UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended June 30, 2023

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

For the transition period from                to               

Commission file number 001-38767

DATASEA INC.

(Exact name of registrant as specified in its charter)

+86 10-56145240

(Registrant’s telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The aggregate market value of the shares of common stock outstanding, other than shares held by persons who may be deemed affiliates of the Registrant as at December 30, 2022, computed by reference to the closing price of $1.50 for the Registrant’s common stock on December 30, 2022, as reported on Nasdaq Capital Market, was approximately $13,358,252.

As of September 20, 2023, 32,784,133 shares of common stock, $0.001 par value per share, were issued and outstanding.

DATASEA INC.

Annual Report on Form 10-K

For the Fiscal Year Ended June 30, 2023

TABLE OF CONTENTS 

All references to “Company,” “we,” or “us” in this report refer to Datasea Inc., a Nevada corporation, its consolidated subsidiaries, and the variable interest entity (“VIE”), unless the context otherwise indicates.

All references to “Datasea” in this report refer to Datasea Inc., a Nevada corporation, not including its consolidated subsidiaries and VIE, unless the context otherwise indicates.

“VIE” or “consolidated VIE” refers to Shuhai Information Technology Co., Ltd. (“Shuhai Beijing”), a variable interest entity.

“WFOE” or “PRC Subsidiary,” which is a wholly foreign owned entity and is a corporation organized under the laws of the PRC and wholly owned by us, through our subsidiary. The WFOE is Tianjin Information Sea Information Technology Co., Ltd. (“Tianjin Information” or “WFOE”).

“PRC” or “China” refers to the People’s Republic of China, excluding, for the purpose of this report only, Taiwan. “RMB” or “Renminbi” refers to the legal currency of China and “$”, “US$”, “USD” or “U.S. Dollars” refers to the legal currency of the United States.

Our reporting currency is the US$. The functional currency of the entities located in China is the RMB. For the entities whose functional currency is the RMB, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the exchange rate at the end of the period, and equity is translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements into US$ are included in determining comprehensive income/loss. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currencies at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

Our business operations are primarily based in China, and the VIE and its subsidiaries are subject to certain legal and operational risks associated with being based in China. On December 28, 2021, the Cyberspace Administration of China (“CAC”), and 12 other relevant PRC government authorities published the amended Cybersecurity Review Measures, which came into effect on February 15, 2022. The final Cybersecurity Review Measures provide that a “network platform operator” that possesses personal information of more than one million users and seeks a listing in a foreign country must apply for a cybersecurity review. Further, the relevant PRC governmental authorities may initiate a cybersecurity review against any company if they determine certain network products, services, or data processing activities of such company affect or may affect national security. As of the latest practicable date, our Company, the VIE and its subsidiaries have not been involved in any investigations on cybersecurity review initiated by any PRC regulatory authority, nor has any of them received any inquiry, notice or sanction. We do not believe that we are subject to: (a) the cybersecurity review with the CAC, as we do not possess a large amount of personal information in our business operations, and our business does not involve the collection of data that affects or may affect national security, implicates cybersecurity, or involves any type of restricted industry; or (b) merger control review by China’s anti-monopoly enforcement agency due to the fact that we do not engage in monopolistic behaviors that are subject to these statements or regulatory actions. On February 17, 2023, the China Securities Regulatory Commission (“CSRC”), issued the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies, or the Trial Measures, which became effective on March 31, 2023. Pursuant to the Trial Measures, domestic companies that seek to offer or list securities overseas, both directly and indirectly, should fulfill the filing procedure and report relevant information to the CSRC. We are required by the Trial Measures to submit a filing to the CSRC and complete the filing procedures of any overseas public offering, but there is no certainty that we will be able to complete such filings in a timely manner. Any failure or perceived failure by us to comply with such filing requirements under the Trial Measures may result in forced corrections, warnings and fines against us and could materially hinder our ability to offer or continue to offer our securities. It remains highly uncertain the impact of such modified or new laws and regulations will have on our daily business operation, our ability to accept foreign investments and list on an U.S. or other foreign exchange. As a result of the legal and operational risks associated with us being based in and having the majority of our operations in China, such risks could result in a material change in our operations and/or the value of our securities and could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. Please see “Risks Associated With Doing Business in China” and the associated risk factor on page 44.

Since 2021, the Chinese government has strengthened its anti-monopoly supervision, mainly in three aspects: (1) establishing the National Anti-Monopoly Bureau; (2) revising and promulgating anti-monopoly laws and regulations, including: the Anti-Monopoly Law (draft Amendment published on October 23, 2021 for public opinions), the anti-monopoly guidelines for various industries, and the detailed Rules for the Implementation of the Fair Competition Review System; and (3) expanding the anti-monopoly law enforcement targeting Internet companies and large enterprises. As of the date of this report, the Chinese government’s recent statements and regulatory actions related to anti-monopoly concerns have not impacted our ability to conduct business, accept foreign investments, or list on a U.S. or other foreign exchange because neither the Company nor its PRC operating entities engage in monopolistic behaviors that are subject to these statements or regulatory actions. Please see “Risks Associated With Doing Business in China” and the associated risk factor on page 44.

As a holding company with no material operations of our own, we conduct a substantial majority of our operations through our operating entities established in the People’s Republic of China, or the PRC, primarily our variable interest entity and its subsidiaries, collectively, the VIE. Due to PRC legal restrictions on foreign ownership in certain internet-related businesses we may explore and operate in the future, we do not have any equity ownership of the VIE, but instead we control and receive the economic benefits of the VIE’s business operations through certain contractual arrangements. We believe such VIE contractual arrangements have not been tested in a court of law in the PRC. Our shares of common stock listed on the Nasdaq Capital Market are shares of our Nevada holding company that maintains service agreements with the associated operating companies. As an investor of our common stock, you may never directly hold equity interests in the Chinese operating companies. There is a risk that the Chinese government may in the future seek to affect operations of any company with any level of operations in PRC, including its ability to offer securities to investors, list its securities on a U.S. or other foreign exchange, conduct its business or accept foreign investment. Substantial uncertainties and restrictions with respect to the political and economic policies of the PRC government and PRC laws and regulations could have a significant impact upon the business that we may be able to conduct in the PRC and accordingly on the results of our operations and financial condition. If the Chinese regulatory authorities disallow our structure or any or all of the foregoing were to occur, it could, in turn, result in a material change in the Company’s operations and/or the value of its common stock and/or significantly limit or completely hinder its ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.

On May 20, 2020, the U.S. Senate passed the Holding Foreign Companies Accountable Act (“HFCAA”) requiring a foreign company to certify it is not owned or controlled by a foreign government if the Public Company Accounting Oversight Board (“PCAOB”) is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to inspect the company’s auditors for three consecutive years, the issuer’s securities are prohibited to trade on a national exchange. On December 18, 2020, the HFCAA was signed into law. On September 22, 2021, the PCAOB adopted a final rule implementing the Holding Foreign Companies Accountable Act (“HFCAA”), which became law in December 2020 and prohibits foreign companies from listing their securities on U.S. exchanges if the company has been unavailable for PCAOB inspection or investigation for three consecutive years. In addition, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (the “AHFCAA”), and on December 29, 2022, a legislation entitled “Consolidated Appropriations Act, 2023” (the “Consolidated Appropriations Act”) was signed into law by President Biden, which contained, among other things, an identical provision to the AHFCAA and amended the HFCAA by requiring the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three, thus reducing the time period for triggering the prohibition on trading. Our auditor, an independent registered public accounting firm that issued the audit report with this annual report, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor is headquartered in New York and has been inspected by the PCAOB on a regular basis. Notwithstanding the foregoing, in the future, if there is any regulatory change or step taken by PRC regulators that does not permit our auditor to provide audit documentations located in China or Hong Kong to the PCAOB for inspection or investigation, you may be deprived of the benefits of such inspection which could result in limitation or restriction to our access to the U.S. capital markets and trading of our securities, including trading on the national exchange and trading on “over-the-counter” markets. Please see “Risks Associated With Doing Business in China” and the associated risk factor on page 44 for more information.

Our contractual agreements with the VIE have not been tested in court in China and this structure involves unique risks to investors. For example, the PRC government could disallow the VIE arrangements, which would likely result in a material change in our operations and structure and significant change in the value of our securities. Such could cause the value of such securities to significantly decline or become worthless. See “Risk Factors—Risks Relating to our Corporate Structure” and the associated risk factor on page 42 for more information.

Below is our organizational chart as of September 20, 2023.

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

PART I

Item 1. Description of Business

Overview

Company Structure

Datasea Inc. is a technology company incorporated in Nevada, USA on September 26, 2014, with subsidiaries and operating entities located in Delaware, US and China, that provides intelligent acoustics (including ultrasound, infrasound, directional sound, and Schumann resonance), 5G messaging and other products and services to various corporate and individual customers. The acoustic business offers a wide range of cutting-edge products including high-quality sonic air disinfection solutions, skin repair and beauty solutions, as well as sleep-aid devices. Our products find extensive applications across various industries and sectors, including sonic antivirus, sonic beauty, sonic medical treatments, and sonic agriculture. Datasea’s common stock currently listed on the Nasdaq Capital Market are shares of our Nevada holding company that maintains service agreements with the associated operating companies which enable us to consolidate the financial results of the VIE and its subsidiaries with Datasea’s corporate group under U.S. GAAP, making Datasea the primary beneficiary of the VIE for accounting purposes. For a description of our corporate structure and contractual arrangements, see “Our Organizational Structure” on page 22 and “VIE Agreements” on page 4.

Datasea is not a Chinese operating company but a Nevada-based holding company with its Delaware subsidiary, Datasea Acoustics LLC, serving as our U.S.-based international business platform. Additionally, through the Company’s subsidiary in China – Tianjin Information Sea Information Technology Co., Ltd (“Shuhai Tianjin”) and the VIE, Shuhai Information Technology Co., Ltd. (“Shuhai Beijing”), we carry out business activities in China, along with their subsidiary entities. Shuhai Beijing possesses cutting-edge products and solutions in intelligent acoustics and 5G messaging applications to support commercial enterprises, households and individuals in China.

Internationalization has always been a crucial strategy for the Company. Datasea incorporated a wholly-owned subsidiary, Datasea Acoustics LLC, based in the State of Delaware, USA. Datasea Acoustics LLC, established on July 31, 2023, exemplifies our strategy aimed at the global market, driven by the U.S. market, and provides “intelligent acoustics” technology and products, which is a transformative blend of acoustics and artificial intelligence. The launch of Datasea Acoustics LLC in the U.S. serves a dual purpose: it solidifies Datasea’s commitment to the field of Intelligent Acoustics and emphasizes the Company’s plan to introduce cutting-edge antivirus acoustic solutions to the U.S. market. Datasea Acoustics LLC will begin to provide leading and high-quality ultrasonic air sterilizers, bathroom and cloakroom sterilizers and odor removal products, as well as continuous new products including ultrasonic Skin Repair Robots and Schumann frequency sleep monitors to the global market, mainly the U.S. market, catering to a broad and growing global consumer base.

Technology and Innovation

Datasea is the global initiator, promoter and practitioner of the concept of intelligent acoustics. Our commitment to technological advancement and global reach positions us at the forefront of delivering cutting-edge intelligent acoustics solutions, especially focusing on ultrasound, infrasound, directional sound and Schumann resonance technology, to meet the evolving needs of our customers and communities worldwide. The research and development of intelligent acoustics technology plays a vital role for the Company and is what makes us different. The Company has non-visual intelligent algorithms and techniques, intelligent acoustics technologies such as ultrasound and directional sound, and 5G messaging related technology. Combined with artificial intelligence (AI), machine learning and data analytics, our Acoustics and 5G intelligent products and solutions are able to serve more than 48.42 million enterprises of all types (over 99% are SMEs) and households in China.

As of the date of this report, Shuhai Beijing and its subsidiaries own 27 Patents and 106 Software Copyrights in the PRC, which include 10 pending patent applications in core technologies, to empower and grow the business. In addition, the U.S. subsidiary, Datasea Acoustics, is actively acquiring U.S. patents, as well as international patents, and collaborating with U.S. universities and world-renowned research institutions.

The Company holds an outstanding position in the field of acoustics, particularly in areas such as ultrasound, infrasound, and directional sound. To promote research and innovation in these areas, the Company actively collaborates with several prominent research institutions and universities, including Chinese Academy of Sciences Institute of Acoustics, China Academy of Information and Communications Technology Cloud Computing and Big Data Research Institute, Tsinghua University Internet Industry Research Institute, Harbin Institute of Technology Artificial Intelligence Research Institute, Beijing Union University, and Jilin University Remote Sensing Research Institute. The Company, together with these partners, is dedicated to conducting research on new topics and developing novel technology applications to drive advancements in the field of acoustics. To better achieve this goal, the Company collaborated for seven joint laboratories to enhance the integration and collaboration of research resources. These collaborations and the establishment of these laboratories further solidify the Company’s leading position in the field of acoustics, providing a strong foundation for future innovations and development.

Additionally, the Company, together with MIIT, Key Laboratory of Artificial Intelligence Key Technology and Application Evaluation and Informatization, CAICT Cloud Computing & Big Data Research Institute, released China’s inaugural white paper on the acoustic intelligence industry. The paper shares compelling analysis and fact findings on intelligent acoustics technology, the commercialization of the technology, and the industry outlook. The white paper discussed the applications of acoustic intelligence on an industry level, demonstrating the expectation for Datasea to lead the initiatives and highlighted the Company’s industry position in the field of acoustics.

Operational goals

Our primary operational goals are: (i) Revenue Growth: drive revenue growth through strategies such as expanding our sales team and distribution channels and network, exploring new domestic and U.S. markets, and providing value-added services; (ii) Technological Innovation: continuously improve the technological level of the ultrasonic antivirus series products and services, as well as prospectively introduce the ultrasonic skin repair and AI diagnosis, Schumann frequency sleep monitors and other acoustic technologies in multiple fields of health to meet global market demand and maintain competitive advantage; (iii) Customer Satisfaction: provide customers with high-quality acoustic products and excellent services to promote customer retention and positive reputation; (iv) International Expansion: continue international expansion with a focus on U.S. market based on our U.S. subsidiary’s operation, M&A and cross-cultural management; (v) Partnerships and Collaborations: foster partnerships, including collaborations with suppliers, partners, and research institutions; (vi) Risk Management: vigilantly identify, assess, and manage various risks, including market, legal, and supply chain risks; and (vii) Shareholder Returns: generate healthy cash flow and returns for shareholders.

Business Strategy

The Company’s business strategy includes striving to provide high-quality products to customers, expanding our footprint in new markets, including the United States and existing markets, and enhancing our branding and market demand through further innovation. The Company provides products to end users through both direct sales and distributors.

International Business Expansion: As of the reporting period, Datasea has already established a subsidiary in the United States (Datasea Acoustics LLC) to expand its operations in international markets. The focus of this strategy is to leverage the United States as a global business hub with its geographical location and resources to further grow Datasea’s international market share. This can be achieved through partnerships with local businesses, marketing expansion, and right collaborations.

Technological Innovation: Datasea continues to invest in research and development (R&D) to maintain a leading position in the fields of intelligent acoustics and 5G messaging. This includes continuously improving existing sonic sterilization and deodorization products, developing new applications, products and solutions regarding ultrasound, directional sound, and Schumann resonance, and staying responsive to the growing needs of global customers and the market.

Technology Collaboration: Datasea can foster collaborations with renowned U.S. universities and research institutions through its U.S. subsidiary. By partnering with these institutions, the Company can engage in joint research and development initiatives to create and adopt cutting-edge intelligent acoustics technologies. This collaborative approach helps Datasea maintain its technological leadership and obtain technical capabilities and reserves in relevant fields.

U.S. Patent Acquisition and Technology Protection: Datasea prioritizes the acquisition of U.S. patents to protect its innovations and intellectual property. Rapidly securing U.S. patents for its technologies is essential to maintain its competitive advantage and defend against potential infringement. This proactive approach in patent acquisition will ensure that Datasea’s intellectual property remains protected in the U.S. market and provide opportunities for licensing and monetization. These strategies will further strengthen Datasea’s position in the global market, consolidate its innovation capacity and protect its intellectual property assets.

Mergers and Acquisitions (M&A) and Joint Ventures: Datasea can expand its products and services portfolio by engaging in mergers and acquisitions or forming joint ventures to meet the growing market demands. Identifying companies that are related to or complementary to the Company’s existing domains of expertise can help Datasea rapidly expand its business and market scale. For example, through M&A and collaborations, Datasea can further strengthen its foundation, market depth, and brand localization in the intelligent acoustics industry in the U.S. market.

Contracts and Collaborations: Datasea can actively seek long-term contracts and collaborations with domestic and international customers, partners, and major corporate clients. These collaborations can encompass product sales, technical cooperation, and joint research and development, helping to stabilize revenue and expand market share.

Compensation and Incentives: In recognition of the contributions made to the Company’s growth by its directors, executives, employees, consultants, and other external partners, the Company has established a multi-layered compensation and incentive system. This includes incentives such as stock awards for a publicly traded company and equity holdings in core business subsidiaries. To date, the Company has consistently issued relevant stocks to directors, executives, employees, and external consultants as part of its stock incentive program. Looking ahead, the Company plans to extend stock incentive initiatives to even more individuals who contribute significantly to the Company, further encouraging and ensuring active contributions from talents within the organization.

Sustainable Growth: The Company can adopt a sustainable approach to ensure long-term success. This involves focusing on Environmental, Social, and Governance (ESG) issues, ensuring that the Company’s operations align with global best practices, and providing sustainable solutions to meet demands of customers.

Market diversification: In the domestic market, Datasea can continue to provide intelligent acoustics and 5G messaging products to various end users, such as corporate customers and household users, to ensure market diversification. In the international market, Datasea intends to target U.S. households and large corporate customers including hospitals, hotels, and schools with leading and high-quality ultrasonic air sterilization, bathroom and cloakroom sterilization and odor removal products, helping to diversify risks and provide broader growth opportunities.

Regulatory Compliance: When expanding into international markets, the Company needs to closely adhere to regulations and laws in various countries and regions. Ensuring compliance is crucial for our long-term success.

In summary, Datasea can pursue its business strategy through international business expansion, technological innovation, contracts and collaborations, and a sustainable growth approach. This will help ensure that the Company gains a competitive advantage in global markets and creates sustainable value for its shareholders. 

VIE Agreements

Shuhai Information Technology Co., Ltd. (“Shuhai Beijing” or the “VIE”) is the VIE of our corporate group that is under contractual control by Datasea. Through contractual arrangements (the “VIE Agreements”) with Shuhai Beijing, and its shareholders, Zhixin Liu, a stockholder as well as the Chairman, President, CEO and Corporate Secretary of Datasea, and Fu Liu, a stockholder as well as a Director of Datasea (Fu Liu is the father of Zhixin Liu), we receive benefits from the business and lead the daily operation of Shuhai Beijing. Please refer to a condensed consolidating schedule that disaggregates the operations and depicts the financial position, cash flows, and results of operations as of the dates and for the periods stated therein at pages F-12 to F-16 of this Annual Report.

Operation and Intellectual Property Service Agreement – The Operation and Intellectual Property Service Agreement allows Tianjin Information Sea Information Technology Co., Ltd (“WFOE”) to manage and operate Shuhai Beijing and collect an operating fee equal to Shuhai Beijing’s pre-tax income, per month. If Shuhai Beijing suffers a loss and as a result does not have pre-tax income, such loss shall be carried forward to the following month to offset the operating fee to be paid to WFOE if there is pre-tax income of Shuhai Beijing the following month. Furthermore, if Shuhai Beijing cannot pay off its debts, WFOE shall pay off the debt on Shuhai Beijing’s behalf. If Shuahi Beijing’s net assets fall lower than its registered capital balance, WFOE shall provide capital for Shuahi Beijing to make up for the deficit.

Under the terms of the Operation and Intellectual Property Service Agreement, Shuhai Beijing entrusts Tianjin Information to manage its operations, manage and control its assets and financial matters, and provide intellectual property services, purchasing management services, marketing management services and inventory management services to Shuhai Beijing. Shuhai Beijing and its stockholders shall not make any decisions nor direct the activities of Shuhai Beijing without Tianjin Information’s consent.

Stockholders’ Voting Rights Entrustment Agreement – Tianjin Information has entered into a stockholders’ voting rights entrustment agreement (the “Entrustment Agreement”) under which Zhixin Liu and Fu Liu (collectively the “Shuhai Beijing Stockholders”) have vested their voting power in Shuhai Beijing to Tianjin Information or its designee(s). The Entrustment Agreement does not have an expiration date, but the parties can agree in writing to terminate the Entrustment Agreement. Zhixin Liu, is the Chairman of the Board, President, CEO of DataSea and Corporate Secretary, and Fu Liu, a Director of the DataSea (Fu Liu is the father of Zhixin Liu).

Equity Option Agreement – Shuhai Beijing stockholders and Tianjin Information entered into an equity option agreement (the “Option Agreement”), pursuant to which the Shuhai Beijing stockholders have granted Tianjin Information or its designee(s) the irrevocable right and option to acquire all or a portion of Shuhai Beijing Stockholders’ equity interests in Shuhai Beijing for an option price of RMB0.001 for each capital contribution of RMB1.00. Pursuant to the terms of the Option Agreement, Tianjin Information and the Shuhai Beijing Stockholders have agreed to certain restrictive covenants to safeguard the rights of Tianjin Information under the Option Agreement. Tianjin Information agreed to pay RMB1.00 annually to Shuhai Beijing stockholders to maintain the option rights. Tianjin Information may terminate the Option Agreement upon prior written notice. The Option Agreement is valid for a period of 10 years from the effective date and renewable at Tianjin Information’s option.

Equity Pledge Agreement – Tianjin Information and the Shuhai Beijing Stockholders entered into an equity pledge agreement on October 27, 2015 (the “Equity Pledge Agreement”). The Equity Pledge Agreement serves to guarantee the performance by Shuhai Beijing of its obligations under the Operation and Intellectual Property Service Agreement and the Option Agreement. Pursuant to the Equity Pledge Agreement, Shuhai Beijing Stockholders have agreed to pledge all of their equity interests in Shuhai Beijing to Tianjin Information. Tianjin Information has the right to collect any and all dividends, bonuses and other forms of investment returns paid on the pledged equity interests during the pledge period. Pursuant to the terms of the Equity Pledge Agreement, the Shuhai Beijing Stockholders have agreed to certain restrictive covenants to safeguard the rights of Tianjin Information. Upon an event of default or certain other agreed events under the Operation and Intellectual Property Service Agreement, the Option Agreement and the Equity Pledge Agreement, Tianjin Information may exercise the right to enforce the pledge. 

There are a number of uncertainties regarding the status of the rights of Datasea, our Nevada holding company, with respect to its contractual arrangements with the VIE, its founders and owners, including whether the PRC legal system could limit our ability to enforce these contractual agreements due to uncertainties under Chinese law and jurisdictional limits. Due to PRC legal restrictions on foreign ownership in any internet-related businesses we may explore and operate, we do not have any equity ownership of the VIE, but instead we receive the economic benefits of the VIE’s business operations through certain contractual arrangements. Our common stock currently listed on the Nasdaq Capital Markets are shares of our Nevada holding company that maintains service agreements with the associated operating companies. The Chinese regulatory authorities could disallow our structure, which could result in a material change in our operations and the value of our securities could decline or become worthless.

We believe that our corporate structure and contractual arrangements comply with the current applicable PRC laws and regulations. We also believe that each of the contracts among our wholly-owned PRC subsidiary, our consolidated VIE and its shareholders is valid, binding and enforceable in accordance with its terms. However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Thus, the PRC governmental authorities may take a view contrary to the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structure will be adopted or if adopted, what they would provide. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations.

Having our operations conducted by the subsidiaries and through contractual arrangements with a variable interest entity (VIE) based in China involves unique risks to investors. The VIE structure is used to allow foreign investment in China-based companies where Chinese law prohibits or restricts direct foreign investment in the operating entities, and Datasea’s shareholders may never directly hold equity interests in our Chinese operating entities. The VIE contractual agreement has not been tested in court. We may have to incur substantial costs and expend significant resources to enforce such arrangements in reliance on legal remedies under PRC law.

All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. In addition, contractual arrangements entered into by the subsidiary and the PRC operating affiliate may be subject to scrutiny by the PRC tax authorities. Such scrutiny may lead to additional tax liability and fines, which would hinder our ability to achieve or maintain profitability. If the PRC government deems that the VIE Agreements do not comply with PRC regulatory restrictions on foreign investment in the relevant industries or other laws or regulations of the PRC, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations, which may therefore materially reduce the value of our ordinary shares. In the event that in the future a company we hold as a VIE no longer meets the definition of a VIE under applicable accounting rules, or we are deemed not to be the primary beneficiary, we would not be able to consolidate line by line that entity’s financial results in our consolidated financial statements for reporting purposes. For a detailed discussion of risks facing the Company as a result of this VIE structure, please see “Risks Relating to our Corporate Structure” from page 42 to page 45 in the Annual Report. 

Summary Consolidated Financial Data

The following historical statements of operations and statements of cash flows for the fiscal years ended June 30, 2022 and June 30, 2023, and balance sheet data as of June 30, 2022 and June 30, 2023, which have been derived from our audited financial statements for those periods. Our historical results are not necessarily indicative of the results that may be expected in the future.

Condensed Consolidated Statements of Operations Information

Condensed Consolidated Balance Sheets Information

Condensed Consolidated Statements of Changes in Stockholders’ Equity Information

Condensed Consolidated Statements of Cash Flows Information

cash transfers and Dividend Distribution

Shuhai Beijing receives substantially all of its revenue in RMB. Under Shuhai Beijing’s current corporate structure, to fund any cash and financing requirements Shuhai Beijing may have, Datasea may rely on dividend payments from its subsidiaries. The WFOE may receive payments from Shuhai Beijing, and then can remit payments to Shuhai Information Skill (HK) Limited in accordance with its registration with the Chinese authority under the “Notice of the State Administration of Foreign Exchange on Relevant Issues concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and in Return Investment via Overseas Special Purpose Companies” and pursuant to the VIE Agreements. Then Shuhai Information Skill (HK) Limited may make distribution of such payments directly to Datasea as dividends thereto. Cash dividends, if any, on our shares of common stock will be paid in U.S. dollars.

Under the existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange (the “SAFE”) by complying with certain procedural requirements. Pursuant to the SAFE Circular 37, Shuhai Beijing is allowed to pay dividends in foreign currencies to WFOE without prior approval from the SAFE, subject to the condition that the remittance of such dividends outside of the PRC shall comply with certain procedures under the PRC foreign exchange regulations applicable to PRC residents only. Approval from or registration with appropriate PRC government authorities is, however, required where RMB is to be converted into a foreign currency and remitted out of China to pay capital expenses, such as the repayment of loans denominated in foreign currencies. The PRC government may also, at its discretion, restrict access in the future to foreign currencies for Shuhai Beijing’s accounts with little advance notice.

Datasea is a Nevada company conducting substantially all of its operations in China through its PRC subsidiaries, the VIE and its subsidiaries established in China. Datasea may make loans to the PRC subsidiaries and VIE entities subject to the approval from governmental authorities and limitation of amount, or may make additional capital contributions to subsidiaries and VIE entities in China.

Any loans to the subsidiaries or VIE entities in China are subject to foreign investment and are under PRC regulations and foreign exchange loan registrations. For example, loans by us to the wholly foreign-owned subsidiaries or VIE entities in China to finance their activities must be registered with the local counterpart of SAFE. In addition, a foreign invested enterprise shall use its capital pursuant to the principle of authenticity and self-use within its business scope. The capital of a foreign invested enterprise shall not be used for the following purposes: (i) directly or indirectly used for payment beyond the business scope of the enterprises or the payment prohibited by relevant laws and regulations; (ii) directly or indirectly use for investment in securities or investments other than banks’ principal-secured products unless otherwise provided by relevant laws and regulations; (iii) the granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) paying the expenses related to the purchase of real estate that is not for self-use (except for the foreign-invested real estate enterprises). On October 23, 2019, the SAFE promulgated the Notice of the State Administration of Foreign Exchange on Further Promoting the Convenience of Cross-border Trade and Investment, or the SAFE Circular 28, which, among other things, allows all foreign-invested companies to use Renminbi converted from foreign currency-denominated capital for equity investments in China, as long as the equity investment is genuine, does not violate applicable laws, and does not violate with the negative list on foreign investment. However, since the SAFE Circular 28 is newly promulgated, it is unclear how SAFE and competent banks will carry this out in practice. In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis.

Current PRC regulations permit WFOE to pay dividends to Shuhai Information Skill (HK) Limited only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, in accordance with Article 166 of the PRC Company Law, each of the subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each such entity in China may further set aside a portion of its after-tax profits as the discretionary common reserve, although the amount to be set aside, if any, is determined at the discretion of such entities board of directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation.

As of the date of this report, neither Shuhai Beijing nor any of Datasea’s subsidiaries have ever paid dividends, made earnings distributions, transferred cash or other assets by kind to Datasea directly or indirectly. Datasea has not made any distributions or paid dividends to its shareholders, including U.S. investors, as of the date of this report. We intend to keep any future earnings to re-invest in and finance the expansion of our business in China. We do not have the intentions to distribute earnings or settle amounts owed under the VIE Agreements in the near future nor do we anticipate that any cash dividends will be paid or Shuhai Beijing’s earnings will be distributed and transferred to the holding company in the foreseeable future. See “Summary Consolidated Financial Data”.

Our Business Summary

We deeply understand that the market needs new application areas, new technologies, and new requirements. Therefore, through the relentless efforts of our team, we transitioned from visual algorithms to non-visual algorithms with acoustics as the core and made significant breakthroughs in the field of acoustics, including ultrasound, infrasound, and directional sound.

Acoustic intelligence is a new field that integrates fundamental acoustic theory with artificial intelligence to gather and process acoustic data and solve problems. Datasea leverages cutting-edge technologies in the realm of intelligent acoustics, especially harnessing the power of ultrasonic sterilization to combat viruses and prevent human infections. This technology capitalizes on the mechanical, thermal, and cavitation effects of ultrasound. When stimulated by ultrasound, microorganisms, including the coronavirus, undergo significant vibration strains, disrupting the virus’s outer shell and internal RNA. The rapid movement of protons in the ultrasound eventually devastates microbial structures, annihilating harmful pathogens.

Leveraging Datasea’s cutting-edge intelligent acoustics technology together with AI technology, we successfully developed a series of ultrasonic disinfection products named the “Hailijia” series air sterilizer products. This lineup includes solutions tailored for in-door, in-vehicle sterilization and deodorization, restroom and cloakroom purification and deodorization, comprehensive air disinfection, and specialized sterilization suitable for environments such as hospitals, airports, hotels, transportation and residential settings. We started to launch those new products in the China market in the year of 2023. Leading labs such as the Wuhan Institute of Virology have proven this ultrasonic disinfection technology to have 99.83% efficacy in nine seconds against Covid-19 and 99.99% efficacy against Staphylococcus Albus and E-col. Meanwhile, this strategic shift and process are aimed at offering people more effective solutions for purifying their environments and healthier lifestyles for people not only in China, but also the United States and globally, particularly in the post-pandemic era when people have raised higher demands for protection and quality of life.

Additionally, the Company makes innovations in Schumann resonance, directional sound and others, launching ultrasonic Skin Repair with AI diagnosis and Schumann frequency sleep monitors and further creating a higher quality living environment for customers in application fields such as acoustic antivirus, acoustic health, and acoustic agriculture. With a diverse product lineup, we strive to achieve a global leading position in this field within three years.

In a strategic move to demonstrate its presence in the global arena, Datasea established a wholly-owned subsidiary, Datasea Acoustics LLC, in Delaware, USA, on July 31, 2023. This venture underlines Datasea’s dedication to “Intelligent Acoustics” and marks its ambition to offer advanced antiviral acoustic solutions at ultrasonic disinfection and sterilization, ultrasonic cosmetology, acoustic medical care, and acoustic agriculture to the US and international market, reaching an ever-growing consumer base. Simultaneously, the establishment of production, assembly, and sales channels, coupled with the reinforcement of technological enhancements and collaborations with international technology laboratories, augments the prospects for the sustainable development of Datasea Acoustics LLC.

Our 5G Messaging business increases and improves how people and businesses communicate, while providing enterprises and brands a platform to engage, convert and efficiently cultivate buying relationships by leveraging 5G messaging service.

The 5G messaging service is known as RCS (“Rich Communication Suite”) and integrates phones, messages, and contacts. Specifically, this communication suite enables users to enjoy various effective interfaces with integrated messages, including texts, pictures, audio, video and emojis, as well as status, location and other communication functions. It has the characteristics of high contact rate, rich media, strong interactivity, convenient service, and high security.

5G messaging technology can create a new message ecosystem in which customers and enterprises can directly and efficiently connect via short messages on mobile phone terminals. When businesses apply 5G messaging to marketing initiatives, higher speed, better transmission quality, and lower latency can create brand new and improved customer experience.

As one of the leading service providers in China’s 5G communication field, Datasea has several primary products and services targeting different customers and needs, including 5G Integrated Messaging Marketing Cloud Platform (“5G IMMCP”), Smart Push (precision marketing solution) and 5G messaging Top Up business related applications applicable to various industries in China. Together with artificial intelligence (AI), machine learning and data analytic capability, our Acoustics and 5G intelligent products and solutions are able to serve more than 48.42 million enterprises and businesses of all types (over 99% are SMEs) and households in China with digital and intelligent services.

Intelligent Acoustics

Industry overview

Acoustics is an application-oriented subject that continually meets various societal needs and application demands, and exhibits significant development potential. For instance, the integration of acoustics with electronics and communication technology has satisfied people’s demands for communicating and enjoying audiovisual content in various occasions, resulting in massive industries such as electroacoustics, telephony, and television. The blend of acoustics and architectural art fulfills the human need for appreciating high-quality music, theater, movies, and other audiovisual programs. Acoustics combined with fields like oceanography addresses challenges related to long-distance underwater detection and communication, providing efficient and indispensable means for human to explore and utilize the oceans. The synergy of acoustics with medicine has given rise to instruments like ultrasound and HIFU, offering new and effective tools for disease diagnosis and treatment and undergoing rapid development. Furthermore, the convergence of acoustics with linguistics, information technology, and related fields has driven the development of speech recognition and synthesis technologies, subsequently linking with cognitive science, making it as one of the fundamental and crucial directions in the future of artificial intelligence. This is why the field of acoustics remains vibrant and dynamic.

Specifically, according to the frequency of sound waves, they are divided into sound waves, ultrasound waves, and infrasound waves. The function of sound waves is to transmit vibration energy and information. A sound wave is a wave that travels through a medium in the form of vibration. The vibrating object causes the air layer particles around it to compress and expand alternately. This change is from near to far, so that the vibration of the excited object spreads at a certain speed. The transmission of this vibration energy is the nature of the propagation of sound waves.

Industry Application and Market Scale

There continues to be significant demand and diverse opportunities for the integration of acoustics with fields such as life and health, natural resources, and agriculture. For example, ultrasound technology has promising application prospects in various sectors, including healthcare, industrial, environmental protection, beauty, and agriculture. Additionally, Schumann resonance has shown effectiveness in sleep health and directional audio plays a crucial role in specific content delivery and personal privacy protection, among other applications. Among these, ultrasound technology, particularly in the areas of air purification, beauty, and agricultural pest control, holds immense market potential.

Ultrasound, or ultrasonics, is the science and technology of sound at frequencies beyond what we can hear. It has a wide range of applications, from medical and health, industrials/inspections, and agriculture. As per The Business Research Company’s Ultrasonic Technology Global Market Report 2023, the global ultrasound technology market size will grow from $1.8 billion in 2022 to $2.1billion in 2023 at a compound annual growth rate (CAGR) of 13%. The ultrasound technology market size is then expected to grow to $3.3 billion in 2027 at a CAGR of 12%.

Directional sound is sound technology that is aimed in a particular directional field, rather than spreading naturally according to traditional sound engineering principles. Directional sound can be useful in many different kinds of applications, from home entertainment and consumer products to the evolution of sonic weaponry. According to the Report Prime Market Research, the global directional sound technology market size will grow from $406 million in 2022 to $431 million in 2023. The directional sound technology market size is then expected to grow to $652 billion in 2030 at a CAGR of 6.1%.

Schumann resonance, or the “earth’s heartbeat”, triggers an Alpha state in human brain which helps people relax, heal faster, and perform better in the daily life. It’s the measurement of 7.83 Hz or the electromagnetic frequency of the earth. One of the biggest applications of Schumann resonance is to treat insomnia, which is to help people improve their sleep quality.

Infrasound is a wave phenomenon of the same physical nature as sound but with frequencies below the range of human hearing, specifically below a frequency of 20 Hz. Infrasound is also a powerful weapon in medical and health, such as cancer therapy.

The management believes that acoustics has substantial room for development in the aforementioned domains.

Technological advancement

The Company has non-visual intelligent algorithms and techniques, as well as intelligent acoustics such as applied technology of ultrasound, directional sound, and 5G messaging related applications applicable to various industries in China. Leveraging artificial intelligence technology, the Company has effectively developed a range of products, represented by ultrasound disinfection and sterilization. Besides, the Company has innovated in areas such as Schumann resonance, directional sound and other aspects, and mastered core technologies and their practical applications in various scenarios.

The Company effectively uses the characteristics of ultrasound, such as mechanical effect, thermal effect, cavitation effect and other physical characteristics as well as the combination of chemical effects, to make coronavirus and microorganisms vibrate with very large vibration amplitude, producing strains that could break certain parts of the virus and do damage to the outer shell and to the RNA inside. Eventually, the high-speed movement of the proton of ultrasound can destroy the formation of microorganisms and can kill bacteria and virus effectively. Leading labs such as the Wuhan Institute of Virology have proven this ultrasonic disinfection technology to have 99.83% efficacy in nine seconds against Covid-19 and 99.99% efficacy against Staphylococcus Albus and E-col.

Datasea intends to harness its expertise in directional sound technology as a fundamental tool. Simultaneously, intelligent digital processing technology will be integrated, facilitating its amalgamation with other acoustic applications to realize directional service functionalities across diverse acoustic products. This presents a huge potential for the future. Directional sound employs hyper-directional acoustic propagation technology and ultrasound as the medium and modulates audio signals onto the ultrasonic signal, enabling originally divergent sound to propagate unidirectionally like a spotlight, thereby controlling sound within a limited sound field ahead while minimizing attenuation during long-distance propagation.

The Datasea team leverages Magnetic Induction of Brain Rhythm (MIBR) technology based on Schumann resonance characterized by ultra-low frequency and weak intensity. This technology is specifically designed to selectively enhance and regulate the function of neuronal cells through the utilization of magnetic induction wave energy (MIBR). By generating a natural frequency magnetic field in resonance with the inherent frequencies of the human body, it induces brain waves to enter a deep sleep state, thereby extending the duration of deep sleep and enhancing its quality. This innovative approach is aimed at optimizing sleep patterns and ultimately improving overall sleep quality.

Our Opportunity

Due to the COVID-19 pandemic, people have become increasingly concerned about their health and the quality of the air in their surroundings. This surge in demand for indoor and in-vehicle air purification, air disinfection, and odor removal has propelled the market into a period of robust growth. Leveraging its proprietary technology and operational expertise in harnessing various core characteristics of ultrasound, Datasea has benefited from the rapid development of the indoor environmental purification and air disinfection and sterilization industry worldwide.

The collaborative technology of sonic and artificial intelligence is a disruptive applied technology in the skin repair market. Currently, most of the existing ultrasonic facial beauty devices on the market utilize the strong penetrating power of ultrasound, capable of reaching depths of 4 to 6mm beneath the skin’s surface, to provide therapeutic treatments for facial skin whitening and texture improvement, and they are contact-based. The company’s contactless ultrasonic and AI skin repair technology and products, especially including the artificial intelligence collaboration of intelligent control arm precision control and AI real-time diagnosis, are disruptive technology applications for the skin repair market. This sector complements the current medical aesthetic industry, which includes six major segments such as cleansing, moisturizing, whitening, spot removal, acne treatment, and anti-aging with significant market space.

Currently, there are relatively few similar technology applications and products related to contactless ultrasonic skin repair technology, directional sound and Schumann resonance in the domestic market, leaving huge opportunities and gaps to be filled.

The broad application prospects of Schumann resonance collaborative technology. The natural frequency magnetic field of Schumann resonance itself has the effect of relieving anxiety and stress, inducing brain waves to enter a deep sleep state, effectively improving the quality of deep sleep, and keeping people away from insomnia. The Magnetic Induction of Brain Rhythm (MIBR) technology, which is mastered by the Company, can create a natural frequency magnetic field similar to Schumann frequency by selectively optimizing and regulating the function of neuronal cells through magnetic induction wave energy (MIBR). It can alleviate stress and solve insomnia problems, and the application terminals of its technology are also portable and convenient to use, which has a great effect on the improvement of sub-health problems in the global population.

Directional sound is currently mainly applied in fields such as audio enhancement, sound system enhancement, and security and communication. Due to technical bottlenecks, adaptability to application scenarios, and cost, there are relatively few similar technological applications and products in the domestic market, and there are a large number of gaps and entry opportunities in the market. The Company has mastered the principles and characteristics of directional sound propagation, as well as the development of corresponding scenario applications. As a basic technology tool, directional sound’s innovative collaboration with existing ultrasound and other technology applications and products is expected to fill the market gap globally.

Faced with these promising market opportunities, the Company has proactively established a strategic presence in the field of acoustic intelligence. We have strategically planned for technological advancements, specialized applications, product development, and customer orientation within this domain. As a result of this strategic planning, the Company has rapidly launched ultrasonic-based antivirus equipment. This includes our first-generation surface virus disinfection and sterilization products, as well as our second-generation air antivirus products known as the Hailijia series.

Industry Position of Acoustics Business

The Company holds a prominent position in the field of acoustics, particularly in areas such as ultrasound, infrasound, and directional sound. To promote research and innovation in these areas, the Company actively collaborates with several prominent research institutions and universities, including Chinese Academy of Sciences Institute of Acoustics, China Academy of Information and Communications Technology Cloud Computing and Big Data Research Institute, Tsinghua University Internet Industry Research Institute, Harbin Institute of Technology Artificial Intelligence Research Institute, Beijing Union University, and Jilin University Remote Sensing Research Institute. The Company, together with these partners, is dedicated to conducting research on new topics and developing novel technology applications to drive advancements in the field of acoustics. To better achieve this goal, the Company collaborated for seven joint laboratories to enhance the integration of research resources and cooperation. These collaborations further solidify the Company’s leading position in the field of acoustics, providing a strong foundation for future innovations and development.

In addition, the Company, together with MIIT, Key Laboratory of Artificial Intelligence Key Technology and Application Evaluation and Informatization, CAICT Cloud Computing & Big Data Research Institute, released China’s inaugural white paper on the acoustic intelligence industry. The paper shares compelling analysis and fact findings on intelligent acoustics technology, the commercialization of the technology, and the industry outlook. The white paper discussed the applications of the acoustic intelligence on an industry level and demonstrated the expectation for Datasea to lead the initiative and highlighted the Company’s industry position in the field of acoustics.

General information

As date of the financial year ended June 30, 2023, our acoustic products primarily consist the “HailiJia” series of ultrasonic air sterilization products, including 1) In-door models (floor and desktop models) suitable for different areas and functions, and 2) In-vehicle models; 3) Restroom and Cloakroom purification and deodorization. Comprehensive air disinfection, and specialized sterilization suitable for environments such as hospitals, airports, hotels, transportation and residential areas.

Ultrasonic air sterilizer products:

Key Features:

Air purification and deodorization products:

New products planned

Skin Repair Robot (Coming soon)

Sleep Monitor (Coming soon)

Hailijia Sleep Monitor adopts ultra-low frequency, weak intensity, and Magnetic induction of brain rhythm (MIBR), which is a magnetic induction of brain rhythm technology. Through the selective optimization and adjustment of the function of neurons through the magnetic induction of brain rhythm (MIBR), the monitor creates a natural frequency magnetic field similar to the Schumann frequency.

Key Features:

1) Reduce the impact of high-frequency radio waves on the human body, relieve anxiety and stress, and gradually relax the body and brain;

2) Resonate between the frequency of Device and the human body’s own frequency, induce brain waves to enter a deep sleep state, prolong the time of deep sleep, and improve the quality of deep sleep, thereby improving sleep and keeping users away from insomnia.

Sales and Distribution

As of the date of this report, our acoustic products are mainly developed and produced in China, and the products we sell in China are mainly through:

1) The sales department of Shuhai Beijing and its subsidiaries directly sign sales contracts with customers.

During the reporting period, Shuhai Beijing and its subsidiaries have formed a complete marketing system, promotion strategies and models, including the Company’s own sales team and innovative partner models. The sales team of Shuhai Beijing and its subsidiaries cover the core economic zones of China in Beijing, Northeast China, the Yangtze River Delta, and the Guangdong Hong Kong Macao Greater Bay Area, promoting various products and services.

2) Sales Channels

Shuhai Beijing and its subsidiaries have established cooperative relationships with multiple domestic sales and channel merchants and established a nationwide marketing channel network through a partnership system.

On December 2022, the Company unveiled national Hailijia air sterilization product event with an online event and offline product launches in various cities in China, including Beijing, Shenzhen, Tianjin, Hangzhou and Harbin. More than 50 institutions specializing in trade and distribution from China, Southeast Asia, and the Middle East participated in the event, highlighting the market interest in the products. During the product launches, Datasea has entered into eight marketing and distribution agreements in order to expand the business and reach to customers and sell certain Hailijia air sterilizers and purifiers in China.

3) Online distributors and living stream

The Company expands its coverage and increases market penetration by collaborating with multiple non- exclusive online distributors, living stream platform and selling innovative products on major e-commerce platforms.

4) International Business Expansion

As of the date of this report, Datasea has established a subsidiary (Datasea Acoustics LLC) in the United States, actively recruiting a sales team, and promoting cooperation with various local offline and online sales channels to support the sales of acoustic products in the U.S. and international markets.

Key Customers and Agreements

Key Suppliers and Raw Materials

Our key suppliers for Hailijia's air disinfection and sterilization products series are as follows:

The raw materials used in the Hailijia air disinfection and sterilization products series primarily include 40KHz ultrasonic kill module, Shipu DC brushless motors, temperature and humidity sensors, dust sensors, ultraviolet lamps and HEPA13 level layered filters. 

Market Results

Datasea sells acoustic intelligence products through our direct sales team and a select network of distributors and online channel partners. Till this fiscal year, Datasea has 6 channel partners and 4 OEMs, typically account for the substantial majority of our sales. From the beginning of this fiscal year, we began to realize the sales of intelligent acoustics products – Hailijia series air Air sterilizers. Direct sales and distributors sales accounted for 49.48% and 50.52% of our $136,884 net revenue of the intelligent acoustics products for this fiscal year, respectively. We believe aggregate sales of intelligent acoustics products, through all channels, accounted for approximately 1.94% of our total net revenue for this year. Due to the fact that the Company’s “HailiJia” series of ultrasonic air sterilization products were officially launched in the first half of 2023, the overall revenue scale has not yet increased significantly.

Latest Advances

In a strategic move to mark its presence in the global arena, Datasea established a wholly owned subsidiary, Datasea Acoustics LLC, in Delaware, USA, on July 31, 2023. This venture underlines Datasea’s dedication to “Intelligent Acoustics” and marks its ambition to offer most advanced antiviral acoustic solutions to the U.S. market, attracting an increasing number of consumers.

Furthermore, Datasea will launch products like “Deep Sleep Monitor” and “Skin Repair Robot” to meet the market needs. These initiatives, originated from intelligent acoustics, align with Datasea’s strategy to cater to the requirements of the niche market and to consistently pursue product portfolio diversification.

5G Messaging

Industry overview

5G messaging service, which refers to RCS message (rich media communication), is a communication method proposed by the GSMA (Global System for Mobile Communications Association. Specifically, this communication service enables users to achieve the effective integration of texts, pictures, audio, video, emoji, location, contact and other information, and more diversified functions such as online payments, online-offline messages, group chats or group messages with unregistered friends.

Competitive Landscape

Industry applications: 5G messaging open interfaces have docking platforms for customers in various industries such as finance, e-commerce, logistics, tourism, government affairs, education, and electricity, or privately deploy the PaaS platform, or customize the development of various proprietary services for industry customers. The industry applications are extremely broad.

We also believe that the main competitive factors about the 5G messaging business in China is the competition at the market end, including product performance, breadth of product offerings, access to customers, partners and distribution channels, software support, pricing and cost. We believe our ability to remain competitive will depend on our ability to predict well the features and functionality that our customers and partners will need, and our ability to deliver consistent products at high quality and competitive prices. Some of our competitors may have more marketing, financial, distribution and manufacturing resources than we do and may be more responsive to changes in market, policy or customer needs. We anticipate that we may face an increasingly competitive environment in the future.

Our current competitors in the field of 5G messaging include Chinese listed companies with similar service systems or platforms, such as Montnets Technology, Zhongjia Bochuang, Xinguomai, Caixun, Tianyuan Dike.

Our Opportunity and Growth Strategy

GSMA (Global Association for Mobile Communications Systems) predicts that by 2025, China will have more 5G connections than North America and Europe combined, ranking first in the world. The number of 5G connections will reach 460 million, accounting for 28% of the country’s total connections. RCS has become an international standard and an international trend. As of September 2020, 90 mobile network operators in the world have launched RCS, with 473 million global monthly active users, according to the GSM Association. By the end of 2021, the RCS market is estimated to be about $74 billion. We believe 5G messaging can improve the retail and commercial user experience. MobileSquared predicts that 74.6% of smartphone users will use RCS channels to communicate by 2023.

Disadvantages of traditional SMS include:

Advantages of 5G messaging over SMS include:

Comparison with WeChat Mini Programs/Official Accounts, Alipay Mini Programs and Service Apps:

In the B2C scenario, 5G messages will have greater advantages than WeChat Mini Programs/Official Accounts, Alipay Mini Programs and Life, Government and People’s Livelihood Service Apps. For WeChat Mini Programs/Official Accounts, Alipay Mini Programs, or life, government and people’s livelihood services, users need to search for mini programs, or need to pay attention to official accounts, or even need to download APPs, and need to authenticate before sending messages, while 5G messages are sent directly through the recipient’s mobile phone number. Moreover, compared to WeChat, Alipay and various service apps, 5G messaging can get the coverage and reach of all users, so it has a very strong business value and service capabilities.

Our Products and Plans

Datasea’s VIE entity, Shuhai Beijing, has a subsidiary, Guohao Century (Beijing) Technology Ltd. (“Guohao Century”), that improves how people and businesses communicate, while providing brands a platform to engage, convert and efficiently nurture buying relationships by leveraging 5G messaging service.

As one of leading service provider in China’s 5G communication field, Datasea has several primary products and services targeting different customers and needs:

Key Customers and Agreements

Key Suppliers and Raw Materials

Our 5G messaging products are generally software systems or platforms, mainly developed by the Company's inhouse research and development team.

Market Results

Datasea helps the digital transformation and upgrading of cities and enterprises in the Chinese market through its self-developed 5G messaging platforms. As of the end of the year, the revenue mainly came from the service fee of our 5G messaging service, whose net income was US $6,686,691, accounting for 94.91% of the total net income of the year. Among them, the net revenue from 5G messaging Top-up services is US $4,481,442, accounting for 67.02% of the company’s net revenue from the 5G messaging business, while the rest is revenue from cloud platform construction project service fees.

Impact of coronavirus outbreak

In early December 2022, China announced a nationwide relaxation of the zero-coronavirus policy, and the recovery of consumption directly drove the Company’s 5G message top-up business to achieve rapid growth in the fourth quarter of 2023. However, the impact of the COVID-19 outbreak still depends on future mutations of the virus, including new information about the severity of the global outbreak and the measures taken, or the emergence of new or more severe strains that are highly uncertain and unpredictable. Therefore, while we do not expect the COVID-19 outbreak to have a negative impact on our business, results of operations and financial condition, the relevant financial impact cannot be reasonably estimated at this time.

Recent Material Developments

During the reporting period, the Company has granted 3,459,500 registered shares under S-8 under the 2018 equity incentive plan to its directors, management, founding team, and employees, as well as to its advisors, issuing a total of 3,459,500 ordinary shares for incentive purposes at a grant price of zero US dollars.

On May 16, 2023, Shuhai Information Technology Co., Ltd. (the “Buyer”, the VIE and a consolidated affiliated entity of Datasea, entered into an Office Purchase Agreement (the “Office Purchase Agreement”) with Fu Liu (the “Seller”), a member of the Board of Directors and a stockholder of Datasea. Pursuant to the Office Purchase Agreement, Buyer will purchase a 2,824.29 square meter office located in Fenggang Jingdong Urban Science and Technology Financial Innovation Center Phase II Project, Building No. 4 Scientific Research Building, PRC (the “Property”). The total purchase price is RMB73,431,540, equivalent to approximately $10,642,252, payable in 5,912,362 shares of common stock of Datasea (the “Consideration Shares”), at an issuance price of $1.80 per share. Pursuant to the requirements of Section 14(c) of the Securities Exchange Act of 1934, Datasea subsequently filed on July 7, 2023 a definitive information statement pertaining to the issuance of the Consideration Shares and the approval thereof by holders of a majority of Datasea’s voting capital stock by written consent in lieu of a meeting. On July 28, 2023, the Consideration Shares, comprising 5,912,362 shares of common stock of Datasea, were issued to the Seller pursuant to the terms of the Office Purchase Agreement. Subsequent to such issuance, Datasea had a total of 33,696,495 shares of common stock issued and outstanding, and the Seller held 12,010,182 shares of common stock, constituting approximately 35.64% of the total issued and outstanding common stock of Datasea. Due to certain transfer process requirements in China, on August 17, 2023, Datasea and the Seller have voluntarily rescinded the issuance of the 5,912,362 Consideration Shares. The 5,912,362 Consideration Shares have been cancelled, and following such cancellation, the Company had a total of 27,784,133 shares of common stock issued and outstanding. The issuance of the Consideration Shares to the Seller will be effected at a later time once all transfer process requirements in China have been met. 

On August 1, 2023, Datasea entered into two separate subscription agreements with a certain non-U.S. investor (“Investor A”), pursuant to which the Company agreed to sell and Investor A agreed to purchase an aggregate of 4,760,000 shares of common stock price (the “Shares”) at a $1.2 per share purchase price. Such Shares must be held for a period of 365 days. In accordance with such two agreements, Investor A shall pay a total purchase price of $2,856,000 in RMB, with an amount of RMB 20,000,000 no later than September 10, 2023 and another purchase price of $2,856,000 in RMB, with an amount of RMB 20,000,000 no later than September 30, 2023. On September 10, 2023, the Company and Investor A signed a supplementary agreement to revise the aforementioned payment date of September 10, 2023 to September 30, 2023, which is aligned with the payment schedule outlined in the second original agreement.

On August 15, 2023, Datasea entered into a subscription agreement (the “Agreement”) with a non-U.S. investor ( “Investor B”), pursuant to which the Company agreed to sell and Investor B agreed to purchase an aggregate of 2,962,963 shares of common stock price (the “Shares”) at a $1.35 per share purchase price, with a total subscription price of $4,000,000. Such Shares must be held for a period of 180 days. Within 5 business days after the signing of the Agreement, Investor B shall pay the amount of $714,286 to the Company, which has been received by the Company as of August 16, 2023, and additionally and before October 15, 2023, Investor B shall pay the remainder amount of $3,285,714 to the Company.

On September 13, 2023, Datasea Inc. announced the closing of its underwritten public offering of 5,000,000 shares of common stock at a public offering price of $0.40 per share, for aggregate gross proceeds of approximately $1.635 million, after deducting underwriting discounts and other offering expenses. In addition, the Company has granted the underwriter a 45-day option to purchase up to an additional 750,000 shares of common stock at the public offering price per share, less the underwriting discounts to cover over-allotments, if any. EF Hutton, division of Benchmark Investments, LLC, acted as the sole book-running manager for the offering. The common stock was offered by the Company pursuant to a “shelf” registration statement on Form S-3 (File No. 333-272889), which was filed with the U.S. Securities and Exchange Commission (SEC) and declared effective by the SEC on July 21, 2023.

Our CORPORATE History and STRUCTURE

VIE Agreements

Datasea relies on contractual arrangements with the consolidated VIE and its shareholders, Zhixin Liu, Chairman of the Board, President, CEO of Datasea and Corporate Secretary, and Fu Liu, a Director of the Datasea (Fu Liu is the father of Zhixin Liu), to operate our business. The contractual arrangements with respect to the VIE are not equivalent to an equity ownership in the business of the VIE. We consolidate the VIE as a primary beneficiary through the contractual agreements between Tianjin Information, an indirect subsidiary of Datasea and Shuhai Beijing, the VIE. If the consolidated VIE or its shareholders fail to perform their respective obligations under these contractual arrangements, our recourse to the assets held by the consolidated VIE is indirect and we may have to incur substantial costs and expend significant resources to enforce such arrangements in reliance on legal remedies under PRC law. These remedies may not always be effective, particularly in light of uncertainties in the PRC legal system. Furthermore, in connection with litigation, arbitration or other judicial or dispute resolution proceedings, assets under the name of any of record holder of equity interest in the consolidated VIE, including such equity interest, may be put under court custody. As a consequence, we cannot be certain that the equity interest will be disposed pursuant to the contractual arrangement or ownership by the record holder of the equity interest.

A condensed consolidating schedule that breaks down the operations and depicts the financial position, cash flows, and results of operations as of the same dates and for the fiscal years ended June 30, 2021 and 2020 in tabular form was contained in pages F-12 to F-16 of the 2021 Annual Report.

All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the U.S.. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant time delays or other obstacles in the process of enforcing these contractual arrangements, it would be very difficult to exert effective control over the consolidated VIE, and our ability to conduct our business and our financial condition and results of operations may be materially and adversely affected.

Our Organizational Structure

The Company’s organizational chart as of September 20, 2023:

Please refer to the discussion in NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES of the Notes to the Consolidated Financial Statements under Item 8 of this Annual Report for a narrative of our organization structure and operating subsidiaries, including their dates of incorporation and history.

Competitive Strengths 

The Company believes our market position and potential future growth can be attributed to the following key factors and competitive strengths:

Innovative technologies and products: Companies with a track record of innovations and a pipeline of new technologies and products can maintain a competitive advantage, which includes focusing on the core industries of acoustics and artificial intelligence (AI), actively participating in the formulation of industry technical standards and the building of a protective barrier, and developing international technical cooperation in China and the United States. We continue to enhance our technological leadership in the field of acoustics, along with the market opportunities created.

Global presence: An extensive international presence can open up new markets and revenue streams, based on the building of operational platforms and market channels in the United States, and the establishment of Datasea Acoustics LLC, a Delaware subsidiary in the U.S., confirms the Company’s pace and determination in implementing its global business strategy.

Strong and diverse management team: The Company has an experienced and visionary management team that can effectively drive strategic plans and adapt to market changes.

Building an international talent team is essential for the sustainable development of the Company. Firstly, we actively tap into internal potential by sending our Vice General Manager of the Research and Development Department, Mr. Li Huan, to pursue further education at a university in Austria. This helps us cultivate talents reserve and acquire new technological knowledge. Secondly, we continuously recruit specialized talents, both in China and the United States, to enhance the Company’s capabilities in management, marketing, sales, capital markets, and corporate governance, promoting our level of internationalization.

The Company’s management team is also very diversified. Among the five members of the board of directors, there are three males and two females, a 40% female representation on the board. Additionally, within the Company’s management, there are four Asian and one White executives. Taking into account the Chief Financial Officer (CFO) and Chief Technology Officer (CTO), the Company’s executive team comprises seven members, including four males and three females. This reflects the Company’s commitment to and demonstration of diversity, equality, and transparency.

Endorsement from the third-party technical certification: Leading third-party labs such as the Wuhan Institute of Virology have proven this ultrasonic disinfection technology to have 99.83% efficacy in nine seconds against Covid-19 and 99.99% efficacy against Staphylococcus Albus and E-col. Meanwhile, this strategic shift and process support the Company to provide a safer and healthier lifestyle for users worldwide in the post-pandemic era with a greater focus on protection and quality of life.

ESG (Environmental, Social, and Governance) Initiatives: Commitment to ESG principles can attract socially responsible investors and enhance the Company’s reputation.

Research and Development 

Datasea’s board of directors and management attach great importance to the building of a technological product innovation and research and development system.

Primarily, the Company’s core research and development efforts are directed towards the advancement and innovation of various technologies encompassing acoustic applications and artificial intelligence. The overarching objective of innovative research rooted in acoustics is to provide technical support for the development of acoustic applications across various industries. In the realm of acoustic intelligence, which includes ultrasound, infrasound, directional sound, and Schumann resonance, the Company has carried out in-depth collaborations with esteemed research institutions such as the Institute of Acoustics at the Chinese Academy of Sciences, the Institute of Artificial Intelligence, the China Institute of Information and Communication Technology, the China Institute of Standards, and the China Artificial Intelligence Industry Alliance in technological innovation, expert resources, and the industry standards development.

As of now, the Company’s acoustic research and development has formed a core application matrix of acoustic technology with ultrasound as the core and Schumann resonance and directional sound as the assistance.

In terms of ultrasound, the Company innovatively uses the longitudinal wave collaborative field of air ultrasound, and the skin-promoting effect of standing surface wave accelerates the skin repair cycle. Moreover, the high-frequency vibration characteristics of ultrasound are fully reflected in the micro-particle atomization method, and the atomization spray using special consumables can fully penetrate into the dermis of the skin, which can double skin repair effect.

In terms of directional sound, the Company has achieved a breakthrough in the transmission of sound waves within an extremely narrow angle (25 degrees) and also achieved signal recovery at the lowest audible frequency in the world (20Hz).

In addition, the Company’s R&D team has developed a general pretrained transformer based on AI and a pretrained Large Language Model (LLM) with deep scene fusion. The intelligent service module based on the large language model has been widely used in the Company’s 5G messaging business and digital city services, which can effectively improve user efficiency.

Intellectual property rights

The Company has established the main direction of technical innovation and application of non-visual convergent technology with acoustic intelligence as the core. As of September 2023, Shuhai Beijing has four currently valid patents (all patents here are PRC registered), Xunrui Technology has two valid patents and Tianjin Information has one currently valid patent, Shenzhen Jingwei has three valid patents, Shenzhen Acoustic has four valid patents, Shuhai Beijing also has twelve patent applications under substantive examination, as shown below:

The Company actively develops and uses acoustic intelligent technologies and products to establish technical barriers and thresholds that are different from other competitors. Research and Development has always been the core and driving force of the Company’s development. The Company strengthens the application and industrialization of the unique intelligent acoustics technology Landing services and fully implements the industrial and technological layout of acoustic sterilization, acoustic medical beauty, acoustic medical treatment, acoustic agriculture, and acoustic detection. In the post-epidemic era, the Company launched a series of acoustic sterilization products that utilize the interaction between ultrasound and biology. Mastering the core technology to solve practical problems using the characteristics of sound waves (especially ultrasound and infrasound) enables the Company to seize the opportunity in the field of acoustic intelligence industry.

As of September 2023, the Company has made the following achievements in patent applications from the State Intellectual Property Bureau:

Publication and Granted Patents:

Patents under Substantive Examination:

Major products

The Company mainly focuses on developing the following two categories of products: software and smart hardware devices.

Software system - mainly refers to software systems and solutions related to 5G messaging cloud platforms/5G digital platforms and smart cities. As a result of the Company’s increased investment in R&D and the training of technical talents, the Company’s software has a total of 106 copyright registrations in China, of which Shuhai Beijing owns 35 Software Copyright registrations, Xunrui owns 27 Software Copyright registrations, Tianjin Information owns 23 Software Copyright registrations and Shuhai Acoustic owns 3 Software Copyrights, and Shenzhen Jingwei owns 18 Software Copyrights. The details are as follows:

Intellectual Property Planning

Datasea is dedicated to cultivating a core product portfolio within the realm of acoustic intelligence, with a primary focus on the integration of acoustics and artificial intelligence. The Company is actively pursuing patent applications to establish a robust technological barrier. Over the course of the next three years, Datasea has outlined its strategic goals, centering its efforts on promising domains such as ultrasound, Schumann resonance technology, and directional sound. The intended achievements include:

Shuhai Beijing, serving as the Company’s flagship operating entity in China, aims to secure a total of 20 new invention patents and 10 international patents within the field of acoustics.

Our overseas subsidiary, primarily based in Delaware, intends to obtain 5 U.S. invention patents and 5 international invention patents in the domain of acoustics.

These strategic endeavors underscore Datasea’s commitment to innovation and its ambition to solidify its position as a leading player at the intersection of acoustics and artificial intelligence.

R&D Investment 

As for the fiscal year ended June 30, 2022 and 2023, we spent $1,259,739 and $938,784 on research and development, respectively. Datasea, the VIE, and its subsidiaries intend to invest approximately $10 million in technological product development over the next three years. The budget for each sector is presented in the table below.

Product Manufacturing

Intelligent hardware terminals

For the fiscal year ended June 30, 2023, our products primarily consist the “HailiJia” series of ultrasonic air sterilizer products, including 1) In-door models (floor and desktop models) suitable for different areas and functions, and 2) In-vehicle models; 3) Restroom and Cloakroom purification and deodorization. Comprehensive air disinfection, and specialized sterilization suitable for environments such as hospitals, airports, hotels, transportation and residential buildings.

For restroom model

For cloakroom model

Skin Repair Robot (Coming soon)

Sleep Monitor (Coming soon)

Production mode

In the Chinese market, on the basis of a comprehensive understanding of the industry and the market, the Company has adopted the model of manufacturing outsourcing in the production of intelligent acoustic hardware products and an independent or joint design model in product appearance, and established the control process of “prototype selection - prototype determination - content determination - replication efficiency and replication effect” on the basis of product line standardization. At the same time, the Company has established the R&D management process from “approval-node monitoring-assessment”, and optimized the standard manufacturing process and construction management process to guide factory production, supply chain procurement and project site construction. During the reporting period, the Company has added a professional antivirus and odor removal equipment manufacturer to customize and produce bathroom and cloakroom odor products and equipment using Datasea’s intelligent acoustics technology. Meanwhile, Schumann sleep aid product has been finalized and developed with partner manufacturers.

In the U.S. market, with the establishment of Datasea Acoustics LLC, a subsidiary in the United States, the establishment of assembly lines and production lines has been initiated. At the same time, cooperation with various local manufacturing enterprises will also be a rapid way to realize international production of products.

Control over manufacturing process and quality

SQA: control over supplier quality system, quality standard formulation, quality assurance capability improvement and guidance, material quality confirmation;

IPQC: responsible for quality control of the manufacturing process, to make sure that the manufacturing process meets relevant technical and quality requirements, and problems are timely identified, back-fed and addressed;

QC: responsible for overall inspection and delivery inspection of finished products.

Outsourcing partners and outsourced products

As of June 30, 2023, we have established partnerships with approximately 60 outsourcing partners. We are currently seeking other outsourcing partners and looking for new opportunities to retain and optimize our outsourcing and supply chain resources.

Government Regulation and Licenses  

Our operations are subject to and affected by PRC laws and regulations. The primary governmental regulation regulating the Internet security equipment industry in the PRC is the Cybersecurity Law, effective June 1, 2017, which governs entities providing “critical information infrastructure.” This statute provides basic protections for Internet users, such as not selling individual’s data to other companies without the user’s permission and not knowingly distributing malware. China’s new Data Security Law took effect in September 2021. The Data Security Law provides that data processing activities must be conducted based on “data classification and hierarchical protection system” for the purpose of data protection and prohibits entities in China from transferring data stored in China to foreign law enforcement agencies or judicial authorities without prior approval by the Chinese government.

On December 28, 2021, thirteen governmental departments of the PRC, including the Cyberspace Administration of China (the “CAC”), issued the Cybersecurity Review Measures, which became effective on February 15, 2022. The Cybersecurity Review Measures provide that an online platform operator, which possesses personal information of at least one million users, must apply for a cybersecurity review by the CAC if it intends to be listed in foreign countries. Because the VIE’s current operations do not possess personal information from more than one million users at this moment, the Company does not believe that the Company is subject to the cybersecurity review by the CAC. In addition, as of the date of this report, the Company has not been involved in any investigations on cybersecurity review initiated by any PRC regulatory authority, nor has the Company received any inquiry, notice, or sanction related to cybersecurity review under the Cybersecurity Review Measures.

The wholly owned subsidiaries and the VIE and its subsidiaries are required to have, and each has, a business license issued by the PRC State Administration for Market Regulation and its local counterparts. In addition, major PRC regulations applicable to our products and services and the Internet security industry include Internet Security Protection Technology Measures Provision (Ministry of Public Security Order No. 82) (“Order 82”). Order 82 specifies certain security measures Internet service providers shall take to ensure Internet security. Providers of ISP connecting service and Internet-based data processing service are within the scope of Order 82. It does not call for any license or permission to any entities.

The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the China Securities Regulatory Commission, or CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. Substantial uncertainty remains regarding the scope and applicability of the M&A Rules to offshore special purpose vehicles. Although we believe that CSRC’s approval is not required for the listing and trading of our common stock on Nasdaq, we cannot assure you that relevant PRC governmental agencies, including the CSRC, would reach the same conclusion as we do.

Shuhai Beijing currently maintains the following licenses issued by the PRC government that are material to its operations:

Shuhai Beijing also maintains the following certificates for its business:

Employees

As of the date of this report, we have approximately 53 full-time employees and no part-time employees. The following table sets forth the number of our employees categorized by function as of that date: 

Item 1A. Risk Factors 

An investment in our common stock is very speculative and involves a high degree of risk. You should carefully consider the following risk factors in evaluating our business before purchasing any shares of our common stock. No purchase of our common stock should be made by any person who is not in a position to lose the entire amount of his or her investment. The order of the following risk factors is presented arbitrarily. You should not conclude the significance of a risk factor because of the order of presentation. Our business and operations could be seriously harmed as a result of any of these risks.

Risks Relating to Our Business and Industry

We have a limited operating history as a developer of intelligent acoustics, 5G messaging and other products and services. Our limited operating history may not provide an adequate basis to judge our future prospects and results of operations.

We have a limited operating history. The operating entity, Shuhai Beijing, was formed in February 2015 and may not generate material revenue or any profit in the foreseeable future. We are still in the process of developing, marketing and expansion of our business. We expect that our intelligent acoustics (including ultrasound, infrasound, directional sound, and Schumann resonance), 5G messaging and other products and services will be our core business in the future. We have limited experience and operating history in developing and marketing our products and services. In addition, the market for our products and services is highly competitive. If we fail to successfully develop and offer our products and services in an increasingly competitive market, we may not be able to capture the potential growth opportunities associated with our products and services or recover our development and marketing costs, and our future results of operations and growth strategies could be adversely affected. Our limited history may not provide a meaningful basis for investors to evaluate our business, financial performance and prospects.

Our independent registered public accounting firm’s auditors’ report includes an explanatory paragraph stating that there is substantial doubt about our ability to continue as a going concern.

We are an early and development stage company and have limited financial resources. We had cash balances of $164,217 and $19,728 as of June 30, 2022 and June 30, 2023, respectively. We generated revenues of $7,045,311 during the year ended June 30, 2023. We had a net cash outflow of $144,489 during fiscal year ended June 30, 2023. We had a deficit of approximately $28,067,500 at June 30, 2023.

Our resources and source of funds have primarily consisted of loans and capital contributions from shareholders and funds raised from equity financing. We believe these are sufficient to keep our business operations functioning for the next twelve months. We have generated revenue of $7,045,311 from our business during the year ended June 30, 2023, and our expenses will be accrued until sufficient financing is obtained or our shareholders loan us the necessary funds to pay for these expenses.

On August 1, 2023, the “Company entered into two separate subscription agreements with a certain non-U.S. investor (“Investor A”), pursuant to which the Company agreed to sell and Investor A agreed to purchase an aggregate of 4,760,000 shares of common stock price at a $1.2 per share purchase price. Such shares must be held for a period of 365 days. In accordance with such two agreements and a subsequent supplementary agreement, Investor A shall pay a total purchase price of $5,712,000 in RMB, at an amount of RMB 40,000,000, no later than September 30, 2023. On September 21, the Company has received all of the payment of RMB 40,000,000.

On August 15, 2023, Datasea Inc. (the “Company”) entered into a subscription agreement with a non-U.S. investor (the “Investor B”), pursuant to which the Company agreed to sell and Investor B agreed to purchase an aggregate of 2,962,963 shares of common stock at a $1.35 per share purchase price, with a total subscription price of $4,000,000. Such shares must be held for a period of 180 days. On August 16, 2023, the investor made the initial investment payment of RMB 5,000,000 to the Company, equal to $714,286.

On September 13, 2023, the Company closed its underwritten public offering of 5,000,000 shares of common stock at a public offering price of $0.40 per share, for aggregate gross proceeds of approximately $1,635,000, after deducting underwriting discounts and other offering expenses. In addition, the Company has granted the underwriter a 45-day option to purchase up to an additional 750,000 shares of common stock at the public offering price per share.

Although such liquidity concern may be mitigated by the Company’s sale of shares, no assurances can be given that we will be able to obtain funds from our shareholders or others to continue our operations in the future. We may need to seek additional financing. The financing sought may be in the form of equity or debt financing or a combination of both from various sources as yet unidentified. No assurance can be given that we will generate sufficient revenue or obtain the necessary financing to continue as a going concern and the failure to do so could cause us to cease our operations.

Supply chain issues that increase our costs or cause a delay in our ability to fulfill orders, could have an adverse impact on our business and operating results, and our failure to estimate customer demand properly may result in excess or obsolete component supply, which could adversely affect our gross margins.

Currently, we do not own or operate our manufacturing facilities, but rely on third-party contractors to manufacture our products, and expect that we will continue to rely on existing and new contractual manufacturers for the foreseeable future. The following reliance issues could have an adverse impact on the supply of our products and on our business and operating results:

In addition, the following supply chain-related issues could adversely affect our customer relationships, operating results and financial condition:

Over the long term, we intend to invest in engineering, sales, service and marketing activities, and these investments may achieve delayed, or lower than expected, benefits which could harm our operating results. 

While we intend to focus on managing our costs and expenses, over the long term, we also intend to invest in personnel and other resources related to our engineering, sales, service and marketing functions as we realign and dedicate resources to key growth areas, such as intelligent acoustics, 5G messaging and other products and services. We are likely to recognize the costs and expenses associated with these investments earlier than some of the anticipated benefits, and the return on these investments may be lower, or may develop more slowly, than we expect. If we do not achieve the benefits anticipated from these investments, or if the achievement of these benefits is delayed, our operating results may be adversely affected.

Our business substantially depends upon the continued growth of intelligent acoustics, 5G messaging and other products and services, the decrease of which could have a negative impact on our business.

A substantial portion of our business and revenue depends on the growth of intelligent acoustics, 5G communication in the PRC and globally, including the continued development and expansion of the Internet. To the extent that an economic slowdown or economic uncertainty and any related reductions in capital spending adversely affect spending on Internet infrastructure, we could experience material harm to our business, operating results and financial condition.

Because of the rapid introduction of new products and changing customer requirements related, we believe that we could receive a high degree of publicity and visibility. Because smart security systems are our major products and resources, our business, operating results and financial condition may be materially adversely affected, regardless of whether or not these problems are due to the performance of our own products or services. Such an event could also result in a material adverse effect on the market price of our common stock independent of direct effects on our business.

Product quality problems could lead to reduced revenue, gross margins, and net income. 

The sonic air sterilization products we provide is highly complex as the products incorporate both hardware and software technologies. There can be no assurance that the pre-shipment testing programs we develop in the future will be adequate to detect all defects, including defects in individual products or defects affecting numerous shipments. Such potential defects might interfere with customer satisfaction, reduce sales opportunities or affect gross margins. As an example, software typically contains bugs that can unexpectedly interfere with expected operations. From time to time, we will have to replace certain components and provide remediation in response to the discovery of defects or bugs in our products. There can be no assurance that such remediation, depending on the product involved, would not have a material adverse impact on our business. An inability to cure a product defect could result in the failure of a product line, temporary or permanent withdrawal from a product or market, damage to our reputation, additional inventory costs, or product reengineering expenses, any of which could have a material adverse impact on our revenue, margins and net income.

We will likely have to incur indebtedness or issue new equity securities to fund future growth. If we are not able to obtain additional capital, our ability to operate or expand our business may be impaired and our results of operations could be adversely affected. 

Our business requires significant levels of capital to finance the research and development of new products and service platforms that meet the constantly evolving industry standards and consumer demands. As such, we expect that we will need additional capital to fund our future growth. For the time being, we are primarily depending on contribution from shareholders, equity financing and cash income. If cash from such sources is insufficient or unavailable, or if cash is used for unanticipated needs, we may require additional capital sooner than anticipated. Our ability to obtain additional capital on acceptable terms or at all is subject to a variety of uncertainties, including:

The sale of additional equity securities would result in dilution of our existing shareholders. In addition, the incurrence of indebtedness would result in increased debt service obligations and could result in operating and financial covenants that would restrict our operations. It is highly uncertain whether financing will be available in amounts or on terms acceptable to us, if at all. If we are not able to obtain additional capital, our ability to operate or expand our business may be impaired and our results of operations could be adversely affected.

Our success is dependent on retaining key personnel who would be difficult to replace.

Our success depends largely on the continued services of our key management and technical staff. In particular, our success depends on the continued efforts of Ms. Zhixin Liu, our Chairman of the Board of Directors, Chief Executive Officer, President and Corporate Secretary, and Mr. Fu Liu, one of our directors and Ms. Liu’s father. Ms. Liu and Mr. Liu have been instrumental in developing our business model and are crucial to our business development. There can be no assurance that they will continue in their present capacities for any particular period of time. The loss of the services of Ms. Liu and/or Mr. Liu could materially and adversely affect our business development.

The various industries we are in are characterized by constant and rapid technological change and evolving standards. If we fail to anticipate and adapt to these changes and evolutions, our sales, gross margins and profitability will be adversely affected.

Technologies change rapidly in the intelligent acoustics, 5G messaging industries with frequent new products and service developments and evolving industry standards. Companies operating within these industries are continuously developing new products and services with heightened performance and functionality, putting pricing pressure on existing products. Accordingly, we believe that our future success will depend on our ability to continue to anticipate technological changes and to offer additional product and service opportunities that meet evolving standards on a timely and cost-effective basis. Our failure to accurately anticipate the introduction of new technologies or adapt to fluctuations in the industry could lead to our having significant amounts of obsolete inventory that can only be sold at substantially lower prices and profit margins than anticipated. In addition, if we are unable to develop planned new technologies, we may be unable to compete effectively due to our failure to offer products or services most demanded by the marketplace. Products and services that our competitors develop or introduce may also render our products and services noncompetitive or obsolete. If any of these failures occur, our business and results of operations would be adversely affected.  

We depend on contract manufacturers, and our production and products could be harmed if they are unable to meet our volume and quality requirements and alternative sources are not available.

We rely on third party contract manufacturers to provide manufacturing services for our products. If these services become unavailable, we would be required to identify and enter into new agreements with other contract manufacturer or take the manufacturing in-house. The loss of our contract manufacturers could significantly disrupt production as well as increase the cost of production. These changes could have a material adverse effect on our business and results of operations.

We have seen a substantial improvement and progress in our internal control over financial reporting. If no improvement measures are taken, or if we experience additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock.

Our management has assessed the effectiveness of our internal control over financial reporting with an assessment report as of June 30, 2023, and plans to shorten the cycle and increase the frequency concerning the testing cycle for the effectiveness of internal control measures. The annual risk control assessment reporting system will be improved to a quarterly risk control assessment system.

Our efforts in the building of our internal control system are not limited to the formulation and implementation of financial management and control measures, but focuses on the combination of comprehensive and targeted control to build up an internal control system that best fits us. According to the management system imperfections concerning job responsibilities and departmental processes that are identified through self-examination, the Company, by highlighting six elements of “internal environment, risk assessment, control activities, information and communication, and internal supervision” and seven control measures of separate control of incompatible functions, authorization and approval control, accounting system control, property protection control, budget control, operation analysis control and performance appraisal control”, is gradually establishing and improving an internal control system featuring organizational structure, development strategy, human resources, social responsibility, corporate culture, financial activities, procurement business sales business, research and development, financial reports, comprehensive budget, contract management, internal information transfer and information system and other contents, and it is formulating the internal control system applicable to the whole company and organizing related implementation in accordance with relevant laws and regulations and supporting measures..

By the end of the fiscal year ended June 30, 2023, we have established a Risk Control Department led by the internal control director and external legal counsels to ensure the Company’s compliance with relevant regulations and risk management requirements. We also formulated new policies or integrated a series of internal control policies, including but not limited to the process from procurement to payment, the process from payment to the sales, cash management, cost management, budget process, accounts receivable policy, policy to prevent and detect fraud, assets and inventory management, internal audit policy and cost accounting. We further set up bookkeeping under U.S. GAAP and we provided training for our employees, such as the Finance Department, Marketing Department, and senior executives. We also set up the International Affair Department to strengthen our compliance and financing management in the international capital market.

Our compliance with complicated U.S. regulations concerning corporate governance and public disclosure will result in additional expenses. Moreover, our ability to comply with all applicable laws, rules and regulations is uncertain given our management’s relative inexperience with operating U.S. public companies. 

As a public company, we are facing with expensive, complicated and evolving disclosure, governance and compliance laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and the Dodd–Frank Wall Street Reform and Consumer Protection Act. New or changing laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with evolving laws, regulations and standards of a U.S. public company are likely to continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

Moreover, our executive officers have little experience in operating a U.S. public company, which makes our ability to comply with applicable laws, rules and regulations uncertain. Our failure to comply with all laws, rules and regulations applicable to U.S. public companies could subject us or our management to regulatory scrutiny or sanction, which could harm our reputation and stock price.

Failure to comply with the Foreign Corrupt Practices Act could adversely affect our business.

We are required to comply with the United States Foreign Corrupt Practices Act (or FCPA), which prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some of our competitors, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in mainland China. If our competitors engage in these practices, they may receive preferential treatment from personnel of other companies or government agencies, giving our competitors an advantage in securing business or from government officials who might give them priority in obtaining new licenses, which would put us at a disadvantage.

We have operations, agreements with third parties, and make sales in China. Companies with operations in China have been accused and found guilty of sales practices that involve unlawful activity, including violations of the FCPA. We believe to date we have complied in all material respects with the provisions of the FCPA. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants and/or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.