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)