UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2022
or
☐
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 001-38474
Gushen, Inc.
(Exact name of registrant as specified in its charter)
Nevada | | 47-3413138 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
Room 1312-13, 14th Floor, Building No.
2, 1 Hangfeng Road,
Fengtai District, Beijing, China
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including
area code: +8613949778662
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
None | | N/A | | N/A |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark whether the registrant
is not required to file reports pursuant to Section 13 or 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, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ | | Accelerated filer ☐ |
Non-accelerated filer ☐ | | Smaller reporting company ☐ |
| | Emerging growth company ☐ | |
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 Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and
asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter
was $980,833,750. This value is calculated by reference to the closing price of $33.80 as of March 31, 2022, the last trading day of the
registrant’s most recently completed second quarter ended on March 31, 2022, and 29,018,750 shares of common stock held by non-affiliates
as of March 31, 2022.
As of September 30, 2022, there were 410,618,750
shares of the registrant’s common stock outstanding and 1,000,000 shares of preferred stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
N/A
Table of Contents
PART I
Item 1. Business.
Overview
Gushen, Inc., a Nevada corporation,
(“we”, “us” or “the Company”) was incorporated under the laws of the State of Nevada on March 9, 2015.
The Company was originally
set up as a holding company operating through its wholly owned subsidiary, Gushen Holding Limited, to provide managerial and IT support
to start-ups as well as SME (small and medium enterprises) in Hong Kong and Malaysia to assist them in their early stages of operations
as they expand and grow their own company. On August 5, 2016, the Company acquired a Hong Kong company, Gushen Credit Limited, with a
money lender license registered according to Cap163 Money Lenders Ordinance of Hong Kong. Due to the keen competition and high rental
expense in Hong Kong, on April 27, 2017, the Company decided to dispose of the asset for a consideration of $105,000 and ceased the business
in Hong Kong. Thereafter, the Company did not open for business or generate any revenue from November 2017 to March 2020, making it dormant.
On March 27, 2020, as a result
of a custodianship in Clark County, Nevada, Custodian Ventures, LLC was appointed custodian of Gushen Inc. David Lazar, a private investor
and managing member of Custodian Ventures, LLC (together with David Lazar, the “Custodian”), was appointed as the Company’s
Chief Executive Officer, President, Secretary, Chief Financial Officer, Chief Executive Officer and Chairman of the Board of Directors.
The Custodian was tasked to solicit investment on behalf of the Company.
On December 9, 2020, the Company,
Custodian, and certain investors (“Purchasers”) entered into a Stock Purchase Agreement (the “SPA”), pursuant
to which the Purchasers acquired 30 million shares of Series A preferred stock (the “Preferred A Shares”), each convertible
into 10 shares of Common Stock, from Custodian for an aggregate purchase price of $525,000. In connection with the SPA, the Company, Custodian,
and Gushen Holding Limited entered into a spin-off agreement, pursuant to which the Custodian acquired all issued and outstanding stock
of Gushen Holdings Limited at a minimal purchase price of $1. Thereafter, the Company no longer retains any interest in Gushen Holding
Limited.
On July 30, 2021, the Company
and Dyckmanst Limited, a British Virgin Islands company (“Dyckmanst Limited”), and all shareholders of Dyckmanst Limited entered
into a share exchange agreement (the “Share Exchange Agreement”), pursuant to which the Company acquired 100% of the issued
and outstanding equity securities of Dyckmanst Limited in exchange for 381,600,000 shares of common stock, par value $0.0001 per share
(the “Common Stock”) of the Company (the “Share Exchange”). Immediately prior to the closing of the Share Exchange,
two existing holders of aggregated 30,000,000 shares of Series A preferred stock of the Company, par value $0.0001 per share (the “Preferred
Stock”) delivered 29,000,000 shares of Preferred Stock to the Company for cancellation (“the “Cancellation of Certain
Preferred Stock”), each Preferred Stock is convertible into 10 shares of Common Stock. As a result, shareholders of Dyckmanst Limited
collectively control 90.72% voting power of the Company on as converted basis, with respect to all of the shares of common stock and preferred
stock, voting as a single class, with each share of common stock entitles to 1 vote and each share of preferred stock entitles to 10 votes.
As a result of the Share exchange,
the Company assumes the business of Dyckmanst Limited. Through certain overseas subsidiaries and contractual arrangements, the Company
is able to consolidate the financial results of Beijing Zhuoxun Century Culture Communication Co., Ltd. (“Zhuoxun Beijing”)
and its subsidiary in accordance with US GAAP as the primary beneficiary. Zhuoxun Beijing is a PRC company that provides family education
resources to promote all-around education onsite in local communities organized by our regional collaborative education agency and offer
parents easy access to a wide variety of courses online through our application.
Going Concern
The accompanying consolidated
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The realization of assets and the satisfaction of liabilities in the normal course of business
are dependent on, among other things, the Company’s ability to operate profitably, to generate cash flows from operations, and to
pursue financing arrangements to support its working capital requirements.
In assessing the Company’s
liquidity, the Company monitors and analyzes its cash and cash equivalents and its operating and capital expenditure commitments. The
Company’s liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure obligations.
As of September 30, 2022, the Company’s current liabilities exceeded the current assets
by $11,282,551, its accumulated deficit was $12,080,418 and the Company has incurred losses during the year ended September
30, 2022 and 2021. None of the Company’s stockholders,
officers or directors, or third parties, are under any obligation to advance us funds, or to invest in us. Accordingly, we may not be
able to obtain additional financing. If we are unable to raise additional capital, we may be required to take additional measures to conserve
liquidity, which could include, but not necessarily be limited to, curtailing operations, suspending the pursuit of our business plan,
and reducing overhead expenses. We cannot provide any assurance that new financing will be available to us on commercially acceptable
terms, if at all.
These conditions raise substantial
doubt about our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should
the Company be unable to continue as a going concern.
Organizational Structure
The Company is a holding company
organized in Nevada in March 2015. As of the date of this annual report, the Company has the following wholly owned subsidiaries: (i)
Dyckmanst Limited, an entity formed under the laws of British Virgin Islands, (ii) Edeshler Limited (“Edeshler Limited”),
an entity formed under the laws of Hong Kong Special Administrative Region of the People’s Republic of China (“Hong Kong”
or “HK”) and a wholly owned subsidiary of Edeshler Limited, (iii) Beijing Fengyuan Zhihui Education Technology Co., Ltd. (“Fengyuan
Beijing”), an entity formed under the laws of People’s Republic of China (“PRC”) as a wholly foreign owned enterprise
and a wholly owned subsidiary of Edescher Limited.
In addition, Fengyuan Beijing
has entered into a series of contractual arrangement (the “VIE Agreements”) with Zhuoxun Beijing, which is commonly known
a variable interest entity (“VIE”), an entity formed under the laws of PRC, pursuant to which Fengyuan Beijing and the Company
are able to consolidate the financial results of Zhuoxun Beijing and its subsidiary in accordance with US GAAP as the primary beneficiary.
The VIE Agreements executed in February 2021 include (i) a Consulting Service Agreement, (ii) a Busieness Operation Agreement, (iii) a
Proxy Agreement, (iv) an Equity Disposal Agreement and (v) an Equity Pledge Agreement. Although Fengyuan Beijing does not own the equity
interests of Zhuoxun Beijing, Mr. Yulong Yi (“Mr. Yi”), our chairman, chief executive officer, president, treasurer, and a
significant stockholder, is also a director of Zhuoxun Beijing and controls all decision-making for Zhuoxun Beijing along with our other
significant stockholder, Mr. Shaowei Peng (“Mr. Peng”), who has the ability to control Zhuoxun Beijing’s technology
matters.
This chart reflects our current organizational structure:
Edeshler Limited was established
in Hong Kong on January 9, 2019 and operates as a holding company for our shares in Fengyuan Beijing.
Fengyuan Beijing was established
in PRC on June 16, 2019 and operates as our onshore holding company in PRC and a party to the VIE Agreements.
Zhuoxun Beijing was established
in PRC on August 22, 2013 and operates as the VIE under the VIE Agreements. Zhuoxun Beijing provides family education resources to promote
all-around education onsite in local communities organized by our regional collaborative education agency and offer parents easy access
to a wide variety of courses online through our application.
Beijing Zhuoxin Education
Technology Co., Ltd. (“Zhuoxin Beijing”) was established in PRC on December 24, 2020. Zhuoxun Beijing owns 70% of equity interests
in Zhuoxin Beijing, with the remaining 30% belonging to Guoxinzhengye Company Management Co., Ltd., a subsidiary of CITIC Group Corporation
Ltd., a major PRC state-owned investment company. Zhuoxin Beijing is primarily engaged in establishing facilities to, among the others,
provide family education consulting services, sell and rent book, organize book clubs, and sell educational electronic devices.
Industry Focus
Zhuoxun Beijing’s primary
business is in the family education industry, integrated with online and onsite classes, which it believes fulfills increasing needs for
parents to enhance their family education. In China, many educational companies for students aged from 3 to 16 years old currently offer
K-12 education and interest classes, emphasizing on helping students on their K-12 school study or providing professional courses to develop
students’ after-class interest. Its family educational services offer well-designed courses for both parents and students, focusing
on children’s all-around development and parenting methods, with a goal to enable effective and efficient communications among children
and parents, to promote science-based parenting methods, and to assist with children’s full skill growth.
The PRC Family Education Promotion
Law went into effect on January 1, 2022, setting forth specific regulatory requirements for the family education industry and clarifying
that parents are the main body of responsibility for family education. To raise more awareness on the importance of family education and
the health and growth of children, the law officially names the week of May 15 (the International Family Day) every year as the National
Family Education Awareness Week. In April 2022, 11 departments including the Ministry of Education jointly issued the “Five-Year
Plan on Guiding and Promoting Family Education (2021-2025)”, emphasizing the importance of uniting governmental and social forces
to work together in the deliveries of family education.
These measures clarify the
regulatory framework and signals government support for the development of the family education industry.
The
Chinese family education industry has significant growth potential. At present, there are about 200 million preschool children and primary
and secondary school students in China, and about 340 million parents (parents), 50% of whose families have spent an average of more than
10,000 RMB annually (or approximately 1,408 USD) on education. China’s
home education market totaled 2 trillion RMB (or approximately 282 billion USD), with
out-of-school education spending accounted for one-third of household expenditures (16.6% in rural areas; 42.2% in urban areas). Additionally,
the country currently has 367 million people under the age of 18, accounting for 28% of the total population.
Recently, the PRC
government continues to put more emphasis on the implementation of the “three-child” family planning policy, improved
level of prenatal and postnatal care services, development in the nursery service system, and reduced cost of child care and
education. In particular, within the 2 trillion RMB (or approximately 282 billion USD) national education service industry, which
accounts for 2% of the annual GDP, the out-of-school training sector for primary and secondary school students accounts for 40% of
the market opportunities. In addition, the industry continues to experience significant growth from the 10 million jobs that the
industry current provides.
From 2021 to 2025, the average growth rate of the size of the out-of-school
training market will remain stable at around 15%. It is estimated that by 2025, the size of China’s education market will reach 7.5 trillion
RMB (or approximately 1,056 billion USD). It is expected that the market will continue to experience supply shortage in the next 30 years,
furnishing new growth space for the family education service providers.
Zhuxun Beijing provides online
family education through onsite educational activities and mobile application.
Products
Onsite Educational Activities
Zhuoxun
Beijing’s customers are parents who desire to acquire various family education resources. Zhuoxun Beijing delivers onsite educational
services to parents through its nationwide physical network of regional collaborative education agencies. Zhuoxun Beijing’s onsite
educational services include programs such as individual development, youth leadership development, and parenting schools, enabling in-person
guidance and interactions in classes. It has developed long term collaboration relationships with 12 regional collaborative
education agencies, who are responsible for organizing, management and logistics while we provide classes. As of the date hereof, it has
onsite educational activities in 30 cities, including but not limited to, Luoyang, Hohhot, Luohe, Yinchuan, Changde, Ruzhou, Xinxiang,
Zhoukou, Sanmenxia, Lingbao, Zhengzhou and Chengdu.
Wisdom Lighthouse (“睿智灯塔”)
Application (Formerly known as “ZhuoXun App”)
Zhuoxun Beijing’s online
family educational services offer parents a convenient platform to access to courses. Users of its mobile applications are encouraged
to become registered members. A registered member can, among others, track their study records, participate in discussion in the designated
sections and post their study takeaways. It offers first class for each course for free. After taking first class, users can decide whether
to purchase the whole course. As of the date hereof, Zhuoxun Beijing has around 68,000 active users on
the Wisdom Lighthouse app.
Courses available through
Widsom Lighthouse App include but are not limited to the followings:
| ● | “Good Parenting” (“教子有方”),
focused on child development, provides courses including emotional intelligence (EQ) training,
learning habits, learning ability, parents-children communication, stages of puberty, etc. to help parents promote children’s mental
and psychological health. |
| ● | “Wise Parents”
(“智慧父母”) introduces general strategies
of family education to parents to help them better understand and support their children’s growth and needs, whereby courses such
as traditional family values, improvement of parents’ qualifications, and psychological analysis are provided. |
| ● | “Lifelong Journey”
(“人生智库”) provides parents with
self-improvement content, with focus on different aspects of Chinese Studies, emotional intelligence (EQ), etiquette and social interaction
skills. |
Through
Zhuoxun Beijing’s mobile application, Zhuoxun Beijing’s users can, based on their own interest and needs, select courses that
are suitable for them and obtain valuable knowledge and skills provided by Zhuoxun Beijing’s courses. Zhuoxun Beijing’s users
on mobile platform can use iPhone, Android, iPad and other tablets to review the courses anywhere and anytime.
Zhuoxun
Beijing’s online family education mobile platform monetizes through in-app purchases. Zhuoxun Beijing provides one free trial class
of each course for all the users. The remaining classes are available for purchase. Users are able to view the first class for free before
determining if to purchase the remaining classes.
Zhuoxun
Anti-Addiction Cellphone
Zhuoxun
Beijing’s product Zhuoxun Anti-Addiction Cellphone (“Zhuoxun Cellphone”) is an intelligent terminal device. Dami Zhilian
Information Technology Group Co., Ltd, a technology company that develops and produces smartphones (“Dami Zhilian”), customizes
and produces Zhuoxun Cellphone according to the design requirements set by Zhouxun Beijing. Zhuoxun Beijing does not own any intellectual
property in connection with Zhuoxun Cellphones. Zhuoxun Beijing sells Zhuoxun Cellphones through regional collaborative education agencies.
Zhuoxun Cellphone has primarily four functions including anti-addiction, myopia prevention, security, and study assistance, for the purpose
of managing elementary and middle school students. Parents are able to personalize and monitor their children’s use of Zhuoxun Cellphone
by setting screen auto-lock, monitoring internet surfing, monitoring mobile application usage, monitoring physical locations, etc.
Household Products
Starting
in the third quarter of fiscal year 2022, the Company sells household products via the Company’s app in a small scale, and the amount
of sales was immaterial compared to the total revenue of the corresponding period.
Other Product Development
Initiatives
In
order to develop new products, the company is actively cooperating with the China Worker’s Electronic Education Center, an organization
affiliated with the All-China Federation of Trade Unions. It has also jointly established an international internet education research
group with Peking University to conduct academic research and discussion on online education for family education. Additionally, it is
exploring other product offering by discussing with potential private education institutions on a broader set of education products and
services.
Sales and Marketing
Zhuoxun Beijing engages in
a variety of marketing activities, integrating onsite and online methods, intended to introduce its products and services to prospective
users. For onsite marketing, it (i) primarily works with regional education agencies in different areas where the regional education agencies
are responsible for organizing, management, promotion and logistics and it is responsible for providing courses; (ii) promote family education
by conferences, salons, lectures, free classes to raise people’s awareness of the significance of family education and promote its
services; and (iii) benefit from its current users’ referrals by ensuring their use experience. For online marketing, Zhuoxun Beijing
holds live broadcasting and carry out promotion events. It also holds various online community marketing activities on WeChat, a Chinese
multi-purpose messaging and social media application to attract new users. It has held activities such as “VIP Membership Experience”,
“Invite New Users to Get Your Rewards”, “Happy Spring Festival”, and “Large Turntable” and exchange
of course points for in-kind prizes.
It has built up long-term
business relationships with regional education agencies in different cities. As of September 30, 2022, we have engaged with 12 service
providers, 6 of which have worked with us for more than 3 years. These agencies are widely distributed in different regions of China,
including Provinces of Shanxi, Fujian, Jiangsu, Inner Mongolia, Zhejiang, Hainan, Henan, Sichuan, Hunan and Ningxia.
Zhuoxun Beijing formulates
marketing strategies, introduce teachers and lecturers, and provide systematic training to regional education agencies. Regional education
agencies, strictly pursuant to its guidance, conduct marketing to sign up new customers, organize educational activities, and provide
customer services before, during, and after classes, so as to ensure the high-quality of our educational services. All the activities
conducted by the regional education agencies are using Zhuoxun Beijing’s logo and visual identity system to create its brand influence.
Customer Base
The main customers of Zhuoxun
Beijing’s family educational services are its registered users who are parents interested in learning more about marriage, parent-child
relationships, children’s habit formation, and children’s healthy growth. The majority of the customers have income at the
middle to upper level in their local regions and are willing to invest in self-improvement and family education.
Seasonality
Seasonal fluctuations have
traditionally affected, and may affect our business in the future, especially between school academic years and summer and winter holidays.
Seasonal fluctuations affected our business when we focused on family education products and services for parents with children of school
age in China, and may continue to affect our business as we shift to new business models. Due to our limited operating history and the
fact that we are shifting our focus from family education to new business models and service offerings, the seasonal trends that we have
experienced in the past may not be indicative of our future operating results.
However, due to COVID-19,
the family education industry has encountered marketing difficulties. The traditional school year-summer/winter holiday and weekday-weekend
distinctions have been disrupted, giving way to continuous school shutdowns and remote learning. These activities have impacted our course
scheduling patterns and in-person marketing activities. We are moving away from traditional weekend- and holiday-based scheduling, and
are balancing our in-person and online marketing and education initiatives. Our financial condition and results of operations for future
periods may continue to fluctuate.
Technology
Zhuoxun Beijing’s internal
product teams are focused on the development and maintenance of product in addition to building and managing our software and hardware
infrastructure. It intends to continue investing in the development of new products, such as mobile applications, and enhancing the efficiency
and functionality of its existing products and infrastructure.
In addition to building and
managing our software and hardware infrastructure, the product team also focuses on product development and maintenance. Zhuoxun Beijing
intends to invest in the development of new products, such as course selection options, which helps students to find courses, assists
institutions to recruit students and facilitates transactions between students and institutions by creating a fair and transparent localized
third-party matching trading platform. Course selection is also beneficial to provide more choices and solutions for our diversified family
education services. It also improves the efficiency and function of existing products and infrastructure.
Employees
We strive to foster a collaborative and team-oriented
culture and view our human capital resources as an ongoing priority. As of September 30, 2022, we employ 59 employees, all of which are
full-time employees. None of our employees are subject to collective bargaining agreements, and we have had no labor-related work stoppages.
We believe we offer competitive terms and incentives to attract and retain employees, including pension, medical insurance, unemployment
insurance, maternity insurance, worker’s compensation insurance, housing provident fund, bonus programs and training opportunities.
Intellectual Property
Zhuoxun Beijing has registered
the following intellectual property under the name of Zhuoxun Beijing:
Copyrights:
In China, the term of copyrights related to published software is from the date of the publishing to December 31 of the 50th year of the
publishing.
Computer Software |
|
Registered
Area |
|
Registration
Number |
|
Description |
|
Registering
Authority |
|
Registration
Date |
Zhuoxun Education Application V1.0 |
|
China |
|
2019SR0024304 |
|
Mobile education application |
|
National Copyright Administration of the People’s Republic of China (“NCAC”) |
|
1/8/2019 |
Zhuoxun Education Software V1.0 |
|
China |
|
2018SR823347 |
|
Education platform |
|
NCAC |
|
10/16/2018 |
Zhuoxn Shangjia Application V1.0 |
|
China |
|
2020SR0048604 |
|
Mobile education application |
|
NCAC |
|
1/10/2020 |
Wisdom Lighthouse Application (Android) V1.0 |
|
China |
|
2019SR0669066 |
|
Mobile education application |
|
NCAC |
|
6/28/2019 |
Wisdom Lighthouse Application (iOS) V1.0 |
|
China |
|
2019SR0669412 |
|
Mobile education application |
|
NCAC |
|
6/28/2019 |
Ruizhi Lighthouse Application (Android) V1.0 |
|
China |
|
2020SR0380970 |
|
Mobile education application |
|
NCAC |
|
4/26/2020 |
Ruzhi Lighthouse (iSO) V1.0 |
|
China |
|
2020SR0380965 |
|
Mobile education application |
|
NCAC |
|
4/26/2020 |
Zhuoxn Shangcheng Application (Android) 1.0 |
|
China |
|
2021SR1183720 |
|
E-commerce platform |
|
NCAC |
|
8/11/2021 |
Zhuoxun Education Application
(Tablet PC) 1.0 |
|
China |
|
2021SR1183894 |
|
Mobile education application |
|
NCAC |
|
8/11/2021 |
Ruizhi Lighthouse Application (Android) V4.0 |
|
China |
|
2021SR1305659 |
|
Mobile education application |
|
NCAC |
|
9/1/2021 |
Ruzhi Lighthouse Application (iSO) V4.0 |
|
China |
|
2021SR1305660 |
|
Mobile education application |
|
NCAC |
|
9/1/2021 |
Trademarks:
In China, the term of a registered trademark is 10 years. The owner can apply extension with the trademark office within six months before
or after the expiration. The review process of a trademark application usually takes about one year in China.
Trademarks |
Registered Area |
Trademark Number |
Category Description |
Term |
Registering Authority |
|
|
China |
37832169 |
Category 9 |
2020/4/7-2030/4/6 |
Trademark Office of The State Administration for Industry & Commerce of the People’s Republic of China (the “Trademark Office”) |
|
China |
37818362 |
Category 16 |
2020/5/28-2030/5/27 |
Trademark Office |
|
China |
37819610 |
Category 35 |
2020/4/14-2030/4/13 |
Trademark Office |
|
|
China |
47571347 |
Category 9 |
2021/3/7-2031/3/6 |
Trademark Office |
|
China |
47549318 |
Category 16 |
2021/3/7-2031/3/6 |
Trademark Office |
|
China |
47554839 |
Category 35 |
2021/3/7-2031/3/6 |
Trademark Office |
|
China |
47571429 |
Category 41 |
2021/3/7-2031/3/6 |
Trademark Office |
|
|
China |
38881941 |
Category 9 |
2020/8/28-2030/8/27 |
Trademark Office |
|
|
China |
38871734 |
Category 16 |
2020/6/21-2030/6/20 |
Trademark Office |
|
China |
38892456 |
Category 41 |
2020/8/28-2030/8/27 |
Trademark Office |
|
|
China |
36092361 |
Category 9 |
2019/9/21-2029/9/20 |
Trademark Office |
|
|
|
|
|
China |
32139796 |
Category 35 |
2019/12/14-2029/12/13 |
Trademark Office |
|
China |
32830528 |
Category 41 |
2020/4/14-2030/4/13 |
Trademark Office |
|
China |
18990205 |
Category 42 |
2017/2/28-2027/2/27 |
Trademark Office |
|
China |
32138964 |
Category 9 |
2019/12/14-2029/12/13 |
Trademark Office |
|
|
China |
37816447 |
Category 9 |
2019/12/14-2029/12/13 |
Trademark Office |
|
China |
37806792 |
Category 16 |
2019/12/21-2029/12/20 |
Trademark Office |
|
China |
37823110 |
Category 35 |
2019/12/21-2029/12/20 |
Trademark Office |
|
China |
37819581 |
Category 41 |
2019/12/14-2029/12/13 |
Trademark Office |
|
|
China |
37811174 |
Category 9 |
2019/12/28-2029/12/27 |
Trademark Office |
|
China |
37832156 |
Category 16 |
2019/12/28-2029/12/27 |
Trademark Office |
|
China |
37816846A |
Category 35 |
2020/2/7-2030/2/6 |
Trademark Office |
|
China |
37832166 |
Category 41 |
2020/1/14-2030/1/13 |
Trademark Office |
|
|
China |
45269917 |
Category 9 |
2020/12/21-2030/12/20 |
Trademark Office |
|
China |
45248201 |
Category 41 |
2020/12/21-2030/12/20 |
Trademark Office |
|
China |
57562173 |
Category 16 |
2021/07/08-2032/01/13 |
Trademark Office |
|
China |
57536072 |
Category 35 |
2021/07/08-2032/01/13 |
Trademark Office |
|
|
China |
45373919 |
Category 9 |
2020/11/28-2030/11/27 |
Trademark Office |
|
Trademark Office |
|
China |
45382746 |
Category 41 |
2020/11/28-2030/11/27 |
Trademark Office |
|
China |
57562180 |
Category 35 |
2021/07/08-2032/01/13 |
Trademark Office |
|
China |
57542202 |
Category 16 |
2021/07/08-2032/01/13 |
Trademark Office |
|
| (1) | Category 9 (Scientific Instruments)
includes: speakers, downloadable mobile phone application software, copiers (photography, static electricity and heat), navigation instruments,
glasses, electronic dictionaries, neon billboards, measuring tools, downloadable computer application software and electronic notepads; |
|
(2) |
Category 16 (Office Supplies) includes: lithographic arts and crafts, paper handkerchiefs, writing tools, notebooks, office punchers, paper packaging boxes, stationery, teaching materials (except instruments), books, billboards made of paper or paperboard; |
| (3) | Category 18 (Leather Goods) includes:
schoolbags, backpacks, walking sticks, suitcases, office bags, umbrella rings, harness accessories, animal skin products, travel bags,
(women’s) wallets; |
|
(4) |
Category 25 (Clothing, Shoes & Hats) includes: infant clothing, shoes (footwear), clothing, scarf, clothing, socks, sleep goggles, hats (outwear), belts, driver’s clothing, gloves (clothing);
|
|
(5) |
Category 26 (Lace, Ribbons, Embroidery & Fancy Goods) includes: wigs, corded crafts, lace accessories, buttons, linen markings, clothing decorations, collar holders, needles, artificial flowers, thermal adhesive patches for repairing textiles; |
|
(6) |
Category 28 (Sporting Goods) includes: swimming pools (for entertainment purposes), chess, archery equipments, sports nets, toys, toy statues, exercise equipments, game equipments, fishing equipments and dolls;
|
|
(7) |
Category 35 (Advertising & Sales) includes: marketing for others, accounting, photocopying services, human resource management, online marketing for buyers and sellers of goods and services, business management of franchises, retail or wholesale services of sanitary preparations, soliciting sponsorship, providing industry information through websites, advertising;
|
|
(8) |
Category 38 (Communication Services) includes: wired transmission of sound, image, signal and data, radio broadcasting, provision of online forum, provision of database access service, video conference service, provision of Internet chat room, data streaming transmission, podcast video transmission, video on-demand transmission, and broadcasting of programs through the Internet;
|
|
(9) |
Category 39 (Transportation & Storage) includes: transportation, ride-sharing services, courier services (letters or commodities), travel reservation, travel arrangement, ship transportation, storage, automobile transportation, air transportation, coordination of travel arrangements for individuals and groups;
|
|
(10) |
Category 41 (Education & Entertainment) includes: tutoring services, arranging and organizing training courses, entertainment services, publishing, lottery issuance, mobile library, zoo services, arranging and organizing educational meetings, training, club services (entertainment or education);
|
|
(11) |
Category 42 (Design & Research) includes: graphic art design, software as a service (SaaS), web design, platform as a service (PAAS), art appraisal, interior design, research and development of new products for others, industrial product appearance design, fashion design and material testing;
|
|
(12) |
Category 45 (Social Service) includes: planning and arranging wedding services, dating services, online social network services, social companionship, dating services, arranging funerals, physical security consulting, personal clothing matching consulting, and providing legal information service through website. |
Domains:
In China, the registration of domains can be extended by annual renewal or periodic renewal by paying the annual or periodic registration
fee. If renewal registration fee is not paid timely, the domain will become available to the public. Zhuoxun Beijing has effectively maintained
the following domains:
Names |
|
Registration Date |
|
Current Expiration Date |
|
Registering Authority |
zhuoxuncn.com |
|
October 4, 2012 |
|
October 4, 2024 |
|
Internet Corporation for Assigned Names and Numbers |
zhuoxuncn.cn |
|
August 10, 2018 |
|
August 10, 2024 |
|
Internet Corporation for Assigned Names and Numbers |
Competition
Zhuoxun Beijing operates in
a highly competitive environment. It believes the primary competitive factors in providing family educational services are high-quality,
systemization, reputation, recognized lecturers, and accessibility. Family education industry is still at the early stage in China, where
Zhuoxun Beijing believes there is no dominating company yet. Zhuoxun Beijing competes with a number of large and small companies, including
integrated online virtue education platforms and onsite educational service companies.
Zhuoxun Beijing believes its
ability to compete depends upon many factors both within and beyond its control, including the following:
|
● |
high-quality and numbers of courses, meetings the needs of the parents with different aged children; |
|
● |
courses research and development ability; |
|
● |
professional software, applications, and webpage R&D team; |
|
● |
recognized teachers, professors, and lecturers; |
|
● |
nationwide strong network of regional service providers under systematic training guidance; |
|
● |
our brand strength in the marketplace relative to our competitors. |
Government Regulations
Zhuoxun Beijing’s business
is regulated by diverse and evolving laws and governmental authorities in China. It is subject to laws and regulations related to Internet
communications, privacy, consumer protection, security and data protection, intellectual property rights, commerce, taxation, entertainment,
recruiting and advertising. These laws and regulations are becoming more prevalent, and new laws and regulations are under consideration
by the Chinese governments. Any failure by it to comply with existing laws and regulations may subject it to liabilities. New laws and
regulations governing such matters could be enacted or amendments may be made to existing regulations at any time that could adversely
impact our services. Plus, legal uncertainties surrounding Chinese government regulations could increase Zhuoxun Beijing’s costs
of doing business, require it to revise its services, prevent it from delivering its services over the Internet or slow the growth of
the Internet, any of which could materially adversely affect its business, financial condition and results of operations.
Foreign Investment
On March 15, 2019, the
National People’s Congress (“NPC”) approved the Foreign Investment Law of the PRC, or the Foreign Investment Law, which
came into effect on January 1, 2020 and replaced the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity
Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law of the PRC and the Wholly Foreign-invested Enterprise
Law of the PRC, together with their implementation rules and ancillary regulations. The organization form, organization and activities
of foreign-invested enterprises shall be governed, among others, by the PRC Company Law and the PRC Partnership Enterprise Law. Foreign-invested enterprises
established before the implementation of the Foreign Investment Law may retain the original business organization and so on within five years
after the implementation of this Law.
The Foreign Investment Law
is formulated to further expand opening-up, vigorously promote foreign investment and protect the legitimate rights and interests of foreign
investors. According to the Foreign Investment Law, foreign investments are entitled to pre-entry national treatment and are subject
to negative list management system. The pre-entry national treatment means that the treatment given to foreign investors and their
investments at the stage of investment access shall not be less favorable than that of domestic investors and their investments. The negative
list management system means that the state implements special administrative measures for access of foreign investment in specific fields.
The Foreign Investment Law does not mention the relevant concept and regulatory regime of VIE structures. However, since it is relatively
new, uncertainties still exist in relation to its interpretation and implementation.
Foreign investors’ investment,
earnings and other legitimate rights and interests within the territory of China shall be protected in accordance with the law, and all
national policies on supporting the development of enterprises shall equally apply to foreign-invested enterprises. Among others,
the state guarantees that foreign-invested enterprises participate in the formulation of standards in an equal manner and that foreign-invested enterprises
participate in government procurement activities through fair competition in accordance with the law. Further, the state shall not expropriate
any foreign investment except under special circumstances. In special circumstances, the state may levy or expropriate the investment
of foreign investors in accordance with the law for the needs of the public interest. The expropriation and requisition shall be conducted
in accordance with legal procedures and timely and reasonable compensation shall be given. In carrying out business activities, foreign-invested enterprises
shall comply with relevant provisions on labor protection.
On December 26, 2019, the
State Council issued the Implementing Regulation of the Foreign Investment Law (the “Implementing Regulation”), which went
into effect on January 1, 2020, delegating the authority to the Ministry of Commerce, or MOFCOM, and the National Development and Reform
Commission, or the NDRC, the authority to determine the limitation of foreign investment activities in certain industries under a Foreign
Investment Access Negative List. Further, it delegated the authority for registration and licensure of foreign invested businesses to
the State Administration for Market Regulation, or SAMR. On August 4, 2020, the Beijing Municipal Market Regulatory Bureau and all of
its district-level counterparts were authorized by the SAMR to directly oversee the registration and licensure of foreign invested businesses.
As indicated in the Implementing
Regulation, investment activities in the PRC by foreign investors are principally governed by the Foreign Investment Access Negative List
(the “Negative List”), which replaces its predecessor, the Guidance Catalog of Industries for Foreign Investment. The Negative
List is promulgated and as amended from time to time by the MOFCOM and National Development and Reform Commission (the “NDRC”).
In June 2020, the MOFCOM and the NDRC promulgated the Special Administrative Measures (Negative List) for Foreign Investment Access
(2020 Version), or the Negative List, which became effective on July 23, 2020. In December 2021, the MOFCOM and the NDRC promulgated
the Special Administrative Measures (Negative List) for Foreign Investment Access (2021 Version), which became effective on January 1,
2022. The 2021 version of the Negative list will replace the 2020 version of the Negative list. Industries listed in the Negative List
are divided into two categories: restricted and prohibited. Industries not listed in the Negative List are generally deemed as constituting
a third “permitted” category. Establishment of wholly foreign-owned enterprises is generally allowed in permitted industries.
Some restricted industries are limited to equity or contractual joint ventures, while in some cases Chinese partners are required to hold
the majority interests in such joint ventures. In addition, restricted category projects are subject to higher-level government approvals.
Foreign investors are not allowed to invest in industries in the prohibited category. Industries not listed in the Negative List are generally
open to foreign investment unless specifically restricted by other PRC regulations.
Pursuant to the 2021 Negative
List, the business engaged by Zhuoxun Beijing and its subsidiary of Radio and TV program production fall within prohibited industries
for foreign investors and can only be carried out by Zhuoxun Beijing.
In addition, the provision
of value-added telecommunications services falls in the restricted category and, with a few exceptions, the percentage of foreign ownership
cannot exceed 50%. However, according to the Notice of the Ministry of Industry and Information Technology (MIIT) on Opening the Limitation
of Foreign Shareholding Ratios in Online Data Processing and Transaction Processing Business (Business E-commerce), issued on June 19,
2015, foreign ownership of online data processing and transaction processing businesses (B21) can reach as high as 100%. Zhuoxun Beijing
operates as a value-added, e-commerce knowledge service provider, and complies with the MIIT Notice. Zhuoxun Beijing also has acquired
a value-added telecommunication service provider license to conduct online data processing and transaction processing business.
Value-added Telecommunications Services
Licenses for Value-Added Telecommunications
Services
On September 25, 2000, the
State Council issued the Regulations on Telecommunications of China, or the Telecommunications Regulations, to regulate telecommunications
activities in China. The Telecommunications Regulations, revised on February 6, 2016, divide the telecommunications services into two
categories, namely “infrastructure telecommunications services” and “value-added telecommunications services.”
Pursuant to the Telecommunications Regulations, operators of value-added telecommunications services must first obtain a Value-added Telecommunications
Business Operating License, or VTB License, from the Ministry of Industry and Information Technology, or MIIT, or its provincial level
counterparts. On July 3, 2017, the MIIT promulgated the Administrative Measures on Telecommunications Business Operating Licenses, which
set forth more specific provisions regarding the types of licenses required to operate value-added telecommunications services, the qualifications
and procedures for obtaining such licenses and the administration and supervision of such licenses.
According to the Catalog of
Classification of Telecommunications Businesses effective from April 1, 2003, internet information services, also called internet content
services, or ICP services, are deemed as a type of value-added telecommunications services. On December 28, 2015, the MIIT published a
revised Catalog of Classification of Telecommunication Businesses, or the 2016 MIIT Catalog, which took effect on March 1, 2016 and the
2016 MIIT Catalog was recently amended on June 6, 2019. According to the latest MIIT Catalog, internet information services, which include
information release and delivery services, information search and query services, information community platform services, information
real-times interactive services, and information protection and processing services, continues to be classified as a category of value-added
telecommunication services. The Administrative Measures on Internet Information Services, or ICP Measures, also promulgated by the PRC
State Council on September 25, 2000 and most recently amended on January 8, 2011, set forth more specific rules on the provision of ICP
services. According to ICP Measures, any company that engages in the provision of commercial ICP services shall obtain a sub-category
VTB License for Internet Information Services, or ICP License, from the relevant government authorities before providing any commercial
internet content services within the PRC, and when the ICP services involve areas of news, publication, education, medical treatment,
health, pharmaceuticals and medical equipment, and if required by law or relevant regulations, specific approval from the respective regulatory
authorities must be obtained prior to applying for the ICP License from the MIIT or its provincial level counterpart. Pursuant to the
above-mentioned regulations, “commercial ICP services” generally refers to provision of specific information content, online
advertising, web page construction and other online application services through internet for profit making purpose.
Operating our online platform
to provide information and services to our users is classified as commercial ICP services. Zhuoxun Beijing hold an ICP License, which
is valid until March 13, 2024.
Foreign Investment in Value-Added
Telecommunication Services
The Regulations on Administration of Foreign-Invested
Telecommunications Enterprises, or the FITE Regulations, which took effect on January 1, 2002 and were amended on September 10, 2008 and
February 6, 2016, respectively, are the key regulations that regulate foreign direct investment in telecommunications companies in China.
The FITE Regulations stipulate that the foreign investor of a telecommunications enterprise is prohibited from holding more than 50% of
the equity interest in a foreign-invested enterprise that provides value-added telecommunications services. In addition, for a foreign
investor to acquire any equity interest in a business providing value-added telecommunications services in China, it must demonstrate
a positive track record and experience in providing such services.
On July 13, 2006, the MIIT
issued the Circular on Strengthening the Administration of Foreign Investment in Value-added Telecommunications Services, or the MIIT
Circular 2006, which requires that (i) foreign investors can only operate a telecommunications business in China through establishing
a telecommunications enterprise with a valid telecommunications business operation license; (ii) domestic license holders are prohibited
from leasing, transferring or selling telecommunications business operation licenses to foreign investors in any form, or providing any
resource, sites or facilities to foreign investors to facilitate the unlicensed operation of telecommunications business in China; (iii)
value-added telecommunications services providers or their shareholders must directly own the domain names and registered trademarks they
use in their daily operations; (iv) each value-added telecommunications services provider must have the necessary facilities for its approved
business operations and maintain such facilities in the geographic regions covered by its license; and (v) all value-added telecommunications
services providers should improve network and information security, enact relevant information safety administration regulations and set
up emergency plans to ensure network and information safety. The provincial communications administration bureaus, as local authorities
in charge of regulating telecommunications services, (i) are required to ensure that existing qualified value-added telecommunications
service providers will conduct a self-assessment of their compliance with the MIIT Circular 2006 and submit status reports to the MIIT
before November 1, 2006; and (ii) may revoke the value-added telecommunications business operation licenses of those that fail to comply
with the above requirements or fail to rectify such non-compliance within specified time limits. Due to the lack of any additional interpretation
from the regulatory authorities, it remains unclear what impact MIIT Circular 2006 will have on us or the other PRC internet companies
with similar corporate and contractual structures. After the MOFCOM and NDRC amended the FIE Catalog in March 2015, MIIT also issued the
Circular on Removing the Restrictions on Shareholding Ratio Held by Foreign Investors in Online Data Processing and Transaction Processing
(Operating E-commerce) Business on June 19, 2015, which amended the relevant provision in FITE Regulations by allowing foreign investors
to own more than 50% of the equity interest in an operator of e-commerce business. However, foreign investors continue to be prohibited
from holding more than 50% of the equity interest in a provider of other category of value-added telecommunications services except for
e-commerce, domestic multi-party communications, store-and-forward and call center. The aforementioned restrictions remain applicable
pursuant to the Negative List. Based on the Notice regarding the Strengthening of Ongoing and Post Administration of Foreign Investment
Telecommunications Enterprises issued by MIIT on October 15, 2020, the MIIT will not issue Examination Letter for Foreign Investment in
Telecommunications Business. Still, foreign invested enterprises need to submit relevant foreign investment materials to MIIT for initial
applications and changes of telecommunications operating permits.
To comply with the above-mentioned
foreign ownership restrictions, all of the shareholders of Zhuoxun Beijing are PRC domestic residents, and Fengyuan Beijing, our PRC subsidiary,
have entered into the VIE Agreements with Zhuoxun Beijing (together with Fengyun Beijing and Zhuoxin Beijing, the “PRC operating
entities”) so that we are able to consolidate the financial results of Zhuoxun Beijing and its subsidiary in accordance with US
GAAP as the primary beneficiary of the arrangements. Zhuoxun Beijing is the holders of the domain names, trademarks and facilities necessary
for daily operations of our online platforms in compliance with the MIIT Circular 2006.
Internet Culture Activities
On February 17, 2011, the
Ministry of Culture, or MOC, promulgated the Interim Administrative Provisions on Internet Culture, or the Internet Culture Provisions,
which became effective on April 1, 2011 and amended on December 15, 2017. The Internet Culture Provisions require ICP services providers
engaging in commercial “internet culture activities” to obtain an Internet Culture Business Operating License from the MOC.
“Internet cultural activities” is defined in the Internet Culture Provisions as an act of provision of internet cultural products
and related services, which includes (i) the production, duplication, importation, and broadcasting of the internet cultural products;
(ii) the online dissemination whereby cultural products are posted on the internet or transmitted via the internet to end-users, such
as computers, fixed-line telephones, mobile phones, television sets and games machines, for online users’ browsing, use or downloading;
and (iii) the exhibition and comparison of the internet cultural products. In addition, “internet cultural products” is defined
in the Internet Culture Provisions as cultural products produced, broadcast and disseminated via the Internet, which mainly include internet
cultural products specially produced for the Internet, such as online music entertainment, online games, online shows and plays (programs),
online performances, online works of art and online cartoons, and internet cultural products produced from cultural products such as music
entertainment, games, shows and plays (programs), performances, works of art, and cartoons through certain techniques and duplicating
those to internet for dissemination. On May 14, 2019, the Office of the Ministry of Culture and Tourism issued the Notice Regarding the
Adjustment of the Approval Scope of “Internet Culture Business Operation License” and Further Standardizing the Approval Work,
or the No.81 Notice, the scope of examination and approval of the “Internet Culture Business Operation License” includes network
music, network performances (programs), network performances, network artwork, network animation and exhibitions, and competition activities.
For units that do not meet the scope of approval to engage in other Internet business activities, the “Internet Culture Business
Operation License” will not be issued.
Zhuoxun Beijing previously
held an Internet Culture Business Operation License, which was valid until October 23, 2021, to conduct business involving internet music
entertainment products and services. However, since Zhuoxun Beijing no longer conducts or intends to conduct any business involving such
products or services, and it currently only operates in activities involving internet cultural communication, education consulting and
e-commerce which are exempted from the application of the Internet Culture Business Operation License under the No. 81 Notice, Zhuoxun
Beijing currently does not hold and is required to hold such license.
Television Program Industry
Television program productions
and distribution businesses are mainly regulated by Regulations on Administration of Radio and Television, which came in to effect on
August 11, 1997 and was recently amended on November 29, 2020, and the Administrative Regulations on Production and Operation of Radio
and Television Program, which came into effect on August 20, 2004 and was recently amended on October 29, 2020. Pursuant to these regulations,
television programs can only be produced by television stations at the municipal level or above or entities with a License for the Production
and Operation of Radio and Television Program. Any entity producing and operating radio and television program without the License for
the Production and Operation of Radio and Television Program will be subject to the confiscation of tools, equipment of producing radio
and television program and a fine of more than 10 thousand RMB and less than 50 thousand RMB by competent local branch of SAPPRFT.
Zhuoxun Beijing holds a License
for the Production and Operation of Radio and Television Program, which is valid until September 16, 2024. According to this license,
the mode of operation is production and distribution, and the approved business scope includes animation, feature films, TV variety shows
(current affairs news, similar topics or columns and other radio and TV programs are not allowed).
Online Audio-Visual Programs
The Measures for the Administration
of Publication of Audio-Visual Programs through Internet or Other Information Network, or the Audio-Visual Measures, promulgated by the
SAPPRFT, on July 6, 2004 and put into effect on October 11, 2004, apply to the activities relating to the opening, broadcasting, integration,
transmission or download of audio-visual programs using internet or other information network. Under the Audio-Visual Measures, to engage
in the business of transmitting audio-visual programs, a license issued by SAPPRFT is required, and “audio-visual programs (including
audio-visual products of films and televisions)” are defined as the audio-visual programs consisting of movable pictures or sounds
that can be listened to continuously, which are shot and recorded using video cameras, vidicons, recorders and other audio-visual equipment
for producing programs. Foreign invested enterprises are not allowed to carry out such business. On April 13, 2005, the State Council
promulgated the Certain Decisions on the Entry of the Non-state-owned Capital into the Cultural Industry. On July 6, 2005, five PRC governmental
authorities, including the SAPPRFT, jointly adopted the Several Opinions on Canvassing Foreign Investment into the Cultural Sector. According
to these regulations, non-state-owned capital and foreign investors are not allowed to engage in the business of transmitting audio-visual
programs through information networks. However, the Audio-Visual Measures have been repealed according to the Administrative Provisions
on Audio-Visual Program Service through Special Network and Directed Transmission that promulgated by the SAPPRFT on April 25, 2016, effective
as of June 1, 2016 and last amended on March 23, 2021.
To further regulate the provision
of audio-visual program services to the public via the internet, including through mobile networks, within the territory of the PRC, the
SAPPRFT and the MIIT jointly promulgated the Administrative Provisions on Internet Audio-Visual Program Service, or the Audio-Visual Program
Provisions, on December 20, 2007, which came into effect on January 31, 2008 and were amended on August 28, 2015. Under the Audio-Visual
Program Provisions, “internet audio-visual program services” is defined as activities of producing, redacting and integrating
audio-visual programs, providing them to the general public via internet, and providing services for other people to upload and transmit
audio-visual programs, and providers of internet audio-visual program services are required to obtain a License for Online Transmission
of Audio-Visual Programs issued by SAPPRFT, or complete certain registration procedures with SAPPRFT. In general, providers of internet
audio-visual program services must be either state-owned or state-controlled entities, and the business to be carried out by such providers
must satisfy the overall planning and guidance catalog for internet audio-visual program services determined by SAPPRFT. In a press conference
jointly held by SAPPRFT and MIIT to answer questions relating to the Audio-Visual Program Provisions in February 2008, SAPPRFT and MIIT
clarified that providers of internet audio-visual program services who engaged in such services prior to the promulgation of the Audio-Visual
Program Provisions are eligible to re-register with the relevant authorities and continue their operation of internet audio-visual program
services so long as those providers did not violate the relevant laws and regulations in the past. On May 21, 2008, SAPPRFT issued a Notice
on Relevant Issues Concerning Application and Approval of License for the Online Transmission of Audio-Visual Programs, as amended on
August 28, 2015, which further sets out detailed provisions concerning the application and approval process regarding the License for
Online Transmission of Audio-Visual Programs. The notice also states that providers of internet audio-visual program services that engaged
in such services prior to the promulgation of the Audio-Visual Program Provisions are eligible to apply for the license so long as their
violation of the laws and regulations is minor in scope and can be rectified in a timely manner and they have no records of violation
during the last three months prior to the promulgation of the Audio-Visual Program Provisions. Further, on March 30, 2009, SAPPRFT promulgated
the Notice on Strengthening the Administration of the Content of Internet Audio-Visual Programs, which reiterates the pre-approval requirements
for the audio-visual programs transmitted via the internet, including through mobile networks, where applicable, and prohibits certain
types of internet audio-visual programs containing violence, pornography, gambling, terrorism, superstition or other similarly prohibited
elements.
According to the Tentative Categories of Internet
Audio-Visual Program Services, or the Categories, promulgated on March 17, 2010 and amended on March 10, 2017, there are four categories
of internet audio-visual program services which are further divided into seventeen sub-categories. The third sub-category to the second
category covers the making and editing of certain specialized audio-video programs concerning, among other things, educational content,
and broadcasting such content to the general public online. However, there are still significant uncertainties relating to the interpretation
and implementation of the Audio-Visual Program Provisions, in particular, the scope of “internet audio-video programs.”
At present, the licenses for
online audio-visual program are mainly required for radio stations, TV station services, and current affairs audiovisual news services;
as well as interviews, news reports, online dramas and such other forms of radio and television media programs available on the Internet.
The main purpose of the license is to regulate and guide the dissemination of radio and television programs that affect public opinions.
Beijing Zhuoxun’s programs are mainly knowledge-based content and does not involve content regulated by the regulations. In addition,
under Section 8 of the Audio-Visual Program Provisions, only state-owned or state-controlled business may apply for the license. Zhuoxun
Beijing is not a state-owned or state-controlled entity and as such cannot apply for such a license.
Accordingly, Beijing Zhuoxun
does not need to apply for nor owns such license. However, if the government tightens control in the future, it may issue such new requirements
for licensing and certifications, which may bring uncertainty to Beijing Zhuoxun’s business.
Cybersecurity
On November 7, 2016,
the Standing Committee of the National People’s Congress (“SCNPC”) promulgated the Cybersecurity Law. The Cybersecurity
Law regulates network operators and others from the following perspectives: the principle of cyberspace sovereignty, security obligations
of network operators and providers of network products and services, protection of personal information, protection of critical information
infrastructure, data use and cross-border transfers, network interoperability and standardization. Under the Cybersecurity Law, network
operators are generally obligated to protect their networks against disruption, damage or unauthorized access, and to prevent data leakage,
theft or tampering. In addition, network operators will also be subject to specific rules depending on their classification under the
multi-level network security protection scheme. Providers of network products and services must comply with national standards and ensure
the security of their products. Personal information and important data collected and generated by a critical information infrastructure
operator in the course of its operations in China must be stored in China, and if a critical information infrastructure operator purchases
internet products and services that affects or may affect national security, it should be subject to cybersecurity review by the Cyberspace
Administration of China, or the CAC.
Measures for Cybersecurity
Supervision, which became effective on June 1, 2020, provide more detailed rules relating to cyber security inspections. On July 10,
2021, the Cyberspace Administration of China (“CAC”) publicly issued the Measures for Cybersecurity Censorship (Revised Draft
for Comments) aiming to, upon its enactment, replace the existing Measures for Cybersecurity Censorship. The draft measures extend the
scope of cybersecurity reviews to data processing operators engaging in data processing activities that affect or may affect national
security, including listing in a foreign country. There still exists uncertainty how the enacted version would have any substantial changes
from this draft and whether clearance of cybersecurity review and other specific actions shall be completed by companies like us.
On June 14, 2022, the
CAC promulgated the Administrative Provisions on Mobile Internet Applications Information Services, or the APP Provisions, which became
effective on August 1, 2022. The APP Provisions replaced the former Administrative Provisions on Mobile Internet Applications Information
Services promulgated on June 28, 2016. Under the APP Provisions, mobile application providers are prohibited from engaging in any
activity that may endanger national security, disturb the social order, or infringe the legal rights of third parties. The APP Provisions
also require application providers to procure approval of the relevant competent departments or the relevant licenses required by laws
and regulations to provide services through such applications.
On June 10, 2021, the SCNPC
promulgated the Data Security Law of the PRC, or the Data Security Law, which will come into effect on September 1, 2021. The Data Security
Law provides for data security and privacy obligations on entities and individuals engaged in data activities. The Data Security Law also
introduces a data classification and hierarchical protection system based on the importance of data in economic and social development,
as well as the degree of harm it may cause to national security, public interests, or legitimate rights and interests of individuals or
organizations when such data is tampered with, destroyed, leaked, or illegally acquired or used. The appropriate level of protection measures
is required for each category of data. For example, a processor of important data must have designated personnel and internal supervision
body responsible for data security, carry out risk assessments for data processing activities and file the risk assessment reports with
the competent government authorities. In addition, the Data Security Law provides a national security review procedure for data activities
which may affect national security and imposes export restrictions on certain data and information.
The Cybersecurity Review Measures,
or the “Review Measures”, which were promulgated on April 13, 2020, and were amended on December 28, 2021 and became
effective on February 15, 2022, provide online platform operator holding more than one million users/users’ individual information
shall be subject to cybersecurity review before listing abroad. Cybersecurity Review Measures do not provide a definition of “online
platform operator”, therefore, we cannot assure you that the VIE and its subsidiary will not be deemed as an “online platform
operator”. On November 14, 2021, the CAC promulgated the Data Security Management Regulations Draft to solicit public opinion
and comments, which provides that an overseas initial public offering to be conducted by a data processor processing the personal information
of more than one million individuals shall apply for a cybersecurity review. Data processor means an individual or organization that independently
make decisions on the purpose and manner of processing in data processing activities.
We may be deemed as a data
processor under the Data Security Management Regulations Draft. Notwithstanding the foregoing, even if we are deemed as an online platform
operator under the Cybersecurity Review Measures or a data processor under the Data Security Management Regulations Draft, we do not expect
to be subject to the cybersecurity review in connection with our status as a U.S. company, because the VIE and its subsidiary do not hold
more than one million users’ individual information.
The Cybersecurity Review Measures
also provide that if a critical information infrastructure operator (“CIIO”) purchases internet products and services that
affect or may affect national security, it should be subject to cybersecurity review by the CAC. Due to the lack of further interpretations,
the exact scope of what constitutes a “CIIO” remains unclear. We do not expect to be a CIIO, since (i) we do not hold a large
amount of individual information, and (ii) data processed in our business is less likely to have a bearing on national security, thus
it may not be classified as core or important data by the authorities. As of the date of this Annual Report, we have not received any
notice from any authorities identifying us as a CIIO or requiring us to undertake a cybersecurity review by the CAC. Further, as of the
date of this Annual Report, we have not been subject to any penalties, fines, suspensions, or investigations from any competent authorities
for violation of the regulations or policies that have been issued by the CAC.
Privacy Protection
The PRC Constitution states that PRC law protects
the freedom and privacy of communications of citizens and prohibits infringement of these rights. In recent years, PRC government authorities
have enacted laws and regulations on internet use to protect personal information from any unauthorized disclosure. According to the Law
on the Protection of Consumer Rights and Interests promulgated in 1993 and last amended in 2013, business operators shall collect and
use the personal information of consumers in a lawful and proper manner by following the principle that information collection or use
is genuinely necessary. They shall expressly state the purposes, methods and scope of information collection or use, and obtain the consent
of the consumers whose information is to be collected. To collect or use the personal information of consumers, business operators shall
disclose their information collection or use rules, and shall not collect or use information in violation of laws or regulations, or in
breach of the agreements between the parties concerned. Business operators and their staff members shall strictly keep confidential the
personal information of consumers collected, and shall not divulge, sell or illegally provide others with the same. According to the PRC
Cybersecurity Law promulgated On November 7, 2016 and became effective from June 1, 2017, network operators shall strictly keep confidential
users’ personal information that they have collected, and establish and improve the users’ information protection system.
To collect and use personal information, network operators shall follow the principles of legitimacy, rightfulness and necessity, disclose
their rules of data collection and use, clearly express the purposes, means and scope of collecting and using the information, and obtain
the consent of the persons whose data is gathered. Pursuant to the Decision on Strengthening the Protection of Online Information issued
by the SCNPC on December 28, 2012 and the Order for the Protection of Telecommunication and Internet User Personal Information issued
by the MIIT in July 16, 2013, any collection and use of user personal information must be subject to the consent of the user, abide by
the principles of legality, rationality and necessity and be within the specified purposes, methods and scopes. “Personal information”
is defined in these regulations as information that identifies a citizen, the time or location for his/her use of telecommunication and
internet services, or involves privacy of any citizen such as his birth date, ID card number, and address. An ICP service provider must
also keep information collected strictly confidential, and is further prohibited from divulging, tampering or destroying of any such information,
or selling or providing such information to other parties. Any violation of the above decision or order may subject the ICP service provider
to warnings, fines, confiscation of illegal gains, revocation of licenses, cancellation of filings, closedown of websites or even criminal
liabilities. Pursuant to the Ninth Amendment to the Criminal Law issued by the SCNPC in August 2015, which became effective in November
2015, any internet service provider that fails to fulfill the obligations related to internet information security administration as required
by applicable laws and refuses to rectify upon orders, shall be subject to criminal penalty for the result of (i) any dissemination of
illegal information in large scale; (ii) any severe effect due to the leakage of the client’s information; (iii) any serious loss
of criminal evidence; or (iv) other severe situation, and any individual or entity that (i) sells or provides personal information to
others in a way violating the applicable law, or (ii) steals or illegally obtains any personal information, shall be subject to criminal
penalty in severe situation. According to the Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate
on Several Issues Concerning the Application of Law in Handling Criminal Cases of Infringing Personal Information of Citizens promulgated
on May 8, 2017 and became effective from June 1, 2017, if a business operator collects personal information of citizens by purchasing,
accepting or exchanging, or collects personal information of citizens in the course of performing their duties and providing services
in violation of relevant provisions of the State (including Law on the Protection of Consumer Rights and Interests) and meet one of the
following standards, such operator shall be considered breaching criminal law and such operator and its responsible personnel shall undertake
the criminal liabilities: (i) illegal acquisition, sale or provision of more than 50 pieces of track information, communication content,
credit information, property information; (ii) illegal acquisition, sale, or provision of more than 500 pieces of accommodation information,
communication records, health, physiological information, trading information, and other personal information may affect the safety of
personal and property; (iii) illegal acquisition, sale, or provision of more than 5000 pieces of personal information other than the information
mentioned in the preceding (i) and (ii); (iv) the profits generated from using the illegally collected and acquired personal information
is more than fifty thousand RMB; and (v) resale of the personal information collected in the course of performing their duties and providing
service and the amount of resold personal information reaches 50% of the prescribed standard mentioned in (i) or (ii), as applicable.
On August 20, 2021, the
Standing Committee of the National People’s Congress (“SCNPC”) promulgated the Personal Information Protection Law of
the PRC, or the Personal Information Protection Law, which became effective on November 1, 2021. As the first systematic and comprehensive
law specifically for the protection of personal information in the PRC, the Personal Information Protection Law provides, among others,
that (i) an individual’s consent shall be obtained to use sensitive personal information, such as biometric characteristics
and individual location tracking, (ii) personal information operators using sensitive personal information shall notify individuals
of the necessity of such use and impact on the individual’s rights, and (iii) where personal information operators reject an
individual’s request to exercise his or her rights, the individual may file a lawsuit with a People’s Court.
On July 7, 2022, the CAC
promulgated the Outbound Data Transfer Security Assessment Measures, which became effective on September 1, 2022. According to the
Outbound Data Transfer Security Assessment Measures, to provide data abroad under any of the following circumstances, a data processor
shall declare security assessment for its outbound data transfer to the CAC through the local cyberspace administration at the provincial
level: (i) where the data processor will provide important data abroad; (ii) where CIIO or the data processor processing the personal
information of more than one million individuals will provide personal information abroad; (iii) where the data processor who has provided
personal information of 100,000 individuals or sensitive personal information of 10,000 individuals in total abroad since January 1 of
the previous year, will provide personal information abroad; and (iv) other circumstances where the security assessment is required as
prescribed by the CAC. Prior to declaring security assessment for outbound data transfer, the data processor shall conduct self-assessment on
the risks of the outbound data transfer. For outbound data transfers that have been carried out before the effectiveness of the Outbound
Data Transfer Security Assessment Measures, if it is not in compliance with these measures, rectification shall be completed within six
months starting from September 1, 2022.
Zhuoxun Beijing applies certain
technical adjustment to its user privacy information in accordance with regulatory regulations. The relevant cyber securities regulator
has also continued to provide oversight on Zhuoxun Beijing’s information security and privacy protection features, and has not flagged
any issue as of the date of this report. Therefore, the Company’s current privacy protection practices comply with laws and regulations.
Private Education
Education Law of the PRC
On March 18, 1995, the PRC
NPC promulgated the Education Law of the PRC, or the Education Law, which was last amended on April 29, 2021 and became effective on April
30, 2021. The Education Law stipulates that the government formulates plans for the development of education, establishes and operates
schools and other types of educational institutions, and in principle, enterprises, institution, social organizations and individuals
are encouraged to operate schools and other types of educational organizations. It is provided in the Education Law that no organization
or individual may establish or operate a school or any other educational institution for commercial purposes, which has been narrowed
down by the SCNPC in the amendment on December 27, 2015 as only restricting a school or other educational institution founded with governmental
funds or donated assets.
The Law for
Promoting Private Education and its Implementing Rules
On December 28, 2002, SCNPC
promulgated the Law for Promoting Private Education, or the Private Education Law and was last amended on December 29, 2018, the amendment
of which also took effect on December 29, 2018. On March 5, 2004, the PRC State Council promulgated the Implementation Rules for the Law
for Promoting Private Education, which became effective on April 1, 2004, or the PE Implementation Rules. On April 7, 2021, the State
Council promulgated the Amended Implementation Rules for the Private Education Law, or the Amended PE Implementation Rules, which became
effective on September 1, 2021. The Private Education Law and the Amended PE Implementation Rules provide rules for social organizations
or individuals, other than state-owned entities, to establish schools or other educational organizations using non-government funds in
PRC, such schools or educational organizations established using non-government funds are referred to as “private school.”
According to the Private Education
Law, establishment of private schools for academic education, pre-school education, self-taught examination support and other cultural
education shall be subject to approval by the authorities in charge of education, while establishment of private schools for vocational
qualification training and vocational skill training shall be subject to approvals from the authorities in charge of labor and social
welfare, A duly approved private school will be granted a private school operating permit, and shall be registered as a legal person at
the competent registration authorities. Sponsors of private schools may set up, at their sole discretion, non-profit or commercial private
schools. Nonetheless, sponsors may not establish commercial private schools providing compulsory education.
According to the Amended PE
Implementation Rules, social organizations and individuals are prohibited from controlling a private school that provides compulsory education
or a non-profit private school that provides pre-school education through mergers and acquisitions and control agreements. A private school
providing compulsory education is prohibited from conducting transactions with its related party. Relevant government authorities shall
enhance the supervision on the agreements entered into between non-profit private schools and its related party and shall review such
transaction on an annual basis; online education activities using internet technology are encouraged by the regulatory authorities and
shall comply with laws and regulations related to internet management. A private school engaging in online education activities using
internet technology shall obtain the relevant private school operating permit. It shall also establish and implement internet security
management systems and take technical security measures. Upon discovery of any information whose release or transmission is prohibited
by applicable laws or regulations, the private school shall immediately cease the transmission of that information and take further remedial
actions, such as deleting that information, to prevent it from spreading. Records pertaining to the situation shall be kept and reported
to the appropriate authorities.
Under the Private Education
Law and Amended PE Implementation Rules, private education is deemed as a public welfare undertaking, and entities and individuals who
establish private schools are commonly referred to as “sponsors” instead of “investors” or “shareholders.”
Sponsors of non-profit private schools may not obtain proceeds from running the schools, and all school-running balances shall be used
for running schools. Sponsors of commercial private schools may obtain proceeds from running the schools, and the school-running balances
shall be disposed of in accordance with the provisions of the Company Law and other relevant laws and administrative regulations. Private
schools shall enjoy property rights of the legal persons in respect of the assets provided by sponsors to private schools, state-owned
assets, donated property and school accumulation. The items and rates of fees to be collected by private schools shall be determined based
on the school-running costs, market demand and other factors, made available to the general public, and subject to the supervision by
the related competent departments. The specific charging measures for non-profit private schools shall be developed by the relevant governments,
while the charging standards for commercial private schools shall be subject to market regulation and determined by the schools at their
sole discretion. The fees collected by private schools shall be used mainly for educational and teaching activities, the improvement of
schools’ conditions and the protection of the benefits of teachers and staff members. The use and the financial management of the
assets for private schools shall be subject to supervision by the examination and approval authority and relevant departments. Private
schools shall prepare their financial and accounting statements towards the end of each fiscal year, entrust public accounting firms to
audit the statements according to law, and publish the audit results.
Regulations Relating to Online Commercial Private
Training
Under the Private Education
Law, private education institutions will be classified as either “non-profit private schools” or “commercial private
schools”, and both nonprofit private schools and commercial private schools are required to obtain a private school operating permit
prior to its registration with applicable registry agency as legal entities. Pursuant to the Implementation Rules for the Classification
Registration of Private Schools jointly issued by the Ministry of Education, or the MOE, and several other government authorities on December
30, 2016, a commercial private school shall first obtain a private school operating permit prior to its registration with the SAMR or
its local counterparts. Pursuant to the Implementation Rules for the Supervision and Administration of Commercial Private Schools jointly
issues by the MOE, the SAIC and Ministry of Human Resources and Social Security on December 30, 2016, commercial private training institutions
shall also be treated by reference to the requirements applicable to commercial private schools. Therefore, we may be required to apply
for a private school operating permit and may be prohibited from continuing operating our English training business before obtaining the
said permit.
According to the Amended PE
Implementation Rules, a private school providing online education for academic qualifications by using Internet technology shall obtain
the school operating permit that shall be obtained for education for academic qualifications at the same level and of the same type, as
well as the Internet operating license. A private school carrying out online training and education activities and occupational qualification
training and occupational skills training activities by using Internet technology, or an Internet technology service platform providing
services for the aforementioned online activities, shall obtain the corresponding Internet operating license, and shall apply to the educational
administrative department and human resources and social security department of the people’s government at the provincial level
at the place where it is located for record-filing, and shall not carry out the education and teaching activities for which a school operating
permit shall be obtained.
On January 2, 2018, Beijing
Municipal Education Commission promulgated Several Opinions on Strengthening the Administration of Private Non-degree Education Institutions
in Beijing, where the VIE and its subsidiary are incorporated, providing that private training institutions carrying out non-academic
qualifications educations without obtaining required school operating permit shall be handled in accordance with the Private Education
Law, and the total amount of newly established private non-academic qualifications training institutions shall be limited.
According to Online After-School
Training Opinions, online after-school training institutions shall file with the competent provincial education regulatory authorities,
see “Item 4. Information on the Company—B. Business Overview—Government Regulations—Private Education—Regulations
Relating to After-School Tutoring”. Furthermore, specific administration measures regarding the institutions offering training service
only via internet have been promulgated by the above-mentioned local government in Beijing as of this annual report. On October 8, 2019,
the Municipal Education Commissions of Beijing promulgated Rules of Beijing Municipality for the Implementation of Online After-school
Training Filing, providing specific administrative measures for institutions offering after-school training service only via internet
to put on record.
However, given that a pure
online commercial training institution like us does not have any school premises, which are generally required in the process of applying
for the private school operating permit pursuant to the currently effectively Private Education Law and its relevant implementation rules,
we would not be able to obtain the private school operating permit had we applied for it. The Amended PE Implementation Rules stimulates
that a private school providing online education for academic qualifications by using internet technology shall obtain the private school
operating permit. However, after consulting with the local competent governmental authorities, we were advised that any institution offering
training service on academic subjects shall obtain the private school operating permit which in practice would not be issued to such institutions
after the end of 2021, and that prior to any specific rules on online commercial private training, they will not grant private school
operating permits to the institutions offering training service on non-academic subjects only via internet like us or request such institutions
to hold such permits.
Regulations Relating to
After-School Tutoring
On February 13, 2018, the
MOE and three other government authorities jointly promulgated the Circular on Special Enforcement Campaign concerning After-school Tutoring
Institutions to Alleviate Extracurricular Burden on Students of Elementary Schools and Middle Schools, or Circular 3. Pursuant to Circular
3, the government authorities seek to alleviate after- school burden on elementary and secondary school students by carrying out a series
of inspections on after-school training institutions and order those identified with potential or actual material safety risks to suspend
business for self-inspection and rectification, and those without proper establishment licenses or school operating permits to apply for
relevant qualifications and certificates under the guidance of competent government authorities if those after-school training institutions
meet the required application conditions of the proper establishment licenses or school operating permits. If the after-school training
institutions, which does not hold the establishment licenses nor school operating permits, does not meet the required application conditions
for the aforesaid licenses and permits, they will be ordered to cease the operation. If the after-school training institutions, which
does not hold the school operating permits but does hold the establishment licenses, does not meet the required application conditions
for the school operating permits, they will be ordered to cease to provide after-school training.
On August 6, 2018, the General
Office of the State Council issued an Opinion on Supervising the Development of After-school Tutoring Institutions (“State Council
Circular 80”) with a view to encourage primary and secondary school students’ training in interests, hobbies, innovation and
practice ability, and to standardize the subject-matter of traditional disciplines (i.e., disciplines taught in schools, such as Chinese
language, mathematics, foreign languages, geography, chemistry, biology, the “traditional disciplines”) such that the level
and degree of content taught by after-school tutoring institutions for primary and secondary school students (“tutoring institution(s)”)
in these traditional disciplines are aligned, and consistent, with the content being taught to the same students at school (e.g., to prohibit
content of after-school tutoring beyond that student’s year level or what that student is being taught at school). The State Council
Circular 80 is aimed at supervising after-school tutoring institutions providing primary and secondary school students’ after-school
tutoring services.
State Council Circular 80
sets out a number of operating standards for after-school tutoring institutions to adhere, including, among others, that: (i) the average
area per student used for any specific training time slot within an after-school tutoring institution shall not be less than three square-meter;
(ii) no in-service primary and secondary teachers may be employed in an after-school tutoring institution and any teachers employed by
an after-school tutoring institution for primary and secondary school subjects shall hold relevant teaching qualifications; (iii) all
content, classes and subject enrolment, progress and school hours information in connection with tutoring of traditional disciplines shall
be filed with the local administration of education, and viewable by the public, and the content taught to a student must not exceed the
ordinary level of the student’s studies at school (i.e., primary school or secondary school); (iv) tutoring must not run past 20:30
in the evening and no homework can be given; (v) fees of more than three months’ tuition cannot be collected as a lump-sum; and
(vi) there shall not be any levied charging or forced fundraising, in any name, by tutoring institutions.
In relation to online education
service providers, State Council Circular 80 provides that regulatory authorities of networking, culture, information technology, radio
and television industries shall cooperate with the education department in supervising online education within their relevant industry.
On November 20, 2018, the
General Office of the MOE, the General Office of the State Administration for Market Regulation of the PRC and the General Office of the
Ministry of Emergency Management of the PRC jointly issued the Circular 10, which provides that the online after-school education institutions
shall file the information of their courses, such as names, contents, target students, syllabi and schedules with the provincial education
departments and shall publish the name, photo, class schedule and certificate number of the teacher qualification of each teacher on their
websites.
The MOE, jointly with other
certain PRC government authorities, promulgated the Implementation Opinions on Regulating Online After-School Training, or the Online
After-School Training Opinions, which became effective on July 12, 2019. The Online After-School Training Opinions are intended to regulate
academic after-school training involving internet technology provided to students in primary and secondary schools. Among other things,
the Online After-School Training Opinions requires that online after-school training institutions shall file with the competent provincial
education regulatory authorities and such education regulatory authorities shall, jointly with other provincial government authorities,
review such filings and the qualification of the online after-school training institutions submitting such filings.
With respect to the filing
requirements, the Online After-School Training Opinions provides, among others: (i) an online after-school training institution shall
file with the competent provincial education regulatory authorities at the place of its domicile after it has obtained the ICP License
and the certificate and the grade evaluation report for the graded protection of cyber security, and furthermore, shall file before October
31, 2019 if it has already conducted online after-school training; (ii) the online after-school training institutions shall file, among
others, (a) the materials related to the institution itself, including the information on their respective ICP License and other relevant
licenses and the materials related to certain management systems regarding the protection of personal information and cyber security,
(b) the materials related to the training content, and (c) the materials related to the training personnel; and (iii) the competent provincial
education regulatory authorities shall promulgate local implementing rules about the filing requirements, focusing on the training institutions,
training content and training personnel.
The Online After-School Training
Opinions further provides that the competent provincial education regulatory authorities shall, jointly with other provincial government
authorities, review such filings and the qualification of the online after-school training institutions submitting such filings before
the end of December 2019, focusing on the following matters: (i) the training content shall not include online games or other content
or links irrelevant with the training, and shall not be beyond the relevant national school syllabus. No illegal publications may be published,
printed, reproduced or distributed, and no infringement or piracy activities may be conducted during the training. And the training content
and data shall be stored for more than one year, among which, the live streaming teaching videos shall be stored for more than 6 months;
(ii) each class shall not last longer than 40 minutes and shall be taken at intervals of not less than 10 minutes, and the training time
shall not conflict with the teaching time of primary and secondary schools. Each live-streaming class provided to students receiving compulsory
education shall not end later than 9:00 p.m., and shall not leave homework for primary school students in Grade 1 and Grade 2. The online
after-school training platforms shall have eye protection and parental supervision functions; (iii) the online after-school training institutions
shall not hire any teacher who is currently working at primary or secondary schools. Training personnel of academic subjects are required
to obtain necessary teacher qualification licenses. The online after-school training institutions’ training platforms and course
interfaces shall publicize the names, photos and teacher qualification licenses of training personnel, and the learning, working and teaching
experiences of foreign training personnel; (iv) with the consent of students and their respective parents, online after-school training
institutions shall verify the identification information of each student, and shall not illegally sell or provide such information to
third parties. User behavior logs must be kept for more than one year; (v) the charge items and standard and refund policy shall be specifically
publicized on the training platforms. The prepaid fees can only be used for education and training purpose, and shall not be used for
other investment activities; where fees are charged based on the number of classes, fees are not allowed to be collected in a lump sum
for more than 60 class-hours, and where fees are charged based on the length of the course, the fees shall not be collected for a course
length of more than three months; and (vi) the online after-school training institutions found to have problems after reviewing by the
competent provincial education regulatory authorities shall complete the rectification before the end of June 2020, and will be subject
to fines, regulatory order to suspend operations or other regulatory and disciplinary sanctions if they fail to complete the rectification
in time. As of the date of annual report, we have completed the filing required.
On March 30, 2021, the MOE
promulgated the Guiding Opinions of the Ministry of Education on Vigorously Promoting the Scientific Connection of Kindergartens and Primary
Schools, which prohibits after-school tutoring institutions from providing training for pre-school children in violation of regulations
and provides that after-school tutoring institutions in violation of regulations above shall be included in the blacklist.
On April 8, 2021, the General
Office of the MOE enacted the Notice of Strengthening the Management of Homework for Compulsory Education, which requires that the local
governments shall implement prohibition measures on leaving homework as an important part of the daily supervision on after-school tutoring
institutions in accordance with relevant regulations, and in order to avoid reducing the burden in schools but increasing the burden after-school,
after-school tutoring institutions shall not leave homework to primary and secondary school students.
On July 24, 2021, the General
Office of State Council and the General Office of Central Committee of the Communist Party of China jointly promulgated the Alleviating
Burden Opinion, which provides that, among other things, (i) local government authorities shall no longer approve new after-school tutoring
institutions providing tutoring services on academic subjects for students in compulsory education, or the Academic AST Institutions,
and the existing after-school tutoring institutions providing tutoring services on academic subjects shall be registered as non-profit;
(ii) online Academic AST Institutions that have filed with the local education administration authorities providing tutoring services
on academic subjects shall be subject to review and re-approval procedures by competent government authorities, and any failure to obtain
such approval will result in the cancellation of its previous filing and ICP license; (iii) Academic AST Institutions are prohibited from
raising funds by listing on stock markets or conducting any capitalization activities and listed companies are prohibited from investing
in Academic AST Institutions through capital markets fund raising activities, or acquiring assets of Academic AST Institutions by paying
cash or issuing securities; and (iv) foreign capital is prohibited from controlling or participating in any Academic AST Institutions
through mergers and acquisitions, entrusted operation, joining franchise or variable interest entities.
Any violation of the foregoing
shall be rectified. Moreover, the Alleviating Burden Opinion specifies a series of operating requirements that after-school tutoring institutions
must meet, including, among other things, (i) after-school tutoring institutions shall not provide tutoring services on academic subjects
during national holidays, weekends and school breaks; (ii) for online tutoring, each session shall be no more than thirty minutes and
the training shall end no later than 9:00 p.m.; (iii) no advertisements for after-school tutoring shall be published or broadcasted in
the network platforms and billboards displayed in the mainstream media, new media, public place and residential areas; (iv) the provision
of overseas education courses is strictly prohibited; (v) fees charged for academic subjects tutoring in compulsory education shall be
included into government-guided price management, and excessive high fees and excessive profit-seeking behaviors will be suppressed; (vi)
government authorities will implement risk management and control for the pre-collection of fees by after-school tutoring institutions
with requirements such as setting up third-party custodians and risk reserves, and strengthen supervision over loans regarding tutoring
services; (vii) online tutoring for preschool-age children is prohibited, and offline academic subjects (including foreign language) tutoring
services for preschool-age children is also strictly prohibited; (viii) no more approval of new after-school tutoring institutions providing
tutoring services on academic subjects for pre-school-age children and students on grade ten to twelve will be granted; and (ix) administration
and supervision over academic subjects tutoring institutions for students on grade ten to twelve shall be implemented by reference to
the relevant provisions of the Alleviating Burden Opinion.
On July 28, 2021, the General
Office of MOE promulgated the Notice on Further Clarifying the Scope of Academic Subjects and Non-Academic Subjects of After-School Tutoring
in the Compulsory Education, which specifies that according to the national curriculum on compulsory education, when after-school institutions
carry out tutoring, morality and rule of law, Chinese, history, geography, mathematics, foreign language (including English, Japanese,
Russian), physics, chemistry and biology are classified as academic subjects, while sports (or sports and health), art (or music, art),
and comprehensive practical activities (including information technology education, labor and technology education) are classified as
non-academic subjects.
Furthermore, on November 8,
2021, the General Office of MOE promulgated the Guidance of Identification of the Classification of Subjects of After-School Tutoring
in the Compulsory Education, or the Identification Guidance. It is provided as indicators of the identification of an academic subject
that (i) the purpose of the tutoring is mainly to boost the grades of academic subjects and guided by academic knowledge and skill training;
(ii) the content of the tutoring is mainly the academic subject knowledge of morality and rule of law, Chinese, history, geography, mathematics,
foreign language (including English, Japanese, Russian), physics, chemistry and biology; (iii) the form of the tutoring primarily consists
of lectures, demonstrations, interaction, or other ways of the teachers (including virtual persons, artificial intelligence, etc.), focusing
on the explanation of academic knowledge, listening, speaking, reading, writing, arithmetic, and other academic subject skills trainings;
and (iv) the result review of the tutoring is materially based on grades, outcomes of examinations or other factors, focusing on the selection
of the students. The Identification Guidance establishes a classification guiding mechanism in which the lower education administration
authorities shall consult with the higher education administration authorities to conduct further research before making any decision
if a situation is in great controversy or difficult to classification. Local education administration authorities can form a panel of
expert or commission a professional institution, when needed, to make opinions on the identification of tutoring program which the local
education administration authorities are unable to determine directly.
On August 14, 2021, the Beijing
Municipality Government and the Beijing Municipal Committee of the Communist Party of China jointly published the full text of the Beijing
Municipality’s Measures to Further Reduce the Burden of Homework and After-School Tutoring on Students in Compulsory Education in
Beijing, or the Beijing Measures, to implement the Alleviating Burden Opinion. The Beijing Measures provide, among others, that (i) no
new Academic AST Institutions will be approved, while existing Academic AST Institutions will be subject to review and re-registration
aimed at reducing their numbers by phases; the remaining Academic AST Institutions shall all be registered as non-profit; (ii) online
Academic AST Institutions previously filed with the local education administration authorities will be subject to review and re-approval;
the registration and ICP license of any disqualifying online Academic AST Institutions will be rescinded; (iii) after-school tutoring
institutions are strictly prohibited from providing tutoring services on academic subjects during any national holiday, weekend, winter
and summer break period; (iv) Academic AST Institutions are prohibited from (a) offering classes over contents outside of or in advance
of the school curriculum, (b) offering classes based on any foreign curriculum, (c) soliciting and recruiting school teacher by offering
excessive compensation, or (d) employing foreign personnel abroad to carry out training activities; non-Academic AST Institutions providers
are prohibited from offering tutoring services on academic subjects; (v) prices for Academic AST Institutions will need to follow the
guidelines from the government to prevent any excessive charging or excessive profit-seeking activity; (vi) Academic AST Institutions
are prohibited from financing by way of listing its securities or conducting other capital market activities; listed companies may not
invest in Academic AST Institutions through capital markets fundraising activities, and may not acquire assets of Academic AST Institutions
by paying cash or issuing securities; foreign capital is prohibited from controlling or participating in Academic AST Institutions through
merger and acquisitions, entrusted operations, joining franchise or using variable interest entities.
On August 25, 2021, the General
Office of MOE issued the Administrative Measures for After-School Tutoring Materials for Primary and Secondary School Students (for Trial
Implementation), which provide that, among others, (i) after-school tutoring materials for primary and secondary school students and staff
preparing such tutoring materials shall meet certain requirements specified in such measures, which include, among others, tutoring materials
shall follow the national curriculum standard and shall not provide contents in advance of the school curriculum; (ii) after-school tutoring
institutions shall establish internal management system for the tutoring materials and the staff preparing such tutoring materials; (iii)
after-school tutoring institutions shall conduct internal review of the tutoring materials and the local education administrations shall
conduct external review of the tutoring materials; (iv) after-school tutoring institutions may only use tutoring materials that have been
internally and externally reviewed or if the materials have been officially published; (v) after school tutoring institutions shall file
with the relevant education administrations the tutoring materials and the staff preparing such materials; (vi) after-school tutoring
institutions in violation of the measures will be subject to rectification and shall not use the relevant tutoring materials during the
rectification period; if the after-school tutoring institution refuses to rectify within the time limit or if the violation is severe,
its private school operating permit may be revoked by the local education administration.
On August 30, 2021, the MOE
published on its official website that the MOE, together with two other government authorities, issued a circular requiring all Academic
AST Institutions to complete registration as non-profit by the end of 2021, and all Academic AST Institutions shall, before completing
such registration, suspend enrollment of students and charging fees.
On September 2, 2021, the
NDRC, the MOE and the SAMR jointly promulgated a Circular on Strengthening the Supervision over Fees for After-School Tutoring on Academic
Subjects in Compulsory Education Stage, which provides that fees charged for online and offline after-school tutoring on academic subjects
in compulsory education are subject to government-guided prices determined by local education administrations. The circular further provides
that by the end of June each year, after-school tutoring institutions shall file with the local education administration, development
and reform administration and market regulation administration the enrollment brochures, fee standards, teacher qualifications and other
materials, along with incomes, costs, profits, related-party transactions and policy implementation information for the previous year.
On September 9, 2021, the
General Office of MOE and the General Office of the Ministry of Human Resources and Social Welfare jointly issued the Administrative Measures
for Practitioners of the After-School Tutoring Institutions (for Trial Implementation), which set out a series of requirements for the
after-school tutoring institutions with respect to their employed teachers, research staff and teaching assistants of Chinese nationality.
Recruitment and employment of non-Chinese nationals shall comply with relevant applicable regulations of China. After-school tutoring
institutions in violation of such requirements will be subject to rectification. If an after-school tutoring institution violates the
requirements several times or violates several requirements, such after-school tutoring institution is prohibited from enrollment of students
and shall not conduct tutoring activities during the rectification period; and if the after-school tutoring institution refuses to rectify
within the time limit or if the violation is severe, its private school operating permit may be revoked by the local education administration.
On September 10, 2021, the
MOE and five other authorities jointly issued the Notice on Effectively Carrying out Change from Record-filing to Approval of Existing
Online Curriculum-subject Tutoring Institutions, which specifies the review and re-approval procedures of online Academic AST Institutions
that have filed with the local education administration authorities required under the Alleviating Burden Opinion.
On November 3, 2021, the SAMR
and seven other authorities jointly issued the Notice on Advertisement Control of the After-School Tutoring, which prohibits online and
offline after-school advertisements targeting primary and secondary school (including kindergarten) students, regardless of academic subjects
or non-academic subjects of the tutoring.
On October 21, 2021, the MOE
and six other authorities jointly issued the Notice on Enhancing the Regulation of the Pre-Payment of Fees Collected by After-School Tutoring
Institutions, which requires the thorough utilization of the Form of Service Contract for After-school Training Provided to Primary and
Secondary School Students and prohibits infringements of students’ legal rights and interests by means of standard terms. The Notice
provides, among others, that (i) it is forbidden to induce parents of primary and secondary school students to use installment loans to
pay for tuition fees; (ii) tuition fees collected by an after-school tutoring institution shall not be collected in a lump sum for more
than 60 course sessions when charged based on the number of classes, or for a course length of more than three months when charged based
on the length of the course; and (iii) an after-school tutoring institution shall set up an escrow bank account for pre-payment tuition
fees it collects and the bank will provide escrow services without charging from the after-school tutoring institution and students.
Intellectual Properties
Copyright and Software
Registration
The SCNPC adopted the Copyright
Law in 1990 and amended it in 2001, 2010 and 2020, respectively. The latest amended Copyright Law became effective from June 1, 2021.
The Copyright Law extends copyright protection to Internet activities, products disseminated over the Internet and software products.
In addition, there is a voluntary registration system administered by the China Copyright Protection Center. The Copyright Law also requires
registration of a copyright pledge. To address the problem of copyright infringement related to the content posted or transmitted over
the Internet, the National Copyright Administration and the MIIT jointly promulgated the Measures for Administrative Protection of Copyright
Related to Internet on April 29, 2005. This measure became effective on May 30, 2005.
In order to further implement
the Computer Software Protection Regulations promulgated by the State Council on December 20, 2001, and most recently amended on January
30, 2013 and taking into effect on March 1, 2013, the State Copyright Bureau issued the Computer Software Copyright Registration Procedures
on February 20, 2002, which applies to software copyright registration, license contract registration and transfer contract registration.
The National Copyright Administration of the PRC shall be the competent authority for the nationwide administration of software copyright
registration and the Copyright Protection Center of China or the CPCC, is designated as the software registration authority. The CPCC
shall grant registration certificates to the Computer Software Copyrights applicants which conforms to the provisions of both the Computer
Software Copyright Registration Procedures and the Computer Software Protection Regulations (Revised in 2013).
Patents
The SCNPC adopted the Patent
Law of the People’s Republic of China in 1984 and amended it in 1992, 2000, 2008 and 2020, respectively. A patentable invention,
utility model or design must meet three conditions: novelty, inventiveness and practical applicability. Patents cannot be granted for
scientific discoveries, rules and methods for intellectual activities, methods used to diagnose or treat diseases, animal and plant breeds
or substances obtained by means of nuclear transformation. The Patent Office under the State Intellectual Property Office is responsible
for receiving, examining and approving patent applications. A patent is valid for a twenty-year term for an invention and a ten-year term
for a utility model or design, starting from the application date. Except under certain specific circumstances provided by law, any third
party user must obtain consent or a proper license from the patent owner to use the patent, or else the use will constitute an infringement
of the rights of the patent holder.
Domain Name
Pursuant to the Administrative
Measures for Internet Domain Names, which was promulgated by the Ministry of Industry and Information Technology of the PRC on August
24, 2017 and became effective on November 1, 2017, domain names are registered on a “first-come, first-served” basis. The
domain names registered or used by an organization or individual shall not contain any contents prohibited by laws and administrative
regulations. A domain name registration applicant shall provide the domain name registration service agency with truthful, accurate and
complete identity information on the domain name holder.
Trademark
Trademarks are protected by
the PRC Trademark Law which was adopted in 1982 and subsequently amended in 1993, 2001, 2013 and 2019 as well as the Implementation Regulation
of the PRC Trademark Law adopted by the State Council in 2002 and amended in 2014. The Trademark Office under the SAIC handles trademark
registrations and grants a term of ten years to registered trademarks which may be renewed for consecutive ten-year periods upon request
by the trademark owner. Trademark license agreements must be filed with the Trademark Office for record. The PRC Trademark Law has adopted
a “first-to-file” principle with respect to trademark registration. Where a trademark for which a registration has been made
is identical or similar to another trademark which has already been registered or been subject to a preliminary examination and approval
for use on the same kind of or similar commodities or services, the application for registration of such trademark may be rejected. Any
person applying for the registration of a trademark may not prejudice the existing right first obtained by others, nor may any person
register in advance a trademark that has already been used by another party and has already gained a “sufficient degree of reputation”
through such party’s use.
Foreign Currency Exchange
Pursuant to the Foreign Currency
Administration Rules, as amended, and various regulations issued by SAFE and other relevant PRC government authorities, RMB is freely
convertible to the extent of current account items, such as trade related receipts and payments, interest and dividends. Capital account
items, such as direct equity investments, loans and repatriation of investment, unless expressly exempted by laws and regulations, still
require prior approval from SAFE, its local counterparts or designated banks for conversion of RMB into a foreign currency, such as U.S.
dollars, and remittance of the foreign currency outside of the PRC. Payments for transactions that take place within the PRC must be made
in RMB. Foreign currency revenues received by PRC companies may be repatriated into China or retained outside of China in accordance with
requirements and terms specified by SAFE.
Dividend Distribution
Pursuant the FIL, foreign
investors may, according to the present law, freely remit into or out of China, in RMB or any other foreign currency, their capital contributions,
profits, capital gains, income from asset disposal, intellectual property royalties, lawfully acquired compensation, indemnity or liquidation
income and so on within the territory of China. In addition, pursuant to the Company Law of PRC, a foreign invested enterprise in China
is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until
its cumulative total reserve funds reach 50% of its registered capital. These reserve funds, however, may not be distributed as cash dividends.
Foreign Exchange Registration of Overseas
Investment by PRC Residents
SAFE Circular on Relevant
Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or Circular
37, issued by SAFE and effective in July 4, 2014, regulates foreign exchange matters in relation to the use of special purpose vehicles,
or SPVs, by PRC residents or entities to seek offshore investment and financing and conduct round trip investment in China. Under Circular
37, a SPV refers to an offshore entity established or controlled, directly or indirectly, by PRC residents or entities for the purpose
of seeking offshore financing or making offshore investment, using legitimate domestic or offshore assets or interests, while “round
trip investment” refers to the direct investment in China by PRC residents or entities through SPVs, namely, establishing foreign-invested
enterprises to obtain the ownership, control rights and management rights. Circular 37 requires that, before making contribution into
an SPV, PRC residents or entities are required to complete foreign exchange registration with the SAFE or its local branch. SAFE Circular
37 further provides that option or share-based incentive tool holders of a non-listed SPV can exercise the options or share incentive
tools to become a shareholder of such non-listed SPV, subject to registration with SAFE or its local branch.
PRC residents or entities
who have contributed legitimate domestic or offshore interests or assets to SPVs but have yet to obtain SAFE registration before the implementation
of Circular 37 shall register their ownership interests or control in such SPVs with SAFE or its local branch. An amendment to the registration
is required if there is a material change in the SPV registered, such as any change of basic information (including change of such PRC
residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions.
Failure to comply with the registration procedures set forth in Circular 37, or making misrepresentation on or failure to disclose controllers
of foreign-invested enterprise that is established through round-trip investment, may result in restrictions on the foreign exchange activities
of the relevant foreign-invested enterprises, including payment of dividends and other distributions, such as proceeds from any reduction
in capital, share transfer or liquidation, to its offshore parent or affiliate, and the capital inflow from the offshore parent, and may
also subject relevant PRC residents or entities to penalties under PRC foreign exchange administration regulations. On February 13, 2015,
SAFE further promulgated the Circular on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct
Investment, or SAFE Circular 13, which took effect on June 1, 2015 and partially abolished on December 30, 2019. This SAFE Circular 13
has amended SAFE Circular 37 by requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch
in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.
Loans to and Direct Investment in the PRC
Entities by Offshore Holding Companies
We are permitted under PRC
laws and regulations as an offshore holding company to provide funding to the PRC operating entities through loans or capital contributions,
subject to satisfaction of applicable government registration, approval and filing requirements.
In the event of subsequent
changes in the capital of the FIE such as increase in capital, such FIE shall complete change registration formalities with competent
administrations for market regulation, and change reporting formalities with competent administrations for commerce in accordance with
relevant regulations, and registration change formalities shall also be completed with the competent administration of foreign exchange
according to the Provisions on Foreign Exchange Control on Direct Investments in China by Foreign Investors.
Pursuant to the Provisional
Measures on Administration of Foreign Debt or the Foreign Debt Measures, issued by the State Development Planning Commission (now the
NDRC), Ministry of Finance and SAFE on January 8, 2003 and became effective on March 1, 2003, any loans provided by us to PRC operating
entities in foreign currencies shall be classified as foreign debt under the Foreign Debt Measures. According to the Foreign Debt Measures,
the sum of cumulative accrued amounts of medium-term to long-term foreign loans and balance amounts of short-term foreign loans taken
by a foreign investment enterprise shall be limited to the difference between the total project investment amount approved by the government
and the amount of registered capital. Foreign investment enterprises may take foreign loans freely within the scope of difference.
On January 12, 2017, the PBOC
issued the Notice of People’s Bank of China on Matters Concerning Macro-prudential Management on All-round Cross-border Financing
or the No.9 Notice, which improved the policy framework of the cross-border financing. The No.9 Notice clarifies the new calculation methods
of the upper limit of the risk-weighted balance for all types of cross-border financing, in particular, the upper limit for risk-weighted
balance for cross-border financing equals to the capital or the net assets multiplied by the leverage rate of cross-border financing and
the macro-prudential adjustment parameters. In the case of PRC operating entities, the capital or the net assets is calculated at the
net assets of each subsidiary, the leverage rate for cross-border financing for an enterprise is 2, and the macro-prudential adjustment
parameter is 1 (the “All-Round Mode”). On March 11, 2020, the PBOC and SAFE promulgated the Circular on Adjusting the Macro-prudential
Regulation Parameter for Full-covered Cross-border Financing, which provides that based on the current macro economy and international
balance of payments, the macro-prudential regulation parameter as set forth in the Notice 9 is updated from 1 to 1.25. On January 7, 2021,
the PBOC and SAFE issued a new circular which adjusted the macro-prudential regulation parameter from 1.25 to 1. Currently, the implementation
of the foregoing methodologies in cross-border financing have not been formally determined by the PBOC and the SAFE. In the practice,
it is still uncertain whether FIEs shall apply the Investment Difference Mode or the All-round Mode. Based on the current registered capital
and total project investment amount, if we would provide funding to PRC operating entities through loans and use the Investment Difference
Mode, PRC operating entities will be required to increase its registered capital and total project investment amount. Alternatively, if
we choose to use the All-Round Mode, the amount of loans we can make to PRC operating entities as calculated according to the foregoing
macro-prudential regulation parameter will not be more than 2 times of the net assets of such entities.
Moreover, as the debtors of
cross-border financing, the PRC operating entities are also required to comply with certain registration formalities for execution of
foreign debt contracts with the foreign exchange bureau at the locality within fifteen working days after signing the contracts according
to the Notice of State Administration of Foreign Exchange on Promulgation of the Administrative Measures on Registration of Foreign Debt
which was promulgated by the SAFE on April 48, 2013 and revised in May 2015.
Pursuant to the Circular of
the National Development and Reform Commission on Promoting the Administrative Reform of the Record-filing and Registration System for
the Issuance of Foreign Debts by Enterprises promulgated on September 14, 2015, or the Circular 2044, before the issuance of foreign debts,
enterprises shall first apply to the National Development and Reform Commission for the handling of the record-filing and registration
procedures and shall report the information on the issuance to NDRC within 10 working days of completion of each issuance. The term “foreign
debts” shall mean yuan-denominated or foreign currency-denominated debt instruments with a maturity of one year or above which are
issued overseas by domestic enterprises and their controlled overseas enterprises or branches and for which the principal and interest
are repaid as agreed, including bonds issued overseas and long- and medium-term international commercial loans, etc. In February 2020,
the NDRC circulated the Guide to the Registration of Foreign Debt Issued by Enterprises on its official website, according to which, domestic
companies (and their controlled overseas companies or branches) who borrowed from foreign companies (including overseas shareholders)
for more than one year need to apply to the NPRC.
PRC Enterprise Income Tax
On January 1, 2008, the PRC
Enterprise Income Tax Law, or PRC EIT Law, took effect. The PRC EIT Law applies a uniform 25% enterprise income tax rate to both foreign-invested
enterprises and domestic enterprises, except where tax incentives are granted to special industries and projects. Enterprises qualified
as “High and New Technology Enterprises” are entitled to a 15% enterprise income tax rate rather than the 25% uniform statutory
tax rate. The preferential tax treatment continues as long as an enterprise can retain its “High and New Technology Enterprise”
status. Under the PRC EIT Law and its implementation regulations, dividends generated from the business of a PRC subsidiary after January
1, 2008 and payable to its foreign investor may be subject to a withholding tax rate of 10% if the PRC tax authorities determine that
the foreign investor is a non-resident enterprise, unless there is a tax treaty with China that provides for a preferential withholding
tax rate. Distributions of earnings generated before January 1, 2008 are exempt from PRC withholding tax.
Under the PRC EIT Law, an
enterprise established outside China with “de facto management bodies” within China is considered a “resident enterprise”
for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. A
circular issued by the State Administration of Taxation in April 2009 regarding the standards used to classify certain Chinese-invested
enterprises controlled by Chinese enterprises or Chinese enterprise groups and established outside of China as “resident enterprises”
clarified that dividends and other income paid by such PRC “resident enterprises” will be considered PRC-source income and
subject to PRC withholding tax, currently at a rate of 10%, when paid to non-PRC enterprise shareholders. This circular also subjects
such PRC “resident enterprises” to various reporting requirements with the PRC tax authorities. Under the implementation regulations
to the PRC EIT Law, a “de facto management body” is defined as a body that has material and overall management and control
over the manufacturing and business operations, personnel and human resources, finances and properties of an enterprise. In addition,
the tax circular mentioned above specifies that certain PRC-invested overseas enterprises controlled by a Chinese enterprise or a Chinese
enterprise group in the PRC will be classified as PRC resident enterprises if the following are located or resided in the PRC: (i) senior
management personnel and departments that are responsible for daily production, operation and management; (ii) financial and personnel
decision making bodies; (iii) key properties, accounting books, the company seal, and minutes of board meetings and shareholders’
meetings; and (iv) half or more of the senior management or directors who have the voting rights.
PRC Value-added Tax (“VAT”)
Pursuant to the Provisional
Regulations on Business Tax which was promulgated by the State Council in December 1993 and revised in November 2008, organizations and
individuals engaging in provision of labor services stipulated in these regulations, transfer of intangible assets or sale of immovables
in China shall be taxpayers of business tax and shall pay business tax and the applicable business rate for service industry is 5%. The
Provisional Regulations on Business Tax was abolished in November 2017. In accordance with Circular on Comprehensively Promoting the Pilot
Program of the Collection of Value-added Tax in Lieu of Business Tax (Caishui [2016] No. 36), which was promulgated on March 23, 2016
and came into effect on May 1, 2016 and has been partially abolished, upon approval of the State Council, the pilot program of the collection
of value-added tax (the “VAT”) in lieu of business tax shall be promoted nationwide in a comprehensive manner starting from
May 1, 2016, and all business tax payers engaged in the building industry, the real estate industry, the financial industry and the life
service industry shall be included in the scope of the pilot program with regard to payment of value-added tax instead of business tax.
For educational service income, the application VAT tax rate is 6% unless otherwise provided by the circular.
According to Provisional Regulations
on Value-added Tax of the PRC or the VAT Regulations, which was promulgated by the State Council on December 13, 1993, came into effect
on January 1, 1994, and was amended on November 10, 2008, February 6, 2016 and November 19, 2017, and The Detailed Rules for the Implementation
of the Provisional Regulations of the People’s Republic of China on Value-added Tax (Revised in 2011), which was promulgated by
the Ministry of Finance and was last amended on October 28, 2011 and came into effect on November 1, 2011, organizations and individuals
engaging in sale of goods or processing, repair and assembly services, sale of services, intangible assets, immovables and importation
of goods in the PRC shall be taxpayers of VAT, and shall pay VAT pursuant to these Regulations. The amount of VAT payable is calculated
as “output VAT” minus “input VAT.” Pursuant to the VAT Regulations, the rate of VAT is 17% for those engaging
in the sale of goods or labor services or tangible personal property leasing services or importation of goods except as otherwise provided
by the VAT Regulations. The tax rate of VAT is 11% for the sales of the service of transportation, posting, basic telecommunications,
construction and leasing real estate, the sale of real estate and the transfer of land use right, or sell or import the goods listed in
the VAT Regulations.
On April 4, 2018, MOF and
SAT jointly promulgated the Circular of the Ministry of Finance and the State Administration of Taxation on Adjustment of Value-Added
Tax Rates, or Circular 32, according to which for VAT taxable sales acts or importation of goods originally subject to value-added tax
rates of 17% and 11% respectively, such tax rates shall be adjusted to 16% and 10%, respectively. Circular 32 became effective on May
1, 2018 and shall supersede existing provisions which are inconsistent with Circular 32. On March 20, 2019, MOF, SAT and GAC jointly promulgated
the Announcement on Policies for Deepening the VAT Reform, or Circular 39, according to which for general VAT payers’ sales activities
or imports that are subject to VAT at an existing applicable rate of 16% or 10%, the applicable VAT rate is adjusted to 13% or 9% respectively.
This Announcement came into force on April 1, 2019.
Dividend Withholding Tax
Pursuant to the Arrangement
Between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with Respect to Tax on Income or the Double Tax Avoidance Arrangement, and other applicable mainland Chinese laws, if
a Hong Kong resident enterprise is determined by the competent tax authority in mainland China to have satisfied the relevant conditions
and requirements under such Double Tax Avoidance Arrangement and other applicable laws, the 10% withholding tax on the dividends the Hong
Kong resident enterprise receives from a mainland China resident enterprise may be reduced to 5% upon receiving approval from in-charge
tax authority. However, based on the Notice on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties,
or the Notice No. 81, issued on February 20, 2009 by the SAT, if the relevant Chinese tax authorities determine, in their discretion,
that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such Chinese
tax authorities may adjust the preferential tax treatment. Based on Notice of the State Administration of Taxation on How to Understand
and Determine the “Beneficial Owners” in Tax Agreements, or the Notice No. 601, issued on October 27, 2009 by the SAT, conduit
companies, which are established for the purpose of evading or reducing tax, or transferring or accumulating profits, shall not be recognized
as beneficial owners and thus are not entitled to the above-mentioned reduced income tax rate of 5% under the Double Tax Avoidance Arrangement.
On February 3, 2018, the SAT issued the Announcement of the State Administration of Taxation on Issues Relating to “Beneficial Owner”
in Tax Treaties, or the Circular 9, which became effective on April 1, 2018 and the Notice 601 was repealed simultaneously. The Announcement
of the State Administration of Taxation on Issues Relating to “Beneficial Owner” in Tax Treaties stipulates issues relating
to determination of “beneficial owner” status in clauses of tax treaties on dividends, interest and royalties.
Accordingly, Edeshler HK may
be able to benefit from the 5% withholding tax rate for the dividends it receives from Fengyuan Beijing, if it satisfies the conditions
prescribed under the Notice No. 81 and other relevant tax rules and regulations. However, if the relevant tax authorities consider the
transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may
adjust the favorable withholding tax in the future.
Employment and Social Insurance
We are subject to laws and
regulations governing our relationship with our employees, including wage and hour requirements, working and safety conditions, and social
insurance, housing funds and other welfare. The compliance with these laws and regulations may require substantial resources.
Pursuant to the PRC Labor
Law effective from January 1, 1995 (as amended on December 29, 2018) and the PRC Labor Contract Law effective as of January 1, 2008 (as
amended on December 28, 2012), a written labor contract shall be executed by employer and an employee when the employment relationship
is established, and an employer is under an obligation to sign an unlimited-term labor contract with any employee who has worked for the
employer for ten consecutive years. Further, if an employee requests or agrees to renew a fixed-term labor contract that has already been
entered into twice consecutively, the resulting contract must have an unlimited term, with certain exceptions. The employer must also
pay severance to an employee in nearly all instances where a labor contract, including a contract with an unlimited term, is terminated
or expires. All employers must compensate their employees equal to at least the local minimum wage standards. All employers are required
to establish a system for labor safety and sanitation, strictly abide by state rules and standards and provide employees with appropriate
workplace safety training. In addition, the government has continued to introduce various new labor-related regulations after the Labor
Contract Law. Among other things, new annual leave requirements mandate that annual leave ranging from 5 to 15 days is available to nearly
all employees and further require that the employer compensate an employee for any annual leave days the employee is unable to take in
the amount of three times his daily salary, subject to certain exceptions. Moreover, all PRC enterprises are generally required to implement
a standard working time system of eight hours a day and forty hours a week, and if the implementation of such standard working time system
is not appropriate due to the nature of the job or the characteristics of business operation, the enterprise may implement a flexible
working time system or comprehensive working time system after obtaining approvals from the relevant authorities. In addition, employers
in China are obliged to pay contributions to the social insurance plan and the housing fund plan for their employees, and such contribution
amount payable shall be calculated based on the employee actual salary in accordance with the relevant regulations.
M&A Rules and Overseas Listing
The Provisions Regarding Mergers
and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule, were jointly adopted by six PRC regulatory authorities,
including China Securities Regulatory Commission, or CSRC, on August 8, 2006 and became effective as of September 8, 2006, and were later
amended on June 22, 2009. The M&A Rules require that a foreign investor is required to obtain necessary approvals when (1) a foreign
investor acquires equity in a domestic non-foreign invested enterprise thereby converting it into a foreign-invested enterprise, or subscribes
for new equity in a domestic enterprise via an increase of registered capital thereby converting it into a foreign-invested enterprise;
or (2) a foreign investor establishes a foreign-invested enterprise which purchases and operates the assets of a domestic enterprise,
or which purchases the assets of a domestic enterprise and injects those assets to establish a foreign-invested enterprise. According
to Article 11 of the M&A Rules, where a domestic company or enterprise, or a domestic natural person, through an overseas company
established or controlled by it/him/her, acquires a domestic company which is affiliated with it/him/her, an approval from the MOFCOM
is required.
This M&A Rules purport
to require, among other things, offshore SPVs, formed for listing purposes through acquisition of PRC domestic companies and controlled
by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange.
We believe that CSRC approval is not required as we are not a special purpose vehicle formed for listing purpose through acquisition of
domestic companies that are controlled by our PRC individual shareholders, as we acquired contractual control rather than equity interests
in the VIE.
However, we cannot assure
you that the relevant PRC government authority, including the CSRC, would reach the same conclusion as we do. If the CSRC or other PRC
regulatory authority subsequently determines that we need to obtain the CSRC’s approval or if CSRC or any other PRC government authorities
will promulgate any interpretation or implementing rules before the Share Exchange that would require CSRC or other governmental approvals
for the Share Exchange, we may face sanctions by the CSRC or other PRC regulatory agencies. In such event, these regulatory agencies may
impose fines and penalties on the VIE’s operations in the PRC, limit VIE’s operating privileges in the PRC, delay or restrict
the repatriation of the proceeds from any future offerings into the PRC, or take other actions that could have a material adverse effect
on our business, financial condition, results of operations, and prospects, as well as the trading price of our shares.
Available Information
Our website address is https://www.zhuoxuncn.com/.
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed pursuant
to Sections 13(a) and 15(d) of the Exchange Act are filed with the SEC. Such reports and other information filed or furnished by us with
the SEC are available on our website at https://www.zhuoxuncn.com/sec.html. However, we will make available, such reports and information
filed or furnished by us with the SEC, by electronic copies free of charge upon request. In addition, while we are not required to provide
an annual report our stockholders, our consolidated financial statements on our Annual Report on Form 10-K contains financial information
that has been examined and reported on, with an opinion expressed by an independent public accountant, WWC, P.C., and are provided to
our stockholders free of charge upon request.
Information contained in,
or accessible through, the websites referred to in this Annual Report on Form 10-K is not incorporated into this filing. Further, our
references to website addresses are only as inactive textual references.
Item 1A. Risk Factors.
The following are factors
that could have a significant impact on our operations and financial results and could cause actual results or outcomes to differ materially
from those discussed in any forward-looking statements.
Risks Related to Our Business and Our Industry
Our onsite business could be affected by
the spread of COVID-19.
If there is new COVID-19 cases discovered inside
the mainland border, the PRC government would impose strict regulations about social distancing or prohibitions on social gatherings,
making it very hard for us to develop offline meetings and courses.
However, on the other hand, this could be a good
opportunity for our online educational services. Because students are not allowed to go to school while there are still new cases of COVID-19,
they have more time to study at home. Thus, there is a bigger possibility that they will use our online courses and other online educational
services.
We depend on the education industry for
a significant portion of our revenues.
Our revenues could seriously decrease if there
were adverse developments in the education industry. Our near-term and long-term prospects depend upon selling our educational services.
Our success is highly dependent on the sales and marketing expenditures of our local distributors and our ability to attract these expenditures.
Some of the adverse developments in the education industry that could affect our revenues would be:
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A reduction in sales and marketing expenditures of educational services; |
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Public or private market initiatives or reforms designed to regulate the manner in which educational enterprises promote their products; |
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Regulatory or legislative developments that discourage or prohibit private enterprises’ activities in educational industry; |
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A decrease in the number of new courses being developed; or |
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The adoption of current legislative and regulatory proposals to control educational costs for families. |
We face intense competition from education
and training services companies, and, if we are unable to compete effectively, we may lose customers and our revenues may decline.
The market for educational services is highly
competitive and we expect competition to persist and intensify. We believe that the principal competitive factors in our markets are industry
expertise, breadth and depth of service offerings, quality of the services offered, reputation and track record, marketing and selling
skills, scalability of infrastructure and price. In addition, the trend towards offshore outsourcing, international expansion by foreign
and domestic competitors and continuing technological changes will result in new and different competitors entering our markets. Our ability
to compete also depends in part on a number of factors beyond our control, including the ability of our competitors to recruit, train,
develop and retain highly skilled professionals, the price at which our competitors offer comparable services and our competitors’
responsiveness to client needs. Therefore, we cannot assure you that we will be able to retain our customers while competing against such
competitors. Increased competition, our inability to compete successfully against competitors, pricing pressures or loss of market share
could harm our business, financial condition and results of operations.
Our success depends substantially on the
continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lose their services.
Our future success heavily depends upon the continued
services of our senior executives and other key employees. If one or more of our senior executives or key employees are unable or unwilling
to continue in their present positions, it could disrupt our business operations, and we may not be able to replace them easily or at
all. In addition, competition for senior executives and key personnel in our industry is intense, and we may be unable to retain our senior
executives and key personnel or attract and retain new senior executive and key personnel in the future, in which case our business may
be severely disrupted, and our financial condition and results of operations may be materially and adversely affected. If any of our senior
executives or key personnel joins a competitor or forms a competing company, we may lose customers, suppliers, know-how and key professionals
and staff members to them. Also, if any of our distributors, who generally keep a close relationship with our customers, joins a competitor
or forms a competing company, we may lose customers, and our revenues may be materially and adversely affected.
Additionally, there could be unauthorized disclosure
or use of our technical knowledge, practices or procedures by such personnel. Most of our executives and key personnel have entered into
employment agreements with us that contain non-competition provisions, non-solicitation and nondisclosure covenants. However, if any dispute
arises between our executive officers and key personnel and us, such non-competition, non-solicitation and our future success heavily
depends upon the continued services of our senior executives and other key employees. If one or more of our senior executives or key employees
are unable or unwilling to continue in their present positions, it could disrupt our business operations, and we may not be able to replace
them easily or at all. In addition, competition for senior executives and key personnel in our industry is intense, and we may be unable
to retain our senior executives and key personnel or attract and retain new senior executive and key personnel in the future, in which
case our business may be severely disrupted, and our financial condition and results of operations may be materially and adversely affected.
If any of our senior executives or key personnel joins a competitor or forms a competing company, we may lose customers, suppliers, know-how
and key professionals and staff members to them. Also, if any of our business development managers, who generally keep a close relationship
with our customers, joins a competitor or forms a competing company, we may lose customers, and our revenues may be materially and adversely
affected. Additionally, there could be unauthorized disclosure or use of our technical knowledge, practices or procedures by such personnel.
Most of our executives and key personnel have entered into employment agreements with us that contain non-competition provisions, non-solicitation
and nondisclosure covenants. However, if any dispute arises between our executive officers and key personnel and us, such non-competition,
non-solicitation and non-disclosure provisions might not provide effective protection to us, especially in China, where most of these
executive officers and key employees reside, in light of the uncertainties with China’s legal system.
If we fail to provide high-quality and reliable
content, we may not be able to attract and retain users to remain competitive.
Our success depends on our ability to maintain
and grow user engagement on our platform. To attract and retain users and compete against our competitors, we must continue to offer high-quality
and reliable content to provide our users with a superior educational experience. To this end, we must continue to produce original content
and source new professional and user-generated content. Given that we operate in a rapidly evolving industry, we need to anticipate industry
changes and respond to such changes timely and effectively. If we fail to continue to offer high-quality and reliable content to our users,
we may suffer from reduced user traffic and engagement, and our business, financial condition and results of operations may be materially
and adversely affected.
In addition to content generated by our users
and content partners, we rely on our research and development team to create original content and to edit, manage, and supervise
the original content origination and production process, and we intend to continue to invest resources in content production. We face
competition for qualified personnel in a limited pool of high-quality creative talent. If we are not able to compete effectively for talents
or attract and retain top talents at reasonable costs, our original content production capabilities would be negatively impacted. Any
deterioration in our in-house content production capability, inability to attract creative talents at reasonable costs or losses
in personnel may materially and adversely affect our business and operating results.
We expect competition to increase significantly
in the future which could reduce our revenues, potential profits and overall market share.
The market for traditional and online education
is competitive. Barriers to entry on the Internet are relatively low, and we expect competition to increase significantly in the future.
We face competitive pressures from certain actual and potential competitors, both onsite and online, many of which have longer operating
histories, greater brand name recognition, larger user bases and significantly greater financial, technical and marketing resources than
we do. We cannot assure you that educational services maintained by our existing and potential competitors will not be perceived by the
education community as being superior to ours.
We may be subject to various approvals,
licenses, permits, registrations and filings for our education services in the PRC in the future if our interpretation and understanding
of the laws and regulations are incorrect or the laws or regulations change significantly.
Pursuant to PRC law, to establish and operate a school, it requires
a private school operation permit from the local education bureau and registration with the local civil affairs bureau to obtain a certificate
of registration for a privately operated non-enterprise entity for not-for-profit private schools, or registration with the local administration
for industry and commerce for for-profit private schools. However, Zhuoxun Beijing’s activities qualify as cultural communication
or education consulting under PRC law, and does not qualify as private education under the PRC Education Law and relevant regulations,
and therefore we believe it is not required to make such filings or obtain such permits with the education or human resources and social
security regulators in PRC.
However, given the significant amount of discretion the local PRC authorities
may have in interpreting, implementing and enforcing relevant rules and regulations, as well as other factors beyond our control, if our interpretation and understanding of the laws and regulations are incorrect or the laws or regulations
change significantly, we may be required to obtain and maintain various approvals, licenses and permits and to fulfill registration and
filing requirements in order to conduct our business. While we intend to use our best efforts to obtain all requisite permits and complete all necessary filings, renewals
and registrations on a timely basis if we are required to do so in the future, we cannot assure you that we will be able to obtain all
required permits. If we fail to receive any required permit, if applicable, in a timely manner or obtain or renew any permits and certificates,
we may be subject to fines, confiscation of the gains derived from our noncompliant operations, suspension of our non-compliant operations,
compensation payments for any economic loss suffered by our students or other relevant parties, which may materially and adversely affect
our business, financial condition and results of operations.
We may be unable to adequately develop our
systems, processes and support in a manner that will enable us to meet the demand for our services.
We have initiated our online operations in the
recent several years and are developing our ability to provide our courses and education systems on a transactional basis over the Internet.
Our future success will depend on our ability to develop the infrastructure effectively, including additional hardware and software, and
implement the services, including customer support, necessary to meet the demand for our services. In the event we are not successful
in developing the necessary systems and implementing the necessary services on a timely basis, our revenues could be adversely affected,
which would have a material adverse effect on our financial condition.
We may lose business if we are unable to
keep up with rapid technological or other changes.
If we are unable to keep up with changing technology
and other factors related to our market, we may be unable to attract and retain users and advertisers, which would reduce our revenues.
The markets in which we compete are characterized by rapidly changing technology, evolving technological standards in the industry, frequent
new service and product announcements and changing consumer demands. Our future success will depend on our ability to adapt to these changes
and to continuously improve the performance, features and reliability of our service in response to competitive services and product offerings
and the evolving demands of the marketplace. In addition, the widespread adoption of new Internet, networking or telecommunications technologies
or other technological changes could require us to incur substantial expenditures to modify or adapt our services or infrastructure, which
might impact our ability to become or remain profitable.
The growth and success of our business depends
on our ability to anticipate and develop new services and enhance existing services in order to keep pace with rapid changes in technology
and in the industries we focus on.
The market for our services is characterized by
rapid technological change, evolving industry standards, changing client preferences and new product and service introductions. Our future
growth and success depend significantly on our ability to anticipate developments in educational services, and develop and offer new product
and service lines to meet our customers’ and end-users’ evolving needs. We may not be successful in anticipating or responding
to these developments in a timely manner, or if we do respond, the services or technologies we develop may not be successful in the marketplace.
The development of some of the services and technologies may involve significant upfront investments and the failure of these services
and technologies may result in our being unable to recover these investments, in part or in full. Further, services or technologies that
are developed by our competitors may render our services uncompetitive or obsolete. In addition, new technologies may be developed that
allow our customers to more cost-effectively perform the services that we provide, thereby reducing demand for our services. Should we
fail to adapt to the rapidly changing educational services market or if we fail to develop suitable services to meet the evolving and
increasingly sophisticated requirements of our customers in a timely manner, our business and results of operations could be materially
and adversely affected.
If we do not succeed in attracting new customers
for our services or growing revenues from existing customers, we may not achieve our revenue growth goals.
We plan to significantly expand the number of
customers we serve to diversify our client base and grow our revenues. Obtaining new customers is important for us to achieve rapid revenue
growth. We also plan to grow revenues from our existing customers by identifying and selling additional services to them. Our ability
to attract new customers, as well as our ability to grow revenues from existing customers, depends on a number of factors, including our
ability to offer high quality services at competitive prices, the strength of our competitors and the capabilities of our sales and marketing
teams. If we are not able to continue to attract new customers or to grow revenues from our existing customers in the future, we may not
be able to grow our revenues as quickly as we anticipate or at all.
As a result of our significant recent growth,
evaluating our business and prospects may be difficult and our past results may not be indicative of our future performance.
Our future success depends on our ability to significantly
increase revenue and maintain profitability from our operations. Our business has grown and evolved significantly in recent years. Our
growth in recent years makes it difficult to evaluate our historical performance and make a period-to-period comparison of our historical
operating results less meaningful. We may not be able to achieve a similar growth rate or maintain profitability in future periods. Therefore,
you should not rely on our past results or our historic rate of growth as an indication of our future performance. You should consider
our future prospects in light of the risks and challenges encountered by a company seeking to grow and expand in a competitive industry
that is characterized by rapid technological change, evolving industry standards, changing client preferences and new product and service
introductions. These risks and challenges include, among others:
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The uncertainties associated with our ability to continue our growth and maintain profitability; |
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Preserving our competitive position in the educational industry in China; |
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Offering consistent and high-quality educational services to retain and attract customers; |
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Implementing our strategy and modifying it from it from time to time to respond effectively to competition and changes in client preferences; |
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Managing our expanding operations and successfully expanding our solution and service offerings; |
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Responding in a timely manner to technological or other changes in the educational industry; |
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Recruiting, training, developing and retaining qualified managerial and other personnel. |
If we are unsuccessful in addressing any of these
risks or challenges, our business may be materially and adversely affected.
Our profitability will suffer if we are
not able to maintain our resource utilization levels or continue to improve our productivity levels.
Our gross margin and profitability are significantly
impacted by our utilization of human resources as well as other resources, such as computers, IT infrastructure and office space, and
our ability to increase our productivity levels. We may face difficulties maintaining high levels of utilization, especially for our newly
established businesses and resources. The framework agreements with some of our customers typically do not impose a minimum or maximum
purchase amount and allow our customers to place service orders from time to time at their discretion. Customers demand is varied and
it may fall to zero or surge to a level that we cannot cost-effectively satisfy. Although we try to use all commercially reasonable efforts
to accurately estimate service orders and resource requirements from our customers, we may overestimate or underestimate, which may result
in unexpected cost and strain or redundancy of our human capital and adversely effects on our utilization ability. Our ability to continually
increase our productivity levels depends significantly on our ability to recruit, train, develop and retain high-performing professionals,
staff projects appropriately and optimize our mix of services and delivery methods. If we experience a slowdown or stoppage of work for
any client or on any project for which we have dedicated professionals or facilities, we may not be able to efficiently reallocate these
professionals and facilities to other customers and projects to keep their high utilization and productivity levels. If we are not able
to maintain high resource utilization levels without corresponding cost reductions or price increases, our profitability will suffer.
Increases in wages for professionals in
China could prevent us from sustaining our competitive advantage and could reduce our profit margins.
Part of our most significant costs are the salaries
and other compensation expenses for our educational professionals and other employees. Because of rapid economic growth, increased productivity
levels, and increased competition for skilled employees and consultants in China, wages for highly skilled employees in China, in particular
middle- and senior-level managers, are increasing at a faster rate than in the past. We may need to increase the levels of employee and
consultant compensation more rapidly than in the past to remain competitive in retaining the quality and attracting number of employees
that our business requires. Increases in the wages and other compensation we pay our employees and consultants in China could reduce our
competitive advantage unless we are able to increase the efficiency and productivity of our professionals as well as the prices we can
charge for our services. In addition, any appreciation in the value of the Renminbi relative to U.S. dollar will cause an increase in
the relative wage levels in China, which could further reduce our competitive advantage and adversely impact our profit margin.
We must continue to upgrade our technology
infrastructure, or we will be unable to effectively meet demand for our services.
We must continue to add hardware and enhance software
to accommodate the increasing content in our courses. In order to make timely decisions about hardware and software enhancements, we must
be able to accurately forecast the growth in demand for our services. This growth in demand for our services could be difficult to forecast
and the potential audience of our services is large. If we are unable to increase the data storage and processing capacity of our systems
at least as fast as the growth in demand, our systems may become unstable and may fail to operate for unknown periods of time. Unscheduled
downtime could harm our business and also could discourage current and potential end users and reduce future revenues.
Our data and web server systems may negatively
interrupt in working or work improperly due to natural disasters, failure of third-party services and other unexpected problems.
We use Alibaba Cloud for our data which is backed-up
on regular basis and one on-site local server used for data backup and simulation test. When unlikely, an unexpected event like a power
or telecommunications outage, fire, flood or earthquake at our Internet service providers’ facilities and at our on-site data facility
could cause the loss of certain data which is not backed-up and interrupt with our services. Currently we don’t have any business
interruption insurance to compensate us for losses that may occur. In addition, we rely on third parties to securely store our archived
data, house our Web server and network systems and connect us to the Internet. The failure by any of these third parties to provide these
services satisfactorily and our inability to find suitable replacements would impair our ability to access archives and operate our systems.
Our computer networks may be vulnerable
to security risks that could disrupt our services and adversely affect our results of operations.
Our computer networks may be vulnerable to unauthorized
access, computer hackers, computer viruses and other security problems caused by unauthorized access to, or improper use of, systems by
third parties or employees. A hacker who circumvents security measures could misappropriate proprietary information or cause interruptions
or malfunctions in our operations. Although we intend to continue to implement security measures, computer attacks or disruptions may
jeopardize the security of information stored in and transmitted through our computer systems. Actual or perceived concerns that our systems
may be vulnerable to such attacks or disruptions may deter our customers from using our platforms or services. As a result, we may be
required to expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these
breaches.
Data networks are also vulnerable to attacks,
unauthorized access and disruptions. For example, in a number of public networks, hackers have bypassed firewalls and misappropriated
confidential information. It is possible that, despite existing safeguards, an employee could misappropriate our customers’ proprietary
information or data, exposing us to a risk of loss or litigation and possible liability. Losses or liabilities that are incurred as a
result of any of the foregoing could have a material adverse effect on our business.
We may lose users and lose revenues if our
cyber security measures fail.
If the security measures that we use to protect
personal information are ineffective, we may lose users of our services, which could reduce our revenues. We rely on security and authentication
technology licensed from third parties. We cannot predict whether these security measures could be circumvented by new technological developments.
In addition, our software, databases and servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions.
We may need to spend significant resources to protect against security breaches or to alleviate problems caused by any breaches. We cannot
assure you that we can prevent all cyber security breaches.
Our future growth depends significantly
on the strength of our brand and reputation. Any failure to maintain and enhance, or any damage to, our brand image or reputation could
materially and adversely affect our business, results of operations, financial condition and prospects.
Our reputation and brand recognition, which depend
on cultivating awareness, trust and confidence among our current or potential users, is critical to the success of our business. We believe
a well-recognized brand is crucial to increasing our user base and, in turn, facilitating our effort to monetize our services and enhancing
our attractiveness to our users and service providers. As we are growing to be known in family education in China, our reputation and
brand are vulnerable to many threats that can be difficult or impossible to control, and costly or impossible to remediate. Regulatory
inquiries or investigations, lawsuits and other claims in the ordinary course of our business, perceptions of conflicts of interest and
rumors, including complaints made by our competitors, among other things, could substantially damage our reputation, even if they are
baseless or satisfactorily addressed.
In addition, any perception that the quality of
our educational services may not be the same as or better than that of other platforms of educational services can damage our reputation.
Any negative media publicity about any of the services available on our platform or product or service quality problems at other educational
services platforms, including at our competitors, may also negatively impact our reputation and brand. Negative perceptions of educational
services, or the industry in general, may reduce the number of users coming to our platform and the number of transactions conducted through
our platform, which would adversely impact our revenues and liquidity position.
We may not be able to prevent others from
unauthorized use of our intellectual property, which could cause a loss of customers, reduce our revenues and harm our competitive position.
We rely on a combination of copyright, trademark,
software registration, anti-unfair competition and trade secret laws, as well as confidentiality agreements and other methods to protect
our intellectual property rights. To protect our trade secrets and other proprietary information, employees, consultants and collaborators
are required to enter into confidentiality agreements or other relevant agreements which include confidentiality provisions therein. These
agreements might not provide effective protection for the trade secrets, know-how or other proprietary information in the event of any
unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. Implementation of intellectual
property-related laws in China has historically been lacking, primarily because of ambiguities in the PRC laws and difficulties in enforcement.
Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as those in the United States
or other developed countries, and infringement of intellectual property rights continues to pose a serious risk of doing business in China.
Policing unauthorized use of proprietary technology is difficult and expensive. The steps we have taken may be inadequate to prevent the
misappropriation of our proprietary technology. Unauthorized copying, other misappropriation, or negligent or accidental leakage of our
proprietary technologies could enable third parties to benefit from our technologies without obtaining our consent or paying us for doing
so, which could harm our business and competitive position. Though we are not currently involved in any litigation with respect to intellectual
property, we may need to enforce our intellectual property rights through litigation. Litigation relating to our intellectual property
may not prove successful and might result in substantial costs and diversion of resources and management attention.
We may face intellectual property infringement
claims that could be time-consuming and costly to defend. If we fail to defend ourselves against such claims, we may lose significant
intellectual property rights and may be unable to continue providing our existing services.
Our success largely depends on our ability to
use and develop our technology and services without infringing the intellectual property rights of third parties, including copyrights,
trade secrets and trademarks. We may be subject to risk related to potential infringement claims of the copyrights, as the copyrights
of some of our educational courses developed by us. For example, pursuant to the Copyright Law of the PRC, providing the public with works
by wired or wireless means, so as to make the public able to respectively obtain the works at the individually selected time and place,
without permission from the owner of the copyrights therein shall constitute infringements of copyrights. The infringer shall, according
to the circumstances of the case, undertake to cease the infringement, take remedial action, and offer an apology, pay damages, etc. We
may be subject to litigation involving claims of violation of other intellectual property rights of third parties. We may be unaware of
intellectual property registrations or applications relating to our services that may give rise to potential infringement claims against
us. There may also be technologies licensed to and relied on by us that are subject to infringement or other corresponding allegations
or claims by third parties which may damage our ability to rely on such technologies. We are subject to additional risks as a result of
our hiring of new employees who may misappropriate intellectual property from their former employers. Parties making infringement claims
may be able to obtain an injunction to prevent us from delivering our services or using technology involving the allegedly infringing
intellectual property. Intellectual property litigation is expensive and time-consuming and could divert management’s attention
from our business. A successful infringement claim against us, whether with or without merit, could, among others things, require us to
pay substantial damages, develop non-infringing technology, or re-brand our name or enter into royalty or license agreements that may
not be available on acceptable terms, if at all, and cease making, licensing or using products that have infringed a third party’s
intellectual property rights. Protracted litigation could also result in existing or potential customers deferring or limiting their purchase
or use of our products until resolution of such litigation, or could require us to indemnify our customers against infringement claims
in certain instances. Any intellectual property claim or litigation in this area, whether we ultimately win or lose, could damage our
reputation and have a material adverse effect on our business, results of operations or financial condition.
Disruptions in telecommunications or significant
failure in our IT systems could harm our service, which could result in a reduction of our revenue.
A significant element of our business strategy
is to continue to leverage and expand our branches strategically located in China. We believe that the use of a strategically located
network of branches will provide us with cost advantages, the ability to attract highly skilled personnel in various regions of the country
and the world, and the ability to serve customers on a regional and global basis. Part of our service model is to maintain active voice
and data communications, financial control, accounting, customer service and other data processing systems between our main offices in
Beijing, our customers’ locations, and our other branches and support facilities. Our business activities may be materially disrupted
in the event of a partial or complete failure of any of these IT or communication systems, which could be caused by, among other things,
software malfunction, computer virus attacks, conversion errors due to system upgrading, damage from fire, earthquake, power loss, telecommunications
failure, unauthorized entry or other events beyond our control. Loss of all or part of the systems for a period of time could hinder our
performance or our ability to complete client projects on time which, in turn, could lead to a reduction of our revenue or otherwise have
a material adverse effect on our business and business reputation. We may also be liable to our customers for breach of contract for interruptions
in service.
We may need additional capital and any failure
by us to raise additional capital on terms favorable to us, or at all, could limit our ability to grow our business and develop or enhance
our service offerings to respond to market demand or competitive challenges.
We believe that our current cash and cash flow
from operations should be sufficient to meet our anticipated cash needs for at least the next 12 months. We may, however, require additional
cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide
to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities
or obtain a credit facility. The sale of additional equity securities could result in dilution to our shareholders. The incurrence of
indebtedness would result in increased debt service obligations and could require us to agree to operating and financing covenants that
would restrict our operations. Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties,
including:
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Investors’ perception of, and demand for, securities of technology services outsourcing companies; |
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Conditions of the U.S. and other capital markets in which we may seek to raise funds; |
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Our future results of operations and financial condition; |
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PRC government regulation of foreign investment in China; |
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Economic, political and other conditions in China; and |
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PRC government policies relating to the borrowing and remittance outside China of foreign currency. |
Financing may not be available in amounts or on
terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability
to grow our business and develop or enhance our product and service offerings to respond to market demand or competitive challenges.
We may incur losses resulting from business
interruptions resulting from occurrence of natural disasters, health epidemics and other outbreaks or events.
Our operational facilities may be damaged in natural
disasters such as earthquakes, floods, heavy rains, sand storms, tsunamis and cyclones, or other events such as fires. Such natural disasters
or other events may lead to disruption of information systems and telephone service for sustained periods. Damage or destruction that
interrupts our provision of outsourcing services could damage our relationships with our customers and may cause us to incur substantial
additional expenses to repair or replace damaged equipment or facilities. We may also be liable to our customers for disruption in service
resulting from such damage or destruction. Prolonged disruption of our services as a result of natural disasters or other events may also
entitle our customers to terminate their contracts with us. We currently do not have insurance against business interruptions.
Fluctuation in the value of the Renminbi
and other currencies may have a material adverse effect on the value of your investment.
Our financial statements are expressed in U.S.
dollars. However, a majority of our revenues and expenses are denominated in Renminbi (RMB). Our exposure to foreign exchange risk primarily
relates to the limited cash denominated in currencies other than the functional currencies of each entity. We do not believe that we currently
have any significant direct foreign exchange risk and have not hedged exposures denominated in foreign currencies or any other derivative
financial instruments. However, the value of your investment in our Common Stock will be affected by the foreign exchange rate between
U.S. dollars and RMB because the primary value of our business is effectively denominated in RMB, while our Common Stock will be traded
in U.S. dollars.
The value of the RMB against the U.S. dollar and
other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign
exchange policies. The People’s Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in RMB exchange
rate and achieve certain exchange rate targets, and through such intervention kept the U.S. dollar-RMB exchange rate relatively stable.
As we may rely on dividends paid to us by the
PRC operating entities, any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition,
and the value of any dividends payable on our Common Stock in foreign currency terms. For example, to the extent that we need to convert
U.S. dollars we receive from any future offerings into for our operations, appreciation of the RMB against the U.S. dollar would have
an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for
the purpose of making payments for dividends on our Common Stock or for other business purposes, appreciation of the U.S. dollar against
the RMB would have a negative effect on the U.S. dollar amount available to us. Furthermore, appreciation or depreciation in the value
of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying
change in our business or results of operations. We cannot predict the impact of future exchange rate fluctuations on our results of operations
and may incur net foreign exchange losses in the future. In addition, our foreign currency exchange losses may be magnified by PRC exchange
control regulations that restrict our ability to convert into foreign currencies.
Fluctuations in exchange rates could adversely
affect our business and the value of our securities.
Changes in the value of the RMB against the U.S.
dollar, euro and other foreign currencies are affected by, among other things, changes in China political and economic conditions. Any
significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and the value of, and any
dividends payable on our shares in the U.S. dollar terms. For example, to the extent that we need to convert U.S. dollar we receive from
any future offerings into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the
RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollar for the purpose of paying
dividends on our Common Stock or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect
on the U.S. dollar amount available to us.
Since July 2005, the RMB is no longer pegged to
the U.S. dollar, although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant
short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the
medium to long term. Moreover, it is possible that in future, PRC authorities may lift restrictions on fluctuations in the RMB exchange
rate and lessen intervention in the foreign exchange market.
Very limited hedging transactions are available
in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may
enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not
be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange
control regulations that restrict our ability to convert RMB into foreign currencies.
We have identified material weaknesses in
our internal control over financial reporting. If we fail to develop and maintain an effective system of internal control over financial
reporting, we may be unable to accurately report our financial results or prevent fraud.
In connection with audits of our financial statements for the fiscal
years ended September 30, 2022 and 2021, our management identified a few material weaknesses in the design and operation of our internal
controls:
| (1) | Inadequate income and cost verification process by the financial department: This weakness increases the risk of revenue recognition
errors and potential fraud. |
| (2) | Ineffective inventory management: This weakness increases the risk of errors in inventory valuation and potential misappropriation
of assets. |
| (3) | Taxation discrepancies: The discrepancy between the declared
tax revenue amount and the actual revenue amount increases the risk of penalties for late payment and potential non-compliance with tax
regulations. |
| (4) | Lack of an effective control environment: The control environment, which is the responsibility of
senior management, helps set the tone of the organization, influences the control consciousness of its officers and employees, and
is an important component affecting how the Company performs risk management, financial analysis, accounting, and financial
reporting. The Company did not maintain an effective control environment primarily attributable to the following identified material
weaknesses: |
| - | The Company’s management does not demonstrate a strong commitment
to internal controls, and there is a lack of accountability for control deficiencies. |
|
- |
There is a risk of management override and inadequate segregation of
duties due to the dual role of the major shareholder as both CEO and CFO. This arrangement grants one individual total authority and control
over financial decisions and transactions. |
|
- |
Ineffective
control environment to provide employees with sufficient training on internal control procedures, and there is a lack of communication
regarding the importance of internal controls within the Company. This resulted in communication failures of relevant facts necessary
for the accounting group to properly conclude on transactions which led to doubtful accounting treatment of certain revenue transactions.
|
| - | The Company did not have sufficient personnel with an appropriate
level of knowledge, experience, and training commensurate with the complexity of the transactions and the financial reporting requirements. |
| (5) | We did not hold any formal board meetings or shareholders meetings
during the last fiscal year; |
| (6) | We do not have an audit committee. |
As defined under standards established by the
Public Company Accounting Oversight Board, a material weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim
consolidated financial statements will not be prevented or detected on a timely basis.
In addition, in order to address the material
weakness in internal control over financial reporting of the Company, we have: (a) hired an experienced outside consultant with adequate
experience with US GAAP and the SEC reporting and compliance requirements. (b) continued our efforts to provide ongoing training courses
in US GAAP to existing personnel, including our Chief Financial Officer; (c) continued our efforts to set up the internal audit department,
and enhance the effectiveness of the internal control system; and (d) continued our efforts to implement necessary review and controls
at related levels and all important documents and contracts will be submitted to the office of its chief executive officer for retention.
All internal control systems, no matter how well
designed, have inherent limitations including the possibility of human error and the circumvention or overriding of controls. Further,
because of changes in conditions, the effectiveness of internal controls may vary over time. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Accordingly, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation.
We cannot be certain that these measures will
successfully remediate the material weakness or that other material weaknesses will not be discovered in the future. If our efforts are
not successful or other material weaknesses or control deficiencies occur in the future, we may be unable to report our financial results
accurately on a timely basis or help prevent fraud, which could cause our reported financial results to be materially misstated and result
in the loss of investor confidence or delisting and cause the market price of our Common Stock to decline. In addition, it could in turn
limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our securities. Additionally,
ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject
us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may
also be required to restate our financial statements from prior periods. Because of our status as an emerging growth company, you will
not be able to depend on any attestation from our independent registered public accountants as to our internal control over financial
reporting for the foreseeable future.
If major mobile application distribution
channels change their standard terms and conditions in a manner that is detrimental to us, or suspend or terminate their existing relationship
with us, our business, financial condition and results of operations may be materially and adversely affected.
We currently cooperate of Apple’s app store
and major PRC-based Android app store to distribute the Wisdom Lighthouse App to users. As such, the promotion, distribution and operation
of our application are subject to such distribution platforms’ standard terms and policies for application developers, which are
subject to the interpretation of, and frequent changes by, these distribution channels. If these third-party distribution platforms change
their terms and conditions in a manner that is detrimental to us, or refuse to distribute our application, or if any other major distribution
channel with which we would like to seek collaboration refuses to collaborate with us in the future on commercially favorable terms, our
business, financial condition and results of operations may be materially and adversely affected.
The Internet is subject to many legal uncertainties
and potential government regulations that may decrease demand for our services, increase our cost of doing business or otherwise have
a material adverse effect on our financial results or prospects.
Any new law or regulation pertaining to the Internet
or online publication, or the application or interpretation of existing laws, could decrease demand for our services, increase our cost
of doing business or otherwise have a material adverse effect on our financial results and prospects.
New laws and regulations or the application or
interpretation of existing laws and regulations pertaining to the Internet or online publication may be adopted by PRC regulatory authorities
in the future that address Internet-related issues, including online content, user privacy, pricing and quality of products and services.
For example, due to the ambiguity of the definition of “online publishing service,” the online distribution of content, including
our online services, the courseware or audio-visual contents uploaded by the users in Wisdom Lighthouse App, through our mobile application,
may be regarded as “online publishing service” and therefore we may be required to obtain an Online Publishing License in
the future.
Our future growth depends on the further
acceptance of the Internet and particularly the mobile Internet as an effective platform for assessing educational services.
While the Internet and the mobile Internet have
gained increased popularity in China as platforms for online educational resources sharing in recent years, many users have limited experience
in accessing educational information online. For example, users may not consider online content to be reliable sources of information.
If we fail to educate users about the value of our content, our platform and our services, our growth may be limited and our business,
financial performance and prospects may be materially and adversely affected. The further acceptance of the internet and the mobile internet
as an effective and efficient platform for information sharing and training content is also affected by factors beyond our control, including
negative publicity around online educational services and potential restrictive regulatory measures taken by the PRC government. If online
and mobile networks do not achieve adequate acceptance in the market, our growth prospects, results of operations and financial condition
could be harmed.
The Chinese government exerts substantial
influence over the manner in which we must conduct our business activities and may intervene or influence our operations at any time,
which could result in a material change in our operations and the value of our Common Stock.
The Chinese government has
exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state
ownership. Zhouxun Beijing’s ability to operate in China may be harmed by changes in its laws and regulations, including those relating
to securities regulation, data protection, cybersecurity and mergers and acquisitions and other matters. The central or local governments
of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures
and efforts on our part to ensure our compliance with such regulations or interpretations.
Government actions in the future
could significantly affect economic conditions in China or particular regions thereof, and could require us to materially change our operating
activities or divest ourselves of any interests we hold in Chinese assets. Zhouxun Beijing’s business may be subject to various
government and regulatory interference in the provinces in which we operate. We may incur increased costs necessary to comply with existing
and newly adopted laws and regulations or penalties for any failure to comply. Zhouxun Beijing’s operations could be adversely affected,
directly or indirectly, by existing or future laws and regulations relating to our business or industry.
Given recent statements by
the Chinese government indicating an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign
investment in China-based issuers, any such action 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 become worthless.
Recently, the General Office
of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the Opinions on Severely
Cracking Down on Illegal Securities Activities According to Law, or the Opinions, which was made available to the public on July 6,
2021. The Opinions emphasized the need to strengthen the administration over illegal securities activities, and the need to strengthen
the supervision over overseas listings by Chinese companies. Effective measures, such as promoting the construction of relevant regulatory
systems, will be taken to deal with the risks and incidents of China-concept overseas listed companies. As of the date of this Annual
Report, we or the VIE have not received any inquiry, notice, warning, or sanctions from PRC government authorities in connection with
the Opinions.
On June 10, 2021, the
SCNPC, promulgated the PRC Data Security Law, which took effect in September 2021. The PRC Data Security Law imposes data security
and privacy obligations on entities and individuals carrying out data activities, and introduces a data classification and hierarchical
protection system based on the importance of data in economic and social development, and the degree of harm it will cause to national
security, public interests, or legitimate rights and interests of individuals or organizations when such data is tampered with, destroyed,
leaked, illegally acquired or used. The PRC Data Security Law also provides for a national security review procedure for data activities
that may affect national security and imposes export restrictions on certain data an information.
In early July 2021, regulatory
authorities in China launched cybersecurity investigations with regard to several China-based companies that are listed in the United States.
The Chinese cybersecurity regulator announced on July 2 that it had begun an investigation of Didi Global Inc. (NYSE: DIDI)
and two days later ordered that the company’s app be removed from smartphone app stores. On July 5, 2021, the Chinese
cybersecurity regulator launched the same investigation on two other Internet platforms, China’s Full Truck Alliance of Full Truck
Alliance Co. Ltd. (NYSE: YMM) and Boss of KANZHUN LIMITED (Nasdaq: BZ). On July 24, 2021, the General Office of the Central
Committee of the Communist Party of China Central Committee and the General Office of the State Council jointly released the Guidelines
for Further Easing the Burden of Excessive Homework and Off-campus Tutoring for Students at the Stage of Compulsory Education, pursuant
to which foreign investment in such firms via mergers and acquisitions, franchise development, and variable interest entities are banned
from this sector.
On November 14, 2021,
the CAC released the Regulations on the Network Data Security Management (Draft for Comments), or the Data Security Management Regulations
Draft, to solicit public opinion and comments. Pursuant to the Data Security Management Regulations Draft, data processor holding more
than one million users/users’ individual information shall be subject to cybersecurity review before listing abroad. Data processing
activities refers to activities such as the collection, retention, use, processing, transmission, provision, disclosure, or deletion of
data. According to the latest amended Cybersecurity Review Measures, which was promulgated on December 28, 2021 and became effective
on February 15, 2022, and replaced the Cybersecurity Review Measures promulgated on April 13, 2020, online platform operator
holding more than one million users/users’ individual information shall be subject to cybersecurity review before listing abroad.
Since the Cybersecurity Review Measures is new, the implementation and interpretation thereof is not yet clear. As of the date of this
Annual Report, we have not been informed by any PRC governmental authority of any requirement that we file for review under the measure.
On August 17, 2021, the
State Council promulgated the Regulations on the Protection of the Security of Critical Information Infrastructure, or the Regulations,
which took effect on September 1, 2021. The Regulations supplement and specify the provisions on the security of critical information
infrastructure as stated in the Cybersecurity Review Measures. The Regulations provide, among others, that protection department of certain
industry or sector shall notify the operator of the critical information infrastructure in time after the identification of certain critical
information infrastructure.
On August 20, 2021, the
SCNPC promulgated the Personal Information Protection Law of the PRC, or the Personal Information Protection Law, which took effect in
November 2021. As the first systematic and comprehensive law specifically for the protection of personal information in the PRC,
the Personal Information Protection Law provides, among others, that (i) an individual’s consent shall be obtained to use sensitive
personal information, such as biometric characteristics and individual location tracking, (ii) personal information operators using
sensitive personal information shall notify individuals of the necessity of such use and impact on the individual’s rights, and
(iii) where personal information operators reject an individual’s request to exercise his or her rights, the individual may
file a lawsuit with a People’s Court.
On July 7, 2022, the CAC
promulgated the Outbound Data Transfer Security Assessment Measures, which became effective on September 1, 2022. According to the
Outbound Data Transfer Security Assessment Measures, to provide data abroad under any of the following circumstances, a data processor
shall declare security assessment for its outbound data transfer to the CAC through the local cyberspace administration at the provincial
level: (i) where the data processor will provide important data abroad; (ii) where CIIO or the data processor processing the personal
information of more than one million individuals will provide personal information abroad; (iii) where the data processor who has provided
personal information of 100,000 individuals or sensitive personal information of 10,000 individuals in total abroad since January 1 of
the previous year, will provide personal information abroad; and (iv) other circumstances where the security assessment is required as
prescribed by the CAC. Prior to declaring security assessment for outbound data transfer, the data processor shall conduct self-assessment on
the risks of the outbound data transfer. For outbound data transfers that have been carried out before the effectiveness of the Outbound
Data Transfer Security Assessment Measures, if it is not in compliance with these measures, rectification shall be completed within six
months starting from September 1, 2022.
As of September 30, 2022, we
have not received any penalty, investigation or warning with respect to the VIE’s business operation from the CAC, nor have we received
any notice or instructions from the CAC requiring us or the VIE to declare a security assessment. Furthermore, as of September 30, 2022,
implementation rules for the rectification requirements have not been issued and we have not started rectifications. We will continually
monitor our compliance status in accordance with the latest developments in applicable regulatory requirements. If it is determined in
the future that we are required to declare a security assessment, it is uncertain whether we can or how long it will take us to complete
such declaration or rectification.
We also face risks relating
to our previous corporate structure. If the PRC government deems that our VIE Agreements with the VIE domiciled in China did not comply
with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing
regulations change or are interpreted differently in the future, we could be subject to severe penalties retroactively.
RISKS RELATING TO OUR SECURITIES
If we fail to maintain effective internal
controls over financial reporting, the price of our Common Stock may be adversely affected.
We are required to establish and maintain appropriate
internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could
adversely impact our public disclosures regarding our business, financial condition or results of operations. Any failure of these controls
could also prevent us from maintaining accurate accounting records and discovering accounting errors and financial frauds. Rules adopted
by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial
reporting. The standards that must be met for management to assess the internal control over financial reporting as effective are complex,
and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays
in completing activities necessary to make an assessment of our internal control over financial reporting. If we cannot assess our internal
control over financial reporting as effective, investor confidence and share value may be negatively impacted.
In addition, management’s assessment of
internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over
financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need
to be addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal controls
over financial reporting, or disclosure of our public accounting firm’s attestation to or report on management’s assessment
of our internal controls over financial reporting may have an adverse impact on the price of our Common Stock.
Because of our lack of operations and the
nature of our business, our securities are considered highly speculative.
Our securities must be considered highly speculative,
generally because of the nature of our business and the current lack of substantial development. We have only generated modest revenues
to date, and there is little likelihood that we will realize any significant profits in the short term. Since we are still a development
stage company, we will have to raise monies for our operations through the sale of our equity securities or debt in order to continue
our business operations.
We may, in the future, issue additional
shares of Common Stock that would reduce investors’ percent of ownership and may dilute our share value.
The future issuance of preferred and/or Common
Stock may result in substantial dilution in the percentage of our Common Stock held by our then existing stockholders. We may value any
shares of Common Stock issued in the future on an arbitrary basis. The issuance of Common Stock may have the effect of diluting the value
of the Common Stock held by our investors, and might have an adverse effect on any trading market for our Common Stock.
The Market for Penny Stock has suffered
in recent years from patterns of fraud and abuse.
Stockholders should be aware that, according to
SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:
(i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation
of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced salespersons; (iv) excessive and undisclosed bid-ask differential
and markups by selling broker-dealers; and, (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices
have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequential investor
losses.
Our Common Stock is subject to the “Penny
Stock” Rules of the SEC, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.
The SEC has adopted regulations that generally
define a “penny stock” to be any equity security other than a security excluded from such definition by Rule 3a51-1 under
the Securities Exchange Act of 1934, as amended. For the purposes relevant to our Company, it is any equity security that has a market
price of less than $5.00 per share, subject to certain exceptions.
Our Common Stock, when and if a trading market
develops, may fall within the definition of “penny stock” and be subject to rules that impose additional sales practice requirements
on broker-dealers who sell such securities to persons other than established customers and accredited investors. The penny stock rules
require a broker-dealer to deliver a standardized risk disclosure document prepared by the SEC, to provide a customer with additional
information including current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson
in the transaction, monthly account statements showing the market value of each penny stock held in the customer’s account, and
to make a special written determination that the penny stock is a suitable investment for the purchaser, and receive the purchaser’s
written agreement to the transaction.
To the extent these requirements may be applicable;
they will reduce the level of trading activity in the secondary market for the Common Stock and may severely and adversely affect the
ability of broker-dealers to sell the Common Stock.
Our common stock is thinly traded, and there
is no guarantee of the prices at which the shares will trade.
Our common stock is quoted on the OTC marketplace operated by the OTC
Markets Group, Inc. Because we are not current in our annual and quarterly reports pursuant to Section 13 and 15(d) of the Exchange Act
(the “Reporting Obligations”), our common stock has been transferred from OTC Pink to OTC “Expert Market”, which
has been associated with very little trading activity and a decrease in the share price. As such, it can only be traded between brokers
and no quote is published. We cannot provide any assurance that the trading volume or price will increase if we become current in our
Reporting Obligations and are quoted on the OTC Pink tier in the future. Not being listed on an established securities exchange has an
adverse effect on the liquidity of our common stock, not only in terms of the number of shares that can be bought and sold at a given
price, but also through delays in the timing of transactions and reduction in security analysts’ and the media’s coverage
of our company. This may result in lower prices for our common stock than might otherwise be obtained and could also result in a larger
spread between the bid and asked prices for our common stock. Historically, our common stock has been thinly traded, and there is no guarantee
of the prices at which the shares will trade or of the ability of stockholders to sell their shares without having an adverse effect on
market prices.
Because we do not intend to pay any dividends
on our shares, investors seeking dividend income or liquidity should not purchase our shares.
We have not declared or paid any dividends on
our shares since inception, and do not anticipate paying any such dividends for the foreseeable future. If payment of dividends does occur
at some point in the future, it would be contingent upon our revenues and earnings, if any, capital requirements, and general financial
condition. The payment of any Common Stock dividends will be within the discretion of our Board of Directors. We presently intend to retain
all earnings to promote our applications and develop new applications and add-on features to our existing applications; accordingly, we
do not anticipate the declaration of any dividends for Common Stock in the foreseeable future. Investors seeking dividend income or liquidity
should not invest in our shares.
Because we can issue additional shares,
purchasers of our shares may incur immediate dilution and may experience further dilution.
We are authorized to issue up to 20,000,000 shares
of Common Stock and 5,000,000 shares of preferred stock. The board of directors of our company has the authority to cause us to issue
additional shares of Common Stock, and to determine the rights, preferences and privileges of such shares, without consent of any of our
stockholders. Consequently, our stockholders may experience more dilution in their ownership of our company in the future.
Our Common Stock may experience extreme
rises or declines in price, and you may not be able to sell your shares at or above the price paid.
Our Common Stock may be highly volatile and could
be subject to extreme fluctuations in response to various factors, many of which are beyond our control, including (but not necessarily
limited to): (i) the trading volume of our shares; (ii) the number of securities analysts, market-makers and brokers following our Common
Stock; (iii) changes in, or failure to achieve, financial estimates by securities analysts; (iv) actual or anticipated variations in quarterly
operating results; (v) conditions or trends in our business industries; (vi) announcements by us of significant contracts, acquisitions,
strategic partnerships, joint ventures or capital commitments; (vii) additions or departures of key personnel; (viii) sales of our Common
Stock; and (ix) general stock market price and volume fluctuations of publicly trading and particularly, microcap companies.
Investors may have difficulty reselling shares of our Common Stock,
either at or above the price they paid for our stock, or even at fair market value. The stock markets often experience significant price
and volume changes that are not related to the operating performance of individual companies, and because our Common Stock is thinly traded
it is particularly susceptible to such changes. These broad market changes may cause the market price of our Common Stock to decline regardless
of how well we perform as a company. In addition, there is a history of securities class action litigation following periods of volatility
in the market price of a company’s securities. Although there is no such shareholder litigation currently pending or threatened
against the Company, such a suit against us could result in the incursion of substantial legal fees, potential liabilities and the diversion
of management’s attention and resources from our business. Moreover, and as noted below, our shares are currently quoted on the
OTC Expert Market and, further, are subject to the penny stock regulations. Price fluctuations in such shares are particularly volatile
and subject to manipulation by market-makers, short-sellers and option traders.
RISKS RELATING TO OUR CORPORATE STRUCTURE
We rely on VIE Agreements with the VIE and
the shareholders of the VIE to consolidate the financial results of the PRC operating entities. We do not have an equity ownership in,
direct foreign investment in, or control of, through such ownership or investment, the VIE.
We have relied and expect to
continue to rely on the VIE Agreements with the VIE to consolidate the financial results of the PRC operating entities. For a description
of these contractual arrangements, see “Item 1 - Organizational Structure.” We do not have an equity ownership in, direct
foreign investment in, or control of, through such ownership or investment, the VIE.
If we had direct ownership
of the VIE, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of the VIE, which in
turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under
the current Contractual Arrangements, we rely on the performance by the VIE and its shareholders of their obligations under the contracts
to consolidate financial results of the VIE. The shareholders of the VIE may not act in the best interests of our company or may not perform
their obligations under these contracts. Such risks exist throughout the period in which we intend to consolidate the financial results
of the PRC operating entities through the VIE Agreementswith the VIE. Although we have the right to replace any shareholder of the VIE
under the Contractual Arrangements, if any shareholder of the VIE is uncooperative or any dispute relating to these contracts remains
unresolved, we will have to enforce our rights under these contracts through the operations of PRC laws and arbitration, litigation and
other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. See “Risk Factors — Uncertainties
with respect to the PRC legal system could have a material adverse effect on us.” Therefore, we do not have an equity ownership
in, direct foreign investment in, or control of, through such ownership or investment, the VIE.
Any failure by the VIE or its shareholders
to perform their obligations under our VIE Agreements with them would have a material adverse effect on our results of operation.
If the VIE or its shareholders
fail to perform their respective obligations under the VIE Agreements, we may have to incur substantial costs and expend additional resources
to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive
relief, and claiming damages, which we cannot assure you will be effective under PRC laws. For example, if the shareholders of the VIE
were to refuse to transfer their equity interest in the VIE to us or our designee if we exercise the purchase option pursuant to these
Contractual Arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal action to compel them
to perform their contractual obligations.
All the agreements under our
VIE Agreements are governed by PRC laws and provide for the resolution of disputes through arbitration in China. 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
system in the PRC is not as well established as in some other jurisdictions, such as in the United States. As a result, uncertainties
in the PRC legal system could limit our ability to enforce these Contractual Arrangements. Meanwhile, there are some regulations that
are unfavorable to the PRC operating entities. There are also very few precedents and little formal guidance as to how VIE Agreements
in the context of a consolidated variable interest entity should be interpreted or enforced under PRC laws and there remain significant
uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings
by arbitrators are final and parties cannot appeal arbitration results in court unless such rulings are revoked or determined unenforceable
by a competent court.
If the losing parties fail
to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in
PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event that we
are unable to enforce these Contractual Arrangements, or if we suffer significant delay or other obstacles in the process of enforcing
these Contractual Arrangements, we may not be able to consolidate the financial results of the PRC operating entities, and our results
of operation may be negatively affected. See “Risk Factors — Risks Related to Our Corporate Structure — Uncertainties
in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to us.”
Our Common Stocks may decline in value or
become worthless if we are unable to assert our contractual rights over the assets of the PRC operating entities that conduct all or substantially
all of our operations.
We are a holding company incorporated
in the State of Nevada. As a holding company with no material operations of our own, we consolidate financial results of the PRC operating
entities through VIE Agreements with the VIE. We have relied and expect to continue to rely on the VIE Agreements with the PRC operating
entities, to operate our business. If the PRC government determines that the VIE Agreements constituting part of the VIE structure
do not comply with PRC regulations, or if these regulations change or are interpreted differently in the future, it would likely result
in a material change in our operations and our Common Stocks may decline in value or become worthless if we are unable to consolidate
the financial results of the PRC operating entities.
The shareholders of the VIE may have actual
or potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
The shareholders of the VIE are currently controlling shareholders
of us with 86.72% equity interest. The shareholders of the VIE are Yulong Yi, our Chairman and CEO, Shaowei Peng, our Vice President
and Chief Technology Officer, and Ru Zhang, Boyu Zhu, Zhenlei Li, Junwei Cao, Xiangle Sun, Wanwu Kang, Fengying Yu, Zhe Wang and Yue Wang,
who holds 53%, 5%, 11%, 5%, 5%, 5%, 5%, 4%, 3%, 2.5%, and 1.5% of the equity interest, respectively, of the VIE. These shareholders
of the VIE are also shareholders of Gushen, Inc. These shareholders may breach, or refuse to renew, the existing VIE Agreements we have
with them, which may have a material and adverse effect on our ability to effectively consolidate financial results of the PRC operating
entities. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests of
our company or such conflicts will be resolved in our favor. If we cannot resolve any conflict of interest or dispute between us and these
shareholders, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial
uncertainty as to the outcome of any such legal proceedings.
If the custodians or authorized users of
our controlling non-tangible assets, including chops and seals of the VIE, fail to fulfill their responsibilities, or misappropriate
or misuse these assets, our business and operations may be materially and adversely affected.
Under PRC law, legal documents
for corporate transactions, including agreements and contracts that our business relies on, are executed using the chop or seal of the
signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant local branch
of the State Administration for Market Regulation (“SAMR”), formerly known as the State Administration for Industry and Commerce.
We generally execute legal documents by affixing chops or seals, rather than having the designated legal representatives sign the documents.
We use two major types of chops:
corporate chops and finance chops. Chops are seals or stamps used by a PRC company to legally authorize documents, often in place of a
signature. We use corporate chops generally for documents to be submitted to government agencies, such as applications for changing business
scope, directors or company name, and for legal letters. We use finance chops generally for making and collecting payments, including
issuing invoices.
Use of corporate chops must
be approved by department manager and office of the president, and use of finance chops must be approved by our finance department. The
chops of our subsidiary and consolidated VIE are generally held by the relevant entities so that documents can be executed locally. Although
we usually utilize chops to execute contracts, the registered legal representatives of our subsidiary and consolidated VIE have the apparent
authority to enter into contracts on behalf of such entities without chops, unless such contracts set forth otherwise.
In order to maintain the physical
security of our chops, we generally have them stored in secured locations accessible only to the designated key employees of the office
of the president or finance departments. Our designated legal representatives generally do not have access to the chops. Although we have
approval procedures in place and monitor our key employees, including the designated legal representatives of our subsidiary and the VIE,
the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our key employees or designated
legal representatives could abuse their authority, for example, by binding our subsidiary and consolidated VIE with contracts against
our interests, as we would be obligated to honor these contracts if the other contracting party acts in good faith in reliance on the
apparent authority of our chops or signatures of our legal representatives. If any designated legal representative obtains control of
the chop in an effort to obtain control over the relevant entity, we would need to have a shareholder or board resolution to designate
a new legal representative to take legal action to seek the return of the chop, apply for a new chop with the relevant authorities, or
otherwise seek legal remedies for the legal representative’s misconduct. If any of the designated legal representatives obtains
and misuses or misappropriates our chops and seals or other controlling intangible assets for whatever reason, we could experience disruption
to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to
resolve the matter, while distracting management from our operations, and our business operations may be materially and adversely affected.
VIE Agreements in relation to the VIE may
be subject to scrutiny by the mainland China tax authorities and they may determine that we or the VIE owe additional taxes, which could
negatively affect our financial condition and the value of your investment.
Under applicable PRC laws and
regulations, arrangements and transactions among related parties may be subject to audit or challenge by the mainland China tax authorities
within ten years after the taxable year when the transactions are conducted. The mainland China enterprise income tax law requires
every enterprise in mainland China to submit its annual enterprise income tax return together with a report on transactions with its related
parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any
related party transactions that are inconsistent with arm’s length principles. We may face material and adverse tax consequences
if the mainland China tax authorities determine that the VIE Agreements among the WFOE, the VIE, and the shareholders of the VIE were
not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC
laws, rules and regulations, and adjust the VIE’s income in the form of a transfer pricing adjustment. A transfer pricing adjustment
could, among other things, result in a reduction of expense deductions recorded by the VIE for mainland China tax purposes, which could
in turn increase its tax liabilities without reducing the WFOE’s tax expenses. In addition, if the WFOE requests the shareholders
of the VIE to transfer their equity interests in the VIE at nominal or no value pursuant to these Contractual Arrangements, such transfer
could be viewed as a gift and subject the WFOE and VIE to mainland China income tax. Furthermore, the mainland China tax authorities may
impose late payment fees and other penalties on the VIE for the adjusted but unpaid taxes according to the applicable regulations. Our
financial position could be materially and adversely affected if our consolidated variable interest entities’ tax liabilities increase
or if it is required to pay late payment fees and other penalties.
If the VIE goes bankrupt or becomes subject
to a dissolution or liquidation proceeding, its ability to operate its business might be materially and adversely hindered, which could
materially and adversely affect our results of operations.
The VIE holds certain assets
that are material to the operation of its business, including certain licenses, permits, leases, and intellectual properties. Under the
VIE Agreements, the VIE may not cause it to, in any manner, sell, transfer, mortgage or dispose of its assets or its legal or beneficial
interests in the business without our prior consent. However, in the event the shareholders of the VIE breach the VIE Agreements and voluntarily
liquidate the VIE or the VIE declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors,
or are otherwise disposed of without our consent, the VIE may be unable to continue some or all of its business activities, which could
materially and adversely affect our results of operations.
RISKS RELATING TO DOING BUSINESS IN CHINA
Uncertainties with respect to the PRC legal
system could have a material adverse effect on us.
The PRC legal system is a civil
law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for
reference but have limited precedential value.
In 1979, the PRC government
began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation
over the past four decades has significantly enhanced the protection afforded to various forms of foreign investments in China. However,
China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects
of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties.
Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual
terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy.
These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or
tort claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts
to extract payments or benefits from us.
In addition, any administrative
and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention.
Uncertainties in the interpretation and
enforcement of Chinese laws and regulations could limit the legal protections available to us.
The PRC legal system is based
on written statutes and prior court decisions have limited value as precedents. Since these laws and regulations are relatively new and
the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement
of these laws, regulations and rules involves uncertainties.
From time to time, we may have
to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities
have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the
outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore,
the PRC legal system is based in part on government policies and internal rules. As a result, we may not be able to keep ourselves updated
with these policies and rules in time. Such uncertainties, including uncertainty over the scope and effect of our contractual, property
(including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to
continue our operations.
China’s economic, political and social
conditions, as well as changes in any government policies, laws and regulations may be quick with little advance notice and could have
a material adverse effect on the PRC operating entities’ business and the value of our Common Stock.
A substantial majority of the
operations of the PRC operating entities are conducted in China, and a significant portion of our net revenues are derived from customers
where the contracting entity is located in China. Accordingly, our business, financial condition, results of operations, prospects and
certain transactions we may undertake may be subject, to a significant extent, to economic, political and legal developments in China.
China’s economy differs
from the economies of most developed countries in many respects, including the amount of government involvement, level of development,
growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the
past two to three decades, growth has been uneven, both geographically and among various sectors of the economy. Demand for the products
of the PRC operating entities depends, in large part, on economic conditions in China. Any slowdown in China’s economic growth may
cause the potential customers of the PRC operating entities to delay or cancel their plans to purchase the PRC operating entities’
products, which in turn could reduce our net revenues.
Although China’s economy
has been transitioning from a planned economy to a more market oriented economy since the late 1970s, the PRC government continues to
play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant
control over China’s economic growth through allocating resources, controlling the incurrence and payment of foreign currency-denominated obligations,
setting monetary policy and providing preferential treatment to particular industries or companies. Changes in any of these policies,
laws and regulations may be quick with little advance notice and could adversely affect the economy in China and could have a material
adverse effect on our business and the value of our Common Stock.
The PRC government has implemented
various measures to encourage foreign investment and sustainable economic growth and to guide the allocation of financial and other resources.
However, we cannot assure you that the PRC government will not repeal or alter these measures or introduce new measures that will have
a negative effect on us, or more specifically, we cannot assure you that the PRC government will not initiate possible governmental actions
or scrutiny to us, which could substantially affect our operation and the value of our Common Stock may depreciate quickly.
We may be subject to litigation and regulatory investigations
and proceedings, and may not always be successful in defending ourselves against such claims or proceedings.
Our business operations entail substantial litigation
and regulatory risks, including the risk of lawsuits and other legal actions relating to fraud and misconduct, labor disputes of employees,
sales and customer services and control procedures deficiencies, as well as the protection of personal and confidential information of
our users and business partners, among others. We may be subject to claims and lawsuits in the ordinary course of our business. We may
also be subject to inquiries, inspections, investigations and proceedings by relevant regulatory and other governmental agencies. Actions
brought against us may result in settlements, injunctions, fines, penalties or other results adverse to us that could harm our business,
financial condition, results of operations and reputation. Even if we are successful in defending ourselves against these actions, the
costs of such defense may be significant to us. A significant judgement or regulatory action against us or a material disruption in our
business arising from adverse adjudications in proceedings against our Directors, officers or employees would have a material adverse
effect on our liquidity, business, financial condition, results of operations, reputation and prospects.
Any failure to comply with relevant regulations
relating to social insurance and housing provident fund may subject us to penalty and materially and adversely affect our business, financial
condition and results of operations.
In accordance with the PRC Social Insurance Law
and the Regulations on the Administration of Housing Fund and other relevant laws and regulations, China has established a social insurance
system and other employee benefits including basic pension insurance, basic medical insurance, work-related injury insurance, unemployment
insurance, maternity insurance, housing fund, and a handicapped employment security fund, or collectively the Employee Benefits. An employer
shall pay the Employee Benefits for its employees in accordance with the rates provided under relevant regulations and shall withhold
the social insurance and other Employee Benefits that should be assumed by the employees. For example, an employer that has not made social
insurance contributions at a rate and based on an amount prescribed by the law, or at all, may be ordered to rectify the non-compliance
and pay the required contributions within a stipulated deadline and be subject to a late fee of up to 0.05% per day. If the employer still
fails to ratify the failure to make social insurance contributions within the stipulated deadline, it may be subject to a fine ranging
from one to three times of the amount overdue.
Under the Social Insurance Law and the Regulations
on the Administration of Housing Fund, our PRC subsidiary shall register with local social insurance agencies and register with applicable
housing fund management centers and establish a special housing fund account in an entrusted bank. Both our PRC subsidiary and their employees
are required to pay the Employee Benefits.
We did not make contributions in full for the
social insurance fund and housing provident fund for our employees as required under the relevant PRC laws and regulations. In September
2020, we received a rectification opinion from the local authorities for the underpaid social insurance premiums for several employees
and we were required to pay up the underpaid premiums. Although we have made supplementary payment on time as required by the rectification
opinion, we cannot assure you that we will not be subject to any order to rectify non-compliance in the future, nor can we assure you
that there are no, or will not be any, employee complaints regarding social insurance payment or housing provident fund contributions
against us, or that we will not receive any claims in respect of social insurance payment or housing provident fund contributions under
the PRC laws and regulation. In addition, we may incur additional costs to comply with such laws and regulations by the PRC Government
or relevant local authorities. Any such development could materially and adversely affect our business, financial condition and results
of operations.
Non-compliance with labor-related laws and
regulations of the PRC may have an adverse impact on our financial condition and results of operation.
We have been subject to stricter regulatory requirements
in terms of entering into labor contracts with our employees. Pursuant to the PRC Labor Contract Law, or the Labor Contract Law, that
became effective in January 2008 and amended in December 2012 and its implementing rules that became effective in September 2008, employers
are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of
employees’ probation and unilaterally terminating labor contracts. In the event that we decide to terminate some of our employees
or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules may limit our ability to affect
those changes in a desirable or cost-effective manner, which could adversely affect our business and results of operations.
As the interpretation and implementation of labor-related
laws and regulations are still evolving, we cannot assure you that our employment practice does not and will not violate labor-related
laws and regulations in China, which may subject us to labor disputes or government investigations. If we are deemed to have violated
relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business, financial
condition and results of operations could be materially and adversely affected.
Some of the lease agreements of our leased
properties have not been registered with the relevant PRC government authorities as required by PRC law, which may expose us to potential
fines.
Under PRC law, we are required to register our
lease agreements with the local land and real estate administration bureau. Although failure to do so does not in itself invalidate the
leases, the lessees may not be able to defend these leases against bona fide third parties and may also be exposed to potential fines
if they fail to ratify such non-compliance within the prescribed time frame after receiving notice from the relevant PRC government authorities.
The penalty ranges from RMB1,000 (approximately $154.40) to RMB10,000 (approximately $1,544.00) for each unregistered lease, at the discretion
of the relevant authority. As of the date of this report, some of the lease agreements for our leased building in China has not been registered
with the relevant PRC government authorities. In the event that any fine is imposed on us for our failure to register our lease agreements,
we may not be able to recover such losses from the lessors.
Our rights to use our leased properties
could be challenged by property owners or other third parties, which may disrupt our operations and incur relocation costs.
As of the date of this report, some of the lessors
of our leased properties in China have failed to provide us with valid property ownership certificates or authorizations from the property
owners for the lessors to sublease the properties. There is a risk that such lessors may not have the relevant property ownership certificates
or the right to lease or sublease such properties to us, in which case the relevant lease agreements and the sublease agreements may be
deemed invalid and we may be forced to vacate these properties. In addition, our usage of the leased properties may be inconsistent with
the designated usage, in which case we may not be able to continue to use the leased properties. The above risks could interrupt our business
operations and result in relocation costs. Moreover, if our lease agreements are challenged by third parties, it could result in diversion
of management attention and cause us to incur costs associated with defending such actions, even if such challenges are ultimately determined
in our favor.
We may rely on dividends and other distributions
on equity paid by the PRC operating entities to fund any cash and financing requirements we may have, and any limitation on the ability
of the PRC operating entities to make payments to us could have a material and adverse effect on our ability to conduct our business.
We are a British Virgin Islands holding company
and we rely principally on dividends and other distributions on equity from the PRC operating entities for our cash requirements, including
for services of any debt we may incur.
The PRC operating entities’ ability to distribute
dividends is based upon its distributable earnings. Current PRC regulations permit the PRC operating entities to pay dividends to its
shareholder only out of its accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition,
each of our PRC subsidiary, the VIE and its subsidiaries are 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. The reserve is not distributable as cash dividends.
If the PRC operating entities incur debt on its own behalf in the future, the instruments governing the debt may restrict their ability
to pay dividends or make other payments to us. Any limitation on the ability of the PRC operating entities to distribute dividends or
other payments to its shareholder could materially and adversely limit our ability to grow, make investments or acquisitions that could
be beneficial to our businesses, pay dividends or otherwise fund and conduct our business.
In addition, the Enterprise Income Tax Law and
its implementation rules provide that a withholding tax rate of up to 10% will be applicable to dividends payable by Chinese companies
to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government
and governments of other countries or regions where the non-PRC resident enterprises are incorporated.
If the custodians or authorized users of
our controlling non-tangible assets, including chops and seals, fail to fulfill their responsibilities, or misappropriate or misuse these
assets, our business and operations could be materially and adversely affected.
Under PRC law, legal documents for corporate transactions,
including agreements and contracts that our business relies on, are executed using the chop or seal of the signing entity or with the
signature of a legal representative whose designation is registered and filed with the relevant Administration for Market Regulation.
In order to maintain the physical security of
our chops, we generally have them stored in secured locations accessible only to authorized employees. Although we monitor such authorized
employees, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our employees could
abuse their authority, for example, by entering into a contract not approved by us or seeking to gain control of one of our subsidiaries
or affiliated entities. If any employee obtains, misuses or misappropriates our chops and seals or other controlling intangible assets
for whatever reason, we could experience disruption to our normal business operations. We may have to take corporate or legal action,
which could involve significant time and resources to resolve while distracting management from our operations.
Fluctuation in the currency exchange rate
of RMB may have a material adverse effect on our business, operations and financial position.
Our revenue and expenses have been and are expected
to continue to be primarily denominated in RMB and we are exposed to the risks associated with the fluctuation in the currency exchange
rate of RMB. Should RMB appreciate against other currencies, any future financings, which are to be converted from US dollar or other
currencies into RMB, would be reduced and might accordingly hinder our business development due to the lessened amount of funds raised.
On the other hand, in the event of the devaluation of RMB, the dividend payments of our Company, which are to be paid in US dollars after
the conversion of the distributable profit denominated in RMB, would be reduced. Hence, substantial fluctuation in the currency exchange
rate of RMB may have a material adverse effect on our business, operations and financial position and the value of your investment in
the Shares.
Governmental control of currency conversion
may limit our ability to utilize our revenues effectively and affect the value of your investment.
The PRC government imposes controls on the convertibility
of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of
our revenues in Renminbi. Under our current corporate structure, our British Virgin Islands holding company may rely on dividend payments
from the PRC operating entities to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations,
payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions,
can be made in foreign currencies without prior approval of the State Administration of Foreign Exchange, or SAFE, by complying with certain
procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the
operations of the PRC operating entities in China may be used to pay dividends to our company. However, approval from or registration
with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China
to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we may need to obtain SAFE approval
or register with SAFE to use cash generated from the operations of the PRC operating entities to pay off its debt in a currency other
than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi.
In light of the flood of capital outflows of China
in 2016 due to the weakening Renminbi, the PRC government has imposed more restrictive foreign exchange policies and stepped up scrutiny
of major outbound capital movement including overseas direct investment. If any of our shareholders regulated by such policies fails to
satisfy the applicable overseas direct investment filing or approval requirement timely or at all, it may be subject to penalties from
the relevant PRC authorities. The PRC government may at its discretion further restrict access in the future to foreign currencies for
current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy
our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of the
Shares.
There are significant uncertainties under
the PRC Enterprise Income Tax Law relating to the withholding tax liabilities of the PRC operating entities, and dividends payable by
the PRC operating entities to our offshore subsidiaries may not qualified to enjoy certain treaty benefits.
Under the PRC Enterprise Income Tax Law and its
implementation rules, the profits of a foreign-invested enterprise, or FIE, generated through operations, which are distributed to its
immediate holding company outside China, will be subject to a withholding tax rate of 10%. Pursuant to a special arrangement between Hong
Kong and China, such rate may be reduced to 5% if a Hong Kong resident enterprise owns more than 25% of the equity interest in the PRC
company and fulfils other conditions set out under relevant PRC regulations. Our current PRC subsidiary, Fengyuan Beijing, is wholly owned
by our Hong Kong subsidiary, Edeshler HK, which may qualify for a 5% tax rate in respect of distributions from Fengyuan Beijing. Under
the Notice on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties promulgated in 2009, the tax payer
needs to satisfy certain conditions to enjoy the benefits under a tax treaty. These conditions include: (i) the taxpayer must be the beneficial
owner of the relevant dividends, and (ii) the corporate shareholder to receive dividends from the PRC subsidiary must have met the direct
ownership thresholds during the 12 consecutive months preceding the receipt of the dividends. Further, in February 2018, the State Administration
of Taxation issued the Announcement of the State Administration of Taxation on Issues Relating to “Beneficial Owner” in Tax
Treaties, which sets forth certain detailed factors in determining “beneficial owner” status.
Entitlement to a lower tax rate on dividends according
to tax treaties or arrangements between the PRC central government and governments of other countries or regions is subject to the Administrative
Measures on Entitlement of Non-resident Taxpayers to Treaty Benefits, which provides that entitlement to treaty benefits for non-resident
taxpayers shall be handled by means of “self-judgment of eligibility, declaration of entitlement, and retention of relevant materials
for future reference.” Where non-resident taxpayers judge by themselves that they meet the conditions for entitlement to treaty
benefits, they may obtain such entitlement themselves at the time of making tax declarations, or at the time of making withholding declarations
via withholding agents. At the same time, they shall collect, gather and retain relevant materials for future reference in accordance
with the provisions of these Measures, and shall accept the follow-up administration of tax authorities. As a result, we cannot assure
you that we will be entitled to any preferential withholding tax rate under treaties for dividends received from the PRC operating entities.
The M&A Rules and certain other PRC
regulations may make it more difficult for us to pursue growth through acquisitions.
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, and
some other regulations and rules concerning mergers and acquisitions established complex procedures and requirements for some acquisitions
of Chinese companies by foreign investors, including requirements in some instances that MOFCOM, be notified in advance of any change-of-control
transaction in which a foreign investor takes control of a PRC domestic enterprise if (i) any important industry is concerned, (ii) such
transaction involves factors that have or may have impact on the national economic security, or (iii) such transaction will lead
to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand. Moreover, the Anti-Monopoly
Law promulgated by the Standing Committee of the NPC which became effective in 2008 requires that transactions which are deemed concentrations
and involve parties with specified turnover thresholds must be cleared by MOFCOM before they can be completed. In addition, the Measures
for the Security Review of Foreign Investment issued by the National Development and Reform Commission, or NDRC, and MOFCOM and became
effective on 18 January 2021 specify that any foreign investment that has or possibly has an impact on state security shall be subject
to security review in accordance with the measures. Foreign investment in any of such fields as the military industry and military-supporting
industry that concern state defense and security, military facilities and areas surrounding industrial military facilities, as well as
foreign investment in any important agricultural product, important energy and resources, major equipment manufacturing, important infrastructure,
important transportation services, important cultural products and services, important information technologies and internet products
and services, important financial services, key technologies and other important fields that concern state security while obtaining the
actual control over the enterprises invested in, shall take the initiative to make a declaration to and obtain approval from the working
mechanism office for security review of foreign investment, which is established under NDRC and led by NDRC and MOFCOM, prior to making
the investment.
In the future, we may pursue potential strategic
acquisitions that are complementary to our business and operations. Complying with the requirements of the above-mentioned regulations
and other relevant rules to complete such transactions could be time-consuming, and any required approval processes may delay or inhibit
our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
The approval of
the China Securities Regulatory Commission, or CSRC, or other PRC regulatory agencies, may be required in connection
with the share exchange transaction that occurred in July 2021 or the publicly listing of our securities on an overseas stock exchange
or trading in the over-the-counter market under PRC law, and if required, we cannot assure you that we will be able to obtain such approval.
The M&A Rules purport
to require offshore special purpose vehicles that are controlled by PRC companies or individuals and that have been formed for the purpose
of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets by means of offering
of its shareholder’s or its share to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange.
In September 2006, the CSRC published a notice on its official website specifying documents and materials required to be submitted to
it by a special purpose vehicle seeking CSRC approval of its overseas listings. As of the date of this report, we have not received any
requirement to obtain approval of CSRC for the share exchange transaction that we entered into in July 2021 or publicly listing of our
securities on an overseas stock exchange or trading in the over-the-counter market. However, given the current regulatory environment
in the PRC, we are subject to the uncertainty of interpretation and enforcement of the rules and regulations in the PRC, which can change
quickly with little advance notice. If CSRC or other PRC regulatory agencies’ approval is required, it is uncertain whether it would
be possible for us to obtain the approval, and any failure to obtain or delay in obtaining CSRC approval for the share exchange transaction
that we entered into in July 2021 or publicly listing of our securities on an overseas stock exchange or trading in the over-the-counter
market would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies. As a result, we face uncertainty about future
actions by the PRC government that could significantly affect our ability to continue to offer securities to investors and cause the value
of our common stock to significantly decline or be worthless.
As we did not acquire any PRC domestic company
or asset by means of offering of our shareholder’s or our share in the share exchange or publicly listing of our securities on an
overseas stock exchange or trading in the over-the-counter market, we of the understanding that we are not be required to submit an application
to the CSRC for the approval of the listing and trading of the common stock. However, there are substantial uncertainty as to how the
M&A Rules will be interpreted or implemented in the context of an overseas offering, and we are subject to any new laws, rules and
regulations or detailed implementations and interpretations in any form relating to the M&A Rules.
PRC regulations relating to offshore investment
activities by PRC residents may limit the PRC operating entities’ ability to change its registered capital or distribute profits
to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties under PRC laws.
In July 2014, SAFE promulgated the Circular on
Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment
Through Special Purpose Vehicles, or SAFE Circular 37. SAFE Circular 37 requires PRC residents (including PRC individuals and PRC corporate
entities as well as foreign individuals that are deemed as PRC residents for foreign exchange administration purpose) to register with
SAFE or its local branches in connection with their direct or indirect investment activities. SAFE Circular 37 further requires an amendment
to the SAFE registrations in the event of any changes with respect to the basic information of the offshore special purpose vehicle, such
as change of a PRC individual shareholder, name and operation term, or any significant changes with respect to the offshore special purpose
vehicle, such as increase or decrease of capital contribution, share transfer or exchange, or mergers or divisions. SAFE Circular 37 is
applicable to our shareholders who are PRC residents and may be applicable to any offshore acquisitions that we make in the future.
If our shareholders who are PRC residents fail
to make the required registration or to update the previously filed registration, the PRC operating entities may be prohibited from distributing
its profits or the proceeds from any capital reduction, share transfer or liquidation to us, and we may also be prohibited from making
additional capital contribution into the PRC operating entities. In February 2015, SAFE promulgated a Notice on Further Simplifying and
Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, effective from June 2015 and partially repealed
on December 30, 2019. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound
overseas direct investments, including those required under SAFE Circular 37, will be filed with qualified banks instead of SAFE. The
qualified banks will directly examine the applications and accept registrations under the supervision of SAFE.
Our shareholders, have completed the initial registrations
with the local SAFE branch or qualified banks as required by SAFE Circular 37. However, we may not be informed of the identifies
of all the PRC residents holding direct or indirect interest in our company, and we cannot provide any assurance that these PRC residents
will comply with our request to make or obtain any applicable registrations or continuously comply with all requirements under SAFE Circular
37 or other related rules. The failure or inability of the relevant shareholders to comply with the registration procedures set forth
in these regulations may subject us to fines and legal sanctions, such as restrictions on our cross-border investment activities, on the
ability of the PRC operating entities in China to distribute dividends and the proceeds from any reduction in capital, share transfer
or liquidation to us. Moreover, any failure to comply with the various foreign exchange registration requirements described above could
result in liability under PRC law for circumventing applicable foreign exchange restrictions. Furthermore, as these foreign exchange regulations
are still relatively new and their interpretation and implementation have been constantly evolving, it is unclear how these regulations,
and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant
government authorities. As a result, our business operations and our ability to distribute profits to you could be materially and adversely
affected.
Any failure to comply with PRC regulations
regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other
legal or administrative sanctions.
In February 2012, SAFE
promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive
Plans of Overseas Publicly-Listed Companies, replacing earlier rules promulgated in March 2007. Pursuant to these rules, PRC
citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock
incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic
qualified agent, which could be the PRC subsidiary of such overseas listed company, and complete certain other procedures. In addition,
an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the
purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who have resided in
the PRC for a continuous period of not less than one year and who are granted options or other awards under the share compensation plan
will be subject to these regulations when our company becomes an overseas listed company upon the completion of this offering. Failure
to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit our ability to contribute additional
capital into our and limit our subsidiaries’ ability to distribute dividends to us. We also face regulatory uncertainties that could
restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law.
The recent joint statement by the SEC and
the PCAOB, and the Holding Foreign Companies Accountable Act all call for additional and more stringent criteria to be applied to emerging
market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected
by the PCAOB. These developments could add uncertainties to our offering.
On April 21, 2020, SEC
Chairman Jay Clayton and PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint statement
highlighting the risks associated with investing in companies based in or have substantial operations in emerging markets including China.
The joint statement emphasized the risks associated with lack of access for the PCAOB to inspect auditors and audit work papers in China
and higher risks of fraud in emerging markets.
On May 20, 2020, the U.S. Senate
passed the HFCA Act requiring a foreign company to certify it is not owned or controlled by a foreign government if the 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 2, 2020, the U.S. House of Representatives approved the HFCA Act. On December 18, 2020, the HFCA Act was signed
into law.
On March 24, 2021, the
SEC announced that it had adopted interim final amendments to implement congressionally mandated submission and disclosure requirements
of the Act. The interim final amendments will apply to registrants that the SEC identifies as having filed an annual report on Forms 10-K,
20-F, 40-F or N-CSR with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction
and that the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in that
jurisdiction. The SEC will implement a process for identifying such a registrant and any such identified registrant will be required to
submit documentation to the SEC establishing that it is not owned or controlled by a governmental entity in that foreign jurisdiction,
and will also require disclosure in the registrant’s annual report regarding the audit arrangements of, and governmental influence
on, such a registrant.
Furthermore, the HFCA Act,
which requires that the PCAOB be permitted to inspect the issuer’s public accounting firm within three years, may result in
the delisting of our Company in the future if the PCAOB is unable to inspect our accounting firm at such future time.
In addition, on June 22,
2021, the U.S. Senate passed the AHFCAA, which, if signed into law, would amend the HFCA Act and require 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 consecutive years.
On November 5, 2021, the
SEC approved the PCAOB’s Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act. Rule 6100
provides a framework for the PCAOB to use when determining, as contemplated under the HFCA Act, whether it is unable to inspect or investigate
completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities
in that jurisdiction. On December 2, 2021, the SEC issued amendments to finalize rules implementing the submission and disclosure
requirements in the HFCA Act. The rules apply to registrants that the SEC identifies as having filed an annual report with an audit report
issued by a registered public accounting firm that is located in a foreign jurisdiction and that PCAOB is unable to inspect or investigate
completely because of a position taken by an authority in foreign jurisdictions. On December 16, 2021, the PCAOB issued a Determination
Report which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in:
(1) mainland China, and (2) Hong Kong.
On August 26, 2022, the
CSRC, the Ministry of Finance of the PRC, and PCAOB signed a Statement of Protocol, or the Protocol, governing inspections and investigations
of audit firms based in China and Hong Kong. Pursuant to the Protocol, the PCAOB has independent discretion to select any issuer audits
for inspection or investigation and has the unfettered ability to transfer information to the SEC. However, uncertainties still exist
whether this new framework will be fully complied with. According to the PCAOB, its December 2021 determinations under the HFCA Act remain
in effect. The PCAOB is required to reassess these determinations by the end of 2022. Under the PCAOB’s rules, a reassessment of
a determination under the HFCA Act may result in the PCAOB reaffirming, modifying or vacating the determination. However, if the PCAOB
continues to be prohibited from conducting complete inspections and investigations of PCAOB-registered public accounting firms in
mainland China and Hong Kong, the PCAOB is likely to determine by the end of 2022 that positions taken by authorities in the PRC obstructed
its ability to inspect and investigate registered public accounting firms in mainland China and Hong Kong completely, then the companies
audited by those registered public accounting firms would be subject to a trading prohibition on U.S. markets pursuant to the HFCA Act.
The lack of access to the PCAOB
inspection in China prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors based in China. As
a result, the investors may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of
auditors in China makes it more difficult to evaluate the effectiveness of these accounting firms’ audit procedures or quality control
procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause existing and potential
investors in our stock to lose confidence in our audit procedures and reported financial information and the quality of our financial
statements.
Our auditor, WWC, P.C., is
an independent registered public accounting firm with the PCAOB, and as an auditor of publicly traded companies in the U.S., is subject
to laws in the U.S. pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional
standards. Our auditor is headquartered in New York, NY, and has been inspected by the PCAOB on a regular basis. The PCAOB currently
has access to inspect the working papers of our auditor. Our auditor is not identified in the PCAOB’s Determination Report.
However, the above recent developments
may have added uncertainties to our offering and we cannot assure you whether regulatory authorities would apply additional and more stringent
criteria to us since we are an emerging growth company and substantial all of the operations are conducting in China.
PRC regulation
of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay
us to make loans or additional capital contributions to our PRC our PRC subsidiary, which could materially and adversely affect our liquidity
and our ability to fund and expand our business.
Any funds we transfer to our PRC subsidiary, either
as a shareholder loan or as an increase in registered capital, are subject to approval by or registration with relevant governmental authorities
in China regardless of the amount of the transfer. According to the relevant PRC regulations on FIEs in China, capital contributions to
our PRC subsidiary are subject to submit the report of changes through the enterprise registration system and registration
with a local bank authorized by SAFE. In addition, (i) any foreign loan procured by our PRC subsidiary is required to be registered
with SAFE or their respective local branches and (ii) our PRC subsidiary may not procure loans which exceed the difference between
their respective total project investment amount and registered capital or 2.5 times of their net worth. We may not be able to complete
such registrations or obtain necessary approvals on a timely basis with respect to future capital contributions or foreign loans by us
to our PRC subsidiary. If we fail to complete such registrations or other procedures, our ability to use the any future offerings, and
to capitalize the VIE’s PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to
fund and expand our business.
On March 30, 2015, the SAFE promulgated the
Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises, or SAFE
Circular 19, which took effect as of June 1, 2015 and partially repealed on December 30, 2019. SAFE Circular 19 launched
a nationwide reform of the administration of the settlement of the foreign exchange capitals of FIEs and allows FIEs to settle their foreign
exchange capital at their discretion, but continues to prohibit FIEs from using the Renminbi fund converted from their foreign exchange
capital for expenditure beyond their business scopes, providing entrusted loans or repaying loans between nonfinancial enterprises. The
SAFE issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or
SAFE Circular 16, effective in June 2016. Pursuant to SAFE Circular 16, enterprises registered in China may also convert their foreign
debts from foreign currency to Renminbi on a self-discretionary basis. SAFE Circular 16 provides an integrated standard for conversion
of foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on a self-discretionary
basis which applies to all enterprises registered in China. SAFE Circular 16 reiterates the principle that Renminbi converted from foreign
currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its business scope or prohibited
by PRC laws or regulations, while such converted Renminbi shall not be provided as loans to its non-affiliated entities. As this circular
is relatively new, there remains uncertainty as to its interpretation and application and any other future foreign exchange related rules.
Violations of these Circulars could result in severe monetary or other penalties. SAFE Circular 19 and SAFE Circular 16 may significantly
limit our ability to invest in or acquire any other PRC companies through our PRC subsidiary, which may adversely affect our business,
financial condition and results of operations.
If we are classified as a PRC resident enterprise for PRC enterprise
income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.
Under the PRC Enterprise Income Tax Law and its
implementation rules, an enterprise established outside of the PRC with its “de facto management body” within the PRC is considered
a “resident enterprise” and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation
rules define the term “de facto management body” as the body that exercises full and substantial control and overall management
over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the State Administration of Taxation, or
SAT, issued a circular, known as SAT Circular 82, which provides certain specific criteria for determining whether the “de facto
management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies
to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners,
the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body”
text should be applied in determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an offshore incorporated
enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de
facto management body” in China, and will be subject to PRC enterprise income tax on its global income only if all of the following
conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating
to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the
PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions
are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the
PRC.
We believe our company is not a PRC resident enterprise
for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties
remain with respect to the interpretation of the term “de facto management body.” If the PRC tax authorities determine that
our company is a PRC resident enterprise for enterprise income tax purposes, we will be subject to PRC enterprise income on our worldwide
income at the rate of 25%. Furthermore, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders
that are non-resident enterprises, including the holders of our shares. In addition, non-resident enterprise shareholders may be subject
to PRC tax on gains realized on the sale or other disposition of shares, if such income is treated as sourced from within the PRC. Furthermore,
if we are deemed a PRC resident enterprise, dividends paid to our non-PRC individual shareholders and any gain realized on the transfer
of shares by such shareholders may be subject to PRC tax at a rate of 20% (which, in the case of dividends, may be withheld at source
by us). These rates may be reduced by an applicable tax treaty, but it is unclear whether non-PRC shareholders of our company would be
able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as
a PRC resident enterprise. Any such tax may reduce the returns on your investment in the shares.
We face uncertainty with respect to
indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
On February 3, 2015, the SAT issued the Public
Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or SAT Bulletin
7, which came into effect on the same day, revised in October 2017 and December 2017. SAT Bulletin 7 extends its tax jurisdiction to transactions
involving the transfer of taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Bulletin
7 has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market.
SAT Bulletin 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer)
of taxable assets, as such persons need to determine whether their transactions are subject to these rules and whether any withholding
obligation applies.
On October 17, 2017, the SAT issued the Announcement
of the State Administration of Taxation on Issues Concerning the Withholding of Non-Resident Enterprise Income Tax at Source, or SAT Bulletin
37, which came into effect on December 1, 2017 and revised in June 2018. The SAT Bulletin 37 further clarifies the practice and procedure
of the withholding of non-resident enterprise income tax.
Where a non-resident enterprise transfers taxable
assets indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident
enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such. Indirect Transfer
to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence
of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding
or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee
or other person who pays for the transfer is obligated to withhold the applicable taxes currently at a rate of 10% for the transfer of
equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if
the transferee fails to withhold the taxes and the transferor fails to pay the taxes.
We face uncertainties as to the reporting and
other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale
of the shares in our offshore subsidiaries and investments. Our company may be subject to filing obligations or may be taxed if our company
is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions, under
SAT Bulletin 7 and/or SAT Bulletin 37. For transfers of shares of our company by investors who are non-PRC resident enterprises, our PRC
subsidiary may be requested to assist in the filing under SAT Bulletin 7 and/or SAT Bulletin 37. As a result, we may be required to expend
valuable resources to comply with SAT Bulletin 7 and/or SAT Bulletin 37 or to request the relevant transferors from whom we purchase taxable
assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material
adverse effect on our financial condition and results of operations.
Regulation and censorship of information
disseminated over the internet in China may adversely affect our business and reputation and subject us to liability for information displayed
on our website.
The PRC government has adopted regulations governing
internet access and the distribution of news and other information over the internet. Under these regulations, internet content providers
and internet publishers are prohibited from posting or displaying over the internet content that, among other things, violates PRC laws
and regulations, impairs the national dignity of China, or is reactionary, obscene, superstitious, fraudulent or defamatory. Failure to
comply with these requirements may result in the revocation of licenses to provide internet content and other licenses, and the closure
of the concerned websites. The website operator may also be held liable for such censored information displayed on or linked to the websites.
If our website is found to be in violation of any such requirements, we may be penalized by relevant authorities, and our operations or
reputation could be adversely affected.
Epidemics, acts of war and other disasters
may adversely affect our operations.
Our business is subject to general economic and
social conditions in the PRC. Natural disasters, epidemics and other acts of God which are beyond human control may adversely affect the
economy, infrastructure and livelihood of the people of the PRC. Many major cities in the PRC are under threat of flood, earthquake, typhoon,
sandstorm or drought. Our business, results of operations and financial condition may be adversely affected if such natural disasters
occur. We may be required to disinfect our affected operational premises, which could adversely affect our operations. Even if we are
not directly affected by the epidemic, it could slow down or disrupt the level of economic activity generally, which could in turn adversely
affect our operating results.
In addition, acts of war and terrorist attacks
may cause damage or disruption to our operations, employees, markets or clients, any of which could adversely impact our turnover, cost
of sales, overall results and financial condition or the market price of the Shares. Potential war or terrorist attacks may also cause
uncertainty and cause the business to suffer in ways that we cannot currently predict.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
All land in China is owned
by the State. Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes. In the case
of land used for industrial purposes, the land use rights are granted for a certain period no more than 50 years. This period may be renewed
at the expiration of the initial and any subsequent terms. Granted land use rights are transferable and may be used as security for borrowings
and other obligations. We do not own or have not been granted land use rights to any property in China or any other countries. We rent
our office space through a lease which we believe is adequate and suitable for our current operations.
We have the property set forth in the table below.
Location |
|
Size |
|
Expiration
Date of Lease |
|
Leased/Owned/
Granted |
|
Function |
Room 1312 & 1313, 14th Floor, Building 2, No. 1 Hangfeng Road, Fengtai District, Beijing, PRC |
|
385.33 square meters (approximately 4,147.66 square feet) |
|
2024.09.19 |
|
Leased |
|
Office |
Room 515, 5th Floor, No. 5 Haiying Road, Fengtai District, Beijing, P.R.C |
|
300 square meters (approximately 3,339 square feet) |
|
2022.09.20 |
|
Leased |
|
Office |
Room 513, 5th Floor, No. 5 Haiying Road, Fengtai District, Beijing, PRC |
|
350 square meters (approximately 3,767 square feet) |
|
2022.09.20 |
|
Leased |
|
Office |
Room 514, 5th Floor, No. 5 Haiying Road, Fengtai District, Beijing, PRC |
|
200 square meters (approximately 2,153 square feet) |
|
2022.09.20 |
|
Leased |
|
Office |
Room 901, Unit 1, Xiangling Zhihuigang (Jianye Zhihuigang), N.W. Corner at Kaiyuan Ave. & Dingdingmen Street, Luoyang, Henan Province, PRC |
|
315.28 square meters (approximately 3,393.65 square feet) |
|
2022.02.10 |
|
Leased |
|
Office |
Room 101-102, Building 4, No. 436, Longmen Avenue, Luolong District, Luoyang City, Henan Province, China |
|
1146.13 square meters (approximately 12,336.84 square feet) |
|
2022.11.01-2024.10.31 |
|
Leased |
|
Office |
Item 3. Legal Proceedings.
We are not currently involved
in any material legal proceedings other than ordinary routine litigation incidental to the business, to which we or any of our subsidiaries
is a party or of which any of our property is the subject. From time-to-time we are, and we anticipate that we will be, involved in legal
proceedings, claims, and litigation arising in the ordinary course of our business and otherwise. The ultimate costs to resolve any such
matters could have a material adverse effect on our financial statements. We could be forced to incur material expenses with respect to
these legal proceedings, and in the event that there is an outcome in any that is adverse to us, our financial position and prospects
could be harmed.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our
Common Stock is not traded on any exchange but is currently available for trading in the over-the-counter market and is quoted on the
OTC Expert Market operated by the OTC Markets Group, Inc. Quotations
in Expert Market securities are restricted from public viewing and only broker-dealers and professional or sophisticated investors are
permitted to view quotations in Expert Market securities. Our securities could be particularly illiquid due to being quoted on this market.
Our Common Stock was
quoted on OTC Pink between January 19, 2017 to April 19, 2023. On April 19, 2023, our common stock was transferred to the OTC Expert
Market by OTC Market Group Inc. from OTC Pink pursuant to Rule 15c2-11 of the Exchange Act which generally prohibits broker-dealers
from publishing or submitting securities of private issuers in a quotation medium other than a national securities exchange, unless
the issuer has made current financial and other information publicly available as specified by the rule. Quotations in Expert Market
securities are restricted from public viewing and only broker-dealers and professional or sophisticated investors are permitted to
view quotations in Expert Market securities. Our securities could be particularly illiquid due to being quoted on this market.
Over the counter securities
are not listed or traded on the floor of an organized national or regional stock exchange. Instead, these securities transactions are
conducted through a telephone and computer network connecting dealers in stocks. Over the counter issuers are traditionally smaller companies
that do not meet the financial and other listing requirements of a regional or national stock exchange.
The SEC also has rules that
regulate broker/dealer practices in connection with transactions in “penny stocks.” Penny stocks generally are equity securities
with a price of less than $5.00 (other than securities listed on certain national exchanges, provided that the current price and volume
information with respect to transactions in that security is provided by the applicable exchange or system). The penny stock rules require
a broker/dealer, before effecting a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure
document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market.
The broker/dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker/dealer
and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s
account. The bid and offer quotations, and the broker/dealer and salesperson compensation information, must be given to the customer orally
or in writing before effecting the transaction, and must be given to the customer in writing before or with the customer’s confirmation.
These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for shares of our
Common Stock. As a result of these rules, investors may find it difficult to sell their shares.
Stock Performance Graph
The
graph below matches our Common Stock’s cumulative 5-year
total stockholder return on common stock with the cumulative total returns of the S&P 500 index, the S&P Information
Technology Index, and the Dow Jones U.S Technology Supersector Index. The graph tracks the performance of a $100 investment in our
common stock and in each index (with the reinvestment of all dividends) from September 30, 2017 to September 30, 2022 (except that prior to our reverse acquisition with Dyckmanst Limited which was completed on July 30, 2021, our
total stockholder return on common stock was indicated as $0). The returns
shown are based on historical results and are not intended to suggest future performance.
| |
GUSHEN, INC. | | |
S&P 500 Index | | |
S&P Information
Technology
Index | | |
Dow Jones
U.S Technology
Supersector Index | |
9/29/17 | |
| 0 | | |
| 100 | | |
| 100 | | |
| 100 | |
9/29/18 | |
| 0 | | |
| 118 | | |
| 131 | | |
| 131 | |
9/29/19 | |
| 0 | | |
| 123 | | |
| 143 | | |
| 139 | |
9/29/20 | |
| 0 | | |
| 142 | | |
| 210 | | |
| 208 | |
9/29/21 | |
| 100 | | |
| 184 | | |
| 271 | | |
| 283 | |
9/29/22 | |
| 70 | | |
| 156 | | |
| 217 | | |
| 209 | |
Holders
As of September 30, 2022,
we had 410,618,750 shares of our Common Stock par value, $0.0001 issued and outstanding. There were 60 beneficial owners of our Common
Stock.
Transfer Agent and Registrar
The transfer agent for our
capital stock is Globex Transfer, LLC, with an address at 780 Deltona Blvd., Suite 202 Deltona, FL 32725 and telephone number is +1 (813)
344-4490.
Penny Stock Regulations
The Securities and Exchange
Commission has adopted regulations which generally define “penny stock” to be an equity security that has a market price of
less than $5.00 per share. Our Common Stock, when and if a trading market develops, may fall within the definition of penny stock and
be subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally those with assets in excess of $1,000,000, or annual incomes exceeding $200,000
individually, or $300,000, together with their spouse).
For transactions covered by
these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the
purchaser’s prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving
a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the Securities and
Exchange Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer
and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing
recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently,
the “penny stock” rules may restrict the ability of broker-dealers to sell our Common Stock and may affect the ability of
investors to sell their Common Stock in the secondary market.
In addition to the “penny
stock” rules promulgated by the Securities and Exchange Commission, the Financial Industry Regulatory Authority (“FINRA”)
has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing
that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status,
investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that
speculative low-priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for
broker-dealers to recommend that their customers buy our Common Stock, which may limit the investors’ ability to buy and sell our
stock.
Dividend Policy
Any future determination as
to the declaration and payment of dividends on shares of our Common Stock will be made at the discretion of our board of directors out
of funds legally available for such purpose. We are under no contractual obligations or restrictions to declare or pay dividends on our
shares of Common Stock. In addition, we currently have no plans to pay such dividends. Our board of directors currently intends to retain
all earnings for use in the business for the foreseeable future.
Equity Compensation Plan Information
The Company has adopted a 2021 Equity Compensation
Plan (the “2021 Plan”) on December 9, 2021, which went into effect on February 7, 2022.
On July 31, 2022, the Board
approved the issuance of an aggregate of 42,061,876 shares of the Company’s common stock to certain employees of Zhuoxun Beijing
as restricted stock under Section 6(c) the 2021 Plan (the “Restricted Stock”) pursuant to a certain stock award agreement
(collectively the “Award Agreements”, each an “Award Agreement”) with each of such employees, which shall be vested
on October 31, 2022, subject to such employees’ continued employment with Zhuoxun Beijing until such time and other terms and conditions
set forth in the Award Agreements. On October 28, 2022, as agreed by each of such intended recipients and the Company, each of the Award
Agreements was cancelled and voided pursuant to Section 7(b) of the 2021 Plan retroactively effective as of the date of such Award Agreements.
Accordingly, the shares of the Restricted Stock were cancelled before vesting.
On March 31, 2023, the Board approved the issuance under the 2021 Plan
of an aggregate of 12,618,523 restricted shares of common stock to certain employees of Edeschler Limited, the Company’s Hong Kong
subsidiary, bearing a legend that such Awards shall be vested on June 30, 2023, pursuant to certain stock award agreement with each of
such employees.
Unregistered Sales of Equity Securities
Share Exchange on July 30, 2021
On July 30, 2021, pursuant
to the terms of the Share Exchange Agreement, the Company issued an aggregate of 381,600,000 shares of its Common Stock to former shareholders
of Dyckmanst Limited upon the closing of the Share Exchange. All of the securities issued pursuant to the Share Exchange Agreement were
offered and issued in reliance upon the exemption from registration pursuant to the exemption from registration provided by Section 4(a)(2)
of the Securities Act and Regulation S promulgated thereunder.
Service Provider Collaboration Agreements, on
July 31, 2022
On July 31, 2022, the Board
of Directors approved the entry by the Company into several service provider collaboration agreements (the “Collaboration Agreements”,
each a “Collaboration Agreement”) with Zhuoxun Beijing, and several service providers (the “Service Providers”,
each a “Service Provider”), under which the Service Providers will provide certain sales, marketing and promotion services
for Zhuoxun Beijing across different regions of China, in exchange for certain monetary and securities compensation. The transaction was
disclosed on a Current Report on Form 8-K filed on July 31, 2022.
The substance of each Collaboration
Agreement is identical, with the exceptions that the name of the Service Provider in each Collaboration Agreement and the defined Service
Region (defined below) for each Service Provider are different.
Pursuant to the terms of each
Collaboration Agreement, each Service Provider shall: (i) provide marketing promotions for Zhuoxun Beijing’s products and services,
including Zhuoxun Beijing’s family education online and offline training courses, mobile applications and anti-addiction mobile
devices; (ii) collaborate with Zhuoxun Beijing to solicit and facilitate sales of such products and services; (iii) provide logistic support
for organizing offline training lectures and courses; and (iv) coordinate customer services with Zhuoxun Beijing. Each Service Provider
is only authorized to conduct such activities provided in each Collaboration Agreement in a prescribed region in the PRC (usually limited
to particular cities, counties or administrative subdivisions of a particular province) (each a “Service Region”). In exchange
for its services under each Collaboration Agreement, each Service Provider will receive 60% of all revenues (the “Revenues”)
generated under the Collaboration Agreement within each Service Region.
In addition, the Collaboration
Agreement provides for an assessment period (the “Assessment Period”) between August 1, 2022 and July 31, 2023, during which
the Revenues generated by each Service Provider will be ranked by Zhuoxun Beijing. At the end of the Assessment Period, those Service
Providers whose Revenues rank among the top 10 of all Service Providers would receive, and Gushen will issue to such Service Providers,
certain amount of shares (the “Granted Shares”) of Gushen’s common stock (the “Common Stock”) based on the
calculation as provided in the Collaboration Agreement.
The Grant Shares are expected
to be issued following the completion of the Assessment Period based on the performance by each Service Provider at the aggregated maximum
amount equal to 2.196% of then issued and outstanding shares of Common Stock of the Company. The issuance of the Grant Shares will be
made pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act.
Purchases of Equity Securities by the Registrant
and Affiliated Purchasers
We have not repurchased any
shares of our common stock during the fiscal year ended September 30, 2022.
Item 6. [Reserved].
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion
of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the
related notes included elsewhere in this filing.
Certain statements in this
report constitute forward-looking statements. These forward-looking statements include statements, which involve risks and uncertainties,
regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategy, (c) anticipated trends
in our industry, (d) our future financing plans, and (e) our anticipated needs for, and use of, working capital. They are generally identifiable
by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,”
“potential,” “project,” “continuing,” “ongoing,” “expects,” “management
believes,” “we believe,” “we intend,” or the negative of these words or other variations on these words
or comparable terminology. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained
in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.
The forward-looking statements
speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation
to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect
the occurrence of unanticipated events.
Overview
Gushen, Inc., a Nevada corporation
(“GSHN” or the “Company”), owns 100% of Dyckmanst Limited, a British Virgin Islands company (“Dyckmanst”),
which owns 100% of Edeshler Limited, a Hong Kong company (“Edeshler”), which in return owns 100% of Beijing Fengyuan Zhihui
Education Technology Co., Ltd., a PRC company (“Fengyuan Beijing”). The Company, Dyckmanst and Edeshler are holding companies
with no substantive operations.
As a holding company with
no material operations of our own, we consolidate financial results of Beijing Zhuoxun Century Culture Communication Co., Ltd., a PRC
company (“Zhuoxun Beijing”), which is a variable interest entity (the “VIE”), through a series of contractual
arrangements dated February 5, 2021, by and among our wholly-owned subsidiary Fengyuan Beijing, Zhuoxun Beijing and the shareholders of
Zhuoxun Beijing (the “VIE Agreements”). Neither we nor our subsidiaries own any equity interests in the VIE or its subsidiary.
A description of the VIE Agreements and forms of such agreements are incorporated by reference from the Current Report on Form 8-K filed
with the U.S. Securities and Exchange Commission (“SEC”) on August 6, 2021.
Zhuoxun Beijing’s customers
are parents who desire to acquire various family education resources. Zhuoxun Beijing delivers onsite educational services to parents
through its nationwide physical network of regional collaborative education agencies. Zhuoxun Beijing’s onsite educational services
include programs such as individual development, youth leadership development, and parenting schools, enabling in-person guidance and
interactions in classes. Zhuoxun Beijing has developed long-term business relationships with 18 regional education agencies around
the country, whom Zhuoxun Beijing provides systematic training and management for to ensure the delivery of high-quality and uniformed
educational services to the customers.
In addition, Zhuoxun Beijing
also provides online education to parents through their mobile application, Wisdom Lighthouse (“睿智灯塔”)
(formerly known as ZhuoXun App). Zhuoxun Beijing’s products provide two sets of curricula: “Good Parenting” (“教子有方”)
and “Wise Parents” (“智慧父母”).
“Good Parenting”, focused on child development, provides courses including emotional intelligence (EQ) training, learning
habits, learning ability, parents-children communication, stages of puberty, etc. to help parents promote children’s mental and
psychological health. “Wise Parents” introduces general strategies of family education to parents to help them better understand
and support their children’s growth and needs, whereby courses such as traditional family values, improvement of parents’
qualifications, and psychological analysis are provided. Through Zhuoxun Beijing’s mobile application, Zhuoxun Beijing’s users
can, based on their own interest and needs, select courses that are suitable for them and obtain valuable knowledge and skills provided
by Zhuoxun Beijing’s courses. Zhuoxun Beijing’s users on mobile platform can use iPhone, Android, iPad and other tablets to
review the courses anywhere and anytime. As of the date hereof, Zhuoxun Beijing has around 52,000 active users on the Wisdom Lighthouse
app.
Zhuoxun Beijing’s online
family education mobile platform monetizes through in-app purchases. Zhuoxun Beijing provides one free trial class of each course for
all the users. The remaining classes are available for purchase. Users are able to view the first class for free before determining if
to purchase the remaining classes.
Zhuoxun Beijing’s product
Zhuoxun Anti-Addiction Cellphone (“Zhuoxun Cellphone”) is an intelligent terminal device. Dami Zhilian Information Technology
Group Co., Ltd, a technology company that develops and produces smartphones (“Dami Zhilian”), customizes and produces Zhuoxun
Cellphone according to the design requirements set by Zhouxun Beijing. Zhuoxun Beijing does not own any intellectual property in connection
with Zhuoxun Cellphones. Zhuoxun Beijing sells Zhuoxun Cellphones through regional collaborative education agencies. Zhuoxun Cellphone
has primarily four functions including anti-addiction, myopia prevention, security, and study assistance, for the purpose of managing
elementary and middle school students. Parents are able to personalize and monitor their children’s use of Zhuoxun Cellphone by
setting screen auto-lock, monitoring internet surfing, monitoring mobile application usage, monitoring physical locations, etc.
Starting in the third quarter
of fiscal year 2022, the Company sells household products via the Company’s app in a small scale, and the amount of sales was immaterial
compared to the total revenue of the corresponding period.
Recent Development
Business Collaboration Agreements
On July 31, 2022, the Company
entered into collaboration agreements (the “Collaboration Agreements”, each a “Collaboration Agreement”) with
Zhuoxun Beijing and several service providers (the “Service Providers”, each a “Service Provider”), under which
the Service Providers will provide certain sales, marketing and promotion services for Zhuoxun Beijing across different regions of China,
in exchange for certain monetary and securities compensation.
The Service Providers include
Luohe Jiusheng Education Technology Co., Ltd., Zhumadian Yixun Education Information Consulting Co., Ltd., Luohe Zhengxun Education Technology
Co., Ltd., Xiamen Maishuxiu Education Consulting Co., Ltd., Jincheng Outstanding Culture Media Co., Ltd., Wuyang Rongxing Culture Communication
Co., Ltd., Zhengzhou Dingxun Culture Communication Co., Ltd., Sanmenxia Lingxun Culture Communication Co., Ltd., Xinxiang Chengxun Network
Technology Co., Ltd., Luoyang Zhengxun Culture Communication Co., Ltd., Wuyang County Zhixue Culture Technology Co., Ltd., Henan Zhuoxun
Culture Communication Co., Ltd.. Each of these Service Providers is an independent company incorporated in the PRC and has no affiliation
with either the Company, Zhuoxun Beijing, or any of the Company’s or Zhuoxun Beijing’s subsidiaries and affiliates.
The substance of each Collaboration
Agreement is identical, with the exceptions that the name of the Service Provider in each Collaboration Agreement and the defined Service
Region (defined below) for each Service Provider are different.
Pursuant to the terms of each
Collaboration Agreement, each Service Provider shall: (i) provide marketing promotions for Zhuoxun Beijing’s products and services,
including Zhuoxun Beijing’s family education online and offline training courses, mobile applications and anti-addiction mobile
devices; (ii) collaborate with Zhuoxun Beijing to solicit and facilitate sales of such products and services; (iii) provide logistic support
for organizing offline training lectures and courses; and (iv) coordinate customer services with Zhuoxun Beijing. Each Service Provider
is only authorized to conduct such activities provided in each Collaboration Agreement in a prescribed region in the PRC (usually limited
to particular cities, counties or administrative subdivisions of a particular province) (each a “Service Region”). In exchange
for its services under each Collaboration Agreement, each Service Provider will receive 60% of all revenues (the “Revenues”)
generated under the Collaboration Agreement within each Service Region.
Restricted Stock Issuance pursuant to 2021
Plan
On July 31, 2022, the Board
approved the issuance of an aggregate of 42,061,876 shares of the Company’s common stock to certain employees (the “Participants”)
of Zhuoxun Beijing as restricted stock (the “Restricted Stock”) under Section 6(c) the Company’s 2021 Plan pursuant
to a certain stock award agreement (collectively the “Award Agreements”, each an “Award Agreement”) with each
of such employees. Pursuant to the terms of the 2021 Plan and each Award Agreement, the Company will issue 14,301,038, 13,880,419, and
13,880,419 shares of Restricted Stock to Hao Wang, Brand Promotion Specialist, Bolei Liu, Marketing Service Specialist, and Deqiang Wen,
Research & Development Manager, respectively, which shall be vested on October 31, 2022, subject to participant’s continued
employment with Zhuoxun Beijing until such time and other terms and conditions set forth therein. On October 28, 2022, as agreed by each
of such intended recipients and the Company, each of the Award Agreements was cancelled and voided pursuant to Section 7(b) of the 2021
Plan retroactively effective as of the date of such Award Agreements. Accordingly, the shares of the Restricted Stock were cancelled before
vesting.
On March 31, 2023, the Board approved the issuance under the 2021 Plan
of an aggregate of 12,618,523 restricted shares of common stock to certain employees of Edeschler Limited, the Company’s Hong Kong
subsidiary, bearing a legend that such Awards shall be vested on June 30, 2023, pursuant to certain stock award agreement with each of
such employees. The issuance of these restricted shares was made pursuant to the exemption from registration pursuant to Section 4(a)(2)
of the Securities Act.
Transfer of Quotation to OTC Expert Market
On April 19, 2023, our common stock was transferred to the OTC Expert
Market by OTC Market Group Inc. from OTC Pink pursuant to Rule 15c2-11 of the Exchange Act which generally prohibits broker-dealers from
publishing or submitting securities of private issuers in a quotation medium other than a national securities exchange, unless the issuer
has made current financial and other information publicly available as specified by the rule. Quotations in Expert Market securities are
restricted from public viewing and only broker-dealers and professional or sophisticated investors are permitted to view quotations in
Expert Market securities. Our securities could be particularly illiquid due to being quoted on this market.
Critical Accounting Policies and Estimates
Basis of Presentation
The financial statements of
the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
Use of Estimates
The preparation of these consolidated
financial statements in conformity with U.S. GAAP requires management of the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an on-going basis, the Company evaluates its
estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or conditions. Identified below are the
accounting policies that reflect the Company’s most significant estimates and judgments, and those that the Company believes are
the most critical to fully understanding and evaluating its consolidated financial statements.
COVID-19 Outbreak
In March 2020, the World Health
Organization declared coronavirus COVID-19 a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, workforces,
customers, and created significant volatility and disruption of financial markets. It has also disrupted the normal operations of many
businesses, including ours and Zhuoxun Beijing’s. This outbreak could decrease spending, adversely affect demand for Zhuoxun Beijing’s
services and harm Zhuoxun Beijing’s business and results of operations. Since March 2020, as different variants and subvariants
of COVID-19 developed and spread in various regions across China, PRC provincial and local governments have imposed various forms of strict
lockdowns, mass testing and extensive contact tracing measures for extended periods of time. Recent examples include lockdown measures
put in place by the local governments in Shenzhen, Guangdong Province, Changchun, Jilin Province and City of Shanghai in March to May
2022. Zhuoxun Beijing’s main business would continue to be affected by China’s anti-epidemic measures such as restrictions
on public gatherings during the COVID-19 pandemic. It is not possible for us to predict the duration or magnitude of the adverse results
of the outbreak and its effects on Zhuoxun Beijing’s business or results of operations at this time.
Revenue Recognition
Zhuoxun Beijing recognizes
revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which Zhuoxun Beijing
expects to receive in exchange for those goods or services. Zhuoxun Beijing recognizes revenues following the five-step model prescribed
under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine
the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues
when (or as) it satisfies the performance obligation.
Revenues are recognized when
control of the promised goods or services is transferred to its customers, which may occur at a point in time or over time depending on
the terms and conditions of the agreement, in an amount that reflects the consideration we expect to be entitled to in exchange for those
goods or services.
Zhuoxun Beijing identified the following performance
obligations for each type of contract:
Training revenue
Zhuoxun Beijing’s onsite
training course service primarily includes assigning instructors, providing onsite classes and presenting training materials to the course
participants who attend the classes. The series of tasks as discussed above are interrelated and are not separable or distinct as the
customers cannot benefit from the standalone task.
Zhuoxun Beijing’s online
training course service primarily includes courseware or videos which are already published on the website. Other than providing the access,
there are no bundle or multiple separable and distinct tasks.
According to ASC 606-10-25-19,
there is one performance obligation for the training course service.
Charge for use of brand
The Company authorized other enterprises
or individuals to use the Company’s brand, providing services to customers at their location, with a brand usage fee. Revenue was
recognized when such events using the Company’s brand are completed.
Other revenues include sales of anti-addiction
mobile phone device and online sales of household items. The amount was immaterial compared to total revenue during year ended September
30, 2022 and 2021.
Practical expedients and exemption
Zhuoxun Beijing has not occurred
any costs to obtain contracts, and does not disclose the value of unsatisfied performance obligations for contracts with an original expected
length of one year or less.
Other service income is earned
when services have been rendered.
Income Taxes
We account for income taxes
using the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the
financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the
differences are expected to reverse. The Company records a valuation allowance against deferred tax assets if, based on the weight of
available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect
on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
We apply ASC 740, Accounting
for Income Taxes, to account for uncertainty in income taxes and the evaluation of a tax position is a two-step process. The first step
is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of
any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets
the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is
measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions
that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which
the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized
in the first subsequent financial reporting period in which the threshold is no longer met.
Foreign Currency and Foreign Currency Translation
The functional currency of
the Company is the United States dollar (“US dollar”). Fengyuan Beijing, Zhuoxun Beijing and Zhuoxun Beijing’s subsidiaries,
all of which are based in PRC, use the local currency, the Chinese Yuan (“RMB”), as their functional currencies. An entity’s
functional currency is the currency of the primary economic environment in which it operates, normally that is the currency of the environment
in which the entity primarily generates and expends cash. Management’s judgment is essential to determine the functional currency
by assessing various indicators, such as cash flows, sales price and market, expenses, financing and inter-company transactions and arrangements.
Foreign currency transactions
denominated in currencies other than the functional currency are translated into the functional currency using the exchange rates prevailing
at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are re-measured
at the applicable rates of exchange in effect at that date. Gains and losses resulting from foreign currency re-measurement are included
in the statements of comprehensive loss.
The consolidated financial
statements are presented in U.S. dollars. Assets and liabilities are translated into U.S. dollars at the current exchange rate in effect
at the balance sheet date, and revenues and expenses are translated at the average of the exchange rates in effect during the reporting
period. Stockholders’ equity accounts are translated using the historical exchange rates at the date the entry to stockholders’
equity was recorded, except for the change in retained earnings during the period, which is translated using the historical exchange rates
used to translate each period’s income statement. Differences resulting from translating functional currencies to the reporting
currency are recorded in accumulated other comprehensive income in the consolidated balance sheets.
Translation of amounts from
RMB into U.S. dollars has been made at the following exchange rates:
Balance sheet items, except for equity accounts | |
|
September 30, 2022 | |
RMB7.1099 to $1 |
September 30, 2021 | |
RMB6.4567 to $1 |
| |
|
Income statement and cash flows items | |
|
For the year ended September 30, 2022 | |
RMB6.5477 to $1 |
For the year ended September 30, 2021 | |
RMB6.5074 to $1 |
Impairment of Long-lived Assets
In accordance with ASC 360-10-35,
the Company reviews the carrying values of long-lived assets for impairment whenever events or changes in circumstances indicate that
the carrying value of an asset may not be recoverable. Based on the existence of one or more indicators of impairment, the Company measures
any impairment of long-lived assets using the projected discounted cash flow method at the asset group level. The estimation of future
cash flows requires significant management judgment based on the Company’s historical results and anticipated results and is subject
to many factors. The discount rate that is commensurate with the risk inherent in the Company’s business model is determined by
its management. An impairment loss would be recorded if the Company determined that the carrying value of long-lived assets may not be
recoverable. The impairment to be recognized is measured by the amount by which the carrying values of the assets exceed the fair value
of the assets. No impairment has been recorded by the Company as of September 30, 2022 and 2021.
Credit risk
Financial instruments that
potentially subject the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents. As of September
30, 2022 and 2021, substantially all of the Company’s cash and cash equivalents were held by major financial institutions located
in the PRC, which management believes are of high credit quality.
For the credit risk related
to trade accounts receivable, the Company performs ongoing credit evaluations of its customers and, if necessary, maintains reserves for
potential credit losses. Historically, such losses have been within management’s expectations.
Fair Value of Financial Instruments
U.S. GAAP establishes a three-tier
hierarchy to prioritize the inputs used in the valuation methodologies in measuring the fair value of financial instruments. This hierarchy
also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The three-tier fair value hierarchy is:
Level 1 – observable inputs that
reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – include other inputs
that are directly or indirectly observable in the market place
Level 3 – unobservable inputs
which are supported by little or no market activity
The carrying value of the
Company’s financial instruments, including cash and cash equivalents, accounts and other receivables, other current assets, accounts
and other payables, and other short-term liabilities approximate their fair value due to their short maturities.
In accordance with ASC 825,
for investments in financial instruments with a variable interest rate indexed to performance of underlying assets, the Company elected
the fair value method at the date of initial recognition and carried these investments at fair value. Changes in the fair value are reflected
in the accompanying consolidated statements of operations and comprehensive loss as other income (expense). To estimate fair value, the
Company refers to the quoted rate of return provided by banks at the end of each period using the discounted cash flow method. The Company
classifies the valuation techniques that use these inputs as Level 2 of fair value measurements.
As of September 30, 2022 and
2021, the Company had no investments in financial instruments.
RESULTS
OF OPERATIONS
Comparison of Year Ended September 30, 2022 and 2021
The following table sets forth key components
of our results of operations during the year ended September 30, 2022 and 2021, both in dollars and as a percentage of our revenue.
| |
Year Ended September 30, | |
| |
2022 | | |
2021 | |
| |
Amount | | |
of Revenue | | |
Amount | | |
of Revenue | |
Revenue | |
$ | 2,407,402 | | |
| 100.00 | | |
$ | 1,928,456 | | |
| 100.00 | |
Cost of revenue | |
| (1,458,804 | ) | |
| (60.60 | ) | |
| (1,203,532 | ) | |
| (62.41 | ) |
Gross profit | |
| 948,598 | | |
| 39.40 | | |
| 724,924 | | |
| 37.59 | |
Selling expenses | |
| (3,365,426 | ) | |
| (139.79 | ) | |
| (9,032,933 | ) | |
| (468.40 | ) |
General and administrative expenses | |
| (1,443,045 | ) | |
| (59.94 | ) | |
| (1,963,374 | ) | |
| (101.81 | ) |
Loss from operations | |
| (3,859,873 | ) | |
| (160.33 | ) | |
| (10,271,383 | ) | |
| (532.62 | ) |
Other income | |
| (3,717,334 | ) | |
| 0.51 | | |
| (403,668 | ) | |
| (20.93 | ) |
Net income (loss) before income taxes | |
| (7,577,207 | ) | |
| (159.83 | ) | |
| (10,675,051 | ) | |
| (553.55 | ) |
Income tax benefit (expenses) | |
| (1,895,387 | ) | |
| (78.73 | ) | |
| 760,013 | | |
| 39.41 | |
Net income (loss) | |
$ | (9,472,594 | ) | |
| (238.56 | ) | |
$ | (9,915,038 | ) | |
| (514.14 | ) |
Less: Net income (loss) attributable to non-controlling interests | |
| (41 | ) | |
| 0.00 | | |
| (884 | ) | |
| (0.05 | ) |
Net income (loss) attribute to the company’s shareholders | |
$ | (9,472,553 | ) | |
| (238.56 | ) | |
$ | (9,914,154 | ) | |
| (514.10 | ) |
Revenue.
The Company’s revenue was increased $478,946 from $1,928,456
to $2,407,402 during the year ended September 30, 2022 compared with the previous year. Due to the impact of COVID-19 and shutdown imposed
by the government, the Company’s offline training has been affected with reduction in classes offered during the fiscal year 2022.
In order to generate more revenue streams, the Company expanded the revenue in charge for use of brand and online sales during fiscal
year 2022. For charge for use of brand, the Company authorized other enterprises or individuals to use the Company’s brand,
providing services to customers at their location, with a brand usage fee. While obtaining brand royalty income, the Company will gain
brand recognition in the market. For online sales, the Company provides goods, mostly household items, to customers on its online sales platform,
the amount of consideration the Company is entitled to upon the transfer of goods.
Cost of revenue.
Our cost of revenue was $1,458,804
and $1,203,532 for the years ended September 30, 2022 and 2021, respectively. The increase was in line with the increase of revenue.
Gross profit and gross margin.
Our gross profit was $948,598 for the year ended September 30, 2022,
compared with a gross profit of $724,924 for the previous year. Gross profit as a percentage of revenue (gross margin) was 39.40% for
the year ended September 30, 2022, compared to a gross profit of 37.59% for the previous year.
Selling expenses.
Our selling expenses consist primarily of compensation and benefits
to our expense related to the revenue, such as advertising fee, marketing fees. Our selling expenses decreased by $3,895,217 to $3,365,426
for the year ended September 30, 2022, compared to $9,032,933 for the previous year. We adjusted the strategy by reducing our sales employees
and imposing a strict control on operating expenses, and due to the impact of COVID-19, the Company reduced offline training business,
also the prepaid marketing fees are mainly for the two-year marketing service, has been fully amortized this fiscal year, by reason of
the foregoing resulting a decline of selling expenses.
| |
Year ended September 30, | |
| |
2022 | | |
2021 | | |
Fluctuation | |
| |
Amount | | |
% | | |
Amount | | |
% | | |
Amount | | |
% | |
Salary and welfare | |
| 618,637 | | |
| 18.38 | | |
| 1,333,847 | | |
| 14.77 | | |
| (715,210 | ) | |
| (53.62 | ) |
Advertising Fees | |
| - | | |
| - | | |
| 224,116 | | |
| 2.48 | | |
| (224,116 | ) | |
| (100.00 | ) |
Conference Fees | |
| 1,700 | | |
| 0.05 | | |
| 129,542 | | |
| 1.43 | | |
| (127,842 | ) | |
| (98.69 | ) |
Marketing fee | |
| 1,137,797 | | |
| 33.81 | | |
| 4,358,393 | | |
| 48.25 | | |
| (3,220,596 | ) | |
| (73.89 | ) |
Rent | |
| 6,343 | | |
| 0.19 | | |
| 1,076 | | |
| 0.01 | | |
| 5,267 | | |
| 489.50 | |
Depreciation and amortization | |
| 15,392 | | |
| 0.46 | | |
| - | | |
| - | | |
| 15,392 | | |
| 100.00 | |
Inventory impairment | |
| 412,888 | | |
| 12.27 | | |
| - | | |
| - | | |
| 412,888 | | |
| 100.00 | |
Others | |
| 1,172,669 | | |
| 34.84 | | |
| 2,985,959 | | |
| 41.13 | | |
| (1,813,290 | ) | |
| (60.73 | ) |
Total Selling Expense | |
$ | 3,365,426 | | |
| 100.00 | | |
$ | 9,032,933 | | |
| 100.00 | | |
$ | (5,667,507 | ) | |
| (62.74 | ) |
General and administrative expenses.
Our general and administrative expenses consist primarily of compensation
and benefits to our general management, finance and administrative staff, professional fees and other expenses incurred in connection
with general operations. Our general and administrative expenses decreased by $520,329 to $1,443,045 for the year ended September 30,
2022, compared to $1,963,374 for the previous year. We adjusted the strategy by reducing our management employees and imposing a strict
control on general and administrative expenses, and reducing the professional service by third parties.
| |
Year ended September 30, | |
| |
2022 | | |
2021 | | |
Fluctuation | |
| |
Amount | | |
% | | |
Amount | | |
% | | |
Amount | | |
% | |
Salary and welfare | |
| 659,457 | | |
| 45.70 | | |
| 904,625 | | |
| 46.08 | | |
| (245,168 | ) | |
| (27.10 | ) |
Depreciation and amortization | |
| 62,777 | | |
| 4.35 | | |
| 105,598 | | |
| 5.38 | | |
| (42,821 | ) | |
| (40.55 | ) |
Rent | |
| 221,174 | | |
| 15.33 | | |
| 142,295 | | |
| 7.25 | | |
| 78,879 | | |
| 55.43 | |
Profession fee | |
| 237,812 | | |
| 16.48 | | |
| 443,076 | | |
| 22.57 | | |
| (205,264 | ) | |
| (46.33 | ) |
Bad debt | |
| 5,655 | | |
| 0.39 | | |
| - | | |
| - | | |
| 5,655 | | |
| 100.00 | |
Others | |
| 256,170 | | |
| 17.75 | | |
| 367,780 | | |
| 18.73 | | |
| (111,610 | ) | |
| (30.35 | ) |
Total G&A Expenses | |
$ | 1,443,045 | | |
| 100.00 | | |
$ | 1,963,374 | | |
| 100.00 | | |
$ | (520,329 | ) | |
| (26.50 | ) |
Income tax benefit.
Our Income tax expense was zero for the year ended September 30, 2022,
compared to income tax benefit of $760,013 for the year ended September 30, 2021.
Net loss.
As a result of the cumulative
effect of the factors described above, our net loss was $9,472,594 and $9,915,038 for the years ended September 30, 2022 and 2021, respectively.
Liquidity and Capital Resources
The following table sets forth
a summary of our cash flows for the periods indicated:
| |
Year Ended September 30, | |
| |
2022 | | |
2021 | |
Net cash used in operating activities | |
$ | (1,668,924 | ) | |
$ | (4,749,894 | ) |
Net cash used in investing activities | |
| (11,610 | ) | |
| (67,461 | ) |
Net cash provided by financing activities | |
| - | | |
| - | |
Net decrease in cash and cash equivalents | |
| (1,680,534 | ) | |
| (4,817,355 | ) |
Effect of exchange rate changes on cash and cash equivalents | |
| (111,469 | ) | |
| 342,871 | |
Cash and cash equivalents at the beginning of period | |
| 2,659,622 | | |
| 7,134,106 | |
Cash and cash equivalents at the end of period | |
$ | 867,619 | | |
$ | 2,659,622 | |
As of September 30, 2022 we
had cash and cash equivalents of $867,619. To date, we have financed our operations primarily through borrowings from our stockholders,
related and unrelated parties.
Operating Activities
Net cash used in operating
activities was $1,668,924 for the year ended September 30, 2022, as compared to $4,749,894 net cash used in operating activities for the
year ended September 30, 2021.
The net cash used in operating
activities for the year ended September 30, 2022 was mainly due to our net loss of $9,472,594, partially offset by an increase in inventory
impairment of $412,888, an increase in amortization of prepaid expenses of $725,041, an increase in estimated liabilities of $3,729,530,
an increase in accounts payable and other payable of $464,395, and an increase in advance from customers of $201,504.
The net cash used in operating
activities for the year ended September 30, 2021 was mainly due to our net loss of $7,730,449, an increase in amortization of prepaid
expenses of $2,607,214, and an increase in other receivable of $2,153,952, partially offset by the decrease in advance from customers
of $1,098,628.
Investing Activities
Net cash used in
investing activities was $11,610 for the year ended September 30, 2022, as compared to $67,461 for the year ended September 30,
2021. The net cash used in investing activities for the year ended September 30, 2022 and 2021 was mainly attributable to purchase
of property, plant and equipment.
Off-Balance Sheet Arrangements
As of September 30, 2022 and 2021, we did not have any off-balance
sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Limited Operating History; Need for Additional
Capital
There is limited historical
financial information about the Company on which to base an evaluation of its performance. There is no guarantee on the continued success
in its business operations. The business is subject to risks inherent in the establishment of a new business enterprise, including limited
capital resources, a narrow client base, limited sources of revenue, and possible cost overruns due to the price and cost increases in
supplies and services.
Without additional funding,
management believes that the Company will not have sufficient funds to meet its obligations beyond one year after the date our condensed
consolidated financial statements are issued. These conditions give rise to substantial doubt as to our ability to continue as a going
concern.
The Company has been, and
intend to continue, working toward identifying and obtaining new sources of financing. To date it has been dependent on related parties
for its source of funding. No assurances can be given that it will be successful in obtaining additional financing in the future. Any
future financing that it may obtain may cause significant dilution to existing stockholders. Any debt financing or other financing of
securities senior to Common Stock that it is able to obtain will likely include financial and other covenants that will restrict its flexibility.
Any failure to comply with these covenants would have a negative impact on its business, prospects, financial condition, results of operations
and cash flows.
If adequate funds are not
available, it may be required to delay, scale back or eliminate portions of Zhuoxun Beijing’s operations or obtain funds through
arrangements with strategic partners or others that may require us to relinquish rights to certain of our assets. Accordingly, the inability
to obtain such financing could result in a significant loss of ownership and/or control of our assets and could also adversely affect
the Company’s ability to fund our continued operations and expansion efforts.
During the next 12 months,
the Company expects to incur the same amount of expenses each month. However, as Zhuoxun Beijing works to expand its operations, it expects
to incur significant research, marketing and development costs and expenses on Zhuoxun Beijing’s online service platforms that meet
the constantly evolving industry standards and consumer demands.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate and Foreign Currency Risk Management
The Company regularly reviews its foreign exchange
forward and option positions and interest rate swaps, both on a stand-alone basis and in conjunction with its underlying foreign currency
and interest rate exposures. Given the effective horizons of the Company’s risk management activities and the anticipatory nature
of the exposures, there can be no assurance these positions will offset more than a portion of the financial impact resulting from movements
in either foreign exchange or interest rates. Further, the recognition of the gains and losses related to these instruments may not coincide
with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect the Company’s
financial condition and operating results.
Interest Rate Risk
The Company’s exposure to changes in interest
rates relates primarily to the Company’s investment portfolio and outstanding debt. While the Company is exposed to global interest
rate fluctuations, the Company’s interest income and expense are most sensitive to fluctuations in U.S. interest rates. Changes
in U.S. interest rates affect the interest earned on the Company’s cash, cash equivalents and marketable securities and the fair
value of those securities, as well as costs associated with hedging and interest paid on the Company’s debt.
Foreign Currency Risk
In general, the Company is a net receiver of currencies
other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, will negatively
affect the Company’s net sales and gross margins as expressed in U.S. dollars. There is a risk that the Company will have to adjust
local currency pricing due to competitive pressures when there has been significant volatility in foreign currency exchange rates.
The Company may enter into foreign currency forward
and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and
liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. In addition,
the Company has entered, and in the future may enter, into foreign currency contracts to partially offset the foreign currency exchange
gains and losses on its foreign currency–denominated debt issuances. The Company generally hedges portions of its forecasted foreign
currency exposure associated with revenue and inventory purchases, typically for up to 12 months. However, the Company may choose not
to hedge certain foreign exchange exposures for a variety of reasons including, but not limited to, accounting considerations or the prohibitive
economic cost of hedging particular exposures.
Actual future gains and losses associated with
the Company’s investment portfolio, debt and derivative positions may differ materially from the sensitivity analyses performed
as of September 30, 2022 due to the inherent limitations associated with predicting the timing and amount of changes in interest
rates, foreign currency exchange rates and the Company’s actual exposures and positions.
Item 8. Financial Statements and Supplementary Data.
FINANCIAL STATEMENTS
Separate
Report on the Audit of the Financial Statements
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders of Gushen, Inc
Opinion
on the Financial Statements
We
have audited the accompanying balance sheets of Gushen, Inc (the Company) as of September 30, 2022 and 2021, and the related statements
of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two-year period ended September,
2022, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations
and its cash flows for each of the years in the two-year period ended September 30, 2022, in conformity with accounting principles generally
accepted in the United States of America.
We also have audited, in accordance with the standards
of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting
as of September 30, 2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated October 4, 2023, expressed an adverse opinion.
Substantial
Doubt About the Company’s Ability to Continue as a Going Concern
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described
in Note 2 to the consolidated financial statements, the Company has working capital deficit and stockholders’ deficit that raise
doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note
2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion
is not modified with respect to this matter.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits
included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
Critical
Audit Matters
The
critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated
or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial
statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters
does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit
matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation
of Deferred Tax Assets
The
valuation of deferred tax assets was identified as a critical audit matter due to the significant judgment and estimation required by
management in determining the appropriate level of allowance. The determination of the valuation allowance is based on management’s assessment
of the likelihood of realizing the deferred tax asset in future periods, which requires consideration of various factors, including the
company’s historical and projected financial performance, the availability of tax planning strategies, and the expiration of tax attributes.
In addressing this critical audit matter, our audit procedures included, among others, assessing the reasonableness of management’s assumptions
and estimates used in determining the valuation allowance, testing the accuracy and completeness of the underlying data used in management’s
analysis. Based on the results of our audit procedures, we found the valuation allowance for the deferred tax asset to be appropriately
determined and the related disclosures to be adequate in accordance with the relevant accounting standards.
Impact
of Ineffective Control Environment
As
discussed in Management’s Annual Report on Internal Controls Over Financial Reporting, at September 30, 2022, management
identified that material weaknesses existed as of September 30, 2022, as the Company did not maintain an effective control environment.
Specifically, the control environment did not ensure that the Company’s employees engaged in conduct consistent with the Company’s
policies and internal rules.
We
identified the evaluation of the sufficiency of audit evidence in response to the material weakness as a critical audit matter. Evaluating
the sufficiency of the audit evidence obtained required especially subjective auditor judgement because of the material weakness identified
above.
The
following are the primary procedures we performed to address this critical audit matter:
| ● | We
applied significant auditor judgment to determine the nature and extent of procedures to
be performed over processes for which control reliance could or could not be placed on certain
key internal controls as a result of the material weakness. |
● | In
those areas where we were unable to rely on internal controls, we reflected the effect of
the material weakness in our assessment of risk, including |
| ● | Increased
the number of items selected to perform certain audit procedures. |
| ● | Lowered
the testing thresholds for investigating differences between recorded amounts and independent
expectations developed by us as relative to what we would have done if the Company’s
controls were designed and operating effectively; and |
| ● | Evaluated
the overall sufficiency of audit evidence obtained by assessing the results of procedures
performed. |
/s/ WWC, P.C. |
WWC,
P.C.
|
|
Certified
Public Accountants |
|
|
|
We have served as the Company’s auditor
since 2021. |
|
|
San Mateo, California |
|
|
October 4, 2023 |
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders of Gushen, Inc
Adverse
Opinion on Internal Control over Financial Reporting
We
have audited Gushen, Inc’s (the Company’s) internal control over financial reporting as of September 30, 2022, based on criteria
established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). In our opinion, because of the effect of the material weakness described in the following paragraph on the achievement
of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of September
30, 2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.
A
material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not
be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment.
| ● | Inadequate
income and cost verification process by the financial department: This weakness increases
the risk of revenue recognition errors and potential fraud. |
| ● | Ineffective
inventory management: This weakness increases the risk of errors in inventory valuation
and potential misappropriation of assets. |
| ● | Taxation
discrepancies: The discrepancy between the declared tax revenue amount and the actual
revenue amount increases the risk of penalties for late payment and potential non-compliance
with tax regulations. |
| ● | The
control environment, which is the responsibility of senior management, helps set the tone
of the organization, influences the control consciousness of its officers and employees,
and is an important component affecting how the Company performs risk management, financial
analysis, accounting, and financial reporting. The Company did not maintain an effective
control environment primarily attributable to the following identified material weaknesses: |
| ● | The
Company’s management does not demonstrate a strong commitment to internal controls,
and there is a lack of accountability for control deficiencies. The Company does not have
the audit committee. |
| ● | There
is a risk of management override and inadequate segregation of duties due to the dual role
of the major shareholder as both CEO and CFO. This arrangement grants one individual total
authority and control over financial decisions and transactions. |
|
● |
Ineffective
control environment to provide employees with sufficient training on internal control procedures, and there is a lack of communication
regarding the importance of internal controls within the Company. This resulted in communication failures of relevant facts necessary
for the accounting group to properly conclude on transactions which led to doubtful accounting treatment of certain revenue transactions. |
| ● | The
Company did not have sufficient personnel with an appropriate level of knowledge, experience,
and training commensurate with the complexity of the transactions and the financial reporting
requirements. |
These material weaknesses were considered in determining
the nature, timing, and extent of audit tests applied in our audit of the 2022 financial statements, and this report does not affect our
report dated October 4, 2023, on those financial statements.
We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the balance sheets and the related statements of
income, comprehensive income, stockholders’ equity, and cash flows of the Company, and our report dated October 4, 2023, expressed
an unqualified opinion.
Basis
for Opinion
The Company’s management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit
of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
Definition
and Limitations of Internal Control over Financial Reporting
A
company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
/s/ WWC, P.C. |
WWC, P.C. | |
San Mateo, California |
| |
October 4, 2023, | |
GUSHEN, INC.
CONSOLIDATED BALANCE SHEETS
(In U.S. dollars except Number of Shares)
| |
September 30, | | |
September 30, | |
| |
2022 | | |
2021 | |
ASSETS | |
| | |
| |
CURRENT ASSETS | |
| | |
| |
Cash and cash equivalents | |
$ | 841,686 | | |
$ | 2,659,116 | |
Other monetary funds | |
| 25,933 | | |
| 506 | |
Prepayment | |
| 452,425 | | |
| 618,325 | |
Other receivables | |
| 140,738 | | |
| 198,656 | |
Due from related parties | |
| 23,297 | | |
| 51,276 | |
Inventory | |
| 91 | | |
| 414,063 | |
Total Current Assets | |
| 1,484,170 | | |
| 3,941,942 | |
| |
| | | |
| | |
NON-CURRENT ASSETS | |
| | | |
| | |
Other long-term assets | |
| 80,593 | | |
| 798,518 | |
Right of use assets | |
| 285,311 | | |
| - | |
Property, plant and equipment, net | |
| 145,766 | | |
| 217,365 | |
Intangible assets | |
| 56,793 | | |
| 73,183 | |
Deferred tax asset | |
| - | | |
| 1,922,113 | |
Total non-Current Assets | |
| 568,463 | | |
| 3,011,179 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 2,052,633 | | |
$ | 6,953,121 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES | |
| | | |
| | |
Accounts payable | |
$ | 2,258,779 | | |
$ | 2,368,900 | |
Lease Liability - current | |
| 130,598 | | |
| - | |
Contract liability | |
| 340,343 | | |
| 170,430 | |
Amount due to related parties | |
| 506 | | |
| 543 | |
Payroll payable | |
| 766,978 | | |
| 843,237 | |
Tax payable | |
| 5,502,085 | | |
| 5,918,303 | |
Other payable | |
| 332,781 | | |
| 13,892 | |
Estimated Liabilities | |
| 3,434,651 | | |
| | |
Total Current Liabilities | |
| 12,766,721 | | |
| 9,315,305 | |
| |
| | | |
| | |
NON-CURRENT LIABILITIES | |
| | | |
| | |
Lease Liability - non-current | |
| 154,713 | | |
| - | |
Total non-Current Liabilities | |
| 154,713 | | |
| - | |
| |
| | | |
| | |
TOTAL LIABILITIES | |
| 12,921,434 | | |
| 9,315,305 | |
| |
| | | |
| | |
COMMITMENTS AND CONTINGENCIES | |
| | | |
| | |
STOCKHOLDERS’ DEFICIT | |
| | | |
| | |
Preferred stock, par value $0.0001, 1,000,000 shares authorized, 1,000,000 shares issued and outstanding as of September 30, 2022 and 1,000,000 shares issued and outstanding as of September 30, 2021* | |
| 100 | | |
| 100 | |
Common stock, Par Value $0.0001, 600,000,000 shares authorized, 410,618,750 shares issued and outstanding as of September 30, 2022 and 410,618,750 shares issued and outstanding as of September 30, 2021* | |
| 41,062 | | |
| 41,062 | |
Additional paid-in capital | |
| 40,498 | | |
| 40,498 | |
Statutory reserve | |
| 1,545 | | |
| 1,545 | |
Accumulated deficits | |
| (12,080,418 | ) | |
| (2,607,865 | ) |
Accumulated other comprehensive gain | |
| 1,129,337 | | |
| 163,360 | |
| |
| | | |
| | |
Non-controlling interest | |
| (925 | ) | |
| (884 | ) |
Total Stockholders’ Deficit | |
| (10,868,801 | ) | |
| (2,362,184 | ) |
| |
| | | |
| | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | |
$ | 2,052,633 | | |
$ | 6,953,121 | |
The accompanying notes are an integral part of
these consolidated financial statements.
GUSHEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(In U.S. dollars except Number of Shares)
| |
For The Years Ended
September 30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
REVENUE | |
$ | 2,407,402 | | |
$ | 1,928,456 | |
| |
| | | |
| | |
COST OF REVENUE | |
| (1,458,804 | ) | |
| (1,203,532 | ) |
| |
| | | |
| | |
GROSS PROFIT | |
| 948,598 | | |
| 724,924 | |
| |
| | | |
| | |
OPERATING EXPENSES | |
| | | |
| | |
Selling expenses | |
| 3,365,426 | | |
| 9,032,933 | |
General and administrative expenses | |
| 1,443,045 | | |
| 1,963,374 | |
Total Operating Expenses, net | |
| 4,808,471 | | |
| 10,996,307 | |
| |
| | | |
| | |
LOSS FROM OPERATIONS | |
| (3,859,873 | ) | |
| (10,271,383 | ) |
| |
| | | |
| | |
OTHER INCOME (EXPENSE), NET | |
| | | |
| | |
Interest income | |
| 4,222 | | |
| 20,950 | |
Other income | |
| 9,160 | | |
| 18,083 | |
Other expense | |
| (3,730,716 | ) | |
| (442,701 | ) |
Total Other Income (Expense), net | |
| (3,717,334 | ) | |
| (403,668 | ) |
| |
| | | |
| | |
NET (LOSS) INCOME BEFORE TAXES | |
| (7,577,207 | ) | |
| (10,675,051 | ) |
| |
| | | |
| | |
Income tax benefit (expense) | |
| (1,895,387 | ) | |
| 760,013 | |
| |
| | | |
| | |
NET LOSS | |
| (9,472,594 | ) | |
| (9,915,038 | ) |
| |
| | | |
| | |
Less: Net loss attributable to non-controlling interests | |
| (41 | ) | |
| (884 | ) |
| |
| | | |
| | |
NET LOSS ATTRIBUTE TO THE COMPANY’S SHAREHOLDERS | |
| (9,472,553 | ) | |
| (9,914,154 | ) |
| |
| | | |
| | |
OTHER COMPREHENSIVE INCOME (LOSS) | |
| | | |
| | |
Foreign currency translation adjustment | |
| 965,977 | | |
| 308,685 | |
| |
| | | |
| | |
COMPREHENSIVE LOSS | |
$ | (8,506,617 | ) | |
$ | (9,606,353 | ) |
| |
| | | |
| | |
Basic and diluted loss per share* | |
$ | (0.02 | ) | |
$ | (0.02 | ) |
| |
| | | |
| | |
Weighted average number of common shares outstanding – basic and diluted* | |
| 410,618,750 | | |
| 410,618,750 | |
The accompanying notes are an integral part of
these interim condensed consolidated financial statements.
GUSHEN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ DEFICIT
(In U.S. dollars except Number of Shares)
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Accumulated | | |
| | |
| |
| |
| | |
| | |
| | |
| | |
Additional | | |
| | |
| | |
other | | |
Non- | | |
Total | |
| |
Preferred
Stock | | |
Common
Stock | | |
Paid-in | | |
Statutory | | |
Accumulated | | |
comprehensive | | |
controlling | | |
Stockholders’ | |
| |
Shares | | |
Value | | |
Shares | | |
Value | | |
Capital | | |
reserves | | |
Deficits | | |
income
(loss) | | |
interests | | |
Deficit | |
Balance at September 30, 2021* | |
| 1,000,000 | | |
$ | 100 | | |
| 410,618,750 | | |
$ | 41,062 | | |
$ | 40,498 | | |
$ | 1,545 | | |
$ | (2,607,865 | ) | |
$ | 163,360 | | |
$ | (884 | ) | |
$ | (2,362,184 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (9,472,553 | ) | |
| | | |
| (41 | ) | |
| (9,472,594 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 965,977 | | |
| | | |
| 965,977 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at September 30, 2022 | |
| 10,000,000 | | |
$ | 100 | | |
| 410,618,750 | | |
$ | 41,062 | | |
$ | 40,498 | | |
$ | 1,545 | | |
$ | (12,080,418 | ) | |
$ | 1,129,337 | | |
$ | (925 | ) | |
$ | (10,868,801 | ) |
The accompanying notes are an integral part of
these consolidated financial statements.
GUSHEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. dollars)
| |
For The Years Ended September 30, | |
| |
2022
| | |
2021 | |
| |
| | |
| |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | |
| |
Net (loss) income | |
$ | (9,472,594 | ) | |
$ | (9,915,038 | ) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | |
| | | |
| | |
(Recovery) provision for doubtful accounts | |
| 5,655 | | |
| (276,786 | ) |
Inventory impairment | |
| 412,888 | | |
| (17,589 | ) |
Depreciation | |
| 78,169 | | |
| 114,675 | |
Amortization of prepaid expenses | |
| 725,041 | | |
| 2,184,590 | |
Estimated Liabilities | |
| 3,729,530 | | |
| - | |
Impairment of other long-term assets | |
| - | | |
| 2,607,214 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Other receivables | |
| 37,417 | | |
| 2,153,952 | |
Advances to suppliers | |
| 93,321 | | |
| (38,306 | ) |
Due from related party | |
| 25,266 | | |
| 64,393 | |
Deferred tax asset | |
| 1,895,387 | | |
| (760,013 | ) |
Inventory | |
| (4,680 | ) | |
| 62,235 | |
Right of use assets | |
| (309,806 | ) | |
| - | |
Accounts payable | |
| 116,742 | | |
| 39,131 | |
Contract liability | |
| 201,504 | | |
| (1,098,628 | ) |
Payroll payable | |
| 1,313 | | |
| 120,005 | |
Tax payables | |
| 138,449 | | |
| (3,196 | ) |
Other payables | |
| 347,653 | | |
| 13,467 | |
Due to related parties | |
| 15 | | |
| - | |
Lease liabilities- current & non-current | |
| 309,806 | | |
| - | |
Net cash used in operating activities | |
| (1,668,924 | ) | |
| (4,749,894 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | | |
| | |
Purchase of property and equipment | |
| (11,610 | ) | |
| (67,461 | ) |
Net cash used in investing activities | |
| (11,610 | ) | |
| (67,461 | ) |
| |
| | | |
| | |
NET CHANGE IN CASH AND CASH EQUIVALENTS | |
| (1,680,534 | ) | |
| (4,817,355 | ) |
| |
| | | |
| | |
EFFECT OF EXCHANGE RATE ON CASH | |
| (111,469 | ) | |
| 342,871 | |
| |
| | | |
| | |
CASH AT BEGINNING OF YEAR | |
$ | 2,659,622 | | |
$ | 7,134,106 | |
| |
| | | |
| | |
CASH AT END OF YEAR | |
$ | 867,619 | | |
$ | 2,659,622 | |
| |
| | | |
| | |
SUPPLEMENTAL CASH FLOW INFORMATION | |
| | | |
| | |
Cash paid during the years for: | |
| | | |
| | |
Income taxes | |
$ | - | | |
$ | - | |
Interest | |
$ | - | | |
$ | - | |
The accompanying notes are an integral part of
these interim condensed consolidated financial statements.
GUSHEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollars except Number of Shares)
1. ORGANIZATION AND BUSINESS
Gushen, Inc. (the “Company”)
was incorporated on March 9, 2015, in the state of Nevada.
On July 30, 2021, the Company, and Dyckmanst Limited, a company organized
under the laws of the British Virgin Islands (“Dyckmanst Limited”), and all shareholders of Dyckmanst Limited immediately
prior to the closing (collectively, the “Dyckmanst Limited Shareholders”, each, a “Dyckmanst Limited Shareholder”)
entered into a share exchange agreement (the “Share Exchange Agreement”), pursuant to which the Company acquired 100%
of the issued and outstanding equity securities of Dyckmanst Limited in exchange for 381,600,000 shares of common stock, par value $0.0001
per share (the “Common Stock”) of the Company (the “Share Exchange”). Immediately prior to the closing
of the Share Exchange, two existing holders of aggregated 30,000,000 shares of Series A preferred stock of the Company, par value $0.0001
per share (the “Preferred Stock”) delivered 29,000,000 shares of Preferred Stock to the Company for cancellation (“the
“Cancellation of Certain Preferred Stock”), each Preferred Stock is convertible into 10 shares of Common Stock. As
a result, immediately following the closing of the Share Exchange, there are 410,618,750 shares of Common Stock issued and outstanding
and 1,000,000 shares of Preferred Stock issued and outstanding. Dyckmanst Limited Shareholders collectively control 90.72% voting power
of the Company on as converted basis, with respect to all of the shares of common stock and preferred stock, voting as a single class,
with each share of common stock entitles to 1 vote and each share of preferred stock entitles to 10 votes.
Dyckmanst Limited, via the PRC affiliated entity
Zhuoxun Beijing, engages in providing family education resources to promote all-around education onsite in local communities organized
by its regional collaborative education agency and offering parents easy access to a wide variety of courses online through the application
In February 2021, Fengyuan Beijing, Zhuoxun Beijing, and the shareholders
of Zhuoxun Beijing entered into a series of contractual agreements for Zhuoxun Beijing to qualify as variable interest entity or VIE (the
“VIE Agreements”). The VIE Agreements are as follows:
Consulting Service Agreement
Pursuant to the terms of the Exclusive Consulting
and Service Agreement dated February 5, 2021, between Fengyuan Beijing and Zhuoxun Beijing (the “Consulting Service Agreement”),
Fengyuan Beijing is the exclusive consulting and service provider to Zhuoxun Beijing to provide business-related software research and
development services; design, installation, and testing services; network equipment support, upgrade, maintenance, monitor, and problem-solving
services; employees training services; technology development and sublicensing services; public relations services; market investigation,
research, and consultation services; short to medium term marketing plan-making services; compliance consultation services; marketing
events and membership related activities planning and organizing services; intellectual property permits; equipment and rental services;
and business-related management consulting services. Pursuant to the Consulting Service Agreement, the service fee is the remaining amount
after Zhuoxun Beijing’s profit before tax in the corresponding year deducts Zhuoxun Beijing’s losses, if any, in the previous
year, the necessary costs, expenses, taxes, and fees incurred in the corresponding year, and the withdraws of the statutory provident
fund. Zhuoxun Beijing agreed not to transfer its rights and obligations under the Consulting Service Agreement to any third party without
prior written consent from Fengyuan Beijing. In addition, Fengyuan Beijing may transfer its rights and obligations under the Consulting
Service Agreement to Fengyuan Beijing’s affiliates without Zhuoxun Beijing’s consent, but Fengyuan Beijing shall notify Zhuoxun
Beijing of such transfer. This Agreement is valid for a term of 10 years subject to any extension requested by Fengyuan Beijing unless
terminated by Fengyuan Beijing unilaterally prior to the expiration.
Business Operation Agreement
Pursuant to the terms of the Business Operation
Agreement dated February 5, 2021, among Fengyuan Beijing, Zhuoxun Beijing and the shareholders of Zhuoxun Beijing (the “Business
Operation Agreement”), Zhuoxun Beijing has agreed to subject the operations and management of its business to the control of
Fengyuan Beijing. According to the Business Operation Agreement, Zhuoxun Beijing is not allowed to conduct any transactions that has substantial
impact upon its operations, assets, rights, obligations and personnel without the Fengyuan Beijing’s written approval. The shareholders
of Zhuoxun Beijing and Zhuoxun Beijing will take Fengyuan Beijing’s advice on appointment or dismissal of directors, employment
of Zhuoxun Beijing’s employees, regular operation, and financial management of Zhuoxun Beijing. The shareholders of Zhuoxun Beijing
have agreed to transfer any dividends, distributions or any other profits that they receive as the shareholders of Zhuoxun Beijing to
Fengyuan Beijing without consideration. The Business Operation Agreement is valid for a term of 10 years or longer upon the request of
Fengyuan Beijing prior to the expiration thereof. The Business Operation Agreement might be terminated earlier by Fengyuan Beijing with
a 30-day written notice.
The foregoing summary of the Business Operation
Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the Business Operation Agreement, which
is filed as Exhibit 10.2 to this Form 8-K.
GUSHEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollars except Number of Shares)
Proxy Agreement
Pursuant to the terms of the Proxy Agreements
dated February 5, 2021, among Fengyuan Beijing, and the shareholders of Zhuoxun Beijing (each, the “Proxy Agreement”,
collectively, the “Proxy Agreements”), each shareholder of Zhuoxun Beijing has irrevocably entrusted his/her shareholder rights
as Zhuoxun Beijing’s shareholder to Fengyuan Beijing , including but not limited to, proposing the shareholder meeting, accepting
any notices with regard to the convening of shareholder meeting and any other procedures, conducting voting rights, and selling or transferring
the shares held by such shareholder, for 10 years or earlier if the Business Operation Agreement was terminated for any reasons.
The foregoing summary of the Proxy Agreements
does not purport to be complete and is subject to, and qualified in its entirety by, the Proxy Agreements, which are filed as Exhibit
10.3 to this Form 8-K.
Equity Disposal Agreement
Pursuant to the terms of the Equity Disposal Agreement
dated February 5, 2021, among Fengyuan Beijing, Zhuoxun Beijing, and the shareholders of Zhuoxun Beijing (the “Equity Disposal
Agreement”), the shareholders of Zhuoxun Beijing granted Fengyuan Beijing or its designees an irrevocable and exclusive purchase
option (the “Option”) to purchase Zhuoxun Beijing’s all or partial equity interests and/or assets at the lowest
purchase price permitted by PRC laws and regulations. The option is exercisable at any time at Fengyuan Beijing’s discretion in
full or in part, to the extent permitted by PRC law. The shareholders of Zhuoxun Beijing agreed to give Zhuoxun Beijing the total amount
of the exercise price as a gift, or in other methods upon Fengyuan Beijing’s written consent to transfer the exercise price to Zhuoxun
Beijing. The Equity Disposal Agreement is valid for a term of 10 years or longer upon the request of Fengyuan Beijing.
The foregoing summary of the Equity Disposal Agreement
does not purport to be complete and is subject to, and qualified in its entirety by, the Equity Disposal Agreement, which is filed as
Exhibit 10.4 to this Form 8-K.
Equity Pledge Agreement
Pursuant to the terms of the Equity Pledge Agreement
dated February 5, 2021, among Fengyuan Beijing and the shareholders of Zhuoxun Beijing (the “Pledge Agreement”), the
shareholders of Zhuoxun Beijing pledged all of their equity interests in Zhuoxun Beijing to Fengyuan Beijing, including the proceeds thereof,
to guarantee Zhuoxun Beijing’s performance of its obligations under the Business Operation Agreement, the Consulting Service Agreement
and the Equity Disposal Agreement (each, a “Agreement”, collectively, the “Agreements”). If Zhuoxun
Beijing or its shareholders breach its respective contractual obligations under any Agreements, or cause to occur one of the events regards
as an event of default under any Agreements, Fengyuan Beijing, as pledgee, will be entitled to certain rights, including the right to
dispose of the pledged equity interest in Zhuoxun Beijing. During the term of the Pledge Agreement, the pledged equity interests cannot
be transferred without Fengyuan Beijing’s prior written consent. The Pledge Agreements is valid until all the obligations due under
the Agreements have been fulfilled.
Based on these contractual arrangements, the Company
consolidates the VIE in accordance with SEC Regulation S-X Rule 3A-02 and Accounting Standards Codification (“ASC”)
topic 810 (“ASC 810”), Consolidation.
The accompanying consolidated financial statements reflect the activities
of each of the following entities:
Name |
|
Background |
|
Ownership |
Dyckmanst Limited |
|
● |
A British Virgin Islands company |
|
Holding Entity |
|
|
● |
Principal activities: Investment holding |
|
|
|
|
· |
|
|
|
Edeshler Limited |
|
● |
A Hong Kong company |
|
100% |
|
|
● |
Principal activities: Investment holding |
|
|
|
|
|
|
|
|
Beijing Fengyuan Zhihui Education Technology Co., Ltd. |
|
● |
A PRC limited liability company and deemed a wholly foreign-invested enterprise |
|
100% |
|
|
● |
Principal activities: Consultancy and information technology support |
|
|
|
|
|
|
|
|
Beijing Zhuoxun Century Culture Communication Co., Ltd. |
|
● |
A PRC limited liability company |
|
VIE by contractual |
|
|
● |
Incorporated on September 2, 2020 |
|
arrangements |
|
|
● |
Principal activities: family education services via online and onsite classes |
|
|
|
|
|
|
|
|
Beijing Zhuoxun Education Technology Co., Ltd. |
|
● |
A PRC limited liability company |
|
70% owned by VIE |
|
|
● |
Principal activities: promotion and support |
|
|
|
GUSHEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollars except Number of Shares)
The following combined financial information of
the Group’s VIEs as of for the year ended September 30, 2022 and 2021 included in the accompanying consolidated financial statements
of the Group was as follows:
| |
At | | |
At | |
| |
September 30, | | |
September 30, | |
| |
2022 | | |
2021 | |
CURRENT ASSETS | |
| | |
| |
Cash and cash equivalents | |
$ | 789,730 | | |
$ | 2,559,546 | |
Other monetary funds | |
| 25,933 | | |
| 506 | |
Prepayment | |
| 452,425 | | |
| 618,325 | |
Other receivables | |
| 127,339 | | |
| 183,900 | |
Intercompany receivables | |
| 171,655 | | |
| 189,021 | |
Due from related parties | |
| 23,297 | | |
| 51,276 | |
Inventory | |
| 91 | | |
| 414,063 | |
Total Current Assets | |
| 1,590,470 | | |
| 4,016,637 | |
| |
| | | |
| | |
NON-CURRENT ASSETS | |
| | | |
| | |
Other long-term assets | |
| 80,593 | | |
| 798,518 | |
Right of use assets | |
| 285,311 | | |
| | |
Property, plant and equipment, net | |
| 145,766 | | |
| 217,365 | |
Intangible assets | |
| 56,793 | | |
| 73,183 | |
Deferred tax asset | |
| - | | |
| 1,922,113 | |
Total non-Current Assets | |
| 568,463 | | |
| 3,011,179 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 2,158,933 | | |
$ | 7,027,816 | |
| |
| | | |
| | |
CURRENT LIABILITIES | |
| | | |
| | |
Accounts payable | |
$ | 2,258,779 | | |
$ | 2,368,900 | |
Lease Liability - current | |
| 130,598 | | |
| - | |
Contract liability | |
| 340,343 | | |
| 170,430 | |
Amount due to related parties | |
| 14 | | |
| 1 | |
Payroll payable | |
| 766,978 | | |
| 843,237 | |
Tax payable | |
| 5,502,085 | | |
| 5,918,303 | |
Other payable | |
| 332,781 | | |
| 13,892 | |
Estimated Liabilities | |
| 3,434,651 | | |
| - | |
Total Current Liabilities | |
| 12,766,229 | | |
| 9,314,763 | |
| |
| | | |
| | |
NON-CURRENT LIABILITIES | |
| | | |
| | |
Lease Liability - non-current | |
| 154,713 | | |
| - | |
Total Non -current Liabilities | |
| 154,713 | | |
| - | |
| |
| | | |
| | |
TOTAL LIABILITIES | |
$ | 12,920,942 | | |
$ | 9,314,763 | |
GUSHEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollars except Number of Shares)
| |
For The Years
Ended | |
| |
September 30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
REVENUE | |
| | |
| |
Training revenue | |
$ | 1,124,655 | | |
$ | 1,927,046 | |
Charge for use of brand | |
| 961,005 | | |
| - | |
Online sales | |
| 315,688 | | |
| - | |
Other revenue | |
| 6,054 | | |
| 1,410 | |
Total revenues | |
| 2,407,402 | | |
| 1,928,456 | |
| |
| | | |
| | |
NET (LOSS) INCOME | |
| (9,430,785 | ) | |
| (9,839,516 | ) |
| |
For The Years
Ended | |
| |
September 30, | |
| |
2022
| | |
2021 | |
Net cash used in operating activities | |
$ | (1,627,156 | ) | |
$ | (4,691,776 | ) |
Net cash provided by (used in) investing activities | |
| (11,610 | ) | |
| (67,461 | ) |
Net cash provided by financing activities | |
| - | | |
| - | |
The following combined financial information of
the Company and its subsidiaries as of for the year ended September 30, 2022 and 2021.
| |
At | | |
At | |
| |
September 30, | | |
September 30, | |
| |
2022 | | |
2021 | |
CURRENT ASSETS | |
| | |
| |
Cash and cash equivalents | |
$ | 51,956 | | |
$ | 99,570 | |
Other receivables | |
| 13,399 | | |
| 14,754 | |
Total Current Assets | |
| 65,355 | | |
| 114,324 | |
| |
| | | |
| | |
NON-CURRENT ASSETS | |
| | | |
| | |
Total non-Current Assets | |
| - | | |
| - | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 65,355 | | |
$ | 114,324 | |
| |
| | | |
| | |
CURRENT LIABILITIES | |
| | | |
| | |
Accounts payable | |
$ | | | |
$ | | |
Intercompany payable | |
| 171,655 | | |
| 189,021 | |
Amount due to related parties | |
| 492 | | |
| 542 | |
Total Current Liabilities | |
| 172,147 | | |
| 189,563 | |
| |
| | | |
| | |
TOTAL LIABILITIES | |
$ | 172,147 | | |
$ | 189,563 | |
GUSHEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollars except Number of Shares)
| |
For The Years Ended September 30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
REVENUE | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
COST OF REVENUE | |
| - | | |
| - | |
| |
| | | |
| | |
GROSS PROFIT | |
| - | | |
| - | |
| |
| | | |
| | |
OPERATING EXPENSES | |
| | | |
| | |
Selling expenses | |
| | | |
| | |
General and administrative expenses | |
| 42,058 | | |
| 75,125 | |
Total Operating Expenses, net | |
| 42,058 | | |
| 75125 | |
| |
| | | |
| | |
LOSS FROM OPERATIONS | |
| (42,058 | ) | |
| (75,125 | ) |
| |
| | | |
| | |
OTHER INCOME (EXPENSE), NET | |
| | | |
| | |
Interest income | |
| 290 | | |
| 487 | |
Total Other Income (Expense), net | |
| 290 | | |
| 487 | |
| |
| | | |
| | |
NET (LOSS) INCOME BEFORE TAXES | |
| (41,768 | ) | |
| (74,638 | ) |
| |
| | | |
| | |
Income tax benefit (expense) | |
| - | | |
| - | |
| |
| | | |
| | |
NET LOSS | |
| (41,768 | ) | |
| (74,638 | ) |
| |
| | | |
| | |
Less: Net loss attributable to non-controlling interests | |
| - | | |
| - | |
| |
| | | |
| | |
NET LOSS ATTRIBUTE TO THE COMPANY’S SHAREHOLDERS | |
| (41,768 | ) | |
| (74,638 | ) |
| |
| | | |
| | |
OTHER COMPREHENSIVE INCOME (LOSS) | |
| | | |
| | |
Foreign currency translation adjustment | |
| 3,302 | | |
| (586 | ) |
| |
| | | |
| | |
COMPREHENSIVE LOSS | |
$ | (38,466 | ) | |
$ | (75,224 | ) |
Basic and diluted loss per share* | |
$ | 0 | | |
$ | 0 | |
| |
| | | |
| | |
Weighted average number of common shares outstanding – basic and diluted* | |
| 410,618,750 | | |
| 410,618,750 | |
GUSHEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollars except Number of Shares)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”)
Going Concern
The accompanying condensed consolidated financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent
on, among other things, the Company’s ability to operate profitably, to generate cash flows from operations, and to pursue financing
arrangements to support its working capital requirements.
In assessing the Company’s liquidity, the
Company monitors and analyzes its cash and cash equivalents and its operating and capital expenditure commitments. The Company’s
liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure obligations. As of September
30, 2022, the Company’s current liabilities exceeded the current assets by $11,282,551, its accumulated deficit was $12,080,418 and
the Company has incurred losses during the year ended September 30, 2022 and 2021. None of the Company’s stockholders, officers
or directors, or third parties, are under any obligation to advance us funds, or to invest in us. Accordingly, we may not be able to obtain
additional financing. If we are unable to raise additional capital, we may be required to take additional measures to conserve liquidity,
which could include, but not necessarily be limited to, curtailing operations, suspending the pursuit of our business plan, and reducing
overhead expenses. We cannot provide any assurance that new financing will be available to us on commercially acceptable terms, if at
all.
In evaluating if there is substantial doubt about
the ability to continue as a going concern, the Company are trying to alleviate the going concern risk through (1) increasing cash generated
from operations by controlling operating expenses and increasing more online and offline training sessions to bring in more training revenue,
(2) financing from domestic banks and other financial institutions, and (3) equity or debt financing. The Company has certain plans to
mitigate these adverse conditions and to increase the liquidity.
On an on-going basis, the Company will also receive
financial support commitments from the Company’s related parties.
These conditions raise substantial doubt about
our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company
be unable to continue as a going concern.
Use of Estimates
The preparation of these consolidated financial
statements in conformity with U.S. GAAP requires management of the Company to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues, costs and expenses, and related disclosures. On an on-going basis, the Company evaluates its estimates
based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different assumptions or conditions. Identified below are the accounting
policies that reflect the Company’s most significant estimates and judgments, and those that the Company believes are the most critical
to fully understanding and evaluating its consolidated financial statements.
GUSHEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollars except Number of Shares)
COVID-19 Outbreak
In March 2020 the World Health Organization
declared coronavirus COVID-19 a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, workforces, customers,
and created significant volatility and disruption of financial markets. It has also disrupted the normal operations of many businesses,
including ours. This outbreak could decrease spending, adversely affect demand for our services and harm our business and results of operations.
It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak and its effects on our business
or results of operations at this time.
Revenue Recognition
The Company recognizes revenues when its customer
obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange
for those goods or services. The Company recognizes revenues following the five step model prescribed under ASU No. 2014-09: (i) identify
contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate
the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) the Company satisfies the
performance obligation.
Revenues are recognized when control of the promised
goods or services is transferred to our customers, which may occur at a point in time or over time depending on the terms and conditions
of the agreement, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The Company identified the following performance obligations for each
type of contract:
Training Revenue
The Company’s offline training course service
primarily includes assigning instructors, providing offline classes and presenting training materials to the course participants who attend
the classes. The series of tasks as discussed above are interrelated and are not separable or distinct as the clients cannot benefit from
the standalone task.
The Company’s online training course service
primarily includes coursewares or videos which are already published on the website. Other than providing the access, there are no bundle
or multiple separable and distinct tasks.
According to ASC 606-10-25-19, there is one performance
obligation for the training course service.
Charge for use of brand
The Company authorized other enterprises or individuals
to use the Company’s brand, providing services to customers at their location, with a brand usage fee. Revenue was recognized when such
events using the Company’s brand are completed.
Online sales
The Company provides goods, mostly household items,
to customers on its online sales platform. Revenue is comprised of sales of goods and represents the amount of consideration the Company
is entitled to upon the transfer of goods. Revenue was recorded on a gross basis, net of surcharges and value added tax (“VAT”)
of gross sales. The Company recorded revenue on a gross basis because the Company is the primary obligor of the sales arrangements has
latitude in establishing prices, has discretion in suppliers’ selection and assumes credit risks on receivables on gross sales from
customers.
Other revenues include sales of anti-addiction
mobile phone device and other revenues. The amount was immaterial compared to total revenue during the year ended September 30, 2022 and
2021.
GUSHEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollars except Number of Shares)
Practical expedients and exemption
The company has not occurred any costs to obtain
contracts, and does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one
year or less.
Other service income is earned when services have
been rendered.
Revenue by major product line
| |
For The Years Ended | |
| |
September 30, | |
| |
2022
| | |
2021 | |
| |
| | |
| |
Training revenue | |
$ | 1,124,655 | | |
$ | 1,927,046 | |
Charge for use of brand | |
| 961,005 | | |
| - | |
Online sales | |
| 315,688 | | |
| - | |
Other revenue | |
| 6,054 | | |
| 1,410 | |
Total Revenue | |
$ | 2,407,402 | | |
$ | 1,928,456 | |
Income Taxes
We account for income taxes using the liability
method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting
and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected
to reverse. The Company records a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is
more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change
in tax rates is recognized in income in the period that includes the enactment date.
We
apply ASC 740, Accounting for Income Taxes, to account for uncertainty in income taxes and the evaluation of a tax position is
a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination,
including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure
a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements.
A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate
settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first
subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria
should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.
GUSHEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollars except Number of Shares)
Foreign
Currency and Foreign Currency Translation
The
functional currency of the Company is the United States dollar (“US dollar”). The Company’s subsidiary and VIEs with
operations in PRC uses the local currency, the Chinese Yuan (“RMB”), as their functional currencies. An entity’s functional
currency is the currency of the primary economic environment in which it operates, normally that is the currency of the environment in
which the entity primarily generates and expends cash. Management’s judgment is essential to determine the functional currency
by assessing various indicators, such as cash flows, sales price and market, expenses, financing and inter-company transactions and arrangements.
Foreign
currency transactions denominated in currencies other than the functional currency are translated into the functional currency using
the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at
the balance sheet date are re-measured at the applicable rates of exchange in effect at that date. Gains and losses resulting from foreign
currency re-measurement are included in the statements of comprehensive loss.
The
consolidated financial statements are presented in U.S. dollars. Assets and liabilities are translated into U.S. dollars at the current
exchange rate in effect at the balance sheet date, and revenues and expenses are translated at the average of the exchange rates in effect
during the reporting period. Stockholders’ equity accounts are translated using the historical exchange rates at the date the entry
to stockholders’ equity was recorded, except for the change in retained earnings during the period, which is translated using the
historical exchange rates used to translate each period’s income statement. Differences resulting from translating functional currencies
to the reporting currency are recorded in accumulated other comprehensive income in the consolidated balance sheets.
Translation
of amounts from RMB into U.S. dollars has been made at the following exchange rates:
Balance sheet
items, except for equity accounts |
|
|
September 30, 2022 |
|
RMB7.1099 to $1 |
September 30, 2021 |
|
RMB6.4567 to $1 |
|
|
|
Income statement and cash
flows items |
|
|
For the year ended September
30, 2022 |
|
RMB6.5477 to $1 |
For the year ended September
30, 2021 |
|
RMB6.5074 to $1 |
Cash
and Cash Equivalents
Cash
and cash equivalents consist of cash on hand and at banks and highly liquid investments, which are unrestricted from withdrawal or use,
and which have original maturities of three months or less when purchased.
Other
monetary funds
Other
monetary funds consist of cash deposited in financial institutions other than banks.
Accounts
Receivable, Net
The
carrying value of accounts receivable is reduced by an allowance that reflects the Company’s best estimate of the amounts that
will not be collected. The Company makes estimations of the collectability of accounts receivable. Many factors are considered in estimating
the general allowance, including reviewing delinquent accounts receivable, performing an aging analysis and a customer credit analysis,
and analyzing historical bad debt records and current economic trends.
The
adoption of the new revenue standards did not change the Company’s historical accounting methods for its accounts receivable.
GUSHEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollars except Number of Shares)
Long-Lived
Assets
Long-lived
assets consist primarily of property, plant and equipment and intangible assets.
Property,
plant and equipment
Property,
plant and equipment are recorded at cost less accumulated depreciation and accumulated impairment. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets.
| |
Estimated useful lives (years) | |
Office and computer equipment | |
| 5 | |
Leasehold improvement | |
| 3 | |
Transportation equipment | |
| 5 | |
Expenditure
for maintenance and repairs is expensed as incurred.
The
gain or loss on the disposal of property, plant and equipment is the difference between the net sales proceeds and the lower of the carrying
value or fair value less cost to sell the relevant assets and is recognized in general and administrative expenses in the consolidated
statements of comprehensive loss.
Intangible
Assets
Intangible
assets mainly comprise domain names and trademarks. Intangible assets are recorded at cost less accumulated amortization with no residual
value. Amortization of intangible assets is computed using the straight-line method over their estimated useful lives.
The
estimated useful lives of the Company’s intangible assets are listed below:
| |
Estimated useful lives (years) | |
Software | |
| 10 | |
Impairment
of Long-lived Assets
In
accordance with ASC 360-10-35, the Company reviews the carrying values of long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying value of an asset may not be recoverable. Based on the existence of one or more indicators
of impairment, the Company measures any impairment of long-lived assets using the projected discounted cash flow method at the asset
group level. The estimation of future cash flows requires significant management judgment based on the Company’s historical results
and anticipated results and is subject to many factors. The discount rate that is commensurate with the risk inherent in the Company’s
business model is determined by its management. An impairment loss would be recorded if the Company determined that the carrying value
of long-lived assets may not be recoverable. The impairment to be recognized is measured by the amount by which the carrying values of
the assets exceed the fair value of the assets. No impairment has been recorded by the Company as of September 30, 2022 and September
30, 2021.
Lease
Under
ASC Topic 842, lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement
date. The interest rate used to determine the present value of the future lease payments is the Company’s incremental borrowing
rate based on the information available at the lease commencement date. The Company generally uses the base, non-cancellable lease term
in calculating the right-of-use assets and lease liabilities.
GUSHEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollars except Number of Shares)
The
Company may recognize the lease payments in the unaudited interim condensed consolidated statements of income on a straight-line basis
over the lease terms and variable lease payments in the periods in which the obligations for those payments are incurred, if any. The
lease payments under the lease arrangements are fixed.
The
Company elected the practical expedients for an entity ongoing accounting and applied the short-term lease exception for lease arrangements
with a lease term of 12 months or less at commencement. Lease terms used to compute the present value of lease payments do not include
any option to extend, renew or terminate the lease that the Company is not able to reasonably certain to exercise upon the lease inception.
Accordingly, operating lease right-of-use assets and liabilities do not include leases with a lease term of 12 months or less.
The
Company did not adopt the practical expedient that allows lessees to treat the lease and non-lease components of a lease as a single
lease component. Non-lease components include payments for building management, utilities and property tax. It separates the non-lease
components from the lease components to which they relate.
The
Company’s accounting for finance lease (formerly called capital lease) remains substantially unchanged. ASC Topic 842 adoption
did not have a material impact on the Company’s consolidated financial statements. Oh the other hand, operating lease expense is
recognized on a straight-line basis over the lease term.
The
Company evaluates the impairment of its ROU assets consistent with the approach applied for its other long-lived assets. The Company
reviews the recoverability of its long-lived assets when events or changes in circumstances occur that indicate that the carrying value
of the asset may not be recoverable. The assessment of possible impairment is based on its ability to recover the carrying value of the
asset from the expected undiscounted future pre-tax cash flows of the related operations. The Company has elected to include the carrying
amount of finance and operating lease liabilities in any tested asset group and include the associated lease payments in the undiscounted
future pre-tax cash flows. For the years ended September 30, 2022 and 2021, the Company did not have any impairment loss against its
operating lease ROU assets.
Credit
risk
Financial
instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents.
As of September 30, 2022, and September 30, 2021, substantially all of the Company’s cash and cash equivalents were held by major
financial institutions located in the PRC, which management believes are of high credit quality.
For
the credit risk related to trade accounts receivable, the Company performs ongoing credit evaluations of its customers and, if necessary,
maintains reserves for potential credit losses. Historically, such losses have been within management’s expectations.
Segments
The
Company evaluates a reporting unit by first identifying its operating segments, and then evaluates each operating segment to determine
if it includes one or more components that constitute a business. If there are components within an operating segment that meets the
definition of a business, the Company evaluates those components to determine if they must be aggregated into one or more reporting units.
If applicable, when determining if it is appropriate to aggregate different operating segments, the Company determines if the segments
are economically similar and, if so, the operating segments are aggregated. The Company has only one major reportable segment in the
periods presented.
GUSHEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollars except Number of Shares)
Fair
Value of Financial Instruments
U.S.
GAAP establishes a three-tier hierarchy to prioritize the inputs used in the valuation methodologies in measuring the fair value of financial
instruments. This hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. The three-tier fair value hierarchy is:
Level
1 – observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level
2 – include other inputs that are directly or indirectly observable in the market place.
Level
3 – unobservable inputs which are supported by little or no market activity.
The
carrying value of the Company’s financial instruments, including cash and cash equivalents, accounts and other receivables, other
current assets, accounts and other payables, and other short-term liabilities approximate their fair value due to their short maturities.
In
accordance with ASC 825, for investments in financial instruments with a variable interest rate indexed to performance of underlying
assets, the Company elected the fair value method at the date of initial recognition and carried these investments at fair value. Changes
in the fair value are reflected in the accompanying condensed consolidated statements of operations and comprehensive loss as other income
(expense). To estimate fair value, the Company refers to the quoted rate of return provided by banks at the end of each period using
the discounted cash flow method. The Company classifies the valuation techniques that use these inputs as Level 2 of fair value measurements.
As
of September 30, 2022 and September 30, 2021, the Company had no investments in financial instruments.
Restricted
assets
The
Company’s PRC subsidiary and VIE are restricted in their ability to transfer a portion of their net assets to the Company. The
payment of dividends by entities organized in China is subject to limitations, procedures and formalities. Regulations in the PRC currently
permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in
China. The Company’s PRC subsidiary and its VIE are also required to set aside at least 10% of its after-tax profit based on PRC
accounting standards each year to its statutory reserves account until the accumulative amount of such reserves reaches 50% of its respective
registered capital. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends.
In
addition, the Company’s operations are conducted and revenues are generated in China, and all of the Company’s revenues earned
and currency received are denominated in RMB. RMB is subject to the foreign exchange control regulation in China, and, as a result, the
Company may be unable to distribute any dividends outside of China due to PRC foreign exchange control regulations that restrict the
Company’s ability to convert RMB into U.S. dollars.
Recent
Accounting Pronouncements
Accounting
Pronouncements Issued But Not Yet Adopted
Financial
Instruments. In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses
(Topic 326)” (“ASU 2016-13”). ASU 2016-13 revises the methodology for measuring credit losses on financial
instruments and the timing of when such losses are recorded. Originally, ASU 2016-13 was effective for fiscal years, and for interim
periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. In November 2019, FASB issued
ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic
842).” This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies
as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The
Company is planning to adopt this standard in the first quarter of fiscal 2023.The Company is currently evaluating the potential
effects of adopting the provisions of ASU No. 2016-13 on its consolidated financial statements.
Income
Taxes. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which
modifies and eliminates certain exceptions to the general principles of ASC 740, Income Taxes. This standard will be effective for King
Eagle beginning September 30, 2021. We are currently evaluating the impact of the standard on our consolidated financial statements.
GUSHEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollars except Number of Shares)
Codification
Improvements: In October 2020, the FASB issued ASU 2020-10, “Codification Improvements”. The amendments in this Update
represent changes to clarify the Codification or correct unintended application of guidance that are not expected to have a significant
effect on current accounting practice or create a significant administrative cost to most entities. The amendments in this Update affect
a wide variety of Topics in the Codification and apply to all reporting entities within the scope of the affected accounting guidance.
ASU 2020-10 is effective for the Company for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning
after December 15, 2022. The amendments in this Update should be applied retrospectively. The Company does not expect the adoption of
this standard to have a material impact on its consolidated financial statements.
Except
for the above-mentioned pronouncements, there are no new recent issued accounting standards that will have material impact on the consolidated
financial position, statements of operations and cash flows.
3.
PREPAYMENTS
Prepayments
consist of the following:
| |
September 30, 2022 | | |
September 30, 2021 | |
Prepaid marketing fee | |
$ | 160,252 | | |
$ | 193,443 | |
Prepaid service fee | |
| 284,928 | | |
| 388,125 | |
Prepaid rent | |
| 7,245 | | |
| 36,757 | |
| |
$ | 452,425 | | |
$ | 618,325 | |
4.
OTHER RECEIVABLES
Other
receivables consist of the following:
Amount
due from agents is mainly the payment collected by the agents from the trainees on behalf of the Company. Agents provide various services
to facilitate the in-person training seminars scheduled by the Company.
| |
September 30, 2022 | | |
September 30, 2021 | |
Amount due from third parties | |
| 33,459 | | |
| 140,996 | |
Amount due from employees | |
| 36,500 | | |
| 38,107 | |
Deposit & guarantee | |
| 86,684 | | |
| 30,388 | |
Others | |
| 17,269 | | |
| 19,961 | |
| |
$ | 173,912 | | |
$ | 229,452 | |
Less: allowance for doubtful accounts | |
| (33,175 | ) | |
| (30,796 | ) |
| |
$ | 140,738 | | |
$ | 198,656 | |
The
following table sets forth the movement of allowance for doubtful accounts:
| |
September 30, 2022 | | |
September 30, 2021 | |
Beginning | |
$ | 30,796 | | |
$ | 294,063 | |
Additions | |
| 5,655 | | |
| 30,556 | |
Write off bad debt | |
| - | | |
| (307,441 | ) |
Exchange rate difference | |
| (3,276 | ) | |
| 13,618 | |
Balance | |
$ | 33,175 | | |
$ | 30,796 | |
GUSHEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollars except Number of Shares)
5.
INVENTORY
The
company’s sole inventory is the anti-addiction cell phone which has primarily four functions including anti-addiction, myopia prevention,
security, and study assistance, for the purpose of managing elementary and middle school students.
| |
September 30, 2022 | | |
September 30, 2021 | |
Cost | |
$ | 383,252 | | |
$ | 417,278 | |
Less: provision for inventory | |
| (383,161 | ) | |
| (3,215 | ) |
Net amount | |
$ | 91 | | |
$ | 414,063 | |
The
following table sets forth the movement of provision for the inventory:
| |
September 30, 2022 | | |
September 30, 2021 | |
Beginning | |
$ | 3,215 | | |
$ | 19,881 | |
Additions | |
| 412,888 | | |
| - | |
Charge-offs | |
| - | | |
| (17,589 | ) |
Exchange rate difference | |
| (32,942 | ) | |
| 923 | |
Balance | |
$ | 383,161 | | |
$ | 3,215 | |
6.
OTHER LONG-TERM ASSETS
Other
long-term assets consist of the following:
The
prepaid marketing fees are mainly for the two-year marketing service provided by different agents which the Company has signed contracts
with.
| |
September 30, 2022 | | |
September 30, 2021 | |
Prepaid marketing fee | |
$ | - | | |
$ | 733,665 | |
Prepaid service fee | |
| 80,593 | | |
| 64,853 | |
| |
$ | 80,593 | | |
$ | 798,518 | |
GUSHEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollars except Number of Shares)
7.
PROPERTY, PLANT AND EQUIPMENT, NET
Property,
plant and equipment, net consist of the following:
| |
September 30, 2022 | | |
September 30, 2021 | |
Office and computer equipment | |
$ | 280,163 | | |
$ | 378,818 | |
Leasehold improvement | |
| 120,255 | | |
| 132,421 | |
Transportation equipment | |
| 74,544 | | |
| - | |
Less: Accumulated depreciation | |
| (329,196 | ) | |
| (293,874 | ) |
| |
$ | 145,766 | | |
$ | 217,365 | |
Depreciation
expenses charged to the statements of operations for the year ended September 30, 2022 and 2021 were $67,672 and $104,460, respectively.
8.
INTANGIBLE ASSETS, NET
Intangible
assets, net, consist of the following:
| |
September 30, 2022 | | |
September 30, 2021 | |
Software | |
$ | 96,668 | | |
$ | 106,448 | |
Less: Accumulated amortization | |
| (39,875 | ) | |
| (33,265 | ) |
| |
$ | 56,793 | | |
$ | 73,183 | |
Amortization
charged to the statements of operations for the year ended September 30, 2022 and 2021 were $10,497 and $10,562, respectively.
9.
LEASE
With
the adoption of the new leasing standard, the Company has recorded a right-of-use asset and corresponding lease liability, by calculating
the present value of future lease payments, discounted at 3.76% (weighted average rate for operating leases), the Company’s incremental
borrowing rate, over the expected term.
Supplemental
balance sheet information related to operating leases and finance leases was as follows:
| |
As of September 30, | |
| |
2022 | | |
2021 |
Right-of-use assets | |
$ | 285,311 | | |
$ | - | |
Operating lease | |
| 285,311 | | |
| - | |
Lease liabilities - current | |
| 130,598 | | |
| - | |
Operating lease | |
| 130,598 | | |
| - | |
Lease liabilities – non-current | |
| 154,713 | | |
| - | |
Operating lease | |
| 154,713 | | |
| - | |
Total lease liabilities | |
$ | 285,311 | | |
$ | - | |
GUSHEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollars except Number of Shares)
The
following is a schedule, by years, of maturities of lease liabilities as of September 30, 2022:
|
|
Operating Leases | |
FY2023 | |
$ | 156,484 | |
FY2024 | |
| 136,702 | |
FY2025 | |
| - | |
FY2026 | |
| - | |
FY2027 | |
| - | |
Thereafter | |
| - | |
Total lease payments | |
| 293,186 | |
Less: Imputed interest | |
| 7,875 | |
Present value of lease liabilities | |
| 285,311 | |
Less: Current lease liabilities | |
| 130,598 | |
Long-term lease liabilities | |
| 154,713 | |
10.
ACCOUNTS PAYABLE
Accounts
payable consist of the following:
| |
September 30, 2022 | | |
September 30, 2021 | |
Amount due to agents | |
$ | 1,333,751 | | |
$ | 1,350,292 | |
Amount due to other service providers | |
| 925,028 | | |
| 1,018,608 | |
| |
$ | 2,258,779 | | |
$ | 2,368,900 | |
11.
CONTRACT LIABILITY
Contract
liability consist of the following:
| |
September 30, 2022 | | |
September 30, 2021 | |
Advance from customers | |
$ | 340,343 | | |
$ | 170,430 | |
| |
$ | 340,343 | | |
$ | 170,430 | |
GUSHEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollars except Number of Shares)
12.
BALANCES WITH RELATED PARTIES
| |
Note | | |
September 30, 2022 | | |
September 30, 2021 | |
Due from related parties | |
| | |
| | | |
| | |
Yulong Yi | |
(a) | | |
$ | 9,155 | | |
$ | 32,727 | |
Ru Zhang | |
(b) | | |
| 5,890 | | |
| 6,486 | |
Shaowei Peng | |
(c) | | |
| 8,252 | | |
| 12,063 | |
| |
| | |
$ | 23,297 | | |
$ | 51,276 | |
| |
| | |
| | | |
| | |
Due to related parties | |
| | |
| | | |
| | |
Yulong Yi | |
| | |
$ | 492 | | |
$ | 542 | |
Ru Zhang | |
| | |
| - | | |
| 1 | |
Shaowei Peng | |
| | |
| 14 | | |
| - | |
| |
| | |
$ | 506 | | |
$ | 543 | |
Amount
due from related parties are mainly cash in advance provided to the related parties by the Company. Amount due to related parties are
mainly the out-of-pocket expenses incurred by the related parties for working purpose which are to be reimbursed by the Company.
All
the above balances are due on demand, interest-free, unsecured and expected to be settled within one operating period.
13.
TAXES
Income
tax
The
Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity
is domiciled.
PRC
Tax
The
Company is subject to corporate income tax (“CIT”) at 25% for the year ended September 30, 2022 and 2021.
A
reconciliation of the income tax benefit determined at the statutory income tax rate to the Company’s income taxes is as follows:
| |
For The Year Ended
September 30, | |
| |
2022 | | |
2021 | |
Loss before income taxes | |
$ | (7,577,207 | ) | |
$ | (8,490,462 | ) |
PRC statutory income tax rate | |
| 25 | % | |
| 25 | % |
Income tax benefit computed at statutory corporate income tax rate | |
| (1,894,302 | ) | |
| (2,122,616 | ) |
Reconciling items: | |
| | | |
| | |
Non-deductible expenses | |
| 41,697 | | |
| 90,806 | |
Change in valuation allowance | |
| 3,747,992 | | |
| 1,271,797 | |
Income tax expenses/ (benefits) | |
$ | 1,895,387 | | |
$ | (760,013 | ) |
GUSHEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollars except Number of Shares)
Deferred
tax assets
The
tax effects of temporary differences that give rise to significant portions of the deferred tax asset and liability as of September 30,
2022 and September 30, 2021 are presented below:
| |
September 30, | | |
September 30, | |
| |
2022 | | |
2021 | |
Deferred tax asset: | |
| | | |
| | |
Bad debt provision | |
$ | 6,992 | | |
$ | 7,699 | |
Inventory provision | |
| 730 | | |
| 804 | |
Tax loss carryforward | |
| 1,740,308 | | |
| 1,916,369 | |
| |
| 1,748,030 | | |
| 1,924,872 | |
Deferred tax liability: | |
| | | |
| | |
Depreciation | |
$ | 2,505 | | |
$ | 2,759 | |
| |
| | | |
| | |
Less: Allowance of deferred tax asset | |
$ | 1,745,525 | | |
$ | - | |
Net amount | |
| - | | |
| 1,922,113 | |
Taxes
payable
Taxes
payable consisted of the following:
| |
September 30, | | |
September 30, | |
| |
2022 | | |
2021 | |
VAT tax payable | |
$ | 1,392,129 | | |
$ | 1,408,729 | |
Company income tax payable | |
| 1,916,238 | | |
| 2,110,094 | |
Individual income tax payable | |
| 2,019,295 | | |
| 2,223,544 | |
Other taxes payable | |
| 174,423 | | |
| 175,936 | |
Totals | |
$ | 5,502,085 | | |
$ | 5,918,303 | |
14.
CHINA CONTRIBUTION PLAN
The
Company participates in a government-mandated multi-employer defined contribution plan pursuant to which certain retirement, medical
and other welfare benefits are provided to employees. Chinese labor regulations require the Company to pay to the local labor bureau
a monthly contribution at a stated contribution rate based on the monthly compensation of qualified employees. The relevant local labor
bureau is responsible for meeting all retirement benefit obligations; the Company has no further commitments beyond their monthly contributions.
For the year ended September 30, 2022 and 2021, the Company contributed a total of $227,967 and $514,160, respectively, to these funds.
15.
SUBSEQUENT EVENT
The Company evaluated all events and transactions
that occurred after September 30, 2022 up through October 4, 2023. There were no other subsequent events occurred that would require recognition
or disclosure in the Company’s consolidated financial statements.
Item
9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
On
July 30, 2021, our board of directors dismissed BF Borgers CPA PC (“BF Borgers”) as our independent auditors and engaged WWC,
P.C., an Independent Registered Public Accounting Firm (“WWC”), to serve as our independent auditors.
BF
Borgers’ report dated September 17, 2020 on our audited financial statements for the fiscal years ended April 30, 2020 and 2019
did not contain an adverse opinion or a disclaimer of opinion nor was it qualified or modified as to uncertainty, audit scope or accounting
principles, except for a “going concern” uncertainty.
During
our two most recent fiscal years and the subsequent interim period through the date BF Borgers was dismissed, there were no disagreements
between us and BF Borgers on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to BF Borgers’ satisfaction, would have caused BF Borgers to make references to the subject
matter of the disagreement in connection with its reports.
During
our two most recent fiscal years and through the subsequent interim period through the date BF Borgers was dismissed, BF Borgers did
not advise us as to any reportable events as set forth in Item 304(a)(1)(v)(A) through (D) of Regulation S-K. Furthermore, during our
two most recent fiscal years, and the subsequent interim period prior to engaging WWC, we (nor anyone on our behalf) did not consult
WWC regarding either the application of accounting principles to a specified transaction, either completed or proposed; or the type of
audit opinion that might be rendered on our financial statements, and neither a written report was provided to us nor oral advice was
provided that WWC concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial
reporting issue; or any matter that was either the subject of a disagreement (as defined in paragraph (a)(1)(iv) of Item 304 of Regulation
S-K and the related instructions to this item) or a reportable event (as described in paragraph (a)(1)(v) of Item 304).
On
July 30, 2021, we acquired all of the capital stock of Dyckmanst Limited and assumed the operations of Dyckmanst Limited and its wholly
owned PRC subsidiary, Fengyuan Beijing, pursuant to a Share Exchange. Prior to the Share Exchange, WWC was the independent
accountants for Dyckmanst Limited and Fengyuan Beijing. Our board of directors determined that because our financial statements are tantamount
to the financial statements of Dyckmanst Limited and Fengyuan Beijing, for reasons of continuity, WWC should be appointed as our independent
registered public accounting firm.
During
our two most recent fiscal years and through the subsequent interim period through the date BF Borgers was dismissed, we have not consulted
with WWC regarding the application of accounting principles to a specified transaction, either completed or proposed, or any of the matters
or reportable events set forth in Item 304(a)(2)(ii)(A) through (D) of Regulation S-K. In addition, prior to the Share Exchange,
neither Dyckmanst Limited, nor any of its subsidiaries, consulted with BF Borgers as to any accounting or auditing matter.
We
have provided BF Borgers with a copy of the disclosures it is making in response to Item 304(a). We have requested and received from
BF Borgers a letter, dated July 30, 2021, addressed to the SEC stating whether BF Borgers agrees with the above statements.
In
connection with the Share Exchange, on December 9, 2021, our board of directors approved our Amended and Restated By-laws, changing the
end date of our fiscal year from April 30 to September 30.
Item
9A. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
As
required by Rule 13a-15 under the Exchange Act, our management has carried out an evaluation, with the participation and under the supervision
of our Chief Executive Officer and Chief Financial Officer which both positions are held by Mr. Yulong Yi, of the effectiveness of the
design and operation of our disclosure controls and procedures as of September 30, 2022. Disclosure controls and procedures refer to controls
and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such
information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate,
to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and
procedures.
Management concluded that our disclosure controls and procedures were
ineffective as of September 30, 2022 due to the material weaknesses in our internal control over financial reporting, which are described
below.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal
control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief
Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding
the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S.
GAAP, and includes those policies and procedures that:
| (1) | pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
| (2) | provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S.
GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors;
and |
| (3) | provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could
have a material effect on the financial statements. |
All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Our
management assessed the effectiveness of our internal control over financial reporting as of September 30, 2022. In making this assessment,
management used the framework set forth in the report entitled Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s
internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication,
and (v) monitoring. Based on our assessment, as a result of the material weaknesses described below, our Chief Executive Officer and Chief
Financial Officer determined that, as of September 30, 2022, our internal control over financial reporting was not effective because of
the following material weaknesses in our internal control over financial reporting has been identified:
| (1) | Inadequate
income and cost verification process by the financial department: This weakness increases the risk of revenue recognition errors and
potential fraud. |
| (2) | Ineffective
inventory management: This weakness increases the risk of errors in inventory valuation and potential misappropriation of assets. |
| (3) | Taxation
discrepancies: The discrepancy between the declared tax revenue amount and the actual revenue amount increases the risk of penalties
for late payment and potential non-compliance with tax regulations. |
| (4) | Lack
of an effective control environment: The control environment, which is the responsibility of senior management, helps set the tone of
the organization, influences the control consciousness of its officers and employees, and is an important component affecting how the
Company performs risk management, financial analysis, accounting, and financial reporting. The Company did not maintain an effective
control environment primarily attributable to the following identified material weaknesses: |
- The Company’s
management does not demonstrate a strong commitment to internal controls, and there is a lack of accountability for control deficiencies.
- There is
a risk of management override and inadequate segregation of duties due to the dual role of the major shareholder as both CEO and CFO.
This arrangement grants one individual total authority and control over financial decisions and transactions.
-
Ineffective control environment to provide employees with sufficient
training on internal control procedures, and there is a lack of communication regarding the importance of internal controls within the
Company. This resulted in communication failures of relevant facts necessary for the accounting group to properly conclude on transactions
which led to doubtful accounting treatment of certain revenue transactions.
- The Company
did not have sufficient personnel with an appropriate level of knowledge, experience, and training commensurate with the complexity of
the transactions and the financial reporting requirements.
| (5) | We
did not hold any formal board meetings or shareholders meetings during the last fiscal year; |
| (6) | We
do not have an audit committee. |
A
material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of our annual financial statements will not be prevented or detected in a timely basis.
We
plan to take steps to remediate these material weaknesses as soon as practicable by implementing a plan to improve our internal control
over financial reporting including, but not limited to, hiring additional staff and/or outside consultants experienced in US GAAP financial
reporting as well as in SEC reporting requirements. Our management team will continue to monitor and evaluate the effectiveness of our
internal controls and procedures and our internal controls over financial reporting on an ongoing basis and is committed to taking further
action and implementing additional enhancements or improvements.
Our
management does not believe that these material weaknesses had a material effect on our financial condition or results of operations
or caused our consolidated financial statements as of and for the year ended September 30, 2022 to contain a material misstatement.
Inherent
Limitations on Effectiveness of Controls
Management,
including our CEO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will
prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations
in all control systems, including the possibility of human error, the circumvention or overriding of controls, or fraud, no evaluation
of controls can provide absolute assurance that all control issues, misstatements, errors, and instances of fraud, if any, within our
organization have been or will be prevented or detected.
These
inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Controls also can be circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, internal controls
may become inadequate as a result of changes in conditions, or through the deterioration of the degree of compliance with policies or
procedures.
Item
9B. Other Information.
None.
Item
9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not
Applicable.
PART
III
Item
10. Directors, Executive Officers and Corporate Governance.
Executive
Officers and Directors
The
following table and text set forth the names and ages of all directors and executive officers as of the date of this Annual Report.
There
are no family relationships among our directors and executive officers. Each director is elected at our annual meeting of shareholders
and holds office until the next annual meeting of shareholders, or until his successor is elected and qualified. Also provided herein
are brief descriptions of the business experience of each director, executive officer and advisor during the past five years and an indication
of directorships held by each director in other companies subject to the reporting requirements under the Federal securities laws. None
of our officers or directors is a party adverse to us or has a material interest adverse to us.
Name |
|
Age |
|
Position |
Yulong Yi |
|
46 |
|
President, Chief Executive
Officer, Chief Financial Officer, Treasurer, Secretary, Chairman, Director |
Shaowei Peng |
|
45 |
|
Vice President, Chief Technology
Officer |
Mr.
Yulong Yi has served as the President, CEO and Chairman of Gushen, Inc. since July 2021. With more than a decade of management and executive
leadership experience, Mr. Yi founded Zhuoxun Beijing in August 2013, and has served as its CEO and Chairman ever since, supervising
all areas of business operations and management. Mr. Yi also served as the CEO and Director of Zhuoxin Beijing, a subsidiary of Zhuoxun
Beijing, since founding the company in December 2020. In 2008, Mr. Yi graduated from Beijing Enterprise Management Institute with a degree
in business management.
Mr.
Shaowei Peng has served as the vice president and chief technology officer of Gushen, Inc. since July 2021, and Zhuoxun Beijing since
June 2016. At Zhuoxun Beijing, Mr. Peng leads all aspect of technology offering and product design. Before assuming his current positions,
Mr. Peng served as General Manager of Beijing Xuri Yuanfan Technology Development Co., Ltd., an internet solution company, from July
2006 to June 2016. From September 2002 to June 2006, Mr. Peng served as manager of the technology department at Beijing Shidai Saibo
Technology Development Co., Ltd., an IT solution company. Earlier in his career, Mr. Peng started at Beijing Jinhaihang Electronic Technology
Co., Ltd., serving as a technical support engineer for the company’s education software businesses, from March 2000 to August 2002.
Mr. Peng graduated from China Management Software Institute in 1999.
Involvement
in Certain Legal Proceedings
To
the best of our knowledge, none of our directors or executive officers has, during the past ten years:
|
● |
been convicted in a criminal
proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
|
● |
had any bankruptcy petition
filed by or against the business or property of the person, or of any partnership, corporation or business association of which he
was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time; |
|
● |
been subject to any order,
judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state
authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business,
securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons
engaged in any such activity; |
|
● |
been found by a court of
competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission
to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; |
|
● |
been the subject of, or
a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended
or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any
federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance
companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty
or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire
fraud or fraud in connection with any business entity; or |
|
● |
been the subject of, or
a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined
in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or
any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated
with a member. |
Except
as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors or executive
officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are
required to be disclosed pursuant to the rules and regulations of the Commission.
Corporate
Governance
Committees
and Meetings
We
do not have a standing audit committee of the Board of Directors. We do not have a financial expert serving on the Board of Directors
or employed as an officer based on management’s belief that the cost of obtaining the services of a person who meets the criteria
for a financial expert under Item 407(d) of Regulation S-K is beyond its limited financial resources and the financial skills of such
an expert are simply not required or necessary for us to maintain effective internal controls and procedures for financial reporting
in light of the limited scope and simplicity of accounting issues raised in its financial statements at this stage of its development.
Code
of Ethics
We
do not have a code of ethics that applies to our officers, employees and directors.
Corporate
Governance
The
business and affairs of the company are managed under the direction of our board. Each stockholder will be given specific information
on how he/she can direct communications to the officers and directors of the corporation at our annual stockholders meetings. All communications
from stockholders are relayed to the members of the board of directors.
Role
in Risk Oversight
Our
board of directors is primarily responsible for overseeing our risk management processes. The board of directors receives and reviews
periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment
of risks. The board of directors focuses on the most significant risks facing our company and our company’s general risk management
strategy, and also ensures that risks undertaken by our company are consistent with the board’s appetite for risk. While the board
oversees our company’s risk management, management is responsible for day-to-day risk management processes. We believe this division
of responsibilities is the most effective approach for addressing the risks facing our company and that our board leadership structure
supports this approach.
Compensation
Committee Report
We
do not currently have a compensation committee. The Chairman of the Board has reviewed and discussed with management the “Compensation
Discussion and Analysis” included in this Annual Report on Form 10-K and, based on such review and discussions, the Compensation
Committee recommended to the Board and the Board of to include such disclosure in this Annual Report on Form 10-K.
Member
of the Board:
Yulong
Yi (Chairman)
Delinquent
Section 16(a) Reports
Section 16(a)
of the Exchange Act requires our executive officers, directors, and greater-than-ten-percent shareholders to file initial reports of
ownership and reports of changes in ownership with the SEC and to furnish us with copies of all Section 16(a) forms they file.
To
our knowledge, based on our review of the copies of such reports furnished to us or written representations from such persons, we believe
that:
| ● | Mr.
Yulong Yi has not filed one Form 3 when he was appointed as President, Chief Executive Officer,
Chief Financial Officer, Treasurer, Secretary, Chairman of the Company and beneficially acquired
171,720,000 shares of the Company’s Common Stock on July 31, 2021. |
| ● | Mr.
Yulong Yi has not filed one Form 4 when he beneficially acquired 63,275,400 shares of the
Company’s Common Stock from other individual affiliated shareholders of the Company
on January 4, 2022; |
| ● | Mr.
Shaowei Peng has not filed one Form 3 when he was appointed as Vice President and Chief Technology
Officer of the Company and acquired 76,320,000 shares of the Company’s Common Stock
on July 31, 2021. |
| ● | Mr.
Shaowei Peng has not filed one Form 4 when he beneficially sold 57,204,150 shares of the
Company’s common stock to other individual affiliated shareholders of the Company on
January 4, 2022. |
Item
11. Executive Compensation.
COMPENSATION
DISCUSSION AND ANALYSIS
This
Compensation Discussion and Analysis, or CD&A, discusses the compensation program for the executives identified as named executive
officers (“NEOs”) in the Summary Compensation Table and below. In this CD&A, the terms “we,” “us,”
“our,” “Gushen” and the “Company” refer to Gushen, Inc.
Overview
of Executive Compensation Program
In
this CD&A, we describe our overall compensation philosophy, objectives and practices. Our compensation philosophy and objectives
generally apply to all of our employees, and most of our key employees are eligible to participate in the main components of our compensation
program: (i) base salary, (ii) equity incentive plan. The relative value of each of these components of our compensation program varies
from year to year and for each employee, depending primarily on our financial and stock price performance, the employee’s role
and responsibilities and competitive market data.
Compensation
Philosophy
The
compensation philosophy of the Company is to complement and support the Company’s mission by attracting, motivating, rewarding
and retaining the right talent so that the Company’s mission and purpose can be achieved. We do this by offering a competitive,
consistent and fair compensation structure that meets the market and allows for flexibility to exceed the market when performance factors
warrant it.
Compensation
Objectives
Leadership
and motivation of our executive officers are critical to our long-term success, and the market for high-quality executive officers in
our industry remains competitive. Our challenge is to offer a compensation program that is competitive and at the same time reinforces
our commitment to being a brand-led, consumer-first organization and our strategic priorities.
Compensation
Program Design
Our
compensation program for our executive officers is designed to reward our executive officers competitively when they achieve targeted
annual performance goals, increase shareholder value, and maintain long-term careers with us. In our view, a competitive pay package
in our industry includes:
| ● | a salary that
provides for a minimum level of compensation for an executive officer; |
| | |
| ● | long-term
equity incentives that offer significant rewards if the market price of our Common Stock
increases in the future; and |
| | |
| ● | benefits that
aim to be competitive with those that are offered by companies similar to ours. |
Risk
and Compensation
We
believe our compensation programs for executive officers are designed to encourage prudent risk-taking to achieve long-term growth in
shareholder value. A variety of principles and practices contribute to the alignment of our executive compensation programs with our
overall risk profile, including the following:
| ● | Our
programs are designed to drive achievement of our strategic objectives, short- and long-term
financial performance and growth in shareholder value, while also promoting the attraction
and retention of executive talent. |
| | |
| ● | Our
programs balance strategic, financial and shareholder measures. |
| | |
| ● | Our
programs enable balance short- and long-term performance incentives via equity compensation. |
| | |
| ● | Our
Board generally establish both strategic and financial measures at the beginning of a performance
period. |
| | |
| ● | Base
salaries and annual adjustments for executive officers are generally based on market practices
and our financial condition and aim to provide total compensation that is competitive with
other similarly sized companies. |
| | |
| ● | The
Company maintains a policy prohibiting hedging by our director, executive officers, and other
insiders. |
Components
of Compensation
The
table below sets forth a summary of the key elements of our 2021 and 2022 compensation program for NEOs.
|
|
|
Component |
Description |
Purpose |
Base
Salary |
Fixed
cash component. |
Reward
for level of responsibility, experience and sustained individual performance. |
Long-Term
Incentives |
Equity
Incentive Plan 2021 allows for the grant of but currently has not granted to any NEO, any form of awards recognized under the
Plan. |
Reward
for the creation of stockholder value, align the interests of employees and shareholders, and retain executives for the
long-term. |
Other
Compensation |
A
matching contribution to our defined pension and various health, life and disability insurance plans and other customary employee
benefits. |
Provide
an appropriate level of employee benefit plans and programs. |
Other
Policies |
Insider
trading policy, which includes anti-hedging and anti-pledging policies. |
Enhance
alignment with stockholder interests. |
Base
Salary
The
base salaries for our named executive officers are set forth in the Summary Compensation Table below.
Long-Term
Incentives
With
respect to long-term incentives, the Company has established an Equity Incentive Plan in 2021, under which stock options, stock appreciation
rights, restricted shares and performance awards may be awarded to our executive officers. While no award has been issued to any NEO
as of September 30, 2022, the Board periodically reviews such options.
These
components constitute what we refer to as “total direct compensation” with respect to each executive officer. We also provide
compensation for our executive officers in the form of various other employee benefits and perquisites, most of which are generally available
to all our employees.
Each
of the elements of our compensation program helps us achieve the objectives of our program, and we believe that, together, they are effective
in achieving our overall objectives.
Compensation
Determinations
The
use and weight of each compensation component is based on a determination by the Board of the importance of each component in meeting
our overall objectives.
The
Board considers several factors when determining appropriate compensation levels for each executive officer, including:
| ● | analyses
of competitive compensation practices; |
| | |
| ● | individual
performance in light of Company goals and objectives relevant to executive compensation; |
| | |
| ● | individual
leadership, experience, expertise, skills, and knowledge; |
| | |
| ● | labor
market conditions (which affect the compensation required to attract and retain key talent);
and |
| ● | analyses from competitive market data pertaining to executive compensation
at comparable companies. |
The
Board’s approach to evaluating these factors is subjective and not formulaic, and the Board may place more or less weight on a
particular factor, or consider other factors it deems relevant, when determining compensation.
The
Board may consider, in addition to the factors described above:
| ● | the
individual’s accumulated vested and unvested equity awards; |
| | |
| ● | the
vesting schedule of the individual’s outstanding equity awards; |
| | |
| ● | a
comparison of individual equity awards between executive officers and in relation to other
compensation elements; |
| | |
| ● | potential
shareholder dilution resulting from stock awards to employees; |
| | |
| ● | total
accounting expense resulting from executive compensation; |
| | |
| ● | shareholders’
advisory votes on executive compensation; and |
| | |
| ● | past
levels of compensation awarded and earned. |
Competitive
Market Compensation Survey Information
As
discussed above, the Board considers competitive compensation practices as just one of many factors used to determine compensation for
the Company’s executives, including for the purpose of determining the extent to which the Company’s executive compensation
practices are competitive relative to competitors and peer companies to attract and retain talented executives. The Board reviews aggregated
data from general industry surveys, retail/wholesale surveys and consumer retail industry surveys. The Board generally focuses on a subset
of companies within a comparable industry and/or range of revenues.
Summary
Compensation Table
The
following table sets forth information regarding the total compensation of our named executive officers, as determined under Item 402
of Regulation S-K, for the years ended September 30, 2022, 2021 and 2020.
Name and Principal Position | |
Fiscal Year | | |
Salary ($) | | |
Bonus ($) | | |
Stock Awards
($) | | |
Option Awards
($) | | |
Other Compensation ($) | | |
Total ($) | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Yulong Yi, | |
| 2020 | | |
| 120,932 | | |
| 37,343 | | |
| - | | |
| - | | |
| - | | |
| 158,275 | |
President | |
| 2021 | | |
| 117,493 | | |
| 33,138 | | |
| - | | |
| - | | |
| - | | |
| 150,631 | |
| |
| 2022 | | |
| 120,393 | | |
| 5,456 | | |
| - | | |
| - | | |
| - | | |
| 125,849 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Shaowei Peng, | |
| 2020 | | |
| 52,244 | | |
| 499 | | |
| - | | |
| - | | |
| - | | |
| 52,743 | |
Vice President | |
| 2021 | | |
| 54,751 | | |
| 33.138 | | |
| | | |
| | | |
| | | |
| | |
| |
| 2022 | | |
| 51,309 | | |
| 12,827 | | |
| - | | |
| - | | |
| - | | |
| 64,136 | |
Salary
Salaries
paid to our named executive officers are set forth in the Summary Compensation Table.
Performance
Bonus
No Performance Bonus has been awarded.
Option
awards
No Option Awards has been awarded.
Stock
awards
No Stock Awards has been awarded.
All
Other Compensation
All
other compensation of our NEOs is set forth in the Summary Compensation Table.
We
provide our NEOs with competitive benefits, and we generally do not provide perquisites or tax reimbursements or other benefits to NEOs
that are not available to other employees. Our NEOs were offered other benefits that were substantially the same as those offered to
all of our employees. These benefits included medical, dental and vision insurance. We also provide an enhanced long-term disability
benefit to our executive officers. This benefit is designed to provide additional protection to our executive officers in the event of
catastrophic illness or disability.
Employment Agreements
On August 21, 2020, Zhuoxun Beijing
entered into employment agreements with Mr. Yulong Yi, Chief Executive Officer, and Mr. Shaowei Peng, Vice President, respectively. Pursuant
to the employment agreements, the Company agreed to pay to Mr. Yi an annual base salary of $120,393, and to Mr. Peng an annual base salary
of $51,309, without any increase of salary in each fiscal year during the term of the agreements. In addition, the Company agreed to a
regular overtime rate of 150% of the base salary, an overtime rate of 200% of the base salary during vacation and weekend, and an overtime
rate of 300% of the base salary during legal holidays. Each of Mr. Yi and Mr. Peng is entitled
to certain bonus based on their work performance, and certain welfare such as medical insurance. Pursuant
to the employment agreements, if the Company terminates the executive’s employment
without “Cause” (as defined in the
agreement), the executive will receive certain severance payment.
Change
in Control Payments
We do not have any cash severance arrangements with our NEOs directly
tied to a change in control of the Company.
Pay
Ratio Disclosure
We
are providing the following information about the relationship of the annual total compensation of our employees and the annual total
compensation of Mr. Yulong Yi, our CEO, pursuant to Item 402(u) of Regulation S-K.
For
2022, our last completed fiscal year: (i) the median of the annual total compensation of all employees of the Company (other than our
CEO) was $426,844, and (ii) the total annual compensation of our CEO was $125,849. Based on this information, the ratio of the annual total compensation
of our CEO to the median of the annual total compensation of all employees was 4.4 to 1 for 2022.
To
identify the median of the annual total compensation of all our employees, as well as to determine the annual total compensation of the
median employee, the methodology and the material assumptions, adjustments and estimates that we used were as follows:
| ● | We
excluded individuals who had worked at the Company and its consolidated subsidiaries for
less than 3 months in 2022 in order to better represent our typical employee population.
After excluding such individuals, we determined that there were 26 individuals (other than
our CEO) in our employee population during 2022. |
| ● | We
selected September 30, 2022, which is within the last three months of 2022, as the date upon which
we would identify the median employee because it enabled us to make such identification in
a reasonably efficient manner, including to more easily calculated total annualized compensation
for each employee. |
| ● | To
identify the median employee from our employee population, we calculated each employee’s
annualized compensation for 2022 based on compensation reported in their income tax certificates. |
| ● | Using
this methodology, we determined that the median employee was 20, with annualized total
compensation for 2022 in the amount of $1,027631. |
With
respect to the annual total compensation of our CEO, we used the amount reported in the “Total” column of our 2022 Summary
Compensation Table included in this Annual Report.
The
SEC’s rules for identifying the median compensated employee and calculating the pay ratio based on that employee’s annual
total compensation allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make reasonable estimates
and assumptions that reflect their employee populations and compensation practices. As a result, the pay ratio reported by other companies
may not be comparable to the pay ratio reported above, as other companies have different employee populations and compensation practices
and may utilize different methodologies, exclusions, estimates, and assumptions in calculating their own pay ratios.
Grants
of Plan-Based Awards
No
NEOs received any form of awards under our 2021 Equity Incentive Plan.
2021
Equity Compensation Plan
On December 9, 2021, the Board adopted the 2021 Equity Incentive Plan
(the “2021 Plan”), which was approved and ratified by the shareholders on December 17, 2021. As of the date hereof, 12,618,523
shares of Restricted Stock has been issued. There are a total of 71,505,227 shares of Common Stock available to be issued under the 2021
Plan.
The
general purpose of the 2021 Plan is to provide an incentive to the Company’s employees, directors, and consultants by enabling
them to share in the future growth of the Company’s business. The Board believes that the granting of stock options, restricted
stock, stock appreciation rights, performance awards and similar kinds of equity-based compensation promotes continuity of management
and increases incentive and personal interest in the welfare of the Company by those who are primarily responsible for shaping and carrying
out its long-range plans and securing its growth and financial success.
The
Board believes that the 2021 Plan will advance the Company’s interests by enhancing its ability to (a) attract and retain
employees, consultants, directors and advisors who are in a position to make significant contributions to the Company’s success;
(b) reward the Company’s employees, consultants, directors and advisors for these contributions; and (c) encourage employees, consultants,
directors and advisors to take into account the Company’s long-term interests through ownership of its shares.
Description
of the 2021 Plan
The
following description of the principal terms of the 2021 Plan is a summary and is qualified in its entirety by the full text of the 2021
Plan, which was filed as an exhibit to the Information Statement on Schedule 14C filed on January 20, 2022.
Purpose. The
purpose of the Plan is to further and promote the interests of the Company and its Stockholders by enabling the Company to attract, retain
and motivate employees, officers, directors and consultants, or those who will become employees, officers, directors or consultants,
and to align the interests of those individuals with the interests of the Company’s Stockholders.
Administration. The
Plan will be administered by the Board or a committee appointed by the Board (the “Committee”), which will have general administrative
authority for the Plan. In the event that the Board has not appointed the Committee, then the Board shall have all the powers of the
Committee under the Plan. The Board or the Committee may delegate certain authority to one or more senior executive officers of the Company
to to grant, cancel, modify, waive rights with respect to, alter, discontinue, suspend, or terminate awards held by to employees who
are not subject to Section 16 of the Exchange Act, subject to the terms or limitations set out by the Board or the Committee.
Eligibility. Persons
eligible to receive awards under the Plan include employees, officers, directors and consultants, or those who will become employees,
officers, directors or consultants, of the Company and/or its subsidiaries. Awards granted to members of the Committee shall be approved
by the Board.
Authorized
Shares. The maximum number of shares of Common Stock that may be initially issued or transferred pursuant to awards under
the Plan shall not exceed 84,123,750 shares, all of which may be issued as any type of award permitted under the Plan, including, but
not limited to, incentive stock options.
Types
of Awards. The Plan authorizes the following types of awards (“Awards”):
A
stock option is the right to purchase shares of Common Stock at a future date at a specified price per share (the “Exercise Price”).
The per share Exercise Price of an option generally may not be less than the fair market value of a share of Common Stock on the date
of grant. The maximum term of an option is ten years from the date of grant. An option may either be an incentive stock option or a nonqualified
stock option. Incentive stock option benefits are taxed differently from nonqualified stock options, as described under “Federal
Income Tax Consequences of Awards Under the Plan” below. Incentive stock options are also subject to more restrictive terms and
are limited in amount by the U.S. Internal Revenue Code (the “Code”) and the Plan.
A
Stock Appreciation Right granted under the Plan shall confer on the holder thereof a right to receive, upon exercise thereof, the excess
of (1) the Fair Market Value of one Share on the date of exercise or, if the Board or the Committee shall so determine in the case of
any such right other than one related to any Incentive Stock Option, at any time during a specified period before or after the date of
exercise over (2) the grant price of the right as specified by the Board or the Committee. Subject to the terms of the Plan, the grant
price, term, methods of exercise, methods of settlement, and any other terms and conditions of any stock appreciation right shall be
as determined by the Board or the Committee. The Board and the Committee may impose such conditions or restrictions on the exercise of
any stock appreciation right as it may deem appropriate.
Restricted
shares are shares of Common Stock granted to Plan participants, subject to such restrictions, terms and conditions, if any, as the Board
or the Committee deems appropriate, including, without limitation. Upon satisfaction or lapse of the applicable restrictions, terms,
and conditions, subject to applicable securities laws, the participant will receive shares of Common Stock in exchange for such restricted
shares.
A
Performance Award (“Performance Award”) granted under the Plan (i) may be denominated or payable in cash, shares (including,
without limitation, restricted stock), other securities, other Awards, or other property and (ii) shall confer on the holder thereof
rights valued as determined by the Board or the Committee and payable to, or exercisable by, the holder of the Performance Award, in
whole or in part, upon the achievement of such performance goals during such performance periods as the Board or the Committee shall
establish. Subject to the terms of the Plan and any applicable award agreement, the performance goals to be achieved during any performance
period, the length of any performance period, the amount of any Performance Award granted, and the amount of any payment or transfer
to be made pursuant to any Performance Award shall be determined by the Board or the Committee. The goals established by the Board or
the Committee shall be based on any one, or combination of, earnings per share, return on equity, return on assets, total stockholder
return, net operating income, cash flow, revenue, economic value added, increase in Share price or cash flow return on investment, or
any other measure the Board or the Committee deems appropriate. Partial achievement of the goal(s) may result in a payment or vesting
corresponding to the degree of achievement.
Dividend
Equivalents; Deferrals. The Board or the Committee may provide for the deferred payment of awards and may determine the
other terms applicable to deferrals. The Board or the Committee may provide that awards under the Plan earn dividends or dividend equivalents
based on the amount of dividends paid on outstanding shares of Common Stock.
Transfer
Restrictions. Subject to certain exceptions contained in the Plan, awards under the Plan generally are not transferable
by the recipient other than by will or the laws of descent and distribution and are generally exercisable, during the recipient’s
lifetime, only by the recipient. Any amounts payable or shares issuable pursuant to an award generally will be paid only to the recipient
or the recipient’s beneficiary or representative.
Adjustments. As
is customary in incentive plans of this nature, each share limit and the number and kind of shares available under the Plan and any outstanding
awards, as well as the exercise or purchase prices of awards, and performance targets under certain types of performance-based awards,
are subject to adjustment in the event of certain reorganizations, mergers, combinations, recapitalizations, stock splits, stock dividends,
or other similar events that change the number or kind of shares outstanding, and extraordinary dividends or distributions of property
to the stockholders.
No
Limit on Other Authority. The Plan does not limit the authority of the Board or any committee to grant awards or authorize
any other compensation, with or without reference to the Company’s Common Stock, under any other plan or authority.
Termination
of or Changes to the Plan. The Board may amend or terminate the Plan at any time and in any manner. Stockholder approval
for an amendment will be required only to the extent then required by applicable law or any applicable listing agency or required under
Sections 422 or 424 of the Code to preserve the intended tax consequences of the plan. For example, stockholder approval will be required
for any amendment that proposes to increase the maximum number of shares that may be delivered with respect to awards granted under the
Plan (adjustments as a result of stock splits or similar events will not, however, be considered an amendment requiring stockholder approval).
Unless terminated earlier by the Board, the authority to grant new awards under the Plan will terminate on January 24, 2032. Outstanding
awards generally will continue following the expiration or termination of the Plan.
No
award has been awarded under the 2021 Plan as of September 30, 2022.
Tax
Withholding
The
Company shall have the authority and the right to deduct or withhold, or require a participant to remit to the Company, an amount sufficient
to satisfy any income, payroll, and other taxes (including, without limitation, pursuant to the Federal Insurance Contributions Act and
the Federal Unemployment Tax Act) to the extent required by law to be withheld with respect to any taxable event concerning a participant
arising as a result of an award under the Plan.
Grants
of Awards
The
grant of awards under the 2021 Plan is discretionary and the Company cannot determine now the specific number or type of options or awards
to be granted in the future to any particular person or group.
Equity
Compensation Plan Information
The
Company has not issued any award during the fiscal year ended September 30, 2022.
Compensation
Committee Interlocks and Insider Participation
We
do not currently have a compensation committee. The Chairman, Mr. Yulong Yi, participated in deliberations of the registrant’s
board of directors concerning executive officer compensation.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The
following table sets forth certain information regarding the ownership of our capital stock, as of the date of this report, for: by (i)
each person known by us to be the beneficial owner of 5% or more of the outstanding Common Stock, (ii) each executive officer and director
of the Company, and (iii) all of our executive officers and directors as a group.
Beneficial
ownership is determined in accordance with SEC rules and generally includes voting or investment power with respect to securities. For
purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of Common Stock
that such person has the right to acquire within 60 days of October 4, 2023. For purposes of computing the percentage of outstanding shares
of our Common Stock held by each person or group of persons named below, any shares that such person or persons has the right to acquire
within 60 days of October 4, 2023 is deemed to be outstanding for
such person, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion
herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership.
Unless
otherwise indicated, the Company believes that all persons named in the table have sole voting and investment power with respect to all
shares of Common Stock beneficially owned by them.
Name (1) |
|
Number of
Shares of
Common Stock
Beneficially Own |
|
|
Approximate
Percentage of
Outstanding Shares of
Common Stock |
|
|
Number of
Shares of
Preferred Stock
Beneficially Own |
|
|
Approximate
Percentage of
Outstanding Shares of
Preferred Stock |
|
|
Voting
Power on
converted basis (2) |
|
Yulong Yi(3)(5)(6)(8) |
|
|
234,995,400 |
(9) |
|
|
57.22 |
% |
|
|
- |
|
|
|
- |
|
|
|
55.87 |
% |
Shaowei Peng(4)(7) |
|
|
19,115,850 |
|
|
|
4.66 |
% |
|
|
- |
|
|
|
- |
|
|
|
4.54 |
% |
All directors and executive officers (2) as a group |
|
|
254,111,250 |
|
|
|
61.88 |
% |
|
|
- |
|
|
|
- |
|
|
|
60.31 |
% |
5% Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhaowei Zhang |
|
|
|
|
|
|
- |
|
|
|
250,000 |
|
|
|
25.00 |
% |
|
|
0.59 |
% |
Pengfei Zhou |
|
|
|
|
|
|
- |
|
|
|
750,000 |
|
|
|
75.00 |
% |
|
|
1.78 |
% |
Dean Limited(5) |
|
|
114,493,382 |
|
|
|
27.88 |
% |
|
|
- |
|
|
|
- |
|
|
|
27.22 |
% |
Menominee Limited(6) |
|
|
88,458,833 |
|
|
|
21.54 |
% |
|
|
- |
|
|
|
- |
|
|
|
21.03 |
% |
Dragoon Limited(9) |
|
|
20,608,567 |
|
|
|
5.02 |
% |
|
|
- |
|
|
|
- |
|
|
|
4.90 |
% |
(1) |
Unless otherwise indicated,
the business address of each of the individuals is 1312-13, 14th Floor, Building No. 2, 1 Hangfeng Road, Fengtai District, Beijing, PRC |
(2) |
Each Preferred Stock is
convertible into 10 shares of Common Stock. |
(3) |
President, Chief Executive
Officer, Treasurer, Chief Financial Officer, Secretary, and Director. |
(4) |
Chief Technology Officer. |
(5) |
Dean Limited is a Hong
Kong limited company. The address of its business office is Suite 603, 6/F, Laws Commercial Plaza, 788 Cheung Sha Wan Road, Kowloon,
Hong Kong. The person having voting, dispositive or investment powers over Dean Limited is Yulong Yi. |
(6) |
Menominee Limited is a
Hong Kong limited company. The address of its business office is Suite 603, 6/F, Laws Commercial Plaza, 788 Cheung Sha Wan Road,
Kowloon, Hong Kong. The person having voting, dispositive or investment powers over Menominee Limited is Yulong Yi. |
(7) |
Oriental Voice Limited
is a Hong Kong limited company. The address of its business office is Suite 603, 6/F, Laws Commercial Plaza, 788 Cheung Sha Wan Road,
Kowloon, Hong Kong. The person having voting, dispositive or investment powers over Oriental Voice Limited is Mr. Shaowei Peng. |
(8) |
Discover The Future Limited
is a Hong Kong limited company. The address of its business office is Suite 603, 6/F, Laws Commercial Plaza, 788 Cheung Sha Wan Road,
Kowloon, Hong Kong. The person having voting, dispositive or investment powers over Discover The Future Limited is Yulong Yi. |
|
|
(9) |
Includes:
(i) 114,493,382 shares of Common Stock held through Dean Limited, a Hong Kong limited company; (ii) 88,458,833 shares of Common Stock
held through Menominee Limited, a Hong Kong limited company; (iii) 11,434,618 shares of Common Stock held through Discover The Future
Limited, a Hong Kong limited company; and (iv) 19,080,000 shares of Common Stock held through Frebis Limited, a Hong Kong limited company.
The business address of each aforementioned holding entity is Suite 603, 6/F, Laws Commercial Plaza, 788 Cheung Sha Wan Road, Kowloon,
Hong Kong. The person having voting, dispositive or investment powers over each aforementioned holding entity is Yulong Yi, our President,
Chief Executive Officer, Treasurer, Chief Financial Officer, Secretary and Director. |
Item
13. Certain Relationships and Related Transactions, and Director Independence.
| |
| |
September 30, | | |
September 30, | | |
September 30, | |
| |
Note | |
2022 | | |
2021 | | |
2020 | |
Due from related parties | |
| |
| | |
| | |
| |
Yulong Yi | |
(a) | |
$ | 9,155 | | |
$ | 32,727 | | |
$ | 68,444 | |
Ru Zhang | |
(b) | |
| 5,890 | | |
| 6,486 | | |
| 27,812 | |
Shaowei Peng | |
(c) | |
| 8,252 | | |
| 12,063 | | |
| 13,792 | |
| |
| |
$ | 23,297 | | |
$ | 51,276 | | |
$ | 110,047 | |
| |
| |
| | | |
| | | |
| | |
Due to related parties | |
| |
| | | |
| | | |
| | |
Yulong Yi | |
| |
$ | 492 | | |
$ | 542 | | |
$ | 272 | |
Ru Zhang | |
| |
| - | | |
| 1 | | |
| 1 | |
| |
| |
$ | 14 | | |
$ | 543 | | |
$ | 273 | |
(a) |
Chairman
of Zhuoxun Beijing and Chairman and legal representative of Fengyuan Beijing. And holds 55.5% voting rights of Zhuoxun Beijing. |
(b) |
Holder
of 4.9% registered capital of Zhuoxun Beijing. |
(c) |
CTO
of Zhouxun Beijing and Director of WFOE. |
All
the above balances are due on demand, interest-free and unsecured. The Company used the funds for its operations.
Policy
for Approval of Related Party Transactions
Our
board of directors is charged with reviewing and approving all potential related party transactions. All such related party transactions
must then be reported under applicable SEC rules. We have not adopted other procedures for review, or standards for approval, of such
transactions, but instead review them on a case-by-case basis.
Director
Independence
Presently,
we are not currently listed on a national securities exchange or in an inter-dealer quotation system and therefore are not required to
comply with the director independence requirements of any securities exchange.
Item
14. Principal Accounting Fees and Services.
Audit
Fees
The
following table sets forth the aggregate fees billed to the Company by its independent registered public accounting firm, WWC P.C.,
for the fiscal years indicated.
Accounting Fees and Services | |
For the year ended September 30, 2022 | | |
For the year ended September 30, 2021 | |
Audit fees | |
$ | 102,082 | | |
$ | 367,348 | |
Audit related fees | |
| 0 | | |
| 0 | |
Tax fees | |
| 0 | | |
| 0 | |
All other fees | |
| 0 | | |
| 0 | |
Total | |
| 102,382 | | |
| 367,348 | |
The
category of “Audit fees” includes fees for our annual audit, quarterly reviews and services rendered in connection with regulatory
filings with the SEC, such as the issuance of comfort letters and consents.
The
category of “Audit-related fees” includes employee benefit plan audits, internal control reviews and accounting consultation.
All
of the professional services rendered by principal accountants for the audit of our annual financial statements that are normally provided
by the accountant in connection with statutory and regulatory filings or engagements for last two fiscal years were approved by our board
of directors.
PART
IV
Item
15. Exhibit and Financial Statement Schedules
(a)
Financial Statements
We
have filed the financial statements in Item 8. Financial Statements and Supplementary Data as a part of this Annual Report on Form 10-K.
(b)
Exhibits
The
following is a list of all exhibits filed or incorporated by reference as part of this Annual Report on Form 10-K.
Item
16. Form 10-K Summary.
None.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
|
GUSHEN,
INC. |
|
|
|
Date: October 4, 2023 |
By: |
/s/
Yulong Yi |
|
Name: |
Yulong Yi |
|
Title: |
Chairman of the Board
of Directors, CEO, President, Treasurer (Principal Executive Officer & Principal Financial Officer & Accounting Officer) |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated below on October 4, 2023.
Signature |
|
Title |
|
|
|
/s/
Yulong Yi |
|
Chairman, Chief Executive
Officer, President and Treasurer |
Yulong Yi |
|
(Principal Executive Officer & Principal Financial
& Accounting Officer) |
|
|
|
|
|
|
/s/ Shaowei
Peng |
|
Vice President, Chief Technology Officer |
Shaowei Peng |
|
|
|
|
|
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SECTION 1. PURPOSE
The purposes of this Equity
Incentive Plan (the “Plan”) are to encourage selected employees, officers, directors and consultants of Gushen, Inc. (together with any successor thereto, the “Company”) and its Affiliates (as defined below) to acquire a proprietary
interest in the growth and performance of the Company, to generate an increased incentive to contribute to the Company’s future
success and prosperity, thus enhancing the value of the Company for the benefit of its stockholders, and to enhance the ability of the
Company and its Affiliates to attract and retain exceptionally qualified individuals upon whom, in large measure, the sustained progress,
growth and profitability of the Company depend.
SECTION 2. DEFINITIONS
As used in the Plan, the following
terms shall have the meanings set forth below:
(a) “Affiliate” shall mean (i) any
entity that, directly or through one or more intermediaries, is controlled by the Company and (ii) any entity in which the Company has
a significant equity interest, as determined by the Board of Directors (the “Board”) or the Committee.
(b) “Award” shall mean any Option,
Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Performance Award, Dividend Equivalent, or Other Stock-Based Award
granted under the Plan.
(c) “Award Agreement” shall mean any
written agreement, contract, or other instrument or document evidencing any Award granted under the Plan.
(d) “Code” shall mean the Internal
Revenue Code of 1986, as amended from time to time.
(e) “Consultant” shall mean a consultant,
distributor, or adviser who provides bona fide services to the Company or an Affiliate as an independent contractor. Service as a Consultant
shall be considered employment for all purposes of the Plan, except for purposes of satisfying the requirements of Incentive Stock Options.
(f) “Committee” shall mean a committee
of not fewer than two (2) members, each of whom is a member of the Board and all of whom are disinterested persons, as contemplated by
Rule 16b-3 (“Rule 16b-3”) promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”) and
each of whom is an outside director for purposes of Section 162(m) of the Code, acting in accordance with the provisions of Section 3,
designated by the Board to administer the Plan.
(g) “Director” shall mean any director
of the Company or of any Affiliate.
(h) “Dividend Equivalent” shall mean
any right granted under Section 6(e) of the Plan.
(i) “Employee” shall mean any employee
of the Company or of any Affiliate.
(j) “Fair Market Value” shall mean,
with respect to any property (including, without limitation, any Shares or other Securities), the fair market value of such property determined
by such methods or procedures as shall be established from time to time by the Board or the Committee.
(k) “Incentive Stock Option” shall
mean an option granted under Section 6(a) of the Plan that is intended to meet the requirements of Section 422 of the Code, or any successor
provision thereto.
(l) “Non-Qualified Stock Option” shall
mean an option granted under Section 6(a) of the Plan that is not intended to be an Incentive Stock Option.
(m) “Officer” shall mean any officer
of the Company or of any Affiliate who performs a policy and decision making functions, or any other person who performs similar policy
and decision making functions for the Company.
(n) “Option” shall mean an Incentive
Stock Option or a Non-Qualified Stock Option.
(o) “Other Stock-Based Award” shall
mean any right granted under Section 6(f) of the Plan.
(p) “Participant” shall mean any person
that renders bona fide services to the Company (including, without limitation, the following: a person employed by the Company or an Affiliate
in a key capacity; an officer or director of the Company; a person engaged by the Company as a consultant; or a lawyer, law firm, accountant
or accounting firm) who receives an Award under the Plan.
(q) “Performance Award” shall mean
any right granted under Section 6(d) of the Plan.
(r) “Person” shall mean any individual,
corporation, partnership, association, joint-stock company, trust, unincorporated organization, or government or political subdivision
thereof.
(s) “Released Securities” shall mean
shares of Restricted Stock as to which all restrictions imposed by the Board or the Committee have expired, lapsed, or been waived.
(t) “Restricted Stock” shall mean
any Share granted under Section 6(c) of the Plan.
(u) “Restricted Stock Unit” shall
mean any right granted under Section 6(c) of the Plan that is denominated in Shares.
(v) “Shares” shall mean the shares
of common stock of the Company, $0.001 par value, and such other securities or property as may become the subject of Awards, or become
subject to Awards, pursuant to an adjustment made under Section 4(b) of the Plan.
(w) “Stock Appreciation Right” shall
mean any right granted under Section 6(b) of the Plan.
SECTION 3. ADMINISTRATION
The Plan shall be administered
by the Board; provided, however, that the Board may delegate such administration to the Committee.
Subject to the provisions
of the Plan, the Board and/or the Committee shall have authority to (a) determine the type or types of Awards to be granted to each Participant
under the Plan; (b) determine the number of Shares to be covered by (or with respect to which payments, rights, or other matters are to
be calculated in connection with) Awards; (c) determine the terms and conditions of any award; (d) determine the time or times when each
Award shall become exercisable and the duration of the exercise period; (e) determine whether, to what extent, and under what circumstances
Awards may be settled in or exercised for cash, Shares, other securities, other Awards, or other property, or canceled, forfeited, or
suspended, and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended; (f) determine whether,
to what extent, and under what circumstances cash, shares, other securities, other Awards, other property, and other amounts payable with
respect to an Award under the Plan shall be deferred either automatically or at the election of the holder thereof or of the Board or
the Committee; (g) construe and interpret the Plan; (h) promulgate, amend and rescind rules and regulations relating to its administration,
and correct defects, omissions and inconsistencies in the Plan or any Award; (i) consistent with the Plan and with the consent of the
Participant, as appropriate, amend any outstanding Award or amend the exercise date or dates; (j) determine the duration and purpose of
leaves of absence which may be granted to Participants without constituting termination of their employment for the purpose of the Plan;
and (k) make all other determinations necessary or advisable for the Plan’s administration. The Board and the Committee’s
interpretation and construction of any provisions of the Plan or of any Award shall be conclusive and final. No member of the Board or
the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Award.
In the case of any Award that
is intended to qualify as performance-based compensation for purposes of Section 162(m) of the Code, once the Award is made, neither the
Board nor Committee shall have discretion to increase the amount of compensation payable under the Award that would otherwise be due upon
attainment of the performance goal.
SECTION 4. SHARES AVAILABLE FOR AWARDS
(a) SHARES AVAILABLE. Subject
to adjustment as provided in Section 4(b):
(i) CALCULATION OF NUMBER OF
SHARES AVAILABLE. The maximum number of Shares reserved and available for granting Awards under
the Plan shall be an aggregate of 84,123,750 shares of common stock, and (ii) on each January 1, starting with January 1, 2022,
an additional number of shares equal to the lesser of (A) 2% of the outstanding number of Shares (on a fully-diluted basis) on the immediately
preceding December 31, and (B) such lower number of Shares as may be determined by the Committee. Further,
if, after the effective date of the Plan, any Shares covered by an Award granted under the Plan or to which such an Award relates, are
forfeited, or if an Award otherwise terminates without the delivery of Shares or of other consideration, then the Shares covered by such
Award, or to which such Award relates, or the number of Shares otherwise counted against the aggregate number of Shares available under
the Plan with respect to such Award, to the extent of any such forfeiture or termination, shall again be, or shall become, available for
granting Awards under the Plan.
In the event of any forward
or reverse stock splits, recapitalizations, or combination of the authorized, issued and outstanding shares of common stock, the aforesaid
maximum 84,123,750 shares of common stock and the exercise prices of Awards and Shares granted under the Plan shall be appropriately adjusted,
as per Section 4(b) below.
(A) if an Award (other than
a Dividend Equivalent) is denominated in Shares, the number of Shares covered by such Award, or to which such Award relates, shall be
counted on the date of grant of such Award against the aggregate number of Shares available for granting Awards under the Plan; and
(B) Dividend Equivalents and
Awards not denominated in Shares shall not be counted against the aggregate number of Shares available for granting Awards under the Plan.
(iii) SOURCES OF SHARES DELIVERABLE
UNDER AWARDS. Any shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or of Treasury
Shares.
(b) ADJUSTMENTS. In the event
that the Board or the Committee shall determine that any dividend or other distribution (whether in the form of cash, Shares, other securities,
or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination,
purchase, or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities
of the Company, or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Board
or the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made
available under the Plan, then the Board or the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the
number and type of Shares (or other securities or property) which thereafter may be made the subject of Awards, (ii) the number and type
of Shares (or other securities or property) subject to outstanding Awards, (iii) the number and type of Shares (or other securities or
property) specified as the annual per-participant limitation under Section 6(g)(vi), and (iv) the grant, purchase, or exercise price with
respect to any Award, or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award; provided, however,
in each case, that with respect to Awards of Incentive Stock Options no such adjustment shall be authorized to the extent that such authority
would cause the Plan to violate Section 422(b)(1) of the Code or any successor provision thereto; and provided, further, however, that
the number of Shares subject to any award denominated in Shares shall always be a whole number.
SECTION 5. ELIGIBILITY
Any Employee, Officer, Director
or Consultant of the Company shall be eligible to receive Awards under the Plan. The Board shall approve any Awards granted to members
of the Committee.
SECTION 6. AWARDS
(a) OPTIONS. The Board and
the Committee are hereby authorized to grant Options which are consistent with the provisions of the Plan, as the Board or the Committee
shall determine:
(i) EXERCISE PRICE. The exercise
price per Share of each Option shall be determined by the Board or the Committee; provided, however, that such exercise price per Share
under any Incentive Stock Option shall not be less than 100% (110% in the case of a “10-percent stockholder" as such term is
used in Section 422(c)(5) of the Code) of the Fair Market Value of a Share on the date of grant of such Incentive Stock Option.
(ii) OPTION TERM. The term of
each Option shall be fixed by the Board or the Committee, provided that no Incentive Stock Option shall have a term greater than ten (10)
years (five (5) years in the case of a “10-percent stockholder”) as such term is used in Section 422(c)(5) of the Code).
(iii) TIME AND METHOD OF EXERCISE.
The Board or the Committee shall determine the time or times at which an Option may be exercised in whole or in part, and the method or
methods by which, property, or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise
price, in which, payment of the exercise price with respect thereto may be made or deemed to have been made.
(iv) GRACE PERIOD. Except as
otherwise determined by the Board or Committee, upon termination of employment (as determined under criteria established by the Board
or the Committee) for any reason during the term of an Option, the employee has 60 days after termination to exercise options vested as
of the date of termination.
(v) INCENTIVE STOCK OPTIONS.
The terms of any Incentive Stock Option granted under the Plan shall comply in all respects with the provisions of Section 422 of the
Code, or any successor provision thereto, and any regulations promulgated thereunder.
(b) STOCK APPRECIATION RIGHTS.
The Board and the Committee are hereby authorized to grant Stock Appreciation Rights. A Stock Appreciation Right granted under the Plan
shall confer on the holder thereof a right to receive, upon exercise thereof, the excess of (1) the Fair Market Value of one Share on
the date of exercise or, if the Board or the Committee shall so determine in the case of any such right other than one related to any
Incentive Stock Option, at any time during a specified period before or after the date of exercise over (2) the grant price of the right
as specified by the Board or the Committee. Subject to the terms of the Plan, the grant price, term, methods of exercise, methods of settlement,
and any other terms and conditions of any Stock Appreciation Right shall be as determined by the Board or the Committee. The Board and
the Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it may deem appropriate.
(c) RESTRICTED STOCK AND RESTRICTED
STOCK UNITS.
(i) ISSUANCE. The Board and
the Committee are hereby authorized to grant Awards of Restricted Stock and Restricted Stock Units.
(ii) RESTRICTIONS. Shares of
Restricted Stock and Restricted Stock Units shall be subject to such restrictions as the Board or the Committee may impose (including,
without limitation, any limitation on the right to receive any dividend or other right or property), which restrictions may lapse separately
or in combination at such time or times, in such installments or otherwise, as the Board or the Committee may deem appropriate.
(iii) REGISTRATION. Any Restricted
Stock granted under the Plan may be evidenced in such manner as the Board or the Committee may deem appropriate, including, without limitation,
book-entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of
Shares of restricted Stock granted under the Plan, such certificate shall be registered in the name of the Participant and shall bear
an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock.
(iv) FORFEITURE. Except as otherwise
determined by the Board or the Committee, upon termination of employment (as determined under criteria established by the Board or the
Committee) for any reason during the applicable restriction period, all Shares of Restricted Stock and all Restricted Stock Units still,
in either case, subject to restriction shall be forfeited and reacquired by the Company; provided, however, that the Board or the Committee
may, when it finds that a waiver would be in the best interests of the Company, waive in whole or in part any or all remaining restrictions
with respect to Shares of Restricted Stock or Restricted Stock Units. Unrestricted Shares, evidenced in such manner as the Board or the
Committee shall deem appropriate, shall be delivered to the Participant promptly after such Restricted Stock shall become Released Securities.
(d) PERFORMANCE AWARDS. The
Board and the Committee are hereby authorized to grant Performance Awards. Subject to the terms of the Plan, a Performance Award granted
under the Plan (i) may be denominated or payable in cash, Shares (including, without limitation, Restricted Stock), other securities,
other Awards, or other property and (ii) shall confer on the holder thereof rights valued as determined by the Board or the Committee
and payable to, or exercisable by, the holder of the Performance Award, in whole or in part, upon the achievement of such performance
goals during such performance periods as the Board or the Committee shall establish. Subject to the terms of the Plan and any applicable
Award Agreement, the performance goals to be achieved during any performance period, the length of any performance period, the amount
of any Performance Award granted, and the amount of any payment or transfer to be made pursuant to any Performance Award shall be determined
by the Board or the Committee. The goals established by the Board or the Committee shall be based on any one, or combination of, earnings
per share, return on equity, return on assets, total stockholder return, net operating income, cash flow, revenue, economic value added,
increase in Share price or cash flow return on investment, or any other measure the Board or the Committee deems appropriate. Partial
achievement of the goal(s) may result in a payment or vesting corresponding to the degree of achievement.
(e) DIVIDEND EQUIVALENTS.
The Board and the Committee are hereby authorized to grant Awards under which the holders thereof shall be entitled to receive payments
equivalent to dividends or interest with respect to a number of Shares determined by the Board or the Committee, and the Board and the
Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional Shares or otherwise reinvested.
Subject to the terms of the Plan, such Awards may have such terms and conditions as the Board or the Committee shall determine.
(f) OTHER STOCK-BASED AWARDS.
The Board and the Committee are hereby authorized to grant such other Awards that are denominated or payable in, valued in whole or in
part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares),
as are deemed by the Board or the Committee to be consistent with the purposes of the Plan, provided, however, that such grants must comply
with applicable law. Subject to the terms of the Plan, the Board or the Committee shall determine the terms and conditions of such Awards.
(g) GENERAL.
(i) NO CASH CONSIDERATION FOR
AWARDS. Awards shall be granted for no cash consideration or for such minimal cash consideration as may be required by applicable law.
(ii) AWARDS MAY BE GRANTED SEPARATELY
OR TOGETHER. Awards may, in the discretion of the Board or the Committee, be granted either alone or in addition to, in tandem with, or
in substitution for any other award granted under any other plan of the Company or any Affiliate. Awards granted in addition to or in
tandem with other awards, or in addition to or in tandem with awards granted under any other plan of the Company or any Affiliate, may
be granted either at the same time or at a different time from the grant of such other awards.
(iii) FORMS OF PAYMENT UNDER
AWARDS. Subject to the terms of the Plan and of any applicable Award Agreement, payments or transfers to be made by the Company or an
Affiliate upon the grant, exercise, or payment of an Award may be made in such form or forms as the Board or the Committee shall determine,
including, without limitation, cash, shares, other securities, other awards, or other property, or any combination thereof, and may be
made in a single payment or transfer, in installments, or on a deferred basis, in each case in accordance with rules and procedures established
by the Board or the Committee. Such rules and procedures may include, without limitation, provisions for the payment or crediting of reasonable
interest on installment or deferred payments or the grant or crediting of Dividend Equivalents in respect of installment or deferred payments.
(iv) LIMITS ON TRANSFER OF AWARDS.
No Award (other than Released Securities), and no right under any such Award, shall be assignable, alienable, saleable, or transferable
by a Participant otherwise than by will or by the laws of descent and distribution; provided, however, that, if so determined by the Board
or the Committee, a Participant may, in the manner established by the Board or the Committee, (a) designate a beneficiary or beneficiaries
to exercise the rights of the Participant, and to receive any property distributable, with respect to any Award upon the death of the
Participant or (b) transfer any Award other than an Incentive Stock Option for bona fide estate planning purposes. Each Award, and each
right under any Award, shall be exercisable, during the Participant’s lifetime, only by the Participant, a permitted transferee
or, if permissible under applicable law, by the Participant’s guardian or legal representative. No Award (other than Released Securities),
and no right under any such Award, may be pledged, alienated, attached, or otherwise encumbered, and any purported pledge, alienation,
attachment, or encumbrance thereof shall be void and unenforceable against the Company or any Affiliate.
(v) TERM OF AWARDS. The term
of each Award shall be for such period as may be determined by the Board or the Committee; provided, however, that in no event shall the
term of any Incentive Stock Option exceed a period of ten (10) years from the date of its grant.
(vi) PER PERSON LIMITATION ON
AWARDS. The number of Shares with respect to which Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units and other
Awards may be granted under the Plan to an individual Participant in any one fiscal year of the Company shall not exceed 5% of the
outstanding Shares, subject to adjustment provided in Section 4(b). The maximum fair market value of payments to an individual Participant
under Performance Awards in any one fiscal year of the Company shall not exceed $ 1,000,000.
(vii) SHARE CERTIFICATES. All
certificates for Shares or other securities delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to
such stop transfer orders and other restrictions as the Board or the Committee may deem advisable under the Plan or the rules, regulations,
and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares or other securities are then
listed, and any applicable federal or state securities laws, and the Board or the Committee may cause a legend or legends to be put on
any such certificates to make appropriate reference to such restrictions.
SECTION 7. AMENDMENT AND TERMINATION
Except to the extent prohibited
by applicable law and unless otherwise expressly provided in an Award Agreement or in the Plan:
(a) AMENDMENTS TO THE PLAN.
The Board may amend, alter, suspend, discontinue, or terminate the Plan, including, without limitation, any amendment, alteration, suspension,
discontinuation, or termination that would impair the rights of any Participant, or any other holder or beneficiary of any Award theretofore
granted, without the consent of any share owner, Participant, other holder or beneficiary of an Award, or other Person.
(b) AMENDMENTS TO AWARDS.
Unless otherwise agreed to in writing between the Company and a Participant, the Board and the Committee may waive any conditions or rights
under, amend any terms of, or amend, alter, suspend, discontinue, or terminate, any Awards theretofore granted, prospectively or retroactively,
without the consent of any Participant, other holder or beneficiary of an Award.
(c) ADJUSTMENTS OF AWARDS
UPON THE OCCURRENCE OF CERTAIN UNUSUAL OR NONRECURRING EVENTS. Except as provided in the following sentence, the Board and the Committee
shall be authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual
or nonrecurring events (including, without limitation, the events described in Section 4(b) hereof) affecting the Company, any Affiliate,
or the financial statements of the Company or any Affiliate, or of changes in applicable laws, regulations, or accounting principles,
whenever the Board or the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits to be made available under the Plan. In the case of any Award that is intended to qualify as performance-based
compensation for purposes of Section 162(m) of the Code, neither the Board nor the Committee shall have authority to adjust the Award
in any manner that would cause the Award to fail to meet the requirements of Section 162(m).
(d) CORRECTION OF DEFECTS,
OMISSIONS, AND INCONSISTENCIES. The Board and the Committee may correct any defect, supply any omission, or reconcile any inconsistency
in the Plan or any Award in the manner and to the extent it shall deem desirable to carry the Plan into effect.
SECTION 8. GENERAL PROVISIONS
(a) NO RIGHTS TO AWARDS. No
Employee, Participant or other Person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity
of treatment of Employees, Directors, Consultants, other holders or beneficiaries of Awards under the Plan. The terms and conditions of
Awards need not be the same with respect to each recipient.
(b) DELEGATION. The Board
and the Committee may delegate to one or more officers or managers of the Company or any Affiliate, or a committee of such officers or
managers, the authority, subject to such terms and limitations as the Board or Committee shall determine, to grant Awards to, or to cancel,
modify, waive rights with respect to, alter, discontinue, suspend, or terminate Awards held by Employees, Consultants, or other holders
or beneficiaries of Awards under the Plan who are not officers or directors of the Company for purposes of Section 16 of the Securities
Exchange Act of 1934, as amended, and who also are not “covered employees” for purposes of Section 162(m) of the Code.
(c) WITHHOLDING. The Company
or any Affiliate shall be authorized to withhold from any Award granted or any payment due or transfer made under any Award or under the
Plan the amount (in cash, Shares, other securities, other Awards, or other property) of withholding taxes due in respect of an Award,
its exercise, or any payment or transfer under such Award or under the Plan and to take such other action as may be necessary in the opinion
of the Company or Affiliate to satisfy all obligations for the payment of such taxes.
(d) NO LIMIT ON OTHER COMPENSATION
ARRANGEMENTS. Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other or
additional compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases.
(e) NO RIGHT TO EMPLOYMENT.
The grant of an Award shall not be construed as giving a Participant the right to remain an employee, director or consultant of the Company
or any Affiliate. Further, the Company or an Affiliate may at any time terminate the service of any employee, director or consultant,
free from any liability, or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement.
(f) GOVERNING LAW. The validity,
construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws
of the State of Nevada and applicable federal law.
(g) SEVERABILITY. If any provision
of the Plan or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction, or as to any Person
or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Board or the Committee, such provision shall
be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination
of the Board or the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction,
Person, or Award, and the remainder of the Plan and any such Award shall remain in full force and effect.
(h) NO TRUST OR FUND CREATED.
Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship
between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive
payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general
creditor of the Company or any Affiliate.
(i) NO FRACTIONAL SHARES.
No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Board and the Committee shall determine whether
cash, other securities, or other property shall be paid or transferred in lieu of any fractional Share, or whether such fractional Shares
of any rights thereto shall be canceled, terminated, or otherwise eliminated.
(j) HEADINGS. Headings are
given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in
any way material or relevant to the construction or interpretation of the Plan or any provision thereof.
SECTION 9. EFFECTIVE DATE OF THE PLAN
Subject to the approval of
the Board of the Company, the Plan shall be effective on the later of January 25, 2022 and twentieth (20th) day following the
date on which an Information Statement is mailed to the stockholders of the Company under Rule 14c-2 of the Exchange Act notifying the
approval of the Plan by the Board of the Company (the “Effective Date”); provided, however, that to the extent that Awards
are granted under the Plan before its approval by the Board, the Awards will be contingent on approval of the Plan by the Board of the
Company at a Board meeting or by written consent.
SECTION 10. TERM OF THE PLAN
No Award shall be granted
under the Plan more than ten (10) years after the Effective Date. However, unless otherwise expressly provided in an applicable Award
Agreement, any Award theretofore granted may extend beyond such date, and the authority of the Board and the Committee to amend, alter,
adjust, suspend, discontinue, or terminate any such Award, or to waive any conditions or rights under any such Award, and the authority
of the Board to amend the Plan, shall extend beyond such date.
The foregoing Equity Incentive
Plan was duly adopted and approved by the Board of Directors on December 9, 2021.
Gushen, Inc.
IN WITNESS WHEREOF, the undersigned have executed
this Equity Incentive Plan as of the date referenced above.
1. I have reviewed this
report on Form 10-K of Gushen, Inc.;
2. Based on my knowledge,
this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge,
the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s
other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation;
and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5. The registrant’s
other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent
function):
a)
all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
The undersigned hereby
certifies, in his capacity as an officer of Gushen, Inc. (the “Company”), for the purposes of 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
(1) The Annual Report
of the Company on Form 10-K for the fiscal year ended September 30, 2022 (the “Report”) fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information
contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
The foregoing certification
is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter
63 of title 18, United States Code) and is not being filed as part of a separate disclosure document.