coverage including Nanjing Branch of China Mobile Communications Group Jiangsu Co., Ltd., value-added service operation center company responsible for its whole network business with China Telecom, one of China’s three major operators, Zhejiang Jiaxing Branch of China Mobile and Jiangsu Branch of China Mobile.

1.B. Contracts developments:

In January 2022, Shuhai Zhangxun signed a $1,110,000 agreement with China Mobile Communications Group Jiangsu Co. Ltd., Nanjing Branch (“CMCG”). The Company will provide 5G messaging services for the financial data middle-office project of Beijing Datang Gaohong Data Network Technology Co., Ltd., including 5G IMMCP and private cloud platform integrated financial big data middle-office. The contract period is one year. Approximately $1 million (RMB6.59 million) has been received as of January 27, 2022. This order not only is an important project in the Company’s 5G messaging financial sector, but also heralds the approach of full commercialization of 5G messaging.

In March 2022, Shuhai Zhangxun Information Technology CO., Ltd, a subsidiary of Shuhai Beijing singed a $345k purchase agreement to supply 5G messaging Aggregation services with Huizhou Huiyang Dongfeng General Hosipital Co., Ltd and Dongfeng’s affiliated entity, pursuant to which Agreement Shuhai Zhangxun shal provide Dongfeng 5G messaging aggregation services to assist Dongfeng to reach and convert high-quality leads and maintain their relationship with customers. In conjunction with the Agreement, Datasea should build and set up a customized 5G messaging aggregation platform for Dongfeng. Upon Datasea’s delivery of its 5G messaging aggregation services, Dongfeng should be able to leverage this one-stop integrated messaging platform to provide a range of interactive options, including multi-channel distribution with a unified ID, marketing materials delivery, and template-based management, to attract Dongfeng consumers’ attention and achieve sustainable marketing growth of Dongfeng. Datasea’s 5G messaging aggregation platform already passed the user acceptance test and was delivered to Dongfeng successfully. The cooperation with Dongfeng does not only demonstrate the great potential of 5G messaging application, but also reinforces Datasea’s leading position in applying 5G messaging in different industries in China, including Express delivery and Healthcare. Datasea’s 5G messaging SaaS model has also been put into use and we believe it will generate high gross margins for Datasea and eventually become our core business model going forward.

In March 2022, Heilongjiang Xunrui Technology Co., Ltd, a subsidiary of Shuhai Beijing, executed a purchase agreement with Jiangsu Xinrong Network Technology Research Institution Co., Ltd., a company providing software development, artificial intelligence, and big data solutions. In conjunction with the agreement, Xinrong will establish and operate information systems for 100 residential communities and has agreed to purchase 5G messaging smart city solutions directly from Xunrui at a budget of RMB 500,000 (approximately USD 78,800) per residential community. Xunrui estimated that the total value of this engagement would be RMB50 million (approximately USD 7.88 million) over the course of the two-year agreement. The 5G messaging smart city solutions include the offerings of hardware equipment which adopts artificial intelligence-based face recognition technology to assist in identifying the potential public security risk, and software which leverage cloud computing safety. The 5G messaging smart city solutions will not only offer visibility but also help the property management team identify behavioral patterns, generate objective, real-time qualitative measurement, and analysis. Eventually preventing safety risk and supporting proactively safety management.

In April 2022, Shuhai Zhangxun and Xinyuan Public Information Development Co., Ltd. (“Xinyuan public”) signed a “project cooperation agreement for the introduction of 5G message key industry solution service providers” (the “agreement”) to jointly promote the multi industry application of 5G message aggregation platform. Xinyuan Public is a wholly-owned subsidiary of China Telecom Co., Ltd., one of the three major operators in China. It is also the value-added service operation center of China Telecom that undertakes the operation and daily continuous development of centralized Internet application services serving the whole network of China Telecom. According to the agreement, Xinyuan Public Co., Ltd. makes overall arrangements to use the solutions, products and services provided by Shuhai Zhangxun; Both parties shall establish a cooperative business system to ensure the healthy and sustainable development of the cooperative business system; And continue to promote the in-depth cooperation between the two sides in 5G message business. Xinyuan Public will focus on promoting the 5G message platform of Shuhai Zhangxun in the whole business system of China Telecom. This cooperation shows that the Company has obtained the highest degree of recognition from China’s three major mobile operators. It focuses on promoting the 5G message solution of Shuhai among operators in the whole region and system industry, which can effectively expand the applicability of products and the coverage of customers. It not only shows the great potential of the company’s 5G message application scheme, but also indicates that the company will obtain further expansion of potential customers and services, and achieve strong growth of 5G message business and revenue.

1.C. Product upgrades:

Hangzhou Shuhai Zhangxun Information Technology Co., Ltd, an affiliate of the Company, has made new efforts, including introducing a new product launch to deepen the cooperation with operators to fully tap the 5G messaging market. The new efforts resolve the complexity in enabling a full range of services across multiple environments and streamline the enterprises’ service transformation by delivering an integrated but yet personalized 5G messaging experience. To this end, Shuhai Zhangxun has launched its new application module “Juchuan Smart Push” to enable personalized delivery services, leveraging big data and data mining. Juchuan Smart Push integrates rich media messaging, such as SMS and video SMS, to provide a range of interactive options and marketing materials that will help brands grab consumers’ attention and achieve sustainable marketing growth. Together with existed 5G message marketing cloud platform, and integrated 5G message marketing cloud platform, Shuhai Zhangxun is able to offer a comprehensive portfolio messaging product to target the lucrative enterprise segment with value-added features. Enterprises from different industries, including but not limited to tourism, retail, real estate, education and training, leisure and entertainment, and express delivery, will all be able to reach, convert and maintain their buyer’s relationship with Shuhai Zhangxun’s 5G messaging offerings.

1.D. Marketing expansion:

Shuhai Beijing and Shuhai Zhangxun have further developed relationships with the three major operators and a number of provincial and municipal operators to expand product applicability and customer coverage. Including, 1) Shuhai Zhangxun cooperates with Nanjing Branch of China Mobile Communications Group Jiangsu Co., Ltd. to provide financial customers with an integrated financial big data platform including an aggregation platform 5G IMMCP and a private cloud platform; 2) It  cooperates with the three major operators in China. 1. China Telecom is responsible for its value-added business operation center company for its entire network business, and jointly promotes the multi-industry application of the Shuhai 5G message aggregation platform; 3) At the same time, as the only 5G message authentication service partner of China Mobile Zhejiang Jiaxing Branch, 5G messaging services can be provided directly to the operators’ existing customers; 4) Shuhai Zhangxun and China Mobile Jiangsu Branch have also accelerated their cooperation in 5G messaging, aiming to set a benchmark for China’s express delivery industry and launch related services on the Jiangsu Mobile cloud platform. product, and plans to launch a marketing campaign covering Chinese express companies in May 2022.

1.E. Industry recognition:

In January, 2022, Shuhai Zhangxun took the lead in organizing the overall technical requirements for 5G messaging applications in express delivery service scenarios—that is, the first seminar of the drafting group for the 5G messaging group standard in China’s express delivery industry. At this seminar, Shuhai Zhangxun and representatives from China Express Association, YTO Express, ZTO Express, STO Express and SF Express and representatives of the three major operators in China delivered speeches together on the “5G News of Express Service Scenarios”. Application General Technical Requirements” group standard version 1.0 seminars and exchanges to speed up the introduction of industry standards and subsequent implementation in the express delivery industry.

Shuhai Zhangxun, the subsidiary of Shuhai Beijing focusing on the 5G messaging business, was recently named the “Top 10 Enterprises of 5G Messaging in 2021” by New 5G Messaging (New Media) and 5G New Business Center.Shuhai Zhangxun   has become an innovative pioneer of cross-platform product integration in the field of 5G messaging in China.Especially in the field of express delivery,  Shuhai Zhangxun set the 5G messaging application benchmark with ZTO express，and the application has been highly recognized by the industry as an expample of “building a cross-platform product matrix in the field of 5G messaging and leading the ecological integration of 5G messaging”.

2.A. Business developments:

Shuhai Beijing and Shuhai Jingwei commit to tap acoustic intelligence’s full business potential and wield acoustic intelligence across industries in meaningful ways. In this quarter, the Company unfolded the commercial potential of acoustic intelligence, through direct sales of acoustic intelligence powered disinfection equipment’s and agreements with different businesses to apply acoustic intelligence in the areas such as automotive systems and smart home appliances. We are determined to become a leading technology and product provider in the field of acoustic intelligence in China and worldwide. The research and development of technology play a vital role for us and are what make us different.

During the reporting period, a new holding subsidiary, Shuhai Acoustic Effect Technology Co., Ltd. (“Shuhai Acoustic Effect”) was established. Shuhai Acoustics New Company will devote itself to the technological development and product design of smart products in the major fields and scenarios such as health, medical care, agriculture, etc. supply chain management, promotion and sales. The core team of Shuhai Acoustics New Company is composed of technical development and market talents with more than 10 years of industry experience in the field of domestic acoustic intelligence in the field of ultrasonic and infrasonic acoustics. They are good at using sound technology and sound products to solve practical problems in various industries. At the same time, a number of industry-renowned experts in the field of acoustic effects, ultrasound, acoustic algorithms and electro-acoustic technology have been introduced to form an expert team to ensure that the joint venture company and Shuhai Beijing maintain their technological leadership in the field of acoustic intelligence in China.

In addition, Shuhai Acoustic Effects was established in Shenzhen, which will effectively utilize the industrial cluster in the Guangdong-Hong Kong-Macao Bay Area, which is conducive to the establishment and improvement of the company’s technology, production, marketing, supply chain and logistics system, and reduces the impact of global inflation on the supply chain. Ensure that the acoustic intelligent hardware products are put on the market as planned. Shuhai acoustic effect has jointly launched a logistics virus disinfection channel (the company provides the core ultrasonic sterilization and antivirus components) with its partner institutions 99.99%, reaching the world advanced level.

Shuhai Beijing and Shanghai Zhuifeng Automotive System Co., Ltd. recently reached a consensus on strategic cooperation in the field of acoustic intelligent industry technology and application. Shanghai Zhuifeng Automotive System Co., Ltd. has domestic OEMs and front vehicle market resources. At present, it is mainly engaged in the R & D and production of on-board acoustic systems and 5G v2x communication products. The two parties jointly promote the acoustic intelligent module products in vehicle application scenarios, such as DMS (fatigue detection) for sound awakening and expand the automobile related front loading market. In the future, the domestic market with more than 400 million cars will be targeted.

In summary, in order to quickly enter the market and increase market share, Shuhai Beijing, Shuhai Jingwei and Shuhai Acoustic Effects’s development strategy, first of all, cooperates with large B-end customers to supply core acoustic disinfection modules, such as the cooperation with Shanghai Chaifeng Automobile, and the company’s cooperation with future customers. we will supply 500,000 sets and 300,000 sets of core disinfection components for Guangdong Herbalife and Nanjing Xinrong respectively, which will enable the company’s supply chain to mature as soon as possible; Datasea’s brand value in the field of acoustic intelligence, especially in the field of home health, and higher gross profit; thirdly, the expansion of international markets in North America and South America, including the United States, international development, and reduce the risk associated with the single market in China.

2.B. Contracts developments:

Shuhai Acoustic Effects Technology Co., Ltd, the subsidiary of Shuhai Beijing, has entered into a three-year collaboration agreement with Guangdong Canbo Electrical Co., Ltd, a company in smart home household appliance. The cooperation will support the advancement of next-generation disinfection cabinets with the integration of Shuhai acoustic effects’s innovative acoustic intelligence-enabled sterilization technology. Canbo is the inventor of the world’s first household disinfection bowl cabinet. According to Jingcanmo Data, by November 2021, Canbo has captured a dominant share of the disinfection cabinet market and accounted for nearly 40% of all online disinfection cabinet sales in China. The company develops, produces, and sells disinfection bowl cabinets, water heaters, gas stoves, smoke machines, and other household appliances. The new collaboration will focus on leveraging the respective strengths of Shuhai acoustic effects and Canbo to promote product evolution and enhance user experience. Shuhai acoustic effects will provide technology called “high-frequency sound air coupling microorganism and synergistic disinfection” to upgrade Canbo’s disinfection cabinet product and tackle the main problems of current disinfection cabinet products such as heat generation and ozone odor, and effectively bring the disinfection time from three minutes down to 10 seconds. Under the agreement terms, both companies will work closely and take on responsibilities for subsequent development and commercialization activities. Once the technology integration and product development are finished and quality assurance is confirmed, the product’s sales are expected to reach 500,000 units annually. The combination of Shuhai acoustic effects’s expertise in acoustic intelligence and Canbo’s dominance in the disinfection cabinet market makes for an ideal partnership to advance disinfection solutions for users. The partnership closely contributes to our goals to give users unique experiences that fundamentally enhance the daily lives.

Shuhai Jingwei has executed a purchase agreement with Jiangsu Xinrong Network Technology Research Institute Co., Ltd. (“Xinrong”), a company providing software development, artificial intelligence, and big data solutions. In conjunction with the agreement, Xinrong is a supplier of intelligent equipment and solutions to a wide range of institutional clients, including banks, universities, and hospitals. To better serve its clients and tap into the needs for sterilization and disinfection solutions. Xinrong agrees to purchase Shuhai Jingwei’s acoustic intelligence powered disinfection equipment such as model WPP-254PL-CP01and undertakes that the total value of this engagement would be RMB 20 million (approximately USD 3.14 million) over the course of the two-year agreement. The acoustic intelligence powered disinfection equipment features innovative ultrasonic sound sterilization that has proven to be able to purify air, reduce bacteria and viruses such as COVID-19 and H1N1by over 99.9%.

2.C. Product updates:

To date, Shuhai Beijing and Shuhai Jingwei prepared four flagship products to unfold the commercial possibilities of acoustic intelligence in the most wanted areas like health, security, and environment protection. The four flagship products are 1) Shuhai ultrasonic sound sterilization and antivirus equipment, the first-ever sterilization and antivirus equipment that combines ultrasonic acoustic effect s with optics to address the Covid-19 sparked disinfecting needs; 2) Shuhai Tianer voice recognition alarm, a product processing real-time sound data necessary to conduct early warning analysis, and actively respond to the emergency incidents and threats; 3) Shuhai directional sound recognizer, a product tackle with noise pollution and can be applied in personal and public situations; and 4) Shuhai refreshing directional sound device, a product help integrating ultrasound, low frequency, electromagnetic waves, music, and voice interaction to deliver customizable experience good for well-being. The four flagship products have produced samples, completed laboratory tests and user pilot tests, entered mass production to varying degrees, and are expected to be introduced to the market in the fiscal year of 2022. Shuhai acoustic effect has jointly launched a logistics virus disinfection channel (the company provides the core ultrasonic sterilization and antivirus components) with its partner institutions 99.99%, reaching the world advanced level.

2.D. Market Expansion:

At present, relying on the Shuhai Beijing, Shuhai Jingwei and Shuhai Acoustic Effects’s team’s deep contacts in the fields of express delivery, transportation and agriculture in China, the team has reached a cooperation agreement with Guangdong Kangbao, a well-known leading enterprise of disinfection cabinets in China, for 500000 sets of microbial disinfection function disinfection cabinets, and has formed cooperation intentions and pilot projects with many logistics companies, ports, terminals, airports and high-speed railway stations in China, which will bring considerable commercial income to the new company in the future.

Datasea has entered into a one-year business cooperation agreement with Unicorner LLC, a company that possesses comparative advantages on supply chain management such as procurement, logistic, warehousing, marketing, and sales on the sterilization industry in the United States. The Partnership leverages the respective strengths of Datasea and Unicorner to create compelling value for both companies. Datasea will provide various acoustic intelligence products and technical support to Uniconer who will utilize and share the over twenty years of experience in U.S operations, internal expertise, and external resources to assist the Company’s product distribution primarily in America.

Datasea also engaged one-year business agreement with ShenZhen New Route Network Technology and QueTal Compra respectively, which the Company believes will help it to create synergies on promotion, sales, business development, branding, and localization, aiming to bolster Datasea’s participation in the North and South America. The new collaboration will help the Company expand the scale and global footprint and integrate New Route Network Technology and QueTal Compra into Datasea’s distribution process. New Route Network Technology utilizes over ten years of experience in China and North America e-commerce industry and nearly twenty physical stores around the world to help clients distribute products effectively. QueTal Compra is a fast-growing company with twenty-two physical stores and about 100 employees all over South America including Peru, Argentina, Columbia, Bolivia, and Mexico. New Route Network Technology and QueTal Compra bridges domestic and overseas markets to deliver streamlined logistics and enable Datasea to strengthen the customer value proposition.

2.F. Industry recognition:

In January, Shuhai Beijing released China’s inaugural white paper with co-authors, Institute of Cloud Computing and Big Data, China Academy of Information and Communications Technology to uncover detailed facts and compelling analyses of the acoustic-intelligence technology, commercial applications, and the industry outlook. Shuhai Beijing dives deeply into the current and future use cases of acoustic intelligence in China and outlines the introduction of acoustic intelligence, technology development, commercial applications and industry outlook to provide technical insights and guide industry development. In addition, China’s acoustic-intelligent industry is under rapid expansion. In the future, acoustic intelligence will be more mature with extensive applications. With the integration of acoustic intelligence, scenario-based solutions will be enhanced. Technological progress will unlock tremendous business opportunities and potentials in the real economy.

3.A. Business developments:

Shuhai Beijing, Guozhong Haoze and Heilongjiang xunrui have visual intelligent algorithms such as face recognition, as well as cutting-edge acoustic and non-visual intelligent algorithms. It combines artificial intelligence, machine learning and data analysis capabilities so that its solutions not only provide visibility but also identify behavioral patterns. In addition, Shuhai Beijing, Guozhong Haoze and Heilongjiang xunrui have established three major middle-end platforms that support modern digital smart city business: big data platform, IoT platform, and digital twin. It has realized the three-dimensional perception of urban full-time and space elements, the application support of full-service systems; the intelligent coordinated command of all scenarios, achieving refined urban governance, scientific auxiliary decision-making, and digital industrial development. Shuhai Beijing, Guozhong Haoze and Heilongjiang xunrui will help the construction of China’s digital smart city and continue to provide a digital smart city application platform that meets the needs of residential communities, schools and commercial enterprises in the Chinese market.

Our business is primarily based on a recurring revenue model, as our customers are generally billed on a fixed and recurring basis each month for the duration of their contract, which is generally one to three years in length and thereafter. Shuhai Beijing, Guozhong Haoze and Heilongjiang xunrui has a diversified client portfolio which makes our business model resilient. Our non-recurring revenue primarily includes installation services related to an initial client deployment and the professional services we provide. Clients are billed typically once, upon completion of the installation or the professional services work performed.

3.B. Contracts developments:

In Mrach 2022, Heilongjiang Xunrui Technology Co., Ltd, a subsidiary of the Chinese operating company contractually controlled by the Datasea, has executed a purchase agreement with Jiangsu Xinrong Network Technology Research Institution Co., Ltd., a company providing software development, artificial intelligence, and big data solutions. In conjunction with the agreement, Xinrong will establish and operate information systems for 100 residential communities and has agreed to purchase 5G messaging smart city solutions directly from Xunrui at a budget of RMB 500,000 (approximately USD 78,800) per residential community. Xunrui estimated that the total value of this engagement would be RMB50 million (approximately USD 7.88 million) over the course of the two-year agreement. The 5G messaging smart city solutions include the offerings of hardware equipment which adopts artificial intelligence-based face recognition technology to assist in identifying the potential public security risk, and software which leverage cloud computing safety. The 5G messaging smart city solutions will not only offer visibility but also help the property management team identify behavioral patterns, generate objective, real-time qualitative measurement, and analysis. Eventually preventing safety risk and supporting proactively safety management.

3.C. Product updates:

Shuhai Beijing and its subsidiaries laid out a series of upgrades in:

1) IoT cloud platform 2.0 upgrade function.

Shuhai Beijing and its subsidiaries have upgraded the Internet of Things platform 1.0 to a major version. In the new version 2.0, we have added the business capabilities of the open data business center and third-party business users to access. Users can pass standardized registration approval and upload their own. Hardware products and communication types and other related configurations, users can customize and set various equipment alarm parameters and the platform provides an alarm interface. The IoT platform provides users with business transformation from a privatized data center to a shared data pillar platform. Now, the 2.0 version of the Shuhai IoT platform has supported the access of the group’s full line of equipment products and popular products in the market, and has provided multiple types of products under the group. The business platform campus security cloud platform, smart community platform, campus dormitory management system, etc. provide massive data flow processing and support.

2) Campus Security Cloud

In the campus security cloud system, Shuhai Beijing and its subsidiaries have added the access management of the Internet of Things service gateway and the access management of the video streaming media gateway. The addition of the two services provides more favorable terminal data push support for the Shuhai security cloud platform. The two gateways can be packaged Complete sets of sales products for equipment sales, which can be combined with our business application platform for sales. The campus security cloud video streaming service gateway can be sold as a device or can be deployed locally in the form of a program. The video streaming function can provide localized video streaming services to the campus security cloud platform, that is, users can deploy The device enables a localized video streaming cloud viewing experience. Various brands of surveillance cameras are now supported.

Datasea closely monitors the impact of the COVID-19 pandemic and global high inflation on our business and operations, including the impact on our customers, suppliers and business partners. While we did not experience significant disruptions from the pandemic nor inflation as of the date of this report, Datasea is taking preventive measures to manage our business. As Datasea mainly operates in China, and we always pay great attention to supply chain and cost management. So far we haven’t seen the significant challenges arising from these areas that would affect our business development and client acquisition. Meanwhile, Datasea has a diversified product portfolio, ranging from 5G messaging, acoustic intelligence and smart city, and in the form of software and hardware.Therefore, our business model is more resilient and has diversified revenue resources. Other than that, as 5G messaging and acoustic intelligence are all emerging areas with high demand and technology barriers, the company is positioned to have certain advantages in the market. Last but not least, the external environment may even fuel the growth of our certain business. For example, the Ultrasonic Sound Sterilization and Antivirus Equipment, a acoustic intelligence product, can benefit from the Covid-sparked sterilization equipment market growth. 

During the quarter ended March 31, 2022, Shuhai Beijing and its subsidiaries’ newly-registered software copyrights and patents were as follows:

Going Concern

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, 2022 and 2021, the Company had a net loss of approximately $4.40 million and $3.05 million, respectively. For the three months ended March 31, 2022 and 2021, the Company had a net loss of approximately $1.28 million and $1.20 million, respectively. The Company had an accumulated deficit of approximately $16.46 million as of March 31, 2022, and negative cash flow from operating activities of approximately $4.22 million and $3.06 million for the nine months ended March 31, 2022 and 2021, respectively. The historical operating results indicate the Company has recurring losses from operations which raise the question related to the Company’s ability to continue as a going concern. There can be no assurance the Company will become profitable or obtain necessary financing for its business or that it will be able to continue in business. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. On July 20, 2021, the Company sold 2,436,904 shares of common stock at $3.48 per share. The net proceeds from the transactions were approximately $7,640,000, after deducting offering costs, and as of March 31, 2022, the Company had cash of $1,628,750.

If deemed necessary, management could raise additional funds by way of private or public offerings, or by obtaining loans from banks or others, to support the Company’s research and development (“R&D”), procurement, marketing and daily operation. While management of the Company believes in the viability of its strategy to generate sufficient revenues and 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 depends 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. There can be no assurance the Company will be successful in any future fund raising. In the event that the Company requires additional funding to finance its operations, Based on the Company’s most recent cash flows projection and working capital requirements, management of the Company believes that the Company will be able to continue to operate as a going concern in the foreseeable future and it will have sufficient working capital to meet its operating needs for at least the next 12 months.

Significant Accounting Policies

Please refer to our significant accounting policies in Note 2 to our CFS.

Results of Operations

Comparison of the nine months ended March 31, 2022 and 2021

The following table sets forth the results of our operations for the nine months ended March 31, 2022 and 2021, respectively, indicated as a percentage of net sales. Certain columns may not add up due to rounding.