Datasea Inc. (NASDAQ:DTSS) Q2 2022 Earnings Conference Call February 14, 2022 8:00 AM ET Company Participants Annabelle Zhang - Investor Relations Zhixin Liu - Chief Executive Officer Mingzhou Sun - Chief Financial Officer Conference Call Participants Operator Greetings. Welcome to Datasea's Second Quarter Fiscal Year 2022 Financial Highlights and Updates. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Plea ...

Financial Performance - The company reported revenue of $175,138 for the year ended June 30, 2021, a significant decrease from $1,414,781 in 2020, primarily due to a shift towards 5G messaging and smart payment services [388]. - Gross profit for the year ended June 30, 2021, was $94,003, down from $1,268,400 in 2020, reflecting increased hardware costs and a shift in revenue sources [392]. - The company incurred a net loss of $4,648,477 for the year ended June 30, 2021, compared to a net loss of $1,863,253 in 2020, attributed to business expansion and increased R&D investment [396]. - As of June 30, 2021, the company had a working capital deficit of $2,372,682, with current assets of $885,985, down from a working capital of $2,609,032 in 2020 [399]. - Non-operating income (expenses) was $(23,030) in 2021, compared to $46,958 in 2020, indicating a decline in interest income and an increase in other expenses [395]. Research and Development - Research and development expenses increased to $851,839 in 2021 from $1,114,486 in 2020, with plans to invest approximately $10 million in technological product development over the next three years [393]. - The company is focusing on long-term technological development and strategic deployment to enhance sustainable growth and potential energy accumulation [407]. - The company emphasizes the fusion of perception technologies and cognitive decision-making to create business value for customers [408]. Strategic Agreements and Investments - The company signed a strategic agreement worth approximately $14.76 million (RMB 95.34 million) to provide smart systems for canteens and restaurants in at least 200 schools over the next two years [390]. - Net cash used in investing activities was $168,685 for the year ended June 30, 2021, compared to $306,813 for the year ended June 30, 2020, indicating a decrease of approximately 45% [404]. Cash Flow and Financing - Net cash provided by financing activities was $2,448,847 during the year ended June 30, 2021, a significant increase from a net cash used of $84,842 in the previous year [405]. Market Position and Future Outlook - The company expects to generate revenue through the expansion of smart city, 5G messaging, and acoustic intelligence services, supported by a strong product portfolio [398]. - Datasea is positioned as an emerging technology company in China, dedicated to intelligent product solutions and value-added services [408]. - The company has strategically entered 5G messaging and smart payment sectors, enhancing overall product value and ecological viability [407]. Operational Changes - Selling expenses increased by 30% to $568,034 in 2021, primarily due to increased payroll expenses for sales personnel [392]. - Integration of visual perception technology and artificial intelligence big data technology aims to shift from passive monitoring to active prevention in security solutions [407]. Financial Condition - There are no off-balance sheet arrangements that are likely to affect the company's financial condition or capital resources [409].

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 September 30, 2020 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 333-202071 DATASEA INC. | --- | --- | --- | --- | --- | |------------------------------|---------------------------------------------------------------------------------------- ...

PART I [Item 1. Description of Business](index=5&type=section&id=Item%201.%20Description%20of%20Business) Datasea is a Beijing-based technology company specializing in smart security systems and education-related technologies for the Chinese market Overview and Impact of COVID-19 - The company focuses on smart security solutions, smart hardware, and education-related technologies, commercializing its products for schools, public communities, and governmental authorities in China[14](index=14&type=chunk) - Revenue is generated from selling smart security systems and hardware, with product design handled in-house and manufacturing outsourced[15](index=15&type=chunk) - The COVID-19 pandemic negatively impacted operations from January to March 2020, but the company developed a new smart epidemic system deployed in **22 schools and 62 communities**[19](index=19&type=chunk)[20](index=20&type=chunk) Recent Developments - Completed an IPO on NASDAQ in December 2018, raising net proceeds of approximately **$5.7 million**[21](index=21&type=chunk) - Expanded operations by incorporating new subsidiaries and acquiring three entities from management for no consideration to enhance marketing, 5G partnerships, and hardware development[22](index=22&type=chunk)[23](index=23&type=chunk)[24](index=24&type=chunk) - Filed a shelf registration on Form S-3 to offer up to **$100 million** in securities and is addressing a Nasdaq compliance issue for a delayed annual shareholder meeting[27](index=27&type=chunk)[28](index=28&type=chunk) History and Corporate Structure - The company operates in the PRC through a **Variable Interest Entity (VIE)**, Shuhai Beijing, controlled via contractual agreements with its wholly-owned subsidiary, Tianjin Information[36](index=36&type=chunk)[37](index=37&type=chunk) - Key VIE agreements include an Operation and IP Service Agreement, a Voting Rights Entrustment Agreement, an Equity Option Agreement, and an Equity Pledge Agreement[39](index=39&type=chunk)[40](index=40&type=chunk)[41](index=41&type=chunk) Business and Products - Core platforms include a big data security analysis system and a smart 3D security platform using advanced computer visual and perception algorithms[45](index=45&type=chunk)[46](index=46&type=chunk) - Key products are the Safe Campus Security System, Public Community Security System, and Scenic Area Security System[49](index=49&type=chunk)[51](index=51&type=chunk)[52](index=52&type=chunk) - Developed a Datasea epidemic system with specific versions for campuses and public communities to address COVID-19 needs[54](index=54&type=chunk)[55](index=55&type=chunk)[56](index=56&type=chunk) - The business model is expanding to include recurring service fees, such as for epidemic systems and big data services charging **0.38% of transaction value**[57](index=57&type=chunk)[58](index=58&type=chunk) Fiscal Year 2020 Revenue Breakdown | Revenue Source | Amount (USD) | Notes | | :--- | :--- | :--- | | Safe Campus Security Systems | $1.29 million | Revenue from 20 schools sold via agents | | Epidemic Related Systems | ~$120,000 | Revenue from 62 contracts | | **Total Revenue** | **$1.41 million** | | Competitive Strengths and Growth Strategy - **Competitive Strengths** include a talented R&D team, **30 software copyrights and 3 patents**, quality certifications, and a customer base across 40% of China's provinces[61](index=61&type=chunk)[62](index=62&type=chunk)[63](index=63&type=chunk) - **Growth Strategy** is driven by new technology, market needs, sales system enhancement, talent acquisition, and data analytics, with global expansion initiated in Africa[67](index=67&type=chunk)[68](index=68&type=chunk)[75](index=75&type=chunk) Research and Development - The company has obtained **30 software copyrights and 3 independent patents** in China, with 13 additional patent applications under review[82](index=82&type=chunk)[84](index=84&type=chunk) - Plans to invest approximately **$10 million in R&D** over the next three years, with 60% allocated to personnel salaries[86](index=86&type=chunk)[87](index=87&type=chunk) R&D Expenditure | Fiscal Year | R&D Spending (USD) | | :--- | :--- | | 2019 | $168,248 | | 2020 | $1,114,486 | Manufacturing, Market Operation, and Competition - The company uses an outsourced manufacturing model, partnering with companies like Hangzhou Tuya Technology Co, Ltd, while conducting design and quality control in-house[89](index=89&type=chunk)[91](index=91&type=chunk)[92](index=92&type=chunk) - Market presence has expanded to 13 provinces, covering about **40% of China's provincial administrative regions**[95](index=95&type=chunk)[96](index=96&type=chunk) - The company's competitive edge lies in its fusion of visual and non-visual perception algorithms, claimed to be superior to competitors[105](index=105&type=chunk)[106](index=106&type=chunk)[107](index=107&type=chunk) FY2020 Financial Snapshot | Metric | Amount (USD) | | :--- | :--- | | Operating Revenue | $1,414,780 | | Operating Cost | $146,380 | | Gross Profit | $1,268,400 | | Gross Margin | 90% | Government Regulation and Employees - Operations are subject to PRC laws, including the Cybersecurity Law and specific regulations for its Safe Campus, Scenic Area, and Smart Community systems[110](index=110&type=chunk)[111](index=111&type=chunk)[112](index=112&type=chunk) - The company's VIE, Shuhai Beijing, holds key licenses such as the National High Tech Enterprises Certificate and Value-Added Telecommunications Business Operating License[114](index=114&type=chunk) Employees by Function | Function | Number of Employees | | :--- | :--- | | Research & Development | 26 | | Marketing and Sales | 11 | | Management | 7 | | Finance & Accounting | 4 | | Other | 10 | | **Total** | **58** | [Item 1A. Risk Factors](index=26&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks related to its going concern status, VIE structure, reliance on the PRC market, and concentrated stock ownership Risks Relating to Our Business and Industry - The independent auditor's report expresses **substantial doubt about the company's ability to continue as a going concern**, citing a deficit of approximately $7.4 million[121](index=121&type=chunk) - The company relies on third-party contractors for manufacturing, exposing it to supply chain risks such as delays, cost increases, and quality control issues[124](index=124&type=chunk) - The business requires significant capital for R&D and growth, and an inability to obtain additional financing could impair operations[131](index=131&type=chunk) - The company faces heightened competition from mature companies with more resources and new entrants in the PRC security industry[135](index=135&type=chunk) - **Control deficiencies in internal control over financial reporting** may cause errors in financial statements or untimely SEC filings[140](index=140&type=chunk) Risks Relating to Our Corporate Structure - The company depends on **VIE agreements** to conduct business in the PRC, which may not be as effective as direct ownership and are subject to interpretation under PRC law[155](index=155&type=chunk)[156](index=156&type=chunk) - If PRC authorities determine the VIE contractual arrangements violate regulations, the company could face severe penalties, including the **revocation of business licenses**[163](index=163&type=chunk)[165](index=165&type=chunk) - The shareholders of the VIE are also the company's majority shareholders and executives, creating **potential conflicts of interest**[167](index=167&type=chunk)[168](index=168&type=chunk) - The company is a **'controlled company'** under NASDAQ rules because majority shareholders hold over 50% of the voting power, exempting it from certain governance requirements[171](index=171&type=chunk) Risks Associated With Doing Business in China - Changes in PRC government policies, a slowdown in the PRC economy, or worsening U.S.-China relations could adversely affect the business[173](index=173&type=chunk)[174](index=174&type=chunk)[175](index=175&type=chunk) - Fluctuations in the Renminbi exchange rate and PRC restrictions on currency conversion may limit the ability to use revenue effectively and distribute dividends[178](index=178&type=chunk)[179](index=179&type=chunk) - The PRC legal system's uncertainties could limit legal protections and make it difficult to enforce U.S. court judgments in the PRC[182](index=182&type=chunk)[184](index=184&type=chunk)[185](index=185&type=chunk) - Failure by PRC resident shareholders to comply with SAFE foreign exchange regulations could restrict profit distribution and cross-border investment[192](index=192&type=chunk)[193](index=193&type=chunk) - The **PCAOB is currently unable to inspect the audit documentation** of the company's auditor located in China, which may deprive investors of such benefits[202](index=202&type=chunk)[203](index=203&type=chunk) Risks Relating to Our an Investment in Our Common Stock - Officers and directors collectively hold approximately **71.6% of the company**, giving them control over shareholder votes and corporate actions[207](index=207&type=chunk)[208](index=208&type=chunk) - The common stock is **thinly traded**, which may limit market visibility and make it difficult for investors to buy or sell shares[209](index=209&type=chunk)[212](index=212&type=chunk)[213](index=213&type=chunk) - The stock may be considered a **'penny stock'** if it trades below $5.00 per share, subjecting it to stricter sales regulations[215](index=215&type=chunk)[216](index=216&type=chunk) - The company is **not likely to pay cash dividends** in the foreseeable future, as it intends to retain earnings for business operation and expansion[222](index=222&type=chunk) [Item 1B. Unresolved Staff Comments](index=46&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) This item is not applicable to the company - The company reports no unresolved staff comments[223](index=223&type=chunk) [Item 2. Description of Property](index=47&type=section&id=Item%202.%20Description%20of%20Property) The company leases all its office spaces and does not own any real estate, with recent expansion into Shenzhen and Hangzhou - The company leases its headquarters in Beijing, with a monthly rent of approximately **$33,100**, under a lease expiring in October 2022[224](index=224&type=chunk) - New leases were signed in August 2020 for office space in Shenzhen (monthly rent ~$29,851) and Hangzhou to support expansion[225](index=225&type=chunk)[226](index=226&type=chunk) [Item 3. Legal Proceedings](index=47&type=section&id=Item%203.%20Legal%20Proceedings) The company and its subsidiaries are not party to any material pending legal proceedings - The company reports that neither it nor its subsidiaries are a party to any material pending legal proceedings[227](index=227&type=chunk) [Item 4. Mine Safety Disclosures](index=47&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - The company reports that mine safety disclosures are not applicable[227](index=227&type=chunk) PART II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=48&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's stock trades on NASDAQ under 'DTSS', with no dividends anticipated and an unused equity incentive plan in place - Common stock began trading on the NASDAQ Capital Market under the symbol **'DTSS'** on December 18, 2018[230](index=230&type=chunk) - The company does not anticipate paying dividends in the foreseeable future and plans to retain earnings for business development[232](index=232&type=chunk) - The 2018 Equity Incentive Plan authorizes up to **4,000,000 shares** of common stock, but no awards have been granted under this plan as of the report date[234](index=234&type=chunk) [Item 6. Selected Financial Data](index=48&type=section&id=Item%206.%20Selected%20Financial%20Data) This item is not applicable to the company - The company reports that Selected Financial Data is not applicable[235](index=235&type=chunk) [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=49&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) The company generated its first significant revenue in FY2020 but saw an increased net loss due to sharply higher operating and R&D expenses Results of Operations - Revenue of **$1.41 million** in FY2020 was generated from Safe Campus security systems ($1.29 million) and customized hardware/software solutions for epidemic control ($124,000)[245](index=245&type=chunk)[247](index=247&type=chunk) - R&D expenses **increased by 562% to $1.11 million**, mainly due to increased staff and project-specific expenses[250](index=250&type=chunk) - Selling expenses **increased by 120% to $438,621**, primarily due to a payment to a service provider to develop and market an education platform[249](index=249&type=chunk) Comparison of Operations (Years ended June 30) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Revenue | $1,414,780 | $0 | | Gross Profit | $1,268,400 | $0 | | Operating Expenses | $3,173,453 | $1,499,308 | | - R&D Expenses | $1,114,486 | $168,248 | | - Selling Expenses | $438,621 | $199,485 | | - G&A Expenses | $1,620,346 | $1,131,575 | | Loss from Operations | ($1,905,053) | ($1,499,308) | | **Net Loss** | **($1,863,253)** | **($1,425,181)** | Liquidity and Capital Resources - Working capital was **$2.6 million** as of June 30, 2020, down from $4.6 million as of June 30, 2019 (excluding restricted cash)[255](index=255&type=chunk) - The increase in cash used in operations was mainly due to a higher net loss, increased prepaid expenses for R&D projects, and decreased advances from customers[260](index=260&type=chunk) - Financing activities in FY2019 were primarily driven by net proceeds from the IPO, while in FY2020 they consisted of a shareholder loan repayment[262](index=262&type=chunk) Summary of Cash Flows (Years ended June 30) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | ($4,573,352) | ($424,048) | | Net cash used in investing activities | ($306,813) | ($66,385) | | Net cash (used in) provided by financing activities | ($84,842) | $5,609,222 | [Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure](index=54&type=section&id=Item%209.%20Changes%20In%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company changed its independent registered public accounting firm in January 2020 without any disagreements on accounting principles - Wei, Wei & Co, LLP resigned as the company's auditor effective January 10, 2020[266](index=266&type=chunk) - There were **no disagreements** with the former auditor on accounting principles, financial disclosure, or auditing scope[266](index=266&type=chunk) - Morison Cogen LLP was appointed as the new independent registered public accounting firm on January 14, 2020[267](index=267&type=chunk) [Item 9A. Controls and Procedures](index=55&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal controls over financial reporting were not effective as of June 30, 2020 - Disclosure controls and procedures were deemed **not effective** as of the end of the reporting period[269](index=269&type=chunk) - A **material weakness** was identified due to the incorrect capitalization of R&D costs, requiring restatement of quarterly reports for FY2020[269](index=269&type=chunk) - Management's report on internal control over financial reporting concluded it was **not effective** as of June 30, 2020, due to weaknesses including poor segregation of duties and lack of US GAAP expertise[274](index=274&type=chunk) - Remediation steps are underway with a target completion date of June 30, 2021[271](index=271&type=chunk)[272](index=272&type=chunk) [Item 9B. Other Information](index=57&type=section&id=Item%209B.%20Other%20Information) There is no other information to report under this item - None[277](index=277&type=chunk) PART III [Item 10. Directors, Executive Officers and Corporate Governance](index=58&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) The company's board includes family members and three independent directors who comprise the Audit, Compensation, and Nomination committees - Director Fu Liu is the father of Chairman and CEO Zhixin Liu[290](index=290&type=chunk) - The Board has three independent directors: Stephen Wong, Tongjun Si, and Ling Wang[298](index=298&type=chunk) - The Audit, Compensation, and Nomination Committees are each composed entirely of independent directors, with Stephen Wong serving as the **audit committee financial expert**[291](index=291&type=chunk)[295](index=295&type=chunk)[296](index=296&type=chunk) Directors and Executive Officers | Name | Age | Position | | :--- | :--- | :--- | | Zhixin Liu | 34 | Chairman of the Board, CEO | | Jijin Zhang | 51 | Chief Financial Officer | | Fu Liu | 55 | Director | | Tongjun Si | 79 | Independent Director | | Stephen (Chun Kwok) Wong | 38 | Independent Director | | Ling Wang | 64 | Independent Director | | Chunqi Jiao | 48 | Chief Technology Officer | [Item 11. Executive Compensation](index=63&type=section&id=Item%2011.%20Executive%20Compensation) Executive compensation consists of salaries, with no equity awards granted in the last fiscal year despite an existing incentive plan - The company has an employment agreement with CEO Zhixin Liu with an annual compensation package of RMB 600,000 (approx **$90,340**)[307](index=307&type=chunk) - **No stock or option awards** were granted to executive officers in the last fiscal year from the 2018 Equity Incentive Plan[307](index=307&type=chunk)[309](index=309&type=chunk) Summary Compensation Table (Fiscal Year 2020) | Name and Principal Position | Salary ($) | Total ($) | | :--- | :--- | :--- | | Ms. Zhixin Liu, Chairman, CEO | 43,174 | 43,174 | | Jijin Zhang, CFO | 4,397 | 4,397 | | Chunqi Jiao, CTO | 19,924 | 19,924 | [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=66&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Company ownership is highly concentrated, with officers and directors as a group beneficially owning 71.6% of the common stock - Ownership is based on 20,943,846 shares of common stock outstanding as of September 16, 2020[318](index=318&type=chunk) Beneficial Ownership (as of Sep 16, 2020) | Name of Beneficial Owner | Number of Common Stock Beneficially Owned | Percent of Class Beneficially Owned | | :--- | :--- | :--- | | Zhixin Liu (CEO) | 9,583,335 | 45.75% | | Fu Liu (Director) | 5,416,668 | 25.86% | | All officers and directors as a group (seven persons) | 15,000,003 | 71.6% | [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=68&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) The company has engaged in several related party transactions, primarily loans and rental agreements with CEO Zhixin Liu - CEO Zhixin Liu provided loans for operating expenses, which were fully settled by June 30, 2020[320](index=320&type=chunk) - The company leases multiple vehicles from Ms. Liu under various rental agreements[320](index=320&type=chunk)[321](index=321&type=chunk) - The company rents an apartment and office space from Ms. Liu for its branch and subsidiary operations[321](index=321&type=chunk)[322](index=322&type=chunk)[324](index=324&type=chunk) [Item 14. Principal Accountant Fees and Services](index=69&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Total accountant fees were $67,000 in FY2020, an increase from $58,000 in FY2019, with all services pre-approved by the Board - All audit and non-audit services were reviewed and approved by the Board, which determined that the provision of these services did not impair the auditors' independence[327](index=327&type=chunk) Accountant Fees | Fee Type | 2020 | 2019 | | :--- | :--- | :--- | | Audit Fees | $50,000 | $58,000 | | Audit-Related Fees | $17,000 | $0 | | Tax Fees | $0 | $0 | | All Other Fees | $0 | $0 | | **TOTAL** | **$67,000** | **$58,000** | PART IV [Item 15. Exhibits, Financial Statement Schedules](index=70&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists all filed exhibits, including financial statements, corporate governance documents, VIE agreements, and executive certifications - The financial statements and report of the independent registered public accounting firm are included[329](index=329&type=chunk) - A list of exhibits is provided, including corporate governance documents, material contracts such as VIE agreements, and executive certifications[331](index=331&type=chunk)[333](index=333&type=chunk)[334](index=334&type=chunk) Financial Statements [Reports of Independent Registered Public Accounting Firms](index=76&type=section&id=Reports%20of%20Independent%20Registered%20Public%20Accounting%20Firms) The auditor's report for FY2020 includes a 'Going Concern' paragraph, highlighting substantial doubt about the company's ability to continue - The auditor's report for FY2020 includes a **'Going Concern' paragraph**, citing net losses and negative cash flows as factors that raise substantial doubt[343](index=343&type=chunk) - Morison Cogen LLP (FY2020) and Wei, Wei & Co, LLP (FY2019) both opined that the respective financial statements were presented fairly in conformity with U.S. GAAP[342](index=342&type=chunk)[349](index=349&type=chunk) [Consolidated Financial Statements](index=78&type=section&id=Consolidated%20Financial%20Statements) Financials show a decrease in assets and stockholders' equity, with an increased net loss of $1.86 million for FY2020 Consolidated Balance Sheet Data (as of June 30) | | 2020 | 2019 | | :--- | :--- | :--- | | **Total Assets** | **$4,913,200** | **$7,448,790** | | Cash | $1,065,936 | $6,072,637 | | **Total Liabilities** | **$1,030,764** | **$1,683,402** | | Advances from customers | $20,953 | $1,318,897 | | **Total Stockholders' Equity** | **$3,882,436** | **$5,765,388** | Consolidated Statement of Operations Data (for the year ended June 30) | | 2020 | 2019 | | :--- | :--- | :--- | | Revenues | $1,414,780 | $0 | | Gross Profit | $1,268,400 | $0 | | **Net Loss** | **($1,863,253)** | **($1,425,181)** | | Net Loss Per Share | ($0.09) | ($0.07) | [Notes to Consolidated Financial Statements](index=83&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Key notes detail the 'Going Concern' uncertainty, VIE structure, revenue recognition, related party transactions, and a full valuation allowance on NOLs - **Going Concern (Note 2):** The financial statements were prepared assuming the company will continue as a going concern, but **net losses ($1.86M), an accumulated deficit ($7.41M), and negative operating cash flow ($4.57M)** raise substantial doubt[373](index=373&type=chunk)[374](index=374&type=chunk) - **VIE Structure (Note 2):** The company consolidates its operating entity, Shuhai Beijing, as a VIE and details the contractual agreements that provide control[377](index=377&type=chunk)[380](index=380&type=chunk)[381](index=381&type=chunk) - **Revenue Recognition (Note 2 & 7):** The company adopted ASC 606 and recognized **$1.29 million** in revenue in June 2020 from two sales agent contracts for its Safe Campus system[407](index=407&type=chunk)[443](index=443&type=chunk) - **Related Party Transactions (Note 8):** The company engaged in several transactions with its President, Zhixin Liu, including interest-free loans (repaid in FY2020), car rentals, and an apartment lease[446](index=446&type=chunk)[447](index=447&type=chunk)[448](index=448&type=chunk) - **Income Taxes (Note 10):** The company has significant Net Operating Loss (NOL) carryforwards of approximately **$5.68 million** and has established a full valuation allowance against deferred tax assets[459](index=459&type=chunk)[464](index=464&type=chunk) - **Subsequent Events (Note 13):** In August 2020, the company formed a new subsidiary and entered into new office lease agreements in Shenzhen and Hangzhou[481](index=481&type=chunk)

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, 2020 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 333-202071 | --- | --- | |------------------------------------------------------------------------------|------------------------------------------| | (Exact name of registrant as ...

FORM 10-Q General Information [Company Identification and Filing Details](index=1&type=section&id=Company%20Identification%20and%20Filing%20Details) Datasea Inc.'s 10-Q report details company identification, filing status, incorporation, principal offices, stock ticker, and company type - Datasea Inc. filed its 10-Q quarterly report for the period ended December 31, 2019[1](index=1&type=chunk) - The company is incorporated in Nevada with its principal executive offices located in Beijing, China[2](index=2&type=chunk) Company Stock Information and Filing Status | Metric | Details | | :--- | :--- | | Ticker Symbol | DTSS | | Registered Exchange | NASDAQ Capital Market | | Filing Company Type | Smaller reporting company | | Filing Company Type | Emerging growth company | | Common Stock Outstanding (as of Feb 14, 2020) | 20,943,846 shares | TABLE OF CONTENTS [Report Structure Overview](index=3&type=section&id=Report%20Structure%20Overview) This section outlines the 10-Q report's official table of contents, detailing its two main parts: financial information and other information - The report is divided into two main parts: Part I for financial information and Part II for other information[6](index=6&type=chunk) - Part I, Financial Information, includes financial statements, management's discussion and analysis of financial condition and results of operations, market risk disclosures, and controls and procedures[6](index=6&type=chunk) - Part II, Other Information, covers legal proceedings, risk factors, unregistered sales of equity securities, defaults on senior securities, mine safety disclosures, other information, and exhibits[6](index=6&type=chunk) PART I – FINANCIAL INFORMATION [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This chapter presents Datasea Inc.'s unaudited condensed consolidated financial statements for the quarter ended December 31, 2019, along with their detailed notes [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets and stockholders' equity decreased as of December 31, 2019, driven by reduced cash and increased operating lease and intangible asset liabilities Total Assets Change | Date | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 7,168,043 | | June 30, 2019 | 7,448,790 | | **Change** | **(280,747)** | | **Percentage Change** | **-3.77%** | Cash Change | Date | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 2,804,740 | | June 30, 2019 | 6,072,637 | | **Change** | **(3,267,897)** | | **Percentage Change** | **-53.81%** | Total Liabilities Change | Date | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 2,562,297 | | June 30, 2019 | 1,683,402 | | **Change** | **878,895** | | **Percentage Change** | **52.21%** | Stockholders' Equity Change | Date | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 4,605,746 | | June 30, 2019 | 5,765,388 | | **Change** | **(1,159,642)** | | **Percentage Change** | **-20.11%** | - Net intangible assets significantly increased from **$555,811** as of June 30, 2019, to **$1,951,504** as of December 31, 2019[11](index=11&type=chunk) - Operating lease liabilities of **$579,475** (current) and **$535,417** (non-current) were added as of December 31, 2019, due to the adoption of ASU 2016-02[11](index=11&type=chunk) [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) The company generated no revenue, resulting in a gross loss, with net loss significantly increasing due to higher operating expenses, particularly general and administrative costs - For the three and six months ended December 31, 2019, the company reported **$0** in revenue[13](index=13&type=chunk) Net Loss (Three Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | (751,032) | | December 31, 2018 | (379,712) | | **Change** | **(371,320)** | | **Loss Increase Percentage** | **97.79%** | Net Loss (Six Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | (1,148,018) | | December 31, 2018 | (743,937) | | **Change** | **(404,081)** | | **Loss Increase Percentage** | **54.32%** | - General and administrative expenses increased by **131.6%** from **$275,582** in 2018 to **$638,157** for the three months ended December 31, 2019[13](index=13&type=chunk) - Research and development expenses increased by **68.2%** from **$41,114** in 2018 to **$69,158** for the three months ended December 31, 2019[13](index=13&type=chunk) - Basic and diluted net loss per share increased from **($0.02)** in 2018 to **($0.04)** for the three months ended December 31, 2019[13](index=13&type=chunk) [Condensed Consolidated Statements of Changes In Stockholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Changes%20In%20Stockholders'%20Equity) Total stockholders' equity decreased from **$5,765,388** on June 30, 2019, to **$4,605,746** on December 31, 2019, primarily due to net loss and foreign currency translation adjustments Total Stockholders' Equity Change | Date | Amount ($) | | :------------- | :--------- | | June 30, 2019 | 5,765,388 | | December 31, 2019 | 4,605,746 | | **Change** | **(1,159,642)** | | **Percentage Change** | **-20.11%** | - Accumulated deficit increased from **($5,550,128)** on June 30, 2019, to **($6,698,145)** on December 31, 2019, reflecting accumulated net losses[14](index=14&type=chunk) - Foreign currency translation adjustments resulted in a **($18,238)** loss for the three months ended December 31, 2019, reducing comprehensive income[14](index=14&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash significantly decreased for the six months ended December 31, 2019, primarily due to increased outflows from operating and investing activities, contrasting with prior year's net inflows from financing Net Cash Outflow from Operating Activities (Six Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | (1,572,243) | | December 31, 2018 | (794,846) | | **Change** | **(777,397)** | | **Cash Outflow Increase Percentage** | **97.81%** | Net Cash Outflow from Investing Activities (Six Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | (1,608,538) | | December 31, 2018 | (30,337) | | **Change** | **(1,578,201)** | | **Cash Outflow Increase Percentage** | **5202.2%** | Net Cash from Financing Activities (Six Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | (84,227) | | December 31, 2018 | 5,038,638 | | **Trend** | **Shift from cash inflow to outflow** | Net (Decrease) Increase in Cash (Six Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | (3,267,897) | | December 31, 2018 | 4,242,022 | | **Trend** | **Shift from significant cash increase to decrease** | - The ending cash balance decreased from **$5,273,508** on December 31, 2018, to **$2,804,740** on December 31, 2019[16](index=16&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed disclosures and explanations for the condensed consolidated financial statements, covering organization, accounting policies, asset and liability details, related party transactions, income taxes, commitments, and subsequent events [NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS](index=9&type=section&id=NOTE%201%20%E2%80%93%20ORGANIZATION%20AND%20DESCRIPTION%20OF%20BUSINESS) Datasea Inc., incorporated in Nevada in 2014, underwent a reverse merger in 2015 with Shuhai Skill (HK) becoming the accounting survivor, and now primarily provides smart security solutions in China, recently expanding with new subsidiaries for technology development and market growth - Datasea Inc. was incorporated in Nevada on September 26, 2014[17](index=17&type=chunk) - On October 29, 2015, the company acquired Shuhai Skill (HK) and its subsidiaries, including its VIE Shuhai Beijing, through a share exchange agreement, treated as a reverse merger[18](index=18&type=chunk) - The company primarily provides smart security solutions for schools, tourist attractions, and public communities in China[19](index=19&type=chunk) - On October 16, 2019, Shuhai Beijing established a wholly-owned subsidiary, Heilongjiang Xunrui Technology Co., Ltd., to focus on developing and marketing smart security system products[20](index=20&type=chunk) - On December 3, 2019, Shuhai Beijing established Nanjing Shuhai Equity Investment Fund Management Co., Ltd., a 99% owned joint venture, to secure government and private funding for new technology development and project incubation[20](index=20&type=chunk) [NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=9&type=section&id=NOTE%202%20%E2%80%93%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This note details the accounting principles and methods used for financial statement preparation, including consolidation, VIE treatment, estimates, cash, inventory, property, intangibles, revenue recognition, income tax policies, and recent accounting updates [BASIS OF PRESENTATION AND CONSOLIDATION](index=9&type=section&id=BASIS%20OF%20PRESENTATION%20AND%20CONSOLIDATION) The unaudited financial statements are prepared according to SEC regulations and consolidate the company, its wholly-owned subsidiaries (Shuhai Skill (HK), Tianjin Information), and its Variable Interest Entity (Shuhai Beijing) and its subsidiaries - The consolidated financial statements include the company and its 100% owned subsidiaries Shuhai Skill (HK), Tianjin Information, and its VIE Shuhai Beijing and its subsidiaries[21](index=21&type=chunk) - The financial statements are unaudited, prepared in accordance with SEC rules and regulations, and reflect all adjustments management deems necessary for a fair presentation of operating results[22](index=22&type=chunk) [VARIABLE INTEREST ENTITY (VIE)](index=10&type=section&id=VARIABLE%20INTEREST%20ENTITY%20(VIE)) The company consolidates Shuhai Beijing as a Variable Interest Entity (VIE) because it is deemed the primary beneficiary, holding the ability to direct its activities and the right to absorb losses or receive benefits through various contractual agreements - The company is required to consolidate Shuhai Beijing as a VIE in its financial statements under FASB ASC Section 810, "Consolidation"[23](index=23&type=chunk) - The company is considered the primary beneficiary of Shuhai Beijing, possessing the ability to direct its economic performance activities and the obligation to absorb losses or receive benefits[24](index=24&type=chunk)[25](index=25&type=chunk) - **Operating and Intellectual Property Service Agreement:** Allows Tianjin Information to manage and operate Shuhai Beijing and collect 100% of its net profits[26](index=26&type=chunk) - **Shareholder Voting Rights Proxy Agreement:** Shuhai Beijing shareholders (Zhixin Liu and Fu Liu) irrevocably delegated their voting rights to Tianjin Information, with no expiration date[27](index=27&type=chunk) - **Equity Option Agreement:** Shuhai Beijing shareholders granted Tianjin Information an irrevocable right to acquire all or part of Shuhai Beijing's equity at a nominal price[33](index=33&type=chunk) - **Equity Pledge Agreement:** Shuhai Beijing shareholders pledged all their equity in Shuhai Beijing to Tianjin Information to secure their performance under other agreements[34](index=34&type=chunk) VIE Financial Data (as of December 31, 2019) | Metric | Amount ($) | | :---------------- | :--------- | | Current Assets | 209,493 | | Non-Current Assets | 306,270 | | Total Assets | 515,764 | | Current Liabilities | 5,940,253 | | Non-Current Liabilities | - | | Total Liabilities | 5,940,253 | [USE OF ESTIMATES](index=11&type=section&id=USE%20OF%20ESTIMATES) Financial statement preparation requires management estimates and assumptions, particularly for asset useful lives, employee benefits, deferred income taxes, and valuation allowances, where actual results may differ significantly - Management must make estimates and assumptions in preparing financial statements, particularly regarding the estimated useful lives and salvage values of property, plant, and equipment, employee benefit provisions, recognition and measurement of deferred income taxes, and valuation allowances for deferred tax assets[37](index=37&type=chunk) - Actual results may differ from these estimates, and such differences could materially impact the condensed consolidated financial statements[37](index=37&type=chunk) [CONTINGENCIES](index=12&type=section&id=CONTINGENCIES) The company assesses potential losses from legal proceedings or unasserted claims, and as of December 31, 2019, and June 30, 2019, no material contingencies were identified - Company management and legal counsel assess contingent liabilities related to legal proceedings or unasserted claims[38](index=38&type=chunk) - If an assessment indicates a high probability of material loss and the amount can be estimated, an estimated liability is accrued; if not probable but reasonably possible, or probable but not estimable, its nature and possible loss range are disclosed[38](index=38&type=chunk)[39](index=39&type=chunk) - As of December 31, 2019, and June 30, 2019, the company had no such contingencies[39](index=39&type=chunk) [CASH AND CASH EQUIVALENTS](index=12&type=section&id=CASH%20AND%20CASH%20EQUIVALENTS) Cash and cash equivalents include cash on hand, demand deposits, and highly liquid short-term cash investments with original maturities of three months or less - Cash and cash equivalents include cash on hand, demand deposits, and highly liquid short-term cash investments with original maturities of three months or less[40](index=40&type=chunk) [INVENTORY](index=12&type=section&id=INVENTORY) Inventory, primarily smart student ID cards and routers for "Safe Campus" products, is valued at the lower of cost or net realizable value using the first-in, first-out method, with no impairment recorded as of December 31, 2019, and June 30, 2019 - Inventory primarily consists of smart student ID cards and routers for installation, related to the company's "Safe Campus" security products[41](index=41&type=chunk) - Inventory is valued at the lower of cost or net realizable value, using the first-in, first-out method[41](index=41&type=chunk) - No inventory impairment was recorded as of December 31, 2019, and June 30, 2019[41](index=41&type=chunk) [ESCROW](index=12&type=section&id=ESCROW) A **$600,000** cash amount in escrow serves as an indemnification escrow account, required by the company's IPO underwriter's financing agreement, for a term of 18 months or longer following the IPO's closing on December 21, 2018 - An escrow account holds **$600,000** in cash[42](index=42&type=chunk) - These funds are an indemnification escrow account required by the company's IPO underwriter's financing agreement[42](index=42&type=chunk) - The escrow term is 18 months or longer following the IPO's closing on December 21, 2018[42](index=42&type=chunk) [PROPERTY AND EQUIPMENT](index=12&type=section&id=PROPERTY%20AND%20EQUIPMENT) Property and equipment are stated at cost less accumulated depreciation, with depreciation calculated using the straight-line method over estimated useful lives of 3 to 10 years, and leasehold improvements depreciated over their estimated useful lives or the shorter remaining lease term - Property and equipment are stated at cost less accumulated depreciation[43](index=43&type=chunk) - Depreciation is calculated using the straight-line method over estimated useful lives[43](index=43&type=chunk) Estimated Useful Lives for Property and Equipment | Asset Type | Useful Life | | :------------- | :--------- | | Furniture and Fixtures | 5-10 years | | Office Equipment | 3-5 years | | Vehicles | 5 years | | Leasehold Improvements | 3 years | - Leasehold improvements are depreciated using the straight-line method over their estimated useful lives or the shorter remaining lease term[46](index=46&type=chunk) [INTANGIBLE ASSETS](index=13&type=section&id=INTANGIBLE%20ASSETS) Intangible assets with finite useful lives, including licenses, certificates, patents, and other technologies, are amortized using the straight-line method over their estimated benefit periods of five to ten years, with no impairment identified as of the balance sheet date - Intangible assets with finite useful lives are amortized using the straight-line method over their estimated benefit periods[47](index=47&type=chunk) - The estimated useful lives for intangible assets range from five to ten years[47](index=47&type=chunk) - Intangible assets include licenses, certificates, patents, and other technologies[47](index=47&type=chunk) - No impairment of intangible assets was identified as of the balance sheet date[47](index=47&type=chunk) [FAIR VALUE MEASUREMENTS AND DISCLOSURES](index=13&type=section&id=FAIR%20VALUE%20MEASUREMENTS%20AND%20DISCLOSURES) The company applies FASB ASC Topic 820, "Fair Value Measurement," which establishes a three-level valuation hierarchy, and due to the short-term nature of financial instruments, their carrying values approximate fair values, with no assets or liabilities requiring recurring fair value presentation identified as of December 31, 2019, and June 30, 2019 - The company follows FASB ASC Topic 820, "Fair Value Measurement," which defines fair value and establishes a three-level valuation hierarchy[48](index=48&type=chunk) - Level 1 inputs: Quoted prices (unadjusted) in active markets for identical assets or liabilities[48](index=48&type=chunk) - Level 2 inputs: Quoted prices for similar assets and liabilities in active markets, and inputs that are observable, either directly or indirectly, for substantially the full term of the financial instrument[48](index=48&type=chunk) - Level 3 inputs: Unobservable inputs that are significant to the fair value measurement[48](index=48&type=chunk) - As of December 31, 2019, and June 30, 2019, the company did not identify any assets or liabilities that are required to be presented at fair value on a recurring basis[49](index=49&type=chunk) [IMPAIRMENT OF LONG-LIVED ASSETS](index=13&type=section&id=IMPAIRMENT%20OF%20LONG-LIVED%20ASSETS) The company reviews long-lived assets for impairment when events or circumstances indicate that the carrying amount may not be recoverable, measuring impairment as the excess of the asset's carrying amount over its fair value, with no impairment losses recognized during the reporting period - In accordance with FASB ASC 360-10, the company reviews long-lived assets for impairment when events or circumstances indicate that the carrying amount of an asset may not be recoverable[50](index=50&type=chunk) - The impairment amount is measured as the excess of the asset's carrying amount over its fair value[50](index=50&type=chunk) - No impairment losses on long-lived assets were recognized during the reporting period[50](index=50&type=chunk) [REVENUE RECOGNITION](index=14&type=section&id=REVENUE%20RECOGNITION) The company adopted ASC 606 on July 1, 2018, recognizing revenue when control of goods and services transfers to customers, typically at a point in time upon delivery, with no significant change in revenue recognition patterns compared to previous standards - The company adopted Accounting Standards Update (ASU) 2014-09, "Revenue from Contracts with Customers" (ASC 606), on July 1, 2018[52](index=52&type=chunk) - The core principle is to recognize revenue when control of promised goods or services is transferred to customers, in an amount that reflects the consideration the company expects to be entitled to[53](index=53&type=chunk) - The company's revenue streams are recognized at a point in time when all performance obligations are satisfied and collection is reasonably assured[53](index=53&type=chunk)[55](index=55&type=chunk) - The adoption of ASC 606 did not result in a significant change in the company's revenue recognition patterns[54](index=54&type=chunk) [INCOME TAXES (Accounting Policy)](index=14&type=section&id=INCOME%20TAXES%20(Accounting%20Policy)) The company accounts for income taxes using the balance sheet method under ASC Topic 740, recognizing current and deferred tax effects, with a valuation allowance provided for deferred tax assets if realization is unlikely, and no significant uncertain tax positions identified - The company accounts for income taxes using the balance sheet method under ASC Topic 740, "Income Taxes"[56](index=56&type=chunk) - Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income, and a valuation allowance is provided for deferred tax assets if their realization is not probable[56](index=56&type=chunk) - The company had no significant uncertain tax positions for all periods presented[57](index=57&type=chunk) [RESEARCH AND DEVELOPMENT EXPENSES (Accounting Policy)](index=15&type=section&id=RESEARCH%20AND%20DEVELOPMENT%20EXPENSES%20(Accounting%20Policy)) Research and development expenses are recognized as incurred, increasing for both the three and six months ended December 31, 2019, compared to the prior year periods - Research and development expenses are recognized as incurred[59](index=59&type=chunk) Research and Development Expenses (Three Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 69,158 | | December 31, 2018 | 41,114 | | **Change** | **28,044** | | **Percentage Change** | **68.21%** | Research and Development Expenses (Six Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 120,365 | | December 31, 2018 | 103,885 | | **Change** | **16,480** | | **Percentage Change** | **15.86%** | [CONCENTRATION OF CREDIT RISK](index=15&type=section&id=CONCENTRATION%20OF%20CREDIT%20RISK) The company holds cash in Chinese state-owned banks with limited insurance coverage, and a significant portion of cash held in US and Hong Kong financial institutions is also uninsured - The company holds cash in Chinese state-owned banks, with amounts below **RMB 500,000** (approximately **$71,806**) covered by insurance[60](index=60&type=chunk) - As of December 31, 2019, **$67,806** in RMB cash held in Chinese financial institutions and approximately **$279,500** in cash held in US financial institutions were uninsured[61](index=61&type=chunk) - As of December 31, 2019, approximately **$2,143,000** in cash held in Hong Kong financial institutions was uninsured (Hong Kong Deposit Protection Board limit is **HK$500,000**, approximately **$64,000**)[61](index=61&type=chunk) [FOREIGN CURRENCY TRANSLATION AND COMPREHENSIVE INCOME (LOSS)](index=15&type=section&id=FOREIGN%20CURRENCY%20TRANSLATION%20AND%20COMPREHENSIVE%20INCOME%20(LOSS)) Financial statements are prepared by converting Chinese entity accounts (RMB) to USD, with assets and liabilities translated at period-end rates, equity at historical rates, and operations and cash flows at weighted-average rates, with translation adjustments reported in other comprehensive income (loss) - Chinese entity accounts (RMB) are translated into USD, with assets and liabilities translated at the balance sheet date exchange rate, stockholders' equity at historical rates, and operations and cash flows at the weighted-average exchange rate for the period[62](index=62&type=chunk) - Resulting translation adjustments are reported in other comprehensive income (loss)[62](index=62&type=chunk) USD to RMB Exchange Rates | Date | Period-End Rate | Average Rate | | :------------- | :--------- | :--------- | | December 31, 2019 | 6.9632 | 7.0711 | | December 31, 2018 | 6.8764 | 6.8587 | | June 30, 2019 | 6.8668 | 6.8263 | [RECENT ACCOUNTING PRONOUNCEMENTS](index=15&type=section&id=RECENT%20ACCOUNTING%20PRONOUNCEMENTS) The company adopted ASU 2016-02 (Leases) on July 1, 2019, recognizing right-of-use assets and operating lease liabilities, and is evaluating the impact of ASU 2018-13 (Fair Value Measurement) and ASU 2019-05 (Credit Losses), both effective August 1, 2020, while other recent pronouncements are not expected to materially impact consolidated financial statements - The company adopted ASU 2016-02, "Leases," on July 1, 2019, resulting in the recording of right-of-use assets and operating lease liabilities[64](index=64&type=chunk) - The company is evaluating the impact of ASU 2018-13, "Fair Value Measurement," and ASU 2019-05, "Financial Instruments—Credit Losses," both effective August 1, 2020[67](index=67&type=chunk)[68](index=68&type=chunk) - Management believes other recently issued accounting pronouncements not yet effective, if currently adopted, would not have a material impact on the consolidated financial statements[69](index=69&type=chunk) [NOTE 3 – PROPERTY AND EQUIPMENT (Details)](index=17&type=section&id=NOTE%203%20%E2%80%93%20PROPERTY%20AND%20EQUIPMENT%20(Details)) Net property and equipment significantly increased from **$41,116** on June 30, 2019, to **$242,458** on December 31, 2019, primarily due to additions in leasehold improvements and office equipment, with depreciation expenses of **$4,490** and **$9,707** for the three and six months ended December 31, 2019, respectively Net Property and Equipment Change | Date | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 242,458 | | June 30, 2019 | 41,116 | | **Change** | **201,342** | | **Percentage Change** | **489.69%** | - Leasehold improvements increased from **$0** to **$126,607**[72](index=72&type=chunk) - Office equipment increased from **$54,641** to **$129,795**[72](index=72&type=chunk) Depreciation Expense (Three Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 4,490 | | December 31, 2018 | 6,186 | | **Change** | **(1,696)** | | **Percentage Change** | **-27.42%** | Depreciation Expense (Six Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 9,707 | | December 31, 2018 | 17,631 | | **Change** | **(7,924)** | | **Percentage Change** | **-44.94%** | [NOTE 4 – INTANGIBLE ASSETS (Details)](index=17&type=section&id=NOTE%204%20%E2%80%93%20INTANGIBLE%20ASSETS%20(Details)) Net intangible assets significantly increased from **$555,811** on June 30, 2019, to **$1,951,504** on December 31, 2019, primarily due to substantial investments in technology development, including **$1,000,000** for security software (not yet started) and **$900,000** for eye protection technology (ongoing) Net Intangible Assets Change | Date | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 1,951,504 | | June 30, 2019 | 555,811 | | **Change** | **1,395,693** | | **Percentage Change** | **251.19%** | - Technology development expenditures increased from **$500,000** on June 30, 2019, to **$1,900,000** on December 31, 2019[74](index=74&type=chunk) - **$1,000,000** was paid to SDT Trade Co., Ltd. for security-related software and system development, which has not yet commenced[74](index=74&type=chunk) - **$900,000** was paid to HW (HK) Limited for eye protection technology system development, which is currently in progress[75](index=75&type=chunk) Amortization Expense (Three Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 1,726 | | December 31, 2018 | 806 | | **Change** | **920** | | **Percentage Change** | **114.14%** | Amortization Expense (Six Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 3,479 | | December 31, 2018 | 1,618 | | **Change** | **1,861** | | **Percentage Change** | **115.02%** | [NOTE 5 – PREPAID EXPENSES AND OTHER CURRENT ASSETS](index=18&type=section&id=NOTE%205%20%E2%80%93%20PREPAID%20EXPENSES%20AND%20OTHER%20CURRENT%20ASSETS) Prepaid expenses and other current assets significantly increased from **$105,932** on June 30, 2019, to **$253,621** on December 31, 2019, primarily due to higher prepaid expenses and advances Total Prepaid Expenses and Other Current Assets Change | Date | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 253,621 | | June 30, 2019 | 105,932 | | **Change** | **147,689** | | **Percentage Change** | **139.42%** | - Prepaid expenses and advances increased from **$34,181** to **$194,027**[78](index=78&type=chunk) [NOTE 6 – ACCRUED EXPENSES AND OTHER PAYABLES](index=18&type=section&id=NOTE%206%20%E2%80%93%20ACCRUED%20EXPENSES%20AND%20OTHER%20PAYABLES) Accrued expenses and other payables significantly decreased from **$264,684** on June 30, 2019, to **$93,996** on December 31, 2019, mainly due to reduced payroll and other payables, and the elimination of deposits Total Accrued Expenses and Other Payables Change | Date | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 93,996 | | June 30, 2019 | 264,684 | | **Change** | **(170,688)** | | **Percentage Change** | **-64.49%** | - Payroll and other payables decreased from **$234,159** to **$93,996**[80](index=80&type=chunk) - Deposits decreased from **$30,525** to **$0**[80](index=80&type=chunk) [NOTE 7 – ADVANCES FROM CUSTOMERS](index=18&type=section&id=NOTE%207%20%E2%80%93%20ADVANCES%20FROM%20CUSTOMERS) As of December 31, 2019, the company recorded **$1,300,638** in advances from customers, a slight decrease from **$1,318,897** on June 30, 2019, related to payments from sales agents for the "Safe Campus Management System," with revenue to be recognized upon product and service sales to third parties Advances from Customers Change | Date | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 1,300,638 | | June 30, 2019 | 1,318,897 | | **Change** | **(18,259)** | | **Percentage Change** | **-1.38%** | - Advances are from two sales agents for marketing the company's "Safe Campus Management System"[81](index=81&type=chunk) - Revenue will be recognized when sales agents sell products and services to third parties[81](index=81&type=chunk) [NOTE 8 – RELATED PARTY TRANSACTIONS](index=18&type=section&id=NOTE%208%20%E2%80%93%20RELATED%20PARTY%20TRANSACTIONS) The company engaged in several related party transactions with President Zhixin Liu and his father Fu Liu, including repayment of shareholder loans, car and apartment lease agreements, and a short-term interest-free loan - Shareholder loans payable (President Zhixin Liu) decreased from **$86,733** on June 30, 2019, to **$0** on December 31, 2019, having been repaid[82](index=82&type=chunk) - A car lease agreement with the President, with monthly rent of approximately **$707**, was renewed until December 31, 2020[82](index=82&type=chunk) - An apartment lease agreement with the President, with annual rent of approximately **$2,828**, was renewed until April 30, 2020[83](index=83&type=chunk) - An interest-free loan of **RMB 400,000** (approximately **$57,000**) was borrowed from the President in April 2019 for operating expenses and repaid in July 2019[83](index=83&type=chunk) [NOTE 9 – INCOME TAXES (Details)](index=19&type=section&id=NOTE%209%20%E2%80%93%20INCOME%20TAXES%20(Details)) The company incurred Net Operating Losses (NOLs) in both reporting periods, resulting in no US federal income tax provision, and despite enjoying a 15% corporate income tax rate in China as a high-tech enterprise, a full valuation allowance has been recorded against deferred tax assets due to significant uncertainty regarding future NOL realization - No US federal income tax provision was recorded for the three and six months ended December 31, 2019, due to losses incurred by US entities[84](index=84&type=chunk) - The company, as a high-tech enterprise, enjoys a **15%** corporate income tax rate in China[84](index=84&type=chunk) Net Operating Losses (NOLs) | Period | Amount ($) | | :------------- | :--------- | | Three months ended December 31, 2019 | 751,032 | | Three months ended December 31, 2018 | 379,712 | | Six months ended December 31, 2019 | 1,148,018 | | Six months ended December 31, 2018 | 743,937 | - As of December 31, 2019, the company had NOLs of approximately **$860,820** related to its Chinese subsidiaries and VIE, expiring between 2019 and 2023[85](index=85&type=chunk) - Due to significant uncertainty regarding the future realization of deferred tax assets, the company has recorded a full valuation allowance, resulting in **$0** net deferred tax assets as of December 31, 2019, and 2018[85](index=85&type=chunk)[91](index=91&type=chunk) - The effective tax rate for all periods presented is **0%** due to the valuation allowance[87](index=87&type=chunk) [NOTE 10 – COMMIMENTS (Lease Agreement Details)](index=20&type=section&id=NOTE%2010%20%E2%80%93%20COMMIMENTS%20(Lease%20Agreement%20Details)) The company entered new operating lease agreements in 2019, including a one-year dormitory lease and a three-year Beijing office lease, resulting in the recognition of **$1,114,892** in right-of-use assets and corresponding operating lease liabilities, with total future minimum lease payments of **$1,114,892**, a weighted-average remaining lease term of **2.33 years**, and a discount rate of **4.75%** - A one-year operating lease agreement for senior management dormitory was signed on March 20, 2019, with monthly rent of approximately **$735**[92](index=92&type=chunk) - A three-year operating lease agreement for Beijing office space (October 2019 to October 2022) was signed on July 30, 2019, with monthly rent of approximately **$32,000**, requiring a three-month rent deposit and including a six-month rent-free period[93](index=93&type=chunk) - A property service agreement for the Beijing office was signed on July 30, 2019, with quarterly fees of approximately **$29,000**, for a term until October 2022[93](index=93&type=chunk) Impact of Operating Leases on Balance Sheet (as of December 31, 2019) | Metric | Amount ($) | | :---------------- | :--------- | | Right-of-Use Assets | 1,114,892 | | Lease Liabilities (Current) | 579,475 | | Lease Liabilities (Non-Current) | 535,417 | - Weighted-average remaining lease term: **2.33 years**[95](index=95&type=chunk) - Weighted-average discount rate: **4.75%**[95](index=95&type=chunk) Total Future Minimum Lease Payments (as of December 31, 2019) | Period | Minimum Lease Payments ($) | | :---------------- | :--------- | | Twelve months ending December 31, 2020 | 465,868 | | 2021 | 485,669 | | 2022 | 163,355 | | **Total Minimum Payments** | **1,114,892** | [NOTE 11 – SUBSEQUENT EVENTS](index=21&type=section&id=NOTE%2011%20%E2%80%93%20SUBSEQUENT%20EVENTS) The company evaluated subsequent events and transactions up to the financial statement issuance date and found no items requiring adjustment or disclosure - The company evaluated subsequent events up to the financial statement issuance date and found no items requiring adjustment or disclosure[98](index=98&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation](index=22&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operation) This section provides management's perspective on the company's financial performance and condition, including forward-looking statements, business overview, recent developments, detailed analysis of operating results, and a discussion of liquidity and capital resources [Cautionary Note Regarding Forward-Looking Statements](index=22&type=section&id=Cautionary%20Note%20Regarding%20Forward-Looking%20Statements) This section warns readers that the report contains forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from projections, advising against undue reliance on these statements based on current management expectations and assumptions - The report contains forward-looking statements, including projections regarding earnings, revenue, future operations, new services, economic conditions, and beliefs[101](index=101&type=chunk) - Actual results may differ materially from forward-looking statements due to known and unknown risks, uncertainties, and other factors[101](index=101&type=chunk) - The company undertakes no obligation to update any forward-looking statements, except as required by federal securities laws[102](index=102&type=chunk) - Factors influencing actual results include: ability to establish and operate businesses and generate revenue, uncertainties in China's economic/political and business conditions, changes in industry trends and product/service demand, timing of customer plans and orders, changes in advertising patterns and pricing policies, unexpected delays in product/service development/market acceptance/installation, changes in Chinese government regulations, and capital availability/terms and deployment, and relationships with third-party equipment suppliers[103](index=103&type=chunk) [Overview (Business Description)](index=22&type=section&id=Overview%20(Business%20Description)) Datasea Inc., founded in 2014 and reverse-merged with Shuhai Skill (HK) in 2015, primarily offers internet security products, new media advertising, micro-marketing, and data analysis services in China, completed its IPO in 2018 raising **$5.7 million**, and sees attractive growth opportunities in the Chinese security equipment market - Datasea Inc. was incorporated in Nevada on September 26, 2014, and changed its name to Datasea Inc. on May 27, 2015[104](index=104&type=chunk) - On October 29, 2015, the company acquired Shuhai Skill (HK) and its subsidiaries and VIE through a share exchange agreement, with Shuhai Skill (HK) becoming the accounting survivor[106](index=106&type=chunk) - The company primarily engages in internet security products and equipment, new media advertising, micro-marketing, and data analysis services in China[107](index=107&type=chunk) - On December 21, 2018, the company completed its IPO, listing on the NASDAQ Capital Market and raising approximately **$5.7 million** in net proceeds[110](index=110&type=chunk) - The company believes the growing demand for security equipment and related products in China offers attractive opportunities for its business development[112](index=112&type=chunk) [Recent Developments](index=24&type=section&id=Recent%20Developments) Datasea Inc. expanded its operations through the establishment of Heilongjiang Xunrui Technology for R&D, a joint venture (Nanjing Shuhai) for new technology funding, and the gratuitous acquisition of three entities (Guozhong Shidai, Guohao Shiji, Guozhong Heze) to broaden business, explore acquisitions, and further develop smart security products, while also noting the potential adverse impact of the Wuhan coronavirus outbreak on its business and liquidity - On October 16, 2019, Shuhai Beijing established a wholly-owned subsidiary, Heilongjiang Xunrui Technology Co., Ltd., focusing on R&D of new technologies and products[113](index=113&type=chunk) - On December 3, 2019, Shuhai Beijing established Nanjing Shuhai Equity Investment Fund Management Co., Ltd., a 99% owned joint venture, to secure government and private funding for new technology development and project incubation[113](index=113&type=chunk) - In January 2020, the company gratuitously acquired three entities established by management for the company: Guozhong Shidai (to expand business), Guohao Shiji (to explore potential acquisition targets), and Guozhong Heze (to further develop and market smart security system products)[114](index=114&type=chunk)[115](index=115&type=chunk) - The company noted that the Wuhan coronavirus outbreak could lead to a prolonged economic slowdown in China, significantly impacting its business and revenue, and potentially raising substantial doubt about its ability to continue as a going concern[116](index=116&type=chunk) [Results of Operations](index=24&type=section&id=Results%20of%20Operations) The company generated no revenue for the three and six months ended December 31, 2019, leading to a significant increase in net loss due to rising operating expenses, particularly a **131.6%** increase in general and administrative expenses and a **68.2%** increase in R&D expenses for the three-month period [Revenue](index=24&type=section&id=Revenue) The company generated no revenue for the three and six months ended December 31, 2019, or for the corresponding periods in 2018 - For the three and six months ended December 31, 2019, and December 31, 2018, the company's revenue was **$0**[117](index=117&type=chunk) [Cost of Goods and Gross Profit](index=24&type=section&id=Cost%20of%20Goods%20and%20Gross%20Profit) For the three and six months ended December 31, 2019, the company recorded **$194** in cost of goods sold and a **$194** gross loss, compared to **$0** for the prior year periods - For the three and six months ended December 31, 2019, cost of goods sold was **$194**, compared to **$0** for the corresponding periods in 2018[117](index=117&type=chunk) - For the three and six months ended December 31, 2019, gross loss was **$194**, compared to **$0** for the corresponding periods in 2018[117](index=117&type=chunk) [Selling, General and Administrative Expenses](index=24&type=section&id=Selling,%20General%20and%20Administrative%20Expenses) Selling expenses decreased for both three and six-month periods due to lower payroll, while general and administrative expenses significantly increased by **131.6%** and **88.2%** respectively, driven by higher rent and the expensing of approximately **$285,000** in capitalized technology Selling Expenses (Three Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 58,146 | | December 31, 2018 | 71,973 | | **Change** | **(13,827)** | | **Percentage Change** | **-19.21%** | Selling Expenses (Six Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 109,321 | | December 31, 2018 | 148,852 | | **Change** | **(39,531)** | | **Percentage Change** | **-26.56%** | General and Administrative Expenses (Three Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 638,157 | | December 31, 2018 | 275,582 | | **Change** | **362,575** | | **Percentage Change** | **131.56%** | General and Administrative Expenses (Six Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 945,416 | | December 31, 2018 | 502,153 | | **Change** | **443,263** | | **Percentage Change** | **88.27%** | - The increase in general and administrative expenses was primarily due to higher rent expenses and the expensing of approximately **$285,000** in capitalized technology for the three months ended December 31, 2019[118](index=118&type=chunk) [Research and Development Expenses](index=26&type=section&id=Research%20and%20Development%20Expenses) Research and development expenses increased for both the three and six months ended December 31, 2019, compared to the prior year periods, primarily due to increased staffing in the R&D department Research and Development Expenses (Three Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 69,158 | | December 31, 2018 | 41,114 | | **Change** | **28,044** | | **Percentage Change** | **68.21%** | Research and Development Expenses (Six Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 120,365 | | December 31, 2018 | 103,885 | | **Change** | **16,480** | | **Percentage Change** | **15.86%** | - The increase in research and development expenses was due to hiring more employees in the R&D department, leading to higher payroll expenses[120](index=120&type=chunk) [Net Loss](index=26&type=section&id=Net%20Loss) Due to a lack of recurring revenue and increased operating expenses, the company reported net losses of **$751,032** and **$1,148,018** for the three and six months ended December 31, 2019, respectively, exceeding the **$379,712** and **$743,937** losses from the prior year periods Net Loss (Three Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | (751,032) | | December 31, 2018 | (379,712) | | **Change** | **(371,320)** | | **Loss Increase Percentage** | **97.79%** | Net Loss (Six Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | (1,148,018) | | December 31, 2018 | (743,937) | | **Change** | **(404,081)** | | **Loss Increase Percentage** | **54.32%** | - The net loss was primarily due to a lack of recurring revenue[121](index=121&type=chunk) [Liquidity and Capital Resources](index=26&type=section&id=Liquidity%20and%20Capital%20Resources) For the six months ended December 31, 2019, the company's liquidity declined due to **$1.9 million** in R&D expenditures, and while management expects existing cash and projected operating cash flows to support operations through December 2020, additional funding may be required through major shareholder support or public/private securities offerings if revenue falls short of expectations - The company's working capital is primarily sourced from common stock sales and shareholder loans[122](index=122&type=chunk) - For the six months ended December 31, 2019, the company paid **$1.9 million** to two third-party entities for new product R&D, leading to a decrease in liquidity[122](index=122&type=chunk) - Management anticipates that, based on current cash levels and projected operating cash flows, the company has sufficient resources to support operations through December 2020[122](index=122&type=chunk) - If revenue does not meet anticipated levels, the company expects to cover cash flow shortfalls through financial support from major shareholders and public or private offerings of securities[124](index=124&type=chunk) Working Capital Change | Date | Amount ($) | | :------------- | :--------- | | December 31, 2019 | 1,105,913 | | June 30, 2019 | 4,568,461 | | **Change** | **(3,462,548)** | | **Percentage Change** | **-75.80%** | - As of December 31, 2019, current assets were **$3,132,793**, primarily comprising **$2,804,740** in cash, **$74,432** in inventory, and **$253,621** in prepaid expenses and other current assets[125](index=125&type=chunk) - As of December 31, 2019, current liabilities were **$2,026,880**, primarily comprising **$52,771** in accounts payable, **$93,996** in accrued expenses and other payables, **$579,475** in operating lease liabilities, and **$1,300,638** in advances from customers[125](index=125&type=chunk) [Cash Flow from Operating Activities](index=26&type=section&id=Cash%20Flow%20from%20Operating%20Activities) Net cash outflow from operating activities significantly increased to **$1,572,243** for the six months ended December 31, 2019, compared to **$794,846** in the prior year, primarily due to increased net loss and changes in prepaid expenses and accrued liabilities Net Cash Outflow from Operating Activities (Six Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | (1,572,243) | | December 31, 2018 | (794,846) | | **Change** | **(777,397)** | | **Cash Outflow Increase Percentage** | **97.81%** | - Key factors for the six months ended December 31, 2019, included a net loss of **($1,148,018)**, changes in prepaid expenses and other current assets of **($271,654)**, and changes in accrued expenses and other payables of **($163,636)**[126](index=126&type=chunk) [Cash Flow from Investing Activities](index=27&type=section&id=Cash%20Flow%20from%20Investing%20Activities) Net cash outflow from investing activities sharply increased to **$1,608,538** for the six months ended December 31, 2019, compared to **$30,337** in the prior year, primarily due to substantial acquisitions of intangible assets (**$1,400,000**) and office equipment (**$208,538**) Net Cash Outflow from Investing Activities (Six Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | (1,608,538) | | December 31, 2018 | (30,337) | | **Change** | **(1,578,201)** | | **Cash Outflow Increase Percentage** | **5202.2%** | - Primarily used for the acquisition of **$1,400,000** in intangible assets[128](index=128&type=chunk) - Primarily used for the acquisition of **$208,538** in office equipment[128](index=128&type=chunk) [Cash Flow from Financing Activities](index=27&type=section&id=Cash%20Flow%20from%20Financing%20Activities) For the six months ended December 31, 2019, the company generated a net cash outflow of **$84,227** from financing activities, mainly due to shareholder loan repayments, a stark contrast to the **$5,038,638** net cash inflow from common stock sales and issuances in the prior year period Net Cash from Financing Activities (Six Months Ended December 31) | Period | Amount ($) | | :------------- | :--------- | | December 31, 2019 | (84,227) | | December 31, 2018 | 5,038,638 | | **Trend** | **Shift from significant cash inflow to outflow** | - For the six months ended December 31, 2019, the primary activity was the net repayment of shareholder loans totaling **$84,227**[128](index=128&type=chunk) - For the six months ended December 31, 2018, primary activities included net proceeds from common stock sales of **$5,748,422** and common stock issuance of **$307,724**, partially offset by shareholder loan repayments of **$17,508** and escrow funds of **$1,000,000**[129](index=129&type=chunk) [Off-Balance Sheet Arrangements](index=27&type=section&id=Off-Balance%20Sheet%20Arrangements) The company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on its financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources - The company has no off-balance sheet arrangements[130](index=130&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=28&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) As a smaller reporting company, Datasea Inc. is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, the company is not required to provide quantitative and qualitative disclosures about market risk[132](index=132&type=chunk) [Item 4. Controls and Procedures](index=28&type=section&id=Item%204.%20Controls%20and%20Procedures) The CEO and CFO deemed the company's disclosure controls and procedures ineffective as of December 31, 2019, due to significant deficiencies including inadequate segregation of duties, lack of GAAP-familiar personnel, and insufficient written policies; the company has initiated corrective actions, such as appointing a CFO, establishing an audit committee, and adopting internal control policies, with further measures planned upon securing additional financing [Disclosure Controls and Procedures](index=28&type=section&id=Disclosure%20Controls%20and%20Procedures) As of December 31, 2019, the company's disclosure controls and procedures were deemed ineffective due to significant deficiencies, including inadequate segregation of duties, weak risk assessment, lack of GAAP-familiar personnel, and insufficient written accounting and financial reporting policies; remedial actions include appointing a CFO, establishing an audit committee, and adopting internal control policies, with further staffing and policy implementation planned upon securing additional financing - As of December 31, 2019, the company's disclosure controls and procedures were deemed ineffective[133](index=133&type=chunk) - Significant deficiencies include: inadequate segregation of duties and weak risk assessment[133](index=133&type=chunk) - Lack of qualified personnel familiar with US GAAP[133](index=133&type=chunk) - Insufficient written policies and procedures for accounting and financial reporting[133](index=133&type=chunk) - Remedial actions taken include: appointing a CFO, establishing an audit committee, adopting internal control policies (e.g., cash flow control, budget approval, reimbursement policies), and establishing an internal audit department and legal team[134](index=134&type=chunk) - Planned remedial actions include: appointing more qualified personnel to address inadequate segregation of duties and risk management issues, and adopting sufficient written accounting and financial reporting policies, upon securing additional financing[134](index=134&type=chunk) [Changes in Internal Control over Financial Reporting](index=28&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) No changes in the company's internal control over financial reporting occurred during the quarter ended December 31, 2019, that materially affected or are reasonably likely to materially affect its internal control - No material changes in the company's internal control over financial reporting occurred during the quarter ended December 31, 2019[136](index=136&type=chunk) PART II – OTHER INFORMATION [Item 1. Legal Proceedings](index=29&type=section&id=Item%201.%20Legal%20Proceedings) The company is not currently involved in any pending legal proceedings, nor is it aware of any such proceedings being contemplated, and no directors, officers, affiliates, or 5%+ shareholders are adverse parties or hold material interests against the company - The company is not currently involved in any pending legal proceedings, nor is it aware of any such proceedings being contemplated[137](index=137&type=chunk) - No director, officer, affiliate, or shareholder holding more than 5% of the company's securities is an adverse party or has a material interest adverse to the company[137](index=137&type=chunk) [Item 1A. Risk Factors](index=29&type=section&id=Item%201A.%20Risk%20Factors) As a smaller reporting company, Datasea Inc. is not required to provide the risk factor information requested under this item - As a smaller reporting company, the company is not required to provide the risk factor information requested under this item[138](index=138&type=chunk) [Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds](index=29&type=section&id=Item%202.%20Unregistered%20Sales%20Of%20Equity%20Securities%20And%20Use%20Of%20Proceeds) No unregistered sales of equity securities occurred during the reporting period - No unregistered sales of equity securities occurred during the reporting period[138](index=138&type=chunk) [Item 3. Defaults Upon Senior Securities](index=29&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is not applicable to the company - This item is not applicable to the company[138](index=138&type=chunk) [Item 4. Mine Safety Disclosures](index=29&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - This item is not applicable to the company[138](index=138&type=chunk) [Item 5. Other Information](index=29&type=section&id=Item%205.%20Other%20Information) No other information requiring disclosure was reported during the period - No other information requiring disclosure was reported during the period[138](index=138&type=chunk) [Item 6. Exhibits](index=29&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed as part of the 10-Q report, including certifications from the CEO and CFO under Sections 302 and 1350 of the Sarbanes-Oxley Act, and various XBRL taxonomy documents - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act and 18 U.S.C. Section 1350[139](index=139&type=chunk) - Exhibits also include XBRL Instance Document, XBRL Taxonomy Extension Schema Document, XBRL Taxonomy Extension Calculation Linkbase Document, XBRL Taxonomy Extension Definition Linkbase Document, XBRL Taxonomy Extension Label Linkbase Document, and XBRL Taxonomy Extension Presentation Linkbase Document[139](index=139&type=chunk) SIGNATURES [Report Signatures](index=30&type=section&id=Report%20Signatures) This report was formally signed by CEO Zhixin Liu and CFO Jijin Zhang on February 14, 2020, certifying its submission under the Exchange Act - The report was signed by Chief Executive Officer Zhixin Liu and Chief Financial Officer Jijin Zhang[141](index=141&type=chunk)[142](index=142&type=chunk) - The signing date was February 14, 2020[141](index=141&type=chunk)[142](index=142&type=chunk)